OPERATIONS FORUM Eurex Clearing AG Central Counterparty Solution August 3rd 2006 London

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OPERATIONS FORUMEurex Clearing AGCentral
Counterparty SolutionAugust 3rd 2006London

• Deutsche Börse AG / Eurex Clearing AG

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Agenda

• Gruppe Deutsche Börse Overview Value Chain
• Role of Eurex Clearing AG
• Clearing Functionality at Eurex Clearing AG
• Eurex Risk Management
• CCP Functionality
• Clearing Services for Irish Stock Exchange
• Future Extension of the Eurex Clearing
  Functionality

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Gruppe Deutsche Börse Overview Value Chain

• Cash and Fixed Income market as well as
  Derivatives market instruments are subject to the
  value chain of Gruppe Deutsche Börse (GDB)

Information
Trading
Clearing
Settlement
Custody

• Streaming data feeds
• Physical terminals
• Indices

• Operate open electronic order books
• Connectivity to international trading members

• Verification of trade-related information
• Central counterparty (CCP)
• Risk Mgmt.

• Delivery of securities
• Financing services
• Securities lending borrowing

• Physical custody of securities
• Related services, e.g. tax, corporate actions,
  income

Information Services
FWB
Eurex Clearing House
Clearstream Banking (Frankfurt and Luxemburg)
Eurex
IT services and software development (DB Systems)
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Agenda

• Gruppe Deutsche Börse Overview Value Chain
• Role of Eurex Clearing AG
• Clearing Functionality at Eurex Clearing AG
• Eurex Risk Management
• CCP Functionality
• Clearing Services for Irish Stock Exchange
• Future Extension of the Eurex Clearing
  Functionality

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Eurex Clearing AG provide sustainable Benefits
Role of Eurex Clearing AG
CounterpartyRisk Reduction

• Eurex Clearing AG becomes legal counterparty to
  all trades
• Reduction in counterparty and credit risk due to
  multilateral netting and decreased probability of
  counterparty default
• Counterparty risk reduction until settlement for
  equities / bonds, underlying derivatives
  obligations, or until maturity for derivatives /
  repos

Processing Efficiency

• Standardised post-trading approach
• Post-trade functionalities for trade management
  (e.g. give-up / position transfers / trade split)
• Netting of settlement instructions and volumes,
  STP-processing
• Reduction of back office complexity
• Reduction in fails and financing needs

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Agenda

• Gruppe Deutsche Börse Overview Value Chain
• Role of Eurex Clearing AG
• Clearing Functionality at Eurex Clearing AG
• Eurex Risk Management
• CCP Functionality
• Clearing Services for Irish Stock Exchange
• Future Extension of the Eurex Clearing
  Functionality

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Eurex Risk Management

• The risks of Eurex Clearing AG can be
  differentiated into three groupsCounterpart
  RiskSystemic RiskOperational RiskCoverage of
  the Counterpart Risk

Systemic Risk and Operational Risk not
considered in this presentation
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Eurex Risk Management Admission Requirements
CAPITAL REQUIREMENTS AND PAYMENTS INTO GUARANTEE
FUNDS GCM (DCM)
Capital
Guaranty fund
in Mio. EUR
Derivatives
125 (12.5)
Bonds
50 (5.0)
Total 5 (1)
Repos
175 (17.5)
Equities
25 (2.5)

• Additional admission requirements
• Financial institution located within the European
  Union or Switzerland
• Securities Pledge Account at CBF or SIS
• Cash Account at BuBa or SNB

Minimum amounts, capital is dynamic (dependent
on the risk) always additive
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Eurex Risk Management Eurex Risk Based
Margining

• Model is Eurex Risk Based Margining
• Margin requirements are calculated on level
  exchange member (NCM)/account type
  (client/proprietary)
• Calculation is based on current market prices
  -intraday- or settlement prices -close of
  business-
• Margin requirements are only applied on the net
  position of a specific series/ security
• Intraday Risk Management
• Permanent online monitoring of current positions
  based on exchange member (NCM)/account type level
• Alerts are triggered approx. every 10 minutes

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Eurex Risk Management Eurex Risk Based
Margining
Principal Elements of Risk-Based Margining I

• It must be deposited by the writer of an option,
  it covers the potential loss that could occur if
  the writer were forced today to liquidate the
  position
• It is continuously adjusted, i.e. if prices
  fluctuate so that the potential loss upon
  liquidation increases, the writer will be obliged
  to deposit additional premium margin based on
  settlement prices
• For those products which are handled on a
  mark-to-market basis, Eurex Clearing AG books the
  trading-day profits and losses of all open
  positions held in an account

PremiumMargin
Variation Margin
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Eurex Risk Management Eurex Risk Based
Margining
Principal Elements of Risk-Based Margining II

• Additional Margin serves to cover through the
  next trading any potential additional costs that
  could arise if the positions had to be liquidated
  immediately.
• Additional margin is imposed on traditional and
  future-style options as well as on non-spread
  futures
• Long or short positions which have expiration
  dates that are not identical,can be offset
  against each other (spreading)
• Counterbalanced positions through time-spread
  orders are subject of Futures Spread Margin
• Futures Spread Margin has the purpose of covering
  that risk until the next trading day
• Current Liquidating Margin addresses the realized
  loss at the end of day
• Long positions are valuated at the last exchange
  price

