central clearing webinar - home - eversheds sutherland … · 2018-05-17 · benefits of cme...
TRANSCRIPT
2©2010 Sutherland Asbill & Brennan LLP
Agenda
Welcome and Opening RemarksRobin Powers, Sutherland
Dealers in the Clearing ProcessAlessandro Cocco, J.P. Morgan
Products and Operational ProcessCorry Bazley, ICE TrustMark Cox, CME Group
Energy/CFTC IssuesMichael Brooks, Sutherland
Legal and Credit IssuesWarren Davis, SutherlandPaul Turner, Sutherland
Q&A
3©2010 Sutherland Asbill & Brennan LLP
Welcome
Welcome
Overview of Current Environment
Introduction of SpeakersAlessandro Cocco, J.P. MorganCorry Bazley, ICE TrustMark Cox, CME GroupMichael Brooks, SutherlandWarren Davis, SutherlandPaul Turner, Sutherland
8©2010 Sutherland Asbill & Brennan LLP
Dealers in the Clearing Process
Client
ED CM
CH
Client A/CHouse A/C
X
X
9©2010 Sutherland Asbill & Brennan LLP
Dealers in the Clearing Process
Client
ED CM
CH
Client A/CHouse A/C
IM CM Client A/C
IM CM House A/CIMED House
A/C
IM
IM
IM
X
X
Products and Operational ProcessCorry BazleySenior Sales North America
Mark CoxDirector, CME Clearing Solutions
11©2010 Sutherland Asbill & Brennan LLP
• Financial safeguards• Transparent daily margining• Multilateral position netting
• Collects margin, processes mark to market from clients in accordance with CME Clearing policies & other regulatory requirements
• Customer positions and margin held in segregated account
• Collateral and Positions protected through segregated accounts
• Margins calculated on net portfolio basis
CME Clearing
Clearing Member
Buy-side Firm
CME Group Solution Model
In the more than 110-year history of CME Clearing, there has never been a failure by a clearing member to pay settlement variation or meet a performance bond call, nor has there ever been a clearing member failure resulting in a loss of customer funds
12©2010 Sutherland Asbill & Brennan LLP
Total Guaranty Fund: ~$8B Total Collateral: >$100B
Temporary Liquidity Facility =
$600million
CME Capital Contribution =
Up to $100 million
Note: Financial Safeguards funding reported as of March 31, 2009
Total Financial Safeguards Package Overview
• CME Group’s Financial Safeguards Package is Being Extended to CDS, IRS and FX Products
• Designed to anticipate potential market exposures and ensure sufficient resources are available to cover future obligations
• Based on ability to cover at least the largest potential net debtor, accounting for collateral damage
• Wide variety of accepted security deposit collateral, including:– Cash (USD) – US Treasuries – CME-approved money market mutual
funds
Benefits of CME Group’s Cleared OTC Solution
13©2010 Sutherland Asbill & Brennan LLP
Portability of Customer Positions in the Event of a Clearing Member Default
Defaulting members positions• Market access restricted• Collateral captured
Customer protection• Collateral held in segregated
account • Positions maintained and moved
to a new clearing member
Benefits of CME Group’s Cleared OTC Solution
CME Clearing
Defaulting Clearing Member
Non-Defaulting Clearing Member
Buy-side Firm
14©2010 Sutherland Asbill & Brennan LLP
CDS: Open Access and Point of Trade Clearing
• 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
• Back-loading of legacy bilateral trades to CME Clearing
• More than 100 years of experience in clearing, settlement and risk management
Clearing CDS trades real-time throughout the day, every day providing immediate cleared trade confirmation, significantly reducing the credit exposure between bi-lateral parties
* CME Group is in discussions with other affirmation vendors for trade submission into CME Clearing
Trade Submission into CME Clearing
Markitwire *
Clearing Member Firm
Clearing Member Firm
Clearing Member Firm
IDBs
CME Clearing
CME ClearPort
Portfolio Back-loadingBloomberg
Executing Dealers & Customers
DTCC TIW
Copper Record Reporting
15©2010 Sutherland Asbill & Brennan LLP
ICE: Diverse Global Derivatives Markets
Global derivatives markets across energy, agriculture, equity indexes, FX and credit
Integrated execution and clearing: 3 futures exchanges, 2 OTC markets and 5 clearing houses
Market participants in more than 55 countries
Industry-leading innovation in products and technology
CDS infrastructure that fully encompasses trade execution, processing and clearing
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.
