ICE CLEAR EUROPE CDS CLIENT CLEARING

Transcription

1 ICE CLEAR EUROPE CDS CLIENT CLEARING 2015

2 AGENDA ICE OTC Overview CDS Clearing Product Scope Trade Workflow Risk Management Overview of EMIR Segregation Structures Omnibus Segregation Models; Individual Segregation through Sponsored Principal Model; Individually Segregated Margin-flow Co-mingled Accounts ( ISOC ) Legal Framework Onboarding Summary 2

3 ICE OTC OVERVIEW Intercontinental Exchange Group (ICE) is the leading network of regulated exchanges and clearing houses for financial and commodity markets. ICE delivers transparent, reliable and accessible data, technology and risk management services to markets around the world through its portfolio of exchanges, including the New York Stock Exchange and ICE Futures. Quarter-end Cumulative Gross Notional March 2009, ICE is the first to clear credit default swaps (CDS) Cleared over $69 Trillion CDS globally across over 550 CDS instruments. Over $11 Trillion 1 in client clearing Open Interest of over $1.47 trillion 1 $72,000 $68,000 $64,000 $60,000 $56,000 $52,000 $48,000 $44,000 $40,000 $36,000 $32,000 $28,000 $24,000 $20,000 $16,000 $12,000 $8,000 $4,000 $0 Q1-09 Q2-09 Q3-09 Q4-09 Q1-10 Q2-10 Q3-10 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 Q1-14 Q2-14 Q3-14 Q4-14 Q1-15 Q As of 1 st September,

4 ICE CDS EXPERTISE Global leader in Credit Default Swaps (CDS) with expertise in execution, post-trade processing, clearing and other operational and risk management processes Open platform architecture each process is available individually and can connect to multiple alternative service providers Integrated ICE CDS solution offers an easier, more efficient execution and processing experience SWAP TRADE/ CREDITEX Top-tier CDS voice and electronic brokerage offering innovative services: credit event auctions, delta neutral auctions and portfolio compression Offer SEF and non-sef execution services as of October 2013, leveraging its highly successful existing technology platform Post-trade platform connected to over 1,000 CDS buy-side firms in addition to all major dealers, clearing brokers, IDBs, SEFs and SDRs/Trade Repositories Helps clients meet new regulatory requirements for automation and standardization ICE Clear Credit (formerly ICE Trust) launched March 2009, the first clearing house to process CDS transactions. ICE Clear Europe launched July 2009 Leading CDS Clearing House s with significant open interest and extensive product coverage 4

5 ICE CLEAR EUROPE CDS PRODUCT SCOPE 60 Indices (multiple tenors); 183 Single Names (across IMM maturity dates & coupons) PRODUCT TYPE/SECTOR INDICES itraxx Main S7 S23 itraxx XO S14 S23 itraxx HVOL S14 S20 itraxx Senior Financials S14 - S23 WESTERN EUROPEAN SOVEREIGNS 7 CONSUMER SERVICES 29 Product List INDUSTRIALS CONSUMER GOODS UTILITIES FINANCIALS 29 BASIC MATERIALS 18 TELECOMMUNICATIONS 15 HEALTHCARE 3 ENERGY 7 5 TECHNOLOGY A full listing of clearing eligible products can be found at: 5

6 CDS TRADE WORKFLOW 1 VOICE TRADE EXECUTION VOICE TRADE IDB / SEF 1. Bilateral trade agreed between Executing Broker and Client TRADE AFFIRMATION EB alleges trade to Client for affirmation on middleware platform (Client could choose to use either ICE Link, Markitwire, Bloomberg VCON or Tradeweb as their middleware platform)*. EXECUTING BROKER START CLIENT AFFIRM 3. Clients affirms trade, allocates if necessary nominates a Clearing Broker 4 CLEARING BROKER 4. Clearing Broker accepts or rejects trade. If the Clearing Broker rejects, the Client/ has the ability to select another Clearing Member/ from their preexisting designated Clearing Brokers with the CH TRADE CLEARING 6 CLEARING BROKER CONSENT 5. The CH accepts trade for clearing and trades are booked into EB s House account and Clearing Broker s Customer Account (Omnibus/ISOC) OR a Sponsored Principal Client s account 6. Cleared message sent to middleware platform Executing Broker House Account Margin: Net IM 8 5 CLEARING 5 Clearing Broker Customer Account / SP Account 7 Margin (per client account): Net IM 8 7. Cleared trade record is sent to DTCC TIW and a Trade Repository 8. CH deposits margin (IM & VM) amounts for cleared transactions by 9am on T+1 from Clearing Broker and Executing Broker s bank account Net VM Net VM * Clients using either Markitwire, Bloomberg VCON or Tradeweb will be required to complete an ICE Link Approved Third Parties Form. 6

