TCS BaNCS Research Journal_Issue 11

RESEARCH JOURNAL ISSUE 11

Simplifying Securities Processing We thank our customers for this marvelousCustodians today seek a robust trade processing endorsement and theplatform that is integrated with corporate actions con dence they reposeand cash processing capabilities for real-time in our solution--and us.settlement. Add to this the ability to manage risk andcompliance needs.TCS BaNCS for Securities Processing manages highvolumes of local and cross-border trades whilstsupporting diverse and complex financialinstruments. Central to our strategy is a collaborativeapproach involving customers, prospects, analystsand other industry players, who continuallyparticipate in the evolution of our platform. Theresult is an enriched solution, offering market-specificfunctionality and regulatory reporting compliance. Meet us at Booth #E10GENEVA 26-29 September 2016

FOREWORDAs capital market players attempt to expand their value chain, simplification of their products and services andexpanding their reach is becoming imminent. Such an agenda is centred on digital experience, channel partnerships,achieving best quartile transaction costs, and delivering an interactive and intuitive experience to clients.Building the right reach and distribution models, offering simplified yet sophisticated wealth products covering boththe life-stage and life-style factors are becoming fundamental to growth and customer retention. Robo advisorsand fintech partnerships are driving the creation of eco-systems that expand the value chain and grow volumesexponentially. All these will require putting in place a robust data architecture and the ability to mash data ofdifferent types and formats, with emphasis on interoperability.Firms are focusing on the above as their core competence and are willing to consider total outsourcing of their back-office to post-trade utilities and managed service providers. The appetite to do this is more now than ever before.Clearly, technology vendors need to up their stake and ensure high availability, incorporate modern technologiessuch as distributed ledgers and ensure that they satisfy the ‘I want now’ appetite of clients and end users…somethingthat TCS BaNCS is directionally aligned to.This edition of the TCS BaNCS Research Journal brings you a collection of viewpoints from the Capital Markets andPayments domains, including PSD2, AIFMD, MiFID II; and, their potential impact and opportunities.Nigel Little of the Euroclear Group talks about how a holistic approach to enterprise-wide workflows can provide areal time view of operations productivity and performance at any given time.PSD2 (Payment Services Directive 2) is set to bring in a new direction by including fintechs, and is expected tooverhaul the payments landscape, ensuring a level playing field for Banks (Account Servicing Institutions) andPayment Service Providers (PSPs).The AIFMD regulation has opened a new window of opportunity for custodians to offer segregated account basedinvestor services and regulatory reporting therein. Even though this will mean incurring more investment intechnology and time, they stand to eventually benefit from increased revenues.From a post trade perspective, MiFID II is expected to force vertically integrated infrastructures that were notpreviously architected to allow interoperability for trades, to now open up. This is likely to spur competition amongCCPs in Europe and lower the cost of clearing.We believe that firms will continue to drive client-focused initiatives andleverage utilities to support activities such as reference data and platformmanagement. Which parts of the value chain are core to their valueproposition and which are candidates to be outsourced? These are justsome of the questions and perspectives being explored in this edition.Please enjoy the magazine. N Ganapathy Subramaniam President – TCS Financial Solutions

EDITORIALDear Reader,Welcome to Issue 11 of the TCS BaNCS Research Journal. We bring you perspectives and viewpoints from our expertsand leading thinkers, who take you through a range of topics that are critical to the industry today. The theme forthe SIBOS conference at Geneva this year is “Transforming the Landscape”. Even as the financial services industryexperiences continuous disruption and a swathe of ever-evolving regulations, we are witnessing remarkable advancesin technology, especially of the cognitive kind. Financial institutions have begun collaborating and competing acrossmarkets, making for interesting and exciting times ahead.We hope you find the articles in this Journal interesting and look forward to hearing from you.On behalf of the Editorial Team. Anjana Srikanth General Manager Marketing and Communications TCS Financial Solutions (TCS BaNCS)

EDITORIAL BOARD Dennis Roman Anjana Srikanth Chief Marketing Officer General ManagerTCS Financial Solutions (TCS BaNCS) Marketing and Communications TCS Financial Solutions (TCS BaNCS) Arun Arunachalam R Vivekanand Nitin Sirohi Head, Product Management Vice President & Head - Market Infrastructure Head, PaymentsTCS Financial Solutions (TCS BaNCS) TCS Financial Solutions (TCS BaNCS) TCS Financial Solutions (TCS BaNCS) Yogesh S Malini Raman Senior Consultant Senior ConsultantTCS Financial Solutions (TCS BaNCS) TCS Financial Solutions (TCS BaNCS)

CONTENTSRESEARCH JOURNAL08 12 18An Interview with Nigel Little from the Surviving the Machines ManagingEuroclear Group on Corporate Actions Operational RiskWorkflows in the Custody Business22 26 30Standardizing Proxy Voting MiFID II/MiFIR implementation - Impact Utilities in the Securities on European financial markets and key Services Back Office – A challenges faced Transformational Journey44 48Navigating the AIFMD Insurance Repositorylandscape successfully and E-Policies

52 56Automating Corporate Asset Servicing ManagersActions Reclaims Tool Kit60 64RISK TRANSFER PRICING - Back to Basics PSD2 and the Evolutionin Evolving Regimes of Fintechs70Understanding the Digital Expectations ofthe Wealth Management Client

8 An Interview with Nigel Little from the Euroclear Group on Corporate Actions WorkflowsTCS BaNCS Research Journal AN INTERVIEW WITH NIGEL LITTLE FROM THE EUROCLEAR GROUP ON CORPORATE ACTIONS WORKFLOWSHTTPS://GOO.GL/MGNYPT Workflows in corporate actions Nigel Little of the Euroclear Group then worked at The Bank of New processing mean different things has worked in various organizations York Mellon, Deutsche Bank and is to different people. They come in a over the past 20 years as a Corporate presently at Euroclear. His last two varied mix -- technical, processing Actions processor, a Change roles included the implementation and operational workflows. Manager, Product Manager and of large scale change initiatives in However, irrespective of how they Implementation Manager, among Global Custody, Sub-Custody and are understood, the concept of many more roles in between. He Investment Banking across global workflows is key to corporate actions began working in the field of Asset markets. He joined Euroclear as an processing and their underlying risk Servicing in 1997 at the Royal implementation specialist in August, management and control. Bank of Scotland and has since 2014, and works across issuer/ investor CSDs in T2S. He has a proven Alan Lawman Nigel Little track record of delivery and is a well- Consultant Director, Product Management, respected member of the Corporate TCS Financial Solutions (TCS BaNCS) Euroclear NV/SA Actions community. Alan Lawman of TCS Financial Solutions sat down with Nigel to discuss workflows in corporate actions processing. Please describe your current role at Euroclear and what workflows within corporate actions means to you? At present, I work as a Director, Product Management, at Euroclear. The role is aligned to the Product Management Department and I Iead the implementation of TCS BaNCS within the ESES (Euroclear

An Interview with Nigel Little from the Euroclear Group on Corporate Actions Workflows 9 When I began processing Corporate TCS BaNCS Research Journal Actions at a Global Custodian inTHE GLOBAL PUSH FOR Settlement of Euronext-zone the late 1990s, workflows were HTTPS://GOO.GL/MGNYPTCORPORATE ACTIONS Securities) Markets. completely manual. From thePROCESSING manual printing of incoming SWIFTSTANDARDS OVER THE Workflows are a by-product of the announcements and re‑keying ofPAST 10 YEARS implementation of TCS BaNCS due data, the printing and posting ofHAS ENABLED SYSTEMS to it being an exception based client notifications, to receivingTO INTERPRET operating system. As i am working clients’ fax instructions andTHE MAJORITY OF on my third implementation, re‑keying them back into theANNOUNCED EVENTS, workflows are close to my heart. system before (manually) sendingAND SCRUB MULTIPLE consolidated instructions onwardSOURCES AND Workflow is not a new concept. to agents/registrars and making theNORMALIZE DATA INTO In fact, within the manual world relevant bookings across the clientAN INTERNAL of CA processing, workflows ledger--- the entire process wasGOLDEN RECORD. have existed for many years manual. and while not always fully “best practiced”, at least, the These tasks were prompted and concept and idea existed. When controlled by the use of leather- you consider workflows in a bound diaries and stored in a technology solution, how would reinforced safe at night. Heaven you best describe the process and forbid the day a diary entry concept itself, and how would you wasn’t made and it related to a consider the impact of manual response deadline date, thereby, Intervention, such as “processing causing potential financial losses. by exceptions”? Fortunately, the world of workflows has moved on since then. To a newcomer, the world of Corporate Actions is daunting. But, with experience, realization dawns on them that all events are similarly structured and only several variations of a lifecycle really exist. This has enabled the systems of today to pick up the relevant information and automate 100% of the once manual tasks. In addition, the global push for Corporate Actions processing standards over the past 10 years has enabled systems to interpret the majority of announced events, and scrub multiple sources and normalize data into an internal golden record. This automation has driven processing to an exception based operating model and facilitated the relocation of operational resources to near/ offshore sites, thereby, reducing the cost per trade.

10 An Interview with Nigel Little from the Euroclear Group on Corporate Actions WorkflowsTCS BaNCS Research Journal OPERATIONAL RISKS Does this view of workflows differ the relevant signature exists on USING AUTOMATED between participating parties; for the daily control sheet; instead,HTTPS://GOO.GL/MGNYPT WORKFLOWS AND example, how are workflows used the system holds majority of the ADDITIONAL FACTORS within the roles of operations- required data. CAN NOW PERFORM A processor, supervisor/manager PROACTIVE ROLE IN and, also outside of operations, That being said, the development SUPPORTING from an audit & control and budget is often thin on the ground, OPERATIONAL TEAMS operational risk perspective? as the benefit case to support the THAT MEASURE AND extraction of ‘Big’ Data is usually at QUANTIFY ALL TYPES OF For operations processors and the wrong end of the list. RISKS. supervisors, these processes are now their bread and butter. Their For operational risk, I believe, it OTHER MARKETS, SUCH day is spent resolving exceptions. is a game changer. Traditionally, AS THE USA WITH THE In theory, if operations can keep operational risk teams were reactive DTCC ARE LOOKING on top of the exceptions then, by to a profit or loss, or a near-miss AT REMOVING LEGACY the end of the day, all their work is incident raised by operations post PROPRIETARY complete. the event. Subsequently, a deep MESSAGING AND dive would be performed to ensure REPLACING THEM A holistic view over enterprise wide that the relevant controls were in WITH ISO. workflows can provide a real time place and that such events were view over operations productivity prevented, going forward. and performance at any given time. Managers can instantly spot Operational risks using automated bottlenecks requiring manual workflows and additional factors intervention and re-assign resources can now perform a proactive role in accordingly. supporting operational teams that measure and quantify all types of What benefits, do you believe, risks (operational, regulatory, client have these roles gained over and counterparty). the past few years of workflow development and evolution? If you look at the evolution of CA processing and, in particular, the Operations, in their day-to-day increase in volumes processed role, have benefitted most from over the past few years, do you workflow developments. Back in feel we would have managed the the manual environment of the volumes without workflows? What 1990’s, it was difficult to know the would have been the consequences status of all the corporate events of not having workflows and, in being processed on a given day particular, from a control and and, often, only towards the end risk and operational efficiency of day did it become apparent that perspective? all tasks were indeed completed. Today, with workflow dashboards, it Prior to automated workflows, is possible to view status in a matter manual processes did work to a of seconds. large extent. I have no doubt that organizations would have created Undoubtedly, the role of Audit and alternative tools to combat the Control should also have become increase in volumes. But, I doubt easier with regards to reviewing that all the benefits of automated operational processes and controls. workflows in an exception based No longer is there a need to call environment would have been back and trawl through a mountain realized, particularly, the reduced of archived files to ensure that dependency on Subject Matter

