SCI Bulletin: CDS clearing comes closer

News
• IntercontinentalExchange (ICE) and The Clearing Corporation (TCC) have announced new agreements intended to advance their joint global clearing solution for CDS. Together with nine dealers in the CDS markets, ICE and TCC have entered into memorandums of understanding (MOUs) to develop a joint global clearing solution and to effect the acquisition of TCC by ICE. Under the terms of the new agreements, ICE will acquire TCC and will form ICE US Trust (ICE Trust), a New York limited purpose trust company and subsidiary of ICE, with the support of Bank of America, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan, Merrill Lynch, Morgan Stanley and UBS.
• The DTCC reports that it has successfully closed out over US$500bn in market participants' exposure from the Lehman Brothers bankruptcy - the largest close-out in the clearer's history. DTCC does not expect there to be any impact to its retained earnings or to market participants' clearing fund deposits as a result of closing out these pending trade obligations. "The liquidation of Lehman was complex, involved multiple asset classes and required a methodical approach to mitigate potential losses from outstanding trading obligations," comments Donald Donahue, DTCC chairman and ceo. "Without question, our ability to manage risk and see exposure from a central vantage point was instrumental in helping us ensure that market risk - and systemic risk - was avoided."
• ISDA has applauded a number of industry initiatives that have had the beneficial effect of reducing notional amounts outstanding in CDS, significantly reducing operational, legal and capital costs for industry participants and improving operational efficiency in the market. In 2008 efforts to reduce notional outstanding amounts have been rewarded by a decrease of over US$25trn in CDS notionals, reflecting a range of activities, including compression exercises run by Trioptima, Creditex and Markit.

People and company moves
• Fortress Investment Group and Quicken Loans Inc have entered into an exclusive joint venture. The partnership will help Fortress implement a comprehensive refinancing and loan modification strategy for its mortgage portfolio and investments. Quicken Loans has the capacity to deploy up to 2,600 of its team members to refinance borrowers in all 50 states into many different loan programmes, including conventional, FHA and reverse mortgages, from its state-of-the-art centralised Web Centres.
• Deerfield Capital Corp is to withdraw its asset management subsidiary, Deerfield Capital Management, from Fitch Ratings' CDO Asset Manager (CAM) rating programme. Deerfield's decision to leave the programme is based on the company's near-term outlook for new issuance in the CLO market and its decision that the programme does not currently justify the added expense of maintaining the rating. The company says it will continue to monitor the prospects for new issuance in the CLO market and may contract with Fitch to be re-rated if market conditions warrant.

Rating agency actions
• S&P has downgraded the ratings on 92 tranches of Asia-Pacific (ex-Japan) synthetic CDOs, of which 66 were also placed on credit watch with negative implications. The agency has also lowered its ratings on 93 tranches relating to 66 Japanese synthetic CDO transactions and placed its ratings on 13 tranches relating to 12 deals on watch with negative implications. The rating actions reflect its revision of certain assumptions, including industry classifications and correlation assumptions, which are applied to the financial services sector in rating CDOs and CDS.
• Moody's has downgraded the MTNs issued by Curzon Funding to Aa3 from Aaa on review for possible downgrade. Curzon Funding is a credit arbitrage ABCP conduit that is able to issue ABCP and several different types of MTNs, including conventional notes and non-credit linked structured notes. Its rated liabilities are fully supported by total return swaps provided and guaranteed by Curzon's sponsor, AIG Financial Products Corp.
• Moody's has downgraded the ratings of nine series of CPDO notes, following the unwinding of the transactions due to either a cash out event or a strategy unwind event, and withdrawn its ratings on another.

Research
• The bankruptcy of Lehman Brothers has put the CDS market to an unprecedented test and has resulted in losses in the hundreds of millions dollars for a number of Moody's-rated firms, but these CDS market disruptions have not, in and of themselves, resulted in the downgrade of any rated company to date, Moody's says in a new report. However, the agency also sees the possible failure or failures of other large CDS market participants as a continuing source of systemic risk. In Moody's opinion, it is highly unlikely that the CDS market would have been able to deal effectively with a simultaneous default by AIG - probably the largest net seller of CDS protection.