The Deriv/SERV Trade Information Warehouse:

Benefits and Opportunities

15th March 2007

Bill StenningBusiness Development

7th March 2007 2

Topics for todayTopics for today

•STP challenges

•Cost and risk issues in OTC processing

•The new vision for OTC derivatives – warehouse

•How to streamline the custodian relationship

•Predictions and plans for the next 12 months

•STP challenges

•Cost and risk issues in OTC processing

•The new vision for OTC derivatives – warehouse

•How to streamline the custodian relationship

•Predictions and plans for the next 12 months

STP ChallengesSTP Challenges

7th March 2007 4

STP challengesSTP challenges

• Trade volumes only go up

•Expanding customer base of OTC users

•Expanding product set & complexity• Custodian relationship and development plans

•Pressure from regulators on the dealers

•Competition for skilled staff

•Bilateral administration• Portfolio reconciliation

• Trade reconciliation

• Payment reconciliation

• Price reconciliation

•Expressing your needs in public

• Trade volumes only go up

•Expanding customer base of OTC users

•Expanding product set & complexity• Custodian relationship and development plans

•Pressure from regulators on the dealers

•Competition for skilled staff

•Bilateral administration• Portfolio reconciliation

• Trade reconciliation

• Payment reconciliation

• Price reconciliation

•Expressing your needs in public

Cost and risk issues in OTC processingCost and risk issues in OTC processing

7th March 2007 6

Cost and risk issues in OTC processingCost and risk issues in OTC processing

•Systems• Continued investment to keep up

•People• Never a worse time to hire experienced staff

•Error rates on payments• Quarterly rolls cause a huge jump in effort

•Lowest common denominator• Only as good as your counterparty

•Custodian service development and investment

•FAXs are no longer adequate

•Systems• Continued investment to keep up

•People• Never a worse time to hire experienced staff

•Error rates on payments• Quarterly rolls cause a huge jump in effort

•Lowest common denominator• Only as good as your counterparty

•Custodian service development and investment

•FAXs are no longer adequate

The new vision for OTC derivatives - warehouseThe new vision for OTC derivatives - warehouse

7th March 2007 8

Today: Bilateral Administration EnvironmentToday: Bilateral Administration Environment

•Parties must constantly “sync up” during contract life

• Payments, events, margining, etc.

• Many manual and duplicative reconciliation/resolution processes (internal and between firms)

•Each party is hostage to its counterparties’ processing

• You’re only as good as your counterparty – your records may be right, but if your counterparty disagrees or doesn’t know, you have a problem

• Operating models vary across firms: different processes for different counterparties

•Parties must constantly “sync up” during contract life

• Payments, events, margining, etc.

• Many manual and duplicative reconciliation/resolution processes (internal and between firms)

•Each party is hostage to its counterparties’ processing

• You’re only as good as your counterparty – your records may be right, but if your counterparty disagrees or doesn’t know, you have a problem

• Operating models vary across firms: different processes for different counterparties

7th March 2007 9

Why a Warehouse for OTC Derivatives? Why a Warehouse for OTC Derivatives?

•Record keeping is harder than it seems

• Still no solution to fully reconciling both parties systems

• FpML is the way forward, but it will take time for it to percolate into all the nooks and crannies of the industry

•Operational practises still not agreed

• Firms employ people to resolve payments issues

• …which could be solved up-front

• No detailed “book of rules” for every product type

•Volume

• Onwards and upwards - people become the scale problem

•Record keeping is harder than it seems

• Still no solution to fully reconciling both parties systems

• FpML is the way forward, but it will take time for it to percolate into all the nooks and crannies of the industry

•Operational practises still not agreed

• Firms employ people to resolve payments issues

• …which could be solved up-front

• No detailed “book of rules” for every product type

•Volume

• Onwards and upwards - people become the scale problem

7th March 2007 10

Future: Trade Information WarehouseFuture: Trade Information Warehouse

• Two main components

1. A comprehensive, centralized trade database with the primary record of each contract

2. A central processing capability to standardize and automate “downstream” processing of payments and other post-confirm processes

o Fully agreed with the industry – no more payment breaks

• Processing flows automatically from the electronic confirmation environment

• Two main components

1. A comprehensive, centralized trade database with the primary record of each contract

2. A central processing capability to standardize and automate “downstream” processing of payments and other post-confirm processes

o Fully agreed with the industry – no more payment breaks

• Processing flows automatically from the electronic confirmation environment

7th March 2007 11

The new vision for OTC derivatives – warehouseThe new vision for OTC derivatives – warehouse

Back office

Confirmation events include: New trade Full & Partial Termination Full & Partial Assignment Increase Amendment Exit

TradeWarehouse

Trade Capture(e.g. e-Trading, or

direct feeds)

Confirmation

CashflowGeneration for‘Gold' Records

Cashflow Matchingfor Gold No-Calc &

Tie-Out records

CLS

Back loadingCredit EventProcessing

TradingTrade execution & capture

DocumentationSubmission, Break resolution, Confirmation

Back officeLoad current state record /break resolution

Middle Office

Credit Event Process

SettlementMembers

Back officeCashflow submission for Gold No-Calc& Tie-Out records

R1

R2

R3

R2

Reference DataProviders

Factors, Fixings, Calendars

Netting, real-timereporting

Funding / Monitoring

Netting will take place in theWarehouse, by account,

currency and counterparty.CLS will settle bilateral net

amounts, not gross.

