Cleared OTC Interest Rate Swaps

Protecting OTC Market Participants Through the Security of Centralized Clearing

Security. Neutrality. Transparency.
June 2011

execute and submit OTC trades through multiple venues to CME Clearing. and product economics of bilateral OTC contracts Benefits of the Solution  Builds on the strength of CME Group’s market leading interest rate products business  Enables customers to negotiate. affirmation platforms. including Bloomberg VCON. and buy-side market participants to create a best in class clearing platform for OTC interest rate swaps  The buy-side contributed significant input to help design a solution that maintains current execution processes.Cleared OTC IRS: Introduction Overview and Background  On October 18. MarkitSERV.S. All rights reserved 2 . and TradeWeb  Protects customers through legal safeguards of U. 2010. clearing firms. which now has 10 buy side participants who have cleared trades and 13 clearing members  CME worked in close collaboration with premier swap dealers. CME launched its interest rate swaps clearing solution. bankruptcy law and CFTC Part 190 Bankruptcy Regulations  Seeking CFTC permission to allow customer capital efficiencies via cross margining of OTC products with benchmark Treasury and Eurodollar futures  Provides operational flexibility of a multi asset class solution via one integrated platform © 2011 CME Group.

roll conventions. business days. GBP. and CAD 3 . accruals. starting with EUR. payment frequencies.Cleared OTC IRS: Product Scope Current Eligible Products for Clearing  USD vanilla interest rate swaps  3 Month LIBOR Index on the floating leg  Flexible coupons. effective dates. resets. etc  Maturity dates out to 31 years Future Product Rollouts  Spreads over/under LIBOR  1M LIBOR and 6M LIBOR indexes  Additional currencies. YEN.

settlement and risk management © 2011 CME Group. every day providing immediate cleared trade confirmation.Cleared OTC IRS: Open Access Platform Clearing IRS trades real-time throughout the day. significantly reducing counterparty credit exposure CME OTC Cleared IRS Model Bloomberg MarkitSERV TradeWeb Other 3rd Party Platforms CME Clearing IRS Clearing Members (FCM) IRS Clearing Member (FCM) IRS Clearing Member (FCM) IRS Clearing Member (FCM)  Negotiate. and submit trades through multiple venues to CME Clearing  Straight through processing and T+0 confirmation  Full life cycle trade management by CME Clearing  More than 100 years of experience in clearing. execute. All rights reserved 4 .

Cleared OTC IRS: Trade Workflow Mechanics 1 – Client executes swap with Executing Broker (ED) Client 1 ED 3 2 2 – ED alleges swap to Client Affirmation Platform 4 5 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). All rights reserved 5 . CME accepts swap for clearing 5 CME Clearing House Product  Account  Credit  5 5 – CME sends “Cleared” notification to Affirmation Platform which displays trade status to principals Clearing Member (Client) Clearing Member (ED) 5 – CME sends a Clearing Confirmation to Clearing Member(s) Validations. notifications and confirmations are real-time and allow Straight Through Processing © 2011 CME Group.

3M LIBOR) Interpolation and Generation • CME uses monotone convex interpolation and Bootstrap Generator to produce a Zero Coupon curve Discounting • LIBOR is currently used to discount future cash flows. All rights reserved 6 .Cleared OTC IRS: Valuation Valuation Overview • USD IRS positions will be marked to market once per day at 3pm EST • Pricing inputs obtained from wire service feeds Pricing Inputs • LIBOR: O/N. T/N • FRA: 0 x 6 • CME Eurodollars–first 6 Quarterly Eurodollar contracts. but CME is converting over to OIS discounting in July 2011 © 2011 CME Group. 15Y. 20Y and 30Y. (SA. convexity adjusted • Par Swap Rates: 2Y – 10Y.

All rights reserved 7 .Cleared OTC IRS: Margin Methodology Objectives  Coverage meets target of 99% confidence interval for a 5-day move  Net portfolio margining isolates the true curve risk in a portfolio and assesses the appropriate margins to cover that risk  Scalable to margin other IRS currencies and Futures  Stable margins during periods of low volatility. but reactive to changes in rate and volatility regimes  Transparent to market participants and easy to replicate Overview  Historical Value at Risk (VaR) model is targeted to replace the existing Principal Component Analysis model  The historical VaR model uses 5 years of historical data for all observed tenors to create 1250+ shock scenarios  CME is targeting to have the historical VaR model available in the testing environment in July and in production in August © 2011 CME Group.

