1. ZED Financials Limits and Exposure Manager What is It: Limits and Exposure Manager ( LEM ) is an application designed to manage both Banking Book facilities and Over The Counter ( OTC ) financial trades. The aim of LEM is to enable the credit risk exposure for a Counterparty to be calculated based on both sets of data so providing a more comprehensive view of the Exposure At Default ( EAD ) for the counterparty. Exposure At Default for the OTC trades is based on the Basel committee SA-CCR standard. LEM includes a fully functional ETL tool intended to capture OTC trade data from a trade entry system in real time and import static data such as exchange rates as either a batch process or on-line service. The ETL tool is designed to be able to cater with complex nested XML structures eg. Interest Rate Cross Currency Swap which have an undetermined number of Payment Calculation Periods.

2. ZED Financials Limits and Exposure Manager Business and Development Benefits: Limits and Exposure Manager ( LEM ) has been designed to manage both Banking Book facilities and Over The Counter ( OTC ) financial trades. The more traditional approach is to have separate systems for each dataset however this does not provide the business user with a single point for measuring Counterparty Credit Risk. Reduced cost and time into production compared to in-house development or other vendor offerings With its built in Extract – Transform – Load ( ETL ) tool there are no additional costs associated with licensing third party tools. Straightforward migration path courtesy of the built in ETL tool. Wide selection of external connectivity adaptors. Wide selection of Transformer classes enabling business logic to be applied as data is loaded into LEM

3. ZED Financials Limits and Exposure Manager User Features: Users are grouped into a number of roles ie. Administrator, Relationship Manager, Credit Officer, Credit Support Officer and OTC User. LEM functionality is made available depending on the user role. LEM users can also be allocated to different functional teams to further sub-divide responsibilities. Each user will be presented with a Workstack screen following logon which identifies actions to be performed eg. Review of Counterparty, Review of Facility, Approve Facility, Review of Margin Account.

4. ZED Financials Limits and Exposure Manager Counterparties: Managing counterparty requirements and their credit risk is what LEM is all about, when a counterparty is added to the system it will be allocated to a Relationship Manager ( RM ) who will be responsible for monitoring the financial well being of that counterparty. Unfortunately it may be necessary to put the counterparty into a default state, at this point LEM includes the functionality: Put the counterparty into and out of default Change ownership of the counterparty and its associated facilities to a different RM and/or team eg. Default Management Team. Create events to track the progress of the counterparty while in default eg. Payments received, counterparty reviews etc.

5. ZED Financials Limits and Exposure Manager Banking Book Facilities and Securities: A counterparty facility can be proposed by a Relationship Manager but must be approved by a Credit Officer before it is made available to the counterparty. Multiple accounts can be created to sub-divide the credit limit of the facility. Each account can have its own limit and drawn amount specified Interest payments for a facility can be entered against the pre-defined payment schedule which is based on the detail entered for the facility. Security detail can be created including Market Value, Recovery Rate and Haircut Value. Facilities can be allocated to the Security Securities and Accounts can be managed via the LEM screens however, if required the data could be loaded from external systems via the built in ETL tool.

6. ZED Financials Limits and Exposure Manager OTC Trades: Regardless of source data format, all trades are mapped to the FpML standard. Exposure At Default is calculated based on the definition provided by the Basel committee SA-CCR standard. These calculations require additional data to support the EAD calculations ie: Margin Accounts, Collateral and Netting/Collateral Agreements LEM includes the functionality to manage this data however, with the ETL this data can be loaded from existing Margin Account, Collateral and Netting Agreement management systems.

7. ZED Financials Limits and Exposure Manager ETL ( Extract – Transform – Load ) Tool: This tool is a fully functional extendable application which includes external adaptors for a multitude of technologies including: JDBC Compliant databases ( that’s about all of them ) Messaging systems ie. MQ and JMS Sockets Flat file format including delimited, fixed field width and XLS Regardless of the format of the data supplied by the source system, internally it will be converted into XML which ultimately will be mapped to FpML ( Financial Products Markup Language ) prior to being loaded into the database. The creation of the XML structures has been implemented using a collection of Classes and Parsers which have been developed internally to include the ability to handle the complex nested data structures required by the FpML standard. The transformation layer includes a wide variety of classes which can be used to enhance the data received from the source system, these include tasks such as string manipulation, data lookups, complex XML structure generation etc. Can be configured to run multiple instances simultaneously in either batch mode or on-line service.

