The document discusses the impact of regulation on collateral markets. It notes there is significant ongoing regulatory activity around collateral, collateral management, and availability. New regulations like Dodd-Frank and EMIR are incentivizing the movement of over-the-counter derivatives contracts to central clearinghouses. This will significantly increase collateral requirements for both cleared and uncleared swaps. Firms will need to acquire or transform assets to meet these new margin requirements. There is uncertainty around how much additional collateral will be required and whether there is a current shortfall.

1. 2013 SIFMA Collateral Conference | May 2013
THE IMPACT OF REGULATION ON
THE COLLATERAL MARKETS
OVERVIEW

2. 2
Quick Comments on Collateral & Collateral Markets
Collateral is the topic of the hour. . . And is not going
anywhere soon.
There is a great deal of activity currently going on around the
topics of collateral, collateral management and collateral
availability, including:
 The initiation of Category 2 Clearing
 Bloomberg LP v. Commodity Futures Trading Commission, 13-cv-
00523, U.S. District Court, District of Columbia
It is not over until its over. . .

3. The central clearing carrot and stick
3
Mandate Regulator Jurisdiction Requirement
Dodd Frank
Title VII;
Rule 731
EMIR
Rule 103
BASEL III
CFTC
SEC
ESMA
BASEL Committee on
Banking Supervision
USA (w/global
implicaitons)
Europe (w/global
implications)
Global
o Clearing of swaps through CCP’s (w/ available)
o Collateral Requirements for both OTC & Bilateral swaps
o 5 & 10 IM for cleared & un-cleared swaps; w/daily mark
to market VM requirements
o Similar in nature to Dodd Frank
o Cover’s OTC clearing, collateral, segregation, CCP’s,
interoperability, etc.
o Strengthens banking capital requirements for
counterparty credit exposure arising from derivatives,
repo’s & securities financial transactions
o Incentives movement of OTCD contracts to CCP’s
Source: TABB Group

4. Source: LCH.Clearnet
How is margin calculated?
Initial Margin – PAIRS
 Designed to cover worse-case
losses based on historical
scenarios from the past five years
(1250 scenarios)
 Represents the amount required to
close out a full portfolio without loss
 Based on 5 day holding period for
members and 7-day holding period
for clients (the period required for
transfer or close-out in the event of
a default)
 Calculated on a Portfolio basis,
using a filtered historical value at
risk (VAR) method
 Back tested against a 99.7%
confidence interval
Variation Margin
 Represents the current value of the
portfolio
 Net Present Value derived intraday;
based on market standard
valuation techniques
 Currency portfolios revalued
according to the LCH.Clearnet yield
curve
 Margin charged/paid out in the
currency of obligation
 Price Alignment Interest (PAI)
applied/charged to Variation Margin
Balance
 Portfolio valuations using OIS
discounting for 6 major currencies
Please note that the above description is being provided to you for informational purposes only and is intended only as a broad overview of
certain aspects of SwapClear, a service of LCH.Clearnet Limited. The above does not, and does not purport to, contain a detailed description
of any of the topics discussed and has not been prepared for any specific audience. Accordingly, you may not rely upon the above
description and should seek your own independent legal advice.

5. Cash
78.8%
Bonds
(Sovereign)
11.6%
Bonds
(Corporate)
3.1%
Other
6.5%
Current Collateral Usage By Breakdown
How is the collateral universe expanding?
Source: TABB Group

6. 6
Acceptable Forms of Collateral for CCP’s.
Product CME ICE
LCH
Clearnet
Cash X X X
Government Securities X X X
Government Sponsored Enterprise / Government
Agency Securities (i.e. FNMA, GNMA, FHLMC) X X
Corporate Bonds X
Equities X
Performance Bonds / Letter of Credit X X
Money Market Fund Shares X
Precious Metals (Bold Bullion * X X X

7. 7
In the end, collateral is about risk, and the tail risk
of some of these products can be long lasting
Source: TABB Group, DTCC

