OTC FX Clearing

8/11/2019 OTC FX Clearing

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2014 CME Group. All rights reserved.

OTC FX Clearing

September 2014

Security. Neutrality. Transparency.
http://www.cmegroup.com/


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CME Group is the worlds leading and most diverse derivatives exchange. Its wherecompanies, institut ions and individuals f rom around the globe come to manage theirbusiness risks, hedge against fluctuations and protect themselves against pricevolatility.

CME Group: Who We Are

Our Global Reach

ACCESS IN

150CountriesCONNECTIONS THROUGH

11GlobalHubsRELATIONSHIPS WITH

12 PartnerExchanges

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Offering a superior solution to meet c lients 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 Flexibili ty

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

Why Customers are Choosing CME Group

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CME OTC FX Product Offering


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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

Estimated Regulatory Timeline*

5

Q4 2014* Q1 2015 Q2 2015

Once the Mandate isannounced:

90 day comment period isopened

Entered into Federal Register:After the comment period, the

implementation clock starts,meaning 90 day implementation

for the first phase of participants

Q3 2015

*All dates indicated are subjective, timeline is based on a beginning Q1 announcement.


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Overview

Provides post-execution clearing solution and settlement service designed to meet the risk-

management 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

CME Group OTC FX Clearing

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2014 CME Group. All rights reserved. 2014 CME Group. All rights reserved.

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.

Benefits

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2014 CME Group. All rights reserved. 2014 CME Group. All rights reserved. 8

FX Clearing Overview

Trade Submission Platform-agnostic open clearing service via CME ClearPort

Compatible with Straight Through Processing (STP) providers allowing for real-time tradesubmission 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 afuture date

NDFs 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 coverageassumption

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.


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CME has independent default waterfalls for each major asset class

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CME Clearing Financial Safeguards

IRS Financial Safeguards

Defaulted Clearing MemberIRS Fund Performance Bonds

Defaulted Clearing MemberIRS Guaranty Fund Contribution

$150MCME Designated Work ing Capital

for IRS Guaranty Fund

Non-Defaulting Clearing MembersIRS Guaranty Fund Contributions

Assessment Powers3rdand 4thlargest CM shortfalls

Base Financial Safeguards

Defaulting Clearing MemberBase Fund Performance Bonds

Defaulting Clearing MemberBase Guaranty Fund Contribution

$100MCME Designated Work ing Capital

for Base Guaranty Fund

Non-Defaulting Clearing MembersBase Guaranty Fund Contributions

Assessment Powers275% of GF per Default1

CDS Financial Safeguards

Defaulting Clearing MemberCDS Fund Performance Bonds

Defaulting Clearing MemberCDS Guaranty Fund Contribution

$50M

CME Designated Working Capitalfor CDS Guaranty Fund2

Non-Defaulting Clearing MembersCDS Guaranty Fund Contributions

Assessment Powers3rdand 4th largest CM shortfalls

IRS Financial Safeguards Product Coverage

Interest Rate Swaps

Cross-margin eligible futures

$1.55 Bill ion $3.26 Bill ion $750 Million

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.G2Equal to the greater of (x) $50 million and (y) 5% of the CDS Guaranty Fund, up to a maximumof $100 million

*All Financial Safeguards numbers are as of 12/31/2013 and do not include AssessmentPowers


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Init ial Margin Methodology: CME OTC FX

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5-Day 99% HVaR

Volatility scaling factors

Past 5 years data to generate historical returnmatricies + extreme scenarios

Generated scenarios

Computation of discounted P&L of total portfolioin each scenario

Rank scenarios: max loss to max gainTake required percenti le (99.7% of cov ered

scenarios) as margin

Appor tion of margin to d if ferent currencies asrequired


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12 OTC FX Non-Deliverable Forwards*

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 sett lement currencies: USD/CAD

Non USD, T+2 settlement currencies: USD/JPY, AUD/JPY, EUR/JPY, CAD/JPY,EUR/AUD, EUR/CHF, EUR/GBP

Cleared OTC FX Product Scope

*All settlements in USD

BrazilianReal

PhilippinePeso

MalaysianRinggit

Indian Rupee Korean Won ChineseRenminbi

Indonesian

Rupiah

Taiwan Dollar Chilean Peso Colombi an

Peso

Peruvian

Nuevo Sol

Russian Ruble

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CME Clearing Europe FX Products

12

Currency

Pair Currency PairSettlement

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+2EUR/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/CNHU.S. Dollar / Chinese Offshore

RenminbiUSD - Value 2 T+2

Product coverage: 38 FX NDFs and CSFs (same as US) + 2 addi tional NDFs and 9 CSFs

* EUR/CNY and USD/UAH are NDFs


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CME OTC FX Trade Flows


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2014 CME Group. All rights reserved. 2014 CME Group. All rights reserved. 14

Clearing Workflows: On-SEF vs. Off-SEF

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:

Trade workflows wil l differ depending on where the trade is executed:

CME Hosted Credit Limits in RAV Claim Workflow

CME will allow Firms to set limits on

accounts.

