OTC Clearing Overview Webcast
Jack Callahan
Executive Director
OTC Products
Liz Flores
Executive Director
Asset Managers
© 2013 CME Group. All rights reserved
Agenda
2
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2013 CME Group. All rights reserved
Clearing
Firm B
CME
Customer
A
Customer
C
Clearing
Firm D
Customer
E
CME Centrally Cleared Environment
Firm A has risk to Firm B, C, D, E, F, G
Firm A
Firm B
Firm G
Firm F
Firm E
Firm D
Firm C
Current OTC Model
Comparison of IRS Environments
• Large Trader reporting requirements that allow a comprehensive
view of customer portfolios across all Clearing Members (i.e.,
improves transparency)
• The CME monitors both Clearing Members and Customers for risk
concerns (e.g., unusual trading, P&L swings, concentration risk, etc.)
across all asset classes cleared at CME
• Real-time, 24 hour a day by 6 days a week monitoring of both
clearing firm and account level position and exposure levels for IRS
• CME Group auditing financials of all clearing firms to ensure capital
compliance levels
• CME Group audits of customer sequestered requirements to ensure
all customer account performance bond requirements are
appropriately accounted
• Credit controls that allow clearing firms to limit the IRS positions
taken on by any specific account
• Stress testing of all CME clearing firm and account level positions
over largest market moves and multiple defaults to ensure clearing
firm capital wherewithal
• Daily mark-to-market calculations and independent valuations
• CME minimum margin requirements ensure collateral is being held
by the Clearing Member for all counterparties/customers
Benefits of a CME centrally cleared environment
A centrally cleared solution with the CME has significant benefits over the current IRS OTC environment
3
© 2013 CME Group. All rights reserved
CME Group OTC Clearing
4
CME Group is the industry leader in OTC Clearing, delivering a broad offering spanning Interest Rates,
Credit, FX, Energy, Metals, and Ags
Founded in 1898 as CME (Chicago Mercantile
Exchange)
#1 derivatives exchange in the U.S. and globally
by volume
Global leader in exchange-traded markets with
$3B in revenue
Leading liquidity / volumes in global benchmarks
across all asset classes
Extensive and diverse distribution network and
customer base
International linkages with leading global
exchanges
Launched in 2002 to provide risk mitigation in
energy markets following the Enron collapse
Market leading OTC Clearing venue for a diverse
range of commodities asset classes
1,700 listed contracts
10,000 registered users around the world
500,000 contracts cleared daily
CME ClearPort CME Group
OTC Product Progression
FX
Coal
Electricity IRS, Freight,
Iron Ore
Natural Gas,
Crude
CDS, Ags, Gold Ferrous Metals
ClearPort
Established
Metals
2002 2003 2007 2009 2011 2004 2008 2010 2012
© 2013 CME Group. All rights reserved
EXISTING PRODUCTS
• USD Fixed/Float out to 51 years- 1M, 3M and 6M LIBOR indexes
• EUR Fixed/Float out to 51 years- 1M, 3M and 6M EURIBOR indexes
• GBP Fixed/Float out to 51 years- 1M, 3M, 6M LIBOR index
• CAD Fixed/Float out to 31 years- 3M CDOR index
• JPY Fixed/Float out to 31 years- 1M, 6M LIBOR index
• CHF Fixed/Float out to 31 years- 6M LIBOR index
• AUD Fixed/Float out to 31 years- 3M, 6M BBSW index
• SEK Fixed/Float out to 31 years- 3M STIBOR index
• DKK Fixed/Float out to 31 years- 6M CIBOR index
• NOK Fixed/Float out to 31 years- 6M NIBOR index
• Zero Coupon Swaps: USD, EUR, GBP out to 50 years
• Overnight Index Swap (OIS): USD, EUR, GBP, JPY out to 30 years
• Basis Swaps: USD, EUR, GBP out to 51 years; AUD, JPY out to 31 years
• Forward Rate Agreements (FRA): USD, EUR, GBP, JPY
• Variable Notional Swaps (Amortizers)
1H 2013 EXPANSION
• Additional Currencies: NZD, HKD
2H 2013 EXPANSION
• Additional Currencies
• Swaptions
Cleared OTC IRS Product Scope CME has delivered a comprehensive global product scope that includes the 10 most actively
traded IRS currencies*
* Notional amounts outstanding received from Bank of International Settlements, December 2010
5
CHF AUD JPY USD EUR GBP CAD
SEK DKK NOK
June 24th
MXN BRL
HKD NZD SGD
HUF CZK PLN ZAR
© 2013 CME Group. All rights reserved 6
