theroadtobasel3-jan2012
TRANSCRIPT
Deutsche Bank
Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking andsecurities activities in the United States.
Deutsche BankCapital Markets and Treasury Solutions
January 2012
The Road to Basel 3Implications for Credit, Derivatives & the Economy
Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking andsecurities activities in the United States. Corporate Solutions & Strategy
Tom Joyce(212) 250-8754 / [email protected]
Michael Dyadyuk(212) 250-0470 / [email protected]
Javier Guzman(212) 250-3464 / [email protected]
Implications for Credit, Derivatives & the Economy
Deutsche Bank
Contents
Section
1 Executive Summary
2 Impact on Credit Facilities and Bond Markets
3 Impact on Derivatives Markets
4 Impact on the Global Economy
5 Positioning for Basel 3: Funding Strategies and Solutions for Corporates
Appendix
I Additional Basel 3 Information
II Glossary of Terms
on Credit Facilities and Bond Markets
Positioning for Basel 3: Funding Strategies and Solutions for Corporates
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Appendix I
Deutsche Bank Americas
Dean BellissimoHead of Derivative Products
Matthias BergnerHead of GTP Asset & Liability Management Americas
Esperanza CerdanRisk & Capital
Scott FliegerCOO CMTS North America
Marc FratepietroHead of Debt and Solutions Coverage - Corporates
Andreas NeumeierHead of Corporate Banking North America
Paul PuleoHead of Debt and Solutions Coverage – Financial Institutions
Adam RaucherCMTS – Debt & Solutions Coverage
Matthew TiloveCMTS – Derivative Products
James VolkweinHead of Structured Finance and Advisory
Notable contributors
Deutsche Bank Europe
Andreas BoegerCo-Head of Capital Solutions Europe & CEEMEA
Caitriona OkellyHead of Prudential Policy
Vatsal ParikhCredit Products Group
Shamil ShahCross Product Structuring
Neil TranterCore Rates Trading
Daniel TrinderGlobal Head of Regulatory Policy
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Appendix II
1. Executive Summary
Deutsche BankCapital Markets and Treasury Solutions
Deutsche Bank
Four key components of Basel 3
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Common Equity Tier 1 Total Capital
Minimal Capital Requirement Conservation Buffer = 2.5%Countercyclical Buffer = 0.0% - 2.5% G-SIBs Buffer = 1.0% -3.5%
(1) New capital requirements to be phased in between 2013-2019G-SIB: Global systemically important banks; Currently, no banks fall under highest GSource: Deutsche Bank, BCBS Press Release
New Capital Requirements (1)
4.5%
7.0%
9.5%
13.0%
6.0%
8.5%
11.0%
14.5%
8.0%
10.5%
13.0%
16.5%
Basel 3 focuses on four key regulatory components:1) Capital: Increases minimum regulatory capital ratios (Common Equity Tier 1, Tier 1, Total Capital) and
tightens definitions of eligible capital
2) Liquidity: Introduces two new liquidity ratios
3) Risk Weighted Assets (RWA): Introduces additional risk charges to account for counterparty credit risk intrading book and derivatives exposures
4) Leverage: Introduces global leverage limitations (Basel 3 goes beyond existing requirements in the U.S.)
LiquidityCoverage Ratio(LCR)
Tests an institution's ability to surviveacute short-term stress (30-dayperiod)Objective: Increase banks’ holdingsof highly liquid assets
Net StableFunding Ratio(NSFR)
Requires longer-term funding ofbanks’ assets (1-year time horizon)Objective: Promote better matchingof banks’ assets and liabilities; reducebanks’ liquidity-constraining activities
Four key components of Basel 3
Global systemically important banks; Currently, no banks fall under highest G-SIB bucket (buffer of 3.5%)
New Liquidity Ratios
Basel 3 focuses on four key regulatory components:Increases minimum regulatory capital ratios (Common Equity Tier 1, Tier 1, Total Capital) and
tightens definitions of eligible capital
Introduces two new liquidity ratios
Introduces additional risk charges to account for counterparty credit risk intrading book and derivatives exposures
Introduces global leverage limitations (Basel 3 goes beyond existing requirements in the U.S.)
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Transmission channels from Basel 3 to the economy
Basel 3 Key Components Availability / Pricing of Credit
1. Higher capital ratios
2. Increased liquidityrequirements (LCR, NSFR)
3. Additional capital charges(CVA, etc.)
4. Leverage constraints (LR)
Impact on credit facilities– Increased internal charges to be
passed through to borrowers (viahigher spreads) and/or investorsin bank shares (via lower ROEs)
– Curtailment of certain lendingproducts (e.g. liquidity facilities,long-term cash lending)
– Resource allocation to top tierclient relationships
Impact on derivatives markets– Increased credit charges on
derivatives transactions
Impact on bond markets– Shift in supply / demand dynamics
Transmission channels from Basel 3 to the economy
Availability / Pricing of Credit Impact on the Global EconomyImpact on credit facilities
Increased internal charges to bepassed through to borrowers (viahigher spreads) and/or investorsin bank shares (via lower ROEs)Curtailment of certain lendingproducts (e.g. liquidity facilities,
term cash lending)Resource allocation to top tierclient relationships
Impact on derivatives marketsIncreased credit charges onderivatives transactions
Impact on bond marketsShift in supply / demand dynamics
Reduced business cycle volatility
Reduced perception of systemicrisks in financial system
× Increased funding costs for privatesector
× Reduced access to certain types ofcredit
× Reduced global output andemployment
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Summary of Basel 3 impact on markets
Expected Impact
CreditFacilities
New liquidity and leverage requirements to lead to reand re-allocation of credit commitments– Undrawn commitments (particularly liquidity back
facilities) to be acutely affectedImpact studies project wide range of lending spreadincreases (from 15 bps to 500+ bps)
BondMarkets
Banks to decrease reliance on short-term (1-3 yr) fundingin favor of longer-term ( 5 yr) issuance
Increased demand by bank investors for highly-rated (AAand higher) non-financial corporate debt– Banks currently represent only ~5% of the investor buyer
base
DerivativesMarkets
Increased capital charges related to Counterparty CreditRisk– S&P estimates a 4–6x increase in credit-related chargesNew Credit Valuation Adjustment (CVA) capital chargeall OTC derivatives transactions will have greatest impact on:– Corporates with higher and more volatile CDS spreads– Corporates with no observable CDS– Lower-rated corporates– Longer-dated and/or highly complex transactions– High threshold margining agreements
Source: BIS, OECD, Fed, IIF, McKinsey Global Institute, Deutsche Bank
Summary of Basel 3 impact on markets
Potential Responses
d to re-pricing
back-stop
lending spread
New capital charges may force banks to:– Increase rates and/or reduce availability of liquidity
back-stop facilities– Focus on bifurcating revolving facilities (where
possible) between “GCP” and “CP back-stop”uses
– Shift to shorter tenors, particularly <1 year
3 yr) funding
rated (AA-
Banks currently represent only ~5% of the investor buyer
Corporates should explore alternative fundingstrategies:– Short-dated capital markets issuance to fill
potential market void
– CDS-based funding commitments (for short-termfinancing needs of lower-rated corporates)
capital charges related to Counterparty Credit
related chargesCredit Valuation Adjustment (CVA) capital charge on
all OTC derivatives transactions will have greatest impact on:Corporates with higher and more volatile CDS spreads
dated and/or highly complex transactions
Impact can be mitigated through:
– Use of CSAs with daily re-margining(provides nearly full relief)
– Use of master netting agreements(provides partial relief)
OECD, Fed, IIF, McKinsey Global Institute, Deutsche Bank7
Deutsche Bank
What can corporate borrowers do to be bestpositioned for Basel 3?
Given Basel 3’s expected (negative) impact on the pricing and availability ofbank credit, clients should explore alternative financing strategies
Closely monitor bank market developments around pricing/availability/structure of revolvingcredit lines, particularly CP back-stop facilities
Consider alternatives to traditional bank products that are expected to be most affected (e.g. CPback-stops, syndicated letter of credit facilities)
In Section 5, we present an overview of potential solutions, including:
– 4 financing alternatives that leverage the capital markets– 3 potential alternatives to traditional commercial paper / back
clients to explore in more detail (Tab E)– Overview of the mechanics and key attributes of
the pricing and execution on OTC derivatives transactions
What can corporate borrowers do to be bestpositioned for Basel 3?
