Cleared OTC Interest Rate Swaps

Security. Neutrality. Transparency.

February 2012

CME Group OTC Clearing

CME Group is the industry leader in OTC Clearing, delivering a broad offering spanning Interest Rates, Credit, FX, Energy, Metals, and Ags

OTC Product Progression

Coal Metals
CDS, Ags, Gold Ferrous Metals

2002

2003

2004

2007

2008

2009

2010

2011

2012

ClearPort Established

Natural Gas, Crude

Electricity

IRS, Freight, Iron Ore

FX

CME Group
Founded in 1898 as CME #1 derivatives exchange in the U.S. and globally by volume Global leader in exchange-traded markets with $3B in revenue Leading liquidity / volumes in global benchmarks across all asset classes Extensive and diverse distribution network and customer base International linkages with leading global exchanges
2012 CME Group. All rights reserved

CME Clearport
Launched in 2002 to provide risk mitigation in energy markets following the Enron collapse Market leading OTC Clearing venue for a diverse range of commodities asset classes 1,700 listed contracts 10,000 registered users around the world

500,000 contracts cleared daily

CME Group OTC Clearing

Overview and Background
CME Group has worked closely with buy side and sell side participants to build a multi-asset class,

market leading OTC clearing solution

Over $345 billion in notional has cleared since launch and open interest is over $208 billion
Successful new product launches of EUR IRS which has cleared over 71.5 billion since launch, GBP

IRS which has cleared over 7.0 billion since December 5th, and the CDX HY Indices which have cleared over $9.8 billion since November 7th
1300 active customer accounts with cleared trades, and an additional 2,500 customer accounts

testing through our 15 clearing firms

Benefits of the Solution

Allows the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS

positions against Eurodollar and Treasury Futures

Builds on the strength of CME Groups market leading interest rate products business, which had an

average daily volume of $3.9 trillion in Q3 2011, and over $37 trillion of notional outstanding
Provides customers full transparency through direct access to daily valuation reports and the CME

CORE margin tool

Operational flexibility of a multi-asset class solution for IRS, CDS, FX, and Commodities via one

clearinghouse
Protects the confidentiality of trading relationships, while enabling customers to terminate positions

with any market participant

2012 CME Group. All rights reserved

Record Customer Clearing Activity

CME Group has built the leading OTC IRS and CDS clearing service by U.S. customer volume
Interest Rate Swaps

$32 $28

Credit Default Swaps

$200 $6

Total Volume Cleared = $303.3 billion Open Interest = $179.2 billion

Total Volume Cleared = $42.1 billion Open Interest = $28.9 billion

$30

$160
$24

$24
Open Interest (Billions) Daily Volume (Billions)
$4 $18

Daily Volume (Billions)

$20 $16 $12 $8

$120

$80

$12

$2
$6

$40 $4 $0
1-Sep-11 1-Oct-11 1-Nov-11 1-Dec-11 1-Jan-12 1-Feb-12

$0 IRS Volume IRS Open Interest

$0
1-Sep-11 1-Oct-11 1-Nov-11 1-Dec-11 1-Jan-12 1-Feb-12

$0 CDS Volume CDS Open Interest

Strong Performance of Newly Launched Products

EUR IRS cleared 71.5 billion since it launched on October 17th GBP IRS cleared 7.0 billion since it launched on December 5th CDX High Yield Indices have cleared $9.8 billion since they launched on November 7th

Note: Data current as of 2/13/12

2012 CME Group. All rights reserved

Open Interest (Billions)

Cleared OTC Financial Products

CME Group is delivering a comprehensive global product scope across IRS, CDS, and FX
Existing Products
USD, GBP, EUR Interest Rate Swaps (IRS) out to 50 years; CAD out to 30 years CDX IG Index, Series 9-17 3, 5, 7, and 10 year tenors as applicable CDX HY Index, Series 11-17, 5 year tenor

Early 2012 Expansion

IRS in JPY, CHF, and AUD out to 30 years CDS single names of index constituents USD Non-Deliverable Forwards (NDFs) in BRL, CNY,

Other Future Product Expansions

IRS in additional currencies, Zero Coupon Swaps, Amortizing Swaps, Basis Swaps, FRAs, and OIS IRS Swaptions Additional CDS single names Deliverable FX Spot, Forwards, Swaps and Options; Non-Deliverable Options (NDOs) USD Non-Deliverable Forwards (NDFs) in KRW, INR, MYR, PHP, IDR, TWD, CLP, COP, RUB, PEN Cash Settled Forwards in AUDUSD, USDCHF, USDCAD, NZDUSD, USDNOK, USDSEK, USDDKK, EURUSD, USDJPY, GBPUSD, USDMXN, USDSGD, USDPLN, USDZAR, AUDJPY, EURAUD, CADJPY, EURGBP, EURJPY, EURCHF, USDCZK, USDHUF, USDTRY, USDILS, USDTHB, USDHKD

