Risk Management in Japanese Banks

Risk Management in Japanese Banks Takehiko Nemoto May 1990 WP # CIS-90-13 RISK MANAGEMENT IN JAPANESE BANKS by TAKEHIKO NEMOTO Submitted to the...
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Risk Management in Japanese Banks Takehiko Nemoto May 1990

WP # CIS-90-13

RISK

MANAGEMENT

IN JAPANESE BANKS

by TAKEHIKO NEMOTO

Submitted to the Alfred P. Sloan School and the Department of Engineering on May 11, 1990 , in partial fulfillment of the requirements for the Degree of Master of Science in the Management of Technology

ABSTRACT

With the liberalization of finance , the diversification and increasing complexity of financial products , and the globalization of operations, risk management has become an increasingly important issue for Japanese banks. In order to achieve a high degree of risk management , appropriate support systems become necessary fo faster comprehension of risk , improved analysis capabilities , and implementation of risk hedges. Therefore , I have suggested a general concept of system architecture in applying risk management to Japanese banks in order to move ahead with construction of this kind of risk management system.

ACKNOWLEDGMENT Thesis supervisor : Stuart E. Madnick Title : Professor of Management Science and Information Technology, Leader for Manufacturing Professor

TABLE OF CONTENTS 1. THE ENVIRONMENTAL CHANGES IN FINANCE AND THE IMPORTANCE OF RISK MANAGEMENT 1-1. THE ENVIRONMENTAL CHANGE 1-2. RISK INCREASE AND CORRESPONDING CONDITIONS 1-3. IMPORTANCE OF RISK MANAGEMENT 1-4. DEVELOPMENT OF RISK MANAGEMENT STRATEGY 1-4-1. CURRENT CONDITION OF RISK MANAGEMENT IN JAPAN--ISSUES AND ITEMS FOR CONSIDERATION 1-4-2. ADVANCE/EXPANSION OF VARIOUS RISK MANAGEMENT STRATEGIES 1-4-3. DEVELOPMENT OF OVERALL RISK MANAGEMENT STRATEGY 2. RISK, RISK MANAGEMENT PROCESS AND APPLICATION SYSTEM 2-1. RISK SYSTEM 2-2. RISK CHARACTERISTICS, REPRESENTATIVE COUNTER MEASURES AND SYSTEM SUPPORT NEEDS 2-3. PREREQUISITES FOR MARKET RISK MANAGEMENT 2-3-1.PERMEATION INTO MANAGEMENT JUDGEMENT 2-3-2. POLICY EXECUTION BY BUSINESS PERSONNEL 2-3-3. SUPPORT THROUGH SPECIALISTS 2-3-4. OPTIMIZATION OF RISK TAKING BETWEEN PRODUCTS AND CURRENCY 2-4. MARKET RISK MANAGEMENT FRAMEWORK 2-4- 1. MANAGEMENT PROCESS 2-4-2. MANAGEMENT ITEMS

2-5. OPERATION FUNCTION AND INFORMATION 2-5-1. FUNCTION CHART 2-5-2. DATA MODEIMDATA ENTITY OUTLINE 2-5-3. FUNCITION DATA MATRIX 2-5-4. INSURING MANAGEABILITY OF MASSIVE AMOUNT OF DATA 2-6. APPLICATION SYSTEM 3. TECHNICAL CONSIDERATIONS AND CONCEPTUAL ARCHITECTURE 3-1. TECHNICAL CONSIDERATIONS 3-1-1. CLASSIFICATION OF PROCESS MODES 3-1-2. COMPREHENDING SYSTEMATIZATION CONSIDERATIONS AND TECHNICAL CONSIDERATIONS FOR REQUIRED SPECIFICATIONS 3-2. LOGICAL ARCHITECTURE 3-2-1. IDENTIFICATION OF LOGICAL COMPONENTS 3-2-1. OUTLINE OF LOGICAL COMPONENTS

INTRODUCTION With the liberalization of finance, the diversification and increasing complexity of financial products, and the globalization of operations, risk management has become an increasingly important issue for Japanese banks. In order to develop and distribute the innovative products required of leaders in universal banking, as well as to expand operations to meet world wide market demands, Japanese banks must comprehend and conduct risk management related to various operations on a world wide level. Furthermore, they must conduct analyses of risks for new and derivative products, define procedures of risk management, and incorporate these systems into their future processes. It is essential to build a management structure that will develop further on its own. In order to achieve a high degree of risk management, appropriate support for systems becomes necessary, for faster comprehension of risk, improved analysis capabilities, and implementation of risk hedges. In terms of the computerization of risk management, we should plan a system which will serve as a source of competitive advantage in an increasingly competitive environment. This system should include the adaptations to changes in the operations environment, the methodical introduction of sophisticated, systematic management techniques maintained by operations departments, the expansion of both qualitative and quantitative systems techniques in operations development, and evaluation of various aspects of the performance and efficiency of the systems themselves. I have suggested a general concept of system architecture in applying risk management to Japanese commercial banks so that we may proceed with the construction of this kind of risk management system.

5 1.

