Covered Bonds Insight

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ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES ARE IN THE DISCLOSURE APPENDIX. FOR OTHER

Covered Bonds – Insight

Global Covered Bond Research

Central bank liquidity: everything has its price

Central banks’ operations: similar, but different

Central banks’ measures since the start of the crisis have contributed to a rise in their balance sheets. From end-2007 to end-2011, the Federal Reserve’s total assets grew by 228%, the Bank of England’s by 184%, and the Eurosystem’s by 81%. Monetary policy instruments resemble each other, but a comparison of the frameworks of the Bank of England, Eurosystem, and Federal Reserve shows that there are differences. We provide an operations overview, focusing on the eligibility of covered bonds as collateral and the haircuts applied to them. In the UK, certain covered bonds are treated similar to asset-backed securities (ABS). In the US, foreign covered bonds (except some from Germany) are not eligible as collateral for the Federal Reserve Discount Window. In Europe, compared to ABS and unsecured bank debt instruments, covered bank bonds benefit from a favourable treatment in terms of eligibility as collateral for Eurosystem credit operations and the haircuts applied to them.

Central banks’ counterparties: uneven playing field

The covered bond eligibility criteria are stricter for the Federal Reserve Discount Window and the Bank of England operations than in the Eurosystem; hence, there is an uneven playing field for both Bank of England and Federal Reserve counterparties and they have less incentive than Eurosystem counterparties to invest in covered bonds. The investor pool for securities with favourable central bank treatment may be broader, as such securities attract the interest of central bank counterparties that use those debt instruments for liquidity management. Thus, a favourable treatment may have a positive impact on the marketability of eligible covered bonds. In addition, banking groups with subsidiaries in different countries may use differences across frameworks strategically – i.e., they may try to access liquidity from different central banks when managing the mismatch between the liquidity of their liabilities and assets.

23 January 2012 Fixed Income Research

http://www.credit-suisse.com/researchandanalytics Research Analysts Sabine Winkler Director +44 20 7883 9398 [email protected]

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Central banks’ operations: similar, but different

3 Eurosystem: special treatment of covered bank bonds

6 Bank of England: covered bonds treated similar to ABS

10

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Central bank liquidity: everything has its price

Central banks’ operations: similar, but different

Central banks provide liquidity to their counterparties, and their measures since the start of the crisis have contributed to a large rise in the size of their balance sheets. At the end of 2011, total assets of the Bank of England were GBP 290bn (up 184% from the GBP 102bn at end-2007), those of the Eurosystem were EUR 2,736bn (up 81% from the EUR 1,511bn at end-2007), while those of the Federal Reserve were USD 2,928bn (up 228% from the USD 894bn at end-2007). Several banks in euro-area countries have lost access to funding in the capital markets. Banks are still turning to central banks for funding. Although Greek, Irish and Portuguese banks are relying on central bank funding, the central bank loans to monetary financial institutions’ (MFIs) total assets ratio is low in other countries. To limit their exposure, central banks require counterparties to cover the amounts allotted to them with eligible debt instruments and impose unilateral risk control measures.

Exhibit 1: Central banks’ balance sheets (January 2007 = 100%)

80% 160% 240% 320% 400% 3/ 07 6/ 07 9/ 07 12/ 07 3/ 08 6/ 08 9/ 08 12/ 08 3/ 09 6/ 09 9/ 09 12/ 09 3/ 10 6/ 10 9/ 10 12/ 10 3/ 11 6/ 11 9/ 11 12/ 11

Eurosystem Bank of England Federal Reserve

Source: Bank of England, European Central Bank, Federal Reserve, Credit Suisse

During times of high market volatility, the covered bond market faces periods of disruption and resorts to the use of retained transactions to access central bank funding. Banks can use certain own-name covered bonds – i.e., covered bonds issued or guaranteed by itself, or by any other entity with which it has close links – as collateral for central bank credit operations to bolster liquidity. However, not all central banks accept own-name covered bonds as collateral. Central banks provide liquidity to banks, but it would be imprudent for a bank to rely on this liquidity except in stressed circumstances or for short periods. The markets reassess the liquidity of securities. Sometimes liquidity is associated with a debt instrument’s eligibility as collateral for central bank operations and the haircuts applied to it. Compared to ABS and unsecured securities, covered bonds may benefit from a favourable treatment in terms of eligibility as collateral and the haircuts applied to them, in particular in countries in which the product plays a more pivotal role in bank funding.

Recognising the interest in central bank operations, we provide an overview of the Bank of England, the Eurosystem and the Federal Reserve operations, focusing on the eligibility of covered bonds as collateral for those operations and the haircuts applied to them. Since the beginning of the crisis, significant changes, including the introduction of (non-standard) facilities and adjustments to existing (standard) operations have been made, but they have not brought convergence in systems. Monetary policy instruments resemble each other, but a comparison of the frameworks of the Bank of England, Eurosystem, and Federal Reserve shows that there are differences, most of which are related to procedures, instruments, terms of operations, counterparty eligibility, collateral eligibility, close links, pre-issuance advice, and haircuts. Covered bonds are not accepted as collateral for all operations, and not all products are treated in the same way.

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Exhibit 2: Banks’ reliance on central banks and capital market funding

Country MFIs' total assets (August 2011) Central bank loans (July 2011) Dependence central bank loans

AT 1,003 7 1% CA 3,700 0 0% CH 2,715 18 1% DE 8,264 46 1% DK 6,190 4 0% ES 3,548 57 2% FI 566 0 0% FR 8,163 29 0% GB 8,427 14 0% GR 490 96 20% IE 1,382 98 7% IT 3,877 80 2% LU 1,050 3 0% NL 2,396 21 1% NO 5,410 23 0% NZ 384 6 2% PT 574 44 8% SE 10,865 0 0% US [1] 12,589 132 1%

Source: IMF, ECB, Statistics Norway, Swiss National Bank, Statistics Sweden, Danmarks Nationalbank, Magyar Nemzeti Bank, Reserve Bank of New Zealand, OSFI, Bank of England, Federal Reserve, Credit Suisse, [1] In this case, MFI means commercial banks.

