Intercontinental Exchange Inc., the owner of the largest credit-default swap clearing house, started guaranteeing trades between banks and clients such as hedge funds a day before a U.S. deadline to improve the $26 trillion market.

The ICE Trust clearing house became the first to process customer trades after receiving U.S. regulatory approval, Intercontinental, of Atlanta, said Monday. Ten hedge funds and asset managers conducted testing before Monday with the 12 dealers that are ICE Trust clearing firms, the company said.

"The collaboration of the buy-side and dealer community played a key role in the successful development and launch of customer clearing," Dirk Pruis, the president of ICE Trust, said in a news release.

Regulators in the U.S. and Europe pushed the financial industry to improve market structure and reduce systemic risk after last year's bankruptcy of Lehman Brothers Holdings Inc., one of the largest credit-swap dealers, froze trading and cost investors hundreds of millions of dollars.

Clearing houses, which are capitalized members, increase stability in over-the-counter derivatives markets such as for credit swaps because they lessen the effect of a default by sharing that risk among the membership and use daily margining procedures to keep accounts current. They also allow regulators to see market positions and prices.

Since its inception in March, ICE Trust has only been open to banks. Investors have demanded the protections of clearing to avoid the risk of counterparty default such as with Lehman Brothers. ICE Trust said its new system will segregate customer margin payments and allow that money to be transferred in the case of a dealer default. It will also allow trades to be cleared on the same day they are executed, according to the company.

In June, the Federal Reserve Bank of New York and banks agreed to a Dec. 15 deadline to offer dealer customers access to clearing houses. ICE Trust faced delays in starting customer clearing after saying in July that it would begin customer clearing in October. It still needed regulatory approval at Oct. 2 when it said it would begin the service this month.

ICE Trust did not disclose which bank customers are participating in its clearing services. It quoted executives from AllianceBernstein Holding LP, D.E. Shaw & Co. and BlueMountain Capital Management LLC, among the largest users of the CDS market, in a Sept. 8 statement about customer clearing for credit swaps.

Credit-default swaps were created initially as a way for banks to hedge their risk from loans. They became popular vehicles for hedge funds, insurance companies and other asset managers to speculate on the quality of debt or the creditworthiness of companies because they were often easier and cheaper to trade than bonds.

On Dec. 11, the House voted to tighten rules for derivatives and create powers to break apart financial firms that threaten the economy. The Senate is expected to take up the measure early next year.

An amendment to the bill limits bank ownership in new clearing or execution services to 20%. Firms in existence with bank stakes exceeding 20% at Jan. 1, 2010, would be exempt unless they change their ownership structure.

ICE Trust has cleared more than $3.1 trillion of credit-swap transactions since March.

Intercontinental competitor CME Group Inc., the world's largest futures exchange, has yet to clear a trade in the credit-swap market. The exchange, of Chicago, has said it plans to be ready by Tuesday to guarantee trades in indexes and single-name contracts. Eurex, Europe's largest futures market, is also competing to back the trades with its clearing house.

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