Multi-Asset Class Solution via One Clearinghouse Delivering Capital Efficiencies in a Capital Constrained World
• CME has worked closely with buy-side and sell-side participants to build a multi-asset class, market leading OTC Clearing
Solution
• Builds on the strength of CME Group’s market leading Interest Rate and FX futures and options products
• In May, over 110 firms cleared trades at CME, comprising a wide array of market participants including asset managers,
hedge funds, insurance companies, GSE’s, and proprietary trading firms
Portfolio Margining
• Allows margin offsets of OTC IRS
against Treasury and Eurodollar
Futures, with savings up to 90%
• Launched portfolio margining for
house accounts in May and
extended this service to customers
in November
• Since the launch of this offering,
market participants have seen
significant risk reductions that
account for margin savings of over
$1 billion
• CME CORE now offers a margin
optimization feature allowing firms
to run a portfolio margin savings
analysis of IRS and Eurodollar and
Treasury Futures
Deliverable Swap Futures
• Deliverable Swap Futures total
volume is over $40.5billion in
notional, with open interest at $5.3
billion in notional since December
2012 launch
• Offers capital efficiencies through
futures-style margining and netting
by providing margin offsets against
Eurodollar and Treasury Futures
• All Open Positions are delivered
into OTC Cleared IRS Swaps at
expiration
• Clients have taken advantage of
the flexible execution through
Globex, block trades, and open
outcry
Multi-Asset Class
• Broadest OTC product scope
available to customers with 10 IRS
currencies, 56 CDX indices, and
12 FX NDFs
• Operational efficiencies of a multi-
asset class solution for IRS, CDS,
and FX all in one clearinghouse
• Simplicity of working with one
clearinghouse instead of several
as firms work to build out their
infrastructure to prepare for OTC
Clearing
• Over $3.6 trillion of notional has
cleared and open interest is over
$2.1 trillion
Real-Time Clearing
• Superior technology enables real-
time clearing with straight-through
processing and real-time
confirmation is sent once the trade
is cleared
• Customers don’t have to wait 15
minutes to find out if a trade has
been accepted or rejected
• Negotiate, execute and submit
trades through 11 affirmation
platforms and SEFs
• Time lags in the clearing cycle
introduces potential credit risk, and
with a faster clearing cycle this risk
is reduced and leads to more
efficient risk management
© 2013 CME Group. All rights reserved
Solid Momentum with Strong Volume and Increasing Open Interest
7
• Since launch, we have cleared $3.6 trillion with Open Interest growing 46% since the end of April
• Record volume month in May; a 81% increase over the previous record in March
• Open Interest is now at $2.1 trillion
• Volumes and Open Interest continue to increase as more firms are onboarding with CME daily
• In May alone, over 110 buy side firms cleared trades at CME
*Data as of 5/31/13
$150,000
$650,000
$1,150,000
$1,650,000
$2,150,000
$2,650,000
$3,150,000
$3,650,000
$4,150,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
No
tio
nal V
alu
e (
$M
illio
ns)
Cumulative Volume Total Open Interest
2012 2013
© 2013 CME Group. All rights reserved
Agenda
8
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2013 CME Group. All rights reserved 9
CME Clearing
Bank of
America Barclays
Platforms Connected to CME Clearing Several market leading affirmation platforms and Swap Execution Facilities
are directly connected to CME Clearing
BNP Paribas Credit Suisse Deutsche
Bank Goldman
Sachs
JPMorgan Morgan
Stanley Nomura UBS
RBS PLC
OTC IRS/CDS
Clearing
Members
Additional
OTC IRS
Clearing
Members
Negotiate, execute, and submit trades through multiple venues to CME Clearing
Straight through processing and real-time confirmation once the trade is cleared
Protects the confidentiality of trading relationships, while enabling customers to terminate positions
with any market participant
Operational flexibility of a multi asset class solution for IRS, CDS, FX, and Commodities via one
clearinghouse
Citigroup
