Credit Baskets Proposal CD-FpML Working Group John Weir

Contents Overview of CreditBasket Product FpML Schema Proposal Discussion

Overview of Credit Baskets Different classes of Credit Basket Products Index Tranches Provides protection on the accumulated losses from credit events that occur on any of the constituents of the index or basket as a percentage of the Implied Portfolio size between the attachment and exhaustion points Credit Index Tranche on Standard Index (*ITraxx etc) Credit Index Tranche on Custom Basket of Reference Entity/Obligations Nth to default baskets Provides protection only for the losses when Credit Events occur on N reference Entities in the portfolio

General approach Based on much of the work done by: Bernard Mullen at Sunguard, Milla Bouklieva and team at Goldman Sachs Leverage general approach and type definitions from the Default Swap Based on FpML 4-2 revision Reuse of the all the key types and elements from the Credit Default swap Keeps vocabulary consistent while not overloading, nor diluting the definition of the CDS Some Variations from the Credit Default Swap Additional sections in General Terms Underlyer - Captures basket constituents in similar style to Equity Swaps Addition of Tranche or Nth to default style Add Margin schedule around tranche Potential for Multiple Protection Terms Each Entity in a Custom Basket can have specific protection terms. More likely many will share a couple of common sets Potential for Multiple Settlement terms Each Entity in Custom Basket can have its own settlement Terms, Physical and/or Cash. More likely many will share a couple of common sets

Credit Baskets::Product Separate FpML Product Multiple sets of protection terms and Settlement terms Similar in style to CDs

Credit Basket :: General terms Resues same elements as Cds::General Terms No type extension from Base New Underlyer element in Style of EquitySwap Multiple anonymous choices can confusing to reader (IMHO) Choice of Tranche or NthToDefault Other permutations may be possible New element – Credit position Specify weighting approach

GeneralTerms::Underlyer Choice of underlyer IndexReferenceInformation as per Cds Collection (basket) of weighted reference information

Basket representation Basket Representation Extends ReferenceInformation Base type References Terms elsewhere Holds Reference (href) to Protection terms associated with this ReferenceInformation Holds Reference (href) to Settlement terms associated with this ReferenceInformation Basket constituents can each be individually weighted – see credit Position

Style of basket Provides support for various flavours Tranche – details next Nth to default Provide protection only for the losses when credit events occur on N Reference entities in the portfolio Do we need to capture the number of defaults to date?

Tranche Definition Defines key aspects of Tranche Attachment point for start of protection Exhaustion point for end of protection Calculated implicit portfolio size (Money) Calculated tranche width Optional Margin schedule See annotations

Other Terms CreditPosition Provides support for equally weighted or individually specified Settlement Terms / Protection terms as multiples, but each with an xsd:ID and name attribute Questions Relationship with Matrix Confirms How can we check for consistency? Should these terms be named Physical and Partial Cash – Delta Neutral Trading strategy?

Questions / Thoughts First stab – needs review and example flesh out What are the validation rules What needs to be added to support credit events?

Graphical Explanation on Index Tranche & Some Terms Compliments to: Christina Baumhardt

Graphical Explanation on Index Tranche & Some Terms Compliments to: Christina Baumhardt