Clearing House of the Year: Ice

There was a time when being called a swap dealer used to carry a certain cachet. But thanks to the effect of the US Dodd-Frank Act, which was signed into law in July 2010, those days are long gone. Dodd-Frank subjects swap dealers to more onerous regulation in areas including capital requirements, margin and business conduct, creating a strong impetus for market participants to avoid the label. In May 2012, the US Commodity Futures Trading Commission (CFTC) finalised rules defining a swap dealer, which meant firms trading over-the-counter swaps with a notional amount exceeding a de minimis threshold of $8 billion would automatically become subject to greater oversight.

For firms trading around 800 cleared OTC energy swaps at Atlanta-based Ice – with underlyings ranging from oil to US power – the rule had the potential to be a headache. But in July that year, Ice helped alleviate the pain by announcing it would transform its cleared OTC swap contracts into futures in January 2013. That process was subsequently brought forward to October 12, 2012, owing to strong demand from Ice’s clients.

“One of the things we do differently is that we are very close to our customers and listen to the issues they have – not just when it comes the clearing house itself – but what else is going on in their environment and how we might be able to alter what we do to minimise the impact of change on them,” says Paul Swann, London-based president and chief operating officer at Ice Clear Europe, Ice’s UK-based clearing house. “The swaps-to-futures transition is a perfect example of that.”

When the swap dealer rule went into effect in October, all the firm’s cleared OTC swaps had been successfully converted into futures, in a process that became known as ‘futurisation’. For Ice, the transition involved a frenzy of work conducted over the preceding months. The process was even more challenging due to the tight deadlines involved – when the swaps-to-futures transition was expedited on September 4, Ice and its clients had less than six weeks to prepare.

To effect the transition, technological changes had to be made Ice’s systems, notes Swann. But the most significant workload came around the issue of market structure. For Ice to clear its OTC swaps as futures, CFTC rules required that they be made available to trade on a regulated market – in this case, Ice Futures US and Ice Futures Europe.

One of the things we do differently is that we listen to issues [our customers] have

Previously, US futures commission merchants (FCMs) clearing OTC swaps via Ice Clear Europe could achieve this by entering into back-to-back trades with their UK affiliates. But under CFTC rules, they would now be required to register as direct clearing members. In a tight timeframe, Swann and his colleagues brought 14 new clearing members on board – an unprecedented number. Another tricky task was moving the margin accounts associated with these firms away from their UK affiliates, which meant transferring funds and bringing them under the regulatory regime of futures trading, while maintaining a minimum required level of segregation at all times.

Unsurprisingly, regulators took a keen interest in what Ice was up to – Swann says the firm was in constant contact with both the CFTC and UK Financial Services Authority during the time the transition took place. Ice also needed to keep in touch with its members, embarking on a sizeable client education effort that involved brochures, webpages, teleconferences and countless one-on-one discussions about the move.

Many of Ice’s clients were enthusiastic about the way the switch was conducted. However, some banks and brokers expressed unease about the conversion. Such firms claim there was confusion about what the move would mean for things such as click-to-trade execution – used by brokers executing OTC swaps but prohibited under CFTC rules for futures – and the examinations that needed to be taken by traders. However, these criticisms are not representative of the majority of clients, which were supportive of the transition, argues Swann. Furthermore, Ice insists that differences between the rules governing cleared swaps and futures were communicated to market participants well in advance of the changes.