Nasdaq Single Treasury Futures (STF)

Transcription

1 Nasdaq Single Treasury Futures (STF) Reference Guide Version 1.00 /

2 CONFIDENTIALITY/DISCLAIMER This Reference Guide is being forwarded to you strictly for informational purposes and solely for the purpose of developing or operating systems for your use that interact with systems of Nasdaq Futures, Inc. (NFX SM ) and its affiliates (collectively, NFX). This specification is proprietary to NFX. NFX reserves the right to withdraw, modify, or replace this Reference Guide at any time, without prior notice. No obligation is made by NFX regarding the level, scope or timing of NFX s implementation of the functions or features discussed in this specification. The Reference Guide is provided AS IS, WITH ALL FAULTS. NFX makes no warranties to this Reference Guide or its accuracy, and disclaims all warranties, whether express, implied, or statutory related to the Reference Guide or its accuracy. This document is not intended to represent an offer of any terms by NFX. While reasonable care has been taken to ensure that the details contained herein are true and not misleading at the time of publication, no liability whatsoever is assumed by NFX for any incompleteness or inaccuracies. By using this Reference Guide you agree that you will not, without prior written permission from NFX, copy or reproduce the information in this Reference Guide except for the purposes noted above. You further agree that you will not, without prior written permission from NFX, store the information contained in this Reference Guide in a retrieval system, or transmit it in any form or by any means, whether electronic, mechanical, or otherwise except for the purposes noted above. In addition you agree that you will not, without prior written permission from NFX, permit access to the information contained herein except to those with a need-to-know for the purposes noted above. NFX SM is a servicemark of Nasdaq Futures, Inc. Copyright 2015, Nasdaq Futures, Inc. All rights reserved. NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 2

3 CONTENTS / 1 Executive Summary What are Single Treasury Futures Who Should Trade Single Treasury Futures (STF) How are STF Contracts Priced STF as an Alternative Finance Tool Nasdaq NFX STF Market Structure NFX Exchange Trading of STF Contracts NFX STF On-Exchange Transactions NFX STF Off-Exchange Reported Transactions NFX Complex Strategies STF Spreads Used for Transferring Assets Off-Balance Sheet Nasdaq NFX Combination Order Functionality The STF Basis Trade An Alternative Finance Trade STF Basis Valuation Model STF Basis on Nasdaq espeed Structuring STF General Collateral Trades STF Clearing And Settlement Services OCC Clearing and Settlement of STF Contracts OCC Credit Risk Management Margin Rates and Clearing Costs Balance Sheet Impact And Capital Treatment Balance Sheet Impact Regulatory Capital Treatment Contact Information NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 3

4 1 EXECUTIVE SUMMARY / New regulatory rule proposals intending to mitigate systemic risk in the wholesale funding market have had a dramatic effect on banks ability to facilitate low risk-weighted asset-financing trades. The roll-out of new capital ratios in addition to money market reform have created supply/demand dislocations in the fixed income markets, and have impacted overall liquidity. As a result, interest in alternative exchange traded, Central Counterparty Cleared (CCP) solutions have arisen. The objective of this document is to present a new financial derivative contract (a Delta1 contract). Single Treasury Futures (STF) replicate a secured funding product and will trade on the Nasdaq Futures, Inc. Exchange (NFX or Exchange) and clear at The Options Clearing Corporation (OCC). It s an interesting idea for asset owners to finance single name positions, and at the same time, cash providers to capture CCP-cleared money market returns. As an alternative to a leveraged U.S. Treasury Security (UST) position, the STF could provide price discovery for term financing and increase liquidity in the market. The goal in introducing Single Treasury Futures is to manage regulatory concerns while offering a capital efficient solution enabling all market participants to manage interest rate risk. 1.1 What are Single Treasury Futures? STFs are Exchange-listed, CFTC regulated, futures contracts on specific US Treasury securities. STF contracts are legally binding agreements, held in a futures account, which give the holder the right to take/make delivery of a specific underlying treasury security at expiration. NFX, following regulatory approval, is able to issue STF contracts on existing single CUSIP U.S. Treasury Notes and Bonds. When the U.S. Department of Treasury auctions new UST benchmark issues, NFX will list STF contracts on each original issue the day following the auction. Settlement at contract expiration will be realized by physical delivery of the single CUSIP treasury security underlying each STF contract. Unlike existing Treasury futures contracts, there are no cheapest to deliver issues; the STF allows precise hedging with no basis risk and mitigates tracking errors. NFX is an all-electronic exchange utilizing Nasdaq s highperformance and proven technology, which provides market participants with advanced functionality for central limit Order Book trading as well as real-time Off-Order Book trade reporting on the same Trading System (trading platform). The Options Clearing Corporation (OCC) provides clearing and settlement services for STF contracts. OCC is a qualified central counterparty (QCCP) and is highly rated by S&P (AA+). OCC will guarantee settlement of all cleared STF transactions with final settlement occurring at Fixed Income Clearing Corporation (FICC). NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 4