16©2010 Sutherland Asbill & Brennan LLP
Global Leader in CDS Clearing
Liquidity13 dealers together with leading hedge funds and asset managers actively clearing today61 index contracts and 151 single names across US & Europe
Risk ManagementWorld class risk management specifically designed for CDS$3 billion guaranty fund -- completely separate from all other products Guaranty fund sized to cover losses from simultaneous default of 2 largest clearing members
CDS and Clearing ExpertiseManaged numerous Credit Events since launching CDS clearingLeading market connectivity processing thousands of CDS trades a dayCo-administrators of ISDA Cash settlement auctions
Ease of Doing BusinessNo changes to existing OTC trade execution requiredSimple legal framework leveraging existing ISDA documentationOpen access provided through support of multiple affirmation platforms
17©2010 Sutherland Asbill & Brennan LLP
* As of April 9th, 2010. Visit www.theice.com/ice_trust for most recent total.
ICE CDS Milestones and Volume ClearedIn
Bill
ions
ICE Global CDS Cumulative Volume
ICE Trust Launches
CDS Clearing
ICE Clear Europe
Launches CDS Clearing
ICE Trust Surpasses $3
Trillion
ICE Trust Launches Buy-side Clearing
ICE Trust/ICE Clear Europe Clear Single
Names
ICE CDS Clearing Surpasses $7 Trillion Globally*
Over 135,000 Trades Cleared
Open Interest of $645B
Cleared over $490MM in Buy-side Notional
18©2010 Sutherland Asbill & Brennan LLP
Why Clear CDS Through ICE?
Gross margin held at clearing house NOT at DCMDefault protections designed to work within existing bankruptcy lawsSeparate swaps and futures guaranty funds
Position and collateral linkage facilitates pre and post default DCM transferTimely and operationally simple transfer in the event of a defaultContingency planning allows establishment of new DCM prior to default
Trades cleared intra-day, on near real-time basisMinimizes intra-day bilateral counterparty risk
Leverage existing OTC infrastructure – one operational processCan clear through non-US Domiciled DCMs (in US)No costly legal negotiations or significant technology build
MARGINPROTECTION
PORTABILITY
INDEPENDENCE
REAL-TIME CLEARING
SIMPLICITY
Governance structure includes independent boardMargin calculated using independent EOD pricing processICE margin requirements transparent to buy-side
19©2010 Sutherland Asbill & Brennan LLP
DTCC
Ease of Doing Business
ICE Supports the Existing OTC Model and Multiple Platforms
Trade Execution & Capture Affirmation & Clearing Consent Clearing & Confirmation
Voice or e-trade
Trade Capture ICE
Executing Broker Alleges
Block Trade
Buy-side Affirms, Allocates and
Routes to DCM
DCM Affirms and Routes to
ICE
ICE Runs Risk Filter Checks and
Accepts Trade
Trade Cleared & Confirmed
Trade Routed to
TIW
No Changes to Trade Execution
Multiple Platforms Supported
Affirmation Platform
Multiple Affirmation PlatformsSupported
(ICE Link, Bloomberg, Tradeweb)
Trades Cleared Intra-day on Near Real-Time Basis
20©2010 Sutherland Asbill & Brennan LLP
Buy-Side Steps to Clear CDS
To begin clearing CDS with ICE Trust, Buy-Side Customers need to:
Establish relationships with one or more DCMs1
Sign ICE Standard Terms Annex, review ICE Rules and ICE DCM Annex
Establish access to an authorized affirmation source and providenecessary authorizations to allow them to act on your behalf 2
1Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, RBS and UBS
2Authorized affirmation sources include ICE Link, Bloomberg and Tradeweb
21©2010 Sutherland Asbill & Brennan LLP
Customer Margin Protection
DCM 2
DCM Minimum Initial Margin (MIM) for all (2) clients is $3MM
Minimum IM: Buy-side A $2MM, Buy-side B $1MMBuy-side positions partially offset - Net Margin is $750k, Custodial is $2.25MM