ICE Link CME ClearPort Javelin MarkitSERV Bloomberg CDS Migration
Utility TradeWeb
Crédit
Agricole-CIB
HSBC
BNY Mellon
RBS Securities
Royal Bank of
Canada
Societe
Generale State Street
Bank of
Montreal
Wells Fargo
Newedge Bank of Nova
Scotia
© 2013 CME Group. All rights reserved
Trade Workflow Mechanics
10
Straight Through Processing allows for real-time clearing and trade confirmations
1 – Dealer and Client agree to trade
2 – Dealer alleges swap to Client through the Affirmation
Platform
3 – Client selects Clearing Member and verifies the swap
through the Affirmation Platform
4 – Affirmation Platform sends the matched trade between
Dealer and Client to CME Clearing House
5 – CME checks for validation of the product, account and applies credit limits set by Clearing member(s), and then accepts the swap for clearing
5 – CME sends “Cleared” notification back to the Affirmation Platform which displays the “Cleared” Status to each party
5 – CME sends a Clearing Confirmation to Clearing
Member(s) once all is validated
Client Dealer
Affirmation
Platform
1
2 3
4 5
Clearing Member
(Client)
Clearing Member
(Dealer)
CME Clearing
House
Product
Account
Credit 5 5
© 2013 CME Group. All rights reserved
Netting Styles FCM will select client’s netting style during account setup
11
IRS Netting
*All CDS trades will be subject to netting during end of day cycles
• The netting process will consider swaps that have exactly the same economics
• May differ in “direction” and “notional” amount
• Swaps with Stubs are eligible for netting
• Real time message are given at the end-of-day after the netting process is completed
• The End-of-day trade register shows all Trade IDs, including the netted trades, which show a status of “Terminated”
Full Netting
• The swaps eligible will full offset each other and will be terminated
• Eligible trades will automatically net based on trade attributes
Selective Netting
• These swaps do not fully offset each other and there is a “remaining” notional
• This option will automatically net eligible trades based on trade attributes AND matching Client
Reference ID
• Provides clients with more control over the netting process to address operational and tax
concerns
Gross
• The trades will not net
© 2013 CME Group. All rights reserved
Agenda
12
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2012 CME Group. All rights reserved CONFIDENTIAL TREATMENT REQUESTED
Scalable to other currencies and asset classes
Coverage meets target levels: 5-day losses during 99% of days
Quickly reacts to changes in rate and volatility regimes
Stable during periods of low and moderate volatility
Ease of implementation
Transparency for market participants
Current IRS Margin Model
13
© 2012 CME Group. All rights reserved CONFIDENTIAL TREATMENT REQUESTED 14
Margins
• 99% 5-day coverage standard
• Historical VaR margins adjusted based on EWMA (Exponentially Weighted Moving
Average) volatility scaling
Financial Safeguards
• The waterfall structure is designed to facilitate efficient default management and portability.
• The Guaranty Fund is sized to cover 4 largest theoretical defaults
2 largest defaults prefunded, 3rd and 4th largest defaults are covered by unfunded assessment powers
Stress tests used to size the Guaranty Fund are based on extreme, yet plausible and theoretical scenarios
Governance
• IRS Risk Committee, IRS Default Management Committee
Cleared OTC Interest Rate Swaps
© 2013 CME Group. All rights reserved
Flexible Collateral for Initial Margin
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CME Clearing accepts a broad array of collateral for the Customer OTC Account Class
Collateral Haircut
US Cash None
Non-US Cash (EUR, GBP, CAD, AUD, JPY, CHF)* 5%**
Sovereign Debt of UK, Germany, France, Canada,
Japan, and Sweden
5%-10.5% (maturity based)
Additional 1.5% for off-the-runs
US Treasury Debt 0.5%-11% (maturity based)
Additional 1.5% for off-the-runs
US Agency Debt 3.5%-7% (maturity based)
Additional 1.5% for off-the-runs
US Agency Mortgage Backed Securities 11%
Corporate Bonds (IEF4) 20%
Money Market Mutual Fund (IEF2) 3%
Bank Deposit Program (IEF5) None
*The last three currencies are available for IRS only.
