Summary of the Capital Working Group Meeting by rrboy

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									Agency Lending Disclosure Taskforce – Capital Group Notes 2004


                   Capital Working Group Meeting Notes from 2004

Table of Contents
Capital Working Group Meeting, November 30, 2004 ...................................................... 2
Capital Working Group Meeting, October 28, 2004 .......................................................... 4
Blind Test Team Meeting, September 30, 2004 ................................................................. 8
Capital Working Group Meeting, September, 23, 2004 ................................................... 10
“Blind Test Team” Meeting, September 15, 2004 ............................................................ 12
Blind Test Meeting, September 9, 2004 ........................................................................... 14
Daily data file test, July 29, 2004 ..................................................................................... 16
Capital Sub-Working Group Meeting, July 01, 2004 ....................................................... 18
Capital Large Working Group Meeting, June 24, 2004.................................................... 19
Capital Sub-Working Group Meeting, June 17, 2004 ...................................................... 21
Capital Working Group Meeting, June 10, 2004 .............................................................. 23
Capital Working Group Meeting, May 14, 2004 .............................................................. 26




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004



Capital Working Group Meeting, November 30, 2004
Participants

1. Michael Larson, Bank of America
2. Jim Collins, Bear Stearns
3. Marshall Levinson, Bear Stearns
4. Bill Tricarico, Barclays Capital
5. Peter Justini, Barclays Capital
6. Mariana Kind, Capco
7. Mike Concannon, Deutsche Bank
8. Jack Edwards, Deutsche Bank
9. Mark Holloway, Goldman Sachs
10. Les Nelson, Goldman Sachs
11. Pat Festino, ING
12. Bill O'Meara, Northern Trust
13. Angie Meyers, Northern Trust
14. Jessica McDermott, State Street

Summary:

1. Follow up on any blind tests that may have been conducted bi-laterally
None of the firms on the call have participated in any bi-lateral blind tests with their
lenders.

2. Follow up on confirmation from regulators on the treatment of corporate action
events.
The SIA Capital committee had not brought up these issues with the SEC. Two questions
remain open:
           o Whether certain corporate actions such as a merger should be treated the
              same as a return and a new loan, and

            o    For pre-paid foreign borrows, it is assumed that securities received on the
                 second day can be treated as cure.

Marshall Levinson volunteered to take these questions with the SEC. As soon as any
guidance is received, it will be shared with the group.

3. Review vendors' preparedness for the development of technical and functional
specifications required for transmission of daily file
Vendors are working internally on their technical and functional requirements. All
vendors and lenders should contact their vendors to acquire any documentation necessary
for lenders/borrowers specifications development.
DTCC has prepared a user guide for connectivity to its system. This guide is available
from Capco or directly through DTCC.
Most firms present on the call had not yet begin conversations with their vendors.

4. Open issues/questions


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Agency Lending Disclosure Taskforce – Capital Group Notes 2004


There were no open questions at this time. Once firms begin to work on their functional
and technical specifications there may be questions, which will be shared with the group.

5. Next Meeting
The next meeting has not been scheduled yet; it will most likely take place sometime in
January. The meeting for December 9th is cancelled due to the BMA conference on
Securities Lending. Many of the taskforce participants will be there. Les Nelson, Eric
Foster, Marshall Levinson and Tred McIntire will present on the Agency Lending
Disclosure initiative at 9:00 am.




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Capital Working Group Meeting, October 28, 2004
Participants:
1.LeAnn Auer, BGI
2. Andy Sears, BGA
3. Michael Larsen, BoA Securities
4. Jim Collins, Bear Stearns
5. Rochelle Pullman, CSFB
6. Mariana Kind, Capco
7. Brad Smith, Capco
8. Ann Marie Vroman, Citigroup
9. Michael Concannon, Deutsche Bank
10. Les Nelson, Goldman Sachs
11. Pat Festino, ING
12. Mary Jo Graffeo, Morgan Stanley
13. Xavier Kunukkasseril, Morgan Stanley
14. Angi Meyers, Northern Trust
15. Bill O’Meara, Northern Trust
16. Jessica McDermott, State Street
17. Andre Setyon, SunGard
18. John Grimaldi, SunGard
19. Scott Wellington, SunGard
20. Brian Mac Williams, TBMA
21. Rob Toomey, TBMA
22. Dan McIsaac, UBS




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Topics Covered:
The group discussed the following topics/questions have been brought to the PMO from
various participants since the last meeting.

1. If mark to markets are presented from the lender’s perspective, borrowers may not be
   able to reconcile the total marks for the day to the cash movement, because the cash is
   sent/received net of all positive and negative marks for that agent.
A: The “Mark to Markets” field will be changed to allow for a sign. A positive number
will indicate that the lender received cash from the borrower. A negative sign will
represent that the lender sent money to the borrower. The sign will precede the value. A
<space> will be used to represent a positive number. (See updated daily data file for
more details).

