Intercontinental Exchange Inc. (ICE), owner of the world’s largest credit-default swap clearinghouse, will petition the U.S. Securities and Exchange Commission to allow asset managers to clear trades in the $26.5 trillion market.
“The SEC’s failure to act has disadvantaged the buy-side and investors relative to the dealers,” Peter Barsoom, chief operating officer of ICE Clear Credit, Intercontinental’s U.S.- based credit swap clearinghouse, said today at a Futures Industry Association conference in New York. “We’ve been doing everything we can to put pressure on the SEC. We will start in the next several days a petition with the buy-side for the SEC” to approve rules needed for so-called client clearing, he said.
Under the Dodd-Frank Act, the SEC has authority over credit swaps on individual companies, while the Commodity Futures Trading Commission will oversee credit-swap indexes. Intercontinental Exchange asked the regulators last year to work together to allow investors who use both types of swaps to combine their trades to reduce margin requirements, known as portfolio margining, Barsoom said.
“The time for the SEC to act is now,” he said. “We haven’t had as much traction with the SEC as we’d like.”
Judith Burns, a spokeswoman for the SEC, declined to comment.
ICE Clear Credit began offering clearing to non-dealer firms in December 2009 and had processed about $24.7 billion of credit-swap trades as of May 11, according to the company. That compares with $30 trillion of trades the company has cleared overall, 99 percent of which were between dealers, Barsoom said today.
The buy-side clearing at ICE Clear Credit only involves index trades now, not so-called single-name contracts on individual companies or countries, said Lee Underwood, a spokesman. Hedge funds and asset managers have little incentive to clear under the existing structure, which requires them to post margin separately on single-name swaps in the SEC account and on the index trades in the CFTC account.
Asset managers and hedge funds are not yet required to clear trades under Dodd-Frank, with the mandate expected to be in place by next year.
If different market rules from the two regulators lead to pricing differentials between single-name and index contracts “that is a big issue,” James Hill, a managing director at Morgan Stanley, said during the panel discussion. “It could have a very big impact on the market.”
Intercontinental asked the SEC in October to allow users of both single-name and index credit swaps to hold both trades in one account that would be overseen by the CFTC. That would allow offsetting trades to be netted, reducing the risk of the overall position and thus cutting the amount of margin that has to be pledged to the clearinghouse.
Investors in the market often buy swaps on an index and then sell them on the individual members, or vice versa, to profit from outsized price differences.
“It’s really one market that people trade together,” Barsoom said.
The SEC wants Intercontinental to offer its users a choice between holding all their positions in an SEC account or a CFTC account, Barsoom said in an interview after the panel discussion. “No one wants that choice,” he said. Either the SEC doesn’t understand what market users want “or this is a political issue with SEC guarding their turf,” he said. Swaps users prefer CFTC accounts in part because they provide better protection for collateral, he said.
Intercontinental’s request is supported by the Managed Funds Association, a trade and lobbying group for hedge funds, it said in a letter to the SEC and CFTC in December. The group “is very concerned that customers, including many MFA members, will not benefit from the same capital relief and access to clearing” that dealers will receive, it said in the letter.
The petition requesting the SEC to make a decision on portfolio margining was approved by ICE Clear Credit’s buy-side committee, Barsoom said. The company doesn’t release what funds are represented on that committee, Underwood said. A draft is being written now and will be sent around for signatures from asset managers and hedge funds, Barsoom said.
“We just want the SEC to approve it,” he said.