Given Basel 3’s expected (negative) impact on the pricing and availability ofbank credit, clients should explore alternative financing strategies
Closely monitor bank market developments around pricing/availability/structure of revolvingstop facilities
Consider alternatives to traditional bank products that are expected to be most affected (e.g. CPstops, syndicated letter of credit facilities)
In Section 5, we present an overview of potential solutions, including:
leverage the capital markets to meet clients’ funding needs (Tabs A-D)alternatives to traditional commercial paper / back-stop programs that DB can work with our
(Tab E)Overview of the mechanics and key attributes of Credit Support Annexes (CSA), which can improvethe pricing and execution on OTC derivatives transactions (Tab F)
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Basel 3 implementation timeline
Key Dates
July 21, 2010 Dodd-Frank Financial Reform Act signed into law
December 1, 2010 Basel Committee releases details of the Basel III rules text
July 20, 2011 EU Commission publishes a provisional draft of its legislation to implement Basel III (CRD4)
December 20, 2011 U.S. Fed releases proposed rules on enhanced prudential standards for large financial institutions (notintended to directly address Basel 3)
Q1 2012 Expected timing of U.S. Fed’s release of Basel III guidelines
2012 Observation period of Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio
2013Expected implementation timing of Basel 3 in EUStart of phase-in period of higher capital requirementsIntroduction of counterparty risk charges
2015 Enforcement of LCR
2016 Start of phase-in of “G-SIBs” capital buffer
2018Enforcement of NSFREnforcement of Leverage Ratio (LR)
2019 Completion of phase-in of higher capital requirements
Source: Basel Committee on Banking Supervision, Deutsche Bank
Basel 3 implementation timeline
Detail
Frank Financial Reform Act signed into law
Basel Committee releases details of the Basel III rules text
EU Commission publishes a provisional draft of its legislation to implement Basel III (CRD4)
proposed rules on enhanced prudential standards for large financial institutions (not
Expected timing of U.S. Fed’s release of Basel III guidelines
Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) commences
Expected implementation timing of Basel 3 in EUin period of higher capital requirements
SIBs” capital buffer
of higher capital requirements
Basel Committee on Banking Supervision, Deutsche Bank9
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Appendix III
2. Impact on Credit Facilities and Bond Markets
Deutsche BankCapital Markets and Treasury Solutions
2. Impact on Credit Facilities and Bond Markets
Deutsche Bank
Overview of Basel 3 regulatory changes
Liquidity Coverage Ratio(LCR)
New ratio to test an institution's ability to survive acute shortAssumes various “outflow factors” for undrawn commitments to nonperiodBanks must retain High Quality Liquid Assets (HQLA) to offset s
Net Stable Funding Ratio(NSFR)
New ratio designed to promote longerAssigns various funding factors depending on the nature and maturity of corporate loan exposuresBanks must retain sufficient Available Stable Funding (ASF) to satisfy ratio requirements
Leverage Ratio(LR)
New ratio focused on gross exposure (i.e. no risk weighting)Includes 100% of unutilized commitments
Intended as a back-stop to the risk
Risk Weighted Assets(RWA)
No change under Basel 3 to banking
Source: BIS, OECD, Fed, IIF, McKinsey Global Institute, Deutsche Bank
Overview of Basel 3 regulatory changes
Description
New ratio to test an institution's ability to survive acute short-term stress (30 day period)Assumes various “outflow factors” for undrawn commitments to non-financial corporates during a stress
must retain High Quality Liquid Assets (HQLA) to offset such potential outflows
to promote longer-term funding of banks’ assetsvarious funding factors depending on the nature and maturity of corporate loan exposures
sufficient Available Stable Funding (ASF) to satisfy ratio requirements
ed on gross exposure (i.e. no risk weighting)Includes 100% of unutilized commitments
risk-based capital requirements
banking book treatment of non-financial loan exposures
OECD, Fed, IIF, McKinsey Global Institute, Deutsche Bank11
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Key Basel 3 ratios
HQLA - characterized by low credit/market risk, high liquidity, low correlation to risky assets– Level 1 Assets (e.g. cash, central bank reserves) and Level 2 Assets (e.g. highly
Net Cash Outflows - defined as expected cash outflows minus expected cash inflows– Complex formula for weighting cash inflows and outflows
Stress scenarios:– Partial loss of deposits; significant reduction of unsecured funding; increase in haircuts for secured
funding; out flows due to rating downgrade; collateral requirements for derivatives; drawings oncommitments
Ratio assumes the following outflow factors related to– 10% for Credit Facilities (1)
– 100% for Liquidity Facilities (2)
Any loan commitments to financial institutions
Banks to avoid granting large un-utilized facilities to corporates due to higher outflow factorsEnsure facilities are documented as “General Corporate Purpose and Working Capital” (vs.Liquidity Back-stop)
Details
Definition
Stock of High Quality Liquid Assets(HQLA)
Net Cash Outflows Over a 30-Day TimePeriod
100%
(1) “Credit Facility”: explicit contractual agreements and/or obligations to extend funds at a future date to retail or wholesale counterparties , awhich do not fall under the “Liquidity Facility” definition(2) “Liquidity Facility”: any back-up facility put in place expressly for the purpose of refinancing the debt of a customer in situations where such acustomer is unable to obtain its ordinary course of business funding requirements in the financial marketsSource: BIS Publications, Deutsche Bank
Key Implications
Relevant Metrics forCorporates
Liquidity Coverage Ratio (LCR)
characterized by low credit/market risk, high liquidity, low correlation to risky assetsLevel 1 Assets (e.g. cash, central bank reserves) and Level 2 Assets (e.g. highly-rated corporate bonds)
defined as expected cash outflows minus expected cash inflowsComplex formula for weighting cash inflows and outflows
Partial loss of deposits; significant reduction of unsecured funding; increase in haircuts for securedfunding; out flows due to rating downgrade; collateral requirements for derivatives; drawings on
Ratio assumes the following outflow factors related to corporate loan exposures (i.e. LCR denominator):
financial institutions are subject to a 100% outflow factor
utilized facilities to corporates due to higher outflow factorsEnsure facilities are documented as “General Corporate Purpose and Working Capital” (vs.
100%
explicit contractual agreements and/or obligations to extend funds at a future date to retail or wholesale counterparties , and
up facility put in place expressly for the purpose of refinancing the debt of a customer in situations where such ato obtain its ordinary course of business funding requirements in the financial markets
Liquidity Coverage Ratio (LCR)
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Key Basel 3 ratios
Available Stable Funding (ASF)– Different weightings applied to different forms of funding– Focuses on Liability side of balance sheet
Required Stable Funding (RSF)– All balance sheet assets and off-balance sheet commitments multiplied by an RSF factor that varies
based on asset type– Focuses on Asset side of balance sheet
Ratio applies the following factors to corporate loan exposures to calculate RSF (i.e. denominator):– 50% for <1 yr maturities– 100% for >1 yr maturities– 5% for undrawn commitments (same for Credit and Liquidity Facilities)
Increased focus on short-term loans (<1 yr) due to favorable RSF factor
Details
Definition
Source: BIS Publications, Deutsche Bank
Key Implications
Relevant Metrics forCorporates
Available Amount of Stable Funding(ASF)
Required Amount of Stable Funding(RSF)
100%
Net Stable Funding Ratio (NSFR)
Different weightings applied to different forms of fundingside of balance sheet
balance sheet commitments multiplied by an RSF factor that varies
side of balance sheet
Ratio applies the following factors to corporate loan exposures to calculate RSF (i.e. denominator):
5% for undrawn commitments (same for Credit and Liquidity Facilities)
term loans (<1 yr) due to favorable RSF factor
100%
Net Stable Funding Ratio (NSFR)
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Key Basel 3 ratios
Capital: Tier 1 Capital (i.e. Core / Additional Tier 1 Capital) after deductions
Assets:– On-balance sheet items based on accounting value– Collateral, guarantees and other risk mitigations not subtracted from assets– Derivatives: accounting measure of exposure plus add
Off Balance Sheet Items: Includes 100% of all Commitments, Guarantees, LCs
Ratio includes the following in calculation of total assets (i.e. denominator):– 100% of utilized and undrawn commitments– 100% of contingencies and guarantees
Gross leverage measure to constrain overall size of bank balance sheets, including loan portfolios
Details
Definition
Source: BIS Publications, Deutsche Bank
Key Implications
Relevant Metrics forCorporates
New Definition of Tier 1 Capital
Total On and Off-Balance Sheet Assets
Leverage Ratio (LR)
: Tier 1 Capital (i.e. Core / Additional Tier 1 Capital) after deductions
balance sheet items based on accounting valueCollateral, guarantees and other risk mitigations not subtracted from assetsDerivatives: accounting measure of exposure plus add-on (exposure can be netted)
: Includes 100% of all Commitments, Guarantees, LCs
Ratio includes the following in calculation of total assets (i.e. denominator):100% of utilized and undrawn commitments100% of contingencies and guarantees
Gross leverage measure to constrain overall size of bank balance sheets, including loan portfolios
3%
Leverage Ratio (LR)
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$100mn, 5yr RCL (Liquidity Facility treatment)
Banks’ Funding Cost L + 75 bps L + 150 bps L + 225 bpsNegative Carry on Liquidity Buffer (a) 75 bps 150 bps 225 bpsLCR Factor 100% 100%Annual Liquidity Charge (bps) 75 bps 150 bps 225 bpsAnnual Liquidity Charge ($) $750,000 $1,500,000 $2,250,000
Incremental Tier 1 Capital Required (b) $3,003,003 $3,003,003 $ 3,003,003
Annual Leverage Charge ($) (c) $600,601 $600,601 $600,601
Annual Leverage Charge (bps) 60 bps 60 bps
Total Annual Capital Charge ($) $1,350,601 $2,100,601 $2,850,601
Total Annual Capital Charge (bps) 135 bps 210 bps 285 bps
Estimating Basel 3 impact on undrawn commitments
Revolving credit facilities may be acutely impacted under Basel 3 as a result of the new LiquidityCoverage Ratio (and to a lesser extent, Leverage Ratio) requirements
The impact may be significantly mitigated if revolving credit facilities (or subas “Credit Facilities” as opposed to “Liquidity Facilities”
(a) (i) Banks' Funding Cost, less (ii) return on re-investment of liquidity buffer (assumed to be Libor flat)(b) Based on 33.3x LR limit(c) Assumes 20% target Return on Equity (ROE)Source: BIS, Deutsche Bank
For Illustrative Purposes Only
LCR/LR Impact on Banks’ Internal Capital Charges
Facility treatment) $100mm, 5yr RCL (Credit Facility treatment)
L + 225 bps L + 75 bps L + 150 bps L + 225 bps225 bps 75 bps 150 bps 225 bps100% 10% 10% 10%
225 bps 8 bps 15 bps 23 bps$2,250,000 $75,000 $150,000 $225,000
3,003,003 $300,300 $300,300 $300,300
$600,601 $60,060 $60,060 $60,060
60 bps 6 bps 6 bps 6 bps
$2,850,601 $135,060 $210,060 $285,060
285 bps 14 bps 21 bps 29 bps
Estimating Basel 3 impact on undrawn commitments
Revolving credit facilities may be acutely impacted under Basel 3 as a result of the new LiquidityCoverage Ratio (and to a lesser extent, Leverage Ratio) requirements
The impact may be significantly mitigated if revolving credit facilities (or sub-limits thereof) qualifyas “Credit Facilities” as opposed to “Liquidity Facilities”
investment of liquidity buffer (assumed to be Libor flat)
For Illustrative Purposes Only
LR impact(currently lessvisible due tolater enforce-ment date)
LCR/LR Impact on Banks’ Internal Capital Charges
LCR impact
Cumulativeimpact
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Estimating Basel 3 impact on drawn spreads
0 50 100 150 200 250 300
IIF
S&P *
McKinsey
OECD
BIS
Regulator and industry impact studies forecast an increase in lending spreads ranging from 15 bps toover 500 bps; this wide range is indicative of the remaining uncertainty around the implementation
40 568
25 75
35 64
Spectrum of Estimated Lending Spread Increases (bps)
(a) Basel 3 impact on lending spreads assumes a 3% increase in regulatory Tier 1 capital ratio(b) Linear extrapolation used (where applicable) for comparison purposes* Assumes a 9.5% CT1R and 10.5% Tier 1 RatioSource: McKinsey Global Institute, BIS, OECD, IIF, S&P
20 164
15 20
Estimating Basel 3 impact on drawn spreads
Regulator and industry impact studies forecast an increase in lending spreads ranging from 15 bps toover 500 bps; this wide range is indicative of the remaining uncertainty around the implementation
and impact of Basel 3
Spectrum of Estimated Lending Spread Increases (bps)
Basel 3 impact on lending spreads assumes a 3% increase in regulatory Tier 1 capital ratio
Key Questions:1. Will banks’ ROE targets remain unchanged or
be forced to decrease?
