FIN929

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FIN929 Corporate Governance

• Gavin QuinnWorldwide Business Development
  Manager FSI
• Gavin.Quinn_at_Sybase.Com
• Bill Jacobs
• Senior Product Manager, Sybase IPG
• bill.jacobs_at_sybase.com

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Whats it all about?
You will be confronted with questions every day
that test your morals. Think carefully, and for
your sake do the right thing, not the easy
thing. Dennis Kozlowski, C.E.O. Tyco
Tyco Internationals CEO made this quote prior to
the discovery that he had taken 600 million by
raiding company loan funds and illegally selling
Tyco shares back to the company through its
offshore subsidiaries. According to court records
he and the CFO pocketed 170 million for personal
use and secretly sold 430 million in Tyco stock
back to the company by channelling the deals
through offshore subsidiaries. This was on top of
his compensation package, which paid him 244
million in 1999 alone. Tyco stock plunged from
59 to 15 losing market value of 100 billion
more than investors lost through the collapse of
Enron.
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What has Happened

• Sumitomo Corp.
• Barings
• Banco Ambrosiano
• BCCI
• Aholt
• AIB
• Enron
• Mirror Group
• 200 firms in US in 2002 restate accounts
• Publicly declared losses in excess of 400bn in
  Op Risk over the last decade.

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Common Factors?

• Losses occur away from Head Office
• Poor controls / processes / procedures (or they
  are poorly applied - which results in the same
  thing)
• Multiple regulators - who tend to believe the
  other regulator is monitoring / they are
  unwilling to embarrass other bodies / there is
  insufficient liaison due to concerns over primary
  jurisdiction
• Confused internal hierarchy matrix reporting
• Lack of ownership / reward market rewards
  profits not losses mitigated

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Where is the Focus

• Board of Directors
• Audit Committees
• Shareholder Relations
• Management Control
• Internal Structures

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Management Responsibility

• If the management sets out processes and
  procedures that it later transpires were not
  adhered to, is it fair to say that those under
  this direction failed?
• Or is the managements fault for failing to
  check?
• Does anybody check to see if the policies and
  procedures are practicable?
• Do the business pay lip service to the policies
  and procedures whilst constantly adopting more
  pragmatic solutions to everyday problems that
  arise?
• Senior management is not expected to fully
  understand the minutiae of all aspects of the
  business but it is clearly their responsibility
  to set up a culture policies procedures and
  system of oversight that will provide the checks
  and balances that should ensure that the business
  is safeguarded.

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Basel Committee Recommendations

• Establish Corporate Values
• Establish Codes of Conduct
• Establish a system to ensure compliance of the
  above
• Enforce standards of appropriate behaviour
• Ensure Risk Management functions are independent
  of business line

• Establish clear understanding of roles and
  responsibilities
• Create decision making authorities
• Incorporate the authorities into the hierarchy
• Create strong internal control systems (inc.
  internal /external audit functions)
• Create appropriate information flows

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Primary Concerns

• Effectiveness and efficiency of operations
• Reliability of financial reporting
• Compliance with laws and regulations
• Safeguarding of assets
• Reputational risk

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Why Capital Markets in Particular?

• Why is Corporate Governance so difficult in this
  sector
• High Value Transactions
• Complexity of instruments and strategies
• Complexity of external Corporate Structures
• Complexity of internal Corporate Structures
• Complexity of desk structure, limits and PL
• Good knowledge of risk / rewards
• Reactive Risk Management
• Internal Controls
• Lack of ownership

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Cost and Complexity of STP Similar to Corporate
Governance?
High
Exotic Options
Exchange Traded Options
Mortgage Backed Securities
Complexity
All Treasury
Simple Fixed Income
Domestic Equity
Low
High
STP Rate
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Simplistic Trade Process Flow
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Is Integration a Problem?
Source Reuters/TowerGroup/Capco
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SWIFT FIX Hub Components
S
N
L
FIX
B
R
engine
I
server
D
S
G
N
E
FIX Hub
FIX
L
powered
engine
B
by
SWIFTNet
SWIFTNet
R
server
Financial
I
Fusion
S
D
N
G
FIX
L
E
engine
B
server
R
I
D
G
Indications Of Interest
E
Orders/executions
Source SWIFT
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What Needs to be Done

• Separation of functions
• Confirmation/Affirmation Processes
• Reconciliation of Positions and Cash Flows
• Clear Delegation of Roles/Responsibilities
• Real time alerts and Escalation Procedures
• Exceptions being passed on to the appropriate
  people
• Escalation procedures on a timely basis across
  business functions
• Collaborative resolution / validation / approval
  basis to be established

