Transcript FRB ICE Presentation

Federal Reserve Bank of Atlanta
2009 Financial Markets Conference
Chuck Vice, President and COO, ICE
May 12, 2009
www.theice.com
ICE INTRODUCTION
ICE is a leading global exchange operator with proprietary trading technology, three
regulated futures exchanges and clearing houses in the energy, agricultural commodities,
equity index and currency markets; ICE also operates leading OTC energy and credit
derivatives markets and clearing houses
Global distribution
• Screens distributed in 57 countries
• Regulated futures exchanges and clearing houses in
the U.S., Europe and Canada, as well as Global OTC
markets
Diversified markets
• Energy, agricultural, equity index, currency and credit
products
• Futures, OTC and Options
Leading-edge technology
• Sophisticated, scalable infrastructure, highly
accessible platform
•
ICE offices in Asia, Canada, Europe
and the U.S.
DERIVATIVES PRODUCT DEVELOPMENT
OTC - Cleared
OTC - Bilateral
•
•
•
•
•
New risks emerge
Dealers & customers
develop products in
response
Highly customized
Lower liquidity
Counterparty risk
•
•
•
•
•
Increased standardization
Central clearing house
(CCP) functions as buyer
to seller, seller to buyer
Contracts marked-tomarket & margined daily
Increased electronic
trading
Professionals-only market
Futures
•
•
•
•
•
3
Fully standardized
products
Contracts marked-tomarket and margined daily
by CCP
Contract specifications
designed by the exchange
& approved by regulators
Primarily electronically
traded
Individuals may participate
ICE U.S. NATURAL GAS SWAPS MARKET
OTC CLEARING INCREASES LIQUIDITY, TRANSPARENCY AND PARTICIPATION
Cleared Volume
Bilateral Volume
Trade Size
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
4
Jan-06
Jan-07
Jan-08
Jan-09
OTC CLEARING
AVOIDS COST AND RISK ASSOCIATED WITH BILATERAL TRADING
Bilateral Trading Costs and Risks
• Bilateral creditworthiness monitoring of large number of counterparties
• Frequent counterparty disagreements on value and the size of resulting
collateral calls
• Trade confirmation and reconciliation
• Trade reporting and warehousing
• Trade settlement
• Trade compression or tear-up
Benefits of OTC Clearing
•
•
•
•
Risk mutualization among market participants
Robust centrally managed risk management
Efficient multilateral netting
Transparency and reporting
5
ICE CLEARING HOUSE OVERVIEW
DIVERSE MARKETS, PRODUCTS AND SERVICES
ICE Clear Europe
Regulator: U.K. Financial Services Authority
ICE Clear U.S.
Regulator: CFTC
ICE Trust
Regulator: Fed, NYSBD
Energy - OTC
– North American
Natural Gas
– North American
Power
– Global Oil and
Refined
Products
Agricultural - Futures
– Sugar
– Coffee
– Cotton
– Cocoa
– OJ
Financial - Futures
– Russell Index
– FX
CDS - OTC
– North American CDX
indices
– To launch North
American single names
in 3Q09
Energy - Futures
– Crude Oil
– Gas Oil
– European
Emissions
– Coal
– UK Natural Gas
& Power
CDS - OTC
– To launch
European
iTraxx indices
in 2Q09
– To launch
European
single names in
3Q09
Related CDS Services
• Brokerage
• Delta neutral auctions
• Trade compression
• Credit event auctions
• STP, Allocations, and Novations
• Auto recouponing of single name CDS
ICE CDS CLEARING RISK MANAGEMENT FRAMEWORK
WATERFALL APPROACH FOR MANAGING SYSTEMIC RISK
• Ensure each clearing member has sufficient
financial resources, operational capabilities and
risk management experience
Membership Criteria
Risk Margin / Initial Margin Requirement
• Collateralize potential clearing member portfolio
loss under distressed market conditions
Mark-To-Market / Variation Margin
• Adjust clearing member collateral through a
daily debit/credit based on EOD mark-to-market
Intra-day Risk Monitoring
Special Margin Call Execution
• Identify additional margin requirements based on
a comparison of unrealized P/L to Risk Margin,
understanding unusual market fluctuations, etc.
