Transcript Corporate Title Slide, Arial 36pt Regular, Title Case

New York Portfolio Clearing
Overview
Walter L. Lukken
Chief Executive Officer
What is
New York Portfolio Clearing LLC (NYPC)
 50% / 50% joint venture created by NYSE Euronext and DTCC
 Create a single “one-pot” VaR risk methodology to aggregate risk of the
combined portfolio across fixed income product classes of derivatives and cash
transactions, thus generating margin efficiencies for hedged portfolios ranging
from 15 to 30 percent
 Will provide increased transparency for regulators, market participants and the
clearinghouse to identify and moderate systemic market risks
 “Open Access” structure—NYPC will launch with products listed on NYSE Liffe
U.S., but will expand to other futures exchanges and clearinghouses once
operational
 Margin savings initially focused on proprietary “House” positions but intended to
expand to customer positions pending appropriate regulatory changes
 Regulatory approvals needed by CFTC as a derivatives clearing organization as
well as the SEC and NY Fed. CFTC out for comment; SEC about to be
 Anticipated go live: Q1 2011, pending regulatory approval
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Current Exchange Clearing Landscape
SEC
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CME
ICE US
clearing
ICE US
Position opened on one exchange must be
closed on the same (non-fungible/vertical)
• Markets are less directly competitive – higher
trading tariffs
• Main clearing houses are operated for profit –
higher clearing tariffs
Trading
platforms
• Markets are highly competitive – low trading
tariffs
• Clearing houses are operated as utilities –
very low clearing tariffs
CME
clearing
CCX
Position opened on one exchange may be closed
on another (fungible/horizontal)
NYSE
Liffe US
ELX
US stock exchanges
& alternative platforms
NYPC
Clearing
FICC
OCC
DTCC
‘One Pot’
Margining
DCM
US options exchanges
CFTC
DCO
OCC
Regulation
Interest rate, commodity, energy, environmental, &
stock index futures markets
Equity, fixed income, equity option & stock index
option markets
“One Pot” vs. “Two Pot” Margining
Existing Landscape (“Two Pot Approach”)
Clearing
House A
Clearing
House B
Derivatives
market
position
offsets
performed
Cash
market
position
offsets
performed
Single Risk
Methodology
Cross Asset
class offsets
FICC cash
positions
Residual
Positions
Non-optimized
Capital Efficiency
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Common
Member
NYPC
derivatives
positions
Cross Margin
Residual
Positions
NYPC Value Proposition (“One Pot Approach”)
Optimized
Capital Efficiency
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Benefits of NYPC over Existing
Futures Clearing Model
Transformational
Capital Efficiencies: NYPC is the first clearing solution to “bridge” the securities and
futures worlds by calculating one margin call for fixed income securities held at
DTCC’s Fixed Income Clearing Corporation (FICC) and U.S Treasury and
Eurodollar futures held at NYPC, thus recognizing the offsetting risks of these
positions and significantly improving the capital efficiency to firms
Operational Advancements: Deliveries on NYPC’s futures contracts will be
seamlessly integrated with the cash securities held at FICC through a “locked-in”
delivery process, thus eliminating the “boxing up” inefficiencies and costs inherent in
the current bond futures delivery system
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Benefits of NYPC over Existing
Futures Clearing Model II
Transparency
Sunshine is the Best Antiseptic: NYPC will provide the first single view of risk
across cash and derivatives for regulators, market participants and the
clearinghouse. Aggregating information about an individual participant’s total risk
in cash and derivatives will provide early opportunities to identify systemic risks
Ahead of its Time: As envisioned by Congress in the recently-passed “Dodd-Frank”
Regulatory Reform Bill, NYPC will provide an “open access” clearinghouse that
brings the risk-reducing benefits of central counterparty clearing to derivatives and
the resulting transparency to the regulators and market
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Benefits of NYPC over Existing Futures Clearing
Model III
Competition and Choice
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•
“The growth of U.S. futures business, which has greatly influenced global
growth, has come from competition and innovation. This challenge from
[NYPC] offers both.”--John Lothian Newsletter
•
This “open access” clearinghouse will spur competition among futures trading
platforms by allowing other futures exchanges and clearinghouses to integrate
into the “one-pot” margining system, thus challenging the current interest rate
product dominant exchange and reducing costs to the marketplace
•
NYPC provides fair access to other futures exchanges by allowing them to join
NYPC under non-discriminatory terms once it is operational
•
Other derivatives clearinghouses (DCOs) may also have access to the “onepot” by joining NYPC as a limited purpose participant (LLP), similar to other
clearing linkages in existence
•
This LPP concept preserves the uniform risk methodology and default
management process that was at the core of DTCC’s decision to partner with
NYSE to build NYPC and minimizes the complexity and cost of replicating the
integration process for all new entrants
NYPC—Day One Products to be Cleared
• NYPC will clear interest rate futures from NYSE Liffe US at launch but
will be open to other products from other exchanges once NYPC is
operational
• At NYPC’s launch, NYSE Liffe U.S. will list Eurodollar futures as well
as 2-year, 5-year, 10-year, 30-year US Treasury bond and Ultra-bond
futures
• Options on these futures as well as interest rate swaps are expected to
be listed and cleared after go-live of NYPC
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Risk Overview
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Original Margin
NYPC will use the VaR method to measure the risk associated with a
given portfolio based on the following considerations:
• VaR is commonly used in the fixed income securities industry and naturally
incorporates the offsetting effects across diverse instruments such as cash,
futures, options, etc.