5 1.2 Who Should Trade Single Treasury Futures Possible Users Client-facing businesses like prime brokers might use STFs to allow their clients to access financing in a more balance sheet friendly way, rather than margin financing. This follows the trend of prime brokers already looking for CCP-cleared synthetic financing alternatives to physical transactions. Cash investors looking for a term repo return that are constrained from accepting term repos themselves could turn to STFs to capture income while maintaining a CCP-cleared product profile. For many investors, while term repo may not fit their investing profile, futures may be a mainstay of their trading program. STF contracts as a Delta1 hedge for UST collateral provides an alternative for cash investors in the event of overnight repo scarcity. Market participants limited in their ability to take advantage of tight repo markets may hold US Treasuries but be excluded from major repo market access. However, they can trade futures. Selling securities in the cash market and buying a STF on the same instrument then reinvesting the cash at a rate above the implied repo rate can capture the specials versus cash reinvestment spread. As a Delta1 contract, STFs are a helpful trading instrument. As repo rates on hot on-the-run US Treasuries ebb and flow, STF prices will change accordingly. Trading a fungible futures contract as a proxy for repo rates via the STF markets will widen the number and types of market participants in repo, providing greater liquidity to the market. Derivatives investors who need collateral to support central clearing may be able to achieve a better cash return and hedge their collateral price risk by buying US Treasury paper to submit to their CCP or clearing member and hedge the risk by selling STFs. Nasdasq Futures, Inc. (NFX) Central Limit Order Book Block and EFP trade reporting Exchange Qualified CCP AA+ Credit Counterparty Physically settles through FICC Centrally Cleared by OCC Traded STF CONTRACTS Delta1 contract Matches Benchmark Durations Built in Financing Conversion ratio of one $1,000,000 face value of underlying UST Matches UST price conventions Expiration dates will match term repo dates STF Specifications Yield Enhancement Vehicle Synthetic Finance Tool Provides transparency to term funding Provides a vehicle for transferring assets offbalance sheet Funds restricted from repo can increase net interest income Efficient funding can increase re-investment returns NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 5

6 1.3 How are STF Contracts Priced? STF contracts are priced like any futures contract Discount on face value based on the net interest accrual at expiration. STF Price Drop = Accrued Interest to STF expiration Repo Expense STF Price Drop = Coupon x days/days in coupon period - UST dirty price x repo rate x days Theoretical STF Pricing Example UST 10yr, 2.25 coupon, ( nds) price,.05% repo assumption, 42 days term STF Price Drop = 2.25 x 42/ * x.0005 x 42/ *Dirty Price calculation based on 1/6 settlement and 2/17 delivery STF Price Drop = YR STF Price = STF pricing is simply a forward price calculation reflecting net implied interest over the term of the futures contract. Theoretical Daily STF price movement relative to underlying UST The STF price accretes each day in an amount equal to one day of net interest. Convergence of the STF price to the UST price on delivery is guaranteed. Date Days STF Price Date Days STF Price 1/6/ /28/ /7/ /29/ /8/ /30/ /9/ /2/ /12/ /3/ /13/ /4/ /14/ /5/ /15/ /6/ /16/ /9/ /20/ /10/ /21/ /11/ /22/ /12/ /23/ /13/ /26/ /17/ /27/ *Calculation based on Bloomberg market data NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 6

