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November 2010 OTC Clearing Special Event. © 2010 CME Group. All rights reserved 2 CME Group Overview Highly Efficient Markets Global Leader OTC Clearing.

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Presentation on theme: "November 2010 OTC Clearing Special Event. © 2010 CME Group. All rights reserved 2 CME Group Overview Highly Efficient Markets Global Leader OTC Clearing."— Presentation transcript:

1 November 2010 OTC Clearing Special Event

2 © 2010 CME Group. All rights reserved 2 CME Group Overview Highly Efficient Markets Global Leader OTC Clearing Services Financial Security of CME Clearing  Diverse customer base  Point of trade clearing  Operational and cost efficiency  Seasoned leadership  Customer focused and global partner of choice  AA Rating placing it in top 15 of S&P 500  Multi-asset class product line  Same FCM relationship as Listed Futures  Same legal and operational infrastructure  Leading risk management practices  Separate Default Fund for OTC instruments  Portfolio margining

3 © 2010 CME Group. All rights reserved Bilateral Market without Central Clearing Counterparty  Multiple bilateral relationships where buyers and sellers face each other as counterparties Sellers must accept each buyer’s credit Buyers send payment directly to each seller Buyers must accept each seller’s ability to perform on the contract  Pricing is differentiated by quality of counterparty  If either party wants to close out a deal prior to expiry, they must negotiate terms Market with a Central Clearing Counterparty  CME Clearing faces each counterparty directly, becoming the seller to the buyer and buyer to the seller through novation  Buyer and seller are guaranteed performance by CME Clearing  Buyer and seller no longer have credit exposure to one another  Parties closeout transactions with whomever provides the best price 3 Buyer Seller Buyer Seller Buyer Seller CME Clearing Buyer Seller Buyer Seller Buyer Seller Bilateral Market vs. Central Counterparty Clearing

4 © 2010 CME Group. All rights reserved CME Clearing Defaulting Clearing Member Non-Defaulting Clearing Member Buy-side Firm 4 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, capital adequacy and compliance with customer protection rules and regulations Default Management  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  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 Portability of Customer Positions & Margin in the Event of a Clearing Member Default CME Group Portability of Customer Accounts

5 © 2010 CME Group. All rights reserved  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, 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, including but not limited to rules regarding separation of customer and FCM assets and investment of customer funds In early October 2010, CME implemented new rules with substantive requirements for the treatment of customer “cleared OTC derivatives” that are cleared by CME Any bankruptcy of a FCM Clearing Member would be governed by U.S. Bankruptcy Code and CFTC regulatory framework (Part 190 Bankruptcy Rules) * See the New OTC Derivatives Account Class Q&A document on the CME Group website for more information. 5 CME Group Customer Protection Mechanism

6 © 2010 CME Group. All rights reserved 6 CME Group OTC Initiatives CME Group OTC Initiatives Energy & Ags CDSIRSFX  Builds on the strength of CME Group’s core business  Maintains current execution processes, affirmation platforms, and product economics of bilateral OTC contracts  Protects customers through legal safeguards of U.S. bankruptcy law and CFTC Part 190 Bankruptcy Regulations  Provides operational flexibility and efficiencies of an integrated, multi asset class solution  Point of trade clearing  Cash flow netting  Streamlined legal documentation  For OTC IRS, seeking CFTC permission to allow customer capital efficiencies via cross margining of OTC products with benchmark Treasury and Eurodollar futures Working in close collaboration with premier swap dealers, clearing firms, and buy- side market participants to create a best in class clearing solution for OTC derivatives

7 © 2010 CME Group. All rights reserved Cleared OTC IRS Product Scope Existing Product Scope CurrencyUSD NotionalNon-amortizing Effective DatesSpot, seasoned, or forward starting Maturity DatesOut to 31 years from cleared date Business Day AdjustmentModified following Fixed LegFlexible coupons Semi-annual payments 30/360 day count Adjusted and unadjusted accruals NY and LON business days Floating Leg3M LIBOR index Quarterly payments or semi-annual payments with quarterly compounding Act/360 day count Adjusted accruals NY and LON business days 7 Future Enhancements Q Flexible payment frequencies, day counts, and business days Stub periods EUR Vanilla IRS Q M LIBOR index 3M/1M basis swaps Spreads over/under LIBOR GBP Vanilla IRS JPY Vanilla IRS Other Future Enhancements Caps, floors, and swaptions Additional currencies

8 © 2010 CME Group. All rights reserved 8 CME Clearing MarkitServBloombergClearPort IRS Clearing Member (FCM) IRS Clearing Member (FCM) CDS Clearing Member (FCM) CDS Clearing Member (FCM) TradeWeb Other 3 rd Party Platforms CME OTC Cleared Trade Submission Model CME Cleared OTC Open Access Platform Clearing OTC trades real-time throughout the day, every day, providing immediate cleared trade confirmation, significantly reducing counterparty credit exposure CME Cleared OTC Cross-Asset Class Benefits  Negotiate, execute, 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, settlement and risk management  Compression capabilities that reduce systemic risk (currently available for CDS and planned for IRS)

9 © 2010 CME Group. All rights reserved Cleared OTC IRS: Trade Workflow Mechanics 9 Validations, notifications and confirmations are real-time and allow Straight Through Processing ClientEB Affirmation Platform CME Clearing House Clearing Member (Client) Clearing Member (EB) 5 Product Account Credit Product Account Credit 5 1 – Client executes swap with Executing Broker (EB) 2 – EB alleges swap to Client 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), CME accepts swap for clearing 5 – CME sends “Cleared” notification to Affirmation Platform which displays trade status to principals 5 – CME sends a Clearing Confirmation to Clearing Member(s)

10 © 2010 CME Group. All rights reserved 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 information, please contact: North America Jack Callahan(312) Steve Dayon(312) Europe Robert Asia Way Yee 10 Cleared OTC IRS: Next Steps and Contact Us

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