An Introduction to DTCCServices and Capabilities

• Introduction...........................................................................................1

• The Depository Trust & Clearing Corporation................................3

• What Markets Does DTCC Serve Today?.........................................3

A. Clearing and Settlement

1. Equities, Corporate and Municipal Bonds

2. Government Securities

3. Mortgage-Backed Securities

4. Clearance and Settlement of Equities in Europe

B. Asset Services

C. Global Corporate Actions

D. OTC Derivatives

E. Wealth Management Services

F. Insurance & Retirement Services

G. Syndicated Loan Processing

• Who Are Our Customers?...................................................................6

• Who Owns DTCC? ..............................................................................6

• Who Regulates Us? ...............................................................................6

• What are DTCC’s Global Operating Capabilities?...........................6

• What are DTCC’s Financial Strengths? ........................................7

• How Does DTCC Establish Its Fees? ...............................................7

• Post-Trading Costs: European Union and U.S. ................................8

• How Do We Manage Risk?..................................................................8

Table of Contents

October 2008

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efficient service. In short, customer choice and competi-tion were encouraged.

Advantages of Centralized Infrastructure

Over time, U.S. market participants came to realizethat while they could always compete on the front end ofthe securities business, there were considerable cost-effi-ciencies and risk-reduction advantages to commoditizingback-office functions. They began to see the advantagesof a centralized infrastructure model that could achieveeconomies of scale from critical mass. They also saw thevalue of centralized trade netting to reduce cost and risk.Eventually, customers steered the regional clearing anddepository organizations into consolidation – a processthat took a number of years to complete.

Between 1977 and 1995, five regional exchanges exit-ed the business of clearance, settlement and custody, andcustomers consolidated this activity at NSCC and DTCC.And, the process of consolidation continues. Beginningin 1999, DTCC worked to bring our depository, DTC,and our equities clearing organization, NSCC, under oneroof.

Later, we brought in – and consolidated – two moreclearing corporations for fixed-income securities,Government Securities Clearing Corporation (GSCC)and MBS Clearing Corporation (MBSCC).

Today, DTCC subsidiaries clear and settle nearly allU.S. market trades in equities, corporate and municipalbonds, U.S. government securities and mortgage-backedsecurities, money market instruments and OTC deriva-tives. We also provide securities safekeeping and assetservicing capabilities for equities, corporate and munici-pal debt, collateralized mortgage obligations, exchange-traded funds, money market instruments and manyother types of securities.

An At-Cost Organization

DTCC is owned by its principal users and operates on an at-cost basis, which means that we look to returnany profits that we make to our customers. Driven in part by economies of scale, our

For 35 years, DTCC’s family of companies has helpedautomate, centralize, standardize and streamline process-es that are critical to the safety and soundness of the cap-ital markets. As a result, we’ve helped our customersincrease their operational efficiency, reduce risk andlower cost.

DTCC is a holding company established in 1999 tocombine The Depository Trust Company (DTC) andNational Securities Clearing Corporation (NSCC). Thosecompanies, in turn, grew out of Wall Street’s paperworkcrisis in the late 1960s and early 1970s. Neither company,however, started out serving a national market. Theywere formed initially to handle clearing and immobilizesecurities solely for the New York Stock Exchange andAmerican Stock Exchange, and later on, Nasdaq.

Need for Greater Efficiencies

Clearing and settlement in the U.S. was highly frag-mented at the time. Regional markets, such as those inBoston, Philadelphia and Chicago, each maintained sep-arate clearing and depository businesses. As trading vol-umes grew, customers became concerned about the highcosts, inefficiencies, redundant systems and disparateprocesses, as well as the need to post collateral at each ofthe clearing companies.

At the same time, U.S. regulators sought to encouragethe creation of a unified national market mechanism. Toguide the process, they advanced a number of key con-cepts. At the heart of them were two primary principles:

• the need for customer choice, and

• the need for price transparency.

To give traders an opportunity to buy or sell a securi-ty wherever the best price could be found, regulatorsrequired the creation of trading links between theexchanges. This meant that dealers could choose to havea trade executed on whichever market offered the bestprice.

