Standardisation Narrative 16-06-10 - Combined

STANDARDISATION IN THE DERIVATIVES MARKET
CREDIT DERIVATIVES
In March 2010, we committed to global regulators to drive a high level of product, processing and legal
standardisation in each asset class with a goal of securing operational efficiency, mitigating operational
risk and increasing the netting and clearing potential for appropriate products (recognizing that
standardisation is only one of a number of criteria for clearing eligibility). The narrative below together
with the attached matrix, analyzes existing, and where appropriate, potential opportunities for further
standardisation in the credit derivatives market.
1. CURRENT LEVEL OF STANDARDISATION IN THE CDS MARKET
The vast majority of credit derivatives products have been highly standardized since the late 1990’s. The
standards have developed over time and, since 2007, additional standardisation has occurred with a
specific focus on electronic confirmation of trades, lifecycle processing of trade events and ease of trade
compression and clearing.
Definitions
Almost all CDS trades are executed under standard legal terms. Typically, they are contained in the ISDA
Master Agreement between the parties, although in a limited number of cases they are contained in the
national equivalent such as Rahmenvertrag in Germany (or in another master agreement between the
parties). At the trade level, the standard trade incorporates the ISDA definitions, supplements, protocols
and other documentation as set forth for that particular product in the attached CDS Documentation
Annex which have been developed over the past decade. This development has included incremental
modification and standardisation over time in order to make trades on the same reference credit, to the
same maturity date fungible in order to facilitate compression and clearing, where appropriate. For
trades confirmed electronically, these standard provisions are typically incorporated via the rules and
procedures governing use of the platform, such as DTCC’s Operating Procedures or a central
counterparty’s rules and procedures (if confirmed at such CCP instead of DTCC). For trades confirmed on
paper, these standard provisions are usually incorporated via a Master Confirmation Agreement.
Contracts
Across the CDS market, the vast majority of all contracts are confirmed electronically via the MarkitServ
confirmation matching platform. In 2005, less than 50% of all CDS contracts were confirmed
electronically. This reliance on a highly manual documentation process led to the creation of a significant
backlog of unexecuted confirmations. By April 2010, more than 99% of all CDS trades eligible to be
confirmed electronically were actually confirmed electronically, representing more than 98% of all CDS
transactions confirmed during that month. Currently, there is no material backlog of unexecuted CDS
confirmations. Over the past few years, we have also seen an increase in the number of vendors
supporting access and enhancements to the MarkitServ platform for market participants, and at least
one central counterparty has emerged which offers its own separate electronic confirmation process.
The small subset of transactions which are not confirmed electronically are confirmed via paper. Paper
confirmations are signed by both parties. These trades represent two types of trades: 1) standardized
products for which electronic confirmation is not yet available and which are confirmed via short form
templates and 2) bespoke trades which use standardized long form industry templates, with variances as
per the terms of the trade.
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The MarkitServ confirmation matching process is accomplished by the bilateral electronic submission or
affirmation of confirmable transaction details by each party to the trade. When all details are matched,
the legal record of the transaction is stored in the Warehouse Trust’s Trade Information Warehouse
(TIW). Any unmatched trades (or unmatched fields of linked trades) are investigated and resolved by the
parties to the trade. The MarkitServ platform provides both detail and summary analysis of the current
status of all transaction within the platform for efficient risk management of the confirmation process.
Market participants have well established processes for escalation and resolution of trade breaks. In May
2010, more than 97% of all electronically confirmed transactions were confirmed and registered in the
TIW within two days of Trade Date.
Going forward, all new industry sponsored standard products, Index and Single Name Derivative
Contracts, will be launched with standard electronic confirmation support.
Market Practices
Standardized Terms:
Within the CDS, there are standards for legal terms and operational protocols to improve efficiency. In
addition, the vast majority of transactions utilize certain market practice and trading standards such as:
 Standardized Coupons (with market premium or discount paid upfront).
 Full first coupon payments on all trades.
 Standardized payment dates.
 Standardized maturity/roll dates.
 Standardized model for calculation of upfront payments (the ISDA CDS standard model: see
www.cdsmodel.com).
 Quoting Conventions:
 Investment Grade: Quoted in current market par spread in basis points running, upfront
payment is calculated using the ISDA Standard Upfront Calculator model.
 High Yield/Distressed: Quoted in current market clean upfront payment, accrued to date
premium is added to allow a full first coupon payment.
Lifecycle Events
Confirmable Events:
 New Trades
 Partial Unwinds
 Novations/Partial Novations
 Backloading into clearing
As outlined above, confirmable activeity on standard trades is typically confirmed via electronic
affirmation/confirmation mechanisms. With respect to Novations, following the adoption of the 2005
Novation Protocol, novation consent has moved to electronic processing platforms for almost all Credit
Derivative transactions. In September of 2010, the industry will launch a new Novation “Consent =
Confirmation” process whereby the multilateral consent process will result in a legally confirmed trade in
a single step for the vast majority of CDS transactions.
Non-Confirmable Events:
 Credit Events: Determinations as to the occurrence of a credit event are made by the regional
ISDA Determination Committee relevant to the particular Reference Entity. The determination
process provides for the use of a robust dispute resolution process if needed. If a Credit Event is
determined to have occurred, such event will typically be settled using the ISDA Credit Event
Settlement Auction process to determine the recovery rate upon which cash settlement will be
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based for all auction covered transactions, which make up the vast majority of trades in the
market.
 Succession Events: Determinations are made by the regional ISDA Determination Committees.
 Coupon Payments: Centrally processed in the TIW for the vast majority of CDS contracts (all
those registered as “Gold Calc” in the TIW)
 Maturity.
Other Standardisation Features