2. Will banks be able and/or willing to fully pass-through increased Basel 3 compliance coststo clients?
3. Or, will competitive landscape restrict banks’ability to pass through higher costs?
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Impact on bond market supply
Historical FI New Issue Volumes Divided by Tenor
Net Stable Funding Ratio (NSFR) to have biggest impact on banks’ issuance patternsNSFR incentivizes banks to shift to longer– For ASF, only senior debt with >1
– Since 2008, banks’ issuance of <3regulatory guidelines
Expected Impact:– Banks to decrease
reliance on short-term(1-3 yr) funding infavor of longer-term
5 yr) issuance– IG investors may face
potential market voidfor shorter-termmaturities if banks shiftto longer-term funding
Potential Opportunity:Corporates shouldseek to fill marketvoid by issuing short-term (up to 3-yr) fixedand/or floating-ratepaper
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003
US
$ B
n<1 Year 1-3 Yrs
(1) Excludes government-guaranteed issuanceSource: Thomson Reuters
Impact on bond market supply
Historical FI New Issue Volumes Divided by Tenor (1)
Net Stable Funding Ratio (NSFR) to have biggest impact on banks’ issuance patternsbanks to shift to longer-term funding
For ASF, only senior debt with >1-year maturities can be included
Since 2008, banks’ issuance of <3-year debt has decreased substantially, partly in anticipation of new
2004 2005 2006 2007 2008 2009 2010 2011
3 Yrs 3-5 Yrs 5-7 Yrs 7-8 Yrs > 10 Yrs
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Impact on bond market demand
Breakdown of 2011 IG Credit by Rating
Liquidity Coverage Ratio (LCR) to havebiggest impact on banks’ demand for IGcredit– Only non-financial corporate debt rated “AA”
and higher can be included as High QualityLiquid Assets (HQLA)
Such highly rated corporate debtrepresents ~7% ($~40 bn) of the IG marketQuantitative Impact Study (QIS)(1)
conducted by BIS estimated potentialshortfall of EUR 1.73 trillion due to LCR
AA- andHigher
Corporates,6.6%
AA
Financials,
OtherCorporates,
55.7%
OtherFinancials,
23.4%
(1) QIS results based on YE2009 figures across a global sample of 223 banksSource: Deutsche Bank CMTS Syndicate, BIS
Expected Impact:– Increased bank
demand for highly-rated (AA- and higher)non-financial corporatedebt
– Decreased bankdemand for unsecureddebt of other financials
Potential Opportunity:Highly-ratedcorporates shouldseek to capitalize onincreased bankdemand during orderbook building
Impact on bond market demand
Breakdown of 2011 IG Credit by Rating
Liquidity Coverage Ratio (LCR) to havebiggest impact on banks’ demand for IG
financial corporate debt rated “AA”High Quality
represents ~7% ($~40 bn) of the IG market
conducted by BIS estimated potentialshortfall of EUR 1.73 trillion due to LCR
Breakdown of Investors in IG Credit
Banks currently represent < 5 % of IGdemandHistorically, banks’ demand has favoredother FI debt over corporate debt– However, unsecured FI debt is ineligible as
HQLAExpect shift in banks’ buying patterns fromFI to non-financial corporate debt
AA- andHigher
Financials,14.3%
Real moneyfunds /
insurance,~90%
Hedgefunds, ~5%
Banks andother,~5%
a global sample of 223 banks
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Appendix IV
3. Impact on Derivatives Markets
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3. Impact on Derivatives Markets
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1. Credit ValuationAdjustment (CVA)
New capital charge introduced on derivatives exposures to cover markcounterparty credit spreads
2. Margin Periodof Risk (MPR) Increased margin period of risk for OTC derivative transactions
3. StressedParameters
Expected exposures on OTC derivatives calculated using stressed assumptions, includingincreased charges for “wrong
4. CorrelationAssumptions Multiplier applied to exposures to large or unregulated financial institutions
Basel 3’s focus on Counterparty Credit Risk
S&P estimates a 4–6x average increase in risk weightings / capital charges as a resultof new capital charges and revisions to existing RWA rules under Basel 3
Four Key Changes to
New Definition of Tier 1 Capital
Total On and Off-Balance Sheet Assets
Tier 1 CapitalCredit Risk + Market Risk + Operational Risk
RWA RWA RWA
Credit Risk
Focus of Basel 3
Market Risk
Remains thesame as Basel 2
Will impactOTC
derivativestransactions
Bank’s Capital Ratio Composition
Source: Basel Committee on Banking Supervision, S&P
New capital charge introduced on derivatives exposures to cover mark-to-market volatility inspreads
Increased margin period of risk for OTC derivative transactions
on OTC derivatives calculated using stressed assumptions, includingincreased charges for “wrong-way” risk
exposures to large or unregulated financial institutions
Basel 3’s focus on Counterparty Credit Risk
6x average increase in risk weightings / capital charges as a resultof new capital charges and revisions to existing RWA rules under Basel 3
Four Key Changes to Credit RWA
New Definition of Tier 1 Capital
Balance Sheet Assets
Tier 1 CapitalCredit Risk + Market Risk + Operational Risk
RWA RWA RWA
Market Risk
same as Basel 2
Op. Risk
Remains thesame as Basel 2
= Tier 1 Capital Ratio
Bank’s Capital Ratio Composition
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Impact on OTC derivatives
Description
Credit ValuationAdjustment
(CVA)(1)Pre-Basel 3: Capital charges only for default risk(and ratings migration)
– No charges required to capture a deterioration ofa counterparty’s credit profile
Basel 3: Introduces explicit capital charge add-onfor Credit Valuation Adjustment (CVA) on all OTCderivatives transactions
– CVA risk charge calculated using normal andstressed market assumptions
– According to BIS, during the financial crisis, ~2/3of banks’ accounting losses attributed tocounterparty credit risk were caused by mark-to-market adjustments from rising credit spreads (i.e.CVA), and only 1/3 were due to actual defaults
Margin Period ofRisk(MPR)
Increase in MPR from 5 – 10 days to 20 days forcomplex and/or illiquid collateralized trades
If daily re-margining, no changes
(1) “CVA” – fair value adjustment to mark-to-market derivatives for counterparty credit riskSource: Basel Committee on Banking Supervision, S&P, Deutsche Bank
Implications for Derivatives Counterparties
1. Pricing of derivatives transactions should nowreflect either:i. Cost of hedging CVA exposure (e.g. CDS); or
ii. Banks’ required hurdle rate on incremental RWAcreated by CVA charge
2. Longer transaction tenors lead to higher CVAcapital charges
3. Higher volatility in CDS leads to higher CVA capitalcharges
4. Expect increased use of master agreements thatpermit regulatory netting
5. Expect shift from uncollateralized trades to mutualCSAs
1. Favor daily re-margining agreements
2. Avoid illiquid collateral and highly complextransactions
Impact on OTC derivatives
deterioration of
credit spreads (i.e.
