MarkitSERV 2012 Impact of Regulatory Reporting on OTC Derivative Processing

May 22nd 2012

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Agenda

Opening Remarks on the Current Regulatory Landscape and MarkitSERV’s continued focus within the Asia-Pac region

Julian Chesser,MD, Head of Product - Asia region, MarkitSERV

Impact of OTC Derivative Regulation on trade processing with a focus on the JSCC and impact on Japan based MarkitSERV users

Simon Todd, Director of Credit Solutions

Closing Remarks and Q&A sessionKatherine Delp, VP, Tokyo Sales

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MarkitSERV was formed in September 2009 as a joint venture between Markit and Deriv/SERV

– Formed in response to market participants looking for a Global cross asset class solution to the regulatory request for further adoption of electronic confirmations

– We started with 300+ employees globally and now have 500+ located in NY, London, Tokyo, Singapore and India

– We are committed to providing 24hour support 5 days a week to ensure our global user base have access to our support teams when needed

MarkitSERV is committed to the Asia-Pac region– New MD hire to run product

– Enhances sales and account management coverage to ensure needs of the region are met with functionality on the platforms

– Support teams in Asia equipped to handle all aspects of trade processing including clearing and reporting support

– MarkitSERV now has Product, Client Support, Sales, Account Management and Infrastructure teams located in Asia (Tokyo and Singapore)

– Concentrated regulatory focus with regulators such as the JFTC, HKMA, MAS, ESMA, FSA, CFTC/SEC

MarkitSERV’s commitment to the Asia-Pac region

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Regulatory change driving priorities for 2012

Global regulatory reform is our main focus in 2012– Focus on transparency (reporting) and systemic risk (clearing)

MarkitSERV is engaged with all aspects of global regulatory reform as a key infrastructure partnerKey focal points of regulatory:

– Central clearing – Build out to multiple clearing houses across asset class, 10 CCP’s are connected to MarkitSERV currently

– Electronic trading – Connectivity to 100+ electronic execution venues which includes many of the soon to be SEF’s under the DFA.

– Trade repositories – Connectivity in place for CDS, Rates and Equity to cover ODRF commitments for confirmation reporting

US legislation has passed but rulemaking still underway; Target implementation July 2012 (pending additional final rules)JFSA regulation has a target implementation on November 2012

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September 2009 – the G20 leaders agreed in Pittsburgh that:– All standardised OTC derivative contracts should be traded on

exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest (Trading, Clearing)

– OTC derivative contracts should be reported to trade repositories (Reporting)

– Non-centrally cleared contracts should be subject to higher capital requirements (Clearing)

The G20 leaders asked the Financial Stability Board (FSB) and its relevant members to assess regularly implementation and whether it is sufficient to:

– Improve transparency in the derivatives markets

– Mitigate systemic risk

– Protect against market abuse

Overarching goals of OTC derivatives regulation

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June 2010 – G20 leaders affirmed their commitment to achieve these goals.October 2010 – report on “Implementing OTC Derivatives Reforms” making 21 recommendations addressing practical issues in meeting commitments.April 2011 – first implementation report published, expressing concern regarding likelihood of many jurisdictions meeting the end-2012 deadline.May 2012 – a meeting was hosted by the Ontario Securities Commission focused on providing a forum for discussion among key OTC derivatives regulators responsible for introducing rules designed to give effect to implementing new international standards relating to OTC derivatives. The group also agreed to actively monitor the consistency of implementation across jurisdictions and bring to the attention of the FSB any overlaps, gaps or conflicts that may prove detrimental to G20 reform objectives.The Future is Now.

Overarching goals of OTC derivatives regulation

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Regulatory Change in OTC Derivatives

Simon Todd, Director of Credit Solutions

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Dodd-Frank ActThe Dodd-Frank Act (DFA) signed into law July 21, 2010 will dramatically change the OTC derivatives environment.

– Goal: To bring transparency and accountability to the derivatives market.– Credit Derivatives regulation in the U.S has split jurisdiction

CFTC – All Broad Based Credit Derivative Index and Tranche transactionsSEC – All Single Name CDS and Narrow Based Credit Derivative Index and Tranche transactions

– CFTC – Released 30 final rules; 18 still to comeMajor rules due for completion: Block Rule; Capital for SDs & MSPs; Straight Through Processing, Clearing Member Risk Management; End-User Exception; Implementation Phasing for Clearing & Trading Mandates, Internal Business Conduct (Documentation, Confirmation, Portfolio Reconciliation); Margin for Uncleared Swaps, Product Definitions (joint w/ SEC); Reporting of Historical Swaps; Swap Execution Facilities; Volcker Rule

Latest rule passed on April 18th regarding th Swap Entity Definition Rules was a critical rule which was a joint rule between the CFTC and SEC

– SEC – Rules are TBD, latest “Exemptions for Security-Based Swaps Issued by Certain Clearing Agencies; no rule timelines provided.

