1. OPERATIONS IN FINANCIAL INSTITUTIONS - WHY IT’S MORE THAN JUST PROCESSES B60.2315.20 OPERATIONS IN FINANCIAL SERVICES Spring 2002 This report is solely for the use of client personnel. No part of it may be circulated, quoted, or reproduced for distribution outside the client organization without prior written approval from McKinsey & Company. This material was used by McKinsey & Company during an oral presentation; it is not a complete record of the discussion.

2. NY-101613.103/020417YlpolSL1 1 THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS 1.How to apply “manufacturing techniques” to reengineer and rethink the operations processes 2.How to use offshoring to redefine the traditional operations location and operating model 3.How to respond to industry planned next-day trade settlement (T+1) initiative

3. NY-101613.103/020417YlpolSL1 2 THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS 1.How to apply “manufacturing techniques” to reengineer and rethink the operations processes 2.How to use offshoring to redefine the traditional operations location and operating model 3.How to respond to industry planned next-day trade settlement (T+1) initiative

4. NY-101613.103/020417YlpolSL1 3 LEAN MANUFACTURING – GENESIS AND KEY PRINCIPLES 1.A workforce that is “waste aware” and skilled in reducing/eliminating waste 2.Level production load from matching demand to capacity/supply 3.A just-in-time production process that produces only when needed and in quantities required 4.A process designed to deliver quality the first time using robust, ‘in- process’ mechanisms 5.An energized organization with the processes and capabilities to achieve continuous improvement year after year Key principles of lean manufacturing Many of these techniques are starting to be applied in service industries, including financial services, driving quick and dramatic improvements in performance, often without the need for significant investment A manufacturing approach based originally on the Toyota production system Has since been adapted by leading manufacturing companies around the world including most of the automotive industry, General Electric, Allied Signal, Solectron, Alcoa and many more

5. NY-101613.103/020417YlpolSL1 4 Main lever Specific improvement Operations excellence Manage demand at the source Optimize process, layout, and flow Optimize/manage complexity Level load incoming demand to match supply Capture information and correct errors one time, accurately, at the source Standardize and stabilize work processes Streamline critical path Build in quality Create one-piece synchronized flow Organize around processes, not tasks Example Segmented volume based on customer profitability to maximize contribution margin Reduced labor costs 40% in check processing due to one- time, quick capture of information Reduced variability on incomplete application handling to a no tolerance approach which improved completion rate by 50% Created “end-to-end” accountability for performance not department/task-based accountability Created measures encouraging branch loan applications to arrive on an ongoing basis during the workday Redesigned the underwriting process to a single piece, first-in/first- out flow which reduced turnaround time from hours to minutes Ordered appraisals on homes for equity loans earlier in the decision process Created data entry forms that have restricted fields to reduce incoming errors Understand customer preferences/tradeoffs Conducted customer interviews to optimize required decision time of loan application Manage perfor- mance Set clear process metrics Created a performance scorecard including timeliness, service quality, and cost/productivity measures Determine stretch targets Designed stretch targets based on theoretical limits, not incremental performance Tailor incentives and consequences to results Tied process metrics to team-level performance and to team compensation Migrate to lower cost channels Reduced channel cost in credit card company by 50% due to migrating inquiries from call center to Web LEAN MANUFACTURING LEVERS TO ACHIEVING OPERATIONS EXCELLENCE

6. NY-101613.103/020417YlpolSL1 5 Number of applications Fax demand Current schedule capacity New schedule capacity 0 20 40 60 80 100 120 140 7 AM 89101112 PM 1234567891011 MANAGE DEMAND: CHANGE SCHEDULES TO MATCH DEMAND

