ICE Inks Markit Deal to Base Futures on Credit-Swap Indexes

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Intercontinental Exchange Inc. obtained the right to link futures contracts to credit-default swap indexes owned by Markit Group Ltd., the largest creator of the derivative instruments in the $25 trillion market.

The gauges, to reference London-based Markit’s North American and European corporate credit swap measures, are expected to be available in the first quarter, Atlanta-based Intercontinental said in a statement today. Other details of the futures contracts, such as the exact Markit indexes to be referenced or the terms of the deal, weren’t disclosed.

Brookly McLaughlin, an Intercontinental spokeswoman, declined to comment on whether the Markit license is exclusive to the company.

“The expansion of the CDS market to futures provides credit-market participants with additional tools for managing credit risk exposure,” David Goone, chief strategic officer of Intercontinental, said in the statement. Intercontinental owns the world’s two largest clearinghouses for credit swaps, in New York and London.

The Dodd-Frank Act, passed in 2010 to overhaul financial-market regulation, is moving most credit swaps into clearinghouses. The contracts will also trade on electronic systems after the unregulated transactions contributed to and complicated efforts to resolve the credit crisis. Futures on credit swaps would open the market to small hedge funds and other investors who couldn’t afford to participate or didn’t want to take the risk.

Largest Banks

Currently, credit-index bets are made through privately negotiated swaps that trade directly between dealers and their customers and not on exchanges.

In 2007, the world’s largest banks that buy and sell credit-default swaps resisted efforts by CME Group Inc. and Eurex AG to offer credit swaps-like futures. That was before the September 2008 failure of Lehman Brothers Holdings Inc., one of the biggest swaps dealers.

Two years ago, Deutsche Bank AG, Goldman Sachs Group Inc. and Morgan Stanley were said to be talking to exchanges including CME Group about creating futures contracts on credit swaps indexes, people familiar with the matter said at the time.

The banking group, which also included Barclays Plc, was coordinating with Markit to potentially offer exchange-traded futures linked to the company’s indexes.

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