BCP: Emerging Themes for

Custodians

Giles Elliott

SVP, Head of Business Development & Support

HSBC Securities Services, Hong Kong

Slide 2

Agenda

1. Recent Trends in the Custody Industry

2. Summary of BCP Trigger Events

3. Critical Failure points in the Custodian Chain

4. The case for BCP Investment for Custodians

5. Key Initiatives for Custodians in BCP

6. Summary Challenges on the BCP Agenda

Slide 3

Recent Trends in the Custody Industry

Activity Growth– Core Asset Growth and Transactional Growth Rates across Asia have

exceeded 50% per annum over the past 5 years

– HSBC CNC now safekeeps over USD 1 trillion of assets globally through over 55 CSDs

Investment Expansion– Expansion across Unlisted Equities, Bonds, Moneymarket securities,

Derivatives, Managed Funds

– New set of market interfaces supporting these assets

Communications Consolidation– SWIFT as preferred primary channel

– Expansion into Fund Management and CSDs, but no single high grade contingency option

Fund Management Consolidation– Consolidation in Funds Management sector driven by cost agenda and

sectoral growth

ACTIVITY GROWTHINVESTMENT EXPANSION

COMMUNICATIONS CONSOLIDATION

CLIENT CONSOLIDATIONAUTOMATIONOPERATIONS

CENTRALISATIONIT STREAMLINING

MARKET COMPLEXITY

Slide 4

Recent Trends in the Custody Industry (Cont.)

Custodian Bank Consolidation– Consolidation in Subcustody and in Global Custody with

HSBC/Westpac, Citibank/ABN and Mellon/BNY as recent examples

– Increasing focus of volume / capacity through single channels

Automation– Cost and volume agenda has driven investment in STP and

automation of core processing channel using message and static data standardisation

– Traditional manual contingency solutions are no longer credible, driving need for focus on high grade contingency solutions.

Operations Centralisation– Trend towards creation of regional operations hubs or Centres of

Excellence

– Changing profile of impact of a single point of failure in operations infrastructure

ACTIVITY GROWTHINVESTMENT EXPANSION

COMMUNICATIONS CONSOLIDATION

CLIENT CONSOLIDATIONAUTOMATIONOPERATIONS

CENTRALISATIONIT STREAMLINING

MARKET COMPLEXITY

Slide 5

Recent Trends in the Custody Industry (Cont.)

IT Streamlining– Rationalization of IT platforms driven by focus on standardisation

and cost management – increasing use of single software solutions regionally for custodians

– Consolidation of databases and IT hardware infrastructure as part of drive for rapid deployment, efficient maintenance and cost reduction

– Resulting consolidation increasing impact of single failure in infrastructure

Market Complexity– Asian markets are developing rapidly and volumes and complexity

of instruments and corporate actions is increasing

ACTIVITY GROWTHINVESTMENT EXPANSION

COMMUNICATIONS CONSOLIDATION

CLIENT CONSOLIDATIONAUTOMATIONOPERATIONS

CENTRALISATIONIT STREAMLINING

MARKET COMPLEXITY

Slide 6

BCP Trigger Events & Impact Level

Natural Disasters– Earthquakes, Tsunami’s

– Typhoon, Floods

– Pandemic - Avian Influenza/SARS.

Technical Failures– Power Failures (NZ)

– Hardware & Software Failure (Y2K)

– Network Failure / Viruses

Human / Political Incidents– Fraud, Industrial Action

– Terrorism, War

Impact Level– Local » City-wide

– Country » Sub-regional/Regional

NATURAL DISASTERSTECHNICAL FAILURES

HUMAN FAILURESPOLITICAL INCIDENTS

IMPACT LEVEL

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Critical Failure Points for Custodians

Core Processing Systems– Hardware Failures, System Mirroring

– Software Failures.

Communications Channels/Interfaces– SWIFT & External Data Communications Vendors

– Telephone/Fax

Buildings / Staff– Hot sites, Warm Sites – Proximity Decision

– Temporary or Permanent Staff Loss

Market Infrastructure– Depositories

– Payments Systems

CORE PROCESSING SYSTEMS

COMMUNICATIONS CHANNELS & INTERFACES

BUILDINGSSTAFF/PERSONNEL

MARKET INFRASTRUCTURE

Slide 8

Investment Case in BCP for Custodians

Financial Motivation– Settlement Failure Costs

– Investment Performance Restriction

– Principal Asset Loss

– Funding Charges

– Fines

Reputational Impact– Market Reputation

– Custodian Reputation

Licensing– Custodial Business Licenses,

– Bank Licenses

FINANCIALREPUTATIONAL

LICENSING

Slide 9

Top Initiatives for Custodians in BCP

Client Communication– High Capacity SWIFT Alternatives

– Internet Channel / CPU-CPU

– Cost of Implementation / Testing & Increased Regional Appointments

– Continued use of Fax Channel

CSD Interface– Upgrading Primary Channel

– Investment in Robust Secondary Channels

Bi-Polar Operations– Dual Site Operations Model

– Workflow and Process Standardisation

– Training and Capacity Investment

– Avian Influenza Focus

CLIENT COMMUNICATIONDEPOSITORY INTERFACE

PAYMENT INTERFACEBI-POLAR OPERATIONS

BCP COORDINATIONSTANDING INSTRUCTIONS

Slide 10

Top Initiatives for Custodians in BCP (Cont.)

BCP Coordination– Complex IT, Operations, CSD Interface Model

– Advanced Coordination Approach

– Regional Focus

Standing Instructions– Increased use of Standing Instructions

– Dynamic focus vs Static Instructions

CLIENT COMMUNICATIONDEPOSITORY INTERFACE

PAYMENT INTERFACEBI-POLAR OPERATIONS

BCP COORDINATIONSTANDING INSTRUCTIONS

Slide 11

Challenges for Custodians in BCP

Reliance on Automation– Increasing Automation in Industry is Increasing the Impact of any failure

of this mechanism

Unique CSD Interfaces– Lack of Common Interface Protocols on Primary or Secondary

Channels increases cost and challenges in having a robust interface solution

Deadline Trend– Client Deadline pressure now leaves little scope for credible

contingency options

– Focus on critical automation

Client Investment Agenda– Fragmented Agent networks makes the investment spend agenda

tough for Global Custodians

– Subcustodian need to present a more credible regional solution that should encourage Investment

AUTOMATIONUNIQUE CSD INTERFACES

DEADLINE TRENDCLIENT INVESTMENT

AGENDA

Thank You