Trading has changed from local to global and so have the processes from paper to Online. The result is change in process from T+3 to T+1 and real time trading and settlement of a trade.
2. Why setting the course for T+3 in 1996 Original G30 Recommendations (1989) Recommendation VII “ All markets should adopt a rolling settlement system. Final settlement should occur no later than T+3.” IOSCO Recommendations (2001) Recommendation 3 – Settlement Cycles “ Rolling settlement should be adopted in all securities markets. Final settlement should occur no later than T+3. The benefits and costs of a settlement cycle shorter that T+3 should be evaluated.” USA moved from T+5 to T+3 in 1996. UK and most of Europe moved to T+3 in 2001.
5. Traditional Trade Process cycle Pre-Trade Compliance Order Management Price Discovery Exchange Execution Custodian Records Settlement / Accounting Order Generation Broker Dealer Order Generation Order Generation
6. Research Document Management Analytics Calculation Framework Trading Transaction Management Risk Risk Management Back Office Settlement Systems Treasury General Ledger / Accounting Treasury Treasury Management CRM Sales Trade/Order Management Clearing & Custodians Operations Data Management Multiple Business Departments and Institutions: Traditional settlement processes Trade Cycle Each department depended On information provided by its Predecessor.
11. Pre requisites for Integrated approach to trade processing: centralisation of information collection process: As Is To Be … to Centralised information source on correspondent banks From … Numerous bilateral information exchanges within financial institutions Source: www.swift.com/index.cfm?item_id=3878
12. Current Key Processes – As Is Brokerage Asset Management Private Banking Investment Banking Institutional investors ** Above Pictures taken from Google Images
13. Future Key Processes – To Be Brokerage Asset Management Private Banking Investment Banking Institutional investors ** Above Pictures taken from Google Images
14. Change in Organisational structure As Is To Be Hierarchy based org Structure Services, Product line based org Structure
15. Intranet: Trade Process goes Online Trade Cycle Decision Support Performance Attribution Order Generation Pre-Trade Compliance Order Management Price Discovery Execution Recs Settlement / Accounting ETC ETS
16. Trade floor design by STP Exchange VMU / ETCP Trade Date Space 1 Pre-trade / Trade Space 3 Clearing & Settlement Order Trade IMI: Investment Manager B/D: Broker Dealer VMU: Virtual Matching Utility GC: Global Cust SC: Sub-Cust SA: Settlement Agent (Clearer) CCP: Central Counterparty ICSD: (Int‘l) Central Securities Depository Institutional (buy) Side Street (sell) Side Space 2 Post Trade / Pre-Settlement Trade Date + X GC SA CCP SA IMI B/D (I)CSD SC B/D Space 4 - Custody Services Non Trade Related Activity 1 2 3
18. New Process Exchang e Electronic Communications Network Market Maker Firm Internalizes Order Internet order Phone order [1] http://www.ibtimes.com/articles/20061006/add-nyse-electronic-trading.htm
19.
20. Trade Floor Sequence diagram GSTPA TFM Fund Manager Broker Custodian DTC/CSD Order Notification BON NOE Trade Match Trade Match Allocations Allocations Allocation Notification Net Proceeds Net Proceeds Net Proceeds Match Net Proceeds Match Net Proceeds Match Settlement Details Settlement Details Settlement Details Match Settlement Details Settlement Details Match Settlement Details Upload Confirms Affirm Trades Upload Affirms Release Cash
21.
22.
23.
24.
25.
26.
27.