The corollary to this was, if a trade could be executedon any market, it could also be cleared and settled bywhichever organization offered a better price or more

Introduction

Continued on page 2

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ferent technology solutions for diverse market sectorsoffer a distinct competitive advantage. We’ve been able torepurpose technology and leverage existing softwaredesign to minimize our technology development costs.

In 2008, for the fifth year in a row, our customers havegiven us a strong vote of confidence on the quality ofservice we provide to the industry. In our annual indus-try-wide customer satisfaction survey, DTCC received aworld-class score of 91%.

We look forward to the continued growth and devel-opment of additional services as we work to anticipateour customers’ needs and the changing nature of theindustry. In our increasingly global industry, we also lookforward to collaborating and partnering more closelywith our colleagues around the world.

transaction fees are among the lowest in the world.

As our customers look to move beyond traditionaltrading in cash equities and fixed income securities mar-kets to more derivative instruments, we continue to workwith them, responding to where market forces are driv-ing their businesses. For instance, we leveraged our expe-rience and technology to rapidly build Deriv/SERV toautomate and lower risk for the growing global market incredit default swaps and other over-the-counter (OTC)derivative instruments.

The point is, of course, that by developing services inconjunction with customers, we partner with our cus-tomers and continue to earn their business.

Broad Experience, A Competitive Advantage

DTCC’s size has also not prevented us from beingquick to market or innovative. In fact, the breadth of ourexperience across product lines and the need to build dif-

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ments that need to be exchanged by an average of 98%each day. NSCC generally clears and settles trades on aT+3 basis.

Services available:

• Automated Customer Account Transfer Service(ACATS)

• Continuous Net Settlement (CNS)• Custom Index Share Processing • Inventory Management System• Processing Trade Reporting and Confirmation• Real-Time Trade Matching (RTTM)• Reconfirmation and Pricing Service• Settlement Services• Stock Borrow Program

2. Government Securities

The Government Securities Division (GSD) of theFixed Income Clearing Corporation (FICC), a subsidiaryof DTCC, provides real-time trade matching, clearing,risk management and netting for trades in U.S.Government debt issues, including repurchase agree-ments, or repos. Securities transactions processed byFICC’s Government Securities Division include Treasurybills, bonds, notes, zero-coupon securities, governmentagency securities and inflation-indexed securities.

Services available:

• Auction Takedown• Real-Time Trade Matching/RTTM Web • Government Securities Net Settlement Services• Fail Netting • Repurchase (Repo) Agreement Processing• General Collateral Finance Repo Services

3. Mortgage-Backed Securities

The Mortgage-Backed Securities Division of the FixedIncome Clearing Corporation, a subsidiary of DTCC,provides real-time automated trade matching, trade con-firmation, risk management, netting and electronic poolnotification to the mortgage-backed securities market.

Key participants in this market are mortgage origina-tors, government-sponsored enterprises, registered bro-ker/dealers, institutional investors, investment managers,mutual funds, commercial banks, insurance companiesand other financial institutions.

Services available:

• Real-Time Trade Matching • Electronic Pool Notification Services • Netting Services

The Depository Trust & ClearingCorporation

DTCC, through its subsidiaries, provides clearing,settlement and information services for equities, corpo-rate and municipal bonds, government and mortgage-backed securities, money market instruments and over-the-counter derivatives. In addition, DTCC is a leadingprocessor of mutual funds and insurance transactions,linking funds and carriers with their distribution net-works. DTCC’s depository provides custody and assetservicing for 3.5 million securities issues from theUnited States and 110 other countries and territories,valued at $40 trillion. In 2007, DTCC settled more than$1.86 quadrillion in securities transactions.

DTCC operates through six subsidiaries – each ofwhich serves a specific segment and risk profile withinthe securities industry:

• National Securities Clearing Corporation (NSCC)• The Depository Trust Company (DTC)• Fixed Income Clearing Corporation (FICC)• DTCC Deriv/SERV LLC• DTCC Solutions LLC• European Central Counterparty Limited

(EuroCCP)

Each of DTCC’s subsidiaries operates separately fromthe others. Each is self-funded from fees paid by usersand each has its own risk profile, collateral fund andsafeguards.