STP: The Credit derivatives market has developed a very high level of Straight Through Processing. From
the use of electronic trade booking by Inter-Dealer Brokers (IDBs) to central processing of bulk novations
and trade terminations resulting from portfolio compression, the industry continues to leverage the
universal infrastructure to drive efficiency in trade processing and a reduction in operational risk. The
TIW centrally processes most lifecycle events for credit derivative contracts including periodic payment
calculation, succession event processing, credit event settlement and reference entity “rename” events.
The launch of “Consent = Confirmation” will further increase the level of STP for a significant portion of
buy-side activity.
CCPs: Central Clearing between major dealers has been in place for 15 months in North America and 1
year in Europe. We estimate that over 90% of the historical stock of eligible trades is now cleared.
Additionally G-14 dealers have committed to a submit new eligible activity for clearing at the rate of at
least 85%. Client clearing was launched in North America in December, 2009, though volumes have
remained low. In both the US and Europe multiple CCPs are working to expand the available set of
products eligible for clearing as well as to expand capabilities for and client access to client clearing.
Collateral: For non-cleared transactions there is widespread use of bilateral collateral arrangements (via
the ISDA Credit Support Annex (CSA)) and over 90% of credit derivatives trades are subject to such
arrangements according to the ISDA Margin Survey 2010.
2. EXECUTION
The attached matrix provides indicative data on the trading mechanisms used for execution in the
market. The level of electronic execution of credit derivative varies by region, contract and whether the
trade is dealer to dealer or dealer to client. For example, the interdealer market in European corporate
indices has a high percentage of trades executed electronically, with client volumes lower but expected
to grow. Electronic execution began later in the US, but client driven activity has found a steady user
base, though many clients still prefer voice execution. Execution is split across multiple market venues
including TradeWeb, Bloomberg, dealers' client platforms, and a variety of interdealer brokers.
In contrast to other asset classes, credit derivative trades are purely OTC with no instances of exchange
trading. Typically the traditional futures or stock exchanges work best where there is depth of liquidity
around standard products that persist in their original form for the life of the contract. This allows for
simple trading protocols, anonymous trading and limit order driven markets. This is evidenced by futures
exchanges which play an important part in the Rates and Equities markets. Prior to the “Big Bang” and
“Small Bang” protocols, credit derivative instruments lacked standardisation and a central mechanism
for determinations around credit events. Thus, they were completely unsuitable for either clearing or
exchange trading. Since these protocols were enacted, the instruments were structurally rendered
clearable (liquidity is still an additional fundamental requirement for clearability). Currently credit
derivative contracts are quoted in four quarterly dates in standard coupons (potentially different per
region) and with standardized restructuring conventions. Contracts are quoted with full first coupons
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thus rendering contracts with matching reference entity and maturity dates fungible. Post a credit event,
accrued interest is no longer used and the quotations take the form of “1-Recovery”.
Exchange trading however still remains inappropriate for the general CDS market, in particular due to the
dispersed nature of credit. Liquidity is distributed across all the tenors of a given credit derivative curve.
At the request of the ISDA Credit Steering Committee, DTCC released statistics around the trading
frequency of the 1000 most traded credits over a 9 month period. Based on that data set, we observe
that for the average credit 20-50% of the trading activity occurs around the “on the run” 5 year point but
trading frequency drops significantly as a contract goes “off the run”. The key to note is that exchanges
work well where the market, unlike in CDS, concentrates liquidity around a small number of widely
traded contracts.
Organized trading venues can take multiple forms and there is some scope for more of the market to
move onto other types of electronic trading platforms, particularly those that are quote driven and
provide the certainty of execution that clients are generally looking for. TradeWeb and Bloomberg are
examples of multi-dealer platforms where clients can request prices from a number of dealers, thus
putting them in competition in an efficient way. In addition, many dealers are starting to offer electronic
execution on their own proprietary platforms. These electronic platforms supplement the voice market
which, as in Bond markets and Foreign Exchange markets, provides for an ability to work larger orders
without adversely impacting the market price for a client, or for off-the run trades for specific risk
management needs.
The OTC Credit Derivative markets work well today. They operate for professional users only, are
competitive, with a high degree of price transparency, offer a broad set of reference credits for clients,
and on average have more liquidity and tighter pricing than the corresponding bond market. There is a
strong consensus across both dealer and end-user that the markets in their current form provide for
price transparency with good liquidity.
3. CONFIRMATION
As highlighted in section 1 above, the confirmation of CDS transactions has become a highly automated
process, largely supported by industry-sponsored infrastructure and leveraging the TIW. In contrast to a
few years ago, there is currently no material backlog of outstanding CDS confirmations. More than 97%
of all electronically eligible CDS transactions, including new trades, unwinds/termination, and novations,
are confirmed within two days of Trade Date. The nearly universal use of ISDA documentation forms and
ISDA definitions has also led to a dramatically improved process for those trades that remain confirmed
on paper. Market participants and supervisors continue to work with the confirmation platform providers
to expand the population of transactions covered by electronic confirmation. Continued industry efforts,
in conjunction with continued rollout of additional electronic confirmation templates, will move more
types of products onto electronic affirmation/confirmation platforms and will further mitigate risks and
increase automation in this process.
4. SETTLEMENT
Settlement breaks in the CDS market have been dramatically reduced over the past five years largely
with the advent of three major process standardisations; the industry wide use of the ISDA Standard
Upfront Calculator with fixed yield curves, the adoption of “Gold Calc” functionality with in TIW and the
use of CLS settlement by major market participants.
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The ISDA Calculator is a publicly available CDS calculator used to convert quoted spreads for CDS
products into a present value number using agreed standard input values (interest rate curve, assumed
recovery rate, curve shape, etc). Because the present value being exchanged between buyer and seller is
a required field for confirmation and small differences (due to counterparties using slightly different
calculator models) historically led to backlogs in both documentation and settlement, the adoption of
the standard calculator has played a critical role in building scalability in the CDS market.
One of the major advantages of the single industry repository for CDS contracts has been the
development and adoption of TIW Gold Calc functionality. In cases where the TIW is the single holder of
the legally confirmed transaction confirmation, it uses this data to perform the calculation of all cash
flows required for the life of the contract. These calculations are supplied to all parties to the trade for
settlement and the use of a single calculating party has removed the risk of differences in calculation
methodology by each party. This process is used for periodic payments as well as life cycle event such as
credit events.
Over the past two to three years, CLS (Continuous Linked Settlement) has partnered with TIW to
combine the CDS settlement requirements for its member firms with its very successful process for
netting payment obligations in the Foreign Exchange market. The service identifies all cash movement
requirements, by currency, among its various members and reduces the required cash movement to the
minimum net movement possible. Through the use of this service, the CDS industry has reduced the
gross amount of currency being exchanged through the CDS market on any given settlement date by up
to 50%. This is a service that is utilized by many of the largest participants in the market and is open to
any party with a CLS clearing members relationship.
5. CLEARING – CCPs
There are several existing central counterparties (CCPs) which currently clear credit derivatives. These
CCPs currently engage in varying states of clearing activity across regions and products and all are
expanding their capabilities to clearing a wide range of Credit Derivative products. Moreover, CCPs
operational for other product types continue to also develop platforms to clear credit derivative
products. There is an active program of work to extend the eligible product set, including the addition of
tranches, sovereign and the expansion of cleared dealer to client volumes over the remainder of 2010. In
addition, new CCPs are beginning to come online, although this will take time to extend the superset of
eligible products.
CCP platforms are being extended to enable end-user access. For larger financial institutions who may
present a systemic risk this will be a significant step forward and, in time, will increase the proportion of
volume in the market to be cleared.
The attached CDS Cleared Product Annex shows the superset of Credit Derivatives products currently
being cleared globally. To date clearing efforts have focused on the interdealer transactions. Backloading
by dealers continues to increase the stock percentage of eligible cleared in line with the regulatory
targets in place for G14 v G14 dealers.
It is important to note that certain CDS products are not suitable for clearing due to a lack of depth of
liquidity or clear availability of pricing. The data recently released by DerivServ relating to trading
volumes in credit derivatives should help the industry, CCPs and regulators determine which products
are capable of being cleared. CCPs should be well regulated though to ensure standardisation (or at
least, minimum standards), particularly around risk management and margin.
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6. TRANSPARENCY
This is covered in significant detail in the industry response on Transparency. However, in summary:
Pre-Trade Transparency
There is excellent pre-trade transparency via a variety of platforms to a wide array of end-users. As part
of the Transparency commitments to the global regulators, the signatories to this letter have delivered a
mapping of existing sources of pre-trade and post-trade transparency. More details with respect to
transparency sources can be found there but in summary the main sources are:
• Dealer “Runs”: Pre-trade price information is provided to clients by dealers through widely
disseminated dealer pricing “runs”. Clients often have a broader view of prices, based on having
access to runs from multiple dealers than the dealers themselves. Clients can review the prices
available in the runs and raise a request for competing quotes from one or more dealers.
• Parsing services: A number of vendors offer parsing services to the market participants to
organize the runs in an easily understandable format, typically in the form of stacks displaying
the best price as well as the depth of quotes (with time and associated dealer of each price
point). These parsing services are available for free or for a fee from vendors, to any client
desiring access to that data.
• Price Aggregators: A number of vendors provide daily mid-market intra-day and end-of-day
pricing based on levels aggregated across various dealers. Although not executable, these prices
provide an indication of the market.
• Bids wanted in competition (BWICs) and Offers wanted in competition (OWICs): These are lists
of positions sent by clients to multiple dealers to seek competitive bids in order to achieve the
best possible price.
Post-Trade Transparency
 Trade Information Warehouse: The TIW can trace its origin to the DerivServ confirmation
matching service. It serves as the single transaction confirmation repository for the CDS market
and, following the merger of DerivServ and Markit Partners in 2009, is owned by Warehouse
Trust, a special purpose trust vehicle regulated by the Federal Reserve Bank of NY. Following the
conclusion of the access framework exercise by the OTC Regulatory Forum, appropriate
regulators will have direct access to conduct their own analysis for both cleared and non-cleared
transactions. Recent enhancements include public reporting on a monthly basis and additional
granularity around counterparty type. There is a commitment to extend this to weekly reporting
by September 2010, and to continue to expand the number of contributors to the repository
which will be a key source of post-trade transparency for regulators.
 CCPs: Clearinghouses provide end of day prices for CDS contracts that are eligible to be cleared.
The clearinghouse end-of-day process typically requires executable pricing from all participating
members across the entire CDS curve and produces a composite price based on each
clearinghouse’s proprietary methodology. The robustness of the methodology is ensured by
requiring participating members to trade on a regular basis if price submissions are crossed. The
CDS contracts that are eligible to be cleared have increased steadily over time, starting with the
most liquid indices to single name constituent entities of the indices. ICE Clear Europe has
recently announced that it will begin clearing sovereign CDS within the next few months.
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 Valuation Reports: Another important source of post-trade transparency to clients can be found
in the valuation reports that are provided to clients by dealers, which typically include a position
level mark-to-market valuation on the positions that the client has facing the dealer.
 Industry Metrics: There are extensive Metrics across a variety of indicators provided to primary
regulators on a monthly basis providing strong transparency on the performance of the industry
in the areas identified as important by regulators.
7. ADDITIONAL / FUTURE STANDARDISATION INITIATIVES
Electronic Affirmation/Confirmation/STP
The markets continue to strive for operational standardisation. The program to create an interoperable
confirmation platform across MarkitWire and the DTCC (through the MarkitSERV joint venture) is a good
example of that.
There is a strong industry focus on the industry utilities, such as MarkitSERV, keeping up with developing
volumes in the marketplace. This is tracked and managed via an established and mature reporting
process around confirming the level of penetration of electronic versus paper confirmation.
Tearups
Portfolio compression reduces the number of trades outstanding in the market, lowering the total
notional outstanding and the volume of trades requiring processing by the industry. Multi-lateral and
bilateral market initiatives (the former leveraging compression service providers) have been active across
the market for several years. These efforts have significantly reduced market notional and continue to do
so going forward. Trade compression of non-cleared bilateral trades also reduces the total size of the
non-cleared eligible for clearing population and drives up the percentage of eligible stock cleared
statistic tracked in the regulatory targets. Please note that these efforts are in addition to the
compression of trade notionals that take place as part of the clearing process.
Collateralization
Work continues to extend the use of bilateral collateralization - pending clear legislation on clearing - and
enhancing the protocols around the collection of collateral, primarily through the industry's collateral
working group and commitments made to regulators around issues such as dispute resolution.
Novation/Allocation
Focus continues on increasing the level of automation in the market to achieve T+0 confirmation through
the roll out of new electronic novation consent and allocation functionality. These initiatives look to
increase the scale of usage in the market covering both dealer and buyside. The new functionality
consolidates the traditionally separate processes of requesting/providing novation consent and
confirmation into a single step consent/confirmation process.
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RATES DERIVATIVES
In March 2010 we committed to global regulators to drive a high level of product, processing and legal
standardisation in each asset class with a goal of securing operational efficiency, mitigating operational
risk and increasing the netting and clearing potential for appropriate products (recognizing that
standardisation is only one of a number of criteria for clearing eligibility). The narrative below and the
attached matrix examine existing levels of standardisation in the market and analyses potential
opportunities for further standardisation in the Rates derivative market.
Within the OTC Interest Rate Derivatives Market there is already high degree of standardisation. The
Rates market features:
 Well-understood product mechanics

