Banks need to offer international settlement and clearing as current set ups are inefficient and un-scalable. As equity and fixed income cross-border volumes grow, an increased focus on cost per trade and an inefficient cross-border post-trade process and infrastructure is leading global investment banks to review front-to-back their cross-border trade flow. Firms can centralize their settlement and clearing and adopt affiliate matching and settlement to better compete in the cross-border business.

1. Contents
New markets, new global
settlement and a new
clearing model................... .2
Go East ...............................2
Cross border trading is
doubly costly ......................3
Consolidated cross-border
trading ................................4
Why affiliate matching and
settlement?..........................4
The drive for operational
excellence ...........................7
Cleared for Globalisation – Time to
Rationalise with Affiliate Matching
and Settlement
Growing equity and fixed income cross-border volumes, an in-
creased focus on cost per trade and an inefficient cross-border
post-trade process and infrastructure is leading global investment
banks to review front-to-back their cross-border trade flow.
Banks need to offer execution to a growing number of markets
and as demand for international portfolios grows; banks need to
consider how they support international settlement and clearing.
A multi-entity approach has resulted in separate back office infra-
structure, operations teams and often each entity has developed
their own custodian network. This inefficient and often costly
process is not scalable and many banks are not well positioned to
support the expected growth in volumes. A new model is emerg-
ing – affiliate matching and settlement – using the infrastructure
and clearing relationship of a local entity to settle and clear trades
in that market for all global entities. This white paper explores
how firms can centralise settlement and clearing and the benefits
to organisations that adopt affiliate matching and settlement. We
suggest that by adopting affiliate matching and settlement, firms
will be in a strong position to compete in cross-border business.
Without a local presence and the
necessary scale to justify a self-clear
model, using local custodians is the
only option available to many firms
looking to expand into new markets.
Cross border assets under custody at
the top 10 custodians has grown 22%
over the last 2 years. This growth is
expected to continue and by the end
of this year, it is estimated that assets
under custody will have over taken
the peak of 43.3 trillion USD
reached in 2007. An opportunity ex-
ists for firms to internalise settlement and clearing and reap the many
rewards of doing so.
Our partner in developing
this white paper:
0
5
10
15
20
25
30
35
40
45
50
2005 2006 2007 2008 2009 2010
TrillionUSD
Figure 1:
Cross Border Assets Under
Custody — Top 10 Custodians
Source: Globalcustody.net

2. New markets, new global settlement and a new clear-
ing model
Global financial institutions are facing a challenge to meet the increase
in cross-border volumes. A fragmented infrastructure has emerged with
organisations establishing a large presence in each hub location to sup-
port markets in the region. As a consequence, each region has often
developed their own global agent bank network and has responsibility
for settlement and clearing in all markets. This has resulted in an ineffi-
cient and costly process with duplicated agent arrangements which is
not scalable and could be improved through centralising clearing and
settlement.
There is a shift of wealth to Asia and emerging economies in general
and many financial organisations are exploring opportunities to expand
into the Asian market, either offering Asian securities to their existing
client base or attracting clients in Asia looking to trade in global mar-
kets, primarily Europe and US. The high cost to play in the fragmented
Asian market and the local infrastructure required to establish an Asian
franchise is holding firms back. By utilising existing infrastructure and
existing custody relationships in the US or Europe and focusing only on
client service in Asia, an efficient and cost effective model can be im-
plemented to meet these opportunities by clearing all trades through
centralising affiliate entities.
Go East
European and US banks over recent years have increasingly looked
East for new opportunities. Whilst expansion was delayed in the after-
math of the global financial crisis, Asian expansion is now fully back
on the agenda. The complexities of setting up business in Asia should
not be underestimated.
Asia is a fragmented
region with each coun-
try having specific and
varied regulations. Even
with a hub and spoke
model, the cost to be a
full player in Asia is
high – full teams need
to be established in the
hub location, partial
teams in the spokes, full
infrastructure across the
region, local exchange membership and CSD connectivity. This is often
too high a barrier for firms to surmount. Clients though increasingly
want to be able to trade and settle a global portfolio. Banks are under
Each region has often devel-
oped their own global agent
bank network. This has re-
sulted in an inefficient and
costly process which is not
scalable.
Asia expansion is back on the
agenda . The cost to be a full
player in Asia is high and is
often too high a barrier for
firms to surmount.
Figure 2:
Multi-Entity Custodian & Instruction Flow
2 TIME TO RATIONALISE WITH AFFILIATE MATCHING AND SETTLEMENT