8. 665 668 1,063
1,979 1,576 1,476 1,340
1,235 1,368
2,193
2,576
1,944 2,004 2,572
2005 2006 2007 2008 2009 2010 2011
US$Billions
OTCD Margin Requirement
Current Req. ($ BB)
+ Collateral ($ BB)
Current Margin (Single Counted) Additional Margin Requirement
3,256
1,900 2,036
4,555
3,520
2,572
3,480
3,912
Source: BIS, ISDA ,WFE, TABB Group
Targeting OTCD Collateral
Requirements
Comparison of the ETD
and GCE Margin Benchmarks
Our initial ’11 estimate of $1.6 trillion is now ~$2.6 trillion
How big is the collateral shortfall?
1,900 2,036
3,256
4,555
3,520
3,480
3,912
1,545
2,014
3,508
4,699
3,776
2005 2006 2007 2008 2009 2010 2011
US$Billions
2011201020092008200720062005
2011201020092008200720062005
GCE Margin Benchmark1
ETD Margin Benchmark2
Note 1: GCE – gross credit exposure
Note 2: ETD – exchange traded derivatives

9. Cross-product netting and margin offsets could
reduce collateral requirements from 15% to 65%
Source: TABB Group
99.5% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Dealers (w/ CCP) 244,912 62% 1.50% 3,674 3,655 18 18 18
Other Dealer
Exposures
52,420 13% 1.50% 786 550 472 393 236 315 393
Financial
Insitutions
74,850 19% 1.50% 1,123 449 337 225 674 786 898
Non-Financial End
Users
25,565 6% 0.00% - - - -
Total 397,747 100% 5,583 910 1,119 1,310
1,909 1,909 1,909
910 1,100 1,291
1,000 809 618
52% 42% 32%
Gross Notional (US $B)
Gross Notional
(%)
Avg. Margin
(%)
Gross Margin
($) Mid Offsets
Low
Offsets
August '12 Demographic Estimates
Estimated Average Benefit from Netting
Estimated MarginPosted ($B)
Estimated Impact onInitial Margin($B)
High
Offsets
Not yet
cleared
Gross MarginRequired
w/Portfolio Margining
Additional MarginSavings
Percentage Savings

10. 10
Asset Class
Initial Margin Requirement (% of
notional exposure)
Credit: 0-2 year duration 2
Credit: 2-5 year duration 5
Credit 5+ year duration 10
Commodity 15
Equity 15
Foreign ExchangeCurrency 6
Interest Rate: 0-2 year duration 1
Interest Rate: 2-5 year duration 2
Interest Rate: 5+ year duration 4
Other 15
Source: BCBS/IOSCO
What will be the margin requirements for
uncleared trades?

11. Cleared (Multi-Asset)
Swaps*
Overnight Index Swap (OIS)*
Basis Swaps*
Forward Rate Agreements
(FRAs)*
* certain currencies / tenors
Credit Default Indices**
** certain baskets of CDS
Energy Related Swaps
Est. Notional Value (2011):
$261 trillion (40%)
Potentially Clearable
(Rates Only)***
Swaps:
Zero Coupon Swap
Quanto Swap
Vanilla Inflation Swap
X-Currency Swap
Swaptions:
European / American Swaption
Forward Swaption
Straddle
Strangle
Spread
Caps/Floors:
Vanilla Cap / Floor
Straddle, Collar, Strangle, Spread
*** certain currencies / tenors
Est. Notional Value (2011):
$254 trillion (39%)
Clearly Unclearable
(Rates Only)
Swaps:
Amortizing
Rollercoasters
Exotic Swaps
BMA, UF, UDI, IMM, LPI
Caps / Floors
Quantos
Digital / Digital Range
Knock-in / Knock-out
Constant Maturity Swaps (CMS)
Structured Products
Cancelable / Callable
Range Accrual
Inverse Floaters
Snowballs / Reverse Snowballs
Est. Notional Value (2011):
$133 trillion (21%)
What will be the impact of clearing and
collateral costs on product selection/extinction?
Source: TABB Group

12. Do you already hold enough collateral to post?
Yes
63%
No
37%
Acquire
38%
Transform
62%
What will you do to meet
collateral requirements?
Source: TABB Group, State Street
Based on interviews
with 34 Buy-side Firms
circa June 2012
Collateral Attitudes – Continued. . .

