ICE Clear Credit

The ICE Clear Credit is a clearinghouse operated by Intercontinental Exchange that specializes in credit derivatives — contracts that trade credit risk. The clearinghouse acts as central counterparty for credit default swaps and other credit derivatives, allowing investors to hedge credit exposure or speculate on credit conditions.

Purpose and credit derivatives

A credit default swap (CDS) is a contract that pays out if a specified bond issuer defaults on its obligations. The buyer of protection pays an annual fee to the seller; if default occurs, the seller compensates the buyer.

CDS contracts allow investors to hedge credit risk (worry about a bond default) without selling the underlying bonds. They also allow speculators to bet on credit conditions without owning the bonds. Before the 2008 financial crisis, CDS markets exploded in size and complexity.

Central counterparty function

Before the financial crisis, most CDS trading occurred over-the-counter (OTC) — directly between dealers without a clearinghouse. This created counterparty risk: if a buyer and seller agreed on a CDS, and later the seller failed, the buyer faced a loss.

Post-crisis regulatory reforms required standardized CDS to be cleared through a clearinghouse. ICE Clear Credit provides that service, stepping in as the central counterparty and eliminating bilateral counterparty risk.

Standardization and indices

ICE Clear Credit cleared standardized CDS index contracts — baskets of credit swaps on major companies grouped by sector (financial, industrial, etc.). These indices are traded actively by asset managers, hedge funds, and banks managing credit exposure.

The standardization also facilitates the central clearing process, as counterparties can offset positions more easily with standardized indices than with bespoke bilateral CDS contracts.

2008 financial crisis aftermath

The clearing house emerged after the 2008 financial crisis, when regulators realized that bilateral OTC derivatives markets had become systemic risks. Lehman Brothers’ bankruptcy created cascading losses throughout OTC derivatives markets because no centralized clearing meant that counterparties could not easily establish which losses they faced.

Regulators globally required major derivatives to be cleared through clearinghouses. ICE Clear Credit is one of the institutions that responded to this mandate.

Regulatory framework

ICE Clear Credit is regulated by the CFTC (Commodity Futures Trading Commission), the SEC, central banks, and international regulators as part of global supervision of systemic financial infrastructure. Its risk management practices, capital adequacy, and operational resilience are subject to intense regulatory scrutiny.

Risk management and collateral

Like all clearinghouses, ICE Clear Credit requires members to post collateral to cover potential losses. The collateral is adjusted daily based on market movements. If a member defaults, the clearinghouse uses the collateral to cover losses and is empowered to liquidate defaulted positions.

Global credit trading

ICE Clear Credit handles a significant portion of global CDS trading volume, making it an essential piece of global credit market infrastructure. Banks, asset managers, pension funds, and insurance companies use the clearinghouse to hedge or trade credit exposure.

See also