Ice launches US CDS clearing service

Atlanta-based derivatives exchange IntercontinentalExchange (Ice) launched its credit default swap (CDS) central clearing platform on March 9 after receiving the green light from the Securities and Exchange Commission (SEC) on March 6.

Ice Trust, a New York limited liability trust company set up by Ice for clearing CDS trades, had already received approvals from the Superintendent of the New York State Banking Department on March 5 and the Federal Reserve Board of Governors on March 4.

Ice Trust will initially clear trades linked to series 10 and 11 of the Markit CDX North American investment-grade, investment-grade high-volatility and high-yield indexes, with single-name trades to follow at some point in the "next several months", Ice said. At first, the exchange will focus on back-loading existing trades executed between eligible clearing members that are stored in the Depository Trust and Clearing Corporation's Trade Information Warehouse. No timetable for clearing new CDS trades has been given.

Membership of Ice's clearing house will be limited to financial institutions with a net worth in excess of $5 billion and a credit rating of A or higher. Participants will also have to demonstrate "sufficient operational capabilities, financial resources, risk management experience and regulatory oversight".

The initial clearing members of Ice Trust, all of which have completed technical and systems testing, are Bank of America and Merrill Lynch, Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and UBS.

After clearing the final regulatory hurdle on March 6, Ice on the same day completed its acquisition of Chicago-based firm The Clearing Corporation (CCorp) for $39 million. The size of the deal was described by Patrick Pinschmidt, vice-president of research at Morgan Stanley in New York as "relatively modest", but was balanced by the shareholders in CCorp benefiting from a 50% profit-sharing arrangement in Ice Trust.

The acquisition of CCorp was instrumental to Ice's initiative to launch a CDS clearing platform, as CCorp had developed the risk management infrastructure. Each member of Ice Trust will be obliged to contribute a minimum of $20 million to the guaranty fund, with further contributions determined by number of trades (and notional value of them) transferred into the clearing house.

Additionally, Ice has contributed an initial $10 million to the guaranty fund, a figure it expects to reach $100 million over time. As the exchange's clearing capabilities expand beyond back-loading, Ice expects the guaranty fund to be over $1 billion.

Users will also be required to pledge initial collateral at the time of contract novation, as well as making supplementary mark-to-market margin requirements calculated at the end of each day based on a counterparty's outstanding positions. Ice has entered into an agreement with Markit to produce this information.

Ice is just one of four platforms vying for a share of the CDS clearing business. In the US, the Chicago Mercantile Exchange Group is still awaiting the regulatory green light from the SEC.

In Europe, NYSE Liffe, in association with London-based clearing house LCH.Clearnet, launched its clearing platform on December 22 but has yet to clear a single trade. Frankfurt-based derivatives exchange Eurex has postponed the launch of its CDS service to the second quarter of the year, having initially hoped to launch in Q1.

See also: Fed approval leaves Ice/TCC on brink of CDS clearing
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