The IntercontinentalExchange will begin clearing Western European sovereign credit default swaps at the end of April, after receiving a green light from regulators.
The move comes after many years of trying to secure approval from regulators on both sides of the Atlantic to clear an instrument that has attracted a good deal of controversy over the past few years. Supervisors are wary of the additional risk of clearing sovereign CDS due to the fact that the creditworthiness of the underlying countries and banks clearing the instruments are heavily correlated. The company’s London-based CCP, ICE Clear Europe, has extended its CDS risk model and margin methodology for the sovereign contracts. This includes additional risk model considerations for country-specific exposures, the firm said.
ICE already clears CDS on emerging market sovereigns including Argentina, Brazil, Mexico, Russia, Turkey and Venezuela. However, the political sensitivities around European sovereign CDS are thought to have prolonged the regulatory sign-off process in this case.
Market makers will hope the combination of central clearing and the new ISDA documentation will help boost liquidity in a product that has struggled to shake off a period of bad publicity. The latest move may also pave the way for regulators to allow CDS on clearing member banks to be accepted at ICE. Regulators are also nervous about clearing these contracts due to the potential issues over wrong-way risk.There are signs that ICE is making progress with regulators, though, after starting to clear the iTraxx Senior Financials index last month.
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