Friday, March 6, 2009

ICE to start clearing CDS on Monday

ICE Trust—the CDS clearinghouse backed by the major dealer banks—has cleared the final regulatory hurdle (SEC approval), and will start clearing credit default swaps (CDS) on Monday. SEC exemptive order here; Reuters article here; Bloomberg article here. Here are the highlights from ICE's press release:

IntercontinentalExchange(R) (NYSE: ICE), a leading operator of regulated global futures exchanges and over-the-counter (OTC) markets, today announced that ICE US Trust, LLC (ICE Trust), a New York limited liability trust company, will begin processing and clearing credit default swap (CDS) index transactions on March 9, 2009. Clearing of North American Markit CDX indexes is expected to be followed by liquid single-name CDS in the following months. ICE Trust has entered into an agreement with Markit to produce daily settlement prices required for mark-to-market pricing, margining and clearing. ICE also announced the closing of its acquisition of The Clearing Corporation (TCC) on March 6, 2009. TCC developed the CDS risk management framework, operational processes and infrastructure for ICE Trust's clearing operations. ... Bank of America, Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Merrill Lynch, Morgan Stanley and UBS have supported the establishment of the clearing house for CDS transactions, and are the initial clearing members of ICE Trust. Each of these participants has completed a rigorous technical testing and validation process over the past several months. In addition, each member has made a significant contribution to establish the ICE Trust guaranty fund, which will continue to increase as positions are transferred into the clearing house.
The press release also highlights a few key provisions from ICE Trust's rules of operating procedures, the most interesting of which (in my opinion) are:
The Board of ICE Trust has been appointed by ICE and consists of seven members, a majority of whom are independent. The Board will soon be expanded to 11 members and will include four additional members nominated by participants in the clearing house, two of whom will be independent. ... ICE has contributed an initial $10 million to the guaranty fund from cash on hand. Over a two-year period, ICE expects to increase its contribution to the guaranty fund to a total of $100 million. The aggregate size of the guaranty fund will be determined by positions held in the clearing house.
Each member must make a $20 million initial contribution to the guaranty fund, and since the press release notes that there are ten initial clearing members (all the major dealer banks), that should put the guaranty fund at $210 million right now. That number will increase significantly as the dealers start novating their CDX contracts onto the clearinghouse on Monday, but that initial $210 million can be thought of as the amount of overcollateralization the clearinghouse is starting with. And away we go....


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