ICE Clear Credit

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ICE Clear Credit LLC, a Delaware limited liability company, is a Derivatives Clearing Organisation (DCO) previously known as ICE Trust US LLC which was launched in March 2009. [1] ICE offers trade execution and processing for the credit derivatives markets through Creditex and clearing through ICE Trust™. [2] ICE Clear Credit LLC operates as a central counterparty (CCP) and clearinghouse for credit default swap (CDS) transactions conducted by its participants. ICE Clear Credit LLC is a subsidiary of IntercontinentalExchange (ICE). ICE Clear Credit LLC is a wholly owned subsidiary of ICE US Holding Company LP (ICE LP) which is "organized under the law of the Cayman Islands but has consented to the jurisdiction of United States courts and government agencies with respect to matters arising out of federal banking laws." [3]

Contents

Regulatory Oversight

ICE Trust "is overseen by the Federal Reserve Board and members may include banks or other institutions that fulfill the membership requirements, which include net worth of at least $5 billion as well as a credit rating of A or better." [4] ICE is controlled indirectly by Intercontinental-Exchange, Inc. (ICE) ICE's wholly owned subsidiary, ICE US Holding Company GP LLC (ICE GP), a Delaware limited liability company, is the general partner of ICE LP. ICE, ICE GP, and. "ICE LP is organized under the law of the Cayman Islands but has consented to the jurisdiction of United States courts and government agencies with respect to matters arising out of federal banking laws."

"[R]egulators increasingly regard clearing houses as central to financial stability (Hosking and Griffiths 2012)." [5] On July 19, 2012, The Financial Stability Oversight Council designated ICE Clear Credit LLC as a Systemically important financial market utility (FMU). [notes 1] [6] ICE Clear Credit waived the right to appeal. This subjects this entity to enhanced regulatory oversight. "One of the concerns raised by regulatory bodies is the concentration of CDS trading in only a few dealer institutions in recent years. (Note that the top 10 global banks are involved in 70% of all credit derivatives transactions.) Over time, the use of clearinghouses such as ICE Trust [ICE Clear Credit LLC since July 16, 2011] is expected to reduce the volume of settlement payments among members of the clearinghouse and, in theory, reduce counterparty credit risks that arise under CDS. However, trading CDS through clearinghouses may not effectively address concentration risk given that, at least initially, the clearinghouse members will be the major dealers currently involved in most trades. In order to address counterparty risk, members must provide collateral to ICE Trust [ICE Clear Credit LLC since July 16, 2011] to cover their obligations under cleared CDS. Members must also make initial and ongoing contributions to a guaranty fund that can be used by ICE Trust in the event of a member default (Forrester et al 2009)." [4]

ICE Clear Credit LLC is regulated by the Commodity Futures Trading Commission (CFTC) as a Derivatives Clearing Organization (DCO) and by the Securities and Exchange Commission (SEC) as a Securities Clearing Agency (SCA). [1]

On July 19, 2012, The Financial Stability Oversight Council designated ICE Clear Credit LLC as a Systemically important financial market utility (FMU). [notes 2] [6] ICE Clear Credit waived the right to appeal. This subjects this entity to enhanced regulatory oversight.

History

In 2009 ICE Trust became a New York chartered bank for purposes of Federal Reserve Act [3] and was therefore eligible for membership in the Federal Reserve System.

