Minutes of Fixed Income e-Trading Conference

1. Business Economy Engineering projects Minutes of Fixed Income e-Trading Conference Bond Market Association 14-15 March 2006 Old Billingsgate Market, London Author: Osman Saglam (B.E.E.P. cvba) B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

2. Minutes of Fixed Income e-Trading ConferenceI . Introduction • By way of introduction, the Bond Market Association reminded the following points : • 1- The objective of e-trading trading platforms is to build liquidity to add enough participants and order flow to provide the opposing trades, and have the region's platforms bolster liquidity for fixed income products. E-trading systems do well in high liquid, high volume markets (Shaded area C in chart below), with participants benefiting from greater transparency, efficiencies and lower transaction costs. With the core costs of running platforms fixed, e-trading helps to scale businesses and expand profits, such that when trading volumes reach a breakout level, spectacular returns can be achieved. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

3. 2- Electronic trading platforms in the U.S. and Europe continued to mature and consolidate in 2005 as online execution of fixed-income transactions has become virtually commonplace. The continued growth in the use of in online trading platforms has resulted in a well-established core group of systems. • Weaker platforms continued to exit the space. Surviving platform vendors have continued to improve their product offerings, which have in turn enhanced the use of online trading for dealers and customers. • 3- Apart of the development of a FIX certification program (with the dynamic collaboration of FIX Protocol Ltd. and the Bond Market Association), the industry has made significant progress on initiatives such as the permanent progress of a common message hub (a means towards implementing straight-through processing in the fixed-income markets); the improvement of a « market data definition language » (comprehensive definitional standards related to bond descriptions); and the consolidation of standards related to operational aspects of prime brokerage services. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

4. 4- It was mentioned that institutions need to further invest in their STP functionalities to ensure fluid execution and settlement of trade, while vendors do well to augment their product offerings beyond the basic fixed-income trading applications to include peripheral services like providing historical pricing and order management. • 5- Traders also accelerated their adoption of electronic execution for less liquid products such as corporate debt securities, according to anecdotal evidence. Platform vendors encouraged the adoption of electronic trading by adding or enhancing features and services on their trading systems such as connectivity for automated trade processing; pre-trade services such as research, analytics and calculation software; and services tailored to syndicated underwriting of new issues. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

5. In summary, the trend towards platforms supporting trading in both the U.S. and Europe continued in 2005. Participants in markets for liquid fixed-income products like sovereign debt continued to incorporate electronic execution as an integral component of their trading. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

6. E-Trading has had a huge impact on the investment process—in productivity, decision making, price transparency, the investment universe. The result of the technological breakthroughs has been to increase price transparency and accelerate execution times while providing more accurate models, reams of data, software to mine the data, and better hedge vehicles. The ultimate result is a fixed-income market that is so efficient that alpha is increasingly difficult to find. At the same time, technology has made managers better at finding alpha. Technology has also made the market more complex. And a complex, efficient market puts a premium on skill. Markets also tend to become liquid at the same time, but liquidity is not the same as market efficiency. Technology always makes markets more efficient; it sometimes (but not always) makes markets more liquid in the process. • Minutes of Fixed Income e-Trading ConferenceII. The impact of e-Trading on Fixed-Income Markets B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

7. In short, there are 4 impacts of e-Trading on Fixed-Income Markets : 1- Productivity The rate of growth and progress in technology has been astounding. The proportion of customer business, as opposed to trading with other dealers, has risen. That is, the market has evolved in such a way that the customer business has grown faster than the market overall. And now, 50 percent of principal amount is traded electronically. The number of tickets per month has tripled, which means that the average ticket size went down a little bit, but the average customer voice ticket has increased 150 percent. In a matter of seconds, the quotes come back, the trader clicks on the best one, and the trade is booked automatically. Even a slow person with a mouse can do this trade in 15 seconds. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

8. 2- Decision Making The second area in which e-trading has made a huge impact is decision making. How important the software technology has been to decision making in bond trading is impossible to categorize quickly and simply. Several dozen types of modeling and decision support tools exist. Models are applied to drive decision making across broad swaths of the fixed-income world: • options/derivatives valuation, • mortgage-backed and asset-backed securities prepayment forecasting, • credit default and recovery analysis, • portfolio structuring and optimization, • risk management, and • asset price evaluation, filtering, and short-term prediction. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

