OTC-IRS

Cleared OTC Interest Rate Swaps Security. Neutrality. Transparency.

May 2012

© 2012 CME Group. All rights reserved

OTC Product Progression

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CME Group OTC Clearing CME Group is the industry leader in OTC Clearing, delivering a broad offering spanning Interest Rates, Credit, FX, Energy, Metals, and Ags

Founded in 1898 as CME

#1 derivatives exchange in the U.S. and globally by volume

Global leader in exchange-traded markets with $3B in revenue

Leading liquidity / volumes in global benchmarks across all asset classes

Extensive and diverse distribution network and customer base

International linkages with leading global exchanges

Launched in 2002 to provide risk mitigation in energy markets following the Enron collapse

Market leading OTC Clearing venue for a diverse range of commodities asset classes

1,700 listed contracts

10,000 registered users around the world

500,000 contracts cleared daily

FX

2004 2008 2009 2010 2003 2011

Coal

2012

Electricity IRS, Freight, Iron Ore Natural Gas, Crude

CDS, Ags, Gold Ferrous Metals

2002

ClearPort Established

2007

Metals

CME Clearport CME Group

© 2012 CME Group. All rights reserved 3

CME Group OTC Clearing

Allows the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS positions against Eurodollar and Treasury Futures

Builds on the strength of CME Group’s market leading interest rate products business, which had an average daily volume of $3.6 trillion in 2011, and over $28 trillion of notional outstanding

Provides customers full transparency through direct access to daily valuation reports and the CME CORE margin tool

Operational flexibility of a multi-asset class solution for IRS, CDS, FX, and Commodities via one clearinghouse

Protects the confidentiality of trading relationships, while enabling customers to terminate positions with any market participant

CME Group has worked closely with buy side and sell side participants to build a multi-asset class, market leading OTC clearing solution

Over $558 billion in notional has cleared since launch and open interest is over $299 billion

Successful new product launches of EUR IRS which has cleared over €88.6 billion since launch, GBP IRS which has cleared over £11.1 billion since December 5th, CAD IRS which has cleared C$6.5B since December 5th, and the CDX HY Indices which have cleared over $18.1 billion since November 7th

1,800 active customer accounts with cleared trades, and an additional 2,500 customer accounts testing through our 16 clearing firms

Overview and Background

Benefits of the Solution


Record Customer Clearing Activity

Total Volume Cleared = $441.7 billion

Open Interest = $262.2 billion

Total Volume Cleared = $116.9 billion

Open Interest = $36.9 billion

Credit Default Swaps Interest Rate Swaps

Note: Data current as of 5/8/12

CME Group has built the leading OTC IRS and CDS clearing service by U.S. customer volume

EUR IRS cleared €88.6 billion since it launched on October 17th

GBP IRS cleared £11.1 billion since it launched on December 5th

CDX High Yield Indices have cleared $18.1 billion since they launched on November 7th

Strong Performance of Newly Launched Products

$0

$70

$140

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Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12

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CDS Volume CDS Open Interest


EXISTING PRODUCTS

• USD Fixed/Float out to 50 years- 1M, 3M and 6M LIBOR indexes • EUR Fixed/Float out to 50 years- 3M and 6M EURIBOR indexes • GBP Fixed/Float out to 50 years- 3M, 6M LIBOR index • CAD Fixed/Float out to 30 years- 3M CDOR index • JPY Fixed/Float out to 30 years- 6M LIBOR index • CHF Fixed/Float out to 30 years- 6M LIBOR index • AUD Fixed/Float out to 30 years- 3M, 6M BBSW index

2012 EXPANSION

• OIS Product: USD, GBP, EUR, and JPY OIS out to 30 years • Zero Coupons Swaps: USD, GBP, EUR out to 50 years

• Maturity out to 30 years for SEK, DKK, NOK, HKD, NZD, SGD

• Basis Swaps, and Zero Coupon Swaps in USD, EUR, and GBP

• Amortizing Swaps in all currencies

OTHER FUTURE PRODUCTS

• Additional Currencies

• Swaptions, Caps, Floors, FRAs, Cross Currency Swaps, and Inflation Products

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CME has delivered a comprehensive global product scope that includes the 7 currencies that account for 95% of vanilla IRS market