7. NY-101613.103/020417YlpolSL1 6 20. Write floor execution report 15. Write down execution & check against pad *Support block desk and other products OPTIMIZE PROCESSES, LAYOUT AMD FLOW: LISTED EQUITIES TRADE FLOW Automated Manual A Automated Eliminated Systems 1. Enter order into A 2. Select block trader from pull- down menu 3. Send order to trader through A 4. Acknowledge order 6. Decide exe- cution strategy 7. Call order to floor/enter order into D 8. Write down order (or print order from B) 9. Beep $2 or house broker 11. Execute order in crowd 12. Call verbal to booth 13. Deliver written to booth 14. Call back execution (or type into B) 16. Enter execution into A 17. Send/allocate execution to sales/trader 18. Call execution to client 19. Print house execution report 22. Type floor report into Roles involved* Sales/ tradersAssistant traders Block traders Booth clerks House brokers $2 brokers Key punch operators Runners 10. Pick up order at booth 5. Write down order on pad 21. Pick up floor reports and deliver for punching Rejected by D Executed by D Client Call order into sales/trader A A A A A A A A A A Sales/trading Sales/tradersBlock traders Exchange floor BoothBrokers Messengers/data entry operators Middle Office Order Room P&S Cash- iers Daily P&L D BA C

8. NY-101613.103/020417YlpolSL1 7 IMPACT FROM REDESIGNING LISTED EQUITIES TRADE FLOW Steps in trade flow process Description of opportunity Trade flow involves over 70 steps, 40 of which are manual Manual steps and the resulting errors requires hiring costly FTE and limits capacity Large numbers of systems increasing the level of complexity and steps Numerous reconciliations based on multiple sources of data entry Key success factors Walking the process to see each activity first-hand Willingness to redesign the process from scratch rather than generating changes to current system Make sure the trade flow is right before introducing technology Financial impact 10% reduction in FTEs Assumptions Service levels to customers would not decline The majority of manual steps do not require complex decisions that cannot be automated BeforeAfter*BeforeAfter Total stepsManual steps -13% *New design also reduced flow through 18% of remaining steps -33% Implementation time 12-18 months

9. NY-101613.103/020417YlpolSL1 8 From convoluted physical flow PC PrinterPC Printer x x x x x 1 Receive fax PC Printer xx Order Denial x6xx6x x U/Ws x 5Order documents for equity second decision 6 Receive documents from vendors 3 regional underwriting queues PC 4,7 Underwriting Fax 2 Print credit report 3 3 8 Mail back to branches OPTIMIZE PROCESSES, LAYOUT AMD FLOW: UNDERWRITING ACTIVITY

10. NY-101613.103/020417YlpolSL1 9 “Production” flow Fax PC Printer 4,7Underwriting Processors Single queue 1 Receive fax X X X X XX Phone U/W 10 paces 5,6,8 Order/receive docs Mail back to branches 3 Print credit report2 OPTIMIZE PROCESSES, LAYOUT AMD FLOW: NEW UNDERWRITING PROCESS

11. NY-101613.103/020417YlpolSL1 10 Eliminated transportation time, increasing underwriting capacity by 6% Moved all clerical work to processors, increasing underwriting capacity by 11% Transitioned all first and second decisions to 4 underwriters (and reprioritize tasks), decreasing through-put time Created ‘phone underwriter’s positions (for 2 staff members) to handle all communication and non-time-sensitive underwriting, allowing other underwriters to focus exclusively on first and second decisions Increased underwriting capacity by 40% IMPACT OF REORGANIZING UNDERWRITING ACTIVITIES

12. NY-101613.103/020417YlpolSL1 11 Checks are transported from branches to centralized processing site Each check is read by a proof operator who enters the amount which is MICR encoded onto the check Checks are then prepped and put into trays The checks are then run through a sorter equipped with a MICR reader and microfilm camera – data from each check is sent from the sorter to the bank’s IP servers 123 Dollars Pay to the Order of Any Bank Anywher e For Date 123 Dollars Pay to the Order of Any Bank Anywher e For Date 123 Dollars Pay to the Order of Any Bank Anywher e For Date Jane Doe 123 Main Street Anywhere, PA 11111 123 Dollars Pay to the Order of Any Bank Anywhere For Date OPTIMIZE PROCESSES, LAYOUT AMD FLOW: CURRENT CHECK PROCESSING

