The Clearing Corporation: Best Practices August 11, 2005

The Clearing Corporation:Best Practices

August 11, 2005

Proprietary & ConfidentialApr 22, 2023Page 2

The Clearing Corporation (CCorp) CCorp is an independent clearinghouse incorporated in 1925,

under the laws of the State of Delaware. CCorp’s independence serves to ensure that its decisions are based purely on promoting the safety and soundness of the marketplace.

CCorp is currently owned by some 50 stockholders, consisting of domestic and international banks, commercial firms, investment houses, futures commission merchants, broker-dealers, and sole proprietors.

Clearing participants are not required to hold shares of CCorp stock in order to clear through The Clearing Corporation; rather, they pledge a contribution to the Guaranty Fund, based on trading activity.

CCorp reduces counterparty risk by interposing itself between the clearing participants to a transaction


Risk Management Strategy

Admission Standards Position Monitoring and Surveillance Original Margin Variation Settlement Financial Reporting and Surveillance Stress Testing Net Settlement Trigger Points Participant Oversight


Admission Standards Stringent, initial and ongoing, credit related

qualifications for participants The participant admission process and related

standards are CCorp’s first line of defense in managing counterparty risk. The objectives are to ensure that: Only credit-worthy parties are allowed to participate. Every similarly situated applicant for participation is

treated equally. Each applicant for participation is not accepted until a

comprehensive initial credit review has been conducted. Each applicant required to have a sound back office facility

and experienced staff.


Position Monitoring and Surveillance

Each clearing participant must regularly post sufficient collateral (margin) to cover the expected daily market move

Intra-day Position monitoring Regular financial reporting requirements

and surveillance practices


Original Margin

Margin levels Margin deposits are used to collateralize the risk of

an adverse price change

Covers 95% to 99% of historical one-day price moves

Qualifications Active secondary market that provides sufficient

liquidity Accurate, reliable, and timely quotation system Clearing Corporation must be capable of obtaining a

perfected security interest


Monthly Margin ApplicationFrom 01/30/04 to 07/29/04

SPAN Parameters Statistical SummaryLast Last Chart

Product US Bond 30 Days 90 Days ContentsMargin Interval 1700 # Observations 30 90 125

Extreme Factor 3x Maximum $1,468.75 $2,250.00 $2,281.25Extreme Collection % 32% Minimum -$1,468.75 -$2,531.25 -$2,531.25

Mean (Abs.) $441.81 $526.99 $506.4095% Probability $1,359.15 $1,438.33 $1,407.3899% Probability $1,669.12 $1,724.75 $1,690.55

99.7% Probability $1,787.54 $1,921.89 $1,885.45

Absolute Price Change

Price Chart

Prices

$0$237$474$711$949

$1,186$1,423$1,660$1,897$2,134$2,371$2,608$2,846

2/2

4/18

7/3

Dol

lar/C

ontr

act

103

105

107

109

111

113

115

117

Jan-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04


ACCEPTABLE FORMS of ORIGINAL MARGIN Cash Treasury Securities Foreign Sovereign Debt Letters of Credit Common Stock Money Market funds Municipal Bonds Corporate Bonds Commercial Paper Government Agency Securities and debt


Variation Settlement

Clearing participants’ net positions are marked-to-market at least twice every trading day.

Mitigates the risk of loss accumulation.


Stress Testing

An annual study covering 10 years of the price change history is used to determine the appropriate stress testing intervals.

To show the market risk associated with the worst-case scenario due to a participant default.

Stress tests of each participant’s proprietary and customer positions are run daily to evaluate the potential exposure to each firm.


