Credit Baskets Proposal

1. Credit Baskets Proposal CD-FpML Working Group John Weir

2. Contents • Overview of CreditBasket Product • FpML Schema Proposal • Discussion

3. Overview of Credit Baskets Different classes of Credit Basket Products • Index Tranches Provides protection on the accumulated losses from credit events that occur on any of the constituents of the index or basket as a percentage of the Implied Portfolio size between the attachment and exhaustion points • Credit Index Tranche on Standard Index (*ITraxx etc) • Credit Index Tranche on Custom Basket of Reference Entity/Obligations • Nth to default baskets Provides protection only for the losses when Credit Events occur on ‘N’ reference Entities in the portfolio

4. General approach Based on much of the work done by: • Bernard Mullen at Sunguard, • Milla Bouklieva and team at Goldman Sachs Leverage general approach and type definitions from the Default Swap • Based on FpML 4-2 revision • Reuse of the all the key types and elements from the Credit Default swap • Keeps vocabulary consistent while not overloading, nor diluting the definition of the CDS Some Variations from the Credit Default Swap • Additional sections in General Terms • Underlyer - Captures basket constituents in similar style to Equity Swaps • Addition of Tranche or Nth to default ‘style’ • Add Margin schedule around tranche • Potential for Multiple Protection Terms • Each Entity in a Custom Basket can have specific protection terms. More likely many will share a couple of common sets • Potential for Multiple Settlement terms • Each Entity in Custom Basket can have its own settlement Terms, Physical and/or Cash. More likely many will share a couple of common sets

5. Credit Baskets::Product • Separate FpML Product • Multiple sets of protection terms and Settlement terms • Similar in style to CDs

6. Credit Basket :: General terms • Resues same elements as Cds::General Terms • No type extension from Base • New Underlyer element in Style of EquitySwap • Multiple anonymous choices can confusing to reader (IMHO) • Choice of Tranche or NthToDefault • Other permutations may be possible • New element – Credit position • Specify weighting approach

7. GeneralTerms::Underlyer • Choice of underlyer • IndexReferenceInformation as per Cds • Collection (basket) of weighted reference information

8. Basket representation Basket Representation • Extends ReferenceInformation Base type • References Terms elsewhere • Holds Reference (href) to Protection terms associated with this ReferenceInformation • Holds Reference (href) to Settlement terms associated with this ReferenceInformation • Basket constituents can each be individually weighted – see credit Position

9. ‘Style’ of basket • Provides support for various flavours • Tranche – details next • N’th to default Provide protection only for the losses when credit events occur on “N” Reference entities in the portfolio • Do we need to capture the number of defaults to date?

10. Tranche Definition • Defines key aspects of Tranche • Attachment point for start of protection • Exhaustion point for end of protection • Calculated implicit portfolio size (Money) • Calculated tranche width • Optional Margin schedule • See annotations

11. Other Terms • CreditPosition • Provides support for equally weighted or individually specified • Settlement Terms / Protection terms as multiples, but each with an xsd:ID and name attribute • Questions • Relationship with Matrix Confirms • How can we check for consistency? • Should these terms be named • Physical and Partial Cash – Delta Neutral Trading strategy?

12. Questions / Thoughts • First stab – needs review and example flesh out • What are the validation rules • What needs to be added to support credit events?

13. Graphical Explanation on Index Tranche & Some Terms Compliments to: Christina Baumhardt

14. Graphical Explanation on Index Tranche & Some Terms Compliments to: Christina Baumhardt