13. NY-101613.103/020417YlpolSL1 12 Each check is run through a sorter equipped with a MICR reader and a digital camera which captures an image of the front and back of the check Checks are transported from branches to centralized processing site 123 Dollars Pay to the Order of Any Bank Anywher e For Date 123 Dollars Pay to the Order of Any Bank Anywher e For Date 123 Dollars Pay to the Order of Any Bank Anywher e For Date Jane Doe 123 Main Street Anywhere, PA 11111 123 Dollars Pay to the Order of Any Bank Anywhere For Date Checks are prepped and put into trays For checks where the image cannot be read, a person at a terminal reviews the image and enters the amount Jane Doe 123 Main Street Anywhere, PA 11111 123 Date The images are then run through OCR software to determine the amount; the amount and other infor- mation on the check are sent to the bank’s server OPTIMIZE PROCESSES, LAYOUT AMD FLOW: IMAGE TECHNOLOGY

14. NY-101613.103/020417YlpolSL1 13 IMPACT OF NEW TECHNOLOGY ON CHECK PROCESSING Before new process Since new process Before new process Since new process Operational lever Streamline critical path Eliminate redundant activities to reduce time to get an entry through the process Selected changes Optimize/ manage complexity Improve labor utilization by introducing cross- training and workcells Build in quality Reducing the number of touches will provide fewer opportunities or errors Organize around processes, not tasks Team-based accountability improves total system quality FTEs Time to get 1 entry through process -25% -83% Low investment required to move sorting equipment

15. NY-101613.103/020417YlpolSL1 14 THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS 1.How to apply “manufacturing techniques” to reengineer and rethink the operations processes 2.How to use offshoring to redefine the traditional operations location and operating model 3.How to respond to industry planned next-day trade settlement (T+1) initiative

16. NY-101613.103/020417YlpolSL1 15 *Cost of international leased line for India; cost of long distance domestic leased line in the U.S.; costs are for January each year; for India, based on Mumbai or Cochin **U.S. half circuit data is derived by dividing full circuit data by half Source: VSNL press releases; literature search; Lynx, Goldman Sachs estimates; McKinsey analysis Advancing technologyEasing regulation Strong financial incentives (Malaysia example) : –100% tax exemption for 10 years –No VAT Aggressive operating incentives (India example): –State-sponsored training in “soft and domain specific skills” –Privacy protection act to protect offshored customer data –SLA’s between state and telecom providers to ensure dedicated, high quality supply Maturing markets Mar 2000 Mar 2001 Mar 2002E Mar 2000 Mar 2001 Mar 2002E Supplier base – India $ Billions, revenue Employment in offshoring industry – India Thousands CAGR 69% CAGR 53% $ Thousands PA for 2 Mbps fiber leased line*, half circuit India Ireland U.S.** 85% drop in India as state monopoly faces competition from private satellite providers Reduction in bandwidth costs Philippines RECENT SIGNIFICANT REDUCTION IN INTERACTION COSTS

17. NY-101613.103/020417YlpolSL1 16 From physically co-located end-to-end operations...... to globally placed links in the supply chain driving optimal value Credit decisioning Call center Data entry Customer research System development Objective Remote servicing is the placement of operational units at globally optimal locations based on factor and interaction costs, timeliness, and quality of service Key drivers for the banking sector Centralizeable operations Significant labor cost differentials Manageable communication/monitoring costs Available and reliable technology/infrastructure Supportive regulatory and political environment REMOTE SERVICING HAS BECOME A LEVER FOR DRIVING PERFORMANCE

18. NY-101613.103/020417YlpolSL1 17 QualityTime Cost Operational improvement Dramatic reduction in cost (10-30%) Increased flexibility permitting greater capacity/demand balancing Improved transparency and predictability 24 x 7 service Faster turnaround times from learning curve benefits Continuous production possible with effective synchronization More established processes and metrics for meeting higher performance standards Access to basic and specialized skills Minimized baggage of outdated infrastructure, e.g., software THREE DIMENSIONS OF BENEFITS FROM REMOTE SERVICING

19. NY-101613.103/020417YlpolSL1 18 Source:McKinsey analysis Philippines Software development Call centers Data entry Singapore E-commerce hub Shared/financial services India Call centers Data entry Software development Engineering design Back-office operations Ireland Software development Call centers Shared services South Africa Financial services Ukraine Software Caribbean Data entry LOCATIONS USED TO REMOTE SERVICE DIFFERENT SERVICES

