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When Broker-Dealers Go Bust - The Humpty Dumpty Cheat Sheet

Lessons learned putting Lehman Brothers back together again
by

Acuity Derivatives

on 25 January 2013

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Transcript of When Broker-Dealers Go Bust - The Humpty Dumpty Cheat Sheet

Tips... When Broker-Dealers go bust! (cc) photo by Metro Centric on Flickr (cc) photo by Franco Folini on Flickr (cc) photo by jimmyharris on Flickr (cc) photo by Metro Centric on Flickr Music Stops... Cash Freezes in place... Armageddon The most able... Leaving... Trades Systems So... identify and retain
*key MO staff for each Trading business identify and retain
*key technology staff
for each Trade booking
system, EOD market data
or securities master app identify and retain
*key Quants and Traders
for each asset class,
model group and trading
book combination Negotiate licenses or/and
TSAs (Technology Service
Agreements) to cover
x 2* of the time it would
typically take the team to migrate a system of that size and complexity Set up Pre-Pricing Environment Finished? Set up Counterparty Claims workflow Valuation Data Migration & Trade Analysis * x 2 as a flexible multiplier to compensate for compressed and more random migration timelines ** Traders who typically face off with the bookrunners and IT are more likely to be of the most value to the process Analyze & Classify Trades Confirms Migrate Trade Economic data Survey legacy Trade Booking & Pricing Systems Migrate Trade & Counterparty Identifiers, Trade mappings and status @ armageddon Analyze & Classify EOD Pricing models Tip..
OCR software and transcribing services like eClerx to turn hard copy confirms electronic will save the estate $ in fees Augment Trade Details data from confirms (key-value store) Augment Trade/ Counterparty Identifiers, mapping and statuses from confirms Test: Generate confirms and diff to original Survey legacy cash management systems Migrate Expected Cash & Realized Cash @ armageddon Augment Counterparty Identifiers from receipts Survey EOD MTM & Risk systems Migrate EOD MTM & Sensitivities and Market Data Migrate Collateral Positions and data Tip..
Snapshot both last good EOD and last good EOM (and days either side of) Trade Details data (*key ≠ most senior**) *key = they built it or are last level support *key Bookrunners, Cash Management personnel, Finance etc Trade data Cash MTMs, Sensitivities & Market Data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Market and Reference Data Sources Consistency Test Market Data Pricing Policies Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Market and Reference Data Sources Build, Buy or bring back online Valuation Systems Pricing Policies Build a curve marking capability for illiquid market data Determine Market and Reference Data gaps Review settlement claims received & determine likely range of valuation dates Establish Pricing Policies* Define Market Data strategy Pricing Policies & Market data *Each Combination of Trade type in the Trade Classifications requires a Pricing Policy

A Pricing Policy will establish what model to use, what method (numerical, Monte Carlo etc), what market data is required for calibration, for pricing, what market data snapshot frequency and what reference data is needed Tip...
Only with Pricing policies established and valuation dates (at least partly) agreed should a market data strategy be defined License market data sources

Buy/Build marking capability for illiquid market data Operational Environment Operational Environment Operational Environment MID Estate Valuations Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Reconcile Valuations with pre-bankruptcy MTMs Pricing Policies Operational Environment MID Estate Valuations Exception Trades Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Build or Buy Netting Engine Pricing Policies Operational Environment MID Estate Valuations Exception Trades Netted Trades Bid-Offer Spreads Net Trades
Calculate Bid-Offer on Netted Trades Match* Counterparty Trades Value Trades Netting Reconcile Valuations against last good MTMs Build or Buy Valuation system(s) Value Trades on Valuation dates (Counterparty unwind dates) Review and fix exception trades Tip..
Net on first order sensitivities where possible Build or Buy a Netting Engine Develop Netting Policies Net Trades as per policy Buy or Build Cash Reconciliations system Track Cash receipts Reconciile Realized Cash against Expected Cash Value Trades Reconcile Cash Counterparty Settlement Consistency Test Claims Pick examples of material (and evil) egregious claims Develop Settlement Workflow* Negotiate & Settle Build a data warehouse of valuations and market data* Data Mining* Revalue inconsistent Estate valuations Settlement Workflow probably not...many more legal fees to go Operational Environment value @ last good EOD and @ last good EOM - MTM and Sensitivities Calculate aggregate Bid-Offer spreads on Netted Trades Generate Expected Cash Reports Generate Expected Cash Reports Encourage submission of counterparty market data Scrub and capture ALL trade details and market data fields included in submission Define & publish Claims submission Template* One submission workflow, segmented Counterparties Claims Submissions *Include standard definitions for instrument identifiers, market data identifiers and formats

Specify required trade fields for all trade submissions e.g. trade date, notional, ccy etc Tip...
Use OCR software and transcription services.

Do NOT cut corners here. Scrub & capture everything submitted Break out largest 10 or 15 counterparties and focus on capturing every minutae of those claims Tip...
Beware the law of precedents.

collateral estoppel
n. the situation in which a judgment in one case prevents (estops) a party to that suit from trying to litigate the issue in another legal action. In effect, once decided, the parties are permanently bound by that ruling. *Develop a settlement strategy for ALL claims *Build or Buy a Matching Engine *Estate's and Counterparties' *Look for:
Pricing inconsistencies
Stale or inconsistent Market Data
Non-random claims patterns Identify egregious claims ...and unleash the Balrogs in bankruptcy court Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Trade Matching Engine Pricing Policies Operational Environment Estate MID Valuations Exception Trades Netted Trades Bid-Offer Spreads Claims Workflow Counterparty Trade details Counterparty Market Data Counterparty Valuations Counterparty Claims Matched Trades Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Data Mining Engine Pricing Policies Operational Environment MID Estate Valuations Exception Trades Netted Trades Bid-Offer Spreads Claims Workflow Counterparty Trade details Counterparty Market Data Counterparty Valuations Counterparty Claims Matched Trades Valuation & Market Data Warehouse Exception Claims Trade Details data Trade to Model mapping data Model classifications data Counterparty Identifiers data Trade Confirms pdfs Trade classifications data Trade Identifiers, status & linkages data Expected Cash data Realized Cash data EOD MTM & EOD Risk data EOD Market data EOD Ref data Counterparty hierarchy & Client (CSA) data Collateral Trades & MTM data Report Engine Pricing Policies Operational Environment MID Estate Valuations Exception Trades Netted Trades Bid-Offer Spreads Counterparty Trade details Counterparty Market Data Counterparty Valuations Counterparty Claims Matched Trades Valuation & Market Data Warehouse Exception Claims Settlement Workflow Settled Claims Settled Claims Data Migration from Estate Legacy Systems Trade Analysis & Classification To Dos © 2011 Acuity Derivatives http://acuityderivatives.com
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