An Interview with Nigel Little from the Euroclear Group on Corporate Actions Workflows 11Experts and the opportunity to Volumes and root cause analyses In addition to workflow usage, TCS BaNCS Research Journalrelocate operational teams to lower of workflows requiring manual what other key elements docost areas. intervention can be created you feel are needed to increase HTTPS://GOO.GL/MGNYPT and used for future contractual production efficiency andDo you believe that there are any discussions. maximize current STP rates?outstanding achievements thathave occurred as a direct result Do the use of workflows increase We briefly touched on the progressof automated workflows, such as productivity or impede it by made in standardizing Corporateclear accountability of a process at adding additional steps, checks, Actions in the past 10 years. Wea current time in the CA lifecycle? processes that some may deem can be sure of continued efforts in unnecessary? this space, particularly in Europe,There are many achievements that as more markets migrate on to T2Sautomated workflows bring, in Yes, there is a trade-off on using and Central Securities Depositoriesaddition to the real time snapshot exception based processing. If (CSDs) align with the Corporateof operations workload progress we have to automate processes, Actions Joint Working Groupand operational risk measurement it does mean that all scenarios (CAJWG) and T2S Corporate Actionscapabilities. need to be covered. Although, Steering Group (CASG) Standards. some variations of corporateOrganizations can also benefit from: actions lifecycles exist, the content The Securities Market Practice variation is huge. These include Group (SMPG) and Nationala) ‘Follow the sun’ capability. security data, market event type Market Practice Groups (NMPG) pay-out, tax and client specific will continue to enhance ISO bestThis involves the possibility of content. If, at any time, a value practices. Other markets, such asmoving open workflows from one provided does not meet expected the USA with the DTCC are lookingbusiness location to another. When behavior, an exception is raised. at removing legacy proprietarythe APAC business day is coming Your workflows are therefore messaging and replacing themto a close, EMEA can take over dependent on the quality of your with ISO; and, no doubt other largeand, when EMEA is coming to a inputs. Poor quality inputs can markets will follow.close, the Americas can take over, cause a drop in productivity asthereby, creating a true global 24/7 operations expend effort resolving There are also other ongoing marketcapability. swathes of exceptions. initiatives, including;-b) Business contingency capability. So, how can productivity be • Digitization of issuer increased by using workflows? announcementsIf a business contingency scenario What can be done to currentoccurs and a site/location is not workflows to enhance • Alignment of global settlementavailable, open workflows can be productivity? cycleseasily transferred to alternativelocations. The analyses of workflow root Last, but not least, let us not forget causes over a period of time can the buzzword of 2016-blockc) User performance metrics be used to identify trends, and chain technology, also known as a resolution can be found by the post-trade distributed ledgerWorkflow resolution is usually removing the exception, thereby, initiative. Although in its infancy,assigned to specific uses rather increasing STP and productivity. financial institutions, central banksthan via a common user pool. Workflow prioritization can and regulators are all investigatingWorkflow time stamping and also be made. By calculating a its advantages and potentialaudit enable managers to monitor weightage of each exception, using to revolutionize the post-tradeuser performance against Key multiple factors, workflows can be landscape.Performance Measures (KPMs) and prioritized for operations to action,Indicators (KPIs). ensuring that most critical items Thank you, Nigel, it has been a useful are resolved fist. discussion on workflows. Teamd) Data provider/Client metrics TCS BaNCS thanks you for sharing insights and your time.Workflow metrics can be monitoredfor a specific data provider/client.

TCS BaNCS Research Journal12 Surviving the Machines SURVIVING THE MACHINESHTTPS://GOO.GL/MGNYPT “STARING INTO HIS UNSEEING The typical Hollywood relationships and cost structures, EYES, I FELT FEAR FOR THE interpretation of Artificial which have characterized this FIRST TIME. WHAT LURKED Intelligence or Robotics is that of a industry to date. Indeed, several BEHIND THE RED LIGHT, I baleful, coldly calculating harbinger analysts have somewhat gleefully WONDERED AS THE MACHINE of destruction, mission bound to announced the imminent demise of STARTED UP AGAIN” - FROM decimate anything vaguely human many segments within the Wealth THE TERMINATOR MOVIE in an apoplectic future. Life it Management industry. SERIES. seems, ironically, does follow fiction in some respects, at least for the However, when one digs deeper Wealth Management (WM) industry into the robo advisor model, such which is, today, grappling with an eventuality is not a foregone the rise of the robo advisor. The conclusion. This paper will advent of this technology is being argue that the fears of imminent touted as a disruptive development extinction of the current WM that will radically alter the advisor landscape are greatly exaggerated

Surviving the Machines 13and the industry is robustly wealth management services which THIS PAPER WILL ARGUE TCS BaNCS Research Journalresponding to the rise of robo had hitherto been the preserve of THAT THE FEARS OFadvisors and the Fin-tech startups the affluent. Boosters also point IMMINENT EXTINCTION HTTPS://GOO.GL/MGNYPTthat are driving them. The industry out to the fact that automated OF THE CURRENTis now beginning to co-opt and services which operate on pre- WM LANDSCAPE AREaddress this disruption in several defined guidelines which can be GREATLY EXAGGERATEDinteresting ways---be it through strictly enforced, reduce compliance AND THE INDUSTRY ISacquisitions, partnerships or by workloads/costs, reduce mis-selling, ROBUSTLY RESPONDINGdesigning new service models. protect against conflicts of interest TO THE RISE OF ROBO and increase the productivity of ADVISORS AND THE FIN-To the uninitiated, the term robo the industry. These compelling TECH STARTUPS THATadvisor is perhaps to some extent benefits to customers are cited as ARE DRIVING THEM.the creation of sensationalist the reason for the influx of severalmedia designed to draw fin tech firms into the industry WHAT HAS BEENattention to a new and disruptive over the past 5-6 years. Further, DISRUPTIVE IS NOTtechnology-enabled service. A empirical research on investment ONLY THE INCREASINGmore precise working definition performance has in the recent AUTOMATION OF THESEwould be that robo advisors are past focused on the efficiency and DECISIONS BUT ALSOservices manifested on online low costs of passive over active THE RISE OF PUREinvestment management sites, investing, with several studies ONLINE STARTUPS,which are powered by algorithms concluding that passive investing WHICH HAVE ESCHEWEDthat dispense wealth management may be better for a large majority of THE NEED TO BUILD ANadvice and automate portfolio retail and mass affluent investors. EXPENSIVE WORFORCEallocation decisions. Most of these This type of passive investing using OF ADVISORS ANDplatforms are US based, but some products such as ETFs is particularly INSTEAD HAVEare also being offered for the amenable to be automated using CUSTOMERS COME TOEuropean and UK Markets. robo advisors. THEM ONLINE, ENTRUST THEM WITH FINANCIALHistorically, many of these services The speed of this disruption has INFORMATIONhave been the domain of firms that now become a point of concern AND THEN RECEIVEengaged financial advisors and for traditional players. For example ADVISORY SERVICES.rendered their services primarily Bloomberg News recently reportedon a personal basis. What has that “The automated investmentbeen disruptive is not only the platforms industry has seenincreasing automation of these dramatic growth, from almost zerodecisions but also the rise of in 2012 to a projected $300 billionpure online startups, which have in assets under management ateschewed the need to build an the end of next year”. For example,expensive workforces of advisors in the year 2015, Betterment (aand instead have customers come leading robo advisor) almost tripledto them online, entrust them with its assets to $3 billion”.financial information and thenreceive advisory services. The Functional Components of adisruption therefore goes beyond Robo advisorthe technology involved in that of abusiness model. Robo advisors combine business model innovation with a coreProponents of the Robo-approach technology platform that comprisecite the fact that this type of wealth the following functions:management is less expensivethan traditional approaches and, in 1. Easy customer onboarding andeffect, democratizes the access to profiling across mobile and web

14 Surviving the MachinesTCS BaNCS Research Journal MANY OF THE interfaces to create an online- information for a single ASSET ALLOCATION only model. customer view across a varietyHTTPS://GOO.GL/MGNYPT MODELS USED BY of financial institutions that are ROBO ADVISORS 2. Intelligent Customer Profiling their clients) ARE UNDERPINNED and Risk Scoring Models, which BY ASSUMPTIONS disaggregate the goals and risk 4. Traditional full service providers ON SUSTAINABLE tolerances of customers into who use robo advisors as a INCOME STREAMS standardized metrics. These supplement to their offerings) FROM EMPLOYMENT. metrics can then be mapped to HANDLING LOSS OF well-defined model portfolios. While robo advisors present INCOME LIFE EVENTS obvious benefits to customers in TOGETHER WITH 3. A Research and Fund Tracking terms of lower costs, the ability to SYNCHRONIZED Platform that focuses on serve a larger scale, automation ASSET VALUE EROSION tracking fund performance, of routine decisions and, in some AND LIQUIDITY Capital Allocation Models and cases, an absence of conflict of PREFERENCES MAY Risk Efficiency. interests, they are not a panacea to CHALLENGE CURRENT what ails the industry. Some of the REBALANCING 4. Automated execution of concerns that have arisen in this ASSUMPTIONS. orders, which reduce the need regard are: for manual intervention and GIVEN THE ABSENCE allow for lower execution 1. Tendency to amplify market OF A HUMAN ADVISOR costs. Algorithms for portfolio gyrations and liquidity TO CROSS-VERIFY AND monitoring across various withdrawals. The S&P spike READ NONVERBAL CUES dimensions such as target at the recent January 2016 IN HUMAN RESPONSES dates, asset allocation month-end was attributed to by IN THE ROBO ADVISOR principles, asset returns and some possible robo-accounts MODEL, ANOTHER liquidity requirements. Robo rebalancing simultaneously. WEAKNESS THAT HAS advisors also feature automated These portfolios were BECOME APPARENT IS risk management systems underweight stocks (due to THE OVER-RELIANCE which the heavy sell-off that month) ON AND OF TAKING cap losses. and had to buy equities in a THE INITIAL RISK short time to get back to the QUESTIONNAIRE AS 5. Intelligent Portfolio benchmark. Such synchronized GOSPEL. Rebalancing of assets under moves can cause price spirals in management in response to both directions. client and market events while also optimizing transaction and 2. Sustainability in Bear Markets. taxation efficiency. Most Robos are creations of America’s remarkable bull In terms of business models, market that has played out robo advisors can be classified as post the ravages of the 2008 follows: financial crisis. Many asset models, algorithms and asset 1. Online-only players correlations are a result of this period. The jury is still 2. Hybrid players who offer an out on how the Robos will online and branch-based handle the inevitable downturn franchise when liquidity, impact costs and asset allocation 3. Account aggregation players models unravel. Many of (i.e. robo advisors offered as a the asset allocation models Software-as-a-Service model used by robo advisors are that aggregates financial

