Cleared OTC Credit Default Swaps Changing the CDS Clearing Landscape Q3 2015
Contents Why CME for CDS Clearing? CDS Margin Model & Benefits Cleared OTC CDS Product Scope Client Clearing Reporting & Tools Next Steps and Contacts
Why CME for CDS Clearing? CME has invested in the development of a new margin risk framework which provides a more holistic model of the risk of a CDS portfolio comprised of a variety of index & single name products CME is committed to expanding our CDS offering in order to be the #1 Clearing House for buyside clients Global multi-asset class solution for CDS, IRS, and FX all under one clearing house Clients appreciate CME s economical fee structure that supports multi-fcm volume discounts Offering the widest acceptable collateral solution for CDS A true open-access architecture without the dependency on a single platform for trade messaging Clients have the flexibility to allocate transactions pre- or post-clearing to one or more clearing members Real-time clearing 23 hrs/6 days a week across all time zones and follow-the-sun client service support 3
Benefits of Margin Model Efficient in Modeling CDS Portfolio Risk - Accounts for hedging, diversification and concentration - Reactive to current market conditions, persistent to extreme events Margins More Accurately Aligned with the Market - Proposed changes to how market risk is assessed may result in reduced margin requirements Intuitive and Straightforward Model Parameters - CORE margin tool to test hypothetical margins on portfolios Applicable to broad range of Credit instruments - CDS NA Indices: High-Yield, Investment Grade - itraxx: Main and Crossover Portfolio Margining - Allows flexibility to offset risks - Will allow for offsets between CDS and itraxx 4
Client Clearing Tools CME CORE CME CORE Margin Tool Margin Results Contact our Risk Team to run margin simulations for new or existing CDS portfolios Select positions and calculate initial margin requirement Maintenance Margin Factor Breakdown CDS Margin Reports Full transparency into margin calculation Analyze and review results Contributing Factor Breakdown Please reach out to cme.core@cmegroup.com or (312) 207 2525 if you have any questions or would like a demo of the applications http://www.cmegroup.com/clearing/cme-core-cme-clearing-online-risk-engine.html 5
Cleared OTC CDS Product Scope Indexes Corporate Bond Indexes Mandated for Clearing Status Tenors 3Y 5Y 7Y 10Y Series North America CDX NA IG Y Live 8+ CDX NA HY Y Live 12+ Europe itraxx Main Y Live 17+ itraxx Crossover Y Live 17+ CME Group is the only clearing house to offer 3 & 7 year tenors in CDX NA IG and itraxx Main 6
Sample Portfolio Margining Scenarios Flexibility to offset risks between combinations of CDX and itraxx Indices Portfolio Margining Scenario CDX Index itraxx Index Portfolio Size $100MM 100 MM Instrument(s) CDX IG 22 itraxx Main 21 Portfolio Direction Buy Protection Sell Protection Tenor 5y 5y Individual Margin Requirement 0.70% 1.51% (% of Notional) Individual Margin Requirement (in USDE) $699,087 $2,053,426 Portfolio Margin Requirement 0.79% of Gross Notional or $1,874,927 (USDE) Savings of $877,586 or 32% 7
Trade Workflow Mechanics Straight Through Processing allows for real-time clearing and trade confirmations Client ED 1 Trade receives credit pre-approval from FCM (precedes this workflow) 2 SEF 2 2 Client executes trade with Executing Dealer (ED) on SEF 3 5 3 SEF sends trade to CME for Clearing 5 CME Clearing House Product Account Credit 5 4 After validating product, account and applying credit limits set by CME, swap is accepted for clearing 5 CME sends Cleared notification to SEF which displays trade status to principals Clearing Member (Client) Clearing Member (ED) 5 CME sends a Clearing Confirmation to Clearing Member(s) 8
CME Clearing Platforms Connected to CME Clearing Several market leading affirmation platforms and Swap Execution Facilities are directly connected to CME Clearing Connectivity Partners OTC Clearing Members 9
Netting Options CME provides Two Customer Netting Options: Daily Net and Adjusted Gross Option Daily Net Description At the end of the day, trades are automatically net into a single position view. The client can maintain separate transactions as they see fit, provided the net matches with CME Allows client to keep their trades open while reporting one net position CME will show one net long or short position view along with the daily activity Clearing Firms and clients are free to keep the trades open on their side At the end of the day, trades are left gross with the ability to selectively net trades Adjusted Gross Allows client to unambiguously keep their trades open CME will show an aggregate long/short position view along with the daily activity at the end of day Clearing Firms and client are free to keep trades open on their side Clients can choose to selectively net positions on their side 10
Comprehensive Reporting Seamlessly integrate key OTC data into your internal systems. Reports Description Time Product Reference File A complete list of products eligible for clearing 6:00 p.m. ET EUR Settlement Price File Provides end-of-day settlement prices for itraxx 12:30 p.m. ET Early Settlement Price File Provides preliminary settlement prices 4:45 p.m. ET Final Settlement Price File Provides end-of-day settlement prices 5:00 p.m. ET Client Margin Summary Report Client MR3 Report CDS Position Report Provides an account breakdown of your USD Initial Margin requirements across your FCMs Provides an account breakdown of your Initial Margin requirements for each breakout currency (USD & EUR), across your FCMs Provides a summary of all positions marked-to-market once per day 10:00 p.m. ET 10:00 p.m. ET 9:00 p.m. ET 11
Contacts For more information, please contact us: On-Boarding Team +1 312 338 7112 onboarding@cmegroup.com Kaitlin Meyer +1 312 648 5343 kaitlin.meyer@cmegroup.com Liam Smith +1 312 207 2538 liam.smith@cmegroup.com Phil Hermon +44 203 379 3983 phil.hermon@cmegroup.com Harry Yeo +65 6593 5581 harry.yeo@cmegroup.com Visit www.cmegroup.com/cds to learn more 12
Disclaimer CME Group, CME Europe and CME Clearing Europe are brands of CME Group Inc. and its subsidiaries, members of which include Chicago Mercantile Exchange Inc, CME Europe Limited, CME Clearing Europe Limited and CME Marketing Europe Limited. Futures and swaps trading is not suitable for all investors, and involves the risk of loss. Futures and swaps are leveraged investments, and because only a percentage of a contract s value is required to trade, it is possible to lose more than the amount of money initially deposited for a futures and a swap position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. CME Group is the trademark of CME Group, Inc. The Globe logo, Globex and CME are trademarks of Chicago Mercantile Exchange, Inc. CBOT is the trademark of the Board of Trade of the City of Chicago Inc. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. All other trademarks are the property of their respective owners. The information within this presentation has been compiled by CME Europe for general purposes only. Although every attempt has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or necessarily the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX and CME Group rules. Current rules should be consulted in all cases concerning contract specifications. This communication does not constitute a Prospectus, nor is it a recommendation to buy, sell or retain any specific investment or to utilise or refrain from utilising any particular service. This communication is for the exclusive use of Eligible Counterparties and Professional Clients only and must not be relied upon by Private Clients who should take independent financial advice. Circulation should be restricted accordingly. Issued by CME Marketing Europe Limited. CME Marketing Europe Limited (FRN: 220523) is authorised and regulated by the Financial Services Authority. 13