2012 CME Group. All rights reserved

IRS Product Rollout

CME is delivering a comprehensive global product scope that includes the 7 currencies that account for 95% of vanilla IRS* before the end of Q1 2012
EXISTING PRODUCTS USD Fixed/Float out to 50 years- 1M, 3M and 6M LIBOR indexes EUR Fixed/Float out to 50 years- 3M and 6M EURIBOR indexes GBP Fixed/Float out to 50 years- 6M Libor index CAD Fixed/Float out to 30 years- 3M CDOR index Flexible day counts, business days, and payment frequencies including stubs
USD EUR GPB CAD CURRENCIES

EARLY 2012 EXPANSION

CURRENCIES

Maturity out to 30 years for JPY, CHF and AUD

JPY CHF AUD

OTHER FUTURE PRODUCTS Additional Currencies Zero Coupon Swaps, Amortizing Swaps, FRAs, Basis Swaps, and OIS Swaptions, Caps, Floors, Additional Currencies, Cross Currency Swaps, and Inflation Products

* Notional amounts outstanding received from Bank of International Settlements, December 2010

2012 CME Group. All rights reserved

Open Access Clearing Solution

Several market leading affirmation platforms and Swap Execution Facilities have already connected directly to CME Clearing
Bloomberg ICE Link Javelin MarkitSERV TradeWeb CME ClearPort CDS Migration Utility

CME Clearing
OTC IRS/CDS Clearing Members Bank of America Goldman Sachs BNY Mellon Barclays JPMorgan BNP Paribas Morgan Stanley RBS Securities Citigroup Nomura Credit Suisse UBS

Deutsche Bank

Additional OTC IRS Clearing Members

RBS PLC

Wells Fargo

Negotiate, execute, and submit trades through multiple venues to CME Clearing
Straight through processing and real-time confirmation once the trade is cleared Protects the confidentiality of trading relationships, while enabling customers to terminate positions with any market participant

Operational flexibility of a multi asset class solution for IRS, CDS, FX, and Commodities via one clearinghouse

2012 CME Group. All rights reserved

Trade Workflow Mechanics

Straight Through Processing allows for real-time clearing and trade confirmations

1 Dealer and Client agree to trade

Client
1

Dealer

2 Dealer alleges swap to Client through the Affirmation Platform

Affirmation Platform
4 5

3 Client selects Clearing Member and verifies the swap through the Affirmation Platform
4 Affirmation Platform sends the matched trade between Dealer and Client to CME Clearing House 5 CME checks for validation of the product, account and applies credit limits set by Clearing member(s), and then accepts the swap for clearing
5

CME Clearing House

Product Account Credit

5 CME sends Cleared notification back to the Affirmation Platform which displays the Cleared Status to each party 5 CME sends a Clearing Confirmation to Clearing Member(s) once all is validated

Clearing Member (Client)

Clearing Member (Dealer)

2012 CME Group. All rights reserved

Transparent Valuation and Reporting

Customers have full visibility into CME Groups swap valuations
VALUATION OVERVIEW
USD IRS positions will be marked to market once per day at 3pm EST
Pricing inputs obtained from wire service feeds CME Group utilizes OIS discounting, monotone convex interpolation, and Bootstrap

Generator to produce a Zero Coupon curve

PRICING INPUTS
LIBOR: O/N, T/N FRA: 0 x 6 CME Eurodollars first 6 Quarterly Eurodollar contracts, convexity adjusted Par Swap Rates: 2Y 10Y, 15Y, 20Y, and 30Y (SA, 3M LIBOR)

REPORTING
CME Group provides customers with full transparency including direct access to daily

reports showing curve inputs, daily discount factors, and valuations for each cleared swap position

2012 CME Group. All rights reserved

Details of Customer Reports

Report
Preliminary Trade Register End of Day Trade Register Curve Input Report Discount Factor Report CME Holiday Calendar Price Alignment Interest (PAI) Rate File

Description
Includes new and open trades as well as corresponding cash flows on positions cleared prior to 4:45pm EST on that day Includes new and open trades as well as corresponding cash flows on positions cleared on that day Contains the curve inputs of the CME Swap Curve Displays the daily discount factor out to 31 years Shows the CME Holiday Calendar Provides the rate used to calculate PAI

Time
4:45pm EST

Available in Testing

Available in Production

8:00pm EST

4:30pm EST

4:30pm EST

3:00pm EST 1:00pm EST

The above reports can be accessed through a secure FTP site. Please contact CMEs Onboarding Team at (312) 338-7112 or onboarding@cmegroup.com to gain access.

