Markit PrimeX Indices

27 April 2010

Markit PrimeX presented by

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Table of contents
Markit Overview Introduction to Markit PrimeX Indices Trading PrimeX PrimeX Operations/Settlement Dealer Contacts

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Markit Overview

About Markit
Markit is a leading global financial information services company with over 1,500 employees We provide independent data, valuations and trade processing across all asset classes in order to enhance transparency, reduce risk and improve operational efficiency Our client base includes the most significant institutional participants in the financial marketplace

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Index operating model
Index Design
Index rules Market research Documentation Index calculation methodology Data procurement Prototyping / Testing Project management

Index Administration
Manage rebalancing process Index research (previews) Custom index development Daily control of constituent lists Control index and analytics Client services Reference database control

Pricing/Production
Receive daily price data Price cleaning and control Price consolidation Quality reporting Index and analytics calculation

Publication
Index and data publication Feeds Vendor management

IT Development and Administration

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Markit public indices
Structured Finance Agency RMBS
Markit IOS

Equities
Thematic indices ETF constituent files Bespoke Indices

Bonds Real-time
Markit iBoxx € Markit iBoxx £

Credit and Loans Credit
Markit iTraxx Europe Markit iTraxx Crossover Markit iTraxx Total Return index Markit iTraxx, Asia ex-JP, Japan, Australia Markit iTraxx SovX Markit CDX.IG Markit CDX.HY Markit CDX.XO Markit CDX.EM Markit MCDX

Non-Agency RMBS
Markit PrimeX Markit ABX.HE Markit TABX.HE

End of day Other
Markit iBoxx US Pension Liabilities Markit iBoxx FX Markit iBoxx Overnight Rate Bespoke Indices Markit iBoxx Global Inflation-linked Markit iBoxx $ Markit iBoxx Asia Markit iBoxx € HY Markit iBoxx GEMX Markit iBoxx Global Sovereign

CMBS
Markit CMBX Markit TRX.NA

Propery Derivatives
NCREIF

Liquid Indices Custom Indices

Loans
Markit iTraxx LevX Markit LCDX

Bespoke Indices

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Markit Structured Finance expertise
ABX.HE, CMBX, TRX.NA, and IOS have brought new levels of transparency to the structured finance markets
– Widely followed indicators of sentiment on market pricing and performance – TRX.NA brought standardization to synthetic TRS contracts referencing amortizing assets – IOS has seen large trading volumes post-launch and has provided an efficient market tool for hedging prepayment and interest rate risk – Publicly available index closes and analytics

Markit is a leading presence in structured finance
– Established leader in European ABS and US CDS of ABS markets – Developing US RMBS Evaluated Pricing Service – Broad suite of offerings to address needs of structured finance market participants

Full Value Proposition
– The complete product suite provides a comprehensive spectrum of services for any point in the pre-trade, trade, and post-trade cycle
Reference and Performance Data Risk and Pricing Deal Structure and Analysis Trade Support

Detailed analysis and support is provided for both US and European ABS deals at the single security, index and portfolio level
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Introduction to PrimeX

PrimeX.FRM & PrimeX.ARM
The PrimeX indices allow investors to synthetically gain exposure to non-Agency Prime RMBS collateral Each index will serve as a standardized, diverse, and liquid tool referencing securitized non-Agency fixed-rate or hybrid ARM loans Markit will initially launch series of the index referencing the 2005, 2006, & 2007 vintages.
– 20 deals in each sub-index, satisfying a series of concentration and collateral tests

Vintages will be separated by a cutoff date of July 1st, 2006, creating 4 different sub indices.
– – – – PrimeX.FRM.1 (issued between 1/1/2005 & 6/30/2006) PrimeX.ARM.1 (issued between 1/1/2005 & 6/30/2006) PrimeX.FRM.2 (issued between 7/1/2006 & 12/31/2007) PrimeX.ARM.2 (issued between 7/1/2006 & 12/31/2007)

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PrimeX construction
Additional selection criteria applied to universe defined by deal collateral
– Must contain at least one tranche that has been rated AAA by at least two major ratings agencies (i.e. Fitch, Moody’s or S&P) – At least one of the AAA tranches in the deal must be registered pursuant to the U.S. Securities Act of 1933 – None of the tranches included in the index shall benefit from a financial guarantee from a third party (though loan-level mortgage insurance is acceptable)

