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Counterparty Risk Seminar

Thursday, March 5, 2009

Presented by:

Gordon F. Peery, Of Counsel, Investment Management, K&L GatesDaniel F. C. Crowley, Partner, Public Policy and Law, K&L GatesChad Dale, Partner, Bankruptcy, K&L GatesBrian Gallagher, Asset Management Industry Professional Practice Director, DeloitteVan Hatziyianis, Head of US OTC Services, NYSE EuronextMarisol Collazo, Vice President, Business Development, Deriv/SERV Trade Information Warehouse

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Program Agenda

Welcome and Introductory Remarks

The state of the $684 trillion OTC market Major industry, legal and exchange developments

K&L Gates LLPProgram Design and Your Questions

Submit additional questions to swaps@klgates.comPresenters

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Overview Of The Current Economic Crises & Prospects For Market Reform

Presenter:

Daniel F. C. Crowley Partner, Public Policy and Law K&L Gates

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Overview

The Bush BailoutThe New AdministrationObama Financial Stability PlanTALFTreasury Blueprint RecommendationsG30 Report RecommendationsLegislative Reform IssuesDerivatives RegulationHedge Fund RegistrationThe Playing Field

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The Bush Bailout

Emergency Economic Stabilization Act (EESA)Troubled Asset Relief Program (TARP)Capital Purchase Program (CPP)Targeted Investment Program (TIP)Automotive Industry Financing Program (AIFP)

Federal Reserve “Liquidity Facilities”TAF/FSLF/PDCF/AMLF/CPFF/MMIFF/TALF

FDIC Liquidity Guarantee Programs

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The New AdministrationPresident Barack Obama & Vice President Joe Biden

The AgendaRevive the economy (stimulus)Provide affordable, accessible health care to allStrengthen the public education and social security systemsDefine a clear path to energy independence and tackle climate changeEnd the war in Iraq responsibly and finish the mission in Afghanistan

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6

Timothy Geithner Secretary

Department of the Treasury

President of the Federal Reserve Bank of New York (2003–2008)Under Secretary of the Treasury for International Affairs (1998–2001)

Lawrence SummersDirector

National Economic Council

Secretary of the Treasury (1999–2001)Deputy Secretary of the Treasury (1995–1999)Under Secretary of the Treasury for International Affairs (1993–1995)

Ben Bernanke Chairman (until 2010)Board of Governors of the Federal Reserve

Member of Board of Governors of the Federal Reserve (2002–2005)Professor at Princeton University (1985–2005) and Stanford University (1979–1985)

Economic Policy Team

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Mary SchapiroChairman

Securities and Exchange Commission

CEO of the Financial Industry Regulatory Authority (FINRA) (2007–2008)Chairman & CEO of NASD (2006–2007)Chairman of CFTC (1994–1996)

Gary GenslerChairman

Commodity Futures Trading Commission

Under Secretary of the Treasury for Domestic Finance (1999–2001)Assistant Secretary of the Treasury (1997–1999)

Financial Industry Regulators

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Chairman Chris Dodd (D-CT)Senate Banking Committee

Oversight of Emergency Economic Stabilization Act implementationDevelop financial regulatory system that ensures institutions are regulated and supervisedConsumer protection in the areas of mortgage lending, credit card lending, and investor rightsHousing

Chairman Barney Frank (D-MA)House Financial Services Committee

Oversight of Emergency Economic Stabilization Act implementationIncrease affordable housing and access to loan modificationExecutive compensation

Key Congressional Leaders - Priorities

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Chairman Tom Harkin (D-IA)Senate Agriculture Committee

2008 Farm Bill implementationAgriculture paymentsChild NutritionConservationCommodities trading

Chairman Collin Peterson (D-MN)House Agriculture Committee

2008 Farm Bill implementation and current agricultural conditionsAgricultural-based renewable fuelsConservation and environmentFederal crop insurance and risk managementAgriculture trade and international food aidAgriculture research and promotion Biotechnology

Key Congressional Leaders - Priorities

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Obama Financial Stability Plan (FSP) – 2/10/09

Capital Assistance Program (CAP) – 2/24/09Supervisory Capital Assessment

“Stress Test” for top 19 banks with assets >$100B“Cumulative mandatory convertible preferred stock”

CPP equity convertible to CAP equityFinancial Stability Trust

Public-Private Investment Fund – (tbd)Public-Private Capital: Initially $500 billion; up to $1 trillionPrivate sector pricing of assets

Consumer and Business Lending Initiative Expansion of TALF to include additional ABS collateralUp to $1 trillion – 3/3/09 Launch (3/17/09 Subscription Date)

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Obama Financial Stability Plan