• The Eurosystem requires counterparties to hold minimum reserves. The Eurosystem applies a uniform positive reserve ratio to most of the balance sheet items included in the reserve base. This reserve ratio was set at 2% in October 1998 and was lowered to 1% in January 2012. In the UK, there is a reserves scheme, but banks are not currently required to set targets for their reserves balances. The Federal Reserve is imposing reserve requirements. There are regular adjustments to these requirements, such as the annual indexation of the low-reserve tranche and the reserve requirement exemption. The latest adjustments became effective on 29 December 2011. Counterparty eligibility differs across frameworks. Differences also exist with regard to the way operations are executed. The central banks undertake operations at different maturities that are not necessarily the same across systems.

• The Eurosystem does not provide pre-issuance advice about the eligibility as collateral for operations. The Bank of England encourages participants to pre-position securities prior to an operation, but reserves the right to reject an instrument offered or provided as collateral at any time. In addition, covered bonds may be deemed ineligible as collateral for operations, such as the Discount Window Facility, if the Bank of England judges that they were issued for the express purpose of obtaining funding from it.

• The Eurosystem applies a single framework for eligible assets for all operations, and EUR-denominated covered bonds are accepted. In contrast to the Eurosystem, the Bank of England and the Federal Reserve specify eligible collateral for each operation. In the UK, covered bonds are not accepted as collateral for all operations, and not all covered bonds are treated equally. In the UK, the bonds’ denomination can be GBP, EUR, USD, AUD, CAD, SEK, or CHF. In the US, US-issued and selected German covered bonds are accepted as collateral for the Discount Window, but are not treated in the same way. The Federal Reserve Banks accept senior unsecured debt of foreign banks, but they do not accept covered bonds of those banks (apart from selected German covered bonds). In the US, eligible currencies are AUD, CAD, CHF, DKK, EUR, GBP, JPY, SEK, and USD. In contrast to the Bank of England requirements, the transparency requirements in the Eurosystem do not apply to covered bonds. Differences further exist with regard to the minimum credit quality and the number of credit ratings required.

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• In the Eurosystem, the close links constraint does not apply to selected covered bonds – i.e., a Eurosystem counterparty may submit as collateral eligible covered bonds issued or guaranteed by itself, or by any other entity with which it has close links. The Bank of England accepts own-name eligible covered bonds, but applies a 5% haircut add-on to the bonds used as collateral in the Discount Window Facility and Extended Collateral Term Repo Facility. As regards the Discount Window Facility, higher fees apply to own-name eligible covered bonds. Although the Federal Reserve Banks accept a wide range of securities as collateral for the Discount Window, they do not accept debt instruments of the pledging institution or its affiliates, or otherwise correlated with the financial condition of the pledging institution – i.e., own-name debt instruments are not accepted as collateral for the Discount Window.

• The collateral value is often calculated as the value of a security less haircuts. Haircuts vary, for example, based on issuer classification, type of instrument, and residual term. In the Eurosystem, eligible collateral is allocated to one of five liquidity categories. The Eurosystem differs from Jumbo covered bank bonds (Category II), and traditional/other covered bank bonds (Category III). The Bank of England differs from Level A collateral (most liquid securities), Level B collateral, Level C collateral, and Level D collateral (least liquid securities). Eligible covered bonds may be part of Level B, C, or D. Haircuts typically increase with the category. The Federal Reserve differs from “Covered Bonds” and “German Jumbo Pfandbriefe”. The haircuts on triple-A-rated US-issued covered bonds are lower than those on triple-B to double-A rated US-issued covered bonds. Higher haircuts – i.e., lower margins – apply to triple-A-rated US-issued covered bonds than to USD-denominated German Jumbo Pfandbriefe with a similar credit quality. In the UK, certain covered bonds are treated similar to ABS. In the US, the haircuts on bills, notes, and bonds of Government Sponsored Enterprises (GSEs), and those on triple-A rated USD-denominated German Jumbo Pfandbriefe are the same, and they are lower than the haircuts on US-issued covered bonds. Lower haircuts apply to triple-B to double-A rated US-issued covered bonds than to double-ABS with a similar credit quality. In the US, USD-denominated corporate bonds are treated similar to US-issued covered bonds. In the Eurosystem, compared to ABS and unsecured bank debt, covered bank bonds benefit from a favourable treatment in terms of eligibility as collateral for credit operations and the haircuts applied to them.

The covered bond eligibility criteria are stricter for the Bank of England operations and the Federal Reserve Discount Window than in the Eurosystem; hence, there is an uneven playing field for both Bank of England and Federal Reserve counterparties and they have less incentive than Eurosystem counterparties to invest in covered bonds. A favourable treatment in terms of eligibility as central bank collateral and lower haircuts may have a positive impact on the marketability of covered bonds. The investor pool for securities with favourable central bank treatment is broader, as such assets attract the interest of central bank counterparties that use those securities for liquidity management given their eligibility as collateral for central bank credit operations.

To enhance the marketability of their covered bonds, banks may structure their deals in accordance with central bank requirements. In addition, banks turning to central banks for funding are likely to use differences across frameworks strategically – i.e., banking groups with subsidiaries in different jurisdictions may try to access liquidity from different central banks when managing the mismatch between the liquidity of their liabilities and assets. Market participants should consider differences across systems and their consequences, in our view.

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Eurosystem: special treatment of covered bank bonds

The monetary policy operations of the Eurosystem are executed under uniform terms and conditions in the euro-area countries. The Eurosystem conducts open market operations, offers standing facilities, and requires counterparties to hold minimum reserves on national central bank accounts (Exhibit 3). It provides funds to the euro-area banks. Counterparties meeting the general eligibility criteria may access the standing facilities and participate in open market operations based on standard tenders. For other operations, each national central bank selects a set of counterparties. Counterparties need to cover the amounts allotted to them with adequate collateral. The Eurosystem may limit or exclude the use of a debt instrument as collateral in its operations, and at the level of individual counterparties.

