2F2 P

Investment Accounting Technology Trends

InvestTech Systems Consulting Jeremy M. Hurwitz October 2005

P2F2

Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion

October, 2005

Introduction to InvestTech Systems Consulting

Industry Leading Investment Systems Implementation Focus, Experience & Qualifications

Specialized expertise in investment management systems within large private institutions and public pension funds Investment industry leader in strategic architecture, operational efficiency and systems evaluation studies Successful completion of multiple large, complex implementation projects over 15 years Strong working experience with most leading investment systems accounting vendors

Qualifications & Experience

InvestTechs Project Team Sample Public Sector Experience
Public Sector Experience
Ohio Public Employee Ret. Systems Florida State Board of Administration Oregon State Treasury (& Ret. Funds) Central Bank of Norway (NORGES) Ontario Muni. Emp. Ret. System (OPERS) Hospitals of Ontario Pen. Plan (HOOPP) ABP Dutch Pension Plan Wisconsin State Investment Board TIAA-Cref State of Alaska Pension Plan State of Florida, Division of Treasury Texas Teachers Pension Fund Washington State Investment Board

Project Descriptions
Strategic architecture - systems evaluation - investment accounting and data warehouse systems implementations. Strategic architecture - systems evaluation - and investment accounting and data warehouse systems implementations Systems evaluations - Investment DWH implementation Custodial evaluation & equity trading systems implementation Strategic investment operations efficiency studies, investment accounting and performance implementations Investment accounting implementation Investment DWH & performance measurement implementation Investment DWH & performance systems implementation Risk management evaluation & selection study Strategic planning study. Investment systems evaluation and selection study Investment accounting systems assessment Strategic architecture - systems evaluation & selection studies.

P2F2

Agenda

1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion

Industry Trends E-Trading

Fixed Income E-Trading Explosion

Bond e-trading ($4T / month) Steep CAGR (150%) Majors are Govts, MBS, CP
Source: Lehman Brothers estimates

Buy-Side Mega-Trends
1. Major Sector Consolidations Mega-brand Power
Banks, brokers, custodians, investment firms and Software Vendors. Vendors

2. Vertical Specialization Niche Focus

Expect leading firms to migrate to models that favor specialization

3. Regulation and Compliance - The Cost of Doing Business

Enterprise-wide infrastructures to address regulatory requirements

4. Data Organization What is your Data Strategy

Next-generation data services - predictive analytics and data mining

5. The Technology Differentiator

Spending on strategic IT projects will define the next leaders
Wall Street and Technology September 2005

Leading Buy-Side 2005 Focus

1. Enterprise Wide Data Integration Consolidate siloed data to derive
meaningful business information to support strategic objectives.

2. Soft Dollars Pressure - Dramatic changes in 2004/5. Impact on vendors services. 3. Algorithmic Trading - 2004/5 boom, greater emphasis on product differentiation. 4. SoX and BIS Basel II Accord (2007) Heavy focus on compliance. 5. Office Integration - Retail investors pressure advisors - must leverage
information across the firm to empower client servicing.

6. Transaction Cost Analysis Focus on execution and the TCA tools. 7. FIX/SWIFT & Other Standards - FIX 4.4 in 2005 focus on derivative products 8. Process Integration - Buy side need to improve operating efficiency across
entire IM cycle. Cost driven process. Soft dollar cuts compounding impact.
Wall Street and Technology April 2005

Accounting Market Backdrop

Pre 1990 Buy-Side predominantly manual/legacy (ADP) Post 2000 - 85% of securities accounting is automated Post 2005 - Growth in security class systems focus 2005 - Leading vendors (200+ clients) lag the technology curve Increased demand for automation and real-time focus
Demand for internal STP outpaces external STP Global processing - corporate actions, program trading, automation Extension of FIX into Fixed income and Derivatives

Typical Investment Systems Architecture

Large Buy-Side Institutions
External Feeds & Connections Market Data & Analytics Front Office Systems Trading Back-Office Accting/Cash Additional Back-Office

