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STEERING COMMITTEE OTC DERIVATIVES: Electronic Confirmation Service STEERING COMMITTEE OTC DERIVATIVES: Electronic Confirmation Service

AGENDA – September 16, 2002 • Overview of Trade Confirmation Initiative • Preliminary Business AGENDA – September 16, 2002 • Overview of Trade Confirmation Initiative • Preliminary Business Case Analysis • Discussion Critical Planning Factors • Next Steps

OVERVIEW OF TRADE CONFIRMATION INITIATIVE OVERVIEW OF TRADE CONFIRMATION INITIATIVE

RATIONALE FOR NEW DTCC SERVICE • Current manual process is expensive and labor intensive, RATIONALE FOR NEW DTCC SERVICE • Current manual process is expensive and labor intensive, resulting in lengthy confirmation cycles, mistakes, and a generally difficult control environment, including difficulty in quickly identifying and responding to the most important discrepancies, non-standard provisions, etc. • Less tangible, but real, costs include: • High probability of improper hedging due to uncertainty or misunderstanding of legally enforceable positions (write-offs) • Limited ability to accommodate increased deal flow (business drag) • Potentially, additional regulatory capital charges (capital costs) • In addition, there is currently no single effective forum for streamlining confirmation process en masse or encouraging quicker/better internal processes and no facility with good buyside connections

RATIONALE FOR NEW DTCC SERVICE • DTCC service will not only replace personnel performing RATIONALE FOR NEW DTCC SERVICE • DTCC service will not only replace personnel performing manual matching of confirms, but will also provide deal certainty, improve internal control processes and facilitate ramp up of volumes, thus reducing less tangible, as well as the tangible, costs. • In addition, by taking deal confirmation to the worlds largest industry utility, the industry will: • Effectively discourage multiple one-off arrangements – consensus reached quicker with an initial smaller group will have imprimatur of recognized utility • Permit utility reporting on deal input timeframes, error rates, etc. – DTCC successfully used this reporting process to cleanup prior industry-wide confirmation/matching problems in the municipal and corporate debt markets • Have the only provider with strong buy-side connections, a product aimed at easing buy-side, as well as inter-dealer processing, and a place where buy-side players would be comfortable with one-stop shopping

TRANSACTIONS COVERED DTCC service aims at covering all transactions, but, to build credibility and TRANSACTIONS COVERED DTCC service aims at covering all transactions, but, to build credibility and provide quick relief for the most problematic areas, DTCC proposes the following implementation schedule: • Within 8 months – single reference entity credit derivatives; and equity options – initial trade only • Year 2 – subsequent events; other credit and equity derivatives; begin fixed income implementation (probably rate and currency options) • Years 3 - 5 – rate and currency swaps, FRAs, commodities (schedule based on accumulated experience, need and state of industry, some items could be pushed up to year 2) Aggressive buy-side marketing follows each successful inter-dealer implementation (subject to analysis and approval by steering committee).

OTHER HIGHLIGHTS FROM DEMOs • Initial feedback from selected large buy-side players is positive, OTHER HIGHLIGHTS FROM DEMOs • Initial feedback from selected large buy-side players is positive, especially ability to accept or modify dealer confirms on-line in one place and use DTCC as central deal database. • The following suggestions, received during demo process, have been incorporated into design and cost estimates for initial pilot implementation: • System will indicate to users when defined key items match (as specified by steering committee), even when non-key items remain unmatched • Where not all key items match, system will suggest pairings of submissions based on some subset of key items matching (as specified by steering committee) • System will indicate when there is no suggested pairing for a submission • System will indicate whether a trade contains non-standard additional provisions, and when only they remain unresolved

PLATFORM FOR FURTHER BENEFITS • Daily automated price/deal reconciliation to facilitate collateralization process • PLATFORM FOR FURTHER BENEFITS • Daily automated price/deal reconciliation to facilitate collateralization process • Payment tracking; end-of-day net settlement at DTC • Multi-lateral collateral and close-out netting • Provides significant regulatory capital benefits under Basle as firms are required to accept non-zero risk-weight collateral • As vetted with leading U. S. and U. K. bankruptcy counsel, proposed DTCC collateral netting facility will: • Permit multi-lateral netting of daily marks and close-out P&L • Reduce counterparty failure risk without loss sharing or independent pricing of deals – parties to badly priced or volatile deals bear the risk • Streamline and remove risk from the collateralization process

PRELIMINARY BUSINESS CASE ANALYSIS PRELIMINARY BUSINESS CASE ANALYSIS

KEY ASSUMPTIONS IN INITIAL BUSINESS CASE • Two initial transaction types: • Credit Derivative: KEY ASSUMPTIONS IN INITIAL BUSINESS CASE • Two initial transaction types: • Credit Derivative: Single Reference Entity • Equity Derivative: Equity Options? • One set of XML messages per product: • Use Fp. ML where it has been developed and satisfactorily tested for a product, otherwise develop an Fp. ML-like XML (development led by Ops & Tech group; agreement reached by 11/1)

