Markit IOS. March 11, 2010

March 11, 2010

Markit IOS

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About Markit

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Markit is a leading global financial information services company with

over 1,400 employees

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We provide independent data, valuations and trade processing

across all asset classes in order to enhance transparency, reduce risk

and improve operational efficiency

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Our client base includes the most significant institutional participants

in the financial market place

Index operating model

ƒ Index rules ƒ Market research ƒ Documentation ƒ Index calculation methodology ƒ Data procurement ƒ Prototyping / Testing ƒ Project management

Index Design

Index Administration

Pricing/Production

ƒ Manage rebalancing process

ƒ Index research (previews)

ƒ Custom index development

ƒ Daily control of constituent lists

ƒ Control index and analytics

ƒ Client services

ƒ Reference database control

ƒ Receive daily price data

ƒ Price cleaning and control

ƒ Price consolidation

ƒ Quality reporting

ƒ Index and analytics calculation

ƒ Index and data publication

ƒ Feeds

ƒ Vendor management

IT Development and Administration

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Markit public indices

Markit ABX.HE Markit TABX Markit CMBX Markit TRX.NA Markit IOS Structured Finance Thematic indices ETF constituent files Bespoke Indices

Equities

Markit iBoxx US Pension Liabilities

Markit iBoxx FX

Markit iBoxx Overnight Rate Bespoke Indices Other Real-time Markit iBoxx € Markit iBoxx £ End of day

Markit iBoxx Global Inflation-linked Markit iBoxx $ Markit iBoxx Asia Markit iBoxx € HY Markit iBoxx GEMX Markit iBoxx Global Sovereign

Liquid Indices Custom Indices

Bonds

Credit

Markit iTraxx Europe Markit iTraxx Crossover Markit iTraxx Total Return index

Markit iTraxx, Asia ex-JP, Japan, Australia Markit iTraxx SovX Markit CDX.IG Markit CDX.HY Markit CDX.XO Markit CDX.EM Markit MCDX Loans

Markit iTraxx LevX Markit LCDX

Bespoke Indices

Structured Finance Expertise

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ABX.HE, CMBX, and TRX.NA have brought new levels of transparency to the

structured finance markets

– Widely followed indicators of sentiment on market pricing and performance

– TRX.NA brought standardization to synthetic TRS contracts referencing amortizing assets

– Publicly available index closes and analytics

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Markit is a leading presence in structured finance

– Established leader in European ABS and US CDS of ABS markets

– Broad suite of offerings to address needs of structured finance market participants

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Full Value Proposition

– The complete product suite provides a comprehensive spectrum of services for any point in the pre-trade, trade, and post-trade cycle

ƒ Reference and Performance Data

ƒ Risk and Pricing

ƒ Deal Structure and Analysis

ƒ Trade Support

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Detailed analysis and support is provided for both US and European ABS deals at

the single security, index and portfolio level

Markit IOS Index

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Synthetic Total Return Swap Index referencing the interest component of 4%, 4.5%

and 5% coupon, 30-year, fixed-rate Fannie Agency pools

– Index references only the interest component of reference pools

– Index cashflows, prices, and valuation are independent of principal component

– Initial plans to focus on limited to Fannie pools, eventually expand to additional coupons and GSEs (Freddie and Ginnie)

– First Markit IOS indices reference “FNCL” pools issued in 2009

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Three sub indices, one for each coupon

– IOS.FN30.400.09

– IOS.FN30.450.09

– IOS.FN30.500.09

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Exposure to agency pool coupon cashflows via synthetic TRS contracts

– Net cashflow exchanges are a function of change in market value of reference pool interest component along with standard monthly exchanges of coupon and financing

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Markit is the calculation, marketing, and administrative agent

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Markit published composites determine daily values & monthly settlement

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Markit as administrator provides independent 3rd party oversight and

consensus pricing

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Operational efficiency

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Trade will confirm in MarkitSERV's DSMatch system

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Standardized settlement calculation

