1. finance
2. investing
3. futures trading

OTC FX Clearing
Security. Neutrality. Transparency.
October 2014
© 2014 CME Group. All rights reserved.
CME Group: Who We Are
CME Group is the world’s leading and most diverse derivatives exchange. It’s where
companies, institutions and individuals from around the globe come to manage their
business risks, hedge against fluctuations and protect themselves against price
volatility.
Our Global Reach
ACCESS IN
150
CONNECTIONS THROUGH
Countries
11
Global
Hubs
RELATIONSHIPS WITH
12
Partner
Exchanges
© 2014 CME Group. All rights reserved.
2
Why Customers are Choosing CME Group
Offering a superior solution to meet client’s needs
Customer Focus
• Global multi-asset class clearing solution for IRS, CDS, FX, and Commodities
• Transparency through reporting directly to customers
• Follow-the-Sun Global Client Service Support
Margin Efficiencies
• Customer margin is based on 5-day historical VAR methodology
• Margin offsets for OTC FX trades
Operational Flexibility
• Ability to real-time clear trades in all time zones
• No requirement of pre-funding to clear trades in normal course of business
• Automated portability for default scenarios
Customer Protections
• Offering clients the option of LSOC, LSOC with Excess, and Combined Cash Flow under
LSOC with Excess
© 2014 CME Group. All rights reserved.
3
CME OTC FX Product Offering
© 2014 CME Group. All rights reserved.
Estimated Regulatory Timeline*
Q4 2014*
Once the Mandate is
announced:
90 day comment period is
opened
Q1 2015
Q2 2015
Q3 2015
Entered into Federal Register:
After the comment period, the
implementation “clock” starts,
meaning 90 day implementation
for the first phase of participants
• Currently there is not a draft proposal on the desk of the CFTC Chairman, but there is still the
possibility of a Q4 2014 public proposal for an FX mandate, with implementation starting Q2
2015 (assuming a Q4 announcement):
- Information at this point is the CFTC is fully focusing on equivalency before mandating more
products.
• Still expecting that a move to MAT status for NDFs could occur quickly, which means trading
moves to SEFs (assuming no “no-action” letters are implemented)
- In order to ensure we offer our clients choice in execution, we are engaged with multiple SEFs to
get them connected to CME
• FX Options are not expected in the initial mandate, but are expected at some point in the
future as they are classified as swaps
*All dates indicated are subjective, timeline is based on a beginning Q1 announcement.
© 2014 CME Group. All rights reserved.
5
CME Group OTC FX Clearing
Overview
• Provides post-execution clearing solution and settlement service designed to meet the riskmanagement needs of FX market participants
• Allows customers to retain the flexibility of OTC products, utilize any established OTC
execution method (Voice, SEF, Single Dealer Platform, other ECN), while mitigating
counterparty credit risk
Product Scope
• Initial focus centered on 12 Non-deliverable Forwards (NDFs) and 26 Cash-Settled Forwards
(CSFs)
• FX options to be delivered at a later date
• Notional can be any amount as long as it conforms to market convention submissions and is
for any valid business date out to 2 years
© 2014 CME Group. All rights reserved.
6
Benefits
Expand Liquidity
• Increase volume with existing accounts by freeing up bilateral credit lines by clearing via CME
• Access to new counterparties previously unattainable for legal or credit reasons
Mitigate Counterparty Risk
• CME acts as the central counterparty to all transactions
Reduce Risk and Utilize Efficient CME Network
• Sequestered customer account treatment (cleared OTC Derivatives Account class) Provides the benefits of bankruptcy protection and portability of customer funds under the full
financial safeguards package of the CME Clearing House
• Balance Sheet Efficiencies - Exchange-style multilateral offsets of OTC FX positions reduce
the need to allocate balance sheet to cover bi-lateral counterparty limits
• Pre-Trade Credit Check Supported Via SEF or credit hubs – CME offering supports pre-trade
credit checking flows to speed up execution and clearing acceptance.
© 2014 CME Group. All rights reserved.
