ICE Clea

Preparations for a Potential Clearing Participa
In preparation for a significant Clearing Participant default, ICE Clear Credit 

enhances, as necessary, its Risk Management Framework and default manwhich are supported by appropriate tools, management information and test

Overview

2

Financial 

Resources

Process and 

Tools

Management 

Information 

• Maintain a prudent 

amount of default waterfall funds – Based on current cleared 

portfolios

– Based on current market 

conditions

• Ensure sufficient 

liquid resources are available to meet the daily cash payouts required from the clearinghouse on behalf of the defaulted Clearing Participant (“CP”)– Mark-to-market– Unsettled upfront-fees– Coupon payments

• Establish a default 

management plan

• Develop tools to 

facilitate the execution of the default management plan

• Create standards for 

information exchange with CPs

• Explore additional 

default management elements– Expand auction 

participation

– Further incentivize 

competitive bidding

– Maximize opportunity to 

return to a matched book

• Each business day, 

provide management with up-to-date information required to execute the plan– Provide position, risk, 

pricing and treasury information through systems views and endof-day reports

– Determine first-order 

hedges daily for each CP

– Maintain an internal 

database of default management contacts

– Administer Default 

Committee membership rotation (i.e., seconded traders)

– Keep templates on file for 

official communications

• Condu

managtests– Partic

clearDefauCommBoard 

– Resu

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• Perfor

departas req

• Perfor

and badefaul– Total – Availa
ICE Clear Credit offers multiple layers of protection to facilitate the c

financial performance of cleared swaps, should a Clearing Participa

Default Waterfall

3

Initial (Risk) 

Margin 

Requirement

Guaranty Fund 

Contribution

ICE Priority Con

FUNDED

UNFUNDED

Layers of Protection

Mark-to-Market 

Margin 

Requirement

Membership 

Criteria and 

Standards

Intra-Day Risk 

Monitoring

Defaulter’s Initia

Collateral on D

Defaulter’s Guar

Collateral on D

Non-Defaulter’s 

Fund Collateral o

Powers of Asse

Default Waterfa

Ensure sufficient operational capabilities, risk-management experience and financial resources

Adjust through a daily debit/credit 

process that reflects end-of-day market pricesCollateralize potential portfolio loss under distressed market conditionsIdentify risk requirement erosion and proactively maintain proper collateralization levelMutualize potential losses under extreme but plausible market scenarios

Resources

Financial Process and 

Tools

Ma

In

Liquidity Tiers• Require CPs to maintain specific perce

on deposit in asset types with defined l

• The specific percentages, or tier sizes, 

maximum assumed 1-day (45%), 2-day than 2-day movements in Initial Margin required for USD denominated position
ICE Clear Credit maintains financial resources designed to cover at 

worst-case simultaneous default of two Clearing Participants

Adequacy of Financial Resources

4

• ICE Clear Credit’s Initial Margin model 

captures multiple risks, including: – Instrument spread level variability (5-day, 99% 

quantile)

– Unexpected credit loss events not accounted for 

in the market valuations of Single Name instruments (i.e., jump to default) 

– Potentially increased liquidation costs of lessliquid and/or more-concentrated positions

• ICE Clear Credit’s Guaranty Fund is sized to 

provide at least Cover-2 protection– Consider the worst-case simultaneous default of 

two CPs and three reference entities

Modeling Approach Financial Resou

• Resources as-of Decemb

Initial Margin: >$

Guaranty Fund: > 

ICE Capital Contribution: $5

+ Assessment Rights

• A market event sufficient 

financial resources would unprecedented and would involve the default to the of several of the world’s lfinancial institutions in adCover-2 requirement

Resources

Financial Process and 

Tools

Ma

In
ICE Clear Credit has an established default management plan

Default Management Plan

5

Declare Fund Activate Defau

Reduce Risk / Hedge Port Auct

Phase 1

(~3 hours)

Phase 2

(~1-5 days)

