Derivatives exchange CME Group and technology firm Citadel Investment Group has announced they have executed a non-binding term sheet to launch a joint venture company within 30 days. They say will be the first electronic trading platform that is fully integrated with a central counterparty clearing facility for credit default swaps. CME Clearing will be the central counterparty for this solution.

The joint venture will operate as an independent organisation with its own board of directors and management team. CME Group and Citadel have invited major CDS market participants to join as founding members by allocating up to 30 percent of the equity in the venture, and by offering them market maker privileges. The equity and market maker incentives are intended to encourage participants to both migrate existing positions and to trade new CDS contracts on the platform.

The firms involved say the joint venture will provide several benefits to market participants. Chief amongst these, they hope it will bring enhanced liquidity through standardised contracts with fixed coupons for all the leading CDS indices and their underlying single-name components, with OTC market conventions, including credit event procedures.

They also say it will provide facilities to convert existing bilateral trades to standardised contracts and straight through processing into CME Clearing, reducing bilateral credit risks, outstanding notional balances and capital requirements while providing more flexibility for trading in and out of existing positions.

The joint venture has entered into preliminary licensing discussions with Markit.