Cleared OTC Interest Rate Swaps

Security. Neutrality. Transparency.

February 2012

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


IRS, Freight, Iron Ore


CME Group
 Founded in 1898 as CME  #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
© 2012 CME Group. All rights reserved

CME Clearport
 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  10,000 registered users around the world

 500,000 contracts cleared daily


FX.CME Group OTC Clearing Overview and Background  CME Group has worked closely with buy side and sell side participants to build a multi-asset class.5 billion since launch.9 trillion in Q3 2011.500 customer accounts testing through our 15 clearing firms Benefits of the Solution  Allows the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS positions against Eurodollar and Treasury Futures  Builds on the strength of CME Group’s market leading interest rate products business. CDS. and over $37 trillion of notional outstanding  Provides customers full transparency through direct access to daily valuation reports and the CME CORE margin tool  Operational flexibility of a multi-asset class solution for IRS. and the CDX HY Indices which have cleared over $9. GBP IRS which has cleared over £7. and Commodities via one clearinghouse  Protects the confidentiality of trading relationships.8 billion since November 7th  1300 active customer accounts with cleared trades. while enabling customers to terminate positions with any market participant © 2012 CME Group. market leading OTC clearing solution  Over $345 billion in notional has cleared since launch and open interest is over $208 billion  Successful new product launches of EUR IRS which has cleared over €71. which had an average daily volume of $3.0 billion since December 5th. All rights reserved 3 . and an additional 2.

2 billion Total Volume Cleared = $42. customer volume Interest Rate Swaps   $32 $28 Credit Default Swaps   $200 $6 Total Volume Cleared = $303.5 billion since it launched on October 17th GBP IRS cleared £7.1 billion Open Interest = $28.9 billion $30 $160 $24 $24 Open Interest (Billions) Daily Volume (Billions) $4 $18 Daily Volume (Billions) $20 $16 $12 $8 $120 $80 $12 $2 $6 $40 $4 $0 1-Sep-11 1-Oct-11 1-Nov-11 1-Dec-11 1-Jan-12 1-Feb-12 $0 IRS Volume IRS Open Interest $0 1-Sep-11 1-Oct-11 1-Nov-11 1-Dec-11 1-Jan-12 1-Feb-12 $0 CDS Volume CDS Open Interest Strong Performance of Newly Launched Products    EUR IRS cleared €71.0 billion since it launched on December 5th CDX High Yield Indices have cleared $9.Record Customer Clearing Activity CME Group has built the leading OTC IRS and CDS clearing service by U. All rights reserved 4 Open Interest (Billions) .S.8 billion since they launched on November 7th Note: Data current as of 2/13/12 © 2012 CME Group.3 billion Open Interest = $179.

USDPLN. EUR Interest Rate Swaps (IRS) out to 50 years. USDSGD. CHF. EURUSD. GBPUSD. USDHKD © 2012 CME Group. USDDKK. GBP. CLP. USDHUF. USDCZK. COP. EURAUD. USDCHF. PEN • Cash Settled Forwards in AUDUSD. Zero Coupon Swaps. and FX Existing Products • USD. CDS. and OIS • IRS Swaptions • Additional CDS single names • Deliverable FX Spot. Series 9-17 – 3. IDR. MYR. Amortizing Swaps. 5 year tenor Early 2012 Expansion • IRS in JPY. All rights reserved 5 . USDZAR. USDNOK. USDSEK. TWD. Series 11-17. USDTHB. Other Future Product Expansions • IRS in additional currencies. USDMXN. EURJPY. USDJPY.Cleared OTC Financial Products CME Group is delivering a comprehensive global product scope across IRS. RUB. 7. USDILS. and AUD out to 30 years • CDS single names of index constituents • USD Non-Deliverable Forwards (NDFs) in BRL. EURGBP. INR. and 10 year tenors as applicable • CDX HY Index. Basis Swaps. FRAs. USDTRY. CADJPY. NZDUSD. CAD out to 30 years • CDX IG Index. Non-Deliverable Options (NDOs) • USD Non-Deliverable Forwards (NDFs) in KRW. 5. AUDJPY. Forwards. EURCHF. PHP. USDCAD. CNY. Swaps and Options.

