In a not entirely unexpected move, CME – the world’s biggest futures exchange by volume – and Citadel abandoned their joint effort to set up a trading platform for credit derivatives.
Still, and optimistically, CME said it would continue to push its CDS clearing effort, which will be expanded to include BlackRock, BlueMountain Capital Management, DE Shaw and Pimco as founding members.
Optimistically, because the exchange has yet to clear a single trade in the $27,000bn market for credit default swaps.
In the statement disclosing the reversal – spun as “CME Group Opens Credit Default Swaps Initiative to Additional Partners and Focuses Solution on Clearing Services” – CME chief executive Terry Duffy said:
Over the past several months, we have been working closely with all market participants. As a result of this collaborative process, we have refocused our offering to provide clearing-only services. Both buy-side and sell-side participants have expressed an interest in continuing to execute their CDS transactions the same as they do today, but with the added benefit of central counterparty clearing.
But as the FT pointed out:
The move is an embarrassing setback for two of the US’s most powerful financial institutions, which touted their solution as a transparent and efficient alternative to the structural risks in the market for agreements such as credit default swaps.
…
The failure of the venture by the two Chicago-based companies indicates the strength of the opposition to overhauling the market among the Wall Street powerhouses that collectively deal about 80 per cent of all CDS trades.
It also reflects the difficulty the CME has had unseating its Atlanta-based rival, IntercontinentalExchange. Per the FT:ICE’s US clearing house for CDS has cleared more than 24,000 contracts with a notional value of more than $2,000bn since its launch in March, while its European venture has cleared €313bn since it began processing European CDS indices in July.
Still, the CME’s new line-up of founding members includes some of the biggest players in the CDS market – notably BlueMountain. This should give the exchange more clout in the coming months.
Related links:
NYSE Liffe quits the CDS clearing game – FT Alphaville
Prof Craig Pirrong on the pricing-clearing link in the derivatives market – FT Alphaville
Will SEC and CFTC see eye to eye on CDS? – FT Alphaville
Central counterparties and CDS risk, a contrarian argument – FT Alphaville