Shortening the lifecycle for trading new structured products Guillaume Aubert

1. Misys Treasury & Capital Markets Shortening the lifecycle for trading new structured products Guillaume Aubert Misys Structured Products Expert Head of Business Solutions EMEA

2. Exotic and Structured ProductsOpportunities and Issues • Opportunities • Significant growth in structured products volume • Equity, FX, Interest Rates, Credit, Hybrids • Significant evolution in products complexity • Yesterday's exotics becoming today’s vanilla: Variance swaps, Index CDOs… • More profitable than vanilla instruments • Higher yield / spread • Gain competitive advantage with innovation • Branding exercise • Number if players is extending • regional banks, hedge funds.. Harnessing the Network of Banking Intelligence

3. Exotic and Structured ProductsOpportunities and Issues • Current Issues • Managed in spreadsheet - Operational Risk • Lack of real control/visibility on trading activity/exposure • Manual and costly processing • No Audit-trail • Managed in multiple systems - Reconciliation Nightmare • FO / BO • By Asset Class (Hybrid Products) • Insufficient valuation/risk framework – Market/Credit Risk • Approximate valuation • Insufficient assessment of counterparty/market exposure • Limited reactivity/creativity in a highly competitive environment • Business ideas/opportunities are there • IT or Product Control is not ready Harnessing the Network of Banking Intelligence

4. System Requirements • Flexibility in Structured Products Design • Control and Security in Trade Input and Access • Trade Lifecycle and Integration • Trends in Valuation Models • Implementing a Structured Product Solution Harnessing the Network of Banking Intelligence

5. System Requirements • Flexibility in Structured Products Design • Control and Security in Trade Input and Access • Trade Lifecycle and Integration • Trends in Valuation Models • Implementing a Structured Product Solution Time-To-Market Harnessing the Network of Banking Intelligence

6. Structured Products Design Flexibility

7. Genesis of a Structured Product Solution MUST • Initial Client Request • 2002: Support for 20 new Structured Products FO/BO • First option: 20 new ad-hoc products template • Second option: An innovative and generic approach • MUST: Multi-Underlying Structured Trades • The Methodology • Analyze term-sheets across all asset classes and instruments • Identify building blocks: components and formulas • Define Data Model and Cash Flows Generation Rules • Back-testing Harnessing the Network of Banking Intelligence

8. Building Blocks • Input Events • Fixing, Barrier • IR, Equity, FX, Credit, Pool Factor… • Corporate Events • Credit Corporate Action, Stock Corporate Actions… • User Actions • Call Option, Currency Chooser…. • Cash Flows • Formula-based Dates, Currencies, Amounts • Contingent to input events, complex pay-off • Variables • Formula-based period-dependent or path-dependent • Input Parameters Harnessing the Network of Banking Intelligence

9. Effective Date: XXX Maturity Date: XXX Pay Leg Ccy JPY Coupon : First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Callable Trigger PRDC Rec Leg Ccy USD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Harnessing the Network of Banking Intelligence

10. Effective Date: XXX Maturity Date: XXX Pay Leg Ccy JPY Coupon : First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Callable Trigger PRDC Reset Components Rec Leg Ccy USD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Harnessing the Network of Banking Intelligence

11. Effective Date: XXX Maturity Date: XXX Pay Leg Ccy JPY Coupon : First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Callable Trigger PRDC Barrier Components Rec Leg Ccy USD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Harnessing the Network of Banking Intelligence

12. Effective Date: XXX Maturity Date: XXX Pay Leg Ccy JPY Coupon : First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Callable Trigger PRDC Option Components Rec Leg Ccy USD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Harnessing the Network of Banking Intelligence

13. Effective Date: XXX Maturity Date: XXX Pay Leg Ccy JPY Coupon : First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Callable Trigger PRDC Cash Flows Components Rec Leg Ccy USD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Harnessing the Network of Banking Intelligence

14. Effective Date: XXX Maturity Date: XXX Pay Leg Ccy JPY Coupon : First Period: XX Max(A.FX-B,0) Notional Exchange XXX Early Redemption Our Option to Call Trigger FX > XXX Callable Trigger PRDC Input Parameters Rec Leg Ccy USD Coupon : Libor + XXX Notional Exchange XXX Start Call XXX End Call XXX Start Trigger XXX Harnessing the Network of Banking Intelligence

