- 18Oct
CME Group Inc., the world’s largest futures exchange, began clearing interest-rate swaps traded between dealers and money managers as U.S. regulators seek to lower risk in the $615 trillion private derivatives market.
Participants in the plan include Freddie Mac, Fannie Mae, Pacific Investment Management Co., BlackRock Inc. and Citadel LLC, Chicago-based CME Group said in a statement today. Freddie Mac and Fannie Mae have more than $1 trillion of bi-lateral rate swaps between them.The Dodd-Frank Act, signed into law by President Barack Obama in July, mandates that most interest-rate, credit-default and other swaps be processed by clearinghouses and traded on exchanges or similar systems, taking business from the Wall Street banks that pioneered the transactions. All trades in the OTC market will be reported to regulators. Dealers and their biggest clients will face higher capital requirements to use the market.
“By working closely with both the buy- and sell-side, we were able to gain significant input into the needs of the overall marketplace,” Laurent Paulhac, CME Group’s managing director of OTC products and services, said in the statement.
CME Group rose $9.71, or 3.6 percent, to $277.22 as of 11:08 a.m. in Nasdaq Stock Market composite trading. The shares have fallen 17 percent this year.
The exchange said margin offsets with its interest-rate futures was “an anticipated goal.” Margin payments, the amount of cash an investor must put up against trades, on cleared interest-rate swaps and futures can cancel each other out if the positions oppose each other, for example.
Swapstream Failure
CME Group will compete with a unit of Nasdaq OMX Group Inc. and LCH.Clearnet Group Ltd. of London for clearing trades in the $349 trillion interest-rate swap market. Rate swaps make up the biggest class of over-the-counter derivatives.
CME Group’s new plan follows the failure of its Swapstream system for interest-rate swaps that the exchange halted in September 2008.
LCH.Clearnet is the world’s largest interest-rate swap clearinghouse. Its SwapClear service has been guaranteeing the trades between banks since 1999 and began offering bank customers, such as money managers, the clearing service in December. Andrew McGuire, a vice president in the clearinghouse’s U.S. office, said in July that LCH.Clearnet sees the U.S. market “as the battleground for the next two years.”
The International Derivatives Clearing Group LLC, majority- owned by Nasdaq, has been open to clear rate swaps since December 2008 and had $393 million of open-interest, or active trades, in it clearinghouse as of Oct. 13, said Alan Sobba, an IDCG spokesman.
Bank Partners
Clearinghouses, which are capitalized by their members, increase stability in over-the-counter derivatives markets because they lessen the effect of a default by sharing the risk among the membership and use daily margining procedures to keep accounts current. They also allow regulators to see market positions and prices.
CME Group is working with bank partners Bank of America Corp., Barclays Plc, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, Nomura Holdings Inc. and UBS AG on its rate swap clearing plan, it said today.
Freddie Mac has $646 billion in outstanding rate swaps as of June 30, while Fannie Mae has $552 billion outstanding, according to their most recent quarterly filings.
