Advanced Operations Management

David Loader is Managing Director of the London based Derivatives and Securities Consultancy Ltd (DSC). DSC provides various consultancy and educational services to a wide range of financial institutions globally. David has over thirty years’ experience in the finance industry, particularly in operations, gained in a number of major organisations including SG Warburg Group where he was Operations Director. He is heavily involved in financial education and training, as a Director of Computer Based Learning Ltd (providing e-learning solutions to the financial services industry), and as an author and presenter of training courses for The Securities and Investment Institute. David is a member of The International Guild of Bankers, The Institute of Directors and The Securities and Investment Institute.

Preface xvii

About the author xix

1 THE CHALLENGE 1

The profile of operations 2

Operations is a business 3

The challenge of change 5

The challenge of management style 7

The challenge of global markets 8

The challenge of personal goals 10

The challenge of dealing with events 10

2 THE MANAGEMENT PHILOSOPHY 13

Reporting lines 19

3 THE MANAGEMENT OF RISK 23

Market risk 26

Characteristics of the products used 27

Management risk 27

Inadequate procedures and controls 27

Information or reporting risk 28

Market or principal risk 28

Credit or counterparty risk 30

Operational risk 31

Means of reducing settlement risk 33

Personnel/HR risk 35

Liquidity risk 36

Systemic risk 37

Financial or treasury risk 38

Technology risk 39

Systems failures 39

Technology awareness 40

Legal risk 40

Regulatory risk 41

Reputation risk 42

Other risks 43

Malicious risk 43

Country risk 43

Understanding risk 45

Controlling risk 45

Strategic controls 46

Management responsibility 48

Role of risk management 49

The risk management process 50

Risk management departments 52

Staff training 55

4 SECURITIES FINANCING 57

What is securities financing? 58

Stock lending 59

Securities lending process flows 64

Loan initiation 65

Delivery of collateral and securities 65

Management of benefits and collateral 65

Return/recall of securities 66

Payment of fees 66

Lending agreement 67

Repurchase agreements (Repos) 67

Collateral 68

Securitisation 70

5 TREASURY AND FUNDING 71

Case study 75

Unsecured borrowing 80

Secured borrowing 81

Money market instruments 83

Derivatives 84

Foreign exchange 84

Treasury settlements 85

Cash management 86

Risk in treasury settlement 88

6 RESOURCE MANAGEMENT 91

Pressures on resource 92

Defining resource 96

Training and developing people 97

Contingency planning 98

Restructuring 101

Training and personal development 103

Succession planning 105

Dealing with people 107

The working environment 110

Managing systems 110

Technical performance 113

Operational performance 114

Difficult people 115

Motivation 117

No motivation means trouble is brewing 120

Performance measurement 120

Management of people 122

7 TECHNOLOGY IN OPERATIONS 127

Timing and resourcing 135

Loss of key personnel 137

Managing the operations function through the project 137

Post-implementation 141

Technology and the future 141

8 PROCEDURAL DOCUMENTATION – CAPTURING THE KNOWLEDGE BASE 143

The historical perspective 144

The benefits of good documentation 145

What is good procedural documentation? 148

In-house or outsource? 150

1 Skill 150

2 Time 151

3 Cost 152

Maintaining, controlling and distributing the documentation 152

9 CLIENT MANAGEMENT 155

Customer relationships 157

The approach to customer relationships and the ‘client culture’ 160

Know your client 164

General guide to account opening and customer identification 164

Money laundering 178

Defining the service and establishing relationships 178

What is considered as client service? 178

Establishing relationships 179

The manager’s role in relationship management 180

Structure of the operations function 182

Responsibility 182

Measuring service levels 184

Escalation procedures 186

Client liaison programmes 187

Front-office client team 188

Industry issues 188

Training the team 189

Analysing competition 189

Developing the service 190

What are the potential problems in customer relationships? 191

Managing risk in the customer relationship 192

Client visits 194

10 MANAGEMENT INFORMATION 197

Information paths 200

Distribution 201

MI production 202

Sourcing data 203

Compilation and validation 204

Production of MI 204

Risks in MI 207

11 OUTSOURCING/INSOURCING OPERATIONS FUNCTIONS 211

Outsourcing 212

Regulation and outsourcing 214

Insourcing 223

12 INDUSTRY DEVELOPMENTS 225

Regulatory changes and T&C 231

Industry recommendation 232

Shortening settlement cycles 232

What else? 233

Bank for International Settlement 233

Securities Industry Association 234

Alternative Investment Management Association 235

International Swaps and Derivatives Association 235

International Securities Markets Association 236

GSCS benchmarks 237

Other industry organisations 237

Remote clearing 237

The G30’s 20 recommendations 239

Creating a strengthened, interoperable global network 239

Mitigating risk 240

Improving governance 241

Appendices

A FATF DOCUMENTS ON THE FORTY RECOMMENDATIONS 243

B FATF–GAFI 279

C CONSOLIDATED KYC RISK MANAGEMENT 283

Glossary 297

List of abbreviations 311

Useful websites and suggested further reading 313

Index 315