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RJ O’Brien & Associates

September 2017

RJ O’Brien & Associates

• R.J. O’Brien & Associates, LLC (“RJO”) is a privately owned Futures Commission Merchant (“FCM”) founded in 1914. RJO is now the largest independent FCM in the United States, and has a global presence with offices in Asia, Europe and North America.

• With client segregated assets of approximately 3.8B USD and an adjusted net capital of approximately 201MM USD, RJO is a fully diversified, integrated FCM servicing some of the world’s largest financial, industrial, and agricultural institutions.

• RJO is the only remaining founding member of the Chicago Mercantile Exchange and continues to be a member of all major futures exchanges worldwide, including the CME Group (CME, CBOT, COMEX, NYMEX), ICE Futures (US, Canada), CBOE Futures (CFE) and the NASDAQ Futures Exchange.

• With rigorous and experienced risk management, the firm’s capital base is strictly utilized for the protection of its customers and is not leveraged in any capacity.

• The R.J. O'Brien group operates through various regulated legal entities across the globe. R.J. O’Brien & Associates, LLC is regulated in the USA by the CFTC and CME, and is a member of the National Futures Association, the Futures Industry Association, and the Managed Funds Association. R.J. O'Brien (UK) Limited and R.J. O’Brien Limited are regulated in the United Kingdom by the FCA, R.J. O'Brien & Associates Canada is regulated in various Canadian provinces by the IIROC, and R.J. O’Brien & Associates (HK) Limited is regulated by the Securities and Futures Commission of Hong Kong.

2Copyright © 2017 The Fixed Income

Group at R.J. O'Brien. All Rights Reserved.

RJO’s Market Position

RJO is consistently the largest independent FCM in the United States in terms of client segregated assets, and is the 11th largest FCM overall.

FCM Assets FCM Assets

1 GOLDMAN SACHS 24,852 11 R.J. O’BRIEN & ASSOCIATES 4,154

2 JP MORGAN 20,030 12 WELLS FARGO 3,703

3 MORGAN STANLEY 16,077 13 DEUTSCHE BANK 3,471

4 SG AMERICAS SECURITIES 15,299 14 INTERACTIVE BROKERS 3,403

5 MERRILL LYNCH 14,913 15 ABN AMRO CLEARING 3,299

6 CITIGROUP 9,622 16 MIZUHO 2,838

7 UBS SECURITIES 8,555 17 BNP PARIBAS 2,798

8 CREDIT SUISSE 6,854 18 RBC CAPITAL MARKETS 2,502

9 BARCLAYS 6,450 19 INTL FCSTONE 2,101

10 ADM INVESTOR SERVICES 4,731 20 MACQUARIE FUTURES 2,057

Data as of February 2017Source: www.cftc.gov

Numbers in hundred thousands



http://www.cftc.gov/

The Fixed Income Group

• The Fixed Income Group (“FIG”) unified in 1997 at R.J. O’Brien.

• Pure agency brokerage– we do NOT take the other side of our clients’ orders. Our clients’ best execution IS our business model.

• Our service is solely directed toward institutional clients.

• Client base: 200+ unique, open and active entities.

• Using exchange-traded futures and options, we advise, construct, execute, and clear hedge and derivative solutions at the request of our clients and the perceived needs of the industry.

• Current focus is motivated by Dodd-Frank mandates that necessitate traditional effectiveness but emphasize mandatory clearing and compliance efficacy. Our goal: reduce capital required for derivatives while maintaining economic and accounting equivalencies.

• Historically, we’ve focused on assets, portfolios, and businesses with significant non-linear risk profiles and/or leverage: mortgage derivatives, whole-loans, MSRs/IO, ABS, structured financing/repo, vega immunization, forward rate lock, synthetic swap/cap/floor/swaptions…



RJO FIG BIOs

• Corrine Baynes

– 3 years of experience in the futures industry

– Marketing and operations

• Jeff Bauman

– 29+ years if futures: Kidder, Greenwich Capital

– 17+ years as Managing Director of RJO FIG

• Rocco Chierici

– 31+ years of experience in the futures industry

– Chicago Mercantile Exchange member for 22+ years, Eurodollar Option Pit Committee Member