DTCC’s joint venture company, Omgeo, has 6,000customers in 42 countries and plays a critical role ininstitutional post-trade processing, acting as a centralinformation management and processing hub for bro-kers, investment managers and custodian banks.

What Markets Does DTCC Serve Today?A. CLEARING AND SETTLEMENT IN THE U.S.1. Equities, Corporate and Municipal Bonds

DTCC’s subsidiary, National Securities ClearingCorporation (NSCC), established in 1976, providesclearing, settlement, risk management, central counter-party services and a guarantee of completion for virtual-ly all U.S. broker-to-broker trades involving equities,corporate and municipal debt, American depositaryreceipts, exchange-traded funds, and unit investmenttrusts. NSCC also nets trades and payments among itsparticipants, reducing the value of securities and pay-

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• Mortgage-Backed Securities Clearing Services

4. Clearing and Settlement of Equities in Europe

European Central Counterparty Ltd. (EuroCCP) isthe European subsidiary of The Depository Trust &Clearing Corporation that has been established to pro-vide pan-European low-cost clearing services. EuroCCP’sservices were launched in mid-August for Turquoise,owned by nine global banks who have formed a tradingplatform of their own to compete in Europe with estab-lished trading venues.

EuroCCP has also been selected to clear and settle forthe block trading platform, SmartPool, owned by NYSEEuronext, HSBC, BNP Paribas and JPMorgan Chase, andthe high frequency trading platform, NYSE Arca Europe(a.k.a. Octopus). Both are expected to be launched beforeyear-end 2008.

EuroCCP uses Citi’s Global Transaction Services as itssettlement agent and initially clears and settles trades in14 countries in seven currencies. In the longer term, itwill clear and settle trades throughout Europe.

EuroCCP is a Recognized Clearing House in the U.Kand is headquartered in London.

B. ASSET SERVICES

DTCC’s subsidiary, The Depository Trust Company,established in 1973, was created to reduce costs and pro-vide clearing and settlement efficiencies by immobilizingsecurities and making “book-entry” changes to owner-ship of the securities. DTC provides securities move-ments for NSCC’s net settlements, and settlement forinstitutional trades (which typically involve money andsecurities transfers between custodian banks and bro-ker/dealers), as well as money market instruments. In2007, DTC settled transactions worth almost $512.7 tril-lion, and processed almost 325 million book-entry deliv-eries.

In addition to settlement services, DTC brings effi-ciency to the securities industry by retaining custody ofabout 3.5 million securities issues worth about $40 tril-lion, including securities issued in the U.S. and 110 othercountries.

Services available:

• Custody & Safekeeping Services• Underwriting Services • Deposit & Withdrawal Services• Dividend, Reorganization and Proxy Services• Restricted Securities Family of Services• Direct Registration Service

C. GLOBAL CORPORATE ACTIONS

DTCC’s Global Corporate Action Validation Service(GCA VS), operated by DTCC Solutions LLC, simplifiesannouncement processing by providing a centralizedsource of “scrubbed” information about corporateactions, including tender offers, conversions, stock splits,and nearly 100 other types of events for equities andfixed-income instruments traded in Europe, Asia-Pacificand the Americas.

For banks, broker/dealers and other financial institu-tions, the GCA VS transforms the way corporate actionannouncements are managed globally by eliminatingredundant operations and technology, and by reducingthe high fixed costs associated with this labor-intensiveprocessing. In 2007, GCA VS processed more than 1 mil-lion corporate actions from more than 160 countries, andmore than 3 million scheduled payment announcements,the most complete global coverage of corporate actionsby any organization.