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Pillars of US Regulation

All eligible standardized swaps must be cleared if available for clearing

CLEARING TRADING

Standardized swaps which are clearable must be traded on SEFs or DCMs.

All swaps (cleared and uncleared) must be real-time and regulatory reported

REPORTING

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DFA Trading RequirementsNew Regulatory World

– Products - Swaps, Security-based Swap (SBS), and will be split jurisdictionally– Participants - Swap Dealer (SD), Major Swap Participant (MSP), will be required

to register– Providers - Swap Execution Facility (SEF), Swap Data Repository (SDR),

Derivatives Clearing Organization (DCO) and Clearing Agencies (CA) will all need to register and will be subject to regulatory requirements

Regulated Marketplace– DFA creates new type of regulated marketplace: “swap execution facilities”

(SEF's) – Goal: “promotion of the trading of swaps on swap execution facilities and pre-trade

transparency in the swaps market.”SEF-Required Transactions

– Subject to clearing and execution requirements– Made available for trading– Not block trades

Types of Trading Systems/Facilities– Request for Quote Systems– Order Books

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DFA Clearing RequirementsClearing Registration Requirement & Eligibility – Proposed rules

– If a swap/sbs is required to be cleared, it must be done on a registered derivatives clearing organization (DCO) or clearing agency.

– DCO’s presumed eligible to accept for clearing any swap that is within a group, category, type, or class of swaps that the DCO already clears.

Commission-initiated Review of Swaps– Commission required to review swaps that have not been accepted for clearing by a

DCO to make a determination as to whether the swaps should be required to be cleared.

– If no DCO has accepted for clearing swaps that the Commission finds would otherwise be subject to a clearing requirement, the Commission would investigate and issue a public report, taking actions as necessary.

Clearing Review Process– Existence of significant outstanding notional exposures, trading liquidity, pricing data– Capacity, operational expertise and resources and credit support infrastructure to

clear terms consistent with trading terms– Effect on the mitigation of systemic risk– Effect on competition, including fees/charges applied to clearing– Existence of reasonable legal certainty in the event of DCO insolvency

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DFA Reporting Requirements

Reporting and publication of trade data will be required through registered swap data repositories (SDRs)

– Cleared or uncleared transactions– Real-time vs. regulatory reporting– Hierarchy: SD, MSP, NonSD/MSP

Various reporting levels and tracks– Real-time reporting– Primary economic terms & “additional terms”– Trade acknowledgment & confirmation

Substance & timing challenges– New data fields required for reporting– Timing challenges are significant

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JFSA reporting requirements

JFSA will require position snapshot of trades undergoing a reportable trade event (“snapshot-delta approach”).Product scope includes Forwards, Options, IRS Swaps and CDSThe JFSA recognizes there are multiple ways to obtain the snapshot and accepts TIW lifecycle data as acceptable meansIt will be acceptable to the JFSA for DTCC to report snapshot data to the JFSA which DTCC obtained via life cycle reporting.The JFSA requires only the Primary Economic Terms (PET)

– Certain core administrative fields are also required– JFSA will not prohibit other fields from being submitted for regulatory

purposes in other jurisdictions. JFSA is developing an updated version of the proposed reporting fields file that lists Japan specific requirements JFSA will publish final ordinances in June or July with a implementation date of November 1st 2012.

