FIN929 – Corporate Governance

1. FIN929 – Corporate Governance Gavin QuinnWorldwide Business Development Manager – FSI Gavin.Quinn@Sybase.Com Bill Jacobs Senior Product Manager, Sybase IPG bill.jacobs@sybase.com

2. What’s it all about? “You will be confronted with questions every day that test your morals. Think carefully, and for your sake do the right thing, not the easy thing.” Dennis Kozlowski, C.E.O. Tyco Tyco International’s CEO made this quote prior to the discovery that he had taken $600 million by raiding company loan funds and illegally selling Tyco shares back to the company through its offshore subsidiaries. According to court records he and the CFO pocketed $170 million for personal use and secretly sold $430 million in Tyco stock back to the company by channelling the deals through offshore subsidiaries. This was on top of his compensation package, which paid him $244 million in 1999 alone. Tyco stock plunged from $59 to $15 losing market value of $100 billion – more than investors lost through the collapse of Enron.

3. What has Happened • Sumitomo Corp. • Barings • Banco Ambrosiano • BCCI • Aholt • AIB • Enron • Mirror Group • 200+ firms in US in 2002 restate accounts • Publicly declared losses in excess of $400bn in Op Risk over the last decade.

4. Common Factors? • Losses occur away from Head Office • Poor controls / processes / procedures (or they are poorly applied - which results in the same thing) • Multiple regulators - who tend to believe the other regulator is monitoring / they are unwilling to embarrass other bodies / there is insufficient liaison due to concerns over primary jurisdiction • Confused internal hierarchy – matrix reporting • Lack of ownership / reward – market rewards profits – not losses mitigated

5. Where is the Focus • Board of Directors • Audit Committees • Shareholder Relations • Management Control • Internal Structures

6. Management Responsibility • If the management sets out processes and procedures that it later transpires were not adhered to, is it fair to say that those under this direction failed? • Or is the management’s fault for failing to check? • Does anybody check to see if the policies and procedures are practicable? • Do the business pay lip service to the policies and procedures whilst constantly adopting more pragmatic solutions to everyday problems that arise? • Senior management is not expected to fully understand the minutiae of all aspects of the business but it is clearly their responsibility to set up a culture; policies & procedures and system of oversight that will provide the checks and balances that should ensure that the business is safeguarded.

7. Establish Corporate Values Establish Codes of Conduct Establish a system to ensure compliance of the above Enforce standards of appropriate behaviour Ensure Risk Management functions are independent of business line Establish clear understanding of roles and responsibilities Create decision making authorities Incorporate the authorities into the hierarchy Create strong internal control systems (inc. internal /external audit functions) Create appropriate information flows Basel Committee Recommendations

8. Primary Concerns • Effectiveness and efficiency of operations • Reliability of financial reporting • Compliance with laws and regulations • Safeguarding of assets • Reputational risk

9. Why Capital Markets in Particular? • Why is Corporate Governance so difficult in this sector • High Value Transactions • Complexity of instruments and strategies • Complexity of external Corporate Structures • Complexity of internal Corporate Structures • Complexity of desk structure, limits and P&L • Good knowledge of risk / rewards • Reactive Risk Management • Internal Controls • Lack of ownership

10. Cost and Complexity of STP Similar to Corporate Governance? High Exotic Options Exchange Traded Options Mortgage Backed Securities Complexity All Treasury Simple Fixed Income Domestic Equity Low High STP Rate

11. Simplistic Trade Process Flow

12. Is Integration a Problem? Source: Reuters/TowerGroup/Capco

13. SWIFT FIX Hub Components S N L FIX B R engine I server D S G N E FIX Hub FIX L ‘powered engine B by’ SWIFTNet SWIFTNet R Financial server I Fusion S D N G FIX L E engine B server R I D G Indications Of Interest E Orders/executions Source: SWIFT

