Transcript Eris Exchange Cleared Interest Rate Swap Futures

Eris Exchange
Cleared Interest Rate Swap Futures
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
Table of Contents
US Regulatory Imperative
3
Eris Exchange Overview
5
Next Steps to Access Eris Exchange
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
15
2
Regulatory Imperative
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
Regulatory Imperative: Cleared Swaps
 The primary result of the Wall Street Reform and Consumer Protection Act – the “Dodd-
Frank Act”…
 The CFTC and the SEC, in consultation with the Federal Reserve, are undertaking a
massive and historic rulemaking effort to implement the Dodd-Frank Act
 The Dodd-Frank Act will be fully effective on July 15, 2011
“The Wall Street reform bill will – for the first time – bring comprehensive regulation to the over-thecounter derivatives marketplace. Derivatives dealers will be subject to robust oversight. Standardized
derivatives will be required to trade on open platforms and be submitted for clearing to central
counterparties. The Commission looks forward to implementing the Dodd-Frank bill to lower risk,
promote transparency and protect the American public.”
–CFTC Chairman Gary Gensler, July 21, 2010
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
4
Eris Exchange Overview
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
Eris Exchange: Corporate Overview
 Eris Exchange is a Delaware LLC that operates as an Exempt Board of Trade (EBOT)
• Initial product is an Interest Rate Swap Future, cleared at CME Clearing House
 Founding Partners – Major Independent Liquidity Providers
• Chicago Trading Company, DRW Trading Group, GETCO, Infinium Capital Management,
Nico Holdings
 Management Team – Deep Industry Experience
• Former senior executives from CME Group and CFTC
Key Milestones
April, 2010
Eris Exchange receives a CFTC Letter related to EBOT Notification
June
CME Clearing and Eris Exchange sign long-term Clearing Services Agreement
July
Eris Exchange on-boards initial FCM’s and Market Makers
August
Customers and market makers execute initial trades with multiple FCM’s
September
Eris Exchange surpasses $4B in notional volume traded
October
Eris Exchange surpasses $10B in notional volume traded
November
Eris Exchange and State Street announce electronic trading platform LOI
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
6
Value Proposition
 Replication of OTC Swap Economics
 Dollar-for-Dollar tracking, includingn costs
of posting collateral
 Full Flexibility of OTC Swaps
 Any coupon, any date
 Flows Seamlessly through Futures
Systems
 Possible due to “Single Price” design
 Futures Exchange Regulation
 Eris Exchange is under the CFTC’s
jurisdiction
 Regulatory framework is well-known and
well-understood
 Wide Access
 Cleared at CME Clearing
 Existing $8 billion guarantee fund stands
behind trades
 Capital Efficiencies
 SPAN margining
 Soon-to-be Eligible for Cross-Margining
(upon receiving recognition as a DCM)
 Transparency
 Streaming, executable quotes
 Independent liquidity providers compete on
price
 Efficiencies in the “unwind” process
 Futures product design allows clients to
“unwind” with any third party
 No ISDAs Required
 Any of 50+ CME Clearing Firms with >$50
million can on-board clients
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
7
The Product: Interest Rate Swap Futures
Plain vanilla, fixed-for-floating interest rate swap based on 3m LIBOR
 Notional: $1 million face per contact
 Maturity: Matures on any business day out to 30 years
 Coupon: Any coupon to six decimals (0.123456)
 Price: Six digits to the right of the decimal (100.123456) market values to the
penny
• Par swaps are booked at a price of 100, by convention
• Each one point move equates to $10,000 on a $1M notional trade (e.g., 100 to
101)
 Final Settlement Value: 100 + net accumulated value of cash flows – total return
on modified variation margin
 Day Count: Fixed side 30/360, Floating side Actual/360
 Daily Settlement: Composite curve from market makers, end users, third-party
sources
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
8
Example Swap: 10-yr, $1M, 3.000% Coupon
Eris
Futures = 100 + A
Price
Initiate
using rate
+
NPV of OTC
Swap
Single price
for futures
bookkeeping
Unwind
using NPV
$50,000
102.5079 = 100 + 5.000
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
+
B
–
C
Historical
“payments”
reinvested
daily
Cumulative
Daily
Interest
Adjustment
($24,890)
$30.85
(2.489)
– 0.003085
9
Trade Execution