THE ENVIRONMENTAL CHANGES IN FINANCE AND THE IMPORTANCE OF RISK MANAGEMENT 1-1. THE ENVIRONMENTAL CHANGE The Japanese financial system is undergoing a great transformation with the progress of financial innovation in the background. Deregulation of finance has been progressing steadily and stimulating the transformation of the financial system further. This section, then provides an overview of the financial innovations that are fueling the transformation of the financial system and the importance of risk management. First let us agree on key terms. (1) Financial organs handling deposits will be called "banks." (2) Financial organs handling deposits and financial organs that do not handle deposits,such as securities companies and insurance companies, will be referred to together as "financial institutions." Also, financial organs not handling deposits as well as non-banking sectors such as the distribution industry will be called "non-banks." At present, financial innovation is making headway in the financial and capital markets. Financial innovation is the process of rapid dissemination of new developments in the area of financial transactions such as new products and services. Financial innovation is of course occurring not only in Japan, but worldwide. Financial innovation has given rise to new financial products: money market certificates, "Kijitsu shitei" (designated withdrawal date) term-deposits, "Big," and "Wide," funds by banks,"chuki-kokusai" (intermediate-term national bond) and other funds by securities companies, and variable life and other insurance by life insurance companies. And products such as commercial papers and warrant bonds have been introduced as means of procuring funds for business enterprises. In the area of services, new developments include credit cards, prepaid cards, improved services for settlement of accounts such as electronic banking, financial futures, and means for hedging risks such as swap and option transactions. The background factors behind these financial innovations include first, technological innovation, especially in the area of communications and information processing. Intermediateterm national bond funds and many other new financial products became feasible because of technical developments in computer processing and communications. Similarly, thanks to technological innovation in communications and information processing, on-line computerization of finance has made great strides (Table 1) and has promoted electronic banking and other financial innovations in the area of service. The financial on-line network has expanded from an on-line system for remittance and CD on-line networks (that is, networks among banks), to networks, such as the farm banking system, which includes clients, as well as networks involving non-bank sectors such as insurance and securities companies. These are in the realm of what may be called the infrastructure for financial transactions. Thus, "24-hour trading" in the international financial markets has become possible through the extension of financial networks into international networks. Therefore, it is no exaggeration to say that technology has been transforming financial transactions. A second factor is the progress of internationalization. Since Japan's Foreign Exchange Law was revised in 1980 to liberalize, in principle, capital transactions, the internationalization of Japan's finance has made rapid progress--especially in the last several years. The following are three facets of this internationalization process. [a] First, international transactions have expanded. International transfers of funds have become vigorous with the growth of global trade, the need for financing international trade imbalances, and deregulation of exchange controls among advanced countries; international financial transactions in the markets of all advanced countries -- including the Euro market-

have increased at an accelerating pace. Similarly, in Japan substantial growth has been achieved since 1980 in both the acquisition and disposal of foreign securities by residents, of domestic securities by nonresidents and in raising dollar funds by Japan's financial institutions in the overseas money centers. Japan's recent investments in domestic and foreign securities have totalled as follows: In 1987, investments in foreign securities were $2.6 trillion--88 times the 1980 level, while investments in domestic securities by nonresidents were slightly less than $ 1 trillion--a 18-fold increase. Japan's net foreign asset have been accumulating since 1980, when its trade balance started to regularly record annual surpluses. In 1982, Japan's net balance on foreign assets had moved into the bank. Japan's foreign debts have also been growing; as of year-end 1987, the balance of its assets in dollar terms had increased 8 items, and debts 6 times, over their respective levels in 1980. Consequently, the mutual interdependence--or globalization--among the world's financial markets have been growing. [b] The enhanced status of Tokyo in global financial markets is also noteworthy. Due to the great accumulation of assets in its private sector, Japan's financial markets have been recording continual high growth, and Japan's foreign assets and liabilities have been accelerating in the international financial markets. The volume of foreign exchange transactions on the Tokyo market has also been increasing. The Tokyo market volume, one half of that of New York in 1983, rivalled it in 1986 with average daily transactions amounting to $48 billion-although it was still smaller than London's. The total value of stocks, listed on the Tokyo Stock Exchange as of year end 1987, was $2.7 trillion, the largest of all markets in the world-attributable in part to the high yen. The Tokyo Exchange's daily trading volume now rivals New York's. The volume on the Japan Offshore Market (JOM), established in December, 1986, is steadily growing. As of end of March, 1988, it totalled $285.9 billion, approaching in volume the Singapore and Hong Kong offshore markets, which were established before Tokyo's. The Tokyo offshore market is approaching the volume of New York's International Banking Facilities (IBF). Backed by an abundance of funds, the Tokyo market has recorded quantum scale growth to rank with New York and London, as one of the three major world markets. Because of its geographical location intermediate between New York, and London, its importance is expected to grow further. [c] The rising importance of the Tokyo market is supported by the influx of foreign financial institutions into Tokyo and the establishment of Japan's institutions in overseas markets. The number of overseas offices established by Japan's institutions aboard and the number of foreign operations established in Japan have been increasing noticeably in recent years (Table 2). A third factor is progress in the development of financial stock. Accumulation of assets has been proceeding at a considerable pace not only in the form of household savings but also as assets for corporations as a result of increases in internal reserves. On the other hand, the outstanding balance of national government bonds issued has been increasing (Table 3). With the building up of such capital stocks,there has been a strong preference regarding interest rates on the part of both business enterprises and households, and their needs in this regard have been diversifying too. Also, the larger issues of national bonds have been leading factors for the issuance of public and corporate bonds, and for the overall development of the distribution market. They have promoted deregulation of interest rates, and they have made possible the development of new products such as the intermediate-term national bond fund and the national bond/ term deposit combination. A fourth factor has been the easing of regulation of interest rates and rules of conduct for business. The deregulation of finance has been moving forward steadily. Let us, then, look at the process of deregulation in finance briefly. The deregulation of finance is proceeding

in the areas of easing of regulations governing interest rates and of regulations governing modes of work which involve international transactions, easing of controls over the establishment of branches, and review and change of the basic rules under which corporate bonds must be secured with collateral. In each of these areas, there has been steady progress.(Table 4). For example, after the introduction of deregulated interest rates for large deposits, the deregulation of interest rates has been broadened, step by step, to include smaller deposits. With regard to securities, deregulation started with the sale of public bonds at banks and has gradually spread to dealing. A fifth factor is the increased interaction between various operations. Among them, there has been particular progress in securitization. As the securities distribution market becomes even more developed, there is a heightened awareness on the part of lenders about securing fluidity and about risk, and enterprises have shifted their means of raising funds from borrowing to bond insurance (convertible bonds, warrant bonds, etc.). As the business opportunities expand with this trend, the handling of securities at financial institutions becomes more attractive. Moreover the financial transactions have become diversified and tie-ups among financial institution have developed (Table 5). A large number of new types of saving products have been developed, and through mutual tie-ups, a large number of combination products and services have been provided. Furthermore banks and post offices are beginning to handle government bonds transactions for their customers. Thus, it is becoming possible to make use of a large variety of products and services at different types of financial institutions. The environmental change can be summarized as follows:

