A new credit default swaps (CDS) exchange led by Creditex founder Sunil Hirani is set to launch in the US, pending approval from the Commodity Futures Trading Commission (CFTC).
Called trueEX, the new platform would operate under the newly-created swap execution facilities (SEFs) designation as a contract market for swaps which are presently traded predominantly OTC. Having left CDS execution platform Creditex last year after selling the firm to IntercontinentalExchange, Hirani has assembled a staff of about 20 and is hoping to begin trading in New York early this year.
The creation of a lit exchange for CDSs would potentially increase transparency and reduce costs in the instrument, which until now has not been subject to extensive pre-trade price transparency. The ability for market participants to see prices on-screen is expected to benefit buy-side firms which would be better able to compare prices.
“This is an effort to bring transparency, standardisation and a regulated platform to the over-the-counter derivatives markets,” Hirani told media outlets.
Under the Dodd-Frank Act, many currently OTC-traded derivatives will be moved on-exchange to SEFs as part of a G20-mandated reform of the international swaps market.
Hirani met with CFTC commissioner Scott O’Malia on 1 February to discuss his new platform’s application. Other operators have already sought to capitalise on the legislation by preparing their own SEFs. Based in New Jersey, TeraExchange established a central limit order book for OTC cleared derivatives in Q4 2011.
The final rules of operation for SEFs are yet to be finalised. Although US regulators expect to begin the implementation of SEF trading mandates by the third quarter of 2012, over 80% of market participants do not expect implementation until 2013, according to a recent study by financial research firm TABB Group.