market derivatives for counterparty credit riskBasel Committee on Banking Supervision, S&P, Deutsche Bank
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CVA – mitigants and alternatives
CVA Hedges
Dealer hedges CCR in the market
Recognized hedges include:– Single-name / contingent CDS
– Other equivalent instrumentsdirectly referencing counterparty
– Index CDS (only grant partialrelief due to basis risk)
Evolution of client’s credit profileover time (i.e. CVA)
Pricing to reflect level and volatilityof client’s CDS
Pricing also subject to dealer’s costof funds (since dealer likely to facecollateral posting requirements onhedge)
Dealers’ procurement of CDS forcapital charge relief couldmaterially increase CDS levels ofcounterparties
Description
Key Variables
Uncertainty sits with dealer
Implications for Clients
Source: Basel Committee on Banking Supervision, Deutsche Bank
mitigants and alternatives
Client enters into 2-way CreditSupport Annex (CSA) with dealer
CSAs typically only variationmargin (VM) requirements
VM required to be posted by clientover term of transaction
Client’s funding cost for suchrequired collateral
Pricing to reflect reduction/absenceof CVA charge
CSA thresholds matter– Non-zero CSAs still carry CVA
charge (albeit smaller thanuncollateralized trades)
Margin periods matter– Daily re-margining provides
greatest cost relief
Collateral Posting (CSA)
Client faces central clearingcounterparty (CCP) instead ofdealer
Initial Margin (IM) and VM conceptsapply
VM required to be posted by clientover term of transaction
Client’s funding cost for suchrequired collateral
Pricing to reflect absence of CVAcharge
However, banks must capitalizecharge for credit exposure to CCP– Risk weight equal to 2% of
Exposure at Default (EAD) for“qualifying” CCPs
Significant uncertainty remainsregarding timing, implementationand scope of central clearing
Central Clearing
Uncertainty sits with client
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CVA – illustrative example
Pre-Basel 3 Capital Charge 3 1.5 bps
Basel 3 CVA Capital Charge 3 1.5
Aggregate Capital Charge 4 3 bps
Cost of Funding 0 bps
Variation Margin Does Not Exist
Liquidity Demands Known (Zero)
Direct Costs to Client
(1) Client pays floating rate, receives fixed rate(2) Client pays USD, receives EUR(3) Capital charges based on the following industry metrics:(4) Excludes additional credit charges banks may impose for counterparty default risk(5) Expected cost of funding assuming symmetrical distribution of future potential exposures (i.e. 50/50 probability of clie
collateral)
Indirect Costs to Client
Source: Basel Committee on Banking Supervision, Deutsche Bank
Pricing comparison for “BBB” rated client
Example #1:5y Fixed/Floating IRS
illustrative example
1.5 bps 7 bps < no risk to bank >
1.5 bps 6 bps < no risk to bank >
3 bps 13 bps 0 bps
0 bps 0 bps 0 bps 5
Does Not Exist Does Not Exist Exists
Known (Zero) Known (Zero) Unknown
No CSA 2-way CSA
(3) Capital charges based on the following industry metrics: Return on Capital target of 15% and Tier 1 Capital Ratio target of 10%(4) Excludes additional credit charges banks may impose for counterparty default risk(5) Expected cost of funding assuming symmetrical distribution of future potential exposures (i.e. 50/50 probability of client posting/receiving
Pricing comparison for “BBB” rated client
Collateral PostingExample #2:
5y EUR/USD CCS2Example #1:
5y Fixed/Floating IRS1
23
Deutsche Bank
Margin Period of Risk (MPR) overview
Pre-Basel 3
Margin Period of Risk (MPR) – Time period from (i) the lastexchange of collateral covering a netting set of transactionswith a defaulting counterparty, until (ii) that counterparty isclosed out and the resulting market risk is re-hedged
Supervisory floors (i.e. minimum holding periods)established depending on type of transaction
– Securities Financing Transactions (SFTs) – includes repo-style transactions
– Other collateralized trades
A capital charge is calculated based on the expected mark-to-market movements during the MPR
Current MPR standards:
MPR floor for SFT = 5 daysMPR floor for all other “netting sets” = 10 days
If daily re
MPR floor of
MPR to be adjusted if 2 or more margin call disputes have occurredon a netting set over the previous 2 quarters that have lasted longerthan the set MPR
Source: Basel Committee on Banking Supervision, Deutsche Bank
Margin Period of Risk (MPR) overview
Basel 3
If daily re-margining, no changes
MPR floor of 20 days will apply for the following:
Netting sets where the number of trades exceeds 5,000
Netting sets containing illiquid collateral or OTC derivatives thatare not easily replaced
– Illiquid collateral and OTC derivatives that are not easily replacedto be determined in the context of stressed market conditionswhere multiple price quotations cannot be obtained withoutmoving the market or reflecting a market discount within 2 orfewer days
MPR to be adjusted if 2 or more margin call disputes have occurredon a netting set over the previous 2 quarters that have lasted longerthan the set MPR
24
Deutsche BankDeutsche BankCapital Markets and Treasury Solutions
Appendix V
4. Impact on the Global Economy
Deutsche BankCapital Markets and Treasury Solutions
4. Impact on the Global Economy
Deutsche Bank
Basel 3 economic impact studies
OECD Fed
Date Published February 2011 February 2011
Increase inLending Rates
U.S.: 64 bps
EU: 54 bps
NA
Impact on GDP(annual growth)
U.S.: (-0.6%)
EU: (-1.1%)
Global: (-0.4%)
Numerous Basel 3 impact studies have been published since August 2010 (BIS, OECD, Fed, IIF, etc.),quantifying the potential effects on credit and GDP growth
– While helpful for illustrative purposes, the results of these studies should be viewed as highly preliminaryand inexact given the number of unknown variables involved
The real economy (GDP) is impacted through 3 main channels:1) Reduced lending volumes
2) Increased interest costs
3) Enhanced financial system stability
Linear extrapolation used (where applicable) for comparison purposes(1) Long Run estimates based on August 2010 BIS studySource: BIS, McKinsey Global Institute, OECD, IIF
Basel 3 economic impact studies
IIF BIS
2011 September 2011 October 2011(1)
U.S.: 243 bps
EU: 328 bps
Transition Period: 15-20 bps
Long Run(1): 39 bps
U.S.: (-1.1%)
EU: (-3.9%)
Transition Period: (-0.2%) to(-1.0%) (Global)
Long Run(1): +0.3% (Global)
Numerous Basel 3 impact studies have been published since August 2010 (BIS, OECD, Fed, IIF, etc.),quantifying the potential effects on credit and GDP growth
While helpful for illustrative purposes, the results of these studies should be viewed as highly preliminaryand inexact given the number of unknown variables involved
The real economy (GDP) is impacted through 3 main channels:
Enhanced financial system stability
Linear extrapolation used (where applicable) for comparison purposes
26
Deutsche Bank
-3.0%
-2.5%
-2.0%
-1.5%
-1.0%
-0.5%
0.0%BIS OECD IIF
Impact on economic growth
Source: Deutsche Bank Global Markets Research, IIF, OECD, BIS
Estimated Negative Impact on GDP Growth
-0.5%
-2.4%
-1.3%
-0.1%
-1.0%
-0.2%
The slowdown in global output growth projected by recent impact studies ranges between 0
According to various impact studies, the economic effects ofBasel 3 can range from marginal to significant– Median estimate (~1% reduction in annual GDP growth) would
have vast ramifications for global economyHowever, the net economic impact of Basel 3 should also takeinto account its potential economic benefits– BIS actually projects a net increase in GDP in the Long Run
(Transition Period)
Impact on economic growth
IIF, OECD, BIS
The slowdown in global output growth projected by recent impact studies ranges between 0 – 2.4%
DB Real GDP Growth Forecast
Basel 3’s impact on growth may create further headwindsto an already-slowing global economy– DB forecasts a slowdown in global economic growth over the
next year (global GDP growth of 3.2% 2012E)
-2%
0%
2%
4%
6%
8%
10%
Asia-ex Japan U.S. UK EU
Ann
ual G
DP
% G
row
th
2010 2011E 2012E
27
Deutsche Bank
Regional economic impact
Size of Banking Systems
$45.8
$12.1
$0$5
$10$15$20$25$30$35$40$45$50
EU U.S.
Tota
l Ass
ets
(US
D T
rillio
ns)
The EU features a substantially higher level of bankintermediation relative to the US– U.S. banking system assets total ~$12 trillion (representing ~
80% of U.S. GDP)– In contrast, EU banking system assets total ~$46 trillion
(~260% of EU GDP), resulting in a significantly morepronounced expected impact from Basel 3 regulations
The EU region is more susceptible to GDP shocks from new Basel 3 requirementsgiven its greater reliance on bank funding relative to the U.S.
Source: Federal Reserve, ECB, IIF, OECD, S&P
0
10
20
30
40
50
60
70
80
90
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
%
Eurozone and UK U.S.
Regional economic impact
Corporate Securities as % of Total Borrowing
Banks play a dominant role in funding European companies,while U.S. corporates rely almost exclusively on capitalmarketsConsequently, Basel 3 impact studies estimate asubstantially greater slowdown in EU GDP growth:– OECD study: -0.59% in the U.S. vs. -1.14% in the EU– IIF study: -1.1% in the U.S. vs. -3.9% in the EU
The EU region is more susceptible to GDP shocks from new Basel 3 requirementsgiven its greater reliance on bank funding relative to the U.S.
