1. Globalisation 3 The Risks of T+1 Goutam Bose Trading Technology Limited

2. Globalisation 3 Agenda Possible Risk Areas Conclusions Strategic Solutions

3. Globalisation 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.

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

5. Globalisation 3 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.

6. Globalisation 3 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.

7. Globalisation 3 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.

8. Globalisation 3 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.

9. Globalisation 3 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.

10. Globalisation 3 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.

11. Globalisation 3 Unsettled Transactions Increase in unsettled transactions …by orders of magnitude for the 1 st 6 months? Reducing over time. Risks that breaks in an “unstable”” T+1 process will rapidly lead to large settlement backlogs.

12. Globalisation 3 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.

13. Globalisation 3 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)

14. Globalisation 3 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.

15. Globalisation 3 Conclusion - Risks 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 Potential Risk Impact High ----- Medium ----- Low Y

16. Globalisation 3 Strategic Solutions Environmental Assessment followed by… ZLE Real-Time Management for T+1

17. Globalisation 3 T+1 Environmental Assessment To determine the operational impacton the institution of T+1 and improved STP To determineissues such astheintra-dayprocess changeand risk managementin a real- time or near-real-time environment To identify thebusiness opportunitiesthat can be realised To determine the operational impacton the institution of T+1 and improved STP To determineissues such astheintra-dayprocess changeand risk managementin a real- time or near-real-time environment To identify thebusiness opportunitiesthat can be realised Objectives Current transaction flows Scenario modelling Riskmanag’t needs Current transaction flows Scenario modelling Riskmanag’t needs Transaction Modelling Current processes Process deficiencies ‘Best Practice’ Model Current processes Process deficiencies ‘Best Practice’ Model Operating Environment Current applications Supporting infrastructure Interfacing capability Current applications Supporting infrastructure Interfacing capability IT Infrastructure Opportunity Areas Opportunity Areas Business/ Operational Impact Business/ Operational Impact ‘Solution’ Architecture & Implementation Needs ‘Solution’ Architecture & Implementation Needs Business DiagnosticReport Work Streams

18. Globalisation 3 ZLE Real Time Management for T+1 Data Integrator Solution Integrator Messages Rules Data access RoutingObjects Core Legacy Systems General Ledger Customer Accounts Back Office Accounting Back Office Order & Trade Processing Data mining & CRM Risk analysis Strategy analysis Business monitor Real-time and/or Near Real Time ZLE Architecture External Gateway Financial Markets Position Exchanges, NASDAQ Market Information Provider Customer Custody & Clearing DTC, NSCC Real-time and/or Near Real Time market info inquiries trading & reporting executions order-inquiries reports-confirms collateral position settlement comparison position trade Solution Integrator Business rules Message routing Data transformation objects–external access Data Integrator 24 x 7 data cache enterprise state engine real-time data warehouse enterprise message log

19. Globalisation 3 www.tradingtechnology.com Goutam Bose Director of new markets Trading Technology Limited 21 Godliman Street London EC4V 5BD, UK Tel: +44-0-7336 0302