I have been refining this plan since 2004. It rectifies problems I see with dealers, and aligns interests with stakeholders and clients, in order to make a dealer both relevant and profitable. I successfully implemented an earlier version of this at MF Global. With new capital requirements leading to the closing of many dealers, or the shrinkage of dealer balance sheets for the ones that remain, more dealers need to think along these lines. This in turn will help liquidity in the MBS Markets.

1. A New Business Model for a
Broker-Dealer Specializing in
Structured Products
Confidential
Samir B. Shah, Jan 2013

2. 01/2013 2
Summary
• Earnings at most Fixed Income Broker-Dealers (BDs) have dropped, and
they are seriously underperforming their hurdle rates. ROEs at many
firms are rumored to be sub-10% (eg MS @ 5%).
• Recent headlines have discussed the problems at the large Primary
Dealers, and they are reducing headcount and capital in Fixed Income.
• Most smaller and intermediate firms are facing similar issues, and
continue to downsize, merge, sell themselves, or shut down.
• The problems faced by most firms step from inefficient business models
that rely on too many people, and a trader-driven culture that focuses on
competing with the customer.
• This creates an opportunity to build a customer-aligned, sales-driven
structured products dealer that can earn business and market share by
adding value to the customer.
• Mr. Shah has the unique abilities, experience and vision to either
restructure an existing BD, or to build and manage a new
competitor in the Structured Products marketplace, with targeted
ROEs in the 20+% area.

3. 01/2013 3
Broker Dealer Business Models
• Model 1: Primaries
• Model 2: Mini Primaries
• Model 3: Sales-driven Boutiques
• My proposal: Sales-Trader Model

4. 01/2013 4
Model 1: Primary Dealer
• Someone else’s capital
• Requires large capital commitment – large fixed costs
• Vertically integrated supermarket. Stock shelves and invite clients to browse
• Trader driven
• Does not rely on value-added sales
• Makes money during periods when clients have to get invested
• In a bear market, the shareholders bear fixed and severance costs
Issues:
1. Agency problem - Traders have a call option with no downside – incentive for
taking inappropriate risks
2. Shareholders bear all risk

5. 01/2013 5
Model 2 : Mini Primary
• Most regional dealers, and most new entrants to the market
• Traders run the firms - take risk and carry inventory
• Typical payouts: traders 10%, sales 35-50%
Issues:
1. Trader ignorance - Traders don’t cover clients. Positions not used for facilitating
client business. Face off against clients instead of a partnership with clients.
2. Islands unto themselves - Do not understand relative value between sectors.
Each trader knows only one sector.
3. Have to invest in their sector even if sector is rich.
4. Agency problem – the typical 10% compensation model is not enough to pay
traders well, so they start running “hedge funds”. Focus on high margin trades,
not flow trades. Daily business, that can improve client penetration, is ignored.
Exposed to random losses.
5. Dilution of account base – Over time, positions get further removed from client
needs. Salesmen get blamed for lack of sales resulting in hiring of more
salesmen, exacerbating the problem.
6. Poor risk management - Traders hire the risk managers, if any.
7. Does not lead to franchise building.

6. 01/2013 6
Model 3 : Sales-driven Boutiques
• Focus on one secondary market sector - derivatives, ABS Credit, CMOs, Bank
bonds, high yield, EMG, etc.
• Can be risk free, or need very limited capital. Capital used only when bonds are
cheap, or when there is a client inquiry.
• Need a few salespeople, experts in their area. Can have high account utilization.
• Traders, if any, support sales. Low overhead, so traders can be paid well too, if
they add value.
Issues:
1. Synergies between salespeople are limited - no incentives to share trade ideas
and leverage relationships.
2. Cyclical - exposed to the sector drying up.
3. This model can work, but can be optimized further.

