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CME Clearing Solutions CME Group Solution Model April 15, 2010 Central Clearing – Questions and Answers from the Buy-Side Perspective Agenda Welcome and Opening Remarks Robin Powers, Sutherland Dealers in the Clearing Process Alessandro Cocco, J.P. Morgan Products and Operational Process Corry Bazley, ICE Trust Mark Cox, CME Group Energy/CFTC Issues Michael Brooks, Sutherland Legal and Credit Issues Warren Davis, Sutherland Paul Turner, Sutherland Q&A ©2010 Sutherland Asbill & Brennan LLP 2 Welcome Welcome Overview of Current Environment Introduction of Speakers Alessandro Cocco, J.P. Morgan Corry Bazley, ICE Trust Mark Cox, CME Group Michael Brooks, Sutherland Warren Davis, Sutherland Paul Turner, Sutherland ©2010 Sutherland Asbill & Brennan LLP 3 Dealers in the Clearing Process Alessandro Cocco Managing Director, Associate General Counsel Dealers in the Clearing Process CH CM1 X CM2 ©2010 Sutherland Asbill & Brennan LLP 5 Dealers in the Clearing Process CH CM1 Client ©2010 Sutherland Asbill & Brennan LLP 6 Dealers in the Clearing Process CH ED CM Client ©2010 Sutherland Asbill & Brennan LLP 7 Dealers in the Clearing Process CH House A/C Client A/C ED X CM X Client ©2010 Sutherland Asbill & Brennan LLP 8 Dealers in the Clearing Process CM House ED House IM IM A/C CM A/C IM Client A/C CH IM IM House A/C Client A/C ED X CM X IM Client ©2010 Sutherland Asbill & Brennan LLP 9 Products and Operational Process Corry Bazley Mark Cox Senior Sales North America Director, CME Clearing Solutions CME Group Solution Model In the more than 110-year history of CME Clearing, there has never been a failure by a clearing member to pay settlement variation or meet a performance bond call, nor has there ever been a clearing member failure resulting in a loss of customer funds • Financial safeguards CME Clearing • Transparent daily margining • Multilateral position netting • Collects margin, processes mark to market from clients in Clearing Member accordance with CME Clearing policies & other regulatory requirements • Customer positions and margin held in segregated account • Collateral and Positions protected through segregated Buy-side Firm accounts • Margins calculated on net portfolio basis ©2010 Sutherland Asbill & Brennan LLP 11 Benefits of CME Group’s Cleared OTC Solution Total Financial Safeguards Package Overview • CME Group’s Financial Safeguards Package is Being Extended to CDS, IRS and FX Products • Designed to anticipate potential market exposures and ensure sufficient resources are available to cover future obligations Temporary Liquidity Facility = • Based on ability to cover at least the $600million largest potential net debtor, accounting for collateral damage CME Capital Contribution = • Wide variety of accepted security deposit Up to $100 million collateral, including: – Cash (USD) – US Treasuries – CME-approved money market mutual Total Guaranty Fund: ~$8B Total Collateral: >$100B funds Note: Financial Safeguards funding reported as of March 31, 2009 ©2010 Sutherland Asbill & Brennan LLP 12 Benefits of CME Group’s Cleared OTC Solution Portability of Customer Positions in the Event of a Clearing Member Default CME Clearing Defaulting members positions Defaulting Non-Defaulting • Market access restricted Clearing Member Clearing Member • Collateral captured Customer protection • Collateral held in segregated account Buy-side Firm • Positions maintained and moved to a new clearing member ©2010 Sutherland Asbill & Brennan LLP 13 CDS: Open Access and Point of Trade Clearing Clearing CDS trades real-time throughout the day, every day providing immediate cleared trade confirmation, significantly reducing the credit exposure between bi-lateral parties Trade Submission into CME Clearing • Negotiate, execute, and submit trades through multiple venues to Executing Portfolio IDBs Markitwire * Bloomberg Dealers & Back-loading CME Clearing Customers • Straight through processing and T+0 confirmation • Full life cycle trade management by CME ClearPort CME Clearing • Back-loading of legacy bilateral Copper Record trades to CME Clearing CME Clearing Reporting • More than 100 years of experience in DTCC TIW clearing, settlement and risk management Clearing Clearing Clearing Member Firm Member Firm Member Firm ©2010 Sutherland Asbill & Brennan LLP 14* CME Group is in discussions with other affirmation vendors for trade submission into CME Clearing ICE: Diverse Global Derivatives Markets IntercontinentalExchange (ICE) is the leading operator of integrated futures and over-the- counter (OTC) markets, clearing, processing and data services for global derivatives markets. Global derivatives markets across energy, ICE Integrated Marketplace agriculture, equity indexes, FX and credit