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Valuation analytics publicly available on www.markit.com

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Licensed dealers will provide daily closing prices using centralized process via Markit website

Benchmark IOS Index

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Transparency

– Objective, rules-based approach to construction of index

ƒ Index references all FNCL pools from designated period

ƒ First Markit IOS will reference all qualifying pools from 2009

– Clear roll mechanism to reference most recently issued agency pools

ƒ Every 6 months after launch, licensed dealers vote on launch & designated period of new index

– Daily, consensus-based prices available on Markit website

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Standardization

– Reference pools for each index are publicly available and static

– Standardized documentation for IOS contracts

– Monthly payment amounts calculated and posted by Markit

– DTCC will offer trade confirmation and settlement

Markit IOS Transactions

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IOS transactions are tied very closely to performance of the reference pools

– Long position on the index replicates the purchase of the interest component of an agency pool funding the transaction at LIBOR

– Short position pays the coupon of the index on swap notional

– Net exchange incorporates the change in market value of the interest component from the underlying pools

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Market value changes

– Consensus based pricing determines price changes on daily basis

– Markit published consensus prices and factors used for month over month settlement payment calculations

– All MTM Payments use price set on Reset Date, 1 day prior to Period End Date

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Trade Dates

– Each transaction accrues from and including one Period End Date to and excluding the next Period End Date

– Period End Date is not adjusted for business day convention

– Index Factor, Price, and LIBOR published on the Reset Date become effective on the Period End Date

– All trade terms, including the amount of days accrued, are up to and excluding the trade date

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Markit IOS: Indicative Terms and Conditions

Long position on the Reference Pools. Pays Financing Payment on monthly basis.

Floating Rate Payer

Short position on the Reference Pools. Pays Interest Payment on monthly basis.

Fixed Rate Payer

Day which Index LIBOR and Commencing Index Price for accrual period are set and

Commencing Index Factor is published. Occurs on business day prior to Period End Date. All Period End Prices, Factors, and LIBOR rates are published on www.markit.com on Reset Date.

Reset Date

Act/360 for the Financing Payment and 30/360 for the Coupon Payment.

Day Count Basis

T+3 from the Period End Date. T+3 only applies only to the exchange of payments.

Payment Dates

12th_{day of each month independent of any business day convention} Period End Date

Factor updates will be published by Markit on each Reset Date.

Index Factor

Pools are initially weighted by their original par balance. Weighted average outstanding balance of each Reference Pool is reset on each Period End Date.

Reference Pool Weighting

All qualifying pools issued during the designated period with the corresponding stated coupon.

Reference Pools

IOS.FN30.400.09 IOS.FN30.450.09 IOS.FN30.500.09

Markit IOS: Indicative Terms and Conditions

LIBOR payment made by the Floating Rate Payer on each Payment Date. Notional * Index Factor * Commencing Index Price * Day count * 1M LIBOR (set from prior Reset Date).

Financing Payment

Coupon payment made by the Fixed Rate Payer on each Payment Date. Notional * Index Factor * Day count * Coupon.

Interest Payment

The difference between the period end market value (Period End Price * Period End Factor * Notional) and the beginning period market value (Commencing Index Price * Commencing Index Factor * Notional). This amount is paid each Payment Date.

Mark to Market (MTM) Payment

The difference between the market value on the Reset Date and Trade Date, net of any coupon and financing payments (Traded Price - Commencing Index Price) * Commencing Index Factor *

Notional +/- net exchange of Interest and Financing Payment]. This amount is only paid once and can go in either direction.