SUMMARY

Main contents

Categor

Technological innovations Mechanization * Technological innovations in the field of communication lines/information processing * Overall renovation/expansion of on line banking system -Expansion of network between banks -24 hour dealing Internationalization Expansion of international relations and operations -Opening of overseas affiliated firms/branch offices -Purchasing overseas financial institutions -Increase of foreign currency bonds/debts Increase of outside pressure regarding overly large presence of Japanese banks overseas Change in customers * * *

Liberalization

Increase in interest rate sensitivity accompanying increased financial assets Sufficient internal funds or direct financing by large corporations Increase in proportion of transactions by small and medium enterprises

in liberalization of deposit interest rate Loosening of business regulations including those for international financial transaction *Loosening of branch office regulation Loosening of advertising regulation *Progress

Increased interaction between various operations * Increase in transactions related to marketable securities -Increase in dealing and government debt resale by banks -Expansion of operations in private placement debts -Establishment of investment consultant companies Increased mutual cooperation between different kinds of financial institutions

1-2 RISK INCREASE AND CORRESPONDING CONDITIONS The environmental change surrounding Japan's banks indicates an increase in risk through structural changes and liabilities. The following is an outline for risk increase characteristics of various risk types. Risk Type

Risk increase characteristics! background

Risk description

Trust risk * A risk in which the asset value cannot be realized on the due date to factors such as bad loans. Interest risk * Risk of decrease in income and asset value due to changes in interest rate.

Liquidity risk * Risk which necessitates unscheduled liquidation of funds and adjustment of high cost capital due to primary insufficiency of capital.

*

Increase in trust risk with loan for small/medium enterprises and consumer expansion.

*

Free interest rate products such as CD,MMC have rapidly increased in terms of percentage of deposits. Due to this phenomenon, interest risk has greatly increased.

*

At present there is no overwhelming danger for Japan, where the liquidation rate is low. However due to the following factors, the danger of increased risk will become greater. -Increase of overseas loan commitments -Increase in price instability of marketable securities -Shifts in interest sensitivity for free interest product -Expansion of settlement system networks between banks

10 Risk increase characteristics!

Risk Type

background

Risk description

Price change risk * Risk in which income and asset value decrease due to changes in marketable securities price.

Exchange risk Risk in which income and asset value decrease due to change in exchange rate.

*

*

securities held as well as dealing balances are increasing every year. Price change have also been accelerating, generating an increase in value change risk. *

Risk has increased due to increase in foreign currency bond/debt balances and in volatility of exchange rates.

*

Risk hedge of off balance transaction, off balance transaction for arbitrations and speculations--for example, the increase in items such as loan commitments, standby L/C, swap etc.--lead to an increase in risk.

*

The debt balance of debtor nations has remained at a high level. Factors such as the drop in distribution market values and suspension of interest payments have been very influential.

Off balance transaction risk *

Risk generated by off

balance transaction from arbitration transactions, ventures and risk hedges.

Country risk *

Trust risk related to

foreign government or foreign corporations.

Balances of marketable

11 Therefore, the environmental change in finance indicates a significant increase in risk, with increased activity in fields such as loans to medium and small enterprises, consumer finance, free interest products, off balance transactions, foreign currency bond/debt transactions and marketable securities-related transactions. However the corresponding response to these risks is inadequate, partially due to the rapid change in environment. The next chart is the result of a research survey on the degree of comprehension and measures of risk importance. The result indicate that the measure for all risk types are insufficient.

12

1) Large city based commercial bank

2) Regional bank Credit risk

100% exchange risk

7 A-

I*

IK I

1NI I/ I

An

I

I

Liquidity risk

3) Mutual loan and saving bank

I I

I I

9

Il/ \ I I Il I

I I

4) Total

I I

I IN

I/

IJ 1

"I

Importance of risk Sufficiency of counter measure

SOURCE : HITACHI CORP. "Financial deregulation and financial institutions NOTE : This research was conducted in 1988 at 43 Japanese banks.In this research each bank answered the following question with a percentage. "Are your bank's counter measures for risks sufficient?" " There is no explanations of the degree in their answers.

interesi Irisk

13

1-3 IMPORTANCE OF RISK MANAGEMENT The issue of how to control these risks is becoming a very crucial element for Japanese bank management. After examining asset/liability structures as well as recent income structures, it is apparent that the allocation and control of risk assets have a significant impact on profits. Furthermore, one wrong step in risk management could lead to a crisis situation in management. In the U.S., which is ahead of Japan in financial liberalization, there have been many examples of this kind of crisis caused by errors in risk management. For example, First Republic (U.S. no 26) failed in their trust risk countermeasures under their single operation model of management, and consequently produced extremely poor results. Furthermore, Continental Illinois (U.S. no 14 ) provided inadequate risk management due to their emphasis on quantitative expansion. The result was a rapid increase in hot money, mainly in CD's, as well as an increase in the degree of dependence on overseas credit, and an increase in loans to debtor nations. Consequently the bank is now receiving aid from the F.D.I.C (Federal Deposit Insurance Corporation). Also, with the advance in liberalization in the first half of the 1980's, there was an increase in bankruptcy of U.S. S&L's due to the rise in deposit interest rates (generating negative spread). Even recently, there have been many cases of serious losses occurring in short periods of time, largely due to the lack of preparation in risk countermeasures for option dealing and trading. As pointed before, it would be an exaggeration to say that the establishment of risk countermeasures is a crisis considering the fact that the current state of risk countermeasures is extremely inadequate for banks in Japan. This urgency of risk management has been reflected in Japan by recent activities such as "Strengthening of commercial bank review system that emphasizes risk management," and "Specific guidance for establishing goals in net worth ratio," conducted by Japanese bank as well as the Ministry of Finance.

14

1-4 DEVELOPMENT OF RISK MANAGEMENT STRATEGY

What counter measures will be necessary for these risks? The following is a general overview of significant countermeasures, with examples of successful foreign banks as well as the current condition of risk management in Japan (issues and items for consideration) serving as the basis for the study. The countermeasures are largely divided into two categories. The first category is the advance/ expansion of various risk management strategies. The second category is the development of an overall an risk management strategy. Each will be examined separately. 1-4-1

Current condition of risk management in Japan ---Issues and items for consideration---

Despite the continuous increase in risk, risk management in Japan today has many problems. The most fundamental problem is that no appropriate systems have been developed to correspond to the risk management. Most banks analyze risks only by gathering information from existing banking business application systems. Moreover, there are other problems besides the lack of systems. This section presents an overview of the present situation (issues) and main items for consideration concerning these issues.

