Introduction to CCBooks by Civet

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									Open Credit Default Swaps
Clearing Solution
Overview

September 2009
Today’s discussion



       State of regulatory and operational readiness


       CME Clearing distinguishing features


       Trade matching and clearing process


       Financial safeguards and risk management
CME CDS clearing is approved and operationally ready to clear CDS

              All U.S. regulatory approvals / no issues letters received to start clearing CDS
Regulatory
                  Received a special exemption from the SEC for CDS through CME Clearing
                  Completed regulatory risk management reviews with the Federal Reserve Bank of
                  New York, the SEC, and the CFTC
                  CME Risk Committee approved the inclusion of CDS in its $8B guaranty fund
              European regulatory approval of CME’s CDS ROCH status is imminent; CME is
              actively engaged with the FSA for its RCH approval
              Customer margin and positions protected under CFTC 30.7; currently seeking CFTC 4d
              that provides segregation of funds and positions

              Licensed Markit’s CDX and iTraxx indices and RED identifiers
Licensing
              Licensed ISDA’s standards terms and definitions


              Completed multiple cycles of full end to end clearing testing, including trade entry,
Operations
              upfront settlement cash flows, margin, and trade registers


              Significant support from buy-side firms due to the strength of customer segregation,
Customers
              size of the guaranty fund, and the efficient futures type operating model
              Working with FCMs, dealers, and buy-side customers to begin on boarding
CME has developed an open CDS clearing solution that builds on the
existing OTC market and incorporates the proven structural benefits of a
futures-type operating model

 Key distinguishing features of CME CDS Clearing:

     Time-tested protection of customer accounts: Customer collateral and positions are
     protected through time-tested 30.7 or 4d regulatory regimes
     Significant systemic and counterparty risk reduction: Facilitates immediate multi-
     lateral netting of positions, enabling offsetting positions to be immediately closed out
     with any trade counterparty and reducing participants’ required capital and margin
     Significant Operational efficiency: CME employs a futures-type model which
         Eliminates credit risk evaluation of trade counterparties as matched trades
         immediately face CME Clearing due to real-time credit checks
         Eliminates the need for bi-lateral ISDAs with each trade counterparty
         Reduces operational and processing costs
     Open Clearing Membership: Time-tested clearing membership standards that
     enable a wide range of firms to receive the benefits of direct CME clearing
     membership
     Unmatched Guaranty Fund: Industry-leading $8 billion guaranty fund to protect
     against CDS clearing member defaults
Overview of CME CDS trade matching and clearing

Trade matching                                    CME Clearing downstream processing
                                 Trade                                                                              CME
                               matching                                                        Buy $10M           Clearing
            Buy $10M
                               platforms                                                         Cash &
                                                                                                reporting

                                 Trade
Dealer / CM A                                                                  Dealer / CM A
                                booking
                                                                                                                Manages all
                                   or                                                                           downstream
                               Migration                                                                           trade
                                utility                                                                         processing

                                   or                             Sell $10M                    Sell $10M
                                                                    Cash &                        Cash &
                                Clearing                           reporting                     reporting
            Sell $10M
                                360 API
Customer B                                         Customer B                     FCM of
                                                                                Customer B


  All eligible contract participants can clear,     CME provides instant clearing confirmations upon trade entry, eliminating
  provided they are a CME CDS clearing              any daylight counterparty risk (i.e., upon trade entry, Dealer / CM A and
  member of have a relationship with a FCM          FCM of Customer B immediately face CME Clearing)
  CME cleared contracts are economically            As all counterparties face CME Clearing, all contracts are multi-laterally
  equivalent to bi-lateral, ISDA contracts          netted down on t+0, immediately eliminating any offsetting exposures
  No need for bi-lateral ISDA agreements            CME manages all down stream CDS processing for CMs and FCMs,
  with any trade counterparties for CME             including real-time confirms, cash flows (MtM, coupons, margin, fees),
  clearing trades                                   credit events, and position reports
CME Clearing’s risk management framework, which has protected
investors for over 110-years, is extended to cover CDS products

Membership
               • $300 million of adjusted net capital
and limits
               • Proven risk management and operational capabilities
               • Ability for CMs to set credit limits for each customer
      +

 Real-time     • Consistent monitoring of financial strength and positions of each CM, including risk-based
 monitoring        examinations, net capital requirements and segregation requirements
               •   Ability to monitor net positions of customers
      +

 Customer      • Customer margin and positions are protected from a CM’s house default through a time-
 segregation       test regulatory based regime

      +
               • Accurate, automated daily mark-to-market calculations for variation margin
 Daily mark    • Robust end of day pricing methodology that leverages multiple data sources, including
 to market         cleared prices, clearing members, and third party data providers
      +

 Portfolio     • Portfolio margining methodology reviewed by NY Fed, SEC, FINRA, CFTC, and 3rd parties
 margining     • Seven factor margin model includes macro-economic (i.e., systematic, curve and spread
                   convergence/divergence risks), sector-level, idiosyncratic, liquidity, and basis risks factors
      +

 Guaranty      • CDS are backed by CME Clearing’s industry leading $8 billion guaranty fund
 fund          • Accessed only in the event of a default of a clearing member

								
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