3M CDOR index • Flexible day counts. Basis Swaps. Floors. business days. Amortizing Swaps. and OIS • Swaptions. Cross Currency Swaps. Additional Currencies.IRS Product Rollout CME is delivering a comprehensive global product scope that includes the 7 currencies that account for 95% of vanilla IRS* before the end of Q1 2012 EXISTING PRODUCTS • USD Fixed/Float out to 50 years. and payment frequencies including stubs USD EUR GPB CAD CURRENCIES EARLY 2012 EXPANSION CURRENCIES • Maturity out to 30 years for JPY.3M and 6M EURIBOR indexes • GBP Fixed/Float out to 50 years. FRAs. December 2010 © 2012 CME Group.6M Libor index • CAD Fixed/Float out to 30 years. All rights reserved 6 . 3M and 6M LIBOR indexes • EUR Fixed/Float out to 50 years. and Inflation Products * Notional amounts outstanding received from Bank of International Settlements. CHF and AUD JPY CHF AUD OTHER FUTURE PRODUCTS • Additional Currencies • Zero Coupon Swaps.1M. Caps.

Open Access Clearing Solution Several market leading affirmation platforms and Swap Execution Facilities have already connected directly to CME Clearing Bloomberg ICE Link Javelin MarkitSERV TradeWeb CME ClearPort CDS Migration Utility CME Clearing OTC IRS/CDS Clearing Members Bank of America Goldman Sachs BNY Mellon Barclays JPMorgan BNP Paribas Morgan Stanley RBS Securities Citigroup Nomura Credit Suisse UBS Deutsche Bank Additional OTC IRS Clearing Members RBS PLC Wells Fargo  Negotiate. 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. and Commodities via one clearinghouse © 2012 CME Group. while enabling customers to terminate positions with any market participant  Operational flexibility of a multi asset class solution for IRS. execute. FX. All rights reserved 7 . CDS.

account and applies credit limits set by Clearing member(s). and then accepts the swap for clearing 5 CME Clearing House Product  Account  Credit  5 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 Clearing Member (Client) Clearing Member (Dealer) © 2012 CME Group. All rights reserved 8 .Trade Workflow Mechanics Straight Through Processing allows for real-time clearing and trade confirmations 1 – Dealer and Client agree to trade Client 1 Dealer 3 2 2 – Dealer alleges swap to Client through the Affirmation Platform Affirmation Platform 4 5 3 – Client selects Clearing Member and verifies the swap through the Affirmation Platform 4 – Affirmation Platform sends the matched trade between Dealer and Client to CME Clearing House 5 – CME checks for validation of the product.

T/N  FRA: 0 x 6  CME Eurodollars – first 6 Quarterly Eurodollar contracts. convexity adjusted  Par Swap Rates: 2Y – 10Y. 15Y. 20Y.Transparent Valuation and Reporting Customers have full visibility into CME Group’s swap valuations VALUATION OVERVIEW  USD IRS positions will be marked to market once per day at 3pm EST  Pricing inputs obtained from wire service feeds  CME Group utilizes OIS discounting. and valuations for each cleared swap position © 2012 CME Group. and Bootstrap Generator to produce a Zero Coupon curve PRICING INPUTS  LIBOR: O/N. 3M LIBOR) REPORTING  CME Group provides customers with full transparency including direct access to daily reports showing curve inputs. daily discount factors. and 30Y (SA. monotone convex interpolation. All rights reserved 9 .

