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Cognizant 20-20 Insights

Legacy Custody Systems Transformation

By Aashish Chandorkar and Ankush Gupta
Executive Summary • Geography of operations
Securities services providers today are at a crucial • Product strategy
decision point that will determine how they evolve • Client segment selection
and remain relevant in the marketplace going for-
The execution of these strategies can be accom-
ward. The forces behind this crossroads include
plished either organically — by growing required
changes in the securities services global landscape,
knowledge and competencies — or inorganically,
the financial crisis, opportunities presented by the
through M&A, joint ventures and market- or ser-
crisis, the developments in the European custody
vice-specific partnerships.
industry and underlying capital markets infrastruc-
ture improvements across the globe. Regardless of which route is taken, securities
services providers need a strong underlying in-
For global custodians who want to stay ahead of
formation technology backbone to handle the
the pack, the aim has to be to develop and ex-
challenges of global, multi-entity, multi-currency
ecute a significantly more aggressive growth and
operations. This IT backbone is also expected to
diversification strategy. The canvas on which they
be flexible and nimble enough to integrate with
operate has to be extended across various di-
other intermediaries, markets and an increasing
mensions. The overall strategic dimensions from
number of in-house systems to reduce time to
which a global custodian can choose include:
market, while providing business agility.

Strategic Dimensions for Global Custodians

Geography of operations, Client segment expansion,

considering direct entry in addressing specific needs of
specific international markets clients who have traditionally not
that demonstrate strong engaged custodians
capital market structure and
Global as agents.
growth potential. Custodians:
Strategic Dimensions

Product strategy, expanding the service offerings, building

stronger existing client relationships and creating new
markets via innovation and operational excellence.

