OTC-IRS

Cleared OTC Interest Rate Swaps Security. Neutrality. Transparency.

February 2012

© 2012 CME Group. All rights reserved

OTC Product Progression

2

CME Group OTC Clearing CME Group is the industry leader in OTC Clearing, delivering a broad offering spanning Interest Rates,

Credit, FX, Energy, Metals, and Ags

Founded in 1898 as CME

#1 derivatives exchange in the U.S. and globally

by volume

Global leader in exchange-traded markets with

$3B in revenue

Leading liquidity / volumes in global benchmarks

across all asset classes

Extensive and diverse distribution network and

customer base

International linkages with leading global

exchanges

Launched in 2002 to provide risk mitigation in

energy markets following the Enron collapse

Market leading OTC Clearing venue for a diverse

range of commodities asset classes

1,700 listed contracts

10,000 registered users around the world

500,000 contracts cleared daily

FX

2004 2008 2009 2010 2003 2011

Coal

2012

Electricity IRS, Freight, Iron Ore Natural Gas, Crude

CDS, Ags, Gold Ferrous Metals

2002

ClearPort Established

2007

Metals

CME Clearport CME Group

© 2012 CME Group. All rights reserved 3

CME Group OTC Clearing

Allows the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS

positions against Eurodollar and Treasury Futures

Builds on the strength of CME Group’s market leading interest rate products business, which had an

average daily volume of $3.9 trillion in Q3 2011, and over $37 trillion of notional outstanding

Provides customers full transparency through direct access to daily valuation reports and the CME

CORE margin tool

Operational flexibility of a multi-asset class solution for IRS, CDS, FX, and Commodities via one

clearinghouse

Protects the confidentiality of trading relationships, while enabling customers to terminate positions

with any market participant

CME Group has worked closely with buy side and sell side participants to build a multi-asset class,

market leading OTC clearing solution

Over $345 billion in notional has cleared since launch and open interest is over $208 billion

Successful new product launches of EUR IRS which has cleared over €71.5 billion since launch, GBP

IRS which has cleared over £7.0 billion since December 5th, and the CDX HY Indices which have

cleared over $9.8 billion since November 7th

1300 active customer accounts with cleared trades, and an additional 2,500 customer accounts

testing through our 15 clearing firms

Overview and Background

Benefits of the Solution


Record Customer Clearing Activity

Total Volume Cleared = $303.3 billion

Open Interest = $179.2 billion

Total Volume Cleared = $42.1 billion

Open Interest = $28.9 billion

Credit Default Swaps Interest Rate Swaps

Note: Data current as of 2/13/12

CME Group has built the leading OTC IRS and CDS clearing service by U.S. customer volume

EUR IRS cleared €71.5 billion since it launched on October 17th

GBP IRS cleared £7.0 billion since it launched on December 5th

CDX High Yield Indices have cleared $9.8 billion since they launched on November 7th

Strong Performance of Newly Launched Products

$0

$6

$12

$18

$24

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IRS Volume IRS Open Interest


CME Group is delivering a comprehensive global product scope across IRS, CDS, and FX

Cleared OTC Financial Products

Early 2012 Expansion

• IRS in JPY, CHF, and AUD out to 30 years

• CDS single names of index constituents

• USD Non-Deliverable Forwards (NDFs) in BRL, CNY,

Existing Products

• USD, GBP, EUR Interest Rate Swaps (IRS) out to 50 years; CAD out to 30 years

• CDX IG Index, Series 9-17 – 3, 5, 7, and 10 year tenors as applicable

• CDX HY Index, Series 11-17, 5 year tenor

Other Future Product Expansions

• IRS in additional currencies, Zero Coupon Swaps, Amortizing Swaps, Basis Swaps, FRAs, and OIS

• IRS Swaptions

• Additional CDS single names

• Deliverable FX Spot, Forwards, Swaps and Options; Non-Deliverable Options (NDOs)

• USD Non-Deliverable Forwards (NDFs) in KRW, INR, MYR, PHP, IDR, TWD, CLP, COP, RUB, PEN

• Cash Settled Forwards in AUDUSD, USDCHF, USDCAD, NZDUSD, USDNOK, USDSEK, USDDKK, EURUSD, USDJPY, GBPUSD,