2. Can the “Activity Type” field become mandatory?
A: Since this may be difficult for some lenders to provide, it will remain optional.
Furthermore, lenders are not sure that this information will always be available. The open
loan detail will reflect all activity so borrowers can infer what the Activity type was.

3. Is the daily data file an activity file, or a snapshot?
A: The daily file is a snapshot sent at the end of each business day.

4. Confirm the assumption that the order in which different collateral is applied in mixed
collateral types (LOC, cash, etc) is a firm-level interpretation and does not affect the
record layout.
A: While it is correct that this issue does not affect the data layout, the group decided
that the issue should be forwarded to the SIA Capital Committee to decide whether to
raise this question with the regulators. The answer will affect individual firms, but not
the automated process addressed by the taskforce. The issue that arises is that a different
regulatory capital charge would result if LOC collateral were applied first or after, for
example, all cash collateral were applied, assuming the loan was over collateralized.

5. In the Detail Record there are 4 different Collateral fields (Cash, LOC, Securities &
Tri-party) but just one Currency Code field. How would we handle Collateral in multiple
currencies?

A: After a discussion on the utility of adding extra currency fields, the capital group
decided that this is necessary, as in the future these fields may be needed for international
transactions. While lenders stated that the collateral currency is independent of the
currency in which, for example, securities collateral is traded, and is often bilaterally
agreed, the existence of these fields will provide future flexibility should they be needed



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(e.g., if cash collateral were in USD and securities collateral were in Euro). The fields
have been added to the layout (See attached most recent version of the daily file).

6. What is the requirement for record retention?
A: The SIA capital committee will meet next week, and decide whether to raise this
question with the regulators. Currently it’s up to the books and records interpretation of
each firm. It is likely that guidance will be sought from the SEC to clarify the application
of the rule to the new system.

7. Is data storage going to be handled by DTCC or do firms need to have a storage
facility imbedded in their internal line of business systems?
A: DTCC will serve only as a pass though for the data. Each firm will be responsible for
storing its own data internally. However, DTCC will also be checking on their record
retention requirements. They are currently planning on holding the data from 5-7 days,
depending on the SEC response

8. For pre-paid foreign borrows, will securities received on the second day be treated as
cure?
A: Currently, this is a firm-level interpretation. There is a historical verbal confirmation
that this is the case, but it has never been formally approved. Since firms have expressed
an interest in obtaining a confirmation on this, the SIA Capital committee is likely to seek
guidance on this issue with regulators. The answer will not affect the layout of daily file
or how information is presented from borrowers to Lenders. This is a practice
clarification, which will affect each firm, but not the implementation of this project.

9. What are the international implications of the Agency Lending Disclosure initiative?
A: Currently the implications only extend to borrowers who are working with non US
agent lenders. However, the group believes that as soon as European regulators find out
about this effort in the US, they are likely to follow suit and construct similar
requirements. Additionally, Basel II will entail similar data disclosure requirements.

10. Is DTCC going to maintain a list of all the tax IDs and pseudo tax IDs for principals?
A: DTCC is not going to maintain a database of tax IDs, nor replicate the IRS tax ID
database. They are going to assign pseudo tax IDs, for those entities which do not have a
valid US tax ID. DTCC will maintain a cross-reference table and make it available to the
industry. This is a separate function that DTCC is going to provide outside of serving as a
transmission hub.

11. Should we talk about Repos and reverse repos under the auspices of this project?
A: This project covers all and any transactions done under a Securities Lending
Agreement. Repos have slightly different capital rules and are not part of this initiative.



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 The next Capital working Group Meeting will take place on November, 18. Details
                                 will follow.

  Any questions should be sent via email to Mariana Kind for distribution to the
                                   entire group




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Blind Test Team Meeting, September 30, 2004
Participants:
   1.    Mariana Kind, Capco
   2.    Brad Smith, Capco
   3.    LeAnn Auer, BGI
   4.    Andy Sears, BGA
   5.    Dan McIsaac, UBS
   6.    Rochelle Pullman, CSFB
   7.    Les Nelson, Goldman Sachs
   8.    Tom Hasselmann, Goldman Sachs
   9.    John Grimaldi, SunGard
   10.   Andre Steyon, SunGard
   11.   Bill O’Meara, Northern Trust
   12.   Dirk Pruis, Equilend

Topics Covered
   I.    Activities for new set of scenarios
   II.   Questions for the SEC

   I.      Activities for new set of scenarios
The group reviewed the activities and collateral type matrix and decided on the following
two scenarios:

   1. An international borrow which failed with different number of days that sale has
      occurred, pre-pay with treasuries and cash. 3 days of files needed showing that
      collateral was paid, but 3 days later the securities are still missing.

   2. An international return which fails: a fully collateralized borrow is in place,
      partial return fails. Collateral is mix of reasuries, cash and LOC Day 1 would
      show a fully collateralized borrow. Day 2 would have partial return that is not
      shown. 3 days of files needed.

