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«Quarter 1, 2007, Volume 22, No. 1 General BondEdge® New Year's Greeting from the BondEdge News: Preview of President of CMS BondEdge Upcoming ...»

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CMS BondEdge Newsletter, "On the Edge" Page 1 of 16

Quarter 1, 2007, Volume 22, No. 1

General BondEdge®

New Year's Greeting from the BondEdge News: Preview of

President of CMS BondEdge Upcoming Release

CMS BondEdge Annual Staff Photos Municipal Markets

Hold the Date! 2007 CMS BondEdge Generic Hybrid ARMs & the Annual Fixed Income Workshops Lehman Indices 4th Quarter 2006 Fixed Income Accounting Issue Updates Markets Review: Market Flash Client Services Q & A Tradeshow Schedule New Year's Greeting from the President of CMS BondEdge The enhancements introduced during the past year and those we look forward to releasing during 2007 are a reflection of several broad trends affecting the institutional fixed income marketplace. With 2007 upon us, we felt it timely to summarize recent product enhancements and review upcoming initiatives.

Chief among the trends observed is the ongoing quest for "alpha" in a relatively low interest rate environment. This need has led us to widen our derivative capabilities (e.g., credit default swaps), expand the coverage of non-vanilla security types, increase the data elements we carry, and enhance our prepayment modeling.

A single name credit default swap model (CDS) was integrated into BondEdge® during 2006. CDS are now supported throughout BondEdge, including appraisal reports, simulation and risk analysis, performance attribution, and cash flow testing. Later in 2007, both CDS and interest rate swaps will be supported via the BondEdge import routine, creating an automated method of creating and valuing these securities.

Comprehensive security coverage continued to be a priority in 2006. Several additional security types and data items were incorporated in various BondEdge databases during 2006, including: global coverage of government and corporate inflation linked securities, expanded interest rate and cash futures coverage, European ABS (non-prepay sensitive), interest-only MBS pools, expanded coverage of fixed to floating rate issues, and data pertinent to non-accruing/defaulted bonds. Fitch ratings were also added to BondEdge during 2006, as well as the ability to create user-defined ratings. User-control over CMO and ABS clean-up calls was also introduced.

A new fixed rate MBS prepayment model was released during 2006, utilizing additional collateral specific data such as loan purpose, loan-to-value ratios (LTV), loan size, and spread at time of origination (SATO).

This additional level of granularity has particularly enhanced the performance of the prepayment model for MBS pools with non-standard characteristics (e.g., low loan balance pools). The new model is also more responsive to interest rate changes, resulting in a closer match to empirical durations and cash flows.

Additional MBS capabilities will be introduced early in 2007 with the addition of mortgage TBA CUSIPs to the BondEdge database, as well as the ability to reflect TBAs and dollar roll strategies in simulations, performance attribution, and cash flow testing. Also in the early part of 2007, an adjustable rate home equity prepayment model will be released to better reflect the risk characteristics of an asset class that has

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The further development of performance attribution capabilities remains a priority at CMS BondEdge.

Historical returns for 250 indices were added to the Returns-based Performance Attribution model during

2006. The framework of the Returns-based model supports the reporting of user-specified segment and bond level total returns for both portfolios and benchmarks. This combination of granularity and flexibility is a particular advantage of the Returns-based approach and has been utilized for a wide spectrum of fixed income portfolios, including those with investment grade, high yield, and municipal mandates. Later in 2007 we will incorporate the ability to support blended benchmarks.

We will be introducing significant enhancements to the Factor-based Performance Attribution model throughout 2007. These enhancements include "policy" style reporting of multiple portfolios and benchmarks, a flexible issue level attribution report, as well as the ability to accommodate blended benchmarks.

A risk and analytical datafeed service was released by CMS BondEdge during 2006 in both the North American and European markets. Mounting regulatory and risk management initiatives have increased the demand for a centralized analytical data repository, particularly for the "middle office" departments within financial organizations. The datafeed service often complements the "front office" focused BondEdge product, which provides users interactive analytical capabilities rather than pre-determined analytical output.

