Discussion Paper
Deutsche Bundesbank
No 16/2017
CDS and credit:
Testing the small bang theory
of the financial universe with micro data
Yalin Gündüz
Steven Ongena
(Deutsche Bundesbank)
(University of Zurich,
Swiss Finance Institute,
KU Leuven and CEPR)
Günseli Tümer-Alkan
Yuejuan Yu
(VU Amsterdam)
(Shandong University)
Discussion Papers represent the authors‘ personal opinions and do not
necessarily reflect the views of the Deutsche Bundesbank or its staff.
Editorial Board:
Daniel Foos
Thomas Kick
Malte Knüppel
Jochen Mankart
Christoph Memmel
Panagiota Tzamourani
Deutsche Bundesbank, Wilhelm-Epstein-Straße 14, 60431 Frankfurt am Main,
Postfach 10 06 02, 60006 Frankfurt am Main
Tel +49 69 9566-0
Please address all orders in writing to: Deutsche Bundesbank,
Press and Public Relations Division, at the above address or via fax +49 69 9566-3077
Internet http://www.bundesbank.de
Reproduction permitted only if source is stated.
ISBN 978–3–95729–368–8 (Printversion)
ISBN 978–3–95729–369–5 (Internetversion)
Non-technical summary
Research Question
In this paper, we investigate the link between credit default swap (CDS) trading,
hedging and subsequent granting of new credit around the “Small Bang” event, which
brought a higher degree of standardization in the CDS market from 2009 on. We are
particularly interested in whether the default risk and existing bank-firm exposures
before this event determine changes in CDS hedging on those firms by banks, and
whether changes in bank-firm CDS positions consequently led to changes in bank-firm
credit exposures.
Contribution
Previous studies use CDS trading data aggregated at the reference firm level. This is the
first paper to couple bank-firm CDS trading information to bank-firm level credit
exposures - first, to uniquely identify the effect of bank-firm exposures on banks’
trading of the CDS on the respective borrowing firms, and second, to examine how
exogenously caused changes in bank-firm level CDS trading affect the bank-firm level
supply of new credit.
Results
We find that the riskier the firm and the higher the existing credit exposure, the more
protection a bank will purchase on that particular firm, with a possible intention of
hedging its credit exposure. Moreover, an increase in the CDS position leads to a
relatively higher allocation of credit to safer firms after the Small Bang. However, if
protection purchasing before the Small Bang was exclusively for hedging purposes,
banks increase their credit exposure to riskier firms.
Our results imply that following the Small Bang more hedging through CDS and
subsequent safer lending took place, we provide first-hand evidence on the benefits of
financial innovation for risk mitigation. Hence policies that foster financial innovation
and spur the usage of credit default swaps are not necessarily associated with more
moral hazardous bank risk-taking, but rather with more risk mitigation.
Nichttechnische Zusammenfassung
Fragestellung
Im vorliegenden Beitrag wird der Zusammenhang zwischen CDS-Handel, Hedging
über CDS und der daraus resultierenden Gewährung neuer Kredite rund um das „ Small
Bang“ Ereignis, welches ab 2008 zu einem höheren Standardisierungsgrad auf dem
CDS-Markt führte, untersucht. Besonderes Interesse gilt dabei den folgenden Fragen:
Sind das Ausfallrisiko und die bestehenden Risikopositionen zwischen Banken und
Unternehmen vor diesem Ereignis für Veränderungen bei der CDS-Absicherung der
Banken gegenüber diesen Unternehmen maßgeblich? Führten Veränderungen der CDSPositionen zwischen Banken und Unternehmen in der Folge auch zu Veränderungen der
entsprechenden Kreditengagements?
Forschungsbeitrag
In früheren Studien wurden auf Ebene der Referenzunternehmen aggregierte Daten zum
CDS-Handel verwendet. In diesem Beitrag werden erstmals Informationen über den
CDS-Handel zwischen Banken und Unternehmen mit den entsprechenden
Kreditengagements verknüpft - erstens, um die Auswirkungen der Risikopositionen im
Zusammenhang mit dem CDS-Handel der Banken auf die jeweiligen kreditnehmenden
Firmen zu bestimmen und zweitens, um zu untersuchen, inwiefern exogen
hervorgerufene Veränderungen beim CDS-Handel zwischen Banken und Unternehmen
die Neukreditvergabe beeinflussen.
Ergebnisse
Es wird festgestellt, dass eine Bank in der möglichen Absicht, ihr Kreditengagement
abzusichern, umso mehr Schutz erwerben wird, je risikobehafteter das betreffende
Unternehmen und je höher die bestehenden Risikopositionen sind. Darüber hinaus führt
eine Aufstockung der CDS-Position im Zuge des Small Bang zu einer vergleichsweise
höheren Kreditgewährung an sicherere Unternehmen. Erfolgte der Erwerb der
Absicherung vor dem Small Bang jedoch ausschließlich zu Hedging-Zwecken, erhöhen
die Banken ihr Kreditengagement gegenüber stärker risikobehafteten Unternehmen.
Die Ergebnisse legen den Schluss nahe, dass das Hedging über CDS nach dem Small
Bang verstärkt und die Kreditvergabe dadurch sicherer wurde; somit gibt es direkte
Hinweise auf die Vorteile von Finanzinnovationen für die Risikominderung. Daher sind
Maßnahmen, die Finanzinnovationen und die Nutzung von CDS fördern, nicht
unbedingt mit einem höheren Moral-Hazard-Risiko der Banken verbunden, sondern
sorgen eher für eine stärkere Begrenzung der Risiken.
%81'(6%$1.',6&866,213$3(51216
&'6DQG&UHGLW
7HVWLQJWKH6PDOO%DQJ7KHRU\RIWKH)LQDQFLDO8QLYHUVHZLWK
0LFUR'DWD
<DOLQ*QG]
6WHYHQ2QJHQD
Deutsche Bundesbank
University of ZurichSwiss Finance
InstituteKU LeuvenDQGCEPR
*QVHOL7PHU$ONDQ
<XHMXDQ<X
VU Amsterdam
Shandong University
$EVWUDFW
'RHVKHGJLQJPRWLYDWH&'6WUDGLQJDQGGRHVWKDWDIIHFWWKHDYDLODELOLW\RIFUHGLW"7R
DQVZHU WKHVH TXHVWLRQV ZH FRXSOH FRPSUHKHQVLYH EDQNILUP OHYHO &'6 WUDGLQJ GDWD
IURP WKH 'HSRVLWRU\ 7UXVW DQG &OHDULQJ &RUSRUDWLRQ ZLWK WKH *HUPDQ FUHGLW UHJLVWHU
FRQWDLQLQJELODWHUDOEDQNILUPFUHGLWH[SRVXUHV:HILQGWKDWIROORZLQJWKH6PDOO%DQJ
LQ WKH (XURSHDQ &'6 PDUNHW H[WDQW FUHGLW UHODWLRQVKLSV ZLWK ULVNLHU ILUPV LQFUHDVH
EDQNV¶ &'6 WUDGLQJ DQG KHGJLQJ RI WKHVH ILUPV 3URSHUO\ KHGJHG EDQNV KROGLQJ PRUH
&'6FRQWUDFWVRIULVNLHUILUPVVXSSO\UHODWLYHO\PRUHFUHGLWWRWKHVHILUPV2XUUHVXOWV
DUHRYHUDOOVWURQJHUIRUILUP&'6VH[SHULHQFLQJODUJHULPSURYHPHQWVLQOLTXLGLW\
.H\ZRUGV &UHGLW GHIDXOW VZDSV FUHGLW H[SRVXUH KHGJLQJ EDQN OHQGLQJ 'HSRVLWRU\
7UXVWDQG&OHDULQJ&RUSRUDWLRQ'7&&
-(/&ODVVLILFDWLRQ*
&RUUHVSRQGLQJDXWKRU:LOKHOP(SVWHLQ6WUDVVH')UDQNIXUWDP0DLQ*HUPDQ\7HOHSKRQH
)D[ (PDLO \DOLQJXQGX]#EXQGHVEDQNGH :H WKDQN 0DUNXV
%UXQQHUPHLHU :ROIJDQJ %KOHU ,UHP 'HPLUFL (WLHQQH )DUYDTXH 'DQLHO )RRV WKH HGLWRU $QGUDV
)XORS ,PDQ YRQ /HO\YHOG $QGUH /XFDV &KULVWRSK 0HPPHO $OEHUW 0HQNYHOG 0DUWLQ 2HKPNH %DV
3HHWHUV.DPLO3OLV]ND$QGUHDV5DWKJHEHU7DQVHOL6DYDVHU0DUWLQ:DJQHUSDUWLFLSDQWVDWWKH$QQXDO
0HHWLQJV RI WKH $PHULFDQ (FRQRPLF $VVRFLDWLRQ &KLFDJR WKH $PHULFDQ )LQDQFH $VVRFLDWLRQ
&KLFDJRWKH(XURSHDQ(FRQRPLF$VVRFLDWLRQ*HQHYDWKH*HUPDQ)LQDQFH$VVRFLDWLRQ/HLS]LJDQG
WKH 6ZLVV 6RFLHW\ IRU )LQDQFLDO 0DUNHW 5HVHDUFK =XULFK WKH Bundesbank &RQIHUHQFH RQ )LQDQFLDO
,QWHUPHGLDULHV DQG WKH 5HDO (FRQRP\ )UDQNIXUW WKH WK ,QWHUQDWLRQDO :RUNVKRS RI 0HWKRGV LQ
,QWHUQDWLRQDO)LQDQFH1HWZRUN2VDNDWKH1HWKHUODQGV(FRQRPLVWV'D\$PVWHUGDPDQGWKH(XURSHDQ
&HQWUDO %DQNLQJ 1HWZRUN 3ROLF\ 5HVHDUFK &RQIHUHQFH /MXEOMDQD DQG VHPLQDU SDUWLFLSDQWV DW $DUKXV
5HQPLQDQG6KDQGRQJ8QLYHUVLWLHVWKH&HQWUDO8QLYHUVLW\RI)LQDQFHDQG(FRQRPLFV(66(&DQG98
$PVWHUGDP IRU KHOSIXO FRPPHQWV 7KH SDSHU ZDV SUHYLRXVO\ FLUFXODWHG DV ³7HVWLQJ WKH 6PDOO %DQJ
7KHRU\RIWKH)LQDQFLDO8QLYHUVH´)URP%DQN)LUP([SRVXUHVWR&KDQJHVLQ&'67UDGLQJDQG&UHGLW
7KHRSLQLRQVH[SUHVVHGLQWKLVSDSHUDUHWKRVHRIWKHDXWKRUVDQGGRQRWQHFHVVDULO\UHIOHFWWKHYLHZVRI
WKHDeutsche BundesbankRUWKHLUVWDII
,QWURGXFWLRQ
³&UHGLW GHIDXOW VZDSV &'6V DUH LQVXUDQFHW\SH FRQWUDFWV WKDW RIIHU WKHLU EX\HUV
SURWHFWLRQDJDLQVWGHIDXOWE\DGHEWRU´7KHGHIDXOWULVNRIWKHRXWVWDQGLQJH[SRVXUHVVKRXOG
EH D GHWHUPLQDQW RI WKH H[WHQW WR ZKLFK ILQDQFLHUV EX\ WKLV SURWHFWLRQ WR KHGJH WKHLU FUHGLW
ULVN 7KHRU\ SUHGLFWV WKDW WKH LQWURGXFWLRQ RI WKH &'6 ZLOO LPSDFW GHEW DQG RWKHU PDUNHWV
*LYHQ LWV ORZHU WUDGLQJ FRVWV QRQUHGXQGDQW &'6V FDQ UHGXFH WKH GHPDQG IRU ERQGV DQG
LPSURYH DOORFDWLRQRU EH XVHG WR WHPSRUDULO\ WUDQVIHU FUHGLW ULVNV %XW WKH LQWURGXFWLRQ RI
&'6FDQDOVRFDXVHRWKHUPDUNHWVWREUHDNGRZQ$WWKHVDPHWLPHWKHHDVHRIKHGJLQJFRXOG
LQSULQFLSOHVSXUQHZOHQGLQJ&'6VDOORZILQDQFLHUVWKDWEX\SURWHFWLRQWRKHGJHWKHLUFUHGLW
ULVNWKHUHIRUHWKHVHILQDQFLHUVVKRXOGLQFUHDVHWKHVXSSO\RIFUHGLWWRWKHXQGHUO\LQJILUPV
,GHQWLI\LQJ DQ\ FDXVDO HIIHFW LQ WKLV UHJDUG KRZHYHU UHPDLQV WKH XOWLPDWH HPSLULFDO
FKDOOHQJH WKDW KDV QRW EHHQ IXOO\ WDFNOHG VR IDU ,Q WKLV SDSHU ZH WKHUHIRUH SURYLGH
FRPSUHKHQVLYHHPSLULFDOHYLGHQFHOLQNLQJRXWVWDQGLQJEDQNILUPFUHGLWH[SRVXUHVWRKHGJLQJ
ZLWK&'6VDQGVXEVHTXHQWJUDQWLQJRIQHZFUHGLWZLWKDOO³DFWLRQ´VTXDUHO\VLWXDWHGDWWKH
EDQNILUPOHYHO:HIXUWKHUH[SORLWWKHHIIHFWVRIWKHVRFDOOHG³6PDOO%DQJ´ZKLFKEURXJKW
FRQWUDFWDQGFRQYHQWLRQFKDQJHVWKDWIDFLOLWDWHDKLJKHUGHJUHHRIVWDQGDUGL]DWLRQLQWKH&'6
6XEUDKPDQ\DP 7DQJ DQG :DQJ op. cit. S 6HH 6WXO] $XJXVWLQ 6XEUDKPDQ\DP 7DQJ
DQG :DQJ DQG $XJXVWLQ 6XEUDKPDQ\DP 7DQJ DQG :DQJ IRU D UHYLHZ $ ODUJH HPSLULFDO
OLWHUDWXUH H[SODLQV &'6 VSUHDGV DQG WUDGLQJ YROXPH HJ (ULFVVRQ -DFREV DQG 2YLHGR *kUOHDQX
3HGHUVHQDQG3RWHVKPDQ=KDQJ=KRXDQG=KX7DQJDQG<DQ%RQJDHUWV'H-RQJDQG
'ULHVVHQ *DOLO 6KDSLU $PLUDP DQG %HQ=LRQ *HKGH7UDSS *QG] DQG 1DVHY DQG
.LHVHO.RODULFDQG6FKLHUHFNDQGWKHXVDJHRI&'6WRSRWHQWLDOO\PLWLJDWHcounterpartyHJ'XIILH
6FKHLFKHUDQG9XLOOHPH\*QG]sovereignHJ$FKDU\D*QG]DQG-RKQVRQRUí
ZKHQIDFLQJVWURQJVKDUHKROGHUVírenegotiationULVN&RORQQHOOR(IILQJDQG=XFFKL
(J2HKPNHDQG=DZDGRZVNL7KHUHDUHGHPRQVWUDEO\IHZHUIULFWLRQVLQWKH&'6PDUNHWWKDQLQWKH
ERQGPDUNHW2HKPNHDQG=DZDGRZVNL
(J'XIIHHDQG=KRXDQG3DUORXUDQG:LQWRQ
&'6VDUHVKRZQWRKDYHLPSRUWDQWH[DQWHFRPPLWPHQWEHQHILWV,Q%ROWRQDQG2HKPNHIRUH[DPSOH
&'6VUDLVHWKHGHEWRU
VSOHGJHDEOHLQFRPH DQGKHOSUHGXFHWKHLQFLGHQFHRIVWUDWHJLFGHIDXOWE\VWUHQJWKHQLQJ
FUHGLWRUV
EDUJDLQLQJ SRZHU ,Q $USLQJ &'6 LPSURYH WKH FUHGLELOLW\ RI IRUHFORVXUH WKUHDWV ZKLFK FDQ
KDYH SRVLWLYH LPSOLFDWLRQV IRU ERUURZHU LQFHQWLYHV DQG FUHGLW DYDLODELOLW\ H[ DQWH 6HH DOVR 6KDQ 7DQJ DQG
:LQWRQ
1
PDUNHW LQ 7KH 6PDOO %DQJ LPSURYHG OLTXLGLW\ )XORS DQG /HVFRXUUHW DQG
VSXUUHG PRUH WUDGLQJ RI &'6V ZH GRFXPHQW ODWHU :H LQYHVWLJDWH KRZ RXWVWDQGLQJ EDQN
ILUPH[SRVXUHVKHOSH[SODLQWKLVH[WUDWUDGLQJDQGLIDQGKRZWKLVH[RJHQRXVO\LQGXFHGH[WUD
WUDGLQJE\LQGLYLGXDOEDQNVRI&'6FRQWUDFWVRQVSHFLILFILUPVDOWHUHGWKHSURYLVLRQRIFUHGLW
E\WKHVHEDQNVWRWKHVHILUPV
&RXSOLQJ XQLTXH DQG FRPSUHKHQVLYH EDQNILUP &'6 WUDGLQJ GDWD ZLWK D FUHGLW UHJLVWHU