Please contact CME’s Onboarding Team at (312) 338-7112 or onboarding@cmegroup.Details of Customer Reports Report Preliminary Trade Register End of Day Trade Register Curve Input Report Discount Factor Report CME Holiday Calendar Price Alignment Interest (PAI) Rate File Description Includes new and open trades as well as corresponding cash flows on positions cleared prior to 4:45pm EST on that day Includes new and open trades as well as corresponding cash flows on positions cleared on that day Contains the curve inputs of the CME Swap Curve Displays the daily discount factor out to 31 years Shows the CME Holiday Calendar Provides the rate used to calculate PAI Time 4:45pm EST Available in Testing Available in Production      8:00pm EST 4:30pm EST 4:30pm EST       3:00pm EST 1:00pm EST The above reports can be accessed through a secure FTP site. © 2012 CME to gain access. All rights reserved 10 .

Robust Financial Safeguards CME structured the IRS risk waterfall to protect our customers during times of market stress and mitigate systemic risk UNFUNDED SURVIVOR PAYS General Assessment Powers for IRS1 • Additional collateral that can be called upon should all previous layers of the waterfall are exhausted • Caps the limited resource waterfall • Expected to cover extreme scenarios that are optimally addressed using a mutualized pool rather than margins • GF Sizing considerations include risk. and portability concerns during periods of default IRS Non-Defaulting CMs Guaranty Fund CME Contributed Capital for IRS $100M DEFAULTER PAYS FUNDED • Contribution set aside by CME to help cure a default prior to dipping into the survivors’ funds Defaulting Member IRS Guaranty Fund Liquidity Charge Baseline Initial Margin • Each Member’s contribution to the GF • Liquidity charge accounts for protecting large concentrated portfolios whose closeout could cost more or take longer than baseline timeframe • Initial Margin is used to cover day-to-day P/L moves 1 The actual amounts will be based on the sum of the third and fourth largest net debtor profiles © 2012 CME Group. capital usage and charges . stakeholders’ incentives. All rights reserved 11 .

and compliance with customer protection rules and regulations  Strong history of risk innovation. industry expertise. according to the results of stress tests. This allocation mechanism further provides incentive to risk diversification across FCMs © 2012 CME Group. crisis management. and a deep understanding of issues related to customer protection in the US agency model  Comprehensive approach towards default management. capital adequacy. and default exercises to ensure readiness in a market crisis ROBUST GUARANTY FUND  Key layer of protection in the US Clearing market that serves as a “capital reserve” buffer during times of market stress and protects against systemic risk associated with catastrophic market events  Sized to cover the simultaneous defaults of the 2 largest FCMs. All rights reserved 12 . which include all extreme historical events as well as “black swan” stress scenarios  Allocated between different FCMs pro-rata according to the residual risk not covered by margins.Superior Customer Protections CME Clearing is the industry leader in mitigating risk for customers through the US FCM clearing model CUSTOMER PROTECTION STANDARDS  The same customer protection standards apply to cleared OTC derivatives as to exchange-traded futures  Clearing Member Firms are monitored and audited for risk. utilizing industry best practices.

CME seamlessly ported all $2. governing transfers of trades © 2012 CME Group. both in times of market stress and during the normal course of business • Portability is underpinned by CME Rule 853.5 million customer positions from Lehman Brothers to a solvent clearing member • In wholesale porting transactions. clients “own” their positions • The agency model supports portability.2 billion of customer funds and 2. All rights reserved 13 . 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.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. 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.

the CFTC passed rule 39. and preliminary analysis shows significant savings for margin offsets:   IRS invoice swaps against corresponding Treasury Futures provide savings of up to 85% IRS swaps against corresponding Eurodollar strips provide savings of up to 95% © 2012 CME Group. and scalable to margin other IRS currencies and Futures Margin Offsets Against Futures   CME Group has the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS positions against Eurodollar and Treasury Futures On October 18. which outlines the process for providing these margin offsets for Customers  “A derivatives clearing organization may allow reductions in initial margin requirements for related positions (margin reductions) if the price risks with respect to such positions were significantly and reliably correlated” Participants will have the ability to move selected futures contracts into their OTC Sequestered Account to strategically offset the risk in their swap portfolio and reduce margins   CME is working to have this available mid-2012. 2011. All rights reserved 14 . based on a 99% confidence of a 5-day move using 5 years of historical data   Net portfolio margining of cleared IRS positions isolates the true curve risk in a portfolio and assesses the appropriate margins to cover that risk Transparent to market participants.Capital Efficient Margin Methodology Model Overview  CME Group utilizes a historical Value at Risk (VaR) model. easy to replicate.13(g)(4)(i).

