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A downgrade to sub-investment grade by at least 2 rating agencies could have a significant Impact. MF global has developed a "break-the-glass" plan to deal with the downgrade. The plan includes Operational plans for each functional area, including preparation and immediate reactions.
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MF Global's "break the glass" document
A downgrade to sub-investment grade by at least 2 rating agencies could have a significant Impact. MF global has developed a "break-the-glass" plan to deal with the downgrade. The plan includes Operational plans for each functional area, including preparation and immediate reactions.
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A downgrade to sub-investment grade by at least 2 rating agencies could have a significant Impact. MF global has developed a "break-the-glass" plan to deal with the downgrade. The plan includes Operational plans for each functional area, including preparation and immediate reactions.
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Evaluated and developed a "break-the-glass plan through discussions with key global business leadership: ! Downgrade to sub-investment grade by at least 2 rating agencies ! Analysis performed on key operating entities (MF Inc and MF UK Limited) ! Scenarios considered significant disruption to funding capabilities ! Operational plans for each functional area, including preparation and immediate reactions, have been considered and continue to develop ! Dialogue continues, including maintaining/updating these analyses
Key message: ! We remain solvent are able to manage liquidity through stress period as we reposition our business and stabilize our financing lines 1 Summary Treasury, Finance and Risk teams developed a downgrade stress scenario: Potential Scenarios 2 Second Quarter Results Rating Agencies: No action taken Equity markets: No reaction Financing: Funding continues Rating Agencies: No action taken Equity markets: Negative reaction Financing: Funding challenged Rating Agencies: Downgrade Equity markets: Minimal reaction Financing: Funding continues Rating Agencies: Downgrade Equity markets: Negative reaction Financing: Funding challenged
Activate Contingency Funding Plan Business As Usual; Monitor Liquidity Business As Usual 3 Key Takeaways Based on the review of the business, capital and liquidity position as well as several stressed risk scenarios, including a downgrade below investment grade, several conclusions emerged: Expectations from the business are an approximate 30 percent decline in revenues+ potential equity impairment Balance sheet would be significantly reduced Revolver and external liabilities would need to be repaid Significant P&L and B/S implications Current levels of liquidity provides management a relatively short amount of time to assess and execute tactical and strategic business alternatives Buys time to re-evaluate Liquidity sufficient Credit rating may necessitate a review and reshaping of current business model and strategic direction Reshaping of the business Based on the analysis, we believe there is sufficient liquidity to manage through one month under a severe stress event Impact of a Downgrade What happens? 4 Main Stressed Uses of Cash
Main Mitigants of Cash
1. Financing of corporate paper becomes stressed = $1.0 to $1.5 billion 2. Financing haircuts are increased by MF to maintain liquidity on other asset classes = $100 - $150mm 3. Clearing houses increase margin requirements = $200 - $250mm 4. Reduction in un-committed boxes at BONY Mellon = $100mm 5. Excess client balances are withdrawn (mainly institutional clients) = $100mm 1. Revolver draw = $0.9 billion 2. Liquidation of corporate paper / recover higher haircuts from clients where possible = $0.75 - $1.0 billion 3. Liquidation of other hard-to-finance inventory positions while minimizing P&L impact = $100mm
5 Liquidity Stress Impact (Risk Assumptions) 6 Downgrade Impact By Business 7 Quick Decisions to be made If a ratings downgrade is imminent, a number of critical decisions will need to be made:
Repos - What are the maturities? Do we extend maturities? Do we start now? What is the P&L impact? RTMs - Biggest draw on cash today how do we respond and what are our options? Can we novate? Hedge fully? Tenor of hedge (unwind after the storm)? Need a clear strategy for this.
Repos / RTM How do we optimize liquidity while minimizing impact to P&L? Liquidity Draw on Revolver Reshaping the business model: Who do we want to be? What business do we want to keep? What can be sold? What do we need to keep the company solvent? Business Model When to draw? How much? How long? What message are we sending to the banks? To the investors? Drawing too much, too soon could pre-signal distress. Internal and External Communications Plan Developed Employees, Regulators, Banks, etc.
