ICE Trust CDS Clearing Buy-side Client Overview DCO Model
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Transcript of ICE Trust CDS Clearing Buy-side Client Overview DCO Model
ICE Trust CDS Clearing Buy-side Client Overview
DCO Model
www.theice.comJanuary 2011
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Agenda
Overview of ICE CDS Clearing
Client Clearing Solution
Operational Workflow
Impact of Dodd-Frank Act on ICE Trust CDS Clearing
ICE Timeline
Client Next Steps
2
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
ICE Introduction
ICE established in 2000, (NYSE: ICE) market capitalization of $8.7B*
Member of S&P 500 and Russell 1000
3 Futures and 2 OTC global derivatives markets across energy, agriculture, equity indexes, FX, and credit
Five clearing houses for futures and OTC markets in U.S., Europe & Canada
Market participants in more than 70 countries
Significant depth and investment in CDS market
ICE Integrated Marketplace
IntercontinentalExchange (ICE) is the leading operator of integrated futures and over-the-counter (OTC) markets, clearing, processing and data services for global derivatives markets.
*As of January 3, 2011
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ICE Global CDS Cumulative Volume
Over $15 Trillion notional cleared globally
ICE Trust cleared over $4.6 Billion in client-related notional
ICE Trust Launches
CDS Clearing
3/09
ICE Clear Launches CDS
Clearing
7/09
ICE Trust Surpasses $3
Trillion
ICE Trust Launches Buy-side Clearing
ICE Trust/ICE Clear Launches Single
Names
12/09
ICE CDS Clearing Surpasses $10 Trillion
Globally
In B
illio
ns
As of January 21, 2011
ICE CDS Clearing Surpasses $14 Trillion
Globally
ICE CDS Milestones and Volume Cleared
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Current Status - Products and Clearing Participants
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68 Indices
North America (CDX) Europe (iTraxx)
IG S8 – S15 Main S7 – S14 HY S8 – S15 XO S9 – S14 HVOL S8 – S15 HVOL S7 – S14
Clearing Participant (CP)
ICE Trust ICE Clear Europe
Bank of America Barclays BNP Paribas Citibank Credit Suisse Deutsche Bank Goldman Sachs HSBC JPMorgan Merrill Lynch -
Morgan Stanley Nomura RBS Societe Generale - UBS Unicredit AG -
190 Single NamesSector North America Europe
Consumer Services 23 21Industrials 15 11Consumer Goods 12 11Utilities 6 16Financials 7 14Basic Materials 5 11Telecommunications 3 13Healthcare 6 2Oil & Gas 7 1Technology 5 1
As of January 14, 2011
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Why Clear with ICE?
Leverage existing infrastructure
Trades cleared intra-day, on near real-time basis
Open access provided through support of multiple affirmation platforms
No costly significant technology build
Ease of Doing Business
Gross margin held at ICE, not at Futures Commission Merchant/Broker Dealer*
Default protections designed to work within existing bankruptcy laws
Pre and post default portability of positions and collateral
World class risk management specifically designed for CDS
Guaranty fund covers simultaneous default of 2 largest Clearing Participants
Expertise &Depth
Over 250 cleared CDS products across US and Europe
14 dealers and hedge fund and asset managers actively clearing today
Managed numerous Credit Events, Succession Events and Matured Contracts
Leading market connectivity processing thousands of trades a day
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Customer Protection
* Dodd-Frank Act requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a FCM for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Agenda
Overview of ICE CDS Clearing
Client Clearing Solution
Operational Workflow
Impact of Dodd-Frank Act on ICE Trust CDS Clearing
ICE Timeline
Client Next Steps
7
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Margin Segregation
CLIENT A
Gross IM $2MM FCMs required to collect the Gross Initial Margin (ICE Minimum Initial Margin) from each client
Margin calculator available to clients to calculate Margin requirements – full transparency provided
FCMs required to post total Gross Initial Margin to ICE
FCMs can charge an Excess Initial Margin. Client and FCM negotiate where Excess Margin is held
FCM and Client negotiate the timing of margin payment
Gross IM held at ICE in the FCM’s Client Omnibus Account
Client Account is fully segregated from the House Account
Gross Margin is held at ICE, not at the Futures Commission Merchant/Broker Dealer
ICE-FCM Client Omnibus Account
CLIENT A
Gross IM $2MM
CLIENT B
Gross IM $1MM
FCM
Gross IM = 3MM
Gross IM = 3 MMfor
Client A and Client B
* Customer segregation is subject to change following the promulgation of final rules by the CFTC and SEC under the Dodd-Frank Act.
