TCS . Beyond the Obvious. TM tcs

Innovations and Financial Market Institutions A Perspective from Tata Consultancy Services Annual Conference of TCS. Beyond the Obvious.TM www.tcs.com September 18, 2005 Shiraz, Iran

Agenda 1 Introduction to Tata Group and TCS 2 TCS Products for Financial Services 3 Indian Financial Markets- Growth Story 4 Financial Markets Institutions 5 Innovative Money Market Instruments 6 FX Market Trading and Settlement Infrastructure 7 Gilt Market trading Practices 8 Indian Commodity Derivatives Market

Tata Conglomerate TATA Consultancy Services • Founded in 1868: Largest and Most Trusted Business House • Contributes 2.6 % of GDP and 5 % of Exports • 91 Operating Companies with revenues over US$ 14.25 Billion • Over 230,000 Employees and 2 Million Shareholders • Established in 1968 • Asia’s Largest Software Company • Over 45,000 Consultants • Overall revenue: • US$ 1.56 billion (2003-04) • US$ 2.24 billion (2004-05)

Our Presence in Financial Services Industry Practices • At TCS BFS Practice, we help our customers achieve financial technology freedom. This entails realizing their business results and technology objectives through: • Consulting (Listening and Sharing) • Thought Leadership (Anticipating your needs) • Proven Component and Point Solutions (Delivering solutions that work) • Leading Strategy to Implementation (Holding ourselves accountable for results) E-Business Outsourcing Service Practices Manufacturing Retail & Dist. Telecom Healthcare BFSI Application Development & Maintenance Architecture & Technology Consulting Engineering Large Projects Security • At TCS BFS Practice, we help our customers in Financial Services Space • Stock Exchanges • Clearing and Settlement Organizations • Depositories • Regulators • Broker Dealers • Investment Management Firms • Custodian Banks • Retail and Commercial Banks • Loans and Mortgages Infrastructure Development & Management. Global Delivery Centers BFS contributes 30+% of TCS topline • More than 90,000 person years of domain based solution delivery experience • 75% of business from Repeat orders

Rich Functionality Secured Access • Compliance to international Standards - G30, ISO 15002, etc., • Access thru Web, IVR, email, SMS, etc., • Supports SSL and RSA Based Authentication • Automatic dispatch of reports using emails • Solution applicable for multiple entities in one installation • 20+ functional components available • Supports whole range of financial instruments • Supports Model I and III, CCP • Integrated Components • Risk Management • Fees & Billing Modern Technology Expertise • Open Standards, J2EE based • Message based • Component based design and development • Model driven architecture • Flexible and Scalable Solution • Proven solution with reference sites • Experience in end-to-end implementations with major clearing and settlement organizations world wide (SIS, STRATE, NSDL, CDS, etc.,) • Experience in handling System Integration and Consulting activities Cost Effective • Reduced Time to Market • Shorter customization time • Onsite – Offshore methodology … Cost-effective product available in modern technology with rich functionality

TradeX™ Cater to needs of the exchanges such as • Order matching, trade management, risk management • Exchange operations - index management, market data dissemination, surveillance, addition of new trading markets • Architectural flexibility to be able to provide for changes in functionality through parameterisation • Single system which can support multiple instruments in various models / levels of integration as desired by stock exchanges • System which has high performance, quick response time • System which has high scalability even at higher volumes • Reduced dependency on the machine vendors • Layering and componentising the technical architecture • Specifications • Hardware : Unix Server on • SUN, HP, Intel, IBM • Op. System : Posix-compliant OS • LINUX, HP UX, SUN Solaris, AIX • Middleware : MQ Series, Unix Q, • in-memory queues • Database : Oracle, in-memory • Application : C • Messaging : FIX 4.3 • Live Sites • NCDEX : TradeX Trader Workstation

