Swap Group Taps ICE for Panels Ruling $11.5 Trillion Market

The International Swaps & Derivatives Association appointed Intercontinental Exchange Inc. to manage the process for determining when insurance contracts pay out in the $11.5 trillion credit-default swaps market.

The trade group is ending its role as secretary for regional committees that make binding decisions for the credit derivatives market. ICE Benchmark Administration, a subsidiary of the world’s third-biggest clearinghouse that oversees gauges including the London interbank offered rate, will be responsible for administering the process to ensure clarity and meet evolving regulations, ISDA said in a statement.

ISDA is seeking distance from the determinations committees of dealers and investors that it helped establish in 2009 as part of an effort to improve transparency and standardization after the financial crisis. It adopted new rules earlier this year to mitigate conflicts of interest after the panels came under scrutiny because the firms making the decisions are also the biggest traders.

“IBA has the necessary skills and expertise to support and develop the DC process and help ensure the long-term viability of the credit derivatives market,” said Scott O’Malia, ISDA’s chief executive officer. “We will work closely with IBA in the coming months to ensure a smooth and orderly transition of the DC secretary responsibilities.”

The group started a seven-month selection process in May. The transition will take about six months and ISDA will continue to maintain and publish the documentation that governs contracts as well as operate forums to discuss changes to market practices.

ICE Benchmark Administration took over administering Libor in 2014 after the British Bankers Association was stripped of responsibility because regulators found banks had tried to manipulate the gauge to profit from derivative bets. The organization also runs the daily London gold auction and a benchmark for interest-rate swaps.

ICE partnered with banks to become the first clearinghouse to process credit-default swaps in 2009 and now clears the most globally.

“ICE is very familiar with the mechanics of the credit-default swap market because they clear a lot of contracts,” said Jochen Felsenheimer, the Munich-based managing director of XAIA Investment GmbH, which oversees 2.3 billion euros ($2.4 billion) of assets. “They’re a logical candidate for the role. ICE can do the job at least as well as ISDA can.”

ISDA started making a series of changes to boost transparency of the credit derivatives committees this year, including requiring written policies concerning the identity of decision makers, identification and management of potential conflicts of interest and record keeping.

The determinations process has drawn criticism because the biggest players are also the referees. Firms such as JPMorgan Chase & Co. and Goldman Sachs Group Inc. wrote the rules, are the dominant buyers and sellers and help decide winners and losers.

— With assistance by Neil Callanan

    Before it's here, it's on the Bloomberg Terminal.