2012 CME Group. All rights reserved

10

Robust Financial Safeguards

CME structured the IRS risk waterfall to protect our customers during times of market stress and mitigate systemic risk

UNFUNDED

SURVIVOR PAYS

General Assessment Powers for IRS1

Additional collateral that can be called upon should all previous layers of the waterfall are exhausted Caps the limited resource waterfall Expected to cover extreme scenarios that are optimally addressed using a mutualized pool rather than margins GF Sizing considerations include risk, capital usage and charges , stakeholders incentives, and portability concerns during periods of default

IRS Non-Defaulting CMs Guaranty Fund

CME Contributed Capital for IRS $100M

DEFAULTER PAYS FUNDED

Contribution set aside by CME to help cure a default prior to dipping into the survivors funds

Defaulting Member IRS Guaranty Fund Liquidity Charge Baseline Initial Margin

Each Members contribution to the GF

Liquidity charge accounts for protecting large concentrated portfolios whose closeout could cost more or take longer than baseline timeframe Initial Margin is used to cover day-to-day P/L moves

The actual amounts will be based on the sum of the third and fourth largest net debtor profiles

2012 CME Group. All rights reserved

11

Superior Customer Protections

CME Clearing is the industry leader in mitigating risk for customers through the US FCM clearing model
CUSTOMER PROTECTION STANDARDS

The same customer protection standards apply to cleared OTC derivatives as to exchange-traded futures Clearing Member Firms are monitored and audited for risk, capital adequacy, and compliance with
customer protection rules and regulations

Strong history of risk innovation, crisis management, and a deep understanding of issues related to
customer protection in the US agency model

Comprehensive approach towards default management, utilizing industry best practices, industry expertise,
and default exercises to ensure readiness in a market crisis

ROBUST GUARANTY FUND

Key layer of protection in the US Clearing market that serves as a capital reserve buffer during times of
market stress and protects against systemic risk associated with catastrophic market events

Sized to cover the simultaneous defaults of the 2 largest FCMs, according to the results of stress tests,
which include all extreme historical events as well as black swan stress scenarios

Allocated between different FCMs pro-rata according to the residual risk not covered by margins. This
allocation mechanism further provides incentive to risk diversification across FCMs

2012 CME Group. All rights reserved

12

Customer Account Portability

Portability of customer positions and collateral is a cornerstone of CME customer protections

CUSTOMER CONTROLLED PORTABILITY TRANSFERS Establishing and managing accounts at multiple clearing members Clients maintaining accounts at multiple clearing members are able to control the timing and pacing of their porting transactions In the agency model, clients own their positions The agency model supports portability; at CME this is a matter of routine and standard practice

PROVEN SUCCESS IN CUSTOMER PORTABILITY Wholesale porting from stressed to solvent clearing members In September 2008, CME seamlessly ported all $2.2 billion of customer funds and 2.5 million customer positions from Lehman Brothers to a solvent clearing member In wholesale porting transactions, CME balances the need to assure client safety with recalibration of financial safeguards to minimize stress in the financial system

Portability is essential to customer protection, both in times of market stress and during the normal course of business
Portability is underpinned by CME Rule 853, governing transfers of trades

2012 CME Group. All rights reserved

13

Capital Efficient Margin Methodology

Model Overview

CME Group utilizes a historical Value at Risk (VaR) model, based on a 99% confidence of a 5-day move using 5 years of historical data

Net portfolio margining of cleared IRS positions isolates the true curve risk in a portfolio and assesses the appropriate margins to cover that risk
Transparent to market participants, easy to replicate, and scalable to margin other IRS currencies and Futures

Margin Offsets Against Futures

CME Group has the unique opportunity to offer unparalleled capital efficiencies via margin offsets of IRS positions against Eurodollar and Treasury Futures On October 18, 2011, the CFTC passed rule 39.13(g)(4)(i), which outlines the process for providing these margin offsets for Customers

A derivatives clearing organization may allow reductions in initial margin requirements for related positions (margin reductions) if the price risks with respect to such positions were significantly and reliably correlated Participants will have the ability to move selected futures contracts into their OTC Sequestered Account to strategically offset the risk in their swap portfolio and reduce margins

CME is working to have this available mid-2012, and preliminary analysis shows significant savings for margin offsets:

