1. Valuation of IR Derivatives in a new Regulatory Environment Speakers: Eduardo Pereira Risk and Regulation Specialist: Bloomberg L.P Bernardo Santos Andrade Senior Manager, Toyota Motor Finance (Netherlands) B.V Dutch Association of Corporate Treasurers Event: Hotels Van Oranje, Noordwijk, The Netherlands. 11 th November 2013.

2. Agenda OIS Discounting: A new valuation framework; CSA Agreements; CVA; CSA Agreements – Bloomberg MARS solution; TMFNL: Collateral Operation Case Study.

3. OIS Discounting

4. Prior to Credit Crisis credit & liquidity effects were largely ignored in IR derivatives pricing Subsequent to Credit Crisis – Stronger Focus on Counterparty Risk (Credit) Evaluating Exposure Risk Management – Stronger Focus on Funding (Liquidity) Divergence between risk free rates and funding levels Funding arbitrage opportunities New framework required as credit & liquidity effects can no longer be ignored in pricing Overview of OIS Framework

5. 26 th Oct 2005: 10MM EUR 7yr Pay 3.10%, q/q

6. IR swaps can have both negative or positive values If market value is positive Counterparty owes money And if counterparty defaults Loss for everything that cant be recovered........ Credit mitigation very important Changes in Regulation Banks to be penalised for uncollateralised swaps Counterparty Risk

7. Mitigating credit exposure (interbank) – Netting Agreements – Credit Support Annex (CSA) agreement – Central Counterparty (CCP) clearing CSA: Collateral posted between counterparties CCP (e.g. LCH.Clearnet): Variation Margin paid (or received) each day by clearing member (in addition to Initial margin) Both CSAs & CCP define how interest accrues on funds (collateral or margin payments) Swaps in the Interbank Market

8. Credit & Liquidity Premium in Euribor LOIS EUR

9. Credit & Liquidity Premium in Euribor Credit Crunch: Market First Fears

10. Credit & Liquidity Premium in Euribor Bear Stearns Bailout

11. Credit & Liquidity Premium in Euribor Lehman Bankruptcy

12. Credit & Liquidity Premium in Euribor Ireland Crisis

13. IR swaps can have both negative or positive values If market value is positive Counterparty owes money And if counterparty defaults Loss for everything that cant be recovered........ Credit mitigation very important Banks generally have agreements to post collateral to each other – Credit Support Annex (CSA) agreement – Central Counterparty Clearing (CCC) Generally corporates do not wish to sign CSAs or agree to CCCs Both parties exposed to counterparty risk Counterparty Risk

14. Counterparty Valuation Adjustments

15. For a swap how do you currently determine what you are being charged for your credit risk? By using the Bloomberg CVA/DVA calculator My relationship banks provide full disclosure on these charges Unaware of any such charges We calculate using other methods We do not get charged Webinar Poll 2 - Question

16. Webinar Poll 2 Results

17. Calculating Credit Spreads CVA/DVA Calculator

18. Calculating Credit Spreads Calculate Exposure from Counterparties Perspective

19. Calculating Credit Spreads Market Information: Credit, Rates & Volatility

20. Calculating Credit Spreads DVA: Cost to Bank of Corporate Defaulting

21. Calculating Credit Spreads CVA Calculation: Cost to Corporate of Bank Defaulting

22. Calculating Credit Spreads Bilateral Calculation

23. Exposure Graph Bilateral Calculation

24. Charting Net Cash Flows Net Cash Flows affect Exposures