Specific deal and tranche selection process
– Markit compiled the list of the largest (by original principal balance) 20 qualifying deals issued during a designated period – List of selected bonds for each deal that represented a pass-through interest in the largest loan group of the deal – Deal and tranche list was circulated to dealers for final approval

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Deal universe selection
Deals are separated into fixed and hybrids
– Collateral filters are different between hybrid and fixed-rate paper – Fixed deals must be 100% backed by fixed-rate collateral – Hybrid deals must be 100% backed by hybrid ARMs WAvg FICO WAvg LTV CLTV Non owner Full/Alt Doc PrimeX.ARM > 730 < 73% If Available < 85% < 15% > 25% > 330 months None None None PrimeX.FRM > 735 < 73% If Available < 85% < 10% > 40% > 330 months None None None

Deals are selected with data compiled from prospectuses as a function of their average or aggregate characteristics
– – – – Issued within the designated period of the sub-index Minimum deal size at issuance of $250mm Deals must pay on the 25th of the month The deal’s collateral must be loans. Re-Remics and NIMs are therefore excluded, as well as synthetic deals – The average loan characteristics of each deal must fall within the filters shown in the table

WA Original Term Seconds Neg-Am Short ARMs (Reset < 30 mo)

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Individual security selection
Appropriate bonds are selected from each qualifying deal
– Markit will select originally AAA rated certificates that reference the largest loan group(s) in the deal
Largest loan group is determined by the original principal balance of loans

– Aggregated certificates will represent a “Pass-Through Interest” in selected loan group

For both the PrimeX.FRM and PrimeX.ARM
– Each deal will be equally weighted with other deals in the index – Within each deal, each bond selected will be weighted according to its original principal balance relative to the aggregate of the certificates selected from that deal – The bonds selected will consist of the fewest number of certificates possible in order to create the pass-through tranche

Once the reference obligations are in the index, they do not drop out, but amortize as a function of prepayments and write-downs

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Trading Markit PrimeX

Markit PrimeX: indicative terms and conditions
INDEX ID PrimeX.ARM.1 REDID 7B579YAA3 7B579YAB1 7B57AKAA1 7B57AKAB9 TERMINATION DATE June 25th, 2036 December 25th, 2037 July 25th, 2036 September 25th, 2037

Indices

PrimeX.ARM.2 PrimeX.FRM.1 PrimeX.FRM.2

Reference Obligation Notional Amount (RONA) Fixed Rate Payer Floating Rate Payer Fixed Rate Additional Fixed Amounts Floating Amounts Interest Short-Fall Period End Date Payment Dates

Original Principal Amount * Factor * Applicable Percentage Short position on the Index. Buyer of Protection. Long position on the Index. Seller of Protection. Premium paid by Fixed-Rate Payer Reimbursements associated with Writedowns, Principal ShortFalls, Interest ShortFalls Writedowns, Principal ShortFalls, Interest ShortFalls No Cap Applicable 25th day of each month using a following business day convention T+5 from the Period End Date. T+5 only applies only to the exchange of payments.

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PrimeX - CDS indices
PrimeX.FRM and PrimeX.ARM
– Each index references component bonds from 20 deals based on collateral characteristics (different criteria for each index) – FRM deals reference only fixed-rate prime collateral – ARM deals reference only hybrid ARM prime collateral

CDS trading convention:
– Long position pays applicable percentage of Interest & Principal Shortfalls as well as writedowns on swap notional – Running fixed coupon paid by short position:
Set by the dealers during the roll process prior to launch date

– Upfront PV exchange of the observed market value of risk

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Payment structure

PrimeX Indices

Fixed Coupon & Additional Fixed Payments

Protection Buyer

Protection Seller

Principal & Interest Shortfalls / Principal Writedowns

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PrimeX counterparties
Fixed Rate Payer (Protection Buyer)
“Seller” of the Index If price is below par, pays the Present Value of the contract upfront
–PV of implied risk over the fixed coupon will be paid upfront –PV of index contract incorporates buyer’s assumption of amortization via voluntary & involuntary prepayments –Index Seller pays a fixed coupon throughout the life of the contract

Floating Rate Payer (Protection Seller)
“Buyer” of the Index If price is above par, pays the Present Value of the contract upfront
–Index Buyer receives a fixed coupon throughout the life of the contract

Pays Fixed Rate Payer in the following events: Receives payment from Floating Rate Payer in the following events:
–Interest Shortfall (Not Capped) –Principal Shortfall –Principal Writedown –Interest Shortfall (Not Capped) –Principal Shortfall –Principal Writedown