Exhibit 3: Eurosystem monetary policy operations

Assets Administration Transaction types Maturity Frequency Procedure

Liquidity provision Liquidity absorption

Open market operations Main refinancing operations

(Non-)marketable Decentralised Reverse transactions

- 1 week Weekly Standard tenders

Longer-term refinancing operations

(Non-)marketable Decentralised Reverse transactions

- 3 months Monthly Standard tenders

Fine-tuning operations (Non-)marketable (De-)centralised Reverse transactions

Reverse transactions

Non-standardised Non-regular Quick tenders, bilateral procedures (Non-)marketable (De-)centralised Foreign exchange

swaps

Collection of fixed-term deposits

Non-standardised Non-regular Quick tenders, bilateral procedures (De-)centralised - Foreign exchange

swaps

Non-standardised Non-regular Quick tenders, bilateral procedures

Structural operations (Non-)marketable Decentralised Reverse transactions

Debt certificate issuance (ECB)

(Non-)standardised (Non-)regular Standard tenders

Marketable Decentralised Outright purchases

Outright sales

- Non-regular Bilateral procedures

Standing facilities

Marginal lending facility (Non-)marketable Decentralised Reverse transactions

- Overnight Access at the discretion of counterparties

Deposit facility Decentralised - Deposits Overnight Access at the discretion of counterparties-

Source: European Central Bank, Eurosystem, Credit Suisse

To be accepted as collateral for Eurosystem credit operations, debt instruments must meet certain criteria, i.e., be “eligible”. The eligibility criteria are uniform across the euro area. The Eurosystem’s single framework for eligible assets (Single List) comprises two asset classes – marketable assets and non-marketable assets. While non-marketable assets are ineligible for outright transactions, marketable assets are eligible for all liquidity-providing operations. There is no pre-issuance advice about the eligibility as collateral for operations. The Eurosystem may at any time decide to remove individual debt instruments from the Single List. Debt instruments must meet the credit standards specified in the Eurosystem credit assessment framework (ECAF).

The Eurosystem assesses the eligibility of covered bank bonds other than ABS. The covered bank bond definition of the Eurosystem follows the covered bond definition as set out in UCITS1 52(4). As Exhibit 4 and Exhibit 5 show, the Eurosystem differs from Jumbo covered bank bonds (i.e., securities with an issuing volume of at least EUR 1bn, for which at least three market makers provide regular bid and ask quotes), traditional covered bank bonds, and other covered bank bonds (i.e., non UCITS 52(4)-compliant covered bonds, including structured covered bonds and multi-issuer covered bonds).

1_{Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and}

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Exhibit 4: Eligible underlying assets are allocated to one of five liquidity categories (January 2011)

Category I Category II Category III Category IV Category V

Central government debt instruments

Local & regional government debt instruments

Debt instruments issued by non-financial corporations and

other issuers

Credit institution debt instruments

(unsecured) Asset-backed securities

Debt instruments issued by

central banks Agency debt instruments Traditional covered bank bonds

Debt instruments issued by financial corporations other than

credit institutions (unsecured) Supranational debt instruments Other covered bank bonds [2]

Jumbo covered bank bonds [1]

Source: European Central Bank, Eurosystem, Credit Suisse, [1] Only debt instruments with an issuing volume of at least EUR 1bn, for which at least three market makers provide regular bid and ask quotes, fall into the asset class of Jumbo covered bank bonds and are part of Category II. [2] Non UCITS 52(4)-compliant covered bonds, including both structured covered bonds and multi-issuer covered bonds, fall into Category III.

Exhibit 5: Jumbo covered bank bonds, traditional covered bank bonds, and other covered bank bonds

Covered bonds as… …Jumbo covered bank bonds …traditional covered bank bonds …other covered bank bonds

Type of asset UCITS 52(4)-compliant covered bonds UCITS 52(4)-compliant covered bonds Non UCITS 52(4)-compliant covered bonds

Minimum credit quality Credit Quality Step 3 Credit Quality Step 3 Credit Quality Step 3

Place of issue EEA EEA EEA

Settlement procedures Debt instrument must be transferable in book-entry form. Debt instrument must be held and settled in the euro area.

Acceptable markets Debt instrument must be admitted to trading on a regulated market or traded on certain non-regulated markets.

Issuer’s place of establishment EEA or non-EEA G10 country EEA or non-EEA G10 country EEA

Guarantor’s place of establishment EEA EEA EEA

Currency of denomination Euro [1] Euro [1] Euro [1]

Source: European Central Bank, Eurosystem, Credit Suisse, [1] The Governing Council may decide to accept as eligible collateral certain non-EUR-denominated debt instruments.

Regardless of whether a marketable or non-marketable asset meets all eligibility criteria, a counterparty may not submit as collateral any debt instrument launched or guaranteed by itself, or by any other entity with which it has close links. "Close links"2 means a situation in which a counterparty is linked to the eligible debt instrument issuer, debtor, or guarantor. This constraint does not apply, for example, to close links between a counterparty and an EEA public sector entity and to bonds guaranteed by an EEA public sector entity, UCITS 52(4)-compliant bonds and securities protected by specific legal safeguards comparable to those bonds and meeting, among other factors, the following conditions.

• Issuer is a credit institution incorporated in a euro-area country;

• Issuer is subject to special public supervision designed to protect bond holders; • Issuer has a minimum credit rating of Credit Quality Step 2;

• Bonds are backed by qualifying EUR-denominated real estate loans; • Bonds are backed by loans governed by euro-area legislation; • Properties securing the real estate loans are located in the euro area; • Residential real estate loans do not have a loan-to-value exceeding 80%; • Commercial mortgage loans do not have a loan-to-value exceeding 60%; • Guarantors for real estate loans do not have close links to the issuer; • Guarantors for real estate loans are rated at least A+, A1, or AH; • Substitute collateral must not in total exceed certain thresholds;

2_{“Close links” means a situation in which a) the counterparty owns directly, or indirectly through one or more undertakings, at least}

20% of the capital of the issuer, debtor or guarantor; or b) the issuer, debtor or guarantor owns directly, or indirectly through one or more undertakings, at least 20% of the capital of the counterparty; or c) a third party owns more than 20% of the capital of the counterparty and the issuer, debtor or guarantor, either directly or indirectly, through one or more undertakings.

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• Minimum mandatory over-collateralisation is 8%3

or 10%4; and • Bonds meet all criteria applying to ABS.

Exhibit 6: Covered bond products’ compliance with UCITS 52(4)

Country Product UCITS 52(4)-compliant

AT Fundierte Bankschuldverschreibungen & Pfandbriefe Yes

AU Special-law-based covered bonds No

CA General-law-based covered bonds No

CH General-law-based covered bonds No

CH Pfandbriefe Yes

DE Pfandbriefe Yes

DK Særligt dækkede obligationer Yes

DK Særligt dækkede realkreditobligationer Yes

ES Cédulas hipotecarias & cédulas territoriales Yes [1]

ES Multi-seller cédulas No

FI Special-law-based covered bonds Yes

FR CRH bonds Yes

FR General-law-based covered bonds No

FR Obligations de financement de l’habitat Yes

FR Obligations foncières Yes

GB General-law-based covered bonds No

GB Special-law-based covered bonds Yes

GR Special-law-based covered bonds (direct issuance) Yes

GR Special-law-based covered bonds (indirect issuance) No

HU Jelzáloglevél Yes

IE Asset covered securities Yes

IT CDP covered bonds No

IT Obbligazioni bancarie garantite Yes

LU Lettres de gage Yes

NL General-law-based covered bonds No

NL Special-law-based covered bonds Yes

NO Obligasjoner med fortrinnsrett Yes

NZ General-law-based covered bonds No

PT Obrigações hipotecárias & obrigações sobre o sector público Yes

SE Säkerställda obligationer Yes

TR İpotek Teminatlı Menkul Kıymetler No

US General-law-based covered bonds No

Source: European Commission, Credit Suisse, [1] Listed cédulas.