** Haircut is only applied when cash is used to meet a margin requirement based in a different currency.
© 2013 CME Group. All rights reserved
Agenda
16
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2013 CME Group. All rights reserved
CME Group provides direct access to daily reports through a secure FTP site, which enables customers to fully
integrate key OTC data into their internal systems
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The Most Transparent OTC Clearing Solution
Position Reporting via the Trade Register End of day mark to market values for all IRS positions across all clearing members, including existing trades
and any new trades cleared that day
Available at 4:45pm EST, so customers and their approved administrators/custodians can complete their daily
NAV reports
IRS Curve Data
CME offers full transparency into IRS valuation, including a detailed white paper on curve construction,
enabling customers to replicate our IRS valuation curve and calculate the value of their IRS positions
The secure FTP site provides daily IRS curve data across all currencies, including curve inputs that are used
to construct both the forecasting and discounting curves, and the curve outputs like daily forward rates and
discount factors
Client-level Margin Files
Clients can see the exact initial margin requirements for each account that CME is passing on to the FCMs for
Cleared OTC IRS, CDS, and FX”
Utilized to verify the margin requirements clients are being charged by their FCMs and also to help ensure
their accounts are properly funded before the FCMs make their margin calls the following day
To set up a secure FTP site for your firm, please contact: CME Onboarding Group at [email protected]
or (312) 338-7112
© 2013 CME Group. All rights reserved
IRS Reporting Establish a secure FTP site to get access to these reports
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CME Group provides direct access to daily reports through a secure FTP site, which enables customers to fully
integrate key OTC data into their internal systems.
To set up a secure FTP site for your firm, please contact:
CME Onboarding Group at [email protected] or (312) 338-7112
© 2013 CME Group. All rights reserved
CME CORE Transparency through an interactive Margin Calculator
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Current Product
Offered in CORE
• OTC IRS (USD,GBP,EUR, AUD,JPY,CHF,CAD)
• OTC CDS
• OTC FX
• Eurodollar and Treasury Futures
• Delta Laddering
• Coming soon: Basis Swaps, FRAs, Zero Coupons, SEK, DKK, NOK
CME CORE
Overview
• Interactive Margin Calculator to view initial margins and calculate portfolio margining savings
• “What if” analysis shows how margins will change as positions are added or removed from any
given portfolio
• Choose from multiple upload options or manually import your portfolio
• Easily export margin results into Microsoft Excel or Adobe PDF formats
Margin
Optimization
• CORE supports margin optimization, which calculates the ideal allocation of futures to move into an
OTC account to minimize portfolio risk, and in turn, minimize IRS margin requirements.
• Portfolio margining savings of Cleared OTC IRS and Interest Rate Futures with savings up to 90%
• Calculates IRS portfolio margins for Clearing Members’ clients, as well as their own proprietary
accounts
To learn more about CME CORE and gain access to this tool:
Visit www.cmegroup.com/core
© 2013 CME Group. All rights reserved
Agenda
20
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2013 CME Group. All rights reserved
OTC Clearing Checklist How to Get Ready with CME Group
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Critical Items Useful Information
Affirmation platform selection and testing
Account registration for OTC Clearing
Finalize legal documents with Clearing Members
Select fee program and netting style
Clearing Members set up Production accounts
that are ready for clearing
Execute first cleared trade in Production
Execute Production trade with each counterparty
Run margin simulations with CME CORE
Run portfolio margining analysis through
CME CORE (if applicable)
Set-up CME secure FTP site for direct
access to reporting:
Position valuation reports
Client account margin reports
IRS curve data
Hold deep dive meetings with CME Group
subject matter experts on products,
operations, and risk management
Evaluate back-loading alternatives (if
applicable)
© 2013 CME Group. All rights reserved 22
OTC Connectivity Partners Asset Classes Supported
Platform IRS CDS FX
Bloomberg
ICELink
Javelin Capital Markets
MarketAxess
MarkitSERV
Sky Road
SwapEX, State Street Bank
Tera Exchange
Tradeweb Markets
Traiana
TruEX
Vyapar Capital Market
© 2013 CME Group. All rights reserved 23
CME Account Registration
Portfolio
Margining
In order to clear OTC IRS, CDS, and NDFs at CME, you need to register your accounts
with CME
The process has been streamlined and now only requires one file to be filled out
Required Information:
Address and User Information
API Relationship Form
Listing the Entities (only applicable if registering multiple account owners)
Download Registration Form, including full details and instructions at
www.cmegroup.com/otcregistration (Full details and instructions are included)