20. NY-101613.103/020417YlpolSL1 19 Source: U.S. Census Bureau; team analysis U.S. cost base industry US$ Billions High (300+) Low (0-1%) Remote serviceable processes share of cost base Medium (100- 300) Low (0-100) Medium (1-5%)High (5%+) Banking Insurance Telecom Retailing Utilities Automotive Computer Airlines Pharma- ceuticals Third-party engineering and design services Electronics Areas of greatest opportunity Oil Packaged goods Aerospace Chemicals Steel Equipment Ship building Hotels Entertain- ment Real estate brokerage Software producer Third-party call center providers LARGE OPPORTUNITIES IN BANKING AND INSURANCE

21. NY-101613.103/020417YlpolSL1 20 Current activities Future activities Source: Press searches; GE Remote services case study Support activities (IT, HR) ( ) Customer acquisition New business processing In-force transactions Asset management Claims processing Claims Processing Risk analysis Underwriting Planning and forecasting Data entry Call center Claims processing (Tier 1) Revenue accounting Claims processing CRM Accounting Transaction processing Financial reconciliation Statutory reporting Bill payments Data entry Call center Application processing INITIAL FOCUS ON LOWER END PROCESSING/DATA ENTRY ACTIVITIES

22. NY-101613.103/020417YlpolSL1 21 *Total pretax operating cost savings based on labor cost savings for main activities adjusted for higher other costs (e.g., telecommunication); not adjusted for startup inefficiencies Source:Literature search; industry interviews; team analysis Cost savings $ Millions PA* Main activities Current employees 340 9,500Call center, mortgage and insurance, accounting, bill payment 2,050Trade finance, check processing, data entry, customer services, loans, bills, credit cards, cash management 730Data processing, accounts, check clearing 400Insurance claim processing, call center 70 14 55 35 1817 41 2001 Forecasted savings (public statements) Transaction processing, e.g., accounts opening, mortgage clearing 300 54 6 60 300 Back-office processing, e.g., payments, account services, support 800 Accounting services, operating services, and call centers 20 146 35105 16 70 54 ESTIMATES EARLY MOVERS ARE ALREADY SEEING BOTTOM-LINE IMPACT

23. NY-101613.103/020417YlpolSL1 22 *Start of year Source: Press searches, Interviews, McKinsey analysis Details Impact Started operations in 1998 and has facilities in Mumbai, Bangalore and other places in India Citibank Overseas Investment Corporation owns 37.2% of the company Process ~ 70 million transactions of varying nature and complexity Currently cater to mainly low to medium end remote service activities –Transaction processing · GF: Mainly focussed on trade finance related activities (Query handling, record keeping, scrutiny, data entry, authorisation and ledger entry). Some cash management activities including payment settlement account reconciliation and ledger keeping · GCB: Still in piloting stage (for TIDE loans, bills processing and expense tracking, credit card interchange) · Provides insurance claims & processing services –Technology services – software verification & validation, web catalog and content management, data center management –Call Centers – call centers, eCRM, sales and collection services : handle ~20 million calls Merged with Citicorp Credit Services and added call center capability ESTIMATE Current Impact: $40 million revenues expected for FY02 1999 20002001 1998* 50 150 370 2,700 Plan to become biggest outsourcing centre within Citigroup. Works for over 22 overseas units - current geographies covered are CEMIA (Eastern Europe, Africa, South Asia). US and UK operations recently announced plans to use India as source base Ensure at least 10% of total business comes from third party sources Operate as a cost centre. Billing is on a cost plus basis for services offered. Billing per employee currently is $25,000-30,000/year Corporate philosophy/thinking CITIGROUP EXAMPLE

