The CDS Market – An International Perspective Tokyo / 3 June 2014

The Science of Finance

\ 2 \ 2

Markit’s Role in the Credit Market

—Data Services — Price Data (spreads and context)

— Value Added Services (liquidity, sector curves, sensitivities)

—Administrator of — Credit Event Auctions

— ISDA CDS Standard Model

—Clearing — Services to the clearinghouses

— Distributor of clearing settlement prices

—Markit Indices

—Markit RED

—MarkitSERV — Trade matching, confirmation, clearing and regulatory reporting

—Portfolio Compression

—Transparency and education

\ 3 \ 3

JSCC and Markit

—Markit and the JSCC have partnered in various ways over the

years — Markit handles index and upcoming single name CDS submissions from

clearing members

— Markit calculates the clearing price on behalf of the JSCC

— Markit distributes the JSCC clearing prices

— MarkitSERV connects clearing participants to the JSCC

Trends

\ 5

Historical Perspective

1999 ISDA Definitions

2003 ISDA Definitions

2005 Credit event auctions

2008-2009 Credit Crisis (Lehman, Fannie, Freddie)

April 2009 Big Bang + Trading conventions

2012 Mandated Clearing

Trade reporting

2013 SEF 2014

MAT

2012 Greek Default

2010 Aiful, JAL

2014 (Expected) JSCC Single Name clearing

2014 ISDA Definitions

2011 JSCC clears iTraxx Japan

March 2009 Central Clearing

2008 Portfolio Compression

\ 6

— Many regulatory events

— DFA

— MiFID

— EMIR

— Basel III

— IOSCO

— Themes include

— Transparency

— Clearing

— Electronic trading

— Collateral/Margining

— Benchmarks

—Some certainty and some unanswered questions

— All rules not finalized

Regulations

\ 7 \ 7

Clearing is Established

Markit provides official CDS settlement prices daily for several clearinghouses

around the world:

* Instruments for Indices; Entities/Sovereigns for Single Names

Clearing House Instrument Type Coverage * Usual Time SLA Time

ICE Clear Credit Indices 128 5:00pm EST 5:20pm EST

ICE Clear Credit Single Names 326 4:45pm EST 5:00pm EST

ICE Clear Europe Indices 44 5:00pm GMT 5:20pm GMT

ICE Clear Europe Single Names 163 4:45pm GMT 5:00pm GMT

JSCC Indices 10 3:45pm JST 3:45pm JST

LCH Clearnet SA Indices 145 5:30pm GMT 5:30pm GMT

LCH Clearnet SA Single Names 187 6:00pm GMT 6:00pm GMT

CME Indices 56 6:00pm EST 6:00pm EST

\ 8 \ 8

Pervasiveness of CDS

Banks

• Risk Management

• Trading

• Valuation

Asset Managers

• Risk Management

• Trading

Regulators

• Rule writing

• Monitoring

Platforms

• Product creation

• Trading

Press

• Credit Monitoring

Corporations

• Market Monitor

• Information

\ 9

Market Structure for Liquidity Formation

Source: TABB Group

Bilateral

(fully customizable)

Counterparty “Organized Market” – ECN, SEF

Request/Order Message and Direction

Potential or Future Counterparty “Organized Market” – Exchange, ECN, MTF

Traditional

RFQ

(1-way, provisional liquidity)

Early Stage Electronic

Order-Driven

(2-way, full multilateral)

Where Regs Want to Go

\ 10

Electronic Trends

89%

79%

19%

11%

21%

59% 22%

2012

2013

2015e

Voice RFQ Electronic RFQ CLOB

What changes are you seeing in the swaps market? Why do you trade on the phone?

What percentage of your swaps will trade via

Source: TABB Group Report: US Swaps 2013: The Future Is Emerging (date)

Based on

conversations

with 50 US Buy

Side Firms,

circa Sept.

