ICE withdraws application to clear derivatives

By Dow Jones Newswires
Posted Dec. 23, 2010 at 11:28 a.m.

ICE Trust, the unit of exchange operator IntercontinentalExchange Inc. dedicated to clearing credit-default swaps, has withdrawn its application to be a derivatives clearing organization registered with the Commodity Futures Trading Commission in response to changes proposed by the regulator.

ICE filed the application Nov. 12, but a spokeswoman told Dow Jones Newswires on Thursday that it decided to withdraw it, “given the significant changes proposed to the commission regulations” for derivatives-clearing organizations, or DCOs.
The CFTC, together with the Securities and Exchange Commission, are writing rules that will overhaul the over-the-counter derivatives market as a result of the Dodd-Frank financial reform bill passed over the summer. Their rulemaking  must be complete before July 15.

On Dec. 16, the CFTC voted in a proposal that DCOs wouldn’t be permitted to set capital requirements on new members above $50 million — significantly lower than the hurdles in place under the ICE model and those of rival clearinghouses.

ICE Trust, which says it will comply with whatever the new rules are, requires members processing trades through clearinghouses on behalf of customers — commonly referred to as futures commission merchants — to maintain a minimum of $1 billion in adjusted net capital. Other participants not acting as FCMs have to have $5 billion in Tier One capital to clear credit derivatives through ICE.

Tier One capital is a measure of a firm’s financial strength used by regulators.

“The proposed participant eligibility requirements will promote fair and open access to clearing,” CFTC Chairman Gary Gensler said Dec. 16 at a hearing.

The CFTC proposal, which wouldn’t be implemented until next year after a 60-day public comment period and subsequent vote, also would prohibit a clearinghouse from requiring members to maintain a swap portfolio of a particular size or from setting transaction volume thresholds.

The SEC has not yet provided parallel recommendations in this area.

ICE filed its application in November to try to provide clarity on its business model to existing clearinghouse members, and to attract new ones. But the Dodd-Frank Act contains language that would ensure ICE is automatically registered as a DCO so long as certain conditions are met.

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