Enterprise Risk Management

October 9, 2007Marie Rey, Managing Director Risk Management, DTCC

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Enterprise Risk Management Governance

DTCC Board of DirectorsCredit & Market Risk Management Committee

Compliance & Operational Risk Management Committee

DTCC Chairman & Chief Executive Officer

Risk Management Managing DirectorDTCC Executive Management Committee Member

Risk Management Department

FRBNYNYSBD

PWCIA

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Enterprise Risk Management

Managing Director

Credit & Market Risk&

Securities ValuationQuantitative Analysis Project Management

Operational RiskManagement

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Role of Risk Management

Protect the safety & soundness of clearance & settlement

Reduce risk of loss due to member failureInsure settlement continues in face of member failure

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Credit & Market Risk Responsibilities

Assess new applicants

On-Going Financial Surveillance

Market Surveillance

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Securities Valuation Responsibilities

Pricing of collateral held across the complex Ratings obtained from outside sources Market prices – external & internal sources Evaluation of adequacy of pricing Determination of appropriate haircuts

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Quantitative Analysis Responsibilities

Mathematical modeling of components of clearing fund requirements

Models validated by third parties Performance of stress tests Performance of back tests

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Project Management Responsibilities

Liaison between risk system users and risk technology staff

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Credit RiskAssessment of an Applicant

Detailed Review Adherence to Corporate

Rules Presentation to Credit &

Market Risk Management Committee

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Credit RiskOngoing Financial Surveillance

Credit Risk Matrix

Parameter Monitoring

Periodic Reviews

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Market RiskSurveillance

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Clearing Fund

DTC Market Risk Review

Market Watch

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Market RiskClearing Fund

The Clearing fund is maintained to protect the Corporation and its members in the event of a member default– NSCC guarantees trades at midnight of T+1– GSD guarantees trades at point of trade comparison

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Market RiskClearing Fund - Composition

The Clearing Fund is comprised of:– Cash (USD) – U.S. Treasuries

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Market RiskClearing Fund

Calculated overnight Requirements sent automatically via email to

Members typically by 7:00 A.M. 9:30-10:00 A.M. deadline for receipt of deficit payment

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NSCC Clearing Fund Methodology

Risk-Based Margining

• Volatility

• Mark-to Market

• Fails

• Market Maker Domination

• Illiquid Charges

• Premium

Intraday Monitoring

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Market RiskVolatility

Largest component of the clearing fund requirement

VaR for equities and fixed income securities

Haircuts

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Haircuts

OTCBB, Pink Sheets and IPOs Applied in instances where there is insufficient

statistical data

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Mark-To-Market (“MTM”)

Unrealized profit and loss on unsettled positions, including fails

(System Price*Net Quantity) – (Contract Value)

No credit is given for a total net credit MTM

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Fails

A trade that has not settled as scheduled Minimum haircut on market value of long and

short (abs) failing positions Haircut may increase based on internal credit

rating

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Market Maker Domination

Measures exposure of correspondent Market Makers

Limited to OTC listed market concentrations

Charge mitigated by credit worthiness

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Illiquid Charges

To capture exposure in illiquid securities Overnight calculation is based on several

components, such as:– Internal credit rating of firm– Position size– Primary market– Average daily volume– Price

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Premium

Member’s clearing fund requirement vs. Member’s capital

Clearing FundCapital

> 1= Premium

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GSD Clearing Fund Methodology

Clearing fund components

Volatility

Margin requirement differential

Coverage component

Premium

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Margin Requirement Differential

Captures changes in VaR

Applies front weighted average of fluctuations

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Coverage Component

Back Test Based

Compares historic P&L of trades against clearing fund requirement

Front weighted

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DTC Market Risk

DTC maintains a fully collateralized system

Collateralization Net debit caps

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Collateralization

Participant is required to have sufficient collateral in its account to support net settlement debits

Collateral includes:

- Participant's deposit to the Participants Fund

- Designated collateral securities in participant’s account

- Securities that are the subject of deliveries from other participants

Collateral is marked-to-market every day, less a haircut Transactions pend until sufficient collateral is available to

support net settlement debit

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Collateralization Review

Review impact of systemic overrides Review impact of price and haircut adjustments

made by Securities Valuation Review impact of price movements

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Net Debit Cap

Based on three largest intra-day net debit balances over a rolling 70 business day period

Limited on a case-by-case basis

Maximum Net Debit Cap

Transactions pend if settlement transactions exceed net debit cap

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Market RiskMarket Watch

Links to news services Market events analyzed Chronology maintained of market events and

actions taken Closeout simulations

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End of Day Line of Credit

Liquidity Needs

Resources