AdditionalMargin
Future Spread Margin
Current Liquidating Margin
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Eurex calculates different types of margin
Eurex Risk Management Eurex Risk Based
Margining
Principal Elements of Risk-Based Margining III
Timeframe yesterday to today
Timeframe today to tomorrow
Additional Margin
Future Spread Margin
Premium Margin
Variation Margin
Equity-, Index Options
Futures
Options onFutures
Current Liquidating Margin
Bonds/ Repos
Equities
Cash
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A permanent margin process covers net exposure
with securities
Eurex Risk Management Eurex Risk Based Margining
Intraday-Margining allows monitoring every 10
minutes
Calculation of risk on net exposure
Change of positions, prices and volatility
Calculation of overall risk requirements after
cross margining
Debit or credit of securities
Comparison of margin requirement with collaterals
Daily calculation of risk haircuts on deposited
collateral
Credit only once a day
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Lines of Defense have survived stress tests
Eurex Risk Management Eurex Risk Based Margining
Frequency of utilization during stress tests
Lines of Defense
Closing out positions
85.6

• Underlying assumptions
• Extreme market movements
• Money market / 0.5 points
• Bonds / 2 points
• Stock / 25
• Varying scenarios (e. g. falling prices of stocks
  or bonds)

Collateral of defaulting member
3.4
Contribution to clearing funds for defaulting
members
5.7
Eurex reserves
5.2
General clearing funds
0
Eurex Clearing AG equity capital
Basis 348 cases Assumption Default of
the member with the largest credit balance
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Agenda

• Gruppe Deutsche Börse Overview Value Chain
• Role of Eurex Clearing AG
• Clearing Functionality at Eurex Clearing AG
• Eurex Risk Management
• CCP Functionality
• Clearing Services for Irish Stock Exchange
• Future Extension of the Eurex Clearing
  Functionality

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CCP Functionality Infrastructure

• Integrating all markets at GDB
• Connecting different security depositories
• Reducing counterparty risk by effective risk
  collateral management
• Reducing cross border settlements
• Offering service to additional markets outside
  Group Deutsche Börse (e.g. ISE)

Market Participants
Eurex Ex/ Ass / Not/ All
Cash Market
Trading
GBP
Floor FWB
Clearing
Eurex Clearing
Settlement
CBF
CBL
SIS
EB
Crest
CBF
SIS
CBF
Planned for begin of 2007
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CCP Post Execution Functions
CCP Functionality Trade Management
Blocking of trades

• The CCP provides centrally the full set of
  information (from time of registration until
  settlement) on gross trade basis
• The CCP performs Corporate Actions on pending
  trades
• Forecast of security and cash settlement online
  available
• Optionally, disposition management for settlement
  available

Full and partial release of trades
Making for gross/net processing
Inquiry of trades (filter, details)
Settlement forecast results overview
Linking of Trades (man./ autom.)
Reporting
Basic functions
Optional functions
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CCP Functionality Delivery Management

• Settlement Netting significantly reduces the
  number of delivery instructions

S1
Trades
S4

• Principle
• On the evening of S - 1, Settlement Netting is
  performed for the first time, so that the
  generated delivery instructions will be available
  for (i)CSD settlement in the night time
  settlement run
• Surplus
• Generation of DVP instruction for (i)CSDs
  (booking of surplus)
• Offsetting Block
• Booking of offsetting block via cash
  correspondent (e.g. Deutsche Bundesbank)

SurplusNet delivery instruction to (i)CSD
S1
S2
S2
S3
S3
S5

Netting
S5
B1
Offsetting block Cash settlement via cash
correspon-dent
S6
B2
S6
B1
B3
B2
B4
B3
S4
B4

• The introduction of the CCP netting algorithm led
  to a
• Settlement Netting efficiency of 96 and
• Settlement efficiency increased from approx. 93
  to 97 on the cash market

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Agenda

• Gruppe Deutsche Börse Overview Value Chain
• Role of Eurex Clearing AG
• Clearing Functionality at Eurex Clearing AG
• Eurex Risk Management
• CCP Functionality
• Clearing Services for Irish Stock Exchange
• Future Extension of the Eurex Clearing
  Functionality

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Clearing Services for Irish Stock Exchange
The Irish Stock Exchange chooses Eurex Clearing
House (ECH) as the central counter-party provider
for equities and ETFs traded on the Xetra ISE
trading platform
Trading

• ECH offer Clearing Services to ISE
• Trades can be routed to CrestCo Irish system by
  members (as is)
• CrestCo will support clearing services (e.g.
  trade validation netting) as in todays UK
  market
• CrestCo will continue to provide settlement
  services
• ECH will receive position data from CrestCo for
  margin calculation
• Margin calls and collateral will be collected by
  ECH
• Reference data will be exchanged between ISE, ECH
  and CREST

Reference data
Transaction data
Clearing
- Central Counterparty - Risk Management -
Buying-In- Member Reporting
Position data
Settl. prices Margin req.
- Trade validation enrichment- Position
management- Corporate action processing- Tax
reporting (e.g. SDRT)- Member reports/enquiries -
Settlement
Collateral
Margin Calls
Settlement
CBF/SIS
BuBa/SNB
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Agenda

• Gruppe Deutsche Börse Overview Value Chain
• Role of Eurex Clearing AG
• Clearing Functionality at Eurex Clearing AG
• Eurex Risk Management
• CCP Functionality
• Clearing Services for Irish Stock Exchange
• Future Extension of the Eurex Clearing
  Functionality

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Future Extension of the Eurex Clearing
Functionality

• New CCP Release planned for end of Q3/ 2007
• Trade Management Services for Certificates
  Warrants
• Settlement of Certificates Warrants via CCP
  infrastructure without involvement of Eurex
  Clearing AG as Central Counterpart (CCP) offers a
  harmonized process for CCP and Non-CCP
  instruments
• Multi Currency Clearing in the CCP
• Offering of multi currency clearing for the
  various trading locations via the CCP of Eurex
  Clearing AG
• Open Repos Variable Repos
• Introduction of clearing and CCP services for
  open and variable repos traded at Eurex Repo GmbH
• Additional Post Trade Services for MiFID