In November 2010, ICE Trust, a division of the derivatives exchange InterContinental Exchange, filed its application to be a derivatives clearing organization with the Commodity Futures Trading Commission (CFTC), saying later that it had submitted the application to meet compliance more quickly and also to bring in new customers before the new rules of Dodd-Frank took effect. Last week, however, the company withdrew that application with little fanfare.
In mid-December, the CFTC, led by Chairman Gary Gensler (left), approved a rule under which derivatives clearing organizations (DCOs), wouldn't be permitted to set capital requirements on new members above $50 million—significantly lower, a Wall Street Journal article reported, than the existing hurdles.
On Dec. 23, ICE sent a letter to the CFTC in which an attorney for the company said that ICE Trust had had second thoughts due to “significant changes proposed” to regulations for clearing organizations. The rules causing concern are those designed to increase transparency of a market that processes around $600 trillion in credit default swaps (CDS). ICE Trust is the largest clearing house for CDS.
Was it necessary for ICE Trust to withdraw its application? After all, in July it will automatically ascend to clearing house status under Dodd-Frank. A New York Times report said that a company spokesman declined to comment.
ICE has cleared over $14 trillion in credit default swaps since its 2009 inception, and has in the past been criticized for exerting its dominance to keep smaller firms out of the market. Derivatives trading has been subject to talk of anticompetitive practices and lack of transparency on fees. Anecdotal talk of profitability indicates that derivatives are the most profitable business in finance. Unlike conventional trades, with derivatives the seller only knows how much he is receiving, and the buyer only knows how much he is paying; the size of the transaction’s commission is known only to the trader at the bank that processes the transaction.
Dodd-Frank rules give the CFTC and the Securities and Exchange Commission (SEC) broad authority to regulate swaps. The law also requires that swaps be processed through regulated clearing houses, and must be traded on regulated exchanges or on swap execution facilities. The clearing houses act as a backstop in the event of a default by one party.