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CPSS Report New Developments in Clearing and Settlement Arrangements for OTC Derivatives (www.bis.org/publ/cpss77.pdf) Joint Bank of England/ECB Conference ECB, Frankfurt 13 November 2007. Exhibit 1 Overview. 1998 Report Progress Since 1998 Areas Where Further Progress is Needed

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Exhibit 1 Overview

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CPSS ReportNew Developments in Clearing and Settlement Arrangements for OTC Derivatives(www.bis.org/publ/cpss77.pdf)Joint Bank of England/ECB ConferenceECB, Frankfurt13 November 2007

Exhibit 1 overview l.jpg

Exhibit 1Overview

  • 1998 Report

  • Progress Since 1998

  • Areas Where Further Progress is Needed

  • Issues Associated with Evolution Toward a More Centralized Infrastructure

Exhibit 2 1998 report l.jpg

Exhibit 21998 Report

  • Settlement Arrangements and Risk Management Practices

    • Largely decentralized processing

    • Bilateral risk management

      • Master agreements (including netting provisions)

      • Collateral agreements

  • Documentation Backlogs

    • Unsigned master agreements

    • Outstanding confirmations

  • Risks Associated with Expanding Use of Collateral

    • Legal risks

    • Operational risks

    • Funding liquidity risks

  • Potential Benefits and Risks of CCP Clearing

    • Risk management challenges associated with relatively illiquid products

  • Exhibit 3 progress since 1998 l.jpg

    Exhibit 3Progress Since 1998

    • Documentation Backlogs

      • Unsigned masters greatly reduced

      • Variety of electronic confirmation services now available (SWIFT, SwapsWire, DerivServ, eConfirm)

      • Credit derivatives backlogs have declined markedly since September 2005

  • Collateral Usage and Risks

    • Usage has expanded greatly

    • Legal and operational risks have been mitigated

    • Funding liquidity risks better understood

  • CCP Clearing

    • SwapClear now clears 40 percent of interdealer interest rate swaps

    • Participants emphasize that SwapClear reduces operational risks as well as counterparty risk

    • In September 2006 SwapClear modified its default procedures to recognize relative illiquidity of swaps

  • Other Significant Enhancements to Infrastructure

    • Prime brokerage

    • Multilateral termination services (TriOptima)

    • DTCC’s trade information warehouse

  • Exhibit 4 areas where further progress is necessary l.jpg

    Exhibit 4Areas Where Further Progress is Necessary

    • Confirmation Backlogs for Instruments Other than Credit Derivatives

      • Equity derivatives

      • Interest rate and commodity derivatives

      • Report recommends broader use of economic affirmations and portfolio reconciliations

  • Potential Market Impact of Closeouts

    • Of significant concern to market participants and to policy makers

    • Report concludes that risks can be reduced through more systematic portfolio reconciliations and voluntary terminations

    • Report recommends that market participants should explore further steps to mitigate market impact

  • Exhibit 5 issues associated with a more centralized infrastructure l.jpg

    Exhibit 5Issues Associated with a More Centralized Infrastructure

    • Interoperability and Open Access to Essential Services

      • Interoperability defined as the ability of a system or product to be used in conjunction with other systems and products without imposing unnecessary costs on users

      • CPSS and CPSS-IOSCO standards for payment and settlement systems require “fair and open access”

  • Operational Reliability of Providers of Essential Services

    • Application of CPSS or CPSS-IOSCO standards for operational reliability may be appropriate

  • Safety and Efficiency of Centralized Payment Arrangements

    • CPSS standards for systemically important payment systems or CPSS-IOSCO standards may be relevant

    • Plans for CLS to offer payments services to DTCC’s trade information warehouse is an example of more centralized arrangements

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