Just a year ago, there was a furious race by exchange companies to set up clearinghouses for OTC derivatives, specifically credit defaults swaps. At one point, there were probably five or six competitors that seemed serious. But as time went on, the InterContinental Exchange (ICE) seemed to establish itself as the leader, the vendor with the most volume in any case. This reflects in part the big dealers who are part owners of the ICE. The CME was a bit slower out of the gate, but it too can now boast some volume. 

There has been lots of talk that the push to move this trading to clearinghouses would be good for exchange companies. And that would appear to be a no-brainer. Indeed, research analysts at investment banks noted this would be a win-win for companies that have established themselves, notably the ICE and CME. Barron's wrote an article bullish on the CME for this reason. 

I do not think a government mandate to put this trading onto actual exchanges--an idea that seemed likely a year ago--will materialize. But the move to central clearinghouses seems almost likely at this point. I think this will represent more revenue for the top players, but this will play out over time. Consider the CDS market. Perhaps 60 to 70 percent of CDS trades now are able to be switched over to clearinghouses. This would include a lot of index-based swaps. The market for individual issues would take a lot before they are ready. A lot of bespoke deals are also not clearable centrally. 

This raises another issue: The quality of the clearing from the buy-side perspective. The process is massively complex, and currently no one should think the clearing process via the exchanges is a wholly automated process. Recall that in June 2009, the major dealers committed to the Federal Reserve Bank of New York to give access to CDS clearinghouses by December 2009. The December 15 deadline was met, thanks to the CME and ICE. 

But, as risk.net, explains, "Dealers say aspects of the services are not properly automated or scalable, and are not part of the day-to-day workflow of clients at the moment." One executive told the publication: "Buy-side clearing of trades isn't really happening. You might have a couple of little outliers where they've done a few trades to say they did it, but it's definitely not pumping numbers through like on the dealer-to-dealer side." 

While central clearing--if not actual exchange-based trading--would likely be a good thing for the market, it's not something that will happen immediately, even if a reform bill becomes law. - Jim