Expanded municipal functionality was released in 2006 and this capability will be further enhanced this year. Of particular note during 2006 was the release of a municipal "duration beta" capability for portfolios with a blend of taxable and tax-exempt holdings. By specifying the relationship between municipal and treasury rates, the durations for blended portfolios can now be reported more consistently.

During 2007 we will incorporate additional data elements for municipal securities such as bank qualified status and underlying ratings. We will also provide more granular reporting for both municipal portfolios and benchmarks. In addition, we are very pleased to report that we may now provide Lehman Municipal Indices, including constituent detail, to Lehman-approved clients.





Later in 2007 a significantly enriched scenario analysis capability will be released for both taxable and taxexempt portfolios and benchmarks. This new functionality will affect both the portfolio specified scenario tool as well as the probability weighted return analysis in Compare. Credit spread changes may be simulated for a cross section of quality and sector designations. In addition, secondary sector and issuer level spread changes may be reflected in an effort to increase the granularity of the analysis.

In recognition of the growing importance of Liability Driven Investing (LDI), we look forward to adding swap and LIBOR-based benchmarks to BondEdge during 2007. In an effort to more seamlessly support risk analysis of liabilities, we are also looking to expand the benchmark notion of the Compare system to encompass liability streams.

Equity analytics, including reporting, risk analysis, and incorporation within Returns-based performance attribution is also under consideration in order to expand our services to portfolios with fixed income/equity mandates.

We appreciate your business and continue to strive to deliver a high quality service to you. We hope that you enjoy a healthy and prosperous 2007.

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Front: Archana Ekbote, Melanie Murai, Lisa Herbert, Crystal Arrieta, Mylan Tam, Sean Tang Middle: Peng Zhen, Brian Gip, Teri Geske, Chris Ruan, Jonathan Hui, Sheldon Smith, Jimmy Fu Back: Dumitru Niculete, Philippe Rasborn, Edward Kim, Jeremy Baker, Bill Burns, Peter Chan

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Sales/Sales Consulting/Consulting/Service Bureau/Client Services Group Front: Paul Tan, Sandi Bradley, Sonia Dixon, Alice Truong, Jennifer Jank, David Lampert Middle: John Siscel, Darius Dadabhoy, Maureen Manacop, Karen Richardson, Laili Agus, Brent Boyd Back: Walter Claus, Chris Pedersen, Jessica Burruss, Eric Chung, Jeffrey Foley, Ian Miller, Tony Armedilla Not Shown: Andy Wong, Kyu Kang, Ken Shibata, Leila Efron

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2007 CMS BondEdge Annual Fixed Income Workshops We are pleased to announce the dates for the 2007 CMS BondEdge Annual Fixed Income Workshops.

This year's Annual Fixed Income Workshops will be presented in primarily two tracks, and will cover fixed income theory as well as practical applications of various BondEdge features. This year we are featuring sessions specifically designed to address current issues in fixed income as well as interactive sessions for one-on-one training with CMS BondEdge senior consultants. We hope you will be able to join us this year at

one of the following locations:

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4th Quarter 2006 Fixed Income Markets Review: Market Flash Despite ending 2006 on a bearish note, total returns for all broad fixed rate benchmarks were significantly higher than returns recorded during 2005. The Lehman Aggregate Index posted a total return of 4.33% for the full year, a 190 basis point (bp) improvement from the 2.43% return achieved during 2005. Price returns, however, were negative for broad benchmarks as the overall level of interest rates moved higher during 2006.

The above is a partial reprint of our quarterly capital markets report, "Market Flash". To view this report in its entirety, please click here.

