ALTERNATIVE METHODS FOR RISK TRANSFER within a Standard Risk Management Process. 10 September 2008

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2 ALTERNATIVE METHODS FOR RISK TRANSFER within a Standard Risk Management Process 10 September

3 Jesse O. Franklin IV Partner, K&L Gates, Seattle Office Construction law consulting and litigation Architects Engineers General Contractors Owners (Public and Private) Subcontractors General business litigation Arbitration International and Domestic Commercial Litigation 3

4 Standard Risk Management Components Risk Identification Risk Assessment Risk Mitigation Risk Financing Risk Review & Monitoring 4

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8 Risk Transfer Mechanisms Non-Insurance Risk Transfer Mechanisms Insurance Risk Transfer Mechanisms Risk Financing Alternatives 8

9 Non-Insurance Risk Transfer Mechanisms Contractual Risk Transfer Mechanisms Allocation by written agreement Indemnification Hold Harmless Agreements Dispute Resolution Provisions Others 9

10 R. Suzen Shaw, CRP, ARM, CRIS, CPIW Senior Risk Manager, Microsoft Worldwide Operations 30 Years Experience in Risk and Insurance Management Risk Management Enterprise Risk Management Operational Risk Management Commercial Insurance Industry Risk Consulting Insurance Brokerage Insurance Underwriting Safety and Loss Control Loss Adjusting 10

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12 Insurance Risk Transfer Mechanisms Traditional Insurance/Surety Products Performance Bonds Workers Compensation /Employers Liability General Liability Builders Risk Time Element - AKA: Business Interruption (BI) Dependent Time Element - AKA : Contingent BI Political Risk 12

13 Political Risks Consequential loss arising from the arbitrary acts of a sovereign government, including: Confiscation Expropriation Nationalization Forced abandonment and divestiture Selective discrimination Embargo and license cancellation Strikes, Riots, and Civil Commotion War, Political violence, and Terrorism 13

14 Political Risks Major Underwriters ACE AIG Atradius Chubb Coface London MIGA OPIC QBE 14

15 Political Risks Major Underwriters ACE AIG Atradius Chubb Coface London MIGA - Multilateral Investment Guarantee Agency OPIC QBE 15

16 Srilal Perera, Chief Counsel, MIGA Extensive experience working with multilateral organizations such as the Colombo Plan, UNDP, and the World Bank Legal Counsel to the President of the Iran United States Claims Tribunal in the Hague LLB Masters in International Affairs - specialization in international law and international economics PhD - specialization in International Law and International Relations Executive Development Program (EDP) at the Harvard University Adjunct Professor of Law, Washington College of Law of the American University, Washington D.C. 16

17 Anthony Nolan Partner, K&L Gates, New York Office Specializes in Structured products Derivatives Domestic and cross-border securitization Broad experience in synthetic risk transfers Has represented Issuers, underwriters, servicers, bond insurers and others in a wide variety of whole-loan sales and asset-backed securities issuances 17

18 Risk Financing Alternatives Credit Derivatives Documentation Settlement Use in Hedging Risk 18

19 ISDA: Documentation Architecture 1992 (or 2002) Master Agreement Governs legal and credit relationship between the parties Includes representations, events of default/termination events, covenants Incorporates schedule and confirmation Schedule Makes elections and changes to standard provisions Incorporates credit support annex Credit Support Documents 1994 Credit Support Annex (New York law) 1995 Credit Support Annex (Transfer-English law) 1995 Credit Support Deed (Security Interest-English law) 1995 Credit Support Annex (Japanese law) 2001 ISDA Margin Supplement (not much used) Confirmations Incorporate Definitions Specify economic terms of each Transaction Include Transaction-specific modifications ISDA PAUG Confirmation Templates Incorporate definitions Definitions 2003 Credit Derivatives Definitions ( supps) 2002 Equity Derivatives Definitions 2000 Definitions 1998 Euro Definitions 1997 Bullion Definitions 1997 Gov t Bond Option Definitions 1993 Commodity Derivatives Definitions ( Supp.) 19

20 Credit Default Swaps An agreement whereby one party pays the other a fixed periodic payment for the specified life of the agreement. The other party makes no payments unless a specified credit event occurs: Reference Entity or Reference Obligation Protection Seller Fixed Fee (in bps per period) Contingent Payment upon Credit Event Protection Buyer 20

21 Credit Default Swaps Credit events for corporate/sovereign CDS: Bankruptcy Failure to Pay Obligation Default / Acceleration Restructuring Repudiation / Moratorium Extension periods Grace Period Extension Repudiation/Moratorium Extension Restructuring options affect deliverable obligations 21

22 Physical Settlement Timeline Credit event must occur no later than 12:59PM GMT on Scheduled Termination Date Credit Event Notice Notice of Publicly Available Information Seller may buy-in Bonds. Buyer must certify it used reasonable efforts to obtain consents to Deliver Loans, and Buyer may Deliver alternative instruments. Settlement Fallbacks Start Cut-off (Eur/Asia) Event Determination Date NoPS Physical Settlement Date > > > > > > <= 14 CD after Scheduled Termination Date, Grace Period Extension Date or Repudiation/Moratorium Extension Date <= 30 CD, subject to any BD convention Eur/Asia = 30BD NA <=30BD Physical Settlement Period 5BD 60BD 22

23 Cash Settlement Timeline Credit event must occur no later than 12:59PM GMT on Scheduled Termination Date Event Determination Date Credit Event Notice Notice of Publicly Available Information 1 st Valuation Date Nth Valuation Date Determine Final Price Cash Settlement Date > <= 14 CD after Scheduled Termination Date, Grace Period Extension Date or Repudiation/Moratorium Extension Date > >=5 BD > 5 BD between quotations > As soon as reasonably practicable > 3BD 23

24 Q & A 24