Transparency, Accountability, Monitoring, and ConditionsTougher standards for firms receiving “exceptional assistance”Require plans to generate new lending, monthly reportsRequire commitment to mortgage foreclosure mitigationRestrict dividends, stock repurchases, and acquisitionsProhibitions on lobbying, contracts posted on financialstability.gov

Homeowner Affordability and Stability PlanLow cost refinancing for “responsible” borrowers through GSEs$75B Homeowner Stability Initiative for “at risk” borrowersDrive down overall mortgage rates (purchase of GSE MBS and debt)

Small Business and Community Lending Initiative under SBA

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Term Asset-backed Securities Facility (TALF)

11/25/08 – $200B; 2/10/09 – $1 TrillionAuto loans, small business loans, credit card receivables, student loans; MBS, other? Non-recourse loan

$10M minimum3 yrs; fixed (100 BPS over 3-yr Libor) or floating (100 BPS over 1-mo Libor) rate

Borrowers eligible for 1 floating and 1 fixed rate loan/moHaircuts from 5% to 16%, depending on ABS

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Merge CFTC and SECDevelop objectives-based regulatory structure:

Market stability regulator to address overall financial market stability (Federal Reserve)Regulatory quid pro quo for governmental capital/liquidityPrinciples based vs. rules based regulationBusiness conduct regulator to address standards for business practices and consumer protectionCreate Optional Federal Charter for Insurance

Treasury Blueprint Recommendations

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G30 Report Recommendations

Require systematically significant financial institutions be subject to prudential oversight; banks should be supervised by one prudential regulator

Improve effectiveness of prudential regulation through international coordination; enhance resources available to regulators and central banks

Strengthen institutional policies and standards

Increase transparency and realign risks of financial markets and products

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Legislative Reform Issues

Capital Markets RegulationCredit Rating AgenciesDefined Contribution PlansHedge Funds and Other Alternative InvestmentsPrivate Equity and Sovereign Wealth FundsCDS and Other OTC Derivatives TradingCredit Card IssuersMortgage “Cram Down” by Bankruptcy JudgesFederal Tax Issues – the 2010 “Train Wreck”

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Derivatives Regulation

H.R. 977, the Derivatives Markets Transparency and Accountability Act of 2009 (Peterson)

All prospective OTC transactions settled and cleared though a CFTC-regulated designated clearing organizationEmpowers CFTC to suspend trading in naked credit default swaps Authorizes CFTC to initiate and prosecute criminal violations ofCommodity Exchange Act

S.272, the Derivatives Trading Integrity Act of 2009 (Harkin)

Eliminates distinction between “excluded” and “exempt” and regulated commoditiesRe-categorizes most swaps as futures contractsRequires that all futures contracts trade on designated contract market or a derivatives transaction execution facility

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Hedge Fund Registration

S. 344, the Hedge Fund Transparency Act (Grassley/Levin)Requires hedge funds to register and file annual disclosure forms with SECRequires hedge funds to comply with the SEC record-keeping standards

H.R. 713, the Hedge Fund Study Act (Castle)Requires the President's Working Group on Financial Markets to conduct a study on the hedge fund industry

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The Playing Field

Financial power has shifted from NYC to WDC

Activist, unified government

Pendulum shift towards “re-regulation”

Multiple stakeholders:Labor unions, consumer groups, trial lawyersRegulators, trade associations, the “commentariat”Financial services providers (a/k/a competitors)

Goal is to navigate and favorably influence reforms

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Bankruptcy, Administration and Insolvency Proceedings, and Key Accounting Issues

• An update on the Lehman proceedings

• A typical fact pattern that implicates critical bankruptcy, accounting and documentation issues

….and the path forward.

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The Lehman Trade Fail

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Recovering Customer Property from LBI (Lehman Brothers, Inc.)

Two Deadlines in 2009 for LBI Claims

Who is a “Customer” and what is a “Customer Claim” ?

Negotiating the Release of Property

LBIE-related Issues Involving Property Release

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Practical Fixes in Legal Documentation

Derivatives Documentation

Basic Brokerage Documentation

“Suites” of Prime Brokerage Documentation

Securities Lending Documentation

New Models that Challenge Traditional Prime Brokerage

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Practical Recommendations for Handling Negotiations with the SIPC Trustee to Release LBI Property

Handling “the Phone Call” from Lehman

Negotiating with SIPC Trustee Counsel

Handling the SIPC Trustee LBI Client Documentation presented byOutside Counsel to the SIPC Trustee

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Recent Auditing, Valuation, and Reporting Issues Related to Credit Exposure

Presenter:

Brian GallagherAsset Management Industry Professional Practice Director Deloitte

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Auditing Issues

Audit of Existence of claims or balances held at counterparty

Individuals not available to respond

Audit of Valuation of amounts due from counterparty

Valuations based on likelihood of collectability

Consideration of guarantees or indemnifications from third parties

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Valuation Issues- Credit Value Adjustments