28. Goal: Integration of Exchange wise, Institution wise enabling analysis and business intelligence on trades and settlements made Investment Banking – Europe division Global Wealth Management Fixed Income US division Trading and Settlement Switzerland Division Drill down By city, country Drill down by Financial product Trend analysis By region Granular Details by region City, state, country
29. Process change – Fax, Telephone to Blackberry Multiple dependencies have now vanished . Share purchaser - Mumbai Back Broker’s office, London Blackberry, Stock Broker, London Blackberry, Price matching brokers, London Broker request to buy stock over phone, blackberry Broker X out of office, Forward his request to his office to check price and availability of particular share Broker X’s office, negotiates for best Share price in market with other broker. Market Broker’s informs about the best deal to Broker X office Broker X’s informs buyer of the best share price available Buyer confirms buying share at said price. Broker X buys shares for buyer at NYSE Electronic Settlement of shares
32. Net Market Makers Net Market Makers Globalised Securities market In GSA’s Regions GSA Services’ Mega Market Exchange Global Trading Web
33.
Notas del editor
Presentation on Financial Services IT – Back Office Operation for Course 683 By Sri Averneni, Kartik Mehta Source for picturs: Google images
Market crash - Year 1987, Location Wall Street. Black Monday's collapse - by far the biggest one-day stock market fall in history. Black Monday was the most dramatic in a huge list of horrible days on the market - many of which are now forgotten. Among the nastiest was 27 October 1997, when a basically bullish market started to be rattled by mounting worries over emerging markets, especially debt-laden Asia. In one day, the Dow lost 550 points, checked only by the circuit-breaker system put in place after 1987. The market continued to be a little frisky thereafter - especially in light of the later collapse of the Russian economy and the multi-billion dollar failure of the LTCM hedge fund. Source: 1. http://www.group30.org/ 2. BBC News
Source: Tower Group/SIA Survey, Technology Trends in the Securities Industry 1999: Transition to an Online World
Source: Googl images
Graphics are taken from google images, concept developed by Kartik and Sri for the presentation
Source: Netik – mass automation of financial services:
http://en.wikipedia.org/wiki/Settlement_(finance) Traditional settlement Traditionally, securities settlement has involved the physical movement of paper instruments, or certificates and transfer forms. Payment was usually made by cheque. It was also risky, inasmuch as paper instruments, certificates, and transfer forms were relatively easy to lose, steal, and forge (see indirect holding system). the United States markets experienced what has become known as "the paper crunch," as settlement delays threatened to disrupt the operations of the securities markets. This led to the formation of the Depository Trust Company (DTC), and ultimately its parent, the Depository Trust & Clearing Corporation. In the United Kingdom, the weakness of paper-based settlement was exposed by a programme of privatisation of nationalised industries in the 1980s, and the Big Bang of 1986 led to an explosion in the volume of trades, and settlement delays became significant. In the market crash of 1987, many investors sought to limit their losses by selling their securities, but found that the failure of timely settlement left them exposed. Electronic settlement The electronic settlement system came about largely as a result of Clearance and Settlement Systems in the World's Securities Markets , a major report in 1989 by the Washington-based think tank, the Group of Thirty. This report made nine recommendations with a view to achieving more efficient settlement. This was followed up in 2003 with a report called Clearing and Settlement: A Plan of Action[1] with 20 recommendations. In an electronic settlement system, electronic settlement takes place between participants. If a non-participant wishes to settle its interests, it must do so through a participant acting as a custodian. The interests of participants are recorded by credit entries in securities accounts maintained in their names by the operator of the system. It permits both quick and efficient settlement by removing the need for paperwork, and the synchronisation of the delivery of securities with the payment of a corresponding cash sum (called delivery versus payment, or DVP). The recent development of electronic securities trading has brought about settlement pressures akin to the paper crunch of the 1970s and 1980s, rendering the need for further efficiencies urgent.
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
Picture 1: http://www.cartoonstock.com/lowres/hsc3590l.jpg Picture 2: http://www.cartoonstock.com/lowres/vsh0492l.jpg Many paper reports were being printed each day with hardly anybody was reading them. The programs that produce reports were hard-coded; once report was generated, the user can not ask for more information ie fields in excel sheets or manipulate the excel sheet reports to fit their needs and the client’s inquiries about their product. Thus, UBS business end user was unable to provide all the relevant information required by the client at one go leading to loss of time, energy and employee’s work load each day. Most printed reports had a lag of one day or more plus wastage of paper, manpower and cost of distribution. Additional work force had to be allocated to ensure that Excel worksheets are getting faxed to right people and the right people are getting them because all these reports had client’s Social Security number’s or Tax id and personal information. Any pilferage of client’s information could mean breach of privacy of client’s data and that could land UBS in big soup. Organisation in above situation had Information. But, what was lacking is organized and analysed data.