Figure 1

cognizant 20-20 insights | december 2010

This paper identifies the various business and
technology challenges faced by securities services
providers. It further analyzes different approach-
es that have been adopted by securities services
firms to transform their technology landscape to
be capable of addressing these challenges in the
best possible manner.
Business Drivers
There are numerous business drivers and scenar-
ios with which global custodians are grappling,
many of which require a tailored response in the
market. These responses often lead to changes or
even a complete overhaul of the underlying IT in-
frastructure, to enable the custodian firm to meet
increased operational complexity, while still stay-
ing agile and nimble in the market.
Central Securities Depositories (CSDs)
CSDs, which were incorporated initially with the
mandate of immobilization of physical securities
certificates, are increasingly looking to compete
with custodial firms. Some CSDs have made an
attempt to transform themselves into banks and
offer services that involve credit risk taking, such
as liquidity provision for settlement, securities fi-
nancing and collateral management.
New Asset Classes
Financial markets innovation, globalization and
competition for superior returns have led to the
introduction of a new and complex set of asset
classes. Alternative investments such as deriva-
tives, hedge funds and commodities will require
custodians to develop and provide a variety of
new and specialized services for these alterna-
tives. Global custodians need to address the pro-
vision of additional risk controls for their clients
in the wake of the economic crisis.
Global Reach
In the last decade, investors have constantly
moved toward emerging and frontier markets.
These markets offer superior returns, provided
operational risks can be effectively mitigated by
the global custodian and its local agents. Global
custodians need to support their clients in these
new markets with a servicing model that adapts
to client needs rapidly, as well provide local mar-
ket expertise and know-how. Many global custo-
dians have expanded their physical footprint in
markets such as China, India, Australia, Japan,
South Korea and most of the UAE. This expansion
of the operating model must be supported by a
single platform or a combination of compatible
technology platforms, providing round-the-clock
processing with local servicing.
cognizant 20-20 insights
Market Dynamics
There is constant M&A activity within the securi-
ties services industry. Moreover, there is a distinct
possibility that in the coming years, only a handful
of custodians of true global scope will exist, driv-
ing consolidation. Survival largely depends on the
depth and width of the services provided to clients
across the globe. This automatically means securi-
ties service providers need to invest heavily in core
processing IT systems to compete in the global
landscape, to continuously support their increasing
geographical footprint, as well as functional com-
plexity. These systems will have to be multi-curren-
cy, multi-asset-class, high-availability, distributed
applications, to cater to the market dynamics.
New Business Services Offerings
Global custodians have created new service offer-
ings that target new market segments. These of-
ferings are the result of various financial services
entities looking to tap the stability offered by bank
custodians, as well as the general churn in the fi-
nancial industry following the global recession.
Prime Custody
Prime custody is a hybrid service developed by
custodian banks and prime brokers to address con-
cerns around counter-party risk. In a prime custody
model, a fund’s unencumbered long assets are held
in a traditional custodial account, while leveraged
positions such as shorts and derivatives are ser-
viced through a prime brokerage account. Prime
custody also incorporates a variety of services be-
yond the provision of pure custody accounts.
Hedge Fund Services
Hedge funds are increasingly looking for securities
services, which were traditionally offered to the
institutional segment. For example, they expect
their custodians to support both long and short
positions, with consolidated reporting across both.
At the same time, custodians are increasing their
derivatives-processing capabilities and looking to
integrate a wider range of services supporting a
broad spectrum of investment strategies. Custodi-
ans have to be able to handle leveraged portfolios
and bring best-of-breed services — whether they
are prime services, financing or synthetics — to the
alternative investments servicing market.
RIAs
New market segments like the RIAs are now be-
ing pursued by custodians to offer securities op-
erations services, which they previously obtained
from the brokerage firms offering custody. Most
RIAs are partnerships or corporations that man-
age assets of high-net-worth individuals and insti-
2
tutional investors and sit on the buy side of the
investment field. They provide a net window of
opportunity for global custodians, provided they
can tailor a “light” custody offering for the RIAs.
Target 2 Securities (T2S)
Target2-Securities, a Eurosystem initiative, aims
to provide harmonized delivery vs. payment (DvP)
settlement in central bank money in a variety of
currencies for almost all heavily traded securities in
Europe. This portends a major step forward in cre-
ating a single market for securities trading, remov-
ing many of the Giovannini barriers to cross-border
clearing and settlement, as well as acting as a cata-
lyst for further harmonization of post-trade servic-
es. In the scenario of post-T2S implementation, local
custodians will have easier access to multiple CSDs,
with membership of a single CSD. Moreover, it is ex-
pected that the cost of settlement, especially cross-
border settlement, will be substantially trimmed,
which will lead to an even further reduction of fees
charged to investors of global custodian banks. Af-
ter 2013 (the tentative timeline to launch T2S), the
settlement activity in Europe will move to this com-
mon T2S platform, which can be tapped by local as
well as global players operating in Europe. The cost
of settlement will reduce dramatically, reducing the
operating margins for individual players.
Technology Drivers
This section covers the technology drivers that
are forcing global custodians to undertake tech-
nology transformation programs. While the busi-
ness drivers mentioned in the previous section
represent ambient macro changes, the technolo-
gy drivers represent inside-out technology trans-
formation requirements.
Scalable Architecture
Traditional custody applications were mostly devel-
oped in the 1990s, usually on mainframe backbones,
to support large transaction volumes. The design
usually involved tight coupling of program, data and
application functions and was not able to accommo-
date the various applications enhancements made
over the last two decades for improving functional
support for services like securities lending, clear-
ance and fund administration. Consequently, most
custodians today deal with a large, monolithic se-
curities processing environment that is difficult to
change, difficult to maintain, and presents a rigid
face in the wake of operational changes required.
Straight-Through Processing
Straight-through processing (STP) has continuous-
ly evolved in terms of definition and metrics. With
new asset classes being traded, many of which
cognizant 20-20 insights
are not captured by any standard information ex-
change protocols, custodians continue to look at
STP rates to ensure improved business efficiencies
and streamlined operations. Increased STP rates
also help in maintaining real-time access to account
information and improving customer service, apart
from better transparency and
reduced counter-party risk. Most custodians
These requirements call for sys-
today deal with a
tems with built-in components large, monolithic
in which processing is enabled securities processing
through rules-based engines
rather than a mish-mash of
environment,
application logic and data ele- which is difficult to
ments. Another requirement for change and difficult
successfully achieving STP is to
design systems that are robust
to maintain, and
and intelligent enough to handle presents a rigid
exceptions up to a certain level face in the wake of
and require a minimum level of
manual intervention.
operational changes
required.
Multiple Systems
Many custodians have evolved inorganically, add-
ing new business via M&A activity. This has result-
ed in multiple operating platforms across different
geographies, fundamentally supporting the same
business processes. These systems are built on dif-
ferent underlying technology, varying underlying
design principles and duplicate
market-side and data interfac- Custodians are
es. This results in a higher cost
of technology ownership for increasingly finding
the custodian, where multiple it difficult to
applications and interfaces are source the legacy
required to be maintained and
additional effort required for technology skills
aggregating information to pro- required to manage
vide consistent data views to their current
the end customer
applications.
Messaging Standards
Custodial applications traditionally do not support
emerging messaging standards, such as ISO 15022,
out of the box. These legacy applications were not
designed to connect to external telecommunications
networks used by the financial services industry. As
a result, it is extremely cumbersome for custodial
services players to continuously enhance them to
achieve compatibility with ever-evolving messag-
ing protocols and standards. These standards will,
however, continue to change to stay in sync with the
changing requirements of the financial markets. In
the current situation, most custodians end up creat-
ing abstraction layers, as well as layers of data and
business logic transformation components to allow
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their core processing applications to communicate
using new financial messaging standards.
Technology Skills
Custodians are increasingly finding it difficult to
source the legacy technology skills required to man-
age their current applications. Many of these sys-
tems rely on technologies such as Cobol, DB2, Natu-
ral/ADABAS and RPG and hardware platforms that
span a wide array of mainframes and minicomputers
(e.g., IBM AS/400 or Tandem) that are increasingly
difficult to service. Today’s IT workforce does not
want to spend a lot of time “unlearning” the object-
oriented, distributed programming techniques now
in vogue across most industries. Hence, custodians
are faced with making a hard call on transforming
their operating landscape to ensure they stay nim-
ble and competitive in the marketplace.
System Transformation Approaches
Based on our market study, we observe that sev-
eral top custodians have embarked on major sys-
tem transformation programs to integrate various
business services in the post-trade domain. This
includes harmonization of platforms for the same
services offered in different parts of globe, as well
as better support for single-market clearing, cus-
tody and asset-servicing product offerings.
These players have taken very different approach-
es to achieve the desired state of future systems.
We observe that the software development life-
cycle (SDLC) strategies being employed vary by
bank and can be qualified using these three SDLC
dimensions (see Figure 2).