24. NY-101613.103/020417YlpolSL1 23 *Start of year **@$30000/FTE/year Source: Press searches, Interviews, McKinsey analysis One of the three global financial resource centres (FRCs)of AMEX 100% owned by AMEX. Caters only to AMEX internal requirements Key geographies covered are Australia, New Zealand, Singapore, Japan, Hong Kong, Philippines Future plans are to: –Expand into higher value added work such as planning and forecasting, account consolidations, risk modeling –Increase service lines especially in TRS for activities such as voice based customer support etc. Background/corporate philosophy Details Impact Started operations in 1994, first remote services effort in India Located in Delhi - ~75,000 sq. ft. complex ~800 FTEs; 100 of which are MBAs/CAs Currently into low/medium and remote services activities. Mainly back-end batch processing –Accounts reconciliation –Accounts opening and closing –Cheque processing/other payment processing –Data processing Expanding into call center operations Rajiv Ahuja, Amex's head of public affairs and communications for India and area countries “The new operations in India will include processing activities such as voice-based customer support, account & transaction processing and fraud and risk modelling” FTEs Current Impact: $20 million/year** ESTIMATE 500 700 800 1,500-2000 1996*199820002003(E) AMERICAN EXPRESS EXAMPLE

25. NY-101613.103/020417YlpolSL1 24 *@$40000/FTE/year Source: Interviews, press searches, McKinsey analysis Created a separate 100% owned subsidiary (HDPI) of HSBC, UK to provide services Provides support for select back office operations of UK and US bank operations Caters to more than 17 business areas Plans to –Expand into high-end retail banking processes and expand to wholesale banking processes, and other branches in Europe, and Australia –Reach 3000 FTEs by 2002 –Add another global processing center in Hyderabad –Invest additional $10 million Corporate philosophy/thinking 1,100 3,000 7,000 20012002(E)2003(E) Impact $ million/year* Current: 12 Expected : 120 Details Impact Started operations in 2000 - located in Hyderabad in an over 40,000 sq. ft. premises Invested additional US$20million at the start of the year Currently employs ~1,100 FTEs, mostly graduates Has out performed UK banks on quality and productivity Current activities include transaction processing, mainly in retail banking (processes are online but not real time) - Account opening/closing, standing instructions, monitoring inward clearing, mortgage processing Recently announced plans to expand its operations to Bangalore ESTIMATE HSBC EXAMPLE

26. NY-101613.103/020417YlpolSL1 25 Source:Team analysis Fully remote serviceable Partially remote serviceable Description Cost Percent of total Savings Percent of cost Initial customer contact Data entry of applications Underwriting/ credit decision- ing Communication and upsell to applicant Document preparation Disbursements/ closing 45-50 15-20 Review of closing document for compliance Booking of document to system Funding General ledger reconciliation 25-30 6-10 Scan and index of file File management Assist in internal and customer inquiries Research of issues 10-15 15-25 Processing final payments Releasing collateral 5-15 20-25 Origination Application to closing Fund disburse- ment to coupon delivery ServicingPayout EXAMPLE PROCESS: END-TO- END LENDING

27. NY-101613.103/020417YlpolSL1 26 Strong candidates for remote servicing: Data entry Document prep. Booking Reconciliation/ compliance Front-end collections Call centers Corporate center From a perspective of product/service supply chains linked end-to-end... Consumer lending Commercial lending Item processing Trust services Cash management... to a perspective of utility-like functions cutting across supply chains Data entry Recon- cilation … FIRMS ADOPTING A “UTILITY” VIEW TO IDENTIFY OPPORTUNITIES

28. NY-101613.103/020417YlpolSL1 27 Infrastructure Service levels/ responsiveness Cost advantage Political/ country Perceived issue/risk Reliability of telecom Lower quality Lower productivity Cultural differences High bandwidth costs Unsustainable labor cost advantage High government/ regional risk/ instability Data protection Operational complexity Current status/method for management Reliability has improved over the last 5 years – satellite now at about 99 percent; fiber at 95 percent Significant further improvements are likely – addition of 14 TBps of international capacity; addition of 270,000 miles of domestic fiber Players experiencing increases in quality due to lower turnover and higher skill level Higher productivity and quality can be achieved through investment in training, compensation and labor pool rotations between on-shore and off-shore locations Bandwidth costs have significantly declined due to deregulation and investment in capacity Supply of talent in some locations ensures cost advantage will exist for 20-30 years Unlikely given not harmful to domestic constituencies Government supports action – e.g., U.S. and Indian government agreed to decouple information technology trade from politics Can manage through multiple location operations (e.g., India and Philippines) Early development of public relations strategy General concerns Operations and community POTENTIAL BARRIERS AND CONCERNS

