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PROPRIETARY & CONFIDENTIAL Newedge OTC Derivative Execution and Central Clearing Forum Toronto: November 17, 2010 Montreal: November 18, 2010.

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Presentation on theme: "PROPRIETARY & CONFIDENTIAL Newedge OTC Derivative Execution and Central Clearing Forum Toronto: November 17, 2010 Montreal: November 18, 2010."— Presentation transcript:

1 PROPRIETARY & CONFIDENTIAL Newedge OTC Derivative Execution and Central Clearing Forum Toronto: November 17, 2010 Montreal: November 18, 2010

2 PROPRIETARY & CONFIDENTIAL 2  IDCG Overview  Product Offering/Trade Flow and Reporting  Risk Management/Default Procedures  Technology Overview Agenda

3 PROPRIETARY & CONFIDENTIAL 3 Key Milestones  March 2007: IDCG is founded by Vincent Viola and John Shay  August 2008: IDCG files DCO application with the CFTC  December 2008: CFTC approves IDCG’s DCO NASDAQ OMX becomes the majority investor IDCG’s clearinghouse goes live and begins clearing contracts MF Global becomes the first clearing member  May 2009: IDCG becomes fully compliant and supported by SunGard’s GMI  June 2009: Shadow Clearing service is launched BNY Mellon acquires a minority stake in IDCG  September 2009: Shadow Clearing volumes exceed USD 1 trillion  October 2009: Shadow Clearing extends to full operational testing  December 2009: Shadow Clearing volumes exceed USD 3 trillion  March 2010: Newedge USA becomes a clearing member  April 2010: IRS vs. 1Month Index, OIS, and FRA products are launched  June 2010: Shadow Clearing volumes exceed USD 7 Trillion  July 2010:BNY Mellon Clearing becomes a clearing member  September 2010:State Street Global Markets becomes a clearing member Shadow Clearing volumes exceed USD 10 Trillion IDCG self certifies the new Part 190 OTC Account Class 

4 PROPRIETARY & CONFIDENTIAL 4 International Derivatives Clearing Group, LLC Corporate Structure International Derivatives Clearing Group, LLC Holding Company NASDAQ OMX Majority Owned Delaware Limited Liability Company Holding Company Owns 100% of All Subsidiaries International Derivatives Clearing Group, LLC Holding Company NASDAQ OMX Majority Owned Delaware Limited Liability Company Holding Company Owns 100% of All Subsidiaries International Derivatives Clearinghouse, LLC Delaware Limited Liability Company CFTC Registered DCO Counterpart to All Banks And Credit Providers International Derivatives Clearinghouse, LLC Delaware Limited Liability Company CFTC Registered DCO Counterpart to All Banks And Credit Providers International Derivatives Clearing Group, LLC is a Delaware corporation and a majority-owned subsidiary of NASDAQ OMX Group Inc. The Clearinghouse (IDCH) was incorporated on December 07, 2007 and was in operation as of January 1, The holding company “IDCG” was incorporated on March 07, IDCH is a registered derivatives clearing organization (DCO) pursuant to Section 5b of the Commodity Exchange Act. On December 22 nd, 2008, the Commodity Futures Trading Commission issued an order granting International Derivatives Clearinghouse, LLC registration as a derivatives clearing organization. As a registered DCO, IDCG is authorized to clear futures contracts, options on future contracts, commodity options, and over the counter derivatives contracts where interest rates and /or currencies constitute the underlying commodity or reference.

