Banking and Capital Markets. Structured Credit and Derivative Transaction Reviews

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1 Banking and Capital Markets Structured Credit and Derivative Transaction Reviews

2 The PricewaterhouseCoopers European Structured Finance Group (the ESFG ) can provide you with a range of services which are designed to help ensure that the structured finance and complex derivative contracts you hold are appropriately captured by your financial and risk systems.

3 Structured Credit and Derivative Transaction Reviews The recent market conditions and volatility in the capital markets has lead to significant write downs on structured credit and other complex derivatives. This environment has placed significant stress on banks structured credit books, in some cases; this has given rise to concerns over the completeness and accuracy of the trade bookings and associated valuations. For some banks, this has also resulted in material operational issues being identified. Who we are The ESFG, part of the Global Structured Finance Group at PricewaterhouseCoopers, is a dedicated team of securitisation and structured finance specialists based in London and all major European countries. The group offers a wide range of services to investment banks who would like to gain assurance that there are no surprises in their holdings of structured credit and derivative transactions. ESFG provides independent advice and practical solutions using a multi-disciplined team of capital markets, corporate finance, accounting, tax, IT and industry experts who specialise in structured finance and securitisations. Structured credit transaction reviews Recent reviews of structured credit and derivatives books performed by the ESFG have allowed us to develop unparalleled expertise in identifying errors and anomalies in structured credit transactions, structured notes and exotic derivative positions, which we leverage for the benefit of our clients. With the developments in the credit derivative and structured credit market in the late 1990 s there was significant product innovation, while systems, controls and legal documents struggled to keep up. Structured Credit and Derivative Transaction Reviews PricewaterhouseCoopers 1

4 It is not at all uncommon in these types of books for transactions to be forced into the systems and for certain elements of the transactions to be either monitored off line or not booked on the grounds of materiality, at the time of booking. With the recent turmoil in the global credit markets some of these off line terms are now critical to the valuation of the transactions and there have been numerous high profile write offs in relation to such issues. Typical issues We have identified a wide range of issues on other reviews, and their underlying causes, and we understand the wider impacts of issues arising. We use this experience to rapidly target, identify and assess key risk areas, and determine the implications on the broader transaction population. The matters we normally focus our reviews on include: Booking and other related issues in structured credit and complex transaction portfolios Valuation issues and themes in structured and complex transactions Root causes of key issues Our approach We agree an approach that fits with the risk profile, but typically the review will be leveraged to identify and review high risk areas first, and provide a lower level of assurance based on sampling, to wider populations of lower risk transactions. This allows our clients to benefit from our experience of risk identification, whilst also managing the overall costs of the review. Stratification We stratify the trades into groups, and assign a preliminary risk rating to each group of similar trades. This allows us to prioritise the review order, based on identifying sub-groups of transactions with similar risk profiles, we can then agree a detailed approach which will give you the level of comfort required. Higher risk assessments We would typically focus most of our efforts on transactions identified as being of higher risk. We review all documentation in detail, capturing key terms and contractual provisions. We then consider the transactions facts as specified in the documentation in relation to our understanding of the transaction type and its economics and capture the key risks from each transaction and identify areas of particular focus. Booking processes We understand the booking process for each type of trade and confirm that all key components of the trades have been captured and reflected in the appropriate accounting, valuation and risk management systems, ensuring that the relevant financial and risk reporting occurs and can be monitored. Valuations We have found that in respect of valuation models the issue is not necessarily the mechanics of the models, but the completeness of the model in relation to the transaction specific inputs and risks the model is actually modelling. Other issues commonly identified are infrequency of updates to, and lack of back testing of, the assumptions used. We also provide independent remodelling services where model integrity has been identified as a significant risk. Reporting findings We document for each transaction or group of similar transactions, as appropriate, a summary of the key trade characteristics, the documents reviewed, key risks identified and any issues arising from the booking review. Lower risk transactions This process would then be repeated for the lower risk transactions, or groups of similar transactions, employing sampling methodology where appropriate, allowing the cost of the review to be managed against the level of risk in a population. 2 Structured Credit and Derivative Transaction Reviews PricewaterhouseCoopers

5 Sharing issues identified We believe that a successful outcome of such reviews requires real ownership of issues by the client and we structure the handover of the issues in a process that includes feedback processes to share understanding. Overarching processes and coordination cross border These reviews often require working cross border, whether because of different locations of the structuring teams, or the front and middle office. Throughout these reviews we use our proven approach to work effectively across different locations and a central project management office will provide direction, alongside a team which has experience of working on such cross border reviews. About the Global Structured Finance Group The Global Structured Finance Group at PricewaterhouseCoopers brings together a unique blend of individuals from the areas of structuring, securitisation, corporate finance, tax, accounting and capital markets in every major European country, working closely with our US and Asia Pacific teams. The team includes individuals who have worked in structured finance front offices. We can bring to bear detailed knowledge of individual industries and expertise in specific types of asset pools, based on our extensive corporate client base. We work closely with other specialist teams within the firm, including the Financial Services Regulatory Practice, the European and US Listings Groups and the Receivables Management Group, which provides standby servicer arrangements and liquidation services. About the European Structured Finance Group By creating the ESFG in 2000, PricewaterhouseCoopers highlighted its commitment to provide securitisation and structured finance services to its UK and Continental European clients. Our objective is to provide a comprehensive range of structured finance and securitisation services including feasibility studies, operational and infrastructure reviews, collateral analysis, structuring advice, preclosing and post-closing services by using experienced specialists drawn from across our European practice. Effective and timely delivery of these products has enabled ESFG to establish itself as a major player in the UK and the rest of Europe. ESFG comprises individuals with expertise in a variety of functional specialties, including capital markets, investment banking, transaction consulting, tax and accounting. The combination of leveraging this skill set with considerable transaction experience enables the group to offer a well-rounded service to our clients. Structured Credit and Derivative Transaction Reviews PricewaterhouseCoopers 3

6 Contacts Peter Jeffrey PricewaterhouseCoopers (Europe) +44 (0) Frank Serravalli PricewaterhouseCoopers (USA) James Hewer PricewaterhouseCoopers (UK) +44 (0) Peter Flick PricewaterhouseCoopers (Germany) Mike Byrne PricewaterhouseCoopers (Jersey) Paul Landy PricewaterhouseCoopers (Netherlands) +31 (0) Michael Codling PricewaterhouseCoopers (Australia) michael.codling@au.pwc.com David Lukach PricewaterhouseCoopers (USA) david.m.lukach@us.pwc.com Guenter Simon PricewaterhouseCoopers (Luxembourg) guenter.simon@lu.pwc.com +352 (0) Mark Tracey PricewaterhouseCoopers (Portugal) mark.tracy@pt.pwc.com Alain Lattafi PricewaterhouseCoopers (Switzerland) alain.lattafi@ch.pwc.com +41 (0) Padraic Joyce PricewaterhouseCoopers (Ireland) +353 (0) padraic.joyce@ie.pwc.com Anik Chaumartin PricewaterhouseCoopers (France) +33 (0) anik.chaumartin@fr.pwc.com This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. Designed by Design & Production, FS, Assurance (24745)