By 2010, Intercontinental Exchange had cleared more than $10 trillion [7] in credit default swaps (CDS) (Terhune Bloomberg Business Week 2010-07-29) through its subsidiaries, ICE Trust CDS (now ICE Clear Credit) in March 2009 and at ICE Clear Europe in July 2009 in New York, launched in 2008, (which also handles soft commodity futures/options) and ICE Clear Europe Limited in London, UK, launched in July 2009, (which also trades in energy futures) clearing entities for credit default swaps (CDS)(Terhune Bloomberg Business Week 2010-07-29). [7] [notes 3] (CME Group comprises the Chicago Board of Trade and the Chicago Mercantile Exchange, the New York Mercantile Exchange and New York Commodities Exchange). [8] Bloomberg's Terhune (2010) explained how investors seeking high-margin returns use Credit Default Swaps (CDS) to bet against financial instruments owned by other companies and countries. Intercontinental's clearing houses guarantee every transaction between buyer and seller providing a much-needed safety net reducing the impact of a default by spreading the risk. ICE collects on every trade.(Terhune Bloomberg Business Week 2010-07-29). [7] Brookings senior research fellow, Robert E. Litan, cautioned however, "valuable pricing data will not be fully reported, leaving ICE's institutional partners with a huge informational advantage over other traders. He calls ICE Trust [now ICE Clear Credit] "a derivatives dealers' club" in which members make money at the expense of nonmembers (Terhune citing Litan in Bloomberg Business Week 2010-07-29). [7] (Litan Derivatives Dealers’ Club 2010)." [9] Actually, Litan conceded that "some limited progress toward central clearing of CDS has been made in recent months, with CDS contracts between dealers now being cleared centrally primarily through one clearinghouse (ICE Trust) [ICE Trust [now ICE Clear Credit] in which the dealers have a significant financial interest (Litan 2010:6)." [9] However, "as long as ICE Trust [now ICE Clear Credit] has a monopoly in clearing, watch for the dealers to limit the expansion of the products that are centrally cleared, and to create barriers to electronic trading and smaller dealers making competitive markets in cleared products (Litan 2010:8)." [9]

The U.S. Securities and Exchange Commission granted an exemption for IntercontinentalExchange to begin guaranteeing credit-default swaps. The SEC exemption represented the last regulatory approval needed by Atlanta-based Intercontinental. Its larger competitor, CME Group Inc., hasn't received an SEC exemption, and agency spokesman John Nester said he didn't know when a decision would be made.

On March 4, 2009, ICE announced that ICE US Trust, LLC (ICE Trust), a New York limited liability trust company, received regulatory approval from the Board of Governors of the Federal Reserve System [3] to become a member of the Federal Reserve System and to serve as a clearing house and central counterparty for credit default swap (CDS) transactions, initially for North American CDS indexes and later adding liquid single-name swaps. Now known as ICE Clear Credit LLC it is subject to direct regulation and supervision by the CFTC and the SEC.

Also in March 2009 ICE acquired The Clearing Corporation (TCC). This acquisition provided the risk management framework, operational processing and clearing infrastructure for CDS clearing. ICE paid TCC's cash on hand at the close, $39 million more in cash and gave profit participation of less than 35% of the total to be paid to the 10 initial clearing members of TCC. [10]

ICE Clear Credit LLC received temporary no-action assurances from CFTC to exempt ICE swap market participants from various requirements under the Commodity Exchange Act (CEA), that would otherwise apply to certain swap transactions as a result Dodd-Frank Wall Street Reform and Consumer Protection Act. The exemption was based on the premise that the Dodd-Frank Act reflected an "underlying policy to facilitate the central clearing of CDS transactions to reduce systemic risk in the global financial markets, while also minimizing unnecessary disruption and costs to the markets." [11]

In an article published in the New York Times (December 11, 2010) Louise Story [12] argued that members of ICE Clear Credit LLC powerful risk committee drawn from banks like Deutsche Bank, JPMorgan Chase, Goldman Sachs and Morgan Stanley, "helps oversee trading in derivatives ... [and also] share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable — and controversial — fields in finance," a system with "costly implications" for customers and smaller banks. "The marketplace as it functions now 'adds up to higher costs to all Americans,' said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said." [12] In the same month, ICE said it was "well positioned" to establish a Swap Execution Facility (SEF), having met with Commissioner Gensler or his staff four times in the past year to discuss SEF registration. An SEF or multiple SEFs will be the derivatives-trading platform(s) newly required under Dodd-Frank financial-markets reform. Other firms said to be looking at becoming SEFs were Bloomberg LP, Thomson TradeWeb, Parity Energy, [13] and MarketAxess. [14] In a call with investors on November 1, CEO Sprecher had discussed the company's position in and preparation across its numerous markets, including the prospects for SEFs. [15]

On July 16, 2011, ICE Trust U.S. changed its name to ICE Clear Credit. At that time it registered with the Commodity Futures Trading Commission as a Derivatives Clearing Organization and with the Securities and Exchange Commission as a Securities Clearing Agency.