Transparent Margins Through CME CORE CME CORE (CME Online Risk Engine) enables customers to calculate and evaluate their initial margin requirements for IRS and CDS Create New or Load Existing Portfolio Validate and Calculate Initial Margin Requirement Analyze and Review Results ENHANCE REPORTS TO INCLUDE ELIGIBLE DISCRIPTIVE DATA PHASE I: Transparency • • • Margin computation PNL reporting Curve scenario reporting PHASE II: Analytics** • • • • Delta ladder Stress testing Incremental VaR Analytics to support back-loading ** Future enhancements © 2012 CME Group. All rights reserved 15 .

and these securities will be held in a tri-party account controlled by CME  This program will be put into effect on March 12. 2012 © 2012 CME Group.5% for off-the-runs US Agency Debt US Agency Mortgage Backed Securities 3. France and Canada US Treasury Debt 5%* 5%-10. CAD. CHF) Sovereign Debt of UK. Germany. AUD.5% for off-the-runs 11% * Haircut is only applied when cash is used to meet a margin requirement based in a different currency Expansion of Acceptable Collateral  CME Clearing is working with several major banks on a specialized collateral program that permits clearing firms to pledge collateral that CME does not accept directly  This program will allow customers to post high quality corporate debt to their clearing firms to cover initial margin requirements.5% (maturity based) 0. GBP.5%-7% (maturity based) Additional 1. JPY. All rights reserved 16 .5%-11% (maturity based) Additional 1.Flexible Collateral for Initial Margin CME Clearing accepts a broad array of collateral for the Customer OTC Account Class Collateral US Cash Haircut None Non-US Cash (EUR.

at least A. IEF4. etc) *The Corporates Collateral Program.rating by NRSO USD denominated.Corporate Bond Collateral Program Clearing Members can transfer securities into a tri-party account controlled by CME at either bank* as a term pledge to receive initial margin credit Overview • Allows corporates bonds to be pledged as initial margin collateral for both Cleared IRS and futures • Reduces costs of clearing for customers and creates further efficiencies for Clearing Members Bond Requirements • • • • • High quality bonds. or putable) Over $300M in principal outstanding TRACE eligible Program Parameters • Haircut: (20%) • Concentration Limits: The lesser of 5% per issuance and 5% per issuer or $200M • Level II industry diversification (up to 25%) Eligible CUSIP List • CME Clearing will publish a list of eligible CUSIPs at the beginning of each month • CUSIP list will likely remain static except bonds that mature. All rights reserved 17 . is supported by a partnership with Bank of New York and JPMorgan Chase © 2012 CME Group. and bonds that are deemed ineligible due to changes (i. rating downgrade. both domestic and global issuances Vanilla Bonds (Fixed rate bullet. callable.e. distress.

com/span/ • Once a SMART Click ID is attained. All rights reserved 18 .com to request entitlements to CME CORE. 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  The team can be reached at (312) 338-7112 and onboarding@cmegroup. • Please ensure your desktop is equipped with a recent version of Microsoft Silverlight (MS Add On): http://www. in an email please provide the user ID and specify the request for the IRS/CDS asset © 2012 CME Group.Customer On-boarding Resources CME CORE Margin Tool  Web-based margin tool that enables customers to generate initial margins for IRS and CDS portfolios  CME CORE can be accessed by doing the following: • Create a CME SMART Click ID at https://cmecore. Specifically. please email cme.aspx CME On-boarding Team  Team of on-boarding experts who work with buy side clients to help them prepare to clear IRS and

