ICE, Clearing Corp to develop CDS clearinghouse
Thursday October 30, 8:08 am ET
ICE looks to launch clearinghouse for credit default swaps, has backing of 9 banks
NEW YORK (AP) -- Exchange operator IntercontinentalExchange Inc. and the Clearing Corp. said Thursday they signed memorandums of understanding to develop a clearinghouse for complex insurance instruments known as credit default swaps.
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As part of the agreement, ICE will acquire Clearing and form ICE US Trust. Terms of the deal were not disclosed.
The new clearinghouse, which could be among the first for the CDS market and is scheduled to launch by the end of the year, will have the backing of nine banks heavily involved in the trading of credit default swaps -- Bank of America Corp., Citigroup Inc., Credit Suisse, Deutsche Bank, Goldman Sachs Group Inc., JPMorgan Chase & Co., Merrill Lynch & Co., Morgan Stanley and UBS.
Credit default swaps have played a prominent role in the mushrooming credit crisis that in the past month led to Lehman filing for bankruptcy protection, a government rescue plan for insurer American International Group Inc. and Merrill Lynch & Co. selling itself to Bank of America Corp.
The market for swaps, which is currently unregulated, is huge: estimated at as much as $62 trillion. While little-known to many individual investors, they are commonly used contracts to insure against the default of financial instruments such as bonds and corporate debt.
What is deemed the riskier, and likely larger portion of the swaps market, are swaps bought and sold as bets against bond defaults -- a buyer doesn't necessarily have to own a bond to buy the CDS that insures it. In such cases, investors use swaps to essentially place bets on a company's performance, similar to shorting a stock -- the move is purely speculative, as the investors are betting only on whether a bond or security will be paid off or fail.
Since the market for the swaps is so much larger than the initial loans they were meant to insure, credit default swaps have magnified risk exponentially.
Regulators have been calling for oversight of the industry and a centralized trading platform to help ensure the financial firms can cover any claims against them in the market.
In New York, where many of the transactions are completed, regulators have said they plan to begin overseeing the portion of the market where companies actually hold the bonds they are insuring. State regulators say that makes the contracts traditional insurance premiums and should be regulated as such, including requiring sellers of the swaps to register and follow state insurance guidelines.
Earlier this month, exchange operator CME Group Inc. said it was teaming up with Citadel Investment Group LLC to create an electronic trading platform and clearinghouse for credit defaults swaps. |
