BCP: Emerging Themes for Custodians

1. BCP: Emerging Themes for Custodians Giles Elliott SVP, Head of Business Development & Support HSBC Securities Services, Hong Kong

2. Agenda • Recent Trends in the Custody Industry • Summary of BCP Trigger Events • Critical Failure points in the Custodian Chain • The case for BCP Investment for Custodians • Key Initiatives for Custodians in BCP • Summary Challenges on the BCP Agenda

3. Recent Trends in the Custody Industry ACTIVITY GROWTH INVESTMENT EXPANSION COMMUNICATIONS CONSOLIDATION CLIENT CONSOLIDATION AUTOMATION OPERATIONS CENTRALISATION IT STREAMLINING MARKET COMPLEXITY Activity Growth • Core Asset Growth and Transactional Growth Rates across Asia have exceeded 50% per annum over the past 5 years • HSBC CNC now safekeeps over USD 1 trillion of assets globally through over 55 CSDs Investment Expansion • Expansion across Unlisted Equities, Bonds, Moneymarket securities, Derivatives, Managed Funds • New set of market interfaces supporting these assets Communications Consolidation • SWIFT as preferred primary channel • Expansion into Fund Management and CSDs, but no single high grade contingency option Fund Management Consolidation • Consolidation in Funds Management sector driven by cost agenda and sectoral growth

4. Recent Trends in the Custody Industry (Cont.) ACTIVITY GROWTH INVESTMENT EXPANSION COMMUNICATIONS CONSOLIDATION CLIENT CONSOLIDATION AUTOMATION OPERATIONS CENTRALISATION IT STREAMLINING MARKET COMPLEXITY Custodian Bank Consolidation • Consolidation in Subcustody and in Global Custody with HSBC/Westpac, Citibank/ABN and Mellon/BNY as recent examples • Increasing focus of volume / capacity through single channels Automation • Cost and volume agenda has driven investment in STP and automation of core processing channel using message and static data standardisation • Traditional manual contingency solutions are no longer credible, driving need for focus on high grade contingency solutions. Operations Centralisation • Trend towards creation of regional operations hubs or Centres of Excellence • Changing profile of impact of a single point of failure in operations infrastructure

5. Recent Trends in the Custody Industry (Cont.) ACTIVITY GROWTH INVESTMENT EXPANSION COMMUNICATIONS CONSOLIDATION CLIENT CONSOLIDATION AUTOMATION OPERATIONS CENTRALISATION IT STREAMLINING MARKET COMPLEXITY IT Streamlining • Rationalization of IT platforms driven by focus on standardisation and cost management – increasing use of single software solutions regionally for custodians • Consolidation of databases and IT hardware infrastructure as part of drive for rapid deployment, efficient maintenance and cost reduction • Resulting consolidation increasing impact of single failure in infrastructure Market Complexity • Asian markets are developing rapidly and volumes and complexity of instruments and corporate actions is increasing

6. BCP Trigger Events & Impact Level NATURAL DISASTERS TECHNICAL FAILURES HUMAN FAILURES POLITICAL INCIDENTS IMPACT LEVEL Natural Disasters • Earthquakes, Tsunami’s • Typhoon, Floods • Pandemic - Avian Influenza/SARS. Technical Failures • Power Failures (NZ) • Hardware & Software Failure (Y2K) • Network Failure / Viruses Human / Political Incidents • Fraud, Industrial Action • Terrorism, War Impact Level • Local » City-wide • Country » Sub-regional/Regional

7. Critical Failure Points for Custodians CORE PROCESSING SYSTEMS COMMUNICATIONS CHANNELS & INTERFACES BUILDINGS STAFF/PERSONNEL MARKET INFRASTRUCTURE Core Processing Systems • Hardware Failures, System Mirroring • Software Failures. Communications Channels/Interfaces • SWIFT & External Data Communications Vendors • Telephone/Fax Buildings / Staff • Hot sites, Warm Sites – Proximity Decision • Temporary or Permanent Staff Loss Market Infrastructure • Depositories • Payments Systems

8. Investment Case in BCP for Custodians FINANCIAL REPUTATIONAL LICENSING Financial Motivation • Settlement Failure Costs • Investment Performance Restriction • Principal Asset Loss • Funding Charges • Fines Reputational Impact • Market Reputation • Custodian Reputation Licensing • Custodial Business Licenses, • Bank Licenses

9. Top Initiatives for Custodians in BCP CLIENT COMMUNICATION DEPOSITORY INTERFACE PAYMENT INTERFACE BI-POLAR OPERATIONS BCP COORDINATION STANDING INSTRUCTIONS Client Communication • High Capacity SWIFT Alternatives • Internet Channel / CPU-CPU • Cost of Implementation / Testing & Increased Regional Appointments • Continued use of Fax Channel CSD Interface • Upgrading Primary Channel • Investment in Robust Secondary Channels Bi-Polar Operations • Dual Site Operations Model • Workflow and Process Standardisation • Training and Capacity Investment • Avian Influenza Focus

10. Top Initiatives for Custodians in BCP (Cont.) CLIENT COMMUNICATION DEPOSITORY INTERFACE PAYMENT INTERFACE BI-POLAR OPERATIONS BCP COORDINATION STANDING INSTRUCTIONS BCP Coordination • Complex IT, Operations, CSD Interface Model • Advanced Coordination Approach • Regional Focus Standing Instructions • Increased use of Standing Instructions • Dynamic focus vs Static Instructions

11. Challenges for Custodians in BCP AUTOMATION UNIQUE CSD INTERFACES DEADLINE TREND CLIENT INVESTMENT AGENDA Reliance on Automation • Increasing Automation in Industry is Increasing the Impact of any failure of this mechanism Unique CSD Interfaces • Lack of Common Interface Protocols on Primary or Secondary Channels increases cost and challenges in having a robust interface solution Deadline Trend • Client Deadline pressure now leaves little scope for credible contingency options • Focus on critical automation Client Investment Agenda • Fragmented Agent networks makes the investment spend agenda tough for Global Custodians • Subcustodian need to present a more credible regional solution that should encourage Investment

12. Thank You