Surviving the Machines 15 underpinned by assumptions These weaknesses in the Robo THE SURVEY SEEMS TCS BaNCS Research Journal on sustainable income streams model, create niches where the TO INDICATE THAT THE from employment. Handling traditional human advisor model IDEA THAT YOUNGER HTTPS://GOO.GL/MGNYPT loss of income life events can not only complement but also INVESTORS WILL ONLY together with synchronized successfully compete alongside the GRAVITATE TOWARDS asset value erosion and robo platform. THE CHEAPEST liquidity preferences may SOLUTION IS A BIT OF A challenge current rebalancing The Road Ahead MYTH. WHILE NOVELTY assumptions. AND LOW COST MAY The rapid adoption of robo HAVE ATTRACTED3. While robo advisors excel with advisors, rather than their current CUSTOMERS, IT passive investing approaches size in terms of AuM (which is still APPEARS THAT premised on asset allocation, relatively miniscule) has so far INVESTORS ARE NOW the ability to handle active been the main talking point for the ALSO BECOMING AWARE portfolios or actively managed industry. The question before the OF THE LIMITATIONS OF components of an aggregated industry today is will the current THE ROBO MODEL. portfolio are still in doubt. form of the online-only robo While attempts have been advisor continue to grow or will it support. The survey seems to made by investing algorithms be supplanted and be beaten by indicate that the idea that younger touting “smart Beta” or dynamic other business models or existing investors will only gravitate allocations based on market incumbents. towards the cheapest solution movements and historical is a bit of a myth. While novelty valuation parameters, the jury One relevant data point worth and low cost may have attracted is still out on the effectiveness highlighting in this regard is customers, it appears that investors of these techniques. the result of a recent E*TRADE are now also becoming aware of Financial Corporation (ETFC) Street the limitations of the robo model.4. Given the absence of a Wise market survey. This survey human advisor to cross-verify is E*TRADE’s quarterly tracking This points to the following and read nonverbal cues study of investors. (The survey in conclusions: in human responses in the question was conducted towards robo advisor model, another the end of 2015 and early 2016.) 1. The dramatic rise of the pure weakness that has become robo advisor may be plateauing apparent is the over-reliance When asked to choose between out soon and that the next on and of taking the initial risk three account types — a low cost, stage of growth will come in the questionnaire as gospel. This a digital-only solution, managed form of Hybrid Models, which makes robo models slaves to and rebalanced solely by an combine traditional human their strict interpretation of algorithm; a moderately priced, advisory services and robo what investors say, with little digital hybrid solution, defined by services. insight as to what they might automatic rebalancing and human actually mean or, indeed, guidance; or, a higher cost, advisor- 2. Unbundling of fee structures. their non-articulated needs. driven account, managed solely The traditional human advisor While such considerations by a professional — investors model which is being replaced are often secondary to were more likely to choose by the robo-human hybrid will investment performance and the digital hybrid model. This see an unbundling of fees. The may indeed be undervalued preference is also becoming more by investors during bullish pronounced among Millennial and times, maintaining investment Gen X investors who had initially discipline during market gravitated to the robo model and turmoil may ultimately hinge had enabled its dramatic rise. This on the insights that the in survey suggest a new paradigm in person-advisor develops about robo advisory models: adaptive her/his customer. solutions backed by human

16 Surviving the MachinesTCS BaNCS Research Journal IT IS LIKELY THAT passive Investing component acquisitions of robo advisors WE WILL SEE MANY run by robos may become by traditional incumbents who MORE PARTNERSHIPS commoditized while advisors will then offer varied levels AND OUTRIGHT will charge separately for more of services from pure robo to ACQUISITIONS OF customized and structured hybrid models as a part of a ROBO ADVISORS services. In fact, many in the bouquet of services under a BY TRADITIONAL European Wealth Management common brand. INCUMBENTS WHO WILL space, see basic robo guidance THEN OFFER VARIED becoming a free service Conclusion LEVELS OF SERVICES thanks to the emerging MIFID FROM PURE ROBO TO regulatory regime, which calls Robos are changing the landscape HYBRID MODELS AS A for fee transparency and un- of financial services and PART OF A BOUQUET bundling. consumers will reap the rewards. OF SERVICES UNDER A They will encourage human COMMON BRAND. 3. Return of the incumbents: The advisors to up their game but will current crop of robos are to a not completely replace the in- large extent mostly commodity person advisory services offered algorithms which sit on top of today. The first iteration of passive fund selections from traditional robo advisors we are seeing today ETF providers. Once the will create tremendous value for traditional service providers of consumers but whether they fulfill the world catch up (which they the aspirations of their private have already started doing) equity backers is not clear. In the the current crop will likely medium term, hybrid models, see margins pressured and ETF giants and even traditional competed away, leaving space advisors who embrace technology for traditional ETF providers to will score big wins for both become de-facto robo advisors. consumers and themselves. It is likely that we will see many more partnerships and outrightHTTPS://GOO.GL/MGNYPT Rohith Srinivasan Senior Consultant TCS Financial Solutions (TCS BaNCS)

Surviving the Machines 17 TCS BaNCS Research JournalBNP Paribas Securities set out toconsolidate custody operations.They found a certain way.BNP Paribas Securities Services (BNP Paribas) is the leading European provider of securitiesservices for fund managers, nancial institutions and businesses. To keep pace with theever-changing sector, BNP Paribas required real-time information in corporate actions. It neededa solution that would facilitate the management of all kinds of corporate events and alsoautomate reporting of these events. Tata Consultancy Services (TCS) implemented the CorporateActions solution from TCS BaNCS, an integrated product suite for nancial services, to consolidatethe global and local custody operations onto a single IT platform. As one of the world’s fastestgrowing technology and business solution providers, TCS enabled a high degree ofstandardization to upgrade business processes to support higher volumes, and facilitate theprocessing of 150,000 corporate action events in a year, thus pushing up STP alongside accurateclient reporting and scaling up of their business. HTTPS://GOO.GL/MGNYPT

18 Managing Operational Risk in the Custody BusinessTCS BaNCS Research Journal MANAGING OPERATIONAL RISK IN THE CUSTODY BUSINESSHTTPS://GOO.GL/MGNYPT Operational risk is the risk of processing business, and much Capital alone does not reduce financial loss resulting from of the risk associated with it is the occurrence of operational deficiencies in information systems operational in nature. As global failures. There are potentially “low or internal controls, failure to custodians operate in multiple frequency and high severity losses”, comply with applicable regulations, regulatory environments, there which are illustrated below. human errors, management failures, is a need for an effective process or disruptions from external events to identify regulatory and market In the above chart, the severity of such as natural disasters. Custody changes and ensure continued losses are represented on the X is a volume-driven, transaction- compliance. axis and frequency of occurrence

Managing Operational Risk in the Custody Business 19 High Failure in Coporate Breach of client Measures to Control TCS BaNCS Research Journal - Actions executions guidelines Mispricing of funds Misdealing Disclosure Incorrect free Auditing Frequency of calculations Insurance Occurrence Fraud Custodianship Business Regulation Stock Lending Failures Settlement Errors Enforcement Counterparty Failures Misappropriation of assets Low Errors in execution Errors in valuationChart 1: Representation of opera- Low Severity of Losses Hightional risk factors – Frequency ofoccurrence vs Severity of losseson the Y axis. It’s important for a lack of follow-up and tracking. cash. Hence, financial lossesall custodians to analyze these The entire entitlement value due to operational problems dofactors to avoid any losses due to could be lost if the deadline for not involve the entire principaloperational risk. the exercise of a right is missed. amount, but mainly the cost of Incorrect client account setup and funds for the value not settled onA custodian that has weak maintenance may lead to crediting time. Inadequate follow-up andoperational controls and continuity entries to the wrong accounts, or tracking and escalation of failedof business arrangements could applying incorrect withholding tax transactions by a custodian can leadcause errors or incur delays in on income, and could even increase to replacement of trades (unsettleprocessing corporate actions, the possibility of fraud. transactions) at high cost in thesettlement and fund administration open market.that, in turn, cause financial loss to Settlement: In most markets,clients. settlement is done by delivery Fund accounting and administration: versus payment (DVP) method, Fund accounting services areCorporate Actions: The entire value thereby ensuring that an investor prone to operational errors inof a Corporate Actions could be at always has either securities or the valuation of a fund, leadingstake due to operational errors or Free Risk Reputation Regulatory Risk Risk Cash Mtg Risk Operational Risk Compliance Risk Client HTTPS://GOO.GL/MGNYPT Support Trading Risk Security Data Mtg Risk RiskChart 2: Operational Risk Forex RiskCategories in a Custody Business

20 Managing Operational Risk in the Custody BusinessTCS BaNCS Research Journal Operational Risk Type Description  Reputation Risk The custodian experiences a high profile negative event that spreads across public media and negatively impacts the organization’s credibility. This risk may expose the institution to litigation, financial loss, or a decline in customer base. Reputation risk results in risk to the safety of the assets, the ability to process transactions, including other operational complexities.  Regulatory Risk Regulatory risk is when a custodian bank is adversely affected by not complying with regulation. It may arise because of lack of preparedness. Whether it is an AIFM directive, UCITS V directive, FATCA, EMIR or many of the other ongoing regulatory changes, increased transparency for both trustees and depository banks is critical. For example, based on the recommendation of the Dodd-Frank act in the US, EMIR in Europe and parallel initiatives in Asia, OTC derivatives will be moved to central clearing very soon. Hence, there is a need for putting appropriate clearing and collateral management processes in place. The latest AIFMD draft proposes a stringent measure on depositories as they have to make good any loss first and then prove that they were not liable.  Compliance Risk A bank which offers custody services must ensure compliance with the provisions of all applicable agreements like disclosure, FATCA, KYC, etc. A strong compliance program should include monitoring of all the laws and regulations that may affect a custodian’s business and reporting of any material changes to the end customer.  Trading Risk On a daily basis, custodians process millions of trades and they are ultimately responsible for ensuring that these trades are processed correctly. Custodians need to put in place sound procedures for processing and settlement to help to avoid failed trades. It is prudent to use pre-matching methods and real-time communication with depositories or local agents.  Data Management In case of information stored in a system, there is always a risk that the data may be Risk lost. Custodians should have in place quality control procedures in place coupled with established tolerance levels to monitor pricing accuracy and checks and balances.  Foreign Exchange The main risk involved here is the risk of receiving sub-optimal rates of FX trades Risk particularly when clients use custodians’ Straight-Through Processing capabilities. According to the study by New City Initiative (NCI), mis-priced foreign exchange (FX) transactions cost the European fund management industry and their underlying clients approximately EUR 1.5 billion per year. Custodians need to establish transparency in reporting FX trade information such as execution price, benchmark rate, execution time, among others.  Security Risk Security risk mainly arises in cases where custody data is accessed or shared with unauthorized individuals or entities. The custodian’s security protocol needs to be thoroughly reviewed to minimize security risk. Data access control needs to be fully in place to help grant access to individuals associated with a particular login id.  Client Support Risk Client Support risk comes into the picture as individuals may lack the knowledge, capabilities, and willingness to provide required custody services by clients. It is therefore critical to have responsive, experienced and stable client support team.  Cash Management Cash Management risks occur when cash movements are not properly managed either Risk because of the lack of or poor implementation of procedures. Custodians need to have in place adequate control processes when executing various cash transactions, includingHTTPS://GOO.GL/MGNYPT wires, fund transfers and expense payments. Setting up limits to restrict certain authorized signatories from specific transactions or accounts, reviewing investment guidelines, and monitoring of cash movements are critical components of a custodian’s cash monitoring processes.  Fee Risk It’s the risk that the fees assessed for custody services are not competitive and lack transparency. More generally, custody fees need to be standardized as per market rates for an investor of similar size and structure.

