Update on Asset Recovery Approach in the Global Markets

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BAFT Annual Meeting April 26-29,
2009 Ritz-Carlton Laguna Niguel, CA

• Update on Asset RecoveryApproach in the Global
  Markets
• Peter B. Cherecwich, Northern Trust

Bankers Association for Finance and Trade
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Agenda

• SNB-UBS Example
• Deal Structure
• Structure of the SPV
• The Valuation and Impairment Process
• Lessons Learned
• Collateral Management Becoming more complex
• Valuation A struggle for All
• Questions

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SNB UBS Example Deal Structure
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SNB UBS Example SPV Structure

• Limited Partnership structure selected with
  General and Limited Partners for SPV, each 100
  owned by SNB.
• Sub-entities structured on behalf of multiple
  asset classes across various markets.
• Assets allocated between entities and accounts
  based on status of asset and cash flows
  performing vs. non-performing.
• LP owns 100 of the underlying entities
  waterfall of loan allocation tracked from top
  down for each entity, i.e., each entity loans to
  the next.
• Groups of assets bundled together, where
  possible, to be create asset purchased into the
  fund like assets or exposure regrouped.

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SNB UBS Example Valuation Impairment Process
Seller must receive a fair or good value
Purchaser must show independence and good value
Coordination and control of asset data, valuation
data, and ongoing adjustments and amendments are
critical
Multiple independent valuation providers employed
must cover all markets and asset classes
Purchaser and Seller must agree to a price on
assets that may not have recently moved in the
market or cannot be readily priced
Ongoing impairment review

• Northern Trust as custodian and facilitator
• Valuation and Business Advisor for the purchaser
  (In this case, Navigant Consulting for the SNB)

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SNB UBS Example Lessons Learned

• Key decisions to address in advance of the
  transfer and valuation of distressed assets
• Correct entity structure is critical to starting
  off right.
• How and when will assets be moved?
• Can asset movements be split?
• Data integrity and control
• Defining Day 2

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SNB UBS Example Lessons Learned

• Making the transfer happen what we all do today
  applied differently

• Leverage the existing industry infrastructure
• Apply strong governance approach to project
  management
• Focus on risk mitigation
• Ensure transparency
• Communicate

Choosing the right partners, providers, and
approach is key to bringing stability to a
complex process!
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Collateral Management Becoming More Complex

• Traditional model for OTC Contracts
• Sell side driven extensive systems in place
• Buy side behind on systems infrastructure
• Custodians passive recipients of instructions
• The new model for OTC Contracts
• Everyone focused on valuation
• Custodians offering active service to Investment
  Managers and Asset Owners
• Asset Owners looking at cross Investment Manager
  counterparty exposure
• Collateral now being requested for TBAs
• Future Model Cross product netting?

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Valuation A Struggle for All

• Asset owners pricing policy
• Pricing vendors volatility and quantity of data
• Dealers departmental pricing
• Regulators the fair value controversy
• Investment Managers need for independence
• Custodians all of the above

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Questions