Linear information flow, incomplete integration, complex web of interfaces

VMUs
Electronic Transaction Systems Security Master Feed
Pricing, FX

Bloomberg

Risk Management

OMS Trading Platform

Fixed Income Trading Equity Trading

Portfolio Accounting

External Warehouse

Salomon Yield Book

Performance Attribution

Reconciliation

Client Reporting Custodians and Admins. Settlement Depositories

Lehman PC Product

Custom Analytics

Compliance

Derivatives Accounting

MBSCC EPN System

CMS BondEdge

Benchmark Modeling

Derivatives Trading

Cash Mgmt Client Billing

Broker Analytics

Credit MBS Analysis Trading System

MBS Trading

CDO/Hedge Accounting

Securities Lending

Front Office Data Marts

Operational Data Hubs

Data Warehouses

Inv. Acct Vendors and Services

Best of Breed Approach
Analytics: Bloomberg, CMS BondEdge Derivatives Solutions, Lehman Point, Solomon Yieldbook, Factset, Barra Trading: Bloomberg POMS, CRD, Ez Castle, Latent Zero, Macgregor, Longview Accounting: Advent, DSTi, Eagle, IDS, Princeton, SS&C/FMC, Thomson, Sungard Performance: DSTi, Sungard, Statpro, Eagle, FMC/SS&C Data Management: DSTi, Eagle PACE, Goldensource (FTI), Sungard FAME, Netik

Integrated Approach
DSTi, Thomson, Blackrock Solutions, Principia, Murex, Simcorp, Sungard, Eagle.

Vertical Best of Breed

Derivatives Solutions, Wall St. Systems, IBSI, Principia, InvestTran, CDOSuite, Beauchamp, InvestTier, Equitrack, Algorithmics

Integrated Vs. best of Breed

Deployment of Integrated Solutions

1-Stop Shop Legacy Systems

Vendor Re-Integrated Solutions

Best of Breed Peak Outsourcing ??????

-----1980------------990s-----------1995----------2000-----------2005--------- Time Scale

Leading Investment Accounting Vendors

Company
ADP Wilco Advent Software, Inc. Microgen plc Beauchamp Financial Technology Checkfree Investment Services DST International Eagle Investment Systems Financial Models Corporation Global Investment Systems (GIS) Integrated Decision Systems (IDS) ITS Associates Inc Misys Princeton Financial Systems QED Information Systems SimCorp SS&C SunGard Thomson Financial Trema Group Wilshire Associates

Product
Tarot Axys, Geneva AIMS Back Office FundManager Checkfree APL HiPortfolio Eagle STAR FMCPacer, FMCGenvest MFACT Global Inv. Manager Tiara Quasar PAM Q2 SimCorp Dimension CAMRA Invest One, Portfolio One Portia, Vestmark Trema Finance KIT Abacus

Full Basic Perf Perf Invest. Suite Acct. Meas. Attrib. DWH Compl. Recon Risk Hedge Pools X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X

Accounting Market Backdrop

Recent banking consolidation and vendor shuffle
Sungard The Consumer is consumed SS&C buys FMC and SS&C is purchased Checkfree buys IDS Macgregor and TradeWeb are purchased Custodians outsourcing drives purchases:
SSB buys PAM and DST products Mellon buys Eagle BoNY buys Netik

Who is next?

Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion

Product Evaluation Framework

Core Product Functionality Technology Platform Data Management Model Extended Integration/Automation (STP) Flexibility & Scalability Service Models and Costs Vendor Strength (Risk Profile and References) Integrated Applications (Value Added)
Data Warehousing Reconciliation tools Performance and Risk Compliance

Technology

Security Type Coverage

1970 - 1990 1990 - 2000 2000 - 2005

Generation I

Generation II

Generation III

Domestic Equity Vanilla Fixed Inc.

Global Equity Extended Fixed Inc Asset Backed Futures/Options Basic Derivatives

Global Equity Extended Fixed Inc Adv. Asset Backed Futures/Options AddI Derivatives Bank Debt REO & Priv. Equity

Extended Securities Trends

Exotics are Becoming the Norm
MBS TBAs, CMBS Swaps (Interest, Currency, Credit Default, Many-to-many legs) Collateralized Debt (CDO, Tracer) Bank Debt, Credit Lines, Distressed Debt Complex Hedging Overlays / Strategies Driving Management Blurry Lines Between Fixed Income and Derivatives

Blame the Fed

Flat curve, tight spreads driving reach for yield

Blame the Hedge Funds

Waitthey are invading your firms!

