New CDS clearing venture gets big backers, big foes

CME Group Inc. and Citadel Investment Group have signed five prominent money managers to their fledgling credit-swap default joint venture.

But the launch of the business — targeting a $29-trillion market — is being thwarted by an “oligopoly” of banks that want to keep business at a rival clearinghouse in which they have an economic interest, according to a letter from one of the founding hedge funds, New York-based BlueMountain Capital Management LLC.

CME’s joint venture, CMDX, has been in the works for more than a year, but its ambitions to be a clearing destination for the insurance-like derivatives known as credit-default swaps have so far gone unfulfilled. CMDX’s main rival, IntercontinentalExchange Inc.’s ICE Trust clearinghouse, opened for business in March and has so far guaranteed $710 billion in credit-default swaps. ICE Trust is backed by a dozen or so Wall Street firms, including Morgan Stanley and Goldman Sachs Group Inc.

The other funds that have signed on to Chicago-based CMDX include bond-fund manager Pacific Investment Management Co. and hedge funds BlackRock Inc., D. E. Shaw & Co. and AllianceBernstein Holding LP.

The letter, from BlueMountain Chief Operating Officer Samuel Cole, was written after an International Swaps and Derivatives Association conference call May 29 among banks and hedge funds to discuss regulation of derivatives trading.

“Dealers are deriving substantially more economic value from their relationship with ICE than the six buy-side firms are from their relationship with CME,” Mr. Cole said in an e-mail, whose subject line was “a note to dealers” and a copy of which was obtained by Crain’s Chicago Business, a sister publication of Pensions & Investments.

“The stunned silence that you heard from buy-side firms on Friday’s call was the disquieting realization,” Mr. Cole wrote, “that the dealer community may be filibustering to protect its oligopoly and not seriously engaged in working with the buy side to develop a clearing solution.”

Mr. Cole, through a spokesman, declined to be interviewed. “We continue to work with the buy side and the sell side to promote our solution,” a CME spokesman said. A Morgan Stanley spokeswoman didn’t immediately return a call seeking comment; a Goldman Sachs spokesman didn’t have an immediate comment.

The letter was earlier reported by Bloomberg News.

Ann Saphir is a reporter at Crain's Chicago Business, a sister publication of Pensions & Investments