USDMXN, USDSGD, USDPLN, USDZAR, AUDJPY, EURAUD, CADJPY, EURGBP, EURJPY, EURCHF, USDCZK, USDHUF,

USDTRY, USDILS, USDTHB, USDHKD


• Additional Currencies

• Zero Coupon Swaps, Amortizing Swaps, FRAs, Basis Swaps, and OIS

• Swaptions, Caps, Floors, Additional Currencies, Cross Currency Swaps, and Inflation Products

OTHER FUTURE PRODUCTS

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• USD Fixed/Float out to 50 years- 1M, 3M and 6M LIBOR indexes

• EUR Fixed/Float out to 50 years- 3M and 6M EURIBOR indexes

• GBP Fixed/Float out to 50 years- 6M Libor index

• CAD Fixed/Float out to 30 years- 3M CDOR index

• Flexible day counts, business days, and payment frequencies including stubs

EXISTING PRODUCTS

CME is delivering a comprehensive global product scope that includes the 7 currencies

that account for 95% of vanilla IRS* before the end of Q1 2012

* Notional amounts outstanding received from Bank of International Settlements, December 2010

• Maturity out to 30 years for JPY, CHF and AUD

EARLY 2012 EXPANSION

IRS Product Rollout

CURRENCIES

CHF AUD JPY

CURRENCIES

USD EUR GPB CAD


CME Clearing

Bank of

America Barclays

Open Access Clearing Solution

Several market leading affirmation platforms and Swap Execution

Facilities have already connected directly to CME Clearing

BNY Mellon

BNP Paribas Credit Suisse Deutsche

Bank

Goldman

Sachs JPMorgan

Morgan

Stanley Nomura

RBS PLC

UBS

RBS Securities

OTC IRS/CDS

Clearing Members

Additional OTC IRS

Clearing Members

Negotiate, execute, and submit trades through multiple venues to CME Clearing

Straight through processing and real-time confirmation once the trade is cleared

Protects the confidentiality of trading relationships, while enabling customers to terminate positions

with any market participant

Operational flexibility of a multi asset class solution for IRS, CDS, FX, and Commodities via one

clearinghouse

Citigroup

ICE Link CME ClearPort Javelin MarkitSERV Bloomberg CDS Migration

Utility TradeWeb

Wells Fargo


Trade Workflow Mechanics

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Straight Through Processing allows for real-time clearing and trade confirmations

1 – Dealer and Client agree to trade

2 – Dealer alleges swap to Client through the Affirmation

Platform

3 – Client selects Clearing Member and verifies the swap

through the Affirmation Platform

4 – Affirmation Platform sends the matched trade between

Dealer and Client to CME Clearing House

5 – CME checks for validation of the product, account and

applies credit limits set by Clearing member(s), and

then accepts the swap for clearing

5 – CME sends “Cleared” notification back to the

Affirmation Platform which displays the “Cleared”

Status to each party

5 – CME sends a Clearing Confirmation to Clearing

Member(s) once all is validated

Client Dealer

Affirmation

Platform

1

2 3

4 5

Clearing Member

(Client)

Clearing Member

(Dealer)

CME Clearing

House

Product

Account

Credit 5 5


Transparent Valuation and Reporting

VALUATION OVERVIEW

USD IRS positions will be marked to market once per day at 3pm EST

Pricing inputs obtained from wire service feeds

CME Group utilizes OIS discounting, monotone convex interpolation, and Bootstrap

Generator to produce a Zero Coupon curve

PRICING INPUTS

LIBOR: O/N, T/N

FRA: 0 x 6

CME Eurodollars – first 6 Quarterly Eurodollar contracts, convexity adjusted

Par Swap Rates: 2Y – 10Y, 15Y, 20Y, and 30Y (SA, 3M LIBOR)

REPORTING

CME Group provides customers with full transparency including direct access to daily

reports showing curve inputs, daily discount factors, and valuations for each cleared swap

position

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Customers have full visibility into CME Group’s swap valuations


Details of Customer Reports

Report Description Time Available in

Testing

Available in

Production

Preliminary

Trade Register

Includes new and open trades as well as

corresponding cash flows on positions

cleared prior to 4:45pm EST on that day

4:45pm EST

End of Day Trade

Register

Includes new and open trades as well as

corresponding cash flows on positions

cleared on that day

8:00pm EST

Curve Input

Report

Contains the curve inputs of the CME Swap

Curve

4:30pm EST

Discount Factor

Report

Displays the daily discount factor out to 31

years

4:30pm EST

CME Holiday

Calendar

Shows the CME Holiday Calendar 3:00pm EST

Price Alignment

Interest (PAI)