A Potential third scenario would include a corporate action, however the group feels

SEC clarification – what do you do with “when issued” ?
When issued are very different
You are unsecured for the when issued.
Because you borrowed them, you are entitled to receive them, you are holding a
receivable from the market.
We need to know what the SEC expects us to do.
Collateralizing when issued, but the securities have not been issued, it looks like over
collateralized because it’s a claim on the entitlement.

Lenders are not in a position to take … between the loan date and the record date.
There is a big problem in the industry with this.



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Agency Lending Disclosure Taskforce – Capital Group Notes 2004


When issued are not only related to Japan, they are popping out in other places Europe,
Canada (sometimes the date is a month out)

The industry convention in the US is to freeze the price during the interim period
But instead you should pro-rate the mark to market, and you need the industry to agree to
adapt the same philosophy

Corporate action – perhaps a merger or a CUSIP swing
CUSIP swing issue -- typically due to a merger, may be trading at a different price.
It’s like a re-allocation of the security, you have a new security with a different price.
You have 2 totally different securities.
Ask SEC
Assume that CUSIP swing is treated as a return and a new borrow. And it should
not matter in the file, because it will just look like a return.

Cash merger – the stock goes away you settle on the difference in the cash. It will look
like a return.

When you have a case when a borrower sees a return, but it’s actually a CUSIP swing or
smth else, can that be recorded as a cure activity? Needs to clarify this assumption.

Ask lenders to include transactions that are currently invisible to the borrower, perhaps
include them in.
BGI – will speak with their operations folks to find out if there are any scenarios that
cause problems

We need 4 new lenders. Ask what systems lenders use.

Set up a working meeting with RMA reps how to settle this issue.
Andy, Curt, LeAnn Auer

Upcoming milestone




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004



Capital Working Group Meeting, September, 23, 2004
Participants
   1. Christine Reese, BGI                            11.   Les Nelson, Goldman Sachs
   2. Ray Gargiulo, Barclays Capital                  12.   Tom Hasselmann, Goldman Sachs
   3. Andrew Sears, BGA                               13.   MaryJo Grafeo, Morgan Stanley
   4. Mike Larsen, Bank of America                    14.   Bill O'Meara, Northern Trust
   5. Marshall Levinson, Bear Stearns                 15.   Andre Setyon, Sungard
   6. Jim Collins, Bear Stearns                       16.   John Grimaldi, Sungard
   7. Ann Marie Vroman, Citigroup                     17.   Rob Toomey, TBMA
   8. Rochelle Pullman, CSFB                          18.   Marilyn Hignett, Capco
   9. Jack Edwards, Deutsche Bank                     19.   Brad Smith, Capco
   10. Dirk Pruis, Equilend                           20.   Mariana Kind, Capco
   21.


Topics Covered:
   I.    Update from blind test team and other groups
   II.   Update on confirmation of assumptions by the regulators
   III.  Tri-party collateral
   IV.   New scenarios development for blind test

I. Update from blind test team and other groups
The first phase of the blind test is completed. All three firms conducting the test were
able to interpret the test scenarios. There were some differences in the presentation of the
data, however the firms used the same methodology for calculating the regulatory capital
charges. The test led to several changes in the Daily Loan Data file. The most recent
version of the file is available on CaPOW (http://capow.capco.com/914).
The output from the first phase of the test with results from 3 participating borrowers is
also available on CaPOW.

In order to further validate the accuracy of the file format, a second phase of tests will be
conducted with more complicated scenarios (see below).

A sub-set of the infrastructure group is currently developing use cases for the
transmission of both the customer data files (periodic) and the daily loan data file. The
former will be completed by the end of September, early October; while the latter should
be completed by the end of October.

II.    Update on confirmation of assumptions by the regulators
Marshall reported again on the progress made with the NYSE and the SEC on the
confirmation of assumptions presented to the in August. T
The regulators confirmed that: borrowers can pro-rate pooled collateral across principals
based on the market value of the securities borrowed, if the agent lenders do not pro-rate
such collateral.




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004


Additionally, the regulators confirmed that a return can be treated the same way as a
mark when determining next day cures.

The SEC indicated that firms do not need the legal right to offset to aggregate by
principal across multiple agent banks.

The discussion will continue with the SEC relating to the currently permitted 1 day grace
period associated with foreign borrows.

III. Tri-party Collateral

Several firms indicated that they do not make a distinction between securities collateral
or tri-party.
However, there is concern that the current SEC rules do not take into consideration the
risk that firms have related to where their collateral is being held.

This issue will be brought up with the regulators in future discussions as, the rules do not
adequately address the question.