Managing Operational Risk in the Custody Business 21to wrong pricing of units bought The Road Ahead custody business and eliminate TCS BaNCS Research Journalor sold by investors. A custodian them completely. New set ofresponsible for the error will be Significant factors that most likely operational risks will continue to HTTPS://GOO.GL/MGNYPTsubject to claims from clients. will shape the custody industry emerge due to interconnectedness, from an operational perspective higher volumes and newOperational Risk Categories are: complexities. New risks may also emerge from increasing legal andFollowing are the key operational - Until recently, global custody regulatory compliance as a resultrisk types we typically come across models have been centered on of greater scrutiny of faults. Thein the custody business: co-mingled omnibus accounts. first step in reducing operational Now, clients are demanding risk in custody is to select a globalThe sub categories of operational clear segregation of their assets custodian who is financiallyrisk are described in the table. for accurate identification sound and has good systems across the entire value chain. and procedures particularly asMeasures to Control Operational i.e., from the global custodian they relate to accounting forRisk through the sub-custodian and identifying client assets. to the CSDs. This move may Operational risk can be mitigated• Operational risks can be require significant changes to to a large extent by way of mitigated with the help an underlying global custody appropriate and stringent controls. of effective policies and operating model (based on Some of the major challenges in procedures, stringent controls pooled accounts) in terms of the coming years will be regulatory and efficient use of technology. costs and prices. compliance and reporting using Custodians identify the the digital medium; the evolution operational risks involved, - New wave of regulations of new technology platforms; and, put controls in place, and like AIFM directive, UCITS V outsourcing of services to achieve continuously evaluate, test and directive, FATCA, European EMIR operational efficiency. monitor the adequacy of such initiatives etc., are increasing controls. the cost of doing business Neelakantiah S for meeting reporting and Consultant• Under Basel regulation, compliance requirements. TCS Financial Solutions (TCS BaNCS) custodian banks are required to self-assess their operational - The move towards outsourcing risk exposure and have models (e.g. middle office sufficient capital to cover outsourcing, OTC derivatives potential losses. outsourcing, collateral management, client reporting,• A global custodian must regulatory compliance, among consider a variety of others) to achieve scale and operational factors, including efficiency and reduce cost differing market rules and pressure will have an impact. conventions, the degree of automation in the foreign - As margin pressure increases, market, different types of the use of technology becomes securities, capital or currency all the more important to restrictions, and the availability improve operating efficiency, and communication of timely rationalize product platforms and accurate information. and better manage operational risk.• It is important to segregate the client assets and also In conclusion… automated reconciliation should be possible at the sub- It’s difficult to classify all the custodian and depository level. operational risks involved in the

TCS BaNCS Research Journal22 Standardizing Proxy Voting STANDARDIZING PROXY VOTING Voting in companies is a critical THOUGH aspect that leads to informed ELECTRONIC decision making by all shareholders. VOTING HAS When shareholding spread across BROUGHT IN MANY geographies, the concept of proxy IMPROVEMENTS, voting came into being. Proxy THE PROXY VOTING voting is, by definition, an exercise PROCESS IS STILL of voting rights by investors/ CONSIDERED TO BE shareholders through a third ONE OF THE MOST party and is based on a legal and COMPLEX---ONE THAT authorization agreements between IS IN DIRE NEED OF the shareholder and proxy voter. STANDARDIZATION. The voting is requested for byHTTPS://GOO.GL/MGNYPT the issuer company, primarily, being set up to offer resolution, on occasions such as an Annual but these efforts have had limited General Meeting, or a Special success. Though electronic voting General Meeting or a Bond Holders has brought in many improvements, Meeting (For Debt Securities). the proxy voting process is still considered to be one of the most Some of these meetings are needed complex---one that is in dire need as per statutory requirements, of standardization. Complexities involving a large number of arise due to a) Diverse rules companies and thereby making and practices across markets the process of voting quite complex. The complexity is further added by participation of many intermediaries acting between shareholders and issuers. As these meetings have a significant impact on the business of companies, it is critical that investors, especially institutional investors, are actively engaged. Standardizing proxy voting has been on the agenda for some time now with many expert committees

Standardizing Proxy Voting 23THOUGH ISO 15022 and, b) Lack of communication regulations may differ in requiring TCS BaNCS Research JournalHAS BEEN UPDATED TO standardization. a blanket Power of AttorneyHANDLE MANY ASPECTS (POA) or one that is specific toRELATED TO PROXY Complexities due to diverse rules the designated meeting only.VOTING THROUGH ITS and practices across markets The submission of a proper POA,STANDARD CORPORATE therefore, can become a time-ACTIONS MESSAGES, END Challenges that come about due consuming exercise.RESOLUTION HAS BEEN to the proliferation of corporateSOMEWHAT INCOMPLETE. governance practices and rules are Voting Confirmation by Issuer: briefly listed below: Because of additional market- specific regulations and the many HTTPS://GOO.GL/MGNYPT Determination of Eligibility parties involved in the cross-border for Company Meetings: Rules proxy voting chain, many votes are that determine eligibility of at greater risk of being rejected shareholders who can vote vary or lost in the chain, especially in across geographies and are myriad cross-border voting. A shareholder in nature. While the US follows the may receive a confirmation from a concept of a Record Date, many proxy agent or custodian that the countries specify the number vote was submitted to or the next of days before the Meeting day intermediary in the chain but may as criteria to calculate entitled not receive a confirmation from the shareholders; e.g., 10 or 15 days issuer. before the Meeting date. In USA, shareholders can sell their holdings Disclosure of Meeting Materials: after the record date and still be While in some countries there eligible for voting while in many are specific guidelines from the other places shareholders need regulators to make the Meeting to send their intention to vote material available to shareholders, before the Meeting following which this does not exist elsewhere. their shares are blocked for the This lack of clarity increases the transaction. complexity involved in processing proxy voting within a stipulated Registration Rules: Problems in time frame. exercising voting instructions can arise in the case of institutional Deadlines: The global nature of investors holding through their proxy voting brings in another custodians or brokers who, in turn, layer of complexity in the form of are also registered owners. In some multiple voting deadlines. Proxy markets such as Sweden, beneficial agents and custodians have their owners (institutional investors) are own deadlines for shareholders, required to register shares in their with no semblance of uniformity own names in order to be eligible in the process. With a range of to vote. Subsequently, they would deadlines announced from multiple then have to re-register in the name custodians for the same meeting, of the nominee (custodians) after deadlines, therefore, are easily the voting is completed. missed. Power of Attorney Rule: In many Complexities due to lack of markets, regulations demand that standardization in communication registered or beneficial owners submit a Power of Attorney Processing the information resident to the issuer company before within the communication between sending voting instructions. These multiple intermediaries is another

24 Standardizing Proxy VotingTCS BaNCS Research Journal challenge. The information flow Until recently, there was no IN USA, SHAREHOLDERS and steps involved in shareholder standard messaging protocol to CAN SELL THEIR meetings and the proxy voting manage proxy voting. Though HOLDINGS AFTER THE process can be described as follows: ISO 15022 has been updated to RECORD DATE AND STILL handle many aspects related to BE ELIGIBLE FOR VOTING o The company notice to proxy voting through its standard WHILE IN MANY OTHER shareholders for the Corporate Actions messages, end PLACES SHAREHOLDERS Meeting, where the company resolution has been somewhat NEED TO SEND THEIR calls for decisions by voting incomplete. Now, ISO 20022 covers INTENTION TO VOTE on specific items on the proxy voting in much more detail; BEFORE THE MEETING agenda however, the adoption of ISO 20022 FOLLOWING WHICH is still low. THEIR SHARES ARE o Delivery of documentation BLOCKED FOR THE and items on the agenda Way Forward… TRANSACTION. o Voting by shareholders, The investor community and related personally or by proxy associations are working towards bringing in a reasonable level of o Decision confirmation by harmonization into market practices the company back to its to avoid the ad hoc processing of shareholders proxy voting. On the other hand, it becomes important to reinforce The involvement of numerous communication through standard intermediaries in the above four messaging protocols like ISO processes, including the lack of 20022, which help in achieving standardization in communication both standardization and Straight- (content), can make these four steps Through-Processing. ISO 20022 akin to a complex maze. proxy voting messages were specifically designed to support What you see below are examples all proxy voting related business of multi-layer communication in proxy voting. Issuer to Investor Communication Flow Issuer Issuer Registrar Proxy Advisor Investment CSD/Exchange Local Custodian Manager/ Global Custodian Beneficial Owner Proxy Agent Investor to Issuer Communication FlowHTTPS://GOO.GL/MGNYPT Electronic Voting or Messages Issuer Issuer Registrar Investment CSD/Exchange Manager/ Local Custodian Global Custodian Beneficial Owner Proxy Agent

Standardizing Proxy Voting 25Message Type Message ID Issuer Intermediary Investor/Voter TCS BaNCS Research JournalMeetingNotification seev.001.001.05MeetingCancellation seev.002.001.05MeetingEntitlementNotification seev.003.001.05MeetingInstruction seev.004.001.05MeetingInstructionCancellation seev.005.001.05MeetingInstructionStatus seev.006.001.05MeetingVoteExecutionConfirmation seev.007.001.05MeetingResultDissemination seev.008.001.05IN SOME MARKETS processes across the complete References:SUCH AS SWEDEN, chain of business participants.BENEFICIAL OWNERS These messages cover entire  ICSA Registrars Group Guidance(INSTITUTIONAL lifecycle of proxy voting, which are Note: Practical Issues aroundINVESTORS) ARE categorized as shown in the table Voting at General MeetingsREQUIRED TO REGISTER below:SHARES IN THEIR OWN  Proxy Advisers Best PracticeNAMES IN ORDER TO In conclusion… Principals:BE ELIGIBLE TO VOTE.SUBSEQUENTLY, THEY With the advent of new technology  Reports from ISSAWOULD THEN HAVE in the form of Blockchain, we expectTO RE-REGISTER IN to see more changes. NASDAQ  SMPG DocumentsTHE NAME OF THE recently announced its plans toNOMINEE (CUSTODIANS) implement a Blockchain voting  ISO 20022AFTER THE VOTING IS trial for the Estonian stock market.COMPLETED. Such developments (disruptions)  Finextra.com may transform the dynamics of the voting process completely. Jitendra Ambastha HTTPS://GOO.GL/MGNYPT Senior Consultant TCS Financial Solutions (TCS BaNCS)

26 MiFID II/MiFIR implementation - Impact on European financial markets and key challenges facedTCS BaNCS Research Journal MIFID II/MIFIR IMPLEMENTATION - IMPACT ON EUROPEAN FINANCIAL MARKETS AND KEY CHALLENGES FACEDHTTPS://GOO.GL/MGNYPT MiFID, one of the most significant MiFID II focuses on reinforcing Enhanced Governance: With regulations passed by the EU investor confidence, reducing prescriptions around the with the objective of improving market disorder and systemic composition of governing boards competitiveness in the EU’s risks and increasing the efficiency and committees financial markets by harmonizing of financial markets, while also the regulatory framework, has reducing unnecessary costs for External Controls/Reporting: now been recast into MiFID II and market participants. Specifically, Additional reporting requirements MIFIR. On October 20, 2011, the MiFID II aims for: to regulators (trade and transaction European Commission adopted reports, expanded asset class and a legislative proposal for the Market Structure Enhancement: In data scope) revision of MiFID to form MiFID the form of a framework which II and a new regulation (MiFIR). ensures that trading, wherever Third country access: Of granting MiFID II is wider in scope in terms appropriate, takes place on third country firms with access to of the asset classes and activities regulated platforms like a the EU markets covered; additionally, stringent Multilateral Trading Facility (MTF) or transparency rules around Organized Trading Facility (OTF) or MiFIR, on the other hand, seeks to reporting have been proposed. Regulated Markets (RMs) drive: MiFID II/MiFIR were originally scheduled to become operational Increased Market Transparency: To New Trading Venues: The mandatory by January 2017. However, enhance disclosure of pre- and trading of derivatives on organized due to significant technical post-trade data venues for Derivatives that are implementation challenges being marked as Clearing Eligible by EMIR faced by market participants, Investor Protection: Ban of the European Commission has inducements to independent Non-discriminatory Access: Removal extended the deadline for advisors and a more stringent of barriers between trading venues compliance to January 2018. disclosure regime for payments and providers of clearing services to paid and received ensure more competition

MiFID II/MiFIR implementation - Impact on European financial markets and key challenges faced 27 TCS BaNCS Research JournalTransparency: The disclosure of pre-execution evaluation by each MIFID II FOCUSES HTTPS://GOO.GL/MGNYPTtrading activity information to the clearing member for limits set for ON REINFORCINGpublic and transaction data to their clients. These tools, such as, INVESTOR CONFIDENCE,regulators and supervisors. say, an ability to perform a ‘What If’ REDUCING MARKET analysis online, will allow clearing DISORDER ANDSupervision: Specific supervisory members to confirm that they are SYSTEMIC RISKSactions regarding financial adequately covered to manage AND INCREASINGinstruments and positions in the exposure arising out of their THE EFFICIENCY OFderivatives clients’ activities. However, this FINANCIAL MARKETS, rule does not apply in cases where WHILE ALSO REDUCINGIn the trading landscape, MiFID II the trading venue and the CCP UNNECESSARYhas extended the scope of financial provide for ‘certainty of clearing’, COSTS FOR MARKETinstruments through inclusion where all transactions are taken PARTICIPANTS.of structured products, emission up for clearing automatically andallowances (like carbon), OTC immediately.Derivatives and PRIPs (PackagedRetail Investment Products). From a post trade perspective,Additionally, trading venues are also MiFID II is expected to forceexpected to provide tools to ensure

