ICE Trust CDS Clearing DCO Model - the ICE · Costs associated with Bid/Offer exposure ... CDS clearing No separate ICE Trust Addendum for customer ... Act on ICE Trust CDS Clearing

Copyright © 2011. ICE. All rights reserved.

ICE Trust CDS ClearingDCO Model

June 2011

Agenda

� Overview of ICE CDS Clearing

� Client Clearing Solution

� Operational Workflow

� Impact of Dodd-Frank Act on ICE Trust CDS Clearing

2Copyright © 2011. ICE. All rights reserved.


� ICE Next Steps

� Client Next Steps

2

ICE Introduction

� ICE established in 2000, (NYSE: ICE) market capitalization of $8.64B*

� Member of S&P 500 and Russell 1000

� 3 Futures and 2 OTC global derivatives markets across

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.


� 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

*As of May 31, 2011

3

$12,000

$14,000

$16,000

$18,000

$20,000

ICE Global CDS Cumulative Volume

� Over $18.6 Trillion notional cleared globally

� ICE Trust cleared over $6.4 Billion in client-related notional

ICE Trust Launches Buy-side Clearing

ICE Trust/ICE Clear Launches Single

Names

ICE CDS Clearing Surpasses $15 Trillion Globally01/11

ICE CDS Clearing Surpasses $10 Trillion Globally07/10

ICE CDS Milestones and Volume Cleared


$

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

4

ICE Trust Launches

CDS Clearing3/09

ICE Clear Launches

CDS Clearing7/09

Names12/09

In Billions

As of June 3, 2011

75 Indices

North America (CDX) Europe (iTraxx)

IG S8 – S16 Main S7 – S15

HY S8 – S16 XO S9 – S15

HVOL S8 – S16 HVOL S7 – S15

Clearing Participant (CP)

ICE Trust ICE Clear Europe

Bank of America � �

Barclays � �

BNP Paribas � �

Citibank � �

Credit Suisse � �

Deutsche Bank � �

249 Single Names

Sector North America Europe

Current Status – Products and Clearing Participants


5

Deutsche Bank � �

Goldman Sachs � �

HSBC � �

JPMorgan � �

Merrill Lynch � �

Morgan Stanley � �

Nomura � �

RBS � �

Societe Generale � �

UBS � �

Unicredit AG - �

Sector North America Europe

Consumer Services 30 22

Industrials 18 15

Consumer Goods 15 19

Utilities 6 16

Financials 22 15

Basic Materials 7 14

Telecommunications 3 13

Healthcare 9 2

Oil & Gas 9 4

Technology 9 1

As of June 13, 2011

Features of ICE Trust Clearing

� 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 supported

� World class risk management specifically designed for CDS

� Guaranty fund covers simultaneous default of 2 largest Clearing Participants (CPs)

� Over 300 cleared CDS products across US and Europe

Customer Protection


� 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

Expertise &Depth

� 15 dealers actively clearing today

� Managed numerous Credit Events, Succession Events and Matured Contracts

� Leading market connectivity processing thousands of trades daily

6

* The Dodd-Frank Act requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a Futures Commission Merchant (FCM) for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS

Agenda







� ICE Next Steps


7

Margin Segregation

CLIENT AGross IM

$2MM

� FCM required to collect the Gross Initial Margin (ICEMinimum Initial Margin) from each client

� Margin calculator available to clients to calculate Margin requirements – full transparency provided

� FCM required to post total Gross Initial Margin to ICE

Gross Margin is held at ICE, not at the Futures Commission Merchant/Broker Dealer

CLIENT A

Gross IM $2MM

CLIENT B

Gross IM $1MM


� FCM required to post total Gross Initial Margin to ICE

� FCM can charge an Excess Initial Margin

� 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

ICE-FCM Client Omnibus Account

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.

8

Risk Management Waterfall

Membership Criteria

Initial Margin Requirement

Ensure CP has sufficient financial resources, operational capabilities and risk management experience

Daily margin call based on dynamic stress test regime

Layers of Protection

1. Defaulting Buy-side Margin

2. Defaulting CP House Margin

3. Defaulting CP Guaranty Fund

Risk Management Waterfall*


Mark-To-Market Margin Requirement

Guaranty Fund

Intra-day Risk Monitoring Special Margin Call

Execution

Additional Assessment Rights

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

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)

