Slide 1
FCM 1.20 Account Segregation – Operations Considerations
FIA Segregation Sub-committee meeting with CFTC
Washington, 15 September 2010
Agenda
Agenda
♦Introduction & Overview 2:00 - 2:10
♦Key areas of consideration (1) 2:10 – 2:45
–Account Structures
–Omnibus accounts
–Reconciliations
♦Key areas of consideration (2) 2:45 – 3:20
–Cash Flows with Clearing House
–Cash Flows with Customers
♦Summary Considerations – Operations and Systemic Risk 3:20 – 3:35
♦Current Financial Safeguards 3:35 – 3:45
♦Wrap Up 3:45 – 4:00
Direct Accounts: Current State
Direct Accounts: Current State
Assets Held
Externally
US FCM
FCM Overall Segregation Environment
3rd Party
customer
Clearing House
Assets
Liabilities
FCM Omni Client Clearing Account (Margin & Positions)
Clearing House Omni
Securities
Cash
Positions
1
1
FCM Agents
Customer Seg Account
Bank Account
FCM Settlement Account
Bank Account
Trust Account
Investment Account
1 customer with 1 CCP
Fed & DTCC Box
Collateral Account
Number of Reconciliations
Incremental per customer
Incremental per CCP
8
0
3
Reconciliations
P/L Account
Commission& Fees
3 customers with 2 CCPs
Number of Reconciliations
11
2
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Direct Accounts – CCP & FCM Segregation: Possible Future State
Direct Accounts – CCP & FCM Segregation: Possible Future State
Assets Held
Externally
FCM Overall Segregation Environment
Assets
Liabilities
3rd Party
customer
Clearing House
Customer Clearing A/C (Margin & Positions)
Clearing House Omni
Assets
Securities
Cash
Customer A/c’s
Positions
FCM Agents
FCM customer Segregation Environment
Customer Trust A/c
Customer Seg A/c
Customer Bank Account
Customer A/c by CCP (positions & cash)
Customer Margin A/C
1
Customer Investment Account
Customer Fed Box
Customer DTCC Box
Customer Collateral Account
Customer Commission A/c
Clearing House
Securities
FCM Clearing A/C
FCM Clearing Account
Cash
Positions
FCM Agents
FCM Bank Account
1 customer with 1 CCP
14
FCM Investment Account
FCM Settlement Account
FCM Investment Account
7
FCM Collateral Account
Number of Reconciliations
Incremental per customer
Incremental per CCP
6
FCM Fed Box
FCM DTCC Box
3 customers with 2 CCPs
Number of Reconciliations
34
Reconciliations
P/L Account
Commission& Fees
3
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Slide 9
Direct Accounts – CCP Segregation Only: Possible Future State
Assets Held
Externally
US FCM
FCM Overall Segregation Environment
3rd Party
customer
Clearing House
Customer Clearing A/C (Margin & Positions)
Clearing House Omni
Assets
Liabilities
Securities
Cash
Customer A/c’s
Positions
Customer A/c by CCP (positions & cash)
FCM customer Segregation Environment
Customer Margin A/C
1
Customer Commission A/c
Clearing House
FCM Clearing A/C
FCM Clearing Account
FCM Agents
FCM Bank Account
1 customer with 1 CCP
FCM Investment Account
FCM Settlement Account
FCM Investment Account
10
FCM Collateral Account
Number of Reconciliations
Incremental per customer
Incremental per CCP
3
6
FCM Fed Box
FCM DTCC Box
3 customer with 2 CCPs
Number of Reconciliations
22
Reconciliations
P/L Account
Commission& Fees
4
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Omnibus Accounts: Current State
Omnibus Accounts: Current State
Assets Held
Externally
US FCM
FCM Overall Segregation Environment
•Legal Relationship between FCM and non member FCM
•No look through to underlying customers
3rd Party
customer
Clearing House
Assets
Liabilities
FCM Clearing
Clearing House Omni
Securities
•Legal Relationship between non member FCM and customer
Cash
Positions
FCM Agents
Non member FCM
Customer Seg
Bank Account
Customer Omni
(Non member FCM)
Non member FCM Omni
3A
3A
3B
3B
3C
3C
FCM Settlement Account
Bank Account
Trust Account
Investment Account
1 customer with 1 CCP
Fed & DTCC Box
Collateral Account
8
0
0
3
Reconciliations
P/L Account
Commission& Fees
Number of Reconciliations
Incremental per omnibus FCM
Incremental per omnibus customer
