London Stock Exchange Group

CC&G Risk Disclosure June 2014

Authorization under EMIR

Page 2

Application Package

has been submitted to

Authorities

2013, Sept. 13th 2013, Oct. 25th

First feedback from

Authorities (additional

documentation

requested)

Within six months from the

declaration of completeness

The authorization was obtained with the unanimous opinion of the College of Regulators on full compliance by CC&G of the EMIR requirements to operate as a CCP

2013, Nov. 28th

Application package

declared complete

from the Authorities

Final

authorization

2014, May. 21th

Summary

Page 3

Risks in CCPs

Margins

Default Funds

Interoperability arrangement

Appendix – Sovereign Risk Framework

Risks in CCPs (1 / 2)

Page 4

Risk Definition

Credit Risk The risk that a counterparty, whether a participant or other entity, will be unable to

meet fully its financial obligations when due, or at any time in the future

- Principal Risk The risk that a counterparty will lose the full value involved in a transaction, for

example, the risk that a seller of a financial asset will irrevocably deliver the asset, but

not receive payment

- Replacement Cost Risk The risk of loss of unrealised gains on unsettled transactions with a counterparty. The

resulting exposure is the cost of replacing the original transaction at current market

prices

Liquidity Risk The risk that a counterparty, whether a participant or other entity, will have insufficient

funds to meet its financial obligations as and when expected, although it may be able

to do so in the future

Custody Risk The risk of loss on assets held in custody in the event of a custodian’s (or

subcustodian’s) insolvency, negligence, fraud, poor administration, or inadequate

recordkeeping

Investment Risk The risk of loss faced by an Financial Market Infrastructure when it invests its own or

its participants’ resources, such as collateral

(CPSS-IOSCO Principles for Financial Markets Infrastructures 2012)

Page 5

Risks in CCPs (1 / 2)

Risk Definition

Legal Risk The risk of the unexpected application of a law or regulation, usually resulting in a

loss

Operational Risk The risk that deficiencies in information systems or internal processes, human errors,

management failures, or disruptions from external events will result in the reduction,

deterioration, or breakdown of services provided by an FMI

General Business Risk Any potential impairment of the FMI’s financial position (as a business concern) as a

consequence of a decline in its revenues or an increase in its expenses, such that

expenses exceed revenues and result in a loss that must be charged against capital

Systemic Risk The risk that the inability of one or more participants to perform as expected will

cause other participants to be unable to meet their obligations when due

(CPSS-IOSCO Principles for Financial Markets Infrastructures 2012)

Confidence intervals

Holding period

Lookback period

Main requirement

Minimum 2 days

EMIR Minimum 99,00%. CC&G Pol. minimum: 99,50%

Minimum 1 year

Procyclicality 10 years time series or a 25%

buffer

Topic

Marg

ins

Margins, Default Fund coverage, collateral

Minimum coverage

Main Requirement

CC&G policy minimum:

•“Cover 4”Bond Section •“Cover 3”Other Sections

Topic

Defa

ult

Fu

nd

Status Status

Cash

At least the first 2 most

exposed participants

Minimum 50% of cash

over total Initial Margin

Maximum 45% of

Assets form a single

issuer over total Initial

Margin

Covered by

Page 6

Covered by

Prudential Requirements

100%

Initial Margins

Initial Margins are calculated using Risk Based Margining Methodologies:

• for equity derivatives and cash equity TIMS

• for bonds using MVP

• for energy derivatives using MMEL

• For agricultural derivatives using MMEG

These methodologies are at industry standards

Historical price and yield curve analysis:

• Prudent Confidence Levels: 99.50% - 99.80%

• Prudent Holding Periods: 2-5 days

• Long Term Price Historical Analyses (>20 years where available)

No Significant Changes to Margin setting approach in last 12 months

Approach performed well during the recent crises

Page 7

Margins: Overview of methodologies

Model Type Distributional assumptions Confidence levels Lookback periods Holding periods P&L

methodology

Mark

et/

pro

du

cts

Equity and Equity

derivatives section:

MTA (shares, warrant,

convertible bonds) MIV

(closed-end fund, investment

companies, REIC) , ETFplus

(ETF, ETC)

TIMS (Theoretical Intermarket Margins System)

Industry Standard Scenario Based Analysis

The most conservative result

obtained by assuming

normal distribution and

real distribution of price

variations is considered.