Functional Department Work-Streams Being Developed. *See appendix for details - Continue to develop workstreams/action plans within and across functions
- Additional dialogue on reshaping the business plan to prepare and respond to such an event
- Ensure communication plans are complete and ready to be executed
- Meetings with the rating agencies Thursday/Friday October 20/21
8 Next Steps
Appendix
I. Downgrade Timeline & Immediate Decisions Required (Details) p.10-11
II. Operational Considerations p.12
III. Key Functional areas and Initial workstreams by function p.13-15
IV. Liquidity Stress Impact (Details of Assumptions) p.16-17
9 . Timeline.mpact of a Downgrade What happens? 10 Cash Inflows
Objective: Optimize Immediate Liquidity with Minimal P&L Impact Cash Outflows
Objective: Meet contractual liabilities + staunch discretionary outflows + prevent off-balance sheet drains Downgrade to BB+ or below T+0 T+1 to T+7 T+ 8 to T+ 30 Beyond T+30 9 Prepare to draw on $0.9billion Revolver (banks may enforce MAC / MAE clause) * 9 Sale of most liquid corporate inventory positions* 9 Sale of MF boxed positions* 9 Sale of Commercial Paper investments* 9 Unwind European RTM book to release margin* 9 Liquidate Investment Portfolios if funding from client balances and/or bi-lateral repo counterparties are lost* 9 Unwind UN-matched book if repo lines are lost* 9 Cancel all uncommitted liquidity extensions 9 Inform traders to pause from using B/S 9 Communicate to key clients about safety of their excess and margin balances 9Move repo positions to CCPs where possible (higher haircut + financing cost)* 9 Unwind UN-matched book if bi-lateral and tri- party lines are lost (loss of liquidity and income)* 9 Meet increased clearing house margin requirements including European RTM portfolio * 9Meet ad hoc regulatory calls for more capital + liquidity buffer infusions * 9 Prepare to meet panicked client redemption notices (especially from institutional clients) * 9 Communicate to banks, equity investors, employees, issue press release 9 Treasury and Operations groups working at capacity 9 Continue unwinding reverse repos
9 Continue sale of inventory
9 Continue selling less liquid assets and investments
9 Release of regulatory capital as balance sheet contracts
9 Orderly client redemptions of mid- market and retail clients
9Increased demand from unsecured vendors for payment ahead of schedule
9 Worse financing terms across all borrowing contracts
9 Erosion of business franchise as key employees leave with their clients to rival firms
9Banks attempt to recover drawn Revolver funds
9 Possible risk further downgrades by rating agencies
9 Re-evaluate business model and re-build franchise
9 Possible sale of strategic assets
9 Excess cash situation due to release of regulatory capital
9 Revolver re-payment due to MAC trigger
9 Possible debt acceleration due to MAC trigger
9 Possible loss of primary dealer designation
9 Provisions for possible legal liabilities/investor lawsuits
Note: All * indicators refer to the resulting scenarios on the Risk Liquidity Stress Analysis I. Immediate Decision Making Required Business Impact (Earnings depletion, Balance Sheet shrinkage due to lower leverage, etc.) ! Once the downgrade is imminent (per communication from the credit agencies, etc.) there are a number of critical decisions to make with significant implications.
