1. 1 ISDA presentation at Gretai Securities Market International Bond Market Conference 2009 Jeffrey Kan Operations Director, Asia Pacific November 20, 2009 International Swaps and Derivatives Association, Inc. (ISDA ® ) ® ISDA is a registered trademark of the International Swaps and Derivatives Association, Inc. Copyright © 2009International Swaps and Derivatives Association, Inc.

2. 2 ISDA ® ISDA  ISDA, which represents participants in the privately negotiated derivatives industry, is among the world’s largest global financial trade associations as measured by number of member firms. ISDA was chartered in 1985, and today has over 840 member institutions from 58 countries on six continents. These members include most of the world's major institutions that deal in privately negotiated derivatives, as well as many of the businesses, governmental entities and other end users that rely on over-the-counter derivatives to manage efficiently the financial market risks inherent in their core economic activities.

3. 3 ISDA ® Financial crisis  Derivatives functioned  The achievement in operational efficiencies (esp. electronic confirmation processing) reduced significant amount of risk in the subsequent event processing  Calls for central counterparty clearing

4. 4 ISDA ® Central Counterparty Clearing  A clearing house is an institution that acts as a central counterparty to cleared transactions –Assumes credit risk of cleared transactions –Provides multilateral netting of transactions  How clearing house works for OTC derivatives –Market participants conclude a deal bilaterally –Each trade broken up into two parts with clearing house on one side of each part –Clearing house charges a fee and requires margin  Lines of defense: How a clearing house manages credit risk –First line: Defaulter pays (margin by counterparties) –Second line: Survivors pay (guaranty funds contributed by members) –Third line: Counterparties pay (loss sharing agreements among members)

5. 5 ISDA ® Central Counterparty Clearing (cont.)  Assume that five counterparties, A, B, C, D, and E, each have three bilateral transactions with each other  No netting involves a total of thirty separate transactions  Bilateral netting reduces number of net payables/receivables to: 10  Multilateral netting reduces number of net payables/receivables to: 5 No netting Bilateral Multilateral Clearing house

6. 6 ISDA ® Central Counterparty Clearing (cont.)  Benefits –Mutualization of risk –Probable reduction of economic and regulatory capital –Likely increased transparency  Costs –Concentration risk (too big to fail) –Limited applicability to exotic, highly customized, and less liquid products  We still need OTC market

7. 7 ISDA ® Central Counterparty Clearing (cont.)  Where are we in Asia Pacific? –Credit: Coupon Standardization –Rates: Members discussing actively via the ISDA working groups in Asia Pacific  More than 1 CCP per asset class? –Benefit: competitive environment –Risk: profit driven or risk management driven?  Buy side access