Cash (Euros. FNMA. France. UK.5% for off the run securities)  Mortgage Backed Securities  15 or 30yr maturity issued by Fannie Mae.6% depending on maturity (plus 0.5% for off the run securities)  Select US Government Agencies  Discount notes up to 12 months issued by FHLB. FHLB  Haircut: 3%.S.S Dollars  Non-U. FHLMC. Ginnie Mae  Haircut: 10% on the market value of all securities © 2011 CME Group. All rights reserved 8 . Freddie Mac. FFCB. and Canadian Dollars)  Haircut on FX: 5%  Select Foreign Debt (Canada. Germany.5% depending on maturity (plus 0. British Pounds. Sweden)  Haircut: 3%-10% depending on maturity  US Treasuries  Haircut: 2%.Acceptable Collateral for Initial Margin Collateral Pledged by Clearing Member Firm to CME Clearing for the Customer OTC Account Class:  U. Bonds up to 30 years issued by FFCB.

unusual trading.g. concentration risk. P&L swings. 24 hour a day by 6 days a week monitoring of both clearing firm and account level position and exposure levels for CDS and all other asset classes at CME  CME auditing financials of all clearing firms to ensure capital compliance levels  CME audits of customer segregation and related requirements to ensure all customer account performance bond requirements are appropriately accounted  Credit controls that allow clearing firms to limit the OTC positions taken on by any specific account  Stress testing of all CME clearing firm and account level positions over largest market moves and multiple defaults to ensure clearing firm capital wherewithal © 2011 CME Group. improves transparency) CME Clearing Risk Management Best Practices Buyer Buyer Buyer CME Clearing  The CME monitors both Clearing Members and Customers for risk concerns (e. etc.) across all asset classes cleared at CME Seller Seller Seller  Real-time.CME Group Risk Management  Information available to CME Clearing that allows a comprehensive view of customer portfolios across all Clearing Members (i.. All rights reserved 9 ..e.

© 2011 CME Group. All rights reserved 10 . the CFTC amended its Part 190 bankruptcy rules to create a new customer account class for “cleared OTC derivatives” • New CFTC Part 190 Rules provide customer protection parallel to the existing 4d/futures account class • CME adopted new rules for the OTC account class which mirror CFTC regulations for the 4d/futures account class.CME Group Customer Protection Mechanism Any bankruptcy of a FCM Clearing Member would be governed by U. including but not limited to rules regarding separation of customer and FCM assets and investment of customer funds • In early October 2010. Bankruptcy Code and CFTC regulatory framework (Part 190 Bankruptcy Rules)  Mandated separation of customer positions and property from the positions and property of the clearing firm per CFTC account class  Customers funds and positions in defined account classes are not property of the debtor’s estate in a FCM bankruptcy  Recently.S. CME implemented new rules with substantive requirements for the treatment of customer “cleared OTC derivatives” that are cleared by CME * See the New OTC Derivatives Account Class Q&A document on the CME Group website for more information.

CME Group Clearing Model In the more than 110-year history of CME Clearing. nor has there ever been a clearing member failure resulting in a loss of customer funds CME Clearing  Financial safeguards  Transparent daily margining  Multilateral position netting Clearing Member (FCM)  Collects margin  Processes mark to market from clients in accordance with CME Clearing policies & other regulatory requirements  Customer positions and margin held in separate account from FCM’s assets  Collateral and Positions protected through separate accounts that Buy-side Firm are separate from FCM assets  Margins calculated on net portfolio basis © 2011 CME Group. All rights reserved 11 . there has never been a failure by a clearing member to pay settlement variation or meet a performance bond call.

CME Group Portability of Customer Accounts Portability of Customer Positions & Margin in the Event of a Clearing Member Default Customer Protection Standards CME Clearing  The same customer protection standards apply to cleared OTC derivatives as to exchange-traded futures  Clearing Member Firms are monitored and audited for risk. All rights reserved 12 . capital adequacy and compliance with customer protection rules and regulations Default Management Defaulting Clearing Member Non-Defaulting Clearing Member  Client positions and margin held at CME Clearing may be ported to a non-defaulting clearing member firm  Positions of the defaulting firm may be auctioned and/or liquidated in accordance with CME rules Portability Buy-side Firm  Clients can transfer positions and associated margin to another clearing firm upon request  CME Rule 853 (“Transfers of Trades”) covers CME’s terms under which trades may be transferred © 2011 CME Group.