*CP Default Related to Client Positions

9

Dynamic Stress-Based Regime

� JTD requirement based on expected losses of a defaultJump-To-Default

(JTD) Requirement

Summary Of Risks Captured by Model Components

Spread Response Requirement

� Risk associated with spread moves, curve shape changes and recovery rates

Initial Margin Requirement


Concentration Requirement

Liquidity/Basis Risk Requirement

� Risk associated with parallel moves in interest rates

� Costs associated with large position liquidation

10

� Total risk requirementInitial Margin Requirement

Interest Rate Risk Requirement

� Costs associated with Bid/Offer exposure upon portfolio liquidation

Agenda







� ICE next Steps


11

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

ICEAffirmation Platform


12

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

Multiple Platforms Supported Multiple Affirmation Platforms

Supported

(ICE Link, Bloomberg, Tradeweb,

MarketAxess, MarkitSERV)

Trades Cleared Intra-day on Near Real-Time

Basis

Agenda







� ICE Next Steps


13

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

Clearing will be mandated for standardized swaps as determined by the CFTC and SEC

Jurisdiction

Clearing Mandate

Key Provisions of the Dodd-Frank Act – Title VII


14

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

Execution

U.S. Customer Clearing

Margin Segregation

Areas of Impact

� 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 (SCA) on the effective date

� Clearing Participants must clear customer business through FCM/BD entity

� Portability and customer segregation governed by CFTC and SEC regulations

Legal Structure

Documentation

� 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

ICE Trust DCO/SCA Conversion


15

� CDS product will remain the same

� Upfront fees will be 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

� ICE Trust will seek to hold both indices and single names in the same OTC account class (Cleared OTC Derivatives Account Class 4(d)(f))

Customer Segregation

Product/ Infrastructure

Margin Methodology

Agenda







� ICE Next Steps


16

Q2 2011

� Rollout of additional single names

� ICE Trust and CPs operationally ready to support client clearing under the DCO/SCAModel

� Client testing under the DCO/SCAModel

Q3 2011

ICE Next Steps


� 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/SCAModel

17

Q3 2011

� Rollout of IG NA single names for client clearing

� Portfolio Margining (index/single names)

� Rollout of HY single names for CP-CP and client clearing

Agenda







� ICE Next Steps


18

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

The Margin Simulation Calculator is available for estimation of margin requirements:

Client Next Steps


19

1 Clearing Participants as of May 31, 2011 - Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Nomura, RBS, Société Générale and UBS. Unicredit AG is a Participant of ICE Clear only.

2 Connectivity providers include ICE Link, Bloomberg, Tradeweb, MarketAxess and MarkitSERV

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

ICE Website – www.theice.com

Regularly updated and provides information on Clearing Eligible Products, EOD Prices and Eligible Collateral

ICE Trust Circulars

Sign up for ICE Trust Circulars to receive updates directly from the clearinghouse at www.theice.com/subscribe

How to Stay Updated


20

ICE Trust Webinars

Webinars available on the website include: Margin Methodology, use of the Margin Simulation Calculator, Clearing Workflows, and Dodd-Frank Impact

ICE CDS Newsletter

Monthly newsletter summarizing ICE CDS developments. To subscribe, visit the ICE Subscription Center at www.theice.com/subscribe and choose Credit Derivatives from the Products menu

Link to ICE Trust Clearing Eligible Instruments:

https://www.theice.com/publicdocs/ice_trust/ICE_Trust_Contract_Roster.xls

Clearing Eligible Instruments available at theice.com


21

Link to ICE Clear Europe Clearing Eligible Instruments:

https://www.theice.com/publicdocs/clear_europe/ICE_Clear_Europe_Cleared_Products_List.xls

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 SerafiniLuciana Miranda

[email protected]@db.com


22

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 Kevin Collins [email protected]

UBSMark DanielsPaul Hamill

[email protected]@ubs.com

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


23

Hakan Guney [email protected]

Goldman Sachs Robert Forkan [email protected]

HSBC Anthony Normand [email protected]

JP MorganDale BraithwaitBrian Oliver

[email protected]@jpmorgan.com

Morgan StanleyOwain RobertsMark Bortnik

[email protected]@morganstanley.com

RBS William Knottenbelt [email protected]

UBSMarcus ButtPaul Hamill

[email protected]@ubs.com

Chris Edmonds

President

ICE Trust US

Email: [email protected] Office: 312-836-6810

Peter Barsoom

Chief Operating Officer

Paul Swann

President

ICE Clear Europe

Email: [email protected]

Office: +44 (0)20 7065 7615

Suzanne Hubble Director – CDS Development

ICE Contacts


24

Chief Operating Officer

ICE Trust US


Office: 212-323-8508

Corry Bazley

Director – Sales and Marketing

ICE Trust US


Office: 212-323-6022

Director – CDS DevelopmentICE Clear Europe


Office: +44(0)20 7065 7625

Documents

ICE Trust CDS Clearing DCO Model - the ICE · Costs associated with Bid/Offer exposure ... CDS clearing No separate ICE Trust Addendum for customer ... Act on ICE Trust CDS Clearing