Cleared OTC Credit Default Swaps

Transcription

1 Cleared OTC Credit Default Swaps Security. Neutrality. Transparency. September 2013

2 CME Group OTC Clearing CME Group is the industry leader in OTC Clearing, delivering a broad offering spanning Interest Rates, Credit, FX, Energy, Metals, and Ags OTC Product Progression Coal Metals CDS, Ags, Gold Ferrous Metals ClearPort Established Natural Gas, Crude Electricity IRS, Freight, Iron Ore FX CME Group Founded in 1898 as CME (Chicago Mercantile Exchange) #1 derivatives exchange in the U.S. and globally by volume Global leader in exchange-traded markets with $3B in revenue Leading liquidity / volumes in global benchmarks across all asset classes Extensive and diverse distribution network and customer base International linkages with leading global exchanges Launched in 2002 to provide risk mitigation in energy markets following the Enron collapse Market leading OTC Clearing venue for a diverse range of commodities asset classes 1,700 listed contracts CME ClearPort 10,000 registered users around the world 500,000 contracts cleared daily 2

3 Multi-Asset Class Solution via One Clearinghouse Delivering Capital Efficiencies in a Capital Constrained World CME has worked closely with buy-side and sell-side participants to build a multi-asset class, market leading OTC Clearing Solution Builds on the strength of CME Group s market leading Interest Rate and FX futures and options products In June, over 200 firms cleared trades at CME, comprising a wide array of market participants including asset managers, hedge funds, insurance companies, GSE s, and proprietary trading firms Portfolio Margining Deliverable Swap Futures Multi-Asset Class Real-Time Clearing Allows margin offsets of OTC IRS against Treasury and Eurodollar Futures, with savings up to 90% Launched portfolio margining for house accounts in May and extended this service to customers in November Since the launch of this offering, market participants have seen significant risk reductions that account for margin savings of over $1 billion CME CORE now offers a margin optimization feature allowing firms to run a portfolio margin savings analysis of IRS and Eurodollar and Treasury Futures Deliverable Swap Futures total volume is over $56.7 billion in notional, with open interest at $5.0 billion in notional since December 2012 launch Offers capital efficiencies through futures-style margining and netting by providing margin offsets against Eurodollar and Treasury Futures All Open Positions are delivered into OTC Cleared IRS Swaps at expiration Clients have taken advantage of the flexible execution through Globex, block trades, and open outcry Broadest OTC product scope available to customers with 12 IRS currencies, 56 CDX indices, and 12 FX NDFs Operational efficiencies of a multiasset class solution for IRS, CDS, and FX all in one clearinghouse Simplicity of working with one clearinghouse instead of several as firms work to build out their infrastructure to prepare for OTC Clearing Over $4.7 trillion of notional has cleared and open interest is over $3.0 trillion Superior technology enables realtime clearing with straight-through processing and real-time confirmation is sent once the trade is cleared Customers don t have to wait 15 minutes to find out if a trade has been accepted or rejected Negotiate, execute and submit trades through 11 affirmation platforms and SEFs Time lags in the clearing cycle introduces potential credit risk, and with a faster clearing cycle this risk is reduced and leads to more efficient risk management 3

4 Solid Momentum with Strong Volume and Increasing Open Interest $6,150,000 $5,150,000 Notional Value ($Millions) $4,150,000 $3,150,000 $2,150,000 $1,150,000 $150,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Cumulative Volume Total Open Interest Since launch, we have cleared $4.7 trillion with Open Interest growing 45% since the end of May Record volume month in June; a 25% increase over the previous record in May Open Interest is now at $3.0 trillion Volumes and Open Interest continue to increase as we have seen a record number of participants in June In June alone, over 200 firms cleared trades at CME *Data as of 6/30/13 4

5 OTC Clearing Checklist How to Get Ready with CME Group Critical Items Affirmation platform selection and testing Account registration for OTC Clearing Finalize legal documents with Clearing Members Select fee program and netting style Clearing Members set up Production accounts that are ready for clearing Execute first cleared trade in Production Execute Production trade with each counterparty Useful Information Run margin simulations with CME CORE Run portfolio margining analysis through CME CORE (if applicable) Set-up CME secure FTP site for direct access to reporting: Position valuation reports Client account margin reports IRS curve data Hold deep dive meetings with CME Group subject matter experts on products, operations, and risk management Evaluate back-loading alternatives (if applicable) 5

