Citadel And CME Plan To Launch CDS Exchange

Citadel and the CME are teaming up to create an electronic trading platform for credit default swaps, the companies announced this morning. They’ve executed a non-binding term sheet to launch a joint venture company within 30 days. The new electronic exchange will be built around a central counterparty clearing facility, CME Clearing, for dredit default swaps (CDS).

Will traders use the platform or continue to write credit default swaps privately? That’s a key question and Citadel and CME are creating incentives to convinced market participants to play ball. They are offering a huge equity stakes to major players in the CDS market, allocating 30 per cent of the equity to participants who sign on as “founding members.” The founders will also get special market maker privileges.

“It is imperative to bring stability and transparency to the CDS market,” said Ken Griffin, Founder and CEO of Citadel Investment Group, in the announcement of the trading platform. “This venture is a comprehensive, state-of-the-art solution that addresses today’s immediate concerns and provides tremendous opportunity for market users into the future.”

“Recent market events highlight the urgent need to reduce counterparty credit risks in the CDS market as well as the other over-the-counter markets. Our innovative new partnership with Citadel, and our invitation to leading market participants to join this first-ever integrated solution, is a key turning point in improving the functioning of these important markets,” said Craig Donohue, Chief Executive Officer of CME Group. “This platform provides an important opportunity for market participants to demonstrate to customers and regulators alike how these markets can be better organised to meet legitimate hedging and trading needs while reducing operational and credit risks that have grown unchecked in the OTC market.”

Here’s a link to the official press release.


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