99,5% minimum for the

minimum time

horizon/holding period

required by EMIR (1

year/2 days).

See next slide for grid

details.

Look back periods

ranging from 6

months to 10 years,

plus one for the

whole time series

starting, where

available, from 1991.

• For equity cash: 1

day and 2-days;

• For derivatives: 1

day, 2-days, 3-days.

Full valuation

Bond section

MTS, MoT, EuroMot, Euro tlx

MVP (Method for Portfolio Valuation)

Industry Standard Scenario Based Analysis

The most conservative result

obtained by assuming

normal distribution and

real distribution of yield

variations is considered.

Levels of coverage for

each time series/holding

period analysed are

defined by applying an

internal model, namely

“Sovereign Risk

Framework” (SRF) .

See next slide for grid

details.

Look back periods

ranging from 6

months to 10 years,

plus one for the

whole time series

starting, where

available, from 1999.

Ranging from 3 to 5

days, depending on the

Band resulting form the

SRF analysis.

Full valuation

IDEX

Energy Derivatives Futures

MMeL, a TIMS-like model

The MMeL margining methodology has a structure of

Classes which recognises contracts tradable on the

market grouped by their specific characteristics

(Delivery Period and type of supply: Baseload or

Peakload). Specific classes are assigned to contracts

during the delivery period.

The most conservative result

obtained by assuming

normal distribution and real

distribution of price

variations is considered. 99.5% confidence level 1-year time series 2-days holding period. Full valuation

Agrex

Durum Wheat Futures

MMeG, a TIMS-like model

The margining methodology foresees a Class

structure capable of classifying the contracts which

are actually traded on the market plus additional

Classes for managing Delivery Positions (Covered

and Uncovered from a delivery certificate) and

Matched (between seller and buyer) Positions.

The most conservative result

obtained by assuming

normal distribution and real

distribution of price

variations is considered Same as for Equity

derivatives

Look back periods

ranging from 6 months

to 10 years, plus one

for the whole time

series referred to time

series of comparables.

Same as for Equity

derivatives.

Full valuation

Page 8

-

100

200

300

400

500

600

700

100,00% 99,90% 99,80% 99,70% 99,60% 99,50%

Nu

mb

er

of

Inst

rum

en

ts

Confidence Level

Shares

Unit of Funds

Convertible Bonds

International Shares

Warrants

ETF

ETC

ETN

Backtested Margin Confidence Level By Cleared Instrument

Page 9

Initial Margins: Equities Updated at 26 June 2014

Backtested Margin Confidence Level By Portfolio (Updated at 26 June 2014)

6 breaches from back-test equity portfolio results on 14.194 occurrences (from 18-02-14 to 27-06-14)

Confidence Level: 99.96%; Holding Period: 3 days

CC&G within Risk Appetite for Equities Margins

CL at 99,96% at Instrument Level, 99.96% at Portfolio Level KEY MESSAGE:

• 100% of all cleared instruments observe at least a 99.6%

confidence level over their whole time series (up to 21 years).

• Average Confidence Level 99,96%

1002

250

93 20 2

Backtested Margin Confidence Level By Cleared Instrument

Number of observations from 14.11.2012 380 A

Margined Bonds Average per day 97 B

Daily price variations 37.093 C ~ A x B

Number of breaches with MI in force at the date (See below) 1 D

Confidence Level 99.997% 1 – D / C

CCT Breaches: The breach is on 27 Feb 13 (3,21% price var. Vs 3,10% Margin). The breach is in the duration classes III (conf lev 99,99%) due to the

presence in that class of Italian CCTs that is characterized by a high volatility compared to fixed rate Italian government bonds. An ad-hoc duration class for CCTs has been implemented and tested. CC&G has requested a feedback to LCH in order to develop the same functionality and go live simultaneously.

