Summary of CDS Clearing Initiatives

The first initiatives to set up a central clearing counterparty for CDS originated in the US

• There were four main initiatives to clear CDS in the US, all of which developed at around the same time in 3Q2008
• The initiatives for a European clearing counterparty followed US efforts given pressure from the European Commission and the ECB for a European-based clearing mechanism that could be locally regulated
• Ten banks committed to start using one or more clearing houses in the Eurozone by the end of July 2009
• The most recent initiatives have been from Asia, with Japan Securities Clearing Corporation (JSCC) and Tokyo Financial Exchange (TFX) working out details on how to clear CDS
• However, it is unlikely that participants would want or use two Japanese clearing institutions for OTC products, as the Japanese CDS market is a small proportion of global volumes. Currently, Japan accounts for 0.6 per cent of global CDS volumes outstanding
• Overall, given recent regulatory focus on counterparty risk across derivatives, exchanges and clearing houses are looking to offer centralized clearing services across more derivative products or expand their existing clearing services to include buyside investors where such services were only available to large dealers
• As of mid-Sep 2009, 15 banks (which include Barclays Capital, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase and Morgan Stanley) have made a pledge to the Fed to clear the majority of credit and interest rate derivatives through central counterparties by the end of the year
• The banks have pledged to clear 95 per cent of all eligible credit default swaps and 80 per cent of all credit default swaps through a central clearing party. They have further pledged to submit 90 per cent of eligible interest rate derivatives, 70 per cent of new trades, and 60 per cent of all existing interest rate derivatives to be cleared centrally

What’s common among the initiatives

• All the US based initiatives are from exchanges – CME, Euronext Liffe, Eurex (part of the Deutsche Borse) and Intercontinental Exchange (ICE)
• The European based initiatives are from clearing providers – Eurex Clearing and LCH.Clearnet – who have been involved in the US effort, Eurex Clearing being the clearing provider for Eurex and LCH.Clearnet being the clearing provider for Euronext Liffe
• In addition, ICE has set up a European clearing provider so that they can provide a transatlantic solution
• The Japanese initiatives are from clearing providers - JSCC is 86.3% owned by the Tokyo Stock Exchange and is the clearing house for all Japanese cash equities and derivatives on the Tokyo Stock Exchange; and TFX is owned by its members and specializes in trading and clearing derivatives
• All the initiatives are focused on applying the central counterparty solution to current CDS contracts rather than creating exchange traded instruments such as futures
• The plan is for trades to be done under standard ISDAs and linked to the current ISDA auction process for settlement
• CDS trades will be agreed bilaterally as they are today, but each leg of the trade will be transacted with the central counterparty
• The central clearing counterparty will then determine a margin amount for each of its counterparties

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Publish Date: December 21, 2009

Source URL: http://creditriskchronicles.blogspot.com/2009/12/summary-of-cds-clearing-initiatives.html