1. Harnessing the Network of Banking Intelligence Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products Expert Head of Business Solutions EMEA Misys Treasury & Capital Markets

2. Harnessing the Network of Banking Intelligence Exotic and Structured Products Opportunities and Issues Opportunities –Significant growth in structured products volume Equity, FX, Interest Rates, Credit, Hybrids –Significant evolution in products complexity Yesterday's exotics becoming todays vanilla: Variance swaps, Index CDOs… –More profitable than vanilla instruments Higher yield / spread –Gain competitive advantage with innovation Branding exercise –Number if players is extending regional banks, hedge funds..

3. Harnessing the Network of Banking Intelligence Exotic and Structured Products Opportunities and Issues Current Issues –Managed in spreadsheet - Operational Risk Lack of real control/visibility on trading activity/exposure Manual and costly processing No Audit-trail –Managed in multiple systems - Reconciliation Nightmare FO / BO By Asset Class (Hybrid Products) –Insufficient valuation/risk framework – Market/Credit Risk Approximate valuation Insufficient assessment of counterparty/market exposure –Limited reactivity/creativity in a highly competitive environment Business ideas/opportunities are there IT or Product Control is not ready

4. Harnessing the Network of Banking Intelligence System Requirements Flexibility in Structured Products Design Control and Security in Trade Input and Access Trade Lifecycle and Integration Trends in Valuation Models Implementing a Structured Product Solution

5. Harnessing the Network of Banking Intelligence System Requirements Flexibility in Structured Products Design Control and Security in Trade Input and Access Trade Lifecycle and Integration Trends in Valuation Models Implementing a Structured Product Solution Time-To-Market

6. Harnessing the Network of Banking Intelligence Structured Products Design Flexibility

7. Harnessing the Network of Banking Intelligence Genesis of a Structured Product Solution MUST Initial Client Request –2002: Support for 20 new Structured Products FO/BO –First option: 20 new ad-hoc products template –Second option: An innovative and generic approach –MUST: Multi-Underlying Structured Trades The Methodology –Analyze term-sheets across all asset classes and instruments –Identify building blocks: components and formulas –Define Data Model and Cash Flows Generation Rules –Back-testing

8. Harnessing the Network of Banking Intelligence Building Blocks Input Events –Fixing, Barrier IR, Equity, FX, Credit, Pool Factor… –Corporate Events Credit Corporate Action, Stock Corporate Actions… –User Actions Call Option, Currency Chooser…. Cash Flows –Formula-based Dates, Currencies, Amounts Contingent to input events, complex pay-off Variables –Formula-based period-dependent or path-dependent Input Parameters

9. Harnessing the Network of Banking Intelligence Callable Trigger PRDC Effective Date:XXX Maturity Date:XXX Pay Leg CcyJPY Coupon :First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Rec Leg CcyUSD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX

10. Harnessing the Network of Banking Intelligence Callable Trigger PRDC Effective Date:XXX Maturity Date:XXX Pay Leg CcyJPY Coupon :First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Rec Leg CcyUSD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Reset Components

11. Harnessing the Network of Banking Intelligence Callable Trigger PRDC Effective Date:XXX Maturity Date:XXX Pay Leg CcyJPY Coupon :First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Rec Leg CcyUSD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Barrier Components

12. Harnessing the Network of Banking Intelligence Callable Trigger PRDC Effective Date:XXX Maturity Date:XXX Pay Leg CcyJPY Coupon :First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Rec Leg CcyUSD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Option Components

13. Harnessing the Network of Banking Intelligence Callable Trigger PRDC Effective Date:XXX Maturity Date:XXX Pay Leg CcyJPY Coupon :First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Rec Leg CcyUSD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Cash Flows Components

14. Harnessing the Network of Banking Intelligence Callable Trigger PRDC Effective Date:XXX Maturity Date:XXX Pay Leg CcyJPY Coupon :First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Rec Leg CcyUSD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Input Parameters