 Robust, proven legal framework
 Standardised documentation
 Industry standard novation protocol
 Upfront electronic trade affirmation / legal confirmation
 Extensive electronic execution capabilities
 High and improving rates of straight through processing (STP)
 Sophisticated benchmark and off-benchmark clearing
 Robust bilateral settlement
 Active trade compression
Rates derivative transactions are effectively standardised through product templates and market practice
defaults for the majority of fields excluding dates, notional and coupon. The industry framework enables
end users to customise transactions to meet their specific requirements without having to forego the
benefits that a standardised infrastructure delivers. Even where fields are revised from market practice
defaults the infrastructure is able to support automated processing of these variances.
Additionally, market participants have no exposure to hidden risks e.g. the legal risks associated with
other derivative markets.
The narrative below provides more detail around the level of standardisation already embedded in the
rates OTC derivatives market.
1. CURRENT LEVEL OF STANDARDISATION IN THE RATES MARKET
Definitions
Almost all trades executed under standard legal terms. Typically these are through an ISDA Master
Agreement, although a small number are executed through national equivalent such as Rahmenvertrag
in Germany.
Contract Form
The form of the IRD product is that it is typically a standardised set of product templates (per the Base
Product and Sub-Product fields in the matrix) with a set of economic fields. Some of these fields have a
menu of options that are specified in ISDA definitions e.g. Buy/Sell, Floating Rate Frequency (3M, 6M
etc.), Accrual Convention (Act/360, 30/360 etc.), Business Day Convention (Modified, Following etc.).
Other fields are bespoke economic terms such as effective date, termination date, notional, fixed
coupon, premium etc.
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The market may generally be thought of as being made up of several discrete types of trades - "vanilla"
single currency fixed versus floating or floating versus floating trades plus single period swaps (FRA's),
European style options (including caps and floors), inflation, cross currency swaps and exotic trades
(trades with more complex payoffs). The vast majority of trades fall into the first bucket. It is important
to note that while there is a very high degree of standardisation of documentation and processes for
IRS / OIS / FRAs / options there is still a high degree of diversity of economic terms - start dates, end
dates, periodicity of interim payments, coupon levels, amortisation and/or compounding schedules, etc.
This diversity means that there is a significant volume of off-benchmark transactions which are therefore
not suitable for exchange trading but they can be traded on Request for Quote based platforms like
Tradeweb and they can be cleared. Exchange trading works best where client interests are concentrated
in a very small number of instrument types.
The actual hedging requirements of end-users require a high degree of diversity with respect to key
economic terms. End users can customize the transaction in line with their requirements by varying any
of the economic fields on a transaction. This is important to enable the end user to fully transfer their
risk to the market maker. Dependent upon which fields are revised from the market standard, the
industry infrastructure can still support STP of these off-benchmark trades.
To give an idea of the scale of the diversity of existing interest rate swaps, the Rates CCP has estimated
that the population of 750,000 individual trades is comprised of at least 200,000 distinct trades i.e. have
different economic terms.
Contracts
A significant majority of transactions are electronically affirmed/confirmed via the MarkitSERV platform
for both inter-dealer (90%+) and dealer to client (70%+) transactions. Penetration of this electronic
mechanism and consequently the electronic confirmation of rates transactions continues to improve
with ongoing work to improve the take-up within both inter-dealer and dealer to client segments. The
small percentage of remaining transactions are confirmed on paper which are either matched (inter-
dealer only typically) or signed by the end user. These paper confirmations typically use standardized
long form industry templates, although there are small variances across different dealers.
STP
With the industry infrastructure that is now in place (MarkitSERV / SwapClear), even dealer to client off-
benchmark transactions can be fully executed and STP’ed for confirmation and clearing. Both the
MarkitSERV and SwapClear platforms support extensive diversity of attributes in the economic terms of
trades and this enables automated processing of a high proportion of diverse trades. Industry STP rates
are consequently high for both benchmark and off-benchmark transactions.
Lifecycle Events
 Confirmable Events: New/Unwinds/Partial Unwinds: As outlined above typically via electronic
affirmation/confirmation mechanisms.
 Novations: Novation adhere to the ISDA Novations protocol where all parties to the transaction
affirm their agreement to one party stepping out and the new party stepping in. This is currently
managed on MarkitSERV for a significant and improving volume of novations, but there are
industry initiatives in progress to move to a fully electronic process.
 Allocations: Allocations are currently managed on MarkitSERV for a significant and improving
volume of novations, but there are industry initiatives in progress to move to a fully electronic
process.
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 Non-Confirmable Events: Rate Resets: This process is unique to the rate markets. Cleared trades
are centrally managed by the CCP. Market participants manage rate resets for bilateral trades
using a standardised market page. A small number of transactions utilize interpolation to
calculate a bespoke rate for a non-standard stub or accrual period.
2. EXECUTION
Typically traditional futures or stock exchanges work best where there is depth of liquidity around
standard products that persist in their original form for the life of the contract. This allows for simple
trading protocols, anonymous trading and limit order driven markets. This is evidenced by futures
exchanges which play an important part in the Rates markets. The short dated (3m) cash contract (Libor,
Euribor etc.) is a valuable tool for managing short term interest rate risk, although not precise enough for
all short term risks. An example is managing specific fixings on a portfolio where these reset risks are
managed through bespoke FRAs. The market has evolved a standardized process to support this
requirement leveraging a technology solution to automate this process (RESET). Bonds, and in many
markets bond futures, provide an immediate proxy hedge for longer dated risks, although leave
potentially a date mismatch and a basis risk (bond vs. IRD) that has to be managed. The key to note is
that exchanges work well where the market concentrates liquidity around a small number of widely
traded contracts.
Organised trading venues can take multiple forms and there is some scope for more of the market to
move onto other types of electronic trading platforms, particularly those that are quote driven that
provide the certainty of execution that clients are generally looking for. TradeWeb and Bloomberg are
examples of multi-dealer platforms where clients can request prices in both benchmark and off-
benchmark transactions from a number of dealers, thus putting them in competition in an efficient way.
In addition, many dealers offer electronic execution on their own proprietary platforms (per the Bilateral
Execution Venue stats in the matrix). These electronic platforms supplement the voice market which, as
in bond markets and Foreign Exchange markets, provides for an ability to work larger orders without
adversely impacting the market price for a client, or for bespoke off-benchmark trades for specific risk
management needs.
The OTC Interest Rate Derivative markets work well today. They operate for professional users only, are
competitive with a high degree of price transparency, a rich set of products for clients, have deep
liquidity and tight pricing (in the US market, benchmark spreads are typically 0.4bp - similar to the bond
futures market). There is a strong consensus across both dealer and end-user that the rate markets in
their current form provide for price transparency with good liquidity.
3. MARKET PRACTICES
It should be noted that benchmark products common in the inter-dealer market often trade in
combinations and packages (multiple underlying IRS trades within the overall transaction) and we
estimate that only 25-30% of the inter-dealer market trades outright benchmarks. These combinations
and packages include but are not limited to curve trades (2 IRS), butterflies (3 IRS), condors (4 IRS), asset
swaps or spreads (bond versus IRS, bond future versus IRS).
The OTC rate derivative markets operates in tandem with and is complimentary to the exchange traded
rates futures market. Short dated and long dated interest rate contracts such as the eurodollar future,
Treasury note future, German bond future are actively traded and are leveraged as proxy hedging tools
for OTC transactions.
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There is a small component of the vanilla bucket that is highly standardised in its economic terms. IMM
swaps leverage the IMM dates as the key economic dates analogous to short dated interest rate futures.
A subset of these transactions has fixed coupons and trade via a variable upfront fee in order to
commoditise the underlying transaction and make the positions fungible. While these swaps are
available to all participants, most users need or choose to use bespoke structures.
4. CONFIRMATION
As highlighted in section 1 above, the combination of the ISDA documentation and high electronic
affirmation/confirmation rates mean that there is a highly standardized and efficient legal framework in
place. This is evidenced by the latest industry target of <0.2 days of volume of aged outstanding
confirmations in the marketplace. Continued industry efforts to move more end users onto electronic
affirmation/confirmation platforms will further mitigate risks in this space.
For cleared transactions, the prime record of the transaction is automatically fed from the affirmation
system and then maintained within the CCP. Extending clearing into the end user space should further
mitigate confirmation risks.
5. SETTLEMENT
Current levels of nostros breaks outstanding on bilateral trades are extremely low, evidencing the
effectiveness of existing settlement mechanisms. These are typically managed via in-house automated
derivatives processing systems and via SWIFT messaging to correspondent banks, with any settlement
netting pre-agreed on a bilateral basis. Additionally all cleared transactions have settlement
automatically executed via the centralized clearing process. Extending clearing into the end user space
will further mitigate settlement risks.This reduction in bilateral activity will take place against a backdrop
of strong existing risk management practices where only 0.59% of gross settlements have post-value date
discrepancy and 0.1% of these issues persist 30 days after settlement date.
CCPs: Central Clearing between major dealers has been in place for over 10 years with
approximately 45% of the total market (historical stock) now cleared. New eligible 1 activity between G14
counterparties is being cleared at the rate of over 90%. Significant increases in the stock of cleared
trades will come about from a variety of initiatives - backloading of legacy inter-dealer trades, the
provision of clearing functionality for more trade types and currencies and the extension of clearing
services to clients.
In notional terms, 60-70% of the IRD market is in single currency interest rate swaps (including OIS) and
the majority of these transactions are clearing eligible highlighting that it is possible to clear a significant
proportion of the market. When FRAs are enabled for clearing this figure rises to 80%+. Other products
such as cross-currency swaps and options which are potentially clearable (although more complex to
implement) represent a significantly smaller proportion of the rates market.
There will still remain a percentage of trades (10-20%) that are unlikely to be cleared representing non-
clearing clients and/or products that are ineligible for clearing.
1
Eligible is defined as a product being clearable and double sided affirmed on MarkitSERV
11 of 32
The existing CCP already clears a wide range of Interest Rate Derivative products, including off-
benchmark trades e.g. forward starting. There is an aggressive program of work to extend the eligible
product set, including the addition of FRAs and other swap features (such as amortising) over the next 12
months, with other products in the pipeline. This program is driven by a combination of buy-side
demand and the scale of the outstanding trade population but it is important to note that certain IRD
products are not suitable for clearing due to a lack of depth of liquidity or clear availability of pricing.
This includes exotics and may include some options products, although this requires further analysis.
CCPs should be well regulated though to ensure the highest standards are applied to key CCP operational
standards, particularly in the areas of risk management, margining and default management,
commensurate with the systemic risk that the CCPs may pose. Other CCPs are beginning to come online,
although this will take time to extend the superset of eligible products.
As legislation is introduced to drive end user clearing of derivatives for systemically important parties
CCPs are being built-out to provide end-user access. The frameworks to support end user clearing are
currently being developed and this will enable clients to clear their new activity plus backload legacy
transactions.
It should be noted that the existing Rates CCP is capable of clearing a wide array of off-benchmark
transactions and that trades do not have to be “standardized” in order to be clearing eligible.
Clearing eligibility does not necessarily equate with an ability to execute electronically (and vice versa).
The existing Rates CCP leverages netting concepts. It performs netting for all settlements on a
multilateral basis into a single variation margin settlement per currency per clearing member. In addition
it determines initial margin for each party based off the net risk position across a user’s portfolio of
transactions in line with the default management process executed on the default of a party.
7. TRANSPARENCY
This is covered in significant detail in the industry response on Transparency. However, in summary:
Interest Rate Trade Reporting Repository