Issues *

Until now, banks in Japan emphasized the development of generalists. As a result, it was customary for workers, after spending a specified period of time (2-3 years) in one department, to transfer to a different one. For this reason, they have been unable to respond quickly and appropriately to specialized tasks and the risk that accompanies those tasks.

Items for consideration -

Introduction of work

specialization ----retaining and training specialist -

Reconsideration of

job rotation system

15 Items for consideration *

*

Accompanying the increase in risk, the demand for composite commodity development has grown. However, because different people handle different commodities within each department, composite commodity development does not go smoothly.

-

In addition, because the business is organized by customer, it is unclear where responsibility lies for commodities and the risk that accompanies them. This has resulted in conditions where development of new commodities is slow and risk management is inadequate.

-

* As regulations are eased and

liberalization increases, opportunities arise to acquire customers and to avoid risk through new commodity development. However, the people responsible for handling the commodities are so busy carrying out their everyday transactions that they have no time to study or examine financing technology, regulations, etc.

Strengthen commodity

development -

Strengthen management

functions horizontally across department

Strengthen control

function for each different commodity

-

Strengthen functions

that allow concentration on commodity development

16

Issues *

Because of inadequate data

compilation and inadequate monitoring systems, it is hard to clarify where responsibilities lie, where the causes of risk occurrence are, etc. This turns risk management itself into a hollow shell. *

*

*

Items for consideration -

Strengthen monitoring

system -

Complete data

compilation

As risk increases, the volume of necessary information also grows. On the one hand, increases in the fluctuation range of prices, interest rates, etc., invite a growth in the volume of transactions, and the burden of those conducting the transactions also grows. As a result, there is not enough time available to input data necessary for risk management.

-

Because the relationship between risk and profit is not clearly organized and analyzed, those in charge of various tasks carry out their transactions without adequate consideration of the overall impact on profit and risk. This leads to occasional instances in which a huge loss cannot be avoided.

-

In responding to specialization and rapid changes in their operations, the number of cases has grown where each business department has modified its own system independently. In this situation, differences in definition and discrepancies in data occur when attempts are made to achieve risk management. Therefore, risk management cannot be adequately carried out.

-

Subdivision of

functional responsibilities

Complete and thorough

profit management with risk taken into consideration

To improve data

compilation,acquire data transfer capability by adding rules and architectural structure

17 Issues *

*

Items for consideration

The system department forms the body of the business application development group. But there is no place that studies and investigates new technology before the actual business application development. Development using new technology takes time. This results in another obstacle to the field of risk management, which requires the most up-to-date technology.

-

In the area of dealing, which is most frequently affected by market risk, employees are unable to monitor the transaction situation during the day on a request basis and must work using the report of the previous day's closing. Therefore, they cannot give appropriate instructions concerning changes in the market environment during the day.

-

Strengthen R&D

organization

Strengthen monitoring

capability

18 1-4-2 Advance/expansion of various risk management strategy In this section I will consider examples of successes by foreign banks where the corresponding measures in Japan are inadequate. In later chapters, after examining U.S. bank examples and clarifying the characteristics of risks, I will specify countermeasures using my operational experience as the basis. Following these procedures, I will extract the application system needs (process conditions, data requests).

19 Risk type

Counter measure

Trust risk * Thorough customer management through perfecting customer information data base.

First Wachovia

*

Quantitative management of loan portfolio. - Setting loan limit amount by quantitative evaluation of loan destination as well as optimization of loan portfolio by monitoring shifts in trust rating.

First Republic

*

Development of high return strategy

Wells

-

Selection and emphasis of high return

Fargo

markets with interest rates that take into account bad loan rates. Interest risk * Understanding current state through ALM (Asset Liability Management) advances/ precision. -

M Corp

With the full use of ALM, the gap of

interest-sensitive assets and liabilities will be quickly and accurately grasped. *

Setting/management of gap margin which includes off balance transactions - Management of gap by setting net position of optimal interest swap with interest direction and bank's position as basis.

*

Application of interest swap - Reforming capital procurement/utilization structure not only with arrangement fees (as an intermediately bank) but also with interest swap transactions for own account.

Liquidity risk * Long term/diversification of capital procurement supply.

National Bank of Detroit

Citicorp

*

Management of liquidity gap margin with ALM.

Bank of America

*

Improvement of perception.

Continental Illinois

20 Risk type

Counter measure

Price change risk * Thorough position management. - Establish risk management to conduct company-wide tasks such as setting of position margin, monitoring, analysis, planning hedge strategies, and position modifications, to create thorough price change risk countermeasures. *

Merrill Lynch

Research and development of new hedge methods such as application of portfolio insurance.

Exchange risk * Conscious distribution of foreign currency assets/liabilities. - Outside capital is distributed in response to change in foreign exchange rates. *

Example

Setting of position margin and complete implementation of reporting system.

National Westminster

Deutsche Bank

Off balance risk * Application of swap transaction. *

Management of off balance. -

*

Increased capability in monitoring.

Improvement in new product development capabilities and preparation for design review system. - With regard to new product development which includes development of off balance transaction products of each operation department, specialized departments support from developmental stage to final stage of the product, including both evaluation and monitoring.

Country risk * Sufficient reserves. *

Shift towards private direct investment.

*

Debt equity swap.

*

Improvement of primary information accumulation capabilities,improvement of evaluation capabilities.