5 PROPRIETARY & CONFIDENTIAL IDCG Product Offering

6 PROPRIETARY & CONFIDENTIAL 6 Product Information  IDCG currently offers central clearing of OTC Interest Rate Derivatives as swaps under the CFTC Part 190 account class. Similar to traditional futures clearing, cleared swaps through IDCG’s clearinghouse allows for: ­ Housing of margins in bankruptcy remote sequestered accounts ­ Pre and Post Default portability of client margins ­ Possible regulatory capital relief  Clearing of swaps under the Part 190 rules enables IDCG members and their clients to: ­ Maintain swaps as swaps, without the need to convert to a listed future or trade through an exchange ­ Continue to use their existing over the counter swap execution venues ­ Counterparty credit risk mitigation through a third party CFTC regulated clearinghouse ­ Flexibility in trade affirmation systems ­ Both MarktiSERV and Bloomberg VCON are able to deliver trades to the IDCG Clearinghouse ­ Operational efficiency through a single point and time of settlement and as well as netting of payments

7 PROPRIETARY & CONFIDENTIAL 7 Products Currently Eligible for Clearing under Part 190 OTC Account Class  US Dollar Interest Rate Swap vs. 3 Month BBA LIBOR  US Dollar Forward Starting Interest Rate Swap vs. 3 Month BBA LIBOR  US Dollar Interest Rate Swap vs. 1 Month BBA LIBOR  US Dollar Forward Starting Interest Rate Swap vs. 1 Month BBA LIBOR  US Dollar Defined Roll Swap (Quarterly Maturities) vs. 3 Month BBA LIBOR  US Dollar Forward Starting Interest Rate Swap (Quarterly Maturities) vs. 3 Month BBA LIBOR  US Dollar Overnight Index Swaps (OIS)  US Dollar 1 Month Forward Rate Agreement (FRA)  US Dollar 3 Month Forward Rate Agreement (FRA)

8 PROPRIETARY & CONFIDENTIAL 8 Novation Mechanics 1. Execute a bilateral swap in the OTC market. 2. Trade is affirmed via 3 rd Party Affirmation Platform. 3. After affirmation is complete the trade is submitted to IDCH for matching 4. Limits are checked then the trade is matched and accepted for clearing 5. IDCH messages counterparties and clearing members of the new position. Client and Dealer are now long or short a cleared swap against IDCH  At this point the bilateral swap ceases to exist.  IDCH risk manages the position on a real- time basis through twice daily margin Client Pay Fixed Long Swap Dealer Receive Fixed Short Swap Client’s Clearing Member Dealer’s Clearing Member Affirmation Platform Matching and Acceptance (1) (2) (3) (4) (5)

9 PROPRIETARY & CONFIDENTIAL 9  Front Office: ◦ MarkitSERV, Bloomberg VCON, TradeWeb, others ◦ MarkitSERV Bi-lateral and Tri-lateral models.  Middle Office : ◦ Misys/Summit, Calypso, others  Back Office : ◦ SunGard/GMI 3 rd Party Reporting Systems

10 PROPRIETARY & CONFIDENTIAL 10 Product Pipeline  IDCG Plans to expand its products eligible for clearing to potentially include: ­ US Dollar Spot Starting Interest Rate Swap vs. 6 Month BBA LIBOR ­ US Dollar Forward Starting Interest Rate Swap vs. 6 Month BBA LIBOR ­ US Dollar Swaptions based upon 3 Month BBA LIBOR ­ Canadian, Euro, Sterling, and Yen denominated Interest Rate Derivatives

11 PROPRIETARY & CONFIDENTIAL Risk Management and Default Procedures

12 PROPRIETARY & CONFIDENTIAL 12  Membership Standards ◦ Application Review ◦ Initial Credit Review ◦ Applicant Risk Standards and Capabilities (Risk and Operational Review) ◦ Determination of limit for each clearing participants  Guaranty Fund ◦ Risk adjustment based upon stress tests ◦ Simulation of multiple defaults ◦ Defined market shock in excess of what was observed in the Autumn of 2008  Risk Monitoring ◦ Twice daily mark-to-market for margin collection purposes, and more frequently if necessary ◦ Real time measurement of clearing participants risk levels in the clearinghouse (initial margin and variation margin) ◦ Active monitoring of collateral values ◦ Adherence to defined risk procedures which have been reviewed by the CFTC consisting of Intraday, Daily, Weekly, Monthly, Quarterly and Annual Practices ◦ Annual review of all risk policies and procedures to ensure the most robust framework possible IDCG Risk Management Oversight

