Commodity Futures Trading Commission (CFTC) has approved application of International Derivatives Clearing Group, LLC (IDCG) as a derivatives clearing organization (DCO). The application was filed on August 25, 2008. This approval paves the way for IDCG’s clearinghouse to begin clearing OTC Interest Rate Swap Contracts before the end of 2008.
The IDCG clearinghouse is a central counter-party providing real-time credit mitigation for over-the-counter (OTC) interest rate swap products. IDCG plans to open the clearinghouse for its members and customers before the end of this year. This scheduled opening will provide a number of counterparties the ability to novate existing positions into the clearinghouse and receive immediate capital efficiency benefits and the elimination of counterparty credit risk.
“The systemic issues facing the interest rate swap market is analogous to the issues faced by the energy markets in the earlier part of this decade,” says Vincent Viola, founder and IDCG board chairman. “The time is right and the macro-market is ready for this innovation just as the energy swap market embraced Clearport in 2002. I commend the staff and the leadership of the CFTC for recognizing the importance of this unique product offering in this unprecedented time.”
NASDAQ OMX owned Philadelphia Board of Trade (PBOT) will serve as the designated contract market (DCM) for these products while IDCG will act as clearinghouse. IDCG will use the “exchange futures for swaps” (EFS) mechanism to accept consummated transactions from a number of independent execution venues. EFS is a common regulatory supported process which allows the current trading practices to remain unchanged and decreases the associated risk of such transactions. Since these instruments are cleared as futures, the benefits include eliminating the capital requirements of held swap positions and replacing them with margin requirements, favorable futures tax treatment, and the protection of customer segregated funds.
“We have seen a significant interest among both buy-side and sell-side participants in the last few weeks,” says Christopher Edmonds, IDCG’s CEO. “We are eager to deliver a clearinghouse and a risk management system that is fungible with the OTC interest rate swap market.”
Edmonds and others at IDCG have told policy makers over the last several months that IDCG sees this effort as part of a private sector response and partial solution to macro-economic problems facing the credit markets. Founder and Chief Marketing Officer, John Shay, counts the number of clearing participants who have already committed to clear OTC Interest Rate Swap Contracts as a testament that the market place will welcome this offering.
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