Embracing Emerging Technologies for Quantum GrowthNov 2008

Agenda

1. Importance of innovation in business

2. Role of technology in the financial services

3. Emerging technologies: Future of financial markets

4. Success stories

5. Q & A

What is innovation?

Qualitative change (not any change) The creation of something new (not just the adoption of somebody

else’s novelties) The innovation process includes invention, and successful

implementation or market launch (commercialization) A focused approach to enhance user value or productivity

TYPES OF INNOVATION Radical innovation: Developing a completely new product/ service

which did not exist (Securitization) Incremental innovation: Improving upon a previous innovation

(Straight Through Processing)

Product and Process Innovation

Product Innovation is characterized by Creation of a differentiator through a superior product/service Has a longer time to market Success of the product/service is determined within a short time period

post launch

Process Innovation is characterized by Creation of a differentiator that captures value through efficiencies Has a shorter time to market Success of the process innovation is determined over a longer period of

time

Product and process innovation complement each other and one alone is seldom good enough to drive quantum growth

Role of technology in financial services

As strong as the Weakest Link

A financial system is as strong as its weakest link.– Alan Greenspan, former chairman of the US federal reserve bank.

IT remains the key to differentiation, competitive advantage and institutional survival.

Capital markets transformation has

been influenced by multiple agents

Globalization

Technologicalrevolution

Regulatory change

Economicenvironment

Industry adoption of

STP

Multiplication of execution

venues

Increasingtransaction

volumes

Client demandsfor improvedservices andlower costs

Consolidation

Firm-wide risk focus

Security

New competitors

Profitability pressure / cost

containmentCapital

Markets

Players

Internalization Systemic risk management

Market Infrastructure organizations

Market participants

Service providers

Industry associations

E-trading has led to skyrocketing of trade volumes with average trade size plummeting

Electronic trading

Changing Face of Capital Markets and role of IT

Shift from open outcry to electronic trading systems

Birth of online retail brokerage as separate from a brick-and-mortar brokerage

Growing disintermediation Direct Market Access Reduced turnaround time for IPO Advanced derivative products Improved pricing analytics and

modeling Competitive landscape with free

markets Reduction in transaction costs Globalization of markets

Algorithmic trading Electronic communication networks Risk management frameworks Order entry and order management

systems Client Relationship Management Derivative trading tools Asset management and

administration Portfolio management tools Clearing and settlement Real time position monitoring and

collateral management Risk reporting Historical trend analysis and data

mining

Significant changes in last decade Key IT enabled functions

Changing Face of Banking and role of IT

Variety of new products and services

Emergence of new delivery channels

Convergence of core banking business and information technology

Mergers & acquisitions New services (Tele-banking, E

banking, door step banking) New approaches to banking

(automated self banking centers)

Core Banking Internet/ electronic banking Mobile banking Payment system gateways Smart cards Risk management AML/ KYC Kiosks/ new delivery channels CRM/ Call Centers/ Help Desks Wireless technologies Resource management

Significant changes in last decade Key IT enabled functions

A rider on IT spend and technology adoption: Spending more on IT doesn’t necessarily translate into higher profitability Spending more on IT

doesn’t necessarily mean higher profits.

Institutions with above-average IT expenditures have higher cost-to-income ratios and below-average increase in revenues.

Many institutions spend too much on running their daily operations and too little on innovations

Institutions face difficulty in translating IT investments into real business value

Scale does not guarantee cost benefits. Many big institutions have yet to see sustainable cost advantages from their vast IT operations

What matters is the way IT is adopted strategically and implemented tactically to drive growth in business

Top-performing banks form their IT strategies in close cooperation with the business

High-performing banks see IT as more strategic, and they drive more of their IT agenda directly; that is, they outsource less

Source: McKinsey

Embracing technology solutions – choosing the right fit

Architecture Characteristics Pros Cons

FO FOFO

MO MOMO

BO BOBO

Single integrated solution usually provided by an external party

Common hardware platform

Single vendor relationship

Overall functional coverage tends to be weak

Dependent on supplier to ride the technology wave

FO FOFO

MO MOMO

BO BOBO

Mix of solutions from multiple vendors that have interfaces / protocols for integration

Advanced functionality coverage

Ability to replace and enhance depending upon technology evolution in a space

Integration challenges

Higher overall cost including maintaining multiple vendor relationships

Mix of hardware, software platforms

Inte

gra

ted

Hyb

rid

Bes

t o

f B

reed FO FOFO

MO MOMO

BO BOBO

Multiple solutions provided by external parties and developed internally

Advanced functionality coverage

Lower cost to replace parts of the system architecture with new technology components

Integration challenges

Higher overall cost including maintaining multiple vendor relationships

Impact of Electronic Trading Technology on the Securities Markets

• Cost-efficiency: Electronic trading greatly lowers continuing operation costs by bringing significant efficiencies to the trading process. This leads to a dramatic increase in trading volumes.