provided it has the authority to do so.asp © 2012 CME Documentation between Clearing Member and Customer  Clearing Member Futures Account Agreement (FCM Agreement)  Clearing Member OTC Addendum Documentation between Customer and Execution Counterparty  OTC Execution Agreement  The FIA and ISDA published a template that market participants can use as a basis for negotiation: by notifying the CME ClearPort Facilitation Desk via email at custcare@cmegroup. All rights reserved 19 .Legal Documentation Documentation between CME Group and Customer  Exchange User License Agreement (EULA) • New customers must register their firm(s) online via the CME Exchange User License Agreement (EULA).futuresindustry. which may be found at: http://www.html • Investment Advisors and Fund Managers can take advantage of an alternative registration process which offers the flexibility to register managed funds.cmegroup.

bay@cmegroup.boyd@cmegroup.Next Steps and Contact Us Establish a relationship with a participating CME IRS 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 steven. please contact: Jack Callahan Steve Dayon 312 454 8312 312 466 4447 For general © 2012 CME +44 20 3379 3726 jonathan.dayon@cmegroup. please contact : On-boarding Team 312 338 7112 onboarding@cmegroup. All rights reserved 20 .com Europe Jonathan Boyd Asia Way Yee Bay +65 6593 5560 wy.

com jack.Cleared OTC IRS Clearing Firm Contacts Firm Bank of America Merrill Lynch Barclays BNP Paribas BNY Mellon Contact Name Todd D’Agosta (US) Ed Allen (EMEA) Sandy Fleischman Patrick Corrigan Avi Pemper Gavin Dixon Sanjay Kannambadi Robert Bosse Email 212 723 5943 212 723 4074 212 538 0761 212 325 4535 212 250 9831 212 250 8845 212 902 7582 212 902 3037 JPMorgan Morgan Stanley Nomura RBS UBS Wells Fargo Piers Murray Catherine Bartzos Jason Swankoski Mark Bortnik Sandeep Kohli Stephen Scalzo Brian Halligan Madlen Dorosh Ed Pla Reinhardt Olsen Jeff Phone Number 646 855 9813 646 855 6506 212 526 6548 212 526 7101 212 841 3753 44 20 7595 8417 212 635 6927 212 635 6718 Citigroup Credit Suisse Deutsche Bank Goldman Sachs Chris Perkins Mariam Rafi Neil Burke John Guthrie Elliot Barr Luciana Miranda Mike Dawley Jack McCabe brian.clearing@baml. All rights reserved 21 212 270 5445 212 834 3105 212 761 5206 44 20 7677 9685 212 667 2037 212 667 8981 203 897 2504 203 897 9869 203 719 2602 203 719 3408 704 715 0528 704 374 2103 © 2012 CME sandy.perkins@citi. Gore Dan Thomas madlen.bosse@bnymellon.kohli@nomura.dawley@gs.pemper@americas.

Therefore. NYMEX is a registered trademark of the New York Mercantile Exchange. Copyright © 2012 CME Group. All rights reserved 22 . All references to options refer to options on futures. all examples in this brochure are hypothetical situations. Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago. it is possible to lose more than the amount of money deposited for a futures position.Disclaimer Futures trading is not suitable for all investors. © 2012 CME Group. CBOT and NYMEX rules. CME Group is a trademark of CME Group Inc. CME Group assumes no responsibility for any errors or omissions. and because only a percentage of a contract’s value is required to trade. All other trademarks are the property of their respective owners. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. and involves the risk of loss. The information within this brochure has been compiled by CME Group for general purposes only. Additionally. Futures are a leveraged investment. Current rules should be consulted in all cases concerning contract specifications. and should not be considered investment advice or the results of actual market experience. The Globe Logo. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME. All rights reserved. CME. traders should only use funds that they can afford to lose without affecting their lifestyles. used for explanation purposes only. Inc.

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