7. 01/2013 7
Limitations on Non-Primaries
• Clients do not need second tier firms unless:
– They add value to the clients through idea generation, or
additional services
– They have a proprietary product
– They compete on price
– Prior relationships (this is not a long term strategy, as
clients turn over)
• Usually partnership capital – low risk threshold
• $10mm appears to be the minimum capital required of a BD to be
accepted as a counterparty by most fixed income institutional
accounts

8. 01/2013 8
My Proposal: The Sales-Trader Model
The Sales-Trader model aligns the interests of all the parties involved in a BD platform
– the capital providers, the salespeople, the traders and the clients.
Objectives:
– Maximizes ROE
– Maximizes Revenue
– Minimizes Risk, and eliminates agency problem
– Gives clients an incentive to do business. Capital is risked to facilitate sales.
– Efficiencies in headcount, account allocation, capital utilization
– Reduces business cycle risk

9. 01/2013 9
The Sales-Trader model
• The Sales-Trader covers the important accounts for sales in his sector. Risks
capital to facilitate sales. Responsible for generating flow and ideas in his sector, i.e.,
a product manager, researcher, and trader, in addition to sales. Adds value to
accounts by having all the market information in his sector.
• Information and expertise gained in a sector allows for efficient risk-taking for profit,
and for facilitation of potential business. Can also leads to new issue capability in the
longer term.
• STs are equity owners – their interests are aligned with the capital providers -
achieved through direct ownership or ROE targeted management profit sharing
pool. Ensures ROE maximization, efficient capital utilization, and minimization of risk.
• STs also sell ideas and products in other sectors. Their take home income is derived
primarily from sales. This prevents risk taking in rich sectors.
• Optimal account allocation - STs will give up accounts to leverage others’ sales
ability and relationships. Ideas also get shared, and revenues are maximized.
• Multiple Sales-Traders/Teams, one for each product sector. Leads to
maximization of account potential – by having multiple STs covering large
accounts for different sectors, accounts are serviced and penetrated optimally,
creating franchise value.
• Scalable by hiring salespersons and junior traders/analysts to leverage the STs.

10. 01/2013 10
Example Compensation Structure
• Sales Commission Payout: 40% for all sales, including to STs.
• ST Revenue Accrual: IN addition, STs paid 10%-25%, on a deferred basis,
to accumulate capital for trading. First loss for trading risk.
• In a partnership structure, STs will own the firm, and share returns with
the external capital providers.
• In a larger organization, STs will participate in a management pool, and
share net income with the firm. This should target ROE or Return on Capital
Allocated, and not revenue, and they should share a greater % of the equity
return as the ROE rises.An example structure:
ROE < 15% 0%
ROE 15-20% 10% of Net Income
ROE 20% to 40% 20% of Net Income
ROE > 40% 25% of Net Income

11. 01/2013 11
Alignment of interests
• With equity provider:
– STs capital contributions, are both first loss, and equity. The trader holdback
of 15%-25% could be used to build up capital, and payout can be deferred.
– STs are partners in the trading pool - avoids investments in rich sectors. When
their sector is quiet, an ST can still sell other products to his clients.
– Risk taking is rational and capital utilization is low. Risk taking decisions are
discussed and shared amongst the STs.
• With sales and clients:
– Account allocation is optimal, as STs will give up accounts when a salesman
has a strong relationship. Information is shared to maximize return on trades.
– STs focus on client axes, and help develop sales relationships.
– Maximizes the probability of success when working on client axes.
• With traders:
– Risk is taken in the appropriate sectors, and when a sector is rich, there is no
need to take positions. So, limited risk of other traders blowing up the desk.
– Conversely, when a sector is cheap, capital will be available to take advantage of
it by other traders taking smaller positions.

12. 01/2013 12
Sales-Traders Model - Summary
• Aligns interests of Sales, Trading, and Capital Providers
• Creates synergies among team members and optimizes relationships with clients.
• Leads to, and fosters, value added client relationships.
• Leads to a very efficient sales model, with high account utilization.
• Maximizes account potential by making the firm important to large accounts by
penetrating at multiple points. Leads to franchise value.
• High payouts are possible, to attract the best possible employees.
• Scalable by hiring more salespersons and growing ST teams.
• Creates a viable business structure with longevity.