Technology Evolution
1970 - 1990 1990 - 2000 2000 - 2005

Generation I

Generation II

Generation III

Legacy VSAM/Propriety Flat Files Batch on T+1 Green Screen

Client Server (2 Tier) Relational Database Multi-File Formats Batch on T+0 Windows Custom APIs

N-Tiers Relational & BLOB XML / Messaging Near Real-time Windows and Web Open APIs and Web Services ASP/BSP Services

Data Management Layers

1970 - 1990 1990 - 2000 2000 - 2005

Generation I

Generation II

Generation III
CRM

Basic Securities Accounting Data End-of-Day Access

Ownership and Contact Extended Security Attributes Intra-day Access

Extended Asset Classes Research and Analytics Direct Access to Security Universe Near Real-Time Market Updates Data Aggregation Warehouse Layer

STP Enabling Features

1970 - 1990 1990 - 2000 2000 - 2005

Generation I

Generation II

Generation III

Basic User Interfaces Reduce Manual Entry

Custom Trading Interfaces Basic System Automation DTC / OASYS SWIFT File Based Reconciliation

ECN / OMS Standard Interfaces Workflow Management Tightly Woven Settlement Integration ISO / FIX Message Based Marching / Recon

Internal System Transparency

STP - Integration is key

Accounting is the core engine of the business processes Open component architectures are keys to agility and efficiency Principles of STP applied from Back to Front Expect more ECNs / ATN (Tradeweb, MarketAcces) Expanding Industry Standards
Bond Market Association and ISITC working on common derivatives protocol for ISO and FIX 4.4

These Features Extend the Shelf-life of your Investment

Service Model The Outsourcing Continuum

Software Licensing for In-House Operation Application Service Provider (ASP) Business Service Provider Business Service Outsourcer

Traditional In-House Model Investment Manager Shoulders Operations And Technology Infrastructure And Integration Between Best of Breed Applications

Remote Access to Vendor Supported Systems/Technology Infrastructure Investment Manager Retains Operations Responsibilities IT Operations assumed by Provider ASP Vendor Provided Market Data Feeds

Technology and Services Supplied Investment Manager Retains Operations Staff Provider Manages System Infrastructure and Services

Traditional In-House Model Operations Staffing Lift-Out Outsourcer fully assumes Middle and Back-office Operations Operations Risk may be assumed by provider

Accounting Outsource Options

State Street Banks Princeton Financial ePAM
Outsourcing on SSBs Multi-currency Horizon or PAM

SS&C SSC Direct

Application Service Provider (ASP), outsourcing CAMRA system support - not operations. (Current maintenance $130k/yr.)

Mellon Bank
GSS has new product using Eagle PACE/STAR for full operations outsourcing.

Bank of New York

Smartsource, potential lift-out current CAMRA. Financial Models Company products (PACER, FMCNet, Recon)

Conning (uses proprietary CAMRA) GlobeOp, IFS, FCS, DSTi + Others

Vendor Momentum & Resources

Installation Base Information
Number of Client Sites 600 500 400 300 200 100 0

550 370 200 45 40 EIS FMC 50 20 PFS SUN TFS DST 250
# of Clients

QED

ADV

Total Number of Employees 290

300 250 200 150 100 50 0

290 250 250 170

60 25 33

# of US Employees

QED

EIS

FMC

ADV

PFS

SUN

TFS

DST

Vendor Product Report Card

Extended asset coverage Industry standards calculations Extended data requirements Value added features (Performance, Recon.) + Message-enabled integration (APIs, MQ,) + Improved data access tool sets Derivatives, multi-asset classes Advanced technology offerings Exception based workflow models
Meeting Markets Needs

High

Med

Low

InvestTech Evaluation Framework

The Devil is in the Details

InvestTech Evaluation Framework

P2F2

Agenda

1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion

Generation IV Tech Gotta Haves

Web-compliant, n-Tier architecture Dynamic data structures (add your own fields) Dynamic security types (build your own flavor) Standard adaptors (OMS, vendors, ISO 15022, OMGEO) Open messaged based API (XML) Data repository integration (reference data) Ease of Implementation (vs ASP) Powerful client reporting tool sets Ease of adoption - Optional service offerings High performance (support the volumes)

Generation IV and Beyond

FI Holdings Modeling Review Equity Modeling Commingled Pool Hedge Fund CDO

Portfolio Management
Service Layers

Analytics Engine

Portfolio Accounting

External Assets

Service Level

Core DB
Research Tools

Message Architecture Based

Attrib

Performance Measurement
Peers

Risk And Compliance

2a-7

External Risk

Composites

Rule Based

Future Of Investment Accounting Systems Can Portfolio Accounting become a commodity? Probably Not
Replacement is non-trivial Integration is non-trivial User training (to optimal efficiency) is nontrivial Cost is non-trivial

Product Development Life Cycles

Development
Peak of Expectations

Time to Pick the Next Winner Expectation Re-alignment

Initial Development

Stability

Market Reaction
42

Decline

Time
2yr Blocks

P2F2

Agenda

1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion

Thank You