Security Pacific

21 1-4-3 Development of overall risk management strategy Along with the advance and expansion of various individual risk management methods, an overall risk management strategy has become more important, with increasing adjustment between different risks, markets and departments, in order to obtain maximum profit and minimum risk. In the following section, I will explain the factors which constitute an over all risk management system by analyzing the current problems in Japanese banks and by examining examples in the U.S.A. (1) Full risk management In order to improve risk management and to execute the decisions made by the ALM committee on the management level, it is necessary to decentralize authority for each risk and carry out appropriate management. However, items related to various risks/ departments such as the setting of risk standards or the validity of risk taking for the entire bank, must be determined at the top level. In these cases, top level participation is the key factor. As a step towards executing this top level decision making effectively, it is absolutely essential to conduct thorough income management which takes risks into account and to increase monitoring control with bank-wide ALM. Furthermore, in cases where risk might be generated, it is necessary to be able to detect risks quickly to prevent their spreading to other units. In order to accomplish this, it is necessary to make the unit of risk management as small as possible. Meanwhile, in order to maintain profitability while offering optimal rates to customers in areas such as dealing, and in order to conduct complex transactions through options, mergers, etc., the following support is required: -

Shared/real time use of outside information with market prices, etc. Real time analysis/simulation which includes outside information concerning dealer positions and strategies. - Decrease in time necessary for risk comprehension on all points. - Decrease in operations cost by integration of both front and back office system. (2)

Strengthening analytical ability/subdivision of functional responsibilities

With the constant appearance of new products, the front office which handles the management procedures fails to manage sufficiently due to the fact that it must spend too much time in buying and selling of new products. Furthermore, the bank office cannot handle processes other than direct slips. With rapid expansion in operations for new products, there will be significant losses created by the lack of skilled personnel, as well as a lack of preparation of risk countermeasures. Aside from the operations which have the following items as a goals, the strengthening of analytical ability and the subdivision of functional responsibilities have become important. -

Specialized measures for increasingly complex risks.

-

Improving management for new products.

-

Reforming back office operations procedures.

(3) Increased product development capabilities With the liberalization in finance accompanied by loosening of financial regulations, there has been a noticeable intensification of price sensitivity, advances in transaction methods, high product demands, and an overall decrease in loyalty to products. Due to these changes, the increase in product development capabilities which take risk coverage into account has

22 become significant for banks. The primary factors for product development capabilities are the R&D system and the systematized capacity for new products. As opposed to U.S. banks, Japanese banks do not have a formal R&D control method. Therefore it is very important to strengthen R&D control and develop product specialization. (4) Increased strength of system support capabilities It has become essential for personnel who have specialized knowledge to respond rapidly to new products and to create new types of plans and simulations in the front office and to process outside information more efficiently. In this regard, decentralization is increasing. Under these conditions, for sharing of information it has become more important to build up the rules/architecture which each development group should follow. (5)Orienting the organization system to products. In the past, Japanese commercial bank control has revolved around an organization system stressing relations with the customer. This approach comes from conducting each transaction (pricing,etc.) with the idea that total profitability will be generated by a series of continuous transactions. The developments in liberalization/securitization of finance in the past few years have allowed direct transactions for the customer in the financial markets. As a result, the following customer characteristics can be noted. - For every single transaction, the best price is requested. - Request for best procurement and allocations methods through the most advanced financial approaches which take customer risk into account. - Presence in markets (share, transaction execution capabilities). Taking the above customer requests into accounts, we must: -

Maintain advanced specialization in products and strengthen product development capabilities. Manage a continuous presence in markets. Improve risk management capabilities.

Due to the emphasis on specialization by product, the methods employed for making the organizational systems responsive to a product-driven organization become important. As mentioned before, the improvement of specialization capabilities is essential for full risk management. Japanese banks have traditionally stressed a 'generalist' approach for personnel control. With college graduates as the major source of personnel, there are very few examples of utilizing those with specialized capabilities at mid-course. There are no rewards for individuals who show an excellent performance in a short period of time. Also, the evaluation systems and capability development controls for specialized fields are inadequate. In order to be able to keep up with each specialized operation and risk, it is necessary to reevaluate present positions and fulfill the following points: -

Introduction of specialists

- Establishment of field evaluation/compensation system for specialists - Increased development system for specialized capabilities -

Implementation of mid-course utilization

-

Reforming service system for the widely prevalent 24 hour business system

The following overview diagram summarizes my explanation in this section.

23

(1) Full risk management -Increased management control/ executive personnel participation -Measures for limited pricing -Measure for sophisticated,complex transactions -Application of risk management to as fine a level as possible (smallest unit of risk) -Strengthening of monitoring control with ALM throughout bank -Thorough income management which takes risk into account

(2) Strengthen analytical ability & Subdivision of function -Specialized measures for increasingly complex risks -improving management for new products -Reforming back office operations procedures

(3) Increased product development capabilities -Strengthening R&D control -Strengthening product specialization

(4) Increased strength of system support capabilities -Integration of total architecture -Balancing of flexibility and focussing

(5) Making the organizational systems oriented to product -Change in customer service due to improvements in expertise regarding product

24 2. RISKRISK MANAGEMENT PROCESS AND APPLICATION SYSTEMS We have examined the current state and background of risk increase and the bank risk management strategies that will be important in the near future. Following this chapter, using my own experience, I will specify items which are the prerequisites for constructing a risk management system including the necessary data for operational/systematization needs. After comprehending and systematizing the risks related to Japanese banks, the basic management approaches and items for risk can be grouped as follows: -

-

Risk system

Risk characteristics and representative countermeasure/system support Main approaches and items for risk management

After taking a bird's eye view of the main approaches and items for risk types, I will detail the significant approaches and items for market risk. Finally, all the necessary risk items will be organized to correspond to each operational field.

SK SYSTFM _External

factor

Market risk

Interest risk

Deposit loan structure Capital operating position

Price risk

Securities position

Exchange risk

Exchange position

iquidity risk

Mismatch of capital due date Marketability of marketable securities

Fluctuation degree in interest between currencies

.Loan risk

Default

Regulation risk

Transaction regulation

imits on transaction produ Change in transaction proce Capital adequacy(adequacy of equity capital)

Taxation Internal factor

Managemen risk

.Unmatching Unsettlement Operation risk Fraudulent transaction Accident/Disaster

26 2-2

RISK CHARACTERISTICS. REPRESENTATIVE COUNTER MEASURES AND SYSTEM SUPPORT NEEDS

In this section, I describe the characteristics, contents, counter measures and system support needs of each of the risk categories that were presented on the previous page. A: Market risk - Interest risk - Deposit loan structure

A-0 Main target product; - Loan and deposit

A-1 Characteristics;

-Mid/long term

-Structural ( Not easily manipulated) A-2 Contents; - Risk generated by interest gap which cannot be controlled by open/interbank/futures/swaps due to large mismatch of interest due dates of deposit-loan structure. - Due to interest changes, cancellation of fixed deposits/ loans mid-way, and shift towards more advantageous due dates/product. A-3 Counter measures; -

-

Management of interest gap framework for portfolios classified by due date and interest linkage, and management of interest risk value (Framework setting is determined by items such as the overall risk taking conditions, procurement capabilities, and potential execution volume of futures, etc). Risk control through operation strategies with the above items as assumptions. Estimation of behavior patterns broken down by deposit/loan amounts, for each customer segment and for the different interest rates changes in each segment, through marketing/sales efforts, formation of mid/long term deposit loan structure with the above items as basic assumption.

