Dr. Robert M. Mark Bmark.blackdiamond@tmo.blackberry 925 299 6859

1. Canadian Annual Derivatives Conference of the Montréal exchange Characteristics of Superior Risk Management SolutionsFairmont Le Chateau FrontenacQuebec, CanadaFriday, August 19, 2005 9:40 am – 10:20 am Dr. Robert M. Mark Bmark.blackdiamond@tmo.blackberry.net 925 299 6859 Dr Bob Mark

2. A significant challenge is to stay on top of a complex combination of “Characteristics” which are at the “Core of Superior ERM Solutions” • The ability to efficiently integrate all the components of risk on a *portfolio basis as well as to effectively operate in complex *markets • while serving *customers as well as satisfying *regulators is a direct function of the quality of the policies, methodologies and infrastructure *Customers Investors Financial Risk -Market Risk -Credit Risk Non Financial Risk -Operational Risk -Business Risk Policies Infrastructure *Regulators Rating Agencies Equity Analysts *Markets Methodologies Dr Bob Mark

3. Basel has driven a significant spend on risk management Three Basic Pillars Market Discipline Requirements Minimum Capital Requirement Supervisory Review Process Dr Bob Mark

4. The ability to proactively manage risk on an integrated portfolio mgmt* basis: • stems from having several sophisticated layers of functionality . • is based on a relentless commitment toward superior analytics and infrastructure = Portfolio Mgmt + Performance Measurement INCREASING KNOWLEDGE REQUIRED + Facilitate Pricing Manage Reserves and Capital + Accounting Capital + Economic (Risk) Capital + Regulatory Capital (Basel) + Stress Test & Scenario Analysis Risk Analysis + Value at Risk + Monitor Identify & Avoid Limit Management Superior ERM Solutions Dr Bob Mark

5. Capital and Risk Committee • Policy setting • Limit setting • Risk reporting B A N K S & I N V E S T O R S I S S U E R S & B O R R O W E R S Client Coverage Syndication / Distribution Origination/ Underwriting CPMG Asset Sales & Trading • Risk Evaluation • Quantification of risk (EL, capital) • Model selection/ Validation Product Structuring/ Securitization Monitoring & Review Servicing Example 1: The Credit Portfolio Management Group(CPMG) proactively manages credit risk on an integrated* basis Dr Bob Mark

6. METHODOLOGIES POLICIES INFRASTRUCTURE A significant challenge is to build a “Superior ERM Solution” in partnership with the C Suite whose “Characteristics” can be benchmarked in terms of: Dr Bob Mark

7. Characteristics of Policies at the Core of Superior ERM Solutions • These include: • The tolerance for risk (financial and non financial) is integrated and consistent with the Business Strategies (and visa versa) • Risk measures are backtested, authorities are expressed in meaningful terms and reflect a desired tolerance for risk • Risk is properly disclosed (e.g. Chinese walls may exist) internally and externally on a drill down and integrated portfolio management * basis Business Strategies Risk Tolerance Appropriate Policies Independent Superior ERM Solutions Authorities Disclosure Dr Bob Mark

8. Risk Disclosure • Key characteristics of disclosure include having the ability to provide disclosures such as: • Slicing and dicing the risk in real time (or near real time) by risk type, asset class ,business, product, industry, country, etc • mark-to-market (mark- to-model) vs. cash flow views • GAAP vs. Economic view • Capital (e.g. GAAP Capital vs. Economic Capital vs. Basel Capital) • the main drivers of risk Business Strategies Risk Tolerance Appropriate Policies Independent Superior ERM Solutions Authorities Disclosure Dr Bob Mark

9. Disclosing the main drivers of financial and non financial risk would include answering such questions as : • What are the top risks in the trading book and banking book (i.e. a literal hit parade of risks) • Where are the concentrations of risk (e.g. hot spots) • How often the list of main risks change • Have the forecasts of the top financial and operational risks (e.g. stress tests) been predictive? • Have any of the top risks listed caused management to take action to alter them in any way? If so, how? • What financial risks keep management up late at night? Dr Bob Mark

10. Example 2: August 1998: • Equity prices dropped sharply • Equity Volatility increased • Liquidity dried up (Flight to quality) • Correlations broke down • Credit spreads widened • Credit quality deteriorated August ‘98 WideCreditSpread HighVolatility LowLiquidity Dr Bob Mark

11. Example 3 :Certain types of backtesting disclosure have become standard (e.g. market risk).Ultimately,similar disclosure will become standard across all risk types ALCO Limit - Upper Boundary Daily Net Trading Revenue Potential Predicted Positive Revenue C$ Millions Potential Negative RevenuePredicted ALCO Limit - Lower Boundary August 27, 1998 Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Dr Bob Mark