FAS 157 requirements to consider nonperformance risk

Requirements are not industry specific, and affect all institutions, especially from a derivatives perspective

However, the following categories of Investment Management clients are affected to varying degrees, to the extent derivative portfolios exist

Highly leveraged hedge fundsNon-leveraged funds

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Valuation Issues- Credit Value Adjustments

Credit spreads are a measure of the intensity of credit risk; Used (with Recovery Rate) to derive “hazard curve” (default)

Credit Risk is bilateral (in a FAS 157 world)

Certain derivatives (or portfolios of derivatives) are two-way contracts for which either party could wind up as the obligor

For two-way derivatives, the potential exposures (positive and negative) describe the extent to which each party is exposed to the other

Collateral arrangements and other credit enhancements can mitigate credit risk in one or both directions

Both credit spreads (intensity) and exposures have term structure

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FASB Staff Position No. FAS 133-1 and FIN 45-4, Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45

• ScopeThe FSP applies to credit derivatives, which is defined as “a derivative instrument (a) in which one or more of its underlyings are related to the credit risk of a specified entity (or a group of entities) or an index based on the credit risk of a group of entities and (b) that exposes the seller to potential loss from credit-risk-related events specified in the contract.”

Examples:

•credit default swaps;

•credit index products and

•credit spread options.

• Effective dateEffective for reporting periods (annual or interim) ending after November

15, 2008.

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The FSP requires a seller of credit derivatives to provide additional disclosures, for each credit derivative (or for groups of similar credit derivatives), even if the likelihood of making payments is remote:

• the nature of the credit derivative:approximate term of derivative

• the maximum potential amount of future payments (undiscounted) the seller could be required to make under the credit derivative (or the fact that there is no limitation to the maximum potential future payments)

• the fair value of the derivative

• the nature of any (1) recourse provisions and assets held as collateral or by third parties that would allow the seller to recover all or portion of the amounts paid under the credit derivative and (2) any assets held as either as collateral or by third parties

FASB Staff Position No. FAS 133-1 and FIN 45-4, Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45

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Appendix B - Disclosure Requirements for Public Entities:

B6. Disclosure requirements for collateral:

If the entity has entered into repurchase agreements or securities lending transactions, its policy for requiring collateral or other security

If the entity has pledged any of its assets as collateral, the carrying amount and classification of those assets and associated liabilities as of the date of the latest statement of financial position presented, including qualitative information about the relationship(s) between those assets and associated liabilities. For example, if assets are restricted solely to satisfy a specific obligation, the carrying amount of those assets and associated liabilities, including a description of the nature of restrictions placed on the assets, shall be disclosed.

FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities

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Appendix B - Disclosure Requirements for Public Entities:

B6. Disclosure requirements for collateral:

If the entity has accepted collateral that it is permitted by contract or custom to sell or repledge, the fair value as of the date of each statement of financial position presented of that collateral and of the portion of that collateral that it has sold or repledged, and information about the sources and uses of that collateral.

FSP FAS 140-4 and FIN 46(R)-8, Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities

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The Role of Derivatives in Crises and the Reform of the Over-the-Counter Derivatives Market

Presenter:

Gordon F. PeeryOf Counsel, Investment ManagementK&L Gates Boston

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Agenda for this Presentation

The Role of Credit Derivatives in the Current Crisis

CDOs and Credit Default SwapsSystemic risk posed by CDSDocumentation Challenges and the Push to Standardize CDS

Principal Reforms in 2009

Industry Initiatives

The 100/500 CDS ContractThe Big Bang Protocol

Auction SettlementDetermination Committee

Questions to swaps@klgates.com

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2008: The Perfect Storm

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Depositor

CDO Investor

Trust

Investor

Swaps

$Bank

Mortgage

$ Bank

Mortgage

$ Bank

Mortgage

Promissory Note Pools of

MortgagesPromissory

Notes

Tranch

es

AAA

AA

A-

BBBBB

Interest rate swaps, credit default swaps

Investor

Investor

Investor

CDO

Promissory Note

Promissory Note

THE CHANGING FACE OF STRUCTURED FINANCE

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An agreement where whereby one party pays the other a fixed periodic payment for the specified life of the agreement.

The other party makes no payments unless a specified credit event occurs, at which point CDSs are either physically settled or settled by cash payment.

Contingent Payment upon

“Credit Event”

Fixed Fee

(in bps per period)

Protection BuyerProtection SellerReference Entity or Entities

The Credit Default Swap

The key is how a swap is settled (cash or physical settlement), the problems that result from physical settlement, and the protocols that resulted.

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In Order to Understand March 2009 ISDA Initiatives, Some Background in CDS is Necessary

How is a derivatives trade documented ?How is a derivatives trade processed ?How is a derivatives trade assigned ?Who trades CDS … and why that’s a problem;The CDS market today (and tomorrow); How a CDS is settled: the “Bond Squeeze”;…..and other processing problems; and,

What the Fed and ISDA are doing about all of this.