A-4 System support needs -

Matching management support for each capital pool. Capital cost management support ( Average,limit cost management support, etc.). Support of items such as interest sensitivity analysis. Calculation support of hedging tools as well as required volume. Monitoring support of hedge performance,etc. Division support with treasury department.

B: Market risk - Interest risk - Capital operation position

B-0 Main target product; -

Capital

B-1 Characteristics;

27 -

Subdivision into mid/long term positions and short term positions.

-

Easily manipulated.

B-2 Contents; -

Actual interest movement is against interest risk-taking based on mid/long term interest forecast. Works against position-making based on short term market interest value.

B-3 Counter measure; -

-

Management of maximum loss during "against" (time when prices, etc. are moving in a direction adverse to the bank's position). * Setting stop loss limit * Monitoring cost to close Ascertaining profit by hedging of break even point. Locking in of profit by follow up on hedging.

B-4 System support needs; -

Position monitoring support.

-

Calculation support of hedging tools as well as required volume. Monitoring support of hedge performance, etc. Matching management support for each capital pool.

-

Capital cost management support, etc.

C: Market risk - Price risk - Securities position

C-0 Main target product; -

Stocks and bonds

C-1 Characteristics; -

Instantaneous

-

Global base ( However, characteristics of each market are reflected).

C-2 Contents; -

Cases in which asset valuation changes/worsens due to change in each transaction market of stocks and bonds. In the same manner, cases in which the profit/loss of dealer buying and selling worsens due to marketable securities markets.

C-3 Counter measure; -

Monitoring of real time position.

-

Setting of position frame, stop loss limit. Global position management, application of hedge opportunities.

-

Immunization of partial portfolio.

C-4 System support needs; -

Position monitoring support.

28 -

Calculation support of hedging tools as well as required volume. Monitoring support of hedge performance, etc.

D: Market risk - Exchange risk - Exchange position D-0 Main target product; -

Foreign assets and foreign liability

D-1 Characteristics; -

Instantaneous Global base 24 hour base

D-2 Contents; -

Diminishing valuation of foreign currency capital due to fluctuations in ethe xchange market. Diminishing profit returns or dividend collections from overseas branches and overseas investment. Exchange difference loss generated from exchange transactions with customers at agreed prices.

D-3 Counter measure; -

Real time position monitoring. Setting stop loss limit.

-

Responding to profit opportunities through globally integrated application.

D-4 System support needs; -

Exchange position monitoring support. Exchange loss/profit monitoring support.

-

Risk point monitoring support.

-

E:

Market risk - Exchange risk - Fluctuation degree in interest between currencies E-0 Main target products; -Foreign currency E- 1 Characteristics; -Global base E-2 Contents; -

Exchange difference losses as generated by differing interest fluctuation ranges for currency, or differences in interest due date of procurement and use of foreign currency.

29 E-3 Counter measure; - Preparation of information related to interest due dates, and precautionary currency operations based on that information. E-5 System support needs; -

Risk point monitoring support.

-

Various analytical simulation support such as arbitration analysis.

F: Market risk - Liquidity risk - Mismatch of capital due dates

F-0 Main target products; -

Loan/deposit/capital

F-1 Characteristics; -

Structural

-

However, can be manipulated on monthly/weekly/daily level.

F-2 Contents; -

Cases in which the capital due date mismatch position exceeds supply reserve capacity, making payment impossible. Or cases in which unneeded procurements are made, and as a result procurement costs accumulate ( for example, in the Euro market, the partner bank's credit line is used up to the limit, requiring a premium if additional procurements become necessary.)

F-3 Counter measure; -

Monitoring of long term structural mismatch. Control within Bank of Japan reserve requirements of short term capital mismatch position by capital dealing. Strengthening procurement power with interbank.

-

Decentralized procurement.

F-4 System support needs; -

Procurement cost management, support of items such as decentralization of procurements.

-

Vender management support.

G: Market risk - Liquidity risk - Marketability of marketable securities

G-0 Main target products; -

Stocks and bonds

G-1 Characteristics; -

Market factors Strategy factors

30

G-2 Contents; -

Decrease in liquidity of held marketable securities. Cases which have strategic difficulties.

G-3 Counter measure; -

Decentralization of brands Management during acceptance

G-4 System support needs; -

Marketability analysis monitoring support

H: Loan risk - Default

H-0 Main target products; -

Loan

H-1 Characteristics; -

Global in nature

H-2 Contents; -

Bad debts from bankruptcy or decrease in trust of swap transaction partner, corporate bond issuer, loan partner etc.

H-3 Counter measure; -

Strengthening procedures in loan examination, bond acceptance examination

-

Global limit management

H-4 System support needs; -

Monitoring support of foreign currency transaction history Credit line management support

I: Regulation risk

- Transaction regulation - Limits on transaction products

I-1 Characteristics; -

Dependent on authorities concerned

1-2 Content; -

Cases in which each country's authorities cause opportunity losses by creating regulations on excessive product purchasing and selling (Delivery restriction on

zero coupon bonds, Euroyen bonds, etc.)

3 1 1-3 Counter measure; -

Training of specialist to follow each country's authorities Following movements of other banks and competitors Monitoring movements in overseas regulations and taxation

1-4 System support needs -

Support of various outside economic/financial information gathering

J: Regulation risk

- Transaction regulation - Changes in transaction procedures

J- 1 Characteristics; -

Dependent on authorities concerned

J-2 Contents; -

Transaction procedure regulations (or change in these regulations) enacted by authorities cause delayed response, opportunity loss, and increased operation processing costs. (Raising of futures consignment guarantee amounts,reevaluation of accounting standards, strengthening trust transaction regulations, etc.)