* Notional amounts outstanding received from Bank of International Settlements, December 2010

IRS Product Rollout

CHF AUD JPY USD EUR GPB CAD

July

4th Quarter SEK DKK NOK HKD NZD SGD


CME Clearing

Bank of America Barclays

Open Access Clearing Solution Several market leading affirmation platforms and Swap Execution

Facilities have already connected directly to CME Clearing

BNY Mellon

BNP Paribas Credit Suisse Deutsche Bank

Goldman Sachs JPMorgan Morgan

Stanley Nomura

RBS PLC

UBS

RBS Securities

OTC IRS/CDS Clearing Members

Additional OTC IRS Clearing Members

Negotiate, execute, and submit trades through multiple venues to CME Clearing

Straight through processing and real-time confirmation once the trade is cleared

Protects the confidentiality of trading relationships, while enabling customers to terminate positions with any market participant

Operational flexibility of a multi asset class solution for IRS, CDS, FX, and Commodities via one clearinghouse

Citigroup

ICE Link CME ClearPort Javelin MarkitSERV Bloomberg CDS Migration Utility TradeWeb

Wells Fargo HSBC


Trade Workflow Mechanics

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Straight Through Processing allows for real-time clearing and trade confirmations

1 – Dealer and Client agree to trade

2 – Dealer alleges swap to Client through the Affirmation Platform

3 – Client selects Clearing Member and verifies the swap through the Affirmation Platform

4 – Affirmation Platform sends the matched trade between Dealer and Client to CME Clearing House

5 – CME checks for validation of the product, account and applies credit limits set by Clearing member(s), and then accepts the swap for clearing

5 – CME sends “Cleared” notification back to the Affirmation Platform which displays the “Cleared” Status to each party

5 – CME sends a Clearing Confirmation to Clearing Member(s) once all is validated

Client Dealer

Affirmation Platform

1

2 3

4 5

Clearing Member (Client)

Clearing Member (Dealer)

CME Clearing House

Product Account Credit 5 5


Transparent Valuation and Reporting

VALUATION OVERVIEW USD IRS positions will be marked to market once per day at 3pm EST

Pricing inputs obtained from wire service feeds

CME Group utilizes OIS discounting, monotone convex interpolation, and Bootstrap Generator to produce a Zero Coupon curve

PRICING INPUTS LIBOR: O/N, T/N

FRA: 0 x 6

CME Eurodollars – first 6 Quarterly Eurodollar contracts, convexity adjusted

Par Swap Rates: 2Y – 10Y, 15Y, 20Y, and 30Y (SA, 3M LIBOR)

REPORTING CME Group provides customers with full transparency including direct access to daily

reports showing curve inputs, daily discount factors, and valuations for each cleared swap position

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Customers have full visibility into CME Group’s swap valuations


Details of Customer Reports

Report Description Time Available in Testing

Available in Production

Preliminary Trade Register

Includes new and open trades as well as corresponding cash flows on positions cleared prior to 4:45pm EST on that day

4:45pm EST

End of Day Trade Register

Includes new and open trades as well as corresponding cash flows on positions cleared on that day

8:00pm EST

Curve Input Report

Contains the curve inputs of the CME Swap Curve

4:30pm EST

Discount Factor Report

Displays the daily discount factor out to 31 years

4:30pm EST

CME Holiday Calendar

Shows the CME Holiday Calendar 3:00pm EST

Price Alignment Interest (PAI) Rate File

Provides the rate used to calculate PAI 1:00pm EST

The above reports can be accessed through a secure FTP site. Please contact CME’s Onboarding Team at (312) 338-7112 or [email protected] to gain access.

mailto:[email protected]


• Expected to cover extreme scenarios that are optimally addressed using a mutualized pool rather than margins

• GF Sizing considerations include risk, capital usage and charges , stakeholders’ incentives, and portability concerns during periods of default

• Additional collateral that can be called upon should all previous layers of the waterfall are exhausted

• Caps the limited resource waterfall

• Contribution set aside by CME to help cure a default prior to dipping into the survivors’ funds

• Each Member’s contribution to the GF

• Liquidity charge accounts for protecting large concentrated portfolios whose closeout could cost more or take longer than baseline timeframe

