New York Portfolio Clearing Overview Walter L. Lukken Chief Executive Officer.
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Transcript of New York Portfolio Clearing Overview Walter L. Lukken Chief Executive Officer.
New York Portfolio ClearingOverview
Walter L. LukkenChief Executive Officer
What isNew York Portfolio Clearing LLC (NYPC)
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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
OCC DTCC
US options exchangesUS stock exchanges & alternative platforms
CFTC
FICC
NYPC
OCC CME
clearingICE USclearing
ICE USCMENYSE
Liffe US
CC
X
ELX
Equity, fixed income, equity option & stock index option markets
Interest rate, commodity, energy, environmental, & stock index futures markets
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latio
nC
lea
ring
Tra
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pla
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Position opened on one exchange may be closed on another (fungible/horizontal)
Position opened on one exchange must be closed on the same (non-fungible/vertical)
• Markets are highly competitive – low trading tariffs
• Clearing houses are operated as utilities – very low clearing tariffs
• Markets are less directly competitive – higher trading tariffs
• Main clearing houses are operated for profit – higher clearing tariffs
DCO
DCM
‘One Pot’Margining
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Existing Landscape (“Two Pot Approach”) NYPC Value Proposition (“One Pot Approach”)
Non-optimized Capital Efficiency
Cross Margin
Clearing House A
Derivatives market
position offsets
performed
Clearing House B
Cash market
position offsets
performed
Residual Positions
Residual Positions
Single Risk Methodology
Cross Asset class offsets
Common Member
FICC cash positions
NYPC derivatives positions
Optimized Capital Efficiency
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“One Pot” vs. “Two Pot” Margining
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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• “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 “one-pot” 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
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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: • 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
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For More Information on NYPC, Contact:
Walt Lukken
Chief Executive Officer
212-855-5210
Ira Krulik
Chief Operating Officer
212-855-5260
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