Communication Layer FRONT OFFICE (MATRIX) Interface Layer Interfaces Access Channels Investors Stock Exchanges & ECN’s Trade Management Decision Support Market Data Broadcast Order Routing Risk Management System Electronic Trade Confirmations OASYS Exposures Management Position Monitoring Limits Management Margin Calculation Broker - Dealers Investor Payment Gateways WAP/IVR Market Data Vendors BACK OFFICE (PRECISION) Instrument Administration Clearing CustomerManagement Trade Management Internet Clients Third Party Interfaces Book Keeping Regulatory Reporting Collateral Management Funds & Securities Settlement Institutional Clients Depositories eIBS –The Broking Business Catalyst Clients CLSA, India ICICI Brokerage Services Ltd. Morgan Stanley Dean Witter HSBC Securities HDFC Securities Ltd. JM Morgan Stanley Retail Services Apollo Sindhoori Capital Investment Ltd. Features Single window Multi-exchange, Multi-segment (Equity, Derivatives) Integrated Front-Office and Back-Office Solution Supports Multiple Business Models Retail Institutional Bank Broker Highly configurable & Flexible Robust scalable Unix and Oracle based architecture Supports global messaging standards such as FIX; STP enabled Component-based Architecture

A Quick QUIZ • Which securities market is the first to set up demutualised stock exchange in the world ? • Which securities market is the first to use satellite communication technology for securities transactions? • Which major securities market has implemented T+2 rolling settlement? • In which market 99.99% of the settlement takes place on dematerialized securities? • In which market 6 mn investors get direct protection from the depository for their holdings ? • Which is the largest market for stock futures? • Which securities market started real time on line position monitoring of brokers? Source: SEBI

It is Truly an Amazing Indian Story • Unparallel reach • Nation wide access to trading system- over 400 cities • Over 3000 VSATs and 1000 leased lines – largest VSAT network in Asia • Daily average turnover exceeded 100 times since the advent of screen based trading • Increased Transparency • Internet trading provides direct access to retail investors • Investors are guaranteed new level of transparency and reliability • Risk Management • Guaranteed financial settlement • Online real-time position monitoring • VaR based daily margining • Transaction costs have reduced by a factor of 10 Indian Markets are transformed through innovative use of technology We touch every trade of Indian Investor…through TCS built systems Source: NSEIL & BSE

International Comparison Source: NSEIL

NSE of India – No. 1 in Stock Futures 12 exchanges

Comparative Analysis of All Contracts Source: NSE Derivatives update June 2005

20th Position in Just 5 years Derivatives Market Enhanced Integrity and Confidence ….Positive impact of technology use and adoption of best practices

Building Blocks of Strong Financial Markets Treasury Derivatives Equity Derivatives Forex Derivatives Commodities Derivatives Interest Rate Derivatives Corporate Debt Commodities Market Forex Market Equities Market Money Market Gilts Market Clearing and Settlement Infrastructures Trading Infrastructures

Infrastructure Institutions in India Treasury Derivatives Equity Derivatives Forex Derivatives Commodities Derivatives Interest Rate Derivatives NSCCL NCDEX MCX NMCE NSE Corporate Debt Commodities Market Forex Market Equities Market Money Market Gilts Market NSCCL BOISL NSDL CDSL RBI CCIL CCIL CCIL Several Regional NSE BSE NSE BSE CCIL CCIL CCIL

Clearing Corporation of India Limited • Promoted by leading Banks, Financial Institutions & Primary Dealers operating in India • Establish a safe institutional structure for the clearing and settlement of trades in Government Securities, Forex, Money and Debt markets • Bring in efficiency in the transaction settlement process • Trading platform for repo and forex transactionsClearcorp Dealing Systems (India) Limited , a wholly owned subsidiary of CCIL, was incorporated in June, 2003 to facilitate, set up and carry on the business of providing dealing systems/platform in CBLO and all money market instruments of any kind and also in foreign exchange, foreign currencies of all kinds.