IRS invoice swaps against corresponding Treasury Futures provide savings of up to 85% IRS swaps against corresponding Eurodollar strips provide savings of up to 95%

2012 CME Group. All rights reserved

14

Transparent Margins Through CME CORE

CME CORE (CME Online Risk Engine) enables customers to calculate and evaluate their initial margin requirements for IRS and CDS
Create New or Load Existing Portfolio Validate and Calculate Initial Margin Requirement

Analyze and Review Results

ENHANCE REPORTS TO INCLUDE ELIGIBLE DISCRIPTIVE DATA

PHASE I: Transparency

Margin computation PNL reporting Curve scenario reporting

PHASE II: Analytics**

Delta ladder Stress testing Incremental VaR Analytics to support back-loading

** Future enhancements

2012 CME Group. All rights reserved

15

Flexible Collateral for Initial Margin

CME Clearing accepts a broad array of collateral for the Customer OTC Account Class
Collateral US Cash Haircut None

Non-US Cash (EUR, GBP, CAD, AUD, JPY, CHF)

Sovereign Debt of UK, Germany, France and Canada US Treasury Debt

5%*
5%-10.5% (maturity based) 0.5%-11% (maturity based) Additional 1.5% for off-the-runs

US Agency Debt
US Agency Mortgage Backed Securities

3.5%-7% (maturity based) Additional 1.5% for off-the-runs

11%

* Haircut is only applied when cash is used to meet a margin requirement based in a different currency

Expansion of Acceptable Collateral

CME Clearing is working with several major banks on a specialized collateral program that permits clearing firms to pledge collateral that CME does not accept directly This program will allow customers to post high quality corporate debt to their clearing firms to cover initial margin requirements, and these securities will be held in a tri-party account controlled by CME This program will be put into effect on March 12, 2012
2012 CME Group. All rights reserved

16

Corporate Bond Collateral Program

Clearing Members can transfer securities into a tri-party account controlled by CME at either bank* as a term pledge to receive initial margin credit
Overview Allows corporates bonds to be pledged as initial margin collateral for both Cleared IRS and futures Reduces costs of clearing for customers and creates further efficiencies for Clearing Members Bond Requirements

High quality bonds, at least A- rating by NRSO USD denominated, both domestic and global issuances Vanilla Bonds (Fixed rate bullet, callable, or putable) Over $300M in principal outstanding TRACE eligible

Program Parameters Haircut: (20%) Concentration Limits: The lesser of 5% per issuance and 5% per issuer or $200M Level II industry diversification (up to 25%) Eligible CUSIP List CME Clearing will publish a list of eligible CUSIPs at the beginning of each month CUSIP list will likely remain static except bonds that mature, and bonds that are deemed ineligible due to changes (i.e. rating downgrade, distress, etc)

*The Corporates Collateral Program, IEF4, is supported by a partnership with Bank of New York and JPMorgan Chase
2012 CME Group. All rights reserved

17

Customer On-boarding Resources

CME CORE Margin Tool
Web-based margin tool that enables customers to generate initial margins for IRS and CDS portfolios

CME CORE can be accessed by doing the following:

Create a CME SMART Click ID at https://cmecore.cmegroup.com/span/ Once a SMART Click ID is attained, please email cme.core@cmegroup.com to request entitlements to CME CORE. Specifically, in an email please provide the user ID and specify the request for the IRS/CDS asset classes. Please ensure your desktop is equipped with a recent version of Microsoft Silverlight (MS Add On): http://www.microsoft.com/getsilverlight/Get-Started/Install/Default.aspx

CME On-boarding Team

Team of on-boarding experts who work with buy side clients to help them prepare to clear IRS and CDS, and engage in testing the clearing process
Extensive work with the affirmation platforms, and ability to connect customers to the right resources at those firms The team can be reached at (312) 338-7112 and onboarding@cmegroup.com

2012 CME Group. All rights reserved

18

Legal Documentation
Documentation between CME Group and Customer Exchange User License Agreement (EULA)

New customers must register their firm(s) online via the CME Exchange User License Agreement (EULA), which may be found at: http://www.cmegroup.com/clearport/registration.html
Investment Advisors and Fund Managers can take advantage of an alternative registration process which offers the flexibility to register managed funds, provided it has the authority to do so, by notifying the CME ClearPort Facilitation Desk via email at custcare@cmegroup.com Documentation between Clearing Member and Customer Clearing Member Futures Account Agreement (FCM Agreement) Clearing Member OTC Addendum

Documentation between Customer and Execution Counterparty

OTC Execution Agreement The FIA and ISDA published a template that market participants can use as a basis for negotiation: http://www.futuresindustry.org/fia-and-isda-publish-documentation-for-cleared-swaps.asp

