Fed discusses CDS clearing house options

The Federal Reserve Bank of New York is today in discussions with interested parties over the establishment of a central clearing house for credit default swaps (CDSs).

Four potential counterparties are participating in the meetings: Frankfurt-based derivatives exchange Eurex; Chicago-based exchange operator CME Group in partnership with hedge fund management firm Citadel Investment Group; NYSE Euronext; and a group including The Clearing Corporation, IntercontinentalExchange (Ice), Markit and Risk Metrics.

Earlier this week CME and Citadel announced their intention to launch a fully integrated CDS trading and clearing platform, “subject to completion of definitive agreements and any necessary regulatory approvals". The two companies confirmed they were still negotiating details of the platform with regulators including the Securities and Exchange Commission and the New York Fed.

On September 29, Chicago-based clearing house The Clearing Corporation (ClearCorp) revealed it was planning to establish a New York trust bank to serve as a central clearing house for CDS deals, and was working with the New York Fed and the New York State Banking Commission to obtain a banking license.

Ice had also been discussing the launch of its own platform with regulators; it fuelled rumours that it was entering the credit derivatives market with the purchase of New York-based electronic brokerage Creditex in June 2008. However, in a joint statement released today, ClearCorp and Ice announced they had “joined forces to support a global clearing solution for credit default swaps”.

The New York Fed said it does not endorse any proposals specifically, but is “seeking to accelerate market adoption of central counterparty services”.

Eurex has previously stated that it plans to clear OTC CDS contracts referencing the European iTraxx indexes “in the first half of 2009”. A market participant predicted that European regulators would urge other operators to follow suit: "They’ll try and force competition in Europe on all the different layers - trading, clearing and settlement.”

See also: CME and Citadel plan CDS exchange