Six months ago, CME Group Inc. and IntercontintenalExchange Inc. were vying for pole position as they announced plans to back credit default swaps with their own clearinghouse operations. The fight between the exchanges is a big deal: The CDS market amounts to a notional $27 trillion.

And so far, there is a clear winner. With regulatory approvals in place, ICE Trust is about to hit the $100 billion mark, while rival CME Group has yet to process a dollar's worth of contracts.

How did ICE get the edge? Banks want to first trade among themselves, then send trades to a clearinghouse. CME Group, backed by partner Citadel Investment Group LLC, stumbled by insisting that clearing customers also trade with the exchange. Atlanta-based ICE was more flexible and gave the banks the latitude they wanted. It couldn't hurt as well that ICE has the backing of nine banks, including Goldman Sachs Group Inc., J.P. Morgan Chase & Co., Citigroup Inc. and UBS, that it gained after acquiring The Clearing Corp. last year, which the banks owned. The banks receive half the profits from clearing trades on ICE Trust.

ICE has its critics. One big complaint: Its trading platform is open only to members, a group restricted to financial firms worth at least $5 billion. Hedge funds and smaller firms have to team up with a member if they want access. That gives rise to fears that nonmembers won't necessarily get the best prices.

Meanwhile, as the CME plays catch-up, it's changing its modus operandi. Not only is it modifying its policy to meet bank needs, but the Chicago-based exchange is offering a more than 50% stake to new partners. The CME platform, CMDX, is also trying to differentiate itself from ICE Trust by featuring a broader membership, incorporating buy-side firms such as hedge funds and offering more products and three different ways to trade.

There are questions whether any of this benefits the broader market. Darrell Duffie, a finance professor at the Stanford Graduate School of Business, and doctoral student Haoxiang Zhu conclude that the central clearinghouses will not remove nearly as much risk as regulators hoped for. What's more, they say, the clearinghouses are unlikely to bring much-needed transparency to trades of CDSs.

In testimony last year to the Senate Committee on Banking, Duffie supported the creation of a central clearinghouse. A member of the Financial Advisory Roundtable of the New York Federal Reserve Bank, he says he still supports that idea and maintains that the current implementation is flawed in several respects. Although the worldwide market for CDSs is huge, it has shrunk by more than 50% in the past year. He says it's now too small -- as is the number of participating institutions -- for clearinghouses that deal only in CDSs to efficiently reduce counterparty risk.

Instead, Duffie and Zhu suggest the clearinghouse should clear a much larger fraction of trades made in the $500 trillion market for over-the-counter (off-exchange) derivatives. Credit default swaps are just a slice of a larger derivatives market.

"Our results make it clear that regulators and dealers should carefully consider the trade-offs involved in carving out a particular class of derivatives, such as credit default swaps, for clearing," the researchers say.

They argue that clearing only CDSs can actually increase the risk to counterparties because the benefits of bilateral netting (consolidating swap agreements between two parties into a single agreement) across asset classes is reduced. They offer an example: Dealer A is exposed to Dealer B by $100 million on CDSs, while at the same time Dealer B is exposed to Dealer A by $150 million on interest-rate swaps. The introduction of central clearing for only credit default swaps increases the maximum loss between these two dealers, before collateral and after netting, from $50 million to $150 million.

Additionally, CDS-only clearing would likely result in demands for additional collateral to protect the two parties. On the other hand, the authors say that a CDS-only clearinghouse would work if the market were larger.

Duffie and Zhu argue that the clearinghouse system won't insure transparency, either. They say the same level of information about CDS trades that would be available to regulators in a clearinghouse is already available through the Depository Trust and Clearing Corp. "With or without a clearinghouse, there is no plan to reveal trades to the public. So the stories of improved transparency are a red herring."