D. OTC DERIVATIVES

DTCC Deriv/SERV LLC provides automated match-ing and confirmation services for over-the-counter(OTC) derivatives trades, including credit, equity andinterest rate derivatives. It also provides related matchingof payment flows and bilateral netting services.Deriv/SERV’s customer base, which includes dealers andbuy-side firms from more than 30 countries, is the largestof any post-trade service provider in the OTC derivativesmarketplace. In 2007, Deriv/SERV processed a record5.87 million transactions.

Deriv/SERV has already been an important driver inincreasing electronic confirmation rates, while loweringthe risk and cost of labor-intensive, paper-based process-ing. More than 90% of credit derivatives traded globallyis now confirmed through Deriv/SERV, up from 15% in2004.

During 2006, DTCC also launched its global TradeInformation Warehouse to bring increased accuracy, costreduction and reduced risk to the post-trade processingof OTC derivatives contracts. The warehouse maintainsthe primary record of each contract and handles the serv-icing of contracts over their lifecycle, which can extendfor many years. Beginning with credit derivatives, thisglobal infrastructure solution, which was developed inclose collaboration with leading dealers and buy-sidefirms, is designed to be extended to accommodate inter-est rate, equity and other OTC derivatives.

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Services available:

• Credit Default Swaps Matching and Confirmation• Equity Derivatives Matching and Confirmation• Interest Rate Derivatives Matching and

Confirmation• Payment Matching, and Bilateral Netting• Trade Information Warehouse• Central Settlement

E. WEALTH MANAGEMENT SERVICES

DTCC also provides a family of services to supportmutual funds, managed accounts and the growing inter-est in alternative investment products.

Mutual Fund Services, provided by DTCC’s sub-sidiary, NSCC, are the acknowledged industry standardsfor processing fund transactions, communicatingaccount-related information, and linking fund compa-nies with their growing network of distribution firms.Fund/SERV® automates purchases, registrations,redemptions and settlement of these fund transactions inthe U.S. and for off-shore funds.

Other capabilities include coordinating account infor-mation between funds and firms; processing definedcontribution transactions; settling commission pay-ments; transferring accounts between firms, and assets inIRAs between fund companies; and providing a central-ized repository for information contained in a fund’sprospectus, thereby expanding the service’s role as a pri-mary industry source for rules-based processing.

Mutual Fund Services also provide money settlementof transactions through the Fedwire system.

Services available:

• ACATS-Fund/SERV• Commission Settlement• Defined Contribution Clearance & Settlement• Fund/SERV®• Fund/SPEED• Mutual Fund Profile Service• Networking• Transfer of Retirement Assets

DTCC’s Managed Accounts Service standardizes theexchange of account and investment informationthrough one central gateway, significantly reducing oper-ational costs, errors and other related risks. Introduced in2006 by DTCC Solutions LLC, the service simplifies anunwieldy and costly account set-up process, linkinginvestment managers, sponsoring broker/dealers andservice providers through one centralized, automatedplatform. The service also includes features that address

account maintenance, corporate actions and fee billing.

Features available:

• Account Set-Up• Account Maintenance• Corporate Actions• Fee Billing

DTCC’s Alternative Investment Products Servicebrings automation and efficiency to critical transactionslike subscriptions, redemptions and position and valua-tion reporting for hedge funds, funds of hedge funds, realestate investment trusts and other alternative invest-ments. The service is built on a platform that streamlinestrade order, documentation workflow, reporting and set-tlement of these complex products.

The service has been designed to accommodate glob-al hedge fund providers and settlement reporting in mul-tiple currencies immediately prior to entering produc-tion. The service is provided by DTCC’s subsidiary,NSCC.

F. INSURANCE & RETIREMENT SERVICES

Insurance & Retirement Services, provided byDTCC’s subsidiary, NSCC, is helping to commoditizeand mainstream annuities, life insurance and retirementprograms. The services include processing of annuityapplications and premiums, licensing and appointments,commission payments, positions and valuations, assetpricing, financial activity reporting and annuity cus-tomer account transfers.

In 2008, two services are being added: Fund Transferswithin variable annuities, which went into full produc-tion in August; and Attachments, currently in pilot test-ing, which will support the electronic transfer of images,signatures and other documents.