SDLC
Our Observations: Summary
Dimension
• Many banks are looking to spend a significant portion of the program lifecycle designing the right
solution. The time planned for design varies from 25% to 40% of the programs we have studied.
• Some banks are concentrating on green-field definitions of requirements. This forward-engineering
approach takes into account new business requirements and potential business process reengi-
neering in the areas of sub-optimal operations.
Design • A few banks, however, are still relying on reverse engineering as the main driver of change.
These banks have tried to study millions of lines of existing code to fully spec out and define
how a future custody system should work.
• However, we observe that most large banks are adopting a hybrid approach, where they mix the
elements of forward- and reverse-engineering to define the best possible solution.

• Custodian banks are currently challenged with large monolithic applications that tend to be func-
tionally overloaded and perform many securities operations functions.
• When the transformation design is complete, some banks have started with a component-based
definition of the new systems. However, we observe that other banks still prefer large applica-
tions that may be more flexible in design but still focus on serving the securities operations
business, end-to-end.
• This thought process is influencing the “develop vs. buy” decision for all the banks.
Build • Some banks clearly prefer to develop all their components (or a single large application) in-house.
That has been their traditional way of operating, and the thought process has continued for their
custody transformation programs.
• Other banks, however, have become more open to buying off-the-shelf applications and are ac-
tively considering vendor products for their new infrastructure.
• Either way, all banks perform thorough due diligence on the “develop vs. buy” approach, leverag-
ing their internal knowledge and preferences and also involving external consultants, who offer
an outside-in industry perspective.

• The deployment theme is about how a bank goes about implementing the chosen solution.
• From our observation, all banks plan for a phased deployment approach, where system and data
migration programs are run over a period of time for a full migration to the new infrastructure.
• However, the difference that we observe in our sample data set is geography vs. a function cut-
over approach.
• Some banks take a geography view for the cutover — basically migrating all functions for a given
Deployment business onto new infrastructure.
• Other banks are planning a function migration approach — migrating a full business function for all
businesses to a new platform, scaling the platform over a period of time.
• Both approaches require the banks to run two sets of systems in parallel for a length of time, and
they pose different challenges, in terms of interface, reconciliation and reporting.
• Additionally, throwaway development is involved with both approaches, as some work performed
for the above overlap areas will become redundant when a full migration takes place.

