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OTC Clearing Special Event

OTC Clearing Special Event. November 2010. CME Group Overview. Global Leader. Seasoned leadership Customer focused and global partner of choice AA Rating placing it in top 15 of S&P 500. Financial Security of CME Clearing. Leading risk management practices

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OTC Clearing Special Event

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  1. OTC Clearing Special Event November 2010

  2. CME Group Overview Global Leader • Seasoned leadership • Customer focused and global partner of choice • AA Rating placing it in top 15 of S&P 500 Financial Security of CME Clearing • Leading risk management practices • Separate Default Fund for OTC instruments • Portfolio margining OTC Clearing Services • Multi-asset class product line • Same FCM relationship as Listed Futures • Same legal and operational infrastructure Highly Efficient Markets • Diverse customer base • Point of trade clearing • Operational and cost efficiency

  3. Bilateral Market vs. Central Counterparty Clearing Bilateral Market without Central Clearing Counterparty Market with a Central Clearing Counterparty CME Clearing faces each counterparty directly, becoming the seller to the buyer and buyer to the seller through novation Buyer and seller are guaranteed performance by CME Clearing Buyer and seller no longer have credit exposureto one another Parties closeout transactions with whomever provides the best price Buyer Buyer Seller Seller CME Clearing Buyer Buyer Seller Seller • Multiple bilateral relationships where buyers and sellers face each other as counterparties • Sellers must accept each buyer’s credit • Buyers send payment directly to each seller • Buyers must accept each seller’s ability to perform on the contract • Pricing is differentiated by qualityof counterparty • If either party wants to close out a deal prior to expiry, they must negotiate terms Buyer Buyer Seller Seller

  4. 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 Default Management Client positions and margin held at CME Clearing may be ported to a non-defaulting clearing member firm Positions of the defaulting firm may be auctioned and/or liquidated in accordance with CME rules Portability Clients can transfer positions and associated margin to another clearing firm upon request CME Rule 853 (“Transfers of Trades”) covers CME’s terms under which trades may be transferred Portability of Customer Positions & Margin in the Event of a Clearing Member Default CME Group Portability of Customer Accounts CME Clearing Defaulting Clearing Member Non-Defaulting Clearing Member Buy-side Firm

  5. CME Group Customer Protection Mechanism • Any bankruptcy of a FCM Clearing Member would be governed by U.S. Bankruptcy Code and CFTC regulatory framework (Part 190 Bankruptcy Rules) • Mandated separation of customer positions and property from the positions and property of the clearing firm per CFTC account class • Customers funds and positions in defined account classes are not property of the debtor’s estate in a FCM bankruptcy • Recently, the CFTC amended its Part 190 bankruptcy rules to create a new customer account class for “cleared OTC derivatives” • New CFTC Part 190 Rules provide customer protection parallel to the existing 4d/futures account class • CME adopted new rules for the OTC account class which mirror CFTC regulations for the 4d/futures account class, including but not limited to rules regarding separation of customer and FCM assets and investment of customer funds • In early October 2010, CME implemented new rules with substantive requirements for the treatment of customer “cleared OTC derivatives” that are cleared by CME * See the New OTC Derivatives Account Class Q&A document on the CME Group website for more information.

  6. CME Group OTC Initiatives • Working in close collaboration with premier swap dealers, clearing firms, and buy-side market participants to create a best in class clearing solution for OTC derivatives • Builds on the strength of CME Group’s core business • Maintains current execution processes, affirmation platforms, and product economics of bilateral OTC contracts • Protects customers through legal safeguards of U.S. bankruptcy law and CFTC Part 190 Bankruptcy Regulations • Provides operational flexibility and efficiencies of an integrated, multi asset class solution • Point of trade clearing • Cash flow netting • Streamlined legal documentation • For OTC IRS, seeking CFTC permission to allow customer capital efficiencies via cross margining of OTC products with benchmark Treasury and Eurodollar futures

  7. Cleared OTC IRS Product Scope

  8. CME Cleared OTC Open Access Platform Clearing OTC trades real-time throughout the day, every day, providing immediate cleared trade confirmation, significantly reducing counterparty credit exposure CME OTC Cleared Trade Submission Model MarkitServ Bloomberg TradeWeb Other 3rd Party Platforms ClearPort CME Clearing IRS Clearing Member (FCM) IRS Clearing Member (FCM) CDS Clearing Member (FCM) CDS Clearing Member (FCM) • CME Cleared OTC Cross-Asset Class Benefits • Negotiate, execute, and submit trades through multiple venues to CME Clearing • Straight through processing and T+0 confirmation • Full life cycle trade management by CME Clearing • More than 100 years of experience in clearing, settlement and risk management • Compression capabilities that reduce systemic risk (currently available for CDS and planned for IRS)

  9. Cleared OTC IRS: Trade Workflow Mechanics Client EB 1 Affirmation Platform 3 2 1 – Client executes swap with Executing Broker (EB) 4 5 2 – EB alleges swap to Client CME Clearing House Product  Account Credit Product  Account Credit 3 – Client selects Clearing Member and affirms swap 4 – Affirmation Platform sends matched trade to CME for Clearing 5 5 5 – After validating product, account and applying credit limits set by Clearing member(s), CME accepts swap for clearing  Clearing Member (Client) Clearing Member (EB) 5 – CME sends “Cleared” notification to Affirmation Platform which displays trade status to principals 5 – CME sends a Clearing Confirmation to Clearing Member(s) Validations, notifications and confirmations are real-time and allow Straight Through Processing

  10. Cleared OTC IRS: Next Steps and Contact Us • Getting Started • Establish a relationship with a participating CME IRS Clearing Member • Discuss and agree on trade capture options and trade flow • Complete required Clearing Member Customer Documentation • Work with Clearing Member throughout testing cycles • Begin clearing trades • For more information, please contact: • North America • Jack Callahan (312) 454-8312 jack.callahan@cmegroup.com • Steve Dayon (312) 466-4447 steven.dayon@cmegroup.com • Europe • Robert Hammond +44-207-796-7100 robert.hammond@cmegroup.com • Asia • Way Yee Bay 656-593-5560 wy.bay@cmegroup.com

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