The aim of the business is to automate and provideseamless end-to-end communication between insurancecarriers, distributors and their solution providers for thesale, processing and money settlement of all types ofinsurance products nationwide.

G. SYNDICATED LOAN PROCESSING

Loan/SERV, also operated by DTCC Solutions LLC,helps automate and streamline the processing of syndi-cated commercial loans by enabling agent banks andlenders to view and reconcile loan positions on a dailybasis.

The first service to be offered, Reconciliation Service,enables lenders to submit and reconcile their loan trans-

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action and position records against those of the agent orview and download the agent information for their ownprocessing. For lenders who do not want the full recon-ciliation service, Loan/SERV offers position reportingwhere a lender can view the agent position records andtransactions online and notify the agent whether theyagree or disagree with the current position.

While the Reconciliation Service launched merely amonth ago, Loan/SERV is moving toward launching aMessaging Service which will provide a safe, secure auto-mated network for the transmission, receipt and onlinestorage of industry standard loan messages.

Who Are Our Customers?DTCC’s customer base extends to thousands of com-

panies within the global financial services industry.DTCC serves brokers, dealers, institutional investors,banks, trust companies, mutual fund companies, insur-ance carriers, hedge funds and other financial intermedi-aries – either directly or through correspondent relation-ships. Increasingly, DTCC’s customers operate both inthe U.S. and overseas.

In the U.S., DTCC provides critical services to themarkets for U.S. Government and mortgage-backedsecurities, and to all U.S. equity marketplaces, includingthe New York Stock Exchange, The Nasdaq Stock Market,the American Stock Exchange, and regional U.S. markets,as well as electronic trading and communications net-works (ECNs).

Who Owns DTCC?DTCC is industry-owned by its customers who are

members of the financial community, such as banks, bro-ker/dealers, mutual funds and other financial institu-tions. DTCC operates on an at-cost basis, returningexcess revenue from transaction fees to its member firms.

Who Regulates Us?All services provided through the U.S. clearing corpo-

rations and depository are registered with and regulatedby the U.S. Securities and Exchange Commission (SEC).The depository is also a member of the U.S. FederalReserve System and a limited-purpose trust companyunder New York State banking law. EuroCCP is regulat-ed by the Financial Services Authority (FSA) in the U.K.

What Are DTCC’s GlobalOperating Capabilities?

DTCC’s services are increasingly being developed toaccommodate not just U.S. but global requirements, andnow encompass thousands of companies in dozens ofcountries.

In addition to DTCC’s clearing and settlement opera-tions in the U.S., our London-based subsidiary, EuropeanCentral Counterparty Ltd. (EuroCCP), provides pan-European low-cost clearing and settlement services tomultilateral trading facilities (MTFs) in Europe.EuroCCP, with its settlement agent, Citi GlobalTransaction Services, initially clears and settles equitytrades in 14 countries in seven different currencies.

Globally, the over-the-counter derivatives marketcontinues to grow rapidly. DTCC has developed a flexibleand growing infrastructure to support matching, confir-mation, payment and lifecycle support of these contractsglobally. We now have more than 1,100 customers inmore than 30 countries using the service, through officesin New York, London and Shanghai.

The Global Corporate Actions Validation Service pro-vides corporate actions announcement information onwell over one million securities in more than 160 coun-tries. In addition to the one million corporate actionsevent announcements a year, it also provides more thanthree million announcements on scheduled paymentsannually for DTC-eligible fixed income instruments.That information is validated and distributed to clientfirms around the world via service centers in New York,London and Shanghai.

DTCC has 16 cross-border depository links with cen-tral infrastructure organizations worldwide, including alink with the Canadian Depository for Securities, whichenables DTC to settle transactions in Canadian dollars onbehalf of its participants. DTCC also has signed informa-tion and cooperation agreements with major post-tradeinfrastructure organizations in Japan, Korea, India,China and Taiwan.

