Bank One Corporation - Page 41

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          number (confidence level), if the counterparty to the swap were             
          to default without recovery by FNBC.  The CEM amount at the                 
          inception of a swap was significantly higher than the current               
          exposure at the inception of the swap; i.e., the CEM amount was a           
          measure of the maximum that FNBC might receive (lose) on the swap           
          in the future, within a certain confidence level, while the                 
          current exposure was a measure of the current value of the swap.            
               During the relevant years, FNBC ascertained its CEM amounts            
          for financial derivatives by using a system called the VEP                  
          system.  FNBC’s VEP system recalculated the CEM amount at least             
          annually.  For transactions where the mark-to-market amount                 
          exceeded the CEM amount, the CEM amount was recalculated monthly.           
          FNBC calculated the CEM amount for all swaps.  A swap that had a            
          negative value (FNBC was the net payor) always had a CEM amount             
          that was greater than zero.                                                 
                         b.  Hsieh Model                                              
               FNBC’s initial VEP system was developed for it in the late             
          1980s by David A. Hsieh (Hsieh).  Hsieh designed FNBC’s VEP                 
          system for risk management purposes to measure credit exposure on           
          interest rate and currency products in a manner consistent with             
          the rules of the FRB.  The VEP system was designed specifically             
          for products with a tenor greater than 18 months and had problems           
          calculating the CEM amount for swaps with shorter maturities.               








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