The advantages of the Eris Credit Index Futures vs. traditional CDX Indicies for funds with less

than $300m Aum.

Sandeep Kumar

March 2016This document is prepared for information purposes only.

Private and Confidential.

Agenda

ERIS Fundamentals

Fund A Example

Advantages

3

Agenda

4

First IG and HY Traded April 2015ERIS Credit Futures

ERIS Futures Contract

Built on ICE’s expertise in Credit and CDS

Simple, efficient, cash settled futures

Traded on ICE Futures US and Cleared via ICE Clear US

Replicate the liquid Indices – IG and HY

Provide Margin Efficiency

Operational Efficiency allowing participants to use existing infrastructure

5

Variation Margin

Collateralized CDS OTC CASH FLOWS

Collateral Posted

Coupon Accrual

Initial Upfront Fee

Interest Paid on Collateral

Credit Event Payment

All Cash Flows are incorporated in the daily

variation margin and accounted for in daily

settlement price.

ERIS Methodology: Replicates OTC Swap Economics

6

ERIS Pricing

• Clean Price as per market, plus accrued intertest from most recent coupon date.• Clean Price repilcates the index credit spread.• Index factor is the sum of constituents, and is used to convert the values into a MTM value of

contract.

• Cumulative Values of all previous cash flows to date

• PAI to account for interest paid on margin between OTC CPTY’s• Accures as per overnight FED Funds• Replicates the ERIS Methodology

• Trades Like Cash• Example to follow

A100+ (Clean Price +

Accrued Interest – 100) x index Factor

B(Historical C/F’s)

C(PAI)

Futures Price

+

-

=

*B & C Values are available on www.theice.com

7

Mirrors CDX IG NA 26

• Convention• Rolls• ISDA Credit Events• Recovery• Day Count• Fixing Curve• Version/Series • Effective/Accrual/Maturity• Quarterly Payments and Roll

ERIS Futures

8

The Mechanics

SpecsContract Size : $100,000Trades: Like Cash Bonds and Value of 1.0 is $1000Tick Size 0.010Tick Value: $10

Risk Buyer Futures is Seller of Protection (Long Credit Risk)Seller of Futures is Buyer of Protection (Short Credit Risk)

ISDA ProtocolsCredit Event/ Rolls are as per ISDA and standardised to Markit CDX Index

Initial MarginsSpeculator: 440Hedger: 400

9

YTD Performance IG NA S25 Dec 20 vs. CWIZ0 Dec 20

Credit Spread

Eqv. Cash Spread

Increase in Open Interest

• YTD performance replicated • Works Like Cash bonds• Increase in Open Interest

YTD Performance CWIZ0 Dec 20

10

• YTD performance replicated • Works Like Cash bonds• Increase in Open Interest

Credit Spread

Equv. Cash Spread

Increase in Open Interest

Fund A with $250m AUM

11

Fund Mandate

Concerns: Liquidity, Funding and Transaction Fees.

+

• Investment Strategy: L/S Credit with fundamental and RV approach.• Fund: Firm AUM $250million.• Registration: FCA Registration as a small AIIFM and MiFID. CFTF registration. SEC registration.• Highly Experienced Team: Significant portion of net worth in the Fund.• Return Profile: Target return of 8% to 10% net per annum.

• Liquidity: Defined broadly as the bid-ask spread for the given instrument.• Initial Margin and Funding Costs: includes the amount of initial margin that must be posted by product

and the cost of funding that initial margin.• FCM Fees: Execution and clearing fees, Capital usage fees charged by the futures commission merchant.• CCP Fees: Exchange, execution and clearing fees charged by the relevant clearinghouse.

Trade Example

L/S Rel Val SpreadITRX EURSR FINS vs. ITRX EUR MAIN

Sold ITRX EUR SR FINS Index 5yrCDS (Long) vs. Buy ITRX EUR MAIN5yr CDS (Short) @ +27.9bps spread.

Closed at 17bps, for gain of 10.9bps after 6 months but close to Zero PNL due the running IM causing an alpha drag.

Buy 10m CDX IG NA S26 5Y

12

1

13

Sell 100 Contracts CWIA Eris Futures2

Trade Example – CDX IG 5Y Jun 21 vs Eris CDX IG Credit Jun21

Trade Type CDX IG 5Y Jun21 ERIS CDX IG Credit Jun21

Ticker MARKIT CDX.NA.IG 26 06 CWIA

Buy/Sell B STrade Date 22-Mar-16 22-Mar-161st Accr Start 21-Mar-16  21-Mar-16Maturity 20-Jun-21 20-Jun-21Tenor 5y  5ySpread 80.177 -Cash Price 100.99 100.99Notional  10m  100 x 1000 ContractsContracts Bought - 100Notional Exposure 10,000,000 10,000,000

