ICE clearing credit initial margin methodology

Credit default swaps play a vital role in the global economy as hedging tools for credit providers and others with exposure to a corporate or sovereign entity and as a market-based indicator of an entity's financial health. Following the financial crisis of 2008, in which uncertainty about credit risk and counterparty exposures in the over-the-counter market were a major factor, IntercontinentalExchange introduced CDS clearing in March 2009 with the launch of ICE Trust, now known as ICE Clear Credit. Today, ICE Clear Credit and ICE Clear Europe, which began clearing CDS in July 2009, offer clearing on more than 300 index and single name underlying references. Through Sept. 9, ICE Clear Credit and ICE Clear Europe have cleared $22.4 trillion in gross notional value resulting in open interest of $1.56 trillion.

From a risk perspective, CDS differ from exchange-traded and other OTC derivatives in a number of critical aspects. For example, reliable end-of-day pricing for the CDS is not generally available, making it more difficult for clearinghouses to assess the value of cleared contracts. CDS also pose "jump-to-default" risk, meaning the risk of a default that would yield a very significant financial payment obligation by CDS protection sellers. Furthermore, the risk presented by CDS is asymmetrically larger for protection sellers (short positions) than for protection buyers (long positions). Finally, CDS instruments may be especially vulnerable to decreased market depth and limited liquidity during distressed economic conditions.

To manage these risks, ICE Clear Credit and ICE Clear Europe have developed a unique methodology for CDS clearing. It is a dynamic model that self-adjusts to market conditions, reflects the highly asymmetric risk profiles of CDS instruments, and captures the specificities of CDS trading behavior while offering robust portfolio efficiencies.

At the heart of the ICE CDS solution is a daily auction-style price discovery process in which all clearinghouse members provide end-of-day (EOD) quotes for all index and single name CDS instruments in which they have open interest. From these quotes, the clearinghouse establishes final EOD prices for mark-to-market and variation margin calculations, as well as for computing initial margin requirements and guaranty fund contributions. All submitted quotes are subject to the same instrument-specific bid/offer width to create a coherent market representation.

To ensure the integrity of the EOD quote process, the clearinghouse requires members on random days to execute trades if the offer price of one clearing member is lower than the bid price of another. The importance of establishing a market price for every product cleared cannot be overstated. Other price-generation approaches, such as price polling or model-based interpolation, can be particularly inadequate for providing a true representation of the market. This is especially true for infrequently-traded maturities, coupons or reference credits. The ICE CDS auction-style price discovery process has proven to be very effective for obtaining high-quality EOD prices.

You might also like
How to Core and Slice an Apple
How to Core and Slice an Apple
The Cuisipro Apple Corer
The Cuisipro Apple Corer
Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer THE STOCK EXCHANGE: The clearing House. London, antique print c1880
Home (Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer)
  • Caption below print: The clearing house
  • Condition: Good; suitable for framing. However, please note: Verso text quite apparent in margin; The image shown may have been taken from a different example of...
  • Size: 14.0 x 14.0cm, 5.5 x 5.5 inches (Small)
  • Type & Age: Year printed c1880. Antique wood engraved print
  • Verso: There are images and/or text printed on the reverse side of the picture which are likely to show through the page to some extent because the paper is quite...
Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer LONDON: Clearing House, Lombard St, antique print, 1847
Home (Shipping by airmail from UK: items normally reach US addresses within a few days but can take longer)
  • Caption below print: The Clearing-House, in Lombard-Street
  • Condition: Good; suitable for framing. Please check the scan for any blemishes prior to making your purchase.
  • Size: 14.5 x 23.5cm, 5.75 x 9.25 inches (Medium)
  • Type & Age: Year printed 1847. Antique wood engraved print
  • Verso: There are images and/or text printed on the reverse side of the picture. In some cases this may be visible on the picture itself (please check the scan prior...

Popular Q&A

avatar
Where can I find margin requirements of CME?

I need to know margin requirements of gold and silver futures in CME, Thus I need official link to the list of margin requirements. I searched the web and CME website, but I could not find it. Please help

This list is about 39 pages, so it's easier to click on "Download Data" then do a search (Ctrl-F) for what you want in Excel.
PRODUCT NAME INITIAL MAINT.
E-MINI SILVER FUTURES 3375.00 2500.00
COMEX MINY GOLD FUTURES 4556.00 3375.00
Your broker will have their own set of margin requirements.

Related Posts