Gross margin is posted and segregatedNet margin is determined pro-rata by Gross IMNet margin at risk only in the event that another client at same DCM defaults and causes the DCM to default
DCM
Buy-side
Hybrid of traditional Net and Gross margin modelsGross margin held at clearing house, NOT DCM
DCM’s Client Omnibus Account
Gross IM of $3MM
Buy-side A Positions
Gross IMof $2MM
Buy-side B Positions
Gross IMof $1MM
Buy-side A Buy-side B
Net
$500K
Net
$250KCustodial $1.5MM
Custodial $750K
22©2010 Sutherland Asbill & Brennan LLP
The ICE Risk Waterfall Provides Multiple Layers of Protection
Membership Criteria
Initial Margin Requirement
Mark-To-Market Margin Requirement
Guaranty Fund
Intra-day Risk Monitoring
Special Margin Call Execution
Limited One-Time Assessment
Ensure CP has sufficient financial resources, operational capabilities and risk management experience
Collateralize potential Clearing Participant portfolio loss under plausible distressed conditions
Adjust Clearing Participant collateral through a daily
debit/credit based on EOD MTM
Identify additional margin requirements based on unusual
market fluctuations
Mutualize losses under extreme but plausible market scenarios
Oblige Clearing Participants to contribute a limited amount of
additional default funding
Layers of Protection
1. Defaulting Buy-side Margin(net & custodial)
2. Defaulting CP House Margin
3. Defaulting CP Guaranty Fund
4. Non-default clients of CP(net only)
7. One Time Assessment on CPs
6. Non-defaulting CPs GF / ICE remaining GF
5. ICE Priority Guaranty Fund (GF)
Risk Management Waterfall
24©2010 Sutherland Asbill & Brennan LLP
Clearing OTC Energy Contracts
• Concerns about oil market volatility in 2007-08 have driven Congress and CFTC Chairman Gensler to press for greater transparency through mandated clearing and other means
• But there are real questions as to whether the system is brokenInstitutional “longs” largely have been operating in the regulated futures marketsIt is not at all clear that price spikes originate in the OTC markets, however much they may lack transparencyMany standardized OTC energy contracts already have migrated to the clearing houses
25©2010 Sutherland Asbill & Brennan LLP
Clearing OTC Energy Contracts
• There are real concerns that “forced” clearing of standardized agreements will undermine market efficiencies
End users continue to lobby for exemption from clearing and margin requirementsSome believe that important non-standardized OTC contracts will not survive the transition (e.g. basis swaps)
• Existing law gives the regulators substantial powers to supervise both the OTC and the forward energy markets
• There are hints that the final legislation will not be as aggressive as some on the Hill and at the Commission would wish
27©2010 Sutherland Asbill & Brennan LLP
Subchapter IV of Chapter 7
•Bankruptcy Code’s Subchapter IV of Chapter 7: Liquidation of Commodity Brokers
Facilitates transfer of customer accounts to different (solvent)commodity brokerIf customer accounts identifiable, then trustee must heed requests for return of customer property and/or transfer to new commodity brokerIf cannot be identified or cannot be transferred, then contract liquidatedIf customer owed money after transfer/liquidation/offset, customer receives ratable distribution (higher priority than non-customer claims)CFTC has right to appear and be heard on issuesChapter 5 provisions apply
28©2010 Sutherland Asbill & Brennan LLP
Bankruptcy Issues
Many concerns originate out of Lehman bankruptcyLBIE (UK entity) had customer accounts released by exchanges to LBIE’s administrators, leaving customers without adequate remedy