Historical Breach Analysis Type of Bond Description Breaches

CCT 7yr Bond (floating) 1

BOT 3m, 6m & 12m ZCB 0

CTZ 24m ZCB 0

BTPi Inflation-linked 5,10,15 & 30yr Bond 0

BTP 3,5,10,15 & 30yr Bond 0

TOTAL 1

Initial Margins: Fixed Income Updated at 27 June 2014

Page 10

Backtested Margin Confidence Level By Portfolio

No breaches from back-test Fixed Income portfolio results on 9.422 occurrences

(from 19-02-14 to 27-06-14) Confidence Level: 100%; Holding Period: 3 days

KEY MESSAGE: CC&G within Risk Appetite for Fixed Income Margins

CL at 99,997% at Instrument Level, 100% at Portfolio Level

Prociclicality

…Close positions…

Market Volatility Increases

…More participants hit VaR limits…

…Volatility and correlations increase…

Some participants

hit VaR limits…

Regulatory framework Requirement CC&G approach

Procyclicality

(ESMA art. 28)

One of the following options:

1. Look-back period of at least 10 years; or

2. Margin buffer of 25%; or

3. 25% weight to stressed observation

1. Opt. 1. always applied, where available

2. Opt. 2. applied for new instruments

Page 11

Page 12

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

-7,87%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

-14,04%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

14,70%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

11,58%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

-11,96%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

11,76%

0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

03-0

7

05-0

7

07-0

7

09-0

7

11-0

7

01-0

8

03-0

8

05-0

8

07-0

8

09-0

8

11-0

8

01-0

9

03-0

9

05-0

9

07-0

9

09-0

9

11-0

9

01-1

0

03-1

0

05-1

0

07-1

0

09-1

0

11-1

0

01-1

1

03-1

1

05-1

1

07-1

1

09-1

1

11-1

1

01-1

2

03-1

2

05-1

2

07-1

2

09-1

2

11-1

2

Stress Test

Margin Breeches

Stress Test Breeches

Margin Interval

FTMIB: 3 Days Index Variation Vs Margins and Stress Test Scenario

Prudent and conservative Initial Margins to cover nearly all (circa 99,6%) actual 3 days variations

Flexible, quick reacting Stress Test Scenario to cover the most extreme reasonably conceivable event also in changing market circumstances

Stress Test Scenario always larger that actual index variations No Stress Test Breaches

Date Margin

Breaches

Margin

Interval

Peak-Over-

Threshold

23 Jan 2008 -7,87% 7,75% 0,12%

8 Oct 2008 -14,04% 13,75% 0,29%

31 Oct 2008 14,70% 14,50% 0,20%

12 May 2010 11,58% 11,50% 0,08%

01-nov-11 -11,96% 11,50% 0,46%

30 Jul 2012 11,76% 11,25% 0,51%

Initial Margins – Index Derivatives

Intraday Margins Amount (Daily Average)

Intraday Margins Stats

Period Days w/ Req.s No. of Requests Amount Req. Daily Average Average IDM

July 2013 23 216 € 4.995.109.412,63 € 217.178.670,11 € 23.125.506,54

August 2013 21 201 € 5.742.485.050,72 € 273.451.669,08 € 28.569.577,37

September 2013 20 228 € 4.601.325.850,13 € 230.066.292,51 € 20.181.253,73

October 2013 22 227 € 5.981.852.116,29 € 271.902.368,92 € 26.351.771,44

November 2013 19 228 € 7.000.919.806,25 € 368.469.463,49 € 30.705.788,62

December 2013 19 201 € 6.031.774.622,07 € 317.461.822,21 € 30.008.828,97

January 2014 21 226 € 5.120.023.757,51 € 243.810.655,12 € 22.654.972,38

February 2014 20 211 € 5.379.879.497,41 € 268.993.974,87 € 25.497.059,23

March 2014 20 233 € 5.620.437.557,01 € 281.021.877,85 € 24.122.049,60

April 2014 20 247 € 5.922.701.954,19 € 296.135.097,71 € 23.978.550,42

May (2014 21 274 € 7.089.481.439,15 € 337.594.354,25 € 25.874.019,85

June (to day) 20 280 € 7.524.093.789,70 € 376.204.689,49 € 26.871.763,53

FY 2014 (to date) 246 2772 € 71.010.084.853,06 € 290.190.911,30 € 25.611.761,81

Updated at 27 June 2014

Page 13 KEY MESSAGE: Recourse to Intraday Margins with Normal Ranges

€ 0

€ 50

€ 100

€ 150

€ 200

€ 250

€ 300

€ 350

€ 400

Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

Millio

ns

Intraday Margin Amount

Page 14

Default Funds

• The size of the Default Funds is gauged on Stress Tests results

• The Default Funds cover the losses in excess of margins for the pertinent market segment (i.e. equity cash & derivatives vs. bonds) in case of catastrophic events