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Schedule•Makes elections and changes

to standard provisions•Incorporates credit support annex

Confirmations

• Incorporate Definitions• Specify economic terms of each Transaction• Include Transaction-specific modifications• ISDA PAUG Confirmation Templates• Master confirmations• Incorporate definitions and annexes

1992 (or 2002) Master Agreement•Governs legal and credit relationship between the parties•Includes representations, events of default/termination events, covenants•Incorporates schedule and confirmation

Credit Support Documents•1994 Credit Support Annex (New York law)•1995 Credit Support Annex (Transfer-English law) •1995 Credit Support Deed (Security Interest-English law)

Definitions (e.g.)

2003 Credit Derivatives Definitions 2002 Equity Derivatives Definitions2000 Definitions

How a Derivatives Trade is Documented (correctly):

Annexes (e.g.)2008 U.S. Emissions Allowance Transaction Annex2004 Gas Annex2003 Power Annex

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How is a Derivatives Trade Processed ?

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How is a Derivatives Trade Processed ?

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ISDA

Who Trades CDS and how this Creates Systemic Risk

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One Look at the CDS Market with an Exchange

ISDA, with modifications

Dealers (as “Members”)

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How a CDS is settled and the “Bond Squeeze”

With Physical Settlement, after a Credit Event, the Protection Buyer must provide “Deliverable Obligations”

If the Buyer doesn’t own them, they must be purchased;

If CDSs outnumber bonds, a “Bond Squeeze”occurs.

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…and Other Problems Presented by CDS

CDS are customized and difficult to process through an exchange;

CDS processing and paper confirmation problems; and

CDSs were novated without consent of the remaining party.

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46Source: Operations Management Group

What the Fed and ISDA are doing about all of this: Electronic Processing Initiatives

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CDS Novations Processing

Email is discontinued for consent to credit derivatives novations.After December 31, 2008, the names of Major Dealers’ customers continuing to request novations by email are to be submitted to each Major Dealer’s primary regulator; and After February 28, 2009, Major Dealers will only accept novation consent requests on eligible products submitted on electronic platforms and will not accept paper or email.

Currently, the following electronic novation consent solutions are available to all industry participants:

DTCC Deriv/Serv. DTCC’s novation consent application is currently available via GUI or MQ line. Electronic consent requests through DTCC can also be submitted via another service provider, including the following platforms, which will themselves feed the messages through DTCC accordingly: Bloomberg, Markit and Tradeweb;T-Zero.

What the Fed and ISDA are doing about all of this:

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Early March 2009: The ISDA Big Bang Protocol

New, North American CDS Contract

Referred to as the “100/500 contract”

Purpose: standardize variables100 or 500 basis point spreads60-day lookback for Credit Events90-day lookback for Succession EventsThe status of the Modification Credit EventAuction HardwiringAdherence Details and Timing Available TODAYSupplement to the 2003 Credit Derivatives Definitions

The Determinations Committee

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Systemic risk: Central CDS Clearing

Competing conceptions of a central clearinghouse:

Central clearinghouse: transparency

Central counterparty: centralized credit and collateral

The Trade Information Warehouse is not a clearinghouse.

Central clearinghouses (e.g., NYSE Euronext Liffe) already exist for various types of trades; Liffe works for iTraxx Europe.

CME / Citadel – not live for CDS (yet)ICE / C-Corp – not live for CDS (yet)NYSE Euronext Liffe / LCH.Clearnet – Bclear platform (live)

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ANY QUESTIONS?

Please submit questions via email to:

swaps@klgates.com

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European Central Clearing of CDS and Status of Central Clearing in the United States

Presenter:

Van HatziyianisHead of US Wholesale ServicesNYSE Euronext - CDS on Bclear

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United States

• Cash Equities

• Options

• Futures

• Fixed Income

• Listings

• Market Data

Europe

• Cash Equities

• Options

• Futures

• Fixed Income

• Listings

• Market Data

Asia & S. America

• Qatar: 25% stake in the Doha Securities Market1

• China: opened Beijing office

• India: 5% stake in both National Stock Exchange and Multi Commodity Exchange

• Japan: strategic alliance with Tokyo Stock Exchange

• Brazil: BM&F Bovespa investment

NYSE Euronext Operates The World’s Leading and Most Liquid Exchange Group

1. Expected to close in Q1'09, subject to regulatory and other approvals

Other

Cooperation Agreements:• Abu Dhabi• LuxembourgSelected

Technology Arrangements:

• Doha Securities Market

• Tokyo• Bursa Malaysia• Philippines• Warsaw• BM&F Bovespa

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Derivatives Trading

24%

European Cash Trading

22% US Cash Trading

12%

Market Data15%

Listings14%

Software and Technology

Services6%

Other5%

NYSE Euronext Revenues Are Highly Diversified

Note: Based on Q3 ‘08 non-GAAP pro forma results for NYSE Euronext. Net revenues exclude activity assessment fees, liquidity payments and routing and clearing fees. Source: NYSE Euronext.