FRQWDLQLQJ DOO UHOHYDQW EDQNILUP FUHGLW H[SRVXUHV ZH FDQ LQYHVWLJDWH KHGJLQJ DFWLYLW\ ZLWK
&'6VbeforeduringDQGafterWKH6PDOO%DQJ:HDUHSDUWLFXODUO\LQWHUHVWHGLQZKHWKHUWKH
GHIDXOWULVNDQGRXWVWDQGLQJDPRXQWRIEDQNILUPH[SRVXUHVEHIRUHWKH6PDOO%DQJGHWHUPLQH
FKDQJHV LQ &'6 KHGJLQJ RQ WKRVH ILUPV E\ EDQNV DQG ZKHWKHU FKDQJHV LQ EDQNILUP &'6
SRVLWLRQVWKHQOHGWRFKDQJHVLQEDQNILUPFUHGLWH[SRVXUHV8VLQJDQLGHQWLILFDWLRQVWUDWHJ\
WKDWLVDSSOLHGLQWKLVOLWHUDWXUHIRUWKHILUVWWLPHRXUUHVXOWVVKRZWKDWDIWHUWKH6PDOO%DQJ
ODUJHUFUHGLWH[SRVXUHVWRULVNLHUILUPVKHOGE\EDQNVOHGWRLQFUHDVHVLQSURWHFWLRQSXUFKDVLQJ
RQ WKHVH ILUPV E\ WKHVH EDQNV :H DOVR ILQG WKDW WKH ELJJHVW HIIHFW DULVHV IRU ILUPV WKDW
EHQHILWWHG PRVW IURP WKH 6PDOO %DQJ LH ILUPV ZLWK &'6V WKDW H[SHULHQFHG WKH ODUJHVW
LPSURYHPHQWLQOLTXLGLW\%DQNVWKDWLQFUHDVHGWKHLUKROGLQJVRI&'6VWKHQDOVRUHDOORFDWHG
WKHLU FUHGLW JUDQWLQJ PDLQWDLQLQJ OHQGLQJ WR VDIHU ILUPV GHVSLWH D FRQFXUUHQW OHQGLQJ
FRQWUDFWLRQ WKDW VWDUWHG LQ *HUPDQ\ LQ 7KLV DOVR LPSOLHV WKDW EDQNV ZLWK LQFUHDVHG
KROGLQJVRI&'6VUHGXFHWKHLUH[SRVXUHWRULVNLHUILUPVZKLFKPD\VRXQGVXUSULVLQJDWILUVW
7KH6PDOO%DQJHQWDLOHGFRQWUDFWFKDQJHVUHODWHGWRUHVWUXFWXULQJDORQJVLGHVHSDUDWHFRQYHQWLRQFKDQJHVWRWKH
(XURSHDQFRUSRUDWH&'6PDUNHWDQG:HVWHUQ(XURSHDQ6RYHUHLJQ&'6WUDGHV0DUNLW7KH6PDOO%DQJ
ZDVFRQVLGHUHGWREHDQDWXUDOH[WHQVLRQRIWKH%LJ%DQJZKLFKHQWDLOHGJOREDOFRQWUDFWDQGFRQYHQWLRQFKDQJHV
LQ 1RUWK $PHULFDQ FRQWUDFWV DQG ZKLFK FDPH LQWR HIIHFW RQ $SULO 7KH LPSDFW RI WKH %LJ %DQJ KDV
UHFHQWO\ EHHQ VWXGLHG E\ 'DQLV DQG +DDV DQG 5H\QROGV 7KH\ DVVHVV WKH LOOLTXLGLW\ VSLOORYHUV
EHWZHHQ&'6DQGHTXLW\PDUNHWVDQGWKHUHVWUXFWXULQJRIGLVWUHVVHGILUPVUHVSHFWLYHO\:KLOHDVDPDUNHWZLGH
HYHQW WKH %LJ %DQJ PD\ KDYH EHHQ SDUWO\ WULJJHUHG E\ WKH /HKPDQ FROODSVH DQG LWV IDOORXW WKH ODWHU HQVXLQJ
6PDOO%DQJLVFOHDUO\PRVWO\H[RJHQRXVWRHDFKLQGLYLGXDOEDQNILUPSDLULQ*HUPDQ\WKDWZHVWXG\
2XU LGHQWLILFDWLRQ VWUDWHJ\ SUHVXPHV WKDW WKH 6PDOO %DQJ ILUVW DQG IRUHPRVW DIIHFWHG &'6 WUDGLQJ :KLOH D
FRQFXUUHQWUHFRYHU\IURPWKHILQDQFLDOFULVHVGXULQJPD\KDYHVWLPXODWHGEDQNVWRWUDGHPRUH&'6ZHDUH
PDLQO\ LQWHUHVWHG LQ WKH FKDQJHV LQ LQGLYLGXDO EDQNILUP OHYHO &'6 WUDGLQJ ZLWKLQ IDLUO\ VKRUW HYHQW ZLQGRZV
DQG ZH ZLOO FRQWURO IRU EDQN DQG ILUP IL[HG HIIHFWV VXFK WKDW DQ\ FKDQJHV LQ GHPDQG RU VXSSO\ SHUWDLQLQJ WR
HDFKLQGLYLGXDOEDQNDQGILUPZLWKLQWKHVKRUWHYHQWZLQGRZVZHVWXG\DUHDFFRXQWHGIRU,QDGGLWLRQQRWLRQDO
DPRXQWVIRUVLQJOHQDPH&'6DFWXDOO\GHFOLQHGIURPWULOOLRQGXULQJWKHILQDQFLDOFULVLVWRDERXWWULOOLRQ
LQ6RLWLVQRWWKHFDVHWKDWZLWQHVVHGDERRPLQWUDGLQJGXHWRDFULVLVUHFRYHU\
2
:H QRWH KRZHYHU WKDW WKLV LV RQO\ REVHUYHG IRU ILUPV ZLWK &'6V WKDW H[SHULHQFHG WKH
VPDOOHVWLPSURYHPHQWLQOLTXLGLW\RUDGURSLQOLTXLGLW\7KLVLVLQOLQHZLWKLQWXLWLRQRIWKH
PRGHO E\ 'XIIHH DQG =KRX ZKLFK DVVRFLDWHV FUHGLW GHULYDWLYHV ZLWK ORDQV WR KLJK
TXDOLW\ ERUURZHUV DQG ZKHUH WKH XVH RI &'6V LV VXSHULRU WR ORDQ VDOHV LI WKH DV\PPHWULF
LQIRUPDWLRQSUREOHPLVVXIILFLHQWO\VHYHUH2QWKHRWKHUKDQGEDQNVH[WHQGHGUHODWLYHO\PRUH
FUHGLW WR ULVNLHU ILUPV LI WKHLU PDLQ LQWHQWLRQ ZDV KHGJLQJ WKHLU FUHGLW H[SRVXUH ZLWK &'6V
EHIRUH WKH 6PDOO %DQJ 7KHVH HIIHFWV DUH QRW RQO\ VWDWLVWLFDOO\ VLJQLILFDQW EXW DOVR
HFRQRPLFDOO\UHOHYDQW
,Q VXP EDQNV H[SORLW WKLV ILQDQFLDO LQQRYDWLRQ WR EHWWHU PDQDJH ULVN 7KH KLJKHU WKHLU
RXWVWDQGLQJFUHGLWH[SRVXUHWRULVNLHUILUPVEHIRUHWKH6PDOO%DQJWKHPRUHWKHEDQNVKHGJH
E\ EX\LQJ &'6 RQ WKRVH ILUPV DIWHU WKH 6PDOO %DQJ +RZHYHU WKH EDQNV GR QRW VHHP WR
VLPSO\ ³DEXVH´ WKH LQQRYDWLRQ WR WDNH RQ PRUH ULVN $IWHU WKH 6PDOO %DQJ RQO\ EDQNV WKDW
ZHUHSURSHUO\KHGJHGEX\PRUHSURWHFWLRQDQGDOORFDWHUHODWLYHO\PRUHFUHGLWWRULVNLHUILUPV
:HDUHQRWWKHILUVWWRLQYHVWLJDWHWKH&'6±FUHGLWQH[XVEXWíDVIDUDVZHDUHDZDUHí
ZH DUH WKH ILUVW WR FRXSOH EDQNILUP &'6 WUDGLQJ LQIRUPDWLRQ WR EDQNILUP OHYHO FUHGLW
H[SRVXUHVWRXQLTXHO\LGHQWLI\WKHHIIHFWRIEDQNILUPH[SRVXUHVRQ&'6WUDGLQJDQGRQWKH
VXSSO\ RI QHZ FUHGLW 0RVW RI WKH SUHYLRXV VWXGLHV XVH &'6 WUDGLQJ GDWD ZKLFK DUH
DJJUHJDWHGDWUHIHUHQFHILUPOHYHOVRWKHVHVWXGLHVORRNDWWKHHIIHFWRI&'6HLWKHUIURPWKH
EDQNVLGHRUIURPWKHILUPVLGH$WWKHEDQNOHYHO1RUGHQ6LOYD%XVWRQDQG:DJQHU
IRU H[DPSOH VKRZ WKDW EDQNV ZLWK ODUJHU JURVV SRVLWLRQV LQ FUHGLW GHULYDWLYHV FKDUJH
VLJQLILFDQWO\ ORZHU FRUSRUDWH ORDQ VSUHDGV ZKLOH EDQNVʾ QHW SRVLWLRQV DUH QRW FRQVLVWHQWO\
UHODWHGWRORDQSULFLQJ6KDQ7DQJDQG<DQRQWKHRWKHUKDQGILQGWKDWEDQNVEHFRPH
PRUHDJJUHVVLYHLQULVNWDNLQJDIWHUWKH\EHJLQXVLQJFUHGLWGHULYDWLYHV/RDQVLVVXHGWR&'6
UHIHUHQFHG ERUURZHUV DUH ODUJHU DQG KDYH KLJKHU \LHOG VSUHDGV LI WKH OHDG EDQNV LQ WKH
$ VRPHZKDW UHODWHG OLWHUDWXUH LQYHVWLJDWHV WKH LPSDFW RI ORDQ VHFXULWL]DWLRQ RQ EDQN OHQGLQJ HJ /RXWVNLQD
DQG6WUDKDQ.DUD0DUTXpV,EixH]DQG2QJHQD/RXWVNLQD
3
V\QGLFDWHDUHDFWLYHLQ&'6WUDGLQJZKLOHDWWKHILUPOHYHOEDQNVDUHOHVVOLNHO\WRV\QGLFDWH
ORDQV DQG UHWDLQ D ODUJHU ORDQ IUDFWLRQ RQFH &'6 DUH DFWLYHO\ WUDGHG RQ WKH ERUURZHU¶V GHEW
6WUHLW]
)XUWKHUDWWKHILUPOHYHO$VKFUDIWDQG6DQWRVIDLOWRILQGHYLGHQFHWKDWWKHJHQHUDO
RQVHWRI&'6WUDGLQJLQWKHILQDQFLDOV\VWHPORZHUVWKHFRVWRIGHEWILQDQFLQJIRUWKHDYHUDJH
ERUURZHULQWKHLUVDPSOH\HWWKH\XQFRYHUHFRQRPLFDOO\VLJQLILFDQWDGYHUVHHIIHFWVRQULVN\
DQGLQIRUPDWLRQDOO\RSDTXHILUPVVHHDOVR.LPDQG6KDQ7DQJDQG:LQWRQ
6DUHWWRDQG7RRNHVILQGWKDWILUPVZLWKWUDGHG&'6FRQWUDFWVRQWKHLUGHEWDUHDEOHWR
PDLQWDLQKLJKHUOHYHUDJHUDWLRVDQGORQJHUGHEWPDWXULWLHV7KH\ILQGWKLVWREHHVSHFLDOO\WUXH
GXULQJ SHULRGV LQ ZKLFK FUHGLW FRQVWUDLQWV EHFRPH ELQGLQJ D ILQGLQJ ZKLFK LV FRQVLVWHQW LQ
WLPLQJ ZLWK WKH DELOLW\ WR KHGJH KHOSLQJ WR DOOHYLDWH IULFWLRQV RQ WKH VXSSO\ VLGH RI FUHGLW
PDUNHWV )LQDOO\ 6XEUDKPDQ\DP 7DQJ DQG :DQJ XVH &'6 WUDGLQJ GDWD WR
GHPRQVWUDWH WKDW WKH FUHGLW ULVN RI UHIHUHQFH ILUPV UHIOHFWHG LQ UDWLQJ GRZQJUDGHV DQG
EDQNUXSWFLHV LQFUHDVHV VLJQLILFDQWO\ XSRQ WKH LQFHSWLRQ RI &'6 WUDGLQJ DW WKH ILUP OHYHO D
ILQGLQJWKDWVHHPVUREXVWDIWHUFRQWUROOLQJIRUWKHHQGRJHQHLW\RI&'6WUDGLQJ$GGLWLRQDOO\
GLVWUHVVHGILUPVDUHPRUHOLNHO\WRILOHIRUEDQNUXSWF\LIWKH\DUHOLQNHGWR&'6WUDGLQJ
$W WKH EDQNILUP OHYHO +DVDQ DQG :X D H[DPLQH WKH UHODWLRQVKLS EHWZHHQ EDQN
&'6 XVH DQG ORDQ VDOHV LQYROYLQJ ODUJH V\QGLFDWHG FUHGLW IDFLOLWLHV 7KH\ ILQG WKDW EDQNV¶
XVDJHRI&'6KHGJLQJLVFRUUHODWHGZLWKíDQGWKHUHIRUHVHHPVWRFRPSOHPHQWíORDQVDOHV
8VLQJWKHVDPHGDWDVHW+DVDQDQG:XEH[DPLQHYDULRXVH[SODQDWLRQVUHJDUGLQJWKH
XVHRI&'6VE\EDQNVVXFKDVKHGJLQJFUHGLWHQKDQFHPHQWUHJXODWRU\FDSLWDOUHOLHIEDQNLQJ
UHODWLRQVKLSDQGSULYDWHLQIRUPDWLRQ
2YHUDOOWKHOLWHUDWXUHILQGVWKDW&'6XVDJHLQWHQVLILHVULVNWDNLQJE\EDQNVHJ6DUHWWR
DQG7RRNHV6XEUDKPDQ\DP7DQJDQG:DQJRU6KDQ7DQJDQG<DQ
7KRXJKPRVWLQVLJKWIXOLQKLJKOLJKWLQJVRPHRIWKHSRWHQWLDOFRQVHTXHQFHVRI&'6WUDGLQJDW
WKHEDQNILUPRUEDQNILUPOHYHOQRQHRIWKHVHSDSHUVH[DPLQHVKRZEDQNILUPOHYHOFUHGLW
4
H[SRVXUHVLQIOXHQFHEDQNVCWUDGLQJRIWKH&'6RQWKHUHVSHFWLYHERUURZLQJILUPVLHDVZH
GR DW WKH EDQNILUP OHYHO DQGRU PHDVXUHV KRZ H[RJHQRXVO\ FDXVHG FKDQJHV LQ EDQNILUP
OHYHO&'6WUDGLQJDIIHFWEDQNILUPOHYHOFUHGLW7KLVLVWKHPDLQFRQWULEXWLRQRIRXUSDSHU$V
RXU HVWLPDWHV LPSO\ WKDW IROORZLQJ WKH 6PDOO %DQJ PRUH KHGJLQJ WKURXJK &'6 DQG
VXEVHTXHQW VDIHU OHQGLQJ WRRN SODFH ZH SURYLGH ILUVWKDQG HYLGHQFH RQ WKH EHQHILWV RI
ILQDQFLDOLQQRYDWLRQIRUULVNPLWLJDWLRQ
7KH UHPDLQGHU RI WKH SDSHU LV RUJDQL]HG DV IROORZV ,Q 6HFWLRQ ,, ZH EULHIO\ UHYLHZ WKH
FRQWRXUVRIWKH&'6PDUNHWDQGWKH6PDOO%DQJ,Q6HFWLRQ,,,ZHGHVFULEHWKHGDWDDQGWKH
PHWKRGRORJ\:HSUHVHQWWKHPDLQHVWLPDWLRQUHVXOWVH[SODLQLQJWKHFKDQJHVLQ&'6WUDGLQJ
DQG WKH VXEVHTXHQW FKDQJHV LQ FUHGLW H[SRVXUHV LQ 6HFWLRQ ,9 IROORZHG E\ D VHULHV RI
UREXVWQHVVWHVWV6HFWLRQ9FRQFOXGHV
³%LJ%DQJ´DQG³6PDOO%DQJ´RQWKH&'60DUNHW
³On March 11, 2009 major European dealers made a commitment to European regulators
to begin clearing index and single name CDS trades through a European central clearing
party by July 31, 2009´0DUNLW8QGHUWKLVVRFDOOHG³6PDOO%DQJ´WKHFRQWUDFWDQG
FRQYHQWLRQFKDQJHVZHUHQRWH[SOLFLWO\UHTXLUHGIRUFHQWUDOFOHDULQJRI&'6WUDGHVDQ\PRUH
WKDQWKHFKDQJHVZHUHUHTXLUHGXQGHUWKHHTXLYDOHQW³%LJ%DQJ´WKDWWRRNSODFHLQWKH86RQ
$SULOEXWWKH\TXLFNO\EHFDPHDPDUNHWVWDQGDUGIRUERWKFOHDUHGDQGQRQFOHDUHG
WUDGHV $OWKRXJK FHQWUDO FRXQWHUSDUW\ FOHDULQJ RI VLQJOHQDPH &'6 KDV ILUVW EHHQ PDQGDWHG
RQO\LQE\WKH(XURSHDQ&RPPLVVLRQWKH6PDOO%DQJHYHQWIXQGDPHQWDOO\FKDQJHGWKH
UXOHVRIWKHJDPHWKURXJKWKHVHQHZWUDGLQJSURWRFROVLQ(XURSHDOUHDG\LQ
7KH (XURSHDQ &RPPLVVLRQ KDV RQO\ UHFHQWO\ PDQGDWHG WKH LPSOHPHQWDWLRQ RI FHQWUDO FOHDULQJ REOLJDWLRQ IRU
FHUWDLQVLQJOHQDPH&'6WKDWDUHGHQRPLQDWHGLQ(XURFRYHULQJVRPH(XURSHDQFRUSRUDWHVDVDVXSSOHPHQWWR
WKH (XURSHDQ 0DUNHW ,QIUDVWUXFWXUH 5HJXODWLRQ (0,5
5HJXODWLRQ (8 1R 7KLV 'HOHJDWHG
5HJXODWLRQ(8UHIHUVWRPDQGDWRU\FHQWUDOFOHDULQJRIVLQJOHQDPH&'6IRUWKHILUVWWLPHDIWHUWKH
*3LWWVEXUJK6XPPLWFRPPLWPHQWLQWRLPSURYHWUDQVSDUHQF\DQGPLWLJDWHULVNVLQ27&PDUNHWV$Q\
5
7KHFKDQJHVWRSURPRWHJUHDWHUVWDQGDUGL]DWLRQRIFRQWUDFWVZHUHH[SHFWHGWRLPSURYHWKH
DELOLW\RIFHQWUDOFOHDULQJSDUWLHVWRFRQGXFWGDLO\KHGJLQJRSHUDWLRQVDQGUHGXFHV\VWHPDWLF
FRXQWHUSDUW\ ULVN DV ZHOO DV EHQHILW WUDGH FRPSUHVVLRQ DQG SURFHVVLQJ $PRQJ VHYHUDO
FRQYHQWLRQFKDQJHVWKDWHQDEOHGIXUWKHUVWDQGDUGL]DWLRQ(XURSHDQFRUSRUDWHVVWDUWHGWRWUDGH
ZLWKIL[HGFRXSRQVSOXVDQXSIURQWIHHLQWKHPDUNHW7KLVLQHIIHFWKDVIDFLOLWDWHGDKLJKHU
IOH[LELOLW\WRGHDOHUVIRUWKHLUELODWHUDODVVLJQPHQWDQGWHUPLQDWLRQQHJRWLDWLRQVWKURXJKRXWWKH
PDWXULW\ 6HFRQG WKH LQWURGXFWLRQ RI DQ event determination committee FUHDWHG D FHQWUDO
GHFLVLRQ PDNHU WR LQGLFDWH ZKHWKHU RU QRW D FUHGLW HYHQW WRRN SODFH WR SUHYHQW GLIIHULQJ
FRQFOXVLRQV UHJDUGLQJ WKH VDPH HYHQW IURP DULVLQJ DQG DJDLQ IDFLOLWDWLQJ D KLJKHU
VWDQGDUGL]DWLRQ 7KLUG D KDUGZLUHG DXFWLRQ PHFKDQLVP ZDV H[SHFWHG WR VXSSRUW D ELQGLQJ
VHWWOHPHQW SULFH ZKHQ VXFK D FUHGLW HYHQW RFFXUUHG +HQFH WKH 6PDOO %DQJ PD\ KDYH
LPSURYHG OLTXLGLW\LQ WKH &'6 PDUNHWDVDOVRVKRZQE\WKHLOOLTXLGLW\PHDVXUHXVHGLQWKLV
SDSHUDQGGRFXPHQWHGE\)XORSDQG/HVFRXUUHWIRULQVWDQFHZKRDOVRILQGWKDWWKH
HIIHFWLVODUJHUIRUPRUHLOOLTXLGILUPV
,QVXPWKHJUHDWHUVWDQGDUGL]DWLRQZDVH[SHFWHGWROHDGWRPRUHWUDGLQJDQGWKLVLVLQGHHG
ZKDWKDSSHQHG)LJXUHYLVXDOL]HVRXUHPSOR\PHQWRIWKUHHTXDUWHUDYHUDJHVEHIRUHWKHILUVW
TXDUWHU RI 4 WKUHH TXDUWHU DYHUDJHV DIWHU WKH WKLUG TXDUWHU RI 4
DQG WKUHH TXDUWHU DYHUDJHV EHWZHHQ 4 DQG 4 7KHVH WZR TXDUWHUV LH WKH ILUVW
DQGWKLUGTXDUWHUVRIWKH\HDUFORVHO\PDWFKWKHWZRHYHQWGDWHVLH0DUFK
ZKHQ WKH (XURSHDQ GHDOHUV PDGH WKH FRPPLWPHQW WR VWDUW WKH FKDQJHV WKDW IDFLOLWDWH FHQWUDO
FOHDULQJDQG-XO\ZKHQWKH6PDOO%DQJFDPHLQWRHIIHFW:HUHIHUWRWKHVHSHULRGV
DV³3UH´LH4WR4³3RVW´LH4WR4DQG³0LG´LH4
WR4UHVSHFWLYHO\:HDUHDZDUHWKDWWKHGDWHZKHQWKHFKDQJHVWKDWZHUHSDUWRIWKH
6PDOO%DQJFRPHLQWRHIIHFWPD\EHGHDOHUVSHFLILFHJVRPHGHDOHUVPD\FKRRVHWRDGKHUH
PDQGDWH RQ FHQWUDO FOHDULQJ RI VLQJOHQDPH &'6 KDV QRW EHHQ UHJXODWHG WR GDWH LQ WKH 86 WKURXJK WKH 'RGG
)UDQN$FW
6
)LJXUH
7LPHOLQHRI6PDOO%DQJLQ(XURSHDQ&'6PDUNHW
6PDOO%DQJ
0DUFK
&RPPLWPHQW
4
Before
4
4
4
3UH
-XO\
,PSOHPHQWDWLRQ