• John Coleman

– 27+ years in futures: Lehman, Kidder, PW/UBS

– 19+ years as Managing Director of RJO FIG since inception in 1997

• Rich Goldblatt

– 30+ years futures: Drexel, Chase, Lehman, Kidder, PW/UBS, 19+ years RJO FIG since inception 1997

– Chicago Board of Trade/CME member for 27+ years, treasury options specialist

• Rob Powell, CPA, CFA

– 28+ years of experience in the futures industry (27 years with RJO), Natl Futures Assoc (regulator)

– 19+ years as Managing Director of RJO FIG since inception in 1997

• Brian Rachwalski


– Trade structure and execution for volatility and amortizing hedges

• Dan Sobolewski


– Trade structure and execution, position risk/margin optimization

• Matt Surwillo

– Quantitative Analyst

– Hedge Model construction using Python, VBA, MATLAB

• Evan Vollman

– 8+ years of experience in the futures industry, Eurodollar Option Pit-Trader

– Trade execution & options strategy specialist



FIG Industry Publications & Recognition

• Fabozzi’s Handbook of Fixed Income Options, “Monetizing Convexity”• Institutional Investor, Eurodollar Futures Hedge Accounting• iTreasurer, Eris Swap Futures Hedge Accounting• Risk Magazine, Eris Swap Futures Margin Incentive• Periodic citations: Bloomberg, Futures Magazine• Global Association of Risk Professionals: Hedge Accounting Studies Make Stronger Case

for Exchange Trading

Additional recent publications include articles on the following topics: CRT Hedging with Credit Futures, Jumbo Hedging with Futures, NPLs, Corporate Bond Hedging, Eris & MAC Swap Futures, Cash Treasury vs. Treasury Futures Basis

Accounting Publications– FAS 133 Accounting Article published in Institutional Investor (Fall 2001)– Eurodollars vs. Swaps Article published by the CME Group (2006)– Eris Swap Futures Cash Flow Hedge Accounting Publication (Aug-2016)– Eris Swap Futures Fair Value Hedge Accounting Publication (Nov-2016)



Recent Conference Engagements

FIG’s Coleman is a frequent speaker/panelist at industry conferences emphasizing Mortgage-related hedging, Swap-Futures-related transactions

– Montreal Exchange Canadian Annual Derivatives Conference (10/15)

– SecureVest Annual CMO Conference (1/16 & 1/17)

– South Florida Bond Traders Mortgage Conference (2/16 & 2/17)

– IMN Annual Mortgage Servicing Rights Conference (4/16 & 3/17)

– The ICE CDX Credit Futures Symposium (6/16)

– Pactolus Investor Forum-- NPLs (9/16)

– Eris Exchange Swap Futures Seminar (annual)

– Trading Technologies - Tech Tap Live (annual)



FIG Execution Capacity

• FIG has executed the most buy-side contracts in the USD swap-futures complex and the largest buy-side, outright transactions in USD IRS futures & CDX futures.

• FIG trade desk offers transaction packaging advice & voice execution during US market hours.• FIG executing brokers are well respected by liquidity providers(“LPs”) / block market makers for knowledge, flow,

and superior execution. Most Street firms and swap-futures LPs use FIG execution in some aspect of their own business.

• RJO 24-hour Global execution desk supports overnight trading in products that are available for trading during Asian & European trading hours.

• RJO offers direct market access (“DMA”) via these electronic execution platforms: Bloomberg EMSX, Trading Technologies, PATS, EOS, CQG, CTS, and other open API formats.

• FIG maintains a vital best-execution presence on the trading floor to handle option arbitrage and complex option executions.

• Continuous market color, flows, volatility/straddle runs, un-axed opinions.• After decades in the business, FIG KNOWS there must be multiple redundancies in execution channels. And

there have to be PEOPLE to solve problems when markets are open: 1) DMA, 2) FIG Trade Desk, 3) FIG FLOOR, 4) 24-hr GLOBAL DESK.

• If there’s a market open in the world, our Chicago office has a trade desk open to handle voice execution and troubleshoot any inquiries 6:00pm ET Sunday through 5:00pm ET Friday.



