1. Private & Confidential European Market Infrastructure Regulation 4th February 2013
European Market Infrastructure
Regulation (EMIR) Teach-In
4th February 2013
1

2. Private & Confidential European Market Infrastructure Regulation 4th February 2013
Regulations
• What?
• Why?
• When?
Implications
• Face Clearing House
• Additional Collateral
• Cash Variation Margin
Decisions
• To Clear or Not?
• Existing Swaps
• New Swaps
2
European Market Infrastructure Regulation (EMIR)

3. Private & Confidential European Market Infrastructure Regulation 4th February 2013 3
Contents
Teach-In Contents
• G20 commitment and subsequent legislative action.
• US regulation – Should UK pension funds be concerned.
• Impact of European rules.
• So why are pension funds clearing now?
• European implementation timing.
• Universe of clearable interest rate swaps.
• Implication 1 – Face Central Counterparty rather than Executing Bank.
• Implication 2 – Initial Margin Requirement.
• Implication 3 – Cash as Variation Margin.
• Decision 1 – To Clear or Not to Clear? Existing Trades.
• Decision 2 – To Clear or Not to Clear? New Trades.

4. Private & Confidential European Market Infrastructure Regulation 4th February 2013
European Market Infrastructure
Regulation (EMIR) Teach-In
4

5. Private & Confidential European Market Infrastructure Regulation 4th February 2013 5
EMIR Summary
Summary of Regulations
What? 1. Clearing Requirement – All standardised OTC derivatives will be cleared through central
counterparties (CCPs).
2. CCP Requirements – Harmonised framework for the provision of clearing services within Europe.
3. Risk Mitigation – Non-cleared derivatives will be subject to additional risk mitigation techniques.
4. Reporting Requirements – All OTC and exchange-traded derivatives will be reported to trade
repositories (TRs).
Why? Increased transparency of OTC markets, reduced counterparty credit risk, reduced risk of systemic
shock.
When? Clearing requirement likely to come into effect in mid-2014. Pension funds are exempt until 2015.
So What? Pension fund asset allocations will be impacted by the move to central clearing.
There are a number of decisions which should be made by all schemes as they approach clearing.

6. Private & Confidential European Market Infrastructure Regulation 4th February 2013
So What? The Implications of Central Clearing
6

7. Private & Confidential European Market Infrastructure Regulation 4th February 2013 7
So What? – The Implications of Clearing
Implications for Pension Funds from Central Clearing
1 Face Clearing House (via Direct Clearing Member) rather than the Executing Bank.
2 Additional Collateral (Initial Margin) – previously not required.
3 Cash as Variation Margin – previously a range of assets such as gilts allowed.

8. Private & Confidential European Market Infrastructure Regulation 4th February 2013
Executing
Bank
8
Implication 1
Facing Central Counterparty (CCP) for derivative transactions
Benefits of facing CCP instead of
Executing Broker
1. Net down of counterparty mark to
markets.
2. Improved counterparty credit risk:
• Segregation.
• Portability.
• Gap risk mitigated.
3. Market consistent, independent
valuation.
Costs of facing CCP instead of Executing
Broker
• Cash required as variation margin.
• Initial margin required – additional
collateral (cash, gilts or other gov. bonds).
• Costs of clearing – CCP fees, Direct
Clearing Member (DCM) fees.
Pension
Fund
Executing
Bank
Agree swap and
collateralise daily
mark to market.
Pension Fund and
Executing Bank agree
swap. Once agreed,
swaps are given up to the
clearing house.
Clearing member holds
pension fund swaps and
makes daily margin
movements.
CCP stands
between the
Executing Bank
and pension
fund in each
trade.
Cleared Transaction
Bilateral Transaction
Pension
Fund
Central
Counterparty
Direct
Clearing
Member