7 ICE CDS RISK MANAGEMENT FRAMEWORK WATERFALL APPROACH FOR MANAGING SYSTEMIC RISK Layers of Protection Membership Criteria Ensure Clearing Member has operational capabilities, risk management experience and financial resources Mark-To-Market Margin Daily MTM based on EOD settlement prices Initial Margin Daily margin call based on dynamic stress-based regime Intra-day Risk Monitoring Special Margin Call Execution Additional margin can be called due to unusual market fluctuations Guaranty Fund Additional collateral to mutualize losses under extreme market scenarios Additional Assessment Rights Oblige Clearing Members to contribute additional default funding 7

8 RISK: INITIAL MARGIN REQUIREMENTS DYNAMIC STRESS-BASED REGIME Component Spread Response Recovery Rate Sensitivity Jump-To-Default Basis Risk Liquidity Interest Rate Sensitivity Concentration Initial Margin Risk Captured Instrument spread level variability and changes in credit spread term structure ( curve ) shape Fluctuations of Recovery Rate (RR) assumptions Unexpected credit event losses not accounted for in the market valuation of Single Name (SN) instruments Differences in trading behavior of indexderived and outright SN positions Transaction (bid-offer) costs associated with unwinding CDS instruments in the event of a Clearing Participant default Fluctuations in interest rates Costs associated with large position liquidation Approach Consider six scenarios Widening / contracting credit spread scenarios 3 curve shapes per credit spread scenario Consider min. and max. reference entity specific RR to determine additional losses Include Loss-Given-Default for sold protection Consider liability associated with 1 credit event using an assumed SN-specific minimum RR Account for liquidity differences (market views are priced into more liquid index instruments sooner than SNs), and expected cash flow differences Capture the proper liquidation cost for directional as well as well-hedged portfolios Estimate costs based on bid-offer width, derived from the end of day price discovery process Assess sensitivity of portfolio Net Asset Value to default-free discount interest rate changes Reflect market depth and liquidity Apply to positions that exceed pre-specified thresholds Increase requirements exponentially 8

9 RISK: PORTFOLIO MARGINING - QUANTIFYING THE BENEFITS INDEX DECOMPOSITION MARGIN METHODOLOGY Portfolio Margining Example ICE has formulated an index decomposition margin methodology which provides benefits to long/short index and single name positions Capital efficiencies are achieved by allowing a portfolio margining approach across European index and single name CDS while maintaining strong risk management protections 125 SN Positions (Bought Protection on 125 names of $1MM each 5Y tenor) Index Position IG Series 18 5 Y (Sold Protection) Margin Portfolio Size 1.89% $125MM (bought protection) 2.53% $125MM (Sold Protection) Total $2.37MM $3.16MM Single Name and Index positions separately Margined $5.53MM Margin s Single Name & Index Comingled and Cross- Margined $1.25MM 9

10 CDS ONBOARDING Omnibus and ISOC Account Sponsored Principal Account 1. Client selects Clearing Member (s) 1. SP signs required legal agreements with Sponsor and Clearing House 2. Client Onboards with Clearing Member and Affirmation Platform* 2. Sponsor requests set up of SP within Clearing systems and completes ICE Link onboarding form 3. Clearing House sets up Client within clearing systems 3. Clearing house sets up SP within clearing systems (clearing platform and ECS) 4. Client and Clearing Member complete Front to Back Testing 4. SP and Sponsor complete front to back testing 5. Go Live 5. Go Live *Affirmation Platforms supported includes: ICE Link, Markitwire, Bloomberg VCON or Tradeweb. 10

11 OMNIBUS CLIENT SEGREGATION Clearing Member is principal to the trade; Customer positions and assets are segregated from those of the firm (i.e. House); Customer positions are identified by customer legal entity via the Desk set up process; Margin is determined on a Customer-by-Customer basis and margin collected from the Clearing Member on a Gross basis; Margin is computed at End of Day and CM meets any increase day over day; where one customer requirement goes up this may be netted against another customer s requirements reducing; Customers share fellow customer risk : At Clearing House, collateral/assets not legally attributed to Customer in terms of asset or value; Margin provided in respect of one customer can offset that on another s positions and gains or losses; one customer margin decrease may offset another s increase; Margin of customer account is potentially subject to mutualisation; Initial Margin (IM) calls, Variation Margin (VM) calls/pays are netted to a single call or pay per currency - Net VM payable to the CM can be used to cover increased margin requirements; Clearing Member can maintain excess buffer at Clearing House to anticipate changes in margin etc., but this is not attributable to individual clients. 11