4
0LG
Bank-Firm Exposure at end-2008Q1
Firm CDS Price at end-2008M3
7
4
4
4
3RVW
4
WRWKRVHQHZSURWRFROVHDUOLHUDURXQG$SULOZKLOHRWKHUVKDGWKHLUFKDQJHVODWHULQ-XO\DQG
WKHVDPHPD\EHWUXHIRUWKHUHVXOWDQWFKDQJHVLQ&'6WUDGLQJDQGKHGJLQJDFWLYLWLHVE\WKH
EDQNV 7KXV ZH GR QRW FRQILQH RXU VWXG\ WR D VKRUW SHULRG DURXQG WKH DQQRXQFHPHQW DQG
LPSOHPHQWDWLRQGDWHVEXWUDWKHUH[WHQGRXUDVVHVVPHQWSHULRGDQGFRPSDUHWKHDYHUDJH&'6
KROGLQJVRIWZRWKUHHTXDUWHUSHULRGVLHWKHGLIIHUHQFHLQ&'6SRVLWLRQVEHWZHHQ³3UH´DQG
³3RVW´,QWKLVZD\ZHDUHDEOHWRLGHQWLI\WKHPRUHVWDEOHDQGSHUPDQHQWHIIHFWRIWKH6PDOO
%DQJZLWKRXWEHLQJLQIOXHQFHGE\VKRUWWHUPIOXFWXDWLRQVRI&'6WUDGLQJ
$V )LJXUH YLYLGO\ LOOXVWUDWHV DQG DV VWDWLVWLFDOO\ VKRZQ LQ 3DQHO $ 7DEOH WKH 6PDOO
%DQJERRVWHG&'6WUDGLQJ:KHQZHFRPSDUHWKHWKUHHTXDUWHUDYHUDJHQRWLRQDODPRXQWRI
&'6 FRQWUDFWV RI RXU VDPSOH EDQNV EHIRUH WKH 6PDOO %DQJ ³3UH´ ZLWK WKH YDOXH DIWHU WKH
6PDOO%DQJ³3RVW´ZHILQGWKDWWKHJURVVQRWLRQDODPRXQWWKHVXPRIEX\LQJDQGVHOOLQJ
GLYLGHG E\ WZR IRU VFDOLQJ SXUSRVHV ZH DOZD\V GLYLGH WKH JURVV DPRXQW E\ WZR LQFUHDVHG
IURP 0LOOLRQ ¼ WR 0LOOLRQ ¼ $Q LQFUHDVH RI 0LOOLRQ ¼ WKDW LV VWDWLVWLFDOO\
VLJQLILFDQW DW WKH SHUFHQW OHYHO 6LPLODUO\ WKHLU DYHUDJH QHW &'6 SRVLWLRQ LQFUHDVHG
VLJQLILFDQWO\IURP0LOOLRQ¼WR0LOOLRQ¼
(YHQPRUHLPSRUWDQWIRURXUSXUSRVHVLVWKHREVHUYDWLRQWKDWWKHDYHUDJHQXPEHURIEDQNV
LQRXUVDPSOHZLWK&'6SRVLWLRQVLQFUHDVHGIURPWRWKHDYHUDJHQXPEHURIILUPVRQ
ZKLFKD&'6FRQWUDFWLVWUDGHGIURPWRDQGWKHDYHUDJHQXPEHURIEDQNILUPSDLUV
ZLWK&'6SRVLWLRQVIURPWR)LQDOO\WKHLOOLTXLGLW\RIDEHQFKPDUN\HDU6HQLRU
&'6 RI WKH VDPSOH ILUPV FRPPRQO\ PHDVXUHG YLD D UHODWLYH ELGDVN VSUHDG DV (AskBid)/((Ask+Bid)/2)DOVRVLJQLILFDQWO\GHFUHDVHV
,W WXUQV RXW WKDW EDQN OHQGLQJ RYHUDOO DFWXDOO\ FRQWUDFWHG GXULQJ WKH VWXGLHG SHULRG IRU
H[DPSOH WKH DYHUDJH RQ EDODQFH VKHHW EDQNILUP FUHGLW H[SRVXUHV FRQWUDFWHG IURP WR
0LOOLRQ ¼ <HW &'6 WUDGLQJ PD\ KDYH VXEVWDQWLDOO\ DUUHVWHG WKLV FRQWUDFWLRQ IRU VRPH
:HQRWHKHUHWKDW7DEOH3DQHO$SUHVHQWVWKHWKUHHTXDUWHUDYHUDJHVRI³3UH´DQG³3RVW´SHULRGVZKLFKDOVR
LQFOXGH DQ\ QRQWUDGLQJ DFWLYLW\ 2Q WKH RWKHU KDQG )LJXUH SURYLGHV D WLPH VHULHV RI WKH FURVVVHFWLRQDO
DYHUDJHVRIEDQNILUPSDLUVWKDWDUHDFWLYHLQWKH&'6PDUNHW
8
WŽƐƚͲ
WƌĞͲ
EŽƚŝŽŶĂůŵŽƵŶƚŽĨ&ŝƌŵ^ŽŶƚƌĂĐƚƐ,ĞůĚďLJĂŶŬƐ;ŵŝůůŝŽŶΦͿ ;'ƌŽƐƐͿ
ϮϱϬ
ϮϰϬ
ϮϯϬ
ϮϮϬ
ϮϭϬ
ϮϬϬ
ϭϵϬ
EŽƚŝŽŶĂůŵŽƵŶƚŽĨ&ŝƌŵ^ŽŶƚƌĂĐƚƐ,ĞůĚďLJĂŶŬƐ;ŵŝůůŝŽŶΦͿ;EĞƚͿ
ϮϬ
ϭϱ
ϭϬ
ϱ
Ϭ
Ͳϱ
ͲϭϬ
EƵŵďĞƌŽĨĂŶŬͲ&ŝƌŵWĂŝƌƐ
ϭϭϱϬ
ϭϭϬϬ
ϭϬϱϬ
ϭϬϬϬ
ϵϱϬ
ϵϬϬ
)LJXUH
&'6WUDGLQJEHIRUHDQGDIWHUWKH6PDOO%DQJLQ(XURSH
7KH ILJXUH SUHVHQWV WKH 1RWLRQDO $PRXQW RI )LUP &'6 &RQWUDFWV +HOG E\ %DQNV ERWK LQ JURVV DQG QHW YDOXHV DQG WKH QXPEHU RI EDQNILUP SDLUV
LQYROYHG LQ &'6 WUDGLQJ EHIRUH DQG DIWHU WKH 6PDOO %DQJ 3UH UHIHUV WR WKH SHULRG EHIRUH -DQXDU\ DQG ³3RVW´ UHIHUV WR WKH SHULRG DIWHU
6HSWHPEHU
9
W\SHVRIILUPVZHZLOOVKRZ,QGHHGWKLVLVZKDWZHZDQWWRGR,QYHVWLJDWHWKHGLIIHUHQWLDO
HIIHFWVIRUHDFKEDQNILUPSDLULQVWHDGRIWKHDYHUDJHHIIHFWV
7KHLQFUHDVLQJWUHQGLQDYHUDJHQHW&'6SRVLWLRQVDQGEDQNILUPSDLUVLVREVHUYHGEHIRUH
WKH6PDOO%DQJ³3UH´DVZHOOZKLOHWKHJURVVQRWLRQDODPRXQWSUHVHQWVDGHFUHDVLQJWUHQGLQ
WKHVDPHSHULRG7KLVVXJJHVWWKDWEDQNVPD\KDYHVWDUWHGWRSXUFKDVHPRUHFUHGLWSURWHFWLRQ
WKDQ WKH\ VHOO GXULQJ WKH FULVLV HVSHFLDOO\ DIWHU WKH /HKPDQ FROODSVH LQ WKH ODVW TXDUWHU RI
DQGFRQWLQXHGWRGRVR+RZHYHUJURVV&'6SRVLWLRQVWDUWVWRLQFUHDVHZLWKWKH6PDOO
%DQJEXWQRWHDUOLHUZKLFKLQGLFDWHVFOHDUO\WKDWWKH6PDOO%DQJOHDGWRDQRYHUDOOLQFUHDVHLQ
&'6 WUDGLQJ DQG WKLV ZDV QRW GXH WR WKH FULVLV $IWHU WKH 6PDOO %DQJ ³3RVW´ QHW &'6
SRVLWLRQVUHPDLQUHODWLYHO\VWDEOHDQGWKHJURVVDPRXQWVOLJKWO\GHFUHDVHVDQGVWD\VEHORZWKH
OHYHOV RI HDUO\ 7KLV GHFUHDVH LQ JURVV DPRXQW KDG EHHQ PRVWO\ GXH D PDUNHWZLGH
DFWLYLW\FDOOHG³SRUWIROLRFRPSUHVVLRQV´
'DWDDQG0HWKRGRORJ\
'DWD6RXUFHV
:H HPSOR\ WKUHH GDWD VRXUFHV $ ILUVW XQLTXH GDWDVHW ZH DFFHVV LV IURP WKH 7UDGH
,QIRUPDWLRQ :DUHKRXVH 7,: RI WKH Depository Trust and Clearing Corporation '7&&
7KLVGDWDVRXUFHFRYHUVPRUHWKDQSHUFHQWRIWKHJOREDODFWLYLW\IRUVWDQGDUGVLQJOHQDPH
&'6VPDNLQJLWE\IDUWKHPRVWFRPSUHKHQVLYHGDWDVHWIRU&'6SRVLWLRQVDQGWUDGLQJ7KH
'7&&SRVLWLRQOHYHOGDWDSURYLGHVDZHHNO\ERXJKWDQGVROGSRVLWLRQIRUHDFKEDQNRQHDFK
7KH%DQNIRU,QWHUQDWLRQDO6HWWOHPHQWVGHILQHVFRPSUHVVLRQDVIROORZV“Compression aggregates derivatives
contracts with similar risks or cash flows into fewer trades. It is a process for tearing up trades that allows
economically redundant derivative trades to be terminated early without changing each participant’s net
position”%DQNIRU,QWHUQDWLRQDO6HWWOHPHQWV:KLOHWHUPLQDWLQJWKHUHGXQGDQWWUDGHVWKHSURFHVVWDNHV
SODFHE\JHQHUDWLQJDVPDOOHUQXPEHURIQHZWUDGHVZLWKPXFKVPDOOHUYROXPHVDOWKRXJKWKH\SRVVHVVWKHVDPH
FDVKIORZVDQGULVNSURILOHDVWKHLQLWLDOSRUWIROLR3RUWIROLRFRPSUHVVLRQKDVHQDEOHGDEHWWHUULVNPDQDJHPHQW
SUDFWLFHE\HOLPLQDWLQJWULOOLRQRI&'6QRWLRQDOWKURXJK\HDUHQG,6'$
8VLQJILUPOHYHODJJUHJDWHGSRVLWLRQVRIWKLVGDWDVHW2HKPNHDQG=DZDGRZVNLIRUH[DPSOHGRFXPHQW
WUDGLQJDQGDUELWUDJHDFWLYLW\RQWKH&'6PDUNHW6HHDOVR'X*DGJLO*RUG\DQG9HJDDQG.LP.RR
DQG/LXRQWKHPDWFKLQJEHWZHHQGHDOHUVDQGFXVWRPHUV
10
ILUPZLWKHDFKFRXQWHUSDUW\DIWHUDFFRXQWLQJIRUDOOQHZWUDGHVDVVLJQPHQWVWHUPLQDWLRQVDQG
DPHQGPHQWVWKDWKDYHKDSSHQHGVLQFHWKHSDVWZHHN
'LIIHUHQW IURP WKH ZHHNO\ ILUPOHYHO GDWD ZKLFK DUH DJJUHJDWHG DFURVV DOO WUDGHV DQG
SXEOLFO\ DYDLODEOH LQ '7&&¶V ZHEVLWHV ZH KDYH XQLTXH DFFHVV WR WKLV '7&& SRVLWLRQOHYHO
GDWD WKDW FRQWDLQ GHWDLOHG LQIRUPDWLRQ RI all EDQNV DQG WKHLU ZHHNO\ &'6 WUDGLQJ ZLWK HDFK
LQGLYLGXDO FRXQWHUSDUW\ RI DOO H[WDQW LQGLYLGXDO ILUP &'6 FRQWUDFWV )RU HDFK EDQN ZH
DJJUHJDWHLWV&'6FRQWUDFWVRQHDFKLQGLYLGXDOILUPDFURVVWUDGHVZLWKGLIIHUHQWFRXQWHUSDUWLHV
DWWKHZHHNO\OHYHO)RUHDFKEDQNWKHVHSRVLWLRQVRISURWHFWLRQERXJKWDQGVROGRQHDFKILUP
XQLTXHO\FDSWXUHWKHULVNWDNLQJUHODWLRQVKLSRIWKHEDQNZLWKWKHUHVSHFWLYHILUPWKDWLVQRW
DYDLODEOHRQWKHSXEOLFZHEVLWHRIWKH'7&&
)RU RXU SHULRG RI LQYHVWLJDWLRQ ZH PDWFK '7&& GDWD ZLWK WKH *HUPDQ FUHGLW UHJLVWHU
(MiMik), ZKLFK PDNHV LW SRVVLEOH WR REVHUYH LQGLYLGXDO H[SRVXUHV RI *HUPDQ EDQNV DW WKH
ERUURZHU OHYHO :H PDWFK WKH ZHHNO\ &'6 GDWD RI *HUPDQ EDQNV¶ &'6 SRVLWLRQV RQ DOO
(XURSHDQ UHIHUHQFH HQWLWLHV ZLWK WKH TXDUWHUO\ FUHGLW UHJLVWHU GDWD RI *HUPDQ EDQNV¶ FUHGLW
H[SRVXUHV RQ WKH VDPH VHW RI (XURSHDQ ERUURZHUV DQG WKHQ WDNH WKH WKUHHTXDUWHU DYHUDJHV
VHSDUDWHO\ IRU WKH &'6 DQG WKH FUHGLW UHJLVWHU GDWD :H FRQVWUXFW RXU VDPSOH LQ D
FRQVHUYDWLYHZD\E\LQFOXGLQJDOOSRWHQWLDOEDQNILUPSDLUVIURPWKHHQWLUHVDPSOHRIEDQNV
DQG ILUPV ZKHUHE\ ZH DFFRXQW RQO\ IRU EDQNV WKDW SDUWLFLSDWHG DW OHDVW RQFH LQ WKH &'6
PDUNHWLQWKH³3UH´SHULRGDQGDFFRXQWRQO\IRUILUPVWKDWDFWXDOO\LVVXHG&'6:HH[FOXGH
7KHFRYHUDJHRIWKH'7&&7,:GDWDVHWZDVVWDEOHGXULQJRXUREVHUYDWLRQSHULRGDQGOHVVOLNHO\WREHDIIHFWHG
E\WKHLQFUHDVLQJWHQGHQF\WRXVHFHQWUDOFRXQWHUSDUW\FOHDULQJ,IDQ\WUHQGLQFRYHUDJHGLGH[LVWWKLVFRXOGQRW
KDYHEHHQEDQNILUPVSHFLILFEXWUDWKHUEDQNRUILUPVSHFLILFIRUZKLFKZHZLOOEHDFFRXQWLQJWKURXJKEDQNDQG
ILUPIL[HGHIIHFWV
6LQFHZHXVHTXDUWHUO\DYHUDJHVRIFUHGLWH[SRVXUHDQG&'6SRVLWLRQGDWDZHDUHOHVVFRQFHUQHGDERXWEDQNV¶
VKRUW WHUP FUHGLW SRVLWLRQ IOXFWXDWLRQV LH VKRUW WHUP ORDQV ZKLFK EDQNV PD\ QRW ERWKHU WR KHGJH DJDLQVW RU
DOWHUQDWLYHO\WKH&'6FRQWUDFWVWKH\WUDQVDFWRQEHKDOIRIWKHLUFOLHQWVZKLFKZLOOEHSDVVHGRQWRWKHLUFOLHQWV
SUREDEO\ZLWKLQDYHU\VKRUWWLPH
11
WKRVH EDQNV DQG ILUPV WKDW DUH QRWSUHVHQWLQWKHFUHGLWUHJLVWHUGDWDVHWVXFKDVLQYHVWPHQW
FRPSDQLHV
$V WKH IRXUWK ODUJHVW HFRQRP\ LQ WKH ZRUOG DQG D EDQNEDVHG V\VWHP *HUPDQ\ LV D
SDUWLFXODUO\ LQWHUHVWLQJ FRXQWU\ WR VWXG\ WKH OLQN EHWZHHQ &'6 WUDGLQJ DQG WKH VXSSO\ RI
FUHGLW7KH*HUPDQXQLYHUVDOEDQNLQJV\VWHPLVVWUXFWXUHGDORQJWKUHHSLOODUVLHFRPPHUFLDO
EDQNV SXEOLF VHFWRU EDQNV DQG FUHGLW FRRSHUDWLYHV .UDKQHQ DQG 6FKPLGW DQG DOO
WKUHHW\SHVRIEDQNVOHQGWRFRUSRUDWHVDQGFRXOGHQWHUWKH&'6PDUNHW
7KH 'HXWVFKH %XQGHVEDQN¶V FUHGLW UHJLVWHU (MiMiK) LV WKH PDLQ GDWD VRXUFH IRU WKH
LQGLYLGXDOH[SRVXUHVRI*HUPDQEDQNVWRILUPV%DQNH[SRVXUHVWRILUPVLQWKHFUHGLWUHJLVWHU
DUH GHILQHG IDLUO\ EURDGO\ HJ WKH\ LQFOXGH ERWK ORDQV DQG FRUSRUDWH ERQGV 'HVSLWH
REWDLQLQJZLWKGUDZLQJDQGUHSD\LQJFUHGLWSRVVLEO\IUHTXHQWO\ILUPVNHHSWKHLULQGLYLGXDO
FUHGLWDPRXQWIURPEDQNVVXUSULVLQJO\FRQVWDQWRYHUWLPHRIDOOLQGLYLGXDOH[SRVXUHVYDU\
OHVV WKDQ SHUFHQW RYHU WLPH ZLWK D PHGLDQ JURZWK RI SHUFHQW 7KLV REVHUYHG
SHUVLVWHQF\LQLQGLYLGXDOH[SRVXUHVPDNHVRXUHQVXLQJHVWLPDWHVRIWKHLPSDFWRI&'6WUDGLQJ
RQFUHGLWHYHQPRUHHFRQRPLFDOO\UHOHYDQW
7KH FUHGLW UHJLVWHU FRQWDLQV LQIRUPDWLRQ RQ ODUJH FUHGLW H[SRVXUHV RI 0LOOLRQ ¼
IRUPHUO\0LOOLRQ'HXWVFKH0DUNDQGDERYHRQHDFKTXDUWHUHQG7KHUHIRUHH[SRVXUHVWR
$OPRVW DOO ILQDQFLDO LQVWLWXWLRQV DFWLYH LQ WKH &'6 PDUNHW WKDW DUH QRW PDWFKHG ZLWK FUHGLW UHJLVWHU GDWD
MiMiKDUHHLWKHULQYHVWPHQWFRPSDQLHVRUDVVHWPDQDJHPHQWFRPSDQLHVWKDWDUHQRWLQYROYHGLQOHQGLQJ
$FFRUGLQJWRWKH%XQGHVEDQN%DQNLQJ6WDWLVWLFVE\WKHHQGRIWKHUHZHUHEDQNVLQWKHFRXQWU\RI
ZKLFK SHUFHQW ZHUH FUHGLW FRRSHUDWLYHV +RZHYHU DV FUHGLW FRRSHUDWLYHV DUH YHU\ VPDOO LQVWLWXWLRQV DQG
FRPPHUFLDO EDQNV LQFOXGH WKH IRXU ODUJHVW LQVWLWXWLRQV LQ WKH FRXQWU\ WKH SLFWXUH LQ WHUPV RI PDUNHW VKDUHV LV
VXEVWDQWLDOO\ GLIIHUHQW &RPPHUFLDO EDQNV DFFRXQW IRU SHUFHQW RI DOO EDQN DVVHWV PRUWJDJH DQG VSHFLDO
SXUSRVH EDQNV SHUFHQW ZKHUHDV SXEOLF VHFWRU EDQNV DOVR WDNH SHUFHQW DQG FUHGLW FRRSHUDWLYHV WRJHWKHU
ZLWKWKHLUFHQWUDOLQVWLWXWLRQVRQO\SHUFHQW7KHVHILJXUHVFOHDUO\LQGLFDWHWKHLPSRUWDQFHRIWKHSXEOLFVHFWRU
EDQNVZKLFKLQFOXGHWKHVDYLQJVEDQNV³6SDUNDVVHQ´DQGWKHLUFHQWUDOLQVWLWXWLRQV³/DQGHVEDQNHQ´
)RUDPRUHGHWDLOHGGHILQLWLRQRIWKHEDQNH[SRVXUHVVHH6HFWLRQRIWKH%DQNLQJ$FW'HXWVFKH%XQGHVEDQN
7KHIROORZLQJLWHPVDUHGHHPHGQRWWREHEDQNH[SRVXUHV6KDUHVLQRWKHUHQWHUSULVHVDQGVHFXULWLHVLQ
WKHWUDGLQJSRUWIROLR'HWDLOVRQWKLVFUHGLWUHJLVWHUFDQDOVREHIRXQGLQ6FKPLHGHUDQGLQSXEOLVKHGZRUN
E\6FKHUWOHU%XFKDQGYRQ:HVWHUQKDJHQ+D\GHQ3RUDWKDQGYRQ:HVWHUQKDJHQDQG2QJHQD
7PHU$ONDQ DQG YRQ :HVWHUQKDJHQ IRU H[DPSOH 7KH %XQGHVEDQN DOVR PDLQWDLQV D ZHEVLWH ZLWK
ZRUNLQJSDSHUVEDVHGRQLWVFUHGLWUHJLVWHU
,IWKHVXPRIWKHH[SRVXUHVWRILUPVLQDERUURZHUXQLWH[FHHGVWKHWKUHVKROGRI0LOOLRQ¼WKHLQGLYLGXDO
H[SRVXUHWRDILUPLQWKDWERUURZHUXQLWLVDOVRUHSRUWHGHYHQLILWLVDVPDOOH[SRVXUHEHORZWKLVWKUHVKROG)RUD
PRUHGHWDLOHGGHILQLWLRQVHH6HFWLRQRIWKH%DQNLQJ$FW'HXWVFKH%XQGHVEDQN,IH[SRVXUHVRI
0LOOLRQ¼RUDERYHH[LVWHGGXULQJWKHUHSRUWLQJSHULRGEXWDUHSDUWO\RUIXOO\UHSDLGWKHUHPDLQLQJH[SRVXUHLV
12
VPDOODQGPHGLXPVL]HGILUPVPLJKWEHXQGHUUHSUHVHQWHGLQWKLVGDWDEDVH+RZHYHUIRUWKLV
VWXG\WKLVWKUHVKROGLVOHVVRIDFRQFHUQDVPRVWLIQRWDOO&'6FRQWUDFWVWKDWDUHWUDGHGSHUWDLQ
WRODUJHILUPVZLWKFRPPHQVXUDWHO\ODUJHH[SRVXUHV
)LQDOO\ZHREWDLQGDLO\&'6TXRWHVIURP%ORRPEHUJ,QRUGHUWRFRPSXWHWKHUHODWLYHELG
DVN VSUHDG DV D PHDVXUH RI LOOLTXLGLW\ ZH PDWFK DOO RXU VDPSOH ILUPV ZLWK %ORRPEHUJ DQG
UHWULHYHWKHHQGRIGD\ELGDQGDVNTXRWHVIRUWKH\HDU6HQLRU&'6±XVXDOO\WKHPRVWOLTXLG
&'6SURGXFW±IRUHDFKUHIHUHQFHILUP
0HWKRGRORJ\