–Pays Floating Rate Payer in the event of the following:
–Principal Shortfall Reimbursement –Interest Shortfall Reimbursement –Writedown Reimbursement

Receives payment from Fixed Rate Payer in the event of the following:
–Interest Shortfall Reimbursement –Principal Shortfall Reimbursement –Writedown Reimbursement

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PrimeX.FRM.1 trade examples
Example 1 Trade Details (“Index Buyer” Perspective)
Notional Amount: Trade Date: Initial Payment Date: Traded Price: Index Factor: Coupon: Days Accrued: $10,000,000 May 5th, 2010 May 10th, 2010 (T+3 exchange for upfront) 96.5 0.656700725 (Published on Apr 27th) 442 bps 7 (since April 28th launch)

Initial (Upfront) Payment
Clean PV + accrued interest =[Notional * ((Price/100) - 1) * Factor] + [Coupon * Notional * Daycount * Factor] =(10,000,000 * ((96.5/100) – 1) * 0.656700725)+(0.0442 * 10,000,000 * (7/360) * 0.656700725) =$(-229,845)+$5,643.98 =$(-224,201.02) There is a negative PV using a positive notional, meaning the short position needs to compensate the long position for the added risk implied by the price below par. Accrued interest is positive with positive notional.

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PrimeX.FRM.1 trade examples
Example 2 Trade Details (“Index Seller” Perspective)
Notional Amount: Trade Date: Initial Payment Date: Traded Price: Index Factor: Coupon: Days Accrued $(10,000,000) – Negative Notional May 19th, 2010 May 24th, 2010 (T+3 exchange for upfront) 88.75 0.656700725 (Published on Apr 27th) 442 bps 21 (since April 28th launch)

Initial (Upfront) Payment

Clean PV + accrued interest =[Notional * ((Price/100) - 1) * Factor] + [Coupon * Notional * Daycount * Factor] =((-10,000,000) * ((88.75/100) – 1) * 0.656700725)+(0.0442 * (-10,000,000) * (21/360) * 0.656700725) =$738,788.32 + $(-16,931.93) =$721,856.39 There is a positive PV using a negative notional, so again the short position needs to compensate the long position for the added risk implied by the price below par. Accrued interest is negative because of the negative notional.

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PrimeX.FRM.1 trade examples
Example 3 Trade Details (“Index Seller” Perspective)
Notional Amount: Trade Date: Initial Payment Date: Traded Price: Index Factor: Coupon: Days Accrued: $(10,000,000) – Negative Notional May 19th, 2010 May 24th, 2010 (T+3 exchange for upfront) 102.45 0.656700725 (Published on Apr 27th) 442 bps 21 (since April 28th launch)

Initial (Upfront) Payment

Clean PV + accrued interest =[Notional * ((Price/100) - 1) * Factor] + [Coupon * Notional * Daycount * Factor] =((-10,000,000) * ((102.45/100) – 1) * 0.656700725)+(0.0442 * (-10,000,000) * (21/360) * 0.656700725) =$(-160,891.68) + $(-16,931.93) =$(-177,823.61) There is a negative PV using a negative notional, meaning the long position needs to compensate the short position for the decreased risk implied by the price above par. Accrued Interest is negative with negative notional.

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PrimeX.FRM.1 monthly settlement example
Constituent Performance
Constituent: Pass-Through Rate: Original Principal Balance: April Factor: May Factor: May Writedown Amount: May Expected Interest: May Paid Interest: Bond X 5% $313,682,000 0.537015168 0.473256329 $20,000,000 $678,487.19 $500,000.00

Constituent Index Calculations
Index Weighting: Index Notional Represented: (Initial Face) Actual $ Exposure Applicable Percentage 3.29% $329,009.22 $176,682.94 0.104886228%

Interest Short-Fall (ISF) =(Expected Interest – Paid Interest) * Applicable Percentage =(701,833.30 – 500,000) * 0.00104886228 =$211.75 Writedown =Bond Writedown * Applicable Percentage =20,000,000 * 0.00104886228 =$20,977.25

Monthly Settlement
Period End Date Payment Date: Coupon: Index Notional: May 25th (adjusted for business days) June 2nd (T+5 from Period End Date) 442 bps $10,000,000

First Settlement Payment
On June 2nd, 2010, the Index Buyer (long position) will have to pay the Index Seller (short position) the following on behalf of the constituent ISF: $211.75 Writedown: $20,977.25 The Index Seller (short position) will have to pay the Index Buyer (long position) the following Fixed Payment on behalf of the constituent =Notional * Factor * Daycount * Coupon =$329,009.22 * 0.537015168 * (27/360) * .0442 =$585.70

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Settlement timeline & operations

Sample PrimeX trade settlement & payment timeline
Trade Date
Upfront Value Agreed on. Trade effective on this date.