The global Interest Rate Trade Reporting Repository (irTRR) went live in December 2009, and Regulators
have received global post-trade transparency reporting since January 2010. Following the conclusion of
the access framework exercise by the OTC Regulatory Forum, appropriate regulators will have direct
access to conduct their own analysis for both cleared and non-cleared transactions. Recent
enhancements include public reporting on a monthly basis and additional granularity around
counterparty type. There is a commitment to extend this to weekly reporting by September 2010, and
to continue to expand the number of contributors to the repository which will be a key source of post-
trade transparency for regulators.
Pre-Trade Transparency
There is excellent pre-trade transparency via a variety of platforms to a wide array of end users.
Post-Trade Transparency
The historical lack of post-trade transparency is being addressed through the Repository as mentioned
above. In addition, for end users pre-trade transparency access points (broker screens and dealer
screens updated by dealers or public access platforms such as Bloomberg or Reuters) can be, and are,
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used as post trade transparency venues since they will typically update to reflect the price, and implicitly
the size, of the most current transaction price executed in the market.
Industry MIS
There is extensive MIS across a variety of indicators provided to primary regulators on a monthly basis
providing strong transparency on the performance of the industry in the areas identified as important by
regulators. This includes information on penetration of electronic confirmation, outstanding
confirmations, outstanding settlements, clearing penetration for existing stock and new activity etc.
8. ADDITIONAL / FUTURE STANDARDISATION INITIATIVES
Electronic Affirmation/Confirmation/STP
The markets continue to strive for Operational standardisation. The programme to create an
interoperable confirmation platform across MarkitWire and the DTCC (through the MarkitSERV joint
venture) is a good example of that. Work is also underway to address the tail of clients, particularly non-
financial firms who do not electronically confirm their trades today.
There is a strong industry focus on the industry utilities such as MarkitSERV keep up with developing
volumes in the marketplace. This is tracked and managed via an established and mature reporting
process around confirming the level of penetration of electronic versus paper confirmation.
Portfolio Compression
Tear-ups reduce the number of trades outstanding in the market, lowering the total notional
outstanding and the volume of trades requiring processing by the industry. Multilateral and bilateral
market initiatives (the former leveraging compression service providers) have been active across the
market for several years. These efforts have significantly reduced market notional and continue to do
going forward. Within the last 12 months, trade compression within the major rates CCP has been
introduced, which will become increasingly important as more trades are cleared. Trade compression of
non-cleared bilateral trades also reduces the total size of the non-cleared eligible for clearing population
and drives up the percentage of eligible stock cleared statistic tracked in the regulatory targets.
Collateral
For non-cleared transactions there is widespread use of bilateral collateral arrangements (via the ISDA
Credit Support Annex (CSA)). This is prevalent amongst financial institutions, although less so with non-
financial counterparties. Initiatives are ongoing to extend the use of bilateral collateralisation pending
legislation on clearing. Increasing utilisation of tools such as the TriResolve product by sell and buy-side
are facilitating improved portfolio reconciliation and work continues on enhancing the protocols around
the collection of collateral through the industry's collateral working group.
Novation/Allocation
Focus continues on increasing the level of automation in the market to achieve T+0 confirmation through
the roll out of new electronic novation consent and allocation functionality. These initiatives look to
increase the scale of usage in the market covering both dealer and buyside. The new functionality
consolidates the traditionally separate processes of requesting/providing novation consent and
confirmation into a single step consent/confirmation process.
9. RECONCILIATION VERSUS IR TRR:
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As of 4 June the data provided in the attached matrix does not fully reconcile to the data in the IR TRR.
This is primarily due to the number of firms submitting data to this matrix being lower than the number
of firms submitting to the IR TRR.
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EQUITY DERIVATIVES
1. CURRENT LEVEL OF STANDARDISATION IN THE EQUITY MARKET
Current State
Equity Derivatives is a highly standardised asset class with the majority of the turnover occurring on
regulated exchanges globally. The ISDA 2009 Year End Market Survey shows outstanding notional value
of OTC Equity Derivatives worldwide at USD 6.8 trillion, whereas according to BIS statistics the notional
turnover in Listed Equity Index Derivatives alone was approximately USD 50 trillion in Q4 2009. Within
the OTC population, the majority of the volume occurs in vanilla products such as Equity Options and
Swaps (Portfolio, TRS, CFD). There is a proportion of business that is more structured in nature which
will be client driven, with the payouts, contract terms and collateral arrangements designed to meet the
needs and requirements of the particular target client base. The accompanying matrix indicates, for the
number of submitting firms indicated at the top of each column, outstanding notional of USD 4.1 trillion
for vanilla products and USD 1.6 trillion for exotics/other although this number may also reflect vanilla
type products traded as strategies.
Confirmations for the asset class typically utilise standard definitions published by ISDA although a small
proportion of trades are executed under local law agreements such as Rahmenvertrag (Germany) and
FBF (France). The 2002 ISDA Equity Derivatives Definitions are currently in the process of being updated,
with an expected completion date of 31 December 2010. Considerable progress has been made in recent
years to develop and publish Master Confirmation Agreements (MCAs) through ISDA.
Once executed bilaterally, MCAs govern all trades executed between those 2 parties that reference that
MCA. The MCA is product specific and is supplemented with a short form confirmation exchanged on a
trade by trade basis to reflect the specific economic details of that trade. As is the case with all ISDA
documentation, bilateral negotiation of the terms of the published MCAs is possible, including election
from a limited number of pre-determined options where it has not been possible to agree a single
common standard during the industry negotiation. It should be noted that in the June 2009 letter to
regulators the signatories committed to use the new MCAs proposed in that letter and any future ISDA-
published MCAs in a form substantially similar to the published version.
Through their adoption, MCAs have created standardised short form confirmations that are restricted to
economic trade details only. This has enabled the on-boarding of a variety of Equity Derivatives products
onto electronic platforms for the confirmation of new trades, Electronic Eligibility has increased from
25% of G14 volume in Q4 2009 to 33% of G14 volume in Q1 2010, and has then also led to the ability to
electronically confirm terminations and partial terminations.
For OTC transactions there is widespread use of bilateral collateral arrangements (via the ISDA Credit
Support Annex (CSA)). This is prevalent amongst financial institutions, and increasingly more so with
non-financial counterparties. Initiatives are ongoing to extend the use of bilateral collateralisation -
pending legislation on clearing. Increasing utilisation of tools such as the TriResolve product by the sell
and buy-side are facilitating improved portfolio reconciliation and work continues on enhancing the
procedures around the collection of collateral through the industry's collateral working groups.
End users can customise the transaction in line with their requirements by varying any of the economic
field on a transaction. This is important to enable the end user to fully transfer their risk to the market
maker. Provided that the transaction in question is covered by an MCA and the form of Transaction
15 of 32
Supplement is standard the industry infrastructure can still support Straight Through Processing of these
non-standard trades.
Future Opportunities / Next Steps

