Loan Operations/Settlement System Solutions Mike Johnstone - LMA

Loan Operations/Settlement System Solutions Mike Johnstone - LMA

Agenda Overview The LMA Loan Operations Committee Projects to date Next steps

Overview LMA Loan Operations Committee formed in 2007 Comprises around 30 leading international financial institutions Aim is to identify common goals re automation Financial institutions work with vendors to develop appropriate platforms

LMA role The LMA will not endorse or recommend any specific system but rather its role is to publicise and promote the overall project and facilitate a collective approach to addressing the issues Financial institutions will individually decide which of the loan settlement/operations systems likely to become available is best suited to their needs

Current loan market operations position Global Syndicated Loans Volume $5,000 3,181 3,500 $4,500 3,000 $4,000 $3,500 2,401 2,407 2,125 2,500 $3,000 1,803 2,000 $2,500 $2,000 1,500 $1,500 1,000 $1,000 500 $500 $0 0 in Billions 2004 2005 2006 2007 2008 Q1 Volume (US$b) Q2 Volume (US$b) Q3 Volume (US$b) Q4 Volume (US$b) # of issues The unprecedented rise in volumes in the Global Loan markets emphasized manual processing issues in the loan product. increased loan origination volume (up to summer of 2007) ever-increasing secondary trading volume lender group size over 1,000 already in the portfolios Highly manual processing results in errors. Manual nature of loan servicing means that poorly performing industry participants affect the entire market. Manual touch points lead to slow settlement cycles, which in turn drives Balance Sheet utilization and counterparty credit risk. Industry Response: Industry solutions centered around automation. Operations professionals are collaborating across the industry to define and select solutions. Source: Thompson (Second Quarter 2008)

Loan Market Issues and Solutions Current Market Issues Industry Solutions Manual processes are labour intensive and error prone Regulators see systemic risk in poor settlement Secondary trade backlogs increase risk Highly structured deals are adding complexity Standard reference data (Loan Facility and participant ID s) Electronic agent messaging (Replacement of fax messaging Central loan reconciliation service (daily) Larger deals and increased trading volumes Automated confirmation,closing and settlement Sharing of key information (Centralised restricted database to share information among participants)

Central Loans Reconciliation Service Agent Position File Industry Reconciliation Tool Position File Participant The Concept: Reconciliation of loan positions between agents and participants Agents will post their positions daily Participants will post their positions either daily for large participants or less frequently depending on their size Aim: Ensure agent/ participant positions remain reconciled Avoids secondary settlement delays due to position differences Ensure cash flows are paid to the correct participant on a timely basis Vendor Solutions: DTCC Commitment level reconciliation solution live. First positions to be uploaded Q3 08 DTCC Currency level reconciliation and reporting testing go live anticipated Q4 08 - facilitates multi currency drawing reconciliation and full drawing reporting Euroclear position reconciliation solution due Q4 08

E-Messaging Agent Message Hub Custodian FpML Web Portal The Concept: Agent messages to be sent in an electronic form Replace existing fax messages, with E-Messages Standard industry message templates locked down through ISDA Centralised messaging hub to provide multiple gateways for participants to receive and manage agent messages Aim: Improve efficiency: Facilitates automation of agent messaging into back end systems Web portal provides workflow capability, which allows smaller participants to better manage incoming messages from agent Secure Mail Vendor Solutions: DTCC messaging hub due for launch Q4 08 Swift CUG due for launch Q4 08.

Secondary Loans Trading The Concept: Buying Counterparty Provide centralised matching platform for secondary loans trading Focus on providing further automation and standardisation to speed up timeliness of vanilla standard par trades Agent Vendor Solution for Trade Matching Service Vendors contract & Operating Procedures Aim: Agree standard market confirmation and transfer certificate for closing vanilla trades Improve efficiency: Vastly reduce settlement times for par trades, Reduces settlement risk Improve market liquidity Selling Counterparty Vendor Solutions: DTCC and Euroclear are looking to implement solutions in 2009

Next Steps As an Industry we need to: Focus efforts on gaining quick wins for 2008/ 09 Loan Identifiers (Implemented in the US for the last couple of years) Centralised reconciliation tool Electronic Messaging Drive forward change at an industry level Engage broad market participation Facilitate key market enablers by addressing key business and legal challenges Strive for market standardisation and efficiency Each Institution needs to: Decide who they work with, or to wait Perform their own due diligence, if necessary at this stage Engage their own key business/ legal stakeholders

No instant solutions Long-term project which requires a phased approach and ongoing commitment from lender/investor institutions LMA will continue in its facilitator role For further information contact Mike Johnstone at the LMA at mike.johnstone@lma.eu.com