 Today: Live trading of Eris Interest Rate Swap Futures through
Web-based RFQ Platform
 RFQ-based trading with multiple independent liquidity providers to initiate
par swaps and unwind aged positions
 Block trade support for pre-negotiated, bilateral trades above size thresholds
 Q1 2011: Streaming Quotes in Central Limit Order Book through
State Street electronic trading platform
 Streaming, executable quotes in Central Limit Order Book for standard
maturity par swaps
 RFQ model for non-standard maturities and unwinds
 Block trade support for pre-negotiated, bilateral trades above size thresholds
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
10
Example Trade Flow
1. Client Trades Par Swap in Rate Terms
2. Trade Confirmed to CME Clearing, FCM and Trading Firm
3. Par Swap Assigned a Futures Price = 100.000
4. Futures Contract entered into FCM bookkeeping systems
5. Initial Margin applied based on SPAN
• 10-Year initial margin – 3.64% of notional
6. Eris Exchange and CME calculate and apply settlement curve daily
7. Futures price moves (e.g., to 100.2540) and variation margin is applied
• Price based on ∑ NPV + cumulative payments received - modified variation margin
8. Client requests price to unwind in NPV terms
• Cumulative payments received and modified variation margin are known and static intra-day
9. Client trades unwind in NPV terms
10. Unwind Trade Confirmed to CME Clearing and FCM systems
• Position is closed and final margin moves
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
11
Clearing, Margin and Fees
 Initial margin is collected by CME Clearing House
• Levels calculated by CME based on SPAN 5-day VaR, based on a 4-year history
• Held in CME’s new OTC “Customer Sequestered” account class
• Standard forms of collateral are accepted, including Cash, Treasuries and other
instruments
 Daily variation margin is paid/collected each day in the same manner as any
standard futures contract
 Coupon and interest accruals typically associated with uncleared interest rate
swaps are embedded in the contract price, and do not require
payments/collections outside of daily variation margin
 Exchange fees charged to buyer and seller based on notional value and tenor
of trade
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
12
Next Steps to Access
Eris Exchange
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
Next Steps to Access Eris Exchange
 Eris Exchange is fully operational today
 Contact Eris Exchange or go to www.erisfutures.com to learn more, view the trading
platform and learn about user agreements
 Contact your FCM to sign the Participant Agreement and set up access
Eris Exchange Contacts
 Neal Brady
Chief Executive Officer
[email protected]
312-253-9056
 Michael Riddle
Head of Business Development & Operations
[email protected]
312-626-2699
 Stephen Humenik
Head of Legal and Regulatory Affairs
[email protected]
312-626-2681
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.
14
Version Created 2010-11-12 Canada
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are leveraged instruments, and
because only a percentage of a contract’s value is required to trade, it is possible to lose more than the amount of
money deposited for a futures position.
All references to options refer to options on futures.
Eris Exchange is the trademark of Eris Exchange LLC. The Eris Logo is a trademark of the Eris Exchange.
The information within this presentation has been compiled by Eris Exchange for general purposes only. Eris
Exchange assumes no responsibility for any errors or omissions. Although every attempt has been made to ensure
the accuracy of the information within this presentation, Eris Exchange assumes no responsibility for any errors or
omissions. Additionally, all examples in this presentation are hypothetical situations, used for explanation purposes
only, and should not be considered investment advice or the results of actual market experience. The information
contained in this presentation does not constitute legal or investment advice. The information contained in this
presentation represents the views and opinions of the speaker and are not necessarily the views of Eris Exchange.
All matters pertaining to rules and specifications herein are made subject to and are superseded by official Eris
Exchange LLC rules. Current rules should be consulted in all cases concerning contract specifications.
Copyright © 2010 Eris Exchange LLC. All rights reserved.
Proprietary & Confidential
Copyright © 2010 Eris Exchange LLC. All rights reserved.