7
FX Clearing Overview
Trade Submission
•
•
Platform-agnostic open clearing service via CME ClearPort
Compatible with Straight Through Processing (STP) providers allowing for real-time trade
submission or migration of existing portfolios (Traiana, Bloomberg-VCON, MarkitServ)
Valuation & Settlement
•
•
•
•
Cleared as OTC Forwards (not futures) with the trades held at the original trade price
Daily mark-to-market (MTM) generates realized P&L, with 2-way flow of cash variation
margin
Currently, positions held on a line item basis, netting/compression to be introduced on a
future date
NDF’s will settle to the EMTA recommended official fix in each pair, while currently the
CSFs will use the WMR 4pm London price (Operational handbook available for more
detailed fix sources and day conventions)
Risk Management
•
•
•
•
Initial margins calculated utilizing historical VaR, using a 99%, 5-day loss coverage
assumption
Collateral held in the Customer OTC Sequestered account class
Currently OTC FX is in the F&O pool, no initial contribution required by F&O clearers
DMP process currently a work in progress, procedures have passed F&O risk committee
and will be filed with regulators shortly.
© 2014 CME Group. All rights reserved.
8
CME Clearing Financial Safeguards
CME has independent default waterfalls for each major asset class
IRS Financial Safeguards
Base Financial Safeguards
CDS Financial Safeguards
$1.55 Billion
$3.26 Billion
$750 Million
Assessment Powers
Assessment Powers
Assessment Powers
3rd and 4th largest CM shortfalls
275% of GF per Default1
3rd and 4th largest CM shortfalls
Non-Defaulting Clearing Members
IRS Guaranty Fund Contributions
Non-Defaulting Clearing Members
Base Guaranty Fund Contributions
Non-Defaulting Clearing Members
CDS Guaranty Fund Contributions
$150M
$100M
$50M
CME Designated Working Capital
for IRS Guaranty Fund
CME Designated Working Capital
for Base Guaranty Fund
CME Designated Working Capital
for CDS Guaranty Fund2
Defaulted Clearing Member
IRS Guaranty Fund Contribution
Defaulting Clearing Member
Base Guaranty Fund Contribution
Defaulting Clearing Member
CDS Guaranty Fund Contribution
Defaulted Clearing Member
IRS Fund Performance Bonds
Defaulting Clearing Member
Base Fund Performance Bonds
Defaulting Clearing Member
CDS Fund Performance Bonds
IRS Financial Safeguards Product Coverage
• Interest Rate Swaps
• Cross-margin eligible futures
Base Financial Safeguards Product Coverage
• Futures and options
• OTC FX
• Other non-IRS or non-CDS OTC products
CDS Financial Safeguards Product Coverage
• Credit Default Swaps
1CME
Rulebook Chapter 8, Rule 802.G
to the greater of (x) $50 million and (y) 5% of the CDS Guaranty Fund, up to a maximum
© 2014 CME Group. All rights reserved.
of $100 million
2Equal
*All Financial Safeguards numbers are as of 12/31/2013 and do not include Assessment
Powers
9
Initial Margin Methodology: CME OTC FX
5-Day 99% HVaR
Past 5 years data to generate historical return
matricies + extreme scenarios
Volatility scaling factors
Generated scenarios
Computation of discounted P&L of total portfolio
in each scenario
Rank scenarios: max loss to max gain
Take required percentile (99.7% of covered
scenarios) as margin
Apportion of margin to different currencies as
required
© 2014 CME Group. All rights reserved.
10
Cleared OTC FX Product Scope
12 OTC FX Non-Deliverable Forwards*
Brazilian
Real
Philippine
Peso
Malaysian
Ringgit
Indian Rupee
Korean Won
Chinese
Renminbi
Indonesian
Rupiah
Taiwan Dollar
Chilean Peso
Colombian
Peso
Peruvian
Nuevo Sol
Russian Ruble
26 OTC FX Cash-Settled Forwards
• USD Settlement: EUR/USD, AUD/USD, GBP/USD, USD/CHF, USD/SEK,
USD/DKK, NZD/USD, USD/NOK, USD/HKD, USD/HUF, USD/ILS, USD/MXN,
USD/SGD, USD/PLN, USD/ZAR, USD/CZK, USD/TRY, USD/THB
• Non USD, T+1 settlement currencies: USD/CAD
• Non USD, T+2 settlement currencies: USD/JPY, AUD/JPY, EUR/JPY, CAD/JPY,
EUR/AUD, EUR/CHF, EUR/GBP
*All settlements in USD
© 2014 CME Group. All rights reserved.