15. Harnessing the Network of Banking Intelligence - Components -Formulas New Product: Building Components and Formulas

16. Harnessing the Network of Banking Intelligence Components and Formulas - Components -Formulas

17. Harnessing the Network of Banking Intelligence Control and Security Trade Input and Access

18. Harnessing the Network of Banking Intelligence Trade Input and Access Reduce and Track Operational Risk –Simplified Trades Entry Allows quick entry of complex trade and prevents booking error –Configurable trade derivation/enrichment Fully controlled by static data instead of hard-coded –Read-Only Fields Protecting a formula ensures the product remains as initially designed and does not get altered at the time of trade entry –Restricted Access to products family Only authorized users must have access to specific complex products. The system must protect against unauthorized access

19. Harnessing the Network of Banking Intelligence Callable Trigger PRDC cont When structured products becomes as easy as vanilla…

20. Harnessing the Network of Banking Intelligence Trade Lifecycle and Integration For free ?!

21. Harnessing the Network of Banking Intelligence Trade STP Trade events management is inherited from the components types: –Market Underlying =>Reset events –Credit Underlying=>Default event, Post-Default Lifecycle –Option=>Exercise event –Barrier=>Crossing event –etc… Accounting and P&L events are also inherited from component types: –All cash flows components => Cash events –interest components => Accrued Interest –Fee components => Amortizations –etc… Confirmation and Documentation: –A generic structured product framework allows for direct and automated mapping of the product parameters and formulas into a document template

22. Harnessing the Network of Banking Intelligence Interfaces and Reporting A typical problem in interfacing and reporting structured products is the complexity of data model and the non- compatibility of the data model from one product to the other Implemented solution: –Product meta-description that summarizes the instruments in a flat, simplified and standardized model –Mapping between the product parameters and the flat representation can be a simple configuration –Example: the Callable Trigger PRDC presented earlier can be viewed for reporting/interfacing purposes as:

23. Harnessing the Network of Banking Intelligence Valuation Models Trends…

24. Harnessing the Network of Banking Intelligence Valuation Models Trends Until recently pricing model integration was for the most part product specific: –One Financial Product => One Pricing Model implementation Trend is shifting to a generic approach for several reasons: –Structured Product and Pricing Models are getting more and more sophisticated –Latest model development such as affine models provides ideal tool for generic and multi-asset calibration –Deployment of grid computing framework –Time-to-market with generic models is much more efficient

25. Harnessing the Network of Banking Intelligence What about Models Integration? Product independent pricing model implementation in the structured product engine requires: –Automatic detection of the risk factors This is possible by analyzing underlying, and payment currencies –Proper separation of the different methods called during the valuation process: Calibration Instruments Underlying process modeling Numerical Procedure –More importantly: easy translation of the product features (pay-off formulas, path-dependencies, Callable option..) So that these features do not need to be re-implemented at the pricing model level (in a tree or a MC simulation), and can be automatically interpreted by the pricing model from the product description –Grid enabled at the pricing level For ex: MC simulation path

26. Harnessing the Network of Banking Intelligence Implementing a Structured Products Solution Providing Expertise

27. Harnessing the Network of Banking Intelligence MUST Implementation Schema Tier 1 International Investment Bank - Structured Rates Desk – 100 + Products Templates - Proprietary Full ownership of the products design Their own pricing models through APIs implemented with the help of Misys Consulting Tier 3 US House Financing Bank - Structured Advances Business - 20 + Products Templates Work closely with Misys Consulting for the definition of their products Use provided core pricing solution such as BGM model New Product Design Processing Definition: Accounting Schema, Payments, Docs… Valuation Model New Product Validation Control and Security Trade Entry Screen, Access Control New Product Design Processing Definition: Accounting Schema, Payments, Docs… Valuation Model New Product Validation Control and Security Trade Entry Screen, Access Control

28. Harnessing the Network of Banking Intelligence Conclusion Misys Summit/MUST 17+ years experience in providing solution to derivatives and structured products business 135 clients / 300 sites around the world managing their derivatives books in Summit 15 clients already LIVE on MUST – 25 clients currently implementing it Summit available in ASP model Summit/MUST: several times award winning as the most innovative solution

29. Harnessing the Network of Banking Intelligence Most recent Summit/MUST Awards The Most Exciting & Innovative Software Release The Best Technology Innovation of The Year - Europe N°1 Cross-Asset Front-to-Back Office solution Technology Company of The Year - Asia N°1 Structured Products Front-to-Back Office system N°1 Software on the Technology pinnacle Best Sell-Side Innovation with Credit Derivatives on MUST