Fincad survey results2014

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2015 Trendsin Pricing and Risk Management

September 18, 2014

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Matthew Streeter, CFAProduct Marketing Manager, FINCAD

Dushyant ShahrawatSenior Research Director, CEB TowerGroup


Top Technology Trends Affecting Capital Markets

Dushyant ShahrawatSenior Research Director, CEB TowerGroup


Presentation Roadmap

Top 10 Trends

Upcoming Regulatory Issues

Risk Trends

Q&A

1

2

3

4


Top 10 Trends


Decrease by More Than 5%

Decrease by More Than 1 – 4.99%

No Change

Increase by 1 – 4.99%

Increase by More Than 5%

Unsure

13%

14%

15%

29%

12%

17%

Modest Budget Growth ExpectedHow Do You Expect Your Company’s IT Budget to Change in the Next Fiscal Year?Percent of Capital Markets Executives, 2014

n = 250


MiFID II

US Trading Changes

OTC Reform & EMIR

Dodd-Frank

UCITS IV

Basel III

Solvency II

FATCA

$6,625

$5,325

$4,875

$3,600

$2,325

$1,950

$1,375

$985

JP Morgan

Bank of America

Citigroup

$11.1

$4.8

$1.4

Stakes of Non-ComplianceCumulative Compliance Spending Across Capital MarketsMillions USD

Allocated Litigation and Legal Costs During the First Nine Months of 2013Billions USD, approximate

This figure doesn’t include settlement payouts, a few of which included:• $13 billion to DOJ for mortgage

securities• $4.5 billion to institutional

investors for mortgage securities • $2.6 billion settlement for Bernie

Madoff’s Ponzi scheme

Source: Bloomberg; CEB analysis.

Source: CEB analysis.


2007 2008 2009 2010 2011 2012 20130.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

NYSE (CAGR = -9.7%)

NASDAQ (CAGR = -2.7%)

BATS (CAGR = 11.5%)

DirectEdge (CAGR = 11.2%)

Falling Trading RevenueEquity Trading Volumes at Major US Exchanges Daily Average, Millions of Shares, 2007-2013

Fixed Income, Currencies, and Commodities (FICC) Revenues Have Weakened SignificantlyGlobal Investment Banking Revenues by Business Line, in Billions USD

Source: SIFMA; CEB analysis.

The Volcker Rule, along with new capital rules and the shift towards electronic trading for FICC, has caused investment banking FICC revenue to decline.


Foreign Exchange

Flow Credit

Commodities

Cash Equities

Prime Services

Proprietary Trading

30%

18%

20%

25%

15%

35%

16%

6%

8%

15%

8%

7%Post-Regulation Pre Regulation

Capital Restrictions Affect All Business LinesReturn on Equity Before and After Regulatory Measures2014

Line of Business Delta

Foreign Exchange -45%

Flow Credit -65%

Commodities -60%

Cash Equities -40%

Prime Services -45%

Proprietary Trading -80%

Source: McKinsey; CEB analysis


Outlook for 2014Top 10 Technology Priorities and Projects2014

Top 10 Technology Initiatives for Capital Markets

Optimize Capital and Liquidity Management

Capabilities

Right-Size Trading Technology in Face of

Capital Squeeze

Accelerate Operational Analytics Through Data

Visualization

Centralize Investment Analytics and Data

Sourcing to Deliver Front-Office Value

Rebalance IT Costs Through Outsourced

Infrastructure

Adopt Flexible Application Delivery Models to Increase

Business Agility

Deliver Cost-Efficient Post-Trade Legacy System

Renewal

Aggregate Risk Data for Consolidated Regulatory

Compliance

Empower Line-of-Business with Self-Service

Information Access

Invest in Risk Oversight Tools to Manage

Obligations Across the Supply Chain

Strategic Responses

Enable Actionable Business Analytics & Decision Making

Focus Risk Management at an Enterprise-Wide Level

Transition Away From a Software-Oriented IT Model

Enhance Liquidity Management, Collateral Optimization, and Data Aggregation Capabilities