12 INDIVIDUALLY SEGREGATED MARGIN FLOW CO-MINGLED ACCOUNT ( ISOC ) ICE Clear Europe has developed an Individually Segregated Margin-flow Comingled Account model - known as ISOC. In this model, the Clearing Member continues to act as principal to the positions but the Clearing House keeps a separate record of positions and assets at individual customer level. The ISOC model introduces new workflows to identify each Client s positions and assets and effects a daily cover call for each Client. At EOD, any changes in initial margin or variation margin requirements for each Customer Account are then aggregated into a single margin call from the Clearing Member. The Clearing Member may then seek to re-allocate assets with its individual clients and must report on such allocations to ICE. Under the model, margin is attributed to each Client s account. Asset Management (Deposits/Withdrawals) is initiated at the Client Account level (i.e. aggregated across all ISOC accounts) and flows through the external settlement process tagged by Customer. ISOC accounts may also be used as private omnibus accounts for groups of Customers that are for example related companies of funds under common management. ISOC accounts utilised prior to ICEU s EMIR authorisation will not be individually segregated accounts. These will prior to EMIR authorisation form part of the customer omnibus account in the event of Clearing Member default. 12

13 LEGAL FRAMEWORK AND DOCUMENTATION Sponsored Principal Accounts: The SP and Sponsor are each joint and severally liable with one another in relation to contracts cleared at the Clearing House. Legal agreements governing cleared SP positions consist of: ICE Clear Europe Clearing Rules, Standard Terms Annex, Procedures, Sponsor/SP Clearing agreement and any other underlying legal agreement (e.g. ISDA/FOA Client Clearing Addendum, German Client Clearing Framework Agreement) SP/Sponsor Agreements with the Clearing House could be either of: Separate Bilateral Agreements The Sponsor executes a Sponsor Agreement ( then notifies new SPs as and when, `Each SP executes a separate agreement ( OR, Tripartite Agreement The Sponsor and Sponsored Principal execute an agreement together ( Omnibus and ISOC Accounts: The legal documentation set has been designed to allow maximum flexibility such that clearing members and their clients can establish arrangements using documentation similar to that used in either the OTC or futures markets today. The Clearing Member to Client relationship is typically be governed by a base document (e.g. an ISDA Master Agreement and ISDA/FOA Clearing Addendum). The Clearing House is agnostic to the type of document used specifies one requirement for these documents: that the Clearing Member and Client agree that the Standard Terms apply and prevail in a way that is legally enforceable. This may be achieved by both parties agreeing the Clearing House rules apply. For further information on customer documentation, please review the link below: 13

14 LEGAL FRAMEWORK AND DOCUMENTATION A principal-to-principal tripartite contract between (1) The Clearing House; and (2) The Sponsor and Sponsored Principal ( SP ) acting jointly. Clearing House - CMs are required to execute a Clearing Membership Agreement binding the Clearing Member to the Clearing House Rules. - Rule 202(b) requires CMs to ensure that their customers have agreed to the CDS standard terms which are annexed to the Rules SP/Sponsor Agreements with the Clearing House could be either of: Separate Bilateral Agreements The Sponsor executes a Sponsor Agreement (then notifies new SPs as and when) Each SP executes a separate agreement OR Tripartite Agreement The Sponsor and Sponsored Principal execute an agreement together Sponsor Sponsored Principal Clearing Member Client - CM and Client to execute bilateral agreement underpinning contractual relationship between the two parties (e.g. ISDA Master Agreement or Futures Clearing Agreement) - Clearing House Standard Terms must be duly cross referenced in the agreement between the CM and Client - ICE Clear Europe does not review, approve or prescribe specific forms of documentation. Nevertheless, the Clearing House has had sight of various industry standard forms of customer documentation. In this context, CMs and Customers should review the table below: ISDA/FOA Client Cleared OTC Derivatives Addendum (11 June 2013) FOA Clearing Module (11 October 2013) Association of German Banks Clearing-Framework Agreement (8 May 2013) ISDA/FBF Annex to the Client Cleared OTC Derivatives Addendum (1 August 2014) This form of documentation complies with the requirements of Rule 202 (b). Please see Clearing House circular C14/055 for further information clear_europe/circulars/c14055.pdf Subject to one amendment being made, this form of documentation complies with the requirements of Rule 202(b). Please see Clearing House circular C14/055 for further information clear_europe/circulars/c14055.pdf Subject to one amendment being made, this form of documentation complies with the requirements of Rule 202(b). Please see Clearing House circular C14/055 for further information clear_europe/circulars/c14055.pdf This form of documentation complies with the requirements of Rule 202 (b) 14