Omgeo, DTCC’s joint venture with Thomson Reuters,formerly Thomson Financial, provides global support forinstitutional post-trade processing and offers more than6,000 customers in more than 40 countries centralized,automated access to trade management services. Thissummer, DTCC launched a new electronic AlternativeInvestment Products Service, linking hedge fundsaround the world to distributors such as banks and bro-ker/dealers to allow them to set up and service hedgefund accounts for qualified customers.

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Increasingly, DTCC’s services are using internationalstandards and messaging at multiple data centers andoperations facilities to process trades and service assetsthrough a growing network that operates around theworld and around the clock. DTCC recognizes theimportance of supporting the increasingly global tradingenvironment with optional efficiencies and low-costinfrastructure service, which will lead to cost savings forinvestors everywhere.

What Are DTCC’s FinancialStrengths?

In 2007, each of DTCC’s regulated subsidiaries (DTC,NSCC, FICC) received Standard & Poor’s highest creditrating, AAA/A-1+.

DTCC’s subsidiaries’ rules require most participantsto maintain deposits of collateral related to their activi-ties, based on calculated requirements to secure partici-pants’ obligations and certain liabilities of the sub-sidiaries.

In 2007, DTCC generated revenue of just over $1.69billion, and gave back $984 million in rebates, discountsand interest. In addition, DTCC reduced its transactionfees for 2008 by $198 million for services provided by itssubsidiaries.

How Does DTCC Establish ItsFees?

DTCC members pay the lowest equity clearance feesin the world – DTCC charges an average of three-tenthsof a cent per transaction or about 66 thousandths of acent per 100 shares. Baked into that fee are our compre-hensive risk management program, enormous processingcapacity and business continuity. These programs aredesigned to protect our members and guarantee thattrades will be completed under both ordinary andextraordinary circumstances, which has the potential tosave financial firms hundreds of millions of dollars, espe-cially when the markets are in turmoil.

DTCC continually works to reduce fees of our coreservices by controlling fixed costs, which yieldseconomies of scale and unit savings. Since our sub-sidiaries are stand-alone entities, our allocation of staffand operating costs is based on actual usage to supporteach particular business segment.

Even as transaction volumes have increased dramati-cally, DTCC has kept annual expenses flat at less than

$100 million a year for the past three years for NSCC’sclearing operations for the entire U.S. equities market,although the number of transactions has doubled overthe same period.

While our fees represent the initial billing for servic-es, the actual cost borne by our customers is the netamount paid after rebates and discounts. Fees are ameans of tracking usage and allocating our costs to cus-tomers.

Effective in 2008, DTCC has made changes to its feepolicies intended to return money to customers fasterand help them accurately capture these returns in theirP&Ls for the period which they are paid. We now imme-diately return any net revenue in excess of our targetgross margin rate in the month in which that revenue wasgenerated.

Given that expenses are relatively fixed, this meansthat when actual volume exceeds budgeted volume, thereis an immediate price reduction for that month in theform of a discount. The margin remaining at the end ofthe year is returned to customers in the form of a rebate.Beginning in 2008, DTCC plans to give customers anestimate of this annual rebate in December, so they canbetter accrue for it before they close their year-end books.

Fee reductions and rebates are only part of the savingsDTCC delivers to the industry. The netting down, orreducing the number of trade obligations requiringfinancial settlement, and streamlining settlementprocesses frees up trillions of dollars of capital each year that customers can then use for other investmentpurposes.

In 2007, NSCC reduced the total value of obligationsrequiring financial settlement by 98% – from $283.2 tril-lion to $5.2 trillion. And even on peak volume days,DTCC nets down financial obligations requiring settle-ment by as much as 99%.

Through its daily Netting process, FICC also sharplylowers the total number of government and mortgage-backed securities trade obligations that require financialsettlement. In 2007, FICC’s netting process eliminatedthree-quarters of all government securities trades requir-ing settlement, and nearly 95% of all mortgage-backedsecurities trades. This markedly increased the capitalavailable to the financial services industry, while lower-ing risk and improving efficiency.

Extensive risk mitigation services from DTCC alsohelp the industry avoid potential loss. (See RiskManagement – page 8.)