Initial Margin * $94,338 $40,000 

(0.9433794 of Notional) $400 per 1000

14

Initial Margin less than 50%

vs. Cleared Swaps via

CME

Clean Price 100.99

Accrued Interest 2 days 0.000055556

Index Factor 1

B ** No Historical Cash Flows

ERIS PAI (C) ** 0.0000116

Futures Price 100.99

*Margin Simulation from BBG Using CME CDSW Function**Prices from https://www.theice.com/marketdata/reports/185

10m CDX IG vs. 100 x 1000 ERIS CDX IG

Credit Futures

ERIS Methodology

A+B - C = Futures Price

3

15

Cross Product Margining and Optimisation

• SPAN Methodology

• Allows offsets against other ICE Clear US future contracts like Russell and MSCI

• Full Visualisation of positions across assets

4

16

New Market Participants

Margin Efficiency

New Trading Strategies

Operational Efficiency

• Increase in Liquidity • Exposure to Credit Indices.• Hedgers and Speculators who were previously tied to OTC markets.

• No need for costly infrastructure or technology.• ICE API supports all post trade clearing vendors.• Flexible Block Trading.

• Allows Multi Strat and Cross Asset funds to gain exposure to credit.• Credit and Future Funds to trade• Futures vs. Credit vs. Equities?• Hedging new issues or single name exposure

• Lower Margin Requirements (1day vs. 5day Var) - SPAN Methodology.• Initial Margin lower to traditional CDX IG Clearing• Cross Product Margining and Optimization • No Running IM charges vs. cleared swaps• No ISDA Required (c. 6% -15%)

Transaction Costs• Full Regulated Clearing and Execution Facility.• Standard fees at $0.25 per contract for executing and $0.50 for Clearing. *• FCM Swaps Clearing Fees range from $150 to $700

Regulatory • CFTC Compliant.• Full Regulated Clearing and Execution Facility.

.

Advantages

Liquidity improvement

Lower transaction cost

B/S Efficiency

Regulatory compliance

Thank You

Sandeep Kumar

March 2016This document is prepared for information purposes only.

Private and Confidential.

Appendix

Appendix

19

The R.J. O'Brien

Can a hedge fund trade futures, forex or swaps?

The CFTC regulates all the futures, foreign currency (“forex”), and swap markets, including options and other derivatives related to the foregoing. If you plan to trade futures, forex, swaps, or related instruments in a hedge fund, you may have to register the fund’s management company with the CFTC as a commodity pool operator (CPO) and, if you plan to give advice to individual accounts outside of the fund, then you may also have to register as a commodity trading advisor (CTA). There are, however, several exemptions that hedge fund managers use to avoid CFTC registration. The most common exemption from CPO registration, known as the “de minimis” exemption, requires that you not market your hedge fund as a vehicle to access the futures/forex/swap markets, you limit participation to “accredited investors” and “qualified eligible persons,” as those terms are defined in the applicable regulations, and, either: i) the aggregate initial margin and premiums used to establish positions in futures/forex/swaps does not exceed 5% of the liquidation value of the fund’s portfolio; or ii) the aggregate net notional value of such positions does not exceed 100% of the liquidation value of the fund’s portfolio. There are certain other exemptions that may also be applicable depending on your circumstances. You should consult with a licensed attorney with experience in fund formation matters to determine whether you will be able to operate under an exemption.

Appendix

20

21

Appendix

22

Appendix

23

Appendix

Appendix

24

Summary Comparison of CDS and Futures 1) Timing and Method of Cash Flows

a. CDS: Known fixed payment amounts are paid by the buyer of protection to the seller of protections on a quarterly basis (“Payment Dates”) throughout the life of the transaction. In return for this consideration, the seller of protection agrees to compensate the buyer of protection upon the occurrence of a credit event. The default probability adjusted net present value of these projected future cash flows is exchanged between counterparties via the daily collateral process, according to the terms of the applicable Credit Support Annex3

b. Futures: All cash flows are exchanged between counterparties through variation margin via the daily mark-to-market process administered by the Clearing House. This valuation process incorporates past fixed and credit event settlement amounts and the NPV of projected future cash flows.

2) Collateral and Variation Margin Treatment

a. CDS (Collateral): Collateral posted under a bilateral Credit Support Annex belongs to the party posting the collateral; ownership does not transfer to the receiving party

b. Futures (Variation Margin): Variation margin for cleared transactions (including Futures) legally belongs to the owner of the account where the variation margin resides, and can be withdrawn and reinvested at the owner’s discretion

3) Restructuring Credit Event for European index contracts

a. CDS: For an OTC contract, the restructuring credit event is not automatically triggered by the ISDA DC declaration of the credit event, and the settlement contains optional actions that can result in a different price depending upon, for example, whether the buyer or seller of protection triggered the credit event.

b. Futures: Futures will automatically trigger a restructuring credit event as though the buyer of protection had triggered. If the “Movement Option” is applicable for the corresponding CDS, because of a lack of auction bucket, it will be exercised for Futures.

As a result of the difference relating to the restructuring credit event for European index contracts, this document focusses solely on index contracts without a restructuring credit event trigger. A separate document will address the comparison of economics of the restructuring credit event trigger