IV. New scenarios development for blind test

A matrix has been developed which covers a variety of activities and collateral types.
Base on it borrowers and lenders from the blind test team will work together over the
next week to develop 3-4 additional “loans” for blind testing. The activities include:
international borrow/return which fails, corporate action, spin-off, among others. These
will be combined with various types of collateral (cash, securities, LOC or a combination
of the three).
The blind test team will work over the next 3 weeks to complete this work, and finalize
the format for the Daily Loan Data.

   The next Capital Working Group Meeting is on October 14. Details will be
announced prior to the meeting. In the mean time, the blind test team will continue
                                     its work.

  **Remember to check CaPOW for updates to file types and other documents.**




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“Blind Test Team” Meeting, September 15, 2004
Participants:
    1.     Marshall Levinson, Bear Stearns
    2.     Rochelle Pullman, CSFB
    3.     John Grimaldi, Sungard
    4.     Scott Wellington, Sungard
    5.     Andre Setyon, Sungard
    6.     Christine Reese, BGI
    7.     LeAnn Auer, BGI
    8.     Tom Hasselmann, Goldman Sachs
    9.     Brian MacWilliams, TBMA
    10.    Brad Smith, Capco
    11.    Mariana Kind, Capco

Topics Covered:

    I.         Commingled collateral
    II.        Receiving firm ID
    III.       Development of New Scenarios for blind test

     I.     Commingled Collateral
Christine Reese checked with her system, and reported that it holds different types of
collateral separately. Additionally, it was noted that they also hold tri-party collateral in
which the securities are custodied with a different custodian. This raised the question as
to whether or not “Tri-Party” collateral should be a different collateral type and be a
unique data element. It needs to be clarified whether or not there is a capital charge if the
tri-party collateral exceeds 105%

It was noted that borrowers would have different risk / exposure levels depending on how
the certain types of collateral is held – e.g., is it held at the agent lender level or allocated
to principals. Rather than an official survey, it was recommended that this question and
implications be discussed at the RMA Securities Lending conference in October.

Furthermore, borrowers should investigate what additional types of collateral they pledge
and then determine if they need to be tracked separately on the daily file for purposes of
reconciliation or regulatory capital computation.

    II.     Receiving Firm ID:
It was reported that the infrastructure group recommends that both a legal entity identifier
and DTC ID be used on the header of the credit (periodic) and daily files. The Tax ID
would be used to denote the legal entity. The DTC ID would only be used for purposes of
routing / determining the destination of the message. Since legal entities may have more
than one DTC ID, borrowers and lenders should agree on a bilateral basis the DTC ID to
be used. Furthermore, within the file (at the booked loan level), the DTC ID will be
added as an optional field. The capital group accepted this recommendation.


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III. Development of new scenarios for blind test
It was recommended that a matrix be developed to identify and track the various
scenarios that have, and need to be, completed. The matrix should identify the collateral
type, and the activity. Activities should include corporate action events (splits, CUSIP
change) and international borrow and return fails. Capco will develop a matrix with all
possible actions and collateral types, review it with the borrowers, and then ask some
lenders to develop scenarios for testing. During this test, we will also ask the borrowers
to qualitatively describe their interpretation of the scenario.

We hope to have the scenarios distributed by the end of next week, 9/24/04.

 The next Capital Working Group meeting is scheduled for Sept 23rd for the entire
 capital working group. An announcement with details will be sent out prior to the
                                   meeting.

        Updated versions of the daily loan data file can be found on CaPOW.




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Blind Test Meeting, September 9, 2004
Participants:
   1.    Christine Reese, BGI
   2.    Andy Sears, Goldman Sachs
   3.    Les Nelson, Goldman Sachs
   4.    Tom Hasselman, Goldman Sachs
   5.    John Grimaldi, Loanet
   6.    Jim Collins, Bear Stearns
   7.    Marshall Levinson, Bear Stearns
   8.    MaryJo Graffeo, Morgan Stanley
   9.    Xavier Kunukkasseril, Morgan Stanley
   10.   Mike Foskin, Morgan Stanley
   11.   Brian MacWilliams, TBMA
   12.   Mariana Kind, Capco

Topics covered:
   I.     Update from SEC, NYSE
   II.    Review of Scenarios
   III.   Receiving Firm ID Discussion

    I.      Update from SEC, NYSE
Marshall reported that in discussion with NYSE and SEC of assumptions presented to
them for confirmation, most were accepted. The SEC said that firms do not need the legal
right to offset to aggregate by principal across multiple agent banks.

The discussion will continue with the SEC relating to the currently permitted 1 day grace
period associated with foreign borrows.

    II.     Review of scenarios
There are some differences between the three firms, of how the capital charge was
calculated. For example, Goldman Sachs considered that no cure activities took place on
Day 1. However, the baseline Excess/Deficit was calculated the same among all three
firms. And all three were able to decipher what the scenario was from the information
presented in the file.

It was decided that the price fields should be increased to carry 4 digits to the right of the
decimal for consistency in the calculations.