In the credit standard assessment, the Eurosystem takes into account information from credit rating agencies, central banks’ in-house credit assessment systems (operated by the Austrian, French, German, and Spanish central bank), third-party providers’ rating tools or counterparties’ internal ratings-based systems. A security has to have a minimum credit rating of BBB- by Fitch or S&P, or Baa3 by Moody’s, or BBBL by DBRS to comply with the Eurosystem credit standards. Subject to regular review, the Eurosystem considers a probability of default over a one-year horizon of 0.4% as equivalent to a credit assessment of Credit Quality Step 3. The Eurosystem reserves the right to determine whether a debt instrument, issuer, debtor, or guarantor complies with its credit standards. Risk control measures are applied to the assets underlying Eurosystem credit operations to protect the Eurosystem from the risk of financial loss if those assets need to be realised on account of counterparty default. The risk control measures used by the Eurosystem are valuation haircuts, variation margins (marketing to market), limits to the use of unsecured

3_{In the case of residential real estate loan-backed structured covered bonds.} 4_{In the case of commercial mortgage loan-backed structured covered bonds.}

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bank debt5, initial margins, exposure limits, supplementary haircuts, additional guarantees from financially sound entities to accept certain assets, and/or exclusion of certain assets and/or counterparties. Valuation haircuts are applied in liquidity-providing operations, but not in liquidity-absorbing operations.

Exhibit 7: Valuation haircuts applied to eligible underlying assets (in %, Credit Quality Step 1 and 2)

Category I Category II [1] Category III [1] Category IV [1] Category V [1]

Residual term (years) Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon

0-1 0.5 0.5 1.0 1.0 1.5 1.5 6.5 6.5 1-3 1.5 1.5 2.5 2.5 3.0 3.0 8.5 9.0 3-5 2.5 3.0 3.5 4.0 5.0 5.5 11.0 11.5 5-7 3.0 3.5 4.5 5.0 6.5 7.5 12.5 13.5 7-10 4.0 4.5 5.5 6.5 8.5 9.5 14.0 15.5 >10 5.5 8.5 7.5 12.0 11.0 16.5 17.0 22.5 16.0

Source: European Central Bank, Eurosystem, Credit Suisse, [1] ABS, covered bank bonds and uncovered bank bonds that are given a theoretical value are subject to a 5% haircut add-on.

Exhibit 8: Valuation haircuts applied to eligible underlying assets (in %, Credit Quality Step 3)

Category I Category II [1] Category III [1] Category IV [1] Category V [1]

Residual term (years) Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon Fixed coupon Zero coupon

0-1 5.5 5.5 6.0 6.0 8.0 8.0 15.0 15.0 1-3 6.5 6.5 10.5 11.5 18.0 19.5 27.5 29.5 3-5 7.5 8.0 15.5 17.0 25.5 28.0 36.5 39.5 5-7 8.0 8.5 18.0 20.5 28.0 31.5 38.5 43.0 7-10 9.0 9.5 19.5 22.5 29.0 33.5 39.0 44.5 >10 10.5 13.5 20.0 29.0 29.5 38.0 39.5 46.0 Not eligible

Source: European Central Bank, Eurosystem, Credit Suisse, [1] ABS, covered bank bonds and uncovered bank bonds that are given a theoretical value are subject to a 5% haircut add-on.

Counterparties have to provide eligible underlying assets with a value at least equal to the liquidity provided by the Eurosystem plus the value of the initial margin. The value of an underlying asset is calculated as the market value of the asset less a certain percentage (haircut). Eligible underlying assets are allocated to one of five distinct liquidity categories based on issuer classification and asset type (Exhibit 4). The valuation haircuts applied to securities included in Categories I to IV differ according to their residual term and coupon structure (Exhibit 7 and Exhibit 8). ABS are subject to a unique valuation haircut of 16% irrespective of the residual maturity or coupon structure.

Jumbo covered bank bonds fall into Category II. Traditional and other covered bank bonds fall into Category III. Covered bank bonds that are theoretically valued (i.e., the reference price is a theoretical price defined by the Eurosystem) are subject to a 5% haircut add-on. The valuation haircut applied to variable-rate debt instruments included in Categories I to IV is that applied to fixed-rate securities with a residual term of zero to one year in the liquidity category to which the security is assigned. Non-euro-denominated securities are subject to a haircut add-on of 8%. Eligible debt instruments issued by credit institutions and traded on an accepted non-regulated market are subject to a 5% haircut add-on. An at least 5% haircut add-on applies to all eligible debt instruments rated below single-A. The assets underlying Eurosystem credit operations are valued daily and the Eurosystem defines the most representative price source to be used for the market value calculation. The haircut-adjusted market value of the assets underlying Eurosystem credit operations needs to be maintained at a certain level over time. If, after valuation, the haircut-adjusted market value of the underlying assets falls below the required level, the respective national central bank makes a margin call and the counterparty has to provide additional assets or cash. If, following revaluation, the haircut-adjusted market value of the underlying assets exceeds the required level, the counterparty can retrieve the excess assets or cash.

5_{The Eurosystem limits the use of unsecured debt instruments issued by a credit institution or by an entity with which it has close}

links. These securities may only be used as collateral to the extent that the value assigned to them by the Eurosystem after the application of haircuts does not exceed 5% of the total value of the collateral submitted by the counterparty.