ICE Capital Contribution*
• ICE participation in the Guaranty Fund (up to
$100 million)
Guaranty Fund
• Mutualize losses under extreme but plausible
market scenarios
• Oblige clearing members to contribute a capped
amount of additional default funding
Limited One-Time Assessment
* ICE has committed to capital contributions for ICE Trust and ICE Clear Europe CDS guaranty funds only
7
HYPOTHETICAL CDX PORTFOLIOS
Portfolio
Instrument
All Short
Position
Balanced
Position
All Long
Position
Position
in $ MM
CDX-NAIGS9V1-5Y
CDX-NAIGS9V1-10Y
CDX-NAIGS10V1-5Y
CDX-NAIGS10V1-10Y
CDX-NAIGHVOLS9V1-5Y
CDX-NAIGHVOLS10V1-5Y
CDX-NAHYS9V2-5Y
CDX-NAHYS10V1-5Y
-100
-100
-100
-100
-100
-100
-100
-100
CDX-NAIGS9V1-5Y
CDX-NAIGS9V1-10Y
CDX-NAIGS10V1-5Y
CDX-NAIGS10V1-10Y
CDX-NAIGHVOLS9V1-5Y
CDX-NAIGHVOLS10V1-5Y
CDX-NAHYS9V2-5Y
CDX-NAHYS10V1-5Y
-100
-100
-100
-100
100
100
100
100
CDX-NAIGS9V1-5Y
CDX-NAIGS9V1-10Y
CDX-NAIGS10V1-5Y
CDX-NAIGS10V1-10Y
CDX-NAIGHVOLS9V1-5Y
CDX-NAIGHVOLS10V1-5Y
CDX-NAHYS9V2-5Y
CDX-NAHYS10V1-5Y
100
100
100
100
100
100
100
100
Initial
Margin
(in $ MM)
$20.3
+4.3
Guaranty
Fund
(in $ MM)
$27.5
Comments
Increased margin for
higher risk (all short)
portfolios
+25.8
$16.0
-2.1
$1.7
-0.2
$13.9
$1.5
Lower, but not
equally offset relative
to the balanced
position
MARK TO MARKET DETERMINATION FOR CDS
TRADABLE SETTLEMENT PRICES ENSURE QUALITY
Bids
Each clearing
member must
submit a bid/offer
each day for each
instrument for
which it has an
open position
On a frequent and
unannounced
basis, bid/offer
submissions are
considered
tradeable and the
algorithm crosses
trades when
determining a
settlement price
CP
Bid
CP
Offer
Goldman
99.1
Citi
98.0
UBS
98.9
JPM
98.8
JPM
98.5
Deutsche
98.9
Deutsche
98.4
UBS
99.4
Citi
97.5
Goldman
99.6
Citi sells to Goldman
JPM sells to UBS
Illustration
Offers
97
98
99
012345678901234567890123456789
Settlement
Price = 98.95
ICE TRUST CDS CLEARINGHOUSE
PROGRESS TO DATE
Index Reference Name
Open Interest
Volume
CDX.NA.IG.10 V3-10Y
$3,284,374,500
$5,223,988,000
CDX.NA.IG.10 V3-5Y
$11,578,860,335
$60,956,630,570
CDX.NA.IG.11 V1-10Y
$1,243,095,000
$2,284,495,000
CDX.NA.IG.11 V1-5Y
$8,696,392,220
$109,673,252,600
CDX.NA.IG.12 V1-5Y
$8,061,836,000
$122,684,857,000
CDX.NA.IG.HVOL.10 V2-5Y
$562,420,000
$2,500,130,000
CDX.NA.IG.HVOL.11 V1-5Y
$1,532,372,000
$3,373,974,430
CDX.NA.IG.HVOL.12 V1-5Y
$263,500,000
$336,900,000
CDX.NA.HY.10 V11-5Y
$3,642,644,115
$14,069,948,470
CDX.NA.HY.11 V11-5Y
$4.098,071,425
$22,937,662,499
CDX.NA.HY.12 V2-5Y
$1,417,280,000
$18,4459,319,500
$44,380,845,595
$362,501,158,069
TOTAL
Volume is the sum of the notional for each trade and is one sided. For example if A and B agree to clear 1 transaction for $2,000,000 notional and C and D agree
to clear 1 transaction for $3,000,000 notional and A and C agree to clear 1 transaction for $8,000,000 notional the volume is $13,000,000 notional.
Open Interest is the sum of the net notional for all clearing participants that are net buyers of protection from ICE Trust at the conclusion of the clearing cycle and is
also one sided. For example if A is net long $10,000,000, B is net long $15,000,000, C is net short $7,000,000 and D is net short $18,000,000 the open interest is
$25,000,000.