Figure 2

cognizant 20-20 insights 4

System Transformation Approaches: Summary
Design Build
D1: Forward Engineering B1: Develop
D2: Reverse Engineering B2: Buy
D3: Hybrid Approach B3: Hybrid Approach
Figure 3
Our Recommendation
Based on our independent observations of custo-
dian banks, and our experience of working with
several large global custodians, we recommend
the following approach to the idea transforma-
tion program:
SDLC Dimension Recommended Approach
Design D3: Hybrid Approach
Build B3: Hybrid Approach
Deployment M2: Geography Migration
Figure 4
In the following sections, we describe the key rea-
sons for the above recommendation, as well as
the considerations that custodian banks need to
make when adopting the above approach.
Hybrid Design Approach
The best way to approach a large custody trans-
formation initiative is to undertake a mix of best
practices distilled from forward- and reverse-en-
gineering approaches. Overall, the design phase
should ideally consume 30% to 35% of the total
SDLC effort, factoring in that existing knowledge,
as well as provisioning for new business and tech-
nology challenges, needs to come together for an
ideal future design.
A custodian bank should not rely solely on reverse-
engineering its existing platform and generating
“specifications” for new-age systems, although this
option might appear attractive at first. Most cur-
rent legacy custody platforms were not designed
to be multi-market, multi-currency and multi-asset
class. Many banks may have created workarounds
or stop-gap developments to these systems over
their lifespan — generally a couple of decades. How-
ever, be advised: These workarounds are not nec-
essarily “specifications” and, if used as-is, will only
result in another inefficient application, albeit on a
new technology platform.
Relying on forward-engineering alone, again,
may appear a viable alternative for a green-field
cognizant 20-20 insights
Deployment
M1: Function Migration
M2: Geography Migration
development, but in reality, no one individual in
business, operations or technology teams within
a custodian bank will have a full view of all the
processing rules for a given business. If every-
thing had to be done from scratch, the effort in-
volved in requirements specification and design
will far outweigh the utility of undertaking a sys-
tem transformation exercise.
The right hybrid design ap- A custodian bank
proach will involve a forward-
looking thought process, but
should not rely
it will also include the exist- solely on reverse-
ing business nuances, with engineering its
careful judgment applied to
what is a legitimate future re-
existing platform
quirement. The hybrid design and generating
approach also helps the bank “specifications” for
use new design paradigms, tap
requirements management
new-age systems,
disciplines, design tools and although this option
approaches, as well as create might appear
a componentized, modular
view of the business.
attractive at first.
Hybrid Build Approach
Similar to a hybrid design approach, we recom-
mend a mix of develop vs. buy for the building of
a future platform.
Traditionally, most large banks have developed their
key application systems in-house. The two main
driver were a dearth of third-party products provid-
ing enough flexibility and range of functionality to
match a bank’s requirements and a lack of industrial
strength for the more acceptable products. Both of
these concerns are gradually being addressed in the
financial software products industry, with several
companies offering robust securities operations so-
lutions.
It is still possible that no one product can fit the
exact need of a bank, and it may never be easy op-
erating in a multi-vendor environment. However,
there are several securities operations functions
that are increasingly becoming commoditized
and offer no real competitive differentiation for
5
 a custody bank. Spending time on overly custom- ucts. Also, if an outside-in view is lacking during
izing applications for these functions may not be the assessment, it is quite possible that the con-
a good use of limited discretionary dollars. ventional wisdom of just developing applications
carries over into the transformation decision-
Core securities operations making process. Banks would do well to take
There are several processes, such as settle- an independent third-party view to ensure that
securities operations ment and clearing support, credible options are considered for all business
position-keeping and book-
func­tions that and technology decisions.
keeping, are the areas where
are increasingly most banks will still feel the In our opinion, the following business processes
becoming need for custom application are moving toward increased standardization and,
development. The inherent with time, will no longer offer any great product dif-
commoditized
complexity and uniqueness ferentiation (see Figure 5, below). During a system
and offer no real associated with these func- transformation exercise, these areas are best suited
competitive dif­ tions within each bank may for deployment with third-party vendor products.
be the basis of a case for cus-
ferentiation for a We anticipate that an increasing number of finan-
tom development. The best
custody bank. approach for a custodian cial software products vendors will strengthen
bank on making the develop their positions in these areas over the next few
vs. buy decision will be to take a component view years. Many product vendors that started with a
and make independent decisions for each compo- specific strength like reconciliation or corporate
nent, factoring in the overall ease of integration in actions are now looking at covering the entire
the application ecosystem. post-trade space via their offerings.