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As a reminder, BondEdge Version 5.50 is scheduled for release on January 31, 2007. Clients will have a 3 to 4 month period to transition from a 5.4x version to a 5.5x version. If you are interested in upgrading to 5.5 as soon as it is released, or if you wish to obtain a copy for testing before upgrading your production version, please contact your BondEdge Consultant or the Client Services Group. We are excited to bring

you the following new features:

TBA CUSIPs & Dollar Rolls – TBA Mortgage CUSIPs have been added to the BondEdge database. With

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this version, you will be able to add these CUSIPs to your portfolios to reflect your exposure to the TBA market and to capture Dollar Roll strategies for performance. You may also choose to define a portfoliospecific "earned reinvestment rate" associated with your TBA positions to reflect the income generated by short-term investments held against the TBA positions. Clients who hold TBAs and who include in the portfolio the related short-term investments should continue to enter an offsetting (short) cash position in the portfolio equal to the market value of the TBAs. Clients who do not include the short-term investments can use the TBA CUSIPs without entering a short cash position. (Click here for related article).

New Simulation Tools – The Specified Scenario and Compare Probability-Weighted Return simulations have been significantly upgraded in this version, giving you much greater flexibility in specifying spread changes along with interest rate shifts. For Corporate bonds, spread changes can now be input by industry and/or by specific Issuer. Changes in MBS spreads can be specified by collateral type and/or or by tranche type for CMOs, while Muni portfolio managers can input spread changes by the type of bond (G.O., Revenue, Pre-Refunded, ETM and Insured). Scenarios can be shared between the two analyses, eliminating the need to rebuild the same scenario twice, and both simulations now offer the ability to input shifts to the yield curve using duration-matched or maturity-matched logic. This type of scenario stresstesting is critical for benchmark comparisons and risk management purposes, to assess a portfolio's risk/return profile under likely scenarios, and to determine the extent of possible losses under extreme scenarios.

Adjustable Rate Home Equity Loan Prepayment Model – Version 5.5 includes a new prepayment model for deals backed by Adjustable Rate Home Equity Loans, a growing asset class that is increasingly important to many of our clients (Click here for related article).

Municipal Portfolio Management Tools – For private wealth managers, P&C insurers, banks and others who hold municipal bonds, version 5.5 includes more tools for managing portfolios containing a blend of tax-exempt and taxable securities. This release offers more descriptive information for municipal securities, such as underlying ratings for insured bonds, more information about credit enhancement and other data.

An expanded Contribution to Duration report shows the portfolio's duration exposure by Muni type, and we have revised the second and third muni sectors to be consistent with those used by the major muni index providers. The custom report writer has a new Muni Distributions field that shows the percentages of the portfolio that are taxable, tax-exempt (Federal, State or both), Credit Enhanced, Callable, Trading to Call, Puttable, OID, Bank Qualified or subject to the AMT. The Contribution to Duration report in Compare now displays exposures by secondary sector (G.O., REV, Insured, Pre-Ref., ETM) for Munis so that you can monitor your contributions to the portfolio's duration by these categories. Finally, the Portfolio Alerts report now shows recently pre-refunded municipal bonds to help you track the impact of these actions on your portfolios.

We also now have the constituent level data for the Lehman Brothers Municipal Bond indices. We look forward to releasing certain of these Muni indices during the first quarter of the year for portfolio versus benchmark comparisons and Returns-based Performance Attribution. If you are interested in subscribing to the Lehman Muni indices, please contact your CMS BondEdge Representative.

Compare's Contribution to Duration Report: Exposure Subtotals – Since our clients prefer to aggregate their portfolio holdings according to various categories, we have added new subtotals to the Compare "Contribution to Duration" report, summarizing portfolio's holdings and contribution to duration into the super-categories of "Government", "Credit" and "Securitized", with further breakdowns within those

headings, as follows:

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This new section, an addition to the existing report, allows you to see combined exposures for Treasury and Agencies, to separate Foreign Agencies from U.S. Government agencies, and to see your total exposure to MBS/ABS/CMBS holdings.

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Performance Attribution with Custom-weighted indices – You can now use custom-blended indices (e.g., 30% of Index 1, 50% of Index 2, 20% of Index 3) in Factors-based Performance Attribution (PART) analyses.

In the next version of BondEdge we'll be releasing more reporting capabilities for the Factors-based Attribution system, including a customizable issue-level attribution analysis allowing you to report on, and subtotal, each component of return at the security level, including unweighted and "contribution to" values.



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