Friday, May 03, 2013 5:47:21 AM

ICE sets date for US credit futures

The InterContinental Exchange (ICE) will launch its first US credit futures contracts next month, which will offer an alternative to credit default swaps that are due to migrate to new electronic trading facilities, subject to rules being finalised.

On 17 June, ICE Futures US will list the Markit CDX Investment Grade WI Future, the first of four new contracts based on Markit CDX and iTraxx credit indices. Subject to regulatory approval, the next three contracts will be: Markit CDX High Yield WI Futures; Markit iTraxx Europe WI Futures; and Markit iTraxx Xover WI Futures. 

The exchange said the launch had been pushed back from May because of the introduction of clearing requirements for some buy-side market participants on 10 June, under the Commodity Futures Trading Commission's rollout of regulations in the Dodd-Frank Act, which create new reporting, clearing and trading requirements for OTC derivatives, including credit default swaps.

Repeated delays to the CFTC's issuance of rules for new trading venues for swaps - known as swap execution facilities - has provided an opportunity for exchanges to offer similar exchange-listed products in advance of the shift of standardised OTC market to centrally cleared platforms.

Although not designed to be economic equivalents of credit default swaps, the new ICE instruments do offer similar exposures. ICE (power and natural gas), CME Group and Eris (interest rates) recently launched swap futures in competition with OTC instruments, but which offer lower initial margins.  

In Q1 results issued earlier this week, ICE said it had cleared more than US$300 billion in credit derivatives following the introduction of clearing for sell-side market participants.

According to ICE, its credit Index futures contracts will offer investors a more efficient means of managing credit risk within a regulated futures market structure, with no 'jump to default' risk. Because the futures contract expires on the first day of trading for the underlying index, there is no risk of the index defaulting. Only non-defaulting entities are included in the index when it is introduced as the next on-the-run contract.

Speaking to in March, Peter Barsoom, COO of ICE Clear Credit, said, "We are optimistic that the new market will be successful and attract new players, but we cannot estimate how large it might become."

The Markit CDX Investment Grade WI Future is based on an index of 125 of the most liquid North American entities with investment grade ratings. The maturity date of each futures contract month will be same as the first trading day of the cleared swap on the relevant new index series. New contract months will be listed every six months (in January and July) 60 days prior to the last trading date of the nearby contract. The contracts will expire in eight months (March and September).

Chris Hall +44 (0)20 7397 3819