Reports for Accessing Clearing House Exposure

The Clearing CorporationEvent Stress-Testing Risk by Scenario

Scenario 1 - Fin Risk Vol Up +1 - Equity Risk Vol Up +1 Scenario 2 - Fin Risk Vol Up -1 - Equity Risk Vol Up +1Scenario 2

Firm Clearing Participant CP ShortFall % of Risk Firm Clearing Participant CP ShortFall % of Risk1 xxxxxxx (25,338,895) 34.96% 1 xxxxxxx (21,320,327) 21.15%2 xxxxxxx (2,250,104) 5.24% 2 xxxxxxx (1,606,500) 1.85%3 xxxxxxx (238,375) 1.44% 3 xxxxxxx (1,581,386) 1.21%4 xxxxxxx (10,250) 0.00% 4 xxxxxxx (1,126,000) 4.00%5 xxxxxxx - 0.58% 5 xxxxxxx (482,162) 0.33%6 xxxxxxx - 0.04% 6 xxxxxxx (227,125) 0.20%7 xxxxxxx - 2.77% 7 xxxxxxx (145,375) 2.77%8 xxxxxxx - 0.07% 8 xxxxxxx (30,000) 0.01%9 xxxxxxx - 0.06% 9 xxxxxxx - 0.58%

10 xxxxxxx - 1.02% 10 xxxxxxx - 0.00%11 xxxxxxx - 0.26% 11 xxxxxxx - 0.04%12 xxxxxxx - 1.27% 12 xxxxxxx - 0.07%13 xxxxxxx 16,500 0.17% 13 xxxxxxx - 0.06%14 xxxxxxx 30,000 0.01% 14 xxxxxxx - 1.02%15 xxxxxxx 130,038 0.02% 15 xxxxxxx - 0.26%16 xxxxxxx 199,156 0.02% 16 xxxxxxx - 1.27%17 xxxxxxx 493,910 1.13% 17 xxxxxxx 117,500 0.17%18 xxxxxxx 746,168 0.92% 18 xxxxxxx 199,156 0.02%19 xxxxxxx 1,028,125 0.20% 19 xxxxxxx 238,375 1.44%20 xxxxxxx 1,475,588 0.33% 20 xxxxxxx 267,538 0.02%21 xxxxxxx 2,171,165 1.21% 21 xxxxxxx 493,910 1.13%22 xxxxxxx 2,369,500 8.15% 22 xxxxxxx 746,168 0.92%


Multiple Strategy Position Risk Advisor


Multi-Layered Stress Testing Account Structure


Strategy Statistic for Products


Flexible Stress-Testing Report


Intraday Liquidity Trigger Points

Intra-day settlement risk Risk that a clearing participant will be unable

to pay the variation settlement arising from intra-day trading losses.

Limits on the amount of credit risk that The Clearing Corporation will assume on an intra-day basis.

Intraday liquidity trigger point established for each clearing participant.

Each clearing participant is monitored throughout the business day on a real-time basis.


Participant P/C’s May Also Be Viewed In Detail

Multi-Currency Real-Time Risk Monitoring


Participant Oversight

A clearing participant’s creditworthiness may deteriorate subsequent to their admission to CCorp. In this case, the objectives would be: To impose financial reporting requirements. To establish financial responsibility criteria To establish and impose a progressive set of responses

in the event a participant’s creditworthiness declines. Financial watch level criteria (i.e., declines in

adjusted net capital) Market risk watch level criteria (i.e., risk-based

margin requirement as a percent of adjusted net capital)


Firm Capital Manager Detail Review FCM

Firm Capital Manager

Intl. 1-FR v.1 Intl. 1-FR v.1 Intl. 1-FR v.1 Intl. 1-FR v.1 Intl. 1-FR v.106/30/04 05/31/04 04/30/04 03/31/04 02/29/04

Net Capital 296,071,170$ 285,881,251$ 283,214,492$ 274,362,554$ 263,212,975$ Adjusted Net Capital 248,269,604 242,728,653 238,288,187 234,347,406 223,636,835 Excess Net Capital 118,121,830 116,928,447 113,981,235 98,025,459 95,555,271 Ownership Equity 420,060,188 416,891,206 410,261,493 406,406,944 400,720,353 Net Income / (Loss) 3,168,982 6,629,713 3,854,549 5,686,591 3,990,996