FIG Execution Capacity (cont’d)



Eris Primary Standards: Quarterly IMM-dated Swap Contracts

• Benchmark Contracts• 10 tenors: 2, 3, 4, 5, 7, 10, 12, 15, 20 & 30 year maturity contracts with quarterly effective

dates that coincide with IMM dates• Liquidity, transparency, anonymity and efficiency of futures a contract, but identical

performance and economics of an OTC MAC interest rate swap• Can be rolled for constant duration/yield curve adjustments or held to maturity (no

physical delivery)• Handful of dealers streaming actionable markets• Stream quotes past the contract’s effective date• Single line item; Unwind existing positions, automatically net and offset. No need to enter

into an offsetting swap, report, clear, post, and compress• Maintains 2-day VaR margin requirement through the maturity date• Margin requirement declines annually with shortening maturity• Full, IMM-dated, trade-able, Off-The-Run Swap Futures Curve. Daily hard-mark settle

for each quarter (no interpolation, “model vs mark” error)

Eris Swap Futures Contracts



Eris Flexes: Date Flexible Swap Futures

• Customizable Contracts• Effective date can be any business day up to 10 years forward• Maturity date can be any business day up to 30 years following the effective

date• Economically similar to a spot or bespoke OTC cleared swap but no ISDA, no

CVA/CSA required– economic parity with futures/CME curve• Yield curve granularity with accounting treatment of OTC swaps• Easily RFQ’d by RJO FIG executing brokers• Notional value = $100k per contract• Maintains 5-day VaR margin requirement through maturity vs. typical 10-

day VaR margin for most bilateral OTC IR swaps. And, margin offsets against other futures contracts cleared at the CME




Eris Standard Invoices: Invoice Swap Futures

• Matched Contracts to Coupons and Maturity of UST• Contracts available against the 2Y, 5Y, 10Y, Ultra 10Y, 30Y, and Ultra

30Y UST futures contracts• Coupons and Maturity Date match Cheapest-to-Deliver (“CTD”)

Treasury notes and bonds in the deliverable basket of the futures• Capital efficient exposure to US govt/USD swap spread• Easily RFQ’d by RJO FIG executing brokers• Notional value = $100k per contract• Maintains 5-day VaR margin requirement through maturity vs.

typical 10-day VaR margin for most bilateral OTC IR swaps. And, margin offsets against other futures contracts cleared at the CME




Curve & Valuation

• Prior to FUTURES last settlement date, Eris trade to NPV: Open Market, Actionable Bid/Ask, Anonymous, Face CME CCP

• Begin/End of Day Yield Curve Valuation– ftp://ftp.Erisfutures.com/ --Dates, Rates, Discount Factors– CME Valuation Curve for ALL Cleared Swaps and Swap Futures-

Settlement; Daily Eris Settles

• AFTER futures period (the effective date): – Eris standards become Eris ‘Aged Standards’ and persist as a future.

Margin remains 2-day VaR but same as for tenor of original future. Pay/Rec payments are averaged over the period and directly adjusted in daily price settlement. PAI (Synthetic FedFunds O/N Interest on Variation) added. “Dirty Price”= NPV+Daily %Pay/Rec+PAI– Identical to total cash flows of OTC Swap (see white paper).



ftp://ftp.erisfutures.com/



Margin Comparison• **Per $1 Million Notional**

• Cleared Swap margin in chart is average of Pay & Receive-Fixed

• Eurodollars are 3 month LIBOR contracts, only out to 10yrs

• Cleared IRS margin found through the CME Core

• Margin comparisons from 9/25/2017

TenorEris Swap Futures

EurodollarsPay-FixedCleared

Swap

Rec-FixedCleared

Swap

Margin Reduction for Futures

Swap Futs % of Cleared

EDs % of Cleared

2 $4,000 $2,220 $5,320 $7,500 62.40% 34.63%

5 $8,500 $7,610 $13,760 $19,490 51.13% 45.77%

7 $12,500 $11,370 $20,690 $29,580 49.73% 45.24%

10 $15,000 $17,010 $29,270 $37,620 44.85% 50.86%

30 $40,000 $83,270 $76,240 50.15%

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

$80,000

2 5 7 10 30

Eris Swap Futures

Eurodollars

Pay-Fixed Cleared Swap

Rec-Fixed Cleared Swap

Contract Tenor

Mar

gin

N O

E U

R O

D O

L L

A R

S

Increased Market Vol => Margin Differential Increasing between OTC & Swap Futures