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Bank of England: covered bonds treated similar to ABS

The Bank of England provides liquidity to institutions meeting the eligibility criteria set out in the Sterling Monetary Framework (SMF). There are eligibility criteria for each facility. All participation is conducted on the basis of legal agreements between the Bank of England and its counterparties. The main elements of the standard SMF are the reserves scheme, the short- and long-term Open Market Operations (OMO) and the Operational Standing Facilities (OSF).6 The SMF contains contingency measures that can be used by the Bank of England in the event of operational or financial disruption. The Bank of England may lend outside the SMF providing emergency funds as part of a support operation. Elements of the non-standard SMF are the Asset Purchase Facilities, the Discount Window Facility (DWF), the Extended Collateral Term Repo Facility and the Special Liquidity Scheme7. To protect its financial position, the Bank of England has risk controls around its lending operations and limits the collateral eligible for its lending operations. The Bank of England can alter collateral eligibility and haircuts at any time. There are different sets of collateral (Exhibit 10). The Bank of England differs from Level A “narrow collateral” (i.e., high-quality and most liquid securities, including GBP-, EUR-, USD-, CAD-denominated debt issued by the governments and central banks of Canada, France, Germany, the Netherlands, the UK and the US), Level B “wider collateral” (i.e., high-quality securities normally traded in liquid markets), Level C collateral (i.e., high-quality, illiquid securities), and Level D collateral (i.e., least-liquid, own-name debt instruments, or pools of loans). Concentration limits exist on exposures to individual issuers. Credit ratings assigned to debt instruments by credit rating agencies play a role by publicly indicating the broad credit quality standards expected by the Bank of England.

Covered bonds do not fall into Level A “narrow collateral”, but the following covered bonds fall into Level B “wider collateral”. UK, French, German and Spanish regulated covered bonds rated triple-A by two or more of Fitch, Moody's and S&P and with an issue size exceeding GBP 1bn or EUR 1bn. The underlying assets may be EEA social housing loans, public sector debt, or prime residential mortgages. The bonds’ denomination can be GBP, EUR, USD, AUD, CAD, SEK, or CHF. Covered bonds backed by assets originated by the participant entering the SMF facility or where the participant entering the SMF facility has some close financial link to the assets comprising the collateral (i.e., own-name covered bonds) are not part of Level B “wider collateral”.

Exhibit 9: Selected Bank of England monetary policy operations

Operational Standing

Lending Facility Market Operations Short-term Open [1]

Long-term Open Market Operations [4]

Discount Window Facility [2]

Extended Collateral Term Repo Facility [2]

Transaction types Reverse transactions Reverse transactions Reverse transactions Reverse transactions Reverse transactions

Eligible collateral Narrow collateral Narrow collateral Narrow / wider collateral

Narrow / wider collateral, DWF collateral securities, DWF loan collateral

Maturity Overnight 1 week 3 or 6 months 30 or 364 days [3] 30 days

Frequency Daily Weekly Monthly Daily Contingent

Source: Bank of England, Credit Suisse, [1] Currently suspended. [2] Non-standard Sterling Monetary Framework facility. [3] During the 30- or 364-day period, counterparties can repay at any time or apply to roll over transactions. [4] The Bank of England can, at its discretion, alter the scale, maturity and or frequency of these operations in response to changes in market conditions.

6_{Reserves-scheme members are currently not required to set reserves targets (i.e., average holdings of reserves over each period}

between the monthly Monetary Policy Committee decisions). The short-term Open Market Operations are currently suspended.

7_{In April 2008, the SLS was introduced by the Bank of England, enabling counterparties to swap eligible securities for UK Treasury}

Bills. The drawdown period for the SLS closed on 30 January 2009, but swaps can be outstanding for up to three years – i.e., 30 January 2012.

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Exhibit 10: Eligible collateral is allocated to one of four categories (December 2011)

Operational Standing

Lending Facility Market Operations Short-term Open [1]

Long-term Open

Market Operations Discount Window Facility [2]

Extended Collateral Term Repo Facility [2]

Level A "narrow collateral" Yes Yes Yes Yes Yes

Level B "wider collateral" No No Yes Yes Yes

Level C collateral No No No Yes Yes

Level D collateral No No No Yes Yes

Source: Bank of England, Credit Suisse, [1] Currently suspended. [2] Non-standard Sterling Monetary Framework facility.

Exhibit 11: Level B, Level C, and Level D covered bonds

Covered bonds as… Level B "wider collateral" Level C collateral Level D collateral Type of asset Regulated covered bonds Covered bonds Covered bonds

Place of establishment of the issuer GB, FR, DE, ES EEA, US EEA, US

Initial size Greater than GBP1bn or EUR1bn N/a N/a

Collateral

EEA social housing loans, public sector debt, or prime residential mortgages

EEA or US social housing loans, public sector debt, SME loans, or

commercial mortgages, or EEA residential mortgages, or certain export credit agency

guaranteed loans

EEA or US social housing loans, public sector debt, SME loans, or

commercial mortgages, or EEA residential mortgages

Minimum credit quality Triple-A Single-A Single-A

Minimum credit quality at issuance Triple-A Triple-A Triple-A

Own-name No No Yes

Currency of denomination GBP, EUR, USD, AUD, CAD, SEK, CHF GBP, EUR, USD, AUD, CAD, SEK, CHF GBP, EUR, USD, AUD, CAD, SEK, CHF

Transparency requirements Yes Yes Yes

Settlement procedures Securities must be capable of being delivered to the Bank of England via the delivery mechanisms.

Source: Bank of England, Credit Suisse

Exhibit 12: DWF fee matrix by collateral category (in %)

Percentage of sterling eligible liabilities Level A "narrow collateral" Level B "wider collateral" Level C collateral Level D collateral

0%-10% 0.50 0.75 1.25 2.00

10%-20% 0.75 1.25 2.00 3.00

20%-30% 1.00 1.75 2.75 4.00

>30% At the discretion of the Bank of England.

Eligible collateral for the DWF are the following covered bonds. EEA and US (own-name) covered bonds rated at least single-A by two or more of Fitch, Moody’s, and S&P (given that they were rated triple-A at issuance), and backed by EEA or US social housing loans, public sector debt, SME loans, or commercial mortgages, or EEA residential mortgages. EEA or US covered bonds backed by certain export credit agency guaranteed loans. The bonds’ denomination can be GBP, EUR, USD, AUD, CAD, SEK, or CHF. Unlisted bonds may be eligible. Covered bonds may be deemed ineligible if the Bank of England judges that they were launched for the express purpose of obtaining funding from the Bank of England.