Customer protection requires segregation & portabilityFactors in segregation: security interest vs. transfer of title, clearinghouse collection of margin, type of margin held, location where margin is held, commingling, rehypothecationPortability relies highly on segregation; e.g., margin must be held away from commodity broker and must not be commingled
29©2010 Sutherland Asbill & Brennan LLP
CFTC Rule
•Final Ruling Effective May 6, 2010Amends existing regulations to create new “account class”
Significance of account classNew category applies only in cases of bankrupt commodity broker that is FCMApplies to cleared OTC derivatives and money, securities or other property securing them
Comments expressed concerns:Bankruptcy courts could decline to find cleared-only contracts as “commodity contracts”Rule did not address bankruptcy of clearing organization
30©2010 Sutherland Asbill & Brennan LLP
Predictions
Continued focus on bankruptcy issues for near- and intermediate- term, particularly if legislation passes requiring more derivatives to be clearedLegislative and regulatory response will leave some gapsAs economy improves, most could lose focus on key issuesProblems will not fully come to light until next major crisis
31©2010 Sutherland Asbill & Brennan LLP
Selective Non-Insolvency Buy-Side Legal Issues
• Status of Trade Before Accepted for Clearing
• Initial Margin Issues
• Porting Transactions
32©2010 Sutherland Asbill & Brennan LLP
Status of Trade Before Accepted for Clearing
• What happens if counterparty enters into a trade with the expectation that it will become a cleared trade and for whatever reason that does not happen?
• Possible Relevant Documentation:Clearing House Rules and ProceduresAgreement with clearing member/counterparty and/or executing broker (in case of “Give-Up Agreement”)Note: ISDA Nov. 2009 Recommended Common Principles for Relationship Between Customer and Executing Broker and Clearing Member
33©2010 Sutherland Asbill & Brennan LLP
Initial Margin Issues
Questions: 1. Will Initial Margin always be custodied at the Clearing House?2. Will Initial Margin required by the Clearing Member in excess of the
Clearing House’s requirement for Initial Margin be custodied at the Clearing House?
3. May a customer utilize securities to satisfy its Initial Margin requirements?
4. If yes, what kinds of securities will be eligible and will there be haircuts?
5. If a customer posts cash to satisfy initial margin, will he be entitled to receive interest on the cash?
6. If yes, will be rate be negotiated between the customer and the Clearing Member or between the Clearing Member and the Clearing House?
34©2010 Sutherland Asbill & Brennan LLP
Possible Relevant DocumentationClearing House Rules Agreement between Clearing House and Clearing MemberAgreement between Clearing Member and Customer
In case of ICE Trust Existing ISDA and CSA and “New”ISDA and for Cover Transactions.
Initial Margin Issues
35©2010 Sutherland Asbill & Brennan LLP
Porting Transactions (Before Clearing Member Insolvency)
Questions:1. When can transactions be moved?2. What is the procedures for moving transactions?
Possible Relevant Documentation:Clearing House Rules Agreement between Clearing House and Clearing MemberAgreement between Clearing Member and CustomerAgreement between Customer and New Clearing Member
36©2010 Sutherland Asbill & Brennan LLP
Questions?
Corry BazleySenior Sales North AmericaICE [email protected]
Alessandro CoccoManaging DirectorAssociate General CounselJ.P. [email protected]
Mark CoxDirector, CME Clearing SolutionsCME [email protected]
Michael BrooksSutherland Asbill & Brennan [email protected]
Warren DavisSutherland Asbill & Brennan [email protected]
Robin PowersSutherland Asbill & Brennan [email protected]
Paul TurnerSutherland Asbill & [email protected]