ACSDA 2011 General Assembly - Bermuda

The increasing role of the CSD in collateral management and OTC trade registration

Secular trends impacting our business - Mitigation of “too big to fail” – prevention of “too big to save”.- Regulation and transparency:

- EMIR - Creation of new pan-European regulator - Basel III.- Risk management focus across the financial industry.- Larger clients now seek services across asset classes.- Competition and consolidation above us in the securities

lifecycle.- In Europe, public sector intervention directly into the CSD

space: - Target 2 Securities - Code of Conduct on Clearing and Settlement - Consultation process on CSD regulation.

In Europe, an enormous amount of external influences are already in train…

MIFID

Price transparencyCSD competitionCustomer protection

Code of Conduct

InteroperabilityCSD competitionPrice transparencyService comparabilityMarket accessService unbundling

Removal of Giovannini Barriers

Particularly:Legal and taxIT interfacesMarket accessMarket harmonisation

T2S &CCBM2

EUR settlementCommon CSD market accessVia a common collateral platform (CCBM2)Integration of European market infrastructures

Efficient interoperabilityVirtual asset poolaccess for CSD customersLow investment costs – quick to marketFacilitator for T2S

Level playing field

Interoperability and competition No barriers Reduced costs Cross-border

efficiencyEU financial service action plan / Lisbon agenda Private

sector

Common goal: a single harmonised financial market with standardised processes

…and further regulation is in the course of implementation… - EMIR – European Market Infrastructure

Regulation - follows a similar approach to Dodd-Frank in the

USA. - seeks to regulate the OTC derivatives market

through: - greater volume of CCP clearing in OTC derivatives - greater transparency in OTC derivatives exposure - registration of OTC derivatives trades - collateralisation of counterparty exposure - inclusion of non-financial corporates in the regulation.- implementation – December 2012.

- Basel III – a game changer for the utilisation of bank balance sheets.

What does this mean for the infrastructure providers in Europe?

Successful providers will need to offer the market…

- Excellence in custody services- Collateral management services- Critical breadth

of asset classes coverage: fixed income, equities, investment funds, derivatives

- Maximum liquidity re-use (central bank money settlement combined with commercial bank money settlement)- Single access point connectivity

- Broad market coverage- Reliable and STP process- Choice of settlement locations (eg CSD / ICSD)

- Cross-border transaction fees lower than today’s domestic fees- Low fixed fees- Capacity to finance continuing investmentValue-added

servicesMulti-value

supportPan-European

settlementPrice / cost leadership

The evidence of change so far… - Dramatic increase in demand for:

- combined CSD / ICSD and collateral management services- anonymous access to the money markets.

- Confusion / Consternation amongst the ill-prepared corporate sector.

- Widespread projects to seek maximum collateral / capital optimisation within banks.

- Pressure from national central banks to remove structural barriers to more efficient liquidity access.

- CSDs working together, more than ever before, to seek opportunities in the new environment:- Link Up Markets- REGIS-TR- Clearstream and CETIP – collateral management.

CSDs find themselves at the epicentre of the changes impacting global capital markets

REGIS-TRa case study in CSD

collaboration in OTC derivatives

REGIS-TR – The trade repository for OTC derivatives

9

REGIS-TR

Feb 2011European Market Infrastructure Regulation – Draft Proposal

Proposed European Regulation

Key components in respect to trade repositories are: The risk mitigation goals impact financial and non-financial (i.e. corporate)

market participants

Clearing to be mandatory also for non-financial market participants beyond a certain activity threshold; non-standardised, non-clearable contracts should be electronically confirmed with an auditable monitoring process

A reporting obligation for OTC derivatives positions no later than trade date plus 1 to record and report contracts with ESMA-registered trade repositories

Competition promoted among trade repositories in general and by derivatives class, providing a transparent service on a cost-related basis

