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ICE Trust backers accused of freezing out rival CME-led clearing house

02 June 2009  |  8393 views  |  0 Stock market newspaper with coins stacked

Major derivatives dealers have been accused of "filibustering" to protect their ogilopoly by withholding support from buy-side-friendly rivals to the InterContinental Exchange's credit default swaps clearing house.

The allegations have been made in an e-mail "note to dealers" sent by BlueMountain Capital COO Samuel Cole.

BlueMountain is one of six founding money management firms to have thrown their weight behind CMDX, the Chicago Mercantile Exchange and Citadel Investment joint venture that is looking to compete with ICE Trust. Other founding members include Pacific Investment Management, BlackRock, D E Shaw and AllianceBernstein.

ICE Trust launched in March with the backing of a collective of major Wall Street dealers and has so far handled up to $710 billion in credit-default swaps. CME, meanwhile, has been forced to keep its powder dry while it searches for sell-side partners prepared to bring their trades to CMDX.

Aware of the mounting disquiet, ICE Trust moved late last month to placate buy side participants by expanding its services to provide for margin segregation and account portability to firms who are not direct clearing members.

However, Cole believes the dealer community is not seriously engaged in working with the buy-side to develop a clearing solution. The e-mail - a copy of which was obtained by Bloomberg - outlining his grievances was sent following a conference call of the International Swaps and Derivatives Association's credit steering committee and buy-side clearing working group.

"The dealers suggested more than once that there is room for only one solution in the market," Cole wrote, adding that they are "deriving substantially more economic value from their relationship with ICE than the six buy-side firms are from their relationship with CME".

"The stunned silence that you heard from buy-side firms on Friday's call was the disquieting realisation that the dealer community may be filibustering to protect its oligopoly" the e-mail continued. "I would urge the dealers to change course and work with us to build a viable clearing solution that is in the interest of the entire market."

Cole's criticisms coincide with the publication of a letter sent by global dealers and buy-side institutions to regulators worldwide committing to fundamental reforms in the over-the-counter markets.

The letter reiterates the industry's commitment to reducing systemic risk through the following actions:
• Implementing data repositories for non-cleared transactions in these markets to ensure appropriate transparency and disclosure, and to assist global supervisors with oversight and surveillance activities.
• Clearing for OTC standardized derivative products in these markets.
• Enabling customer access to clearing through either direct access as a clearing member or via indirect access, including the benefits of initial margin segregation and position portability.
• Delivering robust collateral and margining processes, including portfolio reconciliations, metrics on position and market value breaks, and improved dispute resolution mechanics.
• Updating industry governance to be more inclusive of buy-side participants.
• Continuing to drive improvement in industry infrastructure as well as to engage and partner with supervisors, globally, to expand upon the substantial improvements that have developed since 2005.

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