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Post-Trading Costs: EuropeanUnion and U.S.

In recent years, several European studies have com-pared the costs of post-trade processing in the EU withthe U.S. The studies have found that post-trading pro-cessing costs in the EU are higher than in the U.S., bothfor EU-domestic and cross-border transactions.

While DTCC has, on request, contributed data to var-ious comparative cost studies, we have not sought todraw our own comparisons. As the EuropeanCommission pointed out in its working paper draft aboutpost-trading, many assumptions impact this calculation,and it is difficult to achieve a true comparison.

The Commission analyzed the studies, which includeCEPS, Giovannini I, LSE/Oxera, NERA EconomicConsulting, AFTI/Eurogroup, among others, and con-cluded that:

• In the EU market, a cross-border equity transactionis two to six times more expensive than a domestictransaction from an investor’s point of view.

• A domestic transaction is up to eight times moreexpensive in the EU post-trading environment thanat DTCC.

The studies show that the aggregate excess cost ofpost-trading for investors in the EU is between €2 billionand €5 billion.

According to DTCC’s estimate, clearing an equitytrade in the U.S. market now costs on average about USD 0.003 (three-tenths of a cent) per transaction, afterrebates and discounts. These calculations are less thanestimates by the European studies because they rely ondifferent assumptions (e.g., average trade size, inclusionof rebates and discounts).

How Do We Manage Risk? Managing the risks inherent in executing securities

transactions and holding securities in custody is a keycomponent of DTCC’s business. The globalization offinancial markets, the trading of more complex instru-ments and the application of new technologies all makethe management of risk more critical – and more chal-lenging.

Today’s markets require strong risk management, andour customers place their confidence in DTCC. DTCCroutinely examines a wide range of factors associatedwith market risk, credit risk, operational risk and enter-prise risk.

Tools DTCC employs to mitigate risk include contin-uous trade netting, capital adequacy standards, a com-mon clearing fund, a fully collateralized settlement sys-tem that is marked-to-market daily, ongoing operationalrisk assessment, business resiliency exercises, the widegeographic dispersion of operating and data centers, avariety of advanced quantitative analytical methodolo-gies such as back and stress testing, and a special focus onregulatory and compliance issues. In addition, DTCC’sprincipal subsidiaries all carry the highest credit ratings.

By operating as central counterparties and thus takingthe risk onto themselves, DTCC’s clearing subsidiarieshelp the industry reduce the risk associated with trading,while freeing up available capital. The clearing corpora-tions do this by stepping in between the seller and buyerof each trade to assume the counterparty credit risk andthe responsibility to deliver the securities to the buyerand payment to the seller. This is the function of a centralcounterparty.

In the course of assuming this level of risk, eachDTCC subsidiary sets minimum standards for capitaladequacy and collateral that its customers must meet inorder to do business. Customers typically must post col-lateral, and each customer’s collateral requirements canchange daily, based on its open trading positions. Therisk management programs operated by DTCC’s clearingsubsidiaries determine how much collateral is requiredfrom each customer to secure its outstanding tradingobligations. DTCC’s depository controls the final settle-ment of transactions in equities, corporate and municipaldebt, money market instruments, and unit investmenttrusts, ensuring its ability to complete settlement pay-ments through a series of settlement controls, includingnet debit caps and collateralization.

More recently, DTCC has expanded its use of analyticalvalue-at-risk methodologies for stress testing of customerand participant exposure in extreme market conditions.The company now regularly performs back testing of thequality and accuracy of its risk management systems. Andit uses the results of these tests to recalculate clearing fundand collateral requirements placed on its customers, or torespond to other risk factors the tests may reveal.

Moreover, the additional capacity that our clearing sub-sidiary continues to build in its technology infrastructureallows us to handle steadily increasing trading volumes –while continuing to drive our clearing fees down. We haverecently raised our processing capacity from 280 millionsides per a day to 450 million. DTCC has long been in thebusiness of managing risk on behalf of the industry – andviews it as a core competency.

Produced for distribution at the DTCC Executive Forum 2008. ©2008