• Four separate Default Funds

– Equity/Derivatives

– Bonds

– Electricity

– Agricultural

• Members contribute on a pro-rata basis

• The contribution to the Default Fund of each Member is adjusted on a monthly basis and is proportional to the average initial margin paid in the previous month

• Lines of Defense (Margins, Default Funds, etc) should not be seen in isolation, but to the contrary, they should be seen as different facets of the same entity

Margins

Default Fund

Stress test

Scenario

Page 15

• Equity Derivatives

– Equity and Index Futures: a one-to-one price variation with their underlying

– Equity and Index Options: recalcutated using the stressed price of their underlying and attributing to each

option an implied volatility equal to twice the implied volatility of the option, having the corresponding

moneyness (the so-called «sticky delta» approach)

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

70,00%

8,00 10,00 12,00 14,00 16,00 18,00 20,00 22,00 24,00 26,00 28,00 30,00 32,00 34,00

Volatilità raddoppiate e traslate

Volatilità rilevate in chiusura

Volatlità raddoppiate

Stress Test - Equity and Equity Derivatives Main Scenarios

Hypotesis Downside Upside

a) largest one-day, two-days and three-days price

variation (upside or downside) since September 2001

Largest one-day, two-days and three-days price

variation (upside or downside) since September 2001

b) 1.20 the value of the «Applicable Margin Interval» 1.20 the value of the «Applicable Margin Interval»

c) 4 times the standard deviation

• Cash Equity

Page 16

Stress Test – Fixed Income Main Scenarios

Hypothesis Yield Increase Yield Decrease

Yield Curve Shock

largest upside or downside, one-day, two-days,

three-days, four-days and five-days yield

variations.

Yield Variations resulting of the linear interpolation

of the largest variation for the previous and next

vertices to the duration of the bond.

Largest between the largest upside and downside,

one-day, two-days, three-days, four-days and five-

days yield variations.

Yield Variations resulting of the linear interpolation

of the largest variation for the previous and next

vertices to the duration of the bond.

Review of Stress Test Scenarios Bond Stress Test Case

Design New Stress Test Scenario “with humps”

(Svensson Model) which goes live in Feb 2008

New Stress Test Scenario based on actual yield variations of Italian Curve

Learn

Monitor

Implement

Communicate

Design

2004-2008

CC&G designs a hypothetical stress test scenario as no historical stress scenario was available for the Eurozone countries in 2004

The Hypothetical Stress Test Scenario is communicated to stakeholders

CC&G executes Stress Tests based on above Scenarios

Late 2007: Consistent humps in the Euro curve which impact the significance of the

Stress Test Scenario

Stress Test Scenario needs to be flexible enough to manage the existence of large

humps in the curve

2008-2012

Stress Test Scenario based on new Model

The “Humpy” Stress Test Scenario is communicated to stakeholders

CC&G executes Stress Tests based on “Humpy” Scenarios

Mid 2010: insurgence of Eurozone Crisis

New Stress Test Scenario now needs to incorporate actual events on each sovereign

Curve

Page 17

Page 18

Risk Management Tests

Assess the adequacy of margining

parameters

Details

• If a small change in the margin parameters (confidence level or holding period) results

in a significant increment in Initial Margin value after

sensitivity test, then it means that margin parameters have to

be amended such as to produce more robust results.

Scope

Sen

sit

ivit

y t

est

Determining the Default

Fund for each Section

Details

Definition of a set of historical or hypothetical scenarios for each

Section

At least the first 2 most exposed participants.

Group policy minimum:

•“Cover 4”Bond Section •“Cover 3”Other Sections

Str

es

s t

est

Assess the adequacy of

margin coverage

• Performed both at instrument level and portfolio level.

• At a portfolio level, it is based on the comparison between the Initial margins and the profits and losses that would apply in

case CC&G was to close out all positions of the portfolio over a hypothesised horizon of n days.

Back t

est

Assess the adequacy of stress test framework

Reverse stress testing adopted by CC&G consists in a

reprocessing of the stress tests using a “trial and error”

approach up to identify the conditions where available

resources are no longer sufficient to cover the Non-

Collateralized Exposure of the two most exposed clearing

members.