Any questions related to the ClearPort Registration process:
(including changes, additions, or deletions once complete)
Contact the Team at [email protected]
© 2013 CME Group. All rights reserved
Agenda
24
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2013 CME Group. All rights reserved
Deliverable Swap Futures Unique way to gain swap exposure with the benefits of standardized futures
25
• Created based on strong demand from financial market participants including banks, hedge funds, asset managers and insurers
• U.S. dollar-denominated quarterly contracts expiring on IMM dates for key benchmark maturities (2, 5, 10, 30 years)
• At expiration, all open positions will deliver into CME Group Cleared Interest Rate Swaps
• Complements CME Group’s market-leading Interest Rate Futures and Options businesses and Cleared OTC Swap offerings
• Risk offsets with our liquid Eurodollar and Treasury
contracts
• Flexible execution– CME Globex, Blocks, EFPs or Open
Outcry
• Trade in an OTC manner — block calendar spreads
• No block surcharges
• Lower thresholds
• Longer reporting time
• Currently have 10 block providers for Deliverable Swap
Futures
Overview
Key Benefits
• Contract launched on December 3rd, 2012
• Seen a wide range of market participants including
banks, hedge funds, asset managers, and proprietary
trading firms
• Have traded over $21.5 billion in notional contracts
(215,807contracts) and Open interest is now over $3.4
billion (34,085 contracts) through Globex, block trades,
EFPs, and the pit
• Markets remain tight, about ½ bp wide in OTC terms,
matching the OTC interest rate market
Product Update
© 2013 CME Group. All rights reserved
Deliverable Swap Futures Growing Open Interest and Volume Successful First Expiration & Delivery
DEC 2012 JAN 2013 FEB 2013 MAR 2013 APR 2013 MAY 2013
O.I. 8,428 11,085 20,071 34,085 35,400 53,040
ADV 1,355 1,584 3,225 4,707 2,248 6,380
Product Highlights
• May ADV more than 6,300, a 35% increase
from the previous best month of March ‘13
• Consecutive record daily volumes of 19K on
June 4 and almost 30K on June 5
• Open interest has increased every month
since the December 2012 launch – now above
49,000 and has exceeded 53,000 positions
• Successful first roll - More than 5,000 March
2013 contracts delivered across all four tenors
• 18% of O.I. in the DSFs (as of March 18) was
delivered
• Broad clearing firm participation in first
delivery
• Expiring contracts and calendar spreads were
liquid through the final settlements
• Tight calendar spreads is facilitating a
successful roll into September 2013 contracts
• Track the June-Sep 2013 roll for DSFs with
our Pace of the Roll tool, available online at
cmegroup.com/ratesroll
© 2013 CME Group. All rights reserved
Agenda
27
• Overview of OTC Clearing
• Operational Overview
• Margin Information
• Transparency through Reporting and Tools
• Account Set-up
• Alternatives to OTC Clearing
• Questions & Answers
© 2013 CME Group. All rights reserved 29
Resources
Account Registration: www.cmegroup.com/otcregistration
CME CORE online margin tool: www.cmegroup.com/core
OTC Clearing General Information: www.cmegroup.com/otc
Interest Rate Swap Clearing: www.cmegroup.com/irs
Credit Default Swap Clearing: www.cmegroup.com/cds
Deliverable Swap Futures: www.cmegroup.com/dsf
IRS Portfolio Margining overview web site: www.cmegroup.com/margining
For general inquiries, please contact:
Jennifer Ziehe 212-299-2424 [email protected]
For any questions regarding Onboarding, please contact :
Onboarding Team 312 338 7112 [email protected]
© 2013 CME Group. All rights reserved 30
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a
leveraged investment, and because only a percentage of a contract’s value is required to trade,
it is possible to lose more than the amount of money deposited for a futures position. Therefore,
traders should only use funds that they can afford to lose without affecting their lifestyles. And
only a portion of those funds should be devoted to any one trade because they cannot expect to
profit on every trade.
The Globe Logo, CME®, Chicago Mercantile Exchange®, and Globex® are trademarks of
Chicago Mercantile Exchange Inc. CBOT® and the Chicago Board of Trade® are trademarks of
the Board of Trade of the City of Chicago. NYMEX, New York Mercantile Exchange, and
ClearPort are trademarks of New York Mercantile Exchange, Inc. COMEX is a trademark of
Commodity Exchange, Inc. CME Group is a trademark of CME Group Inc. All other trademarks
are the property of their respective owners.
The information within this presentation has been compiled by CME Group for general purposes
only. CME Group assumes no responsibility for any errors or omissions. Although every attempt
has been made to ensure the accuracy of the information within this presentation, CME Group
assumes no responsibility for any errors or omissions. Additionally, all examples in this
presentation are hypothetical situations, used for explanation purposes only, and should not be
considered investment advice or the results of actual market experience.
All matters pertaining to rules and specifications herein are made subject to and are superseded
by official CME, CBOT, NYMEX and CME Group rules. Current rules should be consulted in all
cases concerning contract specifications.