29. NY-101613.103/020417YlpolSL1 28 Skills Availability of frontline skills –basic/language –specialized (as appropriate) Availability of senior management skill Cost Political risk Stable government No domestic conflict Legal enforcement Bureaucratic transparency and limited corruption Regulatory environment Mode of entry Fiscal incentives Operating area compliances Telecom/other infrastructure Telecom bandwidth and reliability Availability of IT service providers Reliability of power sources Attractiveness of a location for remote services Source:Team analysis COMMON QUESTION: WHERE TO LOCATE?

30. NY-101613.103/020417YlpolSL1 29 Size of operation Significant sub-scale At scale Degree of control desired HighLow Subsidiary Function provides competitive advantage Skill exists internally Immature supplier market Growth business within strategy Joint venture Third-party contract Mature supplier market Function not critical to distinctiveness Scale and skill advantages not in house Need overflow capacity Not part of mission/growth portfolio COMMON QUESTION: WHAT IS THE APPROPRIATE BUSINESS MODEL?

31. NY-101613.103/020417YlpolSL1 30 THREE OPERATIONS-RELATED THEMES FOR FINANCIAL INSTITUTIONS 1.How to apply “manufacturing techniques” to reengineer and rethink the operations processes 2.How to use offshoring to redefine the traditional operations location and operating model 3.How to respond to industry planned next-day trade settlement (T+1) initiative

32. NY-101613.103/020417YlpolSL1 31 Source:Streetside Fixed Income Working Group (The Bond Market Association, SIA) Mandatory industry initiative to shorten settlement cycle from current 3 days after trade execution to 1 day –Impacts most commonly traded securities –Not only U.S.; Canada is also moving to T+1 Included in T+1 effort WHAT PRODUCTS ARE COVERED BY THE T+1 INITIATIVE?

33. NY-101613.103/020417YlpolSL1 32 2004‘03‘02‘0120001999 Projected reduction in settlement exposure from T+1 settlement $ Billions *Average daily transactions grew from 150M to 350M in the same period, a CAGR of 24% Source:SIA; T+1 Business Case 19991995 Average daily number of institutional trades not affirmed prior to settlement CAGR = 36% * 12,000 41,000 WHAT ARE THE BENEFITS OF MOVING TO T+1?

34. NY-101613.103/020417YlpolSL1 33 ACHIEVING T+1 WILL REQUIRE OVER- COMING SIGNIFICANT LIMITATIONS OF CURRENT PROCESSING ENVIRONMENT

35. NY-101613.103/020417YlpolSL1 34 SOLUTIONS PROPOSED BY INDUSTRY (SIA) TO THESE CHALLENGES

36. NY-101613.103/020417YlpolSL1 35 From...... to Allocations Confirm Custodian Investment manager AffirmDepository Broker/dealer Confirm Affirm Confirm Custodian Investment manager Depository Broker/dealer Matching utility (central point of reference) MODULE 1: CREATE NEW MATCHING UTILITIES

37. NY-101613.103/020417YlpolSL1 36 SIA ESTIMATES OF T+1 INVESTMENTS AND COST SAVINGS Total T+1 investment by participant type $ Billions Institutional brokers/dealers Retail brokers/dealers Asset manager Custodian Corres. clearers Depository Exchange Matching utility Total Majority of T+1 investment and benefits fall on market participants, particularly broker-dealers, who also gain vast majority of cost savings Payback period of 3 years expected with a 28% IRR on total investment 99% of total investment “within four walls” focusing on internal changes (e.g., IT infrastructure and applications) Similarly, 78% of investment focused on two of ten building blocks: internal STP and standardizing reference data and protocols Note:Based on surveys; interviews; and industry data. Over 200 surveys were sent to different industry institutions across participant types. More detailed investment surveys were sent to targeted brokers/dealers, asset managers, and custodians to provide a better estimation of T+1 investments Source:SIA T+1 Business Case Annual cost savings opportunity by participant type $ Billions Brokers/dealers Asset managers Custodians Infrastructure service providers Total

