otc clearing overview webcast - cme group · 2017-05-11 · otc clearing overview webcast jack...

OTC Clearing Overview Webcast

Jack Callahan

Executive Director

OTC Products

Liz Flores

Executive Director

Asset Managers

http://www.cmegroup.com/

© 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



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



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



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



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



Agenda

8





• Account Set-up





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



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



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



Agenda

12





• Account Set-up




© 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



Flexible Collateral for Initial Margin

15

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)


US Agency Debt 3.5%-7% (maturity based)


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.



Agenda

16





• Account Set-up





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

17

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

mailto:[email protected]



IRS Reporting Establish a secure FTP site to get access to these reports

18

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




CME CORE Transparency through an interactive Margin Calculator

19

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

http://www.cmegroup.com/core



Agenda

20





• Account Set-up





OTC Clearing Checklist How to Get Ready with CME Group

21

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)



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



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]

http://www.cmegroup.com/otcregistration




Agenda

24





• Account Set-up





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



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



Agenda

27





• Account Set-up





Questions & Answers


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]

http://www.cmegroup.com/otcregistration

http://www.cmegroup.com/core

http://www.cmegroup.com/otc

http://www.cmegroup.com/irs

http://www.cmegroup.com/cds

http://www.cmegroup.com/dsf

http://www.cmegroup.com/margining



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.


otc clearing overview webcast - cme group · 2017-05-11 · otc clearing overview webcast jack...

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