28
Deutsche Bank
Potential economic benefits
Reduced probability / frequency of banking crises
The probability and frequency of a banking crisis decreases proportionately to increases in regulatory Tier 1capital ratios– Higher capital buffers improve banking sector resilience to economic instability– Banks better “equipped” to withstand market crashes– BIS’s Basel 3 study suggests that benefits of a more stable financial system outweigh economic costs (projecting
increased annual GDP growth ranging from 0.31% - 1.87%)
0
50
100
150
200
250
300
350
6% 7% 8% 9% 10%
Num
ber
of Y
ears
Bef
ore
Nex
t Cris
is
Tier 1 Capital Ratio
Implied frequency of a banking crisis
More stringent capital and liquidity requirements imposed by the Basel 3 framework are expected todramatically reduce the frequency and probability of future banking crises
Source: IIF, BIS
Potential economic benefits
Reduced probability / frequency of banking crises
The probability and frequency of a banking crisis decreases proportionately to increases in regulatory Tier 1
Higher capital buffers improve banking sector resilience to economic instability
BIS’s Basel 3 study suggests that benefits of a more stable financial system outweigh economic costs (projecting1.87%)
0%
1%
2%
3%
4%
5%
6%
7%
8%
11% 12% 13% 14% 15%
Prob
abilit
y of
a C
risis
Tier 1 Capital Ratio
Implied probability of a banking crisis
More stringent capital and liquidity requirements imposed by the Basel 3 framework are expected todramatically reduce the frequency and probability of future banking crises
29
Deutsche BankDeutsche BankCapital Markets and Treasury Solutions
Appendix VI
5. Positioning for Basel 3Funding Strategies and Solutions for Corporates
Deutsche BankCapital Markets and Treasury Solutions
Funding Strategies and Solutions for Corporates
Deutsche Bank
Spectrum of capital markets
“AA-” and highercorporates
“BBB” categorycorporates
Sub-inv gradecorporates
Rolling Short-Term Notes
(Tab A)
Short-Term(FRN & Fixed)
(Tab B)
In Tabs A-D, we present 4 alternatives that leverage the capital markets to meet clients’ fundingand liquidity needs
An issuer’s credit rating will help determine which alternatives may be feasible and/or priceefficient for that issuer
“A” categorycorporates
Spectrum of capital markets-based solutions
Term Bonds(FRN & Fixed)
(Tab B)
Bilateral CDS-basedFunding(Tab C)
Bilateral CDS-basedLetter of Credit (LC)
(Tab D)
D, we present 4 alternatives that leverage the capital markets to meet clients’ funding
An issuer’s credit rating will help determine which alternatives may be feasible and/or price-
31
Deutsche Bank
Overview
Description
Rolling Short Term Notes (“RST-Notes”):at substantially lower short-term rates
Tenor: Final maturity of 5-6 yrs; initial maturity of 13 months
Size: Up to $1+ bn for strong issuers (market limited to highly
Characteristics:– Investors elect periodically (e.g. monthly or quarterly) to extend the initial maturity another 1
– If investors elect not to extend, their RSTmonths from such date
– Coupons on rolled notes step-up annually to a slightly higher pre
– Can be structured to include a par call option, exercisable after 5
Illustrative RST-Note Program (monthly extension example)
13 month LIBOR floater
13 month LIBOR floater
13 month LIBOR floater
0 1 2 3 4 5 6 7
Months from initial issue date
RST-Notes election period “Rolling” 13
RST Notes aredesigned to create alow cost termfunding by targetingmoney market fundinvestors, serving asan alternative to CPfor highly ratedcorporates
Description
Notes”): Designed to create effective long-term funding for an issuer, but
6 yrs; initial maturity of 13 months
Up to $1+ bn for strong issuers (market limited to highly-rated issuers (A1/P1)
Investors elect periodically (e.g. monthly or quarterly) to extend the initial maturity another 1-3 months
If investors elect not to extend, their RST-Notes are exchanged into notes with a final maturity of 10-12
up annually to a slightly higher pre-determined spread to Libor
Can be structured to include a par call option, exercisable after 5th year
Note Program (monthly extension example)
13 month LIBOR floater
13 month LIBOR floater
13 month LIBOR floater
8 9 10 11 12 13 14 15 16
Months from initial issue date
“Rolling” 13-month maturity of RST-Notes
33
Deutsche Bank
Key Considerations
Key Benefits
All-in cost to the final program maturity (5-6 yrs) should besubstantially lower than equivalent term funding rates, as noinvestor term premium is required
Pre-determined coupon step-up schedule significantly flatterthan an issuer’s vanilla floating-rate curve
No incremental back-up liquidity required for rating agencypurposes
A rolling 13-mo. maturity should allow an issuer to classify RSTNotes as long-term debt (assuming monthly extensions)
Allows issuer to access money market investor base
Transaction history dating back to 1998, with a very highhistorical investor extension participation rate
Key Considerations
× Introduces short-term liquidity risk into issuer’s capital structure
×Long-term debt classification less certain if issuer electsquarterly extension periods
34
Deutsche Bank
Legal, accounting and tax considerations
Tax
Legal / Documentation
Accounting
(a) Some 4(2) CP documentation may need to be modified to provide for notes issued with a maturity up to 13 months
Deutsche Bank is not acting and does not purport to act in any way as your advisor. We therefore strongly suggest that you sin relation to any legal, tax, accounting and regulatory issues relating to the merits or otherwise of the products and services discussed.
RST Notes can be issued in a public, 144A or CP offering (using a 4(2) program).Documentation and due diligence is equivalent to a regular term issuanceSubsequent extensions of RST Notes are not considered to be a new issue of securities for SEC purposesOther updated offering materials and/or additional underwriting due diligence are not required for the extension, asinvestors are treated as continuing their initial investment decision
RST Notes with monthly extensions can be recorded as longstatements, given the rolling 13-month maturityRST Notes with quarterly extensions roll into 10No mark-to-market requirements as the RST Notes’ extension feature should not be treated as a separablederivative contract subject to FAS 133, because the “underlying” is an interest rate adjustment and involves no riskto full principal recoveryInterest expense for each period should be accrued on each tranche of RST Notes based on its yield to maturity
RST Notes may be characterized alternatively for tax purposes as either a single longexercise of investors’ extension options) or as a series of 13In either case, extensions of the RST Notes should not trigger taxable gain or loss for the issuer or investorsInterest expense for each period should be accrued on each tranche of RST Notes based on its yield to maturity(same as GAAP)
Legal, accounting and tax considerations
(a) Some 4(2) CP documentation may need to be modified to provide for notes issued with a maturity up to 13 months
Deutsche Bank is not acting and does not purport to act in any way as your advisor. We therefore strongly suggest that you seek your own independent advicetax, accounting and regulatory issues relating to the merits or otherwise of the products and services discussed.
Detail
RST Notes can be issued in a public, 144A or CP offering (using a 4(2) program).Documentation and due diligence is equivalent to a regular term issuance(a)
Subsequent extensions of RST Notes are not considered to be a new issue of securities for SEC purposesOther updated offering materials and/or additional underwriting due diligence are not required for the extension, asinvestors are treated as continuing their initial investment decision
RST Notes with monthly extensions can be recorded as long-term debt on an issuer’s quarterly financialmonth maturity
RST Notes with quarterly extensions roll into 10-month maturities, and may require classification as short-term debtas the RST Notes’ extension feature should not be treated as a separable
derivative contract subject to FAS 133, because the “underlying” is an interest rate adjustment and involves no risk
Interest expense for each period should be accrued on each tranche of RST Notes based on its yield to maturity
RST Notes may be characterized alternatively for tax purposes as either a single long-term security (by assumingexercise of investors’ extension options) or as a series of 13-month securities that are periodically extendedIn either case, extensions of the RST Notes should not trigger taxable gain or loss for the issuer or investorsInterest expense for each period should be accrued on each tranche of RST Notes based on its yield to maturity
35
Deutsche Bank
FRN market overview
Annual IG Corporate (Non-Financial)Issuance Volumes
Recent FRN Corporate (NonIssuer Ratings
A2 / A
A1 / A+
A2 / A
A1/A+
A2/A
A1/A+
A3/BBB+
A3/A-
Source: IFR, Deutsche Bank
Demand for short-term FRNs hasincreased in 2011,providing a goodincremental sourceof 18-month to 3-year liquidity andinvestordiversification
05
1015202530354045
2005 2006 2007 2008 2009
US$
Bn
Financial)Breakdown by Issuer Ratings (2011 Issuance)
Recent FRN Corporate (Non-Financial) IssuanceDate Size ($mm) Maturity Spread
12/12 /11 200 12/11/13 3mL+30
12/01/11 500 06/06/13 3mL+45
9/19/11 350 9/22/14 3mL+53
9/26/11 100 9/29/14 3mL+92
9/13/11 350 9/19/14 3mL+155
9/07/11 300 9/12/14 3mL+55
9/07/11 600 9/13/13 3mL+120
8/17/11 400 8/23/13 3mL+75
AAA4%
AA15%
A62%
BBB19%
2010 2011
37
Deutsche Bank
Fixed-rate, short-term bond market overview
Annual IG Corporate (Non-Financial)Issuance Volumes
01020304050607080
2005 2006 2007 2008 2009 2010
US$
Bn
Issuer Ratings
A2/A
Baa1/A-
A2/BBB+
Baa1/BBB+
A2/A
A2/A
A2/A
A3/A-
Source: IFR, Deutsche Bank
Issuance of short-term (~3-yr), fixed-rate notes hasincreasedsubstantially overthe past 3 years ascompanies seek tocapitalize onhistorically lowshort-term rates
Recent Fixed-Rate, Short
term bond market overview
Financial)Breakdown by Issuer Ratings (2011 Issuance)
2010 2011
Date Size ($mm) Maturity Coupon
12/12/11 400 12/15/14 1.125%
12/06/11 750 12/01/14 2.400%
12/06/11 650 12/09/14 2.625%
12/05/11 500 12/08/14 2.375%
12/01/11 650 12/05/14 1.700%
11/29/11 1000 12/01/14 0.875%
11/29/11 600 12/02/14 1.250%
11/29/11 575 12/15/14 1.400%
AAA3% AA
8%
A45%
BBB44%
Rate, Short-Term Corporate (Non-Financial) Issuance
38
Deutsche Bank
Overview
Description
Alternative funding source to traditional bank loan andbond markets
Available in funded and unfunded (i.e. revolver) forms– Unfunded structure provides incremental source of guaranteed
liquidity
Floating-rate term funding structure with pricing linked to acompany’s 1-year CDS credit spread– Up to 10-year maturity, with annual coupon reset based on