Drawing on the revolver: When to draw (immediately or after announcement); how much of the revolver should be drawn (all or partial) a thoughtful, sophisticated analysis needs to be performed on each of these decisions and a need to consider the message that goes out to the public, relationships with banks; rumors could have significant impact. Liquidity - How do we optimize immediate liquidity with the least amount of P&L Impact; sale/unwinding/liquidate inventory and MF boxed positions. Repos how to respond extend maturities? Do we start now or wait until downgrade, what is P&L loss, how much liquidity is being generated, what is the message to the street if we start to do this? RTMs biggest draw on cash today; loss today less the margins posted; generate liquidity with large P&L loss decisions: hedge fully, hedge for a short term (2-3 months and then unwind after the storm), novate? How will LCH respond, how much in excess of margin will be required, time period, can/will they force us out? Legal restrictions, terms of agreements? Need a clear strategy and plan for RTM portfolio. Communication to the regulators, banks, investors, employees Who communications, what is the message, etc. ! There are restrictions on the credit quality of assets that institutional investors can invest in (most are restricted from holding "non- investment grade or "high yield securities or taking unsecured credit exposure to such Firms). This has both positive and negative implications. Business Model - It is necessary to determine how much is held by institutional investors and to estimate the potential loss; what is needed to run the business, which businesses do we potentially want to lose and concentrate on the areas we want/need to save; who do we want to be after the storm? How quickly do we want to send cash back to clients, what is the message if we do not send immediately, what is the strategy if we want to keep the customer and wait until the storm passes. Do we revert back to agency-type business.
Ultimately, clients might not want to do business with us immediately after a downgrade, but it is how we handle ourselves during the downgrade that will determine if they want to do business with us in the future.
11 II. Operational Considerations and Responses Operational Considerations ! How will the multiple lines of business (BO/MO/FO/Static Data/Account Management/IT) co-exist to handle the vast increase in client requests? Expected vast increase in redemptions that will put tremendous pressure on all lines of business to handle the excess. ! Each function should have an "Emergency Plan that would outline roles and responsibilities in a downgrade situation to help prevent disorder and chaos. ! Investor relations and corporate communications need plans specifically for a credit downgrade and addressing the media and clients alike ! Front Office and IR should plan together on what should be said and what needs to be said. One trader saying something that a client perceives as negative could spread very quickly across Wall Street and beyond. ! "Weathering the storm is critical to the plan if the firm is to survive. Senior Management should be briefed on what a potential downgrade could mean to their roles (i.e., the middle office should understand that they are going to be buried with all kinds of requests coming from both back and front offices due to redemptions, people cancelling business, etc) and plan to properly communicate to all of their employees the messaging from corporate communications;
Operational Response ! Most normal business operations will cease and the firm should focus on "disaster recovery ! Investor Relations and Corporate Communications ready to respond and handle the situation with a unified, consistent message that is communicated throughout the organization and externally to all counterparties; Everything from being respectful when answering questions, to being able to properly transfer them to the account management department to help close their account. Excess manpower should be provided to this group to handle the rush of calls. ! Directly contact all regulators and start the communication/address concerns; ! Allocate manpower efficiently to handle all of the excess issues resulting from a downgrade; ! Legal/Compliance/Investor Relations/Executive Management/Front Office proactively fielding questions/calls from clients, exchanges and regulators ! All support functions maintaining 'all hands on deck' with all relevant team members for the foreseeable future
12 13 III. Key Functional Areas The inner circle represents functional areas that will be most affected; the outer circle are areas that will provide direction, support or be responsible for communicating with external stakeholders Finance Legal Technology Compliance Investor Relations Businesses Regional Management Global Management TREASURY OPERATIONS RISK FINANCE DESK III. Initial Workstreams by Function
Treasury: Concerns/Plan - concerns for Treasury are reflected throughout this presentation; response to the plan of action are included below: ! Prepare for Revolver draw ! Monitor secured financing stress ! Monitor inventory positions ! Monitor client funds withdrawals ! Monitor funding requirements from clearing houses and regulators ! Monitor off-balance sheet liquidity events (RTMs, customer financing lines, etc.) Finance: ! All hands on deck from an accounting and analysis perspective; ! Ensure seg calcs are done daily ! Ensure the completeness and accuracy of daily p&l calculations ! Meet all reporting needs (i.e. internal management reporting/external regulatory reporting) Compliance: Concerns: Messaging to the street: key business decisions (i.e. terming repos) made on reducing exposures could send the wrong message if not handled appropriately; rumors could significantly impact our ability to survive; Plan: No specific responsibilities but all hands on deck, on the floor, helping respond to queries and actioning, as well as helping to contact regulators as requested. Operations: Concerns are addressed throughout the document; response to the plan of action are included below: No specific responsibilities above daily and beyond normal business other than handling the sheer volume of client redemptions in a rational and orderly manner, ensuring customer accounts are handled appropriately; concentration on transactions with external counterparties, sec lending/borrowing/tri-party trades; but all hands on deck. IT: Concerns are addressed throughout the document; response to the plan of action are included below: No specific responsibilities above daily and beyond normal business other than increased scruitiny around our trading platforms and ensuring they are stable as more activity on part of some of our traders, pricing of trades and pricing glitches; need to be have appropriate resources to monitor security on the systems, turning off access as appropriate and providing access where necessary. All hands on deck 14 III. Initial Workstreams by Function (continued) Investor Relations: Concerns: Significant pressure on equity creating broader client implications Analyst downgrades, earnings and price target revisions Prominent and broad based negative media coverage Client withdrawals Liquidity rumors Plan: Investor Relations, Corporate Communications, and Marketing are responsible for communication and messaging both internally and externally; teams already have detailed plans in place on how to respond to this situation; need to ensure these plans are known by executive and senior management and that the messaging both internally and external are consistent and executed appropriately.
