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

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

CM1 X CM2

CM1

Client

ED CM

Client

House A/C Client A/C

ED X CM X Client

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

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

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

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

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

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

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

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.

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

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)

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

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

Layers of Protection Risk Management Waterfall

Ensure CP has sufficient financial Membership Criteria resources, operational capabilities and risk management experience 1. Defaulting Buy-side Margin Collateralize potential Clearing (net & custodial) Initial Margin Participant portfolio loss under Requirement 2. Defaulting CP House plausible distressed conditions Margin 3. Defaulting CP Guaranty Mark-To-Market Margin Adjust Clearing Participant Fund Requirement collateral through a daily debit/credit based on EOD MTM 4. Non-default clients of CP Intra-day Risk Monitoring Identify additional margin (net only) Special Margin Call requirements based on unusual market fluctuations 5. ICE Priority Guaranty Fund Execution (GF) Mutualize losses under extreme 6. Non-defaulting CPs GF / Guaranty Fund but plausible market scenarios ICE remaining GF 7. One Time Assessment on Oblige Clearing Participants to Limited One-Time CPs contribute a limited amount of Assessment additional default funding

• Concerns about oil market volatility in 2007-08 have driven Congress and CFTC Chairman Gensler to press for greater transparency through mandated clearing and other means

• But there are real questions as to whether the system is broken ¾ Institutional “longs” largely have been operating in the regulated futures markets ¾ It is not at all clear that price spikes originate in the OTC markets, however much they may lack transparency ¾ Many standardized OTC energy contracts already have migrated to the clearing houses

• There are real concerns that “forced” clearing of standardized agreements will undermine market efficiencies ¾ End users continue to lobby for exemption from clearing and margin requirements ¾ Some believe that important non-standardized OTC contracts will not survive the transition (e.g. basis swaps)

• Existing law gives the regulators substantial powers to supervise both the OTC and the forward energy markets

• There are hints that the final legislation will not be as aggressive as some on the Hill and at the Commission would wish

•Bankruptcy Code’s Subchapter IV of Chapter 7: Liquidation of Commodity Brokers Facilitates transfer of customer accounts to different (solvent) commodity broker If customer accounts identifiable, then trustee must heed requests for return of customer property and/or transfer to new commodity broker If cannot be identified or cannot be transferred, then contract liquidated If customer owed money after transfer/liquidation/offset, customer receives ratable distribution (higher priority than non-customer claims) CFTC has right to appear and be heard on issues Chapter 5 provisions apply

Many concerns originate out of Lehman bankruptcy LBIE (UK entity) had customer accounts released by exchanges to LBIE’s administrators, leaving customers without adequate remedy Customer protection requires segregation & portability Factors in segregation: security interest vs. transfer of title, clearinghouse collection of margin, type of margin held, location where margin is held, commingling, rehypothecation Portability relies highly on segregation; e.g., margin must be held away from commodity broker and must not be commingled

•Final Ruling Effective May 6, 2010 Amends existing regulations to create new “account class” Significance of account class New category applies only in cases of bankrupt commodity broker that is FCM Applies to cleared OTC derivatives and money, securities or other property securing them Comments expressed concerns: Bankruptcy courts could decline to find cleared-only contracts as “commodity contracts” Rule did not address bankruptcy of clearing organization

Continued focus on bankruptcy issues for near- and intermediate- term, particularly if legislation passes requiring more derivatives to be cleared Legislative and regulatory response will leave some gaps As economy improves, most could lose focus on key issues Problems will not fully come to light until next major crisis

• Status of Trade Before Accepted for Clearing

• Initial Margin Issues

• Porting Transactions

• What happens if counterparty enters into a trade with the expectation that it will become a cleared trade and for whatever reason that does not happen?

• Possible Relevant Documentation: Clearing House Rules and Procedures Agreement with clearing member/counterparty and/or executing broker (in case of “Give-Up Agreement”) Note: ISDA Nov. 2009 Recommended Common Principles for Relationship Between Customer and Executing Broker and Clearing Member

Questions: 1. Will Initial Margin always be custodied at the Clearing House? 2. Will Initial Margin required by the Clearing Member in excess of the Clearing House’s requirement for Initial Margin be custodied at the Clearing House? 3. May a customer utilize securities to satisfy its Initial Margin requirements? 4. If yes, what kinds of securities will be eligible and will there be haircuts? 5. If a customer posts cash to satisfy initial margin, will he be entitled to receive interest on the cash? 6. If yes, will be rate be negotiated between the customer and the Clearing Member or between the Clearing Member and the Clearing House?

Possible Relevant Documentation Clearing House Rules Agreement between Clearing House and Clearing Member Agreement between Clearing Member and Customer ¾ In case of ICE Trust Existing ISDA and CSA and “New” ISDA and for Cover Transactions.

Questions: 1. When can transactions be moved? 2. What is the procedures for moving transactions?

Possible Relevant Documentation: Clearing House Rules Agreement between Clearing House and Clearing Member Agreement between Clearing Member and Customer Agreement between Customer and New Clearing Member

Corry Bazley Michael Brooks Senior Sales North America Sutherland Asbill & Brennan LLP ICE Processing 202.383.0863 212.323.6022 [email protected] [email protected] Warren Davis Alessandro Cocco Sutherland Asbill & Brennan LLP Managing Director 202.383.0133 Associate General Counsel [email protected] J.P. Morgan 212.648.0254 Robin Powers [email protected] Sutherland Asbill & Brennan LLP 212.389.5067 Mark Cox [email protected] Director, CME Clearing Solutions CME Group Paul Turner 212.299.2166 Sutherland Asbill & Brennan [email protected] 713.470.6105 [email protected]