Investment Banking Operations The Impact of IT Past, Present

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Investment Banking OperationsThe Impact of
ITPast, Present Future
Michael Purse
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Table of Contents
1
Investment Banking Operations
2
Global Change Factors
Technology Focus
3
4
Conclusion and Challenge
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In a nutshell!
Investment Banking

• What is an Investment Bank?
• A financial intermediary
• What Does an Investment Bank Actually Do?
• Brings together People, Aspirations and Capital
• Whats the Role of Operations
• The Engine Room for transaction processing
  ensuring control service

E.g. Deutsche Bank recently enabled Kingfisher
(owner of BQ) to raise 500M. Kingfisher is
Europes leading home improvement retail group
and the third largest in the world.
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Principal Divisions
Investment Banking
BUY
This is where the furiously competitive pace in
banking comes from. This division buys and sells
a variety of financial instruments across global
markets either on behalf of clients or across the
banks own books.

• Global Markets
• Global Banking
• Asset Management
• Private Wealth Management

SELL
This is a huge division with a number of
responsibilities. The division is split by
industry, product and region to meet clients
needs. Looking after the banks largest corporate
clients, they provide everything from day to day
banking services to strategic financing advice.
Responsible for putting together investment
packages for organisations with lots of cash to
invest (e.g. pension funds). Asset managers and
fund managers have strong relationships with
their clients and invest in a variety of
financial products.
Caters to the needs of high net worth clients
(gt5M). Advises a sophisticated, high net worth,
client base on asset management and preservation,
and active risk management. Ancillary services,
such as inheritance, tax and estate planning, art
or philanthropical activities are also provided.
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Lifecycle of a Trade
Investment Banking Operations
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Technology Imperative
Investment Banking Operations
In Figures
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Table of Contents
1
Investment Banking Operations
2
Global Change Factors
Technology Focus
3
4
Conclusion and Challenge
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Market Drivers
Global Change Factors

• Shareholder Value
• Competitiveness Market Share
• Return on Shareholder Equity (ROE) Profitability
• Business Growth
• Huge Increases in Trading volumes
• Automated trading engines
• Commoditisation and shrinking profit margins
• Higher Volumes Lower Margins
• Product Sophistication
• Demand for complex bespoke financial products

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Regulatory Environment
Global Change Factors

• Market Reputation Investor Confidence
• Image, brand and perception
• Greater Financial Market Regulation
• Sarbanes Oxley (SOx) US Accounting Reform
  Investor Protection Act
• Basel II (Cross Border Risk Management
  Standards)
• Markets in Financial Instruments Directive
  (MiFID) European Single Regulatory Regime

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Industry Consolidation Disintermediation
Global Change Factors
Development of Deutsche Bank as an Integrated
Financial Services Organisation

• Deutsche Banks Transformation
• 1989 Acquisition of Morgan Grenfell Group
• 1999 Acquisition and integration of Bankers Trust
  in the U.S.A.
• 2002 Purchase of the US asset manager Scudder
  Investments
• 2003 Acquisition of the Swiss Private Bank Rued
  Blass Cie
• 2006 Acquisition of the Russian investment bank
  United Financial Group (UFG)
• Clearing Central Securities Depositories
  (CSDs)
• 1999 US DTC merged with NSCC to create DTCC
• 2000 Creation of Clearstream from Cedel
  Deutsche Borse Clearing
• Clearing (Central Counterparties)
• 2003 LCH.Clearnet merger of Euronexts Clearnet
  and the London Clearing House (LCH)
• Remote Exchange Membership
• Exchange membership for non local institutions
  removing the need for relationships with local
  broker dealers

Remote
Vertical Consolidation
Brokers
Local
Horizontal Consolidation
Disintermediation
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Worldwide Influences
Global Change Factors

• Increased Cross Border Activity
• e.g. Impact of European Monetary Union (EMU)
• Shift away from the United States as the World
  economic growth engine BRIC countries will
  increase their influence on world economic growth
• Brazil
• Russia
• India
• China
• Migration of Manufacturing and Service Based
  Industries
• Manufacturing to China (e.g. Textile
  Manufacturing)
• Service to India (e.g. Call Centres)

By 2025 BRIC could account for over half the size
of the G6. Only the US and Japan may be among the
six largest economies in US dollar terms in 2050.
World Trade Organisation says that China is soon
likely to control 50 per cent of the world's
textile market
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People
Global Change Factors
Impact of increased cross border activity

• Increase in Globalisation
• Global Clients demand Global Services
• Local resource scarcity for specialised skills
• Traditional localised resource pools are limited
• Need for a dynamic workforce in a dynamic
  business context
• Cyclical trends require resource flexibility
• Employees demand a greater Work/Life balance
• Resource distribution to Follow the Sun