13. 01/2013 13
Structured Products Broker
Dealers

14. 01/2013 14
Structured Products Environment
• The market for structured products has continued to evolve over the past 5
years.
• Almost all the broker dealers in the space have not adapted well or anticipated
changes to the environment. This is mostly due to their business models being non-
optimal.
• The market has gone from a balance sheet led model pre-2006, to a distressed
model in 2007, back to a balance-sheet led model in 2010, and is now is faced with
low yields and low volumes, that require a fresh approach.
• To be successful in 2013, BDs need a much more efficient structure than they
(with few exceptions) currently have.
• The next few slides are from business plans I presented to MF Global in 2007
and 2010, which resulted in my building a very successful Fixed Income and
Structured Products business for them in 2008 and 2009, and subsequently, in a
substantial allocation of risk capital in 2010.
• They are presented to provide an understanding of how the market has changed.

15. 01/2013 15
Market Environment in 2007
• The US MBS/ABS market has expanded dramatically over the past 5 years due to the global
supply of liquidity, and driven by leverage (CDOs and hedge funds). It has been a ‘new issue’
market, with primary dealers in the sweet spot to make money.
• The 2007 subprime rout in US MBS/ABS has resulted in a massive deleveraging and drying up
of liquidity. This will only get worse – many repo counterparties have not yet taken a hard look at
what they have accepted as collateral.
• This is a phenomenon that is likely to last for 2 years and beyond, as bonds destruct.
Delinquencies spike when payments reset, which is only just starting to happen. The worst is yet
to come.
• There are hundreds of billions of dollars of bonds that will become distressed in the next
four years. No two bonds are alike, and liquidity and price transparency will remain low, creating
ample profit opportunities.
• Primary dealers cannot provide liquidity, and are not interested in repurchasing bonds back from
their clients. This creates a tremendous opportunity for those willing to work on client
orders.
• Information flow and value-added analysis for clients will now lead to trades. Marketing and
finding buyers for client positions will be important. Having a large balance sheet will not be
important, and smaller and smarter firms will have the advantage over large firms. Almost all
brokerage business will be risk free.
• Bid offer spreads are the widest I’ve ever seen. If you can find a buyer and provide liquidity,
you can name your price for bonds. What you can earn will be limited by NASD mark-up rules.
• Having capital to risk will allow you to take advantage of liquidations. You can easily
purchase bonds at significant discounts to where they can be sold. By taking risk on a selective
basis, by knowing the type of bonds you can sell, and by having strong relationships with clients,
you can capture the full bid-offer spreads.

16. Excerpts from the 2009 year end
commentary of a large HF client
• Financing is back in force. We have financing agreements with several
counterparties, who have desire to lend for longer terms. Much of our recent trading
activity has been focused in front-pay, sequential assets**, with financing.
• Term structure normalization. The credit curve is beginning to normalize in most
sectors of the ABS/MBS market. We expect this trend to continue so have been
focusing on shorter duration assets and selling some of our longer duration LCFs,
etc.
• Bid for levered CFs. The market has begun to bet more aggressively on a sustained
Housing recovery, paying up for levered, cuspier cashflows.
** ie, short duration, low risk, low yielding assets that can be safely leveraged to enhance
yield. The availability of financing has led to a lowering of yields, which in turn has forced
hedge funds to use leverage to achieve their returns. Dealers that cannot provide
financing are being disintermediated in their access to large accounts.
1601/2013

17. 01/2013 17
Market Environment in 2010
• Performance in last 6 months of 2009 has been driven by bank and dealer balance
sheets.
• Quantitative easing by the Fed has provided money and liquidity to the markets
• Funding rates are close to zero. Dealers are driving ABS-MBS sales with balance
sheet and repo.
• Banks and dealers have ballooned their balance sheets and have built a massive
carry position to rebuild their capital.
• When clients are selling bonds, often the best bid is a bank/dealer buying for position,
often at higher levels than bids from unlevered customers. This has made the pure
brokerage model much more difficult. It is getting harder to get sell orders from
customers. Bid offer spreads have shrunk. Bond crossing has become more difficult.
• Repo is also being extended to facilitate sales of bonds from position, both to hedge
funds and money managers.
• An inventory will be necessary for those buyer/clients that do not participate in
BWICs.
• There will be consolidation among the regionals. Many will shut down or downsize
desks. This has already started happening.

