Creditflux Newsletter

Credit derivative dealers have set a timetable for solving the problematic issue of buyside access to ICE Trust, the central clearer that has been operating since March.

In a letter to regulators last month, dealers committed to making credit derivatives central clearing available to buyside firms no later than 15 December.

However, sources in the central clearing area say that coming up with a solution for the buyside remains challenging, due to the difficulty of building strong safeguards.

Few buyside firms will have sufficient capital to qualify as clearing members. The alternative is indirect access to central clearing by facing a dealer.

As a result, sources say that ICE Trust is having to ensure there is a strong regulatory and legal framework in two key areas. Buyside firms, when posting initial margin, must feel confident that the collateral they put up is properly segregated from a dealer’s funds. And transfer of customer trades to another central clearing member needs to be watertight in case a dealer goes under.

According to one asset manager, collateral segregation and portability are basic safeguards that need to be right. “There is a lot of work going on in this area,” he says.

ICE Trust says it is working on this issue, but declines to give details of its current position.

On these questions, asset managers appear to be relatively confident about CMDX – a competing central clearing initiative developed by the Chicago Mercantile Exchange and asset manager Citadel. Collateral segregation and portability fall under futures legislation and the regulations of CME’s overseer, the Commodity Futures Trading Commission.

However, dealers are still to back CMDX, having so far put their weight behind ICE Trust, which is regulated as a limited purpose bank.