ICE buys Creditex in bid to access lucrative CDS market

The IntercontinentalExchange (Ice) has agreed to aquire credit derivatives interdealer-broker Creditex in a deal worth $625 million, in an attempt to gain a foothold in the burgeoning credit default swaps (CDS) market.

Ice has engaged in a series of acquisitions over the past 18 months, diversifying its operations from its core energy trading business to include commodities and agricultural products, and moving into foreign exchange and equity futures and options through its acquisition of the New York Board of Trade in January 2007.

Creditex, meanwhile, has seen its credit derivatives execution and processing business boom as the CDS market has exploded in recent years, growing from just $13.9 trillion in notional swap volumes outstanding in December 2005 to $62 trillion by April 2008, according to the International Swaps and Derivatives Association.

The acquisition, worth $565 million in Ice common stock and $60 million in cash, might ultimately be just a stepping stone through which Ice intends to access further new markets. In a statement announcing the merger, the exchange highlighted "significant additional opportunities for expansion of Creditex's OTC trading model to other over-the-counter markets beyond credit derivatives".

Confirmation backlogs on CDS trades, a problem that was considered solved after the large-scale switch to electronic trading by credit derivatives interdealer brokers in the past three years, unexpectedly grew again during the worst of the credit crunch in late 2007, raising questions over the execution and settlement capabilities of interdealer facilitators. In the acquisition announcement, both companies confirmed that the purchase will "help address recent calls for improvements in the operational infrastructure of the OTC markets".

The acquisition will reignite rumours of consolidation in the interdealer sector as brokers attempt to gain ground on market leader Icap. Both Ice and the Chicago Mercantile Exchange were rumoured to be courting Creditex for acquisition as early as mid-2007.

Speculation also persists that rival interdealer brokers GFI Group and Tullett Prebon could similarly join forces to gain market share, a move that might be a step closer to reality following the Creditex purchase.

See also: Back-up power fails as lights go out at Ice
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