November 5, 2012 10:06 pm

ICE gets UK approval for European CDS

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IntercontinentalExchange, the US futures exchange, has won UK regulatory approval to clear European sovereign credit default swaps as the industry prepares for wide-ranging reforms of the off-exchange derivatives market.

ICE, is looking to clear the sovereign debt of Greece, Ireland, Spain, Italy and Portugal through its London-based ICE Futures Europe unit from next year, according to a recent US regulatory filing.

The group was the first exchange to offer clearing for corporate CDS – the over-the-counter derivatives widely blamed for exacerbating the financial crisis. It has long-eyed the sovereign market in Europe. On Monday, the group said the service would begin once it had received US regulatory clearance following the British green light.

“In CDS, we’ve had European sovereigns approved by the FSA. We’re waiting the SEC approval right now,” Scott Hill, chief financial officer of ICE, told investors and analysts on an earnings conference call.

“We have mandatory clearing starting in the first quarter of next year, with the buy side in the portfolio margining that’s critical to that offering. We expect to be approved by the SEC in the not too distant future,” he said.

The push for more of the vast $650tn over-the-counter derivatives market to be processed through clearing houses and backed by collateral, or insurance, is part of a G20 mandate intended to safeguard the financial system. Rules are expected to come into force on both sides of the Atlantic in coming months.

A clearing house stands between two parties, ensuring a trade is completed if one side defaults. Hitherto most OTC trades have been conducted privately and bilaterally.

While broker-dealers have increasingly moved more swaps deals through clearing houses, the CDS market has remained an anomaly.

According to the International Swaps and Derivatives Association, a derivatives trade body, only about 10 per cent of a market with an adjusted annual average outstanding notional value of $30tn was centrally cleared last year.

That’s in part as brokers have not pushed contracts on their own parent or the country in which its parent is based. CDS provide insurance against a default on bond payments and are used by investors to insure against risk and speculate on creditworthiness. Should the country default, the bank would then face making large payouts, increasing its own risk of default. ICE plans to denominate its dealings in US dollars and not euros

Mr Hill’s comments came as ICE reported better-than-expected third-quarter earnings, mainly owing to a more favourable tax rate.

For the period to September 30, net income fell to $131m from $132.6m a year ago. Turnover fell 5.2 per cent to $323m from $341m a year ago. Revenues from processing OTC derivatives such as CDS fell 16 per cent to $123m year-on-year.

Weak trading in US and Canadian futures was offset by a 5 per cent rise in trading on ICE Futures Europe.

The group’s US unit already processes sovereign debt trades of several Latin American countries, including Brazil, Mexico, Argentina and Venezuela.

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