A question was raised as to whether the 105% applies to cure calculations or only to the
capital calculations. The group concluded that it does not apply, and that cure
calculations should be dollar for dollar.

There was also a difference in terms of calculating the return or the mark first.




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The group discussed the need to bring back the “Collateral type” field which was taken
out and replace by three fields indicating the collateral amount for each type (cash, LOC,
Securities).
This field will be added

In terms of the collateral, several questions arose:

1. Would a lender commingle cash, securities and/or LOC collateral against a single
loan?
2. What value would a lender apply to LOC's applied as collateral for a loan: the full
value of the LC, or the value of the loaned securities?
3. If loans are commingled, how would the file format be used to represent how the
collateral was allocated?

Christine Reese has volunteered to check how the systems BGI work in terms of the
commingled collateral issue.

The question of market value was raised, and whose market value are the borrowers
going to rely on?

The group expressed a strong desire for the development of more tests, these will be
developed at our next meeting.

Borrowers need to tell Lenders what they need and why they need it (e.g. reconciliation
or capital charge).

   III.    Receiving Firm ID

A brief discussion on the issue did not come to any new conclusions. The group decided
to give that issue back to the infrastructure group for final decision. An initial informal
survey of a few lenders shows that they use legal entity identification.


The next meeting of this group will take place Wednesday Sept 15, 1:00 – 3:00 pm at
              Capco. Details will be announced prior to the meeting.




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Daily data file test, July 29, 2004
Participants:
   1.    Christine Reese, BGI
   2.    Andy Sears, BGA
   3.    Marshall Levinson, Bear Stearns
   4.    Jim Collins, Bear Stearns
   5.    Dirk Pruis, Equilend
   6.    Les Nelson, Goldman Sachs
   7.    Tom Hasselman, Goldman Sachs
   8.    John Grimaldi, Loanet
   9.    Brian MacWilliams, TBMA
   10.   Brad Smith, Capco
   11.   Mariana Kind, Capco

The group received files from 2 of the borrowers, Bear Stearns and Morgan Stanley.
Additionally, Goldman Sachs, Equilend and Loanet presented their findings verbally.

All companies expressed the difficulty in completing the exercise. Each firm compiled
the data differently.

Some of the most difficult issues include:
    Pending/Settled indicator is confusing. The group proposes that the field be
      replaced with new fields:
          o Securities Status and
          o Collateral Status.
      Each of those fields will be 1 byte with the same indication P – pending; S –
      settled.

        Non-cash collateral, which in one case was a Letter of Credit was indicated only
         as “N” (non-cash), thus making it impossible for borrowers to know that it was in
         a LoC. The group proposes that the current “Collateral Amount” field be replaced
         by two new fields:
             o Cash Collateral Amount
             o Non-cash Collateral Amount
         With a nested drop-down menu for the mixed collateral

        Can a return of one security be applied as a cure to offset the capital charge on
         another? The rule does not provide clarification on this, and thus it is open to
         interpretation from each Broker/Dealer. The only written guidance is regarding
         marks and deficits. The group agrees that this question should be added to the list
         of questions for the regulators.
        The issue of mixed collateral pools is an open one as well. Some contracts allow
         the application of excess collateral to other contracts with deficits. A clear rule is
         needed on this question.



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The group established, that it is very difficult to analyze the results from the borrowers in
their current form, so Capco will design a template and distribute to all borrowers to enter
their data into.

A joint-capital/legal group conference call will be set up for August 4th to finalize and
format the questions that will be presented to the regulators. Details with time and dial in
will follow shortly.

Two more questions will be added to the list:
  1. Does a return or mark cure deficiencies on another loan?
  2. Does a return in general be used as a cure?

A future meeting with this small group to continue its work will be set up, once the new
template is ready. An announcement will follow.




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Capital Sub-Working Group Meeting, July 01, 2004
Participants:
   1.    Christine Reese, BGI
   2.    Marshall Levinson, Bear Stearns
   3.    Brad Smith, Capco
   4.    Mariana Kind, Capco
   5.    Rochelle Pullman, CSFB
   6.    Les Nelson, Goldman Sachs
   7.    Tom Hasselman, Goldman Sachs
   8.    Andrew Sears, Goldman Sachs
   9.    Patrick Festino, ING
   10.   Michael Tucci, MetWest
   11.   Bill O’Meara, Northern Trust
   12.   Daniel McIsaac, UBS

The group decided that the next steps for its work will be two fold:

   1. Present to the SIA capital committee to obtain their feedback. Their next meeting
      is on 7/13 from 1:00-2:30 at the SIA. Capco will work with Rochelle, Marshall
      and Les to prepare a package outlining the background of the initiative, the
      proposed data elements and the scenarios and open issues.

