ICE Defers CDS Clearing in Europe – Analyst Blog

On Thursday, Intercontinental Exchange Inc. (ICE) announced that it has postponed the launch and availability of its European single name credit default swap (CDS) clearing through ICE Trust (ICE’s clearing house) for its buy-side customers to September 2010. Initially, the company had projected to launch the CDS clearing in Europe in June 2010.  

 

Additionally, ICE Clear Europe anticipates the commencement of CDS contracts clearing in Western Europe during the upcoming months. The delay has been explained on the back of pending regulatory approvals and ongoing negotiations with other market participants.

 

Further, the company also announced that it has granted approval to Nomura Holdings Inc. (NMR) for being a clearing member of ICE Trust. Nomura is the 14th clearing member of ICE Trust and the first headquartered in Asia.  

 

Besides, ICE achieved a milestone by clearing over $9 trillion in cumulative gross notional value in the week ended May 28, 2010, which included $1.2 billion in North American buy-side index transactions. The buy-side and clearing member participation also witnessed a climb in ICE. The company has currently cleared 172 single names, thereby expanding its single-name CDS coverage to 80% of iTraxx (26 contracts) and 55% of CDX constituents, presently comprising 35 contracts.

 

The company has also established customer advisory committees in the U.S. and Europe. These efforts by ICE are an attempt to reduce systemic risk and create more transparency in credit derivatives operation. Moreover, the ongoing financial overhaul reform taken up by the U.S. government is also becoming effective in regulating the intensely risk-prone derivatives market.

 

The financial reform bill could even impel the banks to spin off their swap desks. This could in turn add pressure on banking companies and stock exchanges that earn billions annually through the credit swaps. Hence, the trading community seeks to generate a clear and risk-mitigating approach in order to protect clients from severe losses without hampering their own trading volumes.

 

Further, this risk-mitigating approach gives rise to the significance of CDS clearing houses since a CDS is designed to transfer the credit exposure of fixed income products across two parties. Hence, these derivatives can be used to hedge against credit exposure as it provides risk-protection to the buyer and a guarantee of the credit-worthiness of the debt or loan from the seller. Such trading processes can also help in minimizing the credit default tendency of the business organizations, which was an overall image during the recent financial downturn. 

 

Overall, we believe that ICE is one of the most dynamic growth companies in the industry given its higher earnings visibility, consistent cash generation, disciplined investment and limited balance-sheet risk. In the long run, these factors are expected to deliver strong shareholder value, although near term outlook remains cautious due to the current volatile economic conditions.