AMEDA Leadership Forum Alexandria, Egypt, 27-29th April

3. Clarify that we are talking about cash markets here, not derivatives. Principal/Direct loss can be controlled by DVP Consequential losses are where settlement guarantee models come into play. By assuring settlement these can be reduced or controlled. UK Investment Managers Association (IMA) now put settlement certainty and Counterparty risk at the top of criteria for best execution under MiFID (before price and volume)Clarify that we are talking about cash markets here, not derivatives. Principal/Direct loss can be controlled by DVP Consequential losses are where settlement guarantee models come into play. By assuring settlement these can be reduced or controlled. UK Investment Managers Association (IMA) now put settlement certainty and Counterparty risk at the top of criteria for best execution under MiFID (before price and volume)

4. CCP � concentrates risks and manages them. It doe NOT eliminate counterparty risk exposures. Central novation � original bilateral contracts are replaced with two contracts with CCP. With novation a bilateral contract existed at the beginning, so CCP rules should ensure that bilateral credit exposures cannot re-emerge. Open Offer - A contract is concluded with the CCP immediately after the matching of trade details in the trading platform. With open offer, there are no prior bilateral contracts to begin with, so could be deemed to be more legally robust. Would there be any basis in the legal systems of AMEDA members for novation? If not, then perhaps Open Offer mechanism could be a better option. Risk centrally allocated � Risk taken by defaulter, then mutualised, then by CCP (insurance, capital & reserves). e.g. LCH.Clearnet ultimately takes on exposure onto its balance sheet should all other resources be insufficient. Contrast this to KDPW Poland which legally is a CCP but losses are ultimately shared amongst its members. It has not eradicated inter-participant counterparty risk exposure so is it a CCP? Kind of � CCP Lite. Other examples are Hungary and Austria.CCP � concentrates risks and manages them. It doe NOT eliminate counterparty risk exposures. Central novation � original bilateral contracts are replaced with two contracts with CCP. With novation a bilateral contract existed at the beginning, so CCP rules should ensure that bilateral credit exposures cannot re-emerge. Open Offer - A contract is concluded with the CCP immediately after the matching of trade details in the trading platform. With open offer, there are no prior bilateral contracts to begin with, so could be deemed to be more legally robust. Would there be any basis in the legal systems of AMEDA members for novation? If not, then perhaps Open Offer mechanism could be a better option. Risk centrally allocated � Risk taken by defaulter, then mutualised, then by CCP (insurance, capital & reserves). e.g. LCH.Clearnet ultimately takes on exposure onto its balance sheet should all other resources be insufficient. Contrast this to KDPW Poland which legally is a CCP but losses are ultimately shared amongst its members. It has not eradicated inter-participant counterparty risk exposure so is it a CCP? Kind of � CCP Lite. Other examples are Hungary and Austria.

5. Advantages � Politically easier to bail out a CCP? Becoming harder in EU due to competitive CCP environment and x-border nature of CCPs All risks against CCP and CCP ensures these are disclosed and managed. No hidden bilateral risks between counterparties. CCP is counterparty so must manage fail or default itself Novation facilitates multilateral netting since it already replaces bilateral obligations with obligations to central party. Settlement anonymity means counterparties never have to disclose trading strategies Disadvantages - Strength of CCP risk management founded on quality of algorithms assessing margin requirements and timeliness and quality of collateral taken. What would happen should a CCP fail? Would this be allowed? E.g. Austria � OeKB will not give a guarantee for CCP.A. Failure of a CCP would cause more systemic disruption than the failure of any single Clearing member Costs: clearing fees, membership fees, operational costs (systems, communications, staff costs) Credit Risk: Direct Losses may include margin monies left in the CCP�s a/c or securities collateral that cannot be easily recovered as they are not segregated properly. Operational breakdowns in CCPs have knock-on affects for CSD participants (e.g. Italy (Sept08, Lehmans), Germany Mar07 tech issues) T+3 settlement � Risks in proportion to that of derivatives market are actually quite limited. Is it worth bearing the cost of a CCP without a derivatives market? Advantages � Politically easier to bail out a CCP? Becoming harder in EU due to competitive CCP environment and x-border nature of CCPs All risks against CCP and CCP ensures these are disclosed and managed. No hidden bilateral risks between counterparties. CCP is counterparty so must manage fail or default itself Novation facilitates multilateral netting since it already replaces bilateral obligations with obligations to central party. Settlement anonymity means counterparties never have to disclose trading strategies Disadvantages - Strength of CCP risk management founded on quality of algorithms assessing margin requirements and timeliness and quality of collateral taken. What would happen should a CCP fail? Would this be allowed? E.g. Austria � OeKB will not give a guarantee for CCP.A. Failure of a CCP would cause more systemic disruption than the failure of any single Clearing member Costs: clearing fees, membership fees, operational costs (systems, communications, staff costs) Credit Risk: Direct Losses may include margin monies left in the CCP�s a/c or securities collateral that cannot be easily recovered as they are not segregated properly. Operational breakdowns in CCPs have knock-on affects for CSD participants (e.g. Italy (Sept08, Lehmans), Germany Mar07 tech issues) T+3 settlement � Risks in proportion to that of derivatives market are actually quite limited. Is it worth bearing the cost of a CCP without a derivatives market?