Incremental per CCP
3 omnibus customers with 2 CCPs
Number of Reconciliations
11
5
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Slide 13
Omnibus Accounts – CCP & FCM Segregation: Possible Future State
Assets Held Externally
US FCM
FCM Overall Segregation Environment
Clearing House
Customer3A Clearing A/C
Recs *3
Assets
Liabilities
FCM customer 3A Segregation Environment
•Tri party legal Relationship between FCM, non member FCM and underlying customer
3rd Party
customer
Customer 3A Clearing Account
Bank Accounts
Customer 3A Investment Account
Customer Bank 3A Account
Customer3A Bank Account
Omni / 3A Positions A/c by CCP
Customer 3A Investment Account
Liabilities
Customer 3A Fed Box
Customer 3A DTCC Box
Customer 3A Collateral Account
Omni/ 3A Customer Margin A/C
Clearing House
Customer 3B Clearing A/C
Recs *3
Customer 3B Clearing Account
Bank Accounts
Customer3B Bank Account
Omni / 3B Positions A/c by CCP
Liabilities
Non member FCM
Customer 3B Investment Account
Customer 3B Bank Account
Customer 3B Investment Account
FCM customer 3B Segregation Environment
Customer 3B Collateral Account
Omni/ 3B Customer Margin A/C
Broker Omni
3A
3A
3B
3B
Customer 3B Fed Box
Customer 3B DTCC Box
3C
3C
Clearing House
Customer 3C Clearing A/C
Recs *3
Customer 3C Clearing Account
Bank Accounts
Customer3C Bank Account
Omni / 3C Positions A/c by CCP
Liabilities
Customer 3C Investment Account
Customer3C Bank Account
Customer 3C Investment Account
FCM customer 3C Segregation Environment
Customer 3C Collateral Account
Omni/ 3C Customer Margin A/C
1 Omni A/c with 3 customers, 1 CCP
Customer 3C Fed Box
Customer3C DTCC Box
Number of Reconciliations
Incremental per omnibus FCM
Incremental per omnibus customer
Incremental per CCP
28
7
Clearing House
FCM Clearing A/C
Recs *3
FCM Clearing Account
7
Bank Accounts
FCM Bank Account
Omni Commission A/c
FCM Investment Account
12
FCM Investment Account
FCM Bank Account
FCM Collateral Account
1 Omni A/c with 10 customers, 2 CCP
FCM Fed Box
FCM DTCC Box
Number of Reconciliations
89
Reconciliations
P/L Account
Commission& Fees
6
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Slide 15
Start of Day Margin Processing Timelines - Today
Scenario: Two customers, two CCPs, customer 1 pays on T+1, customer 2 pays on T+2
T+1
T+2
05:00
07:00
12:00
15:00
18:00
eod
05:00
07:00
12:00
15:00
18:00
CCPs call margin from FCM
FCM Pays margin to CCP A for both customers
FCM advances own funds to cover customer exposure
FCM Pays margin to CCP B for both customers
FCM advances own funds to cover customer exposure
FCMs verify calls with customers
Managed at CCP level across customers
Customer 1 pays single margin amount for both CCPs
Customer 2 pays single margin amount for both CCPs
Managed at customer level across CCPs
Note: This diagram shows the funding flows to the client following the CCP call on T+1. The first CCP margin funding run to the FCM is on an intraday trade date basis
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Slide 17
Start of Day Processing Timelines – Possible Future State (1)
Scenario: Two customers, two CCPs, each call is $50, customer 1 pays on T+1, customer 2 pays on T+2
T+1
T+2
05:00
07:00
12:00
15:00
18:00
eod
05:00
07:00
12:00
15:00
18:00
CCPs call margin from FCM
FCM Pays margin to CCP A for both customers
FCM advances own funds to cover customer exposure
FCM Pays margin to CCP B for both customers
FCM advances own funds to cover customer exposure
FCMs verify calls with customers
Customer 1 pays margin amount for CCP A
customer 2 pays margin amount for CCP A
Customer 1 pays margin amount for CCP B
Customer 2 pays margin amount for CCP B
CCP records:
CCP A, customer 1 = +$50
CCP A, customer 2 = +$50
CCP B, customer 1 = +$50
CCP B, customer 2 = +$50
Total seg amount A = $100
Total seg amount B = $100
Note: This diagram shows the funding flows to the client following the CCP call on T+1. The first CCP margin funding run to the FCM is on an intraday trade date basis
