ICE Trust CDS Clearing DCO Model

Transcription

1 ICE Trust CDS Clearing DCO Model June 2011

2 Agenda Overview of ICE CDS Clearing Client Clearing Solution Operational Workflow Impact of Dodd-Frank Act on ICE Trust CDS Clearing ICE Next Steps Client Next Steps 2

3 ICE Introduction IntercontinentalExchange (ICE) is the leading operator of integrated futures and over-the-counter (OTC) markets, clearing, processing and data services for global derivatives markets. ICE established in 2000, (NYSE: ICE) market capitalization of $8.64B* ICE Integrated Marketplace Member of S&P 500 and Russell Futures and 2 OTC global derivatives markets across energy, agriculture, equity indexes, FX, and credit Five clearing houses for futures and OTC markets in U.S., Europe & Canada Market participants in more than 70 countries Significant depth and investment in CDS market *As of May 31,

4 ICE CDS Milestones and Volume Cleared ICE Global CDS Cumulative Volume $20,000 $18,000 Over $18.6 Trillion notional cleared globally ICE Trust cleared over $6.4 Billion in client-related notional ICE CDS Clearing Surpasses $10 Trillion Globally 07/10 ICE CDS Clearing Surpasses $15 Trillion Globally 01/11 $16,000 $14,000 $12,000 ICE Trust Launches Buy-side Clearing ICE Trust/ICE Clear Launches Single Names 12/09 In Billions $10,000 $8,000 $6,000 $4,000 $2,000 ICE Trust Launches CDS Clearing 3/09 ICE Clear Launches CDS Clearing 7/09 $ As of June 3,

5 Current Status Products and Clearing Participants 75 Indices North America (CDX) IG S8 S16 HY S8 S16 HVOL S8 S Single Names Europe (itraxx) Main S7 S15 XO S9 S15 HVOL S7 S15 Sector North America Europe Consumer Services Industrials Consumer Goods Utilities 6 16 Financials Basic Materials 7 14 Telecommunications 3 13 Healthcare 9 2 Oil & Gas 9 4 Technology 9 1 Clearing ICE Clear ICE Trust Participant (CP) Europe Bank of America Barclays BNP Paribas Citibank Credit Suisse Deutsche Bank Goldman Sachs HSBC JPMorgan Merrill Lynch Morgan Stanley Nomura RBS Societe Generale UBS Unicredit AG - As of June 13,

6 Features of ICE Trust Clearing Customer Protection Gross margin held at ICE, not at Futures Commission Merchant/Broker Dealer* Default protections designed to work within existing bankruptcy laws Pre and post default portability of positions and collateral supported World class risk management specifically designed for CDS Guaranty fund covers simultaneous default of 2 largest Clearing Participants (CPs) Expertise & Depth Over 300 cleared CDS products across US and Europe 15 dealers actively clearing today Managed numerous Credit Events, Succession Events and Matured Contracts Leading market connectivity processing thousands of trades daily Ease of Doing Business Leverage existing infrastructure Trades cleared intra-day, on near real-time basis Open access provided through support of multiple affirmation platforms No costly significant technology build * The Dodd-Frank Act requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a Futures Commission Merchant (FCM) for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS 6

7 Agenda Overview of ICE CDS Clearing Client Clearing Solution Operational Workflow Impact of Dodd-Frank Act on ICE Trust CDS Clearing ICE Next Steps Client Next Steps 7

8 Margin Segregation Gross Margin is held at ICE, not at the Futures Commission Merchant/Broker Dealer CLIENT A Gross A IM $2MM Gross IM $2MM CLIENT B Gross IM $1MM FCM required to collect the Gross Initial Margin (ICE Minimum Initial Margin) from each client Margin calculator available to clients to calculate Margin requirements full transparency provided FCM Gross IM = 3MM FCM required to post total Gross Initial Margin to ICE FCM can charge an Excess Initial Margin FCM and Client negotiate the timing of margin payment ICE-FCM Client Omnibus Account Gross IM = 3 MM for Client A and Client B Gross IM held at ICE in the FCM s Client Omnibus Account Client Account is fully segregated from the House Account * Customer segregation is subject to change following the promulgation of final rules by the CFTC and SEC under the Dodd-Frank Act. 8