• Initial Margin is used to cover day-to-day P/L moves

1 The actual amounts will be based on the sum of the third and fourth largest net debtor profiles

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IRS Non-Defaulting CMs Guaranty Fund

General Assessment Powers for IRS1

CME Contributed Capital for IRS $100M

Defaulting Member IRS Guaranty Fund

Baseline Initial Margin

Liquidity Charge

FUN

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FUN

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S

SU

RV

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Robust Financial Safeguards CME structured the IRS risk waterfall to protect our customers during times of market stress and mitigate systemic risk


Superior Customer Protections

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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

Strong history of risk innovation, crisis management, and a deep understanding of issues related to customer protection in the US agency model

Comprehensive approach towards default management, utilizing industry best practices, industry expertise, and default exercises to ensure readiness in a market crisis

ROBUST GUARANTY FUND Key layer of protection in the US Clearing market that serves as a “capital reserve” buffer during times of

market stress and protects against systemic risk associated with catastrophic market events

Sized to cover the simultaneous defaults of the 2 largest FCMs, according to the results of stress tests, which include all extreme historical events as well as “black swan” stress scenarios

Allocated between different FCMs pro-rata according to the residual risk not covered by margins. This allocation mechanism further provides incentive to risk diversification across FCMs

CME Clearing is the industry leader in mitigating risk for customers through the US FCM clearing model


Customer Account Portability

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Portability of customer positions and collateral is a cornerstone of CME customer protections

• Clients maintaining accounts at multiple clearing members are able to control the timing and pacing of their porting transactions

• In the agency model, clients “own” their positions

• The agency model supports portability; at CME this is a matter of routine and standard practice

CUSTOMER CONTROLLED PORTABILITY “TRANSFERS”

Establishing and managing accounts at multiple clearing members

• In September 2008, CME seamlessly ported all $2.2 billion of customer funds and 2.5 million customer positions from Lehman Brothers to a solvent clearing member

• In wholesale porting transactions, CME balances the need to assure client safety with recalibration of financial safeguards to minimize stress in the financial system

PROVEN SUCCESS IN CUSTOMER PORTABILITY

Wholesale porting from stressed to solvent clearing members

• Portability is essential to customer protection, both in times of market stress and during the normal course of business

• Portability is underpinned by CME Rule 853, governing transfers of trades


IRS Portfolio Margining

CME will offer capital efficiencies via portfolio margining for OTC IRS and

select Interest Rate Futures

CME CORE will be enhanced to calculate: IRS HVaR, Futures with SPAN and Portfolio

Margin of Futures and IRS with HVaR

Trade Execution workflows in Interest Rate Futures and OTC IRS remain the same

CME working with Clearing Members on Straight Through Processing Solutions

CME Interest Rate Swaps

Portfolio Margining expected to launch for house accounts on May 7th, 2012

Portfolio Margining

U.S. Treasury Futures

Eurodollar Futures

*Customer Portfolio Margining is targeted for 2H 2012 pending regulatory approval.

Customers will have the ability to move select CME Interest Rate Futures into

Cleared Swaps Customer Account


Methodology

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IRS Margin Methodology

Historical VaR

Margins built to provide 99% coverage over a 5-day closeout period Historical scenarios are: Generated using a 5-year look back period Synchronized across all observed tenors on the zero curve, across all currencies Scaled using Exponentially Weighted Moving Average (EWMA) based volatility forecasts

Margin is currently the 99.7th % of portfolio changes (loss) across all scenarios

For cross margining Eurodollar and Treasury Futures with IRS, CME will leverage the current multi-currency Historical VaR framework

Reasoning

CME uses Treasury Future prices and Eurodollar prices (themselves) as an underlying risk factor, as it accounts for risks including: Switch of the Cheapest-to-Deliver (CTD) (applies Treasury Futures) Delivery timing (applies to Treasury Futures) Changes in the convexity adjustment (applies to Eurodollars) Covers extremely well-hedged portfolios (applies to Eurodollars)

Application Apply HVaR methodology to Eurodollar and Treasury futures prices Create a rolling time series of returns (prices)

*Customer Portfolio Margining is targeted for 2H 2012 pending regulatory approval.


