' Swaps Global Operations

ISDA Presentation: June 20,2000

Heidi Coggeshall
 I. GENERAL ROLES OF OPERATIONS
Derivatives Operations units perform two critical functions:

1. TRADE PROCESSING

a) Records: Enters transactions into the systems and the official books and records

b) Confirms: Agrees deal terms and other events with the counterparty

c) Settles: Handles the payment and receipt of funds or instruments

2. INTERNAL CONTROL

a) Separation of Function: lndependent checks and balances

b) External Verification: lndependent review of market data, assumptions, valuations

c) Reconciliation: lndependent monitoring of profit and loss, positions and accounting

 11. STRUCTURAL ORGANIZATION OF OPERATIONS

1 .) MIDDLE VS. BACK OFFICE

VIEW A:

a) Middle Office: Close to Traders, PIL, Risk Reports, Market Data, Exotic Processing,
Other Trade Support Functions, Spreadsheets, Specialists
b) Back Office: Remote, Deal Maintenance, Confirmations, Resets, PaymenVRate
Notifications/Instructions, Official P/L, Generalists

VIEW B:

a) Documentation

b) Operations
c) Controllers/Accounting

2.) OUTSOURCING
a) Hedge Processing
b) Money Transfer
c) General Ledger
 111. GENERIC OPERATIONS RESPONSIBILITIES
FUNCTION RESPONSIBILITY
1 ) Data Capture M ~ d d l eOffice Back O f i c e Account~ng
Deal T~cketRev~ewProv~demlsslng fields
Deal Entry Input to processing system
Market Data Input: Closing prices and volatility
External Verification: Comparison to observable source
Limit Monitoring: Trading, Risk and credit
Credit Exposure Calculation: Potential exposure by deal
Credit Limit Tracking: Available credit line
Static Data Maintenance: Payment Instructions, Contacts

2) Documentation
Master Agreements: Preparation and Negotiation
Confirmations: Outgoing and Incoming
Documentation Tracking: Status of outstanding
3) Processing
Daily Rate Reset Input: Floating rate, index
PayrnentIReset Notification: Advises to counterparties
Event Monitoring: Payment, fees, excercise dates
Settlement Instructions: Payment preparation/authorization
Audit Confirmations: Counterparty transaction verification
Hedge Processing: Futures, options, securities
Collateral Management: Monitor outstandings

4) Accounting
Portfolio Valuation: Mark to market
Profit and Loss Preparation: Change in value
Profit and Loss Analysis: Actual vs. estimate
Cash Management: Cash Inlout Reconciliation
General Ledger Entry: Financial Accounting
 0

111. ORGANIZATIONAL CHART

RISK MANAGEMENT
OPERATIONS

BACK OFFICE MIDDLE OFFICE ACCOUNTING

[Key: Not Front Office]

 11. STRUCTURAL ISSUES

v
1 .) Functional vs. Product

2.) Special Processing vs. Standard Operations

3.) Local vs. Regional

4.) On-site vs. Remote

1.) Regulatory Environment: More guidance, expertise, higher
expectations, focus on operational risk, restrictions decreasing

2.) Technology: More vendor systems, open architecture, global

database, multi-product, internet

3.) Business Direction: Mergers, investment bank product, credit

derivatives and other variations, strict confirm standards,
operational efficiency organizations