11
CME Clearing Europe FX Products
•
Product coverage: 38 FX NDFs and CSFs (same as US) + 2 additional NDFs and 9 CSFs
Currency
Pair
Currency Pair
Settlement
Currency
Currency Benchmark
Reuters Code (for NDFs)
Fixing Date
Settlement
EUR/CZK
Euro / Czech Koruna
EUR
-
Value – 2
T+2
EUR/DKK
Euro / Danish Kroner
EUR
-
Value – 1
T+2
EUR/HUF
Euro / Hungarian Forint
EUR
-
Value – 2
T+2
EUR/NOK
Euro / Norwegian Krone
EUR
-
Value – 2
T+2
EUR/CNH
Euro / Chinese Offshore Renminbi
EUR
-
Value – 2
T+2
EUR/PLN
Euro / Polish Zloty
EUR
-
Value – 2
T+2
EUR/SEK
Euro / Swedish Krona
EUR
-
Value – 2
T+2
EUR/TRY
Euro / Turkish Lira
EUR
-
Value – 2
T+2
EUR/CNY*
Euro / Chinese Onshore Renminbi
EUR
EURCNY=
Value – 2
T+2
USD/UAH*
U.S. Dollar / Ukrainian Hryvnia
USD
EMTAUAHFIX=
Value – 2
T+2
USD
-
Value – 2
T+2
USD/CNH
U.S. Dollar / Chinese Offshore
Renminbi
* EUR/CNY and USD/UAH are NDFs
© 2014 CME Group. All rights reserved.
12
CME OTC FX Trade Flows
© 2014 CME Group. All rights reserved.
Clearing Workflows: On-SEF vs. Off-SEF
Trade workflows will differ depending on where the trade is executed:
On-SEF: Firms will pre-approve credit on all trades executed on SEFs
Off-SEF: Clearing Firms will choose to set an account to one of the following options:
CME Hosted Credit Limits in RAV
•
CME will allow Firms to set limits on
accounts.
•
•
Claim Workflow
•
Clearing Member Firms must
explicitly accept or reject trades
after submission to CME Clearing.
CME will accept or reject trades
after either:
•
Both FCMs have accepted the
trade.
•
A single FCM has rejected the trade
Firms will have the ability to
view and edit limits.
All trades that breach limits will be
rejected.
© 2014 CME Group. All rights reserved.
14
On-SEF Workflow with Pre-Approval
Client
ED
2
2
1
Trade receives credit pre-approval from
FCM (precedes this workflow) prior to
submission to CME
2
Client executes trade with Executing
Dealer (ED) on SEF
3
SEF sends trade to CME for Clearing
4
After validating product, account and
applying credit limits set by CME, CME
accepts swap for clearing
5
CME sends “Cleared” notification to SEF
which displays trade status to principals
5
CME sends a Clearing Confirmation to
FCMs
SEF
3
5
CME Clearing
House
5
4
Clearing Member
(Client)
Product 
Account 
Credit 
5
Clearing Member
(ED)
*Pre-approved trades do not go through request consent workflow.
© 2014 CME Group. All rights reserved.
15
On-SEF Workflow without Pre-Approval
Client
2
2
SEF
4
5
6
Clearing Member
(Client)
2
Trade is entered manually into SEF
3
SEF sends trade to CME for Clearing
4
CME sends “Pending FCM Approval”
notification to SEF
4
6
CME Clearing
House
4
Client and ED execute voice trade
ED
1
3
1
Product 
Account 
Credit 
6
5
4
“Clearing Consent” notifications sent to
FCM (client) and FCM (ED)
5
Clearing Member of both parties accept
the swap
6
CME sends “Cleared” notification to SEF
which displays trade status to principals
6
CME sends a Clearing Confirmation to
FCMs
Clearing Member
(ED)
© 2014 CME Group. All rights reserved.
