Operational Risk – the New Driver

Stuart McKinlay (Former CEO, ISITC Europe)

Risk

The new driver to modernise back

office efficiencies and exposure
reduction!

Prepared by:
ISITC Europe Annual
Stuart A McKinlay
Conference
11 November 2010
Staying out of ‘regulatory jail’
• Fundamental restructuring of the industry
• Competition will heighten:
- capital
- clients
- resources
- sustainable returns
• Firms will need to identify solutions
• Firms will need to cope with a significant cultural shift
• Increased transparency is emerging – measurement
and control

ISITC Europe Annual

Conference
11 November 2010
Staying out of ‘regulatory jail’
What can you do?
• Consensus that current business model is too complex
• Centralisation of critical functions versus the ability to
take advantage of market events and opportunities
• Successful firms will take advantage of standards and
SaaS architectures that enable - interoperability,
flexibility and lower cost delivery of business processes
Tomorrow’s business leaders will no longer simply focus
on staying out of ‘regulatory jail’ – successful firms will
learn to leverage regulatory investments to drive
revenue
ISITC Europe Annual
Conference
11 November 2010
Poor processes and
Operational Risk
• Post trade processes are still in the dark ages while pre
trade processes have moved on.
• Volume to be processed by supporting back office
engines are now overwhelming.
• Cornerstones of financial services operations failed or
were shown to be highly suspect under systemic
pressure.

Markets must embrace step changes to improve post

trade transparency and safety of operation
ISITC Europe Annual
Conference
11 November 2010
Poor processes and
Operational Risk
• Front Office, low latency and trade execution advantage
– this has been the focus
• Real risks exist post trade and are of colossal
proportions
• September 2008 is still fresh in minds today
• Despite a few brave attempts processes remain largely
unaltered
• Absence of failure had presented a false dawn
Failure has exposed the issue - and the scene is not
pretty
ISITC Europe Annual
Conference
11 November 2010
Poor processes and
Operational Risk
• Silo operations
• Efficient trading strategies to monitor, arbitrage
opportunities, hedging options to monitor and control
real time market risk abound
• Post execution trades are largely processed in asset
class silos – lack of awareness
• Perpetuates beyond asset class into the settlement
process itself

Work-arounds and sealed Pandora’s Box abound

ISITC Europe Annual

Conference
11 November 2010
Poor processes and
Operational Risk
• Industry has largely failed to address the issue of
uniform processes across asset classes
• A failure to track and recover entitlements on failed
trades is endemic across the industry
• Historically camouflaged by profits
• False assumption in infallibility of market model
• Multiple pressure now exist to change this view

If the market does not fix itself, then surely the regulator
will – which is altogether less pleasant
ISITC Europe Annual
Conference
11 November 2010
Operational Risk and Standardisation
• Spectacular collapse at certain Financial firms
• Risk and Operational Risk is high on everyone’s agenda
• But is it??????????????
• Essential to monitor exposure to trading counterparties
across ALL business silos
• Relationships that exist between linked transaction is
crucial
• Ability to dashboard the overall impact on a firm’s
liquidity fro diverse operations

At the end of the day it is about data – trade data and how
it is managed
ISITC Europe Annual
Conference
11 November 2010
Operational Risk and Standardisation
• Market has largely failed to achieve standardisation,
efficiency and transparency to an acceptable level!
• Issues are still being shrouded by use of complex
vocabulary and defence of established sacred
processes
• Commercial interests still get in the way
• Investor expectations will rule!

Investor confidence expects transparency of costs,

process and information – not an unrealistic request

ISITC Europe Annual

Conference
11 November 2010
A final
thought provoking statement

During the past 10 years, the Front Office and its quest
for market share and profits has drawn all investment
and innovation focus, leaving the search for efficiency
gains in the post trade world distant cousins.

This may not have mattered before the bubble burst, but
as the market sentiment and regulatory concern now
takes us increasingly back to basics – regularly
punctuated by ‘risk’ - it should now!
ISITC Europe Annual
Conference
11 November 2010