Prepare for OTC Clearing with CME Group 6 October 2016 3:00pm - 3:45pm AEDT

© 2016 CME Group. All rights reserved.

Table of Contents • Legal and Regulatory • Account Structure LSOC

Direct Funding Participant (DFP)

• Products Available for Clearing • Onboarding with CME • Margin Analytics and Reporting

© 2016 CME Group. All rights reserved.

AUD Swap Clearing at CME Group • • • • • •

CME Group has cleared over $520 Billion (A$ 670B) in AUD IRS since launch 31 Market Participants have cleared AUD IRS at CME in 2016 with 13 dealers currently providing liquidity AUD has traded an average of $450 Million (A$ 613M) per day in 2016 Open interest has grown to over $208 Billion (A$ 277B) as of August 31st On February 22, 2016 CME began clearing AUD IMM dated interest rate swaps CME is launching AUD OIS clearing out to 3 years on October 3, 2016

AUD IRS Open Interest at CME

AUD IRS Participant Ecosystem

$250 8/31/16

$200

$150

Banks/Dealers 13

Asset Manager 12

$100

$50

Hedge Fund 6

$0 H2-2013 H1-2014 H2-2014 H1-2015 H2-2015 H1-2016 H2-2016 Present © 2016 CME Group. All rights reserved.

3

Legal and Regulatory

© 2016 CME Group. All rights reserved.

Global OTC Clearing Mandates Legislation in Place: • • • • • • • • • • • •

Argentina Australia China EU Hong Kong India Indonesia Japan Korea South Africa Turkey United States

EU

Mandates in Place: • • • • • • • •

Australia China (RMB IRS) EU (IRS, CDS) Japan (CDS, IRS) India (FX forward) Korea (IRS) Mexico United States (IRS, CDS, product by product basis)

- 2015

Dec 2018 IRS / Cat 4 May 2019 – CDS / Cat 4 June 2019 – IRS, CDS / Cat 3

EU June 21, 2016 IRS Category 1

EU Feb 2017 CDS Category 1

EU Dec 21, 2016 IRS Category 2

2016

2017 and beyond

Japan:

Australia April 4, 2016 (G-4 and AUD IRS) Japan FIBOs (financial instruments business operators) and RFIs (registered financial institutes) subject to clearing mandate – transaction volume no less than JPY 300 billion

Mexico TIIE Swaps from April 1, 2016 (domestic trades), and from November 16, 2016 (foreign trades).

EU August 2017 CDS Category 2

Dec 1, 2016 clearing mandate expanded to insurance companies and trust funds which have over JPY 300 billion outstanding

Singapore 2017 - Expected commencement of mandatory clearing obligations

Hong Kong July 1, 2017 – expected clearing mandate in phases by different types of products and market participants

Switzerland 2017 – Phase-in of clearing obligations expected

© 2016 CME Group. All rights reserved.

5

Legal and Regulatory Certainty for Australian Clients Clearing License

Collateral Protection

Trade Repository

Licensed* in Australia to operate an overseas clearing and settlement facility for OTC IRS and interest rate futures eligible for portfolio margining with OTC IRS.

1 June 2016, the Financial System Legislation Amendment (Resilience and Collateral Protection) Act 2016 (‘Collateral Protection Act’) and the Financial System Legislation Amendment (Resilience and Collateral Protection) Regulation 2016 (‘Collateral Protection Regulation’) were passed to allow trustees of Australian regulated superannuation funds to have access to US derivative clearing houses.

CME Australian Trade Repository (ATR) licensed by ASIC as of October 2015 supports direct submissions, third party platforms or Delegated Reporting through CME Clearing. CME Clearing offers Delegated Reporting services for all Australian clients free of charge.

*CME Inc. is a licensed Clearing and Settlement Facility in Australia (ARBN number 103 432 391)

© 2016 CME Group. All rights reserved. 6

CME Recognition in Other APAC Jurisdictions Jurisdiction

Instruments Covered by Authorization

Permission Granted

Currencies and products subject to mandate

Hong Kong, S.A.R.

All CME-cleared OTC IRS, including swaptions

CME received authorization in Hong Kong for OTC IRS and swaptions and designation as a CCP for its existing G4 + HKD. CME already has authorization in Hong Kong for futures and options on futures.

IRS covers G4 currencies plus HKD will be implemented no earlier than July 1, 2017. Voluntary clearing and associated reporting commenced September 1. CME also a member of HKTR to fulfill reporting requirements and as a precondition to OTC IRS authorization

Japan

Non-Yen OTC IRS; house only

Licensed as a Foreign Clearing Organization

The Japan clearing mandate for IRS covers Yen-denominated swaps referencing 3- and 6month LIBOR and iTraxx Japan index CDS. CME offers clearing services for these products.

Singapore

All products cleared at CME, including products contemplated for inclusion in forthcoming clearing mandate

Recognized Clearing House

The MAS’ has consulted on a clearing mandate for IRS that would cover fixed-to-float swaps denominated in SGD, USD (definitely) EUR, GBP & JPY (potentially). CME offers clearing services for all these products. Mandate should go into effect H1 2017.