16
Off-SEF Workflow: CME Hosted Credit Limits in RAV
1
Affirmation Platform
Client
ED
1
Bilaterally agreed trade is confirmed /
matched on Affirmation Platform and sent
to CME ClearPort
2
Product, account and RAV limits are
validated – partial cleared
3
CME sends Cleared notification to
platform and Clearing Members
3
CME ClearPort
2
RAV
Product 
Account 
Credit 
3
Clearing Member
(Client)
CME Clearing
House
3
Clearing Member
(ED)
*Pre-approved trades do not go through request consent workflow.
© 2014 CME Group. All rights reserved.
17
Off-SEF Workflow: Claim Workflow
1
Affirmation Platform
Client
3
ED
1
Bilaterally agreed trade is confirmed /
matched on Affirmation
2
Product, account and CME limit on CMF
are validated successfully
3
Pending Clearing notification sent to
Affirmation Platform
4
Clearing Consent messages sent to both
Clearing Members
5
Clearing Members of both parties accept
the trade
6
CME sends Cleared Notification to
platform and Cleared Confirmations to
firms
6
CME ClearPort
2
Product 
Account 
Credit 
4
CME Clearing
House
4
5
6
Clearing Member
(Client)
6
Clearing Member
(ED)
*Pre-approved trades do not go through request consent workflow.
© 2014 CME Group. All rights reserved.
18
Bunched Order Processing
© 2014 CME Group. All rights reserved.
Bunched Order Overview
Recent regulations require bunched orders to be sent for clearing immediately after execution
CME Group’s Solution
• Support clearing of bunched orders in a “Holding Account”
• Allow submission of allocations to the end customer account while offsetting the bunched order in the holding account
• 4 allocation methods available:
• Allocations entered on SEF
• Allocations entered on Platforms
• Clearing Firm performs allocations using Transfer workflow in DMS
• Spreadsheet upload using Transfer workflow via CME Client Services Team
2
Client
2
ED
Platform A
3
 Validate Product
 Validate Account
 Validate Limits
ED alleges the bunched order to the Client.
2
Client affirms the bunched order while
selecting the “Holding Account” at CME.
3
Platform A sends the matched deal to CME
Clearing.
4
CME Clearing validates the bunched order.
5
CME sends Cleared notice to Clearing
Member Firms.
1
5b
CME Clearing
5
1
4
5a
5a
5b
Clearing Member Firm
(Bunched Order Holding Account)
Bunched Order
Holding Account
Clearing Member Firm
(ED)
CME sends Cleared notice back to the
platform.
ED Account
(House)
© 2014 CME Group. All rights reserved.
20
Contacts
Visit www.cmegroup.com/fxclearing or contact one of the below team members
Will Patrick
[email protected]
+44 20 3379 3721
[email protected]
+1 312 930 3426
[email protected]
+44 20 3379 3863
[email protected]
+65 6593 5573
Executive Director – FX
Simon Burnham
Senior Director – FX
Nigel Manthorp
Director FX Products
Malcolm Baker
Senior Director Interest Rate & FX Products
Jaki Walsh
[email protected]
+44 20 3379 3858
[email protected]
+1 212 299 2828
Senior Director OTC Products
Fateen Sharaby
Director Clearing Solutions
© 2014 CME Group. All rights reserved.
21
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.
Futures and swaps trading is not suitable for all investors, and involves the risk of loss. Futures and swaps 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 a futures and a swap 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 Europe 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 matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT, NYMEX 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.
Issued by CME Marketing Europe Limited.
CME Marketing Europe Limited (FRN: 220523) is authorised and regulated by the Financial Services Authority.
© 2014 CME Group. All rights reserved.
22