J-3 Counter measure; -

Business manual. Provision for operational manuals and timely maintenance.

J-4 System support needs; -

Full help screen for high tech transactions

K: Regulation risk - Capital adequacy

K-1 Characteristics; -

Dependent on authorities concerned

K-2 Contents; -

Equity capital ratio regulation by BIS. Regulations are added regarding total asset reserves, asset liability ratio etc. created by authorities from the Ministry of Finance and Bank of Japan. Compliance with these changes causes opportunity losses as penalties from violation of regulations.

K-3 Counter measure; -

Monitoring of shifts in regulations

-

Quantitative identification and monitoring of factors impacting on equity capital ratio.

32 K-4 System support needs -

Analysis simulation support for equity capital ratio.

L: Regulation risk - Taxation L-1 Characteristics; -

Dependent on authorities concerned

L-2 Contents; -

Opportunity losses caused by compliance with tax reforms, or penalties from delay in compliance

L-3 Counter measure; -

Strengthening tax management Utilizing low tax nations or markets

L-4 Tax simulation support etc.

33 2-3 PREREOUISITES for MARKET RISK MANAGEMENT 2-3-1 Permeation into management judgement With the increase in impact of interest risk due to the increase in free interest products, with currencies other than the yen for expansions of international operations, expansions the liquidity of global products such as capital exchange operations, U.S. market increased and etc. in major markets, the risk taking conditions for the entire bank and (USTB) bonds treasury the conditions for profitability must be evaluated periodically. It is important to set policies for each department for managing the execution of management strategies for pushing ahead development of the universal bank. From the standpoint of risk management, it is necessary to conduct the following in order to influence these administrator's intentions in each operation department. - Determining evaluation procedures for items such as equity capital with regard to soundness of current risk levels. -

Setting ratios and profitability guideline for risk-taking by field, based on evaluation of risk taking conditions in each business and each region and on the profitability of each of these.

It is necessary to establish an overall plan of meetings for monitoring of the above items. 2-3-2 Policy execution by business personnel The top level of each department must define the methods to actualize management of the items indicated above. The policy is broken down into execution plans. In order to execute these plans, the following items must be considered. -

Because market risk control resulting from deposit/loan structures pertains to customers, in some cases establishing control can take time. This kind of management is determined by the policy towards the customer base and marketing of items such as changes in product line. Therefore, for risk management, policies should be set by which risks from deposit loan structures are kept to a level which can be controlled by operations of the market. As an index for this type of management, there is the accumulated capital gap of the deposit loan portion, interest gap, volume average remaining period for each product, duration, and average remaining period difference/duration/gap of each matching pool. In order to control these kind of items, it becomes necessary to establish goals and to conduct weekly monitoring.

-

As opposed to deposit/loan composition, risks that pertain to positions of bonds, exchange currency, capital etc. correspond to the market fluctuations and are consequently generated at high speed at any place in the large scale world markets. Therefore it is necessary to conduct monthly controlling of items such as risk distribution of currency/ product. It is also necessary to conduct daily monitoring to eliminate concentration in specific products, brand names, etc. For this kind of broad position risk management, a risk management committee (RMC) becomes important. (Optimization of risk-taking between product and currency).

-

Management pertaining to global products of currency/capital, marketable securities portion, etc. is determined by the RMC. The key points which determine the mother market for each product determines the position making policy. This is

34 because there is hegemony in pricing in the markets. From this stand-point, a global dealing management system should be maintained. (Optimization of risk-taking between product and currency) 2-3-3 Support through specialist With the above management activity, the following support from specialist is necessary: - Interest estimate/exchange currency estimate * Specialized skill for mid-long term estimates conducted by fundamental analysis * Specialized skill of market analysts for short term/mid term market activity estimates conducted by market analysis -

Brand analyst *

-

Risk analysis by product *

-

Specialized skill in analysis of special brands/types of business of corporate stocks,etc. Necessary for stock investment

Specialized skill for analyses of risks generated by characteristics of items such as product schemes.

Asset Liability Management (ALM) analyst

* Specialized skill for risk analysis from deposit loan structure 2-3-4 Optimization of risk taking between product and currency By setting goals with RMC as indicated in above, and implementing goal management with a global dealing management system, risk/profit optimization will be established. The following page will summarize the main risk management items corresponding to each operational field.

35 Banking Business Commercial Banking

I

Investment Bankin

Fund

Deposit

Loan

|

Foreign Exchange

Security

Goal assignment to managers I

III

ICompatibility of dealer performance I land profit management I I---------------------------------------------------------------------------IMarketability Yen shift ILowering IStabilization IBackup,commit Imanagement IYen lprocurement lframework mgnt. lof procurement I linvestment Icost lcapital I ILong term I---------I-----------------------IProcurement Icommitment I lcapability lEliminating structural mismatch -----------------------------------------------------------------I hedge

Macro

I I I I

SI SI

-~~~~~ ~ : Credit limit e Country limit I I

-

f *I B : I

----------Long ter short ter -n operatin position

-----------------Position management ------------------------------

I

-

-I

I

Management of stop loss limit Optimal application of multiple currency ---------------------------------------------------------ICredit line management I I I------------------------------------I I Accordance between global management I Isystem and local management system \{11

Dealing portfolio management I I ALM strategy I------------------------------------------------------Risk Management (Expanded ALM)

I

36 Note A-----Total banking business B-----Category of risk management a-----Total risk b-----Liquidity risk c-----Interest risk d-----Price risk e-----Loan risk f-----management risk

37 2-4 MARKET RISK MANAGEMENT FRAMEWORK Having covered basic policies for risk management, I will describe the items to focus on in market risk management on the following pages. By highlighting the relationship of each management level, overal diagram (2-4-1) shows an image of the management process and illustrates the role of each layer of management in risk management and the relationship of the layers. In management items (2-4-2), an outline of the timing and the subject for each organizational rank in the management process from overall diagram (2-4-1) is indicated. These items corresponding to each management level of system design are developed into identification of necessary information (data model), and identification of necessary operations (function chart).