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MarkitSERV Solutions

Simon Todd, Director of Credit Solutions

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MarkitSERV architecture overview

DTCC TIW

Trade Execution (SEFs)Trading Voice Broker

Affirmation/Matching, ConfirmationAllocation Delivery, Reporting, Give-Up

ICE Eurex CME LCH,Clearnet

IDCG

Clie

nt

Dea

ler

Credit Rates Equity

Global Trade Repositories (GTRs)

SGXOCC

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MarkitSERV multi-jurisdiction real-time and regulatory reporting project – How we are doing it

Common Solution Team - A considerable amount of the work required applies to all asset classes so we created a common solution team

– Designing reporting workflow, setting out the requirements for connectivity to SDRs/TRs, and creating the “generic” payloads for Real-time, PET/Add’l Fields and Confirmation records; generic template

– Handling cross asset industry outreach working with cross asset teams at the banks and focusing on cross asset class industry WGs such as UPI, USI, Workflow, etc…

Asset-Class Specific Teams – MarkitSERV’s existing asset class teams are handling industry outreach at an asset class level, running MarkitSERV DF WGs etc… to define and develop DF solutions for our users. This approach allows us to focus on specific solutions that maybe needed to lever existing technology, address specific asset class conditions, and fill new DF related gapsBuyside Team – MarkitSERV’s buyside team are handling the impact to the buyside platforms / solutions caused by DF changes on the confirmation platforms and buyside industry outreach (in conjunction with account management and sales)

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Reporting Solution - Guiding Principles

Single Source – a single submission for trade processing and reportingCentralization – static data set-up allows for efficient post-trade processing and is configurable to allow for trade-by-trade overwritesAggregation – single middleware to aggregate all global reportingFlexibility – a flexible and configurable system, allowing clients to pick and choose services that suitIntegration – allow for integration with multiple repositories with an open designComplete Coverage – ability to report all transactions whether currently electronically supported or not; complete asset class coverageLeveragability – external changes to the system that impact our users will be minimised as much as possible – leverage existing workflows and interfaces

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IRS & CDS Reporting Solution Phase 1 – Confirmation Reporting to meet ODRF

MarkitWire and DSMatch confirmation feed to GTR– Process confirmation trade information of the DTCC GTR for

Rates and Credit confirmation activity

Timeline for reporting and go-live– MarkitWire went live with reporting of IRS transactions to the GTR

in January 2012– DSMatch STP feed of confirmation messages to GTR live on

30th April 2012

All trades sent from MarkitSERV (MarkitWire or DSMatch) to the GTR will be returned to participants with a GTR status via their regular confirmation messaging they receive today

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IRS & CDS Reporting SolutionPhase 2 – Full Dodd-Frank Compliance

Dodd Frank CFTC compliant reporting – RTR Capability– PET Reporting– Confirmation Reporting– RCP Determination– UCI/LEI Mapping– UPI Determination– USI Generation– Generic Template Solution

External BRD published, functional specifications March 29rd

and UAT late May (final date TBD)Production release date ahead of July 16 Compliance DateTransaction coverage

– Clearing-eligible trades– STP-eligible trades that are not clearing-eligible (e.g. swaptions)– “Paper” trades (e.g. Bermudan swaps, callables, CDO’s, etc)

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IRS & CDS Reporting SolutionPhase 3 – Multiple Jurisdiction Reporting

Compliant reporting to multiple Jurisdictions – Determine jurisdictions required for reporting– Real-time, PET and Confirmation Reporting – Entity Determination for USI or UTI– UCI/LEI Mapping– UPI Determination as required– Generic Template Solution for non electronic trade reporting

External BRD will be updated as additional jurisdictional requirements become finalTransaction coverage

– Clearing-eligible trades– STP-eligible trades that are not clearing-eligible (e.g. swaptions)– “Paper” trades (e.g. Bermudan swaps, callables, CDO’s, etc)

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Equity - ODRF/Regulatory commitments

Current ODRF Commitment Focus: “Three Pillars”I. Platform Convergence

– Continued focus related to migration from DSMatch to MarkitWire

– Platform harmonization ongoing with completion by end of year

– Controlled phasing per product type and market participant

II. Enhanced Trade Life-cycle Event Processing– Corporate actions processing service to commence June ‘12

– Novation & Early exercise commitment to process electronically

III. Trade Repository Enhancements– Feed from MarkitWire to GTR for Index Variance Swaps & Options

commenced 1 May

– Share Variance Swaps & Options feed to commence in June, and other products to be phased thereafter

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Equity - DFA focus

X-asset class analysis – work with other asset classes to ensure consistency and to leverage existing infrastructure for real-time, primary economic terms, confirmation reporting

Equity product-specific analysis – analyze per:– DFA-eligible products

– Electronic vs non-electronic products

• Ensure complete product coverage

• Reconcile to ISDA® Taxonomy

– SEC forthcoming requirements

Industry engagement– Weekly industry calls; industry “Transparency Programme” analysis & input;

MarkitSERV-specific workshops ongoing

1x1 engagement– Informational & analysis sessions with swap dealers & end-users ongoing

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Cross Asset Class Reporting SolutionGeneric template - Non-Electronic Confirmations

In order to support reporting for 100% of transactions within an asset class MarkitSERV is adding a generic template.