28 MiFID II/MiFIR implementation - Impact on European financial markets and key challenges facedTCS BaNCS Research Journal • Transparency requirements for Equities & Non-Equities • Trading Obligation for Equities & Non-Equities • Best Execution policies & Transparency • Organizational requirements reporting to clients Measures for firms engaged in Algorithmic trading, providing Direct • Investor Protection policies Micro- Electronic Access (DEA), acting as structural Clearing members, OTFs , MTFs Investor and Regulated Markets (RMs) Protection Issues • Obligation to clear derivatives Post-Trading MiFID II/ Data • Organizational requirements for traded on RMs Issues MiFIR Publication Data Reporting Service Providers and Access like Consolidated Tape Providers • Timing of Acceptance for clearing Commodity (CTP) and Approved Publication Derivatives Arrangement (APA) • Non-Discriminatory access for CCPs & Trading Venues • Reporting Obligations for Market Data Requirement Equities & Non-Equities Reporting Applying on and to Trading • Requirements for the admission Venues of financial instruments to trading on RMs, OTFs and MTFs • Reporting of Commodity Derivatives (CDs) • Position Limits for CDsHTTPS://GOO.GL/MGNYPT IN THE TRADING vertically integrated infrastructures and operating models, as well as LANDSCAPE, MIFID II that were not inclined to allow IT systems, of participants in the HAS EXTENDED THE interoperability for trades EU financial markets. The biggest SCOPE OF FINANCIAL previously to now open up, allowing impact will be experienced by INSTRUMENTS for interoperability. This is likely trading venues, broker dealers and THROUGH INCLUSION to spur competition among CCPs banks. To a lesser extent, Central OF STRUCTURED in Europe and lower the cost of Counterparties (CCPs) will also be PRODUCTS, EMISSION clearing. Players with wider market affected along with investment ALLOWANCES (LIKE coverage, efficient technology, managers, clearing members and CARBON), OTC operational efficiency and advanced custodian banks. A summary of DERIVATIVES AND risk models are expected to capture such key technology changes is PRIPS (PACKAGED market share. The diagram depicted presented below: RETAIL INVESTMENT below highlights the core measures PRODUCTS). of MiFID II/MiFIR. In Conclusion Technology Impact on Market The concurrent implementation Infrastructure Institutions of multiple regulations in Europe such as the MiFID II, Market Abuse MiFID II is expected to result in Directive (MAD) as well as pan significant changes to the business European initiatives such as T2S,

MiFID II/MiFIR implementation - Impact on European financial markets and key challenges faced 29Regulatory Requirements Impact on IT systems TCS BaNCS Research JournalTransparency requirements Trading platforms are likely to need changes to supportRMs, MTFs, and OTFs are required to publish current new products, including reporting of price feeds andbid and offer prices and depth of market (per product) market activity on a real-time basiscontinuously during trading hoursMicrostructural guidelines Appropriate circuit breakers are required to be factoredTrading activity using sophisticated methods (High into High Frequency Trading (HFT) algorithms to mitigateFrequency Trading/Algorithmic Trading) will require the risk of markets becoming disorderlydisclosure of algorithms to regulatorsData Publication and Open Access Reporting and data dissemination capabilities are likely to require significant overhaul to support these• Trading Venues must disaggregate the data by requirements. various criteria like country, currency, industry sector, membership of a major index, and derivative Additional interfaces with CCPs may need to be built product type• Trading venues will be required to provide access, on a non-discriminatory basis to Central Counterparties (CCPs) that wish to clear transactions executed on the trading venueMarket Data Reporting Support for ISO 20022 standardsTrading systems will be required to report instrumentreference data and transactions in a common XML formatin accordance with ISO 20022 standardsPost Trading Issues Clearing systems are likely to need enhancements to support additional product types; interoperability with• Cleared derivative trades from trading venues multiple trading venues; and; supporting the non- need to be accepted for clearing as quickly and functional requirements with respect to timeframes for as technologically possible and responses sent to trade acceptance and reporting trading systems within ten seconds of receipt• When a bilateral derivative transaction is submitted, the CCP’s systems will require to cascade transaction information to clearing members within 60 seconds from receiptand CSD-R have posed several HTTPS://GOO.GL/MGNYPTchallenges for market infrastructureinstitutions and market participantsin responding to the dynamicallychanging financial serviceslandscape. A holistic approachtowards complying with theseregulations and changes will allowfirms to achieve better outcomesoverall. The extension of thedeadline to Jan 2018 will providethe markets with much neededrespite in achieving compliance. Balaji Murali Malini Raman Associate Consultant Senior Consultant TCS Financial Solutions (TCS BaNCS) TCS Financial Solutions (TCS BaNCS)

TCS BaNCS Research Journal30 Utilities in the Securities Services Back Office – A Transformational Journey UTILITIES IN THE SECURITIES SERVICES BACK OFFICE – A TRANSFORMATIONAL JOURNEYHTTPS://GOO.GL/MGNYPT Ongoing reforms in the securities services market MARKET PARTICIPANTS ARE regulatory framework by the G20 in the wake of the INVESTING HEAVILY IN PROCESS global financial crisis of 2008 has added pressure on TRANSFORMATION TO CHURN market participants at a time when the financial industry OUT A ‘DELTA’ PERFORMANCE TO is struggling to recover from diminishing margins, higher HELP SUSTAIN AND REMAIN VIABLE costs, and stiff competition. Market participants are THROUGH VALUE-ADDED SERVICES, investing heavily in process transformation to churn out WHILE ALSO ENHANCING REVENUE a ‘delta’ performance to help sustain and remain viable STREAMS, AND OPTIMIZING COSTS TO through value-added services, while also enhancing RECOVER LOST PROFITABILITY. revenue streams, and optimizing costs to recover lost profitability. Utilities is emerging as an optimum business model for many participants to help overcome

Utilities in the Securities Services Back Office – A Transformational Journey 31 TCS BaNCS Research Journalthese challenges while they focus crisis of 2008. It is clear that the in equities business, are now HTTPS://GOO.GL/MGNYPTon their core competencies. This financial meltdown was not merely forcing Market participants todocument presents TCS’ views due to Lehman Brothers’ bankruptcy restructure their business strategyon the utility value model for the and more a resultant of the earlier –in the form of partnerships or JVs,securities services back office. performance of the financial or by buying companies/selling markets since the year, 2000. their non-revenue generating1. The Global Financial Crisis - business. Market participants need2008 Further, reducing trade volumes, to move to a business model that diminishing returns, lower margins, can reduce costs while ensuringThe timeline below depicts and higher cost-income ratios along process standardization. Themaps the origins of the large-scale with an increased demand for graph above that depicts how ROItransformational changes that took operational transparency coupled was impacted thanks to the crisisplace post the global financial with increasing regulatory pressure strengthens this claim.

HTTPS://GOO.GL/MGNYPT TCS BaNCS Research Journal 32 Utilities in the Securities Services Back Office – A Transformational Journey $(0.-30) $(0.-20) $(0.-10) $- $0.40 2000 Dot-Com Bust Global $0.30 US Fed Reserve Cuts Interest Rates Financial $0.20 US Stock Market Begins to Decline $0.10 Crisis • Sep/*11-Terror Strikes2004 2001 • US Market Crashes2005 Bank A Us Home Market appreciates due to heavy subprime investments2006 2002 US Fed slashes INTEREST RATE to 1%2007 Pre - Crisis Bank B CAUSES OF GLOBAL FINANCIAL CRISIS 2003 Further BOOM in SUBPRIME MORTGAE BUSINESS SEC Lifts Leveraging sanctions on 5 major banks.2008 IMPACT ON ROE 2004 Banks now have 30-40% more capital for investment US FED Increases INTEREST RATES2009 Bank A, Bank C, Bank D, Bank E - Showing ROE decline Post - Crisis Bank C 2005 SUBPRIME DEFAULTERS INCREASE2010 2006 High Interest Rates REDUCES HOME PURCHASE HOME PRICES START TO DECLINE2011 Only Bank B Bank D FURTHER DECLINE in HOME PRICES reported Increase 40% DECLINE in US HOME CONSTRUCTION INDEX2012 in ROE in 2008 2007 NEW CENTURY (Biggest Subprime Lender) Goes BANKRUPT2013 Declining Margins Bank E 2008 More than 25 SUbPRIME LENDERS FILE for BANKRUPTCY Northern Rock (UK) is Nationalized2014 2009 Citigroup, US reports $ 9.83 BILLION LOSS LEHMEN BROTHRS FILE for BANKRUPTCY G20 meet to draw up Action Plan

Utilities in the Securities Services Back Office – A Transformational Journey 331.1. The impact of the financial crisis TCS BaNCS Research JournalAs the economy crumbled in 2008, the myth – “Bigger Banks are safe and too big to fail” was broken. The regulatoryenvironment underwent augmentation. Some of the challenging factors faced by the securities services marketparticipants are summarized in the table below.Factors Due to Challenges for Participants Impact Leverage Ratio,Regulatory Basel III, Liquidity ü Reduction of financial leverage in the system ü Increased capital1 Capital/ ü Limiting the capacity and increasing the cost of risk taking requirements Liquidity/ for banks ü Pressure on Collateral margins Constraints2 Increasing (MiFID II DFA, ü Enforcing standardization of per-and post-trade price ü Reduction inTransparency EMIR, AiFMD, transparency Proprietary trading IFRS, FATCA ü Changes in priced discovery and trade execution process ü Need to maintain ü Improvement in Availability & Quality of Data higher capital3 Scrutiny Security Economic Challenge for Providers due to additional cost ü Higher Investment Buy-side: Potential conflicts of interest that negatively affect the buy-side ü Higher Reporting ü Separation of duties and risk taking ü Higher investments ü Increased focus on operational hygiene e.g. enhanced reporting4 Higher DFA, EMIR, MIFID ü Implementation & Compliance to theses Regulatory Compliance II, IFRS, FATCA, frameworks across geographies Cost AIFMD and BASEL III ü Regulator’s demand for identical devices for each banks across processes creating additional pressureFinancial Market Causes5 Profitability (High Compliance Different level of challenges for the value chain participants ü Higher Reporting Decline and high Regulatory ü Sell-side ü Higher investments implementation ü Market infrastructure providers costs) ü Securities Services market participantCustomer & Business6 Evolving Business Objective being to Maximizing returns while minimizing risk ü Risk Management Client Requirement and cost – Different changes across value chain participants Demand Changes ü Large institutions – issues such as security & segregation are in forefront ü Hedge funds – yield remains the primary concern7 Competitive European ü Aimed at harmonizing settlement processes and reducing ü Increased Environment Securities cross-border settlement costs competition (CSDs) Settlement Platform (T2S) ü Loss of settlement revenue due to T2S ü Sub-Securities Services market participants, will face competition from CSDsTechnology Impact Due to Regulatory, Customer & Business8 Technology Scrutiny Due to high frequency trading being put under additional ü Higher technology (High Frequency scrutiny, Technology advancement continues to drive Securities Investment Trading) Services Back Office evolution ü Cost increase ü Rapid advancement and lower cost of technology remains a catalyst of change HTTPS://GOO.GL/MGNYPT ü Potential opportunities and their impact spans across the Post Trade Lifecycle e-g.-Digitalization of markets and increased Straight-Through-Processing ü Cyber Currencies and Cloud computing could as well stimulate change – however use of these technologies would depend on other market factors9 T2S (Higher ü To connect to the T2S platform directly – Market participants ü Higher technology Investments) would need to make investments in systems investments

