........ 

Paul E. Glotzer, Esq. 

BOARD OF GOVERNORS 

OF THE 

FEDERAL RESERVE SYSTEM 

WASHINGTON, O. (. 20551 

Cleary Gottlieb Steen & Hamilton LLP 

One Liberty Plaza 

New York, New York 10006 

Dear Mr. Glotzer: 

ADDRESS OFFICIAL CORRESPONDENCE 

TO THE BOARD 

June 5, 2009 

This is in response to the request by Cleary Gottlieb Steen & Hamilton LLP, 

on behalf of certain participants in ICE US Trust LLC ("ICE Trust"), New York, 

New York, for a determination of the appropriate risk weights that should apply to 

claims on ICE Trust. 1 Specifically, you request that a zero percent risk weight 

under the risk-based measure of the Board's Capital Adequacy Guidelines for state 

member banks and bank holding companies ("Risk-Based Capital Rules,,)2 be 

assigned to (1) the counterparty credit risk charge on credit default swap ("CDS") 

transactions with ICE Trust, and (2) funds placed with ICE Trust as part of ICE 

Trust's guarantee fund ("GF Contributions") or as additional margin ("Margin"). 

On March 4, 2009, the Board approved the application by ICE Trust to 

become an uninsured state member bank3 that will provide central counterparty 

services by clearing certain CDS contracts among its participants. As a central 

counterparty and clearinghouse for CDS trades of its participants, ICE Trust will 

use a novation process whereby the original contract between buyer and seller is 

extinguished and replaced by two new contracts, one between ICE Trust and the 

buyer and the other between ICE Trust and the seller. In addition to the netting of 

CDS transactions, ICE Trust will collect (i) Margin, which consists of (a) daily 

1 Current participants in ICE Trust are major dealers, including Bank of 

America, N.A.; Goldman Sachs International; Barclays Bank PLC; Citibank, N.A.; 

Credit Suisse International; Deutsche Bank AG, London Branch; JPMorgan Chase 

Bank, N.A.; Merrill Lynch International; Morgan Stanley Capital Services, Inc.; 

and UBS AG. 

2 12 CFR parts 208 and 225, Appendix A. 

3 ICE US Trust LLC (Board order, March 4, 2009). 
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two-way cash-variation margin and (b) 99 percent 5-day Value-at-Risk ("VaR")-

based initial margin, and (ii) 99.999999 percent VaR-based GF Contributions that 

will provide additional protection against the default of a major market participant. 

ICE Trust has established practices to mitigate the risks to participants, including 

the netting of offsetting trades, the daily payment and receipt of cash-variation 

margin, the payment of initial margin, strict standards for participants, and strong 

risk management.4 Margin and GF Contributions effectively function as collateral 

that is available to support the obligations of ICE Trust. Likewise, ICE Trust can 

demand supplemental margin from a participant on an intraday basis or increase 

the size of a participant's GF Contributions at its own discretion, if warranted, to 

protect itself and the other participants. ICE Trust is subject to direct supervision 

by the Federal Reserve and the New York State Banking Department. 

Under the Risk-Based Capital Rules, exposures to insured banks, other 

insured depository institutions, and qualifying securities firms are assigned a 

20 percent risk weight, whereas exposures to other companies generally receive a 

100 percent risk weight.5 ICE Trust is an uninsured state-chartered trust company; 

therefore, direct exposures to ICE Trust, including both Margin and GF 

Contributions, ordinarily would be risk weighted at 100 percent under the 

Risk-Based Capital Rules. The risk weight for the counterparty credit risk on the 

CDS exposures to ICE Trust would be 50 percent.6 However, if ICE Trust were an 

insured depository institution or a qualifying securities firm, a 20 percent risk 

weight would apply to both the CDS transactions and the direct exposures. 

Further, under the Risk-Based Capital Rules, derivative transactions traded on 

exchanges that require daily payment and receipt of cash-variation margin may be 

excluded from the risk-based capital requirements, although direct exposures to 

such exchanges would be risk weighted at 100 percent. 7 

4 Participants are required to demonstrate sufficient financial resources, operational 

capabilities, and risk-management experience under strict guidelines 

(e.g., $5 billion or greater tangible net worth, a minimum long-term debt rating of 

"A," and a $20 million minimum contribution to ICE Trust's guarantee fund). 