html • CME Group has developed an alternative registration process which offers the flexibility for an investment advisor/fund manager (Fund Manager) to complete the registration process for itself and its managed funds. provided it has the authority to do so • Fund Managers may take advantage of this alternative registration process by notifying the CME ClearPort Facilitation Desk via email at © 2011 CME Group.Legal Documentation Documentation between CME and Customer  Exchange User License Agreement (EULA) • New customers must register their firm(s) online via the CME Exchange User License Agreement (EULA) Documentation between Clearing Member and Customer  Clearing Member FCM Agreement and OTC Addendum • The OTC Addendum template may be used as a basis to negotiate the terms and conditions of individual agreements  OTC Give-up Agreement  Both templates are available on our website at: www. which may be found at: http://www. All rights reserved 13 .

and ability to connect customers to the right resources at those firms Customer Reporting  Daily valuation reporting for OTC Cleared products. both CDS and IRS  Daily trade and position reporting  Daily end-of-day settlement price file  IRS curve inputs.Customer On-boarding Resources CME CORE Margin Tool  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 in development for OTC IRS Dedicated On-boarding Staff  Team of experts who work with buy side clients to help them prepare to clear IRS and CDS  Extensive work with the affirmation platforms. forward rates and discount factors  Product reference file listing all clearing eligible products and their applicable identifiers for mapping internal systems © 2011 CME Group. All rights reserved 14 .

bay@cmegroup. All rights reserved 15 .com +44-207-796-7100 steven.hammond@cmegroup.callahan@cmegroup.Cleared OTC IRS: Next Steps and Contact Us Getting Started  Establish a relationship with a participating CME IRS Clearing Member • Discuss and agree on trade capture options and trade flow • Complete required Clearing Member Customer Documentation • Work with Clearing Member throughout testing cycles • Begin clearing trades For more © 2011 CME Group. please contact: North America Jack Callahan Steve Dayon Europe Robert Hammond Asia Way Yee Bay 656-593-5560 (312) 454-8312 (312) 466-4447 jack.

com dan.scalzo@nomura.collins@rbs.pla@ubs.jewsbury@jpmorgan. All rights reserved 16 neil.Key IRS Dealer / Clearing Firm Contacts Firm Bank of America Merrill Lynch Barclays Contact Name John Bell Bill Cleary Todd D’Agosta Sandy Fleischman Stephen Li Patrick Corrigan Avi Pemper Gavin Dixon Chris Perkins Neil Monaghan Steve Mahoney Eric B. Miller Elliot Barr Luciana Miranda Joe Cassidy Mike Dawley Jack McCabe Piers Murray Catherine Bartzos Mark Jewsbury Jason Swankoski Mark Bortnik Sandeep Kohli Stephen Scalzo William Knottenbelt Kevin Collins Ed Pla Reinhardt Olsen Jeff G. Gore Dan Thomas Email mark.6548 44-20-3134-8748 212-526-7101 212-841-3753 44-20-7595-8417 212-723-5943 212-723-5505 212-325-3872 212-325-1192 212-250-9831 212-250-8845 44-20-7547-8645 202-902-7582 202-902-3037 212-270-5445 212-834-3105 44-20-7777-1178 212-761-4723 44-20-7677-9685 212-667-2037 212-667-8981 44-20-7085-1531 203-897-9882 203-719-2602 203-719-3408 704-715-0528 704-374-2103 BNP Paribas Citigroup Credit Suisse Deutsche Bank Goldman Sachs JPMorgan Morgan Stanley Nomura RBS UBS Wells Fargo © 2011 CME Phone Number 415-274-7171 312-234-2066 646-855-9813 kevin.miller@credit-suisse.

and because only a percentage of a contract’s value is required to trade. NYMEX is a registered trademark of the New York Mercantile Exchange. Current rules should be consulted in all cases concerning contract specifications. All rights reserved. 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. 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. traders should only use funds that they can afford to lose without affecting their lifestyles. all examples in this brochure are hypothetical situations. Copyright © 2011 CME Group. CBOT and NYMEX rules. Additionally. Inc. it is possible to lose more than the amount of money deposited for a futures position. and involves the risk of loss. Therefore. All rights reserved 17 . The Globe Logo. All other trademarks are the property of their respective owners. Futures are a leveraged investment. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago.Disclaimer Futures trading is not suitable for all investors. © 2011 CME Group. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME. CME. Inc. and should not be considered investment advice or the results of actual market experience. CME Group is a trademark of CME Group Inc. used for explanation purposes only. and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc.

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