First Period End Date
Next Accrual Period Starts, New factor becomes effective. End date is adjusted by US business/holiday convention

Counterparties exit trade
Counterparties tear up or novate trade. Termination or assignment fees exchanged between counterparties.

Initial Payment Date
Occurs T+3 from Trade Date. Counterparties exchange PV net of Accrued interest

First Payment Date
Monthly payment occurs T+5 from Period End Date. Counterparties exchange Fixed and Floating payments from recent accrual period

5/5/2010

5/10/2010

5/25/2010

6/2/2010

6/6/2010

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Licensed dealer contributions
Dealers will contribute prices every business day for each available index
– Contributions are made between 3pm and 4pm each day

Per the Index Rules, if a dealer fails to comply with minimum submission threshold, that firm will lose index voting privileges Markit uses top & tail process, which eliminates top and bottom quartiles of submissions and calculates average to generate composite Markit will publish aggregate composites daily at www.markit.com no later than 5pm Expect 12 dealers contributing to the index at inception

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Markit PrimeX analytic
Markit will provide a tool for market participants to calculate PV, price, and spread based on defined prepayment & default scenarios Analytic will utilize in-house Markit cashflows, which allows users to specify
– – – – Prepayment scenarios (CPR, PSA, vector) Default scenarios (CDR, vector) Delinquencies (60+, vector) Loss severity

Calculator will utilize model which generates PV directly from projected swap cashflow assumptions Markit calculator will provide participants with the ability to calculate upfront payment amounts PrimeX Calculator can be requested by visiting:
http://www.markit.com/en/products/data/indices/calculators/primex-calculator.page

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Markit PrimeX – Usage & Licenses
PrimeX standard terms require one counterparty to each trade to be a licensed dealer of the index
– Licensed dealers as of the launch date may be found in this presentation and on www.markit.com – PrimeX licenses may be obtained by contacting sfsales@markit.com

PrimeX Trademark and Data Usage
– Usage of the PrimeX index trademark or published prices require either written consent or license agreement from Markit – PrimeX data available on Markit’s public website may be available for limited purposes subject to the terms of use at www.markit.com

PrimeX data feeds are available each US business day
– Markit provides a daily feed to clients that includes composite prices for each index and an updated list of constituents – Subscription including the licensing of the full historical PrimeX dataset may be obtained by contacting sfsales@markit.com

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Dealer Contacts

Dealer trading contacts
Amherst Securities
Joe Vaccaro 212-593-6030

Bank of America
Mark Michael 646-855-6404

Barclays Capital
Will Zak 212-412-2449

Citibank
Taylor Leahy 212-723-6325

Credit Suisse
Ted Moran 212-325-2747

Deutsche Bank
Jashin Patel 212-250-7730

Goldman Sachs
Eric Siegel 212-902-5090

J.P. Morgan
Raphael Gonzalez 212-834-4622

Morgan Stanley
Michael DePietro 212-761-1988

Nomura
James Whitticom 212-667-2408

Royal Bank of Scotland
David Dietche 203-897-6160

UBS
John Fernandez 212-713-4002

Markit
Administrators: Samir Bhatt 212-205-1741 Ned Lipes 212-863-9490 Press: Mike Gormley 212-205-1310

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Disclaimer
Opinions, estimates and projections in this report constitute the current judgment of the author(s) at the time of writing. They do not necessarily reflect the opinions of Markit Group Limited. Markit Group Limited has no obligation to update, modify or amend this report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. The content, information and any materials (“data”) provided by Markit in this presentation is on an “as is” basis. Markit Group makes no warranty, expressed or implied, as to its accuracy, completeness or timeliness, or as to the results to be obtained by recipients, and shall not in any way be liable to any recipient for any inaccuracies, errors or omissions herein. Without limiting the foregoing, Markit Group shall have no liability whatsoever to a recipient of this report, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by such recipient as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by it or any third party, whether or not based on the content, information or materials contained herein. Copyright © 2010, Markit Group Limited. All rights reserved. Any unauthorized use, disclosure, reproduction or dissemination, in full or in part, in any media or by any means, without the prior written permission of Markit Group Limited is strictly prohibited.
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