9 Risk Management Waterfall Layers of Protection Risk Management Waterfall * Membership Criteria Initial Margin Requirement Mark-To-Market Margin Requirement Intra-day Risk Monitoring Special Margin Call Execution Guaranty Fund Additional Assessment Rights Ensure CP has sufficient financial resources, operational capabilities and risk management experience Daily margin call based on dynamic stress test regime Daily MTM based on EOD settlement prices Additional margin can be called unusual market fluctuations Additional collateral to mutualize losses under extreme market scenarios Oblige CPs to contribute additional default funding 1. Defaulting Buy-side Margin 2. Defaulting CP House Margin 3. Defaulting CP Guaranty Fund 4. Non-default clients of CP (net only) 5. ICE Priority Guaranty Fund (GF) 6. Non-defaulting CPs GF/ ICE remaining GF 7. Assessment of CPs *CP Default Related to Client Positions 9

10 Initial Margin Requirement Dynamic Stress-Based Regime Summary Of Risks Captured by Model Components Spread Response Requirement Risk associated with spread moves, curve shape changes and recovery rates Jump-To-Default (JTD) Requirement JTD requirement based on expected losses of a default Liquidity/Basis Risk Requirement Costs associated with Bid/Offer exposure upon portfolio liquidation Interest Rate Risk Requirement Risk associated with parallel moves in interest rates Concentration Requirement Costs associated with large position liquidation Initial Margin Requirement Total risk requirement 10

11 Agenda Overview of ICE CDS Clearing Client Clearing Solution Operational Workflow Impact of Dodd-Frank Act on ICE Trust CDS Clearing ICE next Steps Client Next Steps 11

12 How To Clear a Trade ICE Supports the Existing OTC Model and Multiple Platforms Trade Execution & Capture Affirmation & Clearing Consent Clearing & Confirmation by ICE Voice or e-trade Trade Capture Affirmation Platform ICE Executing Broker Alleges Block Trade Buy-side Affirms, Allocates and Routes to FCM FCM Affirms and Routes to ICE ICE Runs Risk Filter Checks and Accepts Trade Trade Cleared & Confirmed Trade Routed to TIW Multiple Platforms Supported Multiple Affirmation Platforms Supported (ICE Link, Bloomberg, Tradeweb, MarketAxess, MarkitSERV) Trades Cleared Intra-day on Near Real-Time Basis 12

13 Agenda Overview of ICE CDS Clearing Client Clearing Solution Operational Workflow Impact of Dodd-Frank Act on ICE Trust CDS Clearing ICE Next Steps Client Next Steps 13

14 Key Provisions of the Dodd-Frank Act Title VII Jurisdiction Mandates the CFTC regulate swaps including broad based indices (e.g., index CDS) and the SEC regulate security-based swaps including narrow based indices and single name CDS Clearing Mandate Clearing will be mandated for standardized swaps as determined by the CFTC and SEC Execution Swaps that are required to be cleared must be executed on a swap execution facility (SEF), designated contract market or national securities exchange U.S. Customer Clearing Requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a FCM for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS Margin Segregation Funds collected are customer property and must be held in an account segregated from non-customer (house) funds 14

15 ICE Trust DCO/SCA Conversion Areas of Impact Legal Structure ICE Trust will transition to a DCO upon effective date of Dodd-Frank in July of 2011 ICE Trust secured an extension of its existing SEC exemptive order through the Dodd-Frank effective date and will be deemed a Securities Clearing Agency (SCA) on the effective date Clearing Participants must clear customer business through FCM/BD entity Documentation Customer relationship to FCM governed by a bilateral futures agreement Customer relationship to BD governed by a securities account agreement ICE Trust Rules govern CDS clearing No separate ICE Trust Addendum for customer and FCM/BD to bilaterally execute Customer Segregation Portability and customer segregation governed by CFTC and SEC regulations CFTC regulated customer omnibus account ICE Trust will seek to hold both indices and single names in the same OTC account class (Cleared OTC Derivatives Account Class 4(d)(f)) Product/ Infrastructure CDS product will remain the same Upfront fees will be netted with margin movements Customers and CPs can leverage current OTC technology infrastructure (e.g., ICE Link) Margin Methodology ICE Trust is seeking regulatory approval for portfolio margining ( Index Decomposition margin methodology) Acceptable margin collateral and permissible margin investments to be determined once final rules are published by CFTC and SEC 15

