Fundamentals of Securities Operations

Mark AlexanderCIO and Head of Global Wealth and Investment Management Technology & Operations

Bank of America Merrill Lynch

March 9, 2011

Operations Industry Framework

Pricing, Market and Reference Data Providers

Clients Financial

Intermediaries

Market

Infrastructure

Global MarketsAsset Managers

Hedge Funds

Pensions / Insurance

Financial Institutions

Sovereigns

Municipalities

Corporations

Wealth Management

UHNW Individuals

HNW Individuals

Mass Affluent

Affluent

Mass Market

Institutions

Market Access ProvidersBrokers

Dealers

Underwriters

Banks

Custodians

BPOs

Issuing, Paying, Transfer,

and Calculations Agents

Wealth Management

Providers

Full-Service Brokers

Investment Advisors

Private Banks / Trust

Online / Discounters

Mutual Funds

Back Office Services

Trade Execution

Exchanges

Trading Networks

OTC Trading

Clearing, Settlement

and Custody

Central Counterparties

Central Securities

Depositories

Service Providers

Global Markets Fee Demographics

Fee Pools ~$300B

Rates &

Currencies

38%

Equities

20%

Credit

16%

Underwriting

14%

Mortgages &

Securitized

Products 7%

Commodities

5%

Wealth Management Demographics

Wealth Management Market Size (HNWIs)

~$39T

North

America

27%

Europe

24%

Asia

Pacific

25%

Latin

America

17%

Middle East

& Africa

7%

U.S. Financial Assets

by Wealth Segment

Mass Market 7%

Mass Affluent 11%

Affluent/HNW 82%

Global Markets: Key Broker/Dealer Services

Capital Raising

Product Innovation

Structured Products

Complex Derivatives

etc.

Research/Investing Advice

Market Making / Trade Execution

Clearing / Settlement - Mostly

Delivery Versus Payment (DVP)

Prime Brokerage & Financing

Pricing Mechanism / Liquidity

Securities and Derivatives

Principal

Agency / Riskless Principal

Middle / Back Office

Custody

Client Reporting

Stock Loan / Borrow

Repo / Reverse Repo

Synthetic Financing

FX / Derivatives

Wealth Management: Key Services

Basics

Trade Execution - Agency / Riskless Principal

Clearing / Settlement

Custody

Margin Financing

Client Reporting

Value-Added

Financial Planning

Wealth Structuring

Banking, Lending and Insurance

Managed Solutions

Family Office Services

Complex Financing Solutions

Philanthropic Services

Institutional Retirement and Benefit Plans

Small Business Services

Types of Securities and FeaturesEquities

Common Stock

Preferred Stock

Exchange Traded Funds

ADRs / GDRs

Corporates

Bonds / Notes

Investment Grade / High Yield

Structured Products

Listed Options/Futures

Puts

Calls

Single Name / Indices

Securities / Commodities

Mutual Funds

Loads

No-Loads

Share Classes

Open-Ended

Closed-End

Financing

Securities Borrowed / Loaned

Repos / Reverse Repos

Municipals

General Obligations

Revenue Bonds

Special Purpose

Money Markets

Certificates of Deposit

Commercial Paper

Securitized Debt

Mortgages (PassThrus / CMOs)

Asset-Backed

Collateralized Debt Obligations

Sovereign/Government

U.S. Treasuries

Agency Securities

Non-U.S. Governments

Emerging Markets

Features

Debentures (Unsecured)

Subordinated

Secured

Bearer vs. Registered

Bullets vs. Amortizing

Convertible / Exchangeable

Fixed vs. Structured Principal

Principal Protected

Inflation Protected

Floating vs. Fixed Rate

Zero Coupon vs. Income Bonds

Strips

Interest Accrual Rules

Callable / Putable

Refunding

Sinking Fund

Market-Linked

Step-Up / Down

Attached Warrants

etc.

Clearing Corporations/Central Counterparties

Roles:

Trade Comparison Trade Netting Trade Guarantee / Novation Risk Management Margining Audit Trail

Clearing Alternatives:

Continuous Net Settlement (CNS) Net Settlement / Balance Orders Trade-for-Trade

Other Services:

ACATS Mutual Funds

Select CCPs

U.S.

NSCC

FICC

OCC

CME

Non-U.S.

Eurex

LCH.Clearnet

EMCF

Euro CCP

Features

Central Securities Depositories

Roles:

Immobilization of Physical Certificates Book Entry Settlements Liquidity / Credit Management Collection / Disbursement of P&I Payments Notification / Processing of Corporate Actions Processing of Calls / Redemptions Transfers / Re-registration Safekeeping Physical Securities

Key Features/Services:

DVP Free Receipts and Deliveries Fail and Repo Tracking Fail Balancing Claims Processing (Interest)

Select CSDs

North America

DTC

Fedwire

CDS

Non-U.S.