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CDS Clearing via NYSE Liffe

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Key Points – CDS Clearing via Bclear

The only CDS clearing solution live today (iTraxx European Index as of Dec. 22, 2008)Regulated by the FSA in London, approved by the SEC for US customersA pre-negotiated market that adds all the benefits of processing and clearing, without forcing you the market on to an exchange traded modelProcessed using Bclear, our proven solution for OTC derivativesAccount segregation, allowing customer accounts to be isolated from dealer positionsKey agreements in place with ISDA and MarkitFully cleared by LCH.Clearnet Ltd.31 major banks and brokers have signed up to the revenue sharing scheme for CDS

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Multilateral market

NYSE Liffe CDS - A Pre-negotiated, Truly Multilateral Market

LCH.Clearnet Ltd.

AAA

CCC

EEE

BBB

DDD

30

25

602530

35

40 45

AAA

CCC

EEE

BBB

DDD

30

5

10

45

40

20

10

Bilateral market

A centralized clearing house serves as the seller to every buyer and buyer to every seller, eliminating direct counterparty risk found in the bilateral market.

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NYSE Liffe CDS – Summary of Clearing BenefitsStreamlined Front to Back Operations

Virtually all trades are confirmed on T+ 0 Initial trade notifications in your back office within minutes

Novation are no longer requiredMultilateral market with all positions held against LCH.Clearnet, novation between counterparties become redundantGive-up/take-up model allow positions to be passed between counterparties easily

Compression and balance sheet capital efficienciesAll trades in the same product are netted daily, significantly reducing outstanding notionalAdditional balance sheet benefits via cross-margining with other Liffe CDS contracts

Central clearing through LCH.Clearnet LtdThe most experienced global clearer of OTC markets, active and well capitalised

Mark-to-market Valuations and REDMarkit provide daily market-to-market valuations for 4pm London timeLiffe CDS trades and positions are stamped with RED identifiersBoth are provided to users at no additional cost

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Liffe credit default swaps reference ISDA 2003 credit event definitions, and cash settle into the results of ISDA credit event auctions

In order to deliver a true multilateral centrally cleared environment, our approach features additional standardisation:

A defined determinations process for credit events, to which allcontracts are bound

Automatic application of subsequent ISDA updates and amendments to existing contracts

Cash settlement for all contracts, with a facility for physical settlement when pan-European settlement infrastructure will allow

This standardised multilateral approach allows trading with a wider range of counterparties, even without ISDA bilateral agreements in place

Our member relationships and account structure fully support the sell and buy side, and offers account segregation

NYSE Liffe CDS – A Standardised Contract

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For a multilateral centrally cleared environment, a binding credit event decision process is essential

Determinations for Liffe cleared contracts will be made by an independent credit event Adjudicator:

A leading financial QC appointed by Liffe to make an independent determination

Decisions will be based on the existing ISDA concepts of Publically Available Information, the facts of the potential credit event, issuance of ISDA protocols, and other market events

Liffe Clearing Members (typically major CDS broker/dealers) will be able to participate in a Market Advisory Group (MAG) call to present additional facts to the Adjudicator

The Adjudicator’s Terms of Reference have been specifically developed to minimise the risk that a decision would diverge from market consensus

Full details are available in Liffe’s contract documentation

We stand ready to adopt universal market determinations when they become available, and strongly encourage the development of such standards

NYSE Liffe CDS – Credit Event Determinations

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NYSE Liffe CDS – Trade Entry Example

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NYSE Liffe – CDS Trade Flow Example

Buy-side firm Broker-Dealer

Sales trading

TradeRegistration

System (TRS)

TradeRegistration

System (TRS)

1. Pre-negotiatedtrade

BclearBclear

Operations

BclearBclear

Operations

Dealing desk

Clearing& margining

systems

Clearing& margining

systems

2. Trade input to proprietary systemsor directly into Bclear

4. Electronic trade confirmation back

to trader

DTCC

3. Trade arrives at Exchange for validation and

processing

Trade Information Warehouse

Trade Information Warehouse ‘Bronze’ record

sent to DTCC

5. Trade details viewed and claimed via Exchange’s

Trade Registration System (TRS)within seconds of trade

validationby the Exchange

or

via back office systemslinked to Exchange’s systems

Regardless of methodtrades are confirmed

T+0

LCH.Clearnet

API

Liffe

Clearing Processing

System

Clearing Processing

System

7. Clearing and margining –statements to

customers in T+1 viewable on-

line

Risk / trade capture systems

Risk / trade capture systems

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LCH.Clearnet as Central Clearer