• Monitor and prepare• Demonstrate default 

conditions are met

• Obtain required approvals• Ring-fence defaulter’s 

portfolio

• Communicate to CP’s, 

regulators and the public

• Liquefy collateral using 

committed repo facility, if required

• Meet immediate cash 

payment obligations

• Ongoing collateral liquidation 

/ transformation to prepare to meet payment obligations on subsequent days

• Activate the Defa

seconding traders active CPs in the 

• Traders consult w

Credit on hedging strategy, and assif required 

• Execute risk-reducing trades 

/ first-order hedges

• Minimize potential losses 

over the time required to return to a matched book

• Identify non-defaulting clientrelated positions• Identify FCM willing to accept 

non-defaulting positions

• Negotiate with Trustee to 

determine the Initial Margin and mark-to-market margin that can be transferred with the ported positions

• Execute transfers and money 

movement

• Split default portfo

portfolios for sepanecessary)

• Distribute auction • Receive bids• Determine auctio• Execute transfers 

movements

• If a matched book 

achieved, allocate 

Financial 

Resources Tools

Process and Ma

In
ICE Clear Credit is contemplating a number of additional componen

default management plan, in consultation with market participants aregulators

Potential Enhancements (Processes and Tools)

6

Recovery and Resolut

• Extend auction to include direct buy side 

firm participation

• Provide additional incentive for CPs to bid 

competitively– Subordinate Guaranty Fund consumption for less 

competitive bidders and bidders not meeting minimum bid requirements

Auction Expansion and Incentives

• Reduced gains distribution 

(variation margin gains haircutting– Provide time for the market to prepare fo

without consuming additional resources

• Final Auction

– Provide a last opportunity for the market 

remaining defaulter’s portfolio to avoid te

– Pay final auction costs from remaining r

• Selective tear-up

– Return to a matched-book without clear– Tear-up only residual positions in the de– Pay full tear-up replacement cost from r

Financial 

Resources Tools

Process and Ma

In
ICE Clear Credit conducts an industry test of its default managemen

collaboration with Clearing Participants and the Default Committee

Annual Default Management Tests

7

Purpose Test Elements

• Demonstrate clearinghouse and CP 

operational readiness to manage a potential CP default

• Demonstrate CPs’ ability to price a 

realistic default portfolio under tight timeframes 

• Explore new or additional components 

of the default management plan

• Provide opportunity for the industry and 

regulators to provide feedback to the clearinghouse to improve its plan and execution capabilities

• Perform all internal business pr

realistically as possible and in “– Management and staff members mee

present results, make decisions and parties as though a real CP default h

• Prepare a production-like parall

environment and perform near eexecution– Run the simulation using test default 

with current clearinghouse positions

– Book risk reducing trades– Execute auction mechanics– Perform auction award transfers and – Generate all standard end-of-day rep

• Include all CPs in auction execu• Require the 3 seconded traders 

ICE offices to work with the Ris

• Complete accounting to demon

with default and liquidity waterf

Financial 

Resources

Process and 

Tools

Ma

In
EUR Clearinghouse

payment deadlines

USD EUR

Summary of activities in the December 2014 indu

8

7am 8am 9am10am11am 12pm 1pm 3pm 4pm 5pm 2pm 7am 8am 9am 10am11am 12pm 1pm 3pm 4pm 5pm 2pm

Monitor potential default and authorize declaration

Book risk-reducing trades in clearing systems

Day 1 (Monday December 8, 2014) Day 2 (Tuesday December 9, 2014)

Consult with seconded traders on hedging and liquidation strategy

Publish hedge portfolio and wait for CP pricing / bidding

Communicate award and cash-flow to winner of RFQ process

Transfer positions to auction award winners and ledger related cash flows

Publish auction portfolios and wait for CP pricing / bidding

Publish awarded portfolios and cash flows to winning CPs

Hedging RFQ Process 

Multi-Lot Multi-step Liquidation Auction

Funding

Default Committee 

Prepare and execute communications to declare default

Ring-fence defaulting CP

Declaration of Default

Prepare for auction of remaining portion of house portfolio

Publish auction portfolio and wait for CP pricing / bidding

Publish awarded portfolios and cash flows to winning CPs

6pm

CP payment deadline

USD

Activate Default Committee

Negotiate porting and payment of IM and MTMM (Trustee, Client B, Receiving FCM)

Secure approvals to execute

Execute transfers and ledger payments

Porting

All New York Time

Default Committee

Auction Window

ICE Activity

Key

Meet obligations using available cash

Meet obligations using available cashLiquidate non-cash collateral (for day 2) Execute FX transactions

• Def

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Financial 

Resources

Process and 

Tools

Ma

In