7RGLVHQWDQJOHWKHUHODWLRQEHWZHHQ&'6WUDGLQJDQGFUHGLWH[SRVXUHZHIROORZDWZRVWHS
VWUDWHJ\ )LUVW ZH H[SORUH LI WKHUH LV D FKDQJH LQ WUDGLQJ DIWHU WKH 6PDOO %DQJ DQG ZH
LQYHVWLJDWHZKHWKHURUQRWH[LVWLQJFUHGLWUHODWLRQVKLSVGHWHUPLQHWKHWUDGLQJRI&'6RIWKHVH
ILUPVE\WKHVDPHEDQNVHVSHFLDOO\IRUULVNLHUILUPV%DQNVPD\ZDQWWRXVH&'6WRKHGJH
WKHLUH[LVWLQJFUHGLWULVNDQGWKHKLJKHUWKHULVNWKHPRUH&'6WKH\PLJKWWUDGHDQGKHGJH,Q
RXUVDPSOHZHIRFXVRQO\RQEDQNVDQGILUPVWKDWDFWLYHO\SDUWLFLSDWHLQWKH&'6PDUNHWLQ
WKH³3UH´SHULRG:HHVWLPDWHE\2/6UHJUHVVLRQPRGHOVRIWKHIRUP
'CDS Contractsij
E Bank Firm Exposure %HIRUHij E Bank Firm Exposure %HIRUHij Firm CDS Price %HIRUH j D i D j H ij
ZKHUH 'CDS Contractsij LVWKHDEVROXWHGLIIHUHQFHLQWKHWKUHHTXDUWHUDYHUDJHOHYHOVRI&'6
FRQWUDFWVRQILUPjKHOGE\EDQNi DURXQGWKH6PDOO%DQJLHWKHGLIIHUHQFHLQWKHDYHUDJHRI
WKH³3RVW´SHULRGPLQXVWKHDYHUDJHRIWKH³3UH´SHULRGRU³3RVW´PLQXV³0LG´DQG³0LG´
UHSRUWHG HYHQ LI WKH DPRXQW LV ]HUR :H WDNH WKH DFWXDO DPRXQWV RI WKH VLQJOHERUURZHU H[SRVXUHV LQWR
FRQVLGHUDWLRQUDWKHUWKDQWKRVHDWWKHKROGLQJFRPSDQ\OHYHO
:HDGRSWWKH&'6FORVLQJTXRWHVGHOLYHUHGE\SP/RQGRQRIILFH%ORRPEHUJLQFRUSRUDWHGWKHVHTXRWHVIURP
&0$ 'DWD9LVLRQ ZKLFK FODLPV WR UHFHLYH GDWD RQ PRUH WKDQ VLQJOH QDPH &'6 LQGLFHV DQG WUDQFKHV
&0$LVDPRQJWKHPRVWFRPSUHKHQVLYHDQGUHOLDEOH&'6TXRWHSURYLGHUVFRYHULQJDOOPDMRUFUHGLWGHULYDWLYHV
WUDGLQJGHVNVDQGDUHVKRZQWROHDGWKH&'6SULFHGLVFRYHU\SURFHVV0D\RUGRPR3HxDDQG6FKZDUW]
13
PLQXV ³3UH´ UHVSHFWLYHO\ %DQN ± )LUP ([SRVXUH %HIRUHij LV WKH DPRXQW RI FUHGLW
H[SRVXUH EDQN i KDV WR ILUP j EHIRUH RXU HVWLPDWLRQ ZLQGRZ QDPHO\ LQ WKH ILUVW TXDUWHU RI
DQG)LUP&'63ULFH%HIRUHjLVWKHSUHPLXPSDLGIRUD&'6FRQWUDFWRQILUPjDWWKH
HQG RI WKH ILUVW TXDUWHU RI D i DQG D j DUH EDQN DQG ILUP IL[HG HIIHFWV$OO YDULDEOH
QDPHVGHILQLWLRQVDQGVXPPDU\VWDWLVWLFVDUHSUHVHQWHGLQ3DQHO%7DEOH:HQRWHWKDWWKH
VWDQGDUGHUURUVLQWKHDERYHVSHFLILFDWLRQDUHFOXVWHUHGDWWKHEDQNOHYHODQGDOVRGRQRWVXIIHU
IURP VHULDO FRUUHODWLRQ DV ZH DJJUHJDWH WKH REVHUYDWLRQV RYHU WLPH %HUWUDQG 'XIOR DQG
0XOODLQDWKDQ3HWHUVHQ
7KH DYHUDJH OHYHO RI &'6 FRQWUDFWV LV PHDVXUHG ZLWK HLWKHU WKH JURVV RU QHW QRWLRQDO
DPRXQW RU QXPEHU RI FRQWUDFWV UHVSHFWLYHO\ ,Q WKLV FRQWH[W DQ LQFUHDVH LQ WKH JURVV &'6
SRVLWLRQ GHILQHG DV WKH DYHUDJH RI ERXJKW DQG VROG SRVLWLRQV UHIHUV WR D KLJKHU WUDGLQJ
DFWLYLW\ ZKHUHDV DQ LQFUHDVH LQ WKH QHW &'6 SRVLWLRQ WKH GLIIHUHQFH RI ERXJKW DQG VROG
SRVLWLRQVLVFRQVLGHUHGWREHDVVRFLDWHGZLWKKHGJLQJHVSHFLDOO\ZKHQQHW&'6SRVLWLRQVDUH
RQO\ PRGHUDWHO\ H[FHHGLQJ WKH OHYHO RI FUHGLW H[SRVXUH :H WKHUHIRUH GLIIHUHQWLDWH LQ ILUVW
LQVWDQFH EHWZHHQ KHGJLQJ DQG VSHFXODWLRQ DV IROORZV $ SRVLWLYH YDOXH IRU WKH QHW QRWLRQDO
DPRXQW RU WKH QHW QXPEHU RI FRQWUDFWV LQGLFDWHV D KLJKHU WHQGHQF\ WR KHGJH E\ SXUFKDVLQJ
PRUHSURWHFWLRQWKDQVHOOLQJ$QHJDWLYHQHWDPRXQWRUQXPEHURQWKHRWKHUKDQGLQGLFDWHVD
WHQGHQF\WR³VSHFXODWH´E\WDNLQJRQPRUHFUHGLWULVNDVWKHEDQNVHOOVPRUHSURWHFWLRQWKDQLW
EX\V/DWHURQZHDOVRGLIIHUHQWLDWHEHWZHHQORZHUDQGKLJKHUOHYHOVRISRVLWLYHYDOXHVDQG
ZHZLOOH[SODLQWKLVGLIIHUHQWLDWLRQIXUWKHULQWKHQH[WVHFWLRQ
,Q 3DQHO $ 7DEOH ZH DOUHDG\ GRFXPHQWHG WKH LQFUHDVH LQ WKH QRWLRQDO DPRXQW DQG
QXPEHU RI &'6 FRQWUDFWV KHOG E\ EDQNV DURXQG WKH 6PDOO %DQJ ³3RVW´ PLQXV ³3UH´ 2XU
$OWHUQDWLYHO\ZHHPSOR\UHODWLYHFKDQJHVLQ&'6FRQWUDFWVDQGUHHVWLPDWHRXUPRGHO7KHUHVXOWVDUHPDLQO\
XQDIIHFWHG
7KHYDULDEOHLVVXEVXPHGE\WKHILUPIL[HGHIIHFWVWKDWDUHSUHVHQWLQPRVWVSHFLILFDWLRQV+RZHYHUZKHQILUP
IL[HGHIIHFWVDUHQRWIHDWXUHGWKLVYDULDEOHZLOOEHLQFOXGHG7KHVDPHDSSOLHVWRHTXDWLRQEHORZ
:HGRQRW LQFOXGHEDQNERUURZHUIL[HG HIIHFWV VLQFH WKH PRGHOLV HVWLPDWHG ZLWK FURVVVHFWLRQDOGDWD DW WKH
EDQNERUURZHUOHYHO
:H RSW IRU FOXVWHULQJ DW WKH EDQN OHYHO VLQFH WKH DQDO\VLV IRFXVHV RQ EDQNV¶ KHGJLQJ PRWLYHV DQG FUHGLW
H[SRVXUHV:HDOVRUHHVWLPDWHRXUPRGHOVZLWKILUPOHYHOFOXVWHULQJ7KHUHVXOWVDUHTXDOLWDWLYHO\VLPLODU
14
7DEOH
3DQHO$
6XPPDU\VWDWLVWLFV3UHDQG3RVW
&'6WUDGLQJ
1RWLRQDO$PRXQWRI)LUP&'6&RQWUDFWV+HOGE\WKH%DQNPLOOLRQ¼*URVV
1RWLRQDO$PRXQWRI)LUP&'6&RQWUDFWV+HOGE\WKH%DQNPLOOLRQ¼1HW
1XPEHURI)LUP&'6&RQWUDFWV+HOGE\WKH%DQN*URVV
1XPEHURI)LUP&'6&RQWUDFWV+HOGE\WKH%DQN1HW
$YHUDJH1XPEHURI%DQNVZLWK&'6&RQWUDFWV
$YHUDJH1XPEHURI)LUPVZLWK&'6&RQWUDFWV
$YHUDJH1XPEHURI%DQN)LUP3DLUVZLWK&'6&RQWUDFWV
,OOLTXLGLW\RI\HDU6HQLRU&'6
&UHGLWH[SRVXUH
$YHUDJH%DQN)LUP&UHGLW([SRVXUHPLOOLRQ¼
3UH
3RVW
3RVW3UH
3YDOXH
1RWHV 7KH WDEOH UHSRUWV WKH VXPPDU\ VWDWLVWLFV RI &'6 FRQWUDFWV DQG EDQNILUP FUHGLW H[SRVXUHV LQ 3UHDQG 3RVWSHULRGV DQG WKH WZR
JURXS PHDQ FRPSDULVRQ WHVW EHWZHHQ WKHVH SHULRGV 7KH $YHUDJH 1XPEHU RI %DQN)LUP 3DLUV ZLWK &'6 &RQWUDFWV LV WKH QXPEHU RI DFWLYH
EDQNILUP SDLUV ZKHUH WKH EDQN KROG &'6 FRQWUDFWV RI WKH ILUP LQ WKH UHVSHFWLYH SHULRG ,Q WKH HQVXLQJ UHJUHVVLRQV ZH ZLOO EDFNILOO DOO WKH
SRWHQWLDO EDQNILUP FRPELQDWLRQV VHH WH[W IRU GHWDLOV ,OOLTXLGLW\ LV GHILQHG DV WKH UHODWLYH ELGDVN VSUHDG $VN%LG$VN%LG RI D \HDUVHQLRU&'6RQWKHUHIHUHQFHILUP
15
7DEOH
3DQHO%
9DULDEOHQDPHVGHILQLWLRQVDQGVXPPDU\VWDWLVWLFV
'HILQLWLRQ
8QLW
7\SH
3HULRGV
0HDQ
6WDQGDUG
'HYLDWLRQ
0LQ
0D[
&KDQJHLQWKH1RWLRQDO$PRXQWRI)LUP&'6&RQWUDFWV+HOGE\WKH%DQN 7KH GLIIHUHQFH LQ WKH QRWLRQDO DPRXQW RI &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO ILUP KHOG
E\ HDFK LQGLYLGXDO EDQN EHWZHHQ WKH LQGLFDWHG SHULRGV DYHUDJHG DFURVV WKH WKUHH
TXDUWHUVLQWKHSHULRG
PLOOLRQ¼
*URVV
3RVW3UH
3RVW0LG
0LG3UH
3RVW3UH
3RVW0LG
0LG3UH
3RVW3UH
3RVW0LG
0LG3UH
3RVW3UH
3RVW0LG
0LG3UH
3RVW3UH
3RVW0LG
0LG3UH
9DULDEOH1DPH
1HW
&KDQJHLQWKH1XPEHURI)LUP&'6&RQWUDFWV+HOGE\WKH%DQN
7KH GLIIHUHQFH LQ WKH QXPEHU RI &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO ILUP KHOG E\ HDFK
LQGLYLGXDO EDQN EHWZHHQ WKH LQGLFDWHG SHULRGV DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ
WKHSHULRG
*URVV
1HW
&KDQJHLQ%DQN)LUP([SRVXUH
7KH GLIIHUHQFH LQ WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP EHWZHHQ WKH
LQGLFDWHGSHULRGVDYHUDJHGDFURVVWKHWKUHHTXDUWHUVLQWKHSHULRG
PLOOLRQ¼
%DQN)LUP([SRVXUH%HIRUH
7KHDPRXQWRIFUHGLWH[SRVXUHWKHEDQNKDVWRWKHILUPLQ4
PLOOLRQ¼
)LUP&'63ULFH%HIRUH
7KHSUHPLXPSDLGIRUD&'6FRQWUDFWRQWKHILUPDWWKHHQGRI4
3HUFHQW
)LUP&'63ULFH3UH
7KHSUHPLXPSDLGIRUD&'6FRQWUDFWRQWKHILUPDWWKHHQGRI4
3HUFHQW
,OOLTXLGLW\RI\HDU6HQLRU&'6
7KHFKDQJHRIWKUHHTXDUWHUDYHUDJHLOOLTXLGLW\PHDVXUHGE\WKHUHODWLYHELGDVN
VSUHDGRID\HDUVHQLRU&'6RQWKHUHIHUHQFHILUP
%DQN+HGJLQJRQ7KLV)LUP
$ GXPP\ WKDW LV HTXDO WR RQH LI WKH UDWLR RI WKH QHW QRWLRQDO DPRXQW RI &'6 RQ D ILUP
KHOG E\ D EDQN WR WKH FUHGLW H[SRVXUH WKH EDQN KDV WR WKLV ILUP LV EHWZHHQ DQG LQ
WKHODVWTXDUWHURIWKHLQGLFDWHGSHULRGDQGLVHTXDOWR]HURLQDOORWKHUFDVHV
3RVW0LG
3UH
3RVW
1RWHV 7KH WDEOH UHSRUWV WKH YDULDEOH QDPHV GHILQLWLRQV DQG VXPPDU\ VWDWLVWLFV RI DOO GHSHQGHQW DQG LQGHSHQGHQW YDULDEOHV 7KH QXPEHU RI REVHUYDWLRQV LV 0D[ DQG 0LQ RI %DQN )LUP ([SRVXUH %HIRUH DUH WKH DYHUDJH RI WKH WKUHH KLJKHVW DQG ORZHVW
H[SRVXUHV
16
DLP LV WR H[SODLQ WKHVH FKDQJHV ZLWK DQ H[LVWLQJ EDQNILUP H[SRVXUH DQG WKH ULVNLQHVV RI D
ILUPEHIRUHWKH6PDOO%DQJZKHUHDVWKHFRQWUROJURXSFRQVLVWVRIEDQNILUPSDLUVZLWKRXWDQ\
FUHGLW UHODWLRQVKLS :H DUH PDLQO\ LQWHUHVWHG LQ WKH GLIIHUHQWLDO HIIHFW PHDVXUHG E\ WKH
FRHIILFLHQW RI WKH LQWHUDFWLRQ WHUP LQ (TXDWLRQ DERYH ZKHWKHU RU QRW H[LVWLQJ FUHGLW
H[SRVXUHVWRULVNLHUILUPVLQIOXHQFHEDQNV¶WUDGLQJRI&'6RIWKHVHILUPV
,Q D QH[W VWHS ZH H[DPLQH WKH ILQDO LPSDFW RQ H[WHQGLQJ RI FUHGLW LH WKH DVVRFLDWLRQ
EHWZHHQWUDGLQJRIFUHGLWGHIDXOWVZDSVDQGWKHDYDLODELOLW\RIFUHGLW:HH[SODLQWKHFKDQJH
LQWKHFUHGLWH[SRVXUHRIEDQNiWRILUPjXVLQJWKHFKDQJHVLQ&'6FRQWUDFWVKHOGE\WKHVDPH
EDQNRQWKHVDPHILUPLQWKHVDPHSHULRG:HHVWLPDWHWKHIROORZLQJPRGHO
'Bank Firm Exposureij
E'CDS Contractsij E 'CDS Contractsij Firm CDS Price 3UH j D i D j H ij
ZKHUH '%DQN ± )LUP ([SRVXUHij LV GHILQHG DV WKH DEVROXWH GLIIHUHQFH LQ WKH WKUHHTXDUWHUV
DYHUDJHDPRXQWRIH[SRVXUHEDQNiKDVWRWKHILUPjEHWZHHQWKHLQGLFDWHGSHULRGVHJWKH
GLIIHUHQFHLQWKHDYHUDJHRIWKH³3RVW´SHULRGPLQXVWKHDYHUDJHRIWKH³3UH´SHULRG³3RVW´
PLQXV³0LG´DQG³0LG´PLQXV³3UH´UHVSHFWLYHO\'&'6&RQWUDFWVijLVDJDLQPHDVXUHGE\
WKHFKDQJHLQWKHDYHUDJHOHYHOVRIILUP&'6FRQWUDFWVKHOGE\EDQNVDURXQGWKH6PDOO%DQJ
)LUP&'63ULFH3UHjLVWKHSUHPLXPSDLGIRUD&'6FRQWUDFWRQWKHILUPjDWWKHHQGRIWKH
ODVWZHHNLQ'HFHPEHUZKLFKLVWKHHQGRIWKH³3UH´SHULRG:HFKRRVHDVKRUWHUODJ
IRU &'6 SULFH WKDQ WKH RQH LQ WKH SUHYLRXV H[HUFLVH ZKHQ H[SODLQLQJ WKH FKDQJH LQ FUHGLW
H[SRVXUHDURXQGWKH6PDOO%DQJLQRUGHUWRKDYHDPRUHDFFXUDWHLQIRUPDWLRQIRUILUPULVN
:H FRQWLQXH WR FRQWURO IRU ILUP DQG EDQN IL[HG HIIHFWV LQ WKH ³PDLQ OLQH´ RI RXU
VSHFLILFDWLRQV7KHLQFOXVLRQRIILUPIL[HGHIIHFWVLVPDGHSRVVLEOHE\WKHIDFWWKDWIROORZLQJ
WKH6PDOO%DQJQRWDOOEDQNVWKDWKDYHDFUHGLWH[SRVXUHWRDSDUWLFXODUILUPZLOOFRPPHQFH
WUDGLQJ D &'6 RQ WKLV ILUP 7KHLU LQFOXVLRQ UHVXOWVLQ D FRPSDULVRQ RI FKDQJH LQ LQGLYLGXDO
EDQN H[SRVXUHV WR WKH same ILUP IRU ZKLFK VRPH EDQNV WUDGH LWV &'6 ZKLOH RWKHUV GR QRW
7KH LQFOXVLRQ RI EDQN IL[HG HIIHFWV IRFXVHV RQ WKH EHKDYLRXU RI WKH VDPH EDQN ZLWK DQ
17
H[LVWLQJ FUHGLW H[SRVXUH WR VRPH ILUPV EXW QRW RWKHUV DQG WKH HIIHFW RQ &'6 WUDGLQJ
)ROORZLQJ WKH VDPH DUJXPHQW ZH DOVR DGG EDQN DQG ILUP IL[HG HIIHFWV LQ WKH VHFRQG VWHS
DQDO\VLV
7KHFKDQJHLQ&'6WUDGLQJFRXOGper seH[SODLQPRVWGLIIHUHQFHVLQWKHEDQN¶VH[SRVXUHV
+RZHYHUZHDJDLQDLPWRH[DPLQHWKHKHWHURJHQHLW\RIWKHHIIHFWWKHLQIOXHQFHRIWUDGLQJRI
ULVNLHU ILUPV 2XU HPSLULFDO VWUDWHJ\ LV WR DQDO\]H KRZ EDQNILUP H[SRVXUHV UHVSRQG WR WKH
changes LQEDQN¶V&'6WUDGLQJPDLQO\GULYHQE\WKH6PDOO%DQJRQVSHFLILFILUPV
5HVXOWV
&KDQJHLQ&'67UDGLQJDURXQGWKH6PDOO%DQJ
7DEOHV DQG GLVSOD\ WKH FURVV VHFWLRQDO UHJUHVVLRQV RI WKH FKDQJH LQ WKH JURVVQHW
DPRXQWQXPEHURIILUP&'6FRQWUDFWVKHOGE\EDQNVDURXQGWKH6PDOO%DQJRQWKHH[LVWLQJ
EDQNILUP FUHGLW H[SRVXUH DQG WKH ILUP &'6 SULFH EHIRUH RXU HYHQW ZLQGRZ 7KDW LV ZH
HVWLPDWH (TXDWLRQ LQWURGXFHG EHIRUH 5HFDOO WKDW ³3UH´ UHIHUV WR WKUHH TXDUWHUV IURP
4 WR 4 ³0LG´ UHIHUV WR WKH SHULRGV IURP 4 WR 4 WKDW LQFOXGHV WKH
LPSOHPHQWDWLRQRIWKH6PDOO%DQJIURP0DUFKWR-XO\DQGWKDW³3RVW´UHIHUVWR
WKUHHTXDUWHUVIURP4WR4
,Q WKH ILUVW VL[ VSHFLILFDWLRQV LQ 7DEOH ZH H[SODLQ WKH gross FKDQJH LQ WKH notional
amountRIILUP&'6FRQWUDFWVKHOGE\EDQNVDURXQGWKH6PDOO%DQJ*URVVUHIHUVWRWKHVXP
RIEX\DQGVHOOFRQWUDFWVWKHEDQNKDVRQDJLYHQILUPDQGLVDPHDVXUHIRUWUDGLQJDFWLYLW\
:HDUHPDLQO\LQWHUHVWHGLQWKH³3RVW´PLQXV³3UH´FKDQJHVLQWKHYDULDEOH+RZHYHUZHDOVR
HPSOR\³3RVW0LG´DQG³0LG3UH´FKDQJHVLQWKHODVWWZRVSHFLILFDWLRQVRIWKHVHWLQRUGHUWR
FRQGXFWUREXVWQHVVFKHFNVRQSRVVLEOHDQQRXQFHPHQWDQGLPSOHPHQWDWLRQHIIHFWVRIWKH6PDOO
%DQJ
1RWLFH WKDW RXU WHUPLQRORJ\ IRU WKH ³JURVV´ SRVLWLRQ GHYLDWHV IURP WKH '7&& 7,: GHVFULSWLRQ RQ WKHLU
ZHEVLWH :H DGG ERXJKW DQG VROG FRQWUDFWV GLYLGHG E\ WZR LQ RUGHU WR UHDFK D PHDVXUH IRU WUDGLQJ DFWLYLW\
ZKHUHDV '7&& PDNHV XVH RI RQO\ D VLQJOH VLGH RI WKH WUDGH VLQFH WKH\ UHSRUW RQO\ DJJUHJDWH YDOXHV RQ WKHLU
