ICE Trust CDS Clearing Buy-side Client Overview DCO Model

ICE Trust CDS Clearing Buy-side Client Overview

DCO Model

www.theice.comJanuary 2011

Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved.

Agenda

Overview of ICE CDS Clearing

Client Clearing Solution

Operational Workflow

Impact of Dodd-Frank Act on ICE Trust CDS Clearing

ICE Timeline

Client Next Steps

2


ICE Introduction

ICE established in 2000, (NYSE: ICE) market capitalization of $8.7B*

Member of S&P 500 and Russell 1000

3 Futures and 2 OTC global derivatives markets across energy, agriculture, equity indexes, FX, and credit

Five clearing houses for futures and OTC markets in U.S., Europe & Canada

Market participants in more than 70 countries

Significant depth and investment in CDS market

ICE Integrated Marketplace

IntercontinentalExchange (ICE) is the leading operator of integrated futures and over-the-counter (OTC) markets, clearing, processing and data services for global derivatives markets.

*As of January 3, 2011

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Copyright © 2010. ICE. All rights reserved.Copyright © 2011. ICE. All rights reserved. 4

ICE Global CDS Cumulative Volume

Over $15 Trillion notional cleared globally

ICE Trust cleared over $4.6 Billion in client-related notional

ICE Trust Launches

CDS Clearing

3/09

ICE Clear Launches CDS

Clearing

7/09

ICE Trust Surpasses $3

Trillion

ICE Trust Launches Buy-side Clearing

ICE Trust/ICE Clear Launches Single

Names

12/09

ICE CDS Clearing Surpasses $10 Trillion

Globally

In B

illio

ns

As of January 21, 2011

ICE CDS Clearing Surpasses $14 Trillion

Globally

ICE CDS Milestones and Volume Cleared


Current Status - Products and Clearing Participants

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68 Indices

North America (CDX) Europe (iTraxx)

IG S8 – S15 Main S7 – S14 HY S8 – S15 XO S9 – S14 HVOL S8 – S15 HVOL S7 – S14

Clearing Participant (CP)

ICE Trust ICE Clear Europe

Bank of America Barclays BNP Paribas Citibank Credit Suisse Deutsche Bank Goldman Sachs HSBC JPMorgan Merrill Lynch -

Morgan Stanley Nomura RBS Societe Generale - UBS Unicredit AG -

190 Single NamesSector North America Europe

Consumer Services 23 21Industrials 15 11Consumer Goods 12 11Utilities 6 16Financials 7 14Basic Materials 5 11Telecommunications 3 13Healthcare 6 2Oil & Gas 7 1Technology 5 1

As of January 14, 2011


Why Clear with ICE?

Leverage existing infrastructure

Trades cleared intra-day, on near real-time basis

Open access provided through support of multiple affirmation platforms

No costly significant technology build

Ease of Doing Business

Gross margin held at ICE, not at Futures Commission Merchant/Broker Dealer*

Default protections designed to work within existing bankruptcy laws

Pre and post default portability of positions and collateral

World class risk management specifically designed for CDS

Guaranty fund covers simultaneous default of 2 largest Clearing Participants

Expertise &Depth

Over 250 cleared CDS products across US and Europe

14 dealers and hedge fund and asset managers actively clearing today

Managed numerous Credit Events, Succession Events and Matured Contracts

Leading market connectivity processing thousands of trades a day

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Customer Protection

* Dodd-Frank Act requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a FCM for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS


Agenda





ICE Timeline

Client Next Steps

7


Margin Segregation

CLIENT A

Gross IM $2MM FCMs required to collect the Gross Initial Margin (ICE Minimum Initial Margin) from each client

Margin calculator available to clients to calculate Margin requirements – full transparency provided

FCMs required to post total Gross Initial Margin to ICE

FCMs can charge an Excess Initial Margin. Client and FCM negotiate where Excess Margin is held

FCM and Client negotiate the timing of margin payment

Gross IM held at ICE in the FCM’s Client Omnibus Account

Client Account is fully segregated from the House Account

Gross Margin is held at ICE, not at the Futures Commission Merchant/Broker Dealer

ICE-FCM Client Omnibus Account

CLIENT A

Gross IM $2MM

CLIENT B

Gross IM $1MM

FCM

Gross IM = 3MM

Gross IM = 3 MMfor

Client A and Client B

* Customer segregation is subject to change following the promulgation of final rules by the CFTC and SEC under the Dodd-Frank Act.