Rate File

Provides the rate used to calculate PAI 1:00pm EST

The above reports can be accessed through a secure FTP site. Please contact CME’s Onboarding Team

at (312) 338-7112 or [email protected] to gain access.

mailto:[email protected]


• Expected to cover extreme scenarios that are optimally addressed using a mutualized pool rather than margins

• GF Sizing considerations include risk, capital usage and charges , stakeholders’ incentives, and portability concerns during periods of default

• Additional collateral that can be called upon should all previous layers of the

waterfall are exhausted

• Caps the limited resource waterfall

• Contribution set aside by CME to help cure a default prior to dipping into the

survivors’ funds

• Each Member’s contribution to the GF

• Liquidity charge accounts for protecting large concentrated portfolios whose

closeout could cost more or take longer than baseline timeframe

• Initial Margin is used to cover day-to-day P/L moves

1 The actual amounts will be based on the sum of the third and fourth largest net debtor profiles

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IRS Non-Defaulting

CMs Guaranty Fund

General Assessment Powers

for IRS1

CME Contributed Capital for IRS

$100M

Defaulting Member

IRS Guaranty Fund

Baseline Initial Margin

Liquidity Charge

FU

ND

ED

U

NF

UN

DE

D

DE

FA

ULT

ER

PA

YS

S

UR

VIV

OR

PA

YS

Robust Financial Safeguards

CME structured the IRS risk waterfall to protect our customers during times of market stress and mitigate systemic risk


Superior Customer Protections

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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

Strong history of risk innovation, crisis management, and a deep understanding of issues related to

customer protection in the US agency model

Comprehensive approach towards default management, utilizing industry best practices, industry expertise,

and default exercises to ensure readiness in a market crisis

ROBUST GUARANTY FUND

Key layer of protection in the US Clearing market that serves as a “capital reserve” buffer during times of

market stress and protects against systemic risk associated with catastrophic market events

Sized to cover the simultaneous defaults of the 2 largest FCMs, according to the results of stress tests,

which include all extreme historical events as well as “black swan” stress scenarios

Allocated between different FCMs pro-rata according to the residual risk not covered by margins. This

allocation mechanism further provides incentive to risk diversification across FCMs

CME Clearing is the industry leader in mitigating risk for customers through the US

FCM clearing model


Customer Account Portability

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Portability of customer positions and collateral is a cornerstone of CME customer protections

• Clients maintaining accounts at multiple clearing members are able to control the timing and pacing of their porting transactions

• In the agency model, clients “own” their

positions

• The agency model supports portability; at CME

this is a matter of routine and standard practice

CUSTOMER CONTROLLED

PORTABILITY “TRANSFERS”

Establishing and managing accounts at multiple

clearing members

• In September 2008, CME seamlessly ported all $2.2 billion of customer funds and 2.5 million customer positions from Lehman Brothers to a solvent clearing member

• In wholesale porting transactions, CME balances the need to assure client safety with recalibration of financial safeguards to minimize stress in the financial system

PROVEN SUCCESS IN

CUSTOMER PORTABILITY

Wholesale porting from stressed to solvent

clearing members

• Portability is essential to customer protection, both in times of market stress and during the normal course of business

• Portability is underpinned by CME Rule 853, governing transfers of trades


Capital Efficient Margin Methodology

Model Overview

CME Group utilizes a historical Value at Risk (VaR) model, based on a 99% confidence of a 5-day

move using 5 years of historical data

Net portfolio margining of cleared IRS positions isolates the true curve risk in a portfolio and

assesses the appropriate margins to cover that risk

Transparent to market participants, easy to replicate, and scalable to margin other IRS currencies

and Futures

CME Group has the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS

positions against Eurodollar and Treasury Futures

On October 18, 2011, the CFTC passed rule 39.13(g)(4)(i), which outlines the process for providing these

margin offsets for Customers

“A derivatives clearing organization may allow reductions in initial margin requirements for

related positions (margin reductions) if the price risks with respect to such positions were

significantly and reliably correlated”