ZHEVLWHZKLFKLVQRWDVGHWDLOHGDVWKHEDQNVSHFLILFDFWLYLW\GDWDZHXVH
18
7DEOH
7KHFKDQJHLQWKHJURVVILUP&'6FRQWUDFWVKHOGE\EDQNVDURXQGWKH6PDOO%DQJ
'HSHQGHQW9DULDEOH&KDQJHLQ*URVV)LUP&'6&RQWUDFWV+HOGE\WKH%DQN
Period
%DQN)LUP([SRVXUH%HIRUH
Post - Pre
Post - Pre
1RWLRQDO$PRXQWRI&RQWUDFWV
Post - Pre
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Pre
1XPEHURI&RQWUDFWV
Post - Pre
Post - Pre
Post - Mid
Mid - Pre
)LUP&'63ULFH%HIRUH
%DQN)LUP([SRVXUH%HIRUH)LUP&'63ULFH%HIRUH
&RQVWDQW
%DQN)L[HG(IIHFWV
1R
1R
1R
<HV
<HV
<HV
1R
1R
1R
<HV
<HV
<HV
)LUP)L[HG(IIHFWV
1R
1R
1R
<HV
<HV
<HV
1R
1R
1R
<HV
<HV
<HV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1RWHV 7KH WDEOH UHSRUWV HVWLPDWHV IURP RUGLQDU\ OHDVW VTXDUHV UHJUHVVLRQV 7KH GHSHQGHQW YDULDEOH LV WKH &KDQJH LQ *URVV )LUP &'6 &RQWUDFWV +HOG E\ WKH %DQN ZKLFK LV WKH GLIIHUHQFH LQ WKH JURVV QRWLRQDO DPRXQW RI &'6 FRQWUDFWV DQG QXPEHU RI &'6 FRQWUDFWV
RQ HDFK LQGLYLGXDO ILUP KHOG E\ HDFK LQGLYLGXDO EDQN EHWZHHQ WKH LQGLFDWHG SHULRGV DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ WKH SHULRG %DQN )LUP ([SRVXUH %HIRUH LV WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP LQ 4 7KH )LUP &'6 3ULFH %HIRUH LV WKH
SUHPLXP SDLG IRU D &'6 FRQWUDFW RQ WKH ILUP DW WKH HQG RI 4 7DEOH FRQWDLQV DOO GHILQLWLRQV DQG WKH VXPPDU\ VWDWLVWLFV IRU HDFK LQFOXGHG YDULDEOH )LJXUH GLVSOD\V WKH WLPLQJ RI DOO SHULRGV &RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG HUURUV ZKLFK DUH
FOXVWHUHG DW EDQN OHYHO DUH UHSRUWHG LQ WKH URZ EHORZ DQG WKH FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ <HV LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV LV LQFOXGHG 1R LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV LV QRW LQFOXGHG 6LJQLILFDQW DW VLJQLILFDQW
DWVLJQLILFDQWDW
19
:HVWDUWZLWKDUHJUHVVLRQLQFOXGLQJRQO\WKHFRQVWDQWWHUP7KHSRVLWLYHEXWVWDWLVWLFDOO\
LQVLJQLILFDQWFRHIILFLHQWIRUWKHFRQVWDQWFDSWXUHVWKHDYHUDJHLQFUHPHQWDO6PDOO%DQJHIIHFW
RQ &'6 WUDGLQJ ZLWKLQ WKH ³3RVW3UH´ ZLQGRZ 7KHQ ZH LQFOXGH %DQN)LUP ([SRVXUH
%HIRUHWRLQYHVWLJDWHKRZH[LVWLQJFUHGLWH[SRVXUHVEHWZHHQEDQNILUPSDLUVLQIOXHQFH&'6
WUDGLQJRIWKHVHILUPVE\WKHEDQNV7KHFRHIILFLHQWLVLPSUHFLVHO\HVWLPDWHGVXJJHVWLQJWKDW
KDYLQJDOHQGLQJUHODWLRQVKLSEHIRUHWKH6PDOO%DQJPD\QRWEHUHODWHGWRWUDGLQJRI&'6IRU
WKDWSDUWLFXODUILUP
,Q0RGHOZHLQFOXGH)LUP&'63ULFHDJDLQEHIRUHRXUHYHQWZLQGRZDVDSUR[\IRU
GHIDXOWULVNDQGLQWHUDFWLWZLWKWKHFUHGLWH[SRVXUH7KHFRHIILFLHQWRQWKH)LUP&'63ULFH
HTXDOVWREXWLWLVQRWVLJQLILFDQW7KHHVWLPDWHGFRHIILFLHQWRQWKHLQWHUDFWLRQYDULDEOH
HTXDOV 7KLV UHVXOW LPSOLHV WKDW IRU D RQH VWDQGDUG GHYLDWLRQ FKDQJH LQ )LUP &'6
3ULFHDQGPHDVXUHGLQPLOOLRQ¼SHURQHVWDQGDUGGHYLDWLRQFKDQJHLQ%DQN)LUP([SRVXUH
WKHVORSHRIWKHFKDQJHLQ&'6FRQWUDFWVRQ%DQN)LUP([SRVXUHLQFUHDVHVE\PLOOLRQ¼
UHFDOO WKDW WKH DYHUDJH JURVV QRWLRQDO DPRXQW RI ILUP &'6 FRQWUDFWV
KHOGE\WKHEDQNHTXDOVPLOOLRQ¼
&RPSDULQJVLJQLILFDQFHOHYHOVIRUWKHHVWLPDWHGFRHIILFLHQWVRQWKHFRQVWDQWLQVSHFLILFDWLRQVDQGLQ7DEOHV
DQGZLWKWKHWZRJURXSPHDQFRPSDULVRQWHVWVRIWKH3RVW3UHSHULRGVLQ7DEOH3DQHO$VKRXOGWDNHLQWR
DFFRXQWWKHIDFWWKHVWDQGDUGHUURUVDUHFOXVWHUHGDWWKHEDQNOHYHOLQWKHIRUPHUWZRWDEOHVZKLOHWKLVLVQRWWKH
FDVHLQWKHODWWHURQH
,W LV SODXVLEOH WKDW H[LVWLQJ H[SRVXUHV GR QRW SUHGLFW WKH FKDQJHV LQ &'6 SRVLWLRQV DV EDQNV WUDGH &'6
FRQWUDFWVQRWRQO\IRUKHGJLQJSXUSRVHVEXWDOVRIRUVSHFXODWLQJ:KHQGRLQJVREDQNVPLJKWSUHIHULQFUHDVLQJ
WKHLU H[SRVXUHV WR ILUPV E\ VHOOLQJ SURWHFWLRQ DQG HDUQ SURILWV WKURXJK UHFHLYLQJ WKH &'6 SUHPLXP +RZHYHU
WKHLUXOWLPDWHGHFLVLRQWRKHGJHPLJKWEHGULYHQE\WKHGHIDXOWULVNRIWKHSURVSHFWLYHH[SRVXUHVDQGWKDWLVZKDW
ZHH[SORUHQH[W
7KRXJK PRVW ORDQV DUH FROODWHUDOL]HG OLTXLGDWLQJ FROODWHUDO LV SRWHQWLDOO\ FRVWO\ DQG OHQGHUV PD\ FKRRVH WR
KHGJHWKRVHH[SRVXUHVDVZHOO5HFDOOWKDWRXUFUHGLWH[SRVXUHVDPSOHFRQVLVWVRIERWKORDQVJUDQWHGDQGERQGV
SXUFKDVHGE\WKHEDQN
)RUFRQYHQLHQFHZHZLOODOVRLQWKHWH[WLQGLFDWHWKHVLJQLILFDQFHOHYHOVRIWKHHVWLPDWHVPHQWLRQHG$VLQWKH
WDEOHVVLJQLILFDQWDWSHUFHQWVLJQLILFDQWDWSHUFHQWDQGVLJQLILFDQWDWSHUFHQW
)RU FRPSXWLQJ WKH HFRQRPLF UHOHYDQF\RI WKH HVWLPDWHG FRHIILFLHQWV ZH FRQVLGHU WKHVWDQGDUGGHYLDWLRQV RI
WKHYDULDEOHVLQWHUDFWHGHJPLOOLRQ¼IRU%DQN)LUP([SRVXUHLQ4DQGESVIRU)LUP&'6
3ULFHLQ4,QWHUPVRIWRWDOHIIHFWVEDQNVZLWKDSUHYLRXVFUHGLWH[SRVXUHRIPLOOLRQ¼WRDILUPLQ
4DUHH[SHFWHGWRLQFUHDVHWKHJURVVQRWLRQDODPRXQWKHOGRIWKDWSDUWLFXODUILUPE\PLOOLRQ¼ZKHQWKH
ILUP KDG D KLJKHU &'6 3ULFH E\ EDVLV SRLQWV LQ 4 [ [ [ (TXLYDOHQWO\EDQNVDUHH[SHFWHGWRLQFUHDVHWKHLUJURVVWUDGLQJRI&'6FRQWUDFWVRIDILUPZLWKD&'6SULFHRI
ESVLQ4E\PLOOLRQ¼ZKHQWKHEDQNKDGDKLJKHUFUHGLWH[SRVXUHRIPLOOLRQ¼WRWKHILUPLQ
WKDWTXDUWHU [[[*LYHQWKDWWKHOHYHOHIIHFWVDUHQRWVLJQLILFDQWO\GLIIHUHQW
IURP]HURZHFKRRVHWRIRFXVRQWKHDGGLWLRQDOHIIHFW
20
,Q 0RGHO ZH LQFOXGH EDQN DQG ILUP IL[HG HIIHFWV ,Q WKLV FDVH ZH DUH H[SODLQLQJ WKH
FKDQJHLQ&'6WUDGLQJRIWKHsamefirmDURXQG WKH6PDOO%DQJE\WKHsamebank WKDWKDVDQ
H[LVWLQJ FUHGLW H[SRVXUH WR WKLV ILUP 7KH FRHIILFLHQW RQ WKH LQWHUDFWLRQ WHUP LV DOPRVW
XQDIIHFWHGHTXDOWR7KHQH[WWZRPRGHOVXVHDOWHUQDWLYHWLPLQJVIRUWKHGHSHQGHQW
YDULDEOH³3RVW0LG´DQG³0LG3UH´7KHUHVXOWVDUHIXOO\LQOLQHZLWKWKRVHLQ0RGHO7KH
PDJQLWXGHV RI WKH FRHIILFLHQWV DUH ERWK DERXW KDOI ZKHUH WKH VXP HTXDOV WR WKH FRHIILFLHQW
H[SODLQLQJWKH³3RVW3UH´SHULRG7KLVVXJJHVWVWKDWWKHLPSDFWKDVDVLPLODUSDWWHUQLQWKHWZR
VXESHULRGV
7KHQ LQ WKH VHFRQG DQG VLPLODU VHW RI VL[ VSHFLILFDWLRQV LQ 7DEOH ZH H[SODLQWKH gross
FKDQJH LQ WKH number RI ILUP &'6 FRQWUDFWV KHOG E\ EDQNV DURXQG WKH 6PDOO %DQJ 7KH
UHVXOWVDUHPDLQO\XQFKDQJHGH[FHSWWKDWZHQRZREVHUYHDVLJQLILFDQWO\HVWLPDWHGFRQVWDQW
)RU0RGHOIRUH[DPSOHWKHHVWLPDWHGFRHIILFLHQWRQWKHLQWHUDFWLRQYDULDEOHHTXDOV
LPSO\LQJWKDWIRUDRQHVWDQGDUGGHYLDWLRQFKDQJHLQ)LUP&'63ULFHWKHVORSHRIWKHFKDQJH
LQ&'6FRQWUDFWVRQ%DQN)LUP([SRVXUHLQFUHDVHVE\ PHDVXUHGLQ
WKHXQLWRIFRQWUDFWVSHURQHVWDQGDUGGHYLDWLRQFKDQJHLQ%DQN)LUP([SRVXUHUHFDOOWKDWWKH
DYHUDJH JURVV QXPEHU RI ILUP &'6 FRQWUDFWV KHOG E\ WKH EDQN HTXDOV 7KLV LPSOLHV
DJDLQWKDWWKHGHIDXOWULVNLQEDQNILUPH[SRVXUHVEHIRUHWKH6PDOO%DQJGHWHUPLQHVWKHH[WHQW
RIEDQNV¶&'6WUDGLQJDFWLYLW\
7KHQH[WVHWRIVSHFLILFDWLRQVLQ7DEOHWDNHVWKHFKDQJHVLQWKHnetQRWLRQDODPRXQWDQG
QXPEHURI&'6FRQWUDFWV+HUHZHVXEWUDFWWKHDPRXQWQXPEHURI&'6FRQWUDFWVVROGIURP
WKHDPRXQWQXPEHURIFRQWUDFWVERXJKWWRFRPSXWHWKHQHWYDOXH:HXVHWKHVDPHDSSURDFK
DQG LQWHUDFW WKH SUHYLRXV FUHGLW H[SRVXUH DQG ILUP &'6 SULFH LQ WKH WKLUG VSHFLILFDWLRQ
,Q WHUPV RI WRWDO HIIHFWV EDQNV ZLWK D SUHYLRXV FUHGLW H[SRVXUH RI PLOOLRQ ¼ WR D ILUP LQ 4 DUH
H[SHFWHGWRLQFUHDVHWKHJURVVQXPEHU&'6FRQWUDFWVKHOGRIWKDWSDUWLFXODUILUPE\FRQWUDFWVZKHQWKHILUP
KDGDKLJKHU&'63ULFHE\EDVLVSRLQWVLQ4 [[[(TXLYDOHQWO\
EDQNV DUH H[SHFWHG WR LQFUHDVH WKHLU JURVV WUDGLQJ RI &'6 FRQWUDFWVRI D ILUP ZLWK D &'6SULFHRI ESV LQ
4 E\ FRQWUDFWV ZKHQ WKH EDQN KDG D KLJKHU FUHGLW H[SRVXUH RI PLOOLRQ ¼ WR WKH ILUP LQ WKDW
TXDUWHU [[[
1HW&'6SRVLWLRQVDUHPRUHLQIRUPDWLYHRQDEDQN¶VEX\LQJRUVHOOLQJDFWLYLW\:KLOHDQLQFUHDVHLQWKHJURVV
SRVLWLRQLVUHODWHGWRDQRYHUDOOLQFUHDVHLQWUDGLQJWKHQHWSRVLWLRQFOHDUO\LQGLFDWHVKHGJLQJLQFHQWLYHV
21
7DEOH
7KHFKDQJHLQWKHQHWILUP&'6FRQWUDFWVKHOGE\EDQNVDURXQGWKH6PDOO%DQJ
'HSHQGHQW9DULDEOH&KDQJHLQ1HW)LUP&'6&RQWUDFWV+HOGE\WKH%DQN
Period
%DQN)LUP([SRVXUH%HIRUH
Post - Pre
1RWLRQDO$PRXQWRI&RQWUDFWV
Post - Pre
Post - Pre
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Pre
1XPEHURI&RQWUDFWV
Post - Pre
Post - Pre
Post - Mid
Mid - Pre
)LUP&'63ULFH%HIRUH
%DQN)LUP([SRVXUH%HIRUH)LUP&'63ULFH%HIRUH
&RQVWDQW
%DQN)L[HG(IIHFWV
1R
1R
1R
<HV
<HV
<HV
1R
1R
1R
<HV
<HV
<HV
)LUP)L[HG(IIHFWV
1R
1R
1R
<HV
<HV
<HV
1R
1R
1R
<HV
<HV
<HV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1RWHV 7KH WDEOH UHSRUWV HVWLPDWHV IURP RUGLQDU\ OHDVW VTXDUHV UHJUHVVLRQV 7KH GHSHQGHQW YDULDEOH LV WKH &KDQJH LQ WKH QHW )LUP &'6 &RQWUDFWV +HOG E\ WKH %DQN ZKLFK LV WKH GLIIHUHQFH LQ WKH QHW QRWLRQDO DPRXQW DQG QXPEHU RI &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO
ILUP KHOG E\ HDFK LQGLYLGXDO EDQN EHWZHHQ WKH LQGLFDWHG SHULRGV DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ WKH SHULRG %DQN )LUP ([SRVXUH %HIRUH LV WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP LQ 4 7KH )LUP &'6 3ULFH %HIRUH LV WKH SUHPLXP SDLG IRU
D &'6 FRQWUDFW RQ WKH ILUP DW WKH HQG RI 4 7DEOH FRQWDLQV DOO GHILQLWLRQV DQG WKH VXPPDU\ VWDWLVWLFV IRU HDFK LQFOXGHG YDULDEOH )LJXUH GLVSOD\V WKH WLPLQJ RI DOO SHULRGV &RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG HUURUV ZKLFK DUH FOXVWHUHG DW EDQN
OHYHO DUH UHSRUWHG LQ WKH URZ EHORZ DQG WKH FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ <HV LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV LV LQFOXGHG 1R LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV LV QRW LQFOXGHG 6LJQLILFDQW DW VLJQLILFDQW DW VLJQLILFDQWDW
22
0RGHOV DQG 7DNH IRU H[DPSOH WKH LQWHUDFWLRQ FRHIILFLHQW LQ 0RGHO ZKLFK HTXDOV
UHIHUULQJWRDFKDQJHRIPLOOLRQ¼LQWKHVORSHRIWKHFKDQJHLQQHWDPRXQWRI&'6
FRQWUDFWV RQ %DQN)LUP ([SRVXUH SHU RQH VWDQGDUG GHYLDWLRQ FKDQJH LQ ERWK %DQN)LUP
([SRVXUH DQG )LUP &'6 3ULFH EHIRUH [[ ,W LV QRW VXUSULVLQJ WR KDYH D
VPDOOHUHIIHFWZKHQZHFRQVLGHUFKDQJHVLQWKHQHWDPRXQW+RZHYHUZHDOVRQRWHWKDWWKH
DYHUDJH FKDQJH LQ WKH QHW DPRXQW RI &'6 FRQWUDFWV LQ WKH ³3RVW3UH´ SHULRG HTXDOV WR PLOOLRQ ¼VHH 7DEOH 3DQHO $ 7KHSRVLWLYHDQGVLJQLILFDQWFRHIILFLHQWLQGHHGUHYHDOVWKH
KHGJLQJPRWLYHVRIEDQNVWKDWEX\PRUHFUHGLWSURWHFWLRQWKDQWKH\VHOOIRUDULVNLHUILUPWR
ZKLFKWKH\KDYHDQH[LVWLQJFUHGLWH[SRVXUH
)LQDOO\LQ7DEOHZHGLVWLQJXLVKWKHFKDQJHLQWKHQHWQRWLRQDOILUP&'6FRQWUDFWVKHOG
E\EDQNVGHSHQGLQJRQWKHOLTXLGLW\LPSURYHPHQWWKDWLVREVHUYHG5HPHPEHUWKDWWKH6PDOO
%DQJPD\KDYHLPSURYHGOLTXLGLW\LQWKH&'6PDUNHW)XORSDQG/HVFRXUUHWEXWWKDW
VRPH ILUPV PD\ KDYH EHQHILWWHG PRUH WKDQ RWKHUV :H ZRXOG H[SHFW WKH SUHYLRXVO\
GRFXPHQWHGLPSDFWWREHVWURQJHUIRUWKRVHWKDWVHHDPRUHLQWHQVHLPSURYHPHQWLQOLTXLGLW\
,Q3DQHO$ZHWKHUHIRUHOLPLWWKHVDPSOHWRFRQWUDFWVIRUZKLFKWKHFKDQJHIURP0LGWR
3RVW LOOLTXLGLW\ LV LQ WKH ORZHU SHUFHQWLOH PHDVXUHG E\ WKH FKDQJHV LQ UHODWLYH ELGDVN
VSUHDG RIWKHLU\HDU6HQLRU&'6LHWKLVLVWKHJURXSIRUZKLFKOLTXLGLW\LPSURYHVWKHPRVW
IURP 0LG WR 3RVW ,Q 3DQHO % ZH ORRN DW WKH WRS SHUFHQWLOH LH OLTXLGLW\ GURSV LQ WKLV
VHJPHQW7KH HVWLPDWHV DUH IXOO\ LQ OLQH ZLWK WKH H[SHFWDWLRQ DQG FRUURERUDWH RXU HDUOLHU
ILQGLQJV%DQNVEX\PRUHFUHGLWSURWHFWLRQWKDQWKH\VHOOIRUDULVNLHUILUPWRZKLFKWKH\KDYH
7KH UHODWLYH ELGDVN VSUHDG RI D ODUJH IUDFWLRQ RI WKH &'6V ILUVW VSLNHG LQ 'HFHPEHU GXH WR WKH ILQDQFLDO FULVLV WKHQ SODWHDXHG DW D UHODWLYHO\ KLJK OHYHO +RZHYHU DIWHU WKH 6PDOO %DQJ WKH UHODWLYH ELGDVN
VSUHDG VLJQLILFDQWO\ GURSSHG IURP ³0LG´ WR ³3RVW´ DQG IURP ³3UH´ WR ³3RVW´ VHH 7DEOH LH WKHUH LV D
UHPDUNDEOHLPSURYHPHQWLQOLTXLGLW\
,I WKH FKDQJH LQ LOOLTXLGLW\ IURP 0LG WR 3RVW LV LQ WKH ORZHVW SHUFHQWLOH WKH PHDQ RI WKH FKDQJH LQ