15. New Product: Building Components and Formulas -Components -Formulas Harnessing the Network of Banking Intelligence

16. Components and Formulas -Components -Formulas Harnessing the Network of Banking Intelligence

17. Trade Input and Access Control and Security

18. Trade Input and Access • Reduce and Track Operational Risk • Simplified Trades Entry • Allows quick entry of complex trade and prevents booking error • Configurable trade derivation/enrichment • Fully controlled by static data instead of hard-coded • Read-Only Fields • Protecting a formula ensures the product remains as initially designed and does not get altered at the time of trade entry • Restricted Access to products family • Only authorized users must have access to specific complex products. The system must protect against unauthorized access Harnessing the Network of Banking Intelligence

19. Callable Trigger PRDC cont’ • When structured products becomes as easy as vanilla… Harnessing the Network of Banking Intelligence

20. Trade Lifecycle and Integration For free ?!

21. Trade STP • Trade events management is inherited from the components types: • Market Underlying =>Reset events • Credit Underlying =>Default event, Post-Default Lifecycle • Option =>Exercise event • Barrier =>Crossing event • etc… • Accounting and P&L events are also inherited from component types: • All cash flows components => Cash events • interest components => Accrued Interest • Fee components => Amortizations • etc… • Confirmation and Documentation: • A generic structured product framework allows for direct and automated mapping of the product parameters and formulas into a document template Harnessing the Network of Banking Intelligence

22. Interfaces and Reporting • A typical problem in interfacing and reporting structured products is the complexity of data model and the non-compatibility of the data model from one product to the other • Implemented solution: • Product meta-description that summarizes the instruments in a flat, simplified and standardized model • Mapping between the product parameters and the flat representation can be a simple configuration • Example: the Callable Trigger PRDC presented earlier can be viewed for reporting/interfacing purposes as: <Start Date, End Date, Main Notional, Main Rate, A, B, Floating Notional, Floating Spread, Option Start, Option End, Barrier Level, Barrier Start, Barrier End> Harnessing the Network of Banking Intelligence

23. Valuation Models Trends…

24. Valuation Models Trends • Until recently pricing model integration was for the most part product specific: • One Financial Product => One Pricing Model implementation • Trend is shifting to a generic approach for several reasons: • Structured Product and Pricing Models are getting more and more sophisticated • Latest model development such as affine models provides ideal tool for generic and multi-asset calibration • Deployment of grid computing framework • Time-to-market with generic models is much more efficient Harnessing the Network of Banking Intelligence

25. What about Models Integration? • Product independent pricing model implementation in the structured product engine requires: • Automatic detection of the risk factors • This is possible by analyzing underlying, and payment currencies • Proper separation of the different methods called during the valuation process: • Calibration Instruments • Underlying process modeling • Numerical Procedure • More importantly: easy translation of the product features (pay-off formulas, path-dependencies, Callable option..) • So that these features do not need to be re-implemented at the pricing model level (in a tree or a MC simulation), and can be automatically interpreted by the pricing model from the product description • Grid enabled at the pricing level • For ex: MC simulation path Harnessing the Network of Banking Intelligence

26. Implementing a Structured Products Solution Providing Expertise

27. Tier 1 International Investment Bank - Structured Rates Desk – 100 + Products Templates - Proprietary Full ownership of the products design Their own pricing models through APIs implemented with the help of Misys Consulting Tier 3 US House Financing Bank - Structured Advances Business - 20 + Products Templates Work closely with Misys Consulting for the definition of their products Use provided core pricing solution such as BGM model MUST Implementation Schema New Product Design New Product Design New Product Validation New Product Validation Control and Security Trade Entry Screen, Access Control Control and Security Trade Entry Screen, Access Control Processing Definition: Accounting Schema, Payments, Docs… Processing Definition: Accounting Schema, Payments, Docs… Valuation Model Valuation Model Harnessing the Network of Banking Intelligence

28. Conclusion Misys Summit/MUST • 17+ years experience in providing solution to derivatives and structured products business • 135 clients / 300 sites around the world managing their derivatives books in Summit • 15 clients already LIVE on MUST – 25 clients currently implementing it • Summit available in ASP model • Summit/MUST: several times award winning as the most innovative solution Harnessing the Network of Banking Intelligence

29. Most recent Summit/MUST Awards • N°1 Software on the Technology pinnacle • N°1 Cross-Asset Front-to-Back Office solution • N°1 Structured Products Front-to-Back Office system • The Best Technology Innovation of The Year - Europe • The Most Exciting & Innovative Software Release • Technology Company of The Year - Asia • Best Sell-Side Innovation with Credit Derivatives on MUST June 2007 Harnessing the Network of Banking Intelligence