Triparty Collateral Management The efficient outsourced solution for

Triparty Collateral Management The efficient outsourced solution for managing and securing repo transactions AMEDA meeting Beirut – 29 April 2010 Bernard Ferran Regional Head, Relationship Management bernard. ferran@euroclear. com 1

AMEDA – Beirut 29 April 2010 Agenda • Introduction • Repos and the repo markets • Triparty collateral management • Collateral Allocation Interface – Central Bank model 2

Market turmoil The key milestones A number of investment funds freeze redemptions 9 Aug 2007 Concerns about the valuation of structured products Emergency rescue of Bear Stearns 13 March 2008 Lehman Brothers bankruptcy Leverage crisis and credit crunch turns into a full blown insolvency problem 15 Sep 2008 • • Drying-up of inter-bank market Absence of term financing Shortage of USD financing in Europe Massive de-leveraging • • Political willingness of the international community to look for a global solution to a global crisis Coordinated actions of central banks ► Increasing intermediation role ► Special term operations and securities lending schemes ► A wider range of eligible collateral 3

Market turmoil Eurepo/Euribor 3 M Problems at Northern Rock Problems at Sachsen LB and West LB Rescue of Collapse of Bear Stearns. Lehman Brothers Citi closes 7 SIVs Problems at IKB Bear Aug 23 – ECB Stearns Long Term shuts Reserve Operation down two HFs Sep 12 – ECB Dillon Long Term Read HF Reserve shut down Operation by UBS March 11 -Other CB coordinated effort announcing $200 bn of new emergency lending for banks Dec 12 concerted CB action (FED, ECB, BOE, SNB) – TAF auction 4

A major crisis Across all market segments Securities lending Securities collateral No collateral ! Cash collateral Concerns of final Beneficial Owners on certain cash reinvestment programs - • Repo Central bank credit/liquidity Cash driven Securities driven • No more term financing • Secured money market • CCP GC baskets • Massive intermediation • Contingency schemes Routine (e. g. tenders, …) Contingency • • Unsecured market dried-up Term market disappeared + - Unsecured Money markets 5 -

What investors focus on ? Priorities • By order or priority, the money-markets investors will focus on ► Credit/counterparty risk ► Liquidity risk ► Return Need to find a secured financing solution The repo markets 6

From Unsecured to Secured Financing The club is growing • Unsecured is no longer an option • Move to the secured space, in particular to the repo space • However, managing collateral brings new challenges: ►Operational risks, substitution, settlement, corporate actions, valuation, etc. ►Requires resources and know-how • Cash investors (e. g. MMF, Corporates, hedge funds, insurance companies) as new entrants in collateral management opt for the Triparty Solution 7

AMEDA – Beirut 29 April 2010 Agenda • Introduction • Repos and the repo markets • Triparty collateral management • Collateral Allocation Interface – Central Bank model 8

Repos and the repo markets An introduction • What is a repo? ► • Repo can be defined as an agreement in which one party sells securities or other assets to a counterparty, and simultaneously commits to repurchase the same or similar assets from the counterparty, at an agreed future date, at a repurchase price equal to the original sale price plus an interest History of repo ► ► Created by the Federal Reserve Bank of New York in 1916 Boosted by the Glass-Steagall act of 1933 when US investment banks massively started to fund their inventory (development of the ‘general collateral repo’). 9

Repos and the repo markets An introduction • What are the different repo products? ► ► “Repos” – borrow of cash against securities “Reverse repos” – investment of cash against securities “Sec. Lending” - borrow against cash “Total Return Swap” 10

Repos and the repo markets The mechanics of a repo trade A Dutch Bank A is trading a one-month repo with Spanish Bank B at a rate of 0. 885% D-day + 1 month Dutch Bank A € 10, 000, 000 of DE 0001134492 € 12, 157, 315. 07 € 12, 166, 579. 96 Spanish Bank B 11

Repos and the repo markets Bloomberg screen 12

Repos and the repo markets The functions of a repo desk • Firm financing ► Borrowing cash to fund long positions in securities • Match book trading ► Traders make two-way dealing prices on repo – – Customers financing (hedge funds) Proprietary trading • Securities lending ► ► Borrowing of securities to cover short positions Structured trading 13

Repos and the repo markets Risks and risk mitigation • Legal risk ► • Risk of default of counterparty ► • Thorough selection of counterparties Market and liquidity risk on securities collateral ► ► ► • Market standard legal agreements (e. g. GMRA) Clear definition of acceptable collateral Imposed diversification through concentration limits Over-collateralisation of transactions through margins Operational risk ► ► Settlement risk Corporate event risk 14

Repos and the repo markets The European repo market 15

The European repo market Collateral analysis 16 • Share of sovereign collateral 81. 2%

AMEDA – Beirut 29 April 2010 Agenda • Introduction • Repos and the repo markets • Triparty collateral management • Collateral Allocation Interface – Central Bank model 17