Revers

e s

tress t

est

Scope Details

Guarantees deposited by the Defaulter

Defaulter’s contribution to the Default Fund

Skin in the Game

Outstanding Default Fund

CCP capital except regulatory

plus threshold

Unfunded Default Fund

Capped CM’s loss sharing

CC&G own assets

Defaulter’s assets

Page 19

Service closure-cash

settlement with loss

sharing (reduction of

payouts)

Discretional

Default Waterfall

Page 20

Investments

• There is strong regulatory guidance on how CCPs mitigate their investment risk through a number of reinforcing mechanisms, among which:

— CCP shall invest only in cash or highly liquid financial instruments with minimal market and credit risk

– Cash balances with central banks

– Max 5% with commercial banks

— Highly Liquid Financial Instruments are debt instruments backed by: – A Government

– Central Bank

– Qualified Supranational Entities

– Average Time to Maturity < 2yrs

— Diversification by: – Issuer

– Instruments

— Own financial resources which are not invested as per above, do not concur to the CCP capital

• CC&G has access to Central Bank Liquidity

— EMIR: “In assessing the adequacy of liquidity resources, especially in stress situations, a CCP should take into consideration the risks of obtaining the liquidity by only relying on commercial banks credit lines”

Page 21

Markets

CSD

CCPs

Members Members

Trades Trades

Settlement

Instructions

Settlement

Instructions

Margins Margins

Novated Trades

Margins

CC&G – LCH Clearnet SA Interoperability

• The Service covers all Italian Government bonds traded on MTS, on EuroMTS and on

BrokerTec cash and repo platforms

• CCP services jointly provided by CC&G and LCH.Clearnet SA through an interoperability

model

• The terms of the CC&G-LCH.Clearnet SA agreement (December 2002) established that

the two CCPs would set up an integrated Central Counterparty service which would be

seen by users as a single service (that is: a “Virtual Single CCP”)

• One common Risk Margining Methodology using the same parameters (No competition

on Risk Grounds with Members)

• If the 2 players are members of different CCPs, the 2 CCPs will face each other in acting

as “Special Clearing Members/Allied Clearing House”

• In case of a member's default, its CCP will guarantee all its obligations without affecting

the other CCP and the relative members Each CCP would be exposed to losses

exclusively in case of default of one of its own participant and not in the case of default of

a participant of the other CCP (“no spillover”)

Page 22

Interoperability Model

Interoperability – EMIR

• Exchange of Information between CCP: Aligned in formats and contents to the farthest possible

extent to the exchange of information that takes place at group level

• Margins: Group Level Mediation Mechanism comprising LSEG CRO, LCHG CRO, CCPs CEOs and

CROs

• Living Will: CCPs have agreed as interim solution to implement a cash settlement mechanisms; steps

(such as alignments of capital requirements) have been taken towards portability of non-defaulting

members of the defaulting CCP to non-defaulting CCP

Page 23

Link Authorization in parallel with CCP authorization

Guarantees deposited by LCH

Dedicated assets of CC&G

Loss sharing

through reduction of pay outs

Any remaining losses are

allocated to CM pro-rata

based on Default Fund

contributions

Uncapped CM’s loss sharing

CC&G own assets

LCH’s assets

Waterfall for LCH.Clearnet SA Default

Page 24

Service Closure /

Cash Settlement

Appendix

Page 25

Sovereign Risk Framework

Page 26

Background

• This presentation contains a description of the Sovereign Risk Framework

(SRF), implemented by CC&G to develop a tool to measure and monitor

Sovereign Risk and to build adequate protection for the CCP and its

participants

• This SRF aims at representing the state of the art of Sovereign Risk

Management at CCP level:

– Based on a wide set of dynamic market indicators

– No single trigger point, so to eliminate room for potential market manipulation

– Sound statistical and mathematical basis

– Use of local multi-node sovereign curves to incorporate Country-specific factors

– Equal treatment of short and long positions

– Wide set of remedies

– Gradual increase of default lines of defense, so to avoid procyclical effects

Page 27

The Sovereign Risk

• Sovereign Risk has a multiform and complex nature and crises are always

different (e.g. Russia and Argentina), even when the countries affected are

inside the same monetary area (e.g. Greece and Ireland and Portugal)