ESMA will define the technical standards for reporting by June 2012

The new regulations apply from end-2012

10

REGIS-TR

Feb 2011

50% 50%

Shareholders: Two well known European Market Infrastructures Providing exchange trading, clearing, settlement and custody services

European based (Luxembourg) entity with global reach Open governance structure To be ESMA regulated and looking for compliance with non-European regulators across the

globe Service covering all OTC derivative products (one-stop-shop) before regulation materialises Servicing all types of market participants and respective activity profiles in the OTC

derivative space

REGIS-TR Shareholders and governance structure

11

REGIS-TR

Feb 2011Future developmentsParallel development of optional value-added services for the industry

Value-added ServicesTransaction reporting: Application as ARM under MiFiD Offering of transaction reporting for OTC derivatives in accordance with MiFiD II

Exposure valuation: Inclusion of pricing and valuation data:

Directly by the participant – bilateral exposure agreements Independent third-party exposure valuation

Collateral Management: Existing international or domestic collateral pools for collateralisation of exposures in

OTC derivatives

White-labelled Trade Repository services: Provision of REGIS-TR expertise to domestic repository solutions – discussions

ongoing in Americas, Africa and Asia/Pacific

Clearstream & CETIPa case study in CSD

collaboration in collateral management

CETIP wishes to develop…

…a comprehensive collateral management offering to help Brazilian banks reduce their capital requirement and improve

process efficiency

Service currently offered by

Service supported by Algorithmics system

Service supported by collaboration CETIP & Clearstream

1. Establishment

2. Servicing (payment and exposure mgt)

OTC contract Services OTC contract Services“life stage” “life cycle”

3. Servicing(tri-party collateral mgt and reporting

4. Repo services5. Termination

Collateral level calculationCollateral haircut CalculationCollateral identify / optimisationCollateral calls and movementCollateral mark-to-marketAsset servicing / corporate actionsBasic client reportingBasic regulatory reportingAdvanced client reportingAdvanced regulatory reportingTri-party repoSettlement payment calculationSettlement payment

RegistrationInitial collateral

Payment calculationPayment nettingPaymentExposure calculationExposure captureExposure matchingExposure netting

Scope of the agreement (1/2) - CETIP and Clearstream will cooperate in the area

of collateral management for the benefit of the Brazilian market and its participants.

- Cooperation will be guided by feedback received from market participants, CVM and the Central Bank.

- Step-by-step phased roll-out of service – CETIP and Clearstream agreed on scope of first project phase:

- collateralisation of OTC derivative exposures registered at CETIP- exposure calculation as optional feature- CETIP and SELIC assets eligible as collateral- collateral management functions powered by Clearstream

- collateral movements will only occur domestically, ie Brazilian jurisdiction

- reporting will re-use most of Clearstream’s existing reporting facilities (translated into Portuguese).- implementation of phase 1 is scheduled to the beginning of 3Q11

Scope of the agreement (2/2) - Second project phase will be subsequently

agreed following requirements and feedback from the market place.

- Current ideas include: - inclusion of international assets held at Clearstream

- triparty repo service.

Collateral management structure

Mobilisation of domestic assets using triparty collateral management

CETIP

Giver Receiver

Triparty collateral management functions

CETIP & SELIC assets

OTC derivatives trades

Exposure

notification Exposure

notification

Exposure

notificationCollateral

transfer instruction

Eligibility checkSecurities valuationAutomatic allocation

Automatic margin callsUnlimited substitution processReporting

In summary… - The external environment has become very

volatile.- Consequently we are all faced with new

situations – both opportunities and threats.- The CSD role must change dramatically to react

to this new environment… …and the key decision is how best to navigate to your

target business and operating model- Very few CSDs have the financial and

management means to cope alone with all the changes……even those that do are well advised to collaborate – leveraging “economies of network” is faster, cheaper and more efficient than buying “economies of scale”

- CSDs that do not learn to collaborate risk being marginalised

Hence why we believe firmly in partnership and interoperability

Thank you