European CDS clearing a go for ICE

ICE Clear Europe has begun clearing credit default swaps, with five buy-side clients using the London-based central counterparty this week.

By None

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 instruments.

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 2014.

Being prepared

Paul Swann, president of ICE Clear Europe, told the level of preparedness across the industry varied, and clearing CDSs gives market participants the opportunity to test clearing processes before laws mandate it.

“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,” Swann said.

“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.”