Business Continuity & Corporate Security New York
March 21-22, 2006
Where IT, Continuity & Security are Headed in ‘06
Presented by
Larry Tabb
Alex Tabb
Agenda
The Industry Outlook & Continuity
The Business Challenges
A Case Study on Avian Flu
The Conclusion
Earnings Release Dates
Industry performance has been strong and getting stronger
Recent Earnings Earnings Net Income Growth YoY
Q4 ‘05 Q3 ‘05 H1 ‘05
-19%-13%
15%57%
41%70%
46%59%
40%49%
35%42%
22%37%
49%71%
18%75%78%
45%9%
14%10%
35%5%
$0.1$0.4$0.4$0.6
$0.8$1.0
$1.2$1.2$1.4$1.4$1.4$1.5$1.6$1.6$1.8
$2.1$2.3
$2.5$2.5
$2.8$3.5
$3.8$4.1
$7.1$8.0
State StreetPutnam
Bear StearnsNomura
Lehman BrothersAllianz Group
Deutsche BankCredit Agricole
Societe GeneraleMerrill Lynch
ABN AmroCredit SuisseBNP Paribas
Goldman SachsMorgan Stanley
UBSING Group
Mitsubishi UFJJPMorgan ChaseMizuho Financial
Barclays BankRB of Scotland
Bank of AmericaCitigroup
HSBC
Indian, Korean, & Japanese markets had the greatest yearly performance
India
Korea
Japan
DAXCAC
FTSEHK
S&P 500
China
Asia
Europe
Hong Kong
US
China
Derivatives business are all at record levelsOver-the-Counter Interest Rate Derivatives
Outstanding Notional Principal Amounts
57.31
82.74
101.32
123.90
183.58
201.41
220.00
164.49
142.31
69.21
0
25
50
75
100
125
150
175
200
225
250
1H 2H 1H 2H 1H 2H 1H 2H 1H 2H(f)
$ trillions
2001 2002 2003 2004 2005
Source: ISDA Mid-Year 2005 Market Survey, SIA forecastNote: Interest rate derivatives, for the purpose of this Survey, include interest rate sw aps and options and cross-
Over-the-Counter Credit DerivativesOutstanding Notional Amounts
2.19
18.00
5.44
8.42
12.43
1.56
0.63
2.69
3.78
0.92
0
2
4
6
8
10
12
14
16
18
20
1H 2H 1H 2H 1H 2H 1H 2H 1H 2H(f)
$ trillions
2001 2002 2003 2004 2005
Source: ISDA Mid-Year 2005 Market Survey, SIA forecastNote: Credit derivatives, for the purpose of the Survey, include credit default sw aps, baskets and portfolio transactions indexed to single names, indexes, baskets, and portfolios.Over-the-Counter Equity Derivatives
Outstanding Notional Amounts
2.32.5
3.4
4.2
5.4
3.8
2.8
4.8
0
1
2
3
4
5
6
1H 2H 1H 2H 1H 2H 1H 2H(f)
$ trillions
2002 2003 2004
Source: ISDA Mid-Year 2005 Market Survey, SIA forecastNote: Equity derivatives, for the purpose of this Survey, include equity sw aps, options and forw ards.
Metals, Commodities, & Energy have also preformed well in ‘05
Gold & Sliver
Commodities
S&P 500
Gas
Oil
Hedge fund performance improves over ’04 as emerging markets lead performance
-2.6%
-0.1%
0.6%
3.1%
6.1%
7.2%
7.5%
7.6%
9.0%
9.3%
9.7%
11.7%
17.0%
17.4%
Convertible Arbitrage
Managed Futures
Fixed Income Arbitrage
Risk Arbitrage
Equity Market Neutral
Event Driven Multi-Strategy
Multi-Strategy
Credit Suisse/Tremont Hedge Fund Index
Event Driven
Global Macro
Long/Short Equity
Distressed
Dedicated Short Bias
Emerging Markets
Hedge Fund Performance By Strategy YE 2005
Source: CS Tremont
Prime brokerage earnings can reach almost 30% of firm earnings
$3.3$3.6
$1.1
$1.3 $0.9
$0.3
Goldman Sachs Morgan Stanley Bear Stearns
Other Revenues Prime Brokerage Revenues
29% 20%
21%
Prime Broker Earnings vs. Total Firm Earnings 2004 (in US$ billions)
Source: TABB Group’s “Hedge Funds 2005: An Inside Look at Funding, Servicing, Trading & Technology “
Regulation has and will have tremendous impact on markets Past Regulation
Order Handling rules Created ECN Infrastructure Legislated fragmentation Will fragment NYSE within 5 years
Decimalization Reduced spreads Market making => Agency
Terrorism Patriot Act / AML
Future and current Basle II Reg. NMS
Trade-through Access rule Sub-pennies Market data
MiFID PS05/9 (research unbundling)
Market Oversight Research settlement Sarbanes Oxley Mutual fund
Break points Late trading
Hedge Fund Investigations
Regulatory scrutiny is increasing dramatically
2.0
4.6
11.4
16.8
29.0
73.5
94.3
AMEX
CBOE
Other
StateRegulators
NYSE
NASD
SEC
Average Number of Investigations by Agency2005
772
248
98
Average Number of Investigations by Firm Size
Source: SIA
Order Flow Allocation ’04 – ’07(projected)
US Equities market is moving very quickly to a low-touch model
34%
16%
6%
-25%
CAGR (’04 – ’07)
Source: TABB Group Institutional Equity Trading 2005
17%
25%
37%
20%
11%
20%
38%
31%
7%
16%
31%
48%
Algorithms
ECN/DMA/CrossingNetworks
Brokers via Fix
Brokers via Phone
2007 (proj) 2005 2004
2005
Data volumes are going through the roof and milliseconds matter
120,000
80,000
4,799 7,063 9,650 12,906
25,869
55,105
2000 2001 2002 2003 2004 Feb-05 Jun-05 Dec2005Proj
Aggregated One Minute Peak MPS Rates CTS, CQS, OPRA, NQDS
Source: SIAC, OPRA, and NASDAQ
While the industry is strong, global threats are also at record highs
The threat of Avian Flu has firms extremely concerned as 173 persons have been stricken
Epicenter
Natural disasters have become increasingly common
Israel/PalestineIraq
Political instability is spreading globally and could impact international operations
Afghanistan
India / Pakistan
Iran
North Korea
France
NYC / RCN Convention
Data security hitting much closer to home
CitiGroup blocked UK, Russia & Canadian PIN-based transactions of Citi-branded MasterCards – March – 06
A single individual compromised 40m MasterCard accounts – June 05
Gartner estimates that phising in the USA alone, amounted to 2.75 billion dollars in 2005
Malicious code threats that could reveal confidential information rose from 74% of the top 50 malicious code samples to 80% during 2h 05 (Symantec)
BoA, E*Trade, MorganStanley & Schwab launch new higher security accounts and guarantees
Business Continuity & Corporate Security New York
March 21-22, 2006
IT, Continuity & SecurityMaximizing your Investment
Case Study
Avian Flu
Avian Flu - What will be the impact?