   2. Have 2-3 borrowers conduct an exercise where lenders send out files for fictitious
      trades and the borrowers without knowing any background information figure out
      whether they can interpret the information in the daily file or not. Comparisons
      will be made among the results for each borrower to examine where differences
      of interpretation took place. Goldman Sachs and UBS have volunteered for this
      exercise.


         The next sub working group meeting will be on July 15. The large working
         group meeting will meet on July 8th. Details will be announced prior to the
                                         meeting.




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Capital Large Working Group Meeting, June 24, 2004
Participants:
   1.  Les Nelson, Goldman Sachs                     11.   Andrew Sear, BGA
   2.  Rochelle Pullman, CSFB                        12.   Eric Foster, TBMA
   3.  Brad Smith, Capco                             13.   Brian MacWilliams, TBMA
   4.  Mariana Kind, Capco                           14.   Angi Meyers, Northern Trust
   5.  Sally Maske, Banc of America                  15.   Bill O’Meara, Northern Trust
       Securities                                    16.   Daniel McIsaac, UBS
   6. Elaine Orr, BGI                                17.   Irving Klubeck, Pershing
   7. Christine Reese, BGI                           18.   Pat Festino, ING
   8. Marshall Levinson, Bear Stearns                19.   Alexis Garcia, Banc of America
   9. Dirk Prius, Equilend                                 Securities
   10. Tom Hasselmann, Goldman Sachs

Topics Covered:
   I.    Data Elements which differ among the Agent Lenders
   II.   Questions for SEC and discussions with other groups


I. Data Elements from the daily transmission file
Input was available from BGI, BGA, State Street and Northern Trust (not yet in the Excel
file)

Activity type –
    This field may become mandatory rather than optional
    The current options Reallocation, Mark, and Return. The group discussed if
       “corporate action” should be included as well. Most firms thought it would be
       useful to include that, however some expressed concern that such an action will
       only be recorded as a return or a reallocation and a new loan and thus a “corporate
       action” option was not necessary. If there is different capital treatment, capital
       systems need to know that and distinguish it as a return.
    Concern expressed that there will be inconsistency among the agents as to how
       they show certain activity types. It is preferable to have fewer types, so the agents
       are consistent when they report what they have done. Too much detail may lead to
       inconsistency of reporting.
    Additional input is needed from a capital perspective to determine what activity
       types are required and which ones should be considered curative.
    Additionally, regarding if a corporate action event should be curative (e.g., a
       name change, CUSIP change, etc) will be brought up with the SEC.


Open Date: It remains to be decided what the open date will reflect, whether the date of
opening the loan or the settlement date. BGA reflects the settlement date, while the other




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004


three lenders reflect the open date of the loan. This issue will be discussed offline among
the lenders in order to understand the implications from a capital perspective.

Pre-pay: This remains an open issue, and will be discussed off line and in future
discussions with the SEC. Handling different pools of collateral for the same borrower
remains undecided.

II. SEC Questions and discussions with other Groups
Several questions will be sent to the SEC prior to a possible meeting with them in mid-
late July, when the SEC expects to receive a definitive project plan and timeline.

These include:
1. Activity types issues (discussed above)
2. Handling of pre-pay for foreign securities. Should borrowers take a charge on the first
   day?
3. Handling of fails – if a borrower returns a loan but does not receive cash back, should
   the borrower take a capital charge?
4. Aggregation across lender and across principal; Determine whether application of the
   capital charge should occur for each principal within an agent or if principals can be
   aggregated across agents. Do all broker/dealers have to use the same method for
   aggregation?

Additionally, the group agreed that it would be useful to involve the capital committee of
the SIA in the discussion of the above questions, as well invite smaller firms to
participate in a meeting(s) as they will be even more affected than the large firms by the
final requirements. The group will reach out to the SEC and SIA to reach some of the
smaller firms and organize a meeting with them.


  The next Capital sub-working group meeting will take place Thursday, July 1 at
             TBMA. Details will be announced prior to the meeting.




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004




Capital Sub-Working Group Meeting, June 17, 2004
Participants:
   1.   Christine Reese, BGI                           8.    Tom Hasselman, Goldman Sachs
   2.   Les Nelson, Goldman Sachs                      9.    Daniel McIsaac, UBS
   3.   Patrick Festino, ING                           10.   Rochelle Pullman, CSFB
   4.   Eric Foster, TBMA                              11.   Marshall Levinson, Bear Stearns
   5.   Brian MacWilliams, TBMA                        12.   Elaine Orr, BGI
   6.   Brad Smith, Capco                              13.   Bill O’Meara, Northern Trust
   7.   Mariana Kind, Capco

Topics covered:
I. Questions for SEC
II. Project Plan and time line by mid-July
III. Data fields discussion
IV. Open issues

I. Three Questions identified for the SEC:
1. How to handle the one day lag on foreign securities delivered (pre-pay).
2. Aggregation across lender and across principal; Determine whether application of the
capital charge should occur at the agent or the principal level. If capital charge is
computed at the principal level, then what is the effect on the booked contract level?
3. Calculation of the mark – implications for the booked contract level.
These questions will be sent in writing to the SEC, and discussed at a meeting.

