ICE CDS Clearing Overview
FIA Clearing 2010 – Derivatives Forum New York • April 13, 2010
www.theice.com 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
2 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 $460MM 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 In Clearing
ICE Trust Launches CDS Clearing
* As of April 9th, 2010. Visit www.theice.com/ice_trust for most recent total.
3 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
4 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
5 The ICE Risk Waterfall Provides Multiple Layers of Protection
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 (net & custodial) Collateralize potential Clearing 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
6 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)
7 Buy-Side Steps to Clear CDS
To begin clearing CDS with ICE Trust, Buy-Side Customers need to:
Establish relationships with one or more DCMs 1
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
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