KEY ASSUMPTIONS IN INITIAL BUSINESS CASE • Core functionality in Release 1. 0 for KEY ASSUMPTIONS IN INITIAL BUSINESS CASE • Core functionality in Release 1. 0 for Q 2’ 03 • Trade matching of two sides • Acceptance/modification of counterparty input • Field by field matching with tolerances where defined by group business rules • System identified potential matches for users (Where key items match, where subset of key items match, etc. ) • Full transaction audit trail and history • Transaction entry and modification through computer to computer transmission & via the public Internet • Multi-year transaction storage with on-line access

KEY ASSUMPTIONS IN INITIAL BUSINESS CASE • Real-time processing – trade matching operates real KEY ASSUMPTIONS IN INITIAL BUSINESS CASE • Real-time processing – trade matching operates real time • Reporting in real time (to be confirmed by group is more expensive than multiple batch cycles • Processing of unmatched items can be done through computer transmission or via web interface • Web interface will support functionality as shown in TRACER demo • On-line exception viewing with user defined sorting filters • Support for counter party identification data • Multi-level entitlement structure administered by users • Digital certificates for online authentication

TIMING ASSUMPTIONS Q 3’ 02 Finalize Business Case Pilot commitment Functional Specifications Pilot Participant TIMING ASSUMPTIONS Q 3’ 02 Finalize Business Case Pilot commitment Functional Specifications Pilot Participant sign off Technical Specifications Systems Build Systems Test Q 4’ 02 Q 1’ 03 Q 2’ 03 11/15/02 11/1/02 1/3/03 4/403 5/1603 5/30/03 Pilot Rollout

VOLUME ASSUMPTIONS ISDA 2002 Operations Benchmarking Survey • Adjusted to reflect Pilot Market Opportunity VOLUME ASSUMPTIONS ISDA 2002 Operations Benchmarking Survey • Adjusted to reflect Pilot Market Opportunity e. g. 100 Trades 70% for “vanilla” template 38 % interdealer market 60 -80% largest counterparties Net 20 -25% of your Daily Volume assumed in Business Case

DTCC EXPENSE ASSUMPTIONS • $4 million development expense amortized over 3 years • $2. DTCC EXPENSE ASSUMPTIONS • $4 million development expense amortized over 3 years • $2. 5 mm for release 1. 0 • $1. 5 for release 1. 1 • Leverage trade matching engine & existing data centers • Pilot participation of 6, but expansion of participants to 35 by year 5 • Two sources of revenue • Trade ticket starts at $100 with reductions anticipated with additional volume & learning curve benefits • $5, 000/mo/product membership fee • Fully loaded cost for line of business

CALCULATION OF FIRM BENEFITS • Reduction in Operating Expenses • Headcount reduction based on CALCULATION OF FIRM BENEFITS • Reduction in Operating Expenses • Headcount reduction based on ISDA reporting of Trades per FTE per week • Fully loaded FTE = $160, 000 • Salary, bonus, benefits, technology support, space • Risk reduction --- $300, 000 per year • One time implementation expense --- $250, 000

Review of Pro Formas See separate handout Review of Pro Formas See separate handout

DISCUSSION OF CRITICAL PLANNING FACTORS DISCUSSION OF CRITICAL PLANNING FACTORS

DISCUSSION OF CRITICAL PLANNING FACTORS Items for Discussion • Selection of specific product types DISCUSSION OF CRITICAL PLANNING FACTORS Items for Discussion • Selection of specific product types for pilot • Key technical and functionality assumptions • Ops & Tech working group responsibilities (see Next Steps) • Should use of pared down templates be a goal • Should there be a role for inter-dealer brokers and buyside in the pilot

NEXT STEPS NEXT STEPS

NEXT STEPS • Operations & Technology Working Group • Recommend specific functionality for each NEXT STEPS • Operations & Technology Working Group • Recommend specific functionality for each implementation phase • Address message and interface details • Recommend trade matching criteria, tolerances, key items, suggested pairings, etc. • DTCC staff will be produce documentation for review by working group Target first meeting: week of Sept. 23 rd& weekly thereafter until initial specs completed by November 1

NEXT STEPS • Steering Committee • Meet every two weeks beginning week of Sept. NEXT STEPS • Steering Committee • Meet every two weeks beginning week of Sept. 30 • Review Ops & Tech progress on technical issues, sign off on business issues • Prior to next meeting, provide trade data estimates needed to finalize pricing and general feedback on business case • Quick time to market requires early commitments to the pilot