CME Group has committed tointroducing a new US clearing house for credit default swaps – what’s the latest on that initiative?

I don’t think anything has materially changed from what we have said before. We have our regulatory approvals, we have our systems ready. We are working with dealers and buy side customers to ensure the readiness of market participants to use the service.

You told FOW in June that you were in the process of obtaining regulatory approval for your European CDS clearing house. Is that still the case and when do you expect that to go live?

Yes, that is still the case. We are actively working with the Financial Services Authority to obtain the necessary approvals. There is a significant regulatory review process and we cannot predict when that will be complete. In the meantime, however, we are working hard to ensure we are ready to start providing services as soon as the regulatory permission is granted.

Intercontinental Exchange has gone live with CDS clearing in both the US and Europe, and Eurex has also launched a European CDS clearing offering. Will the fact that you are lagging behind your rivals hurt the prospects for CME’s clearing house?

We believe there is room for more than one clearing provider and that we are well, if not best, positioned to serve the market.

While it is good to be first, it is also important to have the right solution. We are confident that we will be able to add value with the CDS solution we are bringing to market. Having better and broader services, which we feel we bring, also has a benefit, especially with respect to servicing the customer-to-dealer market.

There are some very strong differential features in that respect between the CME Group solution and others in terms of the infrastructure, the legal and regulatory regime, and bankruptcy protections, where ours is proven and time-tested.

That message is resonating with a lot of the large buy side institutions – which are concerned about the credit risk mitigation aspect of the clearing service.

Don’t you think that market participants will tend to choose a single clearing house for CDS and stay with that solution exclusively?

We believe in competition, and the ongoing competition in the innovation of services is clearly a strong benefit. We believe there is room for more than one clearing provider and that we are well positioned to extend our exchange-traded clearing experience into the OTC markets, including CDS.

Customers we’re speaking to on the buy and sell sides are also telling us they are looking for more than one clearing alternative for their OTC business.

Also, I think some market participants will prefer to clear in one jurisdiction or another; there might be opportunities for some clearing houses to succeed more in providing risk management for single names as opposed to index products, or for customer activities versus dealer-to-dealer activities. There are a few ways that I think it could break down.

You have added over 200 new OTC contracts. What demands has that placed on CME Clearing House? And how have you facilitated the additional services?

We have been adding to our risk management team. We have a set of processes that are fairly scalable, though we have added additional staff members to service the ongoing risk management surveillance of that much broader product set.

I think that shows that the process by which we bring a product to market is very scalable, we have a relatively rapid product development cycle and we are trying to hone that even more so we can be even more responsive to customer needs when they ask for a new product.

CME has been extremely active in bringing more OTC products for clearing. Is this exclusively driven by customer requests or do you try to anticipate clients’ needs?

A lot of the product development we have done lately has been customer-driven, we try to be very customer-focused. We want to bring products and services to market that are relevant and structured in a way that is most effective for the customer.

This is partly why we have a number of different ways the OTC services come to market through CME ClearPort, dependent on what the product is, or what the customer base is.

Central counterparties are at the heart of proposals to reform the financial sector. However, some market participants have highlighted the danger of a concentration risk building up in clearing houses. Do you disagree?

I do disagree. Because CCPs practice multilateral netting of open exposures, they actually contribute to an enormous reduction in the open position risk in a particular product.

The key ways that CCPs reduce the overall risk to the system come from their risk management. Central clearers’ risk management is different from bilateral risk management in a couple of important ways.

One is that CCP clearing tends to be more stringent. There is a fair playing field for who pays margin and what they pay. There also is more discipline around the mark-to-market process, so that everyone pays their losses every day, sometimes twice a day – like in our case when we collect profits and losses twice daily.

There also tends to be more transparency around the general risk management environment, the mark-to-market prices, the risk management procedures that the CCP follows and there is transparency about knowing the size of the overall market.

That means a market participant knows the total open positions in a particular asset class, and what proportion it and its customers have, so it is in a better position to assess things like concentration risk.

Secondarily, financial regulators hold CCPs to a pretty high set of standards in terms of being able to back their guarantees.

As we speak at the FOW Derivatives World Asia conference, how important is the Asian market to CME Group?

There has been an uptick in OTC activity via CME ClearPort in recent months – a trend that started post-Lehman Brothers and has continued. A lot of that business is coming from Asian market participants. We are very strong in our commodity offerings and the Asian time zone is a big user of commodities, so there is a lot of activity from the region.

The Asian CDS market is not as large as the US and European markets but FX, metals, and interest rate swaps are all very actively traded here. So we see the Asian time zone as a very important regional market to continue to serve, and serve better and more broadly, over the next couple of years.

Do you believe the exchange’s efforts in clearing derivatives are complementary to the OTC market, or are they competitors?

I think different people take different views on that. I happen to be a proponent of the synergistic opportunities for both markets to grow, and we have seen this play out in some of the markets over time.

The Eurodollar market is a very good example of that. The market came on leaps and bounds right along with significant growth in the OTC swaps market. Either one of those markets would not have been able to grow in the way that it did, without the ability to hedge between them. So I think there are complementary growth opportunities for the OTC and listed markets.