Innovative Instruments in Money Markets • Two Traditional popular instruments • Repurchase Agreement (Repo) is a money market instrument in which transaction, a holder of securities sells them to an investor with an agreement to repurchase at a predetermined date and rate (second leg) • Advancing fund against collateral in the form of securities • Repayment of fund against return of the collateral • Payment of a repo interest by the borrower • Compensation of Income earned on the collateral • Daily computation of difference between extended credit & value of collateral • Call Money • Purely Uncollateralized market • Limited participation of market players resulting in restricted price discovery options • Counter-party & default risk in trade and settlement • Disadvantages • Limited participation of market players resulting in restricted price discovery options • Counter - party & default risk in trade and settlement • Complete absence of fungibility • Price and value risk of collaterals • Absence of reference benchmark rate for the market • Multiple inherent problems e.g. illiquidity & non transparency Market innovates new instrument and trading mechanism to address these issues

CBLO – New Money Market Instrument • Collaterised Borrowing and Lending Obligation • CBLO is an obligation by the borrower to return the money borrowed, at a specified future date; • An authority to the lender to receive money lent, at a specified future date with an option/privilege to transfer the authority to another person for value received; • An underlying charge on securities held in custody (with CCIL) for the amount borrowed/lent. Trade guaranteed by CCIL • Features • CBLO is a money market instrument approved by RBI, is a product developed by CCIL for the benefit of the entities who have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market. • CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety Days (can be made available up to one year). • CCIL provides the Dealing System through Indian Financial Network (INFINET), a closed user group to the Members of the Negotiated Dealing System (NDS) who maintain Current account with RBI and through Internet for other entities who do not maintain Current account with RBI. • Four step process • Fixing Members limit • Issue of instrument in Auction Market • Trading in Secondary Market • Redemption on Maturity • Advantages • Lenders • Quicker deployment of short-term resources • Borrowers • Quicker access to short-term resources

CBLO- Advantages over Traditional Instruments Tri-party nature Protected against price & value risk Fully collateralized transactions Easy liquidity & fungibility Borrowing at lower rates Market driven price discovery Eliminating the movement of collaterals Lender’s risk are reduced

Clearing & Settlement Collateral Management Member’s Limit Member’s Limit Member DWS Order Management Fund Settlement Confirmation Funds Obligation CBLO Pay-out Limit Validation CBLO Pay-in Funds Instructions Business Validation Multilateral Netting Authorization Master Set-up Borrow Rqst Orders Order Matching Trades Novation CBLO Trading System – Trades & Settlement CBLO Trading System Accounting System CCIL-Admin RBI

Productis Gaining Market Acceptance CBLO Settlement Volumes

Product is Gaining Market Acceptance CBLO Membership is growing

Market Pricing Recognises the Advantages of the Product Comparative Money Market Rates

Volumes have Surpassed Traditional Instruments Comparative Money Market Volumes Highest Turnover Volume on 1st Sept ’05: US $Million 6918

FX Clear – Domestic FX Dealing Platform • An effective, efficient & robust system for Inter- bank Dealing in Foreign Exchange launched by CCIL on August 7, 2003 • For Inter Bank Forex Deals • Started with – INR-USD Spot and Swap deals. • Now Transactions in major cross currencies (EUR/USD, USD/JPY, GBP/UDS etc.) • Two modes • Negotiation - Negotiation mode can be used for dealing in cross currencies. • Order matching - anonymous . • Spot and Swap deals in USD- INR in Order Matching Mode and Cash, Tom, Spot, Outright forwards and Swap deals in Negotiation Mode • Facilitates setting up of counterparty limits for trading. • Facility available to all Forex Clearing members at free of cost. • Major advantage – Straight Through Processing (STP).

Provides Viable Alternative for Domestic Currency Trading Facility Straight - Through Processing (STP) facility Cost efficient Forex Dealing Advantages of FX - Clear Reduction in counter – party & default risk Automatic price discovery

Trading System - Forex Counter-Party CSS Trade-Details CCIL Admin User Counter-Party-Notificn Basic-Data-Query Dealer Bilateral Limit Basic-Data-Response Bilateral-Limit-Notificn. Oprerating-Param Operating-Param-Resp. Order Order-Notificn. Market-Information Dealer Trade-Notificn Negotiation Market-Query Negotiation-Notificn Market-Response Basic-Data-Query Own-Query Basic-Data-Response Own-Response Transparent Trading Replacing Telephone Market