Euroclear +

Clearstream

Local CSDs

Features

Life Cycle of a Typical U.S. Equity Trade

Client

Buy SellNYSE /

NASDAQ /

ECNs

NSCC

DTCC

Book

Entry

Receive

Book

Entry

Delivery

Locked-in

Trade

Netted

Settlement

Instructions

ClientBroker /

DealerBroker /

Dealer

Order

Confirm

Order /

Execution

Matching

Order

Confirm

Money settlements are further netted across all securities with

adjustments for margin calls, fail marks-to-market and other activity to

create one net money settlement per Broker / Dealer per day

Broker/Dealer A

Buy 100 IBM

Buy 200 IBM

Sell 500 IBM

Net Sell 200 IBM

Obligations marked to market with theoretically one net settlement per

security per Broker / Dealer per day

Broker/Dealer B

Sell 100 IBM

Buy 200 IBM

Net Sell 100 IBM

Broker/Dealer C

Sell 200 IBM

Sell 200 IBM

Buy 500 IBM

Net Buy 100 IBM

CNS in Action

Life Cycle of a Typical U.S. Equity Institutional Trade

Broker /

Dealer

NYSE /

NASDAQ /

ECNs

NSCC

DTCCCustodian A

Custodian B

Custodian C

Order

Average Price Trade

Allocations

Confirms

Ins

titu

tio

na

l C

lie

nt

Order

Execution (Multiple

Fills)

Settlement

Messages

Matching

Settlement

Messages

Life Cycle of a Complex Cross-Border Equity Trade

Broker /

Dealer

Order

VWAP

Allocations

Confirms

Ins

titu

tio

na

l C

lie

nt

Master

Custodian

Non-US

Broker /

Dealer

Non-US

Market

Makers

Local

Exchange

CCP CCP

Alternative

Trading Facility

Sub

CustodiansLocal

CSDSettlement

Messages

Order /

Execution

Order /

Execution

Matching / Settlement

Messages

Collateralized Financing Transactions

Terms Overnight Term Open Flex

Fixed vs. Variable Interest Rates

Collateral Cash Securities Letters of Credit General Collateral vs. Special

Issues

Cross-Product Substitutions

Credit Initial Margin (Haircuts) Mark-to-Market & Margin Calls

Product

Categories

Sovereigns

Agencies

Mortgages/

Asset-Backed

Securities

Corporates

Equities

Transactions

Reverse Repos / Repos

Securities Borrowed /

Loaned

Delivery vs. Payment

Triparty

Hold-In-Custody

Synthetic Derivatives

Features

Repos/Reverse Repos

Repo

Counterparty

Principal Money

Reverse Repo

Counterparty

Securities

Principal Money Plus Interest

Securities

OTC Derivatives

Swaps

Options

Futures

Forward Rate

Agreements

Caps / Floors / Collars

Rates

Currencies

Credit

Equities

Commodities

Notional / NPV

Terms and Conditions

Fixed vs. Floating

Total Return

Index vs. Single Name

Amortizing

Puts / Calls

American vs. European

Swaptions / Captions

Barriers

Knock-ins / Knock-outs

Collateralized

etc.

Transaction

TypesProduct

Categories

Features

Simple Interest Rate Swaps Illustration

Asset LIBOR +1/2%

Liabilities 10-Year Bond @ 4%

Asset Fixed Rate Mortgage @ 6%

Liabilities MMDA at T Bill +1/2%

Pay

LIBOR

Broker/Dealer

(Intermediary)

Receive

LIBOR

Receive

5%

Pay

5%

Bank S&L

* Illustration excludes Broker/Dealer spread

Life Cycle of a Typical OTC Derivatives Trade

Broker /

Dealer

Exchange ISDA Agreements with CSAs

Negotiate Contract Terms (Price,

Collateral, Margin, etc.)

Exchange/Sign Documentation

(Confirms)/Match Terms *

Mark-to-Market Margin / Collateral Movements

Lifecycle Events / Payment Resets

Service

Providers (DTCC)

Exchange Upfront Fees / Premiums

(where applicable)

Matching Service Providers

(Markitwire, DTCC) Client /

Counterparty

* CCPs (CME, ICE, LCH) clear certain interest rate and credit derivatives

Operations Functions in Broker/Dealers

Client OnboardingTrade / Trader

SupportPre-Settlement

ProcessingCash / Security

Settlements

CustodyBooks and

RecordsMargin / Collateral

ManagementOperations Risk

Management

Reference / Market Data

Client Reporting Client ServicesSpecialized

Product Support

Client Onboarding

Account Opening

Anti-Money Laundering

Patriot Act

Office of Foreign Assets Control

Account Documentation

Contract Documentation

Trade/Trader Support

Order Management

Trade Execution Matching / Balancing

Trade Verification

Position / P&L Balancing

Pre-Settlement Processing

Trade Figuration and Enrichment

Trade Clearance

Allocations

Confirmations (Securities & Derivatives)

