OPERATIONS IN FINANCIAL
INSTITUTIONS - WHY IT’S
MORE THAN JUST PROCESSES
B60.2315.20 OPERATIONS IN FINANCIAL SERVICES
Spring 2002
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the discussion.
NY-101613.103/020417YlpolSL1
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
1
NY-101613.103/020417YlpolSL1
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
2
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LEAN MANUFACTURING – GENESIS AND
KEY PRINCIPLES
•
•
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
Key principles of lean manufacturing
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
•
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
4. A process designed to deliver quality
the first time using robust, ‘inprocess’ mechanisms
5. An energized organization with the
processes and capabilities to
achieve continuous improvement year
after year
3
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LEAN MANUFACTURING LEVERS TO
ACHIEVING OPERATIONS EXCELLENCE
Main lever
Manage
demand
at the
source
Operations
excellence
Optimize
process,
layout,
and flow
Manage
performance
Specific improvement
Example
Migrate to lower cost
channels
•
Reduced channel cost in credit card company by 50% due to
migrating inquiries from call center to Web
Optimize/manage complexity
•
Segmented volume based on customer profitability to maximize
contribution margin
Level load incoming demand
to match supply
•
Created measures encouraging branch loan applications to arrive
on an ongoing basis during the workday
Capture information and
correct errors one time,
accurately, at the source
•
Reduced labor costs 40% in check processing due to onetime, quick capture of information
Understand customer
preferences/tradeoffs
•
Conducted customer interviews to optimize required decision
time of loan application
Standardize and stabilize
work processes
•
Reduced variability on incomplete application handling to a no
tolerance approach which improved completion rate by 50%
Streamline critical path
•
Ordered appraisals on homes for equity loans earlier in the
decision process
Build in quality
•
Created data entry forms that have restricted fields to reduce
incoming errors
Create one-piece
synchronized flow
•
Redesigned the underwriting process to a single piece, first-in/firstout flow which reduced turnaround time from hours to minutes
Organize around processes,
not tasks
•
Created “end-to-end” accountability for performance not
department/task-based accountability
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
4
MANAGE DEMAND: CHANGE
SCHEDULES TO MATCH DEMAND
Number of applications
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Fax demand
Current schedule capacity
New schedule capacity
140
120
100
80
60
40
20
0
7
AM
8
9
10
11
12
PM
1
2
3
4
5
6
7
8
9
10
11
5
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OPTIMIZE PROCESSES, LAYOUT AMD
FLOW: LISTED EQUITIES TRADE FLOW
A
Sales/trading
Block traders
4. Acknowledge
order
A
Booth
Manual
2. Select block
trader from pulldown menu
5. Write down order
on pad
3. Send order to
trader through A
6. Decide execution strategy
Messengers/data
entry operators
Brokers
Middle
Office
Order
Room
P&S
Cashiers
Daily
P&L
8. Write down order
(or print order from
B)
A
A
Call order into
sales/trader
10. Pick up order at
booth
A
9. Beep $2 or
house broker
Rejected by D
11. Execute order
in crowd
D
7. Call order to
floor/enter order
A
into D
Client
15. Write down
execution & check
against pad
Executed by D
A
20. Write floor
execution report
21. Pick up floor
reports and deliver
for punching
22. Type floor
report into
A
Sales/ traders
B
• Assistant
traders
• Block traders
* Support block desk and other products
13. Deliver
written to booth
A
Systems
•
A
A
17. Send/allocate
execution to
sales/trader
18. Call execution
to client
A
19. Print house
execution report
12. Call verbal to
booth
14. Call back
execution
(or type into B)
16. Enter execution
into A
Roles
involved*
Automated
Eliminated
Exchange floor
Sales/traders
1. Enter order
into A
Automated
• Booth
clerks
C
• House brokers
• $2 brokers
• Key punch
operators
• Runners
6
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IMPACT FROM REDESIGNING LISTED
EQUITIES TRADE FLOW
Description of opportunity
Steps in trade flow process
Financial impact
• 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
• 10% reduction in FTEs
Total steps
75
Manual steps
-13%
• Numerous reconciliations
based on multiple sources of