15 CLIENT CLEARING FEES Standard clearing fees (applicable to all EMIR Customer Accounts): Product Type Costs Index (per Million) EUR 5 Single Name (per Million) EUR 15 Application and Annual Fee: Segregated Customer Accounts ( S and T ) Individually Segregated Operationally Co-mingled ( ISOC ) Account Individually Segregated Sponsored Account ( Sponsored Principal ) Application Fee Waived Waived EUR 10,000 per Sponsored Principal Annual Fee Waived EUR 5,000 per annum per Individual Customer EUR 25,000 per annum per Sponsored Principal For further information on charges and rates of return for EMIR Customer accounts please review these links:

16 CONTACTS Mark Woodward Vice President, Corporate Development ICE Clear Europe +44 (0) Michael Amakye CDS Product Development ICE Clear Europe +44 (0)

17 US CDS CLEARING PARTICIPANT CONTACTS Firm Name Phone Barclays Raymond Kahn Terrence Burke Bank of America Merrill Lynch Bob Burke BNP Paribas Ira Rudman Stephanie Leung Citigroup Christopher Perkins Mariam Rafi Credit Suisse Neil Burke John Dlubac Deutsche Bank Piers Murray Goldman Sachs Michael Dawley Cassandra Tok HSBC Michael Hynes JPMorgan Thomas Alterson Morgan Stanley Jason Swankoski SG Americas Securities Nicholas Gionfriddo UBS Mark Daniels Mark Willkehr Wells Fargo Alasdair McBarnet Jeff Gore

18 EUROPEAN CDS CLEARING MEMBER CONTACTS Firm Name Phone Barclays Ayman Gammall Key-Yong Tee Bank of America Merrill Lynch Richard Clark Rob van der Meijde BNP Paribas Mark Stafford Gaspard Bonin Citigroup John Frewin Michel Planquart Credit Suisse Daniel Harding Stephen Plestis Deutsche Bank Annegret Waldmann Jason Vitale Goldman Sachs Robert Forkan Stuart Connolly HSBC Neill Pattinson JP Morgan Brian Oliver Morgan Stanley Owain Roberts Mark Bortnik Nomura Simon Weetman Societe Generale Newedge Jamie Gavin UBS Janina Marks

19 ASIA PACIFIC CDS CLEARING PARTICIPANT CONTACTS Firm Name Phone Barclays Ian Lee John Rutledge Bank of America Merrill Lynch Shiau-Ling Chong Jason Warner BNP Paribas Bertrand Danselme Ross Davies Citigroup Thomas Treadwell Lei Li [email protected] [email protected] Credit Suisse Colin Macfarlan [email protected] Deutsche Bank Tate Barnes [email protected] Goldman Sachs Ying Ren Ong Paul Davies [email protected] [email protected] HSBC Andrew Baker [email protected] JPMorgan Jonathan Caldwell Dave Stinson [email protected] [email protected] Morgan Stanley Matthew O Neill Cristina DiLullo [email protected] [email protected] UBS Michael Jansen [email protected]

20 DISCLAIMER Intercontinental Exchange (NYSE: ICE) is the leading network of regulated exchanges and clearing houses for financial and commodity markets. ICE delivers transparent, reliable and accessible data, technology and risk management services to markets around the world through its portfolio of exchanges, including the New York Stock Exchange, ICE Futures and Liffe. Trademarks of ICE and/or its affiliates include Intercontinental Exchange, ICE, ICE block design, NYSE, New York Stock Exchange and LIFFE. Information regarding additional trademarks and intellectual property rights of Intercontinental Exchange, Inc. and/or its affiliates is located at Safe Harbor Statement under the Private Securities Litigation Reform Act of Statements in this press release regarding ICE's business that are not historical facts are "forward-looking statements" that involve risks and uncertainties. For a discussion of additional risks and uncertainties, which could cause actual results to differ from those contained in the forward-looking statements, see ICE's Securities and Exchange Commission (SEC) filings, including, but not limited to, the risk factors in Intercontinental Exchange, Inc. s Annual Report on Form 10-K for the year ended December 31, 2014, as filed with the SEC on February 5, We caution you not to place undo reliance on these forward looking statements. Any forward-looking statement speaks only as of the date on which such statement is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all factors that may affect our business and prospects. Further, management cannot assess the impact of each factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 20