Technology in Capital Markets

8/6/2019 Technology in Capital Markets

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Evolutiony Survival of the fittesty Why Evolution

y Competition at all levels - banks, brokers, exchangey

Commoditisation of products and servicesy Scope for improvement Reducing Risk / Removing

inefficiencies, etc.,y Higher expectations from customers

y

How Evolutiony Technology y Industry Associationsy Process Improvements

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Tech nology in Capital Mark e tsy D o we need Technology in Capital Markets?y Can Technology add value to Capital

Markets?y Citius, Altius, Fortuis

y Capital Markets can become Swifter, Higher,Stronger by use of technology

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NYS E Tech nologi e sy NY SE Technologies is the commercial technology division

of NY SE Euronext.y NY

SE Technologies was launched in January 2009,incorporating all the internal technology divisions of NY SEEuronext, NY SE Euronext s Market D ata division and anumber of acquisitions.

y NY SE Technologies provides comprehensive transaction,data and infrastructure services and managed solutions forbuy-side, sell-side and exchange communities that requirenext-generation performance and expertise for missioncritical and value-added client services.

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NYSE Tech nologi e sy NY SE Technologies is the world's leading provider of end-

to-end electronic trading solutions. Its f lexible and scalableproducts deliver robust and integrated solutions, from

single trading positions to complete exchange platforms.y Through leading edge software, combined with high

performance connectivity, it engages the global tradingcommunity with innovative tools, access to liquidity and worldwide markets and third-party, value-addedapplications.

y From a single company, it delivers best of breed productsusing world class technology connected to all the worlds'major markets.

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NASDAQ y "N ASD AQ" stands for "National A ssociation of

Securities Dealers A utomated Q uotations ".y It is the largest electronic screen-based equity securities trading market in the United States and

second-largest by market capitalization in the world.y As of January 13, 2011, there are 2,872 listings.y The N ASD AQ has more trading volume than any other

electronic stock exchange in the world.

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NASDAQ Q uot e Leve lsN ASD AQ quotes are available at three levels:y Level 1 shows the highest bid and lowest offer -the

inside quote.y Level 2 shows all public quotes of market makers

together with information of market dealers wishingto sell or buy stock and recently executed orders.

y Level 3 is used by the market makers and allows themto enter their quotes and execute orders.

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London Sto ck Exch ang e - SETSy SETS is the London Stock Exchange s flagship electronic

order book, trading FTSE100, FTSE250, FTSE Small CapIndex constituents, Exchange Traded Funds, ExchangeTrading Products as well as other liquid AIM, Irish andLondon Standard listed securities.

y Functionally rich with multiple order types, market makersupport all the way up the book, SETS is one of the mostliquid electronic order books in Europe. It is this liquidity,underpinned by a rigorous rulebook and market

supervision, coupled with the widest stock coverage, thatattracts so many participants creating unrivalledopportunity to do business. Market participants canchoose from 2 competing clearers ensuring anonymous preand post trading, along with full counterparty protection.

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SETS (Elec troni c Trading Se rvice)y The basis of SETS was launched by the London Stock Exchange

in 1997.y It was designed to cater for FTSE 100 firms and the largest of the

FTSE 250 companies. Since then the system has (as ever)

undergone significant change.y Here are some of the main points of the SETS system:y London Stock Exchange SETS deals go through brokers. The

brokers enter buy and sell orders through an electronic order book.Market makers have no role in the transaction - thus removing anadded layer of costs.

y

There is no minimum order size. SETS makes it easier to purchasesmall holdings. This is very useful to the private investor.y The Stock Exchange Electronic Trading System operates on a T+3

basis which means that the financial aspects must be completed onthe third working day after the trade.

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O ptions Cl e aring Corporation

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O ptions Cl e aring Corporationy The Options Clearing Corporation (OCC) is the only clearinghouse in the

world with a " AAA " credit rating from the Standard & Poor's Corporation. TheOCC is recognized as the vital mechanism which provides market and systemicsafety to the listed securities options markets in the U.S.

y As the issuer of exchange listed options, OCC in effect becomes the buyer toevery clearing member representing a seller and the seller to every clearingmember representing a buyer.

y OCC's role is supported by a three-tiered safeguard system.y OCC's qualifications for membership are stringent to protect OCC and its

clearing members. Each clearing member applicant is subject to a thoroughinitial assessment of its operational capability, the experience and competenceof its personnel, and its financial condition in relation to predefined standards.

y After tough membership standards, OCC's second line of defense against

clearing member default is member margin deposits. OCC currently holdsbillions in aggregate clearing member margin deposits.y The third line of defense is the clearing members' contributions to the clearing

fund. A member's clearing fund deposit is based upon its options activity and iscomputed monthly. OCC's clearing fund totals hundreds of millions of dollars.

