This document discusses challenges for financial information systems. It outlines several types of challenges, including: - Compliance with regulations like Basel II and Solvency II - Issues around data representation, management, security and messaging - Technological limitations like the inappropriateness of TCP/IP for low-latency applications - Problems stemming from the proliferation of markets and data It notes that a large portion of spending by capital markets firms goes to addressing ongoing technological issues rather than innovation. The document advocates applying telecommunications perspectives and standards to help resolve challenges in a more coordinated way.

1. Challenges for Financial
Information Systems
Alan Clarke
TSSG

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

3. 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.

4. 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”

5. 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

6. Context : Participants in eFinance
Auditing Regulators Settlements
Retail Banking
Clearing
Insurance &
Re-Insurance
Investment Banking
Financial Information Systems
Funds Data Providers
Exchanges State & Treasury
Boutique Houses
Public & Customers Broadcast Networks

7. Topology & Types of Challenges
Challenges
Dealing & Trading
Compliance Transaction Redundancy
Basle II Standardization Resilience
Insolvency II Latency Reduction
Infrastructure
Data Representation “Performance” Throughput Optimisation
Data Messaging
Risk Data Management Fraud & Financial Protocols QoS reservation & assurance
OTCs Audit Trails Negotiation Dynamic Management Complex Event Processing
Data Security Integrity & Trust Proliferation of Markets Benchmarking
Proliferation of Data Data Syndication Realtime Troubleshooting
Security Audit Trail
Future Business & Future Business Models

8. Challenges: Network Focus
• 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

9. Types of Challenges in Financial Information
Systems
Critical Process Failures (Regulatory & IT) New Instruments ?
Incorrect Validating Data
- e.g. Hoonahan comments Protracted Data Management Issues
Effects of new business models ?
Data Issues & Valuations Longer Audits
Data Management OTCs Increased Costs Effects of Legislation ?
Transparency
Providing accreditation Expense of meeting
Regulatory Requirements
Evident(Seen) Expected(Forseen) Unexpected(Unforseen)
Threshold in scalability in TCP/IP Testing & Bounds of Rationality
Inappropriateness of TCP/IP
Effects in Proliferation of Markets Benefits/Risks, Impact Virtualization ?
Redundancy Resilience
Flooding & Throttling Hidden gotchyas in FIS right now ?
Quality of Service Changes/Benefits/Risks of new Tech ?
Security Compromises
New paradigms, e.g. neuromorphic systems ?
Time

10. 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 ?

11. Response : Capital Markets
ICT Spending
Source: Aite Group 2008, 2010

12. Response to Challenges
(Market Analysis)
• 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 ?

13. 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 ?
Challenges
Basle II Resilience
Insolvency II Latency Reduction
Data Representation Throughput Optimisation
Risk Data Management Fraud Data Messaging
& Financial Protocols
OTCsAudit TrailsNegotiation Dynamic Management Complex Event Processing
Data Security Integrity & Trust Proliferation of Markets Benchmarking
Proliferation of Data Data Syndication Realtime Troubleshooting
Security Audit Trail
• 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.

14. 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

15. 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.

16. TSSG Response: Research Landscape
Financial
Information Systems
Sub-
Service Oriented
Evolution & Integration
theme
Market Infrastructures
Retail Banking
Secure Information Sharing inter-FI
High Speed Networks for
Topics Financial Applications
Complex Event Processing
for Financial Applications
Policy-based
Compliance Management
Trust in Finance and Financial
Networks

17. 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.