The 2002 Equity Derivative Definitions are currently being updated and expanded. This is primarily to
expand the set of product types, payouts and underliers covered. A significant benefit from this piece of
work is to further extend the menu approach which should reduce the amount of bilateral amendments
that are made to the documents which will further facilitate the standardisation of contractual terms.
This work is scheduled to be completed by the end of 2010.
Any standardisation benefits gained from the 2010 Equity Derivative Definitions should also have direct
benefit on future MCA negotiations. However, it should be noted that documentation issues may still
need to be negotiated on a bilateral basis for many products.
2. EXECUTION
Current State
As mentioned above, the majority of the Equity Derivative business is enacted on exchange listed
products. For this activity, the execution venue differs by Region – the majority of the activity in the US
is executed on Exchange, whereas in Europe and most of Asia the business is largely done through the
broker market – some electronically but the majority via voice (See Equity Standardisation Matrix). This
difference in approach is partly driven by historic practice but also by the amount of liquidity on the
exchanges and the variety types of people (e.g. retail) accessing the exchanges.
It should be noted that even where price-discovery is facilitated by an organised trading venue, much of
the liquidity discovery process for exchange listed products is done off-exchange and this is unlikely to
change since the availability of large blocks is typically sourced by Over-The-Counter price requests.
For the ISDA based (or similar) OTC market, the vast majority is done via voice, either via the broker
market or directly with the sales force of the Investment Banks – the former is typical of Interdealer
Transactions, the latter becomes more likely for Client Transactions or the more complex the product is.
Some institutions have bespoke Direct Market Access offerings for OTC products, but these are relatively
limited in scope and target audience. The majority of OTC transactions – and even some highly
structured transactions – are done in competition with a number of different parties and sometimes the
clients have better information available to them than the Investment Banks. It should be noted that,
because of the nature of the products, it may not always be the best price that wins the trade – clients
consider items such as post trade service, reliability, legal terms, and collateral costs in their decision
making.

Generally speaking, the majority of products which are suited to organised trading venues are already
listed and available for trading on regulated futures and options exchanges. Some of the vanilla products
that are currently traded OTC could be moved to exchange listed - in many cases, this is already in
progress (Dividend Futures, Options on ETFs, Options on new underlyings - e.g. Russian Indices - etc).
Note however that while the process of migration from OTC to listed markets is well-established, many
products which are created in the innovation-favouring OTC environment have not successfully migrated
to exchange-trading due to a lack of sustained investor interest. The conditions for successful migration
tend to be the high level of standardisation of a product and the concentration of liquidity around a
small number of benchmark products.
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3. CONFIRMATION
Current State
Trade confirmations are currently processed in three main formats for OTC Equity Derivatives (i)
electronic trade confirmation via an electronic platform, (ii) 'short form' paper confirmation and (iii) 'long
form' paper confirmation. In order for a trade to be confirmed electronically a MCA must be in place
between the parties to the trade. These MCAs can either be based upon ISDA published MCA templates
or a bespoke form bilaterally negotiated between the parties. 'Electronically Eligible' trades for
operational efficiency target purposes are those defined as having an ISDA published MCA (irrespective
of whether such ISDA published form or pre-existing bilateral form is used) and can be matched on an
electronic platform. Currently 'Electronically Eligible' products include Equity Options, Variance Swaps
and Discrete TRS on various Underlyings, see attached Equity Annex for a current full list of Electronically
Eligible products.
Exceptions to the above are Portfolio Swaps and CFDs. Many dealers electronically confirm these
products on bespoke bilateral electronic platforms. Portfolio Swaps are considered to be non-
electronically eligible products for operational efficiency target purposes as they have different
characteristics from Share or Index Discrete TRS and generally operate under bespoke Portfolio Swap
Agreements (“PSA”s) tailored to the needs of the parties. Once the Portfolio Swap Agreement is
executed ongoing and in many cases significant volumes of activity occur under the PSA and are
confirmed to the client on a daily activity report on a negative affirmation basis (a one way
communication from the dealer to the client that is deemed agreed unless the client communicates
otherwise within a predetermined time period).
'Short form' paper confirmations can be used if the parties have executed an MCA covering the product
type in question but cannot or choose not to use an electronic platform. As noted above a short form
confirmation will generally summarise only the economic details of a trade, with all other contract
definitions contained in the MCA itself.
'Long form' paper confirmations are used for all other trade types which are not covered by MCAs -
generally more bespoke or structured transactions; these confirmations contain both the economic and
other contract definitions used for the trade and cannot be confirmed on electronic platforms.

As noted above, in order to increase standardisation in the non-electronically eligible population of OTC
Equity Derivative trades the industry has committed to work with ISDA to publish a new set of Equity
Derivative Definitions by the end of 2010. Notwithstanding the fact that significant legal issues may still
need to be negotiated on a bilateral basis, this will help to increase the speed at which new MCAs can
be negotiated and thus expand the scope of the electronically eligible population; once the electronic
vendors support these product types firms will be able to confirm these trades electronically.
4. PROCESS AND STP
Current State
Currently there is no centralised infrastructure in place for post trade processing beyond that available
for confirmations as described above. However, the industry is pursuing its commitment to establish a
central trade reporting repository which is on track to deliver a first phase by the end of July 2010.
Conversations continue with the OTC Derivative Regulators Forum (ODRF) to deliver enhancements to
17 of 32
the Equity Derivative Reporting Repository (EDRR) in subsequent phases. Such enhancements will be
agreed between the ODRF and the industry acting through the Equity Steering Committee.