2013

74%

24%

24%

11%

7%

Electronification

Ticket Size Change

Less Liquidity

Other

Regionalization

50%

36%

18%

14%

11%

7%

7%

Habit

Trade Size

Relationship/Market Color

Liquidity

Trade Complexity

Market Structure

Dealer Axe

2014 ISDA Definitions

\ 12

— Three major changes impacting CDS Pricing

— New Bail-in trigger for financial entities — “a new credit event triggered by a government-initiated bail-in and a provision for

delivery of the proceeds of bailed-in debt or a restructured reference obligation”

— Sovereign CDS asset package delivery — “introduces the ability to settle a credit event by delivery of assets into which

sovereign debt is converted”

— Standard Reference Obligations (SRO) — “the adoption of a standardized reference obligation across all market-standard CDS

contracts on the same reference entity and seniority level”

ISDA 2014 Definition

\ 13

— The launch of the 2014 Credit Definitions will impact single-name

trades in different ways: — Legacy corporate contracts will automatically move to the new definitions through a

protocol

— Legacy sovereign and European financial contracts will not automatically move to

the new definitions

— This discrepancy will be reflected in Markit indices as well, since the

index baskets follow single-name conventions. For example:

ISDA 2014 Definition

iTraxx Europe Financials Non-Financials Basket Type

22 and above 2014 Definitions 2014 Definitions 2014 Definitions

21 and below Old Definitions 2014 Definitions Mixed

Liquidity

\ 15

Investment Grade – Historical View

Source: Markit

\ 16

High Yield

Source: Markit

\ 17

Volatility

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1/2/2007 1/2/2008 1/2/2009 1/2/2010 1/2/2011 1/2/2012 1/2/2013 1/2/2014

Realized Volatility

iTraxx Europe iTraxx Europe Crossover

Source: Markit

\ 18 \ 18

— Futures and Options global traded volume(1)

— 22.3 billion contracts in 2010

— 24.9 billion contracts in 2011

— 21.2 billion contracts in 2012

— 21.6 billion contracts in 2013

— As of 5/9/2014: 1.7 million credit products contracts total in existence(2)

— The most liquid credit derivatives trade on average ~400 times daily(3)

(1) Source: FIA

(2) Source: DTCC

(3) Source: MarkitSERV Volumes

A Perspective

\ 19 \ 19

Geographical Breakdown

Region Liquidity

Score 1

Liquidity

Score 2

Liquidity

Score 3

Liquidity

Score 4

Liquidity

Score 5

Total

Entities/Tiers

APAC 23 (4%) 37 (6%) 86 (13%) 251 (39%) 249 (39%) 646

Americas 231 (20%) 104 (9%) 105 (9%) 316 (27%) 398 (34%) 1,154

Europe 205 (25%) 87 (11%) 103 (13%) 244 (30%) 177 (22%) 816

Other 5 (5%) 3 (3%) 19 (18%) 49 (46%) 35 (33%) 106

Total 464 231 308 860 859 2,722

— The 2,722 entity/tiers of Markit CDS End of Day pricing

service sliced by region and liquidity score (as of April 30, 2014)

— Liquidity score is rated 1 through 5 (1 is most liquid)

Source: Markit

\ 20 \ 20

APAC Breakdown by Country (CDS)

Region Liquidity

Score 1

Liquidity

Score 2

Liquidity

Score 3

Liquidity

Score 4

Liquidity

Score 5 Total

Japan 14 22 34 118 150 338

Australia 3 11 20 16 26 76

Korea

(Rep of) 1 1 12 34 7 55

Hong Kong 0 1 4 16 16 37

India 0 0 5 15 10 30

Singapore 0 0 4 12 10 26

Other 5 2 7 40 30 84

Total 23 37 86 251 249 646

— APAC breakdown is mostly Japan and 4/5 liquidity scores — Other consists of Malaysia 18, Taiwan 13, Thailand 13, Philippines 12,

China 11, Indonesia 7, New Zealand 5, Other 5 countries totaled 5.

