Hedge Fund Decries CDS-Clearing ‘Oligopoly’

Jun 2 2009 | 1:12am ET

A hedge fund backer of the CME Group’s languishing credit-default swap clearinghouse has accused the banks supporting a rival CDS guarantor of torpedoing the CME’s plans.

Samuel Cole, chief operating officer of New York-based BlueMountain Capital Management, made the accusation in a letter to banks following a conference call last week of the International Swaps and Derivatives Association’s credit steering committee and buy-side clearing working group, Bloomberg News reports. BlueMountain is one of several hedge funds that are founding members of CME’s CMDX clearinghouse, which has yet to clear a single CDS.

“The dealers suggested more than once that there is room for only one solution in the market,” Cole wrote, referring to the Intercontinental Exchange’s ICE Trust, which is backed by such market heavyweights as Goldman Sachs and Morgan Stanley, and which has cleared some $710 billion in CDS since March. “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.”

A copy of Cole’s letter was sent to Theo Lubke, who oversees over-the-counter derivatives trading at the New York Federal Reserve Bank.

“I would urge the dealers to change course and work with us to build a viable clearing solution that is in the interest of the entire market,” Cole wrote. And he also sought to head off charges of hypocrisy, as his own firm receives a fee discount from CMDX as a founding member.

“BlueMountain’s economic arrangement with CME is immaterial to its investors,” he wrote. “Dealers are deriving substantially more economic value from their relationshop with ICE than the six buy-side firms are from their relationship with CME.”

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