18. Competitive Environment in 2013
• Many ABS/MBS broker dealers are struggling, and are downsizing, merging
or closing – most recently Cortview.
• Primaries and Banks are being forced to downsize, raise more capital,
eliminate prop trading, and reduce compensation. They can compete less
with their capital. This is a permanent reversal of their leverage-driven
business models that they have deployed post Glass-Steagal’s repeal,
during the 1990s and 2000s.
• Smaller firms with a “mini-primary” mentality (50mm-200mm capital) are
also struggling. Management is usually from a primary and have not learned
how to earn business from clients, by adding value. They also don’t
efficiently use their capital, and hire too many people, especially in sales.
• Small sales driven boutiques (5-10mm capital) are struggling from lack of
capital, both for counter-party approvals, as well as for risk taking.
• The common theme among most brokers is that they have too many
people and are inefficient users of capital – they have bad business
plans.
01/2013 18

19. Liquidity in 2013
• With yields low, there is limited business flow in the ABS/MBS space.
• MBS supply till recently has been sold via ‘BWIC’ (Bids Wanted in Comp), as primary
dealers had Fed-funded balance sheets and would compete for bonds. However, due
to the afore-mentioned risk-reduction at primaries, DNT (Did Not Trade) percentage
has been creeping up, suggesting sellers are not getting their target levels.
• Customers, especially smaller ones, are once again willing to respond to
reverse inquiry from buyers via smaller dealers.
• The buyer universe is awash in cash to invest, and are looking for bonds and
ideas with incremental yield. There are also many more smaller hedge funds in
existence now than even 3 years ago. Regulatory changes at banks and
insurance companies also imply more demand for most MBS.
• Larger hedge funds still prefer to buy blocks of bonds from large dealers,
usually with ‘repo’ funding for the purchase. A few dealers control this market.
• Smaller customers prefer to deal with smaller dealers that don’t compete with
them, and will not use ideas to corner a market.
• A dealer that shares ideas, does not have egregious markups for cheap
sectors, and helps customers make money, will earn market share.
01/2013 19

20. Problems with the Mini-Primary model
• A number of the smaller regionals have raised capital in the 50mm-200mm range over the past 3
years. Most of them have hired managers that were formerly at primaries.
• Many of these managers are inexperienced with the regional model, and are merely
replicating what they have experienced – a capital-led Sales AND Trading model, albeit with
a lot less capital. They tend to hire traders from primaries, and primary-type salespeople as well.
The entire team is often inexperienced in adding value to clients and building franchises.
• In a capital led model, traders view customers as counterparties and not partners. Capital is
used to compete with customers to build a portfolio for the traders. Traders do not understand a
small shop cannot get the same prices for their positions that primaries can get for similar bonds.
Trader’s end up running hedge funds, and don’t sell bonds often – portfolio turnover is
very low – especially when the market is rallying, which is usually when customers are also
buyers. There is a disdain for risk-free business based on customer axes and orders, and
customer orders are often not executed upon.
• On the sales side, the majority of MBS salespeople each only each have a handful of strong
relationships, Most salespeople, especially those that used to work at primaries, do not
have an in-depth knowledge of the products they are selling or of the analytics required.
They also do not know how to work on orders – they rely on forwarding the inventory, and wait for
the phone to ring. To cover the account base, such firms end up hiring 15-25 salespeople to
access 300-400 accounts.
• As a result, almost all the broker dealers have too many salespeople for the amount of
business that they can generate, and thus get weighed down by excessive costs and low
ROEs.
01/2013 20