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Risk Management Waterfall

Membership Criteria

Initial Margin Requirement

Mark-To-Market Margin Requirement

Guaranty Fund

Intra-day Risk Monitoring Special Margin Call

Execution

Additional Assessment Rights

Ensure CP has sufficient financial resources, operational capabilities and risk management experience

Daily margin call based on dynamic stress test regime

Daily MTM based on EOD settlement prices

Additional margin can be called unusual market fluctuations

Additional collateral to mutualize losses under extreme market

scenarios

Oblige CPs to contribute additional default funding

Layers of Protection

1. Defaulting Buy-side Margin

2. Defaulting CP House Margin

3. Defaulting CP Guaranty Fund

4. Non-default clients of CP (net only)

7. Assessment of CPs

6. Non-defaulting CPs GF/ ICE remaining GF

5. ICE Priority Guaranty Fund (GF)

Risk Management Waterfall*

*CP Default Related to Client Positions

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Initial Margin RequirementDynamic Stress-Based Regime

JTD requirement based on expected losses of a default

Concentration Requirement

Liquidity/Basis Risk Requirement

Jump-To-Default (JTD) Requirement

Risk associated with parallel moves in interest rates

Summary Of Risks Captured by Model Components

Spread Response Requirement

Risk associated with spread moves, curve shape changes and recovery rates

Costs associated with large position liquidation

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Total risk requirementInitial Margin Requirement

Interest Rate Risk Requirement

Costs associated with Bid/Offer exposure upon portfolio liquidation


Agenda





ICE Timeline

Client Next Steps

11


How To Clear a Trade

ICE Supports the Existing OTC Model and Multiple Platforms

Trade Execution & Capture Affirmation & Clearing Consent Clearing & Confirmation by ICE

Voice or e-trade

Trade Capture ICE

Executing Broker Alleges

Block Trade

Buy-side Affirms, Allocates and Routes to FCM

FCM Affirms and Routes to

ICE

ICE Runs Risk Filter Checks and

Accepts Trade

Trade Cleared & Confirmed

Trade Routed to

TIW

No Changes to Trade Execution

Multiple Platforms Supported

Affirmation Platform

Multiple Affirmation Platforms

Supported

(ICE Link, Bloomberg, Tradeweb)

Trades Cleared Intra-day on Near Real-Time

Basis


Agenda





ICE Timeline

Client Next Steps

13


Key Provisions of the Dodd-Frank Act - Title VII

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Mandates the CFTC regulate swaps including broad based indices (e.g., index CDS) and the SEC regulate security-based swaps including narrow based indices and single name CDS

Swaps that are required to be cleared must be executed on a swap execution facility (SEF), designated contract market or national securities exchange

Requires any entity that accepts customer funds in connection with cleared swaps be registered with the CFTC as a FCM for broad based indices and with the SEC as a Broker-Dealer (BD) for cleared narrow based indices and single name CDS

Funds collected are “customer property” and must be held in an account segregated from non-customer (house) funds

Clearing will be mandated for standardized swaps as determined by the CFTC and SEC

Jurisdiction

Clearing Mandate

Execution

U.S. Customer Clearing

Margin Segregation


Areas of Impact for ICE Trust

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ICE Trust will transition to a DCO upon effective date of Dodd-Frank in July of 2011 ICE Trust secured an extension of its existing SEC exemptive order through the Dodd-

Frank effective date and will be deemed a Securities Clearing Agency on the effective date

Clearing Participants must clear customer business through FCM/BD entity

CDS product will remain the same Upfront fees will move to T+1 and netted with margin movements Customers and CPs can leverage current OTC technology infrastructure (e.g., ICE Link)

ICE Trust is seeking regulatory approval for portfolio margining (“Index Decomposition” margin methodology)

Acceptable margin collateral and permissible margin investments to be determined once final rules are published by CFTC and SEC

Portability and customer segregation governed by CFTC and SEC regulations CFTC regulated customer omnibus account (Cleared OTC Derivatives Account Class 4(d)(f)) ICE Trust will seek to hold both indices and single names in the same OTC account class

