1. Triparty Collateral Management The efficient outsourced solution for managing and securing repo transactions
AMEDA meeting
Beirut – 29 April 2010
Bernard Ferran
Regional Head, Relationship Management

2. AMEDA – Beirut 29 April 2010 Agenda
Introduction
Repos and the repo markets
Triparty collateral management
Collateral Allocation Interface – Central Bank model

3. Market turmoil The key milestones
A number of investment funds freeze redemptions
Concerns about the valuation of structured products
Emergency rescue
of Bear Stearns
Lehman Brothers
bankruptcy
Leverage crisis and
credit crunch turns
into a full blown insolvency problem
15 Sep 2008
9 Aug 2007
13 March 2008
Drying-up of inter-bank market
Absence of term financing
Shortage of USD financing in Europe
Massive de-leveraging
Political willingness of the international community to look for a global solution to a global crisis
Coordinated actions of central banks
Increasing intermediation role
Special term operations and securities lending schemes
A wider range of eligible collateral

4. Market turmoil Eurepo/Euribor 3M Problems at Northern Rock Rescue of
Bear Stearns
Collapse of
Lehman Brothers
Problems at Sachsen LB and West LB
Citi closes 7 SIVs
Problems at IKB
Bear Stearns shuts down two HFs
Aug 23 – ECB Long Term Reserve Operation
March 11 -Other CB coordinated effort announcing $200bn of new emergency lending for banks
Sep 12 – ECB Long Term Reserve Operation
Dillon Read HF shut down by UBS
Dec 12 - concerted CB action (FED, ECB, BOE, SNB) – TAF auction

5. A major crisis Across all market segments
Unsecured
Money markets
Securities lending
Repo
Central bank credit/liquidity
Cash driven
No collateral !
Securities collateral
Routine
(e.g. tenders, …)
Securities driven
Contingency
Cash collateral
Unsecured market dried-up
Term market disappeared
Concerns of final Beneficial Owners on certain cash reinvestment programs
No more term financing
Secured money market
CCP GC baskets
Massive intermediation
Contingency schemes + - - -

6. What investors focus on ? Priorities
By order or priority, the money-markets investors will focus on
Credit/counterparty risk
Liquidity risk
Return
Need to find a secured financing solution  The repo markets

7. From Unsecured to Secured Financing The club is growing
Unsecured is no longer an option
Move to the secured space, in particular to the repo space
However, managing collateral brings new challenges:
Operational risks, substitution, settlement, corporate actions,
valuation, etc.
Requires resources and know-how
Cash investors (e.g. MMF, Corporates, hedge funds,
insurance companies) as new entrants in collateral
management opt for the Triparty Solution

8. AMEDA – Beirut 29 April 2010 Agenda
Introduction
Repos and the repo markets
Triparty collateral management
Collateral Allocation Interface – Central Bank model

9. Repos and the repo markets An introduction
What is a repo?
Repo can be defined as an agreement in which one party sells securities or other assets to a counterparty, and simultaneously commits to repurchase the same or similar assets from the counterparty, at an agreed future date, at a repurchase price equal to the original sale price plus an interest
History of repo
Created by the Federal Reserve Bank of New York in 1916
Boosted by the Glass-Steagall act of 1933 when US investment banks massively started to fund their inventory (development of the ‘general collateral repo’).

10. Repos and the repo markets An introduction
What are the different repo products?
“Repos” – borrow of cash against securities
“Reverse repos” – investment of cash against securities
“SecLending” - borrow against cash
“Total Return Swap”

11. Repos and the repo markets The mechanics of a repo trade
A Dutch Bank A is trading a one-month repo with Spanish Bank B at a rate of 0.885%
Dutch
Bank A
€10,000,000 of DE
Spanish
Bank B
D-day
€ 12,157,315.07
Dutch
Bank A
€10,000,000 of DE
Spanish
Bank B
D-day
+ 1 month
€ 12,166,579.96

12. Repos and the repo markets Bloomberg screen

13. Repos and the repo markets The functions of a repo desk
Firm financing
Borrowing cash to fund long positions in securities
Match book trading
Traders make two-way dealing prices on repo
Customers financing (hedge funds)
Proprietary trading
Securities lending
Borrowing of securities to cover short positions
Structured trading

14. Repos and the repo markets Risks and risk mitigation
Legal risk
Market standard legal agreements (e.g. GMRA)
Risk of default of counterparty
Thorough selection of counterparties
Market and liquidity risk on securities collateral
Clear definition of acceptable collateral
Imposed diversification through concentration limits
Over-collateralisation of transactions through margins
Operational risk
Settlement risk
Corporate event risk

15. Repos and the repo markets The European repo market

16. The European repo market Collateral analysis
Share of sovereign collateral 81. 2%

17. AMEDA – Beirut 29 April 2010 Agenda
Introduction
Repos and the repo markets
Triparty collateral management
Collateral Allocation Interface – Central Bank model