6 Key Features of CME Cleared OTC CDS Designed to Align to Industry Commitments with Forward Looking Strategic Vision Efficient Contracts Designed to mirror and be economically equivalent to bilateral OTC contracts T+1 settlement of upfront fee Daily portfolio-level position netting and compression Customer Protections Account segregation thru the Cleared OTC Derivatives Sequestered account class Portability of positions and initial margin to solvent FCM pursuant to CFTC regulations & CME rules CME is the counterparty to every trade Transparent Margin Regime Multi-factor portfolio margin methodology Consistent, transparent and replicable margin methodology applied to all customers CME CORE margin tool which easily, independently replicate the margin requirements Valuations Daily mark-to-market published by 5pm ET Primary source is CME CDS Clearing Member submissions Secondary source includes third party data Event Management Adherence to ISDA DC credit event and succession event determinations Hardwired to ISDA auction protocol Full trade life cycle management by CME 6

7 Regulatory and Industry Collaboration US Regulatory Status CME is registered with the CFTC as a Derivatives Clearing Organization (DCO) CME deemed a registered Securities Clearing Agency (SCA), effective July 16, 2011, in accordance with certain provisions under Section 763(b) of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 Received no-action letter from the Division of Investment Management at the SEC, which permits CME Clearing member FCMs to hold property of 40 Act Funds as margin for OTC cleared CDS contracts, extended through December 31, 2011 Industry Licenses Obtained Licensed Markit credit default swap indices and Markit RED identifiers Licensed ISDA credit definitions, and will follow ISDA declaration/ settlement processes 7

8 Cleared OTC CDS Product Scope Clearing Eligible North American Products Product Scope Status CDX IG CDX HY Series 8 7 and 10 tenors Series , 7, and 10 year tenors Series , 5, 7, and 10 year tenors Series year tenor Clearing Eligible Clearing Eligible Clearing Eligible 8

9 Transparent and Replicable Margin Regime CDS Multi-factor Margin Model Macro-economic risk factors Additional risk factors Systematic Risk Curve Risk Spread Convergence/ Divergence Risk Sector Risk Idiosyncratic Risk Liquidity Risk Addresses six risk factors including the overall risk of credit market, portfolio risk, idiosyncratic risk, and liquidity risk Forecasts are presented as ranges with confidence intervals rather than as point estimates Isolates an asset s sensitivities to each risk factor Method is open, stable, and replicable CME CORE tool allows all CMs and customers to easily and independently replicate the initial margin requirements 9

10 CME Online Risk Engine (CORE) Create New or Load Existing Portfolio Validate and Calculate Initial Margin Requirement Analyze and Review Results KEY FUNCTIONALITY Margin Computation Contributing Portfolio Factor Breakdown Report Portfolio Net Position SNAC Trade Conversion Please reach out to or (312) if you have any questions or would like a demo of the application Or Visit 10

11 Transparent Valuation and Reporting VALUATION OVERVIEW KEY INPUTS CDS positions marked-to-market once per day at approximately 4:30pm ET Pricing inputs rely primarily on Clearing Member submissions ISDA Standard CDS Model will be Used for Quote Spread to Upfront Price Conversion Price Quality Auction Clearing Member Price Submissions Third Party Data Clearing Members required to submit price levels for all clearing eligible products and tenors in which they or their customers hold open interest Required tenors: Full term structure Price quality auction process Third Party data CDS End of Day Settlement Prices REPORTING End of day settlement price file published by 5pm ET Direct access to settlement price file showing valuations for each cleared CDS position, includes multiple price formats Settlement price file available with RED Code 1 Client Margin Report which provides an account by account breakdown of a client s initial margin requirements across the clients' FCMs 1 Available to clients with a Markit RED Code license agreement 11

