Toward transparency and stability: Building a new financial order

1. Toward transparency and stability:Building a new financial order A Future Agenda Study

2. Our analysis focused on selected financial markets industry participants1: Buy side Sell side Processors Others: academics, think tanks, industry associations, regulatory bodies We surveyed 2,754 industry participants2: Qualitative interviews of 185 executives and government officials Survey of 1,493 executives and government officials Survey of 1,076 investors 33% Americas, 35% EMEA3 and 32% Asia We conducted secondary research and developed quantitative models We surveyed over 2,750 industry participants and conducted secondary research to determine how firms must prepare for the future • Which forces will disrupt the industry landscape? • What will clients pay for? • How will the bases for competition change? • What steps must firms take today to win? IBM Institute for Business Value CFA Institute Scope Approach Note: 1Buy side includes institutional and retail asset management inclusive of private banking, hedge funds and the end institutional investor (sovereign wealth funds, retirement plans, endowments & foundations) and individual investors, Sell side includes investment banking and capital markets, Processors include custodians, exchanges, ATSs and clearing firms; 2Primary research was conducted between April 1st, 2008 through February 22nd, 2010, 85% of business leaders are Board or C-level, EVP or divisional head with the remainder Director, SVP or VP level; 3EMEA is Europe, Middle East, Africa 10/3/2014

3. Historically firms have benefited from a lack of transparency; returns of the past are over and firms must concentrate on delivering sustainable results Summary of Findings • Sophistication in financial engineering has outstripped our ability to handle and risk-manage it. • Together government and industry must work together to establish a financial system that balances stability with innovation. • Daily realities must deliver on brand promises by focusing on the needs of clients. • To thrive, the industry must solve its identity crisis, which will likely involve a change in business models. The industry will unbundle into more specialized organizations that are better equipped to monetize client needs. 10/3/2014

4. Volumes - up, down, volatile and variable Pressure on Exchange Infrastructures spills over, CCPs siphoning-off CSD volumes, settlement being split off from asset servicing.in Europe. Products extensions – to strengthen and diversify revenue sources , get out of the “CSD box” (leaving natural monopoly zone?) Demand for risk management, data services and portfolio optimization, but time-to-market factors, competition among infrastructure providers nationally and cross-border. Cost Reduction and Efficiency For-profit pressures Pressure on costs, including capital reserves Cost of innovation (often underestimated) Critical mass and economies of scale issues Regulatory Drivers Systemic risks, liquidity pressure, transparency and debates on global coordination, retail investor protection and omnibus model Competition – up and down, including clients Customer Demand for High Service Levels - absolute reliability, extended hours, real-time support Transaction volumes are growing again But…… Costs are under constant downward pressure CSDs – Main Business and Regulatory Drivers 10/3/2014

5. So, how can CSD’s transform to help firms deliver sustainable results • Business Drivers and Regulatory Drivers will evolve new business models • Need to enhance revenue (justify price points of services) and reduce cost of operations • Is there sufficient critical mass for the independent CSDs to grow their core business? • Stick to core business or innovate in providing new (added-value) service (e.g. fund settlement,…) • Price points vs cost of operations • Use the power of the data floating through the systems: multilateral, potentially expand into bilateral (Markit) • Vertical integration within domestic borders? Or horizontal integration via shared services utility across borders? • Consolidate and integrate horizontally (across products, markets) and vertically (along value chain) to increase economies of scale • Domestic, Cross-Border, Cross Continent consolidation vs fragmentation • Re-use common infrastructure in shared services models The industry may need to adopt new, probably federated business models (‘utility’) that will reduce cost by the same token offering more (added value for revenue) service 10/3/2014

6. CSD Business Models – how to thrive as well as survive? • Vertical • Horizontal • Outsourcing • Consolidation • Shared • Combination models • Implications for each CSD, national economies, Americas region, globalization • Constructive roles for ACSDA 10/3/2014

7. Contacts: Suzanne Duncan Financial Markets Industry Leader IBM Institute for Business Value Cambridge, MA USA Tel:+1 617-216-7743 Email: sduncan@us.ibm.com www.ibm.com/iibv Rosa Ziccarelli Global Client Executive, DTCC, NYSE, and FINRA IBM Corp. 590 Madison Ave. New York, NY 10022 USA Tel: +1 212-745-2048 Mobile: +1 646-784-6736 Email: rziccarelli@us.ibm.com 10/3/2014