Legal: Plans: - Reviewed (1) all material (non-customer) contracts, including revolver, long term debt, Series A & B, non-committed bank facilities, etc. and (2) sample customer and other trading agreements (e.g., electronic trading agreements) for any contractual provisions implicated in the event of a downgrade, liquidity crisis and/or as a result of other trigger events post downgrade (including demands for adequate assurances); - Updating information re all regulators, exchanges and clearinghouses and anyone else we are legally obligated to notify (or otherwise should notify) in immediate response to downgrade (or other triggers); compiled all triggers for notification and/or other reasons we would reach out, contact points and best relationship people to make contacts; messaging to be coordinated with IR; - Updating customer document re security of customer funds and improving detail as necessary or helpful; - Make sure using right assumptions based on where ratings action effective if only by one rating agency vs majority; - Consider options to current structure of trading relationships (between US & UK) and the regulatory and accounting implications on any change to this structure; - Consider whether any limits to the requirements FSA can impose and develop contingency plan to approach Federal Reserve Bank (NY and Washington) and possibly Treasury for support if FSA requests might threaten firm.
15 IV. Liquidity Stress Impact (Details of Assumptions) - US 16 Driving Scenario 1: MFGdowngrade or extreme drop in stock price Analysis for MFGInc. (US) Starting Non-Seg Liquidity Pool 992 Starting Seg Liquidity Pool 2,000 Resulting Scenarios Outflow Pool Day 0 Day 1 Day 2 Day 3 Day 4 Day 5 Week 2 Month 1Month 2 Comment O1 Repo lines gets pulled back, haircut increased, and excess pulled back; mostly impacting the un-matched part of the repo book Haircuts increases for un-matched repo book, and the treasury inventory financed externally (Trsy, MBS, Agn) NSL -25 -25 -25 -10 -10 -10 -25 Combined we would require $130mm based on increased hair cuts. Certain Corp paper returned; part of it put into the box, and part funded internally. NSL -50 -50 -50 -50 -50 -50 -100 -100 -100 Approx 60% of 1.7bn & 300/300mm of IG, or $1000mm of counterparties such as State Street and AIG returned; approx $500 put into committed and uncomitted boxes; rest financed internally. Repos are staggered. Client pull back excess or unwind of un-matched book causes drop in B/D excess NSL -15 -15 -15 -15 -15 -15 Approximately 1/3 of B/D excess generated from customers O2 SLB increased margin or lines get pulled back by counterparties Haircut widening; for matched book and for the customer inventory financed by SLB. NSL -5 -5 Book is small and perfectly matched; 10mm is conservative O3 BNYreduces the size of the box, or returns part of the collateral BNYcloses a portion of the uncommitted box. NSL -83 Our BNYMbox is uncommitted, so they can shrink it at any time. We assumed approx 1/3rd reduction. O4 Increased haircuts at CCPs for Repo (EUREXand LCH) LCH NSL -7 Outflow is 90% add-on - As per rulebook; BB+ 200% LCH.SA NSL -158 Outflow is 90% add-on - As per rulebook; BB+ 200% EUREX NSL -49 Assuming outflow is 50% add-on O5 Customers decide to pull back their excess in FCM 1B of client excess is sent back to customers; requiring Treasury to finance more of their corp book externally and paying haircuts. SL -50 -50 -50 -100 -100 -250 -300 -100 $1bn of client access gets pulled back. In case of client excess pull back ($1bn), more of corporate bond book needs external financing. NSL -25 -25 -25 -50 -50 -125 -150 -50 only 50% of