OTC CLEARING Trade Workflow Netting Reports October 2012
Trade Workflow Netting Reports
New Trade: Sunny Day Scenario Client 1 ED 1 Client executes swap with Executing Dealer (ED) 3 5 USI1 USI11 Clearing Member (Client) Affirmation Platform 4 5 CME Clearing House Product Account Credit USI1 USI11 USI12 USI12 2 5 Clearing Member (ED) 2 ED alleges swap to Client 3 Client selects Clearing Member and affirms swap 4 Affirmation Platform sends matched trade to CME for Clearing 5 After validating product, account and applying credit limits set by Clearing Member(s), CME accepts swap for clearing 5 CME sends Cleared notification to Affirmation Platform which displays trade status to principals 5 CME sends a Clearing Confirmation to Clearing Member(s) Validations, notifications and confirmations are real time and allow Straight Through Processing 3
Trade Workflow Netting Reports
IRS Position Management Clearing Member Firms will specify whether a client account is eligible for netting, gross, or selective netting. 1. GROSS - If this option is selected on the account, the trades will not net. 2. NET - This option will automatically net eligible trades based solely on trade attributes. 3. SELECTIVE NET - This option will automatically net eligible trades based on trade attributes (same as option 2) and matching Client Reference ID. This option provides clients with more control over the netting process to address operational and tax concerns. The netting process will consider swaps with exactly the same economics. Swaps in different position accounts will not be netted together 2012 CME Group. All rights reserved 5
Netting: Full Offset Full Netting The swaps eligible for netting fully offset each other. All the swaps are TERMINATED. Each terminated swap will generate a Clearing Confirm message which will specify the status of TERMINATED and Terminating Event of FULL_NETTING. Each confirm TERMINATED message, unique to the trade, will have reference to ALL the trades that were terminated because of netting. 2012 CME Group. All rights reserved 6
Netting: Partial Offset Partial Netting The swaps that are eligible for netting do not fully offset each other and there is remaining notional. All the swaps are TERMINATED. Each terminated swap will generate a Clearing Confirm message which will specify the status of TERMINATED and Terminating Event of PARTIAL_NETTING. Each confirm TERMINATED message, unique to each trade, will have reference to ALL the trades that were terminated because of netting AND a reference to the replacement trade that is created with the remaining notional. A confirm AMENDED message is sent for the new trade that is created with the remaining notional. This message has a status of AMENDED and originating event of PARTIAL_NETTING. The new trade has references to all the trades that were terminated and a special reference to the Remaining Trade. Within the group of trades that are netted together. Remaining Trade is the oldest trade that was cleared in the direction of the remaining notional. 2012 CME Group. All rights reserved 7
Netting: Partial Offset Example Amend Oldest Trade Clearing Member : Account = Client, Type = CUST, Netting = YES T1 T2 T3 T4 T5 April 15 th 2011 April 15 th 2013 (2y), Pay 1.5% on $30MM April 15 th 2011 April 15 th 2013 (2y), Recv. 1.5% on $10MM April 15 th 2011 April 15 th 2013 (2y), Pay 1.5% on $20MM April 15 th 2011 April 15 th 2013 (2y), Recv. 1.5% on $60MM April 15 th 2011 April 15 th 2013 (2y), Pay 1.5% on $5MM - 30 + 10-20 + 60-5 + 15 Clearing Member : Account = Client, Type = CUST, Netting = YES T1, T2, T3, T4 and T5 are TERMINATED. T6 is created with reference to all terminated trades and reference to T2 as remaining trade id T6 April 15 th 2011 April 15 th 2013 (2y), Recv. 1.5% on $15MM T2 the oldest trade in the same direction as remaining notional = $15MM 2012 CME Group. All rights reserved 8
CDS Position Management Current Approach CME has a position-based bookkeeping for CDS. The day begins with a start of day position, transactions happen throughout the day and the day ends with a end of day position. CME has always maintained the stand that even though CME maintains a positional view the clients and firms are free to keep trades open on their side. CME Proposal CME will provide one of two options on each account NET At end of day trades are Terminated, and a new trade for the net position is booked. GROSS / Selective NET Trades are left gross with the ability to selectively net trades. 2012 CME Group. All rights reserved 9
NET option This setting will allow clients/firms to unambiguously terminate their trades Trades are Terminated and new Trade representing the netted result is created Termination messages for all trades that went into the netting process are sent to the Clearing Firms New Trade message for a trade resulting from the netting process is sent to the Clearing Firms All Trades will carry an Unique Swap Identifier (USI) 2012 CME Group. All rights reserved 10
GROSS option This setting will allow firms / clients to unambiguously keep their trades open As trades clear CME will send a cleared message to the affirmation platform as well as the Clearing Firm with an unique swap identifier At the end of day, CME will show an aggregate long and aggregate short view along with the daily activity CME will NOT send termination messages for any trades Clearing Firms and Clients are free to keep the trades open on their side If clients wish to selectively NET positions on their side, they communicate their net long and net short position to CME through their Clearing Member Firms Clearing Member Firms submit a Position Change Submission file to CME that will change the net long and net short position at CME 2012 CME Group. All rights reserved 11
GROSS option: selective netting example 1. Day 1: Start of Day CME NET LONG NET SHORT 450 MM 300 MM 2. Intraday the Client communicates to the Clearing Firm that they want to terminate one open long of 50 MM with one open short of 50MM 3. Clearing Firm adjusts their books and records for the client so the client statements reflect the accurate state at trade level 4. Clearing Firm sends CME a Position Change Submission of Net Long 400 and Net Short 250 5. CME consumes that information and updates CME records accordingly 6. Day 1: End of Day CME NET LONG NET SHORT 400 MM 250 MM 2012 CME Group. All rights reserved 12
Trade Workflow Netting Reports
Clearing Firm Interfaces / Reports Report Types Real Time FpML or FixML Confirms Request consent messages (FpML or FixML) End of Day Trade Registers IRS Specific reports CDS Specific reports Common files Purpose Used to communicate Trade Details along with USI s, and terminations resulting from netting. Used to manage books Used for approval of trades for clearing For IRS communicates all open trades and top day activity along with USI s and valuation (CSV format) For CDS communicates start of day position, intraday activity with USI s and end of day position (FixML format) Reset reports, cash flow advisory report, position reconciliation report, curves, margin requirement file, margin scenario files, Settlement files, product reference files, risk parameter files, margin files PAI Rate files, Holiday files, banking and collateral reports etc 2012 CME Group. All rights reserved 14
End of Day Reports: IRS (End Clients) Trade Register (CSV Format) Contains all cleared and top day terminated trades. This reports contains trade identifiers, all swap attributes, money amounts that will move the next settlement date along with all the components that go into calculating the money amounts PAI Rate File (CSV Format) Contains the PAI Rates that will be used for all currencies Holiday File (CSV Format) Contains holidays for all currencies Price Files (CSV Format) Contains pricing information specific to each custodian Curves and Margin Scenario Files (CSV Format) Contains curves and margin scenarios that clients can use to replicate CME valuations and margins 2012 CME Group. All rights reserved 15
End of Day Reports: CDS (End Clients) Position Exact Trade Register (CSV Format) Contains all valuations and position information PAI Rate File (CSV Format) Contains the PAI Rates that will be used for all currencies Holiday File (CSV Format) Contains holidays for all currencies Settlement File (FixML Format) Contains settlement prices for each clearable contract. Risk Parameter File (FixML Format) Contains risk parameters that can be used to replicate margins. 2012 CME Group. All rights reserved 16