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Exhibit 13: Haircuts applied to triple-A rated, fixed-rate, GBP-denominated covered bonds (in %) [1]

Residual term (years) backed by EEA social housing loans, Covered bonds public sector debt, or residential mortgages

EEA and US covered bonds backed by SME loans or

commercial mortgages

EEA and US covered bonds backed by certain export credit agency

guarantee loans 0-1 12.0 20.0 3.0 1-3 14.0 22.0 5.0 3-5 15.0 23.0 6.0 5-10 17.0 25.0 8.0 10-20 19.0 27.0 10.0 20-30 22.0 30.0 13.0 >30 24.0 32.0 15.0

Source: Bank of England, Credit Suisse, [1] Eligible covered bonds for which a market price is observed.

Exhibit 14: Haircuts applied to double-A rated, fixed-rate, GBP-denominated covered bonds (in %) [1]

guarantee loans 0-1 17.0 25.0 8.0 1-3 19.0 27.0 10.0 3-5 20.0 28.0 11.0 5-10 22.0 30.0 13.0 10-20 24.0 32.0 15.0 20-30 27.0 35.0 18.0 >30 29.0 37.0 20.0

Exhibit 15: Haircuts applied to single-A rated, fixed-rate, GBP-denominated covered bonds (in %) [1]

guarantee loans 0-1 22.0 30.0 13.0 1-3 24.0 32.0 15.0 3-5 25.0 33.0 16.0 5-10 27.0 35.0 18.0 10-20 29.0 37.0 20.0 20-30 32.0 40.0 23.0 >30 34.0 42.0 25.0

For the purpose of determining the fee for DWF drawings, eligible collateral is classed into the four collateral sets ranging from Level A to Level D (Exhibit 12). Eligible covered bonds may be part of Level B, C, or D. Third-party eligible covered bonds traded in liquid markets may fall into Level B, and those not traded in liquid markets, or which are privately placed, are part of Level C. Own-name eligible covered bonds are part of Level D. When a market becomes illiquid, Level B eligible covered bonds would move to Level C. The fee for DWF drawing depends on the type of collateral used, a participant’s total DWF drawing relative to its sterling eligible liabilities balance, and the level of DWF usage. Exhibit 12 shows the latest DWF fee matrix. Gilts borrowed in the DWF may be used as collateral for the OMO. The Bank of England revalues collateral daily using estimated or observed market prices. When calculating the value of collateral, haircuts are applied. The adjusted collateral value equals the collateral value x (100% – haircut (in %)). The Bank of England calls for margin if this value has fallen below the required level. Haircuts for eligible covered bonds differ according to the place of establishment of the issuer, the underlying collateral type, their coupon structure and residual term (Exhibits 13 to 15). The haircut applied to variable-rate securities is that applied to fixed-rate securities with a residual term of zero to one year in

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the category to which the security is assigned. Non-sterling eligible covered bonds are subject to a 6% haircut add-on. A 5% haircut add-on applies to own-name eligible covered bonds, eligible covered bonds without observable market prices, and those that have been downgraded from triple-A to double-A, and a 10% haircut add-on to eligible covered bonds that have been downgraded from triple-A to single-A. An additional haircut add-on may be applied to covered bonds backed by assets that warrant a higher haircut in the judgment of the Bank of England.

In March 2010, the Bank of England launched a public consultation on its initiative to require greater transparency on ABS and covered bonds as part of the eligibility criteria for debt instruments accepted in its operations. In November 2010, it published details on the eligibility requirements for RMBS and covered bonds backed by residential mortgages and their introduction. For these securities, the publication of transaction documents is required since July 2011. A standardised transaction summary and a monthly investor report8 must be released. At least quarterly, issuers need to disclose to (potential) investors and certain other market professionals loan-level data in a format set by the Bank of England. For RMBS, a (waterfall) cash flow model has to be made available. The Bank of England does not yet demand a (waterfall) cash flow model for covered bonds.

Exhibit 16: Minimum haircuts applied to triple-A rated, 1-to-3 year, fixed-rate, GBP-denominated, residential mortgage covered bonds not meeting the Bank of England’s transparency requirements (in %)

12/11 1/12 2/12 3/12 4/12 5/12 6/12 7/12 8/12 9/12 10/12 11/12

Minimum haircut (in %) 19.0 24.0 29.0 34.0 39.0 44.0 49.0 54.0 59.0 64.0 69.0 74.0

The information must be disclosed on a secure internet website. For RMBS and covered bonds backed by residential mortgages, the full criteria set applies since 1 December 2010. During the implementation period (1 December 2010 to 30 November 2011), securities not meeting the full criteria set were accepted by the Bank of England without penalty. During the transition period (1 December 2011 to 30 November 2012), securities not meeting the criteria are accepted subject to an extra 5% haircut, to be increased by a further 5% each month during the transition period. Exhibit 16 shows an example of the increasing haircuts for specific residential mortgage covered bonds. RMBS and residential mortgage covered bonds not meeting the full criteria set by 30 November 2012 will be ineligible as collateral in the Bank of England operations.

8_{The following must be included in the monthly investor reports for residential mortgage covered bonds: transaction details, asset}

details (i.e., portfolio characteristics, performance ratios, stratification tables, and the results of the asset coverage test), structure and liabilities details, and a glossary of all definitions used in the report.

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Federal Reserve: ineligibility of foreign covered bonds

The Federal Reserve conducts Open Market Operations, imposes reserve requirements, permits depository institutions to hold contractual clearing balances, and provides liquidity through the securities portfolio and repurchase agreements, the Discount Window Facility, and Autonomous Factors. Since the start of the crisis, the Federal Reserve has introduced large-scale asset purchase programmes and a maturity extension programme. The Federal Reserve Bank of New York conducts the Open Market Operations for the Federal Reserve with primary dealers. The Federal Reserve Banks provide liquidity to qualifying institutions through the Discount Window.

Exhibit 17: Selected monetary policy operations of the Federal Reserve

Transaction types Maturity Frequency

Liquidity provision Liquidity absorption - -

Open Market Operations

Short-term operations Repurchase agreements Reverse repurchase agreements < 14 business days Daily

Long-term operations Repurchase agreements Reverse repurchase agreements 14 - 65 business days Weekly

Structural operations Outright purchases Outright sales Non-standardised Non-regular

Discount Window Facility

Primary credit Repurchase agreements Very short-term basis (up to a few weeks) Daily

Secondary credit Repurchase agreements Very short-term basis (up to 60 days) Daily

Seasonal credit Repurchase agreements Non-standardised Daily

Autonomous Factors

Source: Federal Reserve, Credit Suisse

The Federal Reserve accepts securities, such as US Treasury securities, federal agency debt securities, and MBS guaranteed by federal agencies, as collateral for its Open Market Operations, but not covered bonds. Discount Window loans need to be secured by eligible debt instruments. The Federal Reserve Banks must be able to establish a legal right in the event of counterparty default to be first in line to take possession of and, if needed, sell the collateral securing the Discount Window loans – i.e., the Federal Reserve Banks require a perfected, first priority security interest in the collateral. Securities pledged to the Federal Reserve are used for Discount Window and payment system risk purposes.

