ICE CDS Margin Calculator

ICE Link GUI

June 2016

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ICE CDS Margin Simulation Calculator Summary

• Buy-side firms and their counterparties can access the CDS Margin Simulation Calculator

to simulate margin requirements via the ICE Link GUI

• Simply point and click on positions in the positions blotter to calculate margin as ICE Link

already syncs all Buy-side positions with the Trade Information Warehouse

• Users can also upload sample portfolios, via direct GUI entry or spreadsheet upload, to

run “what-if” scenarios

• Margin simulation calculations can be run on portfolios consisting of all current clearing

eligible instruments (indices and single names)

• Margin is calculated using the Index Decomposition margin methodology

• Margin is always at the portfolio level (e.g. fund/legal entity) per FCM

• Provides users an analysis of the margin results for deeper transparency of the ICE

margin methodology

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Risk Management Methodology Initial Margin Modeling Approach

Scenario-Based

Stress Approach

Monte Carlo

Framework

ICE CDS

Risk Management Methodology

• Consider small set of

hypothetical spread and price

scenarios

• Approach is consistent with

prime broker regimes for OTC

• Capture realistic distributional

assumptions to model market behavior

• Provide reliable and efficient portfolio

margining (hedging and diversification

benefits)

• Generate large number of hypothetical

scenarios to accurately estimate high-

quantile portfolio risk measures

• Reflect CDS market dynamics

− Credit spread behavior

− Risk asymmetry

− Liquidity and market depth

− Jump-to-Default losses

− Sensitivities to Interest Rate and

Recovery Rate assumptions

• Realistic CDS spread shock

distribution assumptions

− Heavy-tailed asymmetric

distributions

− Time-changing volatilities

− Term structure shape changes

• Scenario-based framework

− Manageable number of scenarios

− Provide computational transparency

and efficiency

• Monte Carlo benchmark

− Monitor performance of scenario

approach

− Utilize 20,000 scenarios

− VaR and Expected Shortfall measures

− Re-value all instrument for each

scenario

− Use same distribution assumptions as

the scenario approach

• At least five-day risk horizon at 99%

quantile

− Recognizes the shock of default in an

OTC market such as CDS can take

several days to absorb

• Dynamic risk measures

− Revise requirements as market

conditions and CDS spreads change

− Compute daily

− Improve risk forecasting ability

− Recognize importance of stability for

efficient capital allocation

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Unexpected credit event losses not accounted

for in the market valuation of Single Name

(SN) instruments

Concentration

Requirement

Basis Risk

Requirement

Jump-To-Default

Requirement

Risk Captured

Spread Response

Requirement

Instrument spread level variability and changes in

credit spread term structure (“curve”) shape

Costs associated with large position

liquidation

Interest Rate Sensitivity

Requirement

Portfolio-Level Initial Margin Requirement Index Decomposition Margin Methodology

Recovery Rate

Sensitivity

Requirement

Fluctuations of Recovery Rate (RR) assumptions

Liquidity

Requirement

Component

Consider six scenarios

− Widening / contracting credit spread scenarios

− 3 curve shapes per credit spread scenario

Consider min. and max. reference entity specific RR to

determine additional losses

Include Loss-Given-Default for sold protection

Consider liability associated with 1 credit event using an

assumed SN-specific minimum RR

Differences in trading behavior of index-

derived and outright SN positions

Account for liquidity differences (market views are priced

into more liquid index instruments sooner than SNs), and

expected cash flow differences

Transaction (bid-offer) costs associated with

unwinding CDS instruments in the event of a

Clearing Participant default

Capture the proper liquidation cost for directional as well

as well-hedged portfolios

Estimate costs based on bid-offer width, derived from the

end of day price discovery process

Fluctuations in interest rates

Assess sensitivity of portfolio Net Asset Value to default-

free discount interest rate changes

Reflect market depth and liquidity

Apply to positions that exceed pre-specified thresholds

Increase requirements exponentially

Approach

Initial Margin

Requirement

Total risk requirement

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Margin Calculator Overview Index Decomposition/Offset Methodology

Correlation-

Based Portfolio

Benefits*

Index-Derived

Single Names

Outright

Single Names

Index Decomposition Step: Long-Short Notional Based Offsets

Portfolio Spread

Response

Requirement

Index

Positions

IR Sensitivity

Requirements

SN Net Notional

Amounts

Residual Post-

Decomp. Positions

Basis Risk

Requirements

Single

Name

Positions

Offsets

Jump-To-Default

Requirements

Concentration

Requirements

Liquidity

Requirements Concentration

Requirements

Liquidity

Requirements

Illustration of Methodology Implementation Main Methodology Elements

Liquidity and Concentration Requirements

− Based on original Index and Single Name positions

Level I Portfolio Benefits:

Index Decomposition Notional-Based Approach

− Provide long-short offsets (notional netting) between Index-

derived and outright SN positions

Basis Risk Requirements

− Generate Basis Risk (BR) Requirements during decomposition

Jump-to-Default (JTD) Requirements

− Determine JTD Requirements based on the SN Net Notional

Amounts resulting from the decomposition process

Risk Factor Spread Response Requirements

− Estimate P/L for worst-case hypothetical scenario

Two credit regimes (Widening / Contracting)

Three curve shape regimes

Level II Portfolio Benefits:

Risk Factor Correlation-Based Approach

− Provide long-short and diversification benefits for residual

positions based on Kendall tau rank order correlations

Interest Rate & Recovery Rate Sensitivity Requirements

− Assess impact of fluctuations

RR Sensitivity

Requirements

SELL-CORP IG 3Y

SELL-CORP IG 5Y

SELL-HY 5Y

BUY- CORP IG 5Y

BUY-ENERGY IG 3Y

BUY- CONS IG 5Y

BUY- INDU IG 5Y

SELL- TMT IG 5Y

SELL-TECH IG 5Y

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Margin Calculator Overview Multi-Currency Portfolio Benefits