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A global leader in clearing, LCH.Clearnet is the:

Global #1 Clearing House in OTC interest rate swaps

Global #2 Clearing House in OTC fixed income and repos

Global #3 Clearing House in exchange traded futures and options

LCH.Clearnet will carry out risk management of CDS Index products using the same proven framework as other exchange traded, OTC and Liffe products

This framework for managing counterparty risk has been tried andtested and most recently utilised during the default of Lehman Brothers in September

LCH.Clearnet - Risk Management

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The following are the key instruments used for risk management:

Membership Criteria: these act as an entry hurdle for membership and ensure that members have sufficient financial resources and operational capabilities; members are monitored daily and are subject to credit reviews and visits, margins are often increased based on this monitoring. LCH.Clearnet monitors the ratio of Initial Margin levels to net capital at a member level, and takes action if this exceed certain levels

Variation Margin: VM is the daily mark to market mechanism for these contracts, enacted via changing Net Liquidating Value (NLV)

Initial Margin: IM ensures that there are sufficient funds to cover potential losses in a default in normal market conditions; calculated using SPAN, back-tested and reviewed regularly, IM has always been sufficient to manage defaults that have occurred

Intra-day Margin: to cater for large intra-day position or price movements, LCH monitors positions, prices and changes in margin liabilities; LCH can and regularly does call for additional margin when this is deemed prudent

Stress testing: all positions for all members are stress tested daily utilised circa 120 historical and theoretical scenarios to ensure adequacy of the post default backing

LCH.Clearnet - Risk Management

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LCH.Clearnet focuses extensively on default management, and utilised this tried and tested process during the management of the Lehman Brothers International and Lehman Brothers Special Financing defaults

This process enables business as usual for the remaining clearing members, while protecting customers of the defaulting member wherever possibleLCH.Clearnet is the only CCP with a highly formalised process for OTC products through the SwapClear service for Interest Rate SwapsThis involves significant member participation in the hedging and auction activities; this process was tested during LBSF default, for a $9 trillion portfolio, and resulted in significant collateral being returned to the administratorsAs the CDS service expands we will continue to evaluate the default management process, with a potential to introduce a more formal auction process similar to that used for SwapClear

LCH.Clearnet – Default Management

Apply Macro Hedges, as

required

Transfer customer

positions to other CMs, wherever possible

Close residual positions,

individually or via a portfolio

auction

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As stated, Initial Margin has always been sufficient in previous defaults. However, should this be insufficient there are further protections, as illustrated below

The adequacy of the Default Fund is stress tested daily and LCH.Clearnet is able to withstand the default of its largest member under the most extreme conditions, far surpassing the market events of September 2008

LCH.Clearnet – Post-Default Backing

TYPE AMOUNTFebruary 2009

DESCRIPTION

Defaulter’s margin collateral

$x (dependent on the size of the defaulter’s positions)

Cash, securities or bank guaranteesCalculated by bespoke algorithms for each sector to cover inherent market risk in relation to positionsRevalued and collected at least dailyRecourse is to margin collateral provided by the defaulter

Defaulter’s own default fund contribution

$x (dependent on the size of the defaulter’s positions)

Default fund contribution is assessed relative to the size of the member’s positions

LCH.Clearnet Ltd. capital

Up to $30M Before drawing on other members’ default fund contributions LCH.Clearnet Ltd would employ up to $30M of that year’s retained earnings

Default fund ~$850M The LCH.Clearnet Ltd default fund currently stands at ~$850MThe level of the fund is stress tested daily to ensure its adequacy under abnormal market conditions

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Looking Forward

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Q4 2008

Proposed Product Timeline

Launched on 22nd Dec 2008iTraxx Europe, Crossover and HiVol

Q1 2009 Mid 2009

Q1/Q2 2009 CDX IG, Crossover and HiVol

Single name CDSInitially index constituents

Other contracts will be considered according to customer demand (for example, index tranches, sovereign CDS)