21. Quantifying the Mini-Primary Model
Assumptions: 100mm capital; Target ROE: 25%; No cost of infrastructure, no credit for carry, optimistic bid-offer spread projections.
2101/2013
Compensation Sales Trading Heads Ops Total
Typical Headcount 18 12 2 6 38
Average Compensation 750k 750k 1.5mm 250k
Total Compensation 13.5mm 9mm 3mm 1.5mm 27mm
ROE required = 25mm; Total revenue required = 52mm
Products Non
Agency
CMBS
Credit
Agency
CMO
Agency
Passthru
Totals
Capital Allocation (mm) 30 10 30 30 100mm
Leverage Multiplier 1 1 15 20
Positions (mm) 30 10 450 600
Bid Offer Spread % ** 2% 1% 0.5% 0.125% These are very optimistic. Typically lower,
leading to a greater turnover requirement than is
achieved.
Revenue per Turn (mm) 0.60 0.10 2.25 0.75
Budgeted Revenue (mm) 17 5 15 15 52mm
Breakeven Turnover 28.3 50 6.7 20 Most managers DON’T think of this
Turns per month reqd 2.4 4.2 0.6 1.7 Impossible to achieve by BDs not focused on
turnover
Implied Holding Period 13 7 54 18 In days – possible, but not typically achieved
** very aggressive, reality could be half of these, or less

22. Typical Mini-Primary
2201/2013
Expected performance of the Typical 100mm Mini-Primary Model from Risk Only, Capital Led Structure
Products Non
Agency
CMBS
Credit
Agency
CMO
Agency
Passthru
Total Comments/Conclusions
Typical Holding Period
(days)
30 15 30 15 Even these holding periods are often
exceeded.
Typical Position (mm) 20 8 100 500
Total Traded per year 240 192 1,200 12,000
Total P&L (mm) 4.80 1.92 6.00 15.00 27.7mm Assumes generous Bid/Offer
spreads from prev slide
Cost of Sales (50% P&L *
40% commission rate)
(mm)
0.96 0.38 1.20 3.00 5.54mm Not enough bonds traded - sales
commissions too low to pay
Salesforce (avg comp = $310k)
Trading P&L 3.84 1.54 4.80 12.00 22.2mm
Traders, Heads and Ops 13.50mm Traders pay themselves; blame sales
Equity Return mm 8.68mm Equity Return too low for Risk
ROE 8.68%
Budget Shortfall = Risk
Free Profit Reqd (mm)
12.2 3.08 9.00 0.00 24.28mm 24.28mm Total Risk Free Revenue
Reqd to pay Sales and Equity
% RF Revenue Reqd 72% 62% 60% 0% Model cannot work on Risk Alone!
RF Principal Required to
be traded per year
1220 616 3600 0 Assuming half the bid-offer spread
for RF vs that assumed for Risk
RF trades Reqd per mth 101.7 51.3 300 0 With more realistic Bid Offer
spreads, this is almost impossible.

23. Mini-Primary model – conclusions
• My assumptions about bid-offer spreads are highly optimistic, and too aggressive. Real
performance is likely to be much worse. (Offsetting this is carry and rallying-market ‘arbitrage’,
which many dealers account for in their performance.)
• In spite of this, the model shows that most Mini-Primaries that are relying on a Risk-Led
model will not succeed, and demonstrates the failure of the Sales AND Trading model.
• Such a model cannot generate enough Sales Commissions from risk to support a large
sales force. A large portion of revenue must come from Risk Free trades. That means
hiring a different type of sales person and trader.
• In general, such dealers have too many of the wrong type of salespeople to justify the
amount of business that is possible in the current marketplace, diluting the account base for
the productive salespeople. Unless everyone lowers their expectations, there will be high turnover
in the workforce.
• To achieve an acceptable ROE, their choices are to rely on excessive leverage, high
turnover, a large percentage of Risk Free trades (crossing bonds), or the market to keep
rallying on their risk positions. Most dealers are not good are the first 3!
• The Risk Agency CMO business is modeled assuming a new issue CMO business. For such
a business line to succeed and be scalable, one also needs a specialist bank sales force that
can distribute to smaller community banks – however, this adds to headcount in sales.
• The only solution is to align interests and build a sales-led franchise, with a different type
of salesperson – the Sales Trader Model.
01/2013 23