Illustration of Multi-Currency Methodology Multi-Currency Methodology Elements

Risk Charges Applied to Sub-Portfolio Per Currency

− Calculation separates multi-currency portfolio trades into sub-

portfolios per currency and applies normal risk calculation charges

(Basis Risk, Interest Rate Risk, Recovery Rate Risk, Liquidity &

Concentration Risk)

Level I Portfolio Benefits:

Index Decomposition Notional-Based Approach

− Provide sub-portfolio currency specific long-short offsets (notional

netting) between Index-derived and outright SN position

Level II Portfolio Benefits:

Risk Factor Correlation-Based Approach

− Provide long-short and diversification benefits for combined sub-

portfolio currencies residual positions based on Kendall tau rank

order correlations in per sub-portfolio calculation

Risk Factor Spread Response Requirements

− Estimate P/L for worst-case hypothetical scenario for combined

sub-portfolios

Two credit regimes (Widening / Contracting)

Three curve shape regimes

FX risk (haircut) applied to multi-currency offsets

Jump-to-Default (JTD) Calculation

− JTD initially calculated per sub-portfolio; worst loss of short

position selected

− All JTD converted to single currency with applied FX rate

− Worst loss of all sub-portfolios selected, with FX risk (haircut)

applied if FX rate applied to selected loss

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Margin Calculator Tool Launched From a Transaction

1. Prior to clearing a trade, any

party to the transaction can

calculate the clearing house

projected initial margin by

selecting the View Projected

Margin button after providing

FCM and allocation details

2. After selecting the View

Projected Margin button, users

may select to view the margin

amount weighted against all

existing cleared positions from

yesterdays end of day, only

today’s trades, all trades

(selecting both yesterday and

today’s trades), or view the

isolated margin amount

(deselecting yesterdays and

today’s trades) and select OK to

run the calculations

3. The calculator returns the

margin results for each

fund/portfolio (separate row for

each portfolio-FCM combination;

users may optionally email the

calculation results

Note: The ‘Simulation’ option is for

future eligible instruments

margin testing or for Self

Clearing Participants for ICE

Clear Europe

Launch Projected Margin from the Trade Affirm-Allocation (or) Trade Details Screen

Margin Calculator Results Screen

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The margin tool may be accessed pre-trade via the ‘New Deal-Upload’ option in the Menu (or) the GoldSync+ Positions Blotter

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Margin Calculator Tool Using Existing Positions

Users may run hypothetical

Margin calculations on non-

cleared clearing eligible positions

in the ICE Link Position Blotter to

project the clearing house required

minimum margin amounts

To calculate margin from the

Position Blotter, users may:

* Note: Buy-side firms have the ability to upload positions for testing clearing house margin requirements by

selecting the Upload feature in the GUI Menu, see the Help Documents screen for more details

1. Filter positions eligible for margin

simulation

2. Select All (or) Specific Positions

3. Click the Margin button and select

a potential FCM

Note:

A. ICE Link automatically synchronizes

all client DTCC warehouse positions

In the Position Blotter, simplifying

margin calculations

B. Additional positions may be

manually entered or uploaded

via spreadsheet *

C. Cleared trades results are

reported in the clearing reports

D. The Simulation checkbox is only for

ICE Clear Europe calculations for

Self Clearing members or for testing

with new instruments with ICE Clear

Credit

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Margin Calculator Tool Margin Risk Results

1. View all portfolios with summary margin information per portfolio

A . 6 key risk components: Spread, Basis, JTD, Liquidity, Concentration and Interest Rate Risk

B. FX Rate, Haircut, Equivalent IM Requirement and Equivalent Currency for multi-currency portfolios

2. Access Margin Simulation Guides in the results screen

3. Easily share margin results via email with one click or export results to spreadsheet/file

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Margin Calculator Tool Spreadsheet Upload of “What-if” Trades

1. Hypothetical trade positions

may be uploaded directly to

the Margin Calculator via

spreadsheet (CSV file) for

testing; the upload template

and template instructions are

available in the Help

Documents screen

2. After selecting the ‘Margin’

option in the menu, select

‘Upload’ in the Margin

Calculation criteria screen,

select the spreadsheet file

(CSV) and the Open button

to upload (any upload

displayed in the errors

window).

3. Select the Clearing House

the hypothetical portfolio will

be cleared to.

4. Select OK.

Note: ICE Clear Credit and ICE

Clear Europe trades must be

uploaded separately; calculations

can be mixed with existing non-

cleared, cleared, and hypothetical

trades

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Position Blotter Manual Position Upload/Pre-Trade Margin Test

1. To manually upload a portfolio

(position/ trade level) for margin

testing, select the New Deal-

Single Name or Index option in

the GUI menu; On a Pre-trade

basis

2. In the trade entry screen, select

a counterparty (an Executing

Broker) and a clearing eligible

credit, and select OK when

finished.

3. On a Pre-trade basis, users

may enter trade details and

select the ‘View Proj. Margin’

button without actually

uploading the trade

Note: A list of clearing eligible credits

and simulation only credits are

available in the Margin Upload file in

the help documents screen

Manual Position Upload

(Margin Testing)

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ICE Contacts

ICE Link Client Services

ICELinkClientServices@theice.com

North America +1 770 738 2101

Europe + 44 (0) 20 7488 5100

OTC Financial Sales

ICESales.OTCFinancial@theice.com

North America +1 212 323 6020

Europe + 44 (0) 20 7429 4500

Internet

https://www.theice.com/clear-credit