To limit the risk of default by participants, ICE Trust proposes to establish strong and objective participant eligibility requirements. For example, only a firm with a net worth of $5 billion or more and a credit rating of “A” or better may become a participant. Among other criteria, each prospective participant also would be required to demonstrate that it has systems, management, and risk-management expertise with respect to CDS transactions.
Margin requirements for participants in ICE Trust would be comprised of two components: (1) initial margin collateral provided at the time of contract novation that is intended to cover losses from a defaulting participant’s positions under normal market conditions; and (2) mark-to-market margin requirements that are calculated at the end of each day based on a participant’s outstanding positions. ICE Trust plans to regularly perform stress testing on its calculations of credit exposure and margin requirements to determine the sufficiency of the financial resources needed to withstand participant defaults under a range of plausible market scenarios. To ensure its liquidity, margin collateral would be required to be in the form of cash or G7 government debt.
In addition to margin requirements, ICE Trust would require each participant to contribute a minimum of $20 million to the guaranty fund plus additional amounts based on the participant’s expected level of position exposures. Additional contributions would be assessed at least quarterly.
The establishment of ICE Trust as a CCP for CDS contracts is expected to minimize the impact on financial markets of a failure by a single participant by collateralizing counterparty risk exposures through the standardized application of margin and guaranty fund requirements, by reducing exposures through the netting of CDS transactions on a multilateral basis, and by standardizing and centrally managing the close out of a defaulting participant’s positions with the CCP.
After carefully considering all the facts of record, the Board has concluded that ICE Trust’s financial condition, capital adequacy, future earnings prospects, and other financial factors are consistent with approval of the proposal.