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ICE Starts Up CDS Clearing Operation

Atlanta-based IntercontinentalExchange (ICE), a leading operator of global futures exchanges, announced that ICE US Trust LLC, a New York limited liability trust company, began processing and clearing credit default swap (CDS) index transactions last Monday.

ICE also said it had closed on its acquisiton of The Clearing Corporation, which developed the CDS risk management framework, operational processes and infrastructure for ICE US Trust's clearing operations.

The start-up of ICE US Trust came only days after the Securities and Exchange Commission (SEC) approved conditional exemptions to allow the company to operate as a central counterparty for CDS transactions, a move that is designed to make the multi-trillion-dollar CDS market a bit more transparent.

The Board of Governors of the Federal Reserve System earlier this month also gave its regulatory approval for ICE US Trust to become a member of the Federal Reserve System and to serve as a clearinghouse and central counterparty for CDS transactions, which heretofore have been unregulated and contributed to much of the tumult in the credit markets. ICE US Trust's application and charter were approved by the New York State Banking Department in early December.

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

Bank of America, Barclays Capital, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Merrill Lynch, Morgan Stanley and UBS have supported the establishment of the clearinghouse for CDS transactions, and are the initial clearing members of ICE US Trust.

The CDS market was called the "eye of the credit hurricane" by Newsweek magazine in early 2008. CDS transactions are insurance-like contracts that are supposed to cover losses on certain securities in the event of a default. "The buyer of the credit default insurance pays premiums over a period of time in return for peace of mind, knowing that losses will be covered if a default happens. It's supposed to work similarly to someone taking out home insurance to protect against losses from fire and theft. Except that it doesn't. Banks and insurance companies are regulated; the credit swaps market is not. As a result, contracts can be traded -- or swapped -- from investor to investor without anyone overseeing the trades to ensure the buyer has the resources to cover the losses if the security defaults," the magazine said.

The aim of ICE US Trust and clearinghouse operations proposed by other exchanges is to minimize the risks associated with CDS transactions (see NGI, Dec. 15, 2008).

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