operations in financial institutions - why it’s more than just processes
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OPERATIONS IN FINANCIAL INSTITUTIONS - WHY IT’S MORE THAN JUST PROCESSES. B60.2315.20 OPERATIONS IN FINANCIAL SERVICES. Spring 2002. - PowerPoint PPT PresentationTRANSCRIPT
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.
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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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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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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
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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 processesStreamline 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
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Number of applications Fax demandCurrent schedule capacityNew schedule capacity
0
20
40
60
80
100
120
140
7 AM
8 9 10 11 12PM
1 2 3 4 5 6 7 8 9 10 11
MANAGE DEMAND: CHANGE SCHEDULES TO MATCH DEMAND
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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
Rolesinvolved*
• Sales/ traders • Assistant
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 DClient
Call order intosales/trader
A
A
A
A
A
AA
A
A
A
Sales/trading
Sales/traders Block traders
Exchange floor
Booth BrokersMessengers/dataentry operators
MiddleOffice
OrderRoom P&S Cash-
iersDailyP&L
D
BA C
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IMPACT FROM REDESIGNING LISTED EQUITIES TRADE FLOW
Steps in trade flow processDescription 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
6575
Before After*
3045
Before After
Total steps Manual steps
-13%
*New design also reduced flow through 18% of remaining steps
-33%
Implementation time• 12-18 months
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From convoluted physical flow
PC
PC
PCPrinter PC
PC
Printer
x x xx
x
1 Receive fax
PC
PC
Printer Printer
x xOrder
Denial
x6x
xU/Ws
x
5 Order documents for equity second decision
6 Receive documents from vendors
3 regional underwriting queues
PC
PC4,7Underwriting
Fax Fax Fax
2 Print credit report
3
8 Mail back to branches
OPTIMIZE PROCESSES, LAYOUT AMD FLOW: UNDERWRITING ACTIVITY
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“Production” flow
Fax
PC PC
PrinterPrinter
4,74,7 Underwriting
Processors
Singlequeue
11 Receive fax
X
X
X
X
X X
Phone U/W
10 paces
5,6,85,6,8Order/receive docsMail back to branches
33
Print credit report22
OPTIMIZE PROCESSES, LAYOUT AMD FLOW: NEW UNDERWRITING PROCESS
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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
• 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
Increasedunderwriting capacity by 40%
IMPACT OF REORGANIZING UNDERWRITING ACTIVITIES
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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
ofAny BankAnywhereFor
Date123
Dollars
Pay to the Order
ofAny BankAnywhereFor
Date123
Dollars
Pay to the Order
ofAny BankAnywhereFor
Date
Jane Doe123 Main StreetAnywhere, PA 11111
123
Dollars
Pay to the Order of
Any Bank Anywhere
For
Date
OPTIMIZE PROCESSES, LAYOUT AMD FLOW: CURRENT CHECK PROCESSING
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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
ofAny BankAnywhereFor
Date123
Dollars
Pay to the Order
ofAny BankAnywhereFor
Date123
Dollars
Pay to the Order
ofAny BankAnywhereFor
Date
Jane Doe123 Main StreetAnywhere, 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 Doe123 Main StreetAnywhere, 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
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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
FTEsTime to get 1 entry through process
-25%
-83%
Low investment required to move
sorting equipment
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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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*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 halfSource: VSNL press releases; literature search; Lynx, Goldman Sachs estimates; McKinsey analysis
Advancing technology Easing 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
0.51
0.87
1.46
45
70
106
Mar 2000
Mar 2001
Mar 2002E
Mar 2000
Mar 2001
Mar 2002E
Supplier base – India$ Billions, revenue
Employment in offshoring industry – India Thousands
CAGR69%
CAGR53%
$ Thousands PA for 2 Mbps fiber leased line*, half circuit
IndiaIreland
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
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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
ObjectiveRemote 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
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Quality Time
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
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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
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U.S. cost base industryUS$ 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
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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
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*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 inefficienciesSource:Literature search; industry interviews; team analysis
Cost savings$ Millions PA* Main activities
Currentemployees
340 9,500 Call center, mortgage and insurance, accounting, bill payment
2,050 Trade finance, check processing, data entry, customer services, loans, bills, credit cards, cash management