then-current 1y CDS level– Can elect longer tenor (e.g. 3-year) at time of drawdown– Prepayable at par on each annual coupon reset date
DB can provide a bilateral, CDSsources of funding/liquidity; Companies can elect funded or undrawn structures
Source: DB Credit Solutions and Credit Structuring
Illustrative CDS Curve
0
50
100
150
200
250
1 2 3 4 5 7 10
CDS
Spre
ad (b
ps)
Tenor (yrs)
DB can provide a bilateral, CDS-based credit facility to companies seeking alternativesources of funding/liquidity; Companies can elect funded or undrawn structures
40
Deutsche Bank
Coupon mechanism
Coupon Re
12m Libor(a)
•Re-setannually
1y CDS
•Re-setannually
Re-set formula
a) Companies may elect quarterly Libor re
b) Based on DB’s internal cost of funds
Source: DB Credit Solutions and Credit Structuring
Coupon Re-Set Calculation
Fixed Spread
•Fixed forterm of deal
DB LiquidityCost(b)
•Re-setannually
All-inCoupon
•Re-setannually
may elect quarterly Libor re-sets and/or incorporate Libor caps
Based on DB’s internal cost of funds
41
Deutsche Bank
Key considerations
Key Benefits
Short-term funding that does not use relationship bank capacity
Competitive pricing vs. long-term funding
– Take advantage of steepness of companies’ CDS curves
– Forward CDS spreads typically exceed realized credit spreads
No financial covenants required
Pre-payable at par annually
Enables a company to express bullish view on its own credit
Precedent transaction history
Private transaction limits disclosure requirements
Avoid potentially negative signal to market if incremental liquidityis needed
May not require bifurcation under US GAAP due to “closelyrelated” nature of linking cost of funding to a company’s owncredit spreads
Source: DB Credit Solutions and Credit Structuring
Key Considerations
Company exposed to potential widening of 1y CDS spreads ateach annual coupon re-set date
FMV termination payment if prepaid intra-year
– Company to pay if CDS tightens; DB to pay if CDS widens
For unfunded (revolver) structure, [3]-day advance noticerequired as Condition Precedent to each draw to enable DB toprocure CDS in the market
Rating agencies may not give 100% liquidity credit to unfundedstructure (i.e. may impose haircuts)
DB has option to terminate following a Succession Event (perISDA definition)
42
Deutsche Bank
Summary of indicative terms
(a) Staggering of issuances dependent on liquidity constraints for 1y CDS and other applicable market conditions
Source: DB Credit Solutions and Credit Structuring
FundedBorrower [Company’s CDS-referenced entity]
Size / Tranches(a) Up to $[1]bn, depending on CDS liquidityStaggered issuances may be required
Structure /Documentation
Senior Unsecured Notes (the “Notes”)– Standalone / Eurobond (MTN) documentation
Listing Not applicable
Initial Maturity 1 year from issuance, with Extension Option until Maximum MaturityDate
Upfront Fees [0.50]%
Interest Rate [ ]m Libor + 1y Borrower CDS Spread + 1.50% + DB Liquidity Cost
Undrawn Fee Not applicable
Minimum / MaximumDraw
Not applicable
Coupon Reset Date /Extension Option
[3] Business Days before Initial Maturity;– On each Coupon Reset Date, Calculation Agent (DB AG) will
provide an Interest Rate quote, and Borrower can decide toextend Notes for 1 year
Maximum Maturity Date Up to 10 yrs
DB Put Option DB will have right to put Notes back to Borrower in circumstanceswhere a Succession Event has occurred or is about to occur andwhere CDS is envisaged to be split into a different or more than onesuccessor
Prepayment At par on each Coupon Reset Date;Subject to unwind costs if prepaid at any other time
Summary of indicative terms
Overview of Structural Alternatives
Unfunded[Company’s CDS-referenced entity]
Up to $[1]bn, depending on CDS liquidity
Senior Unsecured Credit Facility
Not applicable
with Extension Option until Maximum Maturity Each drawn tranche will mature 1 year from draw date, with Extension Optionuntil Maximum Maturity Date
[0.50]%
]m Libor + 1y Borrower CDS Spread + 1.50% + DB Liquidity Cost [ ]m Libor + 1y Borrower CDS Spread + 1.50% + DB Liquidity Cost– Individually set for each draw
[0.375]% per annum
Minimum: $[20]mn / Maximum: $[250]mn– On each potential draw date, Calculation Agent will provide an Interest Rate
quote, and Borrower can decide whether to draw at such rate– Draw amounts may affect pricing due to CDS liquidity constraints
On each Coupon Reset Date, Calculation Agent (DB AG) willprovide an Interest Rate quote, and Borrower can decide to
[3] Business Days before Initial Maturity of each drawn tranche;– On each Coupon Reset Date, Calculation Agent will provide an Interest
Rate quote, and Borrower can decide to extend each drawn tranche for 1year
Up to 10 yrs
DB will have right to put Notes back to Borrower in circumstanceswhere a Succession Event has occurred or is about to occur andwhere CDS is envisaged to be split into a different or more than one
DB will have right to demand repayment of drawn amounts in circumstanceswhere a Succession Event has occurred or is about to occur and where CDS isenvisaged to be split into a different or more than one successor
At par on each Coupon Reset Date;Subject to unwind costs if prepaid at any other time
43
Deutsche Bank
Overview
A CDS-based Letterof Credit facilitydoes not utilizecapacity underexisting credit lines,while offeringgreater flexibilityand lower cost thancapital marketsalternatives
Source: DB Credit Solutions and Credit Structuring
Size Up to $500m in LCs to support the Company’s collateral posting needs depending onmarket conditions and CDS liquidity
Tenor Up to 5 year maturity
– LCs issued for 364 days with automatic renewal during the 5
Pricing Transparent and fixed for the 5 year term based on a company’s CDS levels
– Company controls the size and price of the facility by controlling DB’s purchases ofCDS
Ramp Up Period Structure allows the company the flexibility to choose a Ramp
– The company and DB work together to purchase the required amount of CDS– Company submits limit orders to DB specifying the CDS amounts and maximum
price– DB carefully manages purchases to minimize impact on company’s CDS levels
Accounting There should be no balance sheet impact unless an LC is drawn, and interestexpense should be tax deductible
Documentation /Disclosure
Standard LC documentation
Disclosure requirements should be similar to any other credit facility
DB offers a market-based alternative letter of credit (“LC”) solution to companies seeking to fulfilltheir traditional LC needsDB’s bilateral LC facility (“DB-LC”) does not use traditional bank credit lines, instead utilizing thepricing and depth of the CDS market
Description
Up to $500m in LCs to support the Company’s collateral posting needs depending onmarket conditions and CDS liquidity
Up to 5 year maturity
LCs issued for 364 days with automatic renewal during the 5-year Facility term
Transparent and fixed for the 5 year term based on a company’s CDS levels
Company controls the size and price of the facility by controlling DB’s purchases of
Structure allows the company the flexibility to choose a Ramp-up Period for execution
The company and DB work together to purchase the required amount of CDSCompany submits limit orders to DB specifying the CDS amounts and maximum
DB carefully manages purchases to minimize impact on company’s CDS levels
There should be no balance sheet impact unless an LC is drawn, and interestexpense should be tax deductible
Standard LC documentation
Disclosure requirements should be similar to any other credit facility
based alternative letter of credit (“LC”) solution to companies seeking to fulfill
LC”) does not use traditional bank credit lines, instead utilizing the
45
Deutsche Bank
Structure overview
1. DB enters into a stand-alone bilateral credit facility with the company that allows for the issuance of LCs to specified Beneficsubject to the agreed upon standard terms and conditions
2. The DB-LC issuance capacity is built up through DB’s purchase of CDS during the Ramp– The total outstanding amount of CDS purchased is the amount of LCs available to be issued by DB under the structure– The company may be as active as it wishes during the ramp-
price reports; orders can be started / terminated / amended at any time
3. Company pays a fixed running spread (based on its CDS level) to DB on the available LC amount
4. Company may request DB to issue LCs at any time and is required to promptly (i.e. same day) reimburse DB for amounts drawnunder the LCs
Description
Source: DB Credit Solutions and Credit Structuring
LCbeneficiaries
LCs issued atCompany’s request
Reimbursement of LC draws
LC issuance fees(CDS cost + spread)
DC-LC facility
Client
41
1
3
DB-LC facility
alone bilateral credit facility with the company that allows for the issuance of LCs to specified Beneficiaries,
LC issuance capacity is built up through DB’s purchase of CDS during the Ramp-up Period.The total outstanding amount of CDS purchased is the amount of LCs available to be issued by DB under the structure
-up period, providing daily or weekly limit orders or monitoring dailyprice reports; orders can be started / terminated / amended at any time
Company pays a fixed running spread (based on its CDS level) to DB on the available LC amount
Company may request DB to issue LCs at any time and is required to promptly (i.e. same day) reimburse DB for amounts drawn
Description
CDSmarket
CDS premium
100% hedge of issuedLC exposure
2
46
Deutsche Bank
Sample indicative terms
(a) Term CDS rate is the weighted average of the CDS premium rates for the aggregate CDS purchases executed by Deutsche BankSource: DB Credit Solutions and Credit Structuring
Facility Borrower [Company’s CDS-referenced entity]
Issuing bank Deutsche Bank AG, NY or one of its affiliates
Letter of credit facility Amount: Up to $500 mMaturity: 5.0 yearsIssuance Fee: Term CDS rate + [50-75] bps(a)
LC commitment amount Up to $500m on the Facility closing date
Ramp-up period~2 weeks – 3 months from the Facility closing date, depending on market liquidity.If the Company would like to begin the Ramp-up Period prior to closing, the Company can do so at its option after signing both aCommitment Letter and Fee Pricing Agreement for the transaction
LC availability amountThe LC Availability Amount will be increased as agreed upon by the Borrower and Deutsche Bank during the Rampfollowing the closing date, and the maximum aggregate LC amount will not at any time exceed $500m (“Maximum LC AvailabilityAmount”)
Structuring fees 1.00% of the LC commitment amount
Annual Facility feesAn amount equal to the LC availability amount multiplied by a per annum rate equal to [TBD]% (based on the average expected Ccost + [50-75] bps)
Financial covenants Based on the terms of the Borrower’s existing term bank credit facilities
Reimbursementobligations