2012 CME Group. All rights reserved

19

Next Steps and Contact Us

Establish a relationship with a participating CME IRS Clearing Member

Select affirmation platform and work with Clearing Member throughout testing cycles

Complete required Clearing Member Customer Documentation

Begin clearing trades

For any questions regarding On-Boarding and Testing, please contact : On-boarding Team 312 338 7112 onboarding@cmegroup.com

For general information, please contact: Jack Callahan Steve Dayon 312 454 8312 312 466 4447 jack.callahan@cmegroup.com steven.dayon@cmegroup.com

Europe
Jonathan Boyd Asia Way Yee Bay +65 6593 5560 wy.bay@cmegroup.com +44 20 3379 3726 jonathan.boyd@cmegroup.com

2012 CME Group. All rights reserved

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Cleared OTC IRS Clearing Firm Contacts

Firm Bank of America Merrill Lynch Barclays BNP Paribas BNY Mellon Contact Name Todd DAgosta (US) Ed Allen (EMEA) Sandy Fleischman Patrick Corrigan Avi Pemper Gavin Dixon Sanjay Kannambadi Robert Bosse Email merrill.otc.clearing@baml.com sandy.fleischman@barcap.com patrick.corrigan@barcap.com avi.pemper@americas.bnpparibas.com gavin.dixon@americas.bnpparibas.com sanjay.kannambadi@bnymellon.com robert.bosse@bnymellon.com Phone Number 646 855 9813 646 855 6506 212 526 6548 212 526 7101 212 841 3753 44 20 7595 8417 212 635 6927 212 635 6718

Citigroup
Credit Suisse Deutsche Bank Goldman Sachs

Chris Perkins Mariam Rafi

Neil Burke John Guthrie Elliot Barr Luciana Miranda Mike Dawley Jack McCabe

christopher.perkins@citi.com mariam.rafi@citi.com
neil.burke@credit-suisse.com john.guthrie@credit-suisse.com elliot.barr@db.com luciana.miranda@db.com michael.dawley@gs.com jack.mccabe@gs.com

212 723 5943 212 723 4074

212 538 0761 212 325 4535 212 250 9831 212 250 8845 212 902 7582 212 902 3037

JPMorgan
Morgan Stanley Nomura RBS UBS Wells Fargo

Piers Murray Catherine Bartzos

Jason Swankoski Mark Bortnik Sandeep Kohli Stephen Scalzo Brian Halligan Madlen Dorosh Ed Pla Reinhardt Olsen Jeff G. Gore Dan Thomas

piers.murray@jpmorgan.com catherine.bartzos@jpmorgan.com
jason.swankoski@morganstanley.com mark.bortnik@morganstanley.com sandeep.kohli@nomura.com stephen.scalzo@nomura.com brian.halligan@rbs.com madlen.dorosh@rbs.com edward.pla@ubs.com reinhardt.olsen@ubs.com jeffrey.gore@wellsfargo.com dan.thomas@wellsfargo.com

212 270 5445 212 834 3105

212 761 5206 44 20 7677 9685 212 667 2037 212 667 8981 203 897 2504 203 897 9869 203 719 2602 203 719 3408 704 715 0528 704 374 2103

2012 CME Group. All rights reserved

21

Disclaimer
Futures trading is not suitable for all investors, and involves the risk of loss. Futures are a leveraged investment, and because only a percentage of a contracts value is required to trade, it is possible to lose more than the amount of money deposited for a futures position. Therefore, traders should only use funds that they can afford to lose without affecting their lifestyles. And only a portion of those funds should be devoted to any one trade because they cannot expect to profit on every trade. All references to options refer to options on futures.

CME Group is a trademark of CME Group Inc. The Globe Logo, CME, and Chicago Mercantile Exchange are trademarks of Chicago Mercantile Exchange Inc. CBOT and the Chicago Board of Trade are trademarks of the Board of Trade of the City of Chicago, Inc. NYMEX is a registered trademark of the New York Mercantile Exchange, Inc. All other trademarks are the property of their respective owners.
The information within this brochure has been compiled by CME Group for general purposes only. CME Group assumes no responsibility for any errors or omissions. Additionally, all examples in this brochure are hypothetical situations, used for explanation purposes only, and should not be considered investment advice or the results of actual market experience. All matters pertaining to rules and specifications herein are made subject to and are superseded by official CME, CBOT and NYMEX rules. Current rules should be consulted in all cases concerning contract specifications. Copyright 2012 CME Group. All rights reserved.

2012 CME Group. All rights reserved

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