38. NY-101613.103/020417YlpolSL1 37 ECONOMICS OF T+1 BY PARTICIPANT $ Millions Source:SIA T+1 Business Case Brokers/ dealers Asset managers Custodians $60-100 40 60 Estimated T+1 investment for large participant Payback period Years Comments B/O operations major cost for brokers/dealers and requires significant investment for T+1 Brokers/dealers making majority of investment, but receiving largest benefit Investment likely for large brokers/dealers given short payback period and business importance of B/O capabilities For medium and small brokers/dealers, however, outsourcing B/O more attractive due to economies of scale in investment BO operations small portion of costs and not perceived as core activity T+1 likely viewed as compliance event Although investment per company less than brokers/dealers or custodians, relative savings even less resulting in longer payback period Despite little economics incentive for asset managers, industry needs their cooperation to move to T+1 B/O operations important cost area and key business capability for custodian requiring large T+1 investment per participant Significant investment and benefits shared by small number of players with short payback period Large role in institutional trades combined with better risk management provide strong incentives to make investments required by T+1

39. NY-101613.103/020417YlpolSL1 38 T+1 as compliance event Approach to back- office redesign T+1 as catalyst for broader design Option 3 Share common tasks and resources for T+1 Individual Joint Approach to back-office partnering Option 1 Implement changes to meet T+1 compliance requirements Option 4 Share/create a single back office processing platform Option 2 Leverage and extend T+1 changes to broader redesign program T+1 IMPLICATIONS FOR BROKER- DEALERS

40. NY-101613.103/020417YlpolSL1 39 POTENTIAL INDIVIDUAL APPROACHES FOR BROKER-DEALERS Change traditional back-office operating model Extended automation (e.g., non-trade-processing activities) –Automate pre-balancing dividend activities Eliminate duplicative work across departments –Integrate reconciliation activities performed in Operations and Accounting in consolidated group –Create central repository that contains all information and documents related to each account Realign organization –Reorganize departments along end-to-end processes instead of functional silos –Shift input of account opening and information upstream to F/O departments and potentially customers Achieve basic STP as a means to accelerate trade processing Redesign institutional trade processing –Eliminate paper confirmations –Build links to electronic matching utilities Modify internal processes to meet compressed deadlines –Consolidate systems supporting different products (front and middle offices) Comply with accelerated submission deadlines –Move to real-time feeds to CDS system Implement new industry communication standards T+1 as compliance event Approach to back-office redesign T+1 as catalyst for broader design Individual changes (no JV) Option 1 Implement changes required to stay in business after T+1 Option 2 Leverage and extend T+1 changes to broader redesign program

41. NY-101613.103/020417YlpolSL1 40 POTENTIAL JOINT APPROACHES FOR BROKER-DEALERS T+1 as compliance event Approach to back- office redesign Combine processing systems and functions Segregate functions that could be performed more efficiently in a joint effort –Trade processing activities relating to clearance and settlement –Support functions such as Dividend Merge systems into predominantly one of the existing IT platforms Establish common interfaces to industry- wide utilities –Institutional trade matching –Fixed Income real-time matching Create common reference data systems Change traditional back-office operating model Extended automation (e.g., non-trade- processing activities) Eliminate duplicative work across departments Realign organization T+1 as catalyst for broader design Leverage overlapping activities Build similar applications together –Standardized communications protocols –Common interfaces with shared vendors and service providers Share common resources –T+1 program design, logistics, and management office (PMO) –Test scripts Option 3 Share common tasks and resources for T+1 IndividualJoint Approach Option 1 Implement changes required to stay in business after T+1 Option 2 Leverage and extend T+1 changes to broader redesign program Option 4 Share/create a single back office processing platform

42. NY-101613.103/020417YlpolSL1 41 POTENTIAL END GAMES