Markit IOS. March 11, 2010

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1 Markit IOS March 11, 2010

2 Markit IOS Presented by 2

3 Markit Overview

4 About Markit Markit is a leading global financial information services company with over 1,400 employees We provide independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency Our client base includes the most significant institutional participants in the financial market place 4

5 Index operating model Index Design Index Administration Pricing/Production Publication Index rules Market research Documentation Index calculation methodology Data procurement Prototyping / Testing Project management Manage rebalancing process Index research (previews) Custom index development Daily control of constituent lists Control index and analytics Client services Reference database control Receive daily price data Price cleaning and control Price consolidation Quality reporting Index and analytics calculation Index and data publication Feeds Vendor management IT Development and Administration 5

6 Markit public indices Structured Finance Equities Bonds Credit and Loans Markit ABX.HE Markit TABX Markit CMBX Markit TRX.NA Markit IOS Thematic indices ETF constituent files Bespoke Indices Other Markit iboxx US Pension Liabilities Markit iboxx FX Markit iboxx Overnight Rate Bespoke Indices Real-time Markit iboxx Markit iboxx End of day Markit iboxx Global Inflation-linked Markit iboxx $ Markit iboxx Asia Markit iboxx HY Markit iboxx GEMX Markit iboxx Global Sovereign Liquid Indices Custom Indices Credit Markit itraxx Europe Markit itraxx Crossover Markit itraxx Total Return index Markit itraxx, Asia ex- JP, Japan, Australia Markit itraxx SovX Markit CDX.IG Markit CDX.HY Markit CDX.XO Markit CDX.EM Markit MCDX Loans Markit itraxx LevX Markit LCDX Bespoke Indices 6

7 Structured Finance Expertise ABX.HE, CMBX, and TRX.NA have brought new levels of transparency to the structured finance markets Widely followed indicators of sentiment on market pricing and performance TRX.NA brought standardization to synthetic TRS contracts referencing amortizing assets Publicly available index closes and analytics Markit is a leading presence in structured finance Established leader in European ABS and US CDS of ABS markets Broad suite of offerings to address needs of structured finance market participants Full Value Proposition The complete product suite provides a comprehensive spectrum of services for any point in the pre-trade, trade, and post-trade cycle Reference and Performance Data Risk and Pricing Deal Structure and Analysis Trade Support Detailed analysis and support is provided for both US and European ABS deals at the single security, index and portfolio level 7

8 Introduction to Markit IOS

9 Markit IOS Index Synthetic Total Return Swap Index referencing the interest component of 4%, 4.5% and 5% coupon, 30-year, fixed-rate Fannie Agency pools Index references only the interest component of reference pools Index cashflows, prices, and valuation are independent of principal component Initial plans to focus on limited to Fannie pools, eventually expand to additional coupons and GSEs (Freddie and Ginnie) First Markit IOS indices reference FNCL pools issued in 2009 Three sub indices, one for each coupon IOS.FN IOS.FN IOS.FN Exposure to agency pool coupon cashflows via synthetic TRS contracts Net cashflow exchanges are a function of change in market value of reference pool interest component along with standard monthly exchanges of coupon and financing Markit is the calculation, marketing, and administrative agent Markit published composites determine daily values & monthly settlement Markit as administrator provides independent 3rd party oversight and consensus pricing 9

10 Operational efficiency Trade will confirm in MarkitSERV's DSMatch system Standardized settlement calculation Valuation analytics publicly available on Licensed dealers will provide daily closing prices using centralized process via Markit website Standard ISDA trade documentation for TRS as basis for IOS trade agreements 10

11 Benchmark IOS Index Transparency Objective, rules-based approach to construction of index Index references all FNCL pools from designated period First Markit IOS will reference all qualifying pools from 2009 Clear roll mechanism to reference most recently issued agency pools Every 6 months after launch, licensed dealers vote on launch & designated period of new index Daily, consensus-based prices available on Markit website Standardization Reference pools for each index are publicly available and static Standardized documentation for IOS contracts Monthly payment amounts calculated and posted by Markit DTCC will offer trade confirmation and settlement Monthly factors and LIBOR amounts calculated and posted by Markit 11

12 Trading Markit IOS

13 Markit IOS Transactions IOS transactions are tied very closely to performance of the reference pools Long position on the index replicates the purchase of the interest component of an agency pool funding the transaction at LIBOR Short position pays the coupon of the index on swap notional Net exchange incorporates the change in market value of the interest component from the underlying pools Market value changes Consensus based pricing determines price changes on daily basis Markit published consensus prices and factors used for month over month settlement payment calculations All MTM Payments use price set on Reset Date, 1 day prior to Period End Date Trade Dates Each transaction accrues from and including one Period End Date to and excluding the next Period End Date Period End Date is not adjusted for business day convention Index Factor, Price, and LIBOR published on the Reset Date become effective on the Period End Date All trade terms, including the amount of days accrued, are up to and excluding the trade date Any trade done prior to a Period End Date is responsible for the full payment on that Period End Date 13

