Yesterday, the New York State Banking Department announced that the New York State Banking Board (NYSBB) had approved an application submitted by the IntercontinentalExchange (ICE) to create a New York-chartered trust company, ICE US Trust LLC, as part of ICE’s earlier announced plan to serve as a central clearing facility for credit default swaps (CDS). Superintendent of Banks and Chairman of the NYSBB Richard H. Neiman, stated that the NYSBB had “worked closely with [their] counterparts at the Federal Reserve Bank of New York in overseeing this industry initiative, to strengthen arrangements for clearing and settling CDS and thereby reduce systemic risk.” Such a clearing facility for CDS, according to the NYS Banking Department, will “mitigate counterparty risk and decrease the notional amount of CDS outstanding, estimated currently to be as large as $30-50 trillion.”

Upon the completion of organizational steps required to taken by ICE US Trust LLC, including raising capital (which is expected to come from ICE), and the fulfillment of other conditions, Superintendent Neiman will authorize ICE US Trust LLC to commence business as a central clearing facility for CDS. However, prior to commencing business, ICE must await approval by the Federal Reserve of related applications.

The impact of the CDS market in perpetuating the current financial crisis has received great attention over the past few months from national and state regulatory authorities, and the approval by the NYS Banking Department of a central clearing facility for CDS marks the first formal regulatory action with respect to the CDS market. Last month, the New York State Insurance Department delayed indefinitely the regulation of CDS as financial guaranty insurance.