Triparty Collateral Management History • Bevil, Bressler and Schulman, a US securities firm ► ► ► Bankruptcy in 1985 Hold-in-custody (HIC) repos ‘Double-dipping’ – ► BB&S was using the same piece of collateral for more than one repo Loss of over $1 bn • The US Securities and Exchange Commission (SEC) asked US banks Chase Manhattan Bank and Bank of New York to become custodians for repos (“Triparty agents”) • Triparty was launched in Europe in the early 90’s 18

Euroclear Triparty client base Increasing financing opportunities Collateral Takers Custodian Bank* Investment Managers Asset Managers, Money Market Funds, Corporates … Agent lenders Central Banks Commercial Banks Collateral Givers Custodian Bank* Hedge Funds Commercial Banks Broker Dealers 1993 … … 2010 19 * Acting as representative

Repos and the repo markets Risks and risk mitigation • Legal risk ► • Risk of default of counterparty Market and liquidity risk on securities collateral ► ► ► • Thorough selection of counterparties Clear definition of acceptable collateral Imposed diversification through concentration limits Over-collateralisation of transactions through margins Operational risk ► ► Settlement risk Corporate event risk Triparty Collateral Management ► • Market standard legal agreements (e. g. GMRA) 20

The outsourcing solution Market and liquidity risk of securities collateral Risks l l l Credit risk Country risk Event risk l Interest rate risk Market volatility Foreign exchange risk l Liquidity risk l l Risk mitigation Criteria Time to maturity l Instrument type l ELIGIBILITY Rating l Issuer type l Country l CONCENTRATION LIMITS MARGIN PERCENTAGES Quotation age l Capitalisation l Traded volume l Mitigating liquidity and market risks 21

Triparty collateral management The Collateral Management outsourcing solution Bi-lateral Contract Triparty Service Agreement Collateral giver Operating Procedures Terms and Conditions Eligibility profile Concentration profile Margin percentages Collateral taker ELIGIBILITY SET 1 • Eligible : AAA - A • No concentration • x % haircut ELIGIBILITY SET 2 • Eligible : AAA - BBB • only y % of BBB • z % haircut Neutral agent 22

Triparty collateral management Operational risk Collateral giver Bilateral agreement Collateral taker + Triparty service agreement Processing Reporting • • • • Match terms of the transaction Verify collateral eligibility Daily mark-to-market Automatic margin calls Automatic substitutions Calculate, enter and settle instructions (DVP or FOP) Automatic transfer of coupons Validation & matching Margin Settlement Custody Risk management Trade simulation 23

Triparty collateral management Mitigating risks of repo transactions • • Daily mark-to-market Automatic and unilateral margin calls Cash exposure of the repo Value of Securities collateral Triparty Collateral Management 24

The outsourcing solution Mitigating the operational risk Collateral giver TRANSACTION Triparty Services Collateral taker Matching Selection In an efficient, Transfer scalable, Valuation risk-controlled Custody environment Reporting 25

Triparty collateral management Customer’s benefits Collateral Takers Collateral Givers • By outsourcing and automating the operational burden related to collateral management, you reduce your back-office workload and operational risk • Mitigate market risks by implementing collateral criteria in line with your risk appetite and diversification requirements • Optimum usage of collateral resources • Benefit from ‘top notch’ asset protection • Pool your collateral resources and collateralise across products (repo, securities lending, derivatives, …) • Top quality asset services for securities used as collateral • Easily indentify financing opportunities using our ‘state-of-the-art’ trading simulator • Granular reporting for full control over the management of the exposure • Gain access to a wide range of counterparties across all market segments of the industry, all within Euroclear Bank 26

Reporting Triweb: trade simulation & granular reporting • Monitoring collateral position ► Static data (triparty agreements) ► Dynamic data (updated 8 times a day) • Supporting trading activity ► Funding possibilities ► Customized reports 27

Reporting Triweb: trade simulation & granular reporting 28

Triparty Collateral Management The Collateral Hub • Rely on a robust and tested collateral management infrastructure • Outsource non-core activity to a specialised firm • Control and optimise assets through granular reporting • Multiply opportunities with the 250+ firms active on Euroclear’s triparty platform 29

AMEDA – Beirut 29 April 2010 Agenda • Introduction • Repos and the repo markets • Triparty collateral management • Collateral Allocation Interface – Central Bank model 30

Collateral Allocation Interface Central banks taking central stage Credit Institution Credit Collateral Profile Central Bank Auto. Select . Triweb Euroclear Bank Collateral Management Services (CMS) In line with Central Bank control requirements 31

Evolution Outsourcing? Collateral Credit Institution Outsourcing Collateral Profile Central Bank Matching Selection Settlement Valuation Custody Reporting 32

Easier access to central bank credit Collateralising central bank credit in triparty 33

Thank you 34