14 Markit IOS: Indicative Terms and Conditions Indices Reference Pools Reference Pool Weighting Index Factor Period End Date Payment Dates Day Count Basis Reset Date Fixed Rate Payer Floating Rate Payer IOS.FN IOS.FN IOS.FN All qualifying pools issued during the designated period with the corresponding stated coupon. Pools are initially weighted by their original par balance. Weighted average outstanding balance of each Reference Pool is reset on each Period End Date. Factor updates will be published by Markit on each Reset Date. 12 th day of each month independent of any business day convention T+3 from the Period End Date. T+3 only applies only to the exchange of payments. Act/360 for the Financing Payment and 30/360 for the Coupon Payment. Day which Index LIBOR and Commencing Index Price for accrual period are set and Commencing Index Factor is published. Occurs on business day prior to Period End Date. All Period End Prices, Factors, and LIBOR rates are published on on Reset Date. Short position on the Reference Pools. Pays Interest Payment on monthly basis. Long position on the Reference Pools. Pays Financing Payment on monthly basis. 14

15 Markit IOS: Indicative Terms and Conditions Initial payment Mark to Market (MTM) Payment Interest Payment Financing Payment The difference between the market value on the Reset Date and Trade Date, net of any coupon and financing payments (Traded Price - Commencing Index Price) * Commencing Index Factor * Notional +/- net exchange of Interest and Financing Payment]. This amount is only paid once and can go in either direction. The difference between the period end market value (Period End Price * Period End Factor * Notional) and the beginning period market value (Commencing Index Price * Commencing Index Factor * Notional). This amount is paid each Payment Date. Coupon payment made by the Fixed Rate Payer on each Payment Date. Notional * Index Factor * Day count * Coupon. LIBOR payment made by the Floating Rate Payer on each Payment Date. Notional * Index Factor * Commencing Index Price * Day count * 1M LIBOR (set from prior Reset Date). 15

16 Markit IOS Trade Cashflows LIBOR Financing Monthly Payment Fixed Rate Payer (Short Position) Upfront Exchange (Trade Date Only) MTM Change Payment (Monthly) Floating Rate Payer (Long Position) IOS Fixed Coupon Monthly Payment 16

17 Markit IOS Trading Conventions New Trades and Post Trade Events Counterparties agree on Initial Payment for each trade, which incorporates: Mark-to-Market movement as of the Trade Date Net exchange of Coupon and Financing up to the Trade Date Accrual conventions are different between the coupon and financing payments Coupon accrues on a 30/360 basis Financing accrues on an ACT/360 Payments T+3 Payment delays are an operational standard and do not affect trading or accrual period conventions Payments for new trades and post trade events occur 3 business days after the Trade/Novation/Termination date Monthly settlement payments occur 3 business days after the Period End Date Reset Date Fixings/Publications On each Reset date, the following calculations apply to published levels Index Price EOD composite price from the Reset Date Index Factor Index level factor calculated from the most recently published pool data information LIBOR taken from EOD two business days prior to the Period End Date, one business day prior to Reset Date 17

18 Trading: XYZ buys $10MM of IOS.FN Firm XYZ Long Position Firm ABC Short Position If Traded Price * factor is less than Commencing Index price * factor, XYZ receives the Initial Payment amount calculated from price * factor differential for the calculation period net of coupon payments financing payments as of the Trade Date XYZ pays the full financing amount on each payment date based on day count, LIBOR, factor, and Commencing Index price. XYZ receives the coupon amount on each payment date based on day count, agency coupon, and factor. If 2 nd Period End Date Price * Factor is less than Commencing Index Price * Factor, XYZ pays MTM Payment (change in market value) If Traded Price * factor is greater than Commencing Index price * factor, ABC receives Initial Payment amount calculated from price * factor differential for the period as well as the coupon payments financing payments as of the Trade Date ABC receives the full financing amount on each payment date based on day count, LIBOR, factor, and Commencing Index price ABC pays the coupon amount on each payment date based on day count, agency coupon, and factor. If 2nd Period End Date Price * Factor is greater than Commencing Index Price * Factor, ABC pays MTM Payment (change in market value) 18