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Markit IOS Trade Cashflows

Fixed Rate Payer (Short Position)

LIBOR Financing Monthly Payment

Upfront Exchange (Trade Date Only)

IOS Fixed Coupon Monthly Payment

MTM Change Payment (Monthly)

Floating Rate Payer (Long Position)

Markit IOS Trading Conventions

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New Trades and Post Trade Events

– Counterparties agree on Initial Payment for each trade, which incorporates:

ƒ Mark-to-Market movement as of the Trade Date

ƒ Net exchange of Coupon and Financing up to the Trade Date

– Accrual conventions are different between the coupon and financing payments

ƒ Coupon accrues on a 30/360 basis

ƒ Financing accrues on an ACT/360

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Payments T+3

– Payment delays are an operational standard and do not affect trading or accrual period conventions

– Payments for new trades and post trade events occur 3 business days after the Trade/Novation/Termination date

– Monthly settlement payments occur 3 business days after the Period End Date

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Reset Date Fixings/Publications

– On each Reset date, the following calculations apply to published levels

ƒ Index Price – EOD composite price from the Reset Date

ƒ Index Factor – Index level factor calculated from the most recently published pool data information

ƒ LIBOR – taken from EOD two business days prior to the Period End Date, one business day prior to Reset Date

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Trading: XYZ buys $10MM of IOS.FN30.450.09

Firm XYZ – Long Position

ƒ If Traded Price * factor is less than

Commencing Index price * factor, XYZ receives the Initial Payment amount calculated from price * factor differential for the calculation period net of coupon payments – financing payments as of the Trade Date

ƒ XYZ pays the full financing amount on each payment date based on day count, LIBOR, factor, and Commencing Index price.

ƒ XYZ receives the coupon amount on each payment date based on day count, agency coupon, and factor.

ƒ If 2nd _{Period End Date Price * Factor is less}

than Commencing Index Price * Factor, XYZ pays MTM Payment (change in market value)

Firm ABC – Short Position

ƒ If Traded Price * factor is greater than

Commencing Index price * factor, ABC receives Initial Payment amount calculated from price * factor differential for the period as well as the coupon payments – financing payments as of the Trade Date

ƒ ABC receives the full financing amount on each payment date based on day count, LIBOR, factor, and Commencing Index price

ƒ ABC pays the coupon amount on each payment date based on day count, agency coupon, and factor.

ƒ If 2nd Period End Date Price * Factor is greater than Commencing Index Price * Factor, ABC pays MTM Payment (change in market value)

IOS.FN30.450.09 Trade Payments

Initial Trade Details

ƒ Notional Amount: $10,000,000

ƒ Trade Date: Apr 5th_{, 2010}

ƒ Initial Payment Date: Apr 8th_{, 2010 (T+3 exchange for upfront)}

ƒ Initial Period End Date: Apr 12th_{, 2010}

ƒ Traded Price: 26.45

ƒ Commencing Index Factor: 0. 969874532 (Published on Mar 11th_{, 2010)}

ƒ Commencing Index Price: 27.12 (Fixed on Mar 11th_{, 2010)}

ƒ Coupon: 0.045

ƒ Index LIBOR: 0.0034 (From EOD Mar 10th_{, 2010)}

ƒ Days Accrued 23 for Coupon, 24 for Financing

Initial (Upfront) Payment

MTM Component

=(Traded Price – Commencing Index Price) * Commencing Factor * Notional =(0.2645 – 0.2712) * 0.969874532 * 10,000,000 = $(64,981.59)

Net Coupon & Financing Component

=[(Coupon * (day count 30/360) * Notional * Commencing Factor)] – [(LIBOR * Commencing Index Price * (day count A/360) * Notional * Commencing Factor)] =[(.045 * (23/360) * 10,000,000 * 0.969874532)] – [(0.0034 * .2712 * (24/360) * 10,000,000 * 0.969874532)]

=$27,287.69

Initial Payment of $(37,693.90) indicates market value has decreased. Firm XYZ receives this amount, which is net of the interest/financing that has already accrued.