Portfolio Margining Examples

Portfolio Portfolio Details Margin Savings Margin Savings Details ($M)**

Max* Average* Margined Separately

Margined Together

2Y Invoice Spread

2Y Treasury Note Futures vs Equivalent Invoice Swap 79% 64% .8M .2M

5Y Invoice Spread

5Y Treasury Note Futures vs Equivalent Invoice Swap 79% 68% 1.9M .4M

10Y Invoice Spread

10Y Treasury Note Futures vs Equivalent Invoice Swap 75% 58% 4.9M 1.2M

30Y Invoice Spread

Treasury Bond Futures vs Equivalent Invoice Swap 67% 41% 6.5M 2.1M

2Y Swap vs ED Hedge 2Y IRS vs Weighted Eurodollar 2Y Strip 89% 72% 100K 10K




Maximum savings is up to 89%, based on back testing of portfolios from 2006 to 2011.

* Savings = [Gross Margin – Net Margin] / Gross Margin, where Gross Margin is the outright swap HVaR margin plus the futures SPAN margin (no offset benefit) and Net Margin is margining both swaps and futures in HVaR (with offset benefit).

** Values are rounded to nearest hundred thousand or ten thousand Dollars. These values do not include transaction costs and are subject to change, depending on market volatility.

*** Customer Portfolio Margining is targeted for 2H 2012 pending regulatory approval.


Transparent Margins Through CME CORE

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CME CORE (CME Online Risk Engine) enables customers to calculate and evaluate their initial margin requirements for IRS and CDS

Create New or Load Existing

Portfolio

Validate and Calculate Initial

Margin Requirement Analyze and Review

Results

PHASE I: Transparency • Margin computation • PNL reporting • Curve scenario reporting

** Future enhancements

PHASE II: Analytics** • Delta ladder • Stress testing • Incremental VaR • Analytics to support back-loading

ENHANCE REPORTS TO INCLUDE ELIGIBLE DISCRIPTIVE DATA


Flexible Collateral for Initial Margin

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CME Clearing accepts a broad array of collateral for the Customer OTC Account Class

Collateral Haircut

US Cash None

Non-US Cash (EUR, GBP, CAD, AUD, JPY, CHF)* 5%**

Sovereign Debt of UK, Germany, France, Canada, Japan, and Sweden

5%-10.5% (maturity based) Additional 1.5% for off-the-runs

US Treasury Debt 0.5%-11% (maturity based) Additional 1.5% for off-the-runs

US Agency Debt 3.5%-7% (maturity based) Additional 1.5% for off-the-runs

US Agency Mortgage Backed Securities 11%

Corporate Bonds (IEF4) 20%

Money Market Mutual Fund (IEF2) 3%

Bank Deposit Program (IEF5) None *The last three currencies are available for IRS only. ** Haircut is only applied when cash is used to meet a margin requirement based in a different currency.


Corporate Bond Collateral Program Clearing Members can transfer securities into a tri-party account controlled by CME at either bank* as a term pledge to receive initial margin credit

*The Corporates Collateral Program, IEF4, is supported by a partnership with Bank of New York and JPMorgan Chase

• Allows corporates bonds to be pledged as initial margin collateral for both Cleared IRS and futures • Reduces costs of clearing for customers and creates further efficiencies for Clearing Members

Overview

• High quality bonds, at least A- rating by NRSO • USD denominated, both domestic and global issuances • Vanilla Bonds (Fixed rate bullet, callable, or putable) • Over $300M in principal outstanding • TRACE eligible

Bond Requirements

• Haircut: (20%) • Concentration Limits: The lesser of 5% per issuance and 5% per issuer or $200M • Level II industry diversification (up to 25%)

Program Parameters

• CME Clearing will publish a list of eligible CUSIPs at the beginning of each month • CUSIP list will likely remain static except bonds that mature, and bonds that are deemed ineligible due to

changes (i.e. rating downgrade, distress, etc)

Eligible CUSIP List


Customer On-boarding Resources CME CORE Margin Tool

Web-based margin tool that enables customers to generate initial margins for IRS and CDS portfolios

CME CORE can be accessed by doing the following:

• Create a CME SMART Click ID at https://cmecore.cmegroup.com/span/

• Once a SMART Click ID is attained, please email [email protected] to request entitlements to CME CORE. Specifically, in an email please provide the user ID and specify the request for the IRS/CDS asset classes.