What is it? Where is it now? When is it coming? What will be the
impact? What can we do to
mitigate the risks?
Pandemic – What is it?(or more importantly What isn’t it?)
WHO Global Pandemic Preparedness Plan* 6 Phased Approach
Phase 1: No new viruses detected Phase 2: New virus detected; limited to animals only Phase 3: Animal to animal spread; w/limited animal to human
spread Phase 4: Small clusters of human to human spread Phase 5: Large clusters of human to human spread Phase 6: Pandemic
Currently status of the disease Initially uncovered in 1996 when a highly pathogenic strain was
isolated in Guangdon Province, China (H5N1) Over last few years, spreading slowly Since Mid 03; spread of disease has increased markedly
* http://www.who.int/csr/resources/publications/influenza/WHO_CDS_CSR_GIP_2005_5/en/
2003200420052006
Pandemic Flu – When is it coming?
Pandemic – What will be the impact?
Societal Impact Globally – devastate
developing nations Significant disruptions Civil society will remain
functional; though stressed (1918 Spanish Flu)
Operational infrastructure Reduced workforce Degraded supply chains
Social distancing Best case - telecommute Worst case – dislocation
Pandemic – What will be the impact?
Economic Impact Impact proportional to
severity FSI’s in more modern
economies more sensitive to disruptions (but better prepared)
FSI’s in lesser developed economies face significant operational risks (limited enabling technology)
FSI’s that have experienced SAR’s should build on ‘lessons learned’
Pandemic – What will be the impact?
Technological Impact Social distancing creates
increased demand for enabling technology
Voice/data networks will respond differently
Increased demand for bandwidth will strain capabilities
Increased demand for traditional phone services
Greater reliance on VPN’s & Citrix solutions
Strained technology provisioning (logistics)
Primary Hubs
Secondary Hubs
Nodes
Homes
Pandemic – What will be the impact?
FSI Impact Vulnerable to Avian Flu Challenges:
Social distancing Maintaining complex
methodologies Sustaining time sensitive
processes (20 – 40% absentee rates)
Smaller institutions are more vulnerable
International institutions are more vulnerable
Payments system breakdown cold devastate developing markets
Pandemic –Mitigating the risks. . .
Managed Transition FSI’s need to use the unique nature of a pandemic to key their
responses Utilize the WHO Avian Flu Plan as a trigger to initiate action
Phase 3: Collect data & create plans; Phase 4: Increase technology provisioning, test assumptions and
rework your plans; Phase 5: Begin transition from a normal work environment to a
‘socially distanced’ work environment; Phase 6: Complete transition to a ‘socially distanced’ work
environment Leverage existing technology to create new methods for
managing work flow Don’t be afraid to rely upon proven ‘old world’ solutions for
‘new world’ issues
‘Managed Transition’ Challenges
Update your assumptions Pandemic flu planning is unique A ‘steady state’ model
Communicating in a decentralized environment Leverage technology Utilize redundant capabilities Alternative solutions sets
Managing a distributed workforce in a distributed model Ensure organizational control Resilient command & control model Operational Authorizations
Logistics Mail, procurement, HR, IT support, etc.
Conclusions
The industry is getting more complex; BC must keep up.
The pace of crisis appears to be increasing with the delta between normal and crisis operations becoming more ‘steep’.
If the sector is to keep up; continuity must be built into the normal business planning cycle. Remember - Continuity can not drive technology . . . Harness
technology change to enhance continuity and security.
Back to basics – Strong foundation based on solid pragmatic planning will go a long way to ensure continuity.
Flexibility – there are no set answers. Only diminishing budgets. We must be prepared to do more with less.
Business Continuity & Corporate Security New York
March 21-22, 2006
Where IT, Continuity & Security are Headed in ‘06
Larry TabbFounder & CEO
T: 646 747-3210
M: 508 579-8551
F: 508 519-0519
UK: +44 (0) 207 870 5319
Alexander TabbPartner
T: 646 747-3204M: 646 338-5357