STRAIGHT THROUGH PROCESSING << From Client to Settlement >>

1. STRAIGHT THROUGH PROCESSING << From Client to Settlement >> Costache Roman Country Manager Romania & Moldova Bucharest, November 19, 2002

2. Straight Through Processing Straight Through Processing (STP) Enables Seamless Communication between Parties

3. What IT IS NOT Straight Through Processing Why? Exactly. Exactly what? Exactly why? Exactly why what? What? Why? Why what, exactly? Why is he mad? I don’t know! From ‘Rosencrantz and Guildenstern Are Dead’ by Eugene Ionesco

4. Straight Through Processing in Finance Straight Through Processing (STP) is the seamless, electronic trade process from pre-trade price discovery to full settlement in all parts of the financial markets value chain.

5. Why STP & Retail Banking ? • Larger volume of clients and operations • Larger range of offered services • Increased operational risk • Increased requirement for high quality services at client • All the above suitable to be addressed by STP

6. Fund Manager Broker/ Dealers Clearing Agent Investor Custodian PARTICIPANTS Decision Support Clear & Settle Order Entry Execution Allocate & Confirm Depository • CUSTOMER • BUSINESS • PROCESS Local Broker Agent Post Trade Provider Sub Custodian Broker/ Dealer Execution Venue Clearing Agent PARTICIPANTS The financial markets value chain

7. Clear & Settle Order Entry Execution Allocate & Confirm • CUSTOMER • BUSINESS • PROCESS Decision Support Industry STP Enterprise STP Industry & Enterprise STP Institutions will only achieve maximum benefit if STP is addressed both by individual enterprises and by the industry as a whole

8. Industry Drivers for STP • Industry Initiatives (growth, globalisation, convergence) • Market Restructuring (exchange consolidation, execution alternatives) • Process Changes (T+1) • Regulatory Requirements (Basel II,….) • Technology Advances (lower entry barriers)

9. Enabling Delivery of Great Customer Service • Provide greater accuracy • Increase customer satisfaction • Improve customer relations COSTS FAILS Reducing Cost • Reduced manual effort • Increased effectiveness RISK Improving Control • Reduced operational risk • Reduced capital allocation • Greater understanding of • Issues & hotspots Enterprise drivers for STP

10. Getting the Organization ready for STP Standardisation of Data and Adoption of Standards Re-engineering of the Business Process Enterprise and Industry Integration

11. STP Vision • Seamless communication among parties • Concurrent, not sequential, exchange of information • Significant real-time processing, less batch processing • Virtual processing, not physical processing • Reduces operational risk • Reduces settlement risk • A catalyst for change • improvement of lower cost structure • more efficient market process and infrastructure

12. Quantitative Approaches in Basel II – Operational Risk Basel II

13. T T Example: settlement claims through unmatched trades Basel II : operational risk loss events Buyer Seller Bond-Trade Sales Desk Bank A Sales Desk Bank B Cash Deal Entry Deal Entry Interest claim No deal entry 3,5% x 50 M x 1/365 Settlement system B Settlement system A Matching failure Not due to IT system failure • Failure of inadequate internal payment/settlement processes • Losses through reconciliation failure • Securities delivery errors • Limit breach • Insufficient capacity of people or systems to cope with volumes • Missing deal ticket • partly information fault: • e.g. Changing account Number • incorrect data input

14. Number of individual loss events by business line and event type > 80 % Source: QIS II

15. You can only predict things after they've happened. Eugène Ionesco Buyer Seller Sales Desk Bank A Bond-Trade Sales Desk Bank B No Deal entry Cash Deal Entry Deal Entry Interest claim 3,5% x 50 M x 1/365 Settlement system Settlement system Matching From loss data to loss distributions Basel II: Loss distribution approach frequency severity

16. Different frequency/ impact types of loss events “Expected-Loss” events Unrealistic loss events High frequency high impact High frequency Low impact High frequency High impact Low frequency low impact Low frequency Low impact Low frequency High impact “Negligible small loss” events “Fat-Tail” events

17. Reducing failure of inadequate internal settlement processes. Possibility to finally reduce expected loss through optimised STP. Reducing operational risk through STP? Basel II advanced measurement approaches Basel II advanced measurement approaches and STP High frequency low impact Low frequency high impact High frequency low Impact High frequency High Impact Low frequency Low impact Low frequency High Impact

18. Typical situation … Order mgmt Market data mgmt Proprietary systems Clearing & settlement Accounting Risk mgmt Trade capture Credit mgmt Portfolio mgmt HTML/XML, Streaming, Wireless Corporate treasurer Retail broker Private investor In-house dealers

19. Business Process Management EnterpriseApplicationIntegration … and STP Vision Traders, Sales, Customers, etc. Accounting, Payment Custody, CRM etc. Front / mid / back office OMS, Risk Applications, Databases etc. B2BIntegration Portals

20. Practical Case – REUTERS STP Solution SWIFT PAYMENTS ACCOUNTING BRANCHES CLIENTS AUTOMATED DEALING TRADE PROCESING KONDOR+ TIBCO Rendezvous Middleware Practical Case – REUTERS STP Solution TREASURY – RISK MANAGEMENT- BACK-OFFICE – CUSTODY SERVICES TIBCO Business Works • Treasury BO operators • Accounting • NOSTRO/LORO • custodian • automated rates • customer desk • interbank dealers • risk management

21. Questions It is not the answer that enlightens, but the question. Eugène Ionesco (Découvertes, 1969)