ICE Clear Europe to Debut Western European CDS

Terry Flanagan

ICE Clear Europe will become the first central counterparty to clear Western European sovereign credit default swaps this month and it is looking to introduce additional contracts.

IntercontinentalExchange said in a statement his week that its European business will introduce clearing for Western European sovereign CDS on April 28 following approval from regulators. ICE initially filed with the US Securities and Exchange Commission to clear European sovereign CDS at the end of 2012 but the SEC filing was resubmitted and updated in February this year.

ICE Clear Europe will begin with CDS on Ireland, Italy, Portugal and Spain sovereign debt, all of which are included in the Markit iTraxx SovX Western Europe index, the main hedging vehicle for European sovereign risk, and are denominated in US dollars.

ICE said in email to Markets Media: “The initial list of European sovereign CDS instruments to be available for clearing on April 28 is based on member and participant demand. Subject to feedback from members and regulatory approvals, we will look to introduce additional sovereign CDS instruments in due course.”

Additional sovereign CDS could include Germany and France, which are amongst the most heavily traded contracts.

ICE Clear Europe said it has extended its existing CDS risk model and margin methodology to clear sovereigns, including additional risk model considerations for country-specific exposure.

“ICE Clear Europe will apply its existing CDS margin methodology for new European sovereign CDS, with further enhancements which include collecting additional initial margin as required to address General Wrong Way Risk,” the exchange added. “For example, where a participant has a high degree of association with an underlying Western European sovereign reference entity by virtue of domicile, a high spread return correlation or where there is additional currency risk.”

Trading volumes of European sovereign CDS have fallen since the European Union banned uncovered short positions in EU sovereign CDS without holding the underlying bond.

The derivatives trade association ISDA said in a report in January 2014, one year after the implementation of the regulation, that the liquidity of the iTraxx SovX Western Europe index and nearly all of its constituents had substantially diminished.

ISDA said: “However, some of the largest declines were observed in the most liquid sovereign CDS. German and French volumes fell 50% in the post-implementation period. Spanish CDS volume declined over 65% since the October 2011 announcement.”

The introduction of Western European sovereign CDS at ICE adds to more than 400 single name and index CDS instruments based on corporate and sovereign debt at the exchange.

ICE Clear Credit began clearing CDS in the US in March 2009 and in Europe in July 2009. In 2011 ICE Clear Credit in the US became the first central counterparty to clear sovereign CDS with the introduction of Argentina, Brazil, Mexico, Venezuela, Russia and Turkey single names.

The exchange said that to date it has cleared more than $50 trillion in gross notional value of CDS, with open interest of approximately $1.6 trillion.

On March 31, ICE began trading 30 Year Ultra Long Gilt futures listed on Liffe, the European derivatives exchange it acquired as part of its acquisition of NYSE Euronext. As at April 15, 16,492 contracts had traded and open interest was 3,441 contracts according to the exchange.

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