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ALTERNATIVE METHODS FOR RISK TRANSFERwithin a Standard Risk Management Process

10 September 2008

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Jesse O. Franklin IVPartner, K&L Gates, Seattle Office

Construction law consulting and litigationArchitectsEngineersGeneral ContractorsOwners (Public and Private)Subcontractors

General business litigationArbitration – International and DomesticCommercial Litigation

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Standard Risk Management Components

Risk Identification

Risk Assessment

Risk Mitigation

Risk Financing

Risk Review & Monitoring

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Risk Transfer Mechanisms

Non-Insurance Risk Transfer Mechanisms

Insurance Risk Transfer Mechanisms

Risk Financing Alternatives

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Non-Insurance Risk Transfer Mechanisms

Contractual Risk Transfer MechanismsAllocation by written agreementIndemnificationHold Harmless AgreementsDispute Resolution ProvisionsOthers

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R. Suzen Shaw, CRP, ARM, CRIS, CPIWSenior Risk Manager, Microsoft Worldwide Operations

30 Years Experience in Risk and Insurance Management

Risk ManagementEnterprise Risk Management

Operational Risk Management

Commercial Insurance IndustryRisk Consulting

Insurance Brokerage

Insurance Underwriting

Safety and Loss Control

Loss Adjusting

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Insurance Risk Transfer Mechanisms

Traditional Insurance/Surety ProductsPerformance BondsWorkers’ Compensation /Employers LiabilityGeneral LiabilityBuilders RiskTime Element - AKA: Business Interruption (BI)Dependent Time Element - AKA : Contingent BIPolitical Risk

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Political RisksConsequential loss arising from the arbitrary acts of a sovereign government, including:

ConfiscationExpropriationNationalizationForced abandonment and divestitureSelective discriminationEmbargo and license cancellationStrikes, Riots, and Civil CommotionWar, Political violence, and Terrorism

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Political Risks – Major UnderwritersACEAIGAtradiusChubbCofaceLondonMIGAOPICQBE

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Political Risks – Major UnderwritersACEAIGAtradiusChubbCofaceLondonMIGA - Multilateral Investment Guarantee AgencyOPICQBE

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Srilal Perera,Chief Counsel, MIGA

Extensive experience working with multilateral organizations such as the Colombo Plan, UNDP, and the World Bank.1986–1989 Legal Counsel to the President of the Iran–United States Claims Tribunal in the HagueLLBMasters in International Affairs - specialization in international law and international economics PhD - specialization in International Law and International RelationsExecutive Development Program (EDP) at the Harvard UniversityAdjunct Professor of Law, Washington College of Law of the American University, Washington D.C.

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Anthony NolanPartner, K&L Gates, New York Office

Specializes in –Structured productsDerivativesDomestic and cross-border securitization

Broad experience in synthetic risk transfersHas represented –

Issuers, underwriters, servicers, bond insurers and others in a wide variety of whole-loan sales and asset-backed securities issuances

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Risk Financing Alternatives

Credit DerivativesDocumentationSettlementUse in Hedging Risk

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ISDA: Documentation Architecture

Schedule•Makes elections and changes

to standard provisions•Incorporates credit support annex

Confirmations•Incorporate Definitions•Specify economic terms of each Transaction•Include Transaction-specific modifications•ISDA PAUG Confirmation Templates•Incorporate definitions

1992 (or 2002) Master Agreement•Governs legal and credit relationship between the parties•Includes representations, events of default/termination events, covenants•Incorporates schedule and confirmation

Credit Support Documents•1994 Credit Support Annex (New York law)•1995 Credit Support Annex (Transfer-English law) •1995 Credit Support Deed (Security Interest-English law)•1995 Credit Support Annex (Japanese law)•2001 ISDA Margin Supplement (not much used)

Definitions2003 Credit Derivatives Definitions (+ 2003 – 2006 supps)2002 Equity Derivatives Definitions2000 Definitions1998 Euro Definitions 1997 Bullion Definitions1997 Gov’t Bond Option Definitions 1993 Commodity Derivatives Definitions (+ 2000 Supp.)

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Credit Default Swaps

An agreement whereby one party pays the other a fixed periodic payment for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs:

Reference Entityor Reference Obligation

Protection Seller Protection BuyerContingent Payment upon “Credit Event”

Fixed Fee (in bps per period)

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Credit Default Swaps

Credit events for corporate/sovereign CDS:

BankruptcyFailure to Pay Obligation Default / AccelerationRestructuringRepudiation / Moratorium

Extension periodsGrace Period ExtensionRepudiation/Moratorium Extension

Restructuring options affect deliverable obligations

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•Credit Event Notice•Notice of Publicly Available Information”

<= 30 CD,subject to any

BD convention

Eur/Asia = 30BDNA <=30BD

Physical Settlement Period

NoPSPhysical

Settlement Date

SettlementFallbacks

Start

•5BD

Cut-off(Eur/Asia)

•60BD

•Seller may buy-in “Bonds”.• Buyer must certify it used reasonable efforts to obtain consents to Deliver Loans, and Buyer may Deliver alternative instruments.

Credit event must occur no later than 12:59PM GMT on Scheduled Termination Date

<= 14 CD after•Scheduled Termination Date,•Grace Period Extension Date or•Repudiation/Moratorium• Extension Date

> > > > > >

Physical Settlement Timeline

Event Determination

Date

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Event Determination

Date

>=5 BD

1st ValuationDate

Credit event must occur no later than 12:59PM GMT on

Scheduled Termination Date

>

Cash SettlementTimeline

>5 BD

betweenquotations

Nth ValuationDate

>As soon asreasonablypracticable

DetermineFinalPrice

CashSettlement

Date

>•3BD

>

•Credit Event Notice•Notice of Publicly Available Information”

<= 14 CD after•Scheduled Termination Date,•Grace Period Extension Date or•Repudiation/Moratorium Extension Date

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Q & A