5 12 CFR parts 208 and 225, Appendix A, sections IILC.2. and III.CA. 

6 The risk weight for counterparty credit risk for derivative exposures is capped at 

50 percent. 12 CFR parts 208 and 225, Appendix A, section IILEA. 

7 12 CFR parts 208 and 225, Appendix A, section IILE.l.e. 
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Under the Basel II advanced approaches rules of the Board's Capital 

Adequacy Guidelines ("advanced approaches rules"), a banking organization may 

attribute an exposure at default of zero to outstanding derivative transactions with a 

qualifying central counterparty ("QCC"), as well as to clearing deposits and posted 

collateral that arise from the derivative transactions, which is equivalent to 

applying a zero percent risk weight to the exposures.8 The Basel Committee on 

Banking Supervision has indicated it will be revisiting this treatment as part of its 

current workplan. 

The Board has broad authority to provide exemptions from the Risk-Based 

Capital Rules and the advanced approaches rules on a case-by-case basis.9 

Based on all the facts of record, including the information provided in your 

request and other supervisory information, the Board believes that it would be 

appropriate to allow current participants in ICE Trust (and their top-tier bank 

holding companies) to apply a 20 percent risk weight under the Risk-Based Capital 

Rules to claims on ICE Trust, including counterparty credit risk of the CDS 

exposures cleared through ICE Trust and claims in the form of Margin and 

GF Contributions, for the first-quarter reporting period of 2009 and for subsequent 

reporting periods. A 20 percent risk weight for such claims on ICE Trust is 

appropriate because the risks ICE Trust poses to counterparties are not materially 

different than those posed by other U.S. depository institutions, as well as by banks 

in countries that are members of the Organisation for Economic Co-operation and 

Development ("OECD banks"). Claims on OECD banks are also risk weighted at 

20 percent. 

This treatment is further supported by the high degree of risk mitigation 

afforded by ICE Trust's practices (e.g., netting of offsetting trades, the daily 

payment and receipt of cash-variation margin, the payment of initial margin, strict 

standards for participants, and strong risk management) and the fact that ICE Trust 

is subject to direct oversight by the Federal Reserve and the New York State 

Banking Department. In addition, most of the current participants are entities that 

8 See 12 CFR part 208, Appendix F; 12 CFR part 225, Appendix G. A QCC must 

facilitate trades between counterparties in one or more financial markets by either 

guaranteeing trades or novating contracts, must require all participants to be fully 

collateralized on a daily basis, and must be in sound financial condition and subject 

to effective oversight by a national supervisory authority. 

9 12 CFR parts 208 and 225, Appendix A, section IILA. 
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qualify directly for a 20 percent risk weight. Exposures to ICE Trust in the form of 

Margin and GF Contributions are not materially riskier than exposures to the 

participants themselves, and the exposures to ICE Trust, therefore, need not be 

subject to higher risk weights. Although the Board believes that a 20 percent risk 

weight for claims on ICE Trust is appropriate under the circumstances, the Board 

might in the future impose a risk-based capital treatment for clearinghouse 

arrangements, including claims on ICE Trust, that differs from the treatment 

provided under this exemption. 

This determination is specifically conditioned on compliance by ICE Trust 

participants with all the commitments and representations made to the Board in 

connection with their request. These commitments and representations are deemed 

to be conditions imposed in writing by the Board in connection with granting the 

request and, as such, may be enforced in proceedings under applicable law. This 

determination is also based on the specific facts and circumstances of the existing 

relationship between ICE Trust and the participants. Any material change in those 

facts or circumstances or any failure by participants to observe any of their 

commitments or representations may result in a different determination or in 

revocation of the exemption. 

Sincerely yours, 

Robert deV. Frierson 

Deputy Secretary of the Board 

cc: Ivan Hurwitz, Vice President 

Federal Reserve Bank of New York 

New York State Banking Department 

Office of the Comptroller of the Currency