Participants will have the ability to move selected futures contracts into their OTC Sequestered

Account to strategically offset the risk in their swap portfolio and reduce margins

CME is working to have this available mid-2012, and preliminary analysis shows significant savings for

margin offsets:

IRS invoice swaps against corresponding Treasury Futures provide savings of up to 85%

IRS swaps against corresponding Eurodollar strips provide savings of up to 95%

Margin Offsets Against Futures


Transparent Margins Through CME CORE

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CME CORE (CME Online Risk Engine) enables customers to calculate and evaluate their

initial margin requirements for IRS and CDS

Create New or Load Existing

Portfolio

Validate and Calculate Initial

Margin Requirement

Analyze and Review Results

PHASE I: Transparency

• Margin computation

• PNL reporting

• Curve scenario reporting

** Future enhancements

PHASE II: Analytics**

• Delta ladder

• Stress testing

• Incremental VaR

• Analytics to support back-loading

ENHANCE REPORTS TO INCLUDE ELIGIBLE

DISCRIPTIVE DATA


Flexible Collateral for Initial Margin

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CME Clearing accepts a broad array of collateral for the Customer OTC Account Class

Collateral Haircut

US Cash None

Non-US Cash (EUR, GBP, CAD, AUD, JPY, CHF) 5%*

Sovereign Debt of UK, Germany, France and

Canada

5%-10.5% (maturity based)

US Treasury Debt 0.5%-11% (maturity based)

Additional 1.5% for off-the-runs

US Agency Debt 3.5%-7% (maturity based)

Additional 1.5% for off-the-runs

US Agency Mortgage Backed Securities 11%

* Haircut is only applied when cash is used to meet a margin requirement based in a different currency

Expansion of Acceptable Collateral

CME Clearing is working with several major banks on a specialized collateral program that

permits clearing firms to pledge collateral that CME does not accept directly

This program will allow customers to post high quality corporate debt to their clearing firms to

cover initial margin requirements, and these securities will be held in a tri-party account

controlled by CME

This program will be put into effect on March 12, 2012


Corporate Bond Collateral Program Clearing Members can transfer securities into a tri-party account controlled by CME at either

bank* as a term pledge to receive initial margin credit

*The Corporates Collateral Program, IEF4, is supported by a partnership with Bank of New York and JPMorgan Chase

• Allows corporates bonds to be pledged as initial margin collateral for both Cleared IRS and futures

• Reduces costs of clearing for customers and creates further efficiencies for Clearing Members

Overview

• High quality bonds, at least A- rating by NRSO

• USD denominated, both domestic and global issuances

• Vanilla Bonds (Fixed rate bullet, callable, or putable)

• Over $300M in principal outstanding

• TRACE eligible

Bond Requirements

• Haircut: (20%)

• Concentration Limits: The lesser of 5% per issuance and 5% per issuer or $200M

• Level II industry diversification (up to 25%)

Program Parameters

• CME Clearing will publish a list of eligible CUSIPs at the beginning of each month

• CUSIP list will likely remain static except bonds that mature, and bonds that are deemed ineligible due to changes (i.e. rating downgrade, distress, etc)

Eligible CUSIP List


Customer On-boarding Resources

CME CORE Margin Tool

Web-based margin tool that enables customers to generate initial margins for IRS and CDS portfolios

CME CORE can be accessed by doing the following:

• Create a CME SMART Click ID at https://cmecore.cmegroup.com/span/

• Once a SMART Click ID is attained, please email [email protected] to request entitlements

to CME CORE. Specifically, in an email please provide the user ID and specify the request for the

IRS/CDS asset classes.

• Please ensure your desktop is equipped with a recent version of Microsoft Silverlight (MS Add On):

http://www.microsoft.com/getsilverlight/Get-Started/Install/Default.aspx

CME On-boarding Team

Team of on-boarding experts who work with buy side clients to help them prepare to clear IRS and CDS,

and engage in testing the clearing process

Extensive work with the affirmation platforms, and ability to connect customers to the right resources at

those firms

The team can be reached at (312) 338-7112 and [email protected]


Legal Documentation

Documentation between CME Group and Customer

Exchange User License Agreement (EULA)

• New customers must register their firm(s) online via the CME Exchange User License Agreement