In addition to the EDRR the industry is committed to deliver a Cash Flow Matching (CFM) tool by the end
of 2010. The CFM utility will deliver pre-value date cash flow matching on a bilateral basis for the
products identified in the Standardisation Matrix.
At the present time due to a lack of industry definition and limited coverage of electronic confirmations
there is no centralised event processing mechanism in place for OTC Equity Derivatives. The industry,
through the Equity Steering Committee continues to monitor this and explore opportunities to develop
central processing in this regard. The main focus for standardisation in this area should now be on
corporate actions, ensuring that they are globally consistent or match the processes on the primary
listed exchange. Also, more standardised forms of Fair Value calculations and values would help.
Current State
The boundary between the OTC and the exchange traded segments of the Equity Derivative market
tends to be fairly porous where standardised Equity Derivatives are concerned. Much of the large-size
transaction business in standardised equity and index options is negotiated in the over-the-counter
market, and then will either get crossed on-exchange and cleared as a listed derivative (i.e. in BCLear,
Liffe and Eurex), or will become a bilateral OTC within an ISDA framework, reasons for deciding on an
approach include, but are not limited to:
 availability of relevant strike and maturity in Exchange Traded Derivatives (ETD),

 access by both parties to an ETD clearing account on economically reasonable terms
 client's mandate allows use of ETD / use of OTC
 requirement for confidentiality
 potentially, restricted access to ETD market in some jurisdictions
 specific terms required are not available on ETD (i.e. dividend re-adjustment, Additional
Disruption Events)
 Inappropriate Corporate Action adjustment rules for ETD
 Trade struck out of market hours, inability to cross or give-up

CCP eligibility will generally be restricted to the more vanilla end of the product spectrum and a key
consideration should be whether the product would benefit from being centrally cleared - it's not
apparent for all products (e.g. CFDs as financing trade effectively reset every day which automatically
removes the credit exposure in the transaction, risk is therefore limited to settlement risk which is more
than adequately covered by Initial Margin, whilst these could be cleared the daily volume is high and the
necessary investment by a CCP would not justify the amount of risk being mitigated).
The potential to clear more structured products is likely to be limited by the margin costs involved to
support the complexity and time consuming models that would be required to effectively support these
products. The bespoke features, unobservable parameters and the speed of innovation all point to a
potentially prohibitive high cost of clearing which would deter users from trading the appropriate
hedging product unless they could trade OTC.
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It should also be noted that Exchange margin requirements don’t always cover the risks associated with
the products being traded. Most exchanges use a variety of Standardised Portfolio ANalysis of risk (SPAN)
Margining (first introduced by CME in 1988) and, as this model is based on volatility and credit spreads, it
will increase in times of stress. This has the consequence of increasing margin calls in bad markets, so
potentially forcing liquidations and therefore exacerbating the effects of the bad market. It should also
be noted that exchanges are commercial ventures and they make money out of volume. It is not in their
commercial interest to make costs, including collateral, prohibitively expensive as they will drive clients
away.
Also CCP eligibility will also potentially be limited due to intellectual property issues, for example indices.
Furthermore it should be noted that differences in corporate action determinations by CCPs of listed
options create basis risk and this has been a barrier to competition between Exchanges as well as a
barrier to moving residual OTC business onto some CCPs (in the past BClear, Liffe and Eurex have applied
different economic results to identical options). Making progress on these issues would allow the
increased portability of trades between OTC and CCPs, as well as between existing CCPs, and thus reduce
the risk being held within firms and increase security and transparency for end-users
6. TRANSPARENCY
Pre Trade Transparency

In the OTC Equities Derivatives Market pre-trade information varies from one product to the other:
 Look-alike OTC (serves as substitution of Equity Listed Products): the price discovery is based on
public screen prices available for Equity Listed Products, and supplemented by request for quote
process that allows competition between dealers. In addition, voice prices can be given by
wholesale brokers, upon request,
 Equity swaps and other delta 1 products: they synthetically replicate long or short positions on a
listed equity underlying (stock or index both listed): the price discovery is based on the following
two components:
1) the price of the underlying stock or index for which exists a full pre-trade transparency
regime pursuant to MiFID; and
2) the price of the “financing service” offered by the dealers and brokers when selling such
products (ie: the direct long/short position on a given underlying being replaced by a
synthetic exposure on this underlying, the financing cost of this exposure is transferred to
the dealer and included in the price of the Equity swap) is negotiated privately and is
dependent upon specific aspects of the client/dealer relationship. Hence, this price is not
made public. Nevertheless, clients can still ask request for quotes and put dealers in
competition.
 Bespoke and structured products: as these trades are privately negotiated (OTC derivatives) and
do not exist prior to their request, there is no specific pre-trade data to transmit. Clients can still
ask request for quotes and put dealers in competition.
Post Trade Transparency

As a general rule we consider that there is not a consistent desire from users for post-trade transparency.
Many large end-users have voiced concerns that publication of trade-level information could give other
participants unnecessary insight and information into their investment strategies. In addition, the market
liquidity relies on the willingness of dealers to commit capital, and this could be significantly
compromised if transactions were to be made public. Any consideration of a post-trade transparency
regime would have to carefully balance the perceived benefits against the interests of users in
19 of 32
maintaining confidentiality and liquidity. In all cases, care must be taken that for large transactions the
ability to execute should not be damaged. We note in this regard that CESR's July 2009 communication
recognises this.
For vanilla OTC derivatives in respect of which a post-trade transparency regime exists for an equivalent
Exchange-traded derivative, any consideration of a post-trade transparency regime must not impose
more constraints than the one existing of the existing Exchange-traded derivatives markets. We note in
this regard that existing Exchange-traded derivatives markets in Europe already impose limitations on
post-trade transparency:
 Eurex non-disclosure on large-sized trades (Eurex circular 236/09) under BaFin regime
 Bclear No-Posting option (London Notice No. 2697, section 2.1e) under FSA regime
For non-vanilla OTC derivatives public disclosure would be complex to disseminate intelligibly and could
compromise client or product confidentiality.
20 of 32
ANNEXES
21 of 32
CREDIT DERIVATIVES ANNEX
1. CDS DOCUMENTATION ANNEX
Single-name CDS:
 Confirmation for use with the Physical Settlement Matrix
 2005 Matrix Supplement
 For each trade, the most recent Physical Settlement Matrix as at Trade Date
 2003 ISDA Credit Derivatives Definitions
 May 2003 Supplement to the 2003 ISDA Credit Derivatives Definitions
 July 2009 Supplement to the 2003 ISDA Credit Derivatives Definitions (the “Small Bang”
Protocol)
 Any other additional provisions that apply for the Reference Entity under the terms of the
Physical Settlement Matrix (e.g., 60-day cap on settlement letter; monoline provisions; Municipal
CDS additional provisions).
 Credit Support Documents between the parties (if applicable)
Single-name CDS Swaption:

 Assuming both parties have adhered to the Small Bang Protocol or otherwise incorporated the
provisions of the Small Bang Protocol:
 Credit Default Swaption Confirmation
 Single Name CDS Swaption Standard Terms Supplement (August 6, 2007)
 For each trade, the most recent version as of the Swaption Trade Date of the ISDA Swaption
Matrix
 2005 Matrix Supplement
 For each trade, the most recent Physical Settlement Matrix as at the Exercise Date of the
Swaption
 2006 ISDA Definitions, including any amendments thereto as at the Swaption Trade Date
 The relevant sections of Schedule 1 to the Small Bang Protocol
 July 2009 Supplement to the 2003 ISDA Credit Derivatives Definitions
 Any other additional provisions that apply for the Reference Entity under the terms of the
Physical Settlement Matrix (e.g., 60-day cap on settlement letter; monoline provisions; Municipal
CDS additional provisions).
Index and Index Tranche (based on Markit CDX and Markit iTraxx Europe):
 Confirmation
 Standard Terms Supplement (For iTraxx untranched transactions, we understand current market
practice is to use the older Master Confirmation Agreements (and Transaction Supplements
thereto), because the Standard Terms Supplement is not currently available for use in the
MarkitSERV electronic Confirmation platform)
22 of 32
 Monoline provisions (for relevant Reference Entities in the CDX indices)
Index Swaptions (based on Markit CDX and Markit iTraxx Europe):