data entry
Assumptions
Key success factors
65
45
-33%
30
Before
After*
Before
After
• Service levels to customers
would not decline
• The majority of manual steps
do not require complex
decisions that cannot be
automated
• 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
Implementation time
• 12-18 months
* New design also reduced flow through
18% of remaining steps
7
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OPTIMIZE PROCESSES, LAYOUT AMD
FLOW: UNDERWRITING ACTIVITY
From convoluted physical flow
5
Order documents for equity second
decision
Order
Denial
6 Receive documents from vendors
PC
x
x
PC
Printer
8 Mail back to branches
Printer
2 Print credit report
PC
Printer
PC
Printer
PC
x
x
x
3 regional
underwriting
queues
PC
PC
x
3
PC
x
x
6
U/Ws
x
x
4,7
Underwriting
x
Fax
Fax
Fax
PC
1 Receive fax
8
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OPTIMIZE PROCESSES, LAYOUT AMD
FLOW: NEW UNDERWRITING PROCESS
“Production” flow
Phone
U/W
X
4,7
5,6,8
PC
Underwriting
Single
queue
X
Order/receive docs
Mail back to
branches
X
X
3
PC
10 paces
Printer
X
X
2 Print credit report
Printer
1
Receive fax
Fax
Processors
9
IMPACT OF REORGANIZING
UNDERWRITING ACTIVITIES
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• 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
Increased
underwriting
capacity by
40%
• 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
10
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OPTIMIZE PROCESSES, LAYOUT AMD
FLOW: CURRENT CHECK PROCESSING
Checks are
transported from
branches to
centralized
processing site
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
Each check is read by a proof
operator who enters the amount
which is MICR encoded onto
the check
Jane Doe
123 Main Street
Pay to the
Anywhere, PA 11111
Pay to the Order
Date
Any Bank
Pay to the Order
of
Pay to the
Any
Anywhere
Any Bank
Bank
Order
of
Anywher
Order of
Any
Bank
of
Anywher
For
e
Anywher
e
For
e
For
For
Date
123
123
123
123Date
Date
Dollars
Dollars
Dollars
Dollars
Checks are then
prepped and put
into trays
11
NY-101613.103/020417YlpolSL1
OPTIMIZE PROCESSES, LAYOUT AMD
FLOW: IMAGE TECHNOLOGY
Checks are
transported from
branches to
centralized
processing site
Jane Doe
123 Main Street
Pay to the
Anywhere, PA 11111
Pay to the Order
Date
Any Bank
Pay to the Order
of
Pay to the
Any
Anywhere
Any Bank
Bank
Order
of
Anywher
Order of
Any
Bank
of
Anywher
For
e
Anywher
e
For
e
For
For
Date
123
123
123
123Date
Date
Dollars
Dollars
Dollars
Dollars
Checks are
prepped and put
into trays
Jane Doe
123 Main Street
Anywhere, PA 11111
123
Date
For checks where the
image cannot be read, a
person at a terminal
reviews the image and
enters the amount
The images are then run
through OCR software to
determine the amount; the
amount and other information on the check are
sent to the bank’s server
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
12
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IMPACT OF NEW TECHNOLOGY ON
CHECK PROCESSING
Operational
lever
Streamline
critical path
Low investment
required to move
sorting equipment
Selected changes
Improve labor utilization
by introducing crosstraining and workcells
Build in
quality
Reducing the number of
touches will provide
fewer opportunities or
errors
Team-based
accountability improves
total system quality
Organize
around
processes,
not tasks
FTEs
Eliminate redundant
activities to reduce time
to get an entry through
the process
Optimize/
manage
complexity
Time to get 1 entry
through process
-25%
-83%
Before
new
process
Since
new
process
Before
Since
new
new
process process
13
NY-101613.103/020417YlpolSL1
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
14
NY-101613.103/020417YlpolSL1
RECENT SIGNIFICANT REDUCTION IN
INTERACTION COSTS
Advancing technology
Reduction in bandwidth costs
$ Thousands PA for 2 Mbps fiber
leased line*, half circuit
Maturing markets
Easing regulation
Supplier base – India
$ Billions, revenue
Mar 2000
0.51
•
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
CAGR
69%
1000
900
800
700
85% drop in India as
state monopoly
faces competition from
private satellite providers
600
500
Philippines
400
300
200
100
1999
2002E
1.46
Employment in offshoring
industry – India
Thousands
CAGR
Mar 2001
0
0.87
Mar 2002E
Mar 2000
India
Ireland
U.S.**
1996
Mar 2001
Mar 2002E
45
53%
70
106
* 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
15
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REMOTE SERVICING HAS BECOME A
