Clearinghouse Pushes Ahead to Auction Credit Default Swaps

(MoneyWatch)  Setting values for elusive Credit Default Swaps (CDS) has taken a step forward when one of two new clearinghouses for their trading won regulatory approval.

IntercontinentalExchange Inc., an Atlanta firm planning a clearinghouse, won approval Dec. 4 for a New York trust charter from the New York State Banking Department. Also approved was a charter for the ICE U.S. Trust bank to house the platform.

The Georgia firm is competing with CME Group of Chicago which plans its own CDS clearinghouse.

CDSs valued at an enormous $30 trillion to $50 trillion make up the market. At the clearinghouses, CDS would be traded, usually at pennies on the dollar.

Stumbling blocks yet to be overcome by the Atlanta firm are Federal Reserve approval for the ICE U.S. Trust bank and squabbling over CDS jurisdiction by the Fed, the SEC and the Commodities Futures Trading Commission.

At the moment, clearing CDSs are handled by the The Depository Trust and Clearing Corp. which typically holds auctions to dispose of troubled assets. For example, a New York auction in October determined that investors who held protection against a default by bankrupt Lehman Brothers got a little more than 91 cents on each dollar of protection purchased. Depository Trust has something like $72 billion of CDS contracts on Lehman alone.