 Confirmation
 Swaption Standard Terms Supplement
 Either (a) the most recent Untranched Index Standard Terms Supplement prior to the Swaption
Trade Date (or such other date specified by the parties); or (b) an Untranched Index Master
Confirmation Agreement between the parties as of a specified date
 2006 ISDA Definitions, including any amendments thereto as at the Effective Date of the relevant
index
 Monoline provisions (for relevant Reference Entities in the CDX indices)
23 of 32
2. CDS CLEARED PRODUCT ANNEX
Clearing Eligible North American Indices (with series, tenor, index version terms)
Index
Full Index Name Index Family Index Series Version Index Tenor
CDX NA IG S14 V1 5Y IG 14 1 5Y
CDX NA HY S14 V1 5Y High Yield 14 1 5Y
CDX NA HVOL S14 V1 5Y HiVol 14 1 5Y
24 of 32
Clearing Eligible North American Single Name Credits (with coupon, tenor, documentation, seniority terms)
Single Name Sector Currency Coupons Tenors Restructuring Tier
AMERICAN ELECTRIC POWER
Utilities USD 100 0M-10Y No R SNRFOR
COMPANY
CONSTELLATION ENERGY No R
Utilities USD 100 0M-10Y SNRFOR
GROUP, INC.
DOMINION RESOURCES, INC. Utilities USD 100 0M-10Y No R SNRFOR
FIRSTENERGY CORP. Utilities USD 100 0M-10Y No R SNRFOR
PROGRESS ENERGY, INC. Utilities USD 100 0M-10Y No R SNRFOR
SEMPRA ENERGY Utilities USD 100 0M-10Y No R SNRFOR
AT&T INC. Telecommunications USD 100 0M-10Y No R SNRFOR
CENTURYTEL, INC. Telecommunications USD 100 0M-10Y No R SNRFOR
VERIZON COMMUNICATIONS No R
Telecommunications USD 100 0M-10Y SNRFOR
INC.
ARROW ELECTRONICS, INC. Industrials USD 100 0M-10Y No R SNRFOR
BURLINGTON NORTHERN No R
Industrials USD 100 0M-10Y SNRFOR
SANTA FE CORPORATION
CATERPILLAR INC. Industrials USD 100 0M-10Y No R SNRFOR
CSX CORPORATION Industrials USD 100 0M-10Y No R SNRFOR
DEERE & COMPANY Industrials USD 100 0M-10Y No R SNRFOR
GOODRICH CORPORATION Industrials USD 100 0M-10Y No R SNRFOR
HONEYWELL INTERNATIONAL No R
INC.
INGERSOLL-RAND COMPANY Industrials USD 100 0M-10Y No R SNRFOR
LOCKHEED MARTIN No R
CORPORATION
NORFOLK SOUTHERN No R
CORPORATION
NORTHROP GRUMMAN No R
CORPORATION
R.R. DONNELLEY & SONS No R
COMPANY
RAYTHEON COMPANY Industrials USD 100 0M-10Y No R SNRFOR
THE SHERWIN-WILLIAMS No R
COMPANY
UNION PACIFIC CORPORATION Industrials USD 100 0M-10Y No R SNRFOR
ALTRIA GROUP, INC. Consumer Goods USD 100 0M-10Y No R SNRFOR
NEWELL RUBBERMAID INC. Consumer Goods USD 100, 500bps 0M-10Y No R SNRFOR
TOLL BROTHERS, INC. Consumer Goods USD 100, 500bps 0M-10Y No R SNRFOR
WHIRLPOOL CORPORATION Consumer Goods USD 100, 500bps 0M-10Y No R SNRFOR
ANADARKO PETROLEUM No R
CORPORATION Oil & Gas USD 100, 500bps 0M-10Y SNRFOR
DEVON ENERGY No R
Oil & Gas USD 100 0M-10Y SNRFOR
CORPORATION
DUKE ENERGY CAROLINAS, No R
Oil & Gas USD 100 0M-10Y SNRFOR
LLC
HALLIBURTON COMPANY Oil & Gas USD 100, 500bps 0M-10Y No R SNRFOR
VALERO ENERGY No R
Oil & Gas USD 100, 500bps 0M-10Y SNRFOR
CORPORATION
AUTOZONE, INC. Consumer Services USD 100 0M-10Y No R SNRFOR
CBS CORPORATION Consumer Services USD 100, 500bps 0M-10Y No R SNRFOR
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COMCAST CORPORATION Consumer Services USD 100 0M-10Y No R SNRFOR
COX COMMUNICATIONS, INC. Consumer Services USD 100 0M-10Y No R SNRFOR
DARDEN RESTAURANTS, INC. Consumer Services USD 100, 500bps 0M-10Y No R SNRFOR
NEWS AMERICA No R
Consumer Services USD 100 0M-10Y SNRFOR
INCORPORATED
NORDSTROM, INC. Consumer Services USD 100, 500bps 0M-10Y No R SNRFOR
SAFEWAY INC. Consumer Services USD 100 0M-10Y No R SNRFOR
SOUTHWEST AIRLINES CO. Consumer Services USD 100, 500bps 0M-10Y No R SNRFOR
TARGET CORPORATION Consumer Services USD 100, 500bps 0M-10Y No R SNRFOR
THE HOME DEPOT, INC. Consumer Services USD 100, 500bps 0M-10Y No R SNRFOR
THE KROGER CO. Consumer Services USD 100 0M-10Y No R SNRFOR
THE WALT DISNEY COMPANY Consumer Services USD 100 0M-10Y No R SNRFOR
TIME WARNER INC. Consumer Services USD 100 0M-10Y No R SNRFOR
WAL-MART STORES, INC. Consumer Services USD 100 0M-10Y No R SNRFOR
ALCOA Basic Materials USD 100 0M-10Y No R SNRFOR
E. I. du PONT Basic Materials USD 100 0M-10Y No R SNRFOR
EASTMAN CHEMICAL CO Basic Materials USD 100 0M-10Y No R SNRFOR
INTERNATIONAL PAPER CO Basic Materials USD 100 0M-10Y No R SNRFOR
THE DOW CHEMICAL CO Basic Materials USD 100 0M-10Y No R SNRFOR
COMPUTER SCIENCES CORP Technology USD 100, 500bps 0M-10Y No R SNRFOR
HEWLETT-PACKARD CO Technology USD 100 0M-10Y No R SNRFOR
INTERNATIONAL BUSINESS No R
Technology USD 100 0M-10Y SNRFOR
MACHINES CORP
MOTOROLA, INC. Technology USD 100, 500bps 0M-10Y No R SNRFOR
XEROX CORP Technology USD 100, 500bps 0M-10Y No R SNRFOR
AETNA INC. Healthcare USD 100, 500bps 0M-10Y No R SNRFOR
AMGEN INC. Healthcare USD 100 0M-10Y No R SNRFOR
BAXTER INTERNATIONAL INC. Healthcare USD 100 0M-10Y No R SNRFOR
BRISTOL-MYERS SQUIBB No R
Healthcare USD 100 0M-10Y SNRFOR
COMPANY
CARDINAL HEALTH, INC. Healthcare USD 100 0M-10Y No R SNRFOR
CIGNA CORPORATION Healthcare USD 100 0M-10Y No R SNRFOR
AMERICAN EXPRESS No R
Financials USD 100, 500 bps 0M-10Y SNRFOR
COMPANY
BOEING CAPITAL No R
Financials USD 100 0M-10Y SNRFOR
CORPORATION
CAPITAL ONE BANK (USA), No R
Financials USD 100, 500bps 0M-10Y SNRFOR
NATIONAL ASSOCIATION
GENERAL ELECTRIC CAPITAL No R
CORPORATION
MARSH & MCLENNAN No R
COMPANIES, INC.
NATIONAL RURAL UTILITIES No R
COOPERATIVE FINANCE Financials USD 100 0M-10Y SNRFOR
CORPORATION
SIMON PROPERTY GROUP, L.P. Financials USD 100, 500bps 0M-10Y No R SNRFOR
26 of 32
Clearing Eligible European Indices (with series, tenor, index version terms)
Full Index Name Index Family Index Series Index Version Index Tenor
iTRAXX Europe S13 V1 10Y Main 13 1 10Y
iTRAXX Europe Crossover S13 V1 5Y Crossover 13 1 5Y
iTRAXX Europe HiVol S13 V1 5Y HiVol 13 1 5Y
27 of 32
Clearing Eligible European Single Name Credits (with coupon, tenor, documentation, seniority terms)
CENTRICA PLC Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
ENEL S.P.A. Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
E.ON AG Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
EDISON S.P.A. Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
EDP - ENERGIAS DE PORTUGAL,
Utilities EUR MMR SNRFOR
S.A. 100,25bps 0M-10Y
ELECTRICITE DE FRANCE Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
ENBW ENERGIE BADEN-
Utilities EUR MMR SNRFOR
WUERTTEMBERG AG 100,25bps 0M-10Y
FORTUM OYJ Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
GAS NATURAL SDG, S.A. Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
GDF SUEZ Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
