1. 1 Sergey Shchepilov, 14 March 2012 NFEA Conference London, UK Russian FX/IR derivatives: pricing margining risks

2. 2 Modern Russian derivatives: multiple exposures Recent legislation developments (introduction of central c/part; CSA enforceability) bring margining of derivatives into focus CSA terms mismatches and different funding schedules introduce significant valuation adjustments Corporate deals pricing through fixed CVA charge approach can be severely distorted (due to cost of collateral funding) Exchange-traded instruments valuation must accommodate margining component

3. 3 Surprising exchange margins 10 august 2011. CME hiked margins across the board. Dynamics of both initial and maintenance margins for CHF contracts

4. 4 Let’s assume we’re long 5y usdrub xccy in 20 usd… Received margin (blue) and posted margin (magenta) USDRUB FX, USD IR and RUB IR components Received margin (blue) and posted margin (magenta) USD IR and RUB IR components

5. 5 Market Track Record & Highlights Funding matters When you have asymmetric margins funding things can get tough… Different funding ccy? EUR/USD 3M basis swap Different CSA terms (causing liquidity mismatch)? EONIA-3mOIS spread

6. 6 The Rationale and Basis for Development Meanwhile in RUB Hedging corporate deals with CME futures increases USD liquidity risks Asymmetric CSA terms must be priced-in Wrong way deals become even more “wrong” when hedging them with USD-funded margined instruments USD/RUB 3y basis swap Every single corporate is ready to pay USD (5Y low on 20 Jan 2012)

7. 7 Thanks Q&A part