3. pressure to meet this demand; otherwise clients may change their in-
vestment bank to one that is able to offer a full global product offering
and suite of services. To avoid the high cost of setup, firms will often
establish local partnerships; execute trades with local brokers rather
than directly on the exchange and use the services of a local custodian.
Outsourcing these parts of the trade lifecycle considerably increases the
cost of trading. It becomes increasingly hard for firms to compete on
cost with local firms or global banks that have the required local struc-
ture in place and have internalised clearing.
Cross border trading is doubly costly
We have seen front-office product COOs move from a contextual desk-
aligned model to an integrated front-to-back model. These COOs are
focusing on cost-per-trade across the full trade lifecycle. Becoming
members of exchanges in key markets has dramatically reduced broker-
age fees and led to the creation of execution centres of excellence. The
effort involved in identifying further savings within pre-trade and trad-
ing far outweighs the benefits. There are no longer any quick-wins. As
the opportunity for cost reduction declines in trading, COOs are in-
creasingly focusing their attention on the forgotten post-trade area. A
COO of a top-tier investment bank believes that “the cost of post-trade
has become disproportionately high compared to the overall cost per
trade”.
Banks are focusing their attention on savings that can be generated in
post-trade across equities and fixed income. Equities has benefited from
huge investment in technology. The emergence of DMA and the switch
from voice-trading to electronic trading has required sophisticated tech-
nology to successfully compete in this business. The result is a vanilla,
greatly automated product with high rates of STP. In contrast, fixed
income suffers from an often outdated infrastructure and processes
which results in very high levels of manual intervention, making the
cost of fixed income processing sensitive to volume increases. The cost
of post-trade will rise considerably with the expected volume increase.
Without changes in the post-trade environment, this is not sustainable.
Furthermore, the cost per trade of cross-border trading for equities and
fixed income is significantly higher than for domestic trades. This is
often due to buying services in an overseas market to compensate for a
lack of depth in local presence and relationships. In an international
business, where a large proportion of growth is expected to come from
cross-border business, this gap needs to be closed.
A general theme of US and European regulation in response to the fi-
nancial crisis is to reduce the level of OTC activity and increase scru-
tiny on high frequency trading. There is a significant drive for increased
transparency and previously OTC products will increasingly be re-
COOs are increasingly focus-
ing their attention on the for-
gotten post-trade area. The
cost of post-trade has become
disproportionately high.
The cost per trade of cross-
border trading is significantly
higher than for domestic
trades. This is often due to
buying services in an overseas
market to compensate for a
lack of depth in local presence
and relationships
TIME TO RATIONALISE WITH AFFILIATE MATCHING AND SETTLEMENT 3

4. quired to be traded on exchanges and centrally cleared. Based on evi-
dence from equities, exchange trading will result in an explosion in vol-
ume and a reduction in trade size. Opportunities exist for new entrants
to provide increased competition for the incumbents. These factors will
combine to put downward pressure on prices and returns.
Consolidated Cross-Border Trading
When entering a new market a network of brokers is often utilised for
execution. Each entity could have a broker network. It is common for
broker dealers to become members of exchanges, in effect centralising
execution for a particular market. All trade flow across the bank is
routed through the execution entity. This reduces the need to use local
brokers, reduces the cost of trading and improves execution perform-
ance.
An opportunity exists for post trade to follow the lead of trading. A dis-
jointed settlement and clearing model, where each entity has estab-
lished individual local custodian
relationships could be central-
ised with the formation of a
matching and settlement service
to its affiliates. The service
would be responsible for clear-
ing trades in the particular mar-
ket or region for all affiliates.
The matching and settlement
service would be responsible for
managing the local custodian for
all entities or could become a
member of the local CSD. The
service could be, but not neces-
sarily, provided by a distinct entity.
Why affiliate matching and settlement?
Rationalisation of agent bank network
By centralising all settlement and clearing through one legal entity
banks can enjoy economies of scale. In the regional model, each entity
would establish custody relationships in each market. There would be
duplication of accounts, additional effort to create legal agreements for
each entity, individual credit reviews and multiple network manage-
Settlement and clearing could
be centralised through a
clearing service which would
be responsible for clearing
trades in their particular
market or region for all affili-
ates.
Figure 3:
Cross-Border Affiliate Matching and
Settlement Flow
4 TIME TO RATIONALISE WITH AFFILIATE MATCHING AND SETTLEMENT