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Om ge oy Omgeo, D TCC's joint venture with Thomson Reuters,

is the global standard for efficiency, certainty and

confidence in post-trade operations.y Their solutions automate trade life-cycle events,

increasing efficiency and reducing risk for more than6,000 clients in 46 countries

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Om ge oy Omgeo is an operations expert automating trade life cycle

events, including allocation, confirmation/affirmation,settlement notification, enrichment, operational analytics

and counterparty risk management between tradecounterparties.y Its offerings address challenges mainly to do with manual,

error-prone processes you may encounter throughout tradelifecycle events.

y Their core expertise lies in automating the communicationbetween parties to a trade or a contract. Providing servicesthat electronically link counterparties around the worldhas allowed them to create a global, efficient community of clients.

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Om ge o O ASYSy Omgeo OAS Y S is Omgeo s U.S. domestic trade

allocation and acceptance service that communicates

trade and allocation details between investmentmanagers and broker/dealers.y OAS Y S replaces error-prone faxes, phone calls and e-

mail by automating trade processing, improving

efficiency, cutting costs and reducing the risk of tradefailure.

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Om ge o Ce ntral Trad e Manag e ry Omgeo Central Trade Manager (Omgeo CTM) is

Omgeo s strategic platform for the central matching of

cross-border and non-U.S. domestic equity and fixedincome transactions.

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Om ge o ALERTy Omgeo ALERT is the industry s largest and most

compliant web-based global database for the

maintenance and communication of standingsettlement and account instructions (SSI).y ALERT enables a community of investment managers,

brokers/dealers and custodian banks to share accurate

SSI automatically worldwide.

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Euro cle ary Euroclear is the world's leading provider of post-trade

services, covering all asset types including bonds,

equities, funds and derivatives.y User-owned and user-governed, it settles more than150 million transactions a year in over 30 currencies.

y The total value of securities transactions settled by the

Euroclear group is over 500 trillion per annum.

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Euro cle ar Se ttl e m e nt Se rvice sy As a trusted intermediary, Euroclear settles the transaction

by taking payment and transferring ownership on behalf

of each side.y Its clients submit an instruction telling it when, how and with whom they want it to settle their securitiestransaction. The counterparty in the trade also submits an

instruction.y They match up the two instructions, and make sure theseller has the securities and, if against payment, the buyercan pay. They can then complete the settlement process.

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Euro cle ar Se ttl e m e nt Se rvice sy Efficient and low-risk

y D elivery Versus Payment ( D VP) settlement process ensures

the simultaneous transfer of cash to the seller and securitiesto the buyer. This eliminates the risk of paying acounterparty and not receiving the asset being bought.

y Automated, straight-through processing (STP), standardisedcommunications and a range of value-added services enableits clients to maximise their settlement efficiency.

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Euro cle ar Asse t Se rvicingy Timely information about securities and corporate actionsy Smooth income and redemption processing and reportingy Real-time corporate action processingy Proactive tax and market claim servicey Streamlined voting proceduresy Safekeeping and asset protection

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Asse t O pti m isation Euro cle ar Banky Provides uncommitted secured credit facilities which help

clients optimise settlement efficiency and avoidunnecessary settlement failures.

y In addition, clients can transfer cash in and out of theEuroclear System in more than 30 eligible settlementcurrencies, usually on a same-day basis.

y Other services, such as the securities lending and

borrowing service, allow clients to avoid failing to deliversecurities in settlement transactions. Lenders withavailable positions can use this service to increase the yieldon their securities portfolios.