13. What is the difference between collateral
transformation and optimization? But . . .
13Source: TABB Group

14. High
Low
14
Clearinghouse differentiators ranked highest to lowest
Source: TABB Group
Based on
interviews with 50
Firms circa May
2012
FCMs and Banks Buy-side
Collateral Attitudes

15. If swaps become more expensive to trade, what other products will you use instead?
17%
8%
8%
33%
58%
TBAs/Repo/ETFs/
Bond Options
New Products
No Change
Cash
Futures
Based on interviews
with 31 Buy-side Firms
circa March 2012
The future of swaps
15
Source: TABB Group

16. Will the market move to futures?
16
Issue Advantage Goes to… Because…
Current Liquidity Swaps
Vanilla US IR Swaps have an annual notional turnover of $175 Trillion;
swap futures have nearly zero turnover
Future Liquidity Swap Futures
- Even if the swaps market remains vibrant, swap futures have the
potential to reach a much broader swath of the market
- Swaps liquidity will likely fragment across multiple SEFs
- Recent trends favor highly liquid, standardized instruments
Customization Swaps
Even cleared swaps will allow for greater customization than swap
futures. There is limited customization available on Eris contracts
Margin Efficiency Swap Futures
The minimum VaR calculation for futures contracts is 1 day, compared to
5 days for cleared swaps
Regulatory Status Swap Futures
Trading swap futures is a known regulatory and reporting framework that
will not require additional registration
Status Quo Swaps
If regulations prove less onerous than expected, then the swaps market
will likely continue largely as it is today
Source: CME, LCH, TABB Group

17. Conclusions / Takeaways
Things are never as bad, or as good, as you think they will
be – the cost of collateral will be high but no where near top
line estimates
Both DCOs and FCMs/clearing brokers are working on a
range of solutions to help investors find the least expensive
collateral to trade swaps
But there are unforseen consequences from OTC regulatory
reform
 Bilateral margin requirements are an unknown
 Independent amounts and potential collateral disputes
 Variation margin under LSOC
 The futurization trend could hurt swaps liquidity
17

18. Q & A
18
When the clearing mandate goes live in March, Derivatives Clearing Organizations (DCOs), Futures Commission
Merchants (FCMs) and clearing brokers must be able to accept trades for clearing within just one minute of
submission. The goal is to create a market in which clicking “execute” completes the trade entirely. A more
automated and real-time clearing workflow will allow the market to more accurately manage risk and, by doing
so, better deploy capital. But the path to this environment will require a technology investment by swaps
dealers, FCMs and the clearinghouses themselves
Real Time Clearing: The New Race to Zero
Author: Will Rhode
Relevant Recent Research from TABB Fixed Income
Death of a SEF – The Coroner’s Report
Author: Adam Sussman
Swap Execution Facilities (SEFs) have a problem: They have the same amount of regulatory burdens as
exchanges but control a narrower slice of the derivatives market, and they largely will depend on the survival of
the status quo. There are multiple scenarios in which the SEF is made obsolete. In contrast, Designated
Contract Markets (DCMs) benefit if the markets move to an exchange-like model and, at the same time, a DCM
can allow many of the existing swaps processes to survive under a futures model. This is the confidence trick of
Dodd-Frank..
This report builds on TABB’s initial Global Risk Transfer Market report, published in November 2010, exploring
the ongoing battle between the status quo and the transformation of the global derivatives market as well as
where various components of the market ecosystem are in their development and implementation cycles. The
report focuses on the primary issues in swaps today -- including clearing, margin, collateral, automated trading
solutions, trading costs, trade reporting and repositories, and extraterritoriality -- with an eye toward juxtaposing
them with exchange-traded derivatives markets.
The New Global Risk Transfer Model – Transformation and the Status Quo
Author: Paul Rowady
US Buy-Side Swaps Trading 2012: I Can See Clearing Now
Author: Will Rhode
This study is based on conversations with 31 buy-side firms, including asset managers, hedge funds, regional
banks and insurance companies. It looks at clearing behavior, dealer relationships, fees, accessing Swap
Execution Facilities (SEFs), central counterparty clearinghouse selection, alternative products, basis risk, and
changes in market structure resulting from regulation