ElectronicTrading Brings Transparency

Institutional Facility for FX Settlement • Traditionally FX deals are settled bilaterally • CCIL acts as the central counter party and guarantees • Settlement of all trades accepted for settlement. • Settlement Banks used for Foreign Currency leg CCIL ABN Amro, NY for USD leg of settlement RBI for INR leg of settlement

Types and Sources of Deals • Types of Deals • Cash – Settling today Tom – Settling on T+ 1 • Spot – Settling on T+ 2 Forwards – Settling beyond Spot window • Source of Deals • Forex Trading System Deals (FX-CLEAR) • Directly reported deals by members • Common Reference • NEWT - A deal reported for the first time • AMND - Amend an existing deal • CANC - Cancel an existing deal

Netting and Exposure Monitoring • CCIL determines the maximum exposure that it would normally be willing to take on the member for a given settlement date • Exposure Limit depends on Settlement Guarantee Fund, the Margin Factor etc assigned to the member • During Exposure monitoring the exposure check for a trade ensures that on acceptance of the trade for settlement, the member’s net sold position in USD does not exceed the his Exposure limit • The netting scheme adopted - netting by novation where the bilateral relationship between the two members is substituted with bilateral contracts between each member and CCIL.

1. Send details of the USD amnt to be received from members (Pay – in Instructions) RBI-DAD SETTLEMENT BANK 4. Send details of the INR amnt to be paid and received from members (Pay in – Pay out ) 6. Send details of the USD amnt to be paid to members (Pay – out Instructions) CCIL as CCP 3. Transfer forex to CCIL’s A/C 5. Get INR confirmation including LOC utilization 1. Send details of USD amnt to be debited for mbrs who have activated the Direct Debit facility Send settlement reports FOREX MEMBERS CORRESPONDENT BANK 2. Instruct to transfer forex to CCIL’s A/C and get confirmation CCIL Eliminates Settlement Risk

Settlement Volumes are Growing Forex Settlement Volumes

GILTS Market Highly characterized with presence of few numbers of wholesale players Major market activities concentrated in government securities alone around 85% Few active players determine prices Markets are active & liquid when interest rates are falling Low volumes render market shallow & prone to market manipulation.

Secondary Market Trading Platforms Heavy Broker bias Lack of reporting Discipline by member participants Inefficient price discovery

Efficient price discovery Based on a price - time priority Nurtures a deep, liquid & vibrantmarket Built usingreal-time messaging architecture Advantages of NDS – OM to Participants Creates a dynamic market in terms of instruments /processes /participants Straight through Processing feature Order Matching System for GILTS Market • Introduced August 2005, promoted by Reserve Bank of India (R.B.I.), hosted & managedby Clearing Corporation of India Limited (CCIL) • Transition from Over the Counter (OTC) Market to Online Trading platform • Screen based online anonymous order matching system • Aims to build a broad based, dynamic, transparent & liquid debt market

Volumes Surpassed in the First Month of Operation Comparative Gilts Market Volume (from 1st Aug ’05 to 31st Aug ‘05) NDS – OM System went live on 1st August 2005

Transparency Improves Price Discovery

Order Matching Provides Competition over Negotiations

Road Ahead: NDS – CALL & NDS Auction

Automating Call Money Market Quote- driven Mode Deals concluded through Negotiation Contracts identified: Call, Notice & Term Risk Management – Regulatory & Exposure Limit System facilitates STP to RTGS environment Facilitates online dealing

Electronic Markets Bring Transparency over Telephone Markets

Automating T Bill Auctions Price/Yield Screen Based Auction System Provides an open or closed bidding platform French/Dutch Auction T - Bills 91 days, 364 days Open Market Operations: Sale by RBI Risk Management Floatation: Issue of Securities with pre announced coupon rate Open Market Operations: Purchase by RBI Issue of securities Through Tap Sales

T – Bill Auction System Member Member Member Bid Entry Bids Confirmation Market Information Reports T – Bill Auctioning System Market information Reports Bid Management

TCS . Beyond the Obvious. TM tcs