II. Data fields Discussion
Open date – decided that this field will be kept in both the header (for reconciliation
purposes) and the repeating section. Further discussion required as to agree on exactly
what this date will reflect, the date the contract is booked, the day the loan is open, etc.

Trade ID – This filed will be included, however it needs to be discussed with the
infrastructure group. There is a technical question of how to link the information in the
header with the repeating section. This is a question for each borrower’s internal database
and its ability to “dissect” the information in such a way that it can still be segregated by
lender.

Activity field – this field will be included in the repeating section. It needs a re-allocation
indicator. Without it the borrowers will have to do a lot of analysis to back into what the
activity was. The question was open of whether there needs to be indicator for a down
reallocation and an up reallocation. But it was decided that that is not necessary.

Rebate and Reclaim rate – these fields are useful in the absence of a shared ID to relate
contracts to one another. The field is not there to drive any calculations, but to assist in a
fairly important reconciliation for the borrowers. It was determined that this field will be
kept.


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Agency Lending Disclosure Taskforce – Capital Group Notes 2004



Shares – a Trade Status field is preferred by both borrowers and lenders. This field will
be added to the static file. The group will propose options for this field.
“Settled” and “Pending” are two proposed options.
There may be some issues with “pending,” as it will not be clear whether collateral was
collected or not, causing the borrower to compute a capital charge, when in fact one was
not supposed to be computed.

Contract value -- “Collateral value” will replace “contract value” field.

Other Issues related to the data fields:
Mark and a partial return: Mark down – it was agreed that mark would be shown
regardless of the return. BGI will compute the mark by the same method as State Street,
showing the mark before the partial return. Confirmation from Northern Trust and Boston
Global Advisors on their preferred method of computation is still pending.

Value of non-cash collateral and pro-rating it – The non-cash collateral has to be
allocated down to the principal level and at the contract level. However, this is difficult if
there are two pools of collateral from the same borrower.
The non-cash collateral has to be clearly allocated with each loan, in case there is a
problem with an underlying principal. It can be treated as cash if there is only one pool
per borrower. If there are more then they have to be aggregated them together.
This question needs to be discussed with the legal and regulatory group in order to better
understand the legal implications of aggregating the non-cash collateral.

IV. Open Issues:
Pre-pay – what is the linkage between the booked contract and the principal?




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004




Capital Working Group Meeting, June 10, 2004
Participants:
   1.   Michael Larsen, Banc of America              8.    Brian MacWilliams, TBMA
        Securities                                   9.    Markus Sgouridis, TBMA
   2.   Christine Reese, BGI                         10.   Brad Smith, Capco
   3.   Michael Concannon, Deutsche Bank             11.   Mariana Kind, Capco
        Securities                                   12.   Wilhelm Brote, State Street
   4.   Dirk Pruis, Equilend                         13.   Tom Hasselman, Goldman Sachs
   5.   Les Nelson, Goldman Sachs                    14.   Daniel McIsaac, UBS
   6.   Patrick Festino, ING                         15.   Rochelle Pullman, CSFB
   7.   Eric Foster, TBMA

Scenarios feedback files
Background
    Two Agent Lenders provided sample files for the 8 scenarios- BGI, and State
      Street.
    Northern Trust and Boston Global Advisers will also be providing sample data for
      the scenarios.
    It was proposed that once the Northern Trust and BGA samples are added, the
      group will develop a proposed standard and send it out to other agent lenders to
      determine if they can provide the data in a similar way.

Findings
The following outlines some of the key differences between the BGI and State Street
files:

Scenario 1: Mark Activity Only
   1. No major differences
   2. General comments relating to all scenarios:
          a. Need to determine if open date is required since the date at the booked
             contract level does not change
          b. It was noted that the Trade ID’s at the allocated level are unique and are
             not linked to the booked trade Trade ID above.
          c. Activity field – it needs to be determined if this field is required in the
             allocated trade level
          d. Rebate and Reclaim rates – confirm if required as mandatory


Scenario 2: Mark and Partial Return
   1. Mark to Markets: There exists a difference between how these two lenders
      calculated the mark with a partial return. State Street’s calculation reflects the
      price decrease before the partial return, while BGI reflects the price decrease after
      the partial return. A consensus needs to be achieved as to which method to use.
      The difference may also arise from the timing of the two events. If there is only


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Agency Lending Disclosure Taskforce – Capital Group Notes 2004


       one file sent at the end of the day, it might make more sense to have the mark
       reflect the partial returns.

Scenario 3: Mark and Re-Allocation
1. No differences on data except Activity Type – Is it necessary to note that it’s a
    reallocation or can it be imputed since the open date is different than the other
    allocations. However, if the reallocation was not completely from one principal to
    another (e.g., from Principal A to Principal D), but was instead also spread across
    other existing Principals, the open date would not be useful for imputing this
    information.
2. Open Date: What is the open date if the principal comes in, goes out and comes back
    in?