Although the Federal Reserve Banks accept a wide range of debt instruments as collateral for the Discount Window, they do not accept debt instruments of the pledging institution or its affiliates, or otherwise correlated with the financial condition of the pledging institution – i.e., own-name debt instruments are not accepted as collateral. Securities need to be rated at least triple-B. If more than one credit rating is available, the lowest one will determine whether the credit quality standards are met. There is no explicit requirement regarding the number of credit ratings needed. Foreign-currency-denominated debt instruments are accepted. Eligible currencies are AUD, CAD, CHF, DKK, EUR, GBP, JPY, SEK, and USD. The following covered bonds are eligible as collateral for the Discount Window. US-issued covered bonds with a minimum credit rating of triple-B, and triple-A rated German Jumbo Pfandbriefe – i.e., special-law-based covered bonds with a minimum volume of EUR 1bn, a fixed coupon, bullet redemption, and supported by the commitment of at least five traders to quote prices. The minimum credit quality requirement for US-issued covered bonds and for German Jumbo Pfandbriefe differs. Although the Federal Reserve Banks accept senior unsecured debt of foreign banks, they do not accept covered bonds of those banks (except German Jumbo Pfandbriefe). US-issued covered bonds must be pledged via DTC, and German Jumbo Pfandbriefe via Clearstream or Euroclear.

The Federal Reserve Banks assign a lendable value to a security accepted as collateral. Collateral is regularly revalued using external vendors’ prices or internally modeled prices. When calculating the value of collateral, margins are applied. Margins are based on risk characteristics of the collateral, the lowest external credit rating assigned to the collateral,

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the expected volatility of the price of the collateral over an estimated liquidation time frame, the currency of denomination of the collateral, and the financial condition of the pledging institution. Margins differ across asset types and residual maturities. The lendable value of collateral equals the collateral value multiplied by the margin.

Exhibit 18: Discount Window & payment system risk collateral margins for selected collateral categories [1]

Margins [3]

Duration Buckets

Collateral Category [2] 0-5 >5-10 >10

US Treasuries & Fully Guaranteed Agencies

Bills, notes, bonds, inflation indexed 99% 97% 96%

Zero coupon, STRIPs [4] 98% 96% 92%

Government Sponsored Enterprises

Bills, notes, bonds 98% 96% 95%

Zero coupon 97% 95% 91%

Supranationals

Bills, notes, bonds – USD-denominated 98% 96% 95%

Bills, notes, bonds – triple-A rated & non-USD-denominated [5] 92% 90% 89%

Zero coupon 97% 95% 91%

Corporate Bonds

Triple-A rated & USD-denominated 97% 95% 94% Double-A to triple-B rated & USD-denominated 95% 93% 92%

Triple-A rated & non-USD-denominated [5] 91% 89% 88%

Covered Bonds

Triple-A rated & US-issued 97% 95% 94% Double-A to triple-B rated & US-issued 95% 93% 92%

German Jumbo Pfandbriefe

Triple-A rated & USD-denominated 98% 96% 95%

Triple-A rated & non-USD-denominated [5] 92% 90% 89%

Asset Backed Securities

Triple-A rated 98% 95% 83%

Double-A to triple-B rated 89% 86% 82%

Source: Federal Reserve, Credit Suisse, [1] Margins are subject to change without notice and the margins schedule is not binding on the Federal Reserve System in any particular transaction. [2] Debt instruments of the pledging depository institution are ineligible as collateral. [3] Eligible debt instruments for which a third party price is unavailable are assigned an internally modeled value. The margin for the >10 duration bucket is applied to these securities. [4] Includes structured guaranteed notes of the FDIC or NCUA which do not accrue interest at a stated rate and do not make any payments prior to maturity. [5] Eligible foreign currencies are AUD, CAD, CHF, DKK, EUR, GBP, JPY, and SEK.

As Exhibit 18 shows, the margins for A rated US-issued covered bonds and for triple-B to double-A rated US-issued covered bonds differ. Lower margins – i.e., higher haircuts – apply to triple-A-rated US-issued covered bonds than to triple-A rated USD-denominated German Jumbo Pfandbriefe. The margins for GSE bills, notes, and bonds, and for triple-A rated USD-denominated German Jumbo Pfandbriefe are the same, and they are higher than the margins for US-issued covered bonds. Higher margins apply to triple-B to double-A rated US-issued covered bonds than to double-ABS with a similar credit quality. However, the margin applied to triple-A rated US-issued covered bonds with a residual term of up to five years is lower than that applied to triple-A rated ABS with a similar term-to-maturity.

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INTEREST RATE STRATEGY

Eric Miller, Managing Director

Global Head of Fixed Income and Economic Research +1 212 538 6480

[email protected]

US RATES EUROPEAN RATES US DERIVATIVES

Carl Lantz, Director US Head

+1 212 538 5081

[email protected]

Helen Haworth, CFA, Director European Head

+44 20 7888 0757

[email protected]

George Oomman, Managing Director Derivatives Head

+1 212 325 7361

[email protected] Ira Jersey, Director

+1 212 325 4674

Michelle Bradley, Director +44 20 7888 5468

[email protected] Scott Sherman, Vice President

+1 212 325 3586

[email protected]

Sabine Winkler, Director +44 20 7883 9398

[email protected] Michael Chang, Vice President

+1 212 325 1962

Panos Giannopoulos, Director +44 20 7883 6947

[email protected] Carlos Pro, Associate

+1 212 538 1863

[email protected]

Thushka Maharaj, Vice President +44 20 7883 0211

[email protected] Eric Van Nostrand, Associate

+1 212 538 6631

[email protected]

Marion Pelata, Analyst +44 20 7883 1333

[email protected]

TECHNICAL ANALYSIS

David Sneddon, Managing Director +44 20 7888 7173

[email protected] Steve Miley, Director

+44 20 7888 7172

[email protected] Christopher Hine, Vice President +1 212 538 5727

[email protected] Pamela McCloskey, Vice President +44 20 7888 7175

[email protected] Cilline Bain, Associate

+44 20 7888 7174

LOCUS ANALYTICS (US AND EUROPE)

Jennifer Drag, Director Locus Analytics Specialist +1 212 538 4303

PARIS SINGAPORE TOKYO

Giovanni Zanni, Director European Economics – Paris +33 1 70 39 0132

Jarrod Kerr, Director +65 6212 2078

Kenro Kawano, Director Japan Head

+81 3 4550 9498

[email protected] Shinji Ebihara, Vice President +81 3 4550 9619

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Disclosure Appendix

Analyst Certification

I, Sabine Winkler, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. Important Disclosures

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail, please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research:

http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse’s policy is to publish research reports as it deems appropriate, based on developments with the subject issuer, the sector or the market that may have a material impact on the research views or opinions stated herein.

