DTCC Deriv/SERV DTCC Deriv/SERV ACSDA Leadership Forum ACSDA Leadership Forum

Michael Velleca, Vice President, Deriv/ServOctober 8, 2007

2DTCC Confidential

Market DriversMarket Drivers

• DTCC has been working with the industry since mid 2002 to reduce operating risk in OTC derivatives - targeting activities on a priority basis

• In 2007, market growth continues unabated; top priorities are product coverage and extension of services

• DTCC has been working with the industry since mid 2002 to reduce operating risk in OTC derivatives - targeting activities on a priority basis

• In 2007, market growth continues unabated; top priorities are product coverage and extension of services

ProgressProgress

• Dramatic growth in customers

• Current: 980+

• Broker dealers: 30

• Buy-side clients: 950+

• Dramatic growth in customers

• Current: 980+

• Broker dealers: 30

• Buy-side clients: 950+

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Benefits of Deriv/SERVBenefits of Deriv/SERV

Reduced Operational Risk;

• Fast and accurate Confirmations

• Quicker feedback on differences

• Reduce outstanding backlog of paper documents

• Easier dialogue with your counterparty

• Common Solution to Multiple Asset Classes

• Low integration and training costs

Reduced Operational Risk;

• Fast and accurate Confirmations

• Quicker feedback on differences

• Reduce outstanding backlog of paper documents

• Easier dialogue with your counterparty

• Common Solution to Multiple Asset Classes

• Low integration and training costs

4DTCC Confidential

Connecting To Deriv/SERVConnecting To Deriv/SERV

Automated Manual

Spreadsheet Template Upload – manual upload of a CSV file via web interface

Via T1 line – Computer-to-Computer connection with MQ Series real-time messaging.

Affirmation – Affirm a trade alleged by the counterparty via web interface. Does not require input by the client.

Data Entry Screen – manual data entry via web interface.

5DTCC Confidential

CDS Trade MatchingCDS Trade Matching

• Service introduced in Nov ’03 that provides confirmation and legal ISDA execution for Credit Default Swaps (CDS) leveraging existing DTCC infrastructure

• DTCC Deriv/SERV offers confirmation matching services on Credit Derivative Products

• Cover all trade lifecycle events

• Service introduced in Nov ’03 that provides confirmation and legal ISDA execution for Credit Default Swaps (CDS) leveraging existing DTCC infrastructure

• DTCC Deriv/SERV offers confirmation matching services on Credit Derivative Products

• Cover all trade lifecycle events

Credit DerivativesCredit Derivatives

6DTCC Confidential

Federal Reserve involvement with CDSFederal Reserve involvement with CDS

• The Federal Reserve and other global regulators become The Federal Reserve and other global regulators become concerned in 2005 that risk resulting from unexecuted paper concerned in 2005 that risk resulting from unexecuted paper confirmations in the CDS market was too large.confirmations in the CDS market was too large.

• The Broker dealers executing the biggest volumes were called to The Broker dealers executing the biggest volumes were called to see the FED September 2005.see the FED September 2005.

FED Targets involving DTCC• 31st January ‘06 – all clients trading >5 trades per week confirm 31st January ‘06 – all clients trading >5 trades per week confirm

on electronic platformon electronic platform

• 31st March ’06 – all clients trading >5 trades per month confirm 31st March ’06 – all clients trading >5 trades per month confirm on electronic platformon electronic platform

• 3131stst October ’06 – brokers dealers to submit 98% of eligible October ’06 – brokers dealers to submit 98% of eligible DTCC trade on or before t +1, confirm 96% DTCC trades by t + DTCC trade on or before t +1, confirm 96% DTCC trades by t + 5.5.

• The Federal Reserve and other global regulators become The Federal Reserve and other global regulators become concerned in 2005 that risk resulting from unexecuted paper concerned in 2005 that risk resulting from unexecuted paper confirmations in the CDS market was too large.confirmations in the CDS market was too large.

• The Broker dealers executing the biggest volumes were called to The Broker dealers executing the biggest volumes were called to see the FED September 2005.see the FED September 2005.

FED Targets involving DTCC• 31st January ‘06 – all clients trading >5 trades per week confirm 31st January ‘06 – all clients trading >5 trades per week confirm

on electronic platformon electronic platform

• 31st March ’06 – all clients trading >5 trades per month confirm 31st March ’06 – all clients trading >5 trades per month confirm on electronic platformon electronic platform

• 3131stst October ’06 – brokers dealers to submit 98% of eligible October ’06 – brokers dealers to submit 98% of eligible DTCC trade on or before t +1, confirm 96% DTCC trades by t + DTCC trade on or before t +1, confirm 96% DTCC trades by t + 5.5.

