Ice Concepts (EU:ICE)
Historical Stock Chart

From Dec 2019 to Dec 2024

CME Group Inc. (CME) said Thursday it will start testing next week a long-delayed clearing platform for credit derivatives.

The exchange operator will begin test-clearing credit-default swap trades with a pilot group of dealer banks and buy-side participants as the exchange finalizes details of the service, according to Ken Vroman, CME's chief of corporate development.

The announcement follows CME's decision to drop a trade-execution platform for credit derivatives in an effort to build support among dealers that control the majority of trade in the $31 trillion over-the-counter market.

CME is competing with rivals IntercontinentalExchange Inc. (ICE) and Deutsche Boerse AG's (DBOEF) derivatives unit Eurex to clear credit-derivatives transactions.

Banks are seeking to route more swap trades through clearinghouses as regulators weigh reforms for over-the-counter markets, which shouldered some of the blame for last year's financial meltdown.

Since launching its service in March, ICE has cleared more than $2 trillion in CDS contracts. That puts the Atlanta-based company far ahead of Frankfurt-based Eurex, which launched a European platform in late July, and CME, which has yet to announce a launch date as it works to secure support from dealer banks.

Speaking to analysts in Chicago on Thursday, Vroman said that CME has been in talks with six to eight dealers "for quite a long time."

"We're confident we'll be coming to closure with them in the near future," he said.

Demand from customers, as well as a Federal Reserve-backed push for competition among clearinghouses, is seen driving dealers to offer CME's service as an option for credit derivatives business.

In mid-September, CME announced that it had signed six buy-side firms as founding members of its credit-derivatives clearing service, including Citadel Investment Group, which had developed the now-abandoned CDS trading solution in conjunction with CME.

Other buy-side members are AllianceBernstein Holding LP (AB), BlackRock Inc. (BLK), BlueMountain Capital Management, D. E. Shaw & Co. and Allianz SE's (AZ) Pimco.

According to Vroman, CME's clearing service will focus on speed - clearing trades as they are executed rather than at the end of the trading day or the day after.

The exchange operator is also considering post-trade processing and portfolio-valuation services around over-the-counter products.

Beyond credit-default swaps, CME is working on clearing functions for the much-larger interest-rate swap market, estimated at around $403 trillion, and over-the-counter foreign-exchange transactions.

While CME has identified the clearing of OTC products as one of its biggest opportunities, executives also sought to put the nascent business in perspective Thursday.

Chief Executive Craig Donohue told analysts that the company was "absolutely not" dependent upon the swaps business to achieve high growth rates, emphasizing expectations for its core listed derivatives business to recover as the global economic picture improves.

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com