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Risk Management Waterfall
Membership Criteria
Initial Margin Requirement
Mark-To-Market Margin Requirement
Guaranty Fund
Intra-day Risk Monitoring Special Margin Call
Execution
Additional Assessment Rights
Ensure CP has sufficient financial resources, operational capabilities and risk management experience
Daily margin call based on dynamic stress test regime
Daily MTM based on EOD settlement prices
Additional margin can be called unusual market fluctuations
Additional collateral to mutualize losses under extreme market
scenarios
Oblige CPs to contribute additional default funding
Layers of Protection
1. Defaulting Buy-side Margin
2. Defaulting CP House Margin
3. Defaulting CP Guaranty Fund
4. Non-default clients of CP (net only)
7. Assessment of CPs
6. Non-defaulting CPs GF/ ICE remaining GF
5. ICE Priority Guaranty Fund (GF)
Risk Management Waterfall*
*CP Default Related to Client Positions
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Initial Margin RequirementDynamic Stress-Based Regime
JTD requirement based on expected losses of a default
Concentration Requirement
Liquidity/Basis Risk Requirement
Jump-To-Default (JTD) Requirement
Risk associated with parallel moves in interest rates
Summary Of Risks Captured by Model Components
Spread Response Requirement
Risk associated with spread moves, curve shape changes and recovery rates
Costs associated with large position liquidation
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Total risk requirementInitial Margin Requirement
Interest Rate Risk Requirement
Costs associated with Bid/Offer exposure upon portfolio liquidation
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Agenda
Overview of ICE CDS Clearing
Client Clearing Solution
Operational Workflow
Impact of Dodd-Frank Act on ICE Trust CDS Clearing
ICE Timeline
Client Next Steps
11
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How To Clear a Trade
ICE Supports the Existing OTC Model and Multiple Platforms
Trade Execution & Capture Affirmation & Clearing Consent Clearing & Confirmation by ICE
Voice or e-trade
Trade Capture ICE
Executing Broker Alleges
Block Trade
Buy-side Affirms, Allocates and Routes to FCM
FCM Affirms and Routes to
ICE
ICE Runs Risk Filter Checks and
Accepts Trade
Trade Cleared & Confirmed
Trade Routed to
TIW
No Changes to Trade Execution
Multiple Platforms Supported
Affirmation Platform
Multiple Affirmation Platforms
Supported
(ICE Link, Bloomberg, Tradeweb)
Trades Cleared Intra-day on Near Real-Time
Basis
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Agenda
Overview of ICE CDS Clearing
Client Clearing Solution
Operational Workflow
Impact of Dodd-Frank Act on ICE Trust CDS Clearing
ICE Timeline
Client Next Steps
13
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Key Provisions of the Dodd-Frank Act - Title VII
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Mandates the CFTC regulate swaps including broad based indices (e.g., index CDS) and the SEC regulate security-based swaps including narrow based indices and single name CDS
Swaps that are required to be cleared must be executed on a swap execution facility (SEF), designated contract market or national securities exchange
Requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a FCM for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS
Funds collected are “customer property” and must be held in an account segregated from non-customer (house) funds
Clearing will be mandated for standardized swaps as determined by the CFTC and SEC
Jurisdiction
Clearing Mandate
Execution
U.S. Customer Clearing
Margin Segregation
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Areas of Impact for ICE Trust
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ICE Trust will transition to a DCO upon effective date of Dodd-Frank in July of 2011 ICE Trust secured an extension of its existing SEC exemptive order through the Dodd-
Frank effective date and will be deemed a Securities Clearing Agency on the effective date
Clearing Participants must clear customer business through FCM/BD entity
CDS product will remain the same Upfront fees will move to T+1 and netted with margin movements Customers and CPs can leverage current OTC technology infrastructure (e.g., ICE Link)
ICE Trust is seeking regulatory approval for portfolio margining (“Index Decomposition” margin methodology)
Acceptable margin collateral and permissible margin investments to be determined once final rules are published by CFTC and SEC
Portability and customer segregation governed by CFTC and SEC regulations CFTC regulated customer omnibus account (Cleared OTC Derivatives Account Class 4(d)(f)) ICE Trust will seek to hold both indices and single names in the same OTC account class
Legal Structure
Documentation
Customer Segregation
Product/ Infrastructure
Margin Methodology
Customer relationship to FCM governed by a bilateral futures agreement Customer relationship to BD governed by a securities account agreement ICE Trust Rules govern CDS clearing No separate ICE Trust Addendum for customer and FCM/BD to bilaterally execute
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Agenda
Overview of ICE CDS Clearing
Client Clearing Solution
Operational Workflow
Impact of Dodd-Frank Act on ICE Trust CDS Clearing
ICE Timeline
Client Next Steps
16
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
ICE Timeline
Present
Q2 2011
Q3 2011
ICE Trust live with client clearing under Derivatives Clearing Member (DCM) Model
Margin Simulation Calculator available
Upon July 2011 effective date of the Dodd-Frank Act: ICE Trust deemed a DCO and SCA
ICE Trust and CPs live with client clearing under the DCO Model
Rollout of IG NA single names for client clearing
Portfolio Margining (index/single names)
Start rollout of HY single names
ICE Trust and CPs operationally ready to support client clearing under the DCO Model
Client testing under the DCO Model
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Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Agenda
Overview of ICE CDS Clearing
Client Clearing Solution
Operational Workflow
Impact of Dodd-Frank Act on ICE Trust CDS Clearing
ICE Timeline
Client Next Steps
18
Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.