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CREST Euro cle ar M e rge ry Business Model demands the need for consolidation of

technology platforms across the group.y This will be implemented in three phases.

y Launch of the Single Settlement Engine, which will providethe first building block of the single platform for Euroclearand will concentrate on the core settlement functionality.

y Intermediate step towards harmonisation, with theimplementation of Euroclear Settlement for Euronext-zoneSecurities (ESES).

y Complete consolidation of group (I)CS D and delivery of acommon communication interface for all users of the group.

y Underpinning the Business Model will be theharmonisation of market practices, rules and services. 23


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Socie ty for Worldwid e Int e rbankFinan cial Te lec omm uni cation

y Role is two-foldy Provide the proprietary communications platform,

products and services that allow its customers toconnect and exchange financial information securely and reliably.

y Act as the catalyst that brings the financial community

together to work collaboratively to shape marketpractice, define standards and consider solutions toissues of mutual interest.

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Socie ty for Worldwid e Int e rbankFinan cial Te lec omm uni cation

y SWIFT enables its customers to automate andstandardise financial transactions, thereby loweringcosts, reducing operational risk and eliminatinginefficiencies from their operations.

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ISITCy The International Securities Association for Institutional

Trade Communication (ISITC) was founded in 1991 by agroup of financial industry leaders and competitors whoall believed in the benefit of facilitating straight-throughprocessing (STP) among custodian banks, investmentmanager, and broker dealers.

y The group's first accomplishment was produced just 10months after the initial meeting, when they eliminatedthe then current and inefficient delivery methods:fax, Telex, and re-keying. The group created an advancedstandard electronic message (format) by which to trademortgage securities.

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ISITCy Because this new electronic template reduced time and

errors significantly, all of the represented companiesimplemented the new message. Within a short timeframe, many others followed suit, and the standardelectronic message market practice was adopted industry- wide.

y Group members realized that this initial effortrepresented a unique initiative in the financial servicesindustry. The opportunity to leverage the initial success with mortgage securities into other trade processingdevelopments across all industry sectors, and establish adistinctive organization which was equipped to addressthese issues. 27


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Signatur e Guarant ee sy Preventing unauthorized transfer of securitiesy If you hold securities in physical certificate form and want to

transfer or sell them, you will need to sign the certificatesor securities powers. Y ou will probably need to get your signature"guaranteed " before a transfer agent will accept the transaction.

y Although it's an inconvenience to get your signature guaranteed,the process protects you by making it harder for people to take your money by forging your signature on your securitiescertificates or related documents.

y

Transfer agents insist on signature guarantees because they limittheir liability and losses if a signature turns out to be forged.y One way to avoid having to get your signature guaranteed is to

have your securities held in street name, meaning that yoursecurities are held in the name of your brokerage firm instead of your name.


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Signatur e Guarant eey An investor can obtain a signature guarantee from a financial

institution such as a commercial bank, savings bank, creditunion, or broker dealer that participates in one of theMedallion signature guarantee programs. The three Medallionsignature guarantee programs are the:

y Securities Transfer Agents Medallion Program (STAMP) whoseparticipants include more than 7,000 U.S. and Canadian financialinstitutions.

y Stock Exchanges Medallion Program (SEMP) whose participantsinclude the regional stock exchange member firms, and clearingand trust companies.

y N ew Y ork Stock Exchange Medallion Signature Program (MSP) whose participants include NY SE member firms.


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Signatur e Guarant eey A Medallion imprint or stamp indicates that the financial

institution is a member of a Medallion signature guaranteeprogram and is an acceptable signature guarantor. B y participating in the program, financial institutions canguarantee customer signatures with the assurance that theirguarantees will be immediately accepted for processing by transfer agents.

y Transfer agents can refuse to accept a signature guarantee froman institution that does not participate in the Medallion programor that is not recognized by the transfer agent. While guarantorfirms can charge a fee for their services, they often don't and offerthem as part of their customer services.


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STAMPy The Securities Transfer Agents Medallion Program, Inc. (STAMP, Inc.)

is a not-for-profit corporation that owns and, together with KemarkFinancial Services, the STAMP Program Administrator, operates theofficial signature guarantee program that is recognized and approvedby the financial industry and that is supported and endorsed by theSecurities Transfer Association (STA).

y The STAMP Program facilitates the equitable treatment of eligibleGuarantor institutions and promotes the prompt, accurate, and safetransfer of securities by providing the Transfer Agent with protectionagainst risk of financial loss if it has no recourse against the Guarantor.

y Transfer Agents and others who rely on a signature guarantee from amember of STAMP are protected against loss from wrongfulendorsements if the Guarantor is unwilling to meet, or is incapable of meeting, its financial obligation under its Program Indemnity Agreement.