FCM records:
CCP A, customer 1 = $0
CCP A, customer 2 = $0
CCP B, customer 1 = $0
CCP B, customer 2 = $0
Total seg amount A = $0
Total seg amount B = $0
Total FCM own assets = $200
CCP records:
CCP A, customer 1 = +$50
CCP A, customer 2 = +$50
CCP B, customer 1 = +$50
CCP B, customer 2 = +$50
Total seg amount A = $100
Total seg amount B = $100
FCM records:
CCP A, customer 1 = $50
CCP A, customer 2 = $0
CCP B, customer 1 = $50
CCP B, customer 2 = +$0
Total seg amount A = +$50
Total seg amount B = +$50
Total FCM own assets = $100
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Slide 19
Start of Day Processing Timelines – Possible Future State (2)
Scenario: Two customers, two CCPs, each call is $50, customer 1 pays on T+1 and covers in securities, customer 2 pays on T+2 and covers in cash
T+1
T+2
T+3
05:00
12:00
18:00
eod
05:00
12:00
18:00
eod
05:00
12:00
18:00
eod
CCPs call margin from FCM
FCM Pays margin to CCP A for both customers
FCM Pays margin to CCP B for both customers
FCMs verify calls with customers
customer 1 deposits securities for CCP A
customer 2 pays margin amount for CCP A
FCMs calls customer 1 for top up of $20
customer 1 pays margin call for CCP A
customer 1 deposits securities for CCP B
customer 2 pays margin amount for CCP B
Customer 1 pays margin call for CCP B
CCP records:
CCP A, customer 1 = +$50
CCP A, customer 2 = +$50
CCP B, customer 1 = +$50
CCP B, customer 2 = +$50
Total seg amount A = $100
Total seg amount B = $100
FCM records:
CCP A, customer 1 = TBills@ $50
CCP A, customer 2 = $0
CCP B, customer 1 = TBills@ $50
CCP B, customer 2 = +$0
Total seg amount A = +$50
Total seg amount B = +$50
Total FCM own assets = $100
CCP records:
CCP A, customer 1 = +$50
CCP A, customer 2 = +$50
CCP B, customer 1 = +$50
CCP B, customer 2 = +$50
Total seg amount A = $100
Total seg amount B = $100
FCM records:
CCP A, customer 1 = TBills@ $40
CCP A, customer 2 = +$50
CCP B, customer 1 = TBills@ $40
CCP B, customer 2 = +$50
Total seg amount A = +$90
Total seg amount B = +$90
Total FCM own assets = $20
Note: This diagram shows the funding flows to the client following the CCP call on T+1. The first CCP margin funding run to the FCM is on an intraday trade date basis
Diagrams are meant to show key flows and accounts only and are not an exhaustive representation of the clearing environment
Current Financial Safeguards
Current Financial Safeguards
♦Performance Bonds/Concentration Performance Bonds. Performance bond requirements cover expected price moves of at least 95% to 99% over varying time-frames. Concentration performance bond requirements are imposed when a clearing firm’s potential exposure becomes large relative to its financial resources.
♦Settlement Cycles. Two full settlement cycles are performed daily, marking open positions to market, collecting and payment variation margin, and resetting performance bond coverage.
♦Capital Requirements. Clearing members have significant minimum capital requirements (OTC derivatives clearing members’ capital requirements are substantially higher). Institutional customers generally require clearing FCMs to maintain capital well in excess of the CFTC/SRO requirements.
–The top 10 FCMs (ranked by adjusted net capital) have excess net capital ranging from slightly more than $10 billion to slightly less than $4 billion. The next ten have excess net capital ranging from slightly more than $2 billion to slightly less than $1 billion.
♦Stress Tests. Daily stress tests are performed on clearing member positions on a portfolio basis and on the individual accounts of the clearing member’s large traders; the clearing member may be required to increase performance bond requirements or reduce or transfer positions.
♦Reporting Requirements. FCMs calculate daily their segregation requirements and capital and report those numbers to their DSRO as required.
♦Early Warning Requirements. FCMs and clearing organizations are subject to certain early warning requirements.