• 10Y instruments

• Per $1MM notional

• Data Source: CME Core and Bloomberg

**Note: To clear a receive-fixed swap today, the margin requirements are nearly 3x what is required for the equivalent Swap Futures contract



Margin Differential Aug2015-Sep2017



$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

$55,000

Margin Comparison (10-year Tenor)Swap Futures

Eurodollar Futures

Pay-Fix Cleared Swap

Rec-Fix Cleared Swap

Cassini Margin Tool

• Eris Exchange offers free client portfolio optimization powered by Cassini. Compare and evaluate margin requirements of your OTC swap positions against the margin requirements of the same risk profile booked as Eris positions.

www.Erisfutures.com/margin-optimization



http://www.erisfutures.com/margin-optimization

Eris Liquidity• Eris offers transparent, anonymous Central Limit Order Book liquidity consolidated into

benchmark tenors like other futures markets

• Frequency of trading in Off-The-Run tenors increasing, with volumes up, and bid / offers consistent with On-The-Run: executions at ~2/10bp from mid

Copyright © 2017 The Fixed Income Group at R.J. O'Brien. All Rights Reserved.

18

Eris Pricing Mirrors OTC Swap Pricing

• Eris futures replicate the economics of OTC swaps

• Futures price movements mirror OTC movements

• Match terms and quoted in the same way as MAC swaps

• Eris Methodology includes price alignment interest, avoiding the convexity bias in other futures

Source: www.Erisfutures.com



http://www.erisfutures.com/

ICE-Eris CDX Credit Futures

• CDX 5-year Credit Futures now available to trade: CDX HY & IG

• $100,000 notional contracts

• Trade in tick sizes of 0.01 (1 tick = $10)

• No basis between Credit Futures and OTC-Cleared CDX

Initial Margin Requirement 5-yr Futures vs. OTC

ICE-Eris Credit Futures CDX OTC

SpeculatorsOutright Hedgers

Buy ProtectionSell

ProtectionCDX.NA.IG.S27 $660 $600 $834 $1,644

CDX.NA.HY.S27 $1,760 $1,600 $3,759 $5,168

*as of November 2016 – subject to change by ICE



Eris Trading Mechanics

• Eris Exchange Swaps Standards and Flexes:

Fixed-Payer Vantage Point–BUY = Pay-Fixed = Short DV’01

SELL = Receive-Fixed = Long DV’01

Eris CDX Swaps:BUY = Receive premium = Long credit risk

SELL = Pay premium = Short credit risk



Chicago Office 800.367.3349– Corrine Abele [email protected]– John Coleman [email protected]– Rob Powell [email protected]– Brian Rachwalski [email protected]– Dan Sobolewski [email protected]– Matt Surwillo [email protected]– Evan Vollman [email protected]

Chicago Board of Trade Floor 800.367.3650– Rocco Chierici [email protected]– Rich Goldblatt [email protected]

Sacramento Office 312.286.0491– Jeff Bauman [email protected]

FIG Contact Info



mailto:[email protected]












DISCLAIMER

This material has been prepared by a sales or trading employee or agent of R.J. O’Brien and is, or is in the natureof, a solicitation. This material is not a research report prepared by R.J. O’Brien’s Research Department. By acceptingthis communication, you agree that you are an experienced user of the futures markets, capable of makingindependent trading decisions, and agree that you are not, and will not, rely solely on this communication in makingtrading decisions.

DISTRIBUTION IN SOME JURISDICTIONS MAY BE PROHIBITED OR RESTRICTED BY LAW. PERSONS IN POSSESSION OFTHIS COMMUNICATION INDIRECTLY SHOULD INFORM THEMSELVES ABOUT AND OBSERVE ANY SUCH PROHIBITIONOR RESTRICTIONS. TO THE EXTENT THAT YOU HAVE RECEIVED THIS COMMUNICATION INDIRECTLY ANDSOLICITATIONS ARE PROHIBITED IN YOUR JURISDICTION WITHOUT REGISTRATION, THE MARKET COMMENTARY INTHIS COMMUNICATION SHOULD NOT BE CONSIDERED A SOLICITATION.

The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whetherthis is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies,is not indicative of future results. Trading advice is based on information taken from trades and statistical services andother sources that R.J. O’Brien believes are reliable. We do not guarantee that such information is accurate orcomplete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific timeand is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.

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