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UBX TM moving at the speed of thoughts to create knowledge exchange. KDS GLOBAL. Table of Contents. Strategic Objectives Who we are Current Products & Services – www.kdsglobal.com UBX TM : Technology Overview Prepayment On-Demand A nalytics Services
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UBXTM moving at the speed of thoughts to create knowledge exchange KDSGLOBAL Confidential & Proprietary
Table of Contents • Strategic Objectives • Who we are • Current Products & Services –www.kdsglobal.com • UBXTM: Technology Overview • Prepayment On-Demand AnalyticsServices • Modeling: Prepayment, Credit, Interest RatesandForwardCurves • MBS Pool and Loan Level RiskScores(P,R,D,B,&Q) • Long-Range Bid,Short-RangeBid vs. DealerAskPrice • Future Opportunities Confidential & Proprietary
Strategic Objectives • Core technology transfer to achieve the followings: • AI & ML– Risk Scoring TechnologybasedProducts • Vertical Mortgage Markets • Servicing - MSR valuation and retention advisory • Origination - Credit Risk Management • Securitization-SCW,Deallibraries,CLCdata • Buyside - Pricing Benchmark – model driven intrinsic value • ATOMSTM&TradableSpecifiedPool(TSPTM)Index • Trading: ETF / Futures Options • Benchmarking • MBS transaction business – All-to-All Trading ExchangePlatform • Trading platform – benchmark pricing Confidential & Proprietary
Current Productswww.kdsglobal.com • Subscription • Prepayment Data and Analytics • On-Demand Valuation Services • NonAgency Remittance reporting • Transaction • All-to-All TradingExchangePartnerships • Structured Cashflow Waterfall Deals • Advisory • Credit Risk Management • Prepayment Risk Management • MSR Valuation and Retention Confidential & Proprietary
Revenue models • Subscription: • annual growth rate 5-10% average for the next 5 years • Transaction: • pricing service offered to broker/dealer, buy/sell side; search engines; annual growth rate 20-30% in 5 years; • Advisory: • principal transaction in issuance, trading, and operation; annual growth rate 25-35% in 5 years; Confidential & Proprietary
MBS Market Pain Point:Fixed income markets have lower liquidity than in the years leading to the financial crisis. Regulatory reform and higher capital rules.Reluctance of banks to commit balance sheet as liquidity providers.Lower dealer leverage, less inventory, and lower liquidityThe Opportunity :Fixed income institutional buy side participants are embracing alternative trading systems. The most popular of which is the all-to-all trading platform. An all-to-all trading platform allows institutional investors, broker-dealers, and private funds to trade with one another on the platform. Confidential & Proprietary
All-To-AllMBSTrading Exchange Platform • Leveraging ourcore competencies: • Agency MBS BIGdata infrastructure. • Expertise in massiveparallel computingfor BIG data analytics. • DailyMBSlong-range&short-rangebidprice for1.5Mcusipuniverse. Confidential & Proprietary
The Vision :All-to-Alltradingexchange platform • Become the “market price benchmark” • Generate alpha for our clients via tighter bid/ask, higher liquidity, and greater transparency. • Increase market efficiency in the “off-the-run” and specified pools. • Entire mortgage market: PassThrough & Structured Products markets at both the collateral and bond levels >$6T We want to be here We are here now… Confidential & Proprietary
Company Overview Confidential & Proprietary
Who we are UBXTM Matrix ComputingArchitecture • Market leader in prepayment data analytics built on our patented UBXTM high speed virtual pocket sorting and indexing core technologies. • Complete PassThrough & Structured Derivative Products libraries at both collateral and bond levels . • AI & ML predictive modeling – developing the “next generation” of risk scoring technologies. Confidential & Proprietary
US Patent Applications • UBXTM Virtual Pocket Sorting & Indexing (US005278987A) • QED Options Pricing Model • Unified Differential Economics • Available TBA-Only MBS Supply (ATOMSTM) • UBiquitousIndeX (UBXTM) • Deconvolution Risk Scores • UnifiedTSPTM IndexReturnandPriceAlgorithms • Risk-Adjusted Yield (RAYTM) MBS Pricing • Unified ATOMSTM Index Return and Price Algorithms • CMO Cashflow Rule-Base Library Builder Confidential & Proprietary
UBX™SolvingBIGDATAProblems • Predictivenon-linear,non-parametricmodels. • Path-dependentMonteCarlo simulations. • Verycomplexiterativeglobal optimization. • Quantum covariance matrixcalculations. • n-dimensionquery stratificationbyn-variablesandfilters. • Real-timeconditionalprobabilitydecisionwithhighly skewedfat-tails. • Probabilisticeconomic value-addedoutcomesintimeseries. • Machine Learning - Adaptivefeedbackloopsfor any incrementalor derivativealphaknowledge. UBiquitousindeX(UBX™)matrix computingarchitecturetechnology (USPTOPatent ApplicationNumber:24300156-622646952690) Confidential & Proprietary
Current Products www.kdsglobal.com • Prepayment BIG Data and Analytics • On-Demand Valuation Services • Prepayment and Forward Curve Modeling • Non-Agency Remittance reporting • ATOMSTM & TSPTM Index • DailyRisk Scoresfor1.5millioncusips • SDPTMAdvisory Service • QED Options Trading model Confidential & Proprietary
Wewerethepathfinderin… • 2000: Web based prepayment on-demand mortgage analytic services • 2008: Monte Carlo simulationsof $30 billion distressed asset acquisition • 2013: QED field effect sell OTM call & put option pricing model • 2015: ATOMS™ Index tracking TBA-Only pricing & returns • 2016: TSP™ Index pricing risk adjust yield, OAS, duration, convexity • 2017: Achieve bid/ask transparency & liquidity via MBS pricing matrix Confidential & Proprietary