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Euronext refers to Euronext N.V. and any company which is at least a 50% owned subsidiary of Euronext N.V. and references to Euronext below includes each and any such company as the context dictates.Euronext is part of the NYSE Euronext group. Liffe is the brand name of the derivatives business of Euronext, comprising the Amsterdam, Brussels, London, Lisbon and Paris derivatives markets. All proprietary rights and interest in this publication shall be vested in Euronext and all other rights including, but without limitation, patent, registered design, copyright, trademark, service mark, connected with this publication shall also be vested in Euronext. LIFFE CONNECT® is a trademark of LIFFE Administration and Management and is registered in Australia, Hong Kong, Singapore, the United States, Japan, the United Kingdom and as a European Community Trade Mark. No part of this publication may be redistributed or reproduced in any form or by any means or used to make any derivative work (such as translation, transformation, or adaptation) without written permission from Euronext. Euronext shall not be liable (except to the extent required by law) for the use of the information contained herein however arising in any circumstances connected with actual trading or otherwise. Neither Euronext, nor its servants nor agents, is responsible for any errors or omissions contained in this publication. This publication is for information only and does not constitute an offer, solicitation or recommendation to acquire or dispose of any investment or to engage in any other transaction. All information, descriptions, examples and calculations contained in this publication are for guidance purposes only, and should not be treated as definitive. Those wishing either to trade in any products available at Liffe or to offer and sell them to others should consider both their legal and regulatory position in the relevant jurisdiction and the risks associated with such products before doing so. Potential users of Liffe contracts should familiarise themselves with the full contract specification of the product concerned and any associated information. Bclear is operated as a clearing service by LIFFE Administration and Management, which is regulated by the Financial Services Authority as a Recognised Investment Exchange. Afirm and Cscreen are operated by LIFFE Services Limited, which is authorised and regulated by the Financial Services Authority as a service company. Those wishing to use the wholesale services should consider their regulatory position in the relevant jurisdiction before doing so.

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OTC Derivatives Infrastructure

Presenter:

Marisol CollazoVice President, Business DevelopmentDTCC Deriv/SERV LLC

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Agenda

DTCC Corporate Structure and Governance

DTCC Deriv/SERV Services

Trade Information Warehouse

Auction Hardwiring

New CDS Contract 100/500

71Confidential

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DTCC Corporate Structure

The Depository Trust & Clearing

Corporation(DTCC)

National Securities Clearing

Corporation(NSCC)

DTCC Deriv/SERVLLC

The Depository Trust Company

(DTC)

DTCC Solutions LLC

OmgeoJoint Venturewith Thomson

Financial

Fixed Income Clearing

Corporation(FICC)

European Central Counterparty, Ltd.

(EuroCCP)

MarkitSERV (pending joint

service offering withMarkit Group Ltd.)

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DTCC Deriv/SERV LLC Governance

User Governing Committee

Authority delegated by DTCC Board

12 representatives from major market participants

50% from European institutions

Barclays, BNPParibas, Credit-Suisse, Deutsche Bank, Societe Generale, UBS

(Other institutions represented: Bank of America, Bank of New York/Mellon, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley)

50% of individual representatives are resident in Europe

Operates on a not-for-profit basis – user governance approves tariffs and rebate of excess revenue, spend, strategic direction and new products

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DTCC Deriv/SERV LLC Services

Electronic Confirmation/Matching (to be contributed to MarkitSERV)

Covers OTC credit, rate and equity derivatives

Greater than 90% of credit derivative market worldwide (including all single name, index, index tranche, CDS on loans and loan indices, CDS on ABS, CMBS and RMBS and asset backed and commercial mortgage indices)

Trade Information Warehouse (for credit derivatives)

Central trade registry and public reporting of positions and turnover

All electronically confirmed CDS are registered in Warehouse (4.4 million sides; 29.2 trillion gross notional value in USD equivalent)

Central hub for life-cycle event processing and facilitation of other infrastructure providers (e.g., CCPs, trade compression providers, etc.)

Central payment calculation, netting and settlement (through link with CLS Bank), including net cash settlements for credit events

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75Confidential

DTCC Deriv/SERV Architecture

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Trade Information Warehouse (TIW)

Central Trade RegistryIndustry commitment (from Oct. 31 Letter) – TIW to be the “single, centralized source of industry portfolio statistics”

We publish weekly positions and turnover for:Top 1,000 single names (of 3,000 total names in Warehouse), both gross and net All indices, both gross and netAggregates, on a gross basis

We currently provide additional data to FRB, ECB and FSA in support of their own regulatory missions (and have committed to provide data to all interested regulators)

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Trade Information Warehouse (TIW)

Central Processing Hub Industry commitment (from Oct. 31 Letter) – will “process major life-cycle events in the TIW for all electronically eligible confirmable trades including:

• Clearing automatically processed through the TIW, where applicable.

• Compression and tear-ups automatically processed through the TIW.

• Credit Events automatically processed through the TIW.

• Successor events automatically processed through the TIW.

• Maturities, expires and exercises automatically processed through the TIW.

• Bulk events such as mass terminations and novations automatically processed through the TIW.”

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Trade Information Warehouse (TIW)

Central Processing Hub – Use to Date

• Working with 4 CCPs to support clearing efforts (ICE, Eurex, LIFFE, CME)

• Supporting the two leading compression and tear-up providers

• 13 other service providers linked to the Warehouse

• Centrally processed 9 credit events last year, with 10 new credit events currently being processed on a simultaneous basis - enabling TIW to calculate payments based on auction rates and settle through CLS where applicable

• Successor event processing in place, one event processed last year, with 3 more pending resolution of legal issues by ISDA

• All maturities are automatically processed

• 4 bulk transfers and mass terminations processed last year (including Lehman), with 3 currently pending

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Trade Information Warehouse (TIW)Central Settlement Processing

Industry commitment (from Oct. 31 Letter) – “By Nov 30, 2009: 96% of settlement volume on electronically matched transactions across market participants settled via TIW and CLS.”