7 1.4 STF as an Alternative Finance Tool STF contracts allow for innovative trading strategies that can be used by securities and futures traders to better manage their cost of financing long or short positions and maximize their return. STF contracts offer an alternative way to purchase and maintain delta exposure to individual UST securities. Trade Example Customer wants delta exposure to UST 10YR (a Delta1 trade). The three options are: Option One Make a fully paid for cash purchase Fully paid for purchase Lose flexibility to use cash for other purposes Sacrifice risk free return on cash held in a money market account Option Two Finance the securities prior to settlement and pay for them with a collaterized loan Pay for purchase using margin financing Requires an unsecured loan on initial margin requirement Credit exposure to the cash lender Option Three Purchase Single Treasury Futures Purchase STF contracts Purchase a 10yr STF contract with built in financing facing AA+ credit Short-term USTs are used to meet initial margin with interest continuing to accrue to STF owners benefit Cash continues to earn interest NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 7

8 2 NASDAQ NFX STF MARKET STRUCTURE / 2.1 Nasdaq Exchange Trading of STF Contracts NFX is utilizing Nasdaq s high-performance and proven technology, which provides market participants with advanced functionality for central limit Order Book trading as well as real-time Off-Order Book trade reporting on the same platform. Order Book Rich matching functionalities Full implied functionality and extensive range of strategies Trade Registration (Off-Order Book) Block Trades Exchange for Related Positions 2.2 Order Book ( On-Exchange Trades ) The Trading System provides sophisticated and rich trade matching functionalities including Implied Order generation with efficient execution of a broad range of hedge, strategy and contingent trades. 2.3 Off-Order Book Trade Reporting ( Off-Exchange Trades ) The Trading System supports Real-Time trade reporting of privately negotiated transactions (brokered transactions) executed away from the Order Book. The trading platform supports the following functionalities: Order a bid or an offer which may include time in force conditions or triggers which qualify Orders. See Chapter IV, Section 4 for Order types. Quote a one or two-sided bid and offer message packet which is replaced with a new Quote. Only one active Quote packet can exist per Instrument series per trading participant (up to twenty-four bids and offers may be contained in one Quote packet). Request for Quote (RFQ) an indication of intent to buy or sell a specified quantity of a Contract used to invite participants into a bidding process for specific products. Market participants who wish to trade an Instrument which may not be particularly liquid use RFQ functionality to request a price from the market and broadcast an interest in trading a particular Instrument. Request for Cross (RFC) an indication of interest submitted by a single party for a two-sided Limit Order at the same price and quantity. Crossing Order functionality provides customers submitting Cross Orders the best available price with optimal market transparency. More details around order book trading can be found in this Reference Guide at Chapter 3. Block Trade - is a privately negotiated futures, options or combination transaction in a Futures Contract or Option that are listed on the Exchange. Block Trades are permitted in specified products and are subject to minimum transaction size requirements which vary according to the product, the type of transaction and the time of execution. Block Trades may be executed at any time at a fair and reasonable price. NFX will support Block Trades electronically submitted by voice brokers as well as principle-to-principle transactions. Exchange for Related Position (EFRP) - Each EFRP trade must be labeled with the appropriate EFRP type (i.e. EFP, EFR or EOO) on the trade report submission. EFRP trade eligibility will be notated on each individual product specification for products in which the Exchange will accept EFRP trades. The Exchange accepts the following: -- Exchange for Physical (EFP) - A privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding cash position. -- Exchange for Risk (EFR) - A privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding OTC swap or other OTC Instrument. -- Exchange of Options for Options (EOO) - A privately negotiated and simultaneous exchange of an Exchange option position for a corresponding OTC option position or other OTC Instrument with similar characteristics. More information concerning trade reporting is located in the NFX Rule Book at Chapter IV, Sections 10 and 11. NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 8

9 3 NFX COMPLEX STRATEGIES 3.1 STF Spreads Used for Transferring Assets Off- Balance Sheet STF calendar spread trading involves the purchase of one STF contract and the simultaneous sale of another STF on the same underlying but with different expiration dates. The price differential on STF contract calendar spreads is purely the time value of money over the term. A holder of USTs could achieve a transfer of the asset off-balance sheet by selling a short expiry STF contract that automatically transfers the asset through FICC at expiration. The second leg of the spread is a simultaneous purchase of a longer-term STF contract. The end result is a transfer of an on-balance sheet low-risk weight asset to an off-balance sheet derivative that replicates the economics of the original asset and is guaranteed by OCC. In the UST Specials repo market, issues in short supply could be financed at negative interest rates. A holder of an issue trading special could transfer the UST through the sale of the front STF contract with a purchase of a longer dated contract and lock in the positive carry over the holding period with minimal balance sheet impact. 3.2 Nasdaq NFX Combination Order Functionality Nasdaq NFX Trading System supports the trading of Strategies also referred to as Combination Orders, which will trade in a separate Order Book. The Exchange may list STF futures combinations for trading, and users may create their own tailor made combinations. Intra-Commodity (Time) Spread Combinations may be formed by buying and selling two futures of the same underlying but with different expirations (Calendar Spreads). -- The price ratio for the underlying legs will be configured to an integer of one. There will be no change to the trading tick size. Inter-Commodity Spread - Combinations may be formed of two or three underlying STF Futures contracts. The STF calendar spread trade replicates a Sell/Buy back repo and mitigates capital and margin charges and credit and operational risk on the trade. Upon expiry of the longer dated STF, FICC will transfer the UST back into your account putting you back into the original position. Weekly STF contracts offer flexibility in trading calendar spreads. NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 9