Client Base Confidential & Proprietary
Technology Overview Confidential & Proprietary
UBXTM Technology: Vertical Foundation UBXTM Enables the Vertical Channel Integration of the Mortgage Markets • The BIG DATA • Agency database, 1988 – today, loan & pool levels, mega/giant/platinum • CMO deals fully expanded • CAS/STACR deals, Single Family Loan Level Credit data, RPL • Data hosted for clients UBXTM Confidential & Proprietary
Patented and patent pending technologies O(n) sorter to handle large dataset Unique ways to handle data extensions UBXTM: massively parallel data analytics platform Completely designed, developed, and maintained by KDS, in C++ Linked with open source libraries on Linux operating system All data fields are indexed by our patented sorter UBXTM Platform Confidential & Proprietary
UBXTM Platform (continued) CGI API Web GUI Excel Plugin • Data distributed among multiple compute nodes to achieve the best IO throughput & scalability • Data replicated 3 copies among multiple hosts for redundancy • Multi-user, concurrent queries execution • Middleware component for complex queries, failover, and load balancing Middleware SysGovernor SysGovernor SysGovernor Compute Node 2 Compute Node N Compute Node 1 Confidential & Proprietary
UBXTM Platform (continued) - Middleware • The glue to our 3 tier architecture • Maintains sophisticated business logic and meta data for the our entire data store • Continuous machine learning – feedback loop with request patterns, input data and output • NoSQL data store serving both machine learning DB as well as Business Logic store • Open standard JavaScriptbased scripting engine (K++) - allows easy development of custom Applications with very thin GUI development • Middleware provides a Confidential & Proprietary
Competitive Advantage • Local/Hybrid Clouds : Massive data history and analytics (3,000+ CPU and 8TB high speed RAM 1,800 TB ) • Patented Technologies • Major market share in Agency Prepayment Data business • AI Predictive Modeling : R & D Scores • Highly Knowledgeable Subject-Matter-Expert Mgmt Team • BIG Data Infrastructure Technology : ATOMS™ Index Confidential & Proprietary
Prepayment On-Demand Services Confidential & Proprietary
S - Curves Confidential & Proprietary
Aging Curves Confidential & Proprietary
Default Rates Confidential & Proprietary
Loss Severities Confidential & Proprietary
Prepayment, Credit, and Rates Modeling Confidential & Proprietary
Inventory of Models and Analytics • Prepayment & Default Models • Interest Rate/Yield Curve Models • HPA Models • Intex Subroutine based pricing analytics Confidential & Proprietary
Prepayment/Default/Severity Models • FNMA/FHLMC/GNMA • Jumbo • Alt-A (conforming and non-conforming) • Subprime • Pay option ARMs (MTA/COFI/Libor) Confidential & Proprietary
Prepayment/Default/Severity Models • Projects monthly prepayment, delinquency, default and loss of new (at purchase) or seasoned (portfolio) loans, and generates collateral cash flows. • Based on a proprietary highly non-linear, non-parametric methodology with parameters estimated from agency and non-agency loan-level data. • Loan-level model takes into account of loan, borrower and collateral risk characteristics as well as macro economic variables on rates and home prices. • Based on a competing risks survivorship model where the prepay & default risk parameters are estimated from historical loan-level data. Confidential & Proprietary
Prepayment/Default/Severity Models • Model Inputs • Collateral type (e.g., agency/non-agency, alt-a, non-conforming balance, no prepay penalty) • age, note rate, mortgage rate, yield curve slope • HPI, (state-level if used as loan-level, otherwise national) • loan amount, documentation, purpose, state, fico, LTV, risk grade, occupancy, channel • delinquency state (for seasoned default models) • Model Outputs • prepayment and default probabilities at each time step • 60 day+ delinquencies • loss severity Confidential & Proprietary
Prepayment Model: Backtest Confidential & Proprietary
HPA Forecast Model • A mean-reversion based HPA forecast model • Based on a target long term HPA using historical “mean” • mean-reversion parameters tunable for faster or slower mean reversion Confidential & Proprietary
Interest Rate/Yield Curve Models • Three-Factor Libor Market Model • Calibrated to the end-of-day swap curve • Swap curve derived from LIBOR spot, futures, intermediate and long term swap rates • Volatility curve calibrated from a series of market option prices daily • Sophisticated Monte Carlo simulation algorithms for very fast convergence Confidential & Proprietary
Intex Subroutine Based Pricing Analytics • Pricing of various tranches of mortgage ABS using loan-level based prepay/default/severity models • Stress analysis for HPA, interest rates, default, prepay • Breakeven analysis & discount margin calculation Confidential & Proprietary
Applications - not just MBS… • Pricing and risk analysis of --- • mortgage whole loan portfolios • mortgage securities (including CDOs). • mortgage servicing rights • derivative hedges for mortgage portfolios and/or service rights Confidential & Proprietary
Long-Range Price OAS Histograms Confidential & Proprietary
Dealer Ask Price OAS Histograms Confidential & Proprietary
Strategic Research & Development : R & D Scores MBS Risk Scoring 2.0 (Overview) Confidential & Proprietary
Why R&D Scores?The Problems with traditional models A common complaint about Prepayment, Credit, and Interest rate modeling is: • BUT if you recalibrate the model too frequently…is it a credible model to begin with? Confidential & Proprietary