What Challenges Lie Ahead? A Review of Emerging Industry Trends

1. What Challenges Lie Ahead?A Review of Emerging Industry Trends Lee Cutrone BDUG Annual Conference October, 2005

2. What Challenges Lie Ahead? Predicting the Future is Hard!!!

3. “Nothing endures but change” Heraclitus “To improve is to change; to be perfect is to change often” Winston Churchill “Change in all things is sweet” Aristotle “I put a dollar in one of those change machines. Nothing happened.” George Carlin

4. Only Three Things Can Drive Fundamental Change in Our Industry: Crisis Regulation Economics

5. Will the Regulators Drive Change? Conflicting Trends: • Declining Investor confidence • Corporate Malfeasance (Enron, Tyco, WorldCom), Mutual Fund scandals • Increased Regulatory oversight • Federal vs. State Regulators -“Regulatory Leapfrog” • Hedge Funds, Mutual Funds, Soft Dollars, Reg NMS • Change in SEC leadership • Conservative appointment • ”Laissez Faire” climate? • Spitzer goes for Governor Which way will the pendulum swing?

6. Shorter Trade Affirmation • The quest for shorter settlement cycles is dead – for now! • Central Matching will not be mandated • Focus on the goal and not the means to get there • Goal: Affirm trades faster to Improve processing efficiency • Central Matching is the most effective means to that end • Same Day Affirmation is where we (& the Regulators) want to be • Could be driven by both regulation and economics • Best Practices alone won’t get it done! • SDA will be mandated – but when??? • Canada in 2007 • U.S. ??? • Europe??? Get Ready for SDA …NOW!

7. Will Economics Drive Change?????

8. YES, Economics Will Drive Change!

9. Emerging Trends Driven by Economics • Single point of access for IMs • Investment Manager Outsourcing (IMO) • Electronic trading • FIX – executions and post-trade processing

10. Seeking a Single Point of Access -Introducing Omgeo Connect… What is Omgeo Connect? “A single point of access for investment managers to interact with Omgeo services and, ultimately, other third-party post-trade solutions, enabling the trade and settlement management of multiple asset classes via an ASP environment.”

11. Traditional Workflow Models & Omgeo Connect Traditional ModelOmgeo Connect · *Omgeo Connect currently offers access to Omgeo Central Trade Manager (Omgeo CTM). All other connectivity references listed above are planned future enhancements.

12. Omgeo Connect Value Proposition • Enable reliable trade and settlement management • Manage operational risk and costs through a single connection • Maintain control over business processes • Consolidate access to best of breed post-trade offerings • Access multiple communities of trade counterparties through a common interface • Mitigate capital cost of continually reconciling systems Now Live!

13. The Move to IM Outsourcing Top Services Investment Managers Would Consider Outsourcing: • SSI Database Management – 65% • Trade Confirmations – 59% • Transition Management – 53% • Performance Measurement and Attribution – 47% • Reconciliations – 44% • Fails Management – 44%

14. Why Outsource? • What’s moving IMs forward? • Cost of technology • Focus on investment performance • What’s causing IMs to hesitate? • Loss of control • Lack of confidence in providers

15. Choosing a Provider

16. The Relationship Fund Managers Custodians

17. Sustainability • Wide gap between consumers and providers on value for price • Mutual belief that this model is not sustainable

18. The Move to IM Outsourcing • Summary of findings: • IM Outsourcing is here to stay • Outsourcing will promote a greater use of STP & standards • IMO “Flexibility” was most important determinant to Outsource by an IM • IMOs believe “cost” was most important determinant • Executing an “exit strategy” is risky & expensive • Nearly half of the survey respondents view the current price/value model as “unsustainable” and in need of change. What does this mean for IM Outsourcing?

19. Is the Current IMO Business Model Flawed? Consider the following: • Virtually every GC has an IMO business today • Competition for new business is fierce • Usually based on “cost” & “flexibility” • “Lift-outs” abound – good for IMs; bad for IMOs • Result: Squeezed Margins • Result: Delays in consolidating IMs to a single platform • Absent these “economies of scale”, the IMO business model begins to breakdown • Likely outcome: IMO “shake-out” and/or increased cost to IMs

20. The Growth in Electronic Trading • Electronic trading (Programs, Algorithmic, DMA) is a growth sector • 60% of US IM’s are doing with algorithmic trading • Hedge Fund growth a factor • Brokers running faster just to stay even! • Volumes AND Commissions • Theory 1: Tighter margins force firms to be more efficient • The IT “Trickle-down effect” to Operations • Good news for STP automation • Theory 2: Tighter margins reduce available IT resources • Post-trade IT resources decline • Bad news for STP automation • A catalyst for change – e.g., differential pricing?

21. Expanding the Use of FIX • TheFinal Information Exchange (FIX) has become the de-facto standard in Trade order IOI and execution in the US • Initially equities focused • Fixed Income is rapidly growing • FIX Europe on the rise • FIX U.S. (equities and Fixed Income) now looking to expand use of FIX protocol to U.S. allocations and confirms.

22. Omgeo Manual FIX Other How are allocations processed today? Percent of Allocations Processed by Channel 52% Domestic 27% Equities 3% 9% 22% Domestic 34% Fixed 1% Income 20% 48% Foreign 29% Equities 2% 15% 37% Foreign 38% Fixed 0% Income 25% Source: The Tabb Group

23. Implications/Contingencies • Legal: • 10(b)10 “No-Action” required – Plausible • NYSE Rule 387 approval – Questionable • Is it needed for Bi-lateral links? • Who is filing entity? • Compliance “legends” on FIX not accommodated • Operational: • Custodian Banks would have to accommodate FIX messages • Promotes Local Vs Central matching • Necessitates multiple “PDQ-Like” links to DTC • May promote greater use of Delivery Orders • Is this contrary to STP goals?