The Chicago Mercantile Exchange is teaming up with Citadel to launch a credit default swaps trading platform and central counterparty facility. News of the move comes as the Federal Reserve meets with industry leaders to push for new risk mitigation techniques in the over-the-counter markets.
CME and Citadel say they have executed a non-binding term sheet to launch a joint venture company within 30 days, to provide an electronic CDS swaps platform that will be fully integrated with a central counterparty operating under the Chicago exchange's existing clearing house.
The joint venture will operate as an independent organisation with its own board of directors and management team. CME Group and Citadel have invited major CDS market participants to join as Founding Members by allocating up to 30 percent of the equity in the venture, and by offering certain market maker privileges. The equity and market maker incentives are designed to encourage participants to both migrate existing positions and to trade new CDS contracts on the platform.
The move comes amid growing political and regulatory clamour for more transparency in the $55 trillion over-the-counter market. The CME initiative comes just a week after CCorp, which is backed by major credit dealers, IDBs and Eurex and Markit, confirmed plans to launch its own central counterparty later this year. Intercontinental Exchange is also understood to be developing a rival solution.
The CME joint venture partners say they have entered into preliminary licensing discussions with price discovery outfit Markit to use its CDS indices and Markit RED identifiers.
Craig Donohue, chief executive officer of CME Group says: "This platform provides an important opportunity for market participants to demonstrate to customers and regulators alike how these markets can be better organised to meet legitimate hedging and trading needs while reducing operational and credit risks that have grown unchecked in the OTC market."