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					                         CDS Clearing for Buy-side Market Participants
                                Frequently Asked Questions

IntercontinentalExchange® (ICE), the industry’s leading provider of global credit default swap (CDS)
clearing services, has designed a customer-related margin segregation and position portability solution
that will benefit firms that are not clearing members of ICE’s CDS clearing houses.

To date, over $9.6 trillion in gross notional value has been cleared through ICE Trust U.S (ICE Trust)
and ICE Clear Europe. ICE Trust is a New York limited purpose trust company regulated by the New
York State banking Department and the Federal Reserve. ICE Trust commenced clearing operations in
March 2009. ICE Clear Europe began offering CDS clearing through a separate risk pool, risk model,
rulebook and independent governance structure in July 2009. ICE Clear Europe is regulated by the
U.K. Financial Services Authority (FSA).


   •   Widest range of cleared products, participants, geographies and services
   •   No changes to trading workflow required, adheres to OTC conventions
   •   World class risk model designed for CDS clearing, stress tested and live
   •   Independent governance and management
   •   Leading client segregation and portability solution that works with existing bankruptcy law
   •   Only solution offering settlements based on executable prices
   •   Combination of strong domain knowledge and experience in CDS, clearing and processing
   •   ICE Link provides connectivity to over 400 firms, processing thousands of CDS trades daily
   •   Handled numerous Credit Events since launching CDS clearing in March 2009
   •   Co-administrators of ISDA cash settlement auctions

For firms that choose not to become clearing members or do not meet CDS clearing house
membership requirements, a buy-side solution enables firms to have the benefit of customer-related
margin segregation and position portability. In developing its solution, ICE consulted extensively with
buy-side participants, members of its CDS clearing houses and regulators. The result is a robust
margin segregation and portability framework that offers important clearing benefits to buy-side

   •   How does it work?
       ICE’s buy-side solution provides a roadmap for the industry’s transition to clearing. It allows
       firms to retain existing trading relationships and workflow, as well as a range of competitive
       execution models. ICE offers open trade execution and platform access and utilizes current
       market infrastructure — including the existing ICE Link connectivity to CDS dealers, more than
       400 buy-side firms and the Trade Information Warehouse (TIW). ICE incorporates existing
       ISDA agreements — eliminating the need for lengthy renegotiation.

   •   Who can be a clearing member?
       ICE’s CDS clearing houses are independent, neutral and open to all qualified market
       participants. In keeping with standards established by the Bank for International Settlements
       and oversight provided by the Federal Reserve, the New York State Banking Department, the
       FSA and others, ICE CDS clearing house membership requirements have been established to
       assure that applicants have adequate resources, controls and industry expertise to be a
       counterparty to the clearing house. As established in the Rulebook, clearing member applicants
       are required to demonstrate sufficient operational capabilities, financial resources, risk
       management experience and regulatory oversight.

   •   Who is the counterparty to a trade by a non-clearing member (customer)?
       Every customer is required to designate one or more clearing house member(s) as the
       customer’s derivatives clearing member (DCM). The customer’s DCM is its counterparty to the
           o Clearing members may submit their customers’ positions to the clearing house in one of
              two ways: bilaterally as principal, or with the clearing member functioning as a DCM.
           o Under the bilateral model, a customer enters into a transaction with a clearing member
              as principal, and the clearing member submits the trade to the CDS clearing house with
              one side as a “customer-related” trade and the other side as a clearing member “house”
              trade. The clearing member and the customer simultaneously record a back-to-back,
              principal-to-principal trade.
           o Under the DCM model, if a customer enters into a transaction with a dealer other than its
              designated DCM, pursuant to a give-up agreement, the customer’s designated DCM,
              acting as an intermediary, and the dealer enter into the trade, which is cleared by the
              ICE CDS clearing house. As with a bilateral trade, the DCM and the customer
              simultaneously record a back-to-back, principal-to-principal trade.

   •   How is it regulated?
         o As a New York limited purpose trust company and a member of the Federal Reserve
             System, ICE Trust is subject to direct regulation and supervision by the Federal Reserve
             and the New York State Banking Department. Subject to compliance with certain
             conditions, ICE Trust operates under exemptions from the Securities and Exchange
             Commission (SEC) and the U.S. Treasury Department.
         o ICE Clear Europe is a U.K. Recognised Clearing House regulated by the FSA to clear
             ICE Futures Europe and ICE OTC energy products, and CDS products.

   •   Is the buy-side involved in the process?
           The buy-side continues to have a critical role in providing input and recommendations to ICE
           with respect to the buy-side clearing offering. Members of the buy-side meet regularly with
           ICE, both separately and in joint sessions with clearing members, to discuss issues
           including the overall segregation model, transfer procedures, reporting procedures, and
           customer documentation.

Yes, trade date clearing is available in connection with the segregated funds clearing solution. Trade
date clearing enables positions to be cleared on the same day the trade occurred, which significantly
reduces the time that a buy-side firm has counterparty exposure to a clearing member, and it simplifies
the operational processes associated with CDS trading. Together with margin segregation and
portability, trade date clearing is an important aspect of ICE’s CDS clearing offering for the buy-side.