Legal Structure

Documentation

Customer Segregation

Product/ Infrastructure

Margin Methodology

Customer relationship to FCM governed by a bilateral futures agreement Customer relationship to BD governed by a securities account agreement ICE Trust Rules govern CDS clearing No separate ICE Trust Addendum for customer and FCM/BD to bilaterally execute


Agenda





ICE Timeline

Client Next Steps

16


ICE Timeline

Present

Q2 2011

Q3 2011

ICE Trust live with client clearing under Derivatives Clearing Member (DCM) Model

Margin Simulation Calculator available

Upon July 2011 effective date of the Dodd-Frank Act: ICE Trust deemed a DCO and SCA

ICE Trust and CPs live with client clearing under the DCO Model

Rollout of IG NA single names for client clearing

Portfolio Margining (index/single names)

Start rollout of HY single names

ICE Trust and CPs operationally ready to support client clearing under the DCO Model

Client testing under the DCO Model

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Agenda





ICE Timeline

Client Next Steps

18


Client Next Steps

19

To begin clearing CDS, Buy-side clients need to:

Establish relationships with one or more Clearing Participant(s)1

Execute legal documentation with Clearing Participant(s) and review ICE Trust Rules

Establish access to a connectivity provider2

1 Clearing Participants as of January 7th, 2011 - Bank of America/Merrill Lynch, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, Nomura, RBS and UBS. Societe General & Unicredit AG are Participants of ICE Clear only.

2 Connectivity providers include ICE Link, Bloomberg, Tradeweb

The Margin Simulation Calculator is available for estimation of margin requirements:

Provides full transparency into the initial margin methodology

Provides detailed analysis of results provided at the net position level

Allows users to utilize existing positions or upload custom portfolios to run “what if” scenarios

Access available through the ICE Link web interface


How to Stay Updated

ICE Website – www.theice.com

Regularly updated and provides information on Clearing Eligible products and EOD prices

ICE CDS Newsletter

Monthly newsletter providing a summary of ICE CDS developments. To subscribe, visit the ICE Subscription Center at www.theice.com/subscribe and choose Credit Derivatives from the Products menu

ICE Webinars

Webinars will be made available on the website explaining the ICE clearing model in more detail


US Clearing Participant Contacts

Firm Name E-Mail

Barclays Peter Borstelmann [email protected]

Bank of America Bob Burke [email protected]

BNP Paribas Mark Esparrago [email protected]

Citigroup Christopher Perkins [email protected]

Credit Suisse Greg Laughlin [email protected]

Deutsche BankHester Serafini Luciana Miranda

[email protected]@db.com

Goldman SachsMichael Dawley Amy Elliott

[email protected]@gs.com

HSBC Donna Parks [email protected]

JPMorgan Peter Sughrue [email protected]

Merrill Lynch Joanne Qiao [email protected]

Morgan Stanley James Hill [email protected]

Nomura Stephen Scalzo [email protected]

RBS John Wilson [email protected]

UBSMark WillkehrPaul Hamill

[email protected]@ubs.com


European Clearing Participant Contacts

Firm Name E-Mail

Barclays Ayman Gammall [email protected]

Bank of AmericaAndrew LallyBrooks Stevens

[email protected][email protected]

Citigroup Andy Sterry [email protected]

Credit Suisse Paul Twohey [email protected]

Deutsche BankTrudy RossHakan Guney

[email protected]@db.com

Goldman Sachs Robert Forkan [email protected]

HSBC Anthony Normand [email protected]

JP MorganDale BraithwaitEmma Priestley

[email protected]@jpmorgan.com

Morgan StanleyOwain RobertsMark Bortnik

[email protected]@morganstanley.com

RBS John Wilson [email protected]

UBS Andrew Downes [email protected]


Chris Edmonds

President

ICE Trust US

Email: [email protected] Office: 312-836-6810

Peter Barsoom

Chief Operating Officer

ICE Trust US

Email: [email protected]

Office: 212-323-8508

Corry Bazley

Director – Sales and Marketing

ICE Trust US


Office: 212-323-6022

Paul Swann

President

ICE Clear Europe


Office: +44 (0)20 7065 7615

Suzanne Hubble Director – CDS DevelopmentICE Clear Europe


Office: +44(0)20 7065 7625

Helen Fermor

CDS Product Manager

ICE Clear Europe


Office: +44(0)20 7065 7626

ICE Contacts

Documents

ICE Trust CDS Clearing Buy-side Client Overview DCO Model