LOOLTXLGLW\HTXDOVOLTXLGLW\LPSURYHVZKLOHIRUWKHWRSSHUFHQWLOHJURXSWKHPHDQRIWKHFKDQJHLQ
LOOLTXLGLW\LVOLTXLGLW\GHWHULRUDWHV
23
7DEOH
7KHFKDQJHLQWKHQHWQRWLRQDOILUP&'6FRQWUDFWVKHOGE\EDQNVGHSHQGLQJRQWKHOLTXLGLW\LPSURYHPHQt
3DQHO$7KHFKDQJHIURP0LGWR3RVWLQWKH,OOLTXLGLW\LQD\HDU6HQLRU&'6LVLQWKHORZHULHOLTXLGLW\ LPSURYHVIURP0LGWR3RVW
Period
Post - Pre
Post - Pre
Post - Pre
Post - Pre
Post - Mid
%DQN)LUP([SRVXUH%HIRUH
)LUP&'63ULFH%HIRUH
%DQN)LUP([SRVXUH%HIRUH)LUP&'63ULFH%HIRUH
&RQVWDQW
%DQN)L[HG(IIHFWV
)LUP)L[HG(IIHFWV
5VTXDUHG
2EVHUYDWLRQV
1R
1R
1R
1R
1R
1R
Mid - Pre
<HV
<HV
<HV
<HV
<HV
<HV
3DQHO%7KHFKDQJHIURP0LGWR3RVWLQWKH,OOLTXLGLW\LQD\HDU6HQLRU&'6LVLQWKHXSSHULHOLTXLGLW\ GURSV IURP0LGWR3RVW
Period
Post - Pre
Post - Pre
%DQN)LUP([SRVXUH%HIRUH
Post - Pre
Post - Pre
Post - Mid
Mid - Pre
)LUP&'63ULFH%HIRUH
%DQN)LUP([SRVXUH%HIRUH)LUP&'63ULFH%HIRUH
&RQVWDQW
%DQN)L[HG(IIHFWV
1R
1R
1R
<HV
<HV
<HV
)LUP)L[HG(IIHFWV
1R
1R
1R
<HV
<HV
<HV
5VTXDUHG
2EVHUYDWLRQV
1RWHV 7KH WDEOH UHSRUWV HVWLPDWHV IURP RUGLQDU\ OHDVW VTXDUHV UHJUHVVLRQV 7KH GHSHQGHQW YDULDEOH LV WKH &KDQJH LQ WKH QHW QRWLRQDO ILUP &'6 FRQWUDFWV KHOG E\ WKH
EDQN ZKLFK LV WKH GLIIHUHQFH LQ WKH QHW QRWLRQDO DPRXQW RI &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO ILUP KHOG E\ HDFK LQGLYLGXDO EDQN EHWZHHQ WKH LQGLFDWHG SHULRGV
DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ WKH SHULRG %DQN )LUP ([SRVXUH %HIRUH LV WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP LQ 4 7KH )LUP
&'6 3ULFH %HIRUH LV WKH SUHPLXP SDLG IRU D &'6 FRQWUDFW RQ WKH ILUP DW WKH HQG RI 4 3DQHO $ SUHVHQWV WKH VXEVDPSOH ZLWK WKH KLJKHVW OLTXLGLW\
LPSURYHPHQW LQ \HDU &'6 IURP 3RVW WR 0LG ZKLOH 3DQHO % GLVSOD\V WKH UHVXOWV IRU WKH VXEVDPSOH RI WKH ORZHVW OLTXLGLW\ LPSURYHPHQW 7DEOH FRQWDLQV DOO
GHILQLWLRQV DQG WKH VXPPDU\ VWDWLVWLFV IRU HDFK LQFOXGHG YDULDEOH )LJXUH GLVSOD\V WKH WLPLQJ RI DOO SHULRGV &RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG
HUURUV ZKLFK DUH FOXVWHUHG DW EDQN OHYHO DUH UHSRUWHG LQ WKH URZ EHORZ DQG WKH FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ <HV LQGLFDWHV WKDW WKH VHW RI
IL[HGHIIHFWVLVLQFOXGHG1RLQGLFDWHVWKDWWKHVHWRIIL[HGHIIHFWVLVQRWLQFOXGHG6LJQLILFDQWDWVLJQLILFDQWDWVLJQLILFDQWDW
24
DQH[LVWLQJFUHGLWH[SRVXUH7KLVLVHVSHFLDOO\WKHFDVHZKHQOLTXLGLW\LPSURYHVPRVWEXWLV
QRWWUXHIRUWKRVHZKLFKOLTXLGLW\GHWHULRUDWHV
,PSDFWRQ/HQGLQJDURXQGWKH6PDOO%DQJ
,Q WKH VHFRQG VWHS RI RXU DQDO\VLV ZH XVH WKH FKDQJHV LQ &'6 FRQWUDFWV WKDW ZHUH WKH
GHSHQGHQWYDULDEOHVLQWKHILUVWVWHSLQDQDWWHPSWWRH[SODLQFKDQJHVLQWKHFUHGLWH[SRVXUH
EHWZHHQWKHVDPHILUPEDQNSDLULQWKHVDPHSHULRG6SHFLILFDOO\ZHHVWLPDWH(TXDWLRQWR
H[SODLQ WKH FKDQJH LQ EDQN ILUP H[SRVXUH IURP PLG WR SRVW6PDOO %DQJ ZLWK WKH
H[RJHQRXVO\FDXVHGFKDQJHLQILUP&'6FRQWUDFWVKHOGE\EDQNVGXULQJWKHVDPHSHULRGDQG
WKHILUP&'6SULFHEHIRUHWKH6PDOO%DQJ:HXVHDVLPLODUDSSURDFKLQRXUHVWLPDWLRQVDQG
WKHXVHRIPHDVXUHVIRUWKHFKDQJHLQ&'6WUDGLQJ,Q7DEOHZHILUVWVWDUWZLWKDUHJUHVVLRQ
LQFOXGLQJRQO\WKHFRQVWDQWWHUP7KURXJKRXWWKHUHVWRIWKHWDEOHZHLQFOXGHFKDQJHVLQWKH
QHWQRWLRQDODPRXQWRIILUP&'6FRQWUDFWVKHOGE\EDQNVLQWKHPRGHO7KHFRHIILFLHQWRQWKH
FKDQJHLQILUP&'6FRQWUDFWVLVQHJDWLYHEXWQRWVLJQLILFDQWLQDQ\PRGHO7KHFRHIILFLHQWRQ
WKH)LUP&'63ULFH3UHYDULDEOHLVQHJDWLYHDQGVLJQLILFDQWLQDOOVSHFLILFDWLRQVVXJJHVWLQJ
WKDW DQ LQFUHDVH LQ ILUP ULVN LV H[SHFWHG WR GHFUHDVH FUHGLW H[SRVXUH WR WKRVH ILUPV 7KH
FRHIILFLHQWHTXDOVWRLQ0RGHOLPSO\LQJWKDWDRQHSHUFHQWDJHSRLQWLQFUHDVHLQ
WKH &'6 SULFH ZRXOG OHDG WR D GHFUHDVH LQ FUHGLW H[SRVXUH E\ ¼ WR WKDW ILUP 7KH
LQWHUDFWLRQWHUPIRUWKH&KDQJHLQ)LUP&'6&RQWUDFWV+HOGE\WKH%DQNIURP0LGWR3RVW
DQG)LUP&'63ULFH3UHLVQHJDWLYHDQGVLJQLILFDQWLQDOOPRGHOVDQGLWHTXDOVWR
LQ0RGHOVDQG7KLVHVWLPDWHLPSOLHVWKDWIROORZLQJWKH6PDOO%DQJLIDEDQNLQFUHDVHVLWV
&'6WUDGLQJE\RQHEX\FRQWUDFWIRUDOHVVULVN\ILUPLHLIWKH)LUP&'6SULFHLVORZHUE\
RQHSHUFHQWDJHSRLQWEHIRUHWKH6PDOO%DQJWKHLQFUHDVHLQWKHWKUHHTXDUWHUDYHUDJHEDQN
ILUPOHYHOFUHGLWH[SRVXUHDYHUDJHGRYHUWKUHHTXDUWHUV³3RVW0LG´HTXDOVWR¼
7KHWLPLQJRI0RGHOPD\QRWEHRSWLPDOIRUWKLVVSOLWDVWKHOLTXLGLW\LPSURYHPHQWFRUUHVSRQGVWRWKHSHULRG
IURP0LGWR3RVWZKLOHWKHGHSHQGHQWYDULDEOHLVPHDVXUHGIURP3UHWR0LG
25
7DEOH
7KHFKDQJHLQEDQNILUPH[SRVXUHIURPPLGWRSRVW6PDOO%DQJH[SODLQHGE\QHW&'6FRQWUDFWVDQGKHGJLQJDFWLYLW\
'HSHQGHQW9DULDEOH
6DPSOH
&KDQJHLQ%DQN)LUP([SRVXUHIURP0LGWR3RVW6PDOO%DQJ
%\&KDQJHLQ,OOLTXLGLW\LQ\HDU6HQLRU&'63RVW
0LG
)XOO
<25%
The timing of Bank Hedging on This Firm:
>75%
<25%
>75%
PrePost&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW
)LUP&'63ULFH3UH
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW)LUP&'63ULFH3UH
%DQN+HGJLQJRQ7KLV)LUP
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW%DQN+HGJLQJRQ7KLV)LUP
)LUP&'63ULFH3UH%DQN+HGJLQJRQ7KLV)LUP
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW)LUP&'63ULFH3UH%DQN+HGJLQJRQ7KLV)LUP
,QVWUXPHQWV/HYHORI)LUP&'61HW+HOGE\WKH%DQNDW(QGRI3UH6PDOO%DQJ
1R
1R
1R
<HV
1R
1R
1R
1R
1R
1R
%DQN)L[HG(IIHFWV
1R
1R
<HV
<HV
1R
<HV
<HV
<HV
<HV
<HV
)LUP)L[HG(IIHFWV
1R
1R
<HV
<HV
1R
<HV
<HV
<HV
<HV
<HV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1RWHV 7KH WDEOH UHSRUWV HVWLPDWHV IURP RUGLQDU\ OHDVW VTXDUHV UHJUHVVLRQV DQG ,9 UHJUHVVLRQV 7KH GHSHQGHQW YDULDEOH LV WKH &KDQJH LQ %DQN)LUP ([SRVXUH IURP 0LG WR 3RVW6PDOO %DQJ ZKLFK LV WKH GLIIHUHQFH LQ WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN
KDV WR WKH ILUP IURP PLG WR SRVW DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ WKH SHULRG 7KH &KDQJH LQ )LUP &'6 &RQWUDFWV +HOG E\ WKH %DQN ZKLFK LV WKH GLIIHUHQFH LQ WKH QXPEHU RU QRWLRQDO DPRXQW RI &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO ILUP KHOG E\ HDFK
LQGLYLGXDO EDQN IURP PLG WR SRVW DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ WKH SHULRG 7KH )LUP &'6 3ULFH 3UH LV WKH SUHPLXP SDLG IRU D &'6 FRQWUDFW LQ WKH SUH SHULRG DYHUDJHG DFURVV WKH WKUHH TXDUWHUV LQ WKH SHULRG %DQN +HGJLQJ RQ WKLV )LUP LV D
GXPP\ ZKLFK HTXDOV WR RQH LI WKH UDWLR RI QHW QRWLRQDO DPRXQW RI &'6 FRQWUDFWV KHOG E\ D EDQN RQ D ILUP DW WKH HQG RI SUH SHULRG DQG SRVWSHULRG UHVSHFWLYHO\ WR WKH VDPH SHULRG EDQNILUP OHYHO FUHGLW H[SRVXUH LV EHWZHHQ DQG DQG ]HUR LQ RWKHU
FDVHV 7KH ODVW IRXU FROXPQV SUHVHQW WKH VXEVDPSOHV LQ ZKLFK WKH OLTXLGLW\ LPSURYHPHQW LQ \HDU &'6 IURP 3RVW WR 0LG EHORQJV WR WKH WRS SHUFHQWLOH FKDQJH RI LOOLTXLGLW\ RU WR WKH ORZHVW SHUFHQWLOH FKDQJH RI LOOLTXLGLW\ ! 7DEOH FRQWDLQV DOO GHILQLWLRQV DQG WKH VXPPDU\ VWDWLVWLFV IRU HDFK LQFOXGHG YDULDEOH )LJXUH GLVSOD\V WKH WLPLQJ RI DOO SHULRGV &RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG HUURUV ZKLFK DUH FOXVWHUHG DW EDQN OHYHO DUH UHSRUWHG LQ WKH URZ EHORZ DQG WKH
FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ <HV LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV RU LQVWUXPHQW LV LQFOXGHG 1R LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV RU LQVWUXPHQW LV QRW LQFOXGHG 6LJQLILFDQW DW VLJQLILFDQW DW VLJQLILFDQW
DW
26
7KH FRQWHPSRUDQHRXV GHILQLWLRQ RI ERWK FUHGLW H[SRVXUHV DQG &'6 SRVLWLRQV E\ EDQNV
UDLVHV WKH FRQFHUQ RI UHYHUVH FDXVDOLW\ ZKLFK RFFXUV IRU H[DPSOH LI WKH FKDQJH LQ FUHGLW
H[SRVXUHVKDVGHWHUPLQHGWKHFKDQJHLQ&'6FRQWUDFWVLQVWHDG:HDSSURDFKWKLVSUREOHPE\
XVLQJDQLQVWUXPHQWDOYDULDEOHVHVWLPDWLRQPHWKRGLQ0RGHO:HLQVWUXPHQWWKHFKDQJHLQ
&'6 FRQWUDFWV DQG LWV LQWHUDFWLRQ ZLWK ILUP &'6 SULFH 3UH ZLWK WKH IROORZLQJ YDULDEOHV
7KH OHYHO RI QHW &'6 FRQWUDFWV KHOGE\WKHEDQNDWWKHHQGRI3UH6PDOO%DQJ4
DQG WKH LQWHUDFWLRQ WHUP EHWZHHQ WKH VDPH LQVWUXPHQW DQG ILUP &'6 SULFH 3UH 7KH
FRHIILFLHQW IRU WKH LQWHUDFWLRQ WHUP LV QHJDWLYH DQG VWDWLVWLFDOO\ VLJQLILFDQW DQG KDV D VLPLODU
PDJQLWXGHWRWKHRQHVLQSUHYLRXVPRGHOV
,QVXPEDQNVWKDWKDGDODUJHUQHWLQFUHDVHLQWKHLU&'6KROGLQJVRIVDIHUILUPVLQFUHDVH
WKHLUFUHGLWH[SRVXUHVWRWKHVHILUPV7KHVHUHVXOWVLQGHHGLQGLFDWHWKDWEDQNVGRQRWVHHPWR
³DEXVH´ WKH LQQRYDWLRQ WR WDNH RQ PRUH ULVN +RZHYHU DQ DOWHUQDWLYH H[SODQDWLRQ PD\ EH
UHODWHG WR WKH VRFDOOHG HPSW\ FUHGLWRU SUREOHP LQ WKH OLWHUDWXUH WKDW LV ZKHQ EDQNV UHGXFH
WKHLUFUHGLWH[SRVXUHWRULVNLHUILUPVZKLOHVSHFXODWLQJRQWKHLUGHIDXOWWKURXJKWKHSXUFKDVH
RI PRUH&'6FRQWUDFWVWKDQWKH\ZRXOGQHHGWRSURSHUO\FRYHUWKHLUH[SRVXUHV%ROWRQDQG
2HKPNH 7KH NH\ WR WKLV LGHQWLILFDWLRQ SUREOHP LV WR VHSDUDWH RXW WKH FDVHV ZKHQ
EDQNVXVH&'6WRKHGJHWKHLUFUHGLWH[SRVXUHUDWKHUWKDQJHWRYHULQVXUHGZKLOHZDLWLQJIRU
WKHILUPWRGHIDXOW
7RDFFRPSOLVKWKLVZHLQWURGXFHDQHZYDULDEOHBank Hedging on This Firm, ZKLFKLVD
GXPP\WKDWLVHTXDOWRRQHLIWKHUDWLRRIWKHQHWQRWLRQDODPRXQWRI&'6RQDILUPKHOGE\D
EDQNWRWKHFUHGLWH[SRVXUHWKHEDQNKDVWRWKLVILUPLVEHWZHHQDQGLQWKHODVWTXDUWHURI
WKHLQGLFDWHGSHULRGDQGLVHTXDOWR]HURLQDOORWKHUFDVHV:HLQWHUDFWWKLVGXPP\YDULDEOH
ZLWK)LUP&'6SULFH3UHDQG&KDQJHLQWKH1HW1RWLRQDO$PRXQWRI)LUP&'6&RQWUDFWV
+HOGE\WKH%DQNIURP0LGWR3RVWWRH[SODLQWKH%DQN)LUP([SRVXUHIURP0LGWR3RVW
7RDVVHVVWKHLPSRUWDQFHRIWKLVVRPHZKDWad hocWKUHVKROGZHXVHKHGJHUDWLRVERWKZLWKDEURDGHUUDQJH
EHWZHHQDQGDQGZLWKDQDUURZHUUDQJHEHWZHHQDQG2XUUHVXOWVDUHIXOO\UREXVWWRWKHVH
DOWHUQDWLYHGHILQLWLRQVRIWKHBank Hedging on This FirmGXPP\
27
:HZRXOGOLNHWRLQYHVWLJDWHLIDEDQNKDVLWVFUHGLWH[SRVXUHWRDULVNLHUILUPSURSHUO\KHGJHG
ZLWK &'6 LQ 3UH RU 3RVW SHULRG DQG LI LW LQFUHDVHV LWV QHW KROGLQJV RI &'6 RQ WKH ILUP
ZKHWKHUWKHQWKHEDQNZLOOH[WHQGPRUHFUHGLWWRWKHILUPDVLWJHWVPRUHVHFXUHG
0RGHOVWRLQ7DEOHSUHVHQWWKHUHVXOWV7KHFRHIILFLHQWVRIWKH&KDQJHLQ1HW1RWLRQDO
$PRXQWRI)LUP&'6&RQWUDFWVIURP0LGWR3RVWDQG)LUP&'63ULFH3UHDVZHOODVRI
WKHLULQWHUDFWLRQWHUPVDOOKDYHVLPLODUVLJQDQGVL]HDVLQWKHSUHYLRXVVWHS+RZHYHUZHDUH
PRUHLQWHUHVWHGLQWKHWULSOHLQWHUDFWLRQWHUPVZKLFKUHYHDOWKHKHWHURJHQHRXVHIIHFWVRIEHLQJ
SURSHUO\KHGJHG7KHFRHIILFLHQWVRQWKHWULSOHLQWHUDFWLRQWHUPVHTXDODQG
UHVSHFWLYHO\ KHQFH DUH SRVLWLYH DQG VLJQLILFDQW 7KH ODWWHU HVWLPDWH VXJJHVWV WKDW LI D EDQN
LQFUHDVHVLWVQHW&'6SRVLWLRQE\RQO\PLOOLRQ¼RQDULVNLHUILUPZLWKD&'6SULFHKLJKHU
E\ RQH SHUFHQWDJH SRLQW DQG JLYHQ WKDW WKH EDQN KDG SURSHUO\ KHGJHG LWV FUHGLW H[SRVXUH
EHIRUH WKH 6PDOO %DQJ WKHQ WKLV EDQN ZRXOG LQFUHDVH LWV EDQNILUP OHYHO FUHGLW H[SRVXUH
DYHUDJHG RYHU WKUHH TXDUWHUV ³3RVW0LG´ E\ DOPRVW ¼ 7KLV LV D VL]HDEOH LQFUHDVH
JLYHQ WKDW WKH DYHUDJH H[SRVXUH LV DURXQG PLOOLRQ ¼ DQG VXSSRUWV RXU SUHYLRXV
DUJXPHQWDWLRQ WKDW LI WKH EDQN LV EX\LQJ PRUH &'6 FRQWUDFWV IRU KHGJLQJ SXUSRVHV UDWKHU
WKDQ VSHFXODWLQJ RQ WKH GHIDXOW RI WKH ILUP WKH EDQN ZLOO JUDQW PRUH FUHGLW WR ULVNLHU ILUPV
GHVSLWHWKHDJJUHJDWHFRQWUDFWLRQLQFUHGLW
,Q0RGHOVWRZHRQFHPRUHGLIIHUHQWLDWHE\LOOLTXLGLW\VLQFHZHEHOLHYHWKDWWKHHIIHFW
VKRXOGEHPRUHSURQRXQFHGIRUILUPVWKDWEHQHILWWHGPRVWIURPWKH6PDOO%DQJ7KLVH[HUFLVH
IHUUHWV RXW IXUWKHU WKH FKDQJHV LQ H[SRVXUH FDXVHG E\ WKH FKDQJHV LQ &'6 FRQWUDFWV GULYHQ
VROHO\E\WKH6PDOO%DQJ:HDOVRLQYHVWLJDWHDQDOWHUQDWLYHWLPLQJIRUBank Hedging on This