Business Drivers

Extracting Value from Big Data

Complying with the Next Phase of Regulatory Compliance

Migrating to a Service-Based Applications Model

Identifying New Sources of Sustainable Revenue

Managing Capital and Liquidity Requirements

Source: CEB analysis


Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 20138.0%

8.5%

9.0%

9.5%

10.0%

10.5%

11.0%MS

Citi

BofA

GS

Wells Fargo

JPM

Initiative 1: Optimize Capital & Liquidity Management Capabilities

Tier 1 Common Capital Ratios of Major Sell-Side FirmsQ3 2012 – Q3 2013

Institution Q3 2012 – Q3 2013 CAGR Basel III Mandate

Morgan Stanley 3.71% N/A

Citigroup 3.98% N/A

Bank of America 2.07% 7.25% - 7.50%

Goldman Sachs 2.89% 8%

Wells Fargo 3.56% 7.49%

JPMorgan Chase 2.17% 7.90%

Source: Company financial statements


Technology Implications of Basel III

Installation Date of Trading Technology Infrastructure

Initiative 2: Right-Size Trading Technology in Face of Capital Squeeze

Current State of Trading Platform Implementation

2014

Percent, of Capital Markets Executives, 2014 Percent, of Capital Markets Executives, 2014

Impact CEB TowerGroup Perspective

Revise Risk Models Conduct Credit Valuation Adjustment (CVA) and VaR calculations using non-parametric approaches such as Monte Carlo simulations.

Data Integration / Data Management Challenges

In order to consolidate positions from trading desks and make trading book compatible with banking book, there needs to be clean and accurate data.

Additional Data Recordkeeping With Tier 1 capital more narrowly defined, firms will need an enterprise-wide view in the way they measure capital.

Calculating Capital, Leverage, Liquidity Ratios

Consider portfolio risk decomposition, scenario analysis, deterministic stress testing, historical analysis, and VaR forecasting.

2007 or Prior

2008 - 2011

2012 - 2013

Unsure

38%

36%

21%

6%

Adopting or Replacing

Have it, No Change

Unsure

Does Not Have It

49%

44%

6%

1%

n = 53.Source: CEB 2014 FSI Survey.

n = 68.Source: CEB 2014 FSI Survey.


Initiative 4: Centralize Investment Analytics to Deliver Front-Office Value

Industry Movement in Portfolio Modeling and Risk AnalyticsIllustrative



Initiative 5: Rebalance IT Costs Through Outsourced Infrastructure

Future of Service Delivery Models in Capital MarketsPercent of Internal Resources Allocated to Each Type of Technology


2018

2013

0.72

0.6

0.28

0.4

Applications Infrastructure

Outsourced, Cloud, SaaS; 8%

In-House; 92%


In-House; 85%


In-House; 65%

Outsourced, Cloud, SaaS;

40%

In-House; 60%


Initiative 6: Adopt Flexible Application Delivery Models to Increase Business Agility

Application Delivery and Deployment Options2010 – 2016P


2010 2012 – 2014 2014 – 2016

ASP

Colocation

Hosted Solutions

ASP

Colocation

Hosted Solutions

Software-as-a-Service

Service Bureau Service Bureau

ASP

Colocation

Hosted Solutions

Software-as-a-Service

Service Bureau

Managed Services

Public Cloud

Private Cloud

Infrastructure-as-a-Service

Platform-as-a-Service

Public Cloud

Infrastructure-as-a-Service

Platform-as-a-Service


Initiative 7: Deliver Cost-Efficient Post-Trade Legacy System Renewal

Main Categories of Post-Trade Solutions and Market Focus2014


Asset Class and Trade Lifecycle Function Description Convergence Value Proposition

Back-Office Alternatives Risk or portfolio management for derivatives

• Asset class coverage extended into listed derivatives, equity, FI

Back Office — Equity/Fixed Income Risk or portfolio management • Asset class coverage extended in to

derivatives• Additional connectivity

Middle-Office Service — Specialist Function

Trade confirmation, trade management, matching

• Asset class coverage extended• Single middle office

Middle-/Back-Office Service — General Outsourcing/BPO Outsource middle-/back-office functions

