ICE Clear Europe has begun clearing credit
default swaps (CDSs), with five buy-side clients using the London-based central
counterparty this week.
ICE Clear Europe, a subsidiary of
IntercontinentalExchange, the US derivatives exchange and clearing house
operator, received regulatory approval to clear CDSs in August, and began clearing
on 7 October for 47 European indices and 121 corporate single name CDS
ICE Clear Europe has five clearing members on
board so far: Citi, Credit Suisse, Goldman Sachs, J.P. Morgan and Merril Lynch.
UK asset management firm Liontrust Investment Partners was one of five buy-side
firms to clear trades this week.
Neale Soffe, partner, head of operations at
Liontrust, said the firm saw value in starting clearing ahead of the European
regulatory mandate even though the firm’s OTC derivatives volumes were relatively low.
“Last week was
a little frantic making sure that all the
moving parts were functioning properly, but we executed trades on Monday that
were cleared without a hitch, so I think we can regard that as a success.”
Soffe said Liontrust worked closely with clearing
member Goldman Sachs. “The legal documentation was relatively
straight forward once you immersed yourself in it,” he added.
Liontrust used the International Swaps and
Derivatives Association (ISDA) and the Futures and Options Association (FOA)
template, which provides standardised documentation of the responsibilities of a
clearing member and its client.
“As ultimately we
will have to clear all clearable OTC
derivative trades, be they equity or credit, by the middle of 2014 it made
sense to address the clearing concept now rather than at the 11th
hour,” Soffe said.
Under the US’ Dodd-Frank Act and the European
market infrastructure regulation, market participants are required to clear OTC
derivatives trades through a central counterparty. The rule has already taken
effect in the US, but is not excepted to come into force in Europe until July
Paul Swann, president of ICE Clear Europe, told theTRADEnews.com
the level of preparedness across the industry varied, and clearing CDSs gives
market participants the opportunity to test clearing processes before laws
“The biggest clients have been working on
this across multiple asset classes for a considerable amount of time. They are
very up to speed with what they are required to do when the law takes effect,”
“Smaller to medium-sized companies have
various levels of preparation. This is why launching now is so important. It
gets the message out to the broader community and prepares them for the
approaching regulatory changes.”