730 Data processing, accounts, check clearing
400 Insurance claim processing, call center
70
1455
351817
41
2001Forecasted savings (public statements)
Transaction processing, e.g., accounts opening, mortgage clearing
300546
60
300 Back-office processing, e.g., payments, account services, support
800 Accounting services, operating services, and call centers
20146
35 105
167054
ESTIMATESEARLY MOVERS ARE ALREADY SEEING BOTTOM-LINE IMPACT
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23*Start of yearSource: 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 FY021999 2000 20011998*
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
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*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* 1998 2000 2003(E)
AMERICAN EXPRESS EXAMPLE
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*@$40000/FTE/yearSource: 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
2001 2002(E) 2003(E)
Impact $ million/year*Current: 12Expected : 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
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Fully remote serviceable
Partially remote serviceable
Description
CostPercent of totalSavingsPercent 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
Servicing Payout
EXAMPLE PROCESS: END-TO-END LENDING
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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
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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
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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?
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Size of operation
Significant sub-scale
At scale
Degree of control desiredHigh Low
Subsidiary
• Function provides competitive advantage
• Skill exists internally
• Immature supplier market
• Growth business within strategy
Joint ventureThird-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?
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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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32Source: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
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
Included in T+1 effort
WHAT PRODUCTS ARE COVERED BY THE T+1 INITIATIVE?
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To reduce settlement exposure
Settlement exposure increases with – Trade volume – Security value – Settlement lag
Fast growth in trade volume (over 33% CAGR) is increasing risk profile
To support increasing trade volume
Current internal and industry-wide systems are strained under growing volume
Manually intensive and reactive processes are already resulting in decreased efficiency
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
250 312 390 488 610762
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?
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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
ACHIEVING T+1 WILL REQUIRE OVER-COMING SIGNIFICANT LIMITATIONS OF CURRENT PROCESSING ENVIRONMENT
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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
SOLUTIONS PROPOSED BY INDUSTRY (SIA) TO THESE CHALLENGES
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From . . . . . . to
Sequential, one-to-one interactions and exchange of information
Batches slow down process No central repository of reference
information that acts as single point of contact for all participants
Multiple manual reconciliations required in internal processes
Central point of contact with access to common reference information
Real-time interactions and exchange of information between participants as needed to resolve discrepancies quickly
Faster, more robust process capable of handling increased volume
Reduced need for normal information and reconciliation
Allocations
Confirm
Custodian
Investment manager
Affirm Depository
Broker/dealer
ConfirmConfirm
Affirm
Confirm
Custodian
Investment manager
Depository
Broker/dealer
Matching utility (central point of reference)
MODULE 1: CREATE NEW MATCHING UTILITIES
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SIA ESTIMATES OF T+1 INVESTMENTS AND COST SAVINGS
Total T+1 investment by participant type$ Billions
3.4
1.2
1.7
0.6
0.8
0.1
0.01
0.1
7.9
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
2.1
0.4
0.3
-0.1
2.7Total
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ECONOMICS OF T+1 BY PARTICIPANT$ Millions
Source: SIA T+1 Business Case
2.0
4.3
2.2Brokers/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
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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
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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
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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 systemsChange 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
Individual JointApproach
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
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POTENTIAL END GAMES Compliance event Redesign catalyst Outsource Alone Joint Alone Joint Rationale Potential issues Small B/D
Likely Likely Uneconomical to invest money and resources to redesign systems and processes as required by T+1
Waiting too long to make decision may result in limited options if best outsourcers reach processing capacity limit
Medium B/D
Likely 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
Large B/D
Very likely
Likely 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