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Package Excerpt from CFTC Announcement on 1/17

Interest Rate Swaps Unique Package Identification Package Transaction Grouping Identifiers and Workflows. 1. Package Excerpt from CFTC Announcement on 1/17. Timeline. Background. Emerging Pain Points.

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Package Excerpt from CFTC Announcement on 1/17

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  1. Interest Rate SwapsUnique Package IdentificationPackage Transaction Grouping Identifiers and Workflows 1

  2. Package Excerpt from CFTC Announcement on 1/17

  3. Timeline

  4. Background

  5. Emerging Pain Points • Market Participants are executing package transactions (one economic transaction) in the Market that include multiple OTC Interest Rate Derivatives. However, since there is no mechanism in the current Market standard trade workflow to group individual trades into package transactions, each individual trade within a given package transaction is being individually submitted to the CCP / FCM for credit analysis/approval and registration. • As a result of the current individual trade transmission and submission workflow to the CCP / FCM the structure and risk profile of the package transaction is not maintained or transmitted to the CCP / FCM. This individual trade submission to the FCM / CCP creates the potential for temporarily incorrect changes in the portfolio risk at the FCM/CCP and in turn leads the FCM to observe/calculate changes in client portfolio risk, in many cases does not reflect the true intended risk of the client and could lead to incorrect breaches of credit limits due to trade flow ordering. • The regulatory requirement to accept or reject trades by the DCO is under 10 seconds and currently does not account for packages.

  6. Objectives and Vision • To define a single industry standard Package and Position ID Format that will uniquely identify a package trade throughout the SEF and Voice Executed transaction life cycle (from execution through clearing at the CCP) and to define how the current Market Standard workflow will change to support Package Trades. • To have a diverse group of FCMs, CCPs, buy-side firms, market makers, SEFs and DCMs immediately adopt the standards and protocols contained in this document for implementation in 2014.

  7. Definitions • The below Package Transaction types will be supported in the Market standard workflow:

  8. Package and Position ID Details and Format

  9. SEF Workflow 1a. Client defines package transaction on SEF, or Client enters package order on SEF. 1b. SEF requests credit approval from FCM / Credit Hub for Client. 1c. SEF receives credit approval from FCM / Credit Hub for Client. 1a Client Executing Broker (EB) 2 1c 2. Executing Broker (EB) executes against Client package transaction on SEF – Package and Position IDs are set and assigned in this step. 2 1b SEF 3 5 Hub/FCM 3. SEF sends executed package transaction to the CCP for Clearing as a single message, containing all positions – This submission includes the Package & Position IDs . 5 3 CCP / Clearing House 4. After validating product, account and applying credit limits set by CCP, CCP accepts package transaction for clearing – The CCP accepts or rejects the complete package as a single action. Product  Account  Credit  6 6 5 5 4 4 5. CCP sends “Cleared” notification to SEF which displays trade status to principals. This is a Package level message. Clearing Member (Client) Clearing Member (EB) 6. CCP sends a Clearing Confirmation to FCMs for each individual trade within the package. Package and Position ID will be added to each trade .

  10. 1a. Client enters Voice Package Order (VPO) on SEF and directs to specified EB to be executed as a package transaction 1b. SEF requests credit approval from FCM/CreditHub for Client 1c. SEF receives credit approval from FCM/CreditHub for client Non-SEF Workflow (SEF affirmation & pre-trade limit check) 2. Specified EB picks up voice package order with all individual trades from SEF Client Executing Broker (EB) 3. Client and EB negotiate pricing for package via Voice 3 4. On the SEF VPO ticket, EB enters price done on phone and Client agrees on GUI, Package and Position IDs are created in this step 4 2 1a SEF(Voice Package Order) 4 5a. SEF sends executed package transaction to the CCP for Clearing as a single message, containing all positions – This submission includes the Package & Position IDs 5b. Optional feed to Middleware via drop copy for affirmation and/or existing feed to client bookkeeping 5c. Optional carry-on feed to CCP if using affirmation 5b 1c 1b 7 5a Middleware Hub/FCM 5c CCP / Clearing House Product  Account  Credit  6. After validating product, account and applying credit limits set by CCP, CCP accepts package transaction for clearing – The CCP accepts or rejects the complete package as a single action. 8 8 Clearing Member (Client) Clearing Member (EB) 6 7. CCP sends “Cleared” notification to SEF which displays trade status to principals. This is a Package level message. 8. CCP sends a Clearing Confirmation to FCMs for each individual trade within the package. Package and Position ID will be added to each trade

  11. Regulatory Changes • Propose a parallel track of work-stream that highlights the issues related to packages to the CFTC. • Propose creating a working document that not only educates the CFTC on the emerging issues --- but suggests proposed guidance for the CFTC. • Once the suggested guidance is finalized, propose to have SIFMA AMG, MFA and other like-mined industry groups also propose similar guidance.

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