Discussions with the CFTC & SEC

Clearing

The Goldman Sachs Group, Inc.

September 2010
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Agenda

 Overview of Central Clearing in OTC Markets

 Clearing House Risk Standards

 Documentation

 Governance and Ownership
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Overview of Central Clearing in OTC Markets

 Key Benefits of OTC Clearing:

— Reduction of systemic risk

— Multilateral netting

— Increased transparency

— Uniform collateral management 

— Consistent risk management for all clearing participants

— Centralized management of member default and related consequences

 Key Considerations:

— Risk management and valuation model implications of more complex products

— Impact on appropriate margin requirements of:

• Broad range of liquidity for different OTC products

• Likelihood of lower liquidity during periods of financial or market stress

• Decentralized and infrequent trading resulting in less reliable price observations 

— Connectivity between members, CCPs, clients and middleware providers 

 Management of clearing house position in a member default is complicated by diversity of products 

(across Futures, Rates and Credit Derivatives) and requires risk-taking participation of clearing members
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Clearing House Risk Standards

 Product level considerations

— Liquidity of different products

— Correlation with events of default

— Concentration of large position with individual clearing members and/or their clients

— Directional bias of clearing member books

— Complexity of overall portfolio

— Inter-market correlation assumptions

 Margin and Guarantee Fund Requirements

— Margin requirements should meet a minimum standard and adjust to changing market conditions

— Guarantee fund requirements should meet IOSCO standards

— Funded vs. unfunded waterfall obligations

 Membership criteria and prerequisites: 

— Adequate resources and operational capabilities

— Willingness and ability to make markets in diverse set of products, including providing daily pricing

— Sufficient capital, trading expertise and formal commitment to participate in large scale liquidation
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Documentation Issues

Client Clearing Documentation –

 Bi-lateral OTC derivatives transactions

 “ISDA-based” client clearing model 

[Planned, never implemented, 

pre-Dodd-Frank] 

 “FCM model” 

Post Dodd-Frank, collateral held for US clients 

who carry cleared derivatives contracts will be 

required to be held by an FCM

Execution Documentation

 ISDA documentation or a compensation agreement may be required

Give-Up Documentation

 Allocation of risk and responsibilities among the parties, with focus on status of trades that fail to clear

Counter

Bank party

ISDA

Clearing 

House

Client

CM

CH-CM ISDA

CM-Client ISDA

CH Rules

Clearing 

House

CM / 

FCM Client

OTC Addendum

FCM Agreement

CH Rules
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Governance and Ownership

Ownership of Market Infrastructure by Users

 Governance

— Clearing members have material participation in governance

• Default management 

• Risk models

• Rule making

— Non-clearing member representation in product offering, portability, etc.

— Independent directors

 CCP Structure and Business Model

— Utility-like model focusing on systemic risk reduction over market returns

— Open architecture