June 1, 2009 / 8:04 PM / 10 years ago

CORRECTED - Banks' 'oligopoly' stymies CDS clearing-BlueMountain

(In fourth paragraph, corrects to show dealers have revenue sharing agreement with ICE)

NEW YORK, June 1 (Reuters) - Large dealers in the $26 trillion credit default swap market are blocking CME Group’s CME.N efforts to clear the trades in a bid to retain their “oligopoly” over the market, hedge fund BlueMountain Capital Management said on Monday.

Central clearing of CDS trades is viewed as imperative to removing risks associated with the potential failure of a large counterparty. Fears of margin losses helped stem a run on Bear Stearns Cos and Lehman Brothers and sparked government calls for mandatory clearing of standardized CDS trades.

The IntercontinentalExchange Inc (ICE.N) and CME Group Inc (CME.O), which runs the Chicago Mercantile Exchange, are the two main exchanges competing to clear CDS trades in the U.S. market.

Dealers are scuttling CME’s efforts in order to control trades through the ICE clearing arm, from which they will receive 50 percent of the revenues, Samuel Cole, chief operating officer at BlueMountain, said in an e-mail.

The letter, titled “A Note to Dealers,” was sent to more than 200 industry representatives, including large dealers, buyside firms, trade groups and regulators, according to a copy obtained by Reuters.

A representative from IntercontinentalExchange was not immediately available to comment.

Cole took issue with comments made in an industry call on Friday, which was held to discuss plans to move CDS trades to central clearing.

“The stunned silence that you heard from buyside firms on Friday’s call was the disquieting realization that the dealer community may be filibustering to protect its oligopoly and not seriously engaged in working with the buyside to develop a clearing solution,” Cole said.

Reporting by Karen Brettell; Editing by Padraic Cassidy and Dan Grebler

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