CME Group Inc. rolled out a service Monday that will handle over-the-counter derivatives transactions tied to fluctuations in global interest rates.
Citigroup Inc., Deutsche Bank AG and Citadel LLC were among the first to use the new service, the companies said.
CME is targeting the interest rate swap market, estimated at more than $349 trillion in size globally, as it broadens a range of clearing house functions for derivatives that are traded off-exchange.
Regulators and lawmakers around the world have pushed clearing, which involves traders' posting collateral against outstanding transactions, as one means of reducing systemic risk in over-the-counter markets.
Monday's introduction of the interest rate swap clearing service at CME is seen as a "soft launch," according to Fredrik Gentzel, who heads Deutsche Bank's counterparty portfolio management and prime brokerage for rates and commodities.
"Today is more about testing trade capture and reporting systems under fire, ahead of clearing any larger volumes, so the trades going through are relatively small," Gentzel said in an interview. "It will be a few days or weeks before we expect to see anyone putting through very large notional trades" or backloading existing portfolios.
Deutsche Bank said Monday that its U.S. broker-dealer arm had cleared a rate-swap transaction on behalf of the hedge fund firm Citadel among the first transactions handled by the new CME service. Citigroup said Monday it also cleared its first dealer-to-customer rate-swap trades at CME.
CME, the largest futures exchange operator in the world by contract volume, means to leverage its dominant position in interest rate futures trading as it develops the rate-swaps service, typically involving two parties who strike a private agreement to exchange interest rate payments.
The venture has secured participation from the U.S. mortgage finance companies Fannie Mae and Freddie Mac, as well as from the asset management firms BlackRock, Citadel and Pimco, CME reported Monday.
Besides Deutsche Bank and Citi, banking company participants in the new CME service include Bank of America Corp.'s Merrill Lynch unit, Barclays PLC, Credit Suisse Group AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, Nomura Holdings Inc. and UBS AG.
CME's interest rate swap-clearing business must compete against an offering from the London clearing entity LCH.Clearnet, which has handled dealer-to-dealer business in the market for a decade and is expanding to accept customer business.
The International Derivatives Clearing Group, backed by Nasdaq OMX Group Inc., is also building a U.S. offering.
Transactions handled Monday at CME were trades in U.S. dollars; CME is expected to begin handling euro-denominated swaps in the first quarter.
CME continues to await regulatory approval for pooling customer collateral posted against rate-swap trades with collateral held by CME against related rate futures business, and this is likely to be granted, according to Ticonderoga Securities analyst Chris Allen.
"Given the overall increases in capital requirements for OTC positions, we would imagine the regulators would allow for capital efficiencies in areas where it made sense, such as cross-margining of interest rate derivative positions," Allen wrote in a note to clients Monday.