Today, Liffe, part of NYSE Euronext, and LCH.Clearnet Ltd, an independent central counterparty (CCP), jointly announced their launch of credit default swap (CDS) index contracts through Bclear, Liffe’s on-exchange administration and clearing service for equity derivatives. The CDS contracts will be negotiated and agreed “away from the exchange before being processed through Bclear and cleared through LCH.Clearnet.” Initially, clearing of CDS offered through Bclear will cover the following CDS index contracts: Markit iTraxx Europe, Market iTraxx Crossover and Markit iTraxx Hi-Vol.
According to Liffe and LCH.Clearnet, the CDS contracts will reference International Swaps and Derivatives Association (ISDA) 2003 Credit Derivative definitions, “and in the case of credit events settle using the Final Price of ISDA Credit Event Auctions.” Liffe Executive Director Gary Jones stated that Liffe has “worked closely with market participants, ISDA and LCH.Clearnet to ensure [its] contract design meets the market’s requirements.”
The launch of the first clearinghouse for CDS marks a significant step for the CDS market. Regulators in both the U.S. and in Europe have vigorously endorsed central counterparty clearing for CDS since the onset of the financial crisis. In the U.S., the Federal Reserve, SEC and CFTC have agreed to coordinate to promote the creation of one or more CCPs for CDS, while Congress continues to hold hearings on the impact of CDS on the current financial crisis. The European Central Bank (ECB) hosted a meeting in November with potential providers of CCPs, their regulators and main users of CCPs, including dealers and buy-side participants, to discuss the establishment of a central CDS clearinghouse, and last week is said to have received commitments from exchanges and dealers to shift CDS into a clearing framework by next year.
The following groups are currently working to create central clearing mechanisms for CDS: Eurex, the derivatives unit of Deutsche Börse., CME Group with Citadel, and IntercontinentalExchange with The Clearing Corporation.