Firms will have the ability to

view and edit limits.

All trades that breach limits will be

rejected.

Clearing Member Firms must

explicitly accept or reject tradesafter 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


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On-SEF Workflow with Pre-Approval

Client ED

SEF

CME ClearingHouse

ProductAccountCredit

Clearing Member(Client)

Clearing Member(ED)

*Pre-approved trades do not go through request consent workflow.

2 2

3 5

455

Trade receives credit pre-approval f romFCM (precedes this workflow) prior tosubmission to CME

Client executes trade with ExecutingDealer (ED) on SEF

SEF sends t rade to CME for Clearing

After validating product, account and

applying credit lim its set by CME, CMEaccepts swap for clearing

CME sends Cleared notification to SEFwhich displays trade status to principals

CME sends a Clearing Confirmation toFCMs

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Off-SEF Workflow: CME Hosted Credit Limits in RAV

Client

CME ClearPort

CME ClearingHouse



Clearing Member(ED)


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Bilaterally agreed trade is confirmed /matched on Affirmation Platform and sentto CME ClearPort

Product, account and RAV limits arevalidated partial cleared

CME sends Clearednotification to

platform and Clearing Members

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EDAff irmat ion Platfo rm

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RAV

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Off-SEF Workflow: Claim Workflow

Client

CME ClearPort

CME ClearingHouse



Clearing Member(ED)


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Bilaterally agreed trade is confirmed /matched on Affirmation

Product, account and CME limit on CMFare validated successfully

Clearing Consent messages sent to bothClearing Members

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EDAff irmat ion Platfo rm

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Pending Clearing notification sent toAffi rmation Plat form

Clearing Members of both parties acceptthe trade

CME sends Cleared Notificationto

platform and Cleared Confirmations tofirms

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Bunched Order Processing


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Recent regulations require bunched orders to be sent for clearing immediately after execution

Bunched Order Overview

2ED alleges the bunched order to the Client.

Client affirms the bunched order while

selecting the Holding Account at CME.

Platform A sends the matched deal to CME

Clearing.

CME Clearing validates the bunched order.

CME sends Clearednoticeto ClearingMember Firms.

CME sends Clearednotice back to theplatform.

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5b

20

5

5a

Client ED

Platform A 1

3 5b

Clearing Member Firm(Bunched Order Holding Account)

Clearing Member Firm(ED)

CME Clearing

5a5

Bunched OrderHolding Account

ED Account(House)

Validate Product

Validate Account

Validate Limits

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2

CME Groups 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


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Contacts

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Visit www.cmegroup.com/fxclearing or contact one of the below team members

Will Patrick [email protected] +44 20 3379 3721

Executive Director FX

Simon Burnham [email protected] +1 312 930 3426

Senior Director FX

Nigel Manthorp [email protected] +44 20 3379 3863Director FX Products

Malcolm Baker [email protected] +65 6593 5573

Senior Director Interest Rate & FX Products

Jaki Walsh [email protected] +44 20 3379 3858Senior Director OTC Products

Fateen Sharaby [email protected] +1 212 299 2828

Director Clearing Solutions
http://www.cmegroup.com/fxclearingmailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]://www.cmegroup.com/fxclearing


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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 leveragedinvestments, and because only a percentage of a contracts 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 expectto profit on every trade.

CME Group is the trademark of CME Group, Inc. The Globe logo, Globex and CME are trademarks of Chicago MercantileExchange, 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 oromissions. 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 andProfessional Clients only and must not be relied upon by Private Clients who should take independent financial advice. Circulationshould be restricted accordingly.

Issued by CME Marketing Europe Limited.

CME Marketing Europe Limited (FRN: 220523) is authorised and regulated by the Financial Services Authority.

Disclaimer

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OTC FX Clearing