1. Dealing Rooms since the Financial Crisis Dr Yves Wagner The Director’s Office LIA October 2009 The Asset Managers’ and Institutional Investors’ Perspective LIA Lux Investment Advisors

2. Introduction The Asset Managers’ Expectations, especially for Institutional Investors, are linked to:  Good Corporate Governance Practices  The Legal Framework imposed on Investment Firms (MiFID) The Financial Crisis 2007-2009 put pressure on Dealing rooms:  Directors’ Responsibility Awareness increased (rubber stamping, oversight agenda, crisis management)  Counterparty Exposure, Trading Methodology, Valuation, Reporting LIA Lux Investment Advisors

3. Institutional Investors Bank Trusts Mutual Funds Insurance Companies Universities and Foundations Pension Funds Hedge Funds CIS: Collective Investment Schemes LIA Lux Investment Advisors

4. Corporate Governance: Directors’ Agendas before the crisis STATUTORY “APPROVAL” AGENDA Approval of the agenda Approval of the minutes Approval of the accounts Approval of the dividend [if any] Approval of major or statutory corporate event. STATUTORY “APPROVAL” AGENDA Approval of the agenda Approval of the minutes Approval of the accounts Approval of the dividend [if any] Approval of major or statutory corporate event. PROFESSIONAL “OVERSIGHT” AGENDA Statutory agenda plus Investment management report Performance review Sales, distribution and marketing Product management Operations including valuation Counterparty risks Risk management report: financial, operational, counterparty, reputational, …risks Legal and compliance report Internal control and audit PROFESSIONAL “OVERSIGHT” AGENDA Statutory agenda plus Investment management report Performance review Sales, distribution and marketing Product management Operations including valuation Counterparty risks Risk management report: financial, operational, counterparty, reputational, …risks Legal and compliance report Internal control and audit LIA Lux Investment Advisors

5. Corporate Governance: Directors’ Agendas after the crisis PROFESSIONAL “OVERSIGHT” AGENDA Statutory agenda plus Investment management report Performance review Sales, distribution and marketing Product management Operations including valuation Counterparty risks Risk management report: financial, operational, counterparty, reputational, …risks Legal and compliance report Internal control and audit PROFESSIONAL “OVERSIGHT” AGENDA Statutory agenda plus Investment management report Performance review Sales, distribution and marketing Product management Operations including valuation Counterparty risks Risk management report: financial, operational, counterparty, reputational, …risks Legal and compliance report Internal control and audit CRISIS ISSUES MANAGEMENT AGENDA Oversight agenda plus issues Counterparties failures Redemptions Liquidity / Deleveraging / credit lines management Valuation / Fair pricing / Gates / Discount / Fire sales. Transfers of assets Suspension / liquidation Investor communications Parent company assistance Central banks intervention. CRISIS ISSUES MANAGEMENT AGENDA Oversight agenda plus issues Counterparties failures Redemptions Liquidity / Deleveraging / credit lines management Valuation / Fair pricing / Gates / Discount / Fire sales. Transfers of assets Suspension / liquidation Investor communications Parent company assistance Central banks intervention. LIA Lux Investment Advisors

6. Markets in Financial Instruments Directive of the European Parliament Conduct of Business Obligations  Investment Firms must act:  Honestly, fairly and professionally  in the best interest of its clients  All information addressed by the investment firm to clients or potential clients:  shall be fair, clear  and not misleading  Appropriate information shall be provided about:  appropriate guidance on and warnings of risks associated with investments  execution venues  costs and associate charges To be defined LIA Lux Investment Advisors

7. Markets in Financial Instruments Directive of the European Parliament Obligation to execute orders on terms most favorable to the client (1)  Investment firms have to take all reasonable steps:  to obtain, when executing orders, the best possible result for their clients  taking into account:  price  costs  speed  likelihood of execution  likelihood of settlement  size  nature  any other relevant execution Selection Criteria LIA Lux Investment Advisors

8. Markets in Financial Instruments Directive of the European Parliament Obligation to execute orders on terms most favorable to the client (2)  Investment firms have to establish and execute an Order Execution Policy (OEP)  Investment firms have to monitor the effectiveness of their OEP  Investment firms have to define their Client Order Handling Rules (COHR) Selection Criteria LIA Lux Investment Advisors

9. Markets in Financial Instruments Directive of the European Parliament Other Possible Selection Criteria  Post-Trade Disclosure by Investment Firms (volume, price, time)  Pre-Trade Transparency (spreads, depths, market models, trading methods)  Access to Central Counterparty, Clearing and Settlement Facilities  Admission of Financial Instruments to trading (see hereunder) LIA Lux Investment Advisors

10. Markets in Financial Instruments Directive of the European Parliament Admission of Financial Instruments to Trading  Any admitted FI is traded in a fair, orderly and efficient manner, is negotiable  Also for Derivatives: orderly pricing and effective settlement conditions  Issuing Companies have initial, ongoing and ad hoc disclosure obligations LIA Lux Investment Advisors

11. Conclusions What Asset Managers expect from Dealing Rooms is a Valuation, Trading and Execution Process allowing Managers to fulfill their legal, moral and fiduciary obligations to the Client. Reporting in general is here a key issue. Since the Financial crisis, those expectations increased, especially in the fields of:  Analysis of Counterparty Risk,  Analysis of Fair Valuation, especially for complex instruments,  Analysis of Liquidity,  Guaranty of Best Execution, Spreads, Timing, especially for complex and “illiquid assets”,  Market Risk of “illiquid”, “complex”, and “leveraged” assets,  Execution Policy, especially in case of “deleveraging”, accepted Credit Lines Facilities  Reporting on Order Management, Execution Policies, Settlement Risks  Reporting on Front, Middle and Back Office Efficiencies,  Reporting on Operational Risks. LIA Lux Investment Advisors