• Outsource new/complex flows• Process utility model


Initiative 10: Invest in Risk Oversight Tools to Manage Obligations Across the Supply Chain

Potential Impact of Various Risk Factors on Securities FirmsBy Type of Risk and Firm, 2014



Upcoming Regulatory Issues


• Stress testing for economic shocks• Reporting of mutual fund holdings• Regulation of large asset managers

believed to pose risks to the financial system

Large Asset Managersas Systemic Risks

“I asked the IM staff for an “action plan” to enhance our asset manager risk management oversight program. Among the initiatives under near-term consideration are expanded stress testing, more robust data reporting, and increased oversight of the largest asset management firms.”

Mary Jo WhiteChair, Securities and Exchange CommissionSEC Speaks 2014, Feb. 21, 2014

Largest Asset Managers, the Primary Targets of Further OversightAssets Under Management, in Trillions USD, 2014

$4.59

$2.86 $2.48

$1.97 $1.95


The SEC is examining new rules designed to address:• Market instability: Continuing to focus on recent steps to limit volatility, such as “Limit up-limit

down”, market-wide circuit breakers, the Market Access Rule, and new rules to regulate infrastructure systems that are “single points of failure”

• High-frequency trading: Examining the general role of HFT firms. Particularly looking at… Aggressive trading strategies that could exacerbate price volatility

HFT firms registering as dealers and joining FINRA

Reducing the gap in data latency between direct feeds and more widely accessible consolidated feeds

Increasing transparency in how data feeds are used

• Dark pools: Increasing the information reported from alternative trading systems (ATSs), and making the information public. Further considering regulation of non-ATS dark pools, as ATSs comprise less than half of dark pool trading volume.

• Broker conflicts: Expanding order routing disclosures to reduce conflicts of interest such as “maker-taker” fees.

Equity Market Structure

Source: Securities and Exchange Commission; CEB analysis.


European Market StructureShare of European Equities Trading by VenueYear to March, 2013 – 2014

0% 20% 40% 60% 80% 100%BATS Chi-X Europe

London Stock Exchange Group

Euronext

Deutsche Borse

Turqoise

Other

Some estimates say dark venues like MTF dark pools and brokers’ crossing networks currently comprise 10-11% of total trading volume.

Source: Thomson Reuters; TABB Group; CEB analysis.


Risk Trends


Top Investment Risk Priorities and Mitigation Techniques

Source: FINCAD.


Top Technology Investments in Risk and Analytics

Spending Across Risk and Analytics Technologies is Picking Up Speed in 2015Percentage of Capital Markets Firms Answering “Increase” for Spending on Each Technology

Corporate Actions

Client Reporting

Reference Data

Performance Measurement

Portfolio Modeling and Risk Analytics

Capital Markets Compliance

28%

31%

36%

45%

45%

48%


FINCAD 2014 Survey Results

Matthew Streeter, CFA

• Market trends and drivers of change

Product Marketing Manager, FINCAD


Survey Results Overview


Global Regulatory Challenges

Source: CEB TowerGroup 2014• Multiple regulatory frameworks• Resource constraints• Uncertain requirements


Top of Mind Regulation


• Implementation of risk management systems– Tech development & Project management

• Risk focused regulatory compliance• Business workflow: Compliance, process &

control

Regulatory Priorities


Improving Risk Management


Risk Mitigation Techniques


Evolving Risk Systems Needs


• Regulation and reporting requirements

• Trading, funding, and collateral costs

• Growing alternate instruments and trading strategies

OTCs Derivatives Trends


Key Derivatives Challenges


Changing market

instruments

Risk system improvement

Quantitative reform and

improved risk oversight

Summary• Regulation continues to have a broad,

market-wide impact • Companies are investing in Enterprise Risk Systems

Fincad survey results2014

Economy & Finance

Transcript of Fincad survey results2014