LEVER FOR DRIVING PERFORMANCE
From physically co-located end-to-end
operations . . .
. . . to globally placed links in the supply
chain driving optimal value
Credit
decisioning
System
development Call center
Customer
research
Data
entry
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
16
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THREE DIMENSIONS OF BENEFITS
FROM REMOTE SERVICING
Cost
•
•
•
Dramatic reduction in cost (10-30%)
Increased flexibility permitting
greater capacity/demand balancing
Improved transparency and
predictability
Operational
improvement
•
•
•
Quality
More established processes and metrics
for meeting higher performance standards
Access to basic and specialized skills
Minimized baggage of outdated
infrastructure, e.g., software
•
•
•
Time
24 x 7 service
Faster turnaround times from
learning curve benefits
Continuous production possible
with effective synchronization
17
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LOCATIONS USED TO REMOTE SERVICE
DIFFERENT SERVICES
Ireland
• Software development
• Call centers
• Shared services
Caribbean
• Data entry
India
• Call centers
• Data entry
• Software development
• Engineering design
• Back-office operations
Philippines
• Software development
• Call centers
• Data entry
Ukraine
• Software
South Africa
• Financial services
Source: McKinsey analysis
Singapore
• E-commerce hub
• Shared/financial
services
18
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LARGE OPPORTUNITIES IN BANKING
AND INSURANCE
High
(300+)
•
•
Oil
Packaged
goods
•
•
•
•
•
Telecom
Retailing
Utilities
Automotive
Computer
•
Airlines
U.S. cost
Medium
base
(100industry
300)
US$ Billions
Low
(0-100)
•
•
Banking
Insurance
•
Pharmaceuticals
Third-party
engineering
and design
services
Electronics
•
•
•
•
•
•
Aerospace
Chemicals
Steel
Equipment
Ship
building
Low (0-1%)
•
•
•
Hotels
Entertainment
Real estate
brokerage
Medium (1-5%)
•
•
•
Areas of
greatest
opportunity
Software
producer
Third-party
call center
providers
High (5%+)
Remote serviceable processes share of cost base
Source: U.S. Census Bureau; team analysis
19
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INITIAL FOCUS ON LOWER END
PROCESSING/DATA ENTRY ACTIVITIES
Current activities
Future activities
Customer
acquisition
Support
activities
(IT, HR)
Asset
( )
management
New business
processing
In-force
transactions
Data entry
Claims
processing
(Tier 1)
Revenue
accounting
Claims
Processing
• CRM
• Accounting
Application
processing
Call center
Data entry
Claims
processing
Claims
processing
•
•
Call center
Source: Press searches; GE Remote services case study
•
Risk analysis
Underwriting
Transaction
processing
•
•
•
Financial
reconciliation
Statutory reporting
Bill payments
Planning and
forecasting
20
EARLY MOVERS ARE ALREADY
SEEING BOTTOM-LINE IMPACT
Cost savings
$ Millions PA*
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ESTIMATES
2001
Forecasted savings
(public statements)
Current
employees Main activities
340
9,500
Call center, mortgage and insurance,
accounting, bill payment
6 14
20
70
300
35 105
2,050
6
Back-office processing, e.g., payments,
account services, support
Trade finance, check processing, data
entry, customer services, loans, bills,
credit cards, cash management
54 60
300
1718
35
Transaction processing, e.g., accounts
opening, mortgage clearing
730
16
54
Data processing, accounts, check
clearing
800
Accounting services, operating
services, and call centers
400
Insurance claim processing, call
center
70
14
41 55
* 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
21
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CITIGROUP EXAMPLE
Corporate philosophy/thinking
•
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
Details
• 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
Impact
2,700
50
1998*
* Start of year
Source: Press searches, Interviews, McKinsey analysis
150
1999
370
2000
2001
ESTIMATE
Current Impact:
$40 million
revenues
expected for
FY02
22
AMERICAN EXPRESS EXAMPLE
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Details
Background/corporate philosophy
•
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.
* Start of year
** @$30000/FTE/year
Source: Press searches, Interviews, McKinsey analysis
•
•
•
•
•
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
Impact
FTEs
500
1996*
1,500-2000
700
ESTIMATE
Current Impact:
800
$20 million/year**
1998
2000
2003(E)
“The new operations in India will include
processing activities such as voice-based