There are structured ways of conducting a “de- Geographical Migration Approach

velop vs. buy” analysis. Sometimes, the custo- A flawless migration from a large existing trans-
dian bank may not have in-house expertise to action processing platform to a transformed
know the functional details about vendor prod- future-state platform is the dream of all bank-

Product
Functional Area Comments
Attractiveness
• The corporate actions lifecycle can be divided into discrete steps,
thus making it amenable to product usage.
Corporate
High • Vendor products offer strong standards compliance, industry con-
Actions
nectivity and customizable workflows for operational ease.

• The reconciliation function can ideally reside in a full utility environ-

Reconciliations High ment, with clearly designated steps.

• Custodian banks offer accounting as a typical add-on service to in-

vestment management clients.
Deployment High • Several standard accounting products are available in the market
that comply with changing regulations and provide support for ever
changing asset classes.

• Trade capture, matching and connecting with industry utilities is a

necessary function for all custodian banks.
Trade Lifecycle • However, the function itself is not revenue generating, and the bank
Medium
Management needs to attain high straight-through processing and low error rates
to ensure that downstream core business functions like custody and
accounting are delivered in a scalable and accurate manner.

• Custodian banks use client reporting as a differentiating factor in

their overall service offering.
Client Reporting Medium • However, certain aspects like reporting delivery, channel manage-
ment and enterprise integration offer avenues to explore the use of
third-party products.

