Preparing for Regulatory Initial Margin

Regulatory IM – Current State

4/16/2018 CONFIDENTIAL 2

>34 Groups Live

>10 more expected Sep 2018

>All on same model (ISDA SIMM™)

>All on same platform (Acadia Hub)

>1250 live/active Reg IM Agreements

>1.1M+ Trades; 27M+ sensitivities daily

>99.91% of trades use SIMM method

>Avg Daily IM Collect amount $105B

Regulatory Initial Margin Phase-in

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3 Trillion ($ or €)

2.25 Trillion ($ or €)

1.5 Trillion ($ or €)

750 Billion ($ or €)

8 Billion ($ or €)

US Sep 1 2016

EU Feb 3 2017

1 Sept

2017

1 Sept

2018

1 Sept

2019

1 Sept

2020

> Phase 1 & Phase 2

> All banks or bank related entities

> 10 firms expected for 2018 - banks

> +20 to 30 in 2019 - Some Buy-sides

> Estimates vary for 2020

> ~500 to ~3500

4/16/2018 CONFIDENTIAL 4

Am I In Scope?

>Calculate Aggregate Average Notional Amount (AANA) of non-centrally cleared derivatives

>Each March, April, May if you exceed the threshold for that year you start exchanging IM on Sep 1 of that year

>If you are an entity in a consolidated group the calculation is summed across all subsidiaries of the group

>Investment funds are considered distinct legal entities as long as they are not collateralized by or otherwise guaranteed or supported by other funds or advisor for insolvency purposes

>If you will be in scope DISCLOSE THIS to counterparties

>ISDA Self-disclosure form

4/16/2018 CONFIDENTIAL 5

ISDA members developed a standard initial margin model (SIMM) which uses a sensitivity based approach (SBA) for the follow reasons:

> Provides transparency

> Allows for netting / facilitates appropriate margin amount

> Ease of replication, Quick calculations, Predictable and Extensible

> Enables effective dispute resolution

SIMM is a living and breathing model. It will continue to change over time.Risk weights and Correlations will be recalibrated periodically as well.

ISDA SIMM

Acadia Hub: Initial Margin Exposure Manager

4/16/2018 CONFIDENTIAL 6

Total IM$ (Post or Collect)

Risk Silo

Risk Class

Sensitivity Type

by Bucket/Tenor

Trade

> Firms calculate and supply trade level sensitivities per SIMM in specific CRIF format

> The IMEM Service:

> Effectively monetizes the sensitivities using applicable risk weights & correlations

> Sums the monetized amounts by bucket

> Provides IM analytics to enable aggregate calculation at all levels of the risk tree

> Helps reconcile amounts at all levels of the risk tree

> Supports drill-down to results at all tree levels for dispute investigation

> In use by all in-scope firms

What to consider?

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> Requires coordinated planning – impacts multiple groups – learning curve

>Front Office: > Trade pricing impacts (MVA), IM Cost allocation and Optimization, Hedging

> Liquidity & funding impacts

> SIMM or Schedule?

>Risk:> Assessing adequacy of model coverage, back testing, benchmarking, process around SIMM

>Technology:> SIMM Buy or Build? SIMM Testing (either way)

> CMS requires multiple margin agmt per trade; integration to IM calculator, single sign-on

>Legal/Documentation> Which counterparties will I face (new Reg IM CSAs), what custodial model for ACA’s (Tri-party or 3rd party); MTA Split between IM/VM

> Long lead times in dealers legal queues

>Collateral Agents/Custodian > Capabilities assessment, long legal and on-boarding lead times

>Downstream client management/education

All of this and SIMM subject matter expertise is SCARCE in the marketplace

SIMM for Phase 4 & 5 firms

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>Firms must license SIMM from ISDA.

>SIMM changes will be proposed following an evidence based approach

>Buy-sides are encouraged to interact with ISDA WGs

>Dealers may include buy-side portfolios when reporting anomalies>Buy-sides can optionally participate in benchmarking and back-testing

>Niche portfolio findings are important to calibrate SIMM; understand anomalies

>ISDA just came out with a fact sheet https://www.isda.org/a/iVmEE/ISDA-Initial-Margin-Fact-sheet.pdf

>TriOptima well versed on IM; has compliant CMS and sensi calc’s

>AcadiaSoft Expert Services is available to help you prepare

>Other consultants…

4/16/2018 CONFIDENTIAL 9

> If you intend to build out the SIMM Model plan on 2 to 2.5 years

> If you will use a service provider plan on 1 to 2 years

> Timeline will vary based on

>How many agreements are in scope

> How many dealers

> How many custodians

>Downstream outreach required

>Collateral system readiness regarding

> Multiple margin agreements per trade

> Integration with AcadiaSoft’s Initial Margin Exposure Manager and Custodians as required

> Support for IM Collect and Post messaging

> Support for Posting Securities; Tri-party or 3rd party SWIFT support

> Margin Agreement support for all fields required for 2 way Reg IM

>Current Risk & Modelling capabilities

What’s My Timeline?

TriOptima Collateral Related Services

CONFIDENTIAL 10

- Variation Margin

- Initial Margin

AcadiaSoftHub

MarginSphere

$

$

CP’s

Client systems

DTCC MTU

TriOptima service

AcadiaSoft service

Client systems

Reconciliation

VM dispute analytics/workflow

Client systems Sensitivities

Valuation

AcadiaSoft Hub IM Exposure

Manager

Reconciliation

IM dispute analytics/workflow

IM Calculation

Data mapping & validation

Collateral Balance Data

Margin agreement data (one-time set up)

VM / IA

Reg IM calcs(SIMM /

schedule)

VM dispute investigation

Collateral

IM dispute investigation

Trade Sensitivities

Trades

Valuations

Collateral System with Full STP

workflow

Embedded connectivity to MarginSphere

Cross Asset Class

• Bilateral OTC

• Cleared OTC

• Repo

• TBAs

Already live forReg IM Bilateral

trioptima.com

4/16/2018