customer support, account & transaction
processing and fraud and risk modelling”
Rajiv Ahuja, Amex's head of public affairs and
communications for India and area countries
23
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HSBC EXAMPLE
Details
Corporate philosophy/thinking
•
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
* @$40000/FTE/year
Source: Interviews, press searches, McKinsey analysis
•
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
•
Recently announced plans to expand its operations to
Bangalore
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
Impact
7,000
Impact
$ million/year*
3,000
Current: 12
Expected : 120
1,100
2001
ESTIMATE
2002(E)
2003(E)
24
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EXAMPLE PROCESS: END-TOEND LENDING
Fully remote
serviceable
Partially remote
serviceable
Origination
Application to
closing
Description
Cost
Percent of total
Savings
Percent of cost
Source: Team analysis
Fund disbursement to coupon
delivery
Servicing
Payout
• Initial customer
• Review of closing • Scan and index
• Processing final
contact
• Data entry of
applications
• Underwriting/
credit decisioning
• Communication
and upsell to
applicant
• Document
preparation
• Disbursements/
closing
document for
compliance
• Booking of
document to
system
• Funding
• General ledger
reconciliation
of file
• File management
• Assist in internal
and customer
inquiries
• Research of
issues
payments
• Releasing
collateral
45-50
25-30
10-15
5-15
15-20
6-10
15-25
20-25
25
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FIRMS ADOPTING A “UTILITY” VIEW TO
IDENTIFY OPPORTUNITIES
. . . to a perspective of utility-like functions
cutting across supply chains
Data
entry
Reconcilation
Consumer lending
Commercial lending
From a perspective
of product/service
supply chains
linked end-to-end . .
.
Item processing
Trust services
Cash management
…
Strong candidates
for remote servicing:
• Data entry
• Document prep.
• Booking
• Reconciliation/
compliance
• Front-end
collections
• Call centers
• Corporate center
26
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POTENTIAL BARRIERS AND CONCERNS
General concerns Perceived issue/risk
Current status/method for management
Infrastructure
• Reliability of
telecom
• 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
Service levels/
responsiveness
• Lower quality
• Lower productivity
• Cultural differences
• 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
Cost advantage
• High bandwidth
costs
• Unsustainable labor
cost advantage
• 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
Political/
country
• High government/
regional risk/
instability
• 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
Operations and
community
• Data protection
• Operational
complexity
• Can manage through multiple location operations (e.g.,
India and Philippines)
• Early development of public relations strategy
27
COMMON QUESTION: WHERE TO
LOCATE?
NY-101613.103/020417YlpolSL1
Skills
• Availability of frontline skills
– basic/language
– specialized (as appropriate)
• Availability of senior
management skill
• Cost
Telecom/other
infrastructure
• Telecom bandwidth
and reliability
• Availability of IT
service providers
• Reliability of power
sources
Attractiveness
of a location
for remote
services
Regulatory
environment
• Mode of entry
• Fiscal incentives
• Operating area
compliances
Political risk
• Stable government
• No domestic conflict
• Legal enforcement
• Bureaucratic transparency
and limited corruption
Source: Team analysis
28
NY-101613.103/020417YlpolSL1
COMMON QUESTION: WHAT IS THE
APPROPRIATE BUSINESS MODEL?
Subsidiary
At scale
• Function provides
•
Size of
operation
Joint venture
•
•
competitive
advantage
Skill exists
internally
Immature supplier
market
Growth business
within strategy
Third-party
contract
• Mature supplier
•
•
•
•
Significant
sub-scale
High
Degree of control desired
market
Function not
critical to
distinctiveness
Scale and skill
advantages not in
house
Need overflow
capacity
Not part of
mission/growth
portfolio
Low
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NY-101613.103/020417YlpolSL1
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
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NY-101613.103/020417YlpolSL1
WHAT PRODUCTS ARE COVERED BY
Included in
THE T+1 INITIATIVE?
T+1 effort
•
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
Type of security
Current settlement
Future settlement

