Challenges for FinancialInformation Systems

Alan ClarkeTSSG

• Outline– Motivation & Goals– Context of Financial Information Systems– Types of Challenges – Response to Challenges– Solutions and the TSSG response

Motivation & Goals of FIDES

• Natural & Logical Step to bring Finance, Telecoms & Computing into the one environment.

• We can look at all aspects of a Financial Information System as a Communication System.

– There is a huge cost in mis-communicating or a breakdown in communication ( most of all in Financial Systems ).

• Goal : To study and research and house Financial Information Systems in their natural environment in order to improve Critical Infrastructure for Financial Services and to help Financial Services deliver the most efficient, resilient, and cost-effective service they can.

– To conduct an ongoing two-way conversation between Financial Services and Research to achieve these ends.

Background:The

World of eFinance

• Defn: “The provision of financial services and markets using electronic communication and computation” (Allen, McAndrews and Strahan 2001)

• e-Finance world contains 3 sectors: B2B (Corporate), B2C (Retail) & infrastructure (Investment & everything else)

• World Bank study in 2000:

– “E-finance has great potential to improve the quality and scope of financial services and expand opportunities for covering trading risks and can widen access to financial services for a much greater set of retail and commercial clients by offering more cost effective services”

FIDES Overview & Context

• The financial services industry is believed to be on the verge of a dramatic revolution, prompted by regulatory requirements, the desire for greater stability and more powerful ICT [source: Frankfurt House of Finance, 2008]

• eFinance is already transforming how banks do business (e.g. online only banks). Ever greater dependence on Financial Information Systems.

• The US position : Dodd Bill on OTCs. Greater Transparency & Accountability

• Many challenges to address

– Lack of standards (apart from FIX)

– Solutions du jour

– Compliance issues (BASEL II, SOLVENCY II)

– Wave of IT and engineering talent driving “market innovation” [source: Credit Suisse]

• Need for better Information systems

Context : Participants in eFinance

Financial Information Systems

Retail Banking

Investment Banking

Funds

Exchanges State & Treasury

Data Providers

Insurance &Re-Insurance

Clearing

SettlementsRegulatorsAuditing

Boutique HousesPublic & Customers Broadcast Networks

Topology & Types of Challenges

QoS reservation & assurance

Redundancy

Challenges

Dealing & Trading

Transaction Compliance

Infrastructure

Standardization

“Performance”

Security

Resilience

Latency Reduction

Dynamic Management

Audit Trail

Complex Event Processing

Realtime Troubleshooting

Data Management

Data Security Integrity & Trust

Negotiation

Throughput Optimisation

Audit Trails

Benchmarking

Risk

OTCs

Proliferation of Markets

Fraud

Data Representation

Data Syndication

Data Messaging& Financial Protocols

Basle II

Insolvency II

Future Business & Future Business Models

Proliferation of Data

• http://ftalphaville.ft.com/blog/2009/07/08/60761/the-cold-war-in-high-frequency-trading/– Latency differentials are directly related to profit margins– If you have lower latencies than your competitors you can complete more trades within this

differential.• Unsuitable for business, and certainly non-critical.• Hidden Nasties in TCP/IP• Direct implications for business (most unknown).• Technology is under event-horizon• Only game in town ?

• TSSG Research – Major contributions to EU Future Internet programmes

• Collaborations with– Irish Companies such as Intune Networks– US Universities (with Boston University): RINA– Resolve such issues– New Business Paradigms

Challenges: Network Focus

Types of Challenges in Financial Information Systems

Evident(Seen) Expected(Forseen) Unexpected(Unforseen)

Inappropriateness of TCP/IP

ResilienceRedundancy

Quality of Service

Providing accreditation

Data Issues & Valuations

Critical Process Failures (Regulatory & IT)

Data Management OTCsTransparency

Incorrect Validating Data - e.g. Hoonahan comments

Threshold in scalability in TCP/IP

Effects in Proliferation of Markets

Flooding & Throttling

Increased Costs

Longer Audits

Expense of meetingRegulatory Requirements

Security Compromises

New Instruments ?

Benefits/Risks, Impact Virtualization ?

Effects of Legislation ?

Hidden gotchyas in FIS right now ?