See also

Notes

  1. ↑ The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Payment, Clearing and Settlement Supervision Act of 2010) mitigate financial risk in the financial system and promoting financial stability by giving the Board of Governors of the Federal Reserve authority to set risk management standards for entities that have been designated as Systemically Important Financial Market Utilities (FMU) by the Financial Stability Oversight Council (FSOC). On July 18, 2012 FSOC designated the eight entities as being systemically important utilities: ICE Clear Credit LLC, The Clearing House Payments Company, L.L.C., on the basis of its role as operator of the Clearing House Interbank Payments System, CLS Bank International, Chicago Mercantile Exchange, Inc., The Depository Trust Company, Fixed Income Clearing Corporation, National Securities Clearing Corporation, The Options Clearing Corporation. It under the FDIC's resolution authority where these entities can be placed into receivership and wound-up by the FDIC rather than reorganizing or liquidating under the supervision of a bankruptcy court.
  2. ↑ The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Payment, Clearing and Settlement Supervision Act of 2010) mitigate financial risk in the financial system and promoting financial stability by giving the Board of Governors of the Federal Reserve authority to set risk management standards for entities that have been designated as Systemically Important Financial Market Utilities (FMU) by the Financial Stability Oversight Council (FSOC). On July 18, 2012 FSOC designated the eight entities as being systemically important utilities: ICE Clear Credit LLC, The Clearing House Payments Company, L.L.C., on the basis of its role as operator of the Clearing House Interbank Payments System, CLS Bank International, Chicago Mercantile Exchange, Inc., The Depository Trust Company, Fixed Income Clearing Corporation, National Securities Clearing Corporation, The Options Clearing Corporation. It under the FDIC's resolution authority where these entities can be placed into receivership and wound-up by the FDIC rather than reorganizing or liquidating under the supervision of a bankruptcy court.
  3. ↑ Intercontinental Exchange's closest rival as credit default swaps (CDS) clearing houses, CME Group (CME) cleared $192 million in comparison to ICE's $10 trillion (Terhune Bloomberg Business Week 2010-07-29).

Related Research Articles

In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.

<span class="mw-page-title-main">Credit default swap</span> Financial swap agreement in case of default

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.

The International Swaps and Derivatives Association is a trade organization of participants in the market for over-the-counter derivatives.

In finance, a swap is an agreement between two counterparties to exchange financial instruments, cashflows, or payments for a certain time. The instruments can be almost anything but most swaps involve cash based on a notional principal amount.

Over-the-counter (OTC) or off-exchange trading or pink sheet trading is done directly between two parties, without the supervision of an exchange. It is contrasted with exchange trading, which occurs via exchanges. A stock exchange has the benefit of facilitating liquidity, providing transparency, and maintaining the current market price. In an OTC trade, the price is not necessarily publicly disclosed.

The Depository Trust & Clearing Corporation (DTCC) is an American financial market infrastructure company that provides clearing, settlement and trade reporting services to financial market participants. It performs the exchange of securities on behalf of buyers and sellers and functions as a central securities depository by providing central custody of securities.

iTraxx is the brand name for the family of credit default swap index products covering regions of Europe, Australia, Japan and non-Japan Asia. Credit derivative indexes form a large sector of the overall credit derivative market. The indices are constructed on a set of rules with the overriding criterion being that of liquidity of the underlying credit default swaps (CDS).

<span class="mw-page-title-main">Options Clearing Corporation</span> Financial services business

Options Clearing Corporation (OCC) is a United States clearing house based in Chicago. It specializes in equity derivatives clearing, providing central counterparty (CCP) clearing and settlement services to 16 exchanges. It was started by Wayne Luthringshausen and carried on by Michael Cahill. Its instruments include options, financial and commodity futures, security futures, and securities lending transactions.

