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ALTERNATIVE METHODS FOR RISK TRANSFERwithin a Standard Risk Management Process
10 September 2008
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Jesse O. Franklin IVPartner, K&L Gates, Seattle Office
Construction law consulting and litigationArchitectsEngineersGeneral ContractorsOwners (Public and Private)Subcontractors
General business litigationArbitration – International and DomesticCommercial Litigation
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Standard Risk Management Components
Risk Identification
Risk Assessment
Risk Mitigation
Risk Financing
Risk Review & Monitoring
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Risk Transfer Mechanisms
Non-Insurance Risk Transfer Mechanisms
Insurance Risk Transfer Mechanisms
Risk Financing Alternatives
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Non-Insurance Risk Transfer Mechanisms
Contractual Risk Transfer MechanismsAllocation by written agreementIndemnificationHold Harmless AgreementsDispute Resolution ProvisionsOthers
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R. Suzen Shaw, CRP, ARM, CRIS, CPIWSenior Risk Manager, Microsoft Worldwide Operations
30 Years Experience in Risk and Insurance Management
Risk ManagementEnterprise Risk Management
Operational Risk Management
Commercial Insurance IndustryRisk Consulting
Insurance Brokerage
Insurance Underwriting
Safety and Loss Control
Loss Adjusting
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Insurance Risk Transfer Mechanisms
Traditional Insurance/Surety ProductsPerformance BondsWorkers’ Compensation /Employers LiabilityGeneral LiabilityBuilders RiskTime Element - AKA: Business Interruption (BI)Dependent Time Element - AKA : Contingent BIPolitical Risk
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Political RisksConsequential loss arising from the arbitrary acts of a sovereign government, including:
ConfiscationExpropriationNationalizationForced abandonment and divestitureSelective discriminationEmbargo and license cancellationStrikes, Riots, and Civil CommotionWar, Political violence, and Terrorism
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Political Risks – Major UnderwritersACEAIGAtradiusChubbCofaceLondonMIGAOPICQBE
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Political Risks – Major UnderwritersACEAIGAtradiusChubbCofaceLondonMIGA - Multilateral Investment Guarantee AgencyOPICQBE
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Srilal Perera,Chief Counsel, MIGA
Extensive experience working with multilateral organizations such as the Colombo Plan, UNDP, and the World Bank.1986–1989 Legal Counsel to the President of the Iran–United States Claims Tribunal in the HagueLLBMasters in International Affairs - specialization in international law and international economics PhD - specialization in International Law and International RelationsExecutive Development Program (EDP) at the Harvard UniversityAdjunct Professor of Law, Washington College of Law of the American University, Washington D.C.
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Anthony NolanPartner, K&L Gates, New York Office
Specializes in –Structured productsDerivativesDomestic and cross-border securitization
Broad experience in synthetic risk transfersHas represented –
Issuers, underwriters, servicers, bond insurers and others in a wide variety of whole-loan sales and asset-backed securities issuances
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Risk Financing Alternatives
Credit DerivativesDocumentationSettlementUse in Hedging Risk
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ISDA: Documentation Architecture
Schedule•Makes elections and changes
to standard provisions•Incorporates credit support annex
Confirmations•Incorporate Definitions•Specify economic terms of each Transaction•Include Transaction-specific modifications•ISDA PAUG Confirmation Templates•Incorporate definitions
1992 (or 2002) Master Agreement•Governs legal and credit relationship between the parties•Includes representations, events of default/termination events, covenants•Incorporates schedule and confirmation
Credit Support Documents•1994 Credit Support Annex (New York law)•1995 Credit Support Annex (Transfer-English law) •1995 Credit Support Deed (Security Interest-English law)•1995 Credit Support Annex (Japanese law)•2001 ISDA Margin Supplement (not much used)
Definitions2003 Credit Derivatives Definitions (+ 2003 – 2006 supps)2002 Equity Derivatives Definitions2000 Definitions1998 Euro Definitions 1997 Bullion Definitions1997 Gov’t Bond Option Definitions 1993 Commodity Derivatives Definitions (+ 2000 Supp.)
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Credit Default Swaps
An agreement whereby one party pays the other a fixed periodic payment for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs:
Reference Entityor Reference Obligation
Protection Seller Protection BuyerContingent Payment upon “Credit Event”
Fixed Fee (in bps per period)
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Credit Default Swaps
Credit events for corporate/sovereign CDS:
BankruptcyFailure to Pay Obligation Default / AccelerationRestructuringRepudiation / Moratorium
Extension periodsGrace Period ExtensionRepudiation/Moratorium Extension
Restructuring options affect deliverable obligations
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•Credit Event Notice•Notice of Publicly Available Information”
<= 30 CD,subject to any
BD convention
Eur/Asia = 30BDNA <=30BD
Physical Settlement Period
NoPSPhysical
Settlement Date
SettlementFallbacks
Start
•5BD
Cut-off(Eur/Asia)
•60BD
•Seller may buy-in “Bonds”.• Buyer must certify it used reasonable efforts to obtain consents to Deliver Loans, and Buyer may Deliver alternative instruments.
Credit event must occur no later than 12:59PM GMT on Scheduled Termination Date
<= 14 CD after•Scheduled Termination Date,•Grace Period Extension Date or•Repudiation/Moratorium• Extension Date
> > > > > >
Physical Settlement Timeline
Event Determination
Date
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Event Determination
Date
>=5 BD
1st ValuationDate
Credit event must occur no later than 12:59PM GMT on
Scheduled Termination Date
>
Cash SettlementTimeline
>5 BD
betweenquotations
Nth ValuationDate
>As soon asreasonablypracticable
DetermineFinalPrice
CashSettlement
Date
>•3BD
>
•Credit Event Notice•Notice of Publicly Available Information”
<= 14 CD after•Scheduled Termination Date,•Grace Period Extension Date or•Repudiation/Moratorium Extension Date
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Q & A