– The generic template allows MarkitWire users (“Firms”) to transmit non-electronic eligible trades for the purposes of regulatory reporting, including RT and/or PET data

– Minimum Real Time + PET fields only – Double sided (both parties) and single sided (one party e.g., SD using

the service) – Support electronic verification on platform (double sided) and

verification off-platform [pre-verification] (for both double and single sided)

– USI - MarkitWire to create USI (if service is elected) if not submitted to MarkitWire; if Submitted, the USI will be carried through-out the trade

– Support all required lifecycle events; amendments, increases, terminations and novations

– The generic template does not qualify as a legal confirmation

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Clearing Solution - Multiple CCPs

A single platform to connect to many CCPs– New regulation presented an onslaught of regional / local CCP's;

each have the intention to meet local regulatory requirements

– Credit Clearing houses supported by MarkitSERV:CME

ICE Clear Credit

ICE Clear Europe**

LCH.SA**

Eurex

JSCC*

* CCP not yet live for T+0 credit volume but MarkitSERV intends to support

** CCP only supports dealer-to-dealer clearing for now

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Clearing Solution - Let MarkitSERV do the work

MarkitSERV maintains clearinghouse eligibility rules for the Executing Broker in order to prevent processing issues up-front:

– Is this product eligible for clearing at the nominated clearinghouse?– Are the legal entities eligible to clear?– Is the clearinghouse open?

As OTC clearing advances, new rules will be applicable to different CCP's and MarkitSERV will upgrade our eligibility rules so you don’t have to maintain theseMarkitSERV aims to standardize workflows to ensure your business operations can easily manage your trading volumes

– Multi-asset class supportCredit, Rates, Equities, FX

Credit Hub – provides pre-trade certainty for clearing transactions across SEF’s, EB’s, FCM’s and CCP’s

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Clearing Solution - Let MarkitSERV do the work

Support multiple workflows– Clearable, electronically eligible (bilateral / non-cleared), & ‘paper trades’– Block and allocations

Execute 100m with your dealer, split it 10 ways with your FCM

– Multiple FCM’s– Automatically match trades so you can focus on exceptions & disputes– Electronic Allocation Delivery for new trades

Match core economics prior to communicating allocations (including Independent Amount)Allocations delivered electronically to dealers, ensuring consistency between cleared and non-cleared trades

Multiple Connectivity & Straight-Through-Processing optionsAPI based connectivitySpreadsheet uploadGUI affirmation Markit Trade Manager

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Client

MarkitSERVTrade Manager

Audit

Matching

Reporting

Paper Workflow

Connectivity

DSMatch

Central Clearing Venues

CCP 1 CCP 2 CCP X

MarkitWire‘Paper’ Confirmations

MarkitSERV Trade Manager workflows

Dealers

trade file

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In summary

Commitments – G20 commitments & home country legislation mandate monumental changes to existing trading, clearing & reporting practices.

Complexity – firms face increasing complexity – multiple platforms and workflows in tight timeframes

Challenges – the OTC market must transfer its success with electronic processing and warehouse to the new regulatory requirements

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In summary

MarkitSERV Commitment – MarkitSERV is committed to buy-side firms success, by leveraging its experience in:

– Front-office workflows, such as allocations, to propel credit operations closer to execution

– Clearing workflow and multiple clearinghouse connectivity– Cross-asset class solutions and connectivity to simplify your

operational and technical requirements– Integration with repositories to meet reporting party obligations

Operationally, MarkitSERV reporting solutions drive automation and exception management to make your firm more operationally and cost-efficient and regulatory-ready!

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Next stepsIf your firm is not yet an existing MarkitSERV client then consider executing the MarkitSERV User Agreement before the rush.

Contact sales to schedule a demonstration and discussion of the available MarkitSERV solutions. (sales@markitserv.com)

Current MarkitSERV clients in need of more information may contact the MarkitSERV Client Account Group. (CAG@markitserv.com)

Visit the MarkitSERV.com website for more information including upcoming events, fact sheets, related links and to access the new MarkitSERV video overview of our buy-side clearing solutions. (www.markitserv.com)

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Q & A

Q & A

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