Scenario 4: Non-Cash Collateral Day 1 and Day 2
1. Non-Cash Market Value – It is preferred that the non-cash collateral value be used as
    the value to allocate across the principals in the repeating section rather than the
    contract amount. The borrower could perform a pro-rata of this amount across
    principals based on their number of shares but this would not work if the non-cash
    collateral is booked across multiple contracts or if the collateral is pooled.
2. Need to determine how accrued rebate is entered – does it get allocated across the
    principals?
3. Contract amount varies across lenders


Scenario 5: Non-Cash Collateral with Mark and Re-Allocation
1. Same as Scenario 4 - Non-Cash Market Value – It is preferred that the non-cash
    collateral value be used as the value to allocate across the principals in the repeating
    section rather than the contract amount. The borrower could perform a pro-rata of
    this amount across principals based on their number of shares but this would not
    work if the non-cash collateral is booked across multiple contracts or if the collateral
    is pooled.
2. Need to determine how accrued rebate is entered– does it get allocated across the
    principals?

Scenario 6: Pre-Pay of Foreign Security
1. Shares – How will number of shares be shown since they have not been delivered? 0
    or the booked contract level. Potentially use a Trade Status Field that shows
    “Pending” – then borrowers would know to ignore the shares field and take a 100%
    exposure on the principals listed in the repeating section. The Trade Status Field
    would only be used at the Booked Contract (Top) section and could potentially be
    “settled” or “pre-paid collateral” / “pending”
2. Non-Cash Market Value – use this amount to allocate across principals in the
    repeating section

Scenario 7: Pre-Pay of Foreign Security with Mark and Reallocation




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004


1. Shares – Same as Scenario 6….How will number of shares be shown since they have
   not been delivered? 0 or the booked contract level. Potentially use a Trade Status
   Field that shows “Pending” – then borrowers would know to ignore the shares field
   and take a 100% exposure on the principals listed in the repeating section. The Trade
   Status Field would only be used at the Booked Contract (Top) section and could
   potentially be “settled” or “pre-paid collateral” / “pending”
2. Non-Cash Market Value – use this amount to allocate across principals in the
   repeating section

Scenario8: Pre-Pay of Foreign Security, which Fails
1. Shares – Same as Scenario 6… How will number of shares be shown since they have
    not been delivered? 0 or the booked contract level. Potentially use a Trade Status
    Field that shows “Pending” – then borrowers would know to ignore the shares field
    and take a 100% exposure on the principals listed in the repeating section. The Trade
    Status Field would only be used at the Booked Contract (Top) section and could
    potentially be “settled” or “pre-paid collateral” / “pending”
2. Non-Cash Market Value – use this amount to allocate across principals in the
    repeating section
3. Note: Add a day 3 file to show how the fail would be shown.


Other Topics of Discussion
Reporting to regulators/Timeline issues

It was noted that a project plan with a timeline will be presented to regulators in mid- end
of July.

Other Issues/Needs

1. Need to create a master list of agents from the RMA and the broker/dealers. – Capco
will oversee – alternatively, leave it up to each borrower to ensure that their lenders can
provide the requested information. Potentially show the lender
2. It would be helpful to also know the system (e.g., proprietary, Loanet, Global One,
Equilend, DML) that lenders use to understand if a) the vendors will be providing the
requested functionality to pull this information and b) how many files would be generated
from a lender.
4. There is a need for the creation of more complex scenarios about corporate actions;
price freeze (i.e. from Loanet); collateralization for “when-issued” shares; multiple
forms of collateral.




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Agency Lending Disclosure Taskforce – Capital Group Notes 2004




Capital Working Group Meeting, May 14, 2004

1) The working group met on 5/14 to discuss next steps in the agent lender disclosure project

2) The group decided to create a sub-team to assist in developing an overall process/functional
model and to develop a project plan. The sub-team will meet on Thursday May 20th from 2-4 at
The BMA. In person attendance is requested but a dial in is also available (Dial in #:
800.283.1476, Pin #: 471172). Volunteers for the subgroup include:

                a.   Christine Reese
                b.   Leslie Nelson
                c.   Rochelle Pullman
                d.   Marshall Levinson
                e.   Daniel McIsaac
                f.   John Eagan
                g.   Tom Hasselman

3) Tom Hasselman will serve as an interim working group chair/point of contact. Full-time co-
chairs from both the lender and borrower side need to be identified

4) The working group will establish a set schedule of meetings - tentatively every other Thursday
beginning May 27th. A schedule of all meetings will be sent out once the dates and times are
confirmed.

The next meeting for the full group will be on May 20th from 2-4. The dial in number is
800.283.1476 and the Pin #: 471172.




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