IntercontinentalExchange Trust to begin clearing CDS on Monday

By Jennifer Chiou

New York, March 6 - IntercontinentalExchange, Inc. announced that ICE US Trust, LLC will begin processing and clearing credit default swap on Monday, and clearing of North American Markit CDX indexes is expected to be followed by liquid single-name CDS in the following months.

According to a news release, ICE Trust has entered into an agreement with Markit to produce daily settlement prices required for mark-to-market pricing, margining and clearing.

Previously, the company agreed to acquire Clearing Corp. to form ICE US Trust with the support of Bank of America, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley and UBS. The acquisition closed on Friday.

The Securities and Exchange Commission issued an order permitting ICE Trust to clear CDS transactions.

As already reported, IntercontinentalExchange and Clearing were working with regulators, other market participants and industry groups to develop a comprehensive central counterparty clearing solution for the credit default swaps market.

The boards of directors of IntercontinentalExchange and Clearing previously approved memorandums of understanding to develop the joint clearing solution and to effect the acquisition, which are subject to the receipt of government approvals.

Clearing Corp.'s risk management systems were developed internally based on a proprietary risk assessment methodology designed specifically for the CDS market, and have been reviewed and validated by Finance Concepts, an independent risk management consultancy, as part of the regulatory review process, the release added.

The methodology will be used by the clearing house to determine initial and variation margin requirements, guaranty fund requirements and official daily settlement prices.

ICE Trust said that membership is open to all qualifying buyside and sellside institutions.

The management team will report to the ICE Trust board and Dirk Pruis will be the president of ICE Trust.

ICE US Trust now operates as a New York limited-purpose trust company and functions as a global clearinghouse and central counterparty for CDS transactions, and it plans to become a member of the Federal Reserve System.

Clearing will continue to support its existing clearing customers.

"Regulatory approval allows ICE Trust to bring to market the most comprehensive range of CDS clearing and risk management services available today," said Jeffrey C. Sprecher, chairman and chief executive officer of ICE.

"ICE Trust has been designed to further enhance well-functioning CDS markets by reducing counterparty and systemic risks, and increasing transparency and capital efficiency in the CDS markets."

ICE noted that it has contributed an initial $10 million to the guaranty fund from cash on hand.

Atlanta-based IntercontinentalExchange operates regulated futures exchanges and over-the-counter markets for agricultural, energy, equity index and currency contracts as well as credit derivatives.

Clearing is a Chicago-based independent derivatives clearinghouse.

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