Thursday, January 15, 2009

Bloomberg on CDS clearinghouses

Bloomberg has a story headlined, "ICE Emerges as Credit-Default Swap Clearinghouse Frontrunner":

Intercontinental Exchange Inc., the second-largest U.S. futures market, is emerging as the leading candidate to run a clearinghouse for the $29 trillion market for credit-default swaps. Analysts at Morgan Stanley and CreditSights Inc. said this week that Atlanta-based Intercontinental, also known as ICE, will likely be the industry choice to back the contracts because of its partnership with Goldman Sachs Group Inc., JPMorgan Chase & Co. and seven other banks that account for over 80 percent of the trading. ... An ICE victory would mean the securities firms that control a market responsible for billions of dollars of losses will continue to shape the way the contracts are traded.
This should surprise no one, as I've noted before. The major CDS dealers, who have absolutely dominated the market since its inception, are going to continue to dominate the CDS market. Shocking. (Note that one of Bloomberg's sources for the claim that ICE is the frontrunner is Morgan Stanley, which is one of the major dealers backing the ICE clearinghouse. The headline could have been: "Major CDS Dealer Says that CDS Dealers Totally Rock.") Back to Bloomberg:
“People have some concerns over the banks’ influence, but no matter what entity this goes to, you’re going to have a lot of dealer influence,” said Brian Yelvington, a New York-based strategist at fixed-income research firm CreditSights. “I don’t see how you get away from that.”
Neither do I. Like I said before, no dealers, no meaningful clearinghouse. But CME, bless its little heart, just refuses to give up:
CME Group, which traces its roots to 1848, says it’s premature to declare a winner in credit-default swaps clearing. “This is way too soon to make any pronouncements about what will happen competitively in the market,” CEO Craig Donohue, 47, said last month in an interview. “You have two very different proposals out there. Many of the dealers we’re talking to very much want to keep their options open to participate on more than one platform.”
The Bloomberg article doesn't offer any new information on the status of ICE's application with the New York Fed (which the Fed effectively rejected once already). I don't think there's any way the ICE clearinghouse gets up and running before the end of March. A clearinghouse needs all the contracts it clears to include a CDS settlement auction provision, and the ISDA says that settlement auctions won't be hardwired into the 2003 Credit Derivatives Definitions until mid-March. Remember when the dealers were assuring regulators everywhere that they'd be clearing trades by the end of 2008 at the latest?


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