Triparty Collateral Management The efficient outsourced solution for managing and securing repo transactions AMEDA meeting Beirut – 29 April 2010 Bernard Ferran Regional Head, Relationship Management bernard.ferran@euroclear.com

AMEDA – Beirut 29 April 2010 Agenda Introduction Repos and the repo markets Triparty collateral management Collateral Allocation Interface – Central Bank model

Market turmoil The key milestones A number of investment funds freeze redemptions Concerns about the valuation of structured products Emergency rescue of Bear Stearns Lehman Brothers bankruptcy Leverage crisis and credit crunch turns into a full blown insolvency problem 15 Sep 2008 9 Aug 2007 13 March 2008 Drying-up of inter-bank market Absence of term financing Shortage of USD financing in Europe Massive de-leveraging Political willingness of the international community to look for a global solution to a global crisis Coordinated actions of central banks Increasing intermediation role Special term operations and securities lending schemes A wider range of eligible collateral

Market turmoil Eurepo/Euribor 3M Problems at Northern Rock Rescue of Bear Stearns Collapse of Lehman Brothers Problems at Sachsen LB and West LB Citi closes 7 SIVs Problems at IKB Bear Stearns shuts down two HFs Aug 23 – ECB Long Term Reserve Operation March 11 -Other CB coordinated effort announcing $200bn of new emergency lending for banks Sep 12 – ECB Long Term Reserve Operation Dillon Read HF shut down by UBS Dec 12 - concerted CB action (FED, ECB, BOE, SNB) – TAF auction

A major crisis Across all market segments Unsecured Money markets Securities lending Repo Central bank credit/liquidity Cash driven No collateral ! Securities collateral Routine (e.g. tenders, …) Securities driven Contingency Cash collateral Unsecured market dried-up Term market disappeared Concerns of final Beneficial Owners on certain cash reinvestment programs No more term financing Secured money market CCP GC baskets Massive intermediation Contingency schemes + - - -

What investors focus on ? Priorities By order or priority, the money-markets investors will focus on Credit/counterparty risk Liquidity risk Return Need to find a secured financing solution  The repo markets

From Unsecured to Secured Financing The club is growing Unsecured is no longer an option Move to the secured space, in particular to the repo space However, managing collateral brings new challenges: Operational risks, substitution, settlement, corporate actions, valuation, etc. Requires resources and know-how Cash investors (e.g. MMF, Corporates, hedge funds, insurance companies) as new entrants in collateral management opt for the Triparty Solution

AMEDA – Beirut 29 April 2010 Agenda Introduction Repos and the repo markets Triparty collateral management Collateral Allocation Interface – Central Bank model

Repos and the repo markets An introduction What is a repo? Repo can be defined as an agreement in which one party sells securities or other assets to a counterparty, and simultaneously commits to repurchase the same or similar assets from the counterparty, at an agreed future date, at a repurchase price equal to the original sale price plus an interest History of repo Created by the Federal Reserve Bank of New York in 1916 Boosted by the Glass-Steagall act of 1933 when US investment banks massively started to fund their inventory (development of the ‘general collateral repo’).

Repos and the repo markets An introduction What are the different repo products? “Repos” – borrow of cash against securities “Reverse repos” – investment of cash against securities “SecLending” - borrow against cash “Total Return Swap”

Repos and the repo markets The mechanics of a repo trade A Dutch Bank A is trading a one-month repo with Spanish Bank B at a rate of 0.885% Dutch Bank A €10,000,000 of DE0001134492 Spanish Bank B D-day € 12,157,315.07 Dutch Bank A €10,000,000 of DE0001134492 Spanish Bank B D-day + 1 month € 12,166,579.96

Repos and the repo markets Bloomberg screen

Repos and the repo markets The functions of a repo desk Firm financing Borrowing cash to fund long positions in securities Match book trading Traders make two-way dealing prices on repo Customers financing (hedge funds) Proprietary trading Securities lending Borrowing of securities to cover short positions Structured trading

Repos and the repo markets Risks and risk mitigation Legal risk Market standard legal agreements (e.g. GMRA) Risk of default of counterparty Thorough selection of counterparties Market and liquidity risk on securities collateral Clear definition of acceptable collateral Imposed diversification through concentration limits Over-collateralisation of transactions through margins Operational risk Settlement risk Corporate event risk

Repos and the repo markets The European repo market

The European repo market Collateral analysis Share of sovereign collateral 81. 2%

AMEDA – Beirut 29 April 2010 Agenda Introduction Repos and the repo markets Triparty collateral management Collateral Allocation Interface – Central Bank model

