CME Group has announced the initial line-up of dealers supporting its credit default swap (CDS) initiative. They are Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley, and UBS.
They join buy-side founding members, AllianceBernstein, BlackRock, BlueMountain Capital Management, Citadel, the D. E. Shaw Group and PIMCO.
In addition, Bank of America Merrill Lynch, Nomura Group, and Royal Bank of Scotland will become CDS clearing member firms and intend to participate in the pre-launch program, scheduled to begin clearing CDS by December 15, 2009.
The launch will rival ICEs CDS clearing house, which has cleared contracts with a notional value of $4,000 billion.
The move to bring the buy- and sell-side together will be seen as an important step forward by CME. In June 2009, Samuel Cole, COO of hedge fund BlueMountain Capital Management and backer of CMEs CDS clearing house, wrote a letter to investment banks accusing them of scuppering CMEs attempt to launch a rival to the ICE platform.
The dealers suggested more than once that there is room for only one solution in the market, said Cole. The dealer community may be filibustering to protect its oligopoly and not seriously engaged in working with the buy side to develop a clearing solution.
Although BlueMountain is a founding member of the CME platform (CMDX), and receives a fee discount, Cole was adamant that dealers were profiting at the expense of the buy side. BlueMountains economic arrangement with CME is immaterial to its investors, Cole stated. Dealers are deriving substantially more economic value from their relationship with ICE than the six buy-side firms are from their relationship with CME.
The new platform looks set to disrupt ICEs monopoly. Speaking to Reuters, Kevin McPartland, senior analyst at TABB Group, said The buy side seem to like the CME model more than ICE. There is a lot of buy-side volume that hasn’t touched a clearinghouse yet, so everybody is essentially starting from zero.”
CME has been looking to launch its CDS clearing house for some time. In March 2009, CME Group and CMDX received a special exemption from the U.S. Securities and Exchange Commission (SEC) for clearing and trading CDS through CME Clearing and the CMDX platform. Yet it has taken nine months to get the buy and sell-side working together on the platform.
The change of heart from the sell-side occurred due to CME dropping the trading interface originally planned for CMDX. A CME spokesperson speaking to Global Custodian explained that the main feedback from everybody was for a clearing solution. As a result, CME dropped the trading platform.
In an early press release CMDX was put forward as an open-architecture electronic trading, trade booking, and migration/clearing-only platform for credit default swaps open to all qualified commercial market participants. Trades executed, booked or migrated through CMDX are processed directly to CME Clearing for multilateral netting and centralized clearing. This would put the platform in direct competition with Wall-Street dealers and investment banks.
Instead, CME has decided to concentrate on clearing. “Thanks to the collaboration and committed effort of so many key buy-side and dealer founding members, we expect to begin clearing CDS contracts by December 15th,” said Terry Duffy, Executive Chairman, CME Group. “We believe that between our product coverage and our strategic alliance with buy-side and dealer firms, CME Group will provide the most comprehensive CDS clearing solution.”
“Today’s announcement represents a landmark industry milestone in bringing together a broad range of prestigious buy and sell side participants to support our clearing solution for credit default swaps,” said Craig Donohue, Chief Executive Officer, CME Group. “CME Group believes that our solution, which was jointly developed with both our buy and sell side founding members over many months of effort, will be the strongest and most effective CDS clearing solution. Our solution will provide a number of benefits including immediate processing of CDS trades submitted for clearing, an extensive range of products to clear including single names and indices, a comprehensive and transparent risk management framework, the security of an industry leading financial safeguards package, and the leveraging of an established regulatory framework to protect customer collateral and positions.”
Giles TurnerNews Editor