additional corporate bonds could be funded uses external lines, rest funded internally using resources including the secured boxes. Customer don't pull at the same time. NSL -3 -3 -3 -5 -5 -13 -15 -5 10% of the remaining 50% as haircut required by external counterparties O6 Certain large FCMcustomers decide to leave MFG Customers xpit out 1B in IM; pulling their excess; reducing the internal financing of Treasury exchange eligible portfolio; requiring external financing including FICC NSL -1 -1 -1 -2 -2 -5 -6 -2 Affects Seg / Margin Excess only (Day 1 -250, Day 2 -250, Day 3 -250, Day 4 -100, Day 5 -100, Week 2 -50 O7 ISDAThresholds gets triggered, requiring MFG to keep post more liquidity FXand others NSL -3 -3 -3 -3 -3 Conservative approximation based on FAS161 history (FX, OTC Comm, others) OTC Commodities NSL -5 -5 -5 -5 -5 Conservative approximation based on FAS161 history O8 Increased collateral at clearance banks CLS (fx) NSL -25 Currently 50Mhas been as high as 100M Non-Seg Liquidity Daily Outflows 0 0 0 0 0 0 0 0 0 Cumulative Outflows 0 0 0 0 0 0 0 0 0 Net Liquidity w/o Mitigants (SoD) 992 992 992 992 992 992 992 992 992 Net Liquidity w/o Mitigants (EoD) 992 992 992 992 992 992 992 992 992 Seg Liquidity Daily Outflows 0 0 0 0 0 0 0 0 0 Cumulative Outflows 0 0 0 0 0 0 0 0 Resulting Scenarios Mitigant Comment M1 Repo Haircut increases or lines get pulled back by counterparties Haircut increase passed onto clients 4 4 2 2 2 4 0 0 15% of increase passed to customer Liquidation of part of the corp paper 38 38 38 38 38 38 75 75 75 75% of portfolio liquidated M2 SLB increased margin or lines get pulled back by counterparties Wind down of the SLB business; keeping only the minimum client facitation position 1 1 1 2 5 Assume orderly liquidation based on current portfolio M3 Reduction in appetite for certain collateral, requiring MFG to fund mismatch Liquidate part of the returned assets 21 10 0 Liquidate 1/2 of the returned assets M4 Increased haircuts at CCPs for Repo (EUREXand LCH) Move to counterparties with favourable terms 21 Novate some positions to OTC counterparties; benefit is 10% of exchange increase) M5 Customers decide to pull back their excess in FCM Unwind positions - smaller liability at exchanges No mitigation Liquidation of the corp paper portfolio, previously funded internally 19 19 19 38 38 94 113 38 75% of internally funded portfolio liquidated Losses on Liquidation of Corp Portfolio -1 -1 -1 -2 -2 -4 -5 -3 Approximated at 1/4 point; only for liquidation purposes. Actual can vary a lot. M6 Certain large FCMcustomers decide to leave MFG Potential margin netting benefit; and reduction in reg cap requirements. No mitigation M7 ISDAThresholds gets triggered, requiring MFG to keep post more liquidity Some counterparties will be paying us for forward loses 10 Novate positions to favorable OTC counterparties to reduce impact by 25% (FX, OTC Comm) M8 Increased collateral at clearance banks Find alternative relationships We recently negotiated down with BofAfrom 100 to 50 Non-Seg Liquidity Daily Mitigants 38 59 80 68 76 77 195 193 110 Cumulative Mitigants 96 177 244 320 397 591 784 894 Cumulative Outflows net of Mitigants 0 96 177 244 320 397 591 784 894 Net Liquidity with Mitigants (SoD) 992 1,030 1,088 1,169 1,236 1,312 1,389 1,583 1,776 Net Liquidity with Mitigants (EoD) 1,030 1,088 1,169 1,236 1,312 1,389 1,583 1,776 1,886 IV. Liquidity Stress Impact (Details of Assumptions) - UK 17 Driving Scenario 1: MFGdowngrade or extreme drop in stock price MFG UKL Starting Liquidity Pool 1,297 Resulting Scenarios Outflow Day 0 Day 1 Day 2 Day 3 Day 4 Day 5 Week 2 Mth 1 Mth 2 Comment O1 