Cleared OTC Credit Default Swaps

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Cleared OTC Credit Default Swaps

Q3 2015

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• Why CME for CDS Clearing?

• CDS Margin Model & Benefits

• Cleared OTC CDS Product Scope

• Client Clearing Reporting & Tools

• Next Steps and Contacts

(3)

• 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

buy-side 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

Why CME for CDS Clearing?

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• 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

Benefits of Margin Model

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• Contact our Risk Team to run

margin simulations for new or

existing CDS portfolios

• Select positions and calculate

initial margin requirement

Client Clearing Tools – CME CORE

5

CME CORE Margin Tool

CDS Margin Reports

http://www.cmegroup.com/clearing/cme-core-cme-clearing-online-risk-engine.html

Please reach out to [email protected] or (312) 207 2525 if you have any questions or would like a demo of the applications

• Full transparency into margin

calculation

• Analyze and review results

Margin Results

Maintenance Margin Factor Breakdown

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Corporate Bond Indexes

Mandated

for

Clearing

Status

Tenors

Series

3Y

5Y

7Y

10Y

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+

Indexes

Cleared OTC CDS Product Scope

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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

Individual Margin Requirement

(% of Notional)

0.70%

1.51%

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%

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Client

ED

SEF 2 2 3 5

Clearing Member

(Client)

Clearing Member

(ED)

CME Clearing

House

Product  Account  Credit  ₅ 5

1 – Trade receives credit pre-approval from FCM

(precedes this workflow)

2 – Client executes trade with Executing Dealer (ED)

on SEF

3 – SEF sends trade to CME for Clearing

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

5 – CME sends a Clearing Confirmation to Clearing

Member(s)

Trade Workflow Mechanics

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Several market leading affirmation platforms and Swap Execution Facilities

are directly connected to CME Clearing

Connectivity Partners

Platforms Connected to CME Clearing

CME

Cleari

ng

OTC Clearing Members

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Netting Options

10

Option

Description

Daily Net

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

Adjusted

Gross

At the end of the day, trades are left gross with the ability to selectively net trades

• 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

CME provides Two Customer Netting Options:

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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

Provides an account breakdown of your USD Initial

Margin requirements across your FCMs

10:00 p.m. ET

Client MR3 Report

Provides an account breakdown of your Initial Margin

requirements for each “breakout currency” (USD &

EUR), across your FCMs

10:00 p.m. ET

CDS Position Report

Provides a summary of all positions marked-to-market

once per day

9:00 p.m. ET

Comprehensive Reporting

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Contacts

12

Visit

www.cmegroup.com/cds

to learn more

On-Boarding Team

+1 312 338 7112

Kaitlin Meyer

+1 312 648 5343

Liam Smith

+1 312 207 2538

Phil Hermon

+44 203 379 3983

Harry Yeo

+65 6593 5581

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.

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