An overview An Overview
Introduction GMEX is an innovative new exchange developed • to address problems arising from recent regulatory change First product is GMEX IRS Constant Maturity • Futures which provides an effective solution to hedging interest rate exposure. GMEX is regulated by the FCA • IRS CMF is listed on Eurex Exchange and cleared • through Eurex Clearing 2
Business summary GMEX Group offers innovative solutions in the global financial markets space . The three main businesses are: GMEX Exchange operates order books to arrange trades in the GMEX IRS Constant Maturity Future • (CMF) cleared through Eurex GDI develops and publishes tradable market and product indices (holds IP to IRS CMF) • GMEX Tech creates and operates cost effective multi-asset electronic exchanges and associated post • trade infrastructure in developing and (in a targeted way) developed markets Deutsche Börse AG & Societe Generale Newedge UK Ltd. are minority stakeholders. 3
Market need The GMEX Interest Rate Swap Constant Maturity Future (IRS CMF) was created to address the problems that now impact interest rate traders: • Increase in cost of OTC interest rate derivative trading due to new laws and regulations • This has lead to contraction of OTC market from $750tn (2012) to $460tn (2015) as trading moved to a Central Counterparty model • Current exchange-traded IRS futures products such as those available on CME, Eris Exchange and ICE are not effective replacements for OTC markets, due to the expense of quarterly rolling and the impact of time decay on the product • The GMEX IRS CMF is closely aligned to the underlying IRS market • The constant maturity element of the IRS CMF avoids the complications & expense of quarterly expiring futures 4
Overview - Disadvantages of alternative products GMEX looked at the disadvantages of other products in the market: Swapnotes Cleared Swaps Specified (not market rate) Closed out by Coupon Only specific taking offsetting Tenors position, still requires margin Forward Starting - Quarterly Priced as NPV of swap = Residual margin breaks investment criteria = Convexity mismatch = Offsetting swap creates convexity mismatch 5
Overview – GMEX IRS CMF GMEX IRS CMF - a new and unique way to hedge and trade interest rate exposure P&L based on PV Trades as a rate not of Fixed Leg not NPV a bond price of swap Best Convexity Match No expiry dates, therefore All annual maturities no extra forward listed 2-30 component Overnight rolling process keeps the maturity constant, and corrects for date issues 6
Overview – GMEX IRS CMF Every annual maturity from 2 years to 30 years • Currently live in Euro - with Sterling and US Dollar to follow • Quoted to ¼ of a basis point • Notional Sizes (2s-3s: 200k, 4s-8s: 100k, 9s-30s: 50k) • Tick Value varies with Present Value of fixed leg of notional swap • Present Value determined by summation of present value of all future fixed leg coupon payments • Discount factors used for present value calculation published on data stream • Traded on a central limit order book (CLOB) with Request For Quote (RFQ) available in addition to a Block • Trade Reporting mechanism based on minimum block size 7
Overview – IRSIA CMF Novation process In order to maintain the maturity there is an overnight novation process After the mark-to-market roll process begins • Day counts for the spot next swap may vary • Calculates the spot next rates for the swap • Day counts for each coupon period may vary • Calculates the PV value for the spot next rate • No free option on the spot next swap price • Novate the market to these positions (no P&L • at the time of novation) 8
Overview – IRS CMF Rolling the Maturity and Contract Exit Rolling the maturity Exiting the contract As the contract has a constant maturity, the user All the hedger needs to do to exit the contract is to • • rolls any contracts required to duration to match the close any open positions in the Order Books asset being hedged From this point onwards the trader will have no • As an example, a € 10,000,000 position, rolled on further obligations, unlike a cleared IRS • each trading day in a year (assume 250 trading days a year) would mean € 40,000 of notional being rolled every day. By this method the hedger can match the duration • of a portfolio very easily 9
Overview IRS CMF – Trading Methodology 2 year and 3 year tenor: price/pro rata matching • 4 year through 30 year: price/time priority • No implied prices • Variety of order types available including Limit Orders & Market Orders • Orders entered as a rate for the market, trade confirmations include the PV value, P&L based • on difference in PV values 10
Constant Maturity Index The IRS Constant Maturity Index is provided by GMEX • Group company GDI It is based initially on a contribution feed from 12+ banks • The feed is based on tradable bids/offers provided - by a market leading IRS platform These are washed to produce a fair mid price for - each tenor These prices are published in real-time throughout - the Trading Day These are used to produce the end of day - settlement prices Plans to add contributions from other vetted market • participants e.g. buy side Discount Factors are produced from a live feed of OIS • swaps Discount factors are published all day • Real-time Index surveillance is in place • Overseen by independent Index Oversight Committee in • accordance with IOSCO best practice 11
Tariffs and Costs The cost of carry (i.e. implied novation cost of the forward rate over the spot rate) is small, and GMEX • can provide a model specifically pitched at asset managers Transaction Fee is € 0.50 per € 100,000 in notional. Transaction fees are collected by the clearing house • Initial margin is based on a floor of 2 day 99.5% VaR • Liquidity provision scheme available • Total transaction and running cost significantly below cleared IRSs • 12
Trading and Regulatory The IRS CMF is listed on Eurex Exchange • GMEX matches orders from its participants and sends these to Eurex • GMEX publishes open orders in a similar manner to pre-trade transparency on an Exchange or MTF • Trade is formed at the point when both counterparties have confirmed the trade to Eurex • Eurex is the venue of execution for transaction reporting purposes • Eurex performs trade reporting • 13
Clearing Cleared via Eurex Clearing • Existing Eurex Clearing memberships apply • Same Default fund as Euro-Bund / Euro-Bobl /Euro-Schatz with potential future margin offsets • VaR based margining available • Access via Eurex Clearing interface • 14
Connectivity - Technical and Logical GMEX operates its primary matching engine at Equinix LD4 in Slough • Interfaces for routing and market data are offered in both FIX and a proprietary binary API. • Hi-Speed Matching using proprietary standardised technology • Technical connectivity via telco leased lines, extranet providers and Colo • Backup Data Centre: Interxion, Hanbury Street, London • Test system available with secure VPN access • 15
Trading model Model designed to make joining and trading as easy as possible GMEX is not a trading venue in its own right – it is an arranger, so no new venue approval required • Orders matched in the GMEX Order Books • Trades confirmed at Eurex Exchange and cleared at Eurex Clearing • Existing Eurex memberships apply • No new initial margin required at Eurex – existing default fund dependent • Front Office Order Management systems are available from Trading Technologies and Fidessa • Bloomberg is providing a live price stream for GMEX products at no cost • SunGard GMI, SunGard Clearvision and SunGard UBIX have deployed back office systems for the product, • connected to Eurex Clearing
Liquidity provision & Jumpball schemes Liquidity provision Unique & sustainable long term liquidity provision scheme • Points-based system based on a tight price ratio throughout the day • Offers Liquidity Providers the ability to discount transaction fees to zero • Up to 10 Liquidity Providers • Jumpball Monthly recurring jumpball scheme over 3 years available to liquidity providers • Top 4 Liquidity Providers per currency proportionately share in 10% of the net revenues generated from • transaction fees This will results in a rebate every month as it is expected such liquidity providers will also be at zero transaction • fee tariff based on the points based system
Onboarding To Get Connected: Sign Exchange Participant agreement • Sign New Product Assignment form at Eurex and confirm set up with GCM • Certify technical connectivity • Complete application form and go through the KYC process • Sign data agreement, if taking data directly from GMEX • 18
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