Equities
T+3
T+1

Corporate bonds
T+3
T+1

Municipal bonds
T+3
T+1

Governments
T+1 and T+0
No change

Agencies
T+1
T+1

UITs
T+3
T+1

Secondary REMICS and CMOs
T+3
T+1

Other mortgage/asset-backed
Various
No change

CDs Bank (retail)
T+3
T+1

MTNs
T+3
T+1

Other money market products
Various
No change

Listed Options
T+1
T+1
Source: Streetside Fixed Income Working Group (The Bond Market Association, SIA)
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WHAT ARE THE BENEFITS OF MOVING
TO T+1?
To reduce
settlement
exposure
To support
increasing
trade volume

Settlement exposure increases with
– Trade volume
– Security value
– Settlement lag

Fast growth in trade volume (over 33%
CAGR) is increasing risk profile

Current internal and industry-wide
systems are strained under growing
volume

Manually intensive and reactive
processes are already resulting in
decreased efficiency
Projected reduction in settlement
exposure from T+1 settlement
$ Billions
762
610
390 488
312
250
1999 2000 ‘01
‘02
‘03
2004
Average daily number of institutional
trades not affirmed prior to settlement
41,000
CAGR =
36% *
12,000
1995
1999
To synchronize
settlement cycles
across major
U.S. markets

Currently, some securities settle on T+3 while others settle on T+1
(e.g., Treasuries)

With uniform settlement cycles retail investors will not have to worry about
funding implications of moving between asset categories
To enhance U.S.
market’s global
competitive partners

European exchanges and clearing/settlement agencies are consolidating and
becoming stronger competitors

T+1 can serve as the catalyst to force the U.S. securities industry to improve
its processes and remain competitive
* Average daily transactions grew from 150M to 350M in the same period, a CAGR of 24%
Source: SIA; T+1 Business Case
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NY-101613.103/020417YlpolSL1
ACHIEVING T+1 WILL REQUIRE OVERCOMING SIGNIFICANT LIMITATIONS OF
CURRENT PROCESSING ENVIRONMENT
Limitations
Description
Why significant challenge
1. Inefficient institutional
processing model

Current process relies on sequential,
reactive exchange
of information

Need to change existing process
involving multitude of broker-dealers,
investment managers, and custodians

Significant automation investment
required
2. Late access to internal
information within
participant firms

Information needed often resides on
different systems

Recalculations to resolve errors often
uncovered on T+1

Increasing STP difficult given:
– Legacy batch systems
– Poorly connected systems with similar
but inconsistent information
3. Communication delays
between participants

Participants often do not receive
information needed to finalize
settlement or even identify errors until
T+1 or later due to . . .
– Reliance on phone/fax to resolve
exceptions
– Need to wait for batches at
counterparty to have access
to information

Current reliance on batches to access
information

Multitude of messaging and protocol
standards make automation harder
4. Uncompared trades not
identified on trade date

Significant percentage of fixed income
trades (corporate bonds, munis, UITs)
not compared on trade date

Requires implementing new solution for
multiple FI products
5. Reliance on paper
documents (including
checks), particularly for
retail customers

Check payment funds unavailable
until T+3

No adequate alternative to checks exists
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SOLUTIONS PROPOSED BY INDUSTRY
(SIA) TO THESE CHALLENGES
Limitations
Proposed solutions/SIA modules
1. Inefficient institutional
processing model
1. Create virtual matching utilities
2. Late access to internal
information within
participant firms
2. Achieve internal STP
3. Communication delays
between participants
3. Improve real-time connectivity between
participants, exchanges, and DTCC
4. Standardize reference data and
messaging protocols
5. Revise Continuous Net Settlement
(CNS) functionality
6. Amend DTCC’s trade guarantee process
4. Uncompared trades not
identified on trade date
7. Report “locked-in” trades to
clearing corporation
5. Reliance on
paper documents
8. Develop alternative means of payment
9. Immobilize physical shares
10. Develop electronic prospectus delivery
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MODULE 1: CREATE NEW MATCHING
UTILITIES
From . . .
. . . to
Allocations
Investment
manager
Confirm
Broker/dealer
Investment
manager
Confirm
Confirm
Affirm
Broker/dealer
Matching utility
(central point
of reference)
Confirm
Custodian
Affirm
Depository
Custodian
Depository