34 Utilities in the Securities Services Back Office – A Transformational JourneyTCS BaNCS Research Journal 2. Mitigation Strategy by Participants Since then, market participants have been evaluating various options to reduce the impact of regulatory and market challenges. The picture below showcases the steps taken by the participants, for e.g. in portfolio optimization, financial efficiency and operational efficiency. Mitigation Strategy Steps Taken So Far A 1 Value Added • Offering Collateral Transformation Services • Using technologies for effective and optimum Portfolio Offerings Optimization allocation of collateral (previously excel RISKS & DATA QUALITY IMPROVEMENT Strategic 2 spreadsheets were used) Financial Alliances Efficiency • Each CSD collaborates with the other –alliances 3 Consolidation for col’eral mgmt. B Operational Activity • Common clients pooling cross geography assets Efficiency on single platform Eg.: Clearstream’s Hub-Go will Internal 4 be connected by the liquidity alliance partners C Utilities allowing partners’ clients offering collateral in diff geog 5 Cloud (Technology) • Stressed margins with higher cost-income ratio, Outsourcing strategic need to offer wide range of offerings Opt & - further consolidation by bigger or cash rich External 6 Services firms/some EU banks are selling their security Utility services operations Eg,: Citi acquiring ING’s Central & Eastern Europe’s custody ops • Global custodians invested in newer operating models for process & cost efficiencies through economies of scale & standardization across LOBs – having a centralized ops team, common technology platform housed in a centralized facility Eg,: Global Custodians partnering with 3rd party vendors setting up internal utilities for managing – Settlements, collaterals, reporting & Derivatives • Capital Markets focus on operations optimization, cost cutting and moving from Capex to Opex & are commoditizing number of common processes. • Part of process/operations (with no competitive edge) outsourcing • Infrastructure/technology (supporting common ops) - outsourced • Security services firms are facing intense pressure to reduce cost on services which no longer give competitive edge and • Focus on core products/market that could still provide the competitive edge Eg.,: Sharing cost of Common processes between banks who have partnered to use the services of the common utilityHTTPS://GOO.GL/MGNYPT 2.1. Transformation Journey Value Added Offerings - Market  Strategic Alliances - The financial participants are offering collateral market infrastructure providers, Faced with tough economic transformation services to their the CSDs, are partnering with conditions, declining margins and customers – to offset declining each other to launch liquidity higher costs pressures, market revenues and margins from alliances ensuring collateral participants are responding by their once high earning revenue management, and enabling trying to arrest declining margins streams of securities lending, partners to pool and mobilize and reduce costs by sharing non- custodial services, settlement and their domestic and international core services such as: clearing. CSD assets on a single platform.

Utilities in the Securities Services Back Office – A Transformational Journey 35 Consolidation - Further, the the overall CAPEX investment benefits. This will help reduce TCS BaNCS Research Journal strategic need to offer a wide reducing maintenance, application costs and also improve focus range of offerings is driving control and IT operations cost. on core competencies such as bigger participants towards growing assets, and servicing consolidation. Big firms are Market participants are also more customers. able to invest in updated evaluating other models which are technology and can absorb the explained below:  Outsourcing – Operations & financial pressures, However, Services - Participants are many European firms who need  Internal Utilities – This model investing heavily in risk and to comply with Basel III are involves a common suite of compliance management selling their securities services technology platforms with solutions, automation, cloud operations to raise funds. a common operations team and open source technologies, who is focused on reducing mobility, high-end analytics,2.2. Utilities costs from business functions and third-party platforms such as settlements, collateral targeted at cost reduction,The graph below shows how a management, reporting and standardization, and portfoliopotential shift post transition to derivatives options, and also in rationalization around LOBsan end-to-end utility model will reducing operational risks and such as asset management,improve process standardization becoming regulatory compliant. brokerage, custody & fundand risk management. There will administration, investmentalso be a significant reduction  Cloud Adoption - A “pay-per-use” banking; and, in using an ITin regulatory compliance and model for common services; for service provider’s tailor-madetransaction processing cost, with example, non-critical functions offerings. such as CRM, HR and employee Value Levers -Predicted Change 80 70 60Impact Measure 50 40 30 20 10 HTTPS://GOO.GL/MGNYPT 0 Cloud (Tech Outsourcing) Ops (Outsourcing) Utility (Tech & Ops Outsourcing) Internal Utility Transition to Utility Process Standardization Risk Management Regulatory Compliance (spend) Transaction Processing (cost) Application Control Capex – H/w & Infra (cost) Maintenance (cost) IT & Operations Staff (cost)

36 Utilities in the Securities Services Back Office – A Transformational JourneyTCS BaNCS Research Journal 2.3. Cloud & Operations 2.4. Benefits of a holistic utility  Greater visibility into securities Outsourcing - Unlike internal model processing lifecycle costs utilities serving different LOBs within the same organization, A holistic utility model will focus  Flexibility to select need-based external utilities are much primarily on the sharing of costs services firms more complex when it comes to with partner Market participants implementation and management. on joint platforms for securities  Faster Go-To-Market They require seamless and processing and offers the following effective collaboration from benefits: 3. Utility Model –Key multiple participants from specific Considerations business areas, such as corporate  Reduced post-trade processing actions confirmations, KYC costs Based on the current market trends, reconciliations, and reference data changing regulatory, financial management.  Reduced IT infrastructure and environmental factors, core investment competency focus areas have been tabulated below. Reducing Cost Reducing Operational Risk Regulatory Core Competency Compliance Focus • IT Operations Staff – Staff • Application Control – will reduce • Partners will • Operational Consolidation across LOBs- for all participating Securities benefit through teams can now potentially high savings. Services providers, as utility will sharing the cost focus more Opportunity for further cost be managing the it infrastructure of Investments on customers reduction with outsourcing/ and would manage applications in systems and centric activities, offshoring based on the participants need, implementing while the utility • Capex-H/w, Infra – Volume industry regulatory needs procedures specialized for effectively team can bring fluctuations could lead to issues • Process Standardization – managing and in timeliness, controlling and efficiency related to capacity & scale introducing risk and control risks due to in specific regulatory functions under however the potential cost is structure for key operational compliance the utility needs and umbrella relatively less in the case of utility. processes would ensure complying to various Reduce CAPEX through sharing standardization across common regulatory frame works processes of utility participants • Transaction Processing Cost – Since the IT infra, resource Costs gets • Risk Management – Reduces distributed, the overall Transaction potential operational risk, Processing cost benefit could be Reporting helps identify transferred to the Participants operational issues at various • Maintenance – Maintenance Cost levels in the organization and willgo down considerably and would enable managing risks early participants will only use the infraHTTPS://GOO.GL/MGNYPT for their selected services and pay the utility based on the service consumption

Utilities in the Securities Services Back Office – A Transformational Journey 373.1. Consideration - Key Operational parameters TCS BaNCS Research JournalWhile many factors support utility model adoption, there are some operational parameters which require marketparticipants to brainstorm on whether and how to move to a utility model.Security & Outage Regulating the Utility Structuring Rules Governing – Vendor – Capability/Management Utility Data access Reputation/Platform across borders support• Security is • Where will the • The consideration • Cross border • The vendor capability,considered to responsibility for a utility data access will reputation and platformbe a shared of managing the structure to be continue to be support form a majorresponsibility liability lie if Joint Venture or the issue, e.g. – consideration.and perhaps the things don’t go as a Royalty based EU & US focusingutility service per plan arrangement on information • A typical challenge would beproviders would needs to be to change the vendor in casebe reluctant to thought over. privacy. Thistake the sole the arrangement does notresponsibility will have toand bear work.financial be workedimplications • Roles &of outage and responsibility out by having • The switching cost wouldbreach. of every utility availability of the be high and availability of partner need option of running compatible technology may to be clearly the utility be low. defined. from multiple jurisdictions. • The terms of liability• Cloud service • Should this be management should be clear providers have made available to as complete data for service faced outages few niche market levels compliance, complete resulting in participants/ transparency of loss of serious business should it be made revenue/penalties incurred impact. available to all? due to SLA non-compliance may not be made available. HTTPS://GOO.GL/MGNYPT

38 Utilities in the Securities Services Back Office – A Transformational JourneyTCS BaNCS Research Journal 3.2. Existing Utilities Many industry participants are enhancing their back-office systems while broker dealers are investing in enhanced front office systems to lower costs. Some of the existing utility service providers are supporting single or multiple business functions. The diagram below shows some of the key utilities launched in the recent past. It also briefly describes the functions supported by each of them. Firm A is the leading provider of investor communications and technology-driven solutions such as Mid-Office & Back-Office IT utility and BPO services for mostly tier-2 banks in the US for broker-dealers, banks, mutual funds and corporate issuers. Firm A Firm G provides custody Mid-Office & Back- Firm G Firm B Firm B, and its affiliates provide a wide Office IT and ops utility for buy-side players range of turnkey outsourcing solutions for Financial Markets administration and account management such as Custody, Fund administration, Utilities Risk-analytics. Their Outsourcing services to broker-dealers, family offices, fund Firm F Firm C managers etc, and clearing solution for sell- supports client’s asset management activities - trade execution to client side brokers in utility mode. reporting. Firm C brought together their capabilities to create a post-trade processing solution The joint venture for Margin Transit Utility named Post Trade Plus aimed at offering (MTU) and Collateral Management Utility non-core, middle-office clearing and (CMU). MTU provides straight-through settlement services to investment banks in processing, CMU addresses the global Asia. This removes the need for post-trade challenge of sub-optimal collateral infrastructure. allocation. Firm E Firm D Firm E jointly with another firm launched Provides post-trade infrastructure and Post - trade processing, a solution to help securities services, Clearing and settlement banks in Europe and Asia-Pacific reduce services based in Luxembourg, also post-trade processing costs. provides the post-trade infrastructure for the German securities industry.HTTPS://GOO.GL/MGNYPT

Utilities in the Securities Services Back Office – A Transformational Journey 394. The Scope – Which functions of operations teams, distribution a utilities model will increase TCS BaNCS Research Journalneed to move of deployment across multiple standardization of messages and regions, levels of decision making processes and reduce the burdenUtilities offer standardized power and authority to be retained, of automation on individual marketprocesses built around universally customer sensitivity and customer participants.accepted standards and industry data security.best practices and supported The table below lists the variouson a pay-per-use basis. The 4.1.1. Asset Servicing asset servicing business functionsinfrastructure ownership and the area-wise that can be moved to amaintenance cost is on the utility Asset servicing is an area that is Utility Model and also mentionsoperated by an expert third party. beset with paper-based processing, what functions should be retainedThe fundamental principle behind making the need for automation with the market participantmoving certain business functions critical. However, it is often themselves to enable exercise ofto this model is largely based on overlooked in favor of compliance authority and control over client-current IT automation levels, size needs. Moving this function to specific decisions. ASSET SERVICINGBusiness Functions What Can be Moved What Can be RetainedAnnouncement Involves data scrubbing from information received from various This is a business function that can be Capture vendors. A very popular function with several securities services completely moved to “Utility Model”. market participants using this function as an internal utility. A fairly automated process for enriching Event This relates to enriching the corporate event details received events from rules or offset dates, does notEnrichment with the information missing in the announcements, however require manual intervention. captured as rules in the Technology Platform. A straightforward process – with practicallyEntitlement The computation of entitlement based on the client positions zero manual intervention or decisionProcessing and the terms of the corporate event. making.Notification The creation of outgoing notifications that need to be sent to The activity of actually sending the notification Creation the clients. may be retained by the custodian to apply last minute changes or send information throughOption The application of election options received from the client. Client Relationship Managers.Election The control may be transferred to market Claim Fairly standard process - a facility to generate inbound and participants after the Utility deadline date,Processing outbound claims beyond which decision making is left to the client. Payments Payment processing based on payment messages received from HTTPS://GOO.GL/MGNYPTTax Reclaims the agent, including the standard rule application in case of The real interaction with markets may partial payments. be controlled by market participants Proxy themselves. Tax Reclaim is very specialized function which includes tax reclamation, reporting and interaction with regulators, and it Any breaks in payment messages which needs high level of expertise, knowledge and experience. require decision making may be handled by Market Participant themselves. Proxy process is a means for shareholders to participate in a firm’s annual shareholding meeting. Securities services market participants This needs high level of expertise, need to submit responses and then share the outcome of the voting knowledge and experience and could with their clients. Already being provided as a utility service. potentially be left to the Utility to manage. Proxy voting is niche processing and is largely provided as a service already.

