© 2016 Thomson Reuters 1

Rates Analytics proposition – David Rickard

RATESANALYTICSPROPOSITION- AGENDA

• Introductiono Backgroundo TargetclientGroupso Technology

• SWPRdemo:moreFlexibility,extendedassetcoverage

• SWPRdemo:Pricingframework&regulation:CreditRiskMitigation(CVA)

• SWPRDemo:VanillaSwaps,CrossCurrencySwapsincludingNegativeRates

• SWPRDemo:SwaptionsandCaps/Collars.

• PortfolioAnalytics:Manageandvalueaportfolioofderivativeinstruments(FX&InterestRates)

RATESANALYTICSPROPOSITION- INTRODUCTION

• Background– FinancialCrisis>>RegulatoryChangesforOTC– IFRS9&13,BASELIII,EMIR,MifiD,Dodd-Frank– NeedforamorecomplexRatesDerivativesPricingframework– InturnledtoChangesinMarketPractice– mainlyduetoCounterpartyCreditRiskissues(CCR)

• MarketIntelligence– ThomsonReutersdevelopedourapplications– Morethan500ClientVisitsandMeetingsGlobally– Feedbackfrommultipleclientsandclienttypes– >>TotallynewInfrastructureandplatform- server-basedpricer andportfolioplusadvanced

analytics• AdapttoRegulationchange

– ProvideanalyticalapplicationsthatalignwithAASB9&13– CVAandDVAalreadyinplace,withFVAtobereleasedduringH22017– IncrementalCVAatatradeandportfolio leveltobereleasedQ12017– XVAmaybedevelopedwithvisibilitytobanksonly.

• OurAim– Apowerfuldesktop Cross-Assetpricingandvaluationsystem– Afullycompliant,openandextendablesystem– Support forAllProducts,ResponsivetoClientNeeds

MARKET-LEADINGANALYTICS– CVAANDCOLLATERAL

– CounterpartyCreditRisk• Howtoprotectagainstlossesintheeventofadefault?• SwapsdisplayBi-LateralCreditRisk– Appliestomeaswellasmycounterparty• Solution>>ExchangingCollateraland/orCVA

– CVA– CreditValuationAdjustment• Howlikelyisacounterpartytodefault?• ExposureSimulation– whichcounterpartyisinreceiptofthenetcashflow?• >>DefaultProbability

– SingleNameCDS,IndexCDS,CreditCurve,IssuerCurve,SpreadoverFundingRate,WACC

• >>Positive&NegativeExposure– SimulationMethod– Canapplytoanyinstrument– WheredoestheExposuretoDefaultRisklie?– WhichofthetwocounterpartiesisprojectedtobeinreceiptofthenetCashFlowat

eachpointduringthelifecycleoftheswap(portfolio)?

RATESANALYTICSPROPOSITION- CVA

CreditcurveestimationisakeyinputintotheCVACalculation.Dependingonthecounterpartythefollowing decisiontreeisused:

IstherealiquidCDS?

Isthereanotherliquid benchmark

(e.g.bond)?

Isthereasuitablesingle-name

proxy?

NO

NO

YESUseCDSQuote

UseCreditCurves (witha

spread)

Useproxywithaspread(Risk

free)

YES

YES

Use the Search tool to find CDS from TR,Markit, GFIS .. Etc..“Basel III capital rules […] defines CVA withrespect to Credit Spread”

EnteraCurrencytousetheTRCreditCurvesTheseareavailablefordifferentRating,Rating/Sectors(e.g.AUDBBBNonFinancial)

Enter a Spread on top of a FundingRate (e.g. Libor + x bp)

IntheNEWSWPRApp

“IFRS13usestheconceptofexitprice,whichimpliestheuseofmarketimpliedinformation”

RATESANALYTICSPROPOSITION- CVA

ResultAnadjustmenttothevalueoftheswap:aninsurancepolicyintheeventofdefaultMoreoftentheCVAadjustmentisexpressedbyadjustingtheFixedRateoftheswap

Unilateral and Bilateral CVA• Unilateral CVA / DVA is for either theCounterparty and / or the Self without reference tothe default probability of the other.• Bilateral CVA / DVA calculates the CVA for eitherthe Counterparty or the Self but computes whichwill likely default first and if either or both willdefault before the maturity date of the transaction.=> The net of the two is additive