10 4 THE STF BASIS TRADE - AN ALTERNATIVE FINANCE TOOL 4.1 STF Basis Valuation Model Trading the STF basis provides an alternative way to transfer securities U.S. Treasury Notes/Bonds Basis (Price Spread) Pricing the basis is a direct function of financing the underlying issue to final settlement of the STF contract At final settlement the STF contract delivers into the US Treasury security itself The STF basis creates pure arbitrage trading opportunities versus underlying term financing Term Repo/ Reverse Repo Rate STF VALUATION MODEL Single Treasury Future STF Basis offers price discovery for term UST financing Basic math solves for the implied repo derived from the STF basis accrued interest - STF basis Implied Repo Rate = UST dirty price x days to delivery STF/UST Basis on Nasdaq espeed* UST 10yr basis sold to 2/17 at a basis price of (32nds) UST Price Calculation (AIE + FP-IRR * d/360 * AI) UST Price = (IRR * d/ ) AIE = Accrued Interest to Expiration FP = STF Price (decimal) IRR = Implied Repo Rate d = actual days to final settlement AI = Accrued interest on UST The Basis and STF Reference price solves for the UST price Nasdaq espeed and NFX provides STP of UST to FICC and STF reports to OCC * Execution Access, LLC operates the an electronic trading platform (espeed) to facilitate matching of orders in U.S. Treasury securities. Execution Access is a member of FINRA and SIPC. BUSINESS.NASDAQ.COM NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 10

11 Mechanics of pricing a basis trade 1. Start with a 10yr Basis price = (32nds), implying 7.7bp repo 2. Pull in current 10yr STF price = ( decimal) 3. Calculate UST 10yr price = Execution and straight through processing (STP) of STF Basis transactions STF Basis Execution UST Pricing STF trade reports sent to NFX STF trades novated to OCC UST post trade processing STF 10yr basis STF reference price STF trade NFX submits trades Matched UST trades trade is matched is fed to espeed for report is sent to to OCC are submitted to FICC on Nasdaq s espeed pricing of UST NFX on behalf OCC becomes legal on behalf of the buyer trading platform at UST trade reports are of FCMs counterpart on all and seller (32nds) sent to counterparts STF trades FICC guarantees performance of its members 4.3 Structuring STF General Collateral Trades NFX, following regulatory approval, can list multiple UST CUSIPs on short notice to facilitate basis transactions; ideal for structuring synthetic general collateral financing trades. Private negotiation with reporting of STF Exchange for Related Products (EFRP) and Block transactions direct to Nasdaq espeed and NFX preserves the Dealer/Client relationship while providing financing in a balance sheet friendly structure. STF GC Basis Trade example using NFX EFP Transaction reporting ABC buys STF GC 01/15 for.10% for 7 days XYZ sells STF GC 01/15 at.10% for 7 days Initial Terms are negotiated i.e. Implied Repo, Quantity, and Term 1. Seller of collateral confirms UST CUSIPs to be delivered DVP 2. A simple spreadsheet can calculate multiple UST/STF transfers Here is an example of multiple STF reports and aggregate IRR pricing Each STF contract listed above converges to the underlying CUSIP at term (7days) Each UST/STF price differential hypothetically returns.10% over the term STF trade management Hold to Delivery OCC guarantees return of cash and collateral at delivery. Seamless unwind with no execution fees (pending regulatory approval). Roll into longer dated STF contracts Executed in the NFX STF order book or privately negotiated as a block trade with an executing broker and reported off-order book. Closed out in the secondary market STF EFP positions can be closed out through private negotiation with a participating executing broker and reported off-order book Block/EFRP. NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 11