40 Utilities in the Securities Services Back Office – A Transformational JourneyTCS BaNCS Research Journal 4.1.2. Clearing & Settlement advancement, particularly in functions that can be moved to a shared C&S to reduce operational Utility Model and also mentions Clearing and Settlement (C&S) is a costs. The potential C&S utility can what functions should be retained complex, time-critical process with automate the process and pave with the market participant to significant financial implications. the way towards achieving T+1 enable exercise of authority Post the financial crises, with settlement. and control over client-specific markets opening up and with decisions. stricter regulatory norms, there The table below lists the various was a great need for technological Clearing & Settlement business Clearing & Settlement Business Functions What Can be Moved What Can be Retained Settlement Post successful validation, settlement instructions are created Any exceptions created due to delivery Instruction based on the reference data available with the trade and any prioritization will be authorized by Processing management requirements like handling splitting of trades to Securities Services participants. meet any depository specific quantity restrictions. Creation of a new instruction or cancellation triggers a delivery prioritization Securities Services participants may process. decide to handle exceptions themselves or allow the Utility vendor to do so. In CSD/Agent Settlement location lists (CSD/Agent), communication method case exceptions are to be handled by Routing (SWIFT/proprietary message etc.) and corresponding settlement Utility vendors, access to depository cycles to be maintained by the Utility. Based on client terminals may have to be facilitated. Allegement settlement instructions and the next party in the settlement Processing chain, relevant message as per the communication method is If a match is not found, the allegement constructed and released to the CSD/agent as per cut-off time of exception is created and routed to Instruction the respective CSD/agent entity. the Securities Services participants Matching & exception queue for resolution. Settlement An allegement instruction is created on receiving a bulk file from the CSD/agent. The matching of allegement instruction Any initiated transaction for auto borrow/ with the unmatched settlement instructions is performed auto lend/tri-party collateral allocations and allegement is stamped with any possible match and to be routed to Securities Services corresponding settlement instructions. Matching process is participants for initiation of settlement triggered whenever a new allegement is created, or a new instructions based on which Securities settlement instruction is created in the system Services participants and the utility side stock records will be adjusted. The matching & settlement updates the settlement instruction status based on incoming matching and settlement status Exception and manual activity messages from CSD or the agent. The partial or full settlement dashboards are made available to both may be performed as per instruction.  Client initiated buy-in utility client services teams (through instructions, for failed receive trades, are processed here and back office UI) and the Securities are sent to the clearing house for processing. Buy-in notices Services participants (Through web received from the clearing house will be routed to Securities channel) to take appropriate action. Services participants immediately and will be used to prioritize the failed deliver settlement instructions. The instructions are settled immediately on contractual settlement date or on actual settlement confirmation as per applicable rules. Fails The Utility vendor will agree on SLA definition and exception Management management policy.HTTPS://GOO.GL/MGNYPT As and when a process raises an exception or needs a manual intervention, this is routed as per the allocation policy. Regulatory & The generation of reports (paper based, online etc.) can be left The distribution and authorization to Client Reporting to the utility. be managed by Securities Services participants.

Utilities in the Securities Services Back Office – A Transformational Journey 414.1.3. Addendum Services TCS BaNCS Research JournalThe addendum services refer to those which provide the backbone for core services. The areas being consideredhere for moving to the “Utility Model” are Reference Data Management (RDM), Know Your Customer (KYC), andreconciliations.The table below lists the various Addendum Services that can be moved to a Utility Model and also mentions whatfunctions should be retained with the market participants themselves to enable exercise of authority and controlover client-specific decisions. Addendum ServicesBusiness Functions What Can be Moved What Can be RetainedReference Data One of the major contributors to the operational risk of a financial institution is The long term strategy loss due to faulty reference data. Estimated to make up 40% to 70% of the data to overcome regulatory used in financial transactions, reference data helps identify key supply chain challenges posed by participants and may include: counterparty information; financial product current inefficient specification; issuer detail; currencies; financial market information; corporate RDM is to develop a actions; and prices. Faulty reference data can cause monetary loss to a financial collaborative cross- services organization. Faulty reference data may also lead to systemic failure. industry ecosystem that Focus on re-inventing RDM capabilities leveraging – Virtualization, Analytics and facilitates the delivery of also using Social Media data to design better trade strategies – thus improving RDM as a service utility. regulatory reporting, cross-product selling, risk management and operational efficiencies. Short-Term focus should be on Reengineering RDM and using an Already there are utilities appropriate data management model (centralized, federated or hybrid), while operating in this space the Long-term strategy should be to move to “Utility Model”. and KYC is a candidates for completely moving to Financial Institutions being the pillars of global financial system, always have to the “Utility Model”. ensure that the very basic and first step in the business process lifecycle should In the first option the function to perform focus on capturing complete information on their customers and periodically reconciliation stays with the market participantsKYC tracking the changes in customers’ profile and updating their records, this and the Utility vendor has become even more important focus area post GFC with the onslaught of only provides the aggregated data. In the regulations like FATCA, EMIR, DFA & MiFID. KYC activities are categorized as Client second option, the entire reconciliation process On-boarding when the bank embarks on a new relationship and Remediation can be handed over to Utility provider. which is a large scale activity as result of merger/acquisition.Reconciliations The existing and most prevalent reconciliation models being used by the participants such as – Unilateral/Bilateral have their share of challenges which are primarily related to – regulatory compliance, non-standard products, HTTPS://GOO.GL/MGNYPT cost inefficient, cross border trading, collateralization, speed to market and Risk Management. The aim of a centralized reconciliation utility model is to reduce operational, counterparty and credit risks as a result of large manual communications among buy-and sell-side firms and their service providers. The solution embraces all parties that adopt this reconciliation model enabling both sides to view the results and work on any inconsistencies. Two potential options exist : Centralized Data Model with proprietary reconciliation tools - utilizes a centralized tool that aggregates data from market sources and allows the market participants to use their own proprietary technology solution to perform reconciliations. Specialized Vendor Reconciliation partner for Portfolio collateralization - utilizes a central vendor to aggregate data from market sources and performs reconciliations.

42 Utilities in the Securities Services Back Office – A Transformational JourneyTCS BaNCS Research Journal 5. The Utility Model Transition Approach In our view, Asset Servicing, Settlement & Clearing and Addendum services have the potential for transitioning to a utility model. There are also existing utilities service providers who provide some or all of these services. Core Custody Functions Custodian Services Ecosystem Addendum Services Mobile Office & Reporting Clearing & Settlement Custody & Sub-Custody Portfolio Administration Local/Global Settlements Asset Servicing Trade Support Settlement Instructions Processing Announcement Capture Reconciliations KYC Pre-Matching/Matching Event Enrichment Reference Data CSD/Agent Routing Pre-matching/Matching Collateral Management Allegement Processing Position Eligibility Risk Analytics Instructions Matching & Settlement Entitlement Processing Performance Attribution Physical settlement Notification Creation Pricing Scripless settlement Option Elections Msg Reporting Fails Management Transaction Posting MIS Reporting P’tion Change/P’tion Mgmt Msg Rejects Operations Reporting Repair Claim Processing Short Term Trade Enrichment Payments Mid Term Trade Netting & CCP Trade Netting Long Term Allocation Processing Tax Re-claim Proxy Trade CaptureHTTPS://GOO.GL/MGNYPT Forex Mgmt Cash Management Collateral Management Securities Lending Regulatory & client Reporting

Utilities in the Securities Services Back Office – A Transformational Journey 436. Potential Challenges Conventional cost-reduction levers 1.7. Advantages & Disadvantages TCS BaNCS Research Journal in the financial services sector are 1.8. - http://www2.calypso.com/the-While utilities are a future-state not enough to preserve and increase 1.9. rise-of-collateral-utilities/model with a broad range of benefits profitability of market participants. 1.10. Citi, UBS to jointly offer somefor institutions and with a proven services to broker-dealers inbusiness case, the implementation  Large market participants would 1.11. Asia-Pacific – Reuters Nov 2012of this model has not taken off in need to join hands, or use McKinsey research commis-a big way. Slower adoption can be existing utility service providers sioned by Wiproattributed to the following reasons: for their non-competitive Accenture website: Accenture services to “mutualize” the and Broadridge Jointly Launch The move to the utility model costs – an arrangement enabling Post-Trade Processing Solution involves an entire market, and market participants to use to Help Banks Operating in achieving critical mass is the key services on a pay-per-usage Europe and Asia Transform their – an arduous task. basis. Operations State Street - http://www. Regulators have not mandated  The classic outsourcing model statestreet.com/solutions/by- the use of industry utilities. has limitations and does not capability/ssgs/middle-office/ enable banks to reach a critical middle-outsourcing.html Lack of collaborative efforts by size to achieve economies of most market participants, leading scale. Bharti Munjal to a lack of common industry Principal Consultant standards development  Most participants will have to make similar changes to their TCS Financial Solutions (TCS BaNCS) Implementation is complex as processes and systems due to utility solutions vendors are upcoming and ever changing Sanjay Mukherjee HTTPS://GOO.GL/MGNYPT not data providers, therefore, new regulations. The utility Associate Consultant requiring extensive integration model offers a viable alternative efforts between multiple parties. to this continuous spend. TCS Financial Solutions (TCS BaNCS) Poor data held both by market  The transition to a utility participants and customers result model should be a phase-wise in the need for a mammoth approach, and business functions data cleansing exercise before could be transitioned over the centralizing to utility. short, mid & long terms. Relationships and trust-levels References/Articles/White Papers between participants and customers 1.1. http://www.investopedia.com/ articles/economics/09/financial-Data, cyber security, and localization crisis-review.aspchallenges across geographies aresome of the other roadblocks. 1.2. http://www.bakertillyinter- national.com/web/insights/7. Conclusion regulation-in-the-post-crash- environment.aspxThe utility model will continue to berefined as it shapes itself to meet 1.3. http://www.apec.org.au/changing industry demands. As docs/11_CON_GFC/Regula-it transforms, market participants tory%20Reform%20Post%20would need to wisen up to the fact GFC-%20Overview%20Paper.that a utility model is the most pdfcost-effective way to prepare forthe future, and undoubtedly one of 1.4. http://www.apbsrilanka.org/arti-the biggest opportunities for firms cales/21_ann/21_pdf_docs/15_to seize. Gayani_Godellawatte.pdf 1.5. http://www.intosai.org/uploads/ gaohq4709242v1finalsubgroup- 1paper.pdf 1.6. http://www.bakertillyinter- national.com/web/insights/ regulation-in-the-post-crash- environment.aspx

44 Navigating the AIFMD landscape successfullyTCS BaNCS Research Journal NAVIGATING THE AIFMD LANDSCAPE SUCCESSFULLYHTTPS://GOO.GL/MGNYPT THE SCOPE OF AIFMD Post the 2008 Global Financial • Established within the IS BROAD AND crisis, primary regulatory bodies EU(European Union) and who APPLICABLE TO including the European Union manage alternative investment MANAGERS OF ALL came up with a comprehensive funds (‘AIFs’), whether or not VARIETIES OF plan to re-visit the alternative those AIFs are marketed within COLLECTIVE investment funds (AIF) industry, the EU; or INVESTMENT which resulted in the Alternative UNDERTAKINGS. IT Investment Fund Managers • Established outside the EU, but COVERS ALL SECURITIES Directive (AIFMD) in 2011. who manage AIFs within the EU FUNDS AND ILLIQUID Articulated with the main objective or market AIFs within or into ASSETS – FOR of addressing any regulatory gaps Member States, which have EXAMPLE, REAL ESTATE, and risks existing therein, this opted to maintain or introduce PRIVATE EQUITY, directive became an imperative, a private placement regime INFRASTRUCTURE OR especially, when viewed against for third-country funds and GOODS SUCH AS the backdrop of the financial crises managers WINE OR ART. and the lack of any such pre- existing regulation in the industry. The scope of AIFMD is broad and applicable to managers of all The idea behind the plan was the varieties of collective investment harmonization of law within the undertakings. It covers all securities EU related to appointment, role funds and illiquid assets – for and liability of a depository credit example, real estate, private equity, institution marketing or conducting infrastructure or goods such as AIF business. wine or art. All possible investment strategies, irrespective of the legal As per the Alternative Investment form or structure of the collective Management Association (AIMA), investment undertaking, whether AIFMD will affect alternative open-ended or closed-ended, or investment fund managers (‘AIFMs’) whether formed under contract who are either fold under the AIFMD guidelines.

