Treasury Systems Selection riskworx

Treasury Systems Selectionwww.riskworx.com

Agenda • RiskWorX • Background • The Technology Response • Selection issues • Implementation Issues

RiskWorX • Risk Services Company • Valuation-oriented technology services • Consulting services: risk measurement & management • Niche data providor • A PricewaterhouseCoopers partner in The Riskhouse • Offering holistic treasury implementation services

SA Background • Opening up of markets in early 1990’s • Environment denoted by rel. high interest rates, high volatility, declining spreads, & increasingly pervasive electronic trading • Investment banking developing, but behind the first world • Tax loopholes closing or less obvious: Need to look for more creative trading opportunities via complex structured products

Key Drivers • More complex structures in the market • Credit derivatives, asset-backed securities etc • New instruments typically handled in spreadsheets • Multiple systems • IRD, Equity, FX/MM, Risk • Costs of those multiple systems, esp staff and operational risk

New challenges • Connectivity (e.g. tie-up of JSE & LSE: IT and related issues) issues • Regulatory and goverance issues, esp post -Enron • International banks with world-class technology

Vendor Environment • Large installed base required to keep up with pace of change (finance and technology) • Maintenance costs often don’t cover it • Vendor consolidation and product rationalisation • SA not a big market • Implications: long term contracts only feasible with major vendors, despite benefits of currency fixing • Vendor risks (esp. stagnation and lack of support)

The Technology Response • SA banks aiming to compete locally and grow internationally • Soft currency makes “sweating” the technology important • Searching for more efficient technology to • Drive transaction volume growth and maintain margins • Ensure local and international exchange connectivity • Provide trade analysis and real-time integrated info (esp.p&l and risk management) • Provide stp either individually or in coordination with other systems

Additional benefits of the “right” technology • Cap technology capex spend • Minimise IT maintenance spend • Maximise use of infrastructure (middleware, database technology etc) • Optimize Euro-based training costs • Reduce operational risks • Reduce integration focus and enhance information impact on decision-making

The build-buy debate • Typically the first issue encountered • Build is tempting, given • Costs • Initial small requirement • Build only when you are sure that • Your needs are and will remain very modest • You have a bottomless development budget • You can do a better job than a specialist development house • You can commit many staff to requirements definition and testing • The cost savings/functionality benefits definitely outweigh the risks

Architectural Issues - Integration • Total solution from one vendor is unlikely • The client should establish where/how they will integrate • Replacement cycle on front office technology typically much shorter than back office • Typical integration challenges: • Across asset classes • Front office <-> rest • Treasury <-> accounting and cash management

“Vertical” Integration Asset Classes Front Office Back Office General Ledger

“Horizontal” Integration All Asset Classes Front Office Back Office General Ledger

Reality Asset Classes Front Office Back Office General Ledger

Architectural Issues - Integration • Integration Methods • “Dumb” flat file transfer (scheduling?) • Middleware routing/messaging • Integration impacts severely on processes • Reconciliation and Control Issues e.g. dealing with mis-booked trades, back-dating transactions etc • Integration severely increases costs and risk

Integration Costs- Example Even with middleware, integration is challenging! Front Office Back Office M.I.S. General Ledger

Architectural Issues • Scalability • Will the system be sufficient in 5 years’ time? • Potential new users of the system (costs?) • What new risk measures will develop? • Multi-site distribution • Systems should allow for multiple sites without losing the ability to consolidate • Real-time • Overnight limit reporting and risk figures are increasingly insufficient

Architectural Options • Client-server versus host • Costs and benefits of each, esp. scalability, security, support and general cost of ownership issues • Open architecture versus black box • Black boxes reduce information benefits • Integration and flexibility • Decide where you are prepared to integrate • Integration across instrument types with the use of good middleware allows continued use of legacy systems • Key is the ability to use proprietary pricing functions and risk models

Desk Risk • Desk risk increasingly critical • Closer to “real time” than the enterprise risk system • Less chance of integration problems • Allows for consolidated risk reporting and trader P&L • Desk risk includes • Pre-deal limit checks • Simulation of risk, hedges and P&L before trading • Value at risk (market risk) and potential future exposures (credit risk) now an essential component of any desk risk offering

Wrong Approaches to System Selection • Looking at systems before reviewing requirements • Failing to clarify the future direction of the business • Failing to agree the level/type of integration required • Expecting a 100% fit • Expect the vendor to do 100% of the implementation without client input • Obsessing on minor areas of functionality • Forgetting that you get what you pay for • Overlooking the financial strength of the vendor and/or his commitment to the treasury system market

Key Aspects in Vendor Selection • Proven track record in your region • Financially substantial • Dependence on Treasury systems • Local support presence and/or implementation partners

Some other hints • Develop an evaluation approach that • weights issues appropriately • is consistent • Don’t be over-awed by gimmicks - manage expectations • Push purchase as far down the selection path as possible • Accept that even with the “best” system, you will still follow the standard emotional cycle (euphoria, disillusionment, acceptance)

Key Issues • When designing the plan, understand that time, cost and quality are often trade-offs • Define the deliverables up-front • Utilise standard project plans and specify milestones • Have a joint project plan for all stakeholders • Agree viability of plan and vendor deliverables with vendor

Vendor should provide • Local support • Quicker turnaround time with face to face communication and hands-on support than via help desk and video conferencing • Adaptation/customisation to South Africa • Has the vendor done it? • Does the technology facilitate this? • Commitment to Implementation • Vendor should contractually agree deliverables • Where required, this should include turn-key solutions • Check the local track record!

Key Internal Issues • Implementation Scope • Important to keep scope as narrow/focused as possible so as to • Obtain maximum benefit from the project team • To minimise disruption to the business • Secure and commit resources • Internal resources need role clarity and focus, esp. wrt. performance measurement • External resources can assist in several ways, esp. speed and in better approaches, often reducing re-work • Clarify roles and responsibilities • Lock in for appropriate period

Environments • Ensure resources available for multiple environments • Ensure multiple environments (including disaster recovery) are in place ASAP • Implement robust change management protocols • Test EVERYTHING, including vendor releases, prior to moving intoproduction, regardless of ISO certification etc!

Focus on Project Outcomes, not just Project Deliverables • Outcomes are user acceptance, exploitation of new system benefits, total switch-off of old systems, ongoing vendor relationships, project perception ex post etc • Many outcomes occur post-delivery! • Are the key test of the success of the project, and of the key sponsors • Need to be planned and managed, just like any aspect of the formal project

Thank You

Treasury Systems Selection riskworx