9. 3- Price transparency • Price transparency has increased by leaps and bounds. And when market participants can see what is going on, markets become more and more sophisticated (Please refer to Nick O'Neill presentation - on MIFID - about this point). • 4- Investment Universe • The fourth area in which technology has had a large impact is the investment universe itself. The main thesis is that the fixed-income market creates products based on participants’ ability to model them, to price them, and to manage their risks. The model is the product. • For example: Interest rate swaps, caps, and floors; exotic options; collateralized debt obligations (CDOs); and collateralized loan obligations (CLOs)—all are technology-enabled products. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

10. In summary, e-Trading makes markets more efficient, and by making markets more efficient, it makes alpha hard to find, but it also makes managers better at finding alpha. Similarly, technology introduces new products and new techniques into the marketplace, so the market becomes more complex. And a complex, efficient market raises the bar in terms of the skills needed to operate successfully in that market. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

11. Flexibility and Market Support Liquidity User Friendliness Technology Transparency And Cost Efficiency ELECTRONIC SYSTEM ATTRIBUTES B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

12. III. MiFID - transparency at the cost of liquidity? • Please refer to Nick O'Neill presentation. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

13. IV. Will eTrading ever be able to meet the needs of the hedge fund community? • With faster transaction and settlement times, fund managers need to know the status of the positions they have, what cash is available to trade and which way their chosen market area is moving. • Many institutions have profited from fixed-income trading in Europe due to high levels of liquidity and a reasonably volatile market. Still, it is those who have had the foresight to create information-packed front-to-back infrastructures that are set to reap further rewards. And, with estimates suggesting up to 75 per cent of fixed-income trading will be managed electronically by 2007, the ride should prove interesting. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

14. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

15. V. The future trends of eTrading • E-Trading will become good enough in terms of the data-mining techniques that it will allow some to develop more practical strategies for trading, but also for risk management, and hedging. • One of the most fascinating contributors to market efficiency is the increasing accuracy of the models (in financial products and derivative securities). An interesting feedback loop happens with models. In typical option models (and there are many to choose from), some underlying assumptions are common: • • the price of the underlying security is continuous and transparent, • • the underlying security can be bought or sold or • sold short in arbitrary amounts at any time, • • no commissions are involved, • • no taxes are involved, and • • investors can borrow or lend cash at a single rate. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

16. In short, a major trend enveloping electronic trading platforms lately will be acceleration in the development of value-added services to enhance the product offerings. These services – spanning historical pricing data, confirmation and allocation services, order management systems and electronic research delivery (produced by third-parties/dealers) – complement the basic functions of price discovery and execution, and can help to reduce end-user costs. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

17. VI. Question and Answer Session • Question 1 : With more complexity in financial products and derivative securities, is more time being spent on due diligence and clarity (MIFID), which might actually be reducing productivity? • There’s no question that the complexity of today’s instruments requires more due diligence. If your objective is to perform due diligence to a level that you understand a structure, it will take you a very, very long time. And all forms of asset-backed securities, CLOs, and CDOs have correspondingly rich structures. Technology frees up time in other ways, but it surely will not do the due diligence for you. And caveat emptor still applies. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

18. Question 2 : At what point and under what circumstances will the trade execution capabilities and price transparency of the developed markets extend to emerging markets? • It will be a long, slow process for any illiquid asset to become actively traded electronically. The frenetic pace of electronic trading activity is taking place, on a percentage basis, primarily in two highly liquid asset classes—government bonds, including European bonds and U.S. Treasuries, and the foreign exchange market. The technology will eventually reach other asset classes but only when its usemakes sense. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

19. Question 3 : Is the new practice of equating “transparency” with “liquidity” misguided? • Liquidity is harder to define than efficiency and has been defined in a number of ways: the ability to get the best possible price for an asset in the shortest possible time, the difference between the bid and ask price, or the ability to move size quickly without affecting the bid–ask spread. In some cases, increased technology, increased transparency, and increased efficiency actually hurt liquidity. • Therefore, greater market efficiency can decrease liquidity. So, liquidity for the trader who wants to move large blocks is hurt, but it occurred in transparent markets as bid–ask spreads narrowed, which is a sign of market efficiency. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

20. Question 4 : What trends and innovations do you expect to see in fixed-income and related derivatives this year? • E-trading will increase transparency and markets will deepen. Participants will extend their scope and focus on more sophisticated products to enhance yields. The euro capital market will become more mature as differentiated credit markets develop. There will be more asset-backed deals, bank and insurance capital raising transactions. Institutional and corporate credit derivatives use will rise as a result of efficiency of capital utilisation and regulatory arbitrage. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE

21. MORE INFO ? Do not hesitate to contact us. B.E.E.P. cvba ● Grensstraat 57 rue de la Limite ● B-1210 Brussels (Belgium) contact@beep.be ● WWW.BEEP.BE