Changes/Benefits/Risks of new Tech ?

New paradigms, e.g. neuromorphic systems ?

Effects of new business models ?

Testing & Bounds of Rationality

Protracted Data Management Issues

Time

Types of Challenges

• Observation : Challenges and issues have the same nature to what we see in any technology in general.

• Hypothesis : The bulk of issues that face Financial Services are technological in nature..

• Evidence ?

Response : Capital Markets ICT Spending

Source: Aite Group 2008, 2010

• Capital markets firms ICT spending globally will amount to €30.4b in 2010, up from €28.7b in 2009 and a modest increase from €30.2b in 2008

• CIO spending focus –trading execution management systems, risk management systems, global trading settlement back-office systems, client reporting, pre-trade & post-trade analytics

• How much spend is just to resolve on-going technological issues ? How much spend is unnecessary ? How many new issues introduced ?

Response

to Challenges (Market Analysis)

Security

ResilienceLatency Reduction

Dynamic Management

Audit Trail

Complex Event Processing

Realtime Troubleshooting

Data Management

Data SecurityIntegrity & TrustNegotiation

Throughput Optimisation

Audit TrailsBenchmarking

RiskOTCs

Proliferation of Markets

FraudData Representation

Data Syndication

Data Messaging& Financial Protocols

Basle IIInsolvency II

Proliferation of Data

Challenges

Response (Contd.)

• Is Capital Expenditure is lost or maybe spent in vain due to a lack of methodology or framework of resolution ?

• Will this present expenditure change the topology of challenges ? Or will that topology grow ?

• How much will the costs ( and knock-on costs) balloon without proper framework, protocols and methodology for developing Financial Information Systems ?

• without industry-wide standards much of the technology is proprietary and likely to remain expensive.

Solution to Challenges: Telecom Perspective

• No quick fix :

• Telecoms Industry has faced many of the similar challenges. But has had the luxury of decades of research and standardization

• Telecoms Industry has had the time to develop and institute a methodology for introducing new technology through standards that meets service requirements in a robust and ubiquitous fashion. e.g. GSM

• Methodology is an ongoing Evolution.

• We see much in common in what both industries want to achieve. The service provision processes are much the same and the desired goals are much the same (providing a robust, tailored service). Minimized hassle, optimal management, optimal management data required. Requires a commitment to research and standardization.

• Many challenges have been seen before

TSSG Response Challenges

• Committed to support Financial Services to achieve the best (and most cost effective) service it can.

• New Research Centre being built to support this commitment. Latest Infrasrtucture at TSSG DataCentre, housing the latest cloud computing facilities and next generation networks

• Leveraging experience, research, expertise. The TSSG will be bring to bear all of it's expertise on the challenges and issues that face financial information systems

• Gathering requirements from industry

• Conducting public and proprietary research in Financial Information Systems.

• Adopting a Dual approach - Top down : Applying our expertise in compliance, standardization, data management, negotiation, etc, to the challenges that face financial information system - Bottom up : Engineer financial networks from the bottom up. So that Applications such as messaging are supported by properly thought through protocols. With input from the industry.

• Implementing a planned approach towards building Critical Infrastructure for Financial Services

• Critical to have robust infrastructure. Reputation depends upon it.

TSSG Response: Research Landscape

FinancialInformation Systems

Retail B

anking

Service O

riented E

volution & Integration

Market Infrastructures

Secure Information Sharing inter-FISecure Information Sharing inter-FI

High Speed Networks for Financial ApplicationsHigh Speed Networks for Financial Applications

Complex Event Processingfor Financial ApplicationsComplex Event Processingfor Financial Applications

Policy-basedCompliance ManagementPolicy-basedCompliance Management

TopicsTopics

Sub-

theme

Sub-

theme

Trust in Finance and FinancialNetworksTrust in Finance and FinancialNetworks

Conclusion

• Financial Information Services pose many challenges in

– Networks

– Algorithmics/Computer Science

– Information Systems Management & Compliance

• TSSG»s

intention through 15 years of telecoms research to address

these challenges (one at a time). To help

Financial Services provide the most efficient, resilient, cost-effective services they can realise.

• Irish Financial Services : Unique opportunity

to spearhead leading research and implementation program in Financial Information Systems.