19 IOS.FN Trade Payments Initial Trade Details Notional Amount: $10,000,000 Trade Date: Apr 5 th, 2010 Initial Payment Date: Apr 8 th, 2010 (T+3 exchange for upfront) Initial Period End Date: Apr 12 th, 2010 Traded Price: Commencing Index Factor: (Published on Mar 11 th, 2010) Commencing Index Price: (Fixed on Mar 11 th, 2010) Coupon: Index LIBOR: (From EOD Mar 10 th, 2010) Days Accrued 23 for Coupon, 24 for Financing Monthly Settlement Reset Date: Apr 9 th, 2010 (T-1 from Period End Date) Period End Date Apr 12 th, 2010 (not adjusted for business days) Payment Date: Apr 15 th, 2010 (T+3 from Period End Date) Coupon: Index LIBOR: (From EOD Mar 10 th, 2010) Commencing Index Factor: (Published on Mar 11 th, 2010) Commencing Index Price: (Fixed on Mar 11 th, 2010) Period End Index Factor: (Published on Apr 9 th, 2010) Period End Index Price: (Fixed on Apr 9 th, 2010) Initial (Upfront) Payment MTM Component =(Traded Price Commencing Index Price) * Commencing Factor * Notional =( ) * * 10,000,000 = $(64,981.59) Net Coupon & Financing Component =[(Coupon * (day count 30/360) * Notional * Commencing Factor)] [(LIBOR * Commencing Index Price * (day count A/360) * Notional * Commencing Factor)] =[(.045 * (23/360) * 10,000,000 * )] [( *.2712 * (24/360) * 10,000,000 * )] =$27, Initial Payment of $(37,693.90) indicates market value has decreased. Firm XYZ receives this amount, which is net of the interest/financing that has already accrued. First Settlement Payment Interest Amount =(Coupon * (day count 30/360) * Notional * Commencing Factor) =(.045 * (30/360) * 10,000,000 * ) =$36, (Paid by Firm ABC) Financing Amount =(LIBOR * Commencing Index Price * (day count A/360) * Notional * Commencing Factor) =( *.2712 * (31/360) * 10,000,000 * ) =$ (Paid by Firm XYZ) MTM Change Amount =[(Period End Index Price * Period End Factor) - (Commencing Index Price * Commencing Index Factor)] * Notional =( * ) ( * ) * 10,000,000 = $(49,014.74) Negative MTM Change indicates Market Value decreased. Firm XYZ pays $13, for total payment, which is net of the interest/financing payment 19 19

20 Markit IOS Timeline Trade Date Reset Date First Payment Date Upfront Value Agreed on. Trade effective on this date. EOD Price, Factor and LIBOR (T-2) fixed/published for the next accrual period. Monthly payment occurs T+3 from Period End Date. Counterparties exchange MTM change between Reset Dates. Interest and Financing paid. Initial Payment Date First Period End Date Counterparties exit trade Occurs T+3 from Trade Date. Exchange of MTM change btw Reset Date and Trade Date net of coupon & financing payments exchanged. Next Accrual Period Starts, Information from Reset Date becomes effective. Not adjusted by business/holiday convention Counterparties tear up or novate trade. Net change in market value as of trade date exchanged. Financing and Coupon up to trade date paid. 4/5/2010 4/8/2010 4/9/2010 4/12/2010 4/15/2010 5/6/

21 Markit IOS Operations

22 Licensed dealer contributions Dealers will contribute prices every business day for each available index Prices contributed represent the present value of all interest cashflows on the underlying pools as a percentage of the outstanding par balance on all of the pools Dealers are not required to contribute once index fails certain liquidity thresholds Contributions are made between 3pm and 4pm each day Per the Index Rules, if dealers fail to comply with minimum submission threshold, such firm will lose voting privileges on the index Markit uses Top & Tail process, which eliminates top and bottom quartiles of submissions and calculates average to generate composite Markit will publish aggregate composites daily at no later than 5pm Reset Date prices (T-1) are used for fixing and settlement Expect a minimum of 8 dealers contributing to the index at inception 22

23 Markit IOS Analytic Markit will provide a tool for market participants to calculate price sensitivity based on IOS prepayment scenarios Analytic will utilize in-house Markit cashflows, which allows users to specify prepayment scenarios (CPR, PSA, vector) Calculator will compute price given a specified set of cashflows and a Markit generated yield curve Markit will provide a calculator for participants to calculate upfront payment amounts. IOS Calculator can be requested by visiting 23

24 Contacts Bank of America Barclays Citibank Credit Suisse Jason Yeung Ilker Ertas Kevin Cheng Jeff Melnik Deutsche Bank Goldman Sachs J.P. Morgan Morgan Stanley Pierre Grellet-Aumont John Ryan Adam Rilander Chas Prasad Nomura Royal Bank of Scotland David Lindley Cass Tokarski Markit Administrator: Ned Lipes Press: Mike Gormley

25 Disclaimer Opinions, estimates and projections in this report constitute the current judgment of the author(s) at the time of writing. They do not necessarily reflect the opinions of Markit Group Limited. Markit Group Limited has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The content, information and any materials ( data ) provided by Markit in this presentation is on an as is basis. Markit Group makes no warranty, expressed or implied, as to its accuracy, completeness or timeliness, or as to the results to be obtained by recipients, and shall not in any way be liable to any recipient for any inaccuracies, errors or omissions herein. Without limiting the foregoing, Markit Group shall have no liability whatsoever to a recipient of this report, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by such recipient as a result of or in connection with any opinions, recommendations, forecasts, judgements, or any other conclusions, or any course of action determined, by it or any third party, whether or not based on the content, information or materials contained herein. Copyright 2010, Markit Group Limited. All rights reserved. Any unauthorised use, disclosure, reproduction or dissemination, in full or in part, in any media or by any means, without the prior written permission of Markit Group Limited is strictly prohibited. 25