Repo lines get pulled back by counterparties, haircut increased, and excess pulled back mostly impacting the un-matched part of the repo book Haircuts double for the o/n rolls -4 -4 -4 -4 -4 -3 Increased haircut of 200% now paid to counterparties based on current O/N Repo Counterparties no longer pay us haircut -4 -4 -4 -4 -2 We no longer receive haircut from counterparties Certain counterparties pull back their lines, and can be replaced only at higher haircuts -2 -2 -2 -2 -2 We are no longer able to use lines and are liable to higher haircuts to finance positions Customers pull back some excess they leave in the repo book -2 -2 -2 -2 -2 Customers no longer keep excess over requirements with us reducing the non seg liq pool O2 SLB increased margin or lines get pulled back by counterparties Haircuts double -8 -8 -8 -8 -8 -8 -4 Increased haircut paid to counterparties based on current O/N SLB Counterparties no longer pay us haircut -6 -6 -6 -6 -6 -3 We no longer receive haircut from counterparties CFD Book -41 -40 Top quality stocks charged 15% haircut by PB (271M) Lower quality become SiB and fully financed by MFG (41M) O3 Increased haircuts at CCPs for Repo (EUREXand LCH) LCH -7 LCH.SA -158 EUREX -49 Assuming outflow is 50% add-on O4 Some customers pull back their excess and others leave MFG Client non seg free equity -10 -10 -10 -10 -15 -20 -40 -50 -20 Historical data for client withdrawals during 2008 40% reduction in Non Seg Free Cash (464M) over 4 days O5 Reduction in appetite for certain collateral, requiring MFG to fund mismatch -5 -5 -5 -5 -5 -15 -10 Assume 10% haircut increase for Corporates in Treasury portfolio (499M) O6 As a result of customer leaving, MFG loose some of the netting benefits at the exchanges Unwind of margin netting benefit -2 -2 -2 -2 -2 -3 -6 -8 -3 Loss of netting benefit is 15% of drawdown. O7 ISDAThresholds gets triggered, requiring MFG to keep post more liquidity OTC Commodities -1 -1 -1 -1 -1 (FX, OTC Comm) FX -1 -1 -1 -1 -1 Daily Outflows -24 -258 -45 -86 -50 -53 -108 -68 -23 Cumulative Outflows -24 -281 -326 -411 -461 -514 -622 -690 -713 Net Liquidity w/o Mitigants (SoD) 1,297 1,273 1,015 971 885 835 782 674 607 Net Liquidity w/o Mitigants (EoD) 1,273 1,015 971 885 835 782 674 607 584 Resulting Scenarios Mitigant Comment M1 Repo Haircut increases or lines get pulled back by counterparties Move to counterparties with favourable terms 6 6 Assume re-finance 50% with favourable counterparties Wind down trading book M2 SLB increased margin or lines get pulled back by counterparties Move to counterparties with favourable terms 13 13 Assume re-finance 50% with favourable counterparties M3 Increased haircuts at CCPs for Repo (EUREXand LCH) Pass haircut increase to client 213 MFGUK passes any margin increase to MFGI M5 MF Sells the Corporate bond book at the prevailing market 38 MFG sells 75% of the corporate holdings Daily Mitigants 0 0 213 0 0 0 19 56 0 Cumulative Mitigants 0 0 213 213 213 213 232 288 288 Cumulative Outflows net of Mitigants -24 -281 -113 -198 -248 -301 -391 -402 -425 Net Liquidity with Mitigants (SoD) 1,297 1,273 1,015 1,184 1,099 1,048 995 906 895 Net Liquidity with Mitigants (EoD) 1,273 1,015 1,184 1,099 1,048 995 906 895 872 Outflow is 90% add-on - As per rulebook; BB+ 200% Conservative approximation based on FAS161 history 18 V. Current Regulated Entity Sources & Uses (Summary) SOURCES (in millions):
USES (in millions):
NET CASH: $6,189 SOURCES (in millions):
USES (in millions):
NET CASH: $ 292
