Trading in credit default derivatives is to be offered on an exchange for the first time, following a tie-up by IntercontinentalExchange, the US futures bourse, and Markit, the data provider.
ICE, which dominates clearing of credit default swaps, said it would licence North American and European corporate CDS indices from UK-based Markit to develop exchange-traded futures and options contracts. ICE’s move illustrates how exchanges are eyeing new opportunities brought about by wide-ranging reforms of the over-the-counter derivatives market. G20 regulations have mandated that more of the vast $650 trillion OTC derivatives market be processed through central clearing and that more trades be backed by collateral or insurance. A clearing house stands between two parties, ensuring a trade is completed if one side defaults.
Many OTC swaps, such as interest rate swaps, have already been moved through clearing houses as part of the impending regulatory changes, but the CDS market has been relatively untouched. According to the International Swaps and Derivatives Association, a derivatives trade body, only about 10 per cent of a market with an adjusted annual average outstanding notional value of $30 trillion had been centrally cleared last year.
European antitrust officials have been investigating the CDS market. Brussels is probing allegations that 16 of the biggest investment banks tried to shut out competitors through their use of Markit to supply information in the CDS market. A second leg of the investigation concerning the European operations of ICE was suspended because of lack of evidence.
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