12 5 STF CLEARING AND SETTLEMENT SERVICES / OCC operates as horizontal clearing provider, servicing sixteen exchanges under the jurisdiction of both the U.S. Securities and Exchange Commission (SEC) and the CFTC. As a registered clearing agency under SEC jurisdiction, OCC clears transactions for exchange-listed options, security futures and OTC options. As a registered derivatives clearing organization under CFTC jurisdiction, OCC offers clearing and settlement services for transactions in futures and options on futures. OCC has recently been designated as a Systemically Important Financial Market Utility (SIFMU) under title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act. OCC has also been granted qualified central counterpart (QCCP) status by the Federal Reserve. 5.1 OCC Clearing and Settlement of STF Contracts Novation OCC s acceptance of STF transactions submitted for clearing go through the process of novation, OCC becomes the counterparty to all buyers and sellers of STF transactions. OCC guarantees the performance on the STF transactions to each of its counterparts. Initial Margin Each of the parties to a transaction will be required to post initial margin to his carrying futures broker to cover the maximum likely loss the party could suffer on the transaction between each mark-to-market cycle. Variation Margin At least once a day, OCC determines the value of each STF contract and calculates a required variation margin based on the mark-to-market value. The margin payment must be paid by the original counterparties to his carrying futures broker, by the opening of the next business day. Settlement Process Expiration Date Last Trading Day OCC will match Clearing Members with short and long positions, and produce a Delivery Invoice Report using the default banking instructions previously provided by the Clearing Members. Expiration Date + One Business Day The deliverer and receiver submit a two-sided trade in to FICC s Real Time Trade Matching (RTTM) system. FICC compares the two trade submissions and matches them. Once FICC makes a match, they step in as guarantor that the trade will settle. FICC provides an immediate match notification to the firms when the match occurs. If a match doesn t occur by 8:00 PM ET, FICC notifies the firms shortly after the deadline for submission has closed. Trades that have matched are considered for both variation and risk margin within FICC. These same trades would also be margined within OCC s system until the morning of the next business day, unless OCC is notified of a non-match situation in which case OCC would continue to hold margin until a trade match at FICC is made. Expiration Date + 2 Business Days FICC nets all settling trades and provides netted settlement instructions to the clearing member banks via FedWire. Those net settlement instructions would begin settling as soon as FedWire opens. If there is a failure to match the transaction at FICC, the Clearing Members must notify OCC of such failure. Please refer to OCC S By-Laws & Rules for the procedures that are followed in such a scenario. NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 12

13 5.2 OCC CREDIT RISK MANAGEMENT OCC will be counterparty to all transactions accepted for clearing and all original parties to the transactions will be unaffected by, and have no exposure upon, the default of one of its original counterparts Exposures and settlement of all transactions submitted by executing brokers and cleared by OCC will be netted, mitigating the firm s total exposure with respect to the cleared transactions. OCC has the ability to mark cleared positions to market frequently in response to market conditions, mitigating credit risk on a continual basis 5.3 Margin Rates and Clearing Costs STF Margin Rates On paper, margin rates potentially favor STFs over the main CCP repo alternative, the FICC. UST Repos that clear through FICC have margin rates approximately 2% for shorter dated US Treasury securities and rise to 6% for long dated US Treasury securities. It should be noted that some market participants believe that in practice, FICC margin rates may be lower than they appear in the rules. While actual haircuts and margin will vary, OCC CUSIP by CUSIP margin should provide capital efficiencies. The chart below compares FICC published margin rates to estimated OCC margin rates. Estimated Initial Margin Rate Comparison Margin Rate Comparison Maturity Bucket FICC UST Rates 1 OCC STF Rates 2 0 to 1 years 2% 0.25% 1 to 2 years 2% 0.05% 2 to 5 years 3% 1% 5 to 10 years 4% 2% 10 to 30 years 6% 4% 1) FICC rates published in Government Securities Division Rulebook 2) OCC STF rates are estimated OCC Clearing Costs OCC clearing costs are posted on the OCC website. Costs are extremely low based on notional value for example; On a 100 contract STF trade ($100mm notional) clearing costs are $5.00. OCC Clearing Fees Contracts Per Trade Fee Per Contact 1 to 500 $ to 1,000 $0.04 1,001 to 2,000 $0.03 > than 2,000 $55.00/trade OCC Schedule of Fees / April 2014 NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 13

