An Overview Introduction GMEX is an innovative new exchange - - PowerPoint PPT Presentation

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

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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

Business summary

Market need

4 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

Overview - Disadvantages of alternative products

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Swapnotes Cleared Swaps = Convexity mismatch = Residual margin breaks investment criteria = Offsetting swap creates convexity mismatch

Specified (not market rate) Coupon Only specific Tenors Forward Starting - Quarterly Priced as NPV of swap Closed out by taking offsetting position, still requires margin GMEX looked at the disadvantages of other products in the market:

Overview – GMEX IRS CMF

6 GMEX IRS CMF - a new and unique way to hedge and trade interest rate exposure

Trades as a rate not a bond price Best Convexity Match No expiry dates, therefore no extra forward component All annual maturities listed 2-30 P&L based on PV

• f Fixed Leg not NPV
• f swap

Overnight rolling process keeps the maturity constant, and corrects for date issues

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 8

• Day counts for the spot next swap may vary
• Day counts for each coupon period may vary
• No free option on the spot next swap price
• After the mark-to-market roll process begins
• Calculates the spot next rates for the swap
• Calculates the PV value for the spot next rate
• Novate the market to these positions (no P&L

at the time of novation)

Overview – IRS CMF Rolling the Maturity and Contract Exit

Rolling the maturity

• As the contract has a constant maturity, the user

rolls any contracts required to duration to match the asset being hedged

• As an example, a €10,000,000 position, rolled on

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
• f a portfolio very easily

9 Exiting the contract

• All the hedger needs to do to exit the contract is to

close any open positions in the Order Books

• From this point onwards the trader will have no

further obligations, unlike a cleared IRS

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
• n difference in PV values

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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

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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

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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

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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

Trading model

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

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Client Confidential

Disclaimer: This product involves the risk of adverse or unanticipated market developments, risks of illiquidity and other risks, including without limitation, principal, interest rate, currency, credit, political, liquidity and market risk. It is not suitable for all investors. The description of special considerations and risks herein does not purport to be

• exhaustive. We disclaim any responsibility to advise prospective investors of such risks as they exist at the date of this document or as they change from time to time.

Prospective investors should understand the risks involved and should reach an investment decision after careful consideration with their tax, accounting and legal advisors of the suitability of the notes in light of their particular financial circumstances and financial objective

For more information please contact -  +44 (0) 20 7148 9009  sales@gmex-group.com  www.gmex-group.com

Global Markets Exchange Group (GMEX)