Citadel, CME Shutter CDS Platform, Bring In New Partners

Sep 21 2009 | 11:52am ET

Citadel Investment Group and the CME Group are scaling back their planned credit derivatives clearinghouse and bringing in new partners, after traders balked at using the two firms’ platform.

CMDX has been in business since March but has yet to clear a single trade, while a rival clearinghouse set up by the Intercontinental Exchange and backed by nine banks, has already built a dominant position in the credit-default swap clearing market. With the major Wall Street players directing all of their trades to a clearinghouse in which they had a hand, the CME-Citadel platform failed to attract any interest.

Terry Duffy, chairman of CME, said that most CDS traders were not interested in doing business on an exchange.

“Both buy-side and sell-side participants have expressed an interest in continuing to their CDS transactions the same as they do today,” he said. But Citadel and CME are not exactly giving up, Duffy said.

“We remain committed to bringing stability and transparency to the CDS market, while further enhancing confidence in the financial marketplace,” he said.

To that end, CMDX is scrapping plans to use an electronic trading system set up by Citadel, and, like its competitor, is bring in partners as an incentive to becoming a customer. Among the new stakeholders of the Citadel-CME clearinghouse are AllianceBernstein Holdings, BlackRock, BlueMountain Capital Management, D.E. Shaw & Co. and Pacific Investment Management co.

“We need to find ways to bring down that trading friction cost, we need to make sure we’re not being taken advantage of,” BlackRock’s Lawrence Fink told Bloomberg News. “Hopefully, our counterparties, our dealers, will make less money from us and our clients are going to make more return.”

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