12 Platforms Connected to CME Clearing Several market leading affirmation platforms and Swap Execution Facilities are directly connected to CME Clearing Bloomberg ICE Link Javelin MarkitSERV TradeWeb CME ClearPort CME Clearing OTC IRS/CDS Clearing Members Bank of America HSBC Barclays JPMorgan BNP Paribas Morgan Stanley Citigroup Nomura Credit Suisse RBS Securities Deutsche Bank UBS Goldman Sachs Additional OTC IRS Clearing Members Bank of Montreal Societe Generale BNY Mellon State Street Crédit Agricole-CIB Wells Fargo Newedge Bank of Nova Scotia Royal Bank of Canada RBS PLC Negotiate, execute, and submit trades through multiple venues to CME Clearing Straight through processing and real-time confirmation once the trade is cleared Protects the confidentiality of trading relationships, while enabling customers to terminate positions with any market participant Operational flexibility of a multi asset class solution for IRS, CDS, FX, and Commodities via one clearinghouse 12

13 Trade Workflow Mechanics Straight Through Processing allows for real-time clearing and trade confirmations Client 1 Dealer 1 Dealer and Client agree to trade 3 Affirmation Platform Dealer alleges swap to Client through the Affirmation Platform 3 Client selects Clearing Member and verifies the swap through the Affirmation Platform 5 Clearing Member (Client) CME Clearing House Product Account Credit 5 Clearing Member (Dealer) 4 Affirmation Platform sends the matched trade between Dealer and Client to CME Clearing House 5 CME checks for validation of the product, account and applies credit limits set by Clearing member(s), and then accepts the swap for clearing 5 CME sends Cleared notification back to the Affirmation Platform which displays the Cleared Status to each party 5 CME sends a Clearing Confirmation to Clearing Member(s) once all is validated 13

14 Customer On-boarding Resources CME CORE Margin Tool Dedicated On-boarding Staff Customer Reporting Web-based margin calculator Generate portfolio initial margin requirements via the User Interface or file upload Run what-if scenarios Access both CME production and new release environments through a single login Download initial margin results by firm and position in PDF and CSV formats Live for OTC CDS and OTC IRS Team of on-boarding experts who work with buy side clients to help them prepare to clear IRS and CDS, and engage in testing the clearing process Extensive work with the affirmation platforms, and ability to connect customers to the right resources at those firms Daily valuation reporting for OTC Cleared products, both CDS and IRS Daily trade and position reporting Daily end-of-day settlement price file Product reference file listing all clearing eligible products and their applicable identifiers for mapping internal systems 14

15 Superior Customer Protections CME Clearing is the industry leader in mitigating risk for customers through the US FCM clearing model LSOC Without Netting Variation Margin In an FCM default, CME Clearing will discontinue netting variation gains and losses within the defaulted FCM s cleared swaps customer account with CME Clearing on a post-default basis By discontinuing Variation Margin netting, CME will better protect non-defaulting customers by helping them keep their positions intact while porting them to another FCM with as much collateral as possible Client- Specific Excess Margin LSOC Phase 2 (LSOC with Excess) will launch on Monday, April 22 CME will accept excess customer funds from an FCM. The FCM must submit a daily Collateral Value Report (CVR) to specify the value of each individual The CVR given to CME Clearing identifies for each customer the amount of collateral protected from being used to meet the obligation of another customer CME Safekeeping Accounts Proposed account structure aims to let end-customers meet their margin obligations at FCM s via third-party custodial accounts Allows end-customers to utilize custodial account arrangements and use assets held in those accounts to meet margin obligations CME, an FCM, an end-customer, and a custodian bank will execute a quad-party custody arrangement to facilitate the CME Safekeeping account transactions 15

16 Customer Account Portability Portability of customer positions and collateral is a cornerstone of CME customer protections CUSTOMER CONTROLLED PORTABILITY TRANSFERS Establishing and managing accounts at multiple clearing members Clients maintaining accounts at multiple clearing members are able to control the timing and pacing of their porting transactions In the agency model, clients own their positions The agency model supports portability; at CME this is a matter of routine and standard practice PROVEN SUCCESS IN CUSTOMER PORTABILITY Wholesale porting from stressed to solvent clearing members In September 2008, CME seamlessly ported all $2.2 billion of customer funds and 2.5 million customer positions from Lehman Brothers to a solvent clearing member In wholesale porting transactions, CME balances the need to assure client safety with recalibration of financial safeguards to minimize stress in the financial system Portability is essential to customer protection, both in times of market stress and during the normal course of business Portability is underpinned by CME Rule 853, governing transfers of trades 16