CVAresultsfromMainTab

RATESANALYTICSPROPOSITION- SWAPPRICER- SWPR

NewSWPR- moreFlexibility,extendedassetcoverageSupportssamecurrencyorasecondcurrencycashcollateral

SelecttopriceOTCorCollateralised

VanillaIRS,Cross-CurrencySwaps– includingnegativerates,Swaptions– vanillaandBermudan,Caps,Floors,Collars– vanillaanddigital,BasisSwaps,In-Arrears,CMS,Non-Deliverable,OIS

RATESANALYTICSPROPOSITION- SWAPPRICER CCSMATRIX

• Comparefunding opportunities inupto8currenciessimultaneouslyagainstyourfunctionalcurrency• Enteryourfunding rateeitherasafixedrateoraspreadoverafunding rate– e.g.3MEuribor+120bps• UsetheHeat-maptoidentify bestandworstfunding ratesforyourselectedcurrenciesandtenors

• Chartsshowfunding levelsforeachcurrencyandtenor• Yourfundingrateisclearlymarkedonthechartforeasycomparison• Changefocusofchartsbyselectingcurrenciesandtenorsintheheat-map

RATESANALYTICSPROPOSITION- SWAPPRICER– MONTECARLOANALYSIS

SwapPricer – CVAexposureresultstabCVAtabtodisplayexposure(Potential&Expected)results

Viewtheexposureresultsasachartorseethedollaramountinatable

(unilateralandbilateral)

ResultstableallowstheusertoseethebreakdownofCVAandDVAonaunilateralandbilateralbasis.SpreadscanbeaddedtoadjusttheresultsintheCreditCurvesection(self&counterparty)

• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile

RATESANALYTICSPROPOSITION- SWAPTION EUR2Y– 3Y- SWPR

Swaption inSwapPricer – 2yr– 3yrChoosespecificdates,volatilitymethodology,Strikepriceand

CashExerciseAdjusttheunderlyingswap,amortisation

orindividuallegdetails

ObservetheCVAforstraightoramortising facevalues,PotentialExposure,Payoffdiagramwith‘Greeks’forindividualtradesor

multilegstrategies,VolatilityCubesandSkew.

RATESANALYTICSPROPOSITION- INTERESTRATEOPTIONS– VANILLACOLLAR

InterestRateCaps,FloorsandCollarsVanillaorBermudanstyleoptionprofiles– includingcoveringnegativeinterestrates

• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile

UsetheVolatilitysurfacetoidentifythemostsuitable

outcome.

RATESANALYTICSPROPOSITION- INCREMETALCVAINSWAPPRICER

Atthetradecalculationleveltheusercanidentifytheirincremental

CVA charges

TheusercanthenchoosethecounterpartythatresultsinthelowestincrementalCVA impact

PORTFOLIO-BASEDPRICINGANDVALUATION– PORTFOLIOANALYTICS

• Tradevs PortfolioLevel– DesktopsupportedONLYTradeLevel– HoweveritisessentialtomanageCVAandCollateralatPortfolioLevel– KeyReasons:

» PortfolioEffectswillimpactpricingofadditionaltrades» Riskreportingmustbedoneattheportfoliolevelforregulatorycompliance» CVAisnotadditive– thereisnetting

– IncrementalCVA(willbedeliveredearly2017)andPortfolioReporting• ImpactofMultipleTradesonPortfolioValuation

– Saywehave200tradeswithabanktradedoverthelast10years– Differentages,maturities,prices,interestrateenvironment– SomeareITM,someOTM– WecanseeimpactonCVAofFixedRateandPayReceive

• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile

• Add or update deals directly from Swap Pricer trade ticket orimport them from excel• Create, share and manage portfolios of interest rate derivatives,cash bonds, bond futures, repo,Organize positions by portfolio, underlying instrument, asset class,currency, counterparties or rating• Manage your counterparties in the system and monitor yourcounterparty exposure• Calculate the portfolio P&L and Mark-to-Market using real-timedata or conduct valuations for an historical date• Supports Multi-currency exposures as well as allowing thefunctional or base currency to be specified

RATESANALYTICSPROPOSITION- PORTFOLIOANALYTICS

VariousCreditRiskreportsareavailable:• CalculateKeyRateExposurefortimebuckets• CalculatePortfolio CashFlows• VaR

• American MonteCarlo Simulation calculates Potential Exposure for Self, Counterparty and Bilateral cases• View POTENTIAL Exposure and EXPECTED Exposure Data per Quartile