Pairoffs / Bulking / Netting

Custodial Matching

Payment Resets (OTC Derivatives)

Life Cycle Event / Trigger Management (Derivatives)

FX Funding

Functions in Broker/Dealers

Cash/Security Settlements

Securities Settlements (DVP and Free) Cash Receipts / Disbursements Funding / Settlement Liquidity

Management

ACATS / Broker Transfers Financing Desk Coordination (Reverse

Repo / Securities Borrow)

Fails Management Claims Processing Network Management Wealth Management Banking Services

Visa, Checking, ACH, Wires, Deposits, Loans, Sweeps

Custody

Corporate Actions Notifications Corporate Actions Election Management Interim Accounting Income / P&I Entitlement Processing Tax Withholding / Collections Transfers / Re-registrations Physical Securities Processing /

Safekeeping (Vault)

Security Deposits / Withdrawals Specialty Asset Services

Functions in Broker/Dealers

Books and Records

External Reconciliations (Cash / Nostro, Box / Depot)

Internal Reconciliations (Inter / Intra-Company, Suspense, Fails)

Receivable / Payable Tracking

Stock Record Maintenance

Customer Account Bookkeeping

Fees and Billing

Margin/Collateral Management

Reg T Initial Margin and Cash Payments

NYSE Rule 431 Margin

Financing Transactions Margin

Forward Trade Margin (e.g., Mortgage TBAs)

Central Counterparty Collateral Posting

OTC Derivatives Margin / Collateral Management

Operations Risk Management

Management Reporting and Metrics SEC Rules 15c3-1 and 15c3-3

Reporting

Client Money Compliance (Including SEC Rule 15c3-3 Reserve Formula)

Sec Rule 15c3-3 Possession or Control Compliance

Escheatment (Abandoned Property) Fraud Management Systems Implementations / Testing

Reference/Market Data

Product Data Maintenance

Client Data Maintenance

Standing Settlement Instructions Maintenance

Pricing

Client Services

Call Centers

Wealth Management Branch Liaison / Support

Institutional Client Relationship Management

Prime Brokerage Client Services

Client Reporting

Statements

Tax Reports

Performance Reporting / Client Reviews

Fails (Institutional Clients)

Derivatives Pricing / Client Valuations

Print and Mail

Functions in Broker/Dealers

Specialized Product Support

Mutual Funds Managed Solutions Insurance Alternative Investments Mutual Funds Transfer Agency / Sub-

Accounting

Trust Services Portfolio Administration / Valuation Benefit Plan Recordkeeping & Services Structured Products Special Purpose Vehicles

Key U.S. Regulations

Anti-Money Laundering

Know Your Customer

SEC Rule 15c3-1 (Net Capital)

SEC Rule 15c3-3 (Customer Protection)

Possession or Control

Reserve Formula

SEC Rule 17a-3 & 17 a-4 (Timely and Accurate Books & Records)

SEC Rule 17a-13 (Quarterly Security Count)

SEC 10b-10 & MSRB G-15 (Confirmation Disclosure)

Regulation T (Credit Extension)

NYSE 431

Operational Risks

Unauthorized Transactions

Manual Processing

Failed Data Feeds

Trigger Events / Deadlines

Reconciliation Breaks

Uncollected Receivables

Fails

Data Accuracy

Aged OTC Derivatives Confirms

Missing Documentation

Uncollected Margin Calls

Technology Stability / Capacity

Service Levels

Vendor Management

Fraud

Key Concepts Key Risks & Metrics

Financial Exposure

Debits / Short Market Value

Unsecured

Deficits (Partly Secured)

Aged Items

Counterparty Events

Regulatory

Policies & Procedures

Audit Trails

Reputational

Credits / Long Market Value

Service Levels

Timeliness / Accuracy

Business Disruptions

System Outages

Natural Disasters

Industry Trends

More Volume

More Products & Complexity

More Technology

Margin Compression

Global Convergence

Multi-Currency

Multi-Lingual

Sourcing / Off-shoring

Regulatory Scrutiny

Leverage of CCPs / Industry Utilities for OTC Derivatives

Banking and Brokerage Convergence

Bad News TravelsFaster Than Ever

What Great Operations Teams Do

Get the Basics Right

Manage by Metrics

Provide World-Class Service

Facilitate / Drive Revenue Growth

Competitively Reduce Expenses

Proactively Manage Risks

Be the Employer of Choice for Great Talent

Manage Operations like a Business

Build Strong Business Relationships as an Equal Partner

Balance Speed and Control

Balance Strategy and Tactics

Leverage Global Capabilities

Always Raise the Bar . Continuously Improve

Challenge the Status Quo

Questions?

Fundamentals of Securities Operations

Mark AlexanderCIO and Head of Global Wealth and Investment Management Technology & Operations

Bank of America Merrill Lynch

March 9, 2011