Regulatory Requirement (Greater of A or B) 130,147,773 125,800,205 124,306,951 136,321,946 128,081,563 A. $250,000 250,000 250,000 250,000 250,000 250,000 B. 4% of Seg / Secured Funds Adjusted For Long Options 130,147,773 125,800,205 124,306,951 136,321,946 128,081,563 Excess / (Deficiency) Regulatory Requirement 118,121,831 116,928,448 113,981,236 98,025,460 95,555,272

Clearing Corp. Requirement (Greater of A or B) 135,715,238 135,966,936 131,529,515 2,500,000 2,500,000 A. $2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 2,500,000 B. 8% of Customer / 4% of Non Customer Risk Maint. Margin Req. 135,715,238 135,966,936 131,529,515 - - Excess / (Deficiency) Clearing Requirement 112,554,366 106,761,717 106,758,672 231,847,406 221,136,835

Early Warning Level (150% of Regulatory Capital Requirement) 135,715,237 135,966,936 131,529,514 204,482,919 192,122,344 Excess / (Deficiency) Early Warning 112,554,367 106,761,717 106,758,673 29,864,487 31,514,491

Equity Withdrawal Restriction (Greater of A, B, and C Plus D and E) 227,758,604 220,150,360 217,537,165 238,563,406 224,142,735 A. 120% of Regulatory Minimum 156,177,328 150,960,246 149,168,341 163,586,335 153,697,876 B. $375,000 375,000 375,000 375,000 375,000 375,000 C. 7% of Seg / Secured Funds Adjusted For Long Options 227,758,604 220,150,360 217,537,165 238,563,406 224,142,735 D. Capital To Be Withdrawn Within 6 Months 0 0 0 0 0 E. Subordinated Debt Maturing Within 6 Months 0 0 0 0 0

Amount Required To Be Segregated (US exchanges) 3,612,282,368 3,560,301,389 3,476,387,495 3,791,760,436 3,442,461,824 Total Amount In Segregation 3,867,837,663 3,839,130,279 3,753,671,735 4,071,805,102 3,669,848,717 Excess / (Deficiency) Funds In Segregation 255,555,295 278,828,890 277,284,240 280,044,666 227,386,893

Amount Required To Be Secured 78,205,524 77,797,718 92,835,408 100,946,399 124,788,904 Total Amount Secured 143,318,461 141,216,791 133,680,222 150,617,056 153,244,144 Excess / (Deficiency) Secured Funds 65,112,937 63,419,073 40,844,814 49,670,657 28,455,240

ANC Below Early Warning No No No No NoANC Below Equity Withdrawal Minimum Capital No No No Yes YesANC Below Regulatory Requirement No No No No NoANC Below Clearing Corp. Requirement No No No No NoIs The Firm Undersegregated? No No No No NoIs The Firm Undersecured? No No No No NoNet Capital Change (Period) 3.6% 0.9% 3.2% 4.2% --Net Capital Change (Quarter) 7.9% 8.6% -- -- --Adjusted Net Capital Change (Period) 2.3% 1.9% 1.7% 4.8% --Adjusted Net Capital Change (Quarter) 5.9% 8.5% -- -- --Excess Net Capital Change (Period) 1.0% 2.6% 16.3% 2.6% --Excess Net Capital Change (Quarter) 20.5% 22.4% -- -- --Ownership Equity Change (Period) 0.8% 1.6% 0.9% 1.4% --Ownership Equity Change (Quarter) 3.4% 4.0% -- -- --Net Loss As A Percentage of ENC (Period - Month, Quarter, Etc.) -- -- -- -- --Seg / ANC Ratio 13.1 13.0 13.0 14.5 14.3CFTC Debt / Equity Ratio 96.3% 96.3% 96.2% 96.2% 96.2%SEC Debt / Equity Ratio 3.7% 3.7% 3.8% 3.8% 3.8%

Month-By-Month

Print Detailed Summary


Summary CCorp’s best practices have evolved over 80 years

to keep up with changing market conditions, business practices, new products, and technology.

CCorp principally minimizes risk by convert market risk to a series of operational best practices that monitors and reduces exposures.

CCorp is highly technological and utilizes proprietary software to reduce the time and risks inherent in acting as a central counterparty.

Documents

The Clearing Corporation: Best Practices August 11, 2005