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STAMPy Once a Guarantor joins the STAMP Program, it must acquire the

necessary STAMP Medallion imprinting equipment and obtain Surety Bond coverage, which in many cases can be obtained at nominal costfrom the Guarantor s existing insurance carrier.

y In addition, Program Procedures require that all Guarantors receivecertification from the Program in accordance with strategies focusedon individual employee certification.

y Guarantor certification is achieved through prescribed training of relevant personnel, supported, in turn, by the availability of furtheronline learning and assistance.

y

Guarantor certification has as its primary goal safety and soundness inthe application of an institution s Medallion imprint. This goal isaccomplished through a well developed awareness of the legalframework and issues, including potential Guarantor liability, whenproviding a signature guarantee in connection with the transfer of asecurity.


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ACATSy A system that facilitates the transfer of securities from one

trading account to another at a different brokerage firm or bank.The N ational Securities Clearing Corporation ( N SCC) developed

the ACATS system, replacing the previous manual asset transfersystem with a fully automated and standardized one.

y Stocks, bonds, cash, unit trusts, mutual funds, options and otherinvestment products can be transferred via the ACATS system.Only N SCC-eligible members and D epository Trust Company member banks can use the ACATS system. This is the system which processes Automated Customer Account Transfers(ACAT).


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ACATSy A system that facilitates the transfer of securities from one

trading account to another at a different brokerage firm or bank.The N ational Securities Clearing Corporation ( N SCC) developed

the ACATS system, replacing the previous manual asset transfersystem with a fully automated and standardized one.

y Stocks, bonds, cash, unit trusts, mutual funds, options and otherinvestment products can be transferred via the ACATS system.Only N SCC-eligible members and D epository Trust Company member banks can use the ACATS system. This is the system which processes Automated Customer Account Transfers(ACAT).


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ACATS - Be ne fitsy ACATS facilitates accurate and timely transfer of a customer's account, with the

following operational advantages to users:y Uniform time frames, standardized reporting and automated control functions.y The service debits delivering brokers the full market value of customers' securities,

promoting the timely transfer of assets. For account transfers where a bank or aFund Company is the contra-side, the assets are delivered free.

y ACATS provides an automated transfer initiation procedure that incorporates theindustry's effort to immobilize paper documents, such as Transfer Initiation Forms(TIFs).

y Automated residual credit processing allows credits that accumulate after a transferis completed, such as stock or cash dividends, to be transferred electronically fromthe delivering firm to the receiving firm through ACATS.

y Through the ACATS-Fund/SERV link, users can easily re-register customers' mutualfund assets.y Through the ACATS/IPS link, users can easily re-register customers' annuity assets.y Automated functionality to process partial transfers, fail clean-ups and position

reclaims.


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ACATS How it worksy Customers initiate account transfers by submitting completed

TIFs to their new broker or bank (in the case of residual creditsand other non-standard transfers, the delivering firm initiatesthe transfer). The TIF data is forwarded to N SCC, which assignscontrol numbers and sends control reports to both deliveringand receiving brokers/banks.

y D elivering brokers/banks must submit asset details or reject thetransfer. Assets that are submitted are reported to the deliveringand receiving firms.

y Receiving firms have one business day to reject the account, orrequest that the delivering firm make adjustments.

y D uring this one-day period, the delivering firm can add, deleteor change an item.

y Receivers can also delete mutual funds or annuities where they don't have a selling agreement with the fund or insurance carrier.


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ACATS How it worksy Securities eligible for the Continuous N et Settlement (C N S)

System are automatically routed into C N S, unless the deliveringfirm indicates otherwise.

y Other securities are transferred through ACATS receive-and-deliver instructions or sent to D TC, if non-C N S, D TC-eligible.

y Eligible mutual fund assets can be transferred through theautomated ACATS-Fund/SERV interface.

y

Eligible annuities can be transferred through the ACATS-IPSinterface.y Options are routed to the Options Clearing Corporation, where

transfers in customer-options positions take place.


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ACATS How it worksy On settlement date, for non-C N S eligible securities,

N SCC automatically debits the delivering broker withthe value of the assets being transferred through

ACATS and credits the receiving broker with the sameamount.

y For assets that are delivered through N SCC's physicaldelivery systems, N SCC will credit the deliveringbroker with the value of those assets and debit acorresponding amount to the receiving broker.

Documents

Technology in Capital Markets