Source: Markit

\ 21 \ 21

Trade Volumes

Other CCY (AUD, CAD, CHF, HKD, SGD) account for 0.16%

Source: DTCC (As of week of 5/9/2014)

61%

36%

3%

DTCC TIW Trade Count by CCY

USD EUR JPY

\ 22

Bid-Ask Spreads Volatility – iTraxx Europe

Source: Markit, as of May 2014

0

0.5

1

1.5

2

2.5

3

3.5

1/9

/2008

3/9

/2008

5/9

/2008

7/9

/2008

9/9

/2008

11/9

/2008

1/9

/2009

3/9

/2009

5/9

/2009

7/9

/2009

9/9

/2009

11/9

/2009

1/9

/2010

3/9

/2010

5/9

/2010

7/9

/2010

9/9

/2010

11/9

/2010

1/9

/2011

3/9

/2011

5/9

/2011

7/9

/2011

9/9

/2011

11/9

/2011

1/9

/2012

3/9

/2012

5/9

/2012

7/9

/2012

9/9

/2012

11/9

/2012

1/9

/2013

3/9

/2013

5/9

/2013

7/9

/2013

9/9

/2013

11/9

/2013

1/9

/2014

3/9

/2014

5/9

/2014

iTraxx Europe - Bid/Offer Spread

\ 23

Bid-Ask Spreads Volatility – iTraxx Japan

0

5

10

15

20

25

1/1

1/2

008

3/1

1/2

008

5/1

1/2

008

7/1

1/2

008

9/1

1/2

008

11/1

1/2

008

1/1

1/2

009

3/1

1/2

009

5/1

1/2

009

7/1

1/2

009

9/1

1/2

009

11/1

1/2

009

1/1

1/2

010

3/1

1/2

010

5/1

1/2

010

7/1

1/2

010

9/1

1/2

010

11/1

1/2

010

1/1

1/2

011

3/1

1/2

011

5/1

1/2

011

7/1

1/2

011

9/1

1/2

011

11/1

1/2

011

1/1

1/2

012

3/1

1/2

012

5/1

1/2

012

7/1

1/2

012

9/1

1/2

012

11/1

1/2

012

1/1

1/2

013

3/1

1/2

013

5/1

1/2

013

7/1

1/2

013

9/1

1/2

013

11/1

1/2

013

1/1

1/2

014

3/1

1/2

014

5/1

1/2

014

iTraxx Japan - Bid/Offer Spread

Source: Markit, as of May 2014

\ 24

The On-the-Run effect in Europe

Source: Markit, MarkitSERV (only days with more than 5 trades are reported), as of May 2014

0

200

400

600

800

1000

1200

1400

May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14

Moving Off-The-Run (iTraxx Europe S18, S19 and S20)

ITRAXX Europe 18 - Trade Count ITRAXX Europe 19 - Trade Count ITRAXX Europe 20 - Trade Count

\ 25

The On-the-Run effect in Japan

0

50

100

150

200

250

300

350

May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14

Moving Off-The-Run (iTraxx Japan S18, S19 and S20)

ITRAXX Japan 18 - Trade Count ITRAXX Japan 19 - Trade Count ITRAXX Japan 20 - Trade Count

Source: Markit, MarkitSERV (only days with more than 5 trades are reported), as of May 2014

\ 26

Concentration

— Top 500 entities account

for 86% of single names

gross notional

— Ratios have not changed

since 2009

Source: Markit, DTCC – as of May 2, 2014

DTCC Top 1000 Single Names Distribution

1-100 Entities

42%

101-200 Entities

16%

201-500 Entities

27%

501-1000 Entities

15%

Conclusion

\ 28 \ 28

—CDS are still a relatively new market

— It is evolving rapidly

—They are useful and economical tools

— Indices are liquid

—Single name liquidity is concentrated

Conclusion

Thank you.

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