• Removing physical constraints on markets: It removes physical constraints such as geography and the number of market participants.

• Disintermediation: By providing a means for natural buyers and sellers to meet without a market intermediary, electronic trading has a great potential to dis-intermediate markets.

• Blurring Regulatory Distinctions: It poses regulatory challenges for market participants and regulators alike

Recent evolution of domestic equity market capitalization in USD

Source: World Federation of Exchanges

Exponential growth in trading volumes in Indian markets

Growth in Indian Stock Market (USD billions)

Source: Dun & Bradstreet

Exponential growth in trading volumes Exchanges had to scale up their

IT systems

Impact of technology in a front to back environment

Better campaign management using CRM tools

Targeted distribution of research in quick time using internet and mobile technologies

Real-time market data use with improved data warehousing

Program trading efficiency Improved beta with trading

in dark liquidity pools Faster analytics using grid

computing

Front Office

Automated accurate fee calculation

Swift quotation of commission structures

Better order management Real-time post trade risk

management and portfolio evaluation

Improved collateral management

Tools for accurate performance measurement

Fast and accurate margin calculation

Electronic client reporting

Middle Office

• Reduced failure in settlements due to automation of manual processes

• Faster and accurate corporate actions processing

• Accuracy in accounting and reconciliation

• Quick cash transfer with electronic payment gateways

• Better risk reporting to management and regulatory bodies

Back Office

Operational Risk Management

Reliable disaster recovery

Robust infrastructure for performance & uptime

Improved STP

Robust securityAutomated exception

management

Emerging technologies: Future of financial markets

Expectations in the current market

Improvement in service levels

A single window for multiple services

Increase in convenience for customers – including being able to transact on the go

Transparency – ability to compare products/services feature for feature against other competitors in the market

Security of transactions and confidentiality of data

Understanding and adapting to the client’s needs,

Convergence in markets will increase

through a broader distribution network,

supported by a wider array of service/product offerings and capable talent,

and ‘state-of-the-art’ technology systems

Convergence of financial institutions is the blurring of conventional boundaries separating the traditional providers of once-discrete financial services (i.e. life assurance, short-term insurance, banking, health, general retail)

Emergence of a financial supermarket is leading to Client Centricity

PersonalCover

Education provision Savings

& Investment

Home loan

Car & household

cover

Banking / Trans-

actionalMedium

term credit

Financial Education

Wills & trusts

Medical

Risk cover

Retirement

Client

Wealth Management

FinancialEducation

Lifestyle

Where Are We In The Technology Hype Cycle? - Gartner

Emerging technologies in capital markets

Next 2 years

2 to 5 years

5 years and more

Real time market-data distributionAlgorithmic trading

toolsDMA trading toolsCredit and market risk

calculation engines

Complex event processing for trading applications

Consumer on-boarding tools

Mobile solutions for developing and emerging markets

Operational risk enginePrivate virtual worlds

Enterprise reference data management solutions

Financial social networks

Component based buy and sell side securities processing

Q & A

Use of some more emerging technologies..

Social Networking In order to conduct an on-line transaction in which both parties have

confidence, identity is a key. Facebook is one platform providing identity. Based on this

identification, third parties can make use of this base for deriving software applications for transaction services.

Cloud computing Promises reliable services delivered through next-generation data

centers that are built on compute and storage virtualization technologies.

Consumers will be able to access applications and data from a “Cloud” anywhere in the world on demand.

The Cloud will appear to be a single point of access for all the computing needs of consumers.

Success Stories

NSE and BSE had to scale up their IT systems to accommodate increasing number of brokers across various instruments

Technological innovations at NASDAQ

NASDAQ tries to keep its systems scaled to two times the level of the previous peak in IT demand.

Has 3 sets of websites: Trade Station, private and public websites

Has Web 2.0 features: Mobile site for nasdaq.com,

boardrecruiting.com: social networking for recruiting candidates for corporate directorships.

Blogs are used for internal use;

site shareholder.com offers interactive webcasting.

It recently consolidated all fundamental and real-time data into a single, internally developed ticker 30 plant. A custom made content management system was developed

Closer at home - National Stock Exchange uses technology effectively

NSE's IT set-up is the largest by any company in India. NSE can handle up

to 6 million trades per day in Capital Market segment

NSE introduced a nation-wide on-line fully-automated screen based trading

system (SBTS)

NEAT is a state-of-the-art client server based application which helps

achieve minimum response time and maximum system availability

Technology has carried the trading platform to the premises of brokers and

to the PCs of investors

More than 9000 users trade on the real time-online NSE application

Trading cycle reduced from 14-30 days earlier to T+2 now