14 6 BALANCE SHEET IMPACT AND CAPITAL TREATMENT / 6.1 Balance Sheet Impact Because futures contracts don t involve booking an asset or a liability, their impact on the balance sheet is limited to their fair market value. As a result, the amount of capital allocated to a futures contract can be small. As an added benefit, U.S. regulators recently clarified an important part of the Leverage Ratio: clearing activity must be single counted as a liability, not double counted (once for the client, second time for the clearing firm). In contrast, the full notional values of repos and cash positions are on the balance sheet, absorbing capital. CCP-based transaction should beat a bilateral transaction in terms of balance sheet impact, especially once other factors like Dodd-Frank 165 are taken into account. Credit transformation and balance sheet efficiency tool Cash Investor Buys UST and Transer of assets to Delta 1 futures Contract Cash Borrower Sells UST and executes a futures executes a futures sale facing OCC OCC becomes legal counterpart buy facing OCC to all STF buyers and sellers FCM NFX OCC NFX FCM Transferring UST assets with a future buy back via STF contracts Consensus opinion is that a transfer of UST to STF contracts is a Legal True Sale as opposed to a secured finance transaction. Accounting for the transfer as a sale is supported by a couple of key facts: -- The credit exposure on the transfer of USTs is bilateral while the future purchase is a legally binding agreement with OCC. -- The holder of the STF contract has the right but not the obligation is to carry the STF position through expiration. 6.2 Regulatory Capital Treatment Basel III introduction of the non-risk based leverage ratio is meant to act as a credible supplementary measure to the risk-based capital requirements. The 3% minimum requirement is a backstop measure and sets a floor for low risk-weighted assets. Banks cost for on-balance sheet UST and UST repo will increase substantially. Full notional value of repos and cash positions on balance sheet will absorb capital at a minimum of 3% for banks and double that for U.S. G-SIFIs. These regulatory pressures have led to repo markets contracting. New proposals to tackle the issue could easily add layers of complexity and cost to financing USTs. There are many factors to consider and they point in one direction: balance sheet size for U.S. Repo businesses will continue to be under pressure and banks will ration its use for low return business segments. As a result, a CCP-Cleared STF contract that could potentially move risk off the balance sheet may be a valuable option. NASDAQ SINGLE TREASURY FUTURES (STF) REFERENCE GUIDE / 14

15 Comparison of an on-balance sheet UST 10-year position versus a STF 10-year Assume a par value of 100 for simplicity. Calculations on the leveraged UST position are based on a UST 10yr applying a unsecured credit exposure of 2% on the over collaterized UST repo and 4% market volatility haircut on exposure. Calculations on the 10yr STF position are based on the OCC market volatility haircut (Initial margin) of 2% and the add-on requirement under Basel III of 1.5% for exposure greater than 5 years. Results for UST assets are predictable since SLR is the binding factor for low risk-weight assets. Derivative contracts capital charge is limited to the initial margin that sits on balance sheet. Leveraged UST 10 yr Position Scenario A Scenario B Leveraged STF 10 yr Position Value of UST $ Value of Cash $ Net Unsecured Credit Exposure $2.00 Market Volatility Haircut on Exposure $4.08 Exposure at Default $6.08 Supplemental Leverage Ratio (SLR) SLR Impact (UST) $ Reference SLR Ratio 3.00% SLR Capital Requirement $3.00 $99.81 Mark to Market of STF Purchased $2.00 Estimated Initial Margin $1.49 Net Potential Future Exposure (PFE) $3.49 Exposure at Default Supplemental Leverage Ratio (SLR) $3.49 SLR Impact (Net PFE from STF Position) 3.00% Reference SLR Ratio $0.105 SLR Capital Req 96.50% CAPITAL SAVINGS 3% ratio applies to non-u.s. Globally Systemically Important Banks (G-SIBs). Additional STF cost and capital efficiencies CUSIP by CUSIP margining frees up capital versus UST margin rates Low cost clearing operation with unbeatable pricing Potential for cross margin for securities specialists and market makers Horizontal clearing provider servicing securities and futures exchanges FOR MORE INFORMATION / Patrick Troy patrick.troy@nasdaq.com / Phone: Copyright All rights reserved. Nasdaq is registered service/trademarks of The Nasdaq OMX group, inc Q15

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