5. ment teams. Up to 3 or 4 network management teams could have a rela-
tionship with the same custodian in a particular market. This is an un-
necessary overhead. Centralising settlement and clearing for a market
into one entity allows a rationalisation of the agent bank network and
will improve operational risk
A centralised settlement and clearing model could also realise signifi-
cant cost savings. A minimum fee or sliding scale pricing structure of
custodians rewards volume and there is often a requirement to pay ini-
tial fees. Individually, each entity may not have sufficient volume to
receive the best rates. Collectively, the entities may meet the volume
levels required and a significant cost saving could be realised. Scale is
key, and one Asian based operations manager said “once trade volumes
are over 1,000 a day a centralised clearing model comes under serious
consideration”. Another head of operations predicted that they would
save 55% of post-trade costs as a result of extending this model further
and internalising settlement and clearing by adopting an affiliate match-
ing and settlement model in one Asian market, they also expect to
achieve similar savings across other Asian markets from adopting affili-
ate matching and settlement.
Global Inventory Management
An efficient capital and collateral management process is paramount in
the evolving financial landscape. Centralised settlement enables the
establishment of a global inventory to allow entities to effectively util-
ise their own local positions as well as positions of other affiliates. A
short position in one entity could be covered by a long in another entity.
With a centralised cash account, real-world loans and borrows could be
reduced through internal loans and borrows. This could lead to less in-
traday and overnight credit requirements, opportunities for funding op-
timisation and reduce the cost of carry and external borrowing costs. By
internalising the settlement process through affiliate matching and set-
tlement, settlement performance is improved whilst maximising collat-
eral usage. Even within a centralised model, it remains important for
each entity to know its true position, with one securities operations
head going so far as to say “the success of affiliate matching and settle-
ment depends on the stock record”.
Client Service Differentiation
Client service is fast becoming the key differentiator for clients deter-
mining their investment bank of choice. Affiliate matching and settle-
ment can lead to an improved client experience. Factors important to
clients are confirmation timeliness and accuracy, settlement rate, fails
management and MIS & reporting. Often delays in confirmations are a
result of incorrect data. With a centralised matching and settlement
Collectively, the entities may
meet the volume levels re-
quired and a significant cost
saving could be realised.
In a centralised settlement
and clearing model, an accu-
rate stock record for each
affiliate is critical.
TIME TO RATIONALISE WITH AFFILIATE MATCHING AND SETTLEMENT 5