• Explicitly specified confidence level of 99 percent is applied to the final
requirement and is verifiable
• Customer positions will also be subject to the VaR methodology but not be
eligible for “single-pot” treatment at launch until the SEC and CFTC reconcile
their authorities
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Variation Margin
NYPC will calculate and pay/collect Variation Margin twice per day
• The offsetting profits and losses based on a mark-to-market calculation
for all futures and cash positions within the portfolio
– End of Day Calculation – FICC & NYPC will calculate their
respective funds settlement obligations
– Intraday Calculation – both entities will have an intraday calculation
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Guaranty Fund
 A Guaranty Fund will be designed to provide an additional layer of
protection in the event of the default of a Clearing Member (CM)
 Total day-one amount of the Guaranty Fund is expected to be $100
million with approximately $50 million from clearing members and $50
million financial guaranty from NYSE Euronext
 Each NYPC Member and Common (FICC and NYPC) Member will
contribute a minimum amount to the Guaranty Fund
• Calculated daily, will be based on projected loss on liquidation of 1.5X
“largest exposure” under “extreme but plausible” conditions
• Target Guaranty Fund measured monthly and adjusted quarterly based on
members’ open interest and volume
 Contributions (cash & eligible securities) will be held by NYPC in an
account separate from original margin
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Who Can Become an NYPC Clearing Member?
Membership Criteria
NYPC has two membership types:
Class A Members – Members who are netting members of the
Government Securities Division of the Fixed Income Clearing
Corporation
Class B Members – Members who are not netting members of the Fixed
Income Clearing Corporation and will have to enter into a securities
settlement arrangement with an FICC netting member
NYPC expects roughly 20 Clearing Members day one
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NYPC MEMBERSHIP QUALIFICATIONS
•
Have a minimum of $5,000,000 in adjusted net capital
•
Be an entity approved by NYPC and in good standing in its jurisdiction of formation
•
Be qualified to conduct business in the state of New York or have an agency agreement in
place with an entity qualified to conduct business in the state of New York
•
Demonstrate fiscal integrity
•
Demonstrate its capacity to engage in the conduct of the business of a Clearing Member
•
Receive all necessary approval from all applicable regulatory authorities and government
agencies to conduct the business of a Clearing Member
•
Registered with the CFTC as an FCM if clearing contracts on behalf of Customers
•
Have designated a Clearing Bank and Settling Bank for payment of margin and settlement
amounts
•
Maintain back-office facilities staffed with experienced and competent personnel
•
Foreign Clearing Members must:
•
•
•
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maintain a presence in the United States, either directly or through a suitable agent, and have individuals
fluent in English
demonstrate that it is in compliance with financial reporting standards of home country and that it is
regulated in its home country by a financial regulatory agency
submit an opinion of outside counsel on home country law and other relevant non-domestic law, if
applicable
For More Information on NYPC, Contact:
Walt Lukken
Chief Executive Officer
[email protected]
212-855-5210
Ira Krulik
Chief Operating Officer
[email protected]
212-855-5260
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