The Risks of T+1

1. The Risks of T+1 Goutam Bose Trading Technology Limited Globalisation3

2. Agenda • Possible Risk Areas • Conclusions • Strategic Solutions Globalisation3

3. Contents • Overview • Is T+1 a Poor Relative to T+0? • The Advent of the Global Day. • Client Cash Collection. • Banks and T+1. • FX Deals. • 24 Hour Banking Operations. • Unsettled Transactions. • Systems Costs. • Operations vs Accounting. • Cost / Benefits. • Conclusion. • Strategic Solutions. Globalisation3

4. Overview - Proposed T+1 vs. Current Process * Notice of Monitor Execution Trades NOE Broker/ Notice of Generate Dealer Execution Trade confirmation NOE allocations trade details Create Send affirmed Send Money Manager Expected Allocations trades Allocations Allocations expected Depository/ Send List of Settle Trade expected allocations Settle Send Trades allocations Clearer Trade(s) Trade(s) allocations New System / Match NOE & Generate affirmations affirmed Trade(s) & Expected Virtual Matching trades Allocation Info Allocation released Utility allocation trades allocations information Match Trade Receive Allocate & Early Check Custodian Warning Positions T T+1 T+2 T+3 Globalisation3

5. Is T+1 a poor relative to T+0? • Processes that used to take 72 hours -> 4 hours • T+1 needs real-time, or near real time processes. • SEGA/Intersettle implemented real time settlement. • Risk Management is quantitatively different in T+0. • Risk is that T+1 is little different to T+3 in terms of: • Availability of Securities and Funds. • Existing practises (i.e. merely speeding them up) • No radical re-thinking of the whole process. Globalisation3

6. The Advent of the Global Day • HK Institutional client instructs UK Broker. • 5pm in HK = 9 am in UK. • UK broker directs order and performs allocations. • Contacts HK, by which time their trading day is over. • Wait till next day to confirm allocations? • Risk of mis-matched trading hours in a Global Day. Globalisation3

7. Client Cash Collection • Private Clients - a cash collection problem in T+1? • Not geared up for T+1 payment unless pre-fund. • Broker capital adequacy may be stretched. • Risk of lost business or over-stretched capital base. Globalisation3

8. Banks and T+1 • RTGS / DNS systems used for “end of day” batches. • Window for entries usually during early afternoon. • Shortens the T+1 window. • Risks arising from inflexible payment timing. Globalisation3

9. FX Deals • A typical Money Market deal may still take 2 days. • Eg HK$ to USD in the previous example. • Some progress with Continuous Linked Settlement. • Risk that some deals will not settle in T+1. Globalisation3

10. 24 Hour Banking Operations • T+1 creates a 24 hour global processing cycle. • Global banks will need 24 hour coverage. • Risk that inadequate banking services causes T+1 breakdown. Globalisation3

11. Unsettled Transactions • Increase in unsettled transactions • …by orders of magnitude for the 1st 6 months? • Reducing over time. • Risks that breaks in an “unstable”” T+1 process will rapidly lead to large settlement backlogs. Globalisation3

12. Systems Costs • Multiple systems will mostly remain in place • Interface development for STP / “Just in time” • Move from batch -> multiple batch / real-time • Require highly resilient and fault tolerant systems. • Maintenance costs are higher, especially interfaces • Need faster response times to problems. • Risk to T+1 Cost/ Benefit assumptions . Globalisation3

13. Operations vs Accounting • Operational risk may increase in some areas. • STP systems standardise operational processes.. ..but accounting may not be fully addressed • Good STP systems create accounting entries at all the right stages …do you know where these are? • STP reduces processes cost and generates many reports. • Risk that errors are difficult to pick up / explain and rapidly accumulate (e.g. Barings style problems) Globalisation3

14. Cost / Benefits • Reducing transaction volumes need to be weighed against capital and maintenance costs. • 3.3bn spent modifying processes in US. • 50% by institutional Broker/Dealers. • 25% by Asset Managers. • A further 2.9bn spent on standardisation. • Assumed that outstanding settlements cut by 67%. • Risk: Cost/ Benefits may not be as attractive as thought in the short to medium term. Globalisation3

15. Conclusion - Risks Potential Risk Impact High ----- Medium ----- Low Y Y Y Y Y Y Y Y Y Y Risk Area • Is T+1 a Poor Relative to T+0? • The Advent of the Global Day • Client Cash Collection • Banks and T+1 • FX Deals • 24 Hour Banking Operations • Unsettled Transactions • Systems Costs • Operations vs. Accounting • Cost / Benefits Globalisation3

16. Strategic Solutions • Environmental Assessment followed by… • ZLE Real-Time Management for T+1 Globalisation3

17. Transaction Operating IT Infrastructure Modelling Environment • Current • Current • Current • Current • Current • Current transaction processes applications transaction processes applications flows • Process • Supporting flows • Process • Supporting • Scenario deficiencies infrastructure • Scenario deficiencies infrastructure modelling • ‘Best Practice’ • Interfacing modelling • ‘Best Practice’ • Interfacing • Risk manag’t Model capability • Risk manag’t Model capability needs needs T+1 Environmental Assessment Objectives Work Streams Objectives Work Streams • To determine the • To determine the operational impact on operational impact on the institution of T+1 and the institution of T+1 and improved STP improved STP • To determine issues such • To determine issues such as the intra - day process as the intra - day process change and risk change and risk management in a real - management in a real - time or near - real - time time or near - real - time environment environment Business Diagnostic Report • To identify the business ‘Solution’ • To identify the business Business/ ‘Solution’ opportunities that can be Business/ Opportunity Architecture & opportunities that can be Opportunity Operational Architecture & realised Operational Areas realised Implementation Areas Impact Implementation Impact Needs Needs Globalisation3

18. ZLE Real Time Management for T+1 Financial Markets Position Market Information Exchanges, NASDAQ Provider trading & Custody & Clearing market info Customer inquiries executions collateral reporting DTC, NSCC position trade order - inquiries settlement reports - confirms comparison External Gateway position Real - time and/or Near Real Time Solution Integrator • Business rules ZLE Architecture • Message routing Solution Data mining & CRM Data Rules • Data transformation access Integrator Real - time Risk analysis • objects – external access and/or Objects Routing Near Real Strategy analysis Data Time Data Integrator Integrator Messages Business monitor • 24 x 7 data cache • enterprise state engine • real - time data warehouse Core Legacy Systems • enterprise message log General Customer Back Office Back Office Order & Ledger Accounts Accounting Trade Processing Globalisation3

19. www.tradingtechnology.com Goutam Bose Director of new markets Trading Technology Limited 21 Godliman Street London EC4V 5BD, UK Tel: +44-0-7336 0302 Globalisation3