9. Private & Confidential European Market Infrastructure Regulation 4th February 2013 9
Implication 2
Initial Margin Requirement
• Initial Margin is an additional collateral requirement required for cleared swaps.
• The purpose is to mitigate ‘close-out’ risk: the risk of suffering adverse market movements from the loss of swap exposure
following the default of a clearing member.
• Clearing houses accept cash and certain high quality government bonds (e.g. German bunds) as initial margin.
• Using London Clearing House’s (LCH) methodology for calculating Initial Margin, we have calculated the potential initial
margin requirement for a notional pension scheme. The scheme is fully hedged for rates and inflation.
• LCH methodology is a portfolio-based historical VaR simulation taking the worst 5-day scenario, using the past 5 years
of available data and scaled for a 7-day period.
Source: Redington, RedAnalytics, Bloomberg
Pension Scheme XYZ
Liability PV (50% Fixed, 50% Real) £1bn
PV01 £2.6m
IE01 £1.2m
Hedge Ratio c. 95% (rates & inflation)
Total Initial Margin Required £67m
As % of Liability Hedged 6.7%
Table 1: Initial Margin Requirement for Notional Pension Scheme using LCH Methodology

10. Private & Confidential European Market Infrastructure Regulation 4th February 2013 10
Implication 3
Cash as Variation Margin
• Clearing houses require cash as Variation Margin.
• In current bilateral transactions pension funds can post a
variety of assets as collateral, usually including gilts and
index-linked gilts.
• The movement to cash to meet daily mark to market
changes of swaps could mean higher cash requirements for
pension funds in the future.
Benefits of Cash as Variation Margin
• Swaps do not need to be recouponed.
• Immediate access to profit from hedge
which can be recycled into asset
allocation.
• Removal of basis risk (sensitivity to OIS
valuation of swap mark-to-market).
Costs of Cash as Variation Margin
• Holding cash is a drag on Strategic
Asset Allocation return.
• May have to increase use of gilt repo to
fund cash for variation margin.
Source: Redington, RedAnalytics, Bloomberg
Swap Curve
-100bps
Swap Curve
-50bps
Swap Curve
+0bps
Swap Curve
+50bps
Swap Curve
+100bps
Inflation Curve
-100bps 15% 1% -10% -21% -29%
Inflation Curve
-50bps 22% 7% -6% -16% -26%
Inflation Curve
+0bps 30% 14% 0% -12% -22%
Inflation Curve
+50bps 38% 21% 6% -6% -17%
Inflation Curve
+100bps 49% 30% 14% 0% -12%
Table 2: Cash margin requirements for movements in rates and inflation

11. Private & Confidential European Market Infrastructure Regulation 4th February 2013
Decisions Required
11

12. Private & Confidential European Market Infrastructure Regulation 4th February 2013 12
So What?
Decisions Required
Please Note:
• The impact of central clearing on each pension scheme depends on the exact nature of the
swap portfolio.
• The cost may be positive or negative depending on the swap book.
Decisions Required by Pension Funds
1 Existing swaps:
A) Keep out of clearing
B) Move into clearing
2 New swaps (during the clearing exemption period):
A) Make use of the exemption until 2015 / 2018.
B) Clear trades early during the exemption period.

13. Private & Confidential European Market Infrastructure Regulation 4th February 2013 13
Decision 1: To Clear or Not to Clear?
Existing Trades.
Existing Trades
Move into
clearing
Keep outside
clearing
Benefits Costs
Netting of counterparty mark to
market.
Variation margin required as
cash.
Reduced close out risk. Initial Margin must be posted.
Frees up bank lines. Other clearing costs.
Actions Required
1. Estimate the potential future cash margin requirements from
market movements.
2. Estimate the cost of funding cash margin calls.
3. Estimate the netting gains of facing one counterparty rather than
many.
Benefits Costs
Variation margin can be gilts or
bonds.
Less efficient collateral
management.
No additional IM requirement. No mitigation of close out risk.
Actions Required
1. Analyse existing swap book now to identify inefficiencies and
prioritise restructuring before the EMIR cut off.
2. Clean up eligible collateral in CSAs.
3. Anticipate any upcoming hedging requirements and prioritise the
decision now.

