Portfolio Margining
Unparalleled Capital Efficiencies for Interest Rate Swap Portfolios
October 2014
© 2014 CME Group. All rights reserved.
Portfolio Margining Overview
9 Clearing Members are now portfolio margining CME swaps and futures
May 7, 2012
Sept. 21, 2012
Nov. 19, 2012
February 2013
September 2014
Portfolio Margining
Available for House
Accounts
CME Optimizer
launched
Portfolio Margining
Available for Customers
CME Optimizer integrated
with CME CORE
DSFs and Ultra Bond
added to portfolio
margining
Creating Solutions for a Capital Constrained World
• CME Group has administered a range of cross-margining programs for more than 20 years
• With market leading Interest Rate products and the launch of Cleared OTC Interest Rate Swaps in
2010, CME Group is able to offer both customer and house accounts capital efficiencies for Cleared
OTC Interest Rate Swaps and Eurodollar and Treasury Futures
Unparalleled Capital Efficiencies
• Over 160 customer accounts already benefitting from this scalable solution
• Total risk reductions now account for over $3.9 billion in initial margin savings
• Achieve capital savings across a diverse portfolio, including all CME currencies and product types
© 2014 CME Group. All rights reserved.
2
Portfolio Margining Savings Analysis
Optimize Efficiencies for both USD and non-USD IRS Portfolios
Portfolio A: USD Portfolio
Product Type Currency Direction
Notional/Contracts
Fixed/Float
USD RECEIVE DV01 Equivalent of 10YR
10YR
USD
Short
1,000
BEFORE PORTFOLIO MARGINING
Initial IRS Margin Requirement
3,299,395.00
Initial Futures Margin Requirement
1,100,000.00
Total Margin
4,399,395.00
AFTER PORTFOLIO MARGINING
Portfolio B: Non-USD Portfolio
Product Type
Fixed/Float
Fixed/Float
Fixed/Float
ED
2YR
5YR
10YR
30YR
Currency
GBP
EUR
JPY
USD
USD
USD
USD
USD
Direction
PAY
PAY
PAY
Short
Long
Long
Long
Long
Notional/Contracts
100,000,000
100,000,000
100,000,000
648
89
524
419
438
BEFORE PORTFOLIO MARGINING
Initial IRS Margin Requirement
5,438,355.34
Portfolio Margin IM Requirement:
1,900,000.00
Initial Futures Margin Requirement
2,163,807.00
Portfolio Margin Savings:
2,499,395.00
Total Margin
7,602,162.34
Portfolio Margin Savings:
57%
AFTER PORTFOLIO MARGINING
Portfolio Margin IM Requirement:
3,390,190.66
Portfolio Margin Savings:
4,211,971.68
Portfolio Margin Savings:
55%
© 2014 CME Group. All rights reserved.
3
Portfolio Margining – Operational Highlights
CME Margin Optimizer
 CME Margin Optimizer: specifies the ideal allocation of Eurodollar and Treasury Futures to move into the OTC
Customer Cleared Swaps account to minimize the portfolio risk, and therefore, reduce margins
 Clearing Members can use this tool to facilitate Portfolio Margining for both their clients and their house accounts
 The tool automates the selection of futures to move and creates a transfer message that is produced and can be
easily copied and sent to CME to make the change for the books and record at the Clearing House
 5 inputs are required (4 by CME and 1 by the FCM that is utilizing the Optimizer)
• CME: Delta Ladder, SPAN, Base Curve, Scaled Log Return Files
• FCM: Futures Position File
Current Account Set-up
Futures
Segregated
Account
Portfolio Margining Account Set-up
Futures
Segregated
Account
Selected Eurodollar and Treasury Futures
OTC Customer
Cleared Swaps
Account
Futures Selected
for Portfolio
Margining
OTC IRS
OTC
Customer
Cleared
Swaps
Account
© 2014 CME Group. All rights reserved.
4
Portfolio Margining Account Structure Detail
Setting-up accounts at FCM for position transfers
Original Set-Up:
Trading Account: All trades and PNL
Collateral Account: IM and VM movements
IRS Account: For swap trades
Portfolio Margining: Two Additional Accounts Added
+ Portfolio Margining Account: Used to book the other side of futures moved into the
IRS account
+ Futures Master Account: Sum of the trading account, collateral account and
portfolio margining
Example* of Account Structure for Portfolio Margining:
Original Set-Up: Client is long 100 Futures
Trading Account: Long 100 and all PNL (realized and unrealized) flows through this account
Portfolio Margining Set-Up: Long 100 Futures, with 80 futures moved over for Portfolio Margining
Trading Account: Remains long 100 and all PNL (realized and unrealized) remains unchanged
Portfolio Margining Account: Shows Sell of 80 contracts
Futures Master Account: Shows the Sum of the Trading Account and Portfolio Margining Account – Long 20 Contracts
IRS Account: Shows Long 80 contracts
Reconciliation
• Trading account remains unchanged
• Positions movements related to portfolio margining will occur at the current days settlement price between the Portfolio Margining
account and the IRS account
• These movements between accounts will not change the net PNL (realized or unrealized) or positions
• They will reflect the movement of positions and PNL between the segregated and sequestered accounts
• The Portfolio Margin account will be a mirror image (positions, realized and unrealized PNL) of the futures in the IRS account
• The purpose of the Futures Master account is to aggregate the Trading account and Portfolio Margining account such that futures
open interest remains unchanged
*Example ignores the collateral account for simplicity
© 2014 CME Group. All rights reserved.
