The Reference Data Challenge: Challenges, Issues

1
The Reference Data ChallengeChallenges, Issues
New Developments

• Presented by
• Larry Tabb
• TowerGroup

2
Agenda

• Cost is todays opportunity
• Where can we take cost out of the picture
• Why reference data is a problem
• How big is the problem?
• Where is the payoff
• A few words of caution
• Conclusions

3
Negative market pushes firms to tighten belt
'00
'01
'02
4
Impact of decimals unexpectedthats a problem
Difference between estimate off actual and
decimalization estimate
Difference
SourceTowerGroup estimate
5
Equity IPO issuance is virtually non-existent
IPO Quantity
IPO Value US Billions
Source SIA Factbook, Hoovers, IPO Monitor
( 1st half 2002)
6
Economic climate forcing firms to retrench

• Layoffs
• IT Reprioritization
• Cutting discretionary initiatives
• Focusing on the institution
• Hunker in the bunker

7
NA IT spending screeches to halt begins decline
North American Securities Industry IT Spending
(US billions)
0.2
-9.0
4.6
-5.4
2.3
25.4
17.3
25.3
23.2
23.0
22.2
21.7
26.5
External Spending
18.4
51
51
51
52
52
52
11.5
44
49
49
49
42
56
48
48
47
Internal Spending
57
SourceTowerGroup estimate
8
IT staffing declines as well
Internal IT Staffing (in 000s)
-7
-4
0
17.5
CAGR 25.8
SourceTowerGroup estimate
9
So what ?(and, your point is?)
10
Industry cant increase risk-based trading

• Firms owned by banks or public
• Financial markets punish earnings volatility
• Cant take on massive trading risk

11
Firms are hunkering down

• Lower cost via etrading
• Nasdaq commission trading
• Outsource risk-based trading
• Hedge funds

12
End result will be

• Consolidation
• Operational efficiency critical
• Focus on Trust
• Brand becomes more important
• From institutional to retail
• Individuals
• More service conscious
• Need more help
• Less price sensitive

13
On the institutional side, efficiency rules!

• 20 increase is not important!
• Consolidation is important
• Its about being the predator not the prey
• Its about scaling the business

14
The industry will still spend more than 7.4
billion on STP through 2005
North American Securities Industry IT Spending on
STP (US billions)
2.1
2.0
1.8
1.5
Source TowerGroup estimate
15
US Broker / Dealers will pick of 68 of STP IT
bill from 2002-2005
Total US STP Spending 2001 to 2005 - 12.3 bill.
SourceTowerGroup estimate
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Firms 5 year STP focus has not eliminated
problems. Firms still have many rejected trades
Percentage of rejected trades from processing
systems
1 to 5
6 to
11 to
20 to
40 to
60 to
All
None
10
19
39
59
79
trades
manual
Source TowerGroup Surveys 9/02
17
How can we take cost out of the picture
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Automating the trading cycle will enable firms to
do more with less
19
Managing process flows real-time messages is
increasingly important
Broker/ Dealer
Execution Agent

• STP Real-time messaging
• More Messaging gt
• Better messaging infrastructure
• Greater focus on exceptions
• Faster resolution of problems
• More robust message management tools

Investor
Clearing Bank
Clearing Corp.
Custodian
Depository
SourceTowerGroup
20
Even though GSTPA is dead matching process still
a question mark

• Less pressure for Omgeo to move to CTM
• Less industry pressure to move toward matching as
  everyone is already connected to Oasys firms
  dont want to spend to integrate

21
Corporate Actions tests firms patience
No standard source
No standard timing
No standard format
No standard action
22
Reference data holding the industry back
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Reference Data is large STP problem
Inconsistent, inaccurate, and incomplete
reference data is the major cause of internal STP
failure within respondents organization
Source CAPCO/Reuters/TowerGroup
ResearchSeptember 2001
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Reference Data management