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Architecture to Improve Controls
?
?
?
FLEXIBLE CONNECTIVTY
TRADE LIFECYCLE MGMT
RE-DEFINED PUBLISH SUBSCRIBEARCHITECTURE
Execution
CLIENTS

• FIX
• SWIFTNET
• ISO 15022
• VMU Connectivity
• Internet Intranet
• Proprietary Networks (e.g. Euroclear)

Trading Apps
Allocations
Risk Mgmt
Confirmations
Confo Matching
FIX HUB
Business Rules Engine
Connectivity Gateway
VMUs, UTILITIES SERVICES
Workflow Exception Resolution
Exception Monitoring
Obligations
F/B Recons
Payments
Settlements
Accounting
Reconciliations
AGENTS EXCHANGES
Custody

• Scope
• Front-to-Back Exception Monitoring
• Automated Exception Resolution linked to
  Business Rules Engine
• Benefits
• Reduced C-of-T
• Improved Controls
• Active investigation

GlobalProductD/B
GlobalAccountD/B

• Scope
• Open Gateway to Clients Service Providers
• Automation of Connectivity to Clients
• Benefits
• Improved security
• Speed of execution
• Early detection

• Scope
• Business Rules Engine for Automation
• Re-architecting Process and System flows
• Benefits
• Reduced C-of-T
• Auto escalation
• Instant information

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Referential Integrity
Source CAPCO
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Some Necessary Building Blocks

• Message enrichment/translation
• Adhere to XML based messaging protocols/standards
  
• Content/Role based Message routing
• Real Time Process Integration
• Automated Reconciliation Procedures
• Alerts generation

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Some More Building Blocks

• Automated Escalation procedures
• Automated Exception handling
• Enhanced protection
• Enhanced audit and compliance
• Improved risk management
• Continuous Process Improvement (STP)
• Trade Flow Visualisation

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Workflow Exception Management
Deals
Audit Control
Customers
Trade input
Risk Mgmt
Settlements
Accounting
Web
Messaging Infrastructure
Exception Management
Investigations Reconciliation
Compliance
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Its all in the Presentation

• Data Visualisation
• Real Time Information
• Drill Down from Pictures
• Data in Context
• Business Activity Monitoring

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Non-Invasive Structure
Treasury
Investment
Private Clients
Brokerage
Corp. Finance
Marketing
Risk Management
Accounting
Internet/Firewall
Device Detection
HTTP/S
FpML
Message Bus
SWIFT
Host Connectivity
Message Broker
FIX
Role Based Workflow Security
External Financial Community
Omgeo
XML
Workflow Management
Integration Handlers
Bus.
Rules
Mainframe
Linux
Unix
DBMS
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NY Fed Commentary

• William McDonough, Chairman of Basel, Committee
  on Banking Supervision and President CEO of New
  York Fed
• Corporate Governance depends on more than just a
  companys compliance with rules, We are all
  learning that effective corporate governance
  emerges from the business culture that a company
  nurtures throughout its operations.
• Bank Supervisors in the US and many countries
  around the world are assessing the safety and
  soundness of banks based less on the strength of
  the balance sheet today, and more on the strength
  of controls that will safeguard a banks
  financial health tomorrow.
• By looking at the strength of internal controls
  and the quality of analysis and judgment applies,
  we are better able to understand how well a bank
  will weather potential future challenges or
  business downturns.

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What needs to be done

• Involve Compliance and Audit
• Reconcile cashflows, nominals and limits between
  front, middle and back office systems
• Integrate disperate system
• Establish a system of alerts and escalation
  procedures that will ensure the right people
  across departments are informed on a timely basis
  and can resolve issues in a transparent
  collaborative way
• Learn from ones past errors and constantly update
  policies and procedures
• Firm-wide compliance management is an important
  element of good corporate governance and that can
  reveal much about a banks culture and commitment
  to managing not only legal and reputational risk,
  but credit, market and operational risks as well
  William McDonough

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And Finally - What God Thinks
Improvements in information technology have
created new opportunities for innovative
companies . The application of technology can
manifestly increase the degree of control and
notification required by the edicts of corporate
governance. Alan Greenspan.
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Sybase Trading Integration Solutions
Middle Back Office
External Connectivity
Trading Applications
STP Integration Platform
Internal Connectivity
External Financial Community
Risk
Adapter
Trading Process Engine
Order Mgmt. Systems
Positions
Adapter
Accounting
Adapter
Other Trading Applications
Integration Broker
Adapter
Compliance
Settlement
Reference Data
Reconciliation
RDBMS
Exception Management
Monitoring Alerting
Analytics Compliance
Data Replication
Exception Workflow
Trade Activity Monitor
BI
Delivery
Compliance Investig.
Enterprise Portal
Mobile Wireless
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Gavin.Quinn_at_Sybase.Com 44 207 285 4033