5
Methodology
Methodology
For cross margining Eurodollar and Treasury Futures with IRS, CME will
leverage the current multi-currency Historical VaR framework
 Margins built to provide 99% coverage over a 5-day closeout period
 Historical scenarios are:
Historical VaR
 Generated using a 5-year look back period
 Synchronized across all observed tenors on the zero curve, across all currencies
 Scaled using Exponentially Weighted Moving Average (EWMA) based volatility forecasts
 Margin is currently the 99.7th % of portfolio changes (loss) across all scenarios
Application
 Apply HVaR methodology to Eurodollar and Treasury futures prices
 Create a rolling time series of returns (prices)
 CME uses Treasury Future prices and Eurodollar prices (themselves) as an
underlying risk factor, as it accounts for risks including:
Reasoning




Switch of the Cheapest-to-Deliver (CTD) (applies to Treasury Futures)
Delivery timing (applies to Treasury Futures)
Changes in the convexity adjustment (applies to Eurodollars)
Covers extremely well-hedged portfolios (applies to Eurodollars)
© 2014 CME Group. All rights reserved.
6
Portfolio Margining Tools
Additional Features
CME CORE
• CORE: Clearing Online Risk Engine
• Ideal business user solution for Portfolio Margin Savings analysis
• Allows firms to calculate their margin for their portfolios
• Can upload exact portfolio via a portfolio upload or enter trades manually
• Once run, CME CORE calculates the portfolio margin savings between OTC IRS and Interest Rate Futures
• Reports breakdown position transfers in PDF and CSV file format
New Features!
•
Enhanced Margin
Optimization: Optimize
portfolios using IRS trades in
addition to Delta Ladders and
Futures
•
Ideal Optimization Analysis:
Run new reports detailing which
futures best hedge your OTC risk
•
Streamline Margin
Calculations: Upload and
margin any combination of IRS
trades, IRS delta ladder and
futures
Margin
Optimization
Report
© 2014 CME Group. All rights reserved.
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Disclaimer
“CME Group”, “CME Europe” and “CME Clearing Europe” are brands of CME Group Inc. and its subsidiaries, members of which include Chicago
Mercantile Exchange Inc., CME Europe Limited, CME Clearing Europe Limited and CME Marketing Europe Limited.
Exchange traded and Over-The-Counter (OTC) derivatives are not suitable for all investors, and involve the risk of loss. Exchange traded and OTC
derivatives are leveraged investments, 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 initially deposited for an exchange traded or OTC derivative 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.
CME Group is the trademark of CME Group, Inc. The Globe logo, Globex® and CME® are trademarks of Chicago Mercantile Exchange, Inc.
CBOT® is the trademark of the Board of Trade of the City of Chicago Inc. NYMEX, New York Mercantile Exchange, and ClearPort are trademarks
of New York Mercantile Exchange Inc. COMEX is a trademark of Commodity Exchange Inc. All other trademarks are the property of their
respective owners. The information within this presentation has been compiled by CME Group for general purposes only. Although every attempt
has been made to ensure the accuracy of the information within this presentation, CME Group assumes no responsibility for any errors or
omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes only, and should not be
considered investment advice or necessarily the results of actual market experience. All data is sourced by CME Group unless otherwise stated.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX, CME Europe,
CME Clearing Europe and CME Group rules. Current rules should be consulted in all cases concerning contract specifications. This communication
does not constitute a Prospectus, nor is it a recommendation to buy, sell or retain any specific investment or to utilise or refrain from utilising any
particular service. This communication is for the exclusive use of Eligible Counterparties and Professional Clients only and must not be relied upon
by Private Clients who should take independent financial advice. Circulation should be restricted accordingly.
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Kingdom. CME Clearing Europe Limited is a Recognised Clearing House (“RCH”) recognised and supervised by the Bank of England. CME
European Trade Repository is a business name of CME Trade Repository Limited, a registered trade repository under EMIR supervised by the
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(ROIE’s) recognised by the Financial Conduct Authority.Issued by CME Marketing Europe Limited. CME Marketing Europe Limited (FRN: 220523)
is authorised and regulated by the Financial Conduct Authority in the United Kingdom.
© 2014 CME Group. All rights reserved.
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