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Operational Risk – the New Driver

Stuart McKinlay (Former CEO, ISITC Europe)

Operational Risk – the New Driver Stuart McKinlay (Former CEO, ISITC Europe)

Risk

The new driver to modernise back office efficiencies and exposure reduction!

ISITC Europe Annual Conference 11 November 2010

Prepared by:

Stuart A McKinlay

office efficiencies and exposure reduction! ISITC Europe Annual Conference 11 November 2010 Prepared by: Stuart A

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

shift • Increased transparency is emerging – measurement and control ISITC Europe Annual Conference 11 November

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

flexibility and lower cost delivery of business processes Tomorrow’s business leaders will no longer simply focus

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

firms will learn to leverage regulatory investments to drive revenue ISITC Europe Annual Conference 11 November

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

step changes to improve post trade transparency and safety of operation ISITC Europe Annual Conference 11

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

a false da wn Failure has exposed the issue - and the scene is not pretty

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

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

model • Multiple pressure now exist to change this view If the market does not fix

If the market does not fix itself, then surely the regulator will – which is altogether less pleasant

ISITC Europe Annual Conference 11 November 2010

then surely the regulator will – which is altogether less pleasant ISITC Europe Annual Conference 11

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

the end of the day it is about data – trade data and how it is

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!

still get in the way • Investor expectations will rule! Investor confidence expects transparency of costs,

Investor confidence expects transparency of costs, process and information – not an unrealistic request

ISITC Europe Annual Conference 11 November 2010

of costs, process and information – not an unrealistic request ISITC Europe Annual Conference 11 November

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

back to basics – regularly punctuated by ‘risk’ - it should now! ISITC Europe Annual Conference