1) Take undrawn portion of credit revolver ($1.26b) 2) Increase maturities of Repos before stress scenario (thru CCP) in an amount close to $2.4bn 1) Move Non-CCP Repos to CCP 3) Sell boxed collateral; Sell Investments (HTM) 4) Cancel any uncommitted lines extended to clients 5) Shut-down Contract for Difference "CFD business and raise margin levels to 30% (similar to 2007). 6) Increase LCH Margin requirements to $300 million MFG INC MFG UKL . 1) Currently $583m of available funds to aid in a stress scenario: UKL has LAB excess: $320mm UKL has non-seg deposits: $199mm UKL has non seg cash at bank $63mm Total Liquidity: $588mm
Note: this does not include the required LAB of $469mm which should not be used and is not taken into account for general use purposes Note 1: Data is from Aug 31 balance sheet
Note 2: Assuming APAC is net liquid after stress scenario
** MFG Inc Repo/Reverse Repo information is from the 9/30 Gross Tenor Report
***MF UKL Repo/Reverse Repo data was obtained from the 10/4 Gross Tenor Report
Cash Inflows: (Green) Cash Outflows: (Red)
Cash 40 Restricted Cash/Securities 7,400 Reverse Repo & SB 58,227** Sec. Owned 4,500 Customer Receivables 276 Affiliate (HTM) Rec. 7,375 B/D & Clearing Orgs 565 Other Rec. 1 Total 78,384 Customer Payables (8,780) B/D & Clearing Orgs Payable (266) Repos & SL (58,563)** Secs sold, not yet purchased (3,312) Affiliate Payable (621) Accrued Exp & Other Liabs (653) Total (72,195) Cash 374 Restricted Cash/Securities 393 Reverse Repo & SB 7,632*** Sec. Owned 1,348 Sec Rec as Collateral 49 Customer Receivables 240 Affiliate (HTM) Rec. 89 B/D & Clearing Orgs 2,021 Other Rec. 84 Total 12,230 Customer Payables (2,623) B/D & Clearing Orgs Payable (263) Repos & SL (8,118)*** Secs sold, not yet purchased (107) Affiliate Payable (456) Accrued Exp & Other Liabs (322) Oblig. to return Sec Borrowed (49) Total (11,938) Liquidity Impact due to Stress (worst-case scenario) Liquidity Impact due to Stress (worst-case scenario)
V. Stress Scenario Impact on MFG Inc. with Mitigants
19 V. Stress Scenario Impact on MF UKL with Mitigants
20 VI. Business Line Impact (based on Product Head feedback)
Fixed Income ! Overall significant impact on business (greater than 50% likely); higher haircut and higher expense ! Ratings Downgrade: Junk Status (50%) estimated change lose of counterparties and their funding; ! (A) $4b in Treasury/Agencies (customer cash providers, lose all in terms of bi-lateral business (6 counterparties); funding can be made up with FICC counterparties (higher haircut/expense); (B) $3b in Agency/MBS, lose 10-12 counterparts ($275m down to 100m in liquidity); (C) Investment grade Corporates (lose more than half of the 10 counterparts) & lose funding ($2b down to $1b in funding which is a direct drain, no CCP offset; of the customers that stay, will mean required higher haircuts, cannot fund but can sell out of portfolio and take a p&l hit; (D) match-book income lost both sides of balance sheet ($200m funding) excess liquidity lost; GCF higher haircuts (another $50m loss) ! Financing: impacted immediately, additional margin support required ! Clearing: negative impact on revenues and volume, clients would have to set up new clearing arrangements Increased collateral requirements, revised settlement funding lines, increase clearing/settlement charges ! Given current Fixed Income dynamics globally, the profits on the Fixed Income business are already lagging, but any trigger event could reduce the profits to "razor-thin levels. Foreign Exchange ! Overall significant impact on business, especially in the US where currently building the business (40% likely) ! Ratings Downgrade: Junk Status (40%) estimated change ! CLS Bank Settlement Impact: - An additional factor following a significant "trigger event" would be the potential reluctance of our CLS settlement bank to continue to provide FX settlement services. This is something that MFG has experienced historically, and there are a limited number of banks that offer these services.