• Is decentralized

Respondents had 43 systems containing client and
counterparty data and 37 systems containing
securities data
Lacks automation
Less than 5 of respondents to the survey
indicated a heavily automated environmentsurvey
average of 58 FTEs update data
Is Expensive
Respondents spent an average of US 3.2 million
per annum to acquire data
Causes operational risk
Respondents to the survey estimated 30 of trade
failure is a direct result of inaccurate
reference data
Source TowerGroup/CapCo/Reuters Survey Sept
2001
25
Many rejected trades are reference data-related
Percentage of reference data-related rejected
trades
45.1
Rejected Trades
Source TowerGroup Surveys 9/02
26
Reference data projects have clearly become an
industry priority
Reference data priority
Source TowerGroup Surveys 9/02
27
Over 70 of firms project are either currently
funded or will be in 2003
Funding time-table
Source TowerGroup Surveys 9/02
28
50 firms projecting data cost to exceed 1mm
with 20 of firms exceeding 10mm
Projected data integration / standardization cost
50.9
Source TowerGroup Surveys 9/02
29
Firms are looking at solving reference data
problems to reduce costs
Will headcount be reduced or redeployed?
Source TowerGroup Surveys 9/02
30
Firms investing to reduce overhead, accelerate
IT, and reduce exceptions
Primary reason for data projects
Source TowerGroup Surveys 9/02
31
Firms looking to reduce reference data vendor
relationships
Firms reference data relationships
Source TowerGroup Surveys 9/02
32
Firms expect data vendors, service bureaus,
custodians, utilities to solve data problems
Who firms are looking to for a reference data
solution
Source TowerGroup Surveys 9/02
33
Firms beginning to centralize reference data
support
Extent firms have centralized data management
across business units
Source TowerGroup Surveys 9/02
34
Few firms currently have outsourcing agreements,
but 45 are investigating
Firms progress in outsourcing reference data
Source TowerGroup Surveys 9/02
35
Is there hope for a collective solution?
Would your firm be willing to fund a collective
solution?
Could a utility effectively meet firms data
requirements?
Vs.
YES
YES
NO
NO
Source TowerGroup Surveys 9/02
36
Where is the eventual payoff?
37
The initial payoff is the front office not from
eliminating a few clerks

• Trading floor efficiencyenables
• Focus on trading
• Cover more products
• Delegate more
• Generate revenues with lower costs
• Front office staffing costs are higher
• Front office revenues are higher

38
Firms beginning to consolidate trading floors,
IT, and sales coverage
Customer
Fixed Income
Equity
FX
Derivatives
Commodities
Treasurys
OTC
Spot
Futures
FI
Repo
Listed
Forward
Options
Equity
Corporate
FX
Muni
Euro
Money Mkt
39
Sales desks become customer focused
Customer
Fixed Income
Equity
FX
Derivatives
Commodities
Treasurys
OTC
Spot
Futures
FI
Repo
Listed
Forward
Options
Equity
Corporate
FX
Muni
Euro
Money Mkt
40
Eventually sales teams become multi-desk focusing
on client need
Customer
Global Markets
Treasurys
OTC
Spot
Futures
FI
Repo
Listed
Forward
Options
Equity
Corporate
FX
Muni
Euro
Money Mkt
41
And then firms begin operational consolidation
around business lines

• IT linkages become seamless
• System interfaces become consistent
• Migration to exception processing
• Processes across products become consistent
• Merging of operations

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A few words of caution
43
Danger! The efficient organization can become
the vulnerable organization

• As IT replaces operations
• Firms will not function in outage
• Traders cant communicate with markets
• Sales cant communicate with customers
• Operations cant communicate with banks,
  utilities, or depositories
• Skills that were needed in manual environment are
  lost
• More key person dependent
• DR / BCP becomes completely to daily operations

44
And can the business function with lower support
levels?

• Buy-side firms say
• 83 sell-side firms can improve service
• 94 communication channel integration would
  improve service
• 9 getting the service that they need

Source Mori 2002
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Final Thoughts

• While T1 maybe in hibernation STP is not
• Firms will continue to spend on STP initiatives
• The big STP paybacks wont come from small
  initiatives
• Payback will come from front office efficiency
• and from
• Radical organization change facilitated by many
  relatively small technology initiatives
• However be careful that radical changes are
  thought out and dont hurt long-term business

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The Reference Data ChallengeChallenges, Issues
New Developments

• Presented by
• Larry Tabb
• TowerGroup