© 2016 CME Group. All rights reserved.

7

Account Structure

© 2016 CME Group. All rights reserved.

Account Structures

LSOC Without Netting Variation Margin

• In an FCM default, CME Clearing will discontinue netting variation gains and losses within the defaulted FCM’s cleared swaps customer account with CME Clearing on a post-default basis • By discontinuing Variation Margin netting, CME will better protect non-defaulting customers by helping them keep their positions intact while porting them to another FCM with as much collateral as possible

• Flexibility to hold excess collateral at CME Clearing, with protection of the client’s full LSOC with Excess

•

collateral value Client’s FCM must submit a daily Collateral Value Report (CVR) to specify the collateral value of each individual account

• Flexibility to hold excess collateral at CME Clearing, with protection of the client's full Combined Cash Flow Under LSOC with Excess

collateral value

• Efficient daily margin process allowing firms to use the excess collateral to cover variation margin obligations, with the potential to eliminate daily cash movements

• Lower variation margin calls for Clearing Members, reducing the funding gap between Clearing Firms and their clients

http://www.cmegroup.com/clearing/risk-management/lsoc-cleared-swaps-customer-protection.html

© 2016 CME Group. All rights reserved.

9

Direct Funding Participant Model Individual Segregation for Customers*

The primary goal of the Direct Funding Participant (“DFP”) model is to provide an individual segregation offering in the U.S. and operational efficiencies • The structure allows for firms or individuals to segregate and protect their collateral • The DFP account will be separate and distinct from any of the Guarantor’s accounts • Anyone wanting to be a DFP must: - have a Clearing Member guarantee; - meet CME DFP requirements; - establish a relationship with a CME approved settlement bank

• Can only be a DFP in the asset classes they have attained required memberships for and asset classes (i.e. Futures, IRS) in which their Guarantors are Clearing Members • DFP default does not result in utilization of the waterfall unless the DFP Guarantor also defaults • The DFP is not designed to be a leverage ratio solution - Initial margin posted by the DFP will not offset leverage exposures for cleared derivatives guaranteed by a Clearing Member serving as a Guarantor

*Subject to regulatory approval

© 2016 CME Group. All rights reserved.

10

DFP Clearing Structure Overview DFP Guarantor • May only guarantee DFP trades in asset classes for which it maintains a membership • Assumes responsibility for DFP obligations to CME Clearing and accountable for any shortfalls • In the event of a DFP default, may serve as CME’s liquidation agent for the DFP portfolio

Customers

DFP & DFP Guarantor: Capital Requirement • DFP: Must post the greater of (1) the margin top-up required due to the move to a two-day liquidation period or (2) 104% of margin that would be required without application of two-day

$

• Guarantor: Must hold 4% capital against the DFP’s performance bond requirement

Reimbursement

$

DFP Guarantee

Clearing Member

Direct Funding Participant • DFP is a special Clearing Membership type that receives full guarantee of another non-DFP Clearing Member firm

$

• Must meet DFP requirements under CME rules and/or imposed by DFP Guarantor • DFP pays and collects IM and VM with CME directly (FCM removed from payment flows)

CME Clearing

• Must use CME approved settlement banks • In the event of the DFP Guarantor’s default, DFP performance bond is not subject to the risk of pro-rata distribution

Auto-debit authority on DFP account

© 2016 CME Group. All rights reserved.

11

Products Available for Clearing

© 2016 CME Group. All rights reserved.

Products Supported – OTC IRS Fixed/Float

Tenor

Index

Zero Coupon Swaps

Currency

Years

Months

USD I EUR I GBP

50 years

BRL

10 years

10

11

15

21

31

51

1

3

6

USD







LIBOR

Overnight Index Swap (OIS)

EUR







EURIBOR

USD I EUR I GBP I JPY

GBP







LIBOR



CAD JPY





CHF AUD



SEK



30 years

CDOR

Basis Swaps



LIBOR

USD I EUR I GBP I JPY

51 years



LIBOR

AUD I JPY

31 years



BBR

Fed Funds vs. Libor (USD)

30 years

STIBOR

DKK



CIBOR

Forward Rate Agreements (FRA)

NOK



NIBOR

USD I EUR I GBP I JPY I AUD I CAD

TIIE-BANXICO

CHF I CZK I DKK I HUF I JPY I NOK NZD I PLN I SEK I SGD I ZAR

MXN

28d

NZD



BBR

HKD



HIBOR

SGD



SOR-VWAP

Swaptions

HUF



BUBOR

USD (≤ 2 years expiry)

CZK



PRIBOR

PLN



WIBOR

ADDITIONAL EXPANSIONS

JIBAR

KRW, CNY, INR IRS

BRL-CDI

EUR Swaptions

ZAR BRL



3 Days – 3 Years

30 years

http://www.cmegroup.com/trading/interest-rates/cleared-otc/ © 2016 CME Group. All rights reserved.

13

Cleared OTC IRS Swaptions Product Scope Current Product Offering: Swaptions Currency

Type

Max Expiry

Final Settlement

Underlying Tenor

Index

Years

Method

Years (up to)

Months