A credit default swap index is a credit derivative used to hedge credit risk or to take a position on a basket of credit entities. Unlike a credit default swap, which is an over the counter credit derivative, a credit default swap index is a completely standardized credit security and may therefore be more liquid and trade at a smaller bid–offer spread. This means that it can be cheaper to hedge a portfolio of credit default swaps or bonds with a CDS index than it would be to buy many single name CDS to achieve a similar effect. Credit-default swap indexes are benchmarks for protecting investors owning bonds against default, and traders use them to speculate on changes in credit quality.

<span class="mw-page-title-main">Intercontinental Exchange</span> American exchange and clearing house company

Intercontinental Exchange, Inc. (ICE) is an American multinational financial services company formed in 2000 that operates global financial exchanges and clearing houses and provides mortgage technology, data and listing services. Listed on the Fortune 500, S&P 500, and Russell 1000, the company owns exchanges for financial and commodity markets, and operates 12 regulated exchanges and marketplaces. This includes ICE futures exchanges in the United States, Canada, and Europe; the Liffe futures exchanges in Europe; the New York Stock Exchange; equity options exchanges; and OTC energy, credit, and equity markets.

A central clearing counterparty (CCP), also referred to as a central counterparty, is a financial market infrastructure organization that takes on counterparty credit risk between parties to a transaction and provides clearing and settlement services for trades in foreign exchange, securities, options, and derivative contracts. CCPs are highly regulated institutions that specialize in managing counterparty credit risk.

Markit was a British financial information and services company with over 4,000 employees, founded in 2003 as an independent source of credit derivative pricing. The company provides independent data, trade processing of derivatives, foreign exchange and loans, customised technology platforms and managed services. The company aims to enhance transparency, reduce financial risk and improve operational efficiency. Its client base includes institutional participants in the financial marketplace. On 12 July 2016, Markit and IHS Inc. merged in an all-stock merger of equals to form IHS Markit. IHS Markit later merged with S&P Global on 28 February 2022.

A synthetic CDO is a variation of a CDO that generally uses credit default swaps and other derivatives to obtain its investment goals. As such, it is a complex derivative financial security sometimes described as a bet on the performance of other mortgage products, rather than a real mortgage security. The value and payment stream of a synthetic CDO is derived not from cash assets, like mortgages or credit card payments – as in the case of a regular or "cash" CDO—but from premiums paying for credit default swap "insurance" on the possibility of default of some defined set of "reference" securities—based on cash assets. The insurance-buying "counterparties" may own the "reference" securities and be managing the risk of their default, or may be speculators who've calculated that the securities will default.

The Clearing Corporation is "a Delaware corporation owned by 17 stockholders, many of whom represent the world-wide derivatives marketplace participants and market makers."

LCH is a financial market infrastructure company headquartered in London that provides clearing services to major international exchanges and to a range of OTC markets. The LCH Group includes two main entities: LCH Limited based in London and LCH SA based in Paris.

A Swap Execution Facility (SEF) is a platform for financial swap trading that provides pre-trade information and a mechanism for executing swap transactions among eligible participants.

trueEX Group LLC, known as trueEX, is a New York based financial technology company established on October 21, 2010, by Founder Sunil G. Hirani, a Co-Founder of Creditex Group Inc. and his Co-founder, Jim Miller. Its headquarters are in the Flatiron District of New York City.

<span class="mw-page-title-main">Securities market participants (United States)</span>

Securities market participants in the United States include corporations and governments issuing securities, persons and corporations buying and selling a security, the broker-dealers and exchanges which facilitate such trading, banks which safe keep assets, and regulators who monitor the markets' activities. Investors buy and sell through broker-dealers and have their assets retained by either their executing broker-dealer, a custodian bank or a prime broker. These transactions take place in the environment of equity and equity options exchanges, regulated by the U.S. Securities and Exchange Commission (SEC), or derivative exchanges, regulated by the Commodity Futures Trading Commission (CFTC). For transactions involving stocks and bonds, transfer agents assure that the ownership in each transaction is properly assigned to and held on behalf of each investor.