IBERDROLA, S.A. Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
NATIONAL GRID PLC Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
RWE AKTIENGESELLSCHAFT Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
UNITED UTILITIES PLC Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
VATTENFALL AKTIEBOLAG Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
VEOLIA ENVIRONNEMENT Utilities EUR 100,25bps 0M-10Y MMR SNRFOR
FRANCE TELECOM Telco EUR 100,25bps 0M-10Y MMR SNRFOR
BRITISH TELECOMMUNICATIONS
Telco EUR MMR SNRFOR
PUBLIC LIMITED COMPANY 100,25bps 0M-10Y
KONINKLIJKE KPN N.V Telco EUR 100,25bps 0M-10Y MMR SNRFOR
HELLENIC
TELECOMMUNICATIONS
ORGANISATION SOCIETE
ANONYME 100,25bps 0M-10Y
DEUTSCHE TELEKOM AG Telco EUR 100,25bps 0M-10Y MMR SNRFOR
PORTUGAL TELECOM
INTERNATIONAL FINANCE B.V. 100,25bps 0M-10Y
TELECOM ITALIA SPA Telco EUR 100,25bps 0M-10Y MMR SNRFOR
TELEFONICA, S.A. Telco EUR 100,25bps 0M-10Y MMR SNRFOR
TELEKOM AUSTRIA
AKTIENGESELLSCHAFT 100,25bps 0M-10Y
TELENOR ASA Telco EUR 100,25bps 0M-10Y MMR SNRFOR
TELIASONERA AKTIEBOLAG Telco EUR 100,25bps 0M-10Y MMR SNRFOR
VIVENDI Telco EUR 100,25bps 0M-10Y MMR SNRFOR
VODAFONE GROUP PUBLIC
LIMITED COMPANY 100,25bps 0M-10Y
ADECCO S.A. Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
AKTIEBOLAGET VOLVO Industrials EUR 100,25,500bps 0M-10Y MMR SNRFOR
ALSTOM Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
COMPAGNIE DE SAINT-GOBAIN Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
DEUTSCHE POST AG
Industrials EUR MMR SNRFOR
100,25bps 0M-10Y
EUROPEAN AERONAUTIC
DEFENCE AND SPACE COMPANY Industrials EUR MMR SNRFOR
EADS N.V. 100,25bps 0M-10Y
FINMECCANICA S.P.A. Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
HOLCIM LTD Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
ROLLS-ROYCE PLC Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
28 of 32
SIEMENS AKTIENGESELLSCHAFT Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
TNT Industrials EUR 100,25bps 0M-10Y MMR SNRFOR
BAYERISCHE MOTOREN WERKE Consumer
EUR MMR SNRFOR
AKTIENGESELLSCHAFT Goods 100,25bps 0M-10Y
BRITISH AMERICAN TOBACCO Consumer
EUR MMR SNRFOR
P.L.C. Goods 100,25bps 0M-10Y
Consumer
EUR MMR SNRFOR
DANONE Goods 25 bps 0M-10Y
Consumer
DIAGEO PLC EUR MMR SNRFOR
Goods 25 bps 0M-10Y
KONINKLIJKE PHILIPS Consumer
EUR MMR SNRFOR
ELECTRONICS N.V. Goods 100,25 bps 0M-10Y
LVMH MOET HENNESSY LOUIS Consumer
EUR MMR SNRFOR
VUITTON Goods 100,25 bps 0M-10Y
Consumer
NESTLE S.A. EUR MMR SNRFOR
Goods 100,25 bps 0M-10Y
REPSOL YPF S.A. Oil & Gas EUR 100,25 bps 0M-10Y MMR SNRFOR
SVENSKA CELLULOSA Consumer
EUR MMR SNRFOR
AKTIEBOLAGET SCA Goods 100,25 bps 0M-10Y
Consumer
UNILEVER N.V. EUR MMR SNRFOR
VOLKSWAGEN Consumer
EUR MMR SNRFOR
AKTIENGESELLSCHAFT Goods 100,25 bps 0M-10Y
Consumer
DAIMLER AG EUR MMR SNRFOR
Consumer
ACCOR EUR MMR SNRFOR
Services 100,25 bps 0M-10Y
Consumer
BERTELSMANN AG EUR MMR SNRFOR
Consumer
CARREFOUR EUR MMR SNRFOR
Consumer
CASINO GUICHARD-PERRACHON EUR MMR SNRFOR
Consumer
COMPASS GROUP PLC EUR MMR SNRFOR
Consumer
EXPERIAN FINANCE PLC EUR MMR SNRFOR
Consumer
GROUPE AUCHAN EUR MMR SNRFOR
Consumer
J SAINSBURY PLC EUR MMR SNRFOR
Consumer
KONINKLIJKE AHOLD N.V. EUR MMR SNRFOR
Consumer
MARKS AND SPENCER P.L.C. EUR MMR SNRFOR
Consumer
METRO AG EUR MMR SNRFOR
Consumer
NEXT PLC EUR MMR SNRFOR
Consumer
PEARSON PLC EUR MMR SNRFOR
PPR Consumer EUR 100,25 bps 0M-10Y MMR SNRFOR
29 of 32
Services
Consumer
PUBLICIS GROUPE SA EUR MMR SNRFOR
Consumer
REED ELSEVIER PLC EUR MMR SNRFOR
Consumer
SAFEWAY LIMITED EUR MMR SNRFOR
Consumer
SODEXO EUR MMR SNRFOR
Consumer
TESCO PLC EUR MMR SNRFOR
Consumer
WOLTERS KLUWER N.V. EUR MMR SNRFOR
Consumer
WPP 2005 LIMITED EUR MMR SNRFOR
Basic
AKZO NOBEL N.V. EUR MMR SNRFOR
Materials 100,25 bps 0M-10Y
Basic
ANGLO AMERICAN PLC EUR MMR SNRFOR
Basic
ARCELORMITTAL EUR MMR SNRFOR
Basic
BASF SE EUR MMR SNRFOR
Basic
GLENCORE INTERNATIONAL AG EUR MMR SNRFOR
Materials 100,25,500 bps 0M-10Y
Basic
HENKEL AG EUR MMR SNRFOR
Basic
KONINKLIJKE DSM N.V. EUR MMR SNRFOR
Basic
LANXESS AKTIENGSELLSCHAFT EUR MMR SNRFOR
Materials 100 bps 0M-10Y
Basic
LINDE AKTIENGESELLSCHAFT EUR MMR SNRFOR
Basic
SOLVAY EUR MMR SNRFOR
Basic
XSTRATA PLC EUR MMR SNRFOR
Materials 100 bps 0M-10Y
STMICROELECTRONICS N.V. Technology EUR 100,25 bps 0M-10Y MMR SNRFOR
BAYER AKTIENGESELLSCHAFT Health Care EUR 100,25 bps 0M-10Y MMR SNRFOR
SANOFI-AVENTIS Health Care EUR 100,25 bps 0M-10Y MMR SNRFOR
AEGON N.V. Financials EUR 100,25 bps 0M-10Y MMR SNRFOR
ALLIANZ SE Financials EUR 100,25 bps 0M-10Y MMR SNRFOR
ASSICURAZIONI GENERALI -
Financials EUR MMR SNRFOR
SOCIETA PER AZIONI 100,25 bps 0M-10Y
AVIVA PLC Financials EUR 100 bps 0M-10Y MMR SNRFOR
AXA Financials EUR 100 bps 0M-10Y MMR SNRFOR
BANCA MONTE DEI PASCHI DI
SIENA S.P.A. 100,25 bps 0M-10Y
BANCO BILBAO VIZCAYA
ARGENTARIA, SOCIEDAD Financials EUR MMR SNRFOR
ANONIMA 100,25 bps 0M-10Y
BANCO ESPIRITO SANTO, S.A. Financials EUR 100 bps 0M-10Y MMR SNRFOR
30 of 32
BANCO SANTANDER, S.A. Financials EUR 100,25 bps 0M-10Y MMR SNRFOR
BANK OF SCOTLAND PLC Financials EUR 100 bps 0M-10Y MMR SNRFOR
INTESA SANPAOLO SPA Financials EUR 100,25 bps 0M-10Y MMR SNRFOR
JTI (UK) FINANCE PLC Financials EUR 100,25 bps 0M-10Y MMR SNRFOR
SWISS REINSURANCE COMPANY
LTD 100 bps 0M-10Y
ZURICH INSURANCE COMPANY
LTD 100,25 bps 0M-10Y
31 of 32
EQUITY DERIVATIVES ANNEX
1. Electronic Eligibility Matrix
Please see accompanying Excel spreadsheet “Electronic Eligibility Matrix”
32 of 32

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STANDARDISATION IN THE DERIVATIVES MARKET

1. CURRENT LEVEL OF STANDARDISATION IN THE CDS MARKET

Other Standardisation Features

7. ADDITIONAL / FUTURE STANDARDISATION INITIATIVES

 Well-understood product mechanics

1. CURRENT LEVEL OF STANDARDISATION IN THE RATES MARKET

Interest Rate Trade Reporting Repository

8. ADDITIONAL / FUTURE STANDARDISATION INITIATIVES

9. RECONCILIATION VERSUS IR TRR:

1. CURRENT LEVEL OF STANDARDISATION IN THE EQUITY MARKET

Future Opportunities / Next Steps

Future Opportunities / Next Steps

Future Opportunities / Next Steps

4. PROCESS AND STP

Future Opportunities / Next Steps

 availability of relevant strike and maturity in Exchange Traded Derivatives (ETD),

Future Opportunities / Next Steps

Pre Trade Transparency

Post Trade Transparency

1. CDS DOCUMENTATION ANNEX

Single-name CDS Swaption:

Index Swaptions (based on Markit CDX and Markit iTraxx Europe):

1. Electronic Eligibility Matrix

Please see accompanying Excel spreadsheet “Electronic Eligibility Matrix”

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