If Deutsche Bank funds any drawn amount under an issued LC, the Borrower is obligated to pay that amount (each, a“Reimbursement Obligation”) to the Administrative Agent on the same Business Day on which the Issuer notifies the Borrower ofsuch LC Drawing (the “LC Reimbursement Date”)
Conditions precedentStandard conditions precedent including but not limited to: (a) receipt of all internal approvals including credit, risk, legcompliance, (b) signed binding documentation acceptable to Deutsche Bank, and (c) receipt of all fees and expenses
Sample indicative terms
Term CDS rate is the weighted average of the CDS premium rates for the aggregate CDS purchases executed by Deutsche Bank
3 months from the Facility closing date, depending on market liquidity.Period prior to closing, the Company can do so at its option after signing both a
Fee Pricing Agreement for the transaction
The LC Availability Amount will be increased as agreed upon by the Borrower and Deutsche Bank during the Ramp-up Periodfollowing the closing date, and the maximum aggregate LC amount will not at any time exceed $500m (“Maximum LC Availability
An amount equal to the LC availability amount multiplied by a per annum rate equal to [TBD]% (based on the average expected CDS
Based on the terms of the Borrower’s existing term bank credit facilities
If Deutsche Bank funds any drawn amount under an issued LC, the Borrower is obligated to pay that amount (each, a“Reimbursement Obligation”) to the Administrative Agent on the same Business Day on which the Issuer notifies the Borrower ofsuch LC Drawing (the “LC Reimbursement Date”)
Standard conditions precedent including but not limited to: (a) receipt of all internal approvals including credit, risk, legal, andcompliance, (b) signed binding documentation acceptable to Deutsche Bank, and (c) receipt of all fees and expenses
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Deutsche Bank
Comparison of DB-LC and alternatives
Key Benefits
Traditional LC Often structured off existing credit facility pricing,availability, and duration
Typically lowest cost alternative
May allow funded loan if underlying agreementprovides for a drawn facility
DB-LC Based on market CDS, not revolver capacity, freeingup liquidity under a company’s traditional revolver
Up to 5 year term with fixed, transparent pricingbased on purchased CDS
LCs may be issued for the benefit of any of thecompany’s affiliates or subsidiaries
No balance sheet impact unless an LC is drawn, andinterest expense should be tax deductible
Documentation based off existing credit facility
Financial strength of issuing bank (DB rated Aa3 / A+)
Proven structure (10+ facilities extended to datetotalling over $7bn)
Source: DB Credit Solutions and Credit Structuring
LC and alternatives
Key Considerations
Often structured off existing credit facility pricing, Difficult to source incremental capacity in current andfuture (Basel 3) environment
Decline in availability and increased pricing on renewedfacilities due to market conditions and overall bank creditappetite
May not provide for funded loan if standalone,bi-lateral LC
Based on market CDS, not revolver capacity, freeingup liquidity under a company’s traditional revolver
Up to 5 year term with fixed, transparent pricing
No balance sheet impact unless an LC is drawn, and
Financial strength of issuing bank (DB rated Aa3 / A+)
Proven structure (10+ facilities extended to date
LCs require beneficiaries to issue standingdraw instructions to be used upon occurrence of aCompany’s Credit Event (i.e. auto-draw)
Likely more expensive due to CDS-based pricing vs.“subsidized” credit facility pricing
DB-LC does not provide for funded loans – LCs only
Early cancellation of committed capacity is subject tomake whole prepayment fees
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Deutsche Bank
Overview of potential alternatives
Solution
1) Bifurcation of RevolvingCredit Facilities(1)
Two documentation alternatives:
a) Establish a sub-limit for “CP Backdrawn to repay CP above the sub
b) Document two distinct facilities
2) Synthetic ContingentLiquidity Facility
An SPV issues term bonds into the capital markets, guaranteed by a corporate sponsor– Bond proceeds are re-invested in UST money market funds
Corporate sponsor enters into an agreement with SPV, whereby it can draw on the cash in exchange fordelivering new senior bonds to the SPV– Corporate sponsor pays a running premium to the SPV, which (together with interest
cover coupon payments on the SPV bonds
SPV bonds remain off-balance sheet (and offproceeds
3) Callable Commercial PaperProgram(2)
(for “A-1/P-1” or better names only)
Establish a new CP program where issuance is limited to CP with a final maturity of 60 daysissuer call option on Day 30-45– If CP is called, company would refinance with new CP under the program
– If CP is not called, company would pay a step
– If company does not call, and cannot refinance, existing CP would mature on final maturity date
A bi-lateral liquidity facility from DB would back
Below we present three potential solutions aimed at mitigating the higher cost / reduced availability of CP backDB can work with our clients to explore these (and other) ideas in more detail
(1) Documentation and administration process around(2) Market and infrastructure (e.g. DTC) will need to develop further to allow for sizable issuanceSource: Deutsche Bank
Overview of potential alternatives
Description
limit for “CP Back-stop” use within existing revolving credit facilities (facility could not bedrawn to repay CP above the sub-limit amount); or
two distinct facilities – one for CP Back-stop, the other for GCP (with distinct pricing for each)
An SPV issues term bonds into the capital markets, guaranteed by a corporate sponsorinvested in UST money market funds
Corporate sponsor enters into an agreement with SPV, whereby it can draw on the cash in exchange fordelivering new senior bonds to the SPV
Corporate sponsor pays a running premium to the SPV, which (together with interest on the collateral)cover coupon payments on the SPV bonds
balance sheet (and off-credit) for the corporate sponsor unless it draws on the
where issuance is limited to CP with a final maturity of 60 days or longer, with
If CP is called, company would refinance with new CP under the program
If CP is not called, company would pay a step-up penalty rate (to incentivize it to call)
If company does not call, and cannot refinance, existing CP would mature on final maturity date
lateral liquidity facility from DB would back-stop the new CP program (requiring >30-day notice to draw)
Below we present three potential solutions aimed at mitigating the higher cost / reduced availability of CP back-stop facilities;DB can work with our clients to explore these (and other) ideas in more detail
Documentation and administration process around sub-limits needs to be developed furtherMarket and infrastructure (e.g. DTC) will need to develop further to allow for sizable issuance 50
Deutsche Bank
Mechanics of a Credit Support Annex (CSA)
Tab FMechanics of a Credit Support Annex (CSA)
Deutsche Bank
(120)(100)
(80)(60)(40)(20)
02040
Feb-06 Jul-06 Nov-06 Mar-07 Jul-07
$m
m
Posting to counterparty under CSA
Mechanics of CSAs
(a) Collateral posting requirement on a $500mm 10y swap executed in FebSource: Deutsche Bank Global Markets
A Credit Support Annex (“CSA”) to an ISDA Master Agreement provides for counterparties to postcollateral (typically cash or Treasuries) against the mark
A party who is out-of-the-money by an amount greater than a predetermined threshold posts to theother party collateral equal to excess of the market value over the threshold
The threshold represents the maximum uncollateralized exposure, and may be zero
In the event of default, the non-defaulting party liquidates collateral to cover the termination cost ofthe ISDA
Basel 3 imposes newcapital charges onbanks for counterpartycredit risk in OTCderivatives, resulting inincreased transactioncosts
Execution of a 2-wayCSA can significantlymitigate such costs
Illustrative Collateral Posting Example (w/Threshold)
Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Sep-09 Jan-10 May-10 Sep-10 Feb-11
Posting from counterparty under CSA Swap mark-to-market Threshold
Collateral posting requirement on a $500mm 10y swap executed in Feb 2006, assuming a CSA threshold of $15mm
Implementing a CSA
A Credit Support Annex (“CSA”) to an ISDA Master Agreement provides for counterparties to postcollateral (typically cash or Treasuries) against the mark-to-market of the derivatives portfolio
money by an amount greater than a predetermined threshold posts to theother party collateral equal to excess of the market value over the threshold
The threshold represents the maximum uncollateralized exposure, and may be zero
defaulting party liquidates collateral to cover the termination cost of
Illustrative Collateral Posting Example (w/Threshold) (a)
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Deutsche Bank
Key considerations
Key Benefits
Reduce bank counterparty credit risk
Improve credit and balance sheet charges imposed bybank counterparties
Reduce potential impact of FAS 157 counterpartyvaluation adjustments
Key Considerations
Operational costs
Funding cost on posted collateral
– Since a company earns interest on posted collateral, posting is aneconomic cost only if the opportunity cost of funds is greater thanthe rate earned (typically fed funds)
The potential cost of posting can be reduced further by:
– Executing CSAs with positive thresholds
– Distributing derivatives transactions among counterparties toavoid mark-to-market concentrations
– If feasible, trading out of offshore subsidiaries with access toexcess cash
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Deutsche BankDeutsche BankCapital Markets and Treasury Solutions
Appendix VII
Appendix A: Additional Basel 3 Information
Deutsche BankCapital Markets and Treasury Solutions
Appendix A: Additional Basel 3 Information
Deutsche Bank
Implementation timeline
2012
Cap
ital
RiskCoverage Counterparty Risk Introduction
Capital Base
Core Tier 1 Ratio 2.0%Tier 1 Ratio 4.0%Total Capital Ratio 8.0%
Phase-in reg. deductions
Instruments no longer qualify forTier 1/Tier 2
CapitalBuffers
Conservation Buffer
Countercyclical Buffer
G-SIB Buffer
LiquidityLCR ObservationNSFR Observation
Leverage Leverage Ratio Monitoring
(1) G-SIBs will be allocated into 4 buckets based on their scores of systemic importance, with various levels of additionalloss absorbency requirements applied to each bucket
Source: Basel Committee on Banking Supervision, DB GTB Asset and Liability Management
Implementation timeline
Roll Out Fully Effective
2013 2014 2015 2016 2017 2018 2019
Introduction
