March 6, 2009 / 9:42 PM / 11 years ago

UPDATE 3-ICE clears SEC hurdle to clear credit derivatives

* ICE to begin clearing CDS March 9

* ICE injects $35 million into Trust’s operations

* Barclays added to group of brokers backing proposal

* CME says expects approval soon (Adds TCC background, guaranty fund, Barclays, Dirk Pruis, TABB estimate)

By Rachelle Younglai and Jonathan Spicer

WASHINGTON/NEW YORK, March 6 (Reuters) - Derivatives exchange operator IntercontinentalExchange (ICE.N) said on Friday it would begin clearing U.S. credit derivatives on Monday after it became the second entity to receive full regulatory approval to act as a clearinghouse.

The Securities and Exchange Commission approved conditional exemptions to allow ICE US Trust LLC, the exchange operator’s New York-based trust company, to provide central counterparty services for credit default swaps, known as CDS.

ICE said it injected $35 million into the Trust’s operations and $10 million into its guaranty fund, and expected to add another $90 million into the fund over two years.

The company also added Barclays Capital to the list of broker-dealers that have agreed to back its clearinghouse, strengthening its bid to take advantage of a potentially lucrative new source of revenue.

ICE’s proposal for the $27 trillion over-the-counter market is one of several industry proposals that could satisfy the government’s goals for forming central counterparties and increasing transparency in the market for CDS, which are contracts that insure against the default of debt issuers.

The private and interconnected nature of the CDS market has been blamed for exacerbating the global credit crisis, including the unwinding of positions held by U.S. insurance giant American International Group, a major issuer of CDS.

“It is critical that we bring increased transparency to credit default swaps by developing efficient and effective oversight of credit default swap clearing agencies,” SEC Chairman Mary Schapiro said in a statement.

In December, the SEC approved Anglo-French clearinghouse LCH.Clearnet to begin operating as a U.S. CDS clearinghouse. Analysts also expect the SEC to soon approve a clearing proposal by Chicago-based derivatives exchange CME Group Inc (CME.O).

“We believe that our SEC approval is imminent,” said CME spokesman Allan Schoenberg.

Exchanges have scrambled to set up clearinghouses for CDS since the market was targeted by regulators and politicians last year. A recent study by research and consulting firm TABB Group said CDS clearinghouses will get almost $100 million in revenue this year and $138 million by 2011.

ICE operates futures exchanges and over-the-counter markets for commodities and derivatives products. It received CDS approval from the U.S. Federal Reserve earlier this week, and said in a statement on Friday it would begin processing and clearing index-based CDS March 9.

It will first clear North American Markit CDX indexes, and then “liquid single-name CDS in the following months,” ICE said.

“ICE Trust has been designed to further enhance well-functioning CDS markets by reducing counterparty and systemic risks, and increasing transparency and capital efficiency in the CDS markets,” ICE Chief Executive Jeffrey Sprecher said in a statement.

ICE agreed in October to buy the broker-owned, The Clearing Corp, giving its CDS proposal the key backing of nine investment banks.

On Friday, Barclays Capital — which purchased some of the businesses of bankrupt broker-dealer Lehman Brothers, an original TCC shareholder — was added to the list.

The ten brokers are “the initial clearing members of ICE Trust” and have made “a significant contribution” to the Trust’s guaranty fund, ICE said.

ICE said all buyside and sellside institutions that meet its standards are eligible for membership. Dirk Prius, a former managing director in the operations division of Goldman Sachs (GS.N), will be the Trust’s president.

The investment banks partnered with ICE in the United States are: Barclays, Bank of America (BAC.N), Citigroup (C.N), Credit Suisse CSGN.VX, Deutsche Bank (DBKGn.DE), Goldman Sachs, JPMorgan Chase (JPM.N), Morgan Stanley (MS.N), UBS UBSN.VX and Merrill Lynch, which Bank of America has agreed to buy. (Editing by Bernard Orr)

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