The Global Association of Central Counterparties or CCP Global, formerly CCP12, is the trade association of central counterparty clearinghouses (CCPs) located in Amsterdam in the Netherlands, and China. It represents 39 primary members, and 3 observer members of CCPs operating across Africa, the Americas, Asia, Australia and Europe and representing over 60 individual CCPs. CCP12 was formed in 2001 by major central counterparty organizations in Europe, Asia and the Americas to share CCP related information and to develop analyses and policy standards for common areas of concern.

<span class="mw-page-title-main">Financial market infrastructure</span> Critical component of the financial system

Financial market infrastructure refers to systems and entities involved in clearing, settlement, and the recording of payments, securities, derivatives, and other financial transactions. Depending on context, financial market infrastructure may refer to the category in general, or to individual companies or entities.

References

  1. 1 2 ICE Clear Credit LLC application to become a Recognised Overseas Clearing House under s288 & 292 of the Financial Services and Markets Act 2000 (Report). London, UK: Office of Fair Trading. October 2012. Retrieved March 15, 2013.
  2. ↑ "ICE Crude Oil" (PDF). www.theice.com. 2009. Retrieved March 16, 2013.
  3. 1 2 3 "Federal Reserve System ICE US Trust LLC New York, New York Order Approving Application for Membership ICE US Trust LLC ("ICE Trust")" (PDF). 2009. Retrieved March 15, 2013.
  4. 1 2 J Paul Forrester; Joel S Telpner; Edmund Parker; Lawrence Hamilton; Jamila Piracci (Summer 2009). "Proposed Reform of the OTC Derivatives Market: Turning "Weapons" into Plowshares?". The Journal of Structured Finance. 15 (2): 9–19. doi:10.3905/jsf.2009.15.2.009. S2CID   154991961.
  5. ↑ Patrick Hosking; Katherine Griffiths (December 21, 2012). "US exchange warns of redundancies after winning the battle for NYSE". The Times. London, UK. Retrieved March 15, 2013.
  6. 1 2 "Designation of Systemically Important Market Utilities" (PDF). US Treasury Department. July 19, 2012. Retrieved March 15, 2013.
  7. 1 2 3 4 Chad Terhune (July 29, 2010). "ICE's Jeffrey Sprecher: The Sultan of Swaps". Bloomberg Business Week. Archived from the original on August 6, 2010. Retrieved February 15, 2013.
  8. ↑ Brendan Bilko (March 10, 2011). Open outcry trading at CME Group fading into obscurity (Report). Chicago: Medill Reports. Archived from the original on April 9, 2013. Retrieved March 15, 2013.
  9. 1 2 3 Robert E. Litan (April 7, 2010). "The Derivatives Dealers' Club and Derivatives Markets Reform: A Guide for Policy Makers, Citizens and Other Interested Parties" (PDF). Brookings Institution. Archived from the original (PDF) on May 28, 2013.
  10. ↑ "ICE Clear Credit Regulation and Governance FACT SHEET May 2012" (PDF). Retrieved 22 July 2012.
  11. ↑ "Investment Company Act of 1940 — Section 17(f) and Rule 17f-6 ICE Clear Credit LLC". US Securities and Exchange Commission. July 16, 2011. Retrieved March 15, 2013.
  12. 1 2 Story, Louise (December 11, 2010). "A Secretive Banking Elite Rules Trading in Derivatives". The New York Times . Retrieved March 15, 2013.
  13. ↑ "Commissioner O'Malia's SEF Showcase: Current Technology & Market Direction" (PDF). CFTC Agenda. March 31, 2011.
  14. ↑ Protess, Ben, "Swap Execution Facility: The New Term on Wall Street", December 17, 2010, 9:47 am. Retrieved 2010-12-22.
  15. ↑ "IntercontinentalExchange CEO Discusses Q3 2010 Results - Earnings Call Transcript", Seeking Alpha , November 01, 2010. Retrieved 2010-12-22.
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