Triparty Collateral Management The efficient outsourced solution for managing and securing repo transactions

1. Triparty Collateral ManagementThe 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

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

3. Market turmoilThe key milestones Concerns about the valuation of structured products A number of investment funds freeze redemptions Emergency rescue of Bear Stearns Lehman Brothers bankruptcy Leverage crisis and credit crunch turns into a full blown insolvency problem 15 Sep 2008 13 March 2008 9 Aug 2007 • 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

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

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

6. 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

7. From Unsecured to Secured FinancingThe 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

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

9. Repos and the repo marketsAn 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 priceequal 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’).

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

11. Repos and the repo marketsThe 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% Dutch Bank A Spanish Bank B €10,000,000 of DE0001134492 D-day € 12,157,315.07 Dutch Bank A Spanish Bank B €10,000,000 of DE0001134492 D-day + 1 month € 12,166,579.96

12. Repos and the repo marketsBloomberg screen

13. Repos and the repo marketsThe 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

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

15. Repos and the repo marketsThe European repo market

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

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

18. Triparty Collateral ManagementHistory • 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 $1bn • 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

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

20. Repos and the repo marketsRisks and risk mitigation • Legal risk • Market standard legal agreements (e.g. GMRA) • Risk of default of counterparty • Thorough selection of counterparties • Market and liquidity risk on securities collateral • 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 Triparty Collateral Management

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

22. Triparty collateral managementThe Collateral Management outsourcing solution Bi-lateral Contract Triparty Service Agreement Operating Procedures Terms and Conditions Eligibility profile Concentration profile Margin percentages Collateral giver 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

23. Triparty collateral managementOperational risk Bilateral agreement Collateral taker Collateral giver + Triparty service agreement Processing Reporting • Validation & matching • Margin • Settlement • Custody • Risk management • Trade simulation • 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

24. Triparty collateral managementMitigating 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

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

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

27. ReportingTriweb: 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

28. ReportingTriweb: trade simulation & granular reporting

29. Triparty Collateral ManagementThe 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

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

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

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

33. Easier access to central bank creditCollateralising central bank credit in triparty

34. Thank you