8. ZED Financials Limits and Exposure Manager OTC Trade Types - Commodities: OTC trades are held internally in FpML structures, the following is a list of those included together with their FpML website example number from the Confirmed trades definition: Ex39-basket-option Ex41-oil-asian-barrier-option Ex19-physical-bullion-forward Ex26-physical-metal-forward Ex6-gas-call-option Ex7-gas-put-option Ex8-oil-call-option Ex9-oil-put-option-american Ex32-weather-index-option Ex4-electricity-swap-hourly-off-peak Ex11-physical-oil-pipeline-heating-oil-fixed-price Ex12-physical-gas-europe-zbt-fixed-price Ex15-physical-oil-pipeline-crude-wcs-fixed-price Ex20-physical-coal-us-fixed-price Ex10-physical-oil-pipeline-crude-wti-floating-price

9. ZED Financials Limits and Exposure Manager OTC Trade Types - Credit: Cds-basket Cds-basket-tranche Cds-index-option Cds-index-tranche Cds-loan-ReferenceObligation Cds-mortgage-CMBS Cd-swaption-1 Cd-swap-1

10. ZED Financials Limits and Exposure Manager OTC Trade Types - Equity: Ex07-barrier-knockout-rebate-long-form Ex20-nested-basket Ex21-flat-weight-basket Ex01-forward-stock-long-form Ex01-american-call-stock-long-form Ex04-european-call-index-long-form Ex04-dispersion-variance-swap Ex01-dividend-swap Ex01-correlation-swap Ex01-variance-swap-index Ex02-variance-swap-single-stock

11. ZED Financials Limits and Exposure Manager OTC Trade Types – Interest Rate: Bond-option Ex28-bullet-payment Ex22-cap Ex23-floor Ex24-collar Ex08-fra Inflation-swap-ex01-yoy Ex01-vanilla-swap Ex06-xccy-swap Ex32-zero-coupon-swap Ex09-euro-swaption-explicit Ex15-american-swaption Ex14-bermuda-swaption

12. ZED Financials Limits and Exposure Manager OTC Trade Types – Foreign Exchange: Ex14-euro-digital-option Ex27-flexible-term-forward Ex01-fx-spot Ex03-fx-fwd Ex07-non-deliverable-forward Ex12-fx-barrier-option Ex09-euro-option Ex10-american-option Ex22-average-rate-option-specific Ex23-straddle Ex08-fx-swap Ex30-fx-variance-swap Ex01-simple-term-deposit

13. ZED Financials Limits and Exposure Manager OTC Trade Types – Supporting Data: Supporting Data is data that is required on a regular basis during the lifetime of the trade Exchange Rates Currency Pair Exchange Rates Commodity Value Interest Rate Dividend Payments Market Value Underlying Value

14. ZED Financials Limits and Exposure Manager Technical Details: The application is written in Java 6 The database technology is Oracle Web based client written using JBoss Richfaces ajax enabled tag library The web server is Java Server Faces web application framework which Runs in Apache Tomcat or JBoss ETL configuration client is also a web based using JBoss Richfaces ajax enabled tag library. ETL configuration is stored in an Apache Derby database.

15. ZED Financials Limits and Exposure Manager Summary: The ZED Financials Limit Manager and ETL tool provide a comprehensive set of functionality however we accept that it is not possible to cater for every trade type, every business requirement etc. so the application has been designed to be easily extended. LEM includes a set of basic reports which can also be expanded, the reports themselves are designed externally from LEM using the BIRT reporting tool and then built into LEM so again, very easy to implement additional reports. Where the source of any data is a Database, the SQL is developed using any development tool the user is familiar with, when complete the query simply has to be placed in a defined location to be available to the ETL tool. The EAD calculations are based on the SA-CCR standard however the derivation of the data presented to these calculations is not clearly defined although most financial institutions will use the same or similar derivations. To cater for these possible differences LEM includes what it calls a Mechanic Layer whose sole function is to gather data from the FpML structure, this layer will be reviewed by the client and any changes incorporated as required.

16. ZED Financials Limits and Exposure Manager Summary ( continued ): LEM has been designed so that it can be configured and amended with as little development effort as possible. It does not pretend to be the answer to everyone’s prayers as this whole Credit Risk topic is far too complex for a single application to meet every requirement out of the box but what it does do is provide a very cost effective method of being able to manage Counterparty Credit Risk. To cater for every business requirement for banking book facilities and different OTC trade types some development effort will be required but this is very straightforward.

17. ZED Financials Limits and Exposure Manager References: SA-CCR standard - http://www.bis.org/publ/bcbs279.htmhttp://www.bis.org/publ/bcbs279.htm FpML ( Financial products Markup Language ) - http://www.fpml.org.http://www.fpml.org BIRT Reporting tool - http://www.eclipse.org/birthttp://www.eclipse.org/birt Jboss Richfaces tag library – http://richfaces.jboss.org/http://richfaces.jboss.org/ Apache Derby Database - https://db.apache.org/derby/https://db.apache.org/derby/