18. Triparty Collateral Management History
Bevil, Bressler and Schulman, a US securities firm
Bankruptcy in 1985
Hold-in-custody (HIC) repos
‘Double-dipping’
BB&S was using the same piece of collateral for more than one repo
Loss of over $1bn
The US Securities and Exchange Commission (SEC) asked US banks Chase Manhattan Bank and Bank of New York to become custodians for repos (“Triparty agents”)
Triparty was launched in Europe in the early 90’s

19. Euroclear Triparty client base Increasing financing opportunities
Custodian Bank*
Investment Managers
Asset Managers, Money Market Funds, Corporates …
Collateral
Takers
Agent lenders
Commercial Banks
Central Banks
Custodian Bank* Hedge Funds
Collateral
Givers
Commercial Banks
Broker Dealers
1993 …
… 2010
* Acting as representative

20. Repos and the repo markets Risks and risk mitigation
Legal risk
Market standard legal agreements (e.g. GMRA)
Risk of default of counterparty
Thorough selection of counterparties
Market and liquidity risk on securities collateral
Clear definition of acceptable collateral
Imposed diversification through concentration limits
Over-collateralisation of transactions through margins
Operational risk
Settlement risk
Corporate event risk
Triparty Collateral Management
Triparty Collateral Management

21. Mitigating liquidity and market risks
The outsourcing solution Market and liquidity risk of securities collateral
Risks
Risk mitigation
Criteria
Time to maturity
Instrument type
Credit risk
Country risk
Event risk
ELIGIBILITY
Rating
Issuer type
Country
CONCENTRATION
LIMITS
Interest rate risk
Market volatility
Foreign exchange risk
Quotation age
Capitalisation
Traded volume
MARGIN
PERCENTAGES
Liquidity risk
Mitigating liquidity and market risks

22. Triparty collateral management The Collateral Management outsourcing solution
Bi-lateral Contract
Triparty Service Agreement
Operating Procedures
Terms and Conditions
Eligibility profile
Concentration profile
Margin percentages
Collateral
giver
Collateral
taker
ELIGIBILITY SET 1
Eligible : AAA - A
No concentration
x % haircut
ELIGIBILITY SET 2
Eligible : AAA - BBB
only y % of BBB
z % haircut
Neutral agent

23. Triparty collateral management Operational risk
Bilateral agreement
Collateral giver
Collateral taker +
Triparty service agreement
Processing
Reporting
Match terms of the transaction
Verify collateral eligibility
Daily mark-to-market
Automatic margin calls
Automatic substitutions
Calculate, enter and settle
instructions (DVP or FOP)
Automatic transfer of coupons
Validation & matching
Margin
Settlement
Custody
Risk management
Trade simulation

24. Triparty collateral management Mitigating risks of repo transactions
Daily mark-to-market
Automatic and unilateral margin calls
Cash exposure
of the repo
Value of
Securities collateral
Triparty Collateral Management

25. The outsourcing solution Mitigating the operational risk
TRANSACTION
Collateral
giver
Collateral
taker
Triparty
Services
Matching
Selection
Transfer
Valuation
In an efficient,
scalable,
risk-controlled
environment
Custody
Reporting

26. Triparty collateral management Customer’s benefits
Collateral Takers
Collateral Givers
By outsourcing and automating the operational burden related to collateral management, you reduce your back-office workload and operational risk
Mitigate market risks by implementing collateral criteria in line with your risk appetite and diversification requirements
Benefit from ‘top notch’ asset protection
Top quality asset services for securities used as collateral
Granular reporting for full control over the management of the exposure
Optimum usage of collateral resources
Pool your collateral resources and collateralise across products (repo, securities lending, derivatives,…)
Easily indentify financing opportunities using our ‘state-of-the-art’ trading simulator
Gain access to a wide range of counterparties across all market segments of the industry, all within Euroclear Bank

27. Reporting Triweb: trade simulation & granular reporting
Monitoring collateral position
Static data (triparty agreements)
Dynamic data (updated 8 times a day)
Supporting trading activity
Funding possibilities
Customized reports

28. Reporting Triweb: trade simulation & granular reporting

29. Triparty Collateral Management The Collateral Hub
Rely on a robust and tested collateral management infrastructure
Outsource non-core activity to a specialised firm
Control and optimise assets through granular reporting
Multiply opportunities with the 250+ firms active on Euroclear’s triparty platform

30. AMEDA – Beirut 29 April 2010 Agenda
Introduction
Repos and the repo markets
Triparty collateral management
Collateral Allocation Interface – Central Bank model

31. Collateral Allocation Interface Central banks taking central stage
Credit Institution
Credit
Collateral Profile .
AutoSelect
Triweb
Euroclear Bank
Collateral Management Services (CMS)
In line with Central Bank control requirements

32. Evolution Outsourcing?
Collateral
Central Bank
Credit Institution
Outsourcing
Collateral Profile
Reporting
Custody
Valuation
Settlement
Selection
Matching

33. Easier access to central bank credit Collateralising central bank credit in triparty

34. Thank you