CME Group Sees Up To Six Dealers Backing Credit Swaps Platform
The expected deal flow would help the exchange regain momentum in the looming battle to clear trades in the $33 trillion CDS market after IntercontinentalExchange Inc. (ICE) effectively took over a bank-backed effort to process the swaps.
CME and Citadel Investment Group, the Chicago hedge-fund manager, will launch their Credit Market Derivatives Exchange when it secures the go-ahead from the Commodity Futures Trading Commission and the Securities and Exchange Commission.
The CDS market has been a key area of expansion for CME amid slowing volume growth in some existing products, but had appeared to lose ground after ICE signed up some of the largest banks and took over their effort to use Chicago-based The Clearing Corp., or TCC, for the business.
Three major credit-derivatives dealers, along with Citadel's own CDS business, are "all that's initially needed for sufficient volume," said Thomas Miglis, senior managing director of information technology at Citadel.
He added that as many as six banks may be onboard at the time of launch; some of these dealers are also backing the ICE venture.
CME and Citadel have also been in discussions with a number of credit hedge funds and traditional asset managers, whose importance to CDS markets CME has stressed in recent weeks.
Miglis noted that the equity stakes available to partners in the CMDX venture may be greater than those offered by the ICE-TCC effort, as CMDX is expected to launch with fewer founding members. CME and Citadel said in November that they will offer the platform's equity partners more than 50% of the ownership in CMDX.
Officials from CME and Citadel, demonstrating the platform on Friday, said that the product has been ready to roll since the beginning of November, and the firms have spent the ensuing weeks adding features and recruiting participants on both the buy and sell side of the CDS market.
Company executives estimated that CMDX will be able to clear 70% to 95% of the current CDS market, mostly constituting CDX and iTraxx index swaps and contracts on the indexes' single-name components; swaps on countries and mortgage bonds won't be supported.
CMDX will come in four forms: a Web-based interface, a deployable application for big firms, an application programming interface for companies that want to design automated trading around the system, and a stand-alone post-transaction clearing service for bilateral over-the-counter CDS transactions.
The Citadel-developed technology will be operated out of CME's data center to counter conflict-of-interest concerns.
Miglis said that initial trading on the platform would see CDS traders negotiating deals via CMDX's "request for quote" model, in which human participants electronically exchange bids and quotes on swap transactions. But he anticipated a quick pickup of automated trading via the API module, noting the standardization that already exists in index and single-name credit derivatives.
He compared the scenario to the equity options markets, where electronic trading initially met resistance from dealers because the tighter spreads that resulted also meant lower margins per deal. Over time, however, Miglis said that faster trading meant that far more trades were made, boosting overall profits.
Despite regulators' self-imposed Dec. 31 deadline and an agreement in mid-November to share oversight of the swaps, there is still no indication exactly when the CDS clearing services will be allowed to launch in the United States.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com
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Publié le 22 Décembre 2008 Copyright © 2008 Dowjones
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