Navigating the AIFMD landscape successfully 45 TCS BaNCS Research JournalTimeline DirectivesTime line Regulation came into existence and the Commission published the regulationJuly 2011 to 2012 Implementation and transitional period for EU AIFMsFrom July 2012to July 2015 Requirements for Non EU AIFMs managing EU AIFsPost 2015 Review of the Directive by the commissionJuly 2017 Possible end of national private placement regimes; substance requirements forPost 2018 all non-EU AIFMDepicted in the table below is a serving critical functions related applicable to all assets received in HTTPS://GOO.GL/MGNYPThistorical view of the Directive and to safekeeping an AIF’s assets and safe custody and these assets mayits underlying tenets. overseeing compliance as defined be in physical or in registered form. by the regulation.Functions and Obligations Oversight: The oversight obligationof Custodians working as a Safekeeping: Depending on the requires that:Depositary for AIFMD type of asset owned by the AIF, safe keeping involves custody or record • Custodians working as aDue to AIFMD directives, custodian keeping. The custodian function is Depositary ensure that all thecan also work as depositories,

46 Navigating the AIFMD landscape successfullyTCS BaNCS Research Journal AIF rules are applicable to units ended funds in the first five years, or shares of the AIF, and that and fund managers can appointHTTPS://GOO.GL/MGNYPT IT IS CLEAR THAT THE the value of the share or unit is any other person as a custodian, DIRECTIVE HAS GONE based on AIF applicable rules thereby potentially transforming the DOWN WELL WITH and the valuation principles in business and making it competitive. INVESTORS, AND THOSE AIFMD ORGANIZATIONS THAT Conflict of Interests and delegation HAVE DONE THE MOST • They make sure that all the of duties: One of the challenges for TO ADJUST TO THE NEW transactions related to an AIF’s the AIFMD custodians to handle REGULATORY REGIME assets are remitted to the AIF is the conflict of interests, which WILL BE REWARDED within defined time limits as per means the AIFMD custodian cannot WITH NEW BUSINESS the rules. work as an investment manager and OPPORTUNITIES. or risk manager for the same AIF. Cash Monitoring: Custodians will have to monitor the cash obligation o The Investment management and have a full overview of cash and risk management movement by the AIF. functions need to be separated from the The custodians which are depository functions held working as depositary have a full by custodians. Further, the overview of the cash position valuation function needs and cash movements of the AIF, to be separated from the including subscription monies. custodian of an AIF, and the This Regulation requires that there same custodian cannot be be proper implementation and appointed as its external timely review by the custodian valuer. of cash monitoring procedures. This will require in reconciliations, o The regulation allows notification of the AIFM in case of custodians working as a any discrepancies found. depository to delegate safekeeping functions to Challenges and opportunities any third party, although, posed by AIFMD regulations depositories are not allowed to delegate oversight AIFMD rules have introduced a mix duties. However, the use of challenges and opportunities of securities settlement for custodian banks. While the systems are not considered main challenges constitute to be custody delegation for account segregation, cash flow AIFMD purposes. monitoring, oversight duties and new liability relationships, many o AIFM Directives will require business opportunities for revenue global custodians to take generation present themselves, as responsibility for their sub- described below: custodians and custodians will have to review and Competitive challenges: Although, revise their procedures for It is required for all AIFs to appoint monitoring risks across sub- a custodian, funds can appoint custodians. any other custodian who can carry out depository services for Cost overhead and loss liability: The closed ended funds. Generally, EU cost of custodian services and loss alternate investment funds do not liability are most challenging: provide the redemption of closed

Navigating the AIFMD landscape successfully 47o While in the past, custodians be required to mitigate the will be required to create open, TCS BaNCS Research Journal had to safe-keep the assets depository’s liability. This segregated accounts for all end of an AIF and participate will increase the custody customers, and although, incurring in settlement activities, cost and charges towards more efforts and time, this activity now they must also have members. Even though there will eventually increase revenues. oversight over all of an is a possibility of increasing Until now, it has been a common AIF’s cash flow activity. This custody costs and charges, practice for custodians to re- includes performing daily there are many EU countries hypothecate client assets, which cash reconciliations and where closed ended may not be allowed anymore. This identifying those that are AIFs are not regulated, again is a challenge that can be inconsistent with an AIF’s thereby, providing the viewed as an opportunity to create normal activities. scope for setting up of new new business. custodians.o Another controversial In conclusion… measure introduced for Reporting Overheads: Another custodians makes them challenge that custodians face is Banks also need to analyze the liable for the loss of the need to provide the AIFMD with implications of their existing financial instruments they disclosure and also share reporting operations and technology are holding in custody. requirements to its clients as per ecosystems and review the need There are exceptions to the regulation. The reporting should for aligning with transformative this new requirement. For be compliant with regulatory solutions that can help them example, a custodian is not requirements. manage their AIFMD compliance liable if it can prove a loss in a smooth and efficient manner. was due to an external event The AIFMD regulation has opened Needless to say, AIFMD may have that was beyond its control. another window of opportunity caused a lot of pain for custodians. for custodians. With volumes of However, it is clear that theo This regulation requires regulatory reporting from fund directive has gone down well with reshaping of the contractual managers to custodians and investors, and those organizations structure between AIFMs, depositories increasing on a regular that have done the most to adjust depositary banks and, if basis, custodians can provide to the new regulatory regime will necessary, custodians, solutions related to regulatory be rewarded with new business prime brokers and sub- reporting. So, what does this opportunities. custodians. Insurance will involve? It means that custodians Neelesh Gupta HTTPS://GOO.GL/MGNYPT Associate Consultant TCS Financial Solutions (TCS BaNCS)

48 Insurance Repository and E-PoliciesTCS BaNCS Research Journal INSURANCE REPOSITORY AND e-POLICIES A STEP TOWARDS DIGITIZING AND CENTRALIZING THE INSURANCE SECTORHTTPS://GOO.GL/MGNYPT PAPER-BASED Estimates point to the fact that many instances, disastrous events PROCESSING IS AN billions of dollars go unclaimed cause the loss or mutilation of EXPENSIVE BURDEN FOR every year during natural insurance policy documents that ISSUERS, ESPECIALLY IN calamities such as floods, are typically needed to request THE BACKDROP OF NEW earthquakes. And, this is despite or process insurance claims. INSURANCE PRODUCTS the enormous impact on life and Policyholders or their beneficiaries BEING LAUNCHED property. , insurance policies in are then forced to approach CONTINUOUSLY THE force to protect policyholders multiple stakeholders, including WORLD OVER. from such events. In fact, while life the insurer and the insurance agent insurance policies are popular in in order to trace an existing policy most countries, family members of and initiate a claim. Digitization of the deceased are often not even policies and easy access to policies aware of a policy’s existence. In is therefore of vital importance for policyholders or their beneficiaries. The insurance industry on the other hand is also facing a key challenge of dealing with large volumes of documentation at each step of the insurance value chain that comprises issuance of policies, underwriting, claims execution, payment management, policy servicing, among others. In addition, there are added overheads to maintain this historical information for future reference and audits. Paper-based processing is an expensive burden for issuers, especially in the backdrop of new insurance products being launched continuously the world over. These challenges drive attention towards the need for setting up ‘Insurance Repositories’. These may be national or regional

Insurance Repository and E-Policies 49POLICYHOLDERS OR repositories that can hold The picture below represents TCS BaNCS Research JournalTHEIR BENEFICIARIES insurance policies across multiple how the Insurance Repository isARE THEN FORCED TO Insurers in electronic form, and well placed to meet the needsAPPROACH MULTIPLE provide policy administration of multiple stakeholders in theSTAKEHOLDERS, and servicing to policyholders at insurance space including insuranceINCLUDING THE large. Policyholders can nominate companies and their agents,INSURER AND THE an authorized representative policyholders and back-office users.INSURANCE AGENT who has access to the insurance Different types of policies such asIN ORDER TO TRACE account in circumstances where life and health insurance can beAN EXISTING POLICY the policyholder is no more or maintained in electronic form at theAND INITIATE A CLAIM. incapable of accessing it. Insurance Repository.DIGITIZATION OFPOLICIES AND EASY Can an Insurance Repository help The core activities performed by anACCESS TO POLICIES IS and in what way? Insurance Repository may vary fromTHEREFORE OF VITAL opening an Insurance Account forIMPORTANCE FOR Insurance Repositories are expected each policyholder, to book-keepingPOLICYHOLDERS OR to act as a centralized database and dematerialization of paper-THEIR BENEFICIARIES. for insurance policies and provide based policies, to facilitating the policyholders a facility to hold collection of premium payments insurance policies in electronic and online claims settlement. In form. Although, they may provide addition, the Insurance Repository policy servicing such as, a request may be required to maintain the for change in a policyholder’s complete history of policy details address, they are not allowed to sell such as premium payments, claims or solicit insurance policies on its raised and payouts by the Insurer. own; this business still remains with Regulators may also rely upon the the insurance companies. Insurance Repository to provide Insurance Companies INSURANCE REPOSITORY Insurance Agents Policyholders Single insurance account per policyholderInsurance Company Insurance Account (electronic)Insurance Agent Insurance Agent ü ePolicies ü Policyholder InformationPolicyholder ü Premium payments history HTTPS://GOO.GL/MGNYPT ü Claims history Policyholder ePolicies Policyholder Health Life Others GeneralFigure 1: Insurance Products and Stakeholders serviced by the Insurance Repository

50 Insurance Repository and E-PoliciesTCS BaNCS Research Journal statistics related to policies digitization, eliminating the subscribed, claims raised vis a vis risks arising out of handling settled, among others. physical paper Parallels to the CSD business – • Eliminates fraudulent insurance Learning from the Past claims by ensuring thorough checks are made during A depository holds in custody registration of policies and and administers underlying that beneficiary information is assets across its life-cycle, captured electronically typically comprising issuance and redemption of assets, • Allows insurers to focus on the processing of settlements business, say, introduction of a instructions and transfers, new product that is attractive including funds settlement. Many to policyholders rather than of these services can easily be investing in technology to meet extended to insurance policies, ever-increasing service delivery as depicted below, thus providing expectations an opportunity for the Insurance industry to benefit from the • Insurers can pass on cost standardization achieved in the saving benefits to customers CSD space. by reducing their insurance premiums What is the value proposition an Insurance Repository can provide Key benefits to the policyholders to its stakeholders? • “Single window view” of all the Key benefits to the Insurers policies held electronically; ability to view the complete • Significant costs savings to picture of policies held with insurance companies through multiple insurers THE CORE ACTIVITIES S. Key Service Capability Central Insurance PERFORMED BY AN No. Securities Repository INSURANCE REPOSITORY Depository MAY VARY FROM OPENING AN INSURANCE ACCOUNT 1 KYC verification and registration  FOR EACH POLICYHOLDER, TO BOOK-KEEPING AND 2 Centralized book-keeping facility  DEMATERIALIZATION OF PAPER-BASED POLICIES, 3 Conversion to electronic form and vice versa   TO FACILITATING THE COLLECTION OF PREMIUM 4 Transaction history and audit trail  PAYMENTS AND ONLINEHTTPS://GOO.GL/MGNYPT CLAIMS SETTLEMENT. 5 Payment processing/Settlements  6 Secure online access  7 Global standards in communication  8 Transaction alerts and reports 