• Credit Ratings should not be taken as the sole indicator of the actual evolution

of financial crises

• Accordingly, it seems appropriate to take into account a set of different

dynamic market factors to monitor country risk rather than considering as

indicator exclusively the breeching of a single static threshold or credit rating

downgrades

• By the same token, CCPs must retain the capacity to calibrate its

approach in order to be case-specific and should not rely on a one-size-fits-

all approach

• The SRF aims to be objective and measurable, using a set of forward looking

market indicators to predict sovereign risk

Page 28

The Sovereign Risk Framework (1 / 2)

• The scope of the SRF is to develop a tool to evaluate the increases of Country Risk, using market

signals and considering each single country in respect of the general economic and financial context

and evaluating the case-specific optimal tradeoff to protect CC&G and its participants, fulfilling the

following criteria:

– avoid procyclical effects and other unwanted/undesirable consequences

– sound statistical basis (including the application of backtest)

– duration-related margins increases

– trigger points identified among a sufficiently wide set of market indicators

– avoid too specific market targets in order to eliminate room for potential market manipulation

– equal treatment of short and long positions

• Larger toolbox

• Early and careful evaluation of larger set of unambiguous market indicators

– Increases/decreases are in small steps and not in big jumps

• Search for trend indicators rather than static thresholds

– CCPs should attempt to catch “early warnings” so that margin increases do not happen too late,

when the crisis is already acute, generating procyclical effects when are least needed

• Use of country specific curve in lieu of a blended Eurozone curve in order to capture each country’s

specificities

Page 29

The Sovereign Risk Framework (2 / 2)

• Trigger-point automatic actions are not desirable as they may become self-

fulfilling prophecies

• High thresholds late interventions

• Indicators should be forward-looking and a single indicator may not tell it all

– “If you only have a hammer, then everything looks like a nail”

• Adequate consideration should be given to the fact that each sovereign crisis

is different and may require different actions

– “Somebody’s medicine (and quantity) can be somebody else’s poison”

• Margin Increases across the board are suboptimal as unfairly penalizing for

shorter maturities

Page 30

Wide Set of Risk Indicators

• CC&G monitors Sovereign Risk via a market data based model

• The model takes into account a list of >50 countries, without necessarily

presuming safe havens and defines for each country a “credit measure”

which will have multiple inputs including:

– Credit Default Swaps

– Sovereign Bond Spreads

– Default Probabilities

– Credit Ratings

Page 31

Granular Sovereign Risk Tier Structure

• Countries are grouped in Bands so that each Country's credit risk is seen as

relative to its “comparables”

• Within Bands, further risk indicators identify relative trends, in order to point

out countries which are most likely to be “demoted” or conversely “promoted”

• Each country is then assigned a Credit Risk Score, which is a function of its

risk indicators

• Score coherence to ensure respect of the Monotonicity Principle (i.e. market

risk indicators should worsen as country relative creditworthiness

deteriorates)

Page 32

Wide Set of Risk Protection Measures

• Beyond a predetermined threshold, credit demotions (i.e. increase in credit

risk score) imply a progressive increase of risk defenses, first by adopting ad

hoc stress test scenarios, as it would still be considered as an extremely

remote although plausible event, which falls under the commonly accepted

definition of “stress risk”

• As creditworthiness further deteriorates, protection migrates from Default

Fund to Margins

– Gradual Increases of Stress Test Scenario

– Gradual Increase of Confidence Levels

– Gradual Increase of Holding Periods

• In addition, the SRF takes also into consideration the theoretical cost of

buying credit protection up to the maturity of the specific country’s government

bond (Credit Hedging Approach)

Page 33

Conclusions

We consider the Sovereign Risk Framework to be in line with the

following criteria:

– avoid pro-cyclical effects and other unwanted/undesirable consequences?

The SRF is forward looking and keeps into consideration early warnings

– sound statistical basis?

The SRF is based on statistical analysis on specific sovereign curves and on a large date base and is

flexible and adequate to economical environmental circumstances

– duration-related margins increases?

The Margins are based on volatility of the individual nodes of the each sovereign curve

– trigger points identified among a sufficiently wide set of market indicators?

The SRF takes into consideration a wide set of market indicators (Ratings, CDS, CDS Vol, Spreads,

Default Probability, absolute and relative yield variations)

– avoid too specific market targets in order to eliminate room for potential market manipulation?

There are no predefined absolute barriers, all indicators are relative expectations and there is sufficient

executive discretion

– equal treatment of short and long positions?

The SRF does not differentiate between long and short positions

London Stock Exchange Group

Thank You!

Page 34 Page 34