14. Private & Confidential European Market Infrastructure Regulation 4th February 2013 14
Decision 2: To Clear or Not to Clear?
New Trades.
New Trades (during
the exemption period)
Clear early during
exemption period
Make use of
pension fund
exemption
Benefits Costs
Pricing & liquidity may be better in
cleared swaps than bilateral
Cash variation margin required
from the outset
New trades will be valued by CCP
on OIS, consistent with market
standard
Clearing costs required to be met
ahead of the required time
Ability to clear trades if a
counterparty is downgraded
Actions Required
1. Begin due diligence of clearing members, begin process to appoint
clearing members
2. This decision should be made in conjunction with the decision on the
back book
Benefits Costs
Variation margin stays as gilts Potential for bilateral initial margin
on non-cleared trades
No additional IM requirement Bilateral initial margin means cost
of clearing without the full benefit
of improved credit risk
Actions Required
1. Review the credit worthiness of current bank counterparties to see if
comfortable to continue giving them risk instead of clearing new risk

15. Private & Confidential European Market Infrastructure Regulation 4th February 2013 15
EMIR Summary
Actions Required
Clear Don’t Clear
Existing
Trades
Estimate the future cash margin
requirements, cost of funding cash
requirement and initial margin
requirements.
Weigh these up against the
benefits of clearing.
Restructure swap portfolio to
ensure collateral efficiency and
prioritise derivative activities ahead
of the introduction of clearing.
Portfolio restructuring completed
after the end of the exemption may
result in trades falling under
EMIR.
New
Trades
Put the operational processes in
place to allow clearing even if
intending to use the pension fund
exemption.
Provide yourself with the option
to clear or not.
Review the credit worthiness of
existing suite of counterparties.
If there are concerns over credit
worthiness, new trades could be
cleared instead.

16. Private & Confidential European Market Infrastructure Regulation 4th February 2013
13-15 Mallow Street London EC1Y 8RD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts
Robert Gardner
Founder & Co-CEO
Direct Line: 0207 250 3416
robert.gardner@redington.co.uk
16
Kenny Nicoll
Director
Direct Line: 0203 326 7111
kenny.nicoll@redington.co.uk
Tom McCartan
Associate
Direct Line: 0203 326 7139
tom.mccartan@redington.co.uk
Freddie Ewer
Analyst
Direct Line: 0203 326 3416
freddie.ewer@redington.co.uk
Disclaimer text
For professional investors only. Not suitable for private
customers.
The information herein was obtained from various sources.
We do not guarantee every aspect of its accuracy. The
information is for your private information and is for
discussion purposes only. A variety of market factors and
assumptions may affect this analysis, and this analysis does
not reflect all possible loss scenarios. There is no certainty
that the parameters and assumptions used in this analysis
can be duplicated with actual trades. Any historical exchange
rates, interest rates or other reference rates or prices which
appear above are not necessarily indicative of future
exchange rates, interest rates, or other reference rates or
prices. Neither the information, recommendations or
opinions expressed herein constitutes an offer to buy or sell
any securities, futures, options, or investment products on
your behalf. Unless otherwise stated, any pricing information
in this message is indicative only, is subject to change and is
not an offer to transact. Where relevant, the price quoted is
exclusive of tax and delivery costs. Any reference to the
terms of executed transactions should be treated as
preliminary and subject to further due diligence .
Please note, the accurate calculation of the liability profile
used as the basis for implementing any capital markets
transactions is the sole responsibility of the Trustees'
actuarial advisors. Redington Ltd will estimate the liabilities if
required but will not be held responsible for any loss or
damage howsoever sustained as a result of inaccuracies in
that estimation. Additionally, the client recognizes that
Redington Ltd does not owe any party a duty of care in this
respect.
Redington Ltd are investment consultants regulated by the
Financial Services Authority. We do not advise on all
implications of the transactions described herein. This
information is for discussion purposes and prior to
undertaking any trade, you should also discuss with your
professional tax, accounting and / or other relevant advisers
how such particular trade(s) affect you. All analysis (whether
in respect of tax, accounting, law or of any other nature),
should be treated as illustrative only and not relied upon as
accurate.
©Redington Limited 2013. All rights reserved. No
reproduction, copy, transmission or translation in whole or
in part of this presentation may be made without
permission. Application for permission should be made to
Redington Limited at the address below.
Redington Limited (6660006) is registered in England and
Wales. Registered office: 13-15 Mallow Street London EC1Y
8RD
email: emir@redington.co.uk