FirmEDVHGRQWKH3RVWSHULRG7KHERWWRPOLQHLVWKDWHVSHFLDOO\IRUWKRVH&'6VIRUZKLFK
WKH 6PDOO %DQJ LPSURYHV OLTXLGLW\ WKH PRVW EDQNV WKDW KDG SURSHUO\ KHGJHG WKHLU FUHGLW
$KHGJLQJUDWLRLQWKHODVWTXDUWHURI3RVWPD\UHIOHFWWKHUHDOWDUJHWRIWKHEDQN¶VSRUWIROLRDGMXVWPHQWIURP
0LG WR3RVW 7KHUHIRUH UDWKHU WKDQ ORRNLQJ DW WKHKHGJLQJUDWLRE\ WKH HQG RI 3UHZKHQ WKH DGMXVWPHQW KDV
PHUHO\VWDUWHGBank Hedging on This Firm RI3RVWSHULRGPD\LQGLFDWHEHWWHULIWKHEDQNFKDQJHVLWV&'6QHW
SRVLWLRQLQRUGHUWRSURSHUO\KHGJHLWVFUHGLWH[SRVXUH
28
H[SRVXUH EHIRUH RU DIWHU WKH 6PDOO %DQJ JUDQW PRUH FUHGLW WR ULVNLHU ILUPV LQGHHG DV
H[SHFWHGWKHUHVXOWVHJWKHFRHIILFLHQWVRIWKHWULSOHLQWHUDFWLRQWHUPVDUHPRVWSURQRXQFHG
IRUWKHKLJKHVWOLTXLGLW\LPSURYHPHQWJURXSFKDQJHRILOOLTXLGLW\
&'6DQG&UHGLW([SRVXUHV:KLFK6HULHV³/HDGV´"
2XU LGHQWLILFDWLRQ UHOLHV RQ WKH 6PDOO %DQJ DV DQ H[RJHQRXV VKRFN RQ &'6 WUDGLQJ
+RZHYHU ZH DOVR FRQVLGHU WKH SRVVLELOLW\ WKDW WKH LQFUHDVHG WUDGLQJ PLJKW EH GULYHQ E\ D
FRQIRXQGLQJHYHQWQDPHO\WKHUHFHQWILQDQFLDOFULVLVZKLFKKDGDGLUHFWHIIHFWRQOHQGLQJDV
ZHOO ,Q WKDW FDVH ZH ZRXOG EH FDSWXULQJ D VSXULRXV FRUUHODWLRQ LQVWHDG RI H[SODLQLQJ WKH
FUHGLW H[SRVXUHV ZLWK &'6 SRVLWLRQV E\EDQNV6LPLODUO\WKHH[RJHQHLW\RIWKH6PDOO%DQJ
FRXOGHYHQEHTXHVWLRQHGLILWLVFRQVLGHUHGDVDUHVSRQVHWRWKHILQDQFLDOFULVLV+RZHYHUZH
QRWH WKDW ZKLOH WKH %LJ %DQJ PD\ KDYH EHHQ SDUWO\ WULJJHUHG E\ WKH /HKPDQ FROODSVH WKH
IROORZLQJ 6PDOO %DQJ LV FOHDUO\ PRVWO\ H[RJHQRXV WR HDFK LQGLYLGXDO EDQNILUP SDLU LQ
*HUPDQ\7KHILUVWSDQHOLQ)LJXUHVKRZVWKDWWKHLQFUHDVHGWUDGLQJZDVQRWLQGXFHGE\WKH
FULVLVDVJURVV1RWLRQDO$PRXQWRI)LUP&'6&RQWUDFWVKDGDGHFUHDVLQJWUHQGLQWKHVHFRQG
KDOIRIDQGWKHDPRXQWVVWDUWHGWRLQFUHDVHZLWKWKHLQWURGXFWLRQRIWKH6PDOO%DQJ
:HDOVRZRXOGOLNHWRIRUPDOO\WHVWZKHWKHUWKHFKDQJHVLQ&'6FRQWUDFWVDUHOHDGLQJWKH
FKDQJHV LQ FUHGLW H[SRVXUH :H HPSOR\ D SDQHO 9$5 PRGHO HPSOR\LQJ $EULJR DQG /RYH
ZKLFKLVDSDQHOYHUVLRQRID9$5PRGHOHVWLPDWHGZLWKWKHEDQNILUPOHYHOIL[HG
HIIHFWV ,Q WKH PRGHO HDFK YDULDEOH LV H[SODLQHG E\ LWV RZQ ODJV DQG WKH ODJV RI WKH RWKHU
HQGRJHQRXV YDULDEOH ZKHUH ZH WUHDW ERWK &'6 DQG EDQNILUP H[SRVXUH DV HQGRJHQRXV
%HIRUH HVWLPDWLQJ WKH PRGHO ZLWK *00 HVWLPDWRUV ZH ILUVW WDNH WKH TXDUWHUHQG &'6
FRQWUDFWVOHYHODQGPDWFKLWZLWKWKHTXDUWHUO\FUHGLWH[SRVXUHGDWD:HUHVWULFWWKHVDPSOHWR
WKHSHULRGEHWZHHQ4DQG4
7DEOH $ GLVSOD\V WKH HVWLPDWHG UHVXOWV 6LQFH ZH KDYH WZR HQGRJHQRXV YDULDEOHV HDFK
PRGHO LQFOXGHV WZR HTXDWLRQV DQG GLIIHUHQW VHWV RI HTXDWLRQV GLIIHU E\ WKH &'6 FRQWUDFW
29
YDULDEOHEHLQJXVHG)RUH[DPSOH0RGHOXVHVWKHQXPEHURIJURVV&'6FRQWUDFWVKHOGE\D
EDQNDVRQHRIWKHHQGRJHQRXVYDULDEOHV:HNHHSWZRODJVRIERWKHQGRJHQRXVYDULDEOHVDQG
DOVRLQFOXGHWKUHHH[RJHQRXVYDULDEOHV)LUP&'6SULFHWLVWKHTXDUWHUHQG&'6SULFHRI
WKH ILUP LQ WKH SUHYLRXV TXDUWHU 9,; LV WKH TXDUWHUHQG &KLFDJR %RDUG 2SWLRQV ([FKDQJH
&%2(9RODWLOLW\,QGH[DQG(XULERU2,6VSUHDGPRQWKLVWKHVSUHDGEHWZHHQWKHUDWHDW
ZKLFK (XURSHDQ EDQNV OHQG WR HDFK RWKHU (XULERU DQG WKH RYHUQLJKW ULVN IUHH
VZDS UDWH
DPRQJWKHVDPHEDQNVRIPRQWKSHULRG%RWK9,;DQG(XULERU2,6VSUHDGPRQWKFDQ
EH VHHQ DV SUR[LHV IRU WKH PDFURHFRQRPLF IDFWRUV LH PDUNHWZLGH ³IHDU´ DQG OLTXLGLW\
ZKLFKFDQLQIOXHQFHWKHHDVLQHVVRIERUURZLQJ
)RUHDFKGHSHQGHQWYDULDEOHZHDUHSDUWLFXODUO\LQWHUHVWHGLQWKHFRHIILFLHQWVRIWKHRWKHU
HQGRJHQRXV YDULDEOH DQG LWV ODJV )RU H[DPSOH LQ WKH ILUVW HTXDWLRQ RI 0RGHO ZKHUH WKH
QXPEHU RI QHW &'6 FRQWUDFWV LV EHLQJ H[SODLQHG ERWK WKH ILUVW DQG WKH VHFRQG ODJV RI WKH
FUHGLWH[SRVXUHGRQRWREWDLQVLJQLILFDQWFRHIILFLHQWVKRZHYHULQWKHVHFRQGHTXDWLRQZKHUH
WKHGHSHQGHQWYDULDEOHLVWKHFUHGLWH[SRVXUHWKHVHFRQGODJRIWKH)LUP&'6FRQWUDFWVKHOG
E\ WKH EDQN FDQ SUHFLVHO\ SUHGLFW WKH FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP )XUWKHU
HYLGHQFH LV IRXQG LQ WKH ODVW WZR URZV ZKHUH WKH UHVXOWV RI D *UDQJHU FDXVDOLW\ WHVW DUH
SUHVHQWHG)RUDOPRVWDOOWKHPRGHOV&'6*UDQJHUFDXVHVWKHFKDQJHLQFUHGLWH[SRVXUHEXW
QRWWKHRWKHUZD\URXQG7KHUHVXOWVRIWKHWHVWIRUWKHRSSRVLWHGLUHFWLRQDUHQRWVLJQLILFDQWDW
WKHSHUFHQWOHYHO7KDWLVWKHEDQNPD\DGMXVWWKHLU&'6SRVLWLRQVWZRTXDUWHUVEHIRUHWKH\
GRVRIRUWKHLUFUHGLWH[SRVXUHSRVVLEO\EHFDXVHWKH6PDOO%DQJKDVDILUVWRUGHUHIIHFWDVDQ
H[RJHQRXVVKRFNRQWKHWUDGLQJRI&'6RUEHFDXVHFXWWLQJRIFUHGLWH[SRVXUHLVDORQJWHUP
GHFLVLRQZKLFKUHTXLUHVPRUHGLVFUHWLRQ
3ODFHER7HVWV
8VDJHRIDQH[RJHQRXVHYHQWWRLGHQWLI\WKHHIIHFWRQ&'6WUDGLQJPLJKWUDLVHTXHVWLRQV
RQ ZKHWKHU WKH UHVXOWV DUH VHQVLWLYH WR WKH VHOHFWLRQ RI WKH HYHQW ZLQGRZ ZH QRWH WKDW DQ\
30
FRQIRXQGLQJHYHQWVGXULQJWKHVHOHFWHGZLQGRZFRPLQJIURPWKHGHPDQGRUVXSSO\VLGHKDYH
DOUHDG\ EHHQ DFFRXQWHG IRU E\ WKH LQFOXVLRQ RI EDQN DQG ILUP IL[HG HIIHFWV DQ\ RWKHU
KHWHURJHQHRXV HYHQW HJ WKH HIIHFW RQ GLIIHUHQW &'6 WUDGHG ILUPV GHDOLQJ ZLWK WKH VDPH
EDQNZLOOEHH[SODLQHGE\RXUH[SODQDWRU\YDULDEOHV,QWKLVVHFWLRQZHWKHUHIRUHUHSOLFDWH
RXUSUHYLRXVH[HUFLVHVRXWVLGHWKH6PDOO%DQJHYHQWZLQGRZQDPHO\IXOO\EHIRUHRUDIWHU
WKH6PDOO%DQJWRDVVHVVLIWKHLGHQWLILHGHIIHFWZRXOGDOVREHSUHVHQWWKHQ:HUHSODFHWKH
RULJLQDO WKUHH SHULRGV ZLWK VLQJOH TXDUWHUV EHIRUH DIWHU WKH 6PDOO %DQJ LH ³3UH´ ZLWK
4 4 ³0LG´ ZLWK 4 4 DQG ³3RVW´ ZLWK 4 4 7KH
FKDQJH LQ WKH LQGLFDWHG YDULDEOH UHIHUV WR WKH GLIIHUHQFH EHWZHHQ WKH LQGLFDWHG SHULRGV
DYHUDJHGDFURVVWKHTXDUWHULQWKHSHULRG
7DEOH$LQWKH$SSHQGL[SUHVHQWWKHUHHVWLPDWLRQRI(TXDWLRQIRUWKRVHQHZO\VHOHFWHG
SHULRGVDIWHUWKH6PDOO%DQJLQGLFDWHGZLWKWKHLUH[DFWSHULRGDQGWKHHTXLYDOHQW³3ODFHER´
WLPLQJEHORZ3DQHO$FRYHUVWKHSODFHERSHULRGEHIRUHWKH6PDOO%DQJZKLOH3DQHO%FRYHUV
WKHWKUHHTXDUWHUSHULRGDIWHUWKH6PDOO%DQJ7KHSUHGHWHUPLQHGYDOXHVIRUWKHH[LVWLQJEDQN
ILUP H[SRVXUH DQG WKH &'6 SULFH DUH PHDVXUHG LQ WKH ³%HIRUH´ SHULRG QDPHO\ 4
4 7KH UHVXOWV LQGLFDWH WKDW WKHUH LV QR HYLGHQFH IRU D UHODWLRQVKLS EHWZHHQ H[LVWLQJ
FUHGLWH[SRVXUHVWRULVNLHUILUPVDQGLQFUHDVHVLQ&'6RQWKHVHILUPVKHOGE\WKHVHEDQNVDIWHU
WKHHYHQWZLQGRZ
7KH VHFRQG H[HUFLVH SUHVHQWHG LQ 7DEOH$LVWKHUHHVWLPDWLRQRI(TXDWLRQH[SODLQLQJ
WKHUHDOORFDWLRQRIFUHGLWZLWKWKHFKDQJHLQ&'6SRVLWLRQV:HFDQQRORQJHUDUJXHDERXWWKH
GLUHFWLRQ RI FDXVDOLW\ KHUH DV WKH FKDQJH LQ ILUP &'6 FRQWUDFWV PD\ QRW EH H[RJHQHRXVO\
GHWHUPLQHG RXWVLGH WKH HYHQW ZLQGRZ RI WKH 6PDOO %DQJ 7KH LQWHUDFWLRQ WHUPV DUH
LQVLJQLILFDQWLQDOPRVWDOOVSHFLILFDWLRQV
,QXQUHSRUWHGSODFHERWHVWVZHDOVRUHSODFHWKHRULJLQDOWKUHHSHULRGVZLWKWKUHHV\PPHWULFSHULRGVDIWHUWKH
6PDOO%DQJQDPHO\³3UH´ZLWKWKHTXDUWHUVIURP4WR4³0LG´ZLWKWKHTXDUWHUVIURP4WR
4DQG³3RVW´ZLWKWKHTXDUWHUVIURP4WR47KHUHVXOWVDUHLQOLQHZLWKWKHSUHYLRXVSODFHER
WHVWV
31
&RQFOXVLRQ
:H LQYHVWLJDWH WKH OLQN EHWZHHQ RXWVWDQGLQJ EDQNILUP FUHGLW H[SRVXUHV KHGJLQJ ZLWK
&'6DQGJUDQWLQJRIQHZFUHGLW7RLGHQWLI\WKLVOLQNZHH[SORLWWKHHIIHFWVRIWKHVRFDOOHG
³6PDOO%DQJ´ZKLFKEURXJKWFRQWUDFWDQGFRQYHQWLRQFKDQJHVDQGIDFLOLWDWHGDKLJKHUGHJUHH
RIVWDQGDUGL]DWLRQLQWKH&'6PDUNHWLQ
7KLV LV WKH ILUVW SDSHU WR FRXSOH XQLTXH DQG FRPSUHKHQVLYH EDQNILUP &'6 WUDGLQJ GDWD
ZLWK D FUHGLW UHJLVWHU FRQWDLQLQJ DOO UHOHYDQW EDQNILUP FUHGLW H[SRVXUHV :H VWXG\ KRZ
IROORZLQJWKH6PDOO%DQJFKDQJHVLQWUDGLQJRI&'6RQVSHFLILFILUPVE\LQGLYLGXDOEDQNVLV
GHWHUPLQHG E\ DQ H[LVWLQJ FUHGLW H[SRVXUH WR D ILUP ZLWK KLJKHU GHIDXOW ULVN DQG KRZ
H[RJHQRXVO\FDXVHGFKDQJHVLQEDQNILUPOHYHO&'6WUDGLQJDIIHFWHGWKHSURYLVLRQRIFUHGLW
E\ WKHVH EDQNV WR WKHVH ILUPV :H ILQG WKDW WKH ULVNLHU WKH ILUP DQG WKH KLJKHU WKH H[LVWLQJ
FUHGLWH[SRVXUHWKHKLJKHUZLOOEHWKHORQJSRVLWLRQLQFUHGLWGHIDXOWVZDSVRIWKDWSDUWLFXODU
ILUP HVSHFLDOO\ ZKHQ OLTXLGLW\ LPSURYHV PRVW GXH WR HIIHFWV RI WKH 6PDOO %DQJ HYHQW
0RUHRYHUDQLQFUHDVHLQ&'6SRVLWLRQOHDGVWRDUHODWLYHO\KLJKHUDOORFDWLRQRIFUHGLWWRVDIHU
ILUPVGXULQJWKH6PDOO%DQJ+RZHYHULISURWHFWLRQSXUFKDVLQJEHIRUHWKH6PDOO%DQJZDV
IRUKHGJLQJSXUSRVHVEDQNVLQFUHDVHWKHLUFUHGLWH[SRVXUHWRULVNLHUILUPV
%HFDXVH RXU HVWLPDWHV LPSO\ WKDW IROORZLQJ WKH 6PDOO %DQJ PRUH KHGJLQJ WKURXJK &'6
DQGVXEVHTXHQWVDIHUOHQGLQJWRRNSODFHDQGWKDWRQO\EDQNVSURSHUO\KHGJHGEHIRUHWKH\PD\
WDNHPRUHULVNZHSURYLGHILUVWKDQGHYLGHQFHRQWKHEHQHILWVRIILQDQFLDOLQQRYDWLRQIRUULVN
PLWLJDWLRQ+HQFHSROLFLHVWKDWIRVWHUILQDQFLDOLQQRYDWLRQDQGVSXUWKHXVDJHRIFUHGLWGHIDXOW
VZDSVDUHQRWQHFHVVDULO\DVVRFLDWHGZLWKPRUHPRUDOKD]DUGRXVEDQNULVNWDNLQJEXWUDWKHU
ZLWKPRUHULVNPLWLJDWLRQ
32
5HIHUHQFHV
$EULJR 050 /RYH , (VWLPDWLRQ RI 3DQHO 9HFWRU $XWRUHJUHVVLRQ LQ 6WDWD D 3DFNDJH RI 3URJUDPV
8QLYHUVLW\RI+DZDLLDW0DQRD0DQRD
$FKDU\D 9*QG] < -RKQVRQ 7& %DQN8VH RI6RYHUHLJQ &'6 LQ WKH(XUR]RQH &ULVLV +HGJLQJ
DQG5LVN,QFHQWLYHV'HXWVFKH%XQGHVEDQN)UDQNIXUW
$USLQJ6&UHGLW3URWHFWLRQDQG/HQGLQJ5HODWLRQVKLSV-RXUQDORI)LQDQFLDO6WDELOLW\
$VKFUDIW $% 6DQWRV -$& +DV WKH &'6 0DUNHW /RZHUHG WKH &RVW RI &RUSRUDWH 'HEW" -RXUQDO RI
0RQHWDU\(FRQRPLFV
$XJXVWLQ 3 6XEUDKPDQ\DP 0* 7DQJ '< :DQJ 64 &UHGLW 'HIDXOW 6ZDSV $ 6XUYH\
)RXQGDWLRQVDQG7UHQGVLQ)LQDQFH
$XJXVWLQ 3 6XEUDKPDQ\DP 0* 7DQJ '< :DQJ 64 &UHGLW 'HIDXOW 6ZDSV 3DVW 3UHVHQW DQG
)XWXUH$QQXDO5HYLHZRI)LQDQFLDO(FRQRPLFV
%DQNIRU,QWHUQDWLRQDO6HWWOHPHQWV6WDWLVWLFDO5HOHDVH27&'HULYDWLYHV6WDWLVWLFVDWHQG'HFHPEHU
0RQHWDU\DQG(FRQRPLF'HSDUWPHQW%DVOH&+
%HUWUDQG 0 'XIOR ( 0XOODLQDWKDQ 6 +RZ 0XFK 6KRXOG :H 7UXVW 'LIIHUHQFHVLQ'LIIHUHQFHV
(VWLPDWHV"4XDUWHUO\-RXUQDORI(FRQRPLFV
%ROWRQ 3 2HKPNH 0 &UHGLW 'HIDXOW 6ZDSV DQG WKH (PSW\ &UHGLWRU 3UREOHP 5HYLHZ RI )LQDQFLDO
6WXGLHV
%RQJDHUWV ' 'H -RQJ ) 'ULHVVHQ - 'HULYDWLYH 3ULFLQJ ZLWK /LTXLGLW\ 5LVN 7KHRU\ DQG (YLGHQFH
IURPWKH&UHGLW'HIDXOW6ZDS0DUNHW-RXUQDORI)LQDQFH
&RORQQHOOR 6 (IILQJ 0 =XFFKL ) (PSW\ &UHGLWRUV DQG 6WURQJ 6KDUHKROGHUV 7KH 5HDO (IIHFWV RI
&UHGLW5LVN7UDGLQJ+DOOH,QVWLWXWHIRU(FRQRPLF5HVHDUFK+DOOH
'DQLV$'R(PSW\&UHGLWRUV0DWWHU"(YLGHQFHIURP'LVWUHVVHG([FKDQJH2IIHUV0DQDJHPHQW6FLHQFH
'HXWVFKH%XQGHVEDQN%DQNLQJ$FW%DQNLQJ5HJXODWLRQV
'X : *DGJLO 6 *RUG\ 0% 9HJD & &RXQWHUSDUW\ 5LVN DQG &RXQWHUSDUW\ &KRLFH LQ WKH &UHGLW
'HIDXOW6ZDS0DUNHW)HGHUDO5HVHUYH%RDUG:DVKLQJWRQ'&
'XIIHH *5 =KRX & &UHGLW 'HULYDWLYHV LQ %DQNLQJ 8VHIXO 7RROV IRU 0DQDJLQJ 5LVN" -RXUQDO RI
0RQHWDU\(FRQRPLFV
'XIILH'6FKHLFKHU09XLOOHPH\*&HQWUDO&OHDULQJDQG&ROODWHUDO'HPDQG-RXUQDORI)LQDQFLDO
(FRQRPLFV
(ULFVVRQ - -DFREV . 2YLHGR 5 7KH 'HWHUPLQDQWV RI &UHGLW 'HIDXOW 6ZDS 3UHPLD -RXUQDO RI
)LQDQFLDODQG4XDQWLWDWLYH$QDO\VLV
)XORS $ /HVFRXUUHW / 7UDQVSDUHQF\ 5HJLPH ,QLWLDWLYHV DQG /LTXLGLW\ LQ WKH &'6 0DUNHW (66(&
%XVLQHVV6FKRRO&HUJ\3RQWRLVH
*DOLO.6KDSLU20$PLUDP'%HQ=LRQ87KH'HWHUPLQDQWVRI&'66SUHDGV-RXUQDORI%DQNLQJ
DQG)LQDQFH
*kUOHDQX 1 3HGHUVHQ /+ 3RWHVKPDQ $0 'HPDQG%DVHG 2SWLRQ 3ULFLQJ 5HYLHZ RI )LQDQFLDO
6WXGLHV
*HKGH7UDSS0*QG]<1DVHY-7KH/LTXLGLW\3UHPLXPLQ&'67UDQVDFWLRQ3ULFHV'R)ULFWLRQV
0DWWHU"-RXUQDORI%DQNLQJDQG)LQDQFH
*QG]<0LWLJDWLQJ&RXQWHUSDUW\5LVN'HXWVFKH%XQGHVEDQN)UDQNIXUW
+DDV 0 5H\QROGV - ,OOLTXLGLW\ &RQWDJLRQ DQG ,QIRUPDWLRQ 6SLOORYHU IURP &'6 WR (TXLW\ 0DUNHWV
8QLYHUVLW\RI9LHQQD9LHQQD
+DVDQ,:X'D&UHGLW'HIDXOW6ZDSVDQG%DQN/RDQ6DOHV(YLGHQFHIURP%DQN6\QGLFDWHG/HQGLQJ
)RUGKDP8QLYHUVLW\1HZ<RUN1<
+DVDQ,:X'E+RZ'R/DUJH%DQNV8VH&UHGLW'HIDXOW6ZDSVWR0DQDJH5LVN"7KH%DQN)LUP
/HYHO(YLGHQFH)RUGKDP8QLYHUVLW\1HZ<RUN1<
