CME Group Clearing 2010: A Derivatives Forum OTC Clearing Platform Panel Tim Doar April 13, 2010 MD Risk Management
CME Group Overview Largest futures exchange in the U.S. and globally by 2009 volume Strong record of growth, both organically and through acquisitions CBOT Holdings (2007) NYMEX Holdings (2008) Deep liquidity in futures and options Execution and clearing services for interest rates, equities, energy, commodities, FX, metals Worldwide distribution through CME Globex Proven CME Clearing Listed futures and options OTC products via CME ClearPort 1. In this presentation, pro forma results for CME Group assume the acquisitions of CBOT and NYMEX were completed as of the beginning of the period presented. See the CME Group Inc. Reconciliation of GAAP to Pro Forma Non-GAAP Measures available on our Web site under the Investor Relations section for detail related to the adjustments made to reach the pro forma results. 1
Diverse Product Portfolio & Customer Base Q4 2009 Revenue Mix Customer Base (1) Equities 18% Foreign Exchange 6% Commodities/ Alt. Investments (2) 9% 100% 80% 31% 35% 34% 39% 41% 43% 43% Proprietary trading firms, primarily algorithmic Energy 24% 60% 40% 16% 10% 16% 16% 15% 14% 14% 13% 9% 8% 6% 6% 7% 8% Banks and investment banks Top Hedge Funds Interest Rates 22% Other Revenue 4% Quote Fees 12% Metals 5% 20% 0% 26% 22% 22% 22% 22% 20% 20% 17% 18% 20% 18% 17% 16% 16% Q208 Q308 Q408 Q109 Q209 Q309 Q409 Other - includes smaller member firms and individual traders Non-members (3) 1. Customer segmentation percentages reflect legacy CME and CBOT products only. 2. Commodities / Alt Investments includes agricultural commodities (grains, dairy, livestock, forest, NYMEX softs, indexes), weather and real estate 3. Non-members include pension funds, index funds, long-only mutual funds, insurance companies, corporates, active individual traders, smaller hedge funds 2
Expanding CME ClearPort Across Asset Classes Build upon growing CME ClearPort business CME Group 2009 transaction revenue $260 million = OTC 12% $1.9 billion = On Exchange 88% Launched 332 new products on CME ClearPort in 2009 Offer flexible clearing services open to all OTC market participants Supported by 100+ years of risk management experience and financial safeguards OTC Products Clearing Technology Exchange-traded Commodities Energy Ags Currently offer Credit Interest Rates FX Pre-launch phase began 12/15/2009 In negotiation 3
OTC CLEARING REQUIREMENTS VARY BY OTC PRODUCT What are the additional requirements for a current CME Clearing Member to clear OTC products? What are the requirements for a participant to become a CME Clearing Member for CDS? What are the requirements for a non-clearing Member participant? Adjusted Net Capital (ANC) of $300M for financial OTC products (e.g., interest rates) or $50M (agricultural)1 Membership equivalent requirement of $5M $2.5M security deposit Verification of existing business, financial, and operational capabilities to support the market activity 1/Possible exemption of ANC requirement for affiliate of CME member firm ADDITIONAL SCREENING MAY INCLUDE Minimum Tier One capital or ANC of $500M Membership equivalent requirement of $5M $50M security deposit or $500/number of CDS members Verification of existing business and operational capabilities to meet CDS clearing member requirements Non-Clearing Members are required to transact through a CME Clearing Member (Currently 46 CME Clearing Member firms ) Account administration, suitability, and verification to be performed by chosen firm Participant may have futures affiliate that is a CME Clearing Member - n.b., proprietary positions held at CME futures affiliate may be subject to SEC capital charge Financial health via submission of certified and/or regulatory financial filings Disciplinary history including verification with other exchanges where the firm is a member Credit reviews through a credit check 4
Industry-Leading Risk Management $90B in clearing firm collateral $8.5B financial safeguards package Total safeguards overview Designed to anticipate potential market exposures and ensure sufficient resources are available to cover future obligations Adequacy of package reviewed continuously by CME Clearing and periodically by Clearing House Risk Committee Financial safeguards set based on ability to cover the largest two net debtors across all products Wide variety of accepted security deposit collateral, including: Cash (USD) US Treasuries CME-approved money market mutual funds Aggregate Performance Bond Deposits Contingent Risk Capital Assessment powers Risk Capital Contribution Security Deposit Temporary Liquidity Facility Temporary Liquidity Facility = $800million CME Capital Contribution CME Capital Contribution = $100million More information: http://www.cmegroup.com/clearing/cmeclearing-overview/safeguards.html Total Financial Safeguards: ~$8.5B Guaranty Fund: ~$2.3B Total Collateral: >$90B 5
Risk Management Financial Safeguards - Overview Financial safeguards approach reserves funding tranche respectively for CDS/Futures losses until CDS/Futures losses have been crystallized Losses in one product set have no recourse to the funded portions of the other tranche until all losses are crystallized. Futures Specific CDS Specific In a futures default, if general assessment is utilized, but ultimately there is an excess in the CDS tranche, then the CDS tranche will recapitalize the assessed Clearing Members using excess funds from the CDS tranche. Effectively, the futures tranche is senior to the CDS and combined product tranches after futures losses are crystallized Same is true vice versa 4a 6 5 3 General Assessment Powers (275% of combined guaranty fund) Up to $6.32B Combined Product (CDS/Futures) Guaranty Fund $100M + $360M = $460M (20% / 20%) CDS non-defaulting CMs guaranty fund $400M (80%) CDS losses CME Contributed Capital $100M Futures Guaranty Fund $1,440M (80%) Futures losses 4b 2 1 Defaulting Member CDS Guaranty Fund $50M Defaulting Member CDS Overnight/Initial Margin $200M Defaulting Member Other Guaranty Fund $50M Defaulting Member Other Overnight/Initial Margin $200M 6