17 Legal Documentation Documentation between CME and Customer There is no longer a legal document, but by registering with CME, you are agreeing to the rules, policies, and procedures of CME and, as applicable, participating exchanges The registration documents can be found at: Documentation between Clearing Member and Customer Clearing Member Futures Account Agreement (FCM Agreement) Clearing Member OTC Addendum 17

18 Flexible Collateral for Initial Margin CME Clearing accepts a broad array of collateral for the Customer OTC Account Class Collateral Haircut US Cash None Non-US Cash (EUR, GBP, CAD, AUD, JPY, CHF)* 5%** Sovereign Debt of UK, Germany, France, Canada, Japan, and Sweden US Treasury Debt US Agency Debt US Agency Mortgage Backed Securities 11% Corporate Bonds (IEF4) 20% Money Market Mutual Fund (IEF2) 3% Bank Deposit Program (IEF5) 5%-10.5% (maturity based) Additional 1.5% for off-the-runs 0.5%-11% (maturity based) Additional 1.5% for off-the-runs 3.5%-7% (maturity based) Additional 1.5% for off-the-runs None *The last three currencies are available for IRS only. ** Haircut is only applied when cash is used to meet a margin requirement based in a different currency. 18

19 Next Steps and Contact Us Establish a relationship with a participating CME CDS Clearing Member Select affirmation platform and work with Clearing Member throughout testing cycles Complete required Clearing Member Customer Documentation Begin clearing trades For any questions regarding On-Boarding and Testing, please contact: On-boarding Team ccsg@cmegroup.com For general information, please contact: Jennifer Peve jennifer.peve@cmegroup.com Jack Callahan jack.callahan@cmegroup.com Visit to learn more 19

20 Cleared OTC CDS Clearing Firm Contacts Firm Contact Name Phone Number Bank of America Merrill Lynch Todd D Agosta (US) Samantha Page (EMEA) merrill.otc.clearing@baml.com Barclays Peter Borstelmann Sandy Fleischman peter.borstelmann@barclayscapital.com sandy.fleischman@barclayscapital.com BNP Paribas Ira Rudman Gavin Dixon Ira.rudman@us.bnpparibas.com gavin.dixon@americas.bnpparibas.com Citigroup Chris Perkins Mariam Rafi christopher.perkins@citi.com mariam.rafi@citi.com Credit Suisse Neil Burke John Dlubac neil.burke@credit-suisse.com john.dlubac@credit-suisse.com Deutsche Bank Piers Murray Thanassis Diplas piers.murray@db.com athanassios.diplas@db.com HSBC Julianna Salazar julianna.x.salazar@us.hsbc.com Nick Marcelle nick.marcelle@hsbcib.com Goldman Sachs Mike Dawley michael.dawley@gs.com JPMorgan Morgan Stanley Nomura Societe Generale UBS Dave Olsen Peter Sughrue Greg Azrak Thomas Levy Jason Swankoski Sandeep Kohli Michael Schneider Giovanna Carraro Shahab Amin Paul Hamill Mark Daniels david.a.olsen@jpmorgan.com peter.m.sughrue@jpmorgan.com gregory.s.azrak@jpmorgan.com thomas.levy@morganstanley.com Jason.Swankoski@morganstanley.com sandeep.kohli@nomura.com michael.schneider1@nomura.com giovanna.carraro@sgcib.com shahab.amin@sgcib.com paul.hamill@ubs.com mark.daniels@ubs.com

21 Disclaimer Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures. CME Group is a trademark of CME Group Inc. The Globe Logo, CME, and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX is a registered trademark of the New York Mercantile Exchange, Inc. All other trademarks are the property of their respective owners. The information within this brochure has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules. Current rules should be consulted in all cases concerning contract specifications. This communication does not constitute a Prospectus, nor is it a recommendation to buy, sell or retain any specific investment. This communication is for the exclusive use of Professional Clients only and must not be relied upon by Private Clients who should take independent financial advice. Circulation should be restricted accordingly. Issued by CME Marketing Europe Limited. CME Marketing Europe Limited is authorised and regulated by the Financial Services Authority Copyright. 21