Nostro AccountFunds transfer

Cashflow generation includes: Regular coupons for CDS, CD Index,

ABX, CMBX Adjustments due to Index factors

following a credit event Fixings on ABX & CMBX contracts Settlement Calendars All event related changes such as

Terminations, Amendments,Assignments and Increases

R2 delivered in multiple phases, CDS &CD Index initially.

Diagram dated 13th Feb 2007 v0.5

7th March 2007 12

Participant BenefitsParticipant BenefitsCorrect balance sheet:

• through immediate trade reporting to warehouse and centralized deal maintenance.

• Reduces risk in:

• Reporting (corporate, regulatory, etc.)

• Market risk management

• Counterparty credit risk management

Correct balance sheet:

• through immediate trade reporting to warehouse and centralized deal maintenance.

• Reduces risk in:

• Reporting (corporate, regulatory, etc.)

• Market risk management

• Counterparty credit risk management

Overhead reduced:

• Standardization of trade capture processing

• Reduced nostro fees; nostro breaks eliminated for all warehouse trades

• Efficient collateral management process; reduced disputes/investigations

• Standardized, automated processing for credit (and other) events and related reconciliations

• Reduced capital requirements due to more efficient tear-ups/portfolio management; lower reserves vs. settlements

Overhead reduced:

• Standardization of trade capture processing

• Reduced nostro fees; nostro breaks eliminated for all warehouse trades

• Efficient collateral management process; reduced disputes/investigations

• Standardized, automated processing for credit (and other) events and related reconciliations

• Reduced capital requirements due to more efficient tear-ups/portfolio management; lower reserves vs. settlements

7th March 2007 13

Current stateCurrent state

• TIW went live on November 13th 2006

•All customers live at the same time (so 750+)

•All trades since go-live now automatically “in the warehouse” with a common DTCC TRI

• Fed 14 dealers began back-loading immediately after go-live

•Back-loading will widen during 2007

•Development for 2007 agreed up-front, with central settlement the goal

• TIW went live on November 13th 2006

•All customers live at the same time (so 750+)

•All trades since go-live now automatically “in the warehouse” with a common DTCC TRI

• Fed 14 dealers began back-loading immediately after go-live

•Back-loading will widen during 2007

•Development for 2007 agreed up-front, with central settlement the goal

How to streamline the custodian relationshipHow to streamline the custodian relationship

7th March 2007 15

Integrate!Integrate!

•Get rid of faxes

• Put in place direct electronic data feeds

• Reconcile your trade data with the Warehouse

• Reconcile your payments with the Warehouse

•Be aware of infrastructure at each step of the value chain

• See next slide

•Develop an integration plan with your partners

•Represent your needs publicly using SIFMA, ISDA, DTCC and other forums

•Get rid of faxes

• Put in place direct electronic data feeds

• Reconcile your trade data with the Warehouse

• Reconcile your payments with the Warehouse

•Be aware of infrastructure at each step of the value chain

• See next slide

•Develop an integration plan with your partners

•Represent your needs publicly using SIFMA, ISDA, DTCC and other forums

7th March 2007 16

Industry infrastructure is the keyIndustry infrastructure is the keyPricing &Execution

Trade Capture

TradeWeb /MarketAxess

LegalConfirmation

Deriv/SERV Confirmations

PaymentCalculation

Deriv/SERV Trade Warehouse

Credit EventProcessing

Pricing

CollateralManagement

Settlement Deriv/SERV & CLS Global Settlement Platform

In-house /Custodian

Voice Broker

Deriv/SERVAffirmXpress

Telephone Telephone

TZeroInternal systems

ConfirmGeneration

Thunderhead /Scrittura /In-House

Record Keeping& Added Value

Services

Predictions and plans for the next 12 monthsPredictions and plans for the next 12 months

7th March 2007 18

PredictionsPredictions• Asset Managers

• Increased emphasis on timely and accurate trade booking & confirmation

• You must begin reconciling your systems to the Warehouse – legally the primary record of the trade.

• Migrate away from the Payment Reconciliation service for “gold” records

• Custodians

• Build an automatic feed of contract details from TIW

• Build an automatic feed of payment amounts from TIW

• Achieve more accurate trade booking and settlement

• Lower cost & lower risk

• Work with the Asset Managers on an annual development plan

• Industry & infrastructure

• New expansion plans by most providers

• Warehouse expansion into Rates or Equities, subject to board approval

• Asset Managers

• Increased emphasis on timely and accurate trade booking & confirmation

• You must begin reconciling your systems to the Warehouse – legally the primary record of the trade.

• Migrate away from the Payment Reconciliation service for “gold” records

• Custodians

• Build an automatic feed of contract details from TIW

• Build an automatic feed of payment amounts from TIW

• Achieve more accurate trade booking and settlement

• Lower cost & lower risk

• Work with the Asset Managers on an annual development plan

• Industry & infrastructure

• New expansion plans by most providers

• Warehouse expansion into Rates or Equities, subject to board approval

7th March 2007 19

SummarySummary

•New entrants want access to OTC products without processing risks

•Investment in technology is the only way to keep ahead of market growth

•Possible emergence of turn-key solutions from multiple providers

•Future state may be fundamentally different from the past

•OTC markets may become as automated as exchange markets, in time

•New entrants want access to OTC products without processing risks

•Investment in technology is the only way to keep ahead of market growth

•Possible emergence of turn-key solutions from multiple providers

•Future state may be fundamentally different from the past

•OTC markets may become as automated as exchange markets, in time