Credit derivative trades between a buy-side firm and an executing dealer are typically executed and
legally confirmed on a bilateral basis. This requires buy-side customers to have ISDA documentation in
place with each executing dealer and to take counterparty risk to executing dealers when entering into
CDS transactions. Trade date clearing eliminates the need for this documentation between buy-side
firms, customers and executing dealers. Instead, a buy-side firm may enter a transaction with any
executing dealer, and may clear the trade at ICE through their DCM. This process consolidates the
buy-side firm's counterparty risk to its designated DCMs, who are in turn required to contribute to the
guaranty fund, post margin and comply with the risk management framework prescribed by the CDS
clearing house
  • Where is customer margin held?
       o Customer margin on CDS trades is segregated from DCM margin through a customer
          omnibus account established at the clearing house for each DCM. Customer omnibus
          accounts retain margin for all customers of an individual DCM. While each DCM has one
          customer omnibus account, customers may have margin deposits in more than one
          omnibus account if they clear through more than one DCM.
       o ICE requires DCMs to collect a minimum amount of margin from customers based on
          each customer's portfolio. Gross margin collected from customers is effectively passed
          through to the CDS clearing house and held in a custody excess account.

      •   Is customer margin protected if a clearing firm defaults?
          If a DCM defaults because of a house position, customer margin is protected by the
          segregated customer omnibus account.
          o Losses from a DCM house default are covered in this order:
                     defaulting DCM’s house account margin;
                     defaulting DCM’s guaranty fund contribution;
                     ICE’s priority guaranty fund contribution;
                     remaining guaranty fund contribution (non-defaulting DCMs and ICE); and
                     assessed contributions of non-defaulting DCMs.
          o ICE will not offset a DCM house default (caused by a house position) with customer
               omnibus account margin.
               If a DCM defaults because of a customer position, customer margin in the DCM’s
               customer omnibus account (to the extent of the net margin obligation) may be used to
               offset losses.
          o Customer default risk is mutualized across a DCM’s customer book, and losses are
               covered in this order following liquidation of a defaulting customer’s posted margin:
                    o defaulting DCM’s house account margin to the extent that the margin was not
                        required to cover house losses;
                    o defaulting DCM’s guaranty fund contribution to the extent not required to cover
                        house losses;
                    o net margin in the defaulting DCM’s customer omnibus account;
                    o ICE’s priority guaranty fund contribution;
                    o remaining guaranty fund contribution (non-defaulting DCM’s and ICE); and
                    o assessed contributions of non-defaulting DCMs.
          o Non-defaulting customer margin that is not included in the net margin requirement
               (custodial margin) is not at risk and cannot be utilized by the clearing house to offset

      •   What if another customer of a DCM defaults?
          If a customer defaults but its DCM remains solvent and operational, the DCM may use the
          defaulting customer’s omnibus margin to unwind the customer’s position.

          o   If a DCM defaults because of a customer and there are losses in the DCM’s customer
              omnibus account, ICE may mutualize losses using customer omnibus margin as
              described above.
          o   If the CDS clearing house transfers customer positions as a result of a DCM default,
              assets in the customer omnibus account may be moved to a new DCM.
          o   Otherwise, customer omnibus account margin may be returned to the defaulting CM’s
              receiver/trustee for distribution to customers.

          •    If a DCM defaults can a customer move its position to another clearing firm?

               o    ICE has developed rules to enhance position portability for customers.
               o    In the ICE model, customers have the ability (in certain circumstances) to transfer
                    positions from one DCM to another for both pre- and post-default scenarios.

          •    How are end-of-day (EOD) prices established?

                    o ICE has developed an effective price discovery process to serve the needs of the
                         CDS clearing houses and the market.
                    o ICE requires clearing members to submit quotes at the end of each day for each of
                         their cleared positions. ICE encourages the submission of reliable market prices by
                         crossing/locking the price submissions and, on a random basis, requires that the
                         crossed clearing members execute bi-lateral firm-trades at the crossed/locked prices.

          •    Where are EOD prices published?
               On a daily basis, certain official ICE CDS closing prices are publically available at
      Direct access to a comprehensive database of current
               and historical ICE settlement prices is available pursuant to a user licensing agreement. For
               more information on license terms and prices please see


          •    When will buy-side clearing be available?
               ICE Trust is actively clearing buy-side trades today, with the first trades being cleared on
               December 14, 2009.

               ICE Clear Europe is working with U.K. regulators for approval of its buy-side solution.

          •    What products are being cleared?
               ICE Trust has been clearing North American index CDS since March 2009 and began
               clearing single name CDS on December 21, 2009. Today, ICE offers clearing 35 CDX
               indexes for buy-side customers. Single name CDS products will be available for buy-side
               clearing during the second half of 2010.

               ICE Clear Europe began clearing iTraxx trades in July 2009 and began certain constituent
               single name CDS on December 14, 2009.

               ICE Clear Europe expects to introduce buy-side clearing in the second half of 2010.

          •    How do I get more information?
               Please contact us at: or

IntercontinentalExchange (NYSE: ICE) is a leading operator of regulated futures exchanges and over-the-counter markets for agricultural,
credit, currency, emissions, energy and equity index contracts. ICE Futures Europe hosts trade in half of the world’s crude and refined oil
                           ®                          ®                                                           ®
futures. ICE Futures U.S. and ICE Futures Canada list agricultural, currencies and Russell Index markets. ICE is also a leading operator of
central clearing services for the futures and over-the-counter markets, with five regulated clearing houses across North America and Europe.
ICE serves customers in more than 55 countries. Visit us at

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