DTCC Confidential

DTCC Deriv/SERV

Trade Information Warehouse

DTCC Confidential

Transformation of Credit Derivatives MarketTransformation of Credit Derivatives Market

•Rapid, multi-dimensional growth on a global scale

Trading volumes; new products; new market participants; secondary market development

•Rapid spread of automated trade confirmation

Bulk of all trading is now confirmed on an automated basis – both inter-dealer and dealer-to-customer

•Rapid, multi-dimensional growth on a global scale

Trading volumes; new products; new market participants; secondary market development

•Rapid spread of automated trade confirmation

Bulk of all trading is now confirmed on an automated basis – both inter-dealer and dealer-to-customerTrends create both concern around post-trade

processing and opportunity to mitigate Trends create both concern around post-trade processing and opportunity to mitigate

DTCC Confidential

Growth in Credit Derivatives Market(Notional Value Outstanding)

Growth in Credit Derivatives Market(Notional Value Outstanding)

0

2

4

6

8

10

12

14

16

18

4Q 01 2Q 02 4Q 02 2Q 03 4Q 03 2Q 04 4Q 04 2Q 05 4Q 050

2

4

6

8

10

12

14

16

18

4Q 01 2Q 02 4Q 02 2Q 03 4Q 03 2Q 04 4Q 04 2Q 05 4Q 05

$US Trillions

DTCC Confidential

Spread of Automated Confirmation through Deriv/SERVSpread of Automated Confirmation through Deriv/SERV

0

50

100

150

200

250

300

350

400

450

2004 Current0

50

100

150

200

250

300

350

400

450

2004 Current

Global buy-side take-up** Includes 2nd tier dealers

All major dealers

globally

use Deriv/SERV

DTCC Confidential

Current Bilateral Administration EnvironmentCurrent Bilateral Administration Environment

Parties must constantly “sync up” during contract life

• Payments, events, margining, etc.

• Many manual and duplicative reconciliation/resolution processes (internal and between firms)

Each party is hostage to its counterparties’ processing

• You’re only as good as your counterparty – your records may be right, but if your counterparty disagrees or doesn’t know, you have a problem

• Operating models vary across firms: different processes for different counterparties

Parties must constantly “sync up” during contract life

• Payments, events, margining, etc.

• Many manual and duplicative reconciliation/resolution processes (internal and between firms)

Each party is hostage to its counterparties’ processing

• You’re only as good as your counterparty – your records may be right, but if your counterparty disagrees or doesn’t know, you have a problem

• Operating models vary across firms: different processes for different counterparties

DTCC Confidential

Central Trade Information WarehouseCentral Trade Information Warehouse

Two primary components:

•A comprehensive, centralized trade database with the most up-to-date record of each contract

•A central processing capability to standardize and automate “downstream” processing of payments and other post-confirm processes

Processing flows automatically from the electronic confirmation environment

Two primary components:

•A comprehensive, centralized trade database with the most up-to-date record of each contract

•A central processing capability to standardize and automate “downstream” processing of payments and other post-confirm processes

Processing flows automatically from the electronic confirmation environment

DTCC Confidential

Model for WarehouseModel for Warehouse

•Central asset servicing through central securities depositories or listed derivative clearing houses

But NO book-entry DVP services and NO central counterparty (CCP) credit

intermediation

•Central asset servicing through central securities depositories or listed derivative clearing houses

But NO book-entry DVP services and NO central counterparty (CCP) credit

intermediationComplexities of OTC derivatives demanded a multitude of unique and innovative servicing solutions.

Complexities of OTC derivatives demanded a multitude of unique and innovative servicing solutions.

DTCC Confidential

Warehouse Schematic – 1st PhaseWarehouse Schematic – 1st Phase

* Events include credit events, assignment consents

Trade Warehouse•Contract Maintenance•Event Processing*•Payment Calculation•Bilateral Netting

Deriv/SERVAutomated Confirmation

Back Loading

External Data Sources(notional factors, etc.)