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Customer Adoption of Deriv/SERVCustomer Adoption of Deriv/SERV

0100200300400500600700800900

1000

2004 2005 2006 20070

100200300400500600700800900

1000

2004 2005 2006 2007

Global buy-side take-up*

All major dealers globally use Deriv/SERV

*Includes 2nd tier dealers

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Equity Derivatives Equity Derivatives

• OTC Index options

• Single share options

• Variance Swaps

• Total Return Swaps

• OTC Index options

• Single share options

• Variance Swaps

• Total Return Swaps

DTCC Deriv/SERV offers confirmation matching services on the following Equity Derivative Products:

DTCC Deriv/SERV offers confirmation matching services on the following Equity Derivative Products:

Deriv/SERV is also developing a tool that will facilitate negotiation of Master Confirmation Agreements

9DTCC Confidential

• Developed based upon customer demand for a one-stop shop

• Vanilla Interest rate swaps and swaption trade variants

• Covers all trade lifecycle events

• Developed based upon customer demand for a one-stop shop

• Vanilla Interest rate swaps and swaption trade variants

• Covers all trade lifecycle events

Interest Rate DerivativesInterest Rate Derivatives

10DTCC Confidential

Payment Processing: Deriv/SERV solutionPayment Processing: Deriv/SERV solution

Provides reconciliation and bilateral netting positions for OTC derivative payments

• Started with quarterly CDS cash flows

• Leverages existing trade matching connectivity

• Points to potential matches

• Designed to process OTC payments in any currency

Provides reconciliation and bilateral netting positions for OTC derivative payments

• Started with quarterly CDS cash flows

• Leverages existing trade matching connectivity

• Points to potential matches

• Designed to process OTC payments in any currency

11DTCC Confidential

STP challenges for OTC ContractsSTP challenges for OTC Contracts

Trade volumes only go up

Expanding customer base of OTC users

Expanding product set & complexity

Pressure from regulators on the dealers

Competition for skilled staff

Bilateral administration

Trade volumes only go up

Expanding customer base of OTC users

Expanding product set & complexity

Pressure from regulators on the dealers

Competition for skilled staff

Bilateral administration

12DTCC Confidential

Today: Bilateral Administration EnvironmentToday: Bilateral Administration Environment

• Parties must constantly “sync up” during contract life• Payments, events, margining, etc.

• Each party is hostage to its counterparties’ processing• You’re only as good as your counterparty –

your records may be right, but if your counterparty disagrees or doesn’t know, you have a problem

• Parties must constantly “sync up” during contract life• Payments, events, margining, etc.

• Each party is hostage to its counterparties’ processing• You’re only as good as your counterparty –

your records may be right, but if your counterparty disagrees or doesn’t know, you have a problem

13DTCC Confidential

Deriv/SERV Trade Information WarehouseDeriv/SERV Trade Information Warehouse

• November 2006, DTCC launched its Deriv/SERV Trade Information Warehouse, creating a centralized and secure global post-trade processing infrastructure

• The Warehouse is made up of two components:• A comprehensive trade database containing the

“official legal record” for all contracts eligible for automated Deriv/SERV confirmation

• A central support infrastructure that automates and standardizes post-trade processes (such as payments, notional adjustments and contract term changes) over the life of each contract, which can extend five or more years

• Currently the warehouse supports credit derivatives• Will extend to other OTC derivatives products

including rates, equities, FX and commodities in the future

• November 2006, DTCC launched its Deriv/SERV Trade Information Warehouse, creating a centralized and secure global post-trade processing infrastructure

• The Warehouse is made up of two components:• A comprehensive trade database containing the

“official legal record” for all contracts eligible for automated Deriv/SERV confirmation

• A central support infrastructure that automates and standardizes post-trade processes (such as payments, notional adjustments and contract term changes) over the life of each contract, which can extend five or more years

• Currently the warehouse supports credit derivatives• Will extend to other OTC derivatives products

including rates, equities, FX and commodities in the future

14DTCC Confidential

Deriv/SERV Trade Information Warehouse Cont’dDeriv/SERV Trade Information Warehouse Cont’d

• December 2006 - The Depository Trust & Clearing Corporation (DTCC) announced the selection of CLS Bank International (Continuous Linked Settlement (CLS®)) to provide central settlement of payments for over-the-counter (OTC) derivatives contracts housed in DTCC Deriv/SERV’s Trade Information Warehouse.

• CLS provides global settlement services in 15 currencies, and is an integral part of the foreign exchange market, settling 270,000 instructions equivalent to approximately $2.9 trillion each day.

• This partnership will provide an automated, seamless processing and settlement environment for the handling of OTC derivatives contracts on a global basis

• December 2006 - The Depository Trust & Clearing Corporation (DTCC) announced the selection of CLS Bank International (Continuous Linked Settlement (CLS®)) to provide central settlement of payments for over-the-counter (OTC) derivatives contracts housed in DTCC Deriv/SERV’s Trade Information Warehouse.

• CLS provides global settlement services in 15 currencies, and is an integral part of the foreign exchange market, settling 270,000 instructions equivalent to approximately $2.9 trillion each day.

• This partnership will provide an automated, seamless processing and settlement environment for the handling of OTC derivatives contracts on a global basis