The Deriv/SERV Trade Information Warehouse: Benefits and Opportunities 15 th March 2007 Bill Stenning Business Development

2 7th March Topics 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 Challenges

4 7th March STP 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 processing

6 7th March Cost 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 - warehouse

8 7th March Today: 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

9 7th March 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

10 7th March Future: 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 oFully 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 oFully agreed with the industry – no more payment breaks Processing flows automatically from the electronic confirmation environment

11 7th March The new vision for OTC derivatives – warehouse

12 7th March Participant Benefits Correct balance sheet: t hrough 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: t hrough 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

13 7th March Current state TIW went live on November 13 th 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 13 th 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 relationship

15 7th March 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

16 7th March Industry infrastructure is the key

Predictions and plans for the next 12 months

18 7th March Predictions 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

19 7th March Summary 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