24. 01/2013 24
A Value Added Structured
Products Regional Dealer

25. Value-Added BD Model
• Any broker dealer with 5mm-200mm in capital is still going to be considered a regional
dealer by institutional customers. As such, there is not enough capital to compete with the
primaries on balance sheet size – primaries often carry billions in every sector!
• However, the institutional customer base is significantly larger than all the dealers put together.
The goal, then, should be to borrow capital from the customers.
• This can be done by aligning interests with the clients, not competing with them, but instead
helping them to achieve their objectives and returns. This is done through fairness, transparency
and trust. In return, many customers will trust you to market and sell bonds for them, and give you
buy orders and inquiry for bonds they wish to purchase – they will lend you their balance sheet.
• The business should be led by salespeople that have strong product and market
knowledge, in addition to relationships, that can advise and help customers make decisions.
Salespeople should be a resource for customers to understand and value difficult bonds.
• Capital and balance sheet should be used to help customers. The ‘traders’ should have an
understanding of what customer axes are, and should deploy capital to have bonds that can be
sold quickly. Bid offer spreads should be reasonable, and customers should always be ‘engaged’
if they show a bid, Have an opinion about what is cheap, and use inventory to lever ideas. High
portfolio turnover should be the target, not maximization of every individual trade. Trades beget
trades, and demonstrating turnover gets the attention of clients and will allow you to earn orders
and risk free trades.
• Such a model is best implemented using the Sales-Trader model. In the current environment,
and in the long run, it is the only model that will create a franchise, and thus will maximize ROE for
the stake holders.
2501/2013

26. Value-Added BD Model - options
1. Restructuring an existing Broker Dealer in the Structured Products space
that has sufficient capital, but is underperforming. Operating strategy and
timeline will depend on what is already in place.
2. Building out a new Structured Products BD or department where one
does not currently exist – similar to what I built for MF Global.
– Adding Structured Products to an existing BD with capital that is not in
Structured Products, but ideally already in Fixed Income.
– Adding a US Fixed Income presence to a foreign broker-dealer, possibly
one that wants to distribute foreign securities to US investors, or has US
Dollars to invest.
– Raising capital to start a new Broker Dealer, or to buy and capitalize an
existing non-operational BD.
01/2013 26

27. Model BD – Projections Summary
Target Performance when fully staffed and functional.
- 100mm capital
- Products – Non Agency, Agency CMOs, Passthroughs, CMBS Credit, other ABS
- Total Headcount – 31
- Smaller Bid-offer spreads assumed that in the previous model, offset by more turnover.
- No carry or capital gains assumed; no cost allocations assumed.
- Risk Revenue: 38.65mm
- Risk Free Rev: 10.20mm
- Total Revenue: 48.85mm
- Avg Revenue/Head: 1.58mm
- Compensation Expense: 12.12mm
- Sales Trader Holdback/Equity: 6.82mm
- Total paid to Employees: 20.13mm
- Compensation for Equity/Mgmt: 28.72mm
- ROE: 20% to 28.7%
- Please inquire about a more detailed model if interested.
2701/2013

28. Samir Shah Bio Summary
• 24 years in ABS/MBS, in research, sales and trading, with over 17 years in
sales.
• Experienced at building a value added broker-dealer.
• Went looking for a non-MBS BD with capital in 2007 and found MF Global.
Created the MF Global MBS and Fixed Income franchise from scratch in
2007, (generating over 30mm in risk free revenue), and set the stage for MF
Global to expand into other fixed income areas and eventually become a
primary dealer.
• Top salesperson at MF Global. Personally covered and traded with over
100 accounts.
• Producing Sales Manager. Hired a team of 13 to be sales-traders
• Head risk-taking trader in Non Agency MBS, CMO and derivatives for MF
Global.
• Relationships with over 300 MBS accounts, and over 100 dealers.
• Investing personally in ABS/MBS Credit, MBS derivatives, and CMBS IOs.
01/2013 28

29. Contact Information
For more information, please contact:
Samir Shah
Email: shaeshah@gmail.com
Phone: 203-388-8356
More information is available for investors interested in participating in the creation of a ground
breaking broker dealer.
2901/2013