Figure 5

cognizant 20-20 insights 6

ing IT departments. In reality, such migrations
present immense challenges. Managing business
risks during such transitions is neither easy nor
guaranteed. Hence, choosing the right migration
approach becomes key to obtaining approvals for
future spend on large transformation programs.
We recommend using the geographical migration
approach for custody systems. Basically, a bank
can choose an appropriate geography of opera-
tions representing manageable risk, as well as de-
livering tangible business value and do a full cut-
over to the new infrastructure for this geography.
Subsequently, new countries can be added over a
period of time.
This approach helps in “piloting” the new in-
frastructure in a fully operational manner for a
manageable business boundary. It helps in un-
derstanding the integration challenges between
the various applications required to create a fully
functional custody environment. Such a selective
migration also brings to the fore any operation-
al challenges that the business teams may face
after the migration. Their concerns can then be
considered for future roll-outs.
The limitation of undertaking a function through
function migration is that the business never gets
to touch and feel a fully operational platform until
the entire program has been completed. We be-
lieve this approach over time fails to retain busi-
ness commitment for future investments.
For custodian banks, which are primarily single-
geography operations, we recommend an iterative
cutover. This means starting with a well-defined
set of “operationally complete” applications and
increasing the complexity with iterations. How-
ever, maintaining operational completeness is,
again, very important in demonstrating the value
that the new platform brings to the business.
Whatever the situation, creating a detailed migra-
tion plan that is understood not just by the tech-
nology and operations staff, but also by the busi-
ness teams and key CXO-level decision makers, is
a must for a custody transformation program. Un-
derstanding the dependencies and inter-linkages
between different branches of the program helps
manage the potential show-stoppers that crop up
during a migration exercise.
Ideally, a migration strategy should be created right
at the outset of the program, where the preferenc-
es, challenges and a broad roadmap should be out-
lined. This migration strategy can then, over time,
cognizant 20-20 insights
give way to more specific plans that pertain to the
chosen unit of migration – geography or function
— leading to effective risk management. Each plan
must be formally signed off by
empowered representatives of A flawless migration
the bank’s business, operations from a large
and technology teams, as well
as the vendor product teams. existing transaction
processing platform
Guiding Principles for
Custody Transformation
to a transformed
For the successful completion future-state
of legacy custody systems platform is the
transformation programs, we
recommend using the follow-
dream of all banking
ing “guiding principles.” These IT departments.
principles should be accounted In reality, such
for irrespective of the chosen
design, build and deployment
migrations present
approach. immense challenges.
Business Process Reengineering
Any system transformation program also pro-
vides great scope for associated operational
transformation. In fact, system transformation
should be driven by operational transformation,
so that the new platform supports an optimized
business delivery process. Before embarking on
the technology design for a custody platform, it
will be prudent for the bank to look at its existing
business processes and rationalize them first. The
aim should be to benchmark existing business
processes with industry standards and against
the future operational perfor-
mance requirements the bank Any system
will potentially service. An opti- transformation
mized business process design
is the best place to start scop-
program also
ing a new system platform. provides great
In many instances, the opera-
scope for associated
tions teams may not agree on a operational
case for business process reen- transformation.
gineering. They may not see the
need for a change. The program execution team,
therefore, has to create an early consensus on the
need for any changes well in advance of the pro-
gram’s commencement.
Think Future
It is extremely important that the design for a
transformed custody platform is based on poten-
tial future needs, rather than the impending cur-
rent ones. Even if the bank does not operate in
multiple geographies, the custody system should
be able to handle multi-geography and multi-cur-
7
 rency requirements. Traditional custody applica-
tions were batch processing-oriented systems,
working in a single time-zone. Such an approach
will be impractical, even if a custodian bank today
operates in a single time-zone. Any new platform
must be built and budgeted with geographical
expansion in mind and,
With new technology hence, address the com-
and the increasing plexities that are inherently
present in such an envi-
realization that the ronment. Using existing
systems belong business rules and design
to the users using structure will most cer-
tainly result in sub-optimal
them, not to the future-proofing of the cus-
technologists tody platform.
creating them, the Another area to future-
focus of design proof custody infrastructure
is handling different types
should shift from
of asset classes. Tradition-
being technology- ally, most custodians did not
centric to being service derivatives — listed
or OTC. When they entered
user-centric.
these new asset class ser-
vicing businesses, it was mostly via a different set
of core processing applications. If a full transfor-
mation exercise is undertaken, adequate consider-
ation must be made for core processing, data ag-
gregation, reporting, reconciliation and street-side
interfacing to handle these instruments.
Risk Management
Custody platforms are large online transaction
processing applications that will continue to op-
erate around the clock, especially in a global envi-
ronment. Doing away with one such platform and
introducing a new one poses several risks — op-
erational, reputational and financial. Any custody
transformation program essentially has to be de-
signed to be a risk management program from a
planning and implementation standpoint. Every
step forward has to be “insured” via a plan to re-
verse the change if absolutely required due to a
business reason. A long-haul parallel operation of
the existing and new custody platforms is more
or less a given for any transformation program,
so the increased cost of maintenance and opera-
tions in the interim also has to be provided for
and factored in.
User-Driven Design
Traditionally, most IT applications were written by
technology specialists for their own breed. The
applications were designed in such a way that the
simplest of business changes required IT interven-
cognizant 20-20 insights
tion, giving rise to large maintenance programs
that ran forever. However, with new technology
and the increasing realization that the systems
belong to the people using them rather than the
technologists creating them, the focus of design
should shift from being technology-centric to
user-centric.
New custody platforms should be nimble and flex-
ible enough to allow users to complete simple
tasks on their own — configuring new rules, apply-
ing or changing simple business data-based vali-
dations, creating user hierarchies and user sets