The size of the IT employment market in the
United States today is reportedly higher than it
was at the height of the dot.com boom
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Technology Trends
Global Change Factors
Open Source e.g. Linux
Moore's Law the maximum processing power of a
microchip at a given price doubles roughly every
18 months
Graph from Intel.com
Metcalfe's law states that the value of a
telecommunications network is proportional to the
square of the number of users of the system
sometimes!
Grid Computing
Edholms Law of Bandwidth Bandwidths follow
Moores Law with Wireline, Nomadic and Wireless
technologies converging over time
Messaging Technologies e.g. XML
Gilder's Law the total bandwidth of
communication systems will triple every 12 months
Service Oriented Architectures
Graph from Telecom Edholms Law of Bandwidth,
IEEE Spectrum, July 2004
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Pace of Change From Basement to Billionaires
Global Change Factors
Technology Breakthrough Innovative webpage value
algorithm.
13 Billion September 2006 Forbes estimate net
worth of each founder.
September 1998 Founded as a company.
6 years
Technology Accelerating Change
Global Dominance
Inception
20 months
Technology Breakthrough Realised opportunity to
leverage social networking trends.
1.65 Billion October 2006 Bought by Google. 100
million videos viewed daily.
February 2005 Founded and officially launched in
December 2005.
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Deutsche Bank AG in 2006
Global Change Factors
In figures

1957
2006 Staff
16839
63427 Female/Male ratio
38
45 Staff based
in Germany 99
42 Number of
branches 323
1588 in 73
countries 129 Nationalities Clients
Limited number of private
clients 16 million
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Table of Contents
1
Investment Banking Operations
2
Global Change Factors
Technology Evolution
3
4
Conclusion and Challenge
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Transforming the IBO Operating model
Technology Evolution
a competitive necessity

A higher Cost/Income ratio represents lower
profitability Profitability impacts shareholder
value and business viability The Cost/Income
ratio can be improved by
Cost Income Ratio of DB versus Competitors Q4 2005
Lowering costs
Increasing revenues
Both of the above
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Cost Avoidance Cost Reduction Strategies
Technology Evolution

• Eliminate processing duplication and
  inefficiencies
• Extend exception based Straight-Through-Processi
  ng (STP)
• Leverage lower cost labour pools
• Mitigate skills scarcity
• Redeploy highly skilled workforce to higher
  value roles
• Avoid costs of increasing headcount

Technology is an enabler of all these strategies!
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Redefining the Operating Model
Technology Evolution
Traditional Model Traditionally, operational
services were co-located with regionally aligned
businesses. With all businesses now operating
globally from all locations, this model is
sub-optimal with functions duplicated across
locations Global Hubs A more efficient solution
is a functionally aligned model where
standardised services are delivered from a small
number of globally connected processing hubs

Traditional model
ILLUSTRATIVE
Post
-
SOM
Globally Connected Processing Hubs
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Impact of Technology on Processes
Technology Evolution

STP
People intensive process Exception based
process Location specific Location
independent Dependence on Global network of
knowledge Individual knowledge Embedded within
technology
Mobile Architecture
Task Management Workflow
Technology is the key to business competitiveness
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Extending STP
Technology Evolution
Deutsche Bank eSPEAR STP Platform

• The Automated Back Office
• Event-driven, exception-based straight-through-pr
  ocessing (STP)
• No human intervention from execution to General
  Ledger
• gt1M trades per day

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Location Independent
Technology Evolution
Mobile Architecture

• Standardised Business Processes Prescribed
  Workflows
• Thin-client access
• Time-zone affinity
• Central Application and Data Centres
• Network Infrastructure (Broadband Access
  tools)
• Centralised Security (authentication, profiles,
  encryption)
• Flexible Global EOD
• 24x7 IT Support
• Service-Oriented Architecture Approach

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Functional Re-alignment
Technology Evolution
Task Management Workflow

• Functional Re-alignment
• Vertical Organisation
• End-to-end knowledge required (scarce resource)
• Typically single threaded, serial process
• Processing bottlenecks common
• Limited scalability (additional end-to-end
  experts required)
• Horizontal Organisation
• Reduced domain knowledge dependency (knowledge of
  the function only)
• Parallel processing
• Load balancing by function
• Scalable
• Prescriptive workflow
• Individual functions clearly documented
• Limited specialised knowledge required
• Easily scaled
• Greater efficiency i.e. lower cost

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Role change From Hero to IT Broker
Technology Evolution
User We need to do business in Zürich!
Immense reliance on single individual. Key person
dependency and front-to-back expertise required.
IT Hero does everything from analysis to
deployment
Analyst liaises with users and development team
Global team, distribution of roles and
responsibilities
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Investment Banking IT goes Global
Technology Evolution
IB IT has 4000 employees distributed over 20
locations Change of roles and skills required as
well as focus on innovation

UK
Canada
France
India
South Africa
Argentina
Australia
New Zealand
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Table of Contents
1
Investment Banking Operations
2
Global Change Factors
Technology Focus
3
4
Conclusion and Challenge
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Conclusion
Conclusions Challenge
Evolution

Investment Banks have to evolve to remain
competitive in the global business environment
and recruitment market or they will disappear.
Innovation
The Operational and Technology models have to
adapt or the business cannot maintain its
competitiveness.
Technology plays a key role in enabling the
necessary changes. Without Technology, the
current growth of the world economy would not be
possible.
Technology
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Your challenge!
Conclusions Challenge
Your Future!
The Future.

• Over the next 10 years how will Investment Banks
  have to evolve to meet the future developments
  and trends in
• Technology
• Demographics
• Business

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Contact
Conclusions Challenge
Michael Purse IBIT Investment Banking
Operations IT E-Mail michael.purse_at_db.com www.d
b.com/careers