Sequential, one-to-one interactions and
exchange of information

Central point of contact with access to
common reference information

Batches slow down process

Real-time interactions and exchange of
information between participants as needed
to resolve discrepancies quickly

No central repository of reference
information that acts as single point of
contact for all participants

Multiple manual reconciliations required
in internal processes

Faster, more robust process capable of
handling increased volume

Reduced need for normal information
and reconciliation
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SIA ESTIMATES OF T+1 INVESTMENTS
AND COST SAVINGS
•
•
•
•
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
Total T+1 investment by participant type
$ Billions
Institutional brokers/dealers
3.4
Retail brokers/dealers
2.1
Brokers/dealers
1.2
Asset manager
Custodian
Annual cost savings opportunity by participant type
$ Billions
1.7
0.4
Asset managers
0.6
0.3
Custodians
Corres. clearers
0.8
Depository
0.1
Exchange
0.01
Matching utility
0.1
Total
Infrastructure
service providers
-0.1
Total
2.7
7.9
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
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ECONOMICS OF T+1 BY PARTICIPANT
$ Millions
Estimated T+1
investment for
large participant
Payback period
Years
Comments
•
•
Brokers/
dealers
$60-100
•
2.2
•
•
Asset
managers
40
4.3
•
•
•
•
Custodians
60
2.0
•
•
Source: SIA T+1 Business Case
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
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T+1 IMPLICATIONS FOR BROKERDEALERS
Approach to back-office partnering
Individual
T+1 as
compliance
event
Approach
to backoffice
redesign
T+1 as
catalyst for
broader
design
Joint
Option 1
Option 3
Implement
changes to meet
T+1 compliance
requirements
Share common
tasks and
resources for T+1
Option 2
Option 4
Leverage and
extend T+1
changes to
broader redesign
program
Share/create a
single back
office
processing
platform
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POTENTIAL INDIVIDUAL APPROACHES
FOR BROKER-DEALERS
Individual changes
(no JV)
Option 1
T+1 as
compliance
event
Implement changes
required to stay in
business after T+1
Approach to
back-office
redesign
Option 2
T+1 as
catalyst for
broader
design
Leverage and extend
T+1 changes to broader
redesign program
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
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
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POTENTIAL JOINT APPROACHES FOR
BROKER-DEALERS
Approach
Individual
T+1 as
compliance
event
Approach
to backoffice
redesign
Joint
Option 1
Option 3
Implement changes
required to stay in
business after T+1
Share common tasks
and resources for
T+1
Option 2
Option 4
Leverage and extend
Share/create a single
T+1 changes to broader back office
redesign program
processing platform
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
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 industrywide 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-tradeprocessing activities)
• Eliminate duplicative work across
departments
• Realign organization
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POTENTIAL END GAMES
Compliance event
Small
B/D
Medium
B/D
Large
B/D
Outsource Alone
Likely
Likely
Likely
Very
likely
Joint
NY-101613.103/020417YlpolSL1
Redesign catalyst
Alone
Joint
Rationale

Uneconomical to
invest money and
resources to
redesign systems
and processes as
required by T+1
Potential issues

Waiting too long to
make decision may
result in limited
options if best
outsourcers reach
processing capacity
limit
Likely
Maybe

Medium players
need options that
make them cost
competitive with
larger scale player

Coordinating efforts
of two or more
partners in shared
options

Throwaway spend if
unable to compete
and forced to
outsource in the
future

Not committing to a
decision may limit
options

Less incentive to
share efforts as
significant
economies of scale
available or
implementing alone

Adopting “easy
approach” of limiting
implementation to
compliance event,
losing opportunity to
redesign back-office

Access to resources
needed to implement
broader redesign in
parallel with T+1
Likely
41