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Major Challenges

Globalization
Cross Product Collateralization
E-Commerce/Customer Requirement

Risk Management
People
Regulation, e.g .Capital Adequacy, Reg Reporting
Collateral Optimization
Collateral Management

Mark Jennis
Morgan Stanley Dean Witter

ISDA--Introduction to Operations Training Course June 20,2000


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Agenda

- Objective of the Presentation


- Collateral Management Roles and Responsibilities
- Risk Management
- Major Trends
- Major Challenges
Objective of Presentation

Review the current state of collateral management.


Discuss risk management requirements and issues.
Identify trends.
Assess future challenges.
The Benefits of Collateral
Mitigate Credit Risk
-+
Fully Utilized Credit Lines w1
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a
Limited Universe of High ~ r n 8 4
Credit Players

I Longer Trade Duration


Volatile I Illiquid & Stand
Alone Deal Structures
Concerns About the Future
Regulatory/Accounting
Benefits
Liquidity Benefits -% @@md
The Costs / Risks to Consider
&lLU prLd.&i
-
Residual Credit Risk - q
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Operational Risk -
Legal Risk -9 &tj$/q$
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Collateral Management's Role

Assist Origination and Credit in the


Development of Collateral Arrangements
Manage the Margin Process.
Maintain Collateral Standards Across Locations
Efficiently Manage Collateral
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The Collateral Negotiation Process

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Type of Document pq. Operational Feasibility &
Standards
I Perfection of Security
Interest - Acceptable Collateral
Legal Opinion - Haircuts

Collateral Calculation - Calculations

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Collateral Threshold - Delivery Times

Eligible Collateral - Valuations

Dispute Mechanism - Settlement / Custody

- Distribution
Criteria For Eligible Collateral

Ability to Price
Non Volatile Pricing
Liquidity
Credit Quality
Settlement ~ i s k
Ability to Perfect a
Security Interest
Deal 1 Collateral
Correlation
Cost
Margin Process
Receive Deal and Collateral Information
Calculate Collateral Requirement
Execute Margin Actions
Source Collateral
Collateral Disputes
Credit Reporting
Periodic Processing
Margin Process-Workflow
I Customer I valuation systems I Collateral ~ g1' It Other I
Collateral Collateral
I values I I Requirement I
Receive Call Margin Call I
Notice I ~ n s u r eEligibility I
Decide what I
collateral to J Collateral I
deliver
Notify Custody of
Pending Collateral
-1 Custody
Receipt
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Recalculate Margin 4
Collateral Calculations

Margin Frequency
Margin Deadlines
Threshold

Transfer Amounts
Initial Margin / Independent ."
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Amount
Valuation Discount &n.-$l M- &d,
Independent Amounts

Types of Independent Amounts


- Deal Level
% of Notional, e.g. Matrix by underlyinglmaturity
Risk Driven (VARIRisk Formula)
Fixed vs. Variable
Non-Standard
- Relationship Level
VAR
Fixed vs Variable
Collateral Systems
1 Interface with Product and Risk Svstems.
Calculation of Margin Requirement.
Tracking of Margin Actions.
Security and Cash Settlement and Control. 3
Management of Collateral.
I Maintain Collateral Standards Across A11 Locations
Collateral ~ocumentation
Collateral Calculations
Valuations
Acceptable Collateral
Distributions
Delivery Times
Segregation of Duties
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Efficiently Manage Collateral
I
. Global, Centralized
Collateral Management
Rehypothecation
Link with Treasury
Custodian Selection
Outsourcing Collateral
Risk Management

Market Risk
Requirements, Concentration, Liquidity, Volatility, Stress

Credit Risk
Know your client, Transparency, Review
Operational Risk
Asset control, Coordination
Legal Risk
Perfection, Deal Stmcture
~ntir~retation,
Business Risk
Relationship banking
Major Trends

ISDA Survey and Recommendations


ISDA Revised Credit Support Annex
ISDA Survey of Collateral Practitioners

Origins and Growth


Collateralized Counterparties
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585
5 c &
Assets Used as Collateral
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Collateral Programs
Collateral Experiences during Market Crisis
/ ~ S D ACollateral Review Recommendations
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Credit Analysis and Collateralization
Assessing the Risks that Surround the Collateral
Function - tLId(jyU/
Dispute Resolution -m% ' 72 & &- ( ~ e s d ) * j " )

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Shortening the Collateral C e R e d u c e Exposures ari 9
Expansion of Collateral Types
iW@f {&wl Q&$ 0,s.
Initial Margin

I Legal and Documentation Issues


Cross-Product Netting and Cross-Product
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Collateralization
Substitutions and Liquidity.
ISDA Revised Credit Support Annex

Portfolio Reconciliation
Dispute Resolution -@ . @ /~ / c ~ ~ L * * D o I P

Transfer Timing
Collateral Substitution
Interim Credit Support
Cross-Product Collateralization
Major Challenges

Globalization
Cross Product Collateralization
E-Commerce/Customer Requirement
CostICapacity
Risk Management
People flr--~?,w&B.. ,
-h

Regulation, e.g.Capita1 Adequacy, Reg Reporting


Collateral Optimization

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