ECNs, e-CheckoutServices, AffirmXpress

Market Participants

Central FundsSettlement Agents

Automated Funds Transfer

DTCC Confidential

Warehouse Schematic – Potential Build Out*Warehouse Schematic – Potential Build Out*

* Events include credit events, assignment consents, corporate actions

Trade Warehouse•Contract Maintenance•Event Processing*•Payment Calculation•Margin Calculation•Bilateral Netting

Deriv/SERVAutomated Confirmation

Back Loading

External Data Sources(add pricing, resets, etc)

ECNs, e-CheckoutServices, AffirmXpress

Market Participants

Other Automated Confirm Services

Central SecuritiesDepositories

Central FundsSettlement Agents

Automated Funds Transfer Automated Collateral Transfer

*Assuming market participant support

DTCC Confidential

Core Principle – Extensible DesignCore Principle – Extensible Design

Assets

Functions

CreditDerivs

RatesDerivs

EquityDerivs

FXDerivs

CommodityDerivs

Contract Maintenance

Release 12nd half ’06

Event Processing

Release 1-2 2nd half ’06 (both)

Full Payment Processing(bilateral net)

Release 2-32nd half ’06; 1st half ’07

Full Margin Processing(bilateral net)

DTCC Confidential

Participant Cost SavingsParticipant Cost Savings

Processes eliminated:

• Verbal or ad hoc trade checkouts

• Portfolio substantiation/tie-outs

• Bilateral cash flow reconciliation

• Assignment e-mail processes

• Margin disputes, delays

• Investigation of breaks with respect to the above

Processes eliminated:

• Verbal or ad hoc trade checkouts

• Portfolio substantiation/tie-outs

• Bilateral cash flow reconciliation

• Assignment e-mail processes

• Margin disputes, delays

• Investigation of breaks with respect to the above

Overhead reduced:• Reduced nostro fees

• Efficient collateral processing

• Standardized, automated processing for credit (and other) events

• More efficient portfolio management (tear-ups, position netting, etc.)

Overhead reduced:• Reduced nostro fees

• Efficient collateral processing

• Standardized, automated processing for credit (and other) events

• More efficient portfolio management (tear-ups, position netting, etc.)

DTCC Confidential

Participant Risk ReductionParticipant Risk Reduction

Correct balance sheet:

Achieves immediate contract transparency

Reduces risk in:

• Reporting (corporate, regulatory, etc.)

• Market risk management

• Counterparty credit risk management

Correct balance sheet:

Achieves immediate contract transparency

Reduces risk in:

• Reporting (corporate, regulatory, etc.)

• Market risk management

• Counterparty credit risk management

Other risk reduction:

• Credit event management (especially multiple credit event scenarios) Ad hoc reconciliation

eliminated Fully transparent data

set Standard messaging

• Similar for other events

• Payments always correct and complete

• Collateral always correct and complete

Other risk reduction:

• Credit event management (especially multiple credit event scenarios) Ad hoc reconciliation

eliminated Fully transparent data

set Standard messaging

• Similar for other events

• Payments always correct and complete

• Collateral always correct and complete

DTCC Confidential

User OversightUser Oversight

Global Senior Oversight Group

• Established by OTC Derivatives Operations & Planning Committee of DTCC Board

• Dealers – Senior personnel from the 14 major dealers

All committed to their European and North American regulators to support this project and undertake other actions regarding reducing operational risk in the credit derivatives market

Other dealers are eligible to participate if they make the same commitments

• Buy-Side – Senior personnel from Europe and North America

Where possible, nominated by hedge fund and traditional and asset manager trade associations

Global Senior Oversight Group

• Established by OTC Derivatives Operations & Planning Committee of DTCC Board

• Dealers – Senior personnel from the 14 major dealers

All committed to their European and North American regulators to support this project and undertake other actions regarding reducing operational risk in the credit derivatives market

Other dealers are eligible to participate if they make the same commitments

• Buy-Side – Senior personnel from Europe and North America

Where possible, nominated by hedge fund and traditional and asset manager trade associations