OTC - Master Agreements RA Hermann Stahl Central Legal Dept. Frankfurt/Main Commerzbank AG

Master Agreements - I Which Products? OTC Derivatives Swaps Caps, Floors, Collars Options FRA’s Foreign Exchange Transactions Securities Lending Transactions Repurchase Transactions Commerzbank AG

Master Agreements - II National Master Agreements Deutscher Rahmenvertrag für Finanztermingeschäfte Austrian, Swiss, Dutch and Spanish Master Agree-ments BBA Master Agreements IFEMA (FX only) ICOM (FX options only) FEOMA (FX and FX options) Commerzbank AG

Master Agreements - III International Master Agreements (cross-border) 1992 ISDA Master Agreement (draft: 2002 ISDA Master Agreement) PSA/ISMA Global Master Repurchase Agreement OSLA (Overseas Securities Lender‘s Agreement) AFB/FBF Convention-cadre relative aux opérations de marché à terme Commerzbank AG

Master Agreements - IV European Banking Federation EMA = European Master Agreement (currently only with annexes for repurchase and securities lending transactions; annex for derivatives under development) The Bond Market Association Cross-Product Master Agreement International Swaps and Derivatives Association Cross-agreement bridge (project) Commerzbank AG

Master Agreements - V Why Master Agreements? simplification / standardization contractual framework Netting payment close-out insolvency capital adequacy requirements market risks credit protection Commerzbank AG

Structure Master Agreement Confirmation Definitions Definitions together: one single agreement Commerzbank AG

Structure of 1992 ISDA Master Agreement Section 1 - 18: General Schedule Part 1 - 4 (menue) Schedule Part 5 - ___ (free choice) ISDA Definitions Transaction (Swap) Confirmation 1996 ISDA Equity Derivatives Definitions 1997 ISDA Government Bond Option Def. 1998 FX and Currency Option Definitions 1998 ISDA Euro Definitions 1999 ISDA Credit Derivatives Definitions 2000 ISDA Definitions Commerzbank AG

1992 ISDA Master Agreement I Short summary of the most important provisions: Sec. 1(c) Single Agreement Sec. 2(a) Conditions precedent (c) Payment netting (d) Gross-up (tax) Sec. 3 Representations Sec. 4 Agreements Commerzbank AG

1992 ISDA Master Agreement II Short summary of the most important provisions: Sec. 5(a) Events of Default (i) Failure to pay or deliver (vi) Cross Default (vii) Bankruptcy Sec. 5(b) Termination Events (i) Illegality (iv) Credit Event upon Merger (v) Additional Termination Event (Schedule) Commerzbank AG

1992 ISDA Master Agreement III Short summary of the most important provisions: Sec. 6 Early Termination (close-out procedure) (a) Automatic Termination (b) Termination upon Notice (e) Calculation Method First Method („Walk Away“) Second Method (Full Two Way Payment) Market Quotation / Loss / Replacement Value under discussion Commerzbank AG

1992 ISDA Master Agreement IV Short summary of the most important provisions: Sec. 9(e) Confirmations Sec. 12 Notices Sec. 13 Governing Law (New York or English Law), Jurisdiction: New York or England Sec. 14 Definitions Commerzbank AG

1992 ISDA Master Agreement - Schedule I - Part 1: Termination Provisions Specified Entity (e.g. Affiliates) Cross Default (Threshold) Credit Event upon Merger Automatic Termination Market Quotation or Loss Termination Currency Commerzbank AG

1992 ISDA Master Agreement - Schedule II - Part 2: Tax Representations Part 3: Documents to be Delivered signature list, Board Resolution, abstract from register, Articles of Association, annual report, capacity legal opinion Part 4: Miscellaneous (a) Addresses for Notices (b) Process Agent (affiliate or special company) (d) Multibranch Party (h) Governing Law (New York, English Law) Commerzbank AG

1992 ISDA Master Agreement - Schedule III - Part 5: Other Provisions (free choice) Example: Incorporation of ISDA Definitions Set-off clause (obligations from other contracts) Relationship between Parties: Non-Reliance No Agency Commerzbank AG

1992 ISDA Master Agreement - Confirmation - Content of a Confirmation: reference to (existing) master agreement reference to applicable ISDA Definitions special provisions details of the transaction Commerzbank AG

Netting - Overview - 1. Payment Netting (settlement netting) 2. Novation Netting 3. Close-out Netting Commerzbank AG

Payment Netting EUR-Interest Rate-Swap A B floating fixed (14) 10,25 Payment Date 1 3 Payment Date 2 3,5 Payment Date 3 3,5 (14) 10,25 Payment Date 4 (3,75) net Commerzbank AG

Novation Netting FX Forwards Novation on 25.06.1999: B 26.05.1999 10 10,6 Euro USD A B 25.06.1999 5,5 5 USD Euro 29.11.1999 Novation on 25.06.1999: A pays 5 Euro, B pays 5,1 USD on 29.11.1999 Commerzbank AG

Close-out Netting Single Agreement Master Agreement Transactions 1. +4 MtM-value in favour of A 2. –2 MtM-value in favour of A 3. +1 MtM-value in favour of A 4. +2 MtM-value in favour of A 5. –1 MtM-value in favour of A 6. +3 MtM-value in favour of A Settlement Amount: + 7 MtM-value in favour of A + 2 unpaid amounts B + 0,2 interest on unpaid amounts B ./. 1 unpaid amounts A ./. 0,1 interest on unpaid amounts A Sum: + 8,1 Close-out Amount (claim of A against B) Commerzbank AG

Reduction of Credit Risk - Overview - Supervisory Recognition of Netting Novation Netting (BIZ 1988) Close-out Netting EU-Directive of 1996 Implementation in Germany: GroMiKV Grundsatz I Commerzbank AG

Supervisory Recognition of Netting Conditions: contractual netting agreement (internationally customary or recommended by trade association) single payment obligation in the event of insolvency or payment default mutual obligation incorporation of individual transactions validity and enforceability of netting agreement evidenced by written and reasoned legal opinion from knowledgeable and independent third party annual update submission to BAKred Commerzbank AG

Legal Opinions Insolvency Law No Capacity Opinion jurisdiction of headquarter jurisdiction of branches No Capacity Opinion Sponsors of Legal Opinions ISDA TBMA / ISMA Zentraler Kreditausschuß Commerzbank AG

Collateral I Reduction of Exposure which remains after Netting: expanded use of credit lines further reduction of capital requirements Types of Collateral: Cash Government Bonds Corporate Bonds Shares Commerzbank AG

Collateral II Collateral Agreements: ISDA AFB / FBF Credit Support Annex (New York, English + Japanese Law) Credit Support Deed (English Law) AFB / FBF Annexe remise en garantie Deutscher Rahmenvertrag für Finanztermingeschäfte Sicherheitenanhang (Deutsches Recht) Commerzbank AG