13 PROPRIETARY & CONFIDENTIAL 13  Credit Monitoring ◦ Monthly financial reporting by all participants in a uniform standard ◦ Ongoing review of limits and performance  Performance Bond ◦ Daily calculation of initial margin levels, minimum monthly reaffirmation or published changes ◦ Minimum margin is based upon the cum of the three day absolute price change over the previous 125 trading days at the 99.7% confidence interval ◦ Use of SPAN for contract offsets  Governance/Oversight  Established Risk Committee to provide representation for clearing participants and end-users IDCG Risk Management Oversight

14 PROPRIETARY & CONFIDENTIAL 14 IDCH Guaranty Fund  Three Levels of Protection: ­ The minimum level of the Guaranty fund is based upon 5% of average initial margin for all clearing members over the previous 125 trading days  The Guaranty Fund with reflect the greater of : ­ A robust stress testing to simulate the concurrent default of the two top clearing members and a random third, and shifting prices by six standard deviations ­ A regulatory stress test to simulate the default of the largest clearing member in terms of initial margin and shifting prices by the worst observed over the previous two years

15 PROPRIETARY & CONFIDENTIAL 15 IDCH Defaulting Clearing Member Waterfall  Each Clearing Member must maintain at least $2.5 million for Futures class and/or $5 million for OTC class in Guaranty Fund plus Initial Margin based on portfolio risk  The order of liquidity default has multiple levels of protection ­ 1st Protection: The defaulting member’s Initial Margin plus Member’s Guaranty Fund contribution. Liquidity supported by a committed line of credit with current balance of $125 million. ­ 2nd Protection: IDCH’s $50 million Surplus Capital ­ 3rd Protection: Guaranty fund contributions of non-defaulting clearing members’ (pro-rata based on member’s required contribution to Guaranty Fund) ­ 4th Protection: Final backstop is the clearing house’s assessment powers requiring a clearing member capital call to fund any possible residual loss. Defaulting Member’s Initial Margin/Guaranty Fund Contribution IDCH Surplus Capital $50 Million Guaranty Fund Contribution Assessment Power 40% Clearing Members’ Net Capital $30 Million Per Clearing Member Limit Guaranty Fund *Open Interest Market Share0.10%0.25%0.5%0.75 %1.00 % Projected Initial Margin (Millions)$710$1,770$3,550$5,320$7,090 Projected Guaranty Fund (Millions)$85$140$225$315$400

16 PROPRIETARY & CONFIDENTIAL Technology

17 17 Seamless Front & Back Office Integration  IDCG is able to accept trades via MarkitSERV & Bloomberg’s VCON  MarkitSERV is the leading electronic platform for processing OTC derivatives  IDCG executed a Software Development Agreement in December 2008 to enhance GMI to support IDCG cleared Interest Rate Derivatives  GMI is the most widely used software solution for the acquisition, processing, management, dissemination, integration, and booking of all clearing and trade processing activities for virtually any listed derivative instrument  SunGard delivered the completed IDCG software upgrade/integration on May 5th The upgraded GMI system is currently available to all SunGard/GMI clients

18 PROPRIETARY & CONFIDENTIAL 18 Technology Partnerships  Technology Partner: IDCG has entered into a strategic partnership with NASDAQ OMX Group for the development of the platform ◦ IDCH is a best-in-breed clearing system that manages real-time risk for all participants, providing the necessary clearing efficiencies and safeguards  Risk Management Partner: IDCG has entered into a strategic partnership with Razor Risk Technology to provide IDCH with state-of-the-art risk management technology  IDCH was built to incorporate the following specifications: ◦ Best-in-breed clearing technology ◦ Full redundancy ◦ Disaster recovery site and procedures ◦ Proven post-trade efficiency and reliability

19 PROPRIETARY & CONFIDENTIAL 19 Contact Information Matthew J. Guadagno, Director of Sales & Marketing


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