14. What Needs to be Done • Separation of functions • Confirmation/Affirmation Processes • Reconciliation of Positions and Cash Flows • Clear Delegation of Roles/Responsibilities • Real time alerts and Escalation Procedures • Exceptions being passed on to the appropriate people • Escalation procedures on a timely basis across business functions • Collaborative resolution / validation / approval basis to be established

15. Architecture to Improve Controls    FLEXIBLE CONNECTIVTY TRADE LIFECYCLE MGMT RE-DEFINED PUBLISH & SUBSCRIBEARCHITECTURE Execution CLIENTS • FIX • SWIFTNET • ISO 15022 • VMU Connectivity • Internet & Intranet • Proprietary Networks (e.g. Euroclear) Trading Apps Allocations Risk Mgmt Confirmations Confo Matching FIX HUB Connectivity Gateway Business Rules Engine VMUs, UTILITIES& SERVICES Workflow & Exception Resolution Exception Monitoring Obligations F/B Recons Payments Settlements Accounting Reconciliations AGENTS & EXCHANGES Custody • Scope • Front-to-Back Exception Monitoring • Automated Exception Resolution linked to Business Rules Engine Benefits • Reduced C-of-T • Improved Controls • Active investigation GlobalProductD/B GlobalAccountD/B • Scope • Open Gateway to Clients & Service Providers • Automation of Connectivity to Clients Benefits • Improved security • Speed of execution • Early detection • Scope • Business Rules Engine for Automation • Re-architecting Process and System flows Benefits • Reduced C-of-T • Auto escalation • Instant information

16. Referential Integrity Source: CAPCO

17. Some Necessary Building Blocks • Message enrichment/translation • Adhere to XML based messaging protocols/standards • Content/Role based Message routing • Real Time Process Integration • Automated Reconciliation Procedures • Alerts generation

18. Some More Building Blocks • Automated Escalation procedures • Automated Exception handling • Enhanced protection • Enhanced audit and compliance • Improved risk management • Continuous Process Improvement (STP) • Trade Flow Visualisation

19. Workflow Exception Management Deals Audit & Control Customers Trade input Risk Mgmt Settlements Accounting Web Messaging Infrastructure Exception Management Investigations & Reconciliation Compliance

20. It’s all in the Presentation • Data Visualisation • Real Time Information • Drill Down from Pictures • Data in Context • Business Activity Monitoring

21. Non-Invasive Structure Treasury Investment Private Clients Brokerage Corp. Finance Marketing Risk Management Accounting Internet/Firewall Device Detection HTTP/S FpML Message Bus SWIFT Host Connectivity Message Broker FIX Role Based Workflow Security External Financial Community Omgeo XML Workflow Management Integration Handlers Rules Bus. Mainframe Linux Unix DBMS

22. NY Fed Commentary • William McDonough, Chairman of Basel, Committee on Banking Supervision and President & CEO of New York Fed: • “Corporate Governance depends on more than just a company’s compliance with rules, We are all learning that effective corporate governance emerges from the business culture that a company nurtures throughout its operations.” • “Bank Supervisors in the US and many countries around the world are assessing the safety and soundness of banks based less on the strength of the balance sheet today, and more on the strength of controls that will safeguard a bank’s financial health tomorrow.” • “By looking at the strength of internal controls and the quality of analysis and judgment applies, we are better able to understand how well a bank will weather potential future challenges or business downturns.”

23. What needs to be done • Involve Compliance and Audit • Reconcile cashflows, nominals and limits between front, middle and back office systems • Integrate disperate system • Establish a system of alerts and escalation procedures that will ensure the right people across departments are informed on a timely basis and can resolve issues in a transparent collaborative way • Learn from ones past errors and constantly update policies and procedures • “Firm-wide compliance management is an important element of good corporate governance and that can reveal much about a bank’s culture and commitment to managing not only legal and reputational risk, but credit, market and operational risks as well” William McDonough

24. And Finally - What God Thinks “Improvements in information technology have created new opportunities for innovative companies… . The application of technology can manifestly increase the degree of control and notification required by the edicts of corporate governance.” Alan Greenspan.

25. Gavin.Quinn@Sybase.Com + 44 207 285 4033