6. Membership Criteria: ensures high quality counterparties. CMs financial position monitored daily Novation: real-time novation ensures there is never any bilateral exposure and CCP coverage starts from point of trade until settlement finality Principal: So client�s effectively give-up their obligations to a Clearing Member, moving the risk exposure up into a better capitalised entity. Multilateral Netting: Reduces size of potential default Margins: Initial posted by Clearing Members as collateral against projected exposure; Variation margins covers price movements in open positions and collateral. Clearing fund: Stress tested daily against parameters reflective of abnormal market conditions. Monthly revaluation of contributions, but can be called daily. Defaulter pays/Survivor pays model. Members are obliged to replenish the fund � very important use example of Greece in 1999. NB. The replenishment of the clearing fund can only be used to cover subsequent defaults. BiSo: CCP able to initiate Buy-in or Sell-out operations to deliver/pay the aggrieved counterparty and recoup principal value of delivery. Secure Payments: Members must use an approved Settlement Bank, and Central Bank payment systems used. Various sanctions can be imposed on defaulting members, ranging from a warning to the withdrawal of the clearing licence. LCH.Clearnet Ltd has the following Default Protections in place. 1. Membership Criteria 2. Variation Margin 3. Initial Margin 4. Intra-day Margining 5. Defaulter?s own Default Fund Contribution 6. Ltd?s own capital (capped) 7. Remaining Default Fund 8. Insurance 9. Remainder of Ltd?s capital In the event of a member default non-defaulters? positions are unaffected. Of 5 defaults from 1990-2008 (in Ltd�s EquityClear service), initial margin was always sufficient. Total financial resources available at Nov08 was GBP 750m+Membership Criteria: ensures high quality counterparties. CMs financial position monitored daily Novation: real-time novation ensures there is never any bilateral exposure and CCP coverage starts from point of trade until settlement finality Principal: So client�s effectively give-up their obligations to a Clearing Member, moving the risk exposure up into a better capitalised entity. Multilateral Netting: Reduces size of potential default Margins: Initial posted by Clearing Members as collateral against projected exposure; Variation margins covers price movements in open positions and collateral. Clearing fund: Stress tested daily against parameters reflective of abnormal market conditions. Monthly revaluation of contributions, but can be called daily. Defaulter pays/Survivor pays model. Members are obliged to replenish the fund � very important use example of Greece in 1999. NB. The replenishment of the clearing fund can only be used to cover subsequent defaults. BiSo: CCP able to initiate Buy-in or Sell-out operations to deliver/pay the aggrieved counterparty and recoup principal value of delivery. Secure Payments: Members must use an approved Settlement Bank, and Central Bank payment systems used. Various sanctions can be imposed on defaulting members, ranging from a warning to the withdrawal of the clearing licence. LCH.Clearnet Ltd has the following Default Protections in place. 1. Membership Criteria 2. Variation Margin 3. Initial Margin 4. Intra-day Margining 5. Defaulter?s own Default Fund Contribution 6. Ltd?s own capital (capped) 7. Remaining Default Fund 8. Insurance 9. Remainder of Ltd?s capital In the event of a member default non-defaulters? positions are unaffected. Of 5 defaults from 1990-2008 (in Ltd�s EquityClear service), initial margin was always sufficient. Total financial resources available at Nov08 was GBP 750m+

7. Green � In general, the entity employs this process Red � In general, the entity does not employ this process This is not a league table of effectiveness, but just to illustrate different approaches to managing these risks in the markets. Many markets work perfectly well without a CCP or Clearing House, although we would reiterate that recent events have shown strong arguments for the use of some kind of settlement guarantee or counterparty risk intermediation mechanism. Green � In general, the entity employs this process Red � In general, the entity does not employ this process This is not a league table of effectiveness, but just to illustrate different approaches to managing these risks in the markets. Many markets work perfectly well without a CCP or Clearing House, although we would reiterate that recent events have shown strong arguments for the use of some kind of settlement guarantee or counterparty risk intermediation mechanism.

8. Greece interestingly are proposing introducing a clearing member structure without a separate clearing house/CCPGreece interestingly are proposing introducing a clearing member structure without a separate clearing house/CCP