Integrated execution and clearing: 3 futures exchanges, 2 OTC markets and 5 clearing houses Market participants in more than 55 countries Industry-leading innovation in products and technology CDS infrastructure that fully encompasses trade execution, processing and clearing ©2010 Sutherland Asbill & Brennan LLP 15 Global Leader in CDS Clearing Liquidity 13 dealers together with leading hedge funds and asset managers actively clearing today 61 index contracts and 151 single names across US & Europe Risk Management World class risk management specifically designed for CDS $3 billion guaranty fund -- completely separate from all other products Guaranty fund sized to cover losses from simultaneous default of 2 largest clearing members CDS and Clearing Expertise Managed numerous Credit Events since launching CDS clearing Leading market connectivity processing thousands of CDS trades a day Co-administrators of ISDA Cash settlement auctions Ease of Doing Business No changes to existing OTC trade execution required Simple legal framework leveraging existing ISDA documentation Open access provided through support of multiple affirmation platforms ©2010 Sutherland Asbill & Brennan LLP 16 ICE CDS Milestones and Volume Cleared ICE Global CDS Cumulative Volume Over 135,000 Trades Cleared ICE CDS Clearing Open Interest of $645B Surpasses $7 Trillion Cleared over $490MM in Buy-side Notional Globally* ICE Trust Launches Buy-side Clearing ICE Trust/ICE Clear Europe Clear Single Names ICE Trust Surpasses $3 Trillion ICE Clear Europe Launches CDS In Billions Clearing ICE Trust Launches CDS Clearing * As of April 9th, 2010. Visit www.theice.com/ice_trust for most recent total. ©2010 Sutherland Asbill & Brennan LLP 17 Why Clear CDS Through ICE? Gross margin held at clearing house NOT at DCM MARGIN Default protections designed to work within existing bankruptcy laws PROTECTION Separate swaps and futures guaranty funds Position and collateral linkage facilitates pre and post default DCM transfer PORTABILITY Timely and operationally simple transfer in the event of a default Contingency planning allows establishment of new DCM prior to default Governance structure includes independent board INDEPENDENCE Margin calculated using independent EOD pricing process ICE margin requirements transparent to buy-side Trades cleared intra-day, on near real-time basis REAL-TIME CLEARING Minimizes intra-day bilateral counterparty risk Leverage existing OTC infrastructure – one operational process SIMPLICITY Can clear through non-US Domiciled DCMs (in US) No costly legal negotiations or significant technology build ©2010 Sutherland Asbill & Brennan LLP 18 Ease of Doing Business ICE Supports the Existing OTC Model and Multiple Platforms Trade Execution & Capture Affirmation & Clearing Consent Clearing & Confirmation Voice or Trade Affirmation Platform DTCC e-trade Capture ICE Executing Buy-side Affirms, DCM Affirms ICE Runs Risk Trade Trade Broker Alleges Allocates and and Routes to Filter Checks and Cleared & Routed to Block Trade Routes to DCM ICE Accepts Trade Confirmed TIW No Changes to Trade Execution Multiple Affirmation Platforms Trades Cleared Intra-day on Near Real-Time Supported Basis Multiple Platforms Supported (ICE Link, Bloomberg, Tradeweb) ©2010 Sutherland Asbill & Brennan LLP 19 Buy-Side Steps to Clear CDS To begin clearing CDS with ICE Trust, Buy-Side Customers need to: Establish relationships with one or more DCMs1 Sign ICE Standard Terms Annex, review ICE Rules and ICE DCM Annex Establish access to an authorized affirmation source and provide necessary authorizations to allow them to act on your behalf 2 1Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, RBS and UBS 2Authorized affirmation sources include ICE Link, Bloomberg and Tradeweb ©2010 Sutherland Asbill & Brennan LLP 20 Customer Margin Protection Hybrid of traditional Net and Gross margin models Gross margin held at clearing house, NOT DCM DCM’s Client Omnibus Account Gross IM of DCM Minimum Initial Margin (MIM) for all (2) clients $3MM is $3MM DCM 2 DCM Buy-side A Positions Buy-side B Positions Minimum IM: Buy-side A $2MM, Buy-side B $1MM Gross IM Gross IM Buy-side positions partially offset - Net Margin is of $2MM of $1MM $750k, Custodial is $2.25MM Buy-side A Buy-side B Buy-side Gross margin is posted and segregated Net Net Custodial Custodial Net margin is determined pro-rata by Gross IM $500K $1.5MM $250K $750K Net margin at risk only in the event that another client at same DCM defaults and causes the DCM to default ©2010 Sutherland Asbill & Brennan LLP 21 The ICE Risk Waterfall Provides Multiple Layers of Protection Layers of Protection Risk Management Waterfall Ensure CP has sufficient financial Membership Criteria
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