AECSD conference, Tashkent 15 October 2009

1. A Return to Simplicity?An examination of the impact of the credit crisis and market eventson the structure of the global securities business AECSD conference, Tashkent 15 October 2009

2. "Simplicity is the ultimate sophistication."Leonardo da Vinci

3. The facts…… • Between 1998 and 2007, the value of OTC derivatives contracts increased from $80 trillion to $600 trillion • Between 1996 and 2006, the CDO/ABS/MBS market grew 700% to $2.75 trillion • Early 2007, shadow banking, at €10.5 trillion in assets, was €500 billion bigger than the entire global banking system • Recessions caused by banking crises are, on average, twice as protracted as those caused by other forms of financial stress • In 2005, sub-prime and Alt A borrowers represented 40% of all mortgages originated in the US • Lehman’s assets are subject to 76 different insolvency procedures • Lehman had more than 3,000 legal entities across the globe • Lehman’s operating units did not align with their legal entities “Much of the wealth the industry has generated during the past decade has come from creating and exploiting “pockets of opacity” and leveraging heavily to magnify the returns” Source: 1) IBM Research Report 2009: Toward transparency and sustainability 2) Wall Street Journal, May 14th 2009

4. The shape of banking in the future • We argue that the business of banking, including the post-trade space, will take on a new shape in the future: • “Tomorrow’s winners are likely to be those that specialise and deliver a first-rate service, rather than trying to do everything themselves” • “46% of banks changed their correspondent networks in 2008, the majority consolidating. At least two thirds expect to consolidate their bank relationships in future” • “60% of banking industry executives favour outsourcing non-core activities, compared with 30% in previous years” Success in future will be evermore about concentrating on your core strengths, achieving client intimacy and exploiting “economies of network”. It will be about simplicity of structure, and profiting after the removal of the “pockets of opacity”. Source: 1) IBM Research Report 2009: Toward transparency and sustainability 2) The Market Report: FI Metrix 2009

5. There are simple models in the trade and post-trade space, but they are not universally exploited Exchange business: Cash markets: 70% Derivatives markets: 30% No counterparty risk Netting Risk management Straight-through- processing Standardisation Collateral management Anonymity Standards Official quotation Clearing Information Trading Custody Settlement Financial crisis Financial crisis Triparty management Standardisation Bilateral quotation Individual contracts Rare involvement of CCP OTC business: Cash markets: 30% Derivatives markets:70 %

6. “……..but the custody business is ALREADY simple, isn’t it?”

7. 1878 The New York Times, March 5 • We announced exclusively in Sunday’s Times that the banking and brokerage firm of Greenleaf, Norris Co had been placed in receivership as a result of the fact that the firm had rehypothecated large amounts of securities deposited with them by other persons, as security for obligations in their own name, and that in this rehypothecation, the securities had been mingled together. This has made it very difficult for the owners of the pledged securities to obtain their own property, creating a sensation on the street today.

8. Safe custody can mean many different things – particularly in one-stop-shopping Infrastructure Provider – (I)CSD Global Custodian Prime Broker • Service areas • Issuance • Trading • Clearing • Post-trade services • Financing • Asset classes • Core products (equities, funds, bonds) • Structured products 1) a a a a a a a a a a a a a RISK 1) Notary function

9. The traditional capital markets model……… Issuers Infrastructure Client Servicing Organisations Capital Managers Investors

10. ……..has transformed into one with blurred responsibilities Issuers Infrastructure Client Servicing Organisations Capital Managers Investors

11. Even in the regular custody business, complexity is rife Market 1 Market 2 Custodian A Market 3 Market 8… Market 7 Market 4 Market 5 Market 6 Custodian B

12. How do we bring simplicity to the market? Working in PARTNERSHIP… …promoting INTEROPERABILITY… …creating OPPORTUNITIES ...encouraging COMPETITION…

13. A simple, four-legged strategy Towards achieving service excellence Nucleus of our strategy Real-time processing Core custody Global collateral management Partnership Liquidity Hub + Solutions for the Inv. Funds market Central Facility for Funds Interoperability Multi-market access Cross-border services 2005 2006 2007 2008 2009 2010 2011

14. Solutions in core custody and settlement example: Clearstream Cross-border services

15. Increasing efficiencies and reducing costsin cross-border transactions …by providing simple, secure and cost-effective solutions via a seamless CSD network • Single point of access for CSDs to participating markets. • Easy implementation of enhanced CSD-links in central bank money leveraging T2 Cash. • Reuse of efficient local infrastructures. • Absorbing differences in market standards. • Best-in-class CSD services. • Continuous harmonisation of market practices. • Flexible extension of market coverage. Link Up Markets Other CSDs

16. Solutions in liquidity management example: Euro GC Pooling

17. Short-term • financing • Pre- • crisis • Aug 07 to • Summer 08 • Lehman • collapse • After Govt • rescue plans • 2009 • outlook • Interbank • CDs • Deposits • Central Bank • Long-term • financing • Non-guaranteed bonds • Guaranteed bonds • Covered bonds • Securitisation The funding crunch for European banks continues Available Impaired Restricted Not relevant Source : European Central Bank

18. Euro GC Pooling – linking anonymous trading, CCP, settlement and collateral re-use Euro GC Pooling - Evolution of collateral under management (outstanding) in Euro (bn) €75,7bn average outstanding volume in April 2009 Daily outstanding volume record €86.7 bn reached on 25 March 2009 A simple but perfect solution to a dramatically changing market

19. In the face of regulation and market pressure, might the future look like this? Issuers Capital Managers Client Servicing Organisations Infrastructure Investors

20. So, a strategy based on… PARTNERSHIP INTEROPERABILITY and Driving harmonisation Domestic market Intl. market Equities Bonds Leveraging expertise Reducing risks Stock Exchange OTC Economising investments Central bank money Comm. bank money A Return to Simplicity