16 Agenda Overview of ICE CDS Clearing Client Clearing Solution Operational Workflow Impact of Dodd-Frank Act on ICE Trust CDS Clearing ICE Next Steps Client Next Steps 16

17 ICE Next Steps Q Rollout of additional single names ICE Trust and CPs operationally ready to support client clearing under the DCO/SCA Model Client testing under the DCO/SCA Model Q Upon July 2011 effective date of the Dodd-Frank Act: ICE Trust deemed a DCO and SCA ICE Trust and CPs live with client clearing under the DCO/SCA Model Rollout of IG NA single names for client clearing Portfolio Margining (index/single names) Rollout of HY single names for CP-CP and client clearing 17

18 Agenda Overview of ICE CDS Clearing Client Clearing Solution Operational Workflow Impact of Dodd-Frank Act on ICE Trust CDS Clearing ICE Next Steps Client Next Steps 18

19 Client Next Steps To begin clearing CDS, Buy-side clients need to: Establish relationships with one or more Clearing Participant(s) 1 Execute legal documentation with Clearing Participant(s) and review ICE Trust Rules Establish access to a connectivity provider 2 The Margin Simulation Calculator is available for estimation of margin requirements: Provides full transparency into the initial margin methodology Provides detailed analysis of results provided at the net position level Allows users to utilize existing positions or upload custom portfolios to run what if scenarios Access available through the ICE Link web interface 1 Clearing Participants as of May 31, Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Nomura, RBS, Société Générale and UBS. Unicredit AG is a Participant of ICE Clear only. 2 Connectivity providers include ICE Link, Bloomberg, Tradeweb, MarketAxess and MarkitSERV 19

20 How to Stay Updated ICE Website Regularly updated and provides information on Clearing Eligible Products, EOD Prices and Eligible Collateral ICE Trust Circulars Sign up for ICE Trust Circulars to receive updates directly from the clearinghouse at ICE Trust Webinars Webinars available on the website include: Margin Methodology, use of the Margin Simulation Calculator, Clearing Workflows, and Dodd-Frank Impact ICE CDS Newsletter Monthly newsletter summarizing ICE CDS developments. To subscribe, visit the ICE Subscription Center at and choose Credit Derivatives from the Products menu 20

21 Clearing Eligible Instruments available at theice.com Link to ICE Trust Clearing Eligible Instruments: Link to ICE Clear Europe Clearing Eligible Instruments: ucts_list.xls 21

22 US Clearing Participant Contacts Firm Name Barclays Peter Borstelmann Bank of America Bob Burke BNP Paribas Mark Esparrago Citigroup Christopher Perkins Credit Suisse Greg Laughlin Deutsche Bank Goldman Sachs Hester Serafini Luciana Miranda Michael Dawley Amy Elliott HSBC Donna Parks JPMorgan Peter Sughrue Merrill Lynch Joanne Qiao Morgan Stanley James Hill Nomura Stephen Scalzo RBS Kevin Collins UBS Mark Daniels Paul Hamill 22

23 European Clearing Participant Contacts Firm Name Barclays Ayman Gammall Bank of America Andrew Lally Brooks Stevens Citigroup Andy Sterry Credit Suisse Paul Twohey Deutsche Bank Trudy Ross Hakan Guney Goldman Sachs Robert Forkan HSBC Anthony Normand JP Morgan Morgan Stanley Dale Braithwait Brian Oliver Owain Roberts Mark Bortnik RBS William Knottenbelt UBS Marcus Butt Paul Hamill 23

24 ICE Contacts Chris Edmonds President ICE Trust US Office: Peter Barsoom Chief Operating Officer ICE Trust US Office: Paul Swann President ICE Clear Europe Office: +44 (0) Suzanne Hubble Director CDS Development ICE Clear Europe Office: +44(0) Corry Bazley Director Sales and Marketing ICE Trust US Office: