CME Exploring 'Alternatives' For Swap-Clearing Platform--CEO
24 Agosto 2010 - 10:18PM
Dow Jones News
CME Group Inc. (CME) is exploring ways to tweak its method of
handling off-exchange commodity trades as regulators debate the
platform's model, according to the company's chief executive.
Clearport, CME's platform for backing up energy- and
agriculture-related swap deals, has come under scrutiny at the
Commodity Futures Trading Commission as the agency prepares to
erect a new regulatory framework around derivatives trading.
The debate has raised questions around the future shape of
Clearport, an eight-year-old business that contributed about 10% of
CME's revenue in the second quarter of 2010. The platform is a
precursor to the current crop of clearinghouses set up to handle
over-the-counter derivatives trades.
"A lot of us will be adapting and we are working closely with
regulators to preserve the benefits of our existing model, as well
as evaluating a number of alternatives in light of changes from the
financial-reform efforts," said Craig Donohue, chief executive of
CME, in an interview.
Donohue declined to elaborate on possible changes to the
platform, citing an ongoing dialogue with regulators on the
matter.
The CFTC is trying to reconcile the operation of Clearport with
new rules aimed at providing a better view of activity and pricing
in off-exchange markets, according to persons involved in the
discussions.
The financial-overhaul bill signed into law last month requires
that standardized swap products be routed through clearinghouses to
reduce systemic risks represented by the $615 trillion
over-the-counter derivatives market.
The legislation also requires derivative transactions that can
be cleared also to be executed on an electronic platform.
The latter provision is key to the discussions around Clearport,
which passes privately negotiated swap deals into CME's
clearinghouse. Many of the more than 700 products that Clearport
handles are converted into futures contracts for the purposes of
clearing, which carries tax benefits and makes posting collateral
more efficient.
The issue, according to persons involved in the discussions, is
that the transactions Clearport handles generally aren't agreed
upon in an open market, but negotiated privately.
A spokesman for the CFTC had no comment on the matter.
One potential alternative for Clearport would be to add a
transaction execution capability, and to register the platform with
regulators as a "swap execution facility," according to people
involved in the discussions.
Requiring CME to treat all Clearport-listed products as swaps,
instead of converting some to futures contracts, could see the
exchange company lose market share in the business, according to
observers.
U.S. regulators favor an open clearing model for products traded
over the counter, allowing instruments such as credit derivatives
to be cleared at multiple venues.
A report last week from Equity Research Desk estimated that CME
could see an 11% decline in income if the transactions handled by
Clearport are made clearable at other venues by the coming
regulations.
Some trades, including in customized options transactions
facilitated by Clearport, are unlikely to move, given their
complexity, according to the report.
CME isn't the only exchange facing potential changes to the way
it approaches off-exchange trading as market authorities implement
the aims of the financial-overhaul bill.
Rival futures market operator IntercontinentalExchange Inc.
(ICE) may also register its futures and credit derivatives trading
platforms as "swap execution facilities," while dealer banks have
rolled out clearing functions to accommodate customers'
over-the-counter derivatives trading.
-By Jacob Bunge, Dow Jones Newswires; 312-750-4117;
jacob.bunge@dowjones.com
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