6. model, clients only need to manage one set of SSIs, compared to many
SSIs based on entities and markets traded. Once SSIs are setup as part
of the initial client on-boarding process, on-going maintenance should
be minimal thus reducing the time and effort from clients whilst seeing
an improvement in trade performance. Improved inventory manage-
ment and internal borrow process should filter through to clients in the
form of improved settlement rates.
IT Capacity
Some IT systems are under strain from the growth in volumes and may
reach breaking point as volumes continue to increase. Volume increases
will be driven by the move of OTC products to exchanges and the
likely reduction in trade sizes which will increase volumes even further
and continued growth of cross-border trading. The impact of cross-
border trading to capacity will be significant. Simple vanilla trade flows
are turned into complicated multi-leg transactions as soon as the exe-
cuting entity is different from the client entity. What should be a
straight forward cross-border trade can often involve four real-world
settlements; executing entity with exchange, local entity with the client
and an inter-entity trade between the two entities. This has conse-
quences for system performance, storage capacity and 3rd
party messag-
ing costs where settlement is not internalised. Affiliate matching and
settlement has the potential to reduce internal trade messages and asso-
ciated costs by 50%.
Centres of Excellence
In response to increasing volumes, the impact of globalisation and fo-
cus on risk and control, banks are employing a variety of operating
models. Securities post-trade teams are often established in regional
hubs to support markets within the local timezone. The teams are asset
class aligned with an understanding of the local market and customers
and a basic understanding of global markets. The establishment of a
clearing entity with the market knowledge, expertise, infrastructure and
relationships would allow the creation of centres of excellence. Such a
model removes the unnecessary duplication of having teams spread
across the globe, consolidates subject matter expertise, co-locates the
people who have the required detailed knowledge and experience to
best manage risk and resolve issues. Synergies can be leveraged
through integrated systems and management. The execution and clear-
ing entity can focus on the market side of the transaction, leaving the
client entity to focus on the client. With a single point of contact rela-
tionship management model for the client, the client can be provided
with a consistent experience regardless of the market traded.
The establishment of a clear-
ing entity with market knowl-
edge, expertise, infrastructure
and relationships would allow
for the creation of centres of
excellence.
Affiliate matching and settle-
ment has the potential to re-
duce internal trade messages
and associated costs by 50%.
6 TIME TO RATIONALISE WITH AFFILIATE MATCHING AND SETTLEMENT

7. The drive for operational excellence
Centres of excellence can be the first step on the path to a cost-effective
operating model. The regional focus can be maintained with the crea-
tion of utilities which are developed as a response to common require-
ments across product lines. Synergies can be leveraged across identical
processes. This model can be globalised with the creation of a centre
focused on core processing activities. Often, these are functions that
could be suitable to be completed in an offshore location where labour
arbitrage savings and economies of scale can be realised.
A centralised settlement and clearing model could be extended further
down the trade lifecycle into Asset Servicing. In particular, corporate
action processing would benefit greatly and operational risk reduced by
the formation of centres of excellence, local teams with local market
expertise.
Has the time come to fully internalise settlement and clearing? Clearing
is a cost and a potential revenue stream for investment banks. Within
investment banks, prime services are actively creating a client clearing
offering in response to regulation and the increase in products that will
be required to be cleared. Self clearing would internalise clearing, al-
lowing banks to benefit from economies of scale and a reduction in fees
and securities financing costs.
The light is shining brightly on post-trade, and operations teams will be
under increasing pressure to implement process improvements. Cen-
tralising settlement and clearing by adopting affiliate matching and set-
tlement is an enabler to a more efficient and cost effective cross-border
trading model.
A centralised settlement and
clearing model could be ex-
tended further down the
trade lifecycle into Asset Ser-
vicing.
TIME TO RATIONALISE WITH AFFILIATE MATCHING AND SETTLEMENT 7

8. About Broadridge
Broadridge is a technology services company focused on global capital markets. Broadridge is the market leader enabling
secure and accurate processing of information for communications and securities transactions among issuers, investors and
financial intermediaries. Broadridge builds the infrastructure that underpins proxy services for over 90% of public compa-
nies and mutual funds in North America; processes more than $3 trillion in fixed income and equity trades per day; and
saves companies billions annually through its technology solutions.
Through its Gloss solution, Broadridge offers an industry-leading multi-asset transaction processing, settlement and book
keeping solution for international operations, enabling firms to capture, process and settle multi-asset transactions in virtu-
ally any currency and market.
For more information about Broadridge, please visit www.broadridge.com.
To learn more about affiliate matching and settlement, contact Paul Clark on +44 (0) 207 551 3000 or e-mail
paul.clark@broadridge.com
About Investance
Investance is a global business and technology consulting firm, focused on the financial services industry. Since 2001, the
firm has grown to over 260 people, with offices in London, Paris, New York and Hong Kong. Investance’s range of services
includes capital markets research, which builds on our strong core consulting capability and deep market knowledge to pro-
vide insight and thought leadership for our clients. Find out more about Investance by visiting www.investance.com.
This report was commissioned by Broadridge and produced by Investance. The findings are based on industry research and
detailed interviews conducted by Investance.
Figure 1 Source: © 2011 globalcustody.net. Reproduced with consent under licence. Extract from source:
www.globalcustody.net as at March 16, 2011