Client Next Steps
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To begin clearing CDS, Buy-side clients need to:
Establish relationships with one or more Clearing Participant(s)1
Execute legal documentation with Clearing Participant(s) and review ICE Trust Rules
Establish access to a connectivity provider2
1 Clearing Participants as of January 7th, 2011 - Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Nomura, RBS and UBS. Societe General & Unicredit AG are Participants of ICE Clear only.
2 Connectivity providers include ICE Link, Bloomberg, Tradeweb
The Margin Simulation Calculator is available for estimation of margin requirements:
Provides full transparency into the initial margin methodology
Provides detailed analysis of results provided at the net position level
Allows users to utilize existing positions or upload custom portfolios to run “what if” scenarios
Access available through the ICE Link web interface
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How to Stay Updated
ICE Website – www.theice.com
Regularly updated and provides information on Clearing Eligible products and EOD prices
ICE CDS Newsletter
Monthly newsletter providing a summary of ICE CDS developments. To subscribe, visit the ICE Subscription Center at www.theice.com/subscribe and choose Credit Derivatives from the Products menu
ICE Webinars
Webinars will be made available on the website explaining the ICE clearing model in more detail
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US Clearing Participant Contacts
Firm Name E-Mail
Barclays Peter Borstelmann [email protected]
Bank of America Bob Burke [email protected]
BNP Paribas Mark Esparrago [email protected]
Citigroup Christopher Perkins [email protected]
Credit Suisse Greg Laughlin [email protected]
Deutsche BankHester Serafini Luciana Miranda
[email protected]@db.com
Goldman SachsMichael Dawley Amy Elliott
[email protected]@gs.com
HSBC Donna Parks [email protected]
JPMorgan Peter Sughrue [email protected]
Merrill Lynch Joanne Qiao [email protected]
Morgan Stanley James Hill [email protected]
Nomura Stephen Scalzo [email protected]
RBS John Wilson [email protected]
UBSMark WillkehrPaul Hamill
[email protected]@ubs.com
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European Clearing Participant Contacts
Firm Name E-Mail
Barclays Ayman Gammall [email protected]
Bank of AmericaAndrew LallyBrooks Stevens
[email protected][email protected]
Citigroup Andy Sterry [email protected]
Credit Suisse Paul Twohey [email protected]
Deutsche BankTrudy RossHakan Guney
[email protected]@db.com
Goldman Sachs Robert Forkan [email protected]
HSBC Anthony Normand [email protected]
JP MorganDale BraithwaitEmma Priestley
[email protected]@jpmorgan.com
Morgan StanleyOwain RobertsMark Bortnik
[email protected]@morganstanley.com
RBS John Wilson [email protected]
UBS Andrew Downes [email protected]
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Chris Edmonds
President
ICE Trust US
Email: [email protected] Office: 312-836-6810
Peter Barsoom
Chief Operating Officer
ICE Trust US
Email: [email protected]
Office: 212-323-8508
Corry Bazley
Director – Sales and Marketing
ICE Trust US
Email: [email protected]
Office: 212-323-6022
Paul Swann
President
ICE Clear Europe
Email: [email protected]
Office: +44 (0)20 7065 7615
Suzanne Hubble Director – CDS DevelopmentICE Clear Europe
Email: [email protected]
Office: +44(0)20 7065 7625
Helen Fermor
CDS Product Manager
ICE Clear Europe
Email: [email protected]
Office: +44(0)20 7065 7626
ICE Contacts