EMIR and CDS Clearing: The Road Ahead

The European Market Infrastructure Regulation, better known as EMIR, now requires European credit default swaps (CDS) to be centrally cleared through an authorized clearing house. In May 2016, the CDS Clearing Obligation RTS (regulatory technical standards) took effect, covering both iTraxx Europe Main Series 17 onwards 5Y and iTraxx Europe Crossover Series 17 onwards 5Y. As the market plans for new CDS clearing requirements, there are several milestones for compliance.

Our Solution

Recent & Upcoming EMIR Milestones

9 October, 2016

Front-loading begins for Categories 1 & 2 (Category 1 entities are clearing members of at least one of the classes of credit OTC derivatives subject to the clearing obligation & Category 2 entities are Financials and Alternative investment funds above a threshold of non-cleared OTC derivatives)

9 February, 2017

Clearing Obligation begins for Category 1 entities (9 months from entry into force of RTS)

9 August, 2017

Clearing Obligation begins for Category 2 entities (15 months from entry into force of RTS)

9 May, 2019

Clearing Obligation begins for Category 4 entities (3 years from entry into force of RTS; Category 4 entities are Non-Financials not included in Cat 1, 2 or 3)

21 June, 2019

Clearing Obligation begins for Category 3 entities (Category 3 entities are Financials and Alternative Investment Funds)

Evaluating Margin models

As clearing obligations continue to increase under EMIR, the need to establish the most capital efficient margining model is becoming increasingly important; the model you choose will affect how capital will be charged against the portfolios you bring in to clearing. Models that provide margin offsets between indexed products and single name products can produce an efficient, single margin requirement through the use of portfolio margining.

At ICE, we’ve developed an index decomposition margin methodology that provides benefits to both long and short index and single name positions. Capital efficiencies are achieved by enabling you to clear index and single name CDS in a single segregated CFTC customer account while maintaining strong risk management protections. So, in addition to clearing index CDS, which will be mandatory under the law, voluntary clearing of single names also offers you the ability achieve these margin benefits against mandatorily cleared indices.

For example, the margin requirements for a $1 billion CDX IG Index Arb portfolio (Bought SN/Sold Index), can be reduced from $15 million to $5 million as a result of our index decomposition model.

Preparing for EMIR with ICE

While parts of EMIR are still in the implementation phase, CDS clearing is far from new or uncharted at ICE.

In 2009, we invested in the development of the first CDS clearing houses, ICE Clear Credit, which has been recognized as a third country central counterparty under EMIR, ICE Clear Europe, in response to a post-crisis need for a safer and more transparent way to trade and settle CDS. CDS instruments play an important role for market participants in hedging credit risk exposure for bondholders and credit issuers. Many market participants looked to central counterparty clearing as a proven way to reduce systemic, counterparty and market risk for those instruments. We've been working closely with market participants for the past several years to shape and develop risk management services to ensure our customers benefit from the cleared model. As a result of the desire for counterparty risk management and the commitment by the CDS community to clear, coupled with ICE’s investment in the CDS and clearing businesses, we quickly became the leading provider of credit derivatives clearing, in advance of an official clearing requirement.

Today, we're the largest provider of credit clearing with our market participants clearing over 500 CDS instruments including global CDS indices, corporate single names and sovereign debt instruments. We're now focused on supporting the industry as it prepares to move to mandatory clearing by introducing more new cleared products.

Margin Models That Work for You:

Account segregation – options available but selection must balance the cost with risks

At ICE, we provide individual segregation, omnibus segregated client accounts, and co-mingled general accounts to help you choose the model that best meets the risk profile you want to achieve. High degrees of segregation provide high degrees of protection, but that will be a more costly solution when compared to omnibus accounts where your firm’s positions are co-mingled with other customers’ positions. We provide various options to consider and our experienced specialists can help you understand the features of each account type so your firm can determine the balance of risk and cost that best suits your business.

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