3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5%4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0%8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0%
20% 40% 60% 80% 100% 100%
90% 80% 70% 60% 50% 40% 30%
0.625% 1.25% 1.875% 2.50%
Phased in at discretion of national regulator
1.0% - 3.5% surcharge introduced in parallelwith conservation and countercyclical buffers (1)
IntroductionIntroduction
Parallel running Disclosure Introduction
scores of systemic importance, with various levels of additional
Basel Committee on Banking Supervision, DB GTB Asset and Liability Management 55
Deutsche Bank
Basel 3 capital requirements
Higher Core Capital Ratio Requirements
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
Current Basel III Current
Minimal Capital Requirement Conservation Buffer = 2.5%
Common Equity
2.0%
4.5%
7.0%
9.5%
13.0%
4.0%
G-SIB: Global systemically important banksSource: Deutsche Bank, BCBS Press Release
The new Basel 3 framework substantially increases minimum capital requirements, andredefines Tier 1 capital to exclude hybrid instruments and other securities
Basel 3 capital requirements
Higher Core Capital Ratio Requirements
Basel III Current Basel III
Conservation Buffer = 2.5% Countercyclical Buffer = 0.0% - 2.5% G-SIBs Buffer = 1.0% -3.5%
Tier 1 Total Capital
6.0%
8.5%
11.0%
14.5%
8.0%
10.5%
13.0%
16.5%
8.0%
The new Basel 3 framework substantially increases minimum capital requirements, andredefines Tier 1 capital to exclude hybrid instruments and other securities
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Deutsche Bank
Tier 1 Common Equity(CET1)
Common shares, minority interests and retained earnings are the only qualifying elementsHybrid securities excluded under Basel 3
Additional Tier 1 (AT1)Instruments classified as liabilities for accounting purposes and have loss absorption feature built inDated, cumulative instruments no longer qualify as Tier
Tier 2 CapitalPrimarily comprised of dated subordinated debtDiminished importance given Basel 3’s focus on Tier 1
Tier 3 CapitalDated, subordinated debt issued to satisfy market risk requirementsEliminated from capital under Basel 3
Basel 3 capital requirements
Stricter Definition of Core Capital
G-SIB: Global systemically important banksSource: Deutsche Bank, BCBS Press Release
Common shares, minority interests and retained earnings are the only qualifying elementssecurities excluded under Basel 3
Instruments classified as liabilities for accounting purposes and have loss absorption feature built inDated, cumulative instruments no longer qualify as Tier 1
subordinated debtgiven Basel 3’s focus on Tier 1
subordinated debt issued to satisfy market risk requirements
Basel 3 capital requirements
Stricter Definition of Core Capital
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Deutsche BankDeutsche BankCapital Markets and Treasury Solutions
Appendix VIII
Appendix B: Glossary of Terms
Deutsche BankCapital Markets and Treasury Solutions
Deutsche Bank
Glossary of terms
ASF Available Stable Funding
AVC Asset Value Correlation; correlations among assets
BCBS Basel Committee for Banking Supervision
BIS Bank of International Settlements
CCP Central clearing house
CCR Counterparty Credit Risk
CME Chicago Mercantile Exchange
CSA Credit Support Annex; Rules governing the mutual posting of collateral in a derivatives transaction
CVA Credit Valuation Adjustment
EAD Exposure at Default; Total value of exposure at time of default
EBA European Banking Authority
EPE Expected Positive Exposure; Weighted average of positive exposures over tenor of transaction
FI Financial Institutions
Key Benefits
Annex; Rules governing the mutual posting of collateral in a derivatives transaction
Default; Total value of exposure at time of default
average of positive exposures over tenor of transaction
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Deutsche Bank
Glossary of terms (cont’d)
HQLA High Quality Liquid Assets; Low credit / market risk, high liquidity assets with low correlation to risk assets
IIF International Institute of Finance
IMF International Monetary Fund
LCR Liquidity Coverage Ratio; Tests a bank’s ability to survive acute short
LGD Loss Given Default; Expected recovery value upon default
LR Leverage ratio; Measure of exposure relative to capital
MAG Macro Economic Assessment Group
MPR Margin Period of Risk; Time period from last exchange of collateral covering a netting set of transactions with a defaultingcounterparty until that counterparty is closed out and market risk is re
NSFR Net Stable Funding Ratio; Tests a bank’s long-term funding ability (1
OECD Organization of Economic Co-Operation and Development
PD Probability of Default; Likelihood of a counterparty defaulting
RSF Required Stable Funding
RWA Risk Weighted Assets
Glossary of terms (cont’d)
Key Benefits
credit / market risk, high liquidity assets with low correlation to risk assets
a bank’s ability to survive acute short-term stress (30-days)
default
Period of Risk; Time period from last exchange of collateral covering a netting set of transactions with a defaultingcounterparty until that counterparty is closed out and market risk is re-hedged
term funding ability (1-year)
and Development
Likelihood of a counterparty defaulting
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Deutsche Bank
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We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggesseek their own independent advice in relation to any investment, financial, legal, tax, accounting, or regulatory issues discAnalyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions exprescontained herein shall constitute any representation or warranty as to future performance of any financial instrument, creditother market or economic measure. Furthermore, past performance is not necessarily indicative of future results.
This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buenter into any agreement or contract with Deutsche Bank AG or any affiliates. Any offering or potential transaction that maysubject matter of this communication will be made pursuant to separate and distinct documentation and in such case the informherein will be superseded in its entirety by such documentation in final form.
Because this communication is a summary only it may not contain all material terms, and therefore this communication in and onot form the basis for any investment decision. Financial instruments that may be discussed herein may not be suitable for alpotential investors must make an independent assessment of the appropriateness of any transaction in light of their own objeccircumstances, including the possible risks and benefits of entering into such a transaction. By accepting receipt of this corecipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investmentunderstand the risks involved in any purchase or sale of any financial instrument discussed herein. If a financial instrumentcurrency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the incthe financial, and any investor in that financial instrument effectively assumes currency risk. Prices and availability of andescribed in this communication are subject to change without notice.
Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSESIPC, and its broker-dealer affiliates. Lending and other commercial banking activities in the United States are performed by DeAG, and its banking affiliates. This communication and the information contained herein is confidential and may not be reproddistributed in whole or in part without our prior written consent. (C) 2009 Deutsche Bank AG.
For more information contact Tom Joyce (212-250-8754)
The information herein is believed to be reliable and has been obtained from sources believed to be reliable, but we make no representation orwarranty, express or implied, with respect to the fairness, correctness, accuracy, reasonableness or completeness of such information. Inaddition we have no obligation to update, modify or amend this communication or to otherwise notify a recipient in the event that any matterstated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.
We are not acting and do not purport to act in any way as an advisor or in a fiduciary capacity. We therefore strongly suggest that recipientsseek their own independent advice in relation to any investment, financial, legal, tax, accounting, or regulatory issues discussed herein.Analyses and opinions contained herein may be based on assumptions that if altered can change the analyses or opinions expressed. Nothingcontained herein shall constitute any representation or warranty as to future performance of any financial instrument, credit, currency rate orother market or economic measure. Furthermore, past performance is not necessarily indicative of future results.
This communication is provided for information purposes only. It is not an offer to sell, or a solicitation of an offer to buy any security, nor toenter into any agreement or contract with Deutsche Bank AG or any affiliates. Any offering or potential transaction that may be related to thesubject matter of this communication will be made pursuant to separate and distinct documentation and in such case the information containedherein will be superseded in its entirety by such documentation in final form.
Because this communication is a summary only it may not contain all material terms, and therefore this communication in and of itself shouldnot form the basis for any investment decision. Financial instruments that may be discussed herein may not be suitable for all investors, andpotential investors must make an independent assessment of the appropriateness of any transaction in light of their own objectives andcircumstances, including the possible risks and benefits of entering into such a transaction. By accepting receipt of this communication therecipient will be deemed to represent that they possess, either individually or through their advisers, sufficient investment expertise tounderstand the risks involved in any purchase or sale of any financial instrument discussed herein. If a financial instrument is denominated in acurrency other than an investor’s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from,the financial, and any investor in that financial instrument effectively assumes currency risk. Prices and availability of any financial instruments
Securities and investment banking activities in the United States are performed by Deutsche Bank Securities Inc., member NYSE, FINRA anddealer affiliates. Lending and other commercial banking activities in the United States are performed by Deutsche Bank
AG, and its banking affiliates. This communication and the information contained herein is confidential and may not be reproduced ordistributed in whole or in part without our prior written consent. (C) 2009 Deutsche Bank AG.