• Please ensure your desktop is equipped with a recent version of Microsoft Silverlight (MS Add On): http://www.microsoft.com/getsilverlight/Get-Started/Install/Default.aspx

CME On-boarding Team

Team of on-boarding experts who work with buy side clients to help them prepare to clear IRS and CDS, and engage in testing the clearing process

Extensive work with the affirmation platforms, and ability to connect customers to the right resources at those firms

The team can be reached at (312) 338-7112 and [email protected]


Legal Documentation Documentation between CME Group and Customer

Exchange User License Agreement (EULA)

• New customers must register their firm(s) online via the CME Exchange User License Agreement (EULA), which may be found at: http://www.cmegroup.com/clearport/registration.html

• Investment Advisors and Fund Managers can take advantage of an alternative registration process which offers the flexibility to register managed funds, provided it has the authority to do so, by notifying the CME ClearPort Facilitation Desk via email at [email protected]

Documentation between Clearing Member and Customer

Clearing Member Futures Account Agreement (FCM Agreement)

Clearing Member OTC Addendum

Documentation between Customer and Execution Counterparty

OTC Execution Agreement

The FIA and ISDA published a template that market participants can use as a basis for negotiation: http://www.futuresindustry.org/fia-and-isda-publish-documentation-for-cleared-swaps.asp

http://www.futuresindustry.org/fia-and-isda-publish-documentation-for-cleared-swaps.asp


Establish a relationship with a participating CME IRS Clearing Member Select affirmation platform and work with Clearing Member throughout testing cycles

Complete required Clearing Member Customer Documentation

Begin clearing trades

For any questions regarding On-Boarding and Testing, please contact : On-boarding Team 312 338 7112 [email protected]

For general information, please contact: Jack Callahan 312 454 8312 [email protected] Steve Dayon 312 466 4447 [email protected]

Europe Jonathan Boyd +44 20 3379 3726 [email protected]

Asia Way Yee Bay +65 6593 5560 [email protected]

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Next Steps and Contact Us


Firm Contact Name Email Phone Number Bank of America Merrill Lynch

Todd D’Agosta (US) Ed Allen (EMEA)

[email protected] 646 855 9813 646 855 6506

Barclays Sandy Fleischman Patrick Corrigan

[email protected] [email protected]

212 526 6548 212 526 7101

BNP Paribas Avi Pemper Gavin Dixon


212 841 3753 44 20 7595 8417

BNY Mellon Sanjay Kannambadi Vipul Pal


212 635 6927 212 635 8359

Citigroup Chris Perkins Mariam Rafi


212 723 5943 212 723 4074

Credit Suisse Neil Burke John Guthrie


212 538 0761 212 325 4535

Deutsche Bank Elliot Barr Luciana Miranda


212 250 9831 212 250 8845

Goldman Sachs Mike Dawley Jack McCabe


212 902 7582 212 902 3037

HSBC Julianna Salazar Nick Marcelle


212 525 2353 44 20 7991 9132

JPMorgan Piers Murray Catherine Bartzos


212 270 5445 212 834 3105

Morgan Stanley Jason Swankoski Mark Bortnik


212 761 5206 44 20 7677 9685

Nomura Sandeep Kohli Stephen Scalzo


212 667 2037 212 667 8981

RBS Brian Halligan (RBS SI) Madlen Dorosh (RBS SI)


203 897 2504 203 897 9869

UBS Ed Pla Reinhardt Olsen


203 719 2602 203 719 3408

Wells Fargo Jeff G. Gore Dan Thomas


704 715 0528 704 374 2103

Cleared OTC IRS Clearing Firm Contacts

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Disclaimer

Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade.

All references to options refer to options on futures.

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX is a registered trademark of the New York Mercantile Exchange, Inc. All other trademarks are the property of their respective owners.

The information within this brochure has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules. Current rules should be consulted in all cases concerning contract specifications.

Copyright © 2012 CME Group. All rights reserved.

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Documents

OTC-IRS