Includes regular fee and coupon payments as well as net cash settlement for credit events

Currently all major global dealers centrally settle via TIW and CLSAll major currencies Multi-lateral net funding of obligationsCreates settlement certaintyEliminates nostro breaks

Example - Lehman credit event had a $72 billion in gross obligations, which netted to $5.2 billion in net funding obligations.

Efforts underway to on-board non-OMG banks and buy-side globally

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Auction Hardwiring

Big Bang ProtocolScheduled for adherence to begin on March 12nd and to close on April 7th.

It will become effective as of April 8th covering trades with a trade date of BEFORE April 8th and effective date ON or BEFORE April 8th .

This Supplement establishes the Credit Derivatives Determinations Committees, adds the Auction Supplement Settlement provisions, and creates Credit and Succession Event backstop dates

Determination Committee (DC)

There will be 5 different DCs by region (Americas, Europe Middle East Africa [EMEA], Asia ex-Japan, Japan, and Australia New Zealand).

Each DC has 15 voting members: 8 Global Dealers, 2 Regional Dealers, 5 buy-side firms.

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Auction Hardwiring

“Covered” transactions subject to the DC’s rulings

Excluded transactions are at a high-level:

• ABS & related indices (ABX/CMBX)

• LCDS/ELCDS & related indices (LCDX and LevX)

• CDS on Muni & related indices (MCDX)

• Bespoke portfolios based on CLNs

• CDS on CDO

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Auction Hardwiring

60/90 day look-back:

The 60/90 day limit on event notification will not be effective under the protocol as of April 7th.

it will be effective as of a second implementation date – June 20th

During this intermediate period, new transactions will have the 60/90 day look back applicable but the historic portfolio won’t.

This document covers historical transactions between protocol adherent firms

Credit Events will have a 60 day look-back period

Successor Events will have a 90 day look-back period

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Auction Hardwiring

Adherence to Protocol

Firms can begin to sign up for the Protocol on March 12th.

Adherence is free through ISDA; Firms send both a signed and a confirmed Adherence letter to ISDA.

Adhering Parties to the Protocol, do not need to amend the bilateral MCAs. The Protocol automatically amend market standard MCA based on the terms of the March 2009 Supplement.

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100/500 New CDS contractStandard North American CDS contract

Standardize Single Name tradingInvestment Grade names trading on a 100 bps spread and quoted with a flat curve spread High Yield names trading on a 500 bps spread and quoted as points up-front

Confirmation of “SNAC” contractsMatrix: ISDA will publish an updated Matrix that includes a new "Standard North American Corporate" Transaction Type. Master Confirmation Agreement (MCA): Firms can trade “SNAC”contracts using existing MCA’sPaper Confirmations: A standard long-form template is under development to ensure that paper trades match the intended termsof the 100/500 trades.

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100/500 New CDS contractChanges to DTCC DerivSERV Operating Procedures

Procedures to be amended to incorporate Supplement to all transactions with a Trade Date or Novation Date on or after April 8, 2009.

For transactions prior to April 8, 2009, parties must adhere to the ISDA Protocol for the Supplement to apply

Note, regardless of adherence or non-adherence to the ISDA Protocol for the Supplement, DerivSERV will perform credit event or successor event processing for all affected transactions, including those with a trade date prior to April 8, 2009. Firms will still have the option to exclude these transactions from processing for the particular event.

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100/500 New CDS contractChanges to Existing Template

There are no new fields or changes to any of the various messaging templates. The FpML committee has agreed on the valid value for the matrix as

Matrix: StandardNorthAmericanCorporateMCA: ISDA2003StandardCreditNorthAmerican

DTCC will overwrite several fields including:Effective date Payment frequency First Fixed Rate Payer Payment Date, Single Payment DateRestructuring

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Question & Answer Session

Also submit questions to:

swaps@klgates.com

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Panelist Contact Information

Gordon PeeryOf Counsel617.261.3269 gordon.peery@klgates.com

Daniel F. C. CrowleyPartner 202.778.9447 dan.crowley@klgates.com

Charles A. Dale IIIPartner 617.261.3112 chad.dale@klgates.com

Van HatziyianisHead of US OTC Services NYSE Euronext212.656 5122vhatziyianis@nyx.com

Marisol CollazoVice President, Business Development Deriv/SERV Trade Information Warehouse212.855.2670mcollazo@dtcc.com