Triparty Collateral Management History Bevil, Bressler and Schulman, a US securities firm Bankruptcy in 1985 Hold-in-custody (HIC) repos ‘Double-dipping’ BB&S was using the same piece of collateral for more than one repo Loss of over $1bn The US Securities and Exchange Commission (SEC) asked US banks Chase Manhattan Bank and Bank of New York to become custodians for repos (“Triparty agents”) Triparty was launched in Europe in the early 90’s

Euroclear Triparty client base Increasing financing opportunities Custodian Bank* Investment Managers Asset Managers, Money Market Funds, Corporates … Collateral Takers Agent lenders Commercial Banks Central Banks Custodian Bank* Hedge Funds Collateral Givers Commercial Banks Broker Dealers 1993 … … 2010 * Acting as representative

Repos and the repo markets Risks and risk mitigation Legal risk Market standard legal agreements (e.g. GMRA) Risk of default of counterparty Thorough selection of counterparties Market and liquidity risk on securities collateral Clear definition of acceptable collateral Imposed diversification through concentration limits Over-collateralisation of transactions through margins Operational risk Settlement risk Corporate event risk Triparty Collateral Management Triparty Collateral Management

Mitigating liquidity and market risks The outsourcing solution Market and liquidity risk of securities collateral Risks Risk mitigation Criteria Time to maturity Instrument type Credit risk Country risk Event risk ELIGIBILITY Rating Issuer type Country CONCENTRATION LIMITS Interest rate risk Market volatility Foreign exchange risk Quotation age Capitalisation Traded volume MARGIN PERCENTAGES Liquidity risk Mitigating liquidity and market risks

Triparty collateral management The Collateral Management outsourcing solution Bi-lateral Contract Triparty Service Agreement Operating Procedures Terms and Conditions Eligibility profile Concentration profile Margin percentages Collateral giver Collateral taker ELIGIBILITY SET 1 Eligible : AAA - A No concentration x % haircut ELIGIBILITY SET 2 Eligible : AAA - BBB only y % of BBB z % haircut Neutral agent

Triparty collateral management Operational risk Bilateral agreement Collateral giver Collateral taker + Triparty service agreement Processing Reporting Match terms of the transaction Verify collateral eligibility Daily mark-to-market Automatic margin calls Automatic substitutions Calculate, enter and settle instructions (DVP or FOP) Automatic transfer of coupons Validation & matching Margin Settlement Custody Risk management Trade simulation

Triparty collateral management Mitigating risks of repo transactions Daily mark-to-market Automatic and unilateral margin calls Cash exposure of the repo Value of Securities collateral Triparty Collateral Management

The outsourcing solution Mitigating the operational risk TRANSACTION Collateral giver Collateral taker Triparty Services Matching Selection Transfer Valuation In an efficient, scalable, risk-controlled environment Custody Reporting

Triparty collateral management Customer’s benefits Collateral Takers Collateral Givers By outsourcing and automating the operational burden related to collateral management, you reduce your back-office workload and operational risk Mitigate market risks by implementing collateral criteria in line with your risk appetite and diversification requirements Benefit from ‘top notch’ asset protection Top quality asset services for securities used as collateral Granular reporting for full control over the management of the exposure Optimum usage of collateral resources Pool your collateral resources and collateralise across products (repo, securities lending, derivatives,…) Easily indentify financing opportunities using our ‘state-of-the-art’ trading simulator Gain access to a wide range of counterparties across all market segments of the industry, all within Euroclear Bank

Reporting Triweb: trade simulation & granular reporting Monitoring collateral position Static data (triparty agreements) Dynamic data (updated 8 times a day) Supporting trading activity Funding possibilities Customized reports

Reporting Triweb: trade simulation & granular reporting

Triparty Collateral Management The Collateral Hub Rely on a robust and tested collateral management infrastructure Outsource non-core activity to a specialised firm Control and optimise assets through granular reporting Multiply opportunities with the 250+ firms active on Euroclear’s triparty platform

AMEDA – Beirut 29 April 2010 Agenda Introduction Repos and the repo markets Triparty collateral management Collateral Allocation Interface – Central Bank model

Collateral Allocation Interface Central banks taking central stage Credit Institution Credit Collateral Profile . AutoSelect Triweb Euroclear Bank Collateral Management Services (CMS) In line with Central Bank control requirements

Evolution Outsourcing? Collateral Central Bank Credit Institution Outsourcing Collateral Profile Reporting Custody Valuation Settlement Selection Matching

Easier access to central bank credit Collateralising central bank credit in triparty

Thank you