The analyst(s) involved in the preparation of this research report received compensation that is based upon various factors, including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's Investment Banking and Fixed Income Divisions.

Credit Suisse may trade as principal in the securities or derivatives of the issuers that are the subject of this report. At any point in time, Credit Suisse is likely to have significant holdings in the securities mentioned in this report.

As at the date of this report, Credit Suisse acts as a market maker or liquidity provider in the debt securities of the subject issuer(s) mentioned in this report. For important disclosure information on securities recommended in this report, please visit the website at https://firesearchdisclosure.credit-suisse.com or call +1-212-538-7625. For the history of any relative value trade ideas suggested by the Fixed Income research department as well as fundamental recommendations provided by the Emerging Markets Sovereign Strategy Group over the previous 12 months, please view the document at

http://research-and-analytics.csfb.com/docpopup.asp?ctbdocid=330703_1_en. Credit Suisse clients with access to the Locus website may refer to http://www.credit-suisse.com/locus.

For the history of recommendations provided by Technical Analysis, please visit the website at http://www.credit-suisse.com/techanalysis.

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Emerging Markets Bond Recommendation Definitions

Buy: Indicates a recommended buy on our expectation that the issue will deliver a return higher than the risk-free rate. Sell: Indicates a recommended sell on our expectation that the issue will deliver a return lower than the risk-free rate. Corporate Bond Fundamental Recommendation Definitions

Buy: Indicates a recommended buy on our expectation that the issue will be a top performer in its sector.

Outperform: Indicates an above-average total return performer within its sector. Bonds in this category have stable or improving credit profiles and are undervalued, or they may be weaker credits that, we believe, are cheap relative to the sector and are expected to outperform on a total-return basis. These bonds may possess price risk in a volatile environment.

Market Perform: Indicates a bond that is expected to return average performance in its sector.

Underperform: Indicates a below-average total-return performer within its sector. Bonds in this category have weak or worsening credit trends, or they may be stable credits that, we believe, are overvalued or rich relative to the sector.

Sell: Indicates a recommended sell on the expectation that the issue will be among the poor performers in its sector.

Restricted: In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated: Credit Suisse Global Credit Research or Global Leveraged Finance Research covers the issuer but currently does not offer an investment view on the subject issue.

Not Covered: Neither Credit Suisse Global Credit Research nor Global Leveraged Finance Research covers the issuer or offers an investment view on the issuer or any securities related to it. Any communication from Research on securities or companies that Credit Suisse does not cover is factual or a reasonable, non-material deduction based on an analysis of publicly available information.

Corporate Bond Risk Category Definitions

In addition to the recommendation, each issue may have a risk category indicating that it is an appropriate holding for an "average" high yield investor, designated as Market, or that it has a higher or lower risk profile, designated as Speculative and Conservative, respectively.

Credit Suisse Credit Rating Definitions

Credit Suisse may assign rating opinions to investment-grade and crossover issuers. Ratings are based on our assessment of a company's creditworthiness and are not recommendations to buy or sell a security. The ratings scale (AAA, AA, A, BBB, BB, B) is dependent on our assessment of an issuer's ability to meet its financial commitments in a timely manner. Within each category, creditworthiness is further detailed with a scale of High, Mid, or Low – with High being the strongest sub-category rating: High AAA, Mid AAA, Low AAA – obligor's capacity to meet its financial commitments is extremely strong; High AA, Mid AA, Low AA – obligor's capacity to meet its financial commitments is very strong; High A, Mid A, Low A – obligor's capacity to meet its financial commitments is strong; High BBB, Mid BBB, Low BBB – obligor's capacity to meet its financial commitments is adequate, but adverse

economic/operating/financial circumstances are more likely to lead to a weakened capacity to meet its obligations; High BB, Mid BB, Low BB – obligations have speculative characteristics and are subject to substantial credit risk; High B, Mid B, Low B – obligor's capacity to meet its financial commitments is very weak and highly vulnerable to adverse economic, operating, and financial circumstances; HighCCC, Mid CCC, Low CCC – obligor's capacity to meet its financial commitments is extremely weak and is dependent on favorable economic, operating, and financial circumstances. Credit Suisse's rating opinions do not necessarily correlate with those of the rating agencies.

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Structured Securities, Derivatives, and Options Disclaimer

Structured securities, derivatives, and options (including OTC derivatives and options) are complex instruments that are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Supporting documentation for any claims, comparisons, recommendations, statistics or other technical data will be supplied upon request. Any trade information is preliminary and not intended as an official transaction confirmation.

OTC derivative transactions are not highly liquid investments; before entering into any such transaction you should ensure that you fully understand its potential risks and rewards and independently determine that it is appropriate for you given your objectives, experience, financial and operational resources, and other relevant circumstances. You should consult with such tax, accounting, legal or other advisors as you deem necessary to assist you in making these determinations. In discussions of OTC options and other strategies, the results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether OTC options or option-related products, as well as the products or strategies discussed herein, are suitable to their needs.

CS does not offer tax or accounting advice or act as a financial advisor or fiduciary (unless it has agreed specifically in writing to do so). Because of the importance of tax considerations to many option transactions, the investor considering options should consult with his/her tax advisor as to how taxes affect the outcome of contemplated options transactions.

Use the following link to read the Options Clearing Corporation's disclosure document: http://www.theocc.com/publications/risks/riskstoc.pdf

Transaction costs may be significant in option strategies calling for multiple purchases and sales of options, such as spreads and straddles. Commissions and transaction costs may be a factor in actual returns realized by the investor and should be taken into consideration.

Covered Bonds Insight