12. Characteristics of Methodologies at the Core of Superior ERM Solutions • These include: • VaR and Stress Test methodologies are predictive of the actual losses and integrated across all risks and all books of business • Ongoing dedication toward first class risk methodology research • Mathematical models are properly vetted. • Positions are properly valued (and becomes a bigger deal with SOX). • Risk methodologies are tied into pricing and performance measurement. Independent First-Class Proactive Risk Management Best-Practice Methodologies (formulas) VaR Performance Stress Tests Vetting & Valuation Dr Bob Mark

13. Scenarios P & L Positions Change in Positions Hedging Dynamic Adjustments of The Greeks Impact on Liquidity Horizon Price Path Volatility Positions Adjust Over Time Market Movements Over Time Example 4: A key characteristic of superior market risk methodologies is to realistically capture liquidity risk Trading Rules Initial Position Data Scenarios Data } Results Dr Bob Mark

14. Facility Rating Example 5:A key characteristic of superior credit risk solutions is to build a robust Risk Rating Process that enables you to calculate the PD, LGD ,attribute capital and price credits Collateral Transaction Structure Maturity of Transaction Third Party Support Managerial Capability,Competitive Position Obligor Rating Quality of Financial Information, Country Risk Financial Assessment (Floor on obligor rating) Dr Bob Mark

15. t N t 0 A term structure of risk is calculated over multiple time periods • The term structure of PD’s (from the obligor rating) and RR’s (from the facility rating ) is typically applied to price as well as determine the capital for credit risk EXAMPLE EXPOSURE PROBABILITY 0 DEFAULTS TIME CREDIT LOSS RECOVERIES Dr Bob Mark

16. E(VT)=V OemT Credit risk models (eg Merton’s model) have also become deeply practical for the purposes of predicting such things as: Probability of default (PD) Assets Value Distribution of asset values at maturity of the debt obligation VT V0 F Probability of default Time T Dr Bob Mark

17. t N t 0 Example 6: A key characteristic of superior credit risk stress test solutions is to arrive at reasonable paranoia stress tests • Stressing the boundaries of credit risk EXAMPLE . . .To produce perturbations of combined distributions of simulated future credit losses Credit risk factors may be shocked . . . Shocks EXPOSURE PROBABILITY DEFAULTS 0 TIME CREDIT LOSS RECOVERIES Dr Bob Mark

18. Example 7:A key characteristic of being able to calculate credit risk is to be able to calculate a joint PDF for such things as credit grade migration… Obligor #2 (single-A) Obligor #1 BB AAA AA A BBB BB B CCC Default 0.09 2.27 91.05 5.52 0.74 0.26 0.01 0.06 AAA 0.03 0.00 0.00 0.03 0.00 0.00 0.00 0.00 0.00 AA 0.14 0.00 0.00 0.13 0.01 0.00 0.00 0.00 0.00 A 0.67 0.00 0.02 0.61 0.40 0.00 0.00 0.00 0.00 BBB 7.73 0.01 0.18 7.04 0.43 0.06 0.02 0.00 0.00 BB 80.53 0.07 1.83 73.32 4.45 0.60 0.20 0.01 0.05 B 8.84 0.01 0.20 8.05 0.49 0.07 0.02 0.00 0.00 CCC 1.00 0.00 0.02 0.91 0.06 0.01 0.00 0.00 0.00 Default 1.06 0.00 0.02 0.97 0.06 0.01 0.00 0.00 0.00 Joint migration probabilities (%) with zero correlation for 2 issuers rated BB and A Dr Bob Mark

19. ….which includes being able to calculate meaningful estimates of correlation between asset returns • -Typical assumption is that the joint normalized return distribution for the assets is a bivariate normal PDF Note: Equity returns are sometimes used as a proxy for asset returns. Dr Bob Mark

20. Example 8: A key characteristic of superior methodologies is that they are used to price market, credit and operational risk. For example, a Credit Derivative can be modeled as a put Dr Bob Mark

21. - - rT B Fe P ln ln 0 F F = - = y T T T cs = - y r T T 1 V cs = - = - + - [ 0 y r ln N ( d ) N ( d )] 2 1 T T - rT T Fe …and can be used to calculate expected credit spreads (CS). Liquidity is a key element Dr Bob Mark

22. The Credit Insurance market has exploded Global Credit Derivatives Volume now over 5 trillion US$ ($ in billions) Sources: British Bankers Association 2001-2002 Credit Derivatives Survey and Standard and Poor’s Financial Institutions: Demystifying Banks’ Use of Credit Derivatives (December 8, 2003) Dr Bob Mark

23. Example9: A key characteristic of superior retail methodologies is that credit scoring analytics can be supplemented with sophisticated analytics….. Good Accounts Cut-off Score Bad Accounts Percent of Accounts Credit Score The presumption underlying credit scoring models is that there exists a metric that can divide good credits and bad credits into distinct distributions Dr Bob Mark

24. ….. which can be used to construct an efficient frontier so as to optimally make market share vs. risk tradeoff decisions Low cutoffs high E [ Volume ] High cutoffs E [ Losses ] low E [ Profit ] high Dr Bob Mark