Source: www.swift.com/index.cfm?item_id=3878 Bank not only has to take of care of transactions held in the bank but also the transactions the bank has with Corresponding banks and financial institutions. That cannot happen when bank’s different division, say, Asset Management interacts with Corresponding bank’s Asset management division. For Anti Money Laundering activities, Integration of Bank’s different division is must. This would enable a central agency, single point of contact, with external world, be it any financial institution or regalator. This way bank would be able to monitor bank’s external transactions.
Only pictures copied from Images in Google, rest concept and diagram drawn using MS Power point are my own creation. Change in approach has its direct bearing on the way of governance of Bank’s traditional processes. They too require a change To be able to meet Proactive risk management approach of the bank. Change process – Transactions, Exchange of financial services and products need to change from merely Information gathering and building A elephant of Information to Intelligence gathering. For the same, Integration of the process, of the system is a pre-requisite.
Only pictures copied from Images in Google, rest concept and diagram drawn using MS Power point are my own creation. Change process – Transactions, Exchange of financial services and products need to change from merely Information gathering and building A elephant of Information to Intelligence gathering. This makes for Centralised Intelligence gathering system which in turn helps the bank develop Financial Intelligence needed about Each and every of its customer as well as each and every transaction made by the Bank’s customer or corresponding bank’s customer. For the same, Integration of the process, of the system is a pre-requisite.
Hierarchy based org Structure : As is to Services, Product line based org Structure: To Be Hierarchy decreases and collaborative work gain more prominence because work load is higher and problem is more complex requiring feedback across the various divisions of the organisation.. Office boy transferring files, doing faxes to Internet & Intranet connection to transfer file, paper thereby reducing manual work and increasing work done on Internet & Intranet.
Source: Netik – mass automation of financial services
Source: Presentation on STP at Mumbai Stock Exchange
New system merges data from multiple sources, thereby, preventing data loss and disintegration. 1. Market data (pricing, fundamentals, news, corporate act, etc.) 2. Front office (indications, pricing, risk, trends, etc.) 3. Back office (accounts, inventory, settlement, etc.)
Source: power point from google
Source: Netik – mass automation of financial services
Source: Netik – mass automation of financial services
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
Source: Netik – mass automation of financial services
Source diagram: IBM
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
** Only graph of slide taken from IIT Professor S.Seshadari’s slide, inputs and details are my own understanding of working of bank. Pre-requisite for Money Laundering Analysis Across Bank’s various Divisions for Analysis to happen is : Centralisation of all the Data, Transactions, Client details of the various divisions of the bank. Once bank has a control of what is Internal transactions and what are External transactions can the bank run analysis. Why is it necessary? In the new system aim is to merge the data from multiple sources in order to prevent data loss and data disintegration. 1. Market data (pricing, fundamentals, news, corporate act, etc.) 2. Front office (indications, pricing, risk, trends, etc.) 3. Back office (accounts, inventory, settlement, etc.) Once data is Centralised only then all the data can be stored at a Data Store ie Data Ware house and only then an analysis can be done. Hence, first goal, even before thinking of Money Laundering analysis is centralisation of all various divisions of the banks.
Images from google images while Analysis and concept of diagram done by Kartik and Sri for the presentation based on understanding developed during the course
Notes: CVMU plays a major role in implementing T +1 It will be centralized and the firms will have a membership as like Clearing corp. membership. CVMU will be regulated so that there will not be a monopoly issue.
Analysis done by Kartik and Sri for the presentation based on understanding developed during the course
Majority of sources we have tried to quote but some might have not been quoted because we did did extensive research and for whole gamut of data lost few of data sources.