(EULA), which may be found at: http://www.cmegroup.com/clearport/registration.html

• Investment Advisors and Fund Managers can take advantage of an alternative registration process

which offers the flexibility to register managed funds, provided it has the authority to do so, by

notifying the CME ClearPort Facilitation Desk via email at [email protected]

Documentation between Clearing Member and Customer

Clearing Member Futures Account Agreement (FCM Agreement)

Clearing Member OTC Addendum

Documentation between Customer and Execution Counterparty

OTC Execution Agreement

The FIA and ISDA published a template that market participants can use as a basis for negotiation:

http://www.futuresindustry.org/fia-and-isda-publish-documentation-for-cleared-swaps.asp

















Establish a relationship with a participating CME IRS Clearing Member

Select affirmation platform and work with Clearing Member throughout testing cycles

Complete required Clearing Member Customer Documentation

Begin clearing trades

For any questions regarding On-Boarding and Testing, please contact :

On-boarding Team 312 338 7112 [email protected]

For general information, please contact:

Jack Callahan 312 454 8312 [email protected]

Steve Dayon 312 466 4447 [email protected]

Europe

Jonathan Boyd +44 20 3379 3726 [email protected]

Asia

Way Yee Bay +65 6593 5560 [email protected]

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Next Steps and Contact Us


Firm Contact Name Email Phone Number

Bank of America

Merrill Lynch

Todd D’Agosta (US)

Ed Allen (EMEA)

[email protected] 646 855 9813

646 855 6506

Barclays Sandy Fleischman

Patrick Corrigan

[email protected]

[email protected]

212 526 6548

212 526 7101

BNP Paribas Avi Pemper

Gavin Dixon

[email protected]

[email protected]

212 841 3753

44 20 7595 8417

BNY Mellon Sanjay Kannambadi

Robert Bosse

[email protected]

[email protected]

212 635 6927

212 635 6718

Citigroup Chris Perkins

Mariam Rafi

[email protected]

[email protected]

212 723 5943

212 723 4074

Credit Suisse Neil Burke

John Guthrie

[email protected]

[email protected]

212 538 0761

212 325 4535

Deutsche Bank Elliot Barr

Luciana Miranda

[email protected]

[email protected]

212 250 9831

212 250 8845

Goldman Sachs Mike Dawley

Jack McCabe

[email protected]

[email protected]

212 902 7582

212 902 3037

JPMorgan Piers Murray

Catherine Bartzos

[email protected]

[email protected]

212 270 5445

212 834 3105

Morgan Stanley Jason Swankoski

Mark Bortnik

[email protected]

[email protected]

212 761 5206

44 20 7677 9685

Nomura Sandeep Kohli

Stephen Scalzo

[email protected]

[email protected]

212 667 2037

212 667 8981

RBS Brian Halligan

Madlen Dorosh

[email protected]

[email protected]

203 897 2504

203 897 9869

UBS Ed Pla

Reinhardt Olsen

[email protected]

[email protected]

203 719 2602

203 719 3408

Wells Fargo Jeff G. Gore

Dan Thomas

[email protected]

[email protected]

704 715 0528

704 374 2103

Cleared OTC IRS Clearing Firm Contacts

21


Disclaimer

Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a

leveraged investment, and because only a percentage of a contract’s value is required to trade,

it is possible to lose more than the amount of money deposited for a futures position. Therefore,

traders should only use funds that they can afford to lose without affecting their lifestyles. And

only a portion of those funds should be devoted to any one trade because they cannot expect to

profit on every trade.

All references to options refer to options on futures.

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, and Chicago Mercantile

Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board

of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX is a

registered trademark of the New York Mercantile Exchange, Inc. All other trademarks are the

property of their respective owners.

The information within this brochure has been compiled by CME Group for general purposes

only. CME Group assumes no responsibility for any errors or omissions. Additionally, all

examples in this brochure are hypothetical situations, used for explanation purposes only, and

should not be considered investment advice or the results of actual market experience. All

matters pertaining to rules and specifications herein are made subject to and are superseded by

official CME, CBOT and NYMEX rules. Current rules should be consulted in all cases

concerning contract specifications.

Copyright © 2012 CME Group. All rights reserved.

22

OTC-IRS

Documents

party account

initial margin

chicago mercantile

daily volume

market participants

affirmation

clearing member

industry leader