Securities Valuations: A Primer

1. Securities Valuations: A Primer The When, Why, What, How and Who of Evaluated Pricing Barry S. Raskin, Managing Director, SIX Telekurs USA Inc. 2011 FIRMA National Risk Management Training Conference, April 20, 2011

2. Contents • About SIX Telekurs • Securities Valuations and Evaluated Pricing • When? • Why? • What? • How? • Who? • And I should care because…? 2

3. SIX Group – a world leader in securities processing, trading and financial data Securities Trading Securities Services Key figures • SIX Swiss Exchange • STOXX • Scoach • SIX Exfeed • Eurex • Swiss Fund Data • SIX x-clear: Clearing • SIX SIS • 1) Settlement • 2) Custody • 3) Administration • SIX SAG • Revenue of over 1.354 bn USD (2010) • Approximately 3,800 employees • Present in 23 countries around the globe Financial Information Payment Transactions • Stock exchange data • Index data • Evaluation data • Information for securities administration • Corporate Actions • Interbank payments in CHF and EUR • Card business • POS services • LSV (direct debits) / PayNet 3

4. About SIX Telekurs • Gather & distribute all information for securities administration and valuation • Security master/descriptive data • Corporate actions & events • Payments & Distributions • Pricing • Compliance information • Class actions • ETF & index constituent data • Custom solutions • Founded in Zurich in 1930 • Stable ownership & corporate structure • Direct presence in 23 countries • Nearly 1,290 employees worldwide • Annual revenue of $437 million (2010) • Over 2,200 worldwide customers – 190 in North America 4

5. Our clients include some of the world’s best-known firms Commercial, Retail & Investment Banks Asset/Investment Managers, Fund Administration Technology & Web 5

6. Securities Valuations: When? Nowadays people know the price of everything and the value of nothing - Oscar Wilde If I don’t get a price for this bond, you’ll get nothing! - Irate client 6

7. Securities valuations: When? To provide valuation for an instrument that is, Listed on an exchange but does not trade regularly (illiquid) Not traded on exchange (OTC) Complex or structured To approximate a fair value within an orderly market As an interim value pending periodic reset/adjustment (as with private equity) To provide a range of valuations for a given security that might reflect a benchmark index, economic fundamentals, etc. As a reality check on other price sources - even for traded markets that might vary widely 7

8. Securities Valuations: Why? Liquidity is like oxygen…you only notice its absence, not its presence. 8

9. Cash flow, probability, and time 9

10. Reinvestment risk 10

11. Credit risk and optionality risk 11

12. Applications beyond spot 12

13. Applications to swaps 13

14. Securities valuations: Why? • In the absence of liquid pricing, financial institutions need to know the value of holdings, • To provide clients with the best information possible about their holdings • For regulatory compliance • However, • Many instruments are rarely, if ever traded on organized markets • As of March 2011, only 54% of the nearly 7 million securities in SIX Telekurs’ database are listed on an exchange • Asset classes can include, • Fixed income • Structured securities • OTC derivatives • Private equity • Unusual circumstances can interfere with regular valuation practices • Reference data and data on benchmark transactions were and completely unavailable for auction rate securities in the wake of the market collapse in February 2008 14

15. Securities valuations: Why? Regulatory drivers – FAS 157 and Tier 1, 2, 3 designations Internal audit and risk management requirements Client demand for arms-length, independent, third-party valuations 15

16. Securities Valuations: What? There is no right or wrong price – it depends on the intended usage. 16

17. Securities valuations: What? Evaluated pricing vs. fair value An evaluated price is derived using, Market observations (inputs) Quantitative elements Fair value is an accounting concept (FAS 157, IAS 30) that defines fair value on three levels: Level 1: Unadjusted, quoted price from an active, orderly market Level 2: No observable quotes in active markets, values calculated using comparable instruments or inputs derived from/corroborated by observable market data Level 3: No observable quotes or inputs in active markets, values calculated using inputs based on assumptions Evaluated prices can be classified as fair value Level 2 or Level 3 17

18. Securities Valuations: How? Research is an ongoing process of discovery, and we seek to share our advancements on a continuous basis. 18

19. Securities valuations: How? Maximize market-based observations and inputs Ability to reverse-engineer complex instruments Market and reference data are just as important as the models Verify, verify, verify… 19

20. Securities valuations: How? A common way to provide valuations for complex securities… 20

21. Securities valuations: How? And the SIX Telekurs way… 21

22. Securities valuations: How? Methodology Sourcing primary data wherever that may be found Applying quantitative methods where necessary and being transparent Having a process around mapping techniques when they are used Providing assumptive data when and where practicable Developing a framework and sticking to it 22

23. Securities Valuations: Who? When you have confidence, you can have a lot of fun. And when you have fun, you can do amazing things. - Joe Namath 23

24. Securities valuations: Who? Use a pricing source that is, Independent Consistent in process, using commonly accepted methods where plausible and giving maximum consideration of market inputs when possible Experienced in both theory and practice Transparent with regard to methodology and inputs Flexible Able to anticipate requirements and proactively respond Committed to continual process improvement Responsive to valuations challenges 24

25. And I should care because...? When? Whenever a security is thinly traded, illiquid or complex – or to validate another pricing source. Why? Customers and regulators demand current, accurate valuations for a wide variety of reasons – P&L, capital adequacy, risk management and more. What? An evaluated pricing service that can easily handle plain vanilla securities but is also adaptable and extensible to encompass even highly complex structures How? Thoughtful consideration of any relevant market-based inputs applied within an appropriate pricing framework Who? SIX Telekurs, naturally! 25

26. Thank you for your time! For more information, Visit www.six-telekurs.com Email sales@tkusa.com