IDCG granted regulatory approval to clear OTC interest rate swaps

Date: Tuesday, December 23, 2008
Author: Hedgeweek.com

International Derivatives Clearing Group has announced that the Commodity Futures Trading Commission has approved its application as a derivatives clearing organisation.

The application was filed on 25 August 2008.

The approval paves the way for IDCG's clearinghouse to begin clearing OTC interest rate swap contracts before the end of 2008.

The IDCG clearinghouse is a central counter-party providing real-time credit mitigation for over-the-counter interest rate swap products.

IDCG plans to open the clearinghouse for its members and customers before the end of this year.

Vincent Viola, founder and IDCG board chairman, says: "The systemic issues facing the interest rate swap market is analogous to the issues faced by the energy markets in the earlier part of this decade. The time is right and the macro-market is ready for this innovation just as the energy swap market embraced Clearport in 2002."

Nasdaq OMX-owned Philadelphia Board of Trade will serve as the designated contract market for these products while IDCG will act as clearinghouse.

IDCG will use the "exchange futures for swaps" (EFS) mechanism to accept consummated transactions from a number of independent execution venues.

EFS is a common regulatory supported process which allows the current trading practices to remain unchanged and decreases the associated risk of such transactions.

IDCG says that since these instruments are cleared as futures, the benefits include eliminating the capital requirements of held swap positions and replacing them with margin requirements, favourable futures tax treatment, and the protection of customer segregated funds.

Christopher Edmonds, IDCG's chief executive, says: "We have seen a significant interest among both buy-side and sell-side participants in the last few weeks. We are eager to deliver a clearinghouse and a risk management system that is fungible with the OTC interest rate swap market."