25. Significant progress has been made in measuring market risk and credit risk …. with some early success at measuring operational risk but… having a a highly reliable unified measure of risk inside of a common risk architecture is at the core of superior ERM solutions Dr Bob Mark

26. Valuation and Performance • Key Characteristics includes an ability to : • accurately vet and value transactions (e.g. loan valuations and derivative valuations) • appropriately (e.g. traditional RAROC is flawed) quantify the return to risk relationships of the individual as well as portfolio of transactions Independent Superior ERM Solutions Best-Practice Methodologies (formulas) VaR Performance Vetting & Valuation Stress Testing Dr Bob Mark

27. Example 10:A key characteristic of superior solutions is that all models to measure risk are fully vetted Deal Database MarketDatabase Input Risk Statistical Tools Vendors of parameters Estimation Risk Model 1 Model n Model N Model Risk (valuation) Model Calibration Deal Valuation Hedging Models Hedging Risk Dr Bob Mark

28. Key Characteristics of Infrastructure at the Core of Superior ERM Solutions • includes having: • The appropriate people in place • A single enterprise wide risk and data architecture • A integrated risk architecture which incorporates and replaces many of the mid office functions (e.g. valuing deals) • Single integrated risk engine • Real time access to data (e.g. market data,transaction data,legal data,etc) • Periodic Change initiatives Technology Accurate Data INFRASTRUCTURE Independent Superior ERM Solutions Operations People (Skills) Dr Bob Mark

29. Building the infrastructure to support an Independent and Integrated Comprehensive ERM integrated framework is Framework • tough ,efficient (e.g. replaces mid office costs) and effective (e.g. for direct risk takers) and has become a competitive necessity Methodologies Infrastructure Policies Analyze Deal Price Deal Compare Risk to Limit Execute Confirm/ Settle Manage Business Unit Risk Credit Risk Market Risk Operational Risk Risks Business Risk Incremental Risk Direct Risk Takers Total Risk Dr Bob Mark

30. Appendix Operational Risk Matrix (Basel II) Dr Bob Mark

31. Appendix Dr Bob Mark

32. Appendix Dr Bob Mark

33. Appendix Dr Bob Mark

34. Crouhy,Galai and Mark Co-Authored a leading Risk Management Book. This Book is considered the Risk Management benchmark for technical and practical Risk Management strategies. Dr Bob Mark

35. Bio of Dr. Mark • Dr. Robert M. Mark is the Chief Executive Officer of Black Diamond which provides corporate governance, risk management consulting and transaction services. He serves on several Boards such as the Fields Institute for Research in Mathematical Sciences, IBM’s Deep Computing Institute, Checkpoint Canada, The Royal Conservatory and is an Advisory Director on Entergy Koch’s Audit Committee of the Board . He also serves on Checkpoint’s Investment Committee. In 1998, he was awarded the Financial Risk Manager of the Year by the Global Association of Risk Professionals (GARP). He is the Chairperson of The Professional Risk Managers’ International Association’s (PRMIA) Blue Ribbon Panel • Prior to his current position, he was the Senior Executive Vice-President and Chief Risk Officer (CRO) at the Canadian Imperial Bank of Commerce (CIBC). Dr. Mark was a member of the Management Committee. Dr. Mark’s global responsibility covered all credit, market and operating risks for all of CIBC as well as for its subsidiaries. Prior to his CRO position, he was the Corporate Treasurer at CIBC. • Prior to CIBC, he was the partner in charge of the Financial Risk Management Consulting practice at Coopers & Lybrand(C&L). The Risk Management Practice and C&L advised clients on risk management issues and was directed toward financial institutions and multi-national corporations. This specialty area also coordinated the delivery of the firm’s accounting, tax, control, and litigation services to provide clients with integrated and comprehensive risk management solutions and opportunities. • Prior to his position at C&L, he was a managing director in the Asia, Europe, and Capital Markets Group (AECM) at Chemical Bank. His responsibilities within AECM encompassed risk management, asset/liability management, research (quantitative analysis), strategic planning and analytical systems. He served on the Senior Credit Committee of the Bank. Before he joined Chemical Bank, he was a senior officer at Marine Midland Bank/Hong KongShanghaiBank (HKSB) where he headed the technical analysis trading group within the Capital Markets Sector. • He earned his Ph.D., with a dissertation in options pricing, from New York University’s Graduate School of Engineering and Science, graduating first in his class. Subsequently, he received an Advanced Professional Certificate (APC) in accounting from NYU’s Stern Graduate School of Business, and is a graduate of the Harvard Business School Advanced Management Program. He is an Adjunct Professor and co-author of “Risk Management” (McGraw-Hill), published in October 2000. He also served on the board of ISDA as well as the Chairperson of the National Asset/Liability Management Association (NALMA). Dr Bob Mark