and providing configurable workflow capabilities.
These tasks provide operational freedom to users.
As such, users are more likely to accept systems
that minimize their interaction with technology
specialists.
Standards Compliance
Technology standards are part and parcel of the
world of securities operations. There are several
regulatory as well as industry bodies that strive
to enable greater standardization and uniformity
in the way financial data is exchanged and pro-
cessed by financial institutions the world over.
Adoption of these standards — especially the ones
that are mature and proven in the marketplace
— is extremely critical for custodian banks. The
financial industry is essentially a network indus-
try, and the cost of operations can be significantly
minimized by adopting these standards. Using se-
curities market practices and conforming to ISO
standards like 15022 and 20022 with a proven
business case will make it easier for the custodian
bank to interact with its clients and agents, alike.
In certain cases, the messaging standards contin-
ue to evolve, such as the Financial Products Mark-
up Language (FpML). However, over time, even
complex asset classes, such as OTC derivatives,
will be covered under these standards. Hence,
early adoption and familiarization with these
standards increases a custodian bank’s chances
of more tightly integrating in the marketplace.
Non-Functional Requirements
It is extremely critical for the bank to plan not just
for its functional requirements over time but also
the non-functional requirements. Specific ideas
around the size of the user base, the spread of the
user base across multiple geographies and the
system usage pattern needs to be factored into
the platform design. These considerations help
improve planning for optimizing application per-
formance, as well as for the non-functional costs,
8
such as IT infrastructure, bandwidth requirements
and communications expenses. Again, it is critical
for the bank to plan ahead for the transaction vol-
umes that it expects to see in a few years and not
just rely on historical data.
SME Involvement
A custody transformation program can never
succeed if it is driven entirely by the technology
organization within the bank. As previously stated,
the program needs to engage the system users up-
front, who are invariably the subject matter experts
(SMEs). The SME involvement should start right at
the planning phase and should continue on a regular
basis through all the program steps — scoping, busi-
ness process definition, design, vendor evaluation,
migration planning and testing. Such commitment
requires very strong advance planning, as SME time
is always difficult to find. If the business and opera-
tions teams are not committed to the transforma-
tion program, there is no way the technology team
will be able to demonstrate success on its own.
Test Strategy
Along with the SME involvement over the course
of the program, it is extremely critical to con-
struct an effective test strategy for all iterations
of the build cycle. This test strategy should be
devised very much like the migration strategy
— there has to be an all-party agreement on the
testing approach, including frequency, duration of
testing cycles and the kind of data to be used for
validation. As the program evolves, there will be
a greater need for focusing on regression testing
— validating that any new release or iteration has
not disturbed or broken an existing functionality.
It is also important that the operations users ac-
tually participate in the testing execution and that
this function is not left to the technology teams.
The users who see the applications on a day-to-
day basis are most likely to understand any func-
tional errors that creep in due to misunderstand-
ing of the requirements.
Time to Market
Any business that is funding a large-scale custody
transformation program will keenly monitor when
the business benefits of such a program start
accruing. Any incremental funding of the program
will take place only when the validation of such
benefits is in place. When designing the execution
plan, the technology teams may tend to compro-
cognizant 20-20 insights
mise time to market for richness of functionality.
Such a situation needs to be avoided to manage
business perceptions. Some of the principles out-
lined above (e.g., SME involvement and risk man-
agement) help in creating realistic time-to-market
goals for the technology teams.
Behavioral Changes
Finally, it is important to understand that a large
custody transformation program requires signifi-
cant behavioral changes and management of such
change for the business,
operations and technology It is important that
teams. It is very difficult to the operations users
suddenly eliminate a given
way of doing things informed actually participate in
by a long-standing set of ap- the testing execution
plications. Users may take and that this function
their own time to use the
full functionality of the new is not left to the
infrastructure. In the transi- technology teams.
tion period, it is important to
have “operations champions” designated who show
an early propensity to explore the system and could
eventually become power-users. These operations
champions can bring about the required behavioral
change in the user community and will accelerate
acceptance of the new systems.
In fact, it is advisable to run elaborate user train-
ing sessions well in advance of go-live, so that
the user community is well versed in the new sys-
tems. There will always be the initial skepticism
and resistance to move away from the usual way
of running the day-to-day business. Careful plan-
ning and involvement by the operations champi-
ons can help the technology execution teams sur-
mount these barriers.
Conclusion
We expect an increasing number of custodian
banks to undertake legacy systems transforma-
tion programs over the next few years. Learn-
ing from experiences within the industry, being
open to challenging established notions of design
and operations and, at the same time, retaining
uniqueness of operations, will be required for the
success of any such program.
The application of structured business-IT trans-
formation methodologies can help banks succeed
in their endeavor to create an agile, cost-effective
and scalable custody platform.
9
About the Authors
Aashish Chandorkar is Senior Manager, Consulting, with Cognizant Business Consulting and leads the
offshore Securities Services Domain Practice for the Banking and Financial vertical. Based in Pune, In-
dia, he has worked on several consulting, application transformation and large development initiatives
with Cognizant’s global custody and asset management clients. Aashish can be reached at Aashish.
Chandorkar@cognizant.com

Ankush Gupta is an Associate Consultant with Cognizant Business Consulting and works with depository,
custody and asset management clients within the Securities Services Consulting Practices. Based in
London, he previously worked with financial product vendors in the securities operations space. Ankush
can be reached at Ankush.Gupta@cognizant.com.

About Cognizant

Cognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-
sourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how,
our industry expertise and worldwide resources to working together with clients to make their businesses stronger.
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unique global delivery model infused with a distinct culture of customer satisfaction. A member of the NASDAQ-100
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