First Settlement Payment

Interest Amount

=(Coupon * (day count 30/360) * Notional * Commencing Factor) =(.045 * (30/360) * 10,000,000 * 0.969874532)

=$36,370.29 (Paid by Firm ABC)

Financing Amount

=(LIBOR * Commencing Index Price * (day count A/360) * Notional * Commencing Factor)

=(0.0034 * .2712 * (31/360) * 10,000,000 * 0.969874532)

=$770.09 (Paid by Firm XYZ)

MTM Change Amount

=[(Period End Index Price * Period End Factor) - (Commencing Index Price * Commencing Index Factor)] * Notional

=(0.2689 * 0.959942355) – (0.2712 * 0.969874532) * 10,000,000 = $(49,014.74)

Negative MTM Change indicates Market Value decreased. Firm XYZ pays $13,414.54 for total payment, which is net of the interest/financing payment Monthly Settlement

ƒ Reset Date: Apr 9th_{, 2010 (T-1 from Period End Date)}

ƒ Period End Date Apr 12th_{, 2010 (not adjusted for business days)}

ƒ Payment Date: Apr 15th_{, 2010 (T+3 from Period End Date)}

ƒ Coupon: 0.045

ƒ Index LIBOR: 0.0034 (From EOD Mar 10th_{, 2010)}

ƒ Commencing Index Factor: 0.969874532 (Published on Mar 11th_{, 2010)}

ƒ Commencing Index Price: 27.12 (Fixed on Mar 11th_{, 2010)}

ƒ Period End Index Factor: 0.959942355 (Published on Apr 9th_{, 2010)}

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Markit IOS Timeline

Upfront Value Agreed on. Trade effective on this date.

EOD Price, Factor and LIBOR (T-2) fixed/published for the next accrual period.

Monthly payment occurs T+3 from Period End Date. Counterparties exchange

MTM change between Reset Dates. Interest and Financing paid.

Occurs T+3 from Trade Date. Exchange of MTM change btw Reset Date and Trade Date net of coupon &

financing payments exchanged.

Next Accrual Period Starts, Information from Reset Date becomes

effective. Not adjusted by business/holiday convention

Counterparties tear up or novate trade. Net change in market value as of trade

date exchanged. Financing and Coupon up to trade date paid.

Trade Date

Reset Date

First Payment Date

Initial Payment Date

First Period End Date

Counterparties exit trade

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Licensed dealer contributions

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Dealers will contribute prices every business day for each available index

– Prices contributed represent the present value of all interest cashflows on the underlying pools as a percentage of the outstanding par balance on all of the pools

– Dealers are not required to contribute once index fails certain liquidity thresholds

– Contributions are made between 3pm and 4pm each day

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Per the Index Rules, if dealers fail to comply with minimum submission threshold, such

firm will lose voting privileges on the index

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Markit uses Top & Tail process, which eliminates top and bottom quartiles of

submissions and calculates average to generate composite

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Markit will publish aggregate composites daily at www.markit.com no later than 5pm

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Reset Date prices (T-1) are used for fixing and settlement

Markit IOS Analytic

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Markit will provide a tool for market participants to calculate price sensitivity based on

IOS prepayment scenarios

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Analytic will utilize in-house Markit cashflows, which allows users to specify

prepayment scenarios (CPR, PSA, vector)

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Calculator will compute price given a specified set of cashflows and a Markit

generated yield curve

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Markit will provide a calculator for participants to calculate upfront payment amounts.

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IOS Calculator can be requested by visiting

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Contacts

Royal Bank of Scotland Cass Tokarski 203-897-2895 Nomura David Lindley 212-667-2279 Morgan Stanley Chas Prasad 212-761-2792 J.P. Morgan Adam Rilander 212-834-4477 Goldman Sachs John Ryan 212-902-3169 Deutsche Bank Pierre Grellet-Aumont 212-250-2811 Credit Suisse Jeff Melnik 212-325-3306 Citibank Kevin Cheng 212-723-6244 Barclays Ilker Ertas 212-412-5147 Bank of America Jason Yeung 646-855-8199 Markit

Administrator: Ned Lipes 212-863-9490 Press: Mike Gormley 212-205-1310

Disclaimer

Opinions, estimates and projections in this report constitute the current judgment of the author(s) at the time of writing. They do not necessarily reflect the opinions of Markit Group Limited. Markit Group Limited has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

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