Technical Provisions Task Group

1. Technical Provisions Task Group 29 November 2012 Lance Osburn SAM Risk-free Rate Workshop

2. Old Mutual Perspectives • There are a number of valid arguments in support of either the bond or swap market as the basis for a risk-free curve • Electing only one gives rise to a number of both theoretical and practical complications including restricting the hedging universe in a constrained market • Seek consistency between SII, IFRS and MCEV curves to avoid complexity and seek to ensure 3rd country equivalence with SII • Although different curves may not be significant in a solvency evaluation context it is material for valuation and hedging purposes • The base curve should be product specific and liquidity, matching and residual risk adjustments can be captured in an appropriate premium or risk margin • Strongly favour a principles based approach to selecting from a suite of curves rather than a strictly prescribed basis

3. Swaps Market Considerations • Flexibility & Credit Risk • Hedging instruments can be tailored to specific liability characteristics • Not all swap arrangements are credit risk equal and highly dependent on CSA • Market Depth & Liquidity & Participating Banks • Depends on Term & Technical Market Factors • Zero-sum Nature of Derivative Contracts depends on offsetting market interest • Market Developments • Banks have begun charging CVA charges to account for counterparty risks • There is a pending Basel III drive towards a central clearing repository which may increase capital requirements and drive product consolidation • Dodd-Frank and other regulations could dampen risk appetite and presence of participating banks • Real Rates • Real swap market is illiquid & expensive, complicated by negative real rates

4. Bond Market Considerations • Nominal bond market continues to improve and lengthen… • Recently introduced the R2048 being a 37 year maturity bond • There is a weekly supply of long dated hedging stock • Inflation Linked bond market continues to improve and lengthen… • Recently introduced the I2050 being a 39 year maturity bond • The curve has been become more populated and tradable over the past 2 years • JSE has introduced a real bond curve for publication • Basel III Implications • Bank will have an increased liquid asset requirement increasing demand for bonds • Demand for highly rate credit assets will rise • Market Developments • Drive for a central order book with uncertain impact on market liquidity • South Africa continue to face the pressure of sovereign rating downgrades

5. Thank you

6. Colour Palette Green R:0 G:135 B:101 Orange R:243 G:117 B:3 Blue R:51 G:204 B:204 Gold R:255 G:204 B:0 Green R:197 G:222 B:168 Dark Grey R:191 G:191 B:191 Light Grey R:234 G:234 B:234 Black R:0 G:0 B:0 Green R:0 G:180 B:133 Green R:146 G:208 B:80

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