- Following a downgrade or "trigger event", liquidity providers would be even less inclined to settle trades bilaterally with MFG outside of CLS (other than in the instances where MFG had "winning" trades which they may wish to delay settlement on if it appeared that we were in distress), so this would have significant impacts and would mean that we would not be able to execute business. Retail ! Overall potentially less material impact on business (less than 25% likely) ! Ratings Downgrade: Junk Status (25%) estimated change ! General Brokerage (UK/Welch): $1.6b held, benefits from very strong long-standing customer relationships., which with management of the news flow and reassurance of the Desk Head should limit the flight of customers, and this was the case historically. ! Electronic Direct / Online Trading: (US/Sachs): $1.0b ! CFD + FO (APAC): $200-250 million, we have a greater exposure to white label F/O than we do to CFDs (which are manufactured by DB).
21 VI. Business Line Impact continued.
Commodities ! Overall significant impact on business (potentially greater than 40% if junk status) ! Ratings Downgrade: Junk Status greater than (40%) estimated change ! Metals: Less significantly impacted than other 2 from historical figures and customer relationships in UK, believe it would be hit (20-25%) ! Agriculture: Significantly impacted, upwards of 50% decline in revenues; ! Energy: Significantly impacted (already currently impacted due to market cap and stock price); upwards of 50% decline in revenues; ! Regulatory capital for commodities is $300 million; margin requirements $2 to $3 billion, it would cause $800 million in balances to be pulled out (30- 40%). ! Expect Metals (mostly non-seg customers in UK) cash surplus would likely reduce from $200 million to $100 million. Equities Overall potentially less material impact to business (approx 10%, maybe 15% if junk status and/or multiple events occurred ) Ratings Downgrade: not significant impacted due to the nature of the business (85% DVP). ! Cash Equity: makes up 46% of US Equities, mostly DVP and as such, a trigger event will not have a vast impact; ! Equity Derivs: makes up 37%, largely consists of listed derivatives and are largely DVP, a trigger event will not have a vast impact (looking to build up OTC Equity Derivs, but not applicable at this time); ! Electric Trading: DMA makes up 11% (of which 30% is flat @ EOD) and the rest is 6%, this business is largely DVP, a trigger event will have a minimum impact; Interest Rate Products ! Overall non-material impact on business between(10%-15%) likely ! Ratings Downgrade: Junk status Lose clearing accounts ! Execution: accounts for close to 85% of the business, given past considerations the phone lines were back up to normal business in a few days. ! Clearing: would not be affected greatly but when the split between execution and clearing trends towards 60/40 in the future the impact will be greater. Prime Services ! Overall non-material impact on business (less than 10% likely) ! Ratings Downgrade: not significantly impacted due to the nature of the business and client relationships; ! Client Solutions: across these lines of business there is $4.6 billion in capitalization in what are considered "Middle Markets. ! 90% of this is deemed to be safe considering the nature of the client relationships ! The 10% lost will be due to the largest CTA's and hedge funds