+D\GHQ(3RUDWK'YRQ:HVWHUQKDJHQ1'RHV'LYHUVLILFDWLRQ,PSURYHWKH3HUIRUPDQFHRI*HUPDQ
%DQNV"(YLGHQFHIURP,QGLYLGXDO%DQN/RDQ3RUWIROLRV-RXUQDORI)LQDQFLDO6HUYLFHV5HVHDUFK
,6'$&'60DUNHW6XPPDU\0DUNHW5LVN7UDQVDFWLRQ$FWLYLW\
.DUD $ 0DUTXpV,EixH] ' 2QJHQD 6 6HFXULWL]DWLRQ DQG /HQGLQJ 6WDQGDUGV (YLGHQFH IURP WKH
:KROHVDOH/RDQ0DUNHW-RXUQDORI)LQDQFLDO6WDELOLW\
.LHVHO).RODULF66FKLHUHFN'5HYDOXDWLQJ)LUP&UHGLW5LVN±7KH,PSDFWRIWKH5DWLQJ5HYLHZ
3URFHVVRQ&UHGLW0DUNHWV7HFKQLVFKH8QLYHUVLWDW'DUPVWDGW'DUPVWDGW
.LP *+ &UHGLW 'HULYDWLYHV DV D &RPPLWPHQW 'HYLFH (YLGHQFH IURP WKH &RVW RI &RUSRUDWH 'HEW
-RXUQDORI%DQNLQJDQG)LQDQFH
33
.LP -6 .RR % /LX = +RZ 7UDGH 0DWFKLQJ )RUPV LQ WKH &UHGLW 'HIDXOW 6ZDS 0DUNHW 0RQDVK
8QLYHUVLW\
.UDKQHQ-36FKPLGW5+7KH*HUPDQ)LQDQFLDO6\VWHP2[IRUG8QLYHUVLW\3UHVV2[IRUG
/RXWVNLQD ( 7KH 5ROH RI 6HFXULWL]DWLRQ LQ %DQN /LTXLGLW\ DQG )XQGLQJ 0DQDJHPHQW -RXUQDO RI
)LQDQFLDO(FRQRPLFV
/RXWVNLQD (6WUDKDQ3( 6HFXULWL]DWLRQ DQG WKH 'HFOLQLQJ ,PSDFW RI %DQN)LQDQFHRQ /RDQ 6XSSO\
(YLGHQFHIURP0RUWJDJH$FFHSWDQFH5DWHV-RXUQDORI)LQDQFH
0DUNLW &'6 6PDOO %DQJ 8QGHUVWDQGLQJ WKH *OREDO &RQWUDFW DQG (XURSHDQ &RQYHQWLRQ &KDQJHV
/RQGRQ
0D\RUGRPR 6 3HxD -, 6FKZDUW] (6 $UH $OO &UHGLW 'HIDXOW 6ZDS 'DWDEDVHV (TXDO" (XURSHDQ
)LQDQFLDO0DQDJHPHQW
1RUGHQ/6LOYD%XVWRQ&:DJQHU:)LQDQFLDO,QQRYDWLRQDQG%DQN%HKDYLRU(YLGHQFHIURP&UHGLW
0DUNHWV-RXUQDORI(FRQRPLF'\QDPLFVDQG&RQWURO
2HKPNH 0 =DZDGRZVNL $ 6\QWKHWLF RU 5HDO" 7KH (TXLOLEULXP (IIHFWV RI &UHGLW 'HIDXOW 6ZDSV RQ
%RQG0DUNHWV5HYLHZRI)LQDQFLDO6WXGLHV
2HKPNH0=DZDGRZVNL$7KH$QDWRP\RIWKH&'60DUNHW5HYLHZRI)LQDQFLDO6WXGLHV
2QJHQD67PHU$ONDQ*YRQ:HVWHUQKDJHQ1&UHGLWRU&RQFHQWUDWLRQ$Q(PSLULFDO,QYHVWLJDWLRQ
(XURSHDQ(FRQRPLF5HYLHZ
3DUORXU &$:LQWRQ$ /D\LQJ2II &UHGLW 5LVN /RDQ 6DOHVYHUVXV &UHGLW'HIDXOW 6ZDSV-RXUQDORI
)LQDQFLDO(FRQRPLFV
3HWHUVHQ0$(VWLPDWLQJ6WDQGDUG(UURUVLQ)LQDQFH3DQHO'DWD6HWV&RPSDULQJ$SSURDFKHV5HYLHZ
RI)LQDQFLDO6WXGLHV
6DUHWWR $ 7RRNHV +( &RUSRUDWH /HYHUDJH 'HEW 0DWXULW\ DQG &UHGLW 6XSSO\ 7KH 5ROH RI &UHGLW
'HIDXOW6ZDSV5HYLHZRI)LQDQFLDO6WXGLHV
6FKHUWOHU $ %XFK &0 YRQ :HVWHUQKDJHQ 1 +HWHURJHQHLW\ LQ /HQGLQJ DQG 6HFWRUDO *URZWK
(YLGHQFHIURP*HUPDQ%DQNOHYHO'DWD,QWHUQDWLRQDO(FRQRPLFVDQG(FRQRPLF3ROLF\
6FKPLHGHU&7KH'HXWVFKH%XQGHVEDQN
V/DUJH&UHGLW'DWDEDVH%$.,60DQG0L0L.6FKPROOHUV
-DKUEXFK
6KDQ 6& 7DQJ '< :LQWRQ $ 0DUNHW YHUVXV &RQWUDFWLQJ &UHGLW 'HIDXOW 6ZDSV DQG &UHGLWRU
3URWHFWLRQLQ/RDQV6KDQJKDL$GYDQFHG,QVWLWXWHRI)LQDQFH6KDQJKDL
6KDQ 6& 7DQJ '< <DQ + &UHGLW 'HIDXOW 6ZDSV DQG %DQN 5LVN 7DNLQJ 6KDQJKDL $GYDQFHG
,QVWLWXWHRI)LQDQFH6KDQJKDL
6WUHLW] ' 7KH ,PSDFW RI &UHGLW 'HIDXOW 6ZDS 7UDGLQJ RQ /RDQ 6\QGLFDWLRQ 5HYLHZ RI )LQDQFH 6WXO]50&UHGLW'HIDXOW6ZDSVDQGWKH&UHGLW&ULVLV-RXUQDORI(FRQRPLF3HUVSHFWLYHV
6XEUDKPDQ\DP0*7DQJ'<:DQJ64'RHVWKH7DLO:DJWKH'RJ"7KH(IIHFWRI&UHGLW'HIDXOW
6ZDSVRQ&UHGLW5LVN5HYLHZRI)LQDQFLDO6WXGLHV
7DQJ '< <DQ + 0DUNHW &RQGLWLRQV 'HIDXOW 5LVN DQG &UHGLW 6SUHDGV -RXUQDO RI %DQNLQJ DQG
)LQDQFH
=KDQJ%<=KRX+=KX+([SODLQLQJ&UHGLW'HIDXOW6ZDS6SUHDGVZLWKWKH(TXLW\9RODWLOLW\DQG
-XPS5LVNVRI,QGLYLGXDO)LUPV5HYLHZRI)LQDQFLDO6WXGLHV
34
7DEOH$
3DQHO9$5PRGHORIILUP&'6FRQWUDFWKHOGE\EDQNDQGEDQNILUPFUHGLWH[SRVXUH
'HSHQGHQW9DULDEOH
Firm CDS Contracts held by Bank of Independent and Dependent Variables:
CDS
Notional
Amount
Gross
)LUP&'6&RQWUDFWV+HOGE\WKH%DQNW
Exposure
CDS
Number
Gross
Exposure
CDS
Notional
Amount
Net
Exposure
CDS
Exposure
Number
Net
)LUP&'6&RQWUDFWV+HOGE\WKH%DQNW
%DQN)LUP([SRVXUHW
%DQN)LUP([SRVXUHW
)LUP&'63ULFHW
9,;
(XULERU2,6VSUHDGPRQWK
1XPEHURI2EVHUYDWLRQV
SYDOXHRI*UDQJHUFDXVDOLW\WHVW([SRVXUHFDXVHV&'6
SYDOXHRI*UDQJHUFDXVDOLW\WHVW&'6FDXVHV([SRVXUH
1RWHV 7KLV WDEOH UHSRUWV HVWLPDWHV IURP SDQHO 9$5 PRGHO &'6 LV WKH QXPEHU RU QRWLRQDO DPRXQW RI WKH &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO ILUP KHOG E\ HDFK LQGLYLGXDO EDQN LQ WKH HQG RI TXDUWHU W ([SRVXUH LV
WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP LQ WKH HQG RI TXDUWHU W %RWK WKHVH WZR YDULDEOHV DUH DVVXPHG WR EH HQGRJHQRXV LQ WKH PRGHO DQG HDFK YDULDEOH LV H[SODLQHG E\ LWV RZQ ODJV DQG WKH ODJV RI
WKH RWKHU YDULDEOH LQ WKH WZRHTXDWLRQ V\VWHP 7KH )LUP &'6 3ULFH W LV WKH SUHPLXP SDLG IRU D &'6 FRQWUDFW RQ WKH ILUP DW WKH HQG RI TXDUWHU W 9,; LV WKH TXDUWHU HQG YL[ LQGH[ DQG (XULERU2,6 VSUHDG PRQWK LV WKH VSUHDG EHWZHHQ WKH UDWH DW ZKLFK (XURSHDQ EDQNV OHQG WR HDFK RWKHU (XULERU DQG WKH RYHUQLJKW ULVN IUHH
VZDS UDWH DPRQJ WKH VDPH EDQNV RI PRQWK SHLRG ,Q WKH HQG RI WKH WDEOH ZH DOVR GLVSOD\
WKH SYDOXH RI WKH *UDQJHU FDXVDOLW\ WHVW RI WKH FRUUHVSRQGLQJ PRGHO 7DEOH FRQWDLQV DOO GHILQLWLRQV DQG WKH VXPPDU\ VWDWLVWLFV IRU HDFK LQFOXGHG YDULDEOH )LJXUH GLVSOD\V WKH WLPLQJ RI DOO SHULRGV
&RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG HUURUV ZKLFK DUH FOXVWHUHG DW EDQN OHYHO DUH UHSRUWHG LQ WKH URZ EHORZ DQG WKH FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ 6LJQLILFDQW DW
VLJQLILFDQWDWVLJQLILFDQWDW
35
7DEOH$
3DQHO$
3ODFHERWHVWEHIRUHWKH6PDOO%DQJ7KHFKDQJHLQWKHILUP&'6FRQWUDFWVKHOGE\EDQNV
2008Q2 to 2008Q4
2008Q3 to 2008Q4
2008Q2 to 2008Q4
2008Q2 to 2008Q4
2008Q3 to 2008Q4
2008Q2 to 2008Q4
1XPEHURI&RQWUDFWV
Net
Net
Net
2008Q2 to 2008Q4
2008Q3 to 2008Q4
%DQN)L[HG(IIHFWV
)LUP)L[HG(IIHFWV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1RWLRQDO$PRXQWRI&RQWUDFWV
Net
Net
Net
2008Q2 to 2008Q4
%DQN)LUP([SRVXUH4)LUP&'63ULFH4
1XPEHURI&RQWUDFWV
Gross
Gross
Gross
2008Q2 to 2008Q4
Placebo Period
%DQN)LUP([SRVXUH4
2008Q3 to 2008Q4
From Indicated Period to Indicated Period
1RWLRQDO$PRXQWRI&RQWUDFWV
Gross
Gross
Gross
2008Q2 to 2008Q4
'HSHQGHQW9DULDEOH&KDQJHLQWKH)LUP&'6&RQWUDFWV+HOGE\WKH%DQN
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Mid
Mid - Pre
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
3DQHO%
3ODFHERWHVWDIWHUWKH6PDOO%DQJ7KHFKDQJHLQWKHILUP&'6FRQWUDFWVKHOGE\EDQNV
2010Q1 to 2010Q3
2010Q1 to 2010Q2
2010Q2 to 2010Q4
2010Q1 to 2010Q3
2010Q1 to 2010Q2
2010Q2 to 2010Q4
1XPEHURI&RQWUDFWV
Net
Net
Net
2010Q2 to 2010Q4
2010Q1 to 2010Q2
1RWLRQDO$PRXQWRI&RQWUDFWV
Net
Net
Net
2010Q1 to 2010Q3
1XPEHURI&RQWUDFWV
Gross
Gross
Gross
2010Q2 to 2010Q4
Placebo Period
2010Q1 to 2010Q2
From Indicated Period to Indicated Period
1RWLRQDO$PRXQWRI&RQWUDFWV
Gross
Gross
Gross
2010Q1 to 2010Q3
'HSHQGHQW9DULDEOH&KDQJHLQWKH)LUP&'6&RQWUDFWV+HOGE\WKH%DQN
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Mid
Mid - Pre
Post - Pre
Post - Mid
Mid - Pre
%DQN)LUP([SRVXUH4
%DQN)LUP([SRVXUH4)LUP&'63ULFH4
%DQN)L[HG(IIHFWV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
)LUP)L[HG(IIHFWV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
<HV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1RWHV 7KH WDEOH UHSRUWV HVWLPDWHV IURP RUGLQDU\ OHDVW VTXDUHV UHJUHVVLRQV7KH GHSHQGHQW YDULDEOH LV WKH &KDQJH LQ *URVV DQG 1HW )LUP &'6 &RQWUDFWV +HOG E\ WKH %DQN ZKLFK LV WKH GLIIHUHQFH LQ WKH QRWLRQDO DPRXQW DQG QXPEHU RI &'6 FRQWUDFWV RQ HDFK
LQGLYLGXDO ILUP KHOG E\ HDFK LQGLYLGXDO EDQN EHWZHHQ WKH LQGLFDWHG SHULRGV DYHUDJHG DFURVV WKH TXDUWHU LQ WKH SHULRG 3DQHO $ FRYHUV WKH SODFHER SHULRG EHIRUH WKH 6PDOO %DQJ ZKLOH 3DQHO % FRYHUV WKH SHULRG DIWHU WKH 6PDOO %DQJ %DQN )LUP ([SRVXUH LV WKH DPRXQW
RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH ILUP LQ 4 RU 4 7KH )LUP &'6 3ULFH LV WKH SUHPLXP SDLG IRU D &'6 FRQWUDFW RQ WKH ILUP DW WKH HQG RI 4 RU 4 &RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG HUURUV ZKLFK DUH FOXVWHUHG DW EDQN OHYHO DUH
UHSRUWHG LQ WKH URZ EHORZ DQG WKH FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ <HV LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV LV LQFOXGHG 1R LQGLFDWHV WKDW WKH VHW RI IL[HG HIIHFWV LV QRW LQFOXGHG 6LJQLILFDQW DW VLJQLILFDQW DW VLJQLILFDQW DW
36
7DEOH$
3DQHO$
7KHFKDQJHLQEDQNILUPH[SRVXUHIURP4WR43ODFHER3RVW0LGH[SODLQHGE\QHW&'6FRQWUDFWVDQGKHGJLQJDFWLYLW\
'HSHQGHQW9DULDEOH
7KH7LPLQJRIBank Hedging on This Firm:
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW
Pre(2008Q2)
)LUP&'63ULFH4
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW)LUP&'63ULFH4
&KDQJHLQ%DQN)LUP([SRVXUHIURP3ODFHER0LGWR3RVW4WR4
Pre(2008Q2)
Pre(2008Q2)
%DQN+HGJLQJRQ7KLV)LUP
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW%DQN+HGJLQJRQ7KLV)LUP
)LUP&'63ULFH4%DQN+HGJLQJRQ7KLV)LUP
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW)LUP&'63ULFH4%DQN+HGJLQJRQ7KLV)LUP
&RQVWDQW
1R
1R
%DQN)L[HG(IIHFWV
)LUP)L[HG(IIHFWV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1R
1R
<HV
<HV
Pre(2008Q2)
1R
1R
Pre(2008Q2)
<HV
<HV
Post(2008Q4)
1R
1R
Post(2008Q4)
<HV
<HV
3DQHO%
7KHFKDQJHLQEDQNILUPH[SRVXUHIURP4WR43ODFHER3RVW0LGH[SODLQHGE\QHW&'6FRQWUDFWVDQGKHGJLQJDFWLYLW\
&KDQJHLQ%DQN)LUP([SRVXUHIURP3ODFHER0LGWR3RVW4WR4
PrePrePrePrePostPost(2010Q1)
(2010Q1)
(2010Q1)
(2010Q1)
(2010Q3)
(2010Q3)
7KH7LPLQJRIBank Hedging on This Firm:
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW
)LUP&'63ULFH4
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW)LUP&'63ULFH4
%DQN+HGJLQJRQ7KLV)LUP
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW%DQN+HGJLQJRQ7KLV)LUP
)LUP&'63ULFH4%DQN+HGJLQJRQ7KLV)LUP
&KDQJHLQ1HW1RWLRQDO$PRXQWRI&'6&RQWUDFWV)URP0LGWR3RVW)LUP&'63ULFH4%DQN+HGJLQJRQ7KLV)LUP
&RQVWDQW
%DQN)L[HG(IIHFWV
1R
1R
<HV
1R
<HV
1R
<HV
)LUP)L[HG(IIHFWV
1R
1R
<HV
1R
<HV
1R
<HV
56TXDUHG
1XPEHURI2EVHUYDWLRQV
1RWHV 7KH WDEOH UHSRUWV HVWLPDWHV IURP RUGLQDU\ OHDVW VTXDUHV UHJUHVVLRQV 7KH GHSHQGHQW YDULDEOH LV WKH &KDQJH LQ %DQN)LUP ([SRVXUH EHWZHHQ WKH LQGLFDWHG SHULRGV ZKLFK LV WKH GLIIHUHQFH LQ WKH DPRXQW RI FUHGLW H[SRVXUH WKH EDQN KDV WR WKH
ILUP EHWZHHQ WKH LQGLFDWHG SHULRGV 7KH &KDQJH LQ 1HW 1RWLRQDO $PRXQW RI &'6 &RQWUDFWV )URP 0LG WR 3RVW LV WKH GLIIHUHQFH LQ WKH QHW QRWLRQDO DPRXQW RI &'6 FRQWUDFWV RQ HDFK LQGLYLGXDO ILUP KHOG E\ HDFK LQGLYLGXDO EDQN EHWZHHQ SODFHER
0LG WR 3RVW SHULRG 3DQHO $ FRYHUV WKH SODFHER SHULRG EHIRUH WKH 6PDOO %DQJ ZKLOH 3DQHO % FRYHUV WKH SHULRG DIWHU WKH 6PDOO %DQJ 7KH )LUP &'6 3ULFH LV WKH SUHPLXP SDLG IRU D &'6 FRQWUDFW DW WKH HQG RI 4 RU 4 %DQN +HGJLQJ
RQ WKLV )LUP LV D GXPP\ ZKLFK HTXDOV WR RQH LI WKH UDWLR RI QHW QRWLRQDO DPRXQW RI &'6 FRQWUDFWV KHOG E\ D EDQN RQ D ILUP DW WKH HQG RI SODFHER SUH SHULRG DQG SRVWSHULRG UHVSHFWLYHO\ WR WKH VDPH SHULRG EDQNILUP OHYHO FUHGLW H[SRVXUH LV
EHWZHHQ DQG DQG ]HUR LQ RWKHU FDVHV &RHIILFLHQWV DUH OLVWHG LQ WKH ILUVW URZ UREXVW VWDQGDUG HUURUV ZKLFK DUH FOXVWHUHG DW EDQN OHYHO DUH UHSRUWHG LQ WKH URZ EHORZ DQG WKH FRUUHVSRQGLQJ VLJQLILFDQFH OHYHOV DUH SODFHG DGMDFHQWO\ <HV
LQGLFDWHVWKDWWKHVHWRIIL[HGHIIHFWVLVLQFOXGHG1RLQGLFDWHVWKDWWKHVHWRIIL[HGHIIHFWVLVQRWLQFOXGHG6LJQLILFDQWDWVLJQLILFDQWDWVLJQLILFDQWDW
'HSHQGHQW9DULDEOH
Pre(2010Q1)
37