38

IOver all plan meeting I -Determining total framework for risk taking I -Forming policy for risk taking share of each I operation *--------------------------------[i]

- --------

[b]*

: *[a] IALM committee I-Deposit loan structure policy I decision I-Macro hedge goal decision for I deposit loan mismatch

I I I I B I[i]

-*

I:

I I I

A*

*

:[i]

I I I I I

Risk management committee I-Risk distribution by I product I-Risk distribution by I region

I I I I I

A __________________*

[i]

____________

*:

1:***************

I :** [c]

-*-

*

I * ICapital procure meeting C :*I I : -Forming short term I :*I market capital I* Iprocurement policy & I :*I plan

**'

[d]

:

I I I I I I I I I

I IGlobal dealing I I management I I-Forming policy & I I implementing I I controls for global I I product position

I * I-Comprehending progress I I-Macro hedge for I I base position of I: * Ishort term estimation I I entire bank loan I: * Iof deposit

I II

II

I: * Istructure policy

Local dealing I management I-Operation Icontrol by Iproduct within Ilocal area Ilimit

* ------------------------------

'

*

I : *

*[f]

[i] *

D:~ -----------------II Business II affairs I I department

. ** *

[i]

*

* * *

:

*

* *

'* **

I: *[e]

A*

*

A

*[g] *

*

* * *

*

[i]

*

*

. *

------)ealing/portfolio departmentI I I I I I I

[h]

I I I I I I I

39 Note A-------Top management B-------Top level management of business C-------Middle management D-------Line a-------Deposit loan risk framework b-------Dealing risk framework c-------Short term miss match framework d-------Risk frame work by product,by region e-------Deposit loan structure policy f-------Short term capital procurement policy g-------Front/back support i-------Report/feedback

40 2-4-2 Management items ----------------------------------------------------------------------------I a: Planning participants Icycle IRisk Main management items b: I I management I c: Necessary information I I Iorganization I--------------- I------- I---------------------------------------------------la Chairman, director, affiliated director IQ IOverall I I I plan lb -Comprehending present risk level of I I meeting I entire banks as well as levels categoI I lized by operation, region and product. I I Assessment of soundness from the I I standpoint of equity capital and corrI I esponding profit result. I I -Setting overall risk-taking framework I I of entire bank. I I -Ratio by operating field of riskI I taking,setting guideline for profitaI I I bility corresponding to these ratios, I and clarifying implementers, policy I I transmission,authorization. I I I Ic -Profit result, risk-taking value, risk I I cover rate and risk profit rate calcuI I I lated for the entire bank as a whole. I I -Counting of above items by operation, I region etc. I la Affiliated directors, affiliated sub IM I director IW I I I I lb -Monitoring of risk-taking framework I progress condition of entire banks as I I well as by operation field. Assessment I I of soundness from the standpoint of I I corresponding profit achievement I I condition,etc. I I -Necessary counter measure decisions I I and corresponding clarifications, I I instructions,etc. for parties responI I sible for execution. I I I Ic -Risk-taking framework condition of I I entire bank as well as individual I I operation field. I I -Status of profit realization as well I I as future policies/plans of I I authorities. I I -Risk profit simulation for various I I scenarios. I ---------------------------------------------------------------------------------

41

a: Planning participants I Icycle IRisk b: Main management items I I Imanagement c: Necessary information I I lorganization I--------------------------------------------------------------------------------------I I IALM Ia Director,head of a department IM Icommittee I I Ib -Review of long/short deposit-loan gap I I I condition and macro hedge condition. I Feedback to overall planning meeting. I -With the goal of keeping loan gap I I I interest exposure within a range that I I I I I can be controlled by manipulable I instruments such as MMC and CD, under I I risk-taking policy set by the overall I I planning meeting, loan structure I I policy is set, and transmitted to the I I I business divisions and capital I I procurement meeting, and the I I implementers are clarified or I I designated. I I I -Macro hedge goal setting of deposit I loan mismatch section, transmission to I I I treasury department and clarification I of implementers. I I I Ic -Interest gap by due date of deposit I I loan portion, interest gap by interest I I I linkage, duration gap, average remainI I ing period by each product, average I I remaining period difference by duration I I and by matching pool. I -Risk-taking framework condition of I I entire bank as well as individual I I operation field. I I -Possible execution volume for I I manipulable installments. I I I -Risk taking simulation for various I I scenarios. I I -Behavior pattern estimate information I I by customer segment. etc. I--------------------------------------------------------------------

42

I a: Planning participants Icycle b: Main management items I I Imanagement c: Necessary information I I Iorganization I-------------------------------------------------------------------------------------------------------Ia Affiliated sub director IW ICapital I I I procurement Ib -Evaluation of soundness of status of I I meeting I previous week's capital procurement I I from the standpoint of established I I I deposit loan structure policy, I procurement cost, procurement I I I decentralization,etc. I I -Forming market capital procurement I I policy/plan and deposit loan structure I I for following week. I I -Transmission of policy/plan for I I treasury department and clarification I I of implementers. I I -Feedback of necessary information to I I ALM committee. I

IRisk

I

I

I

Ic -Same as above c.

I-------------------------------------------------------------------------------------------------------IRISK I management I committee

I

IW I I I I I Il I I I I I I I I I I I I I I I I I I

Ia A head of security department, I affiliated director I Ib -With regard to each investment banking I operation, such as bonds, swaps, I foreign currency, capital, etc.,monitoI ring of position allocation by product I (by currency) and by region is I conducted. With this monitoring as the I basis, the position risk of the entire I bank and profit conditions are I comprehended on a board, goal basis. I -Evaluation of soundness of state of I allocations with regard to risk-taking I policy set at overall planning meeting, I and feedback to this overall planning I meeting. I -Implementing of risk distribution by I product (currency)/region with goal of I optimization of risk-taking between I product and currency within risk-taking I policy framework(for following week). I -Clarification and goal instruction for I implementers. I

43

Risk

Icycle

I

a: Planning participants

Imanagement lorganization

I I

I I

b: Main management items c: Necessary information

I---------------------------------------------------------------------------------

I I

I I I I I

Ic I I I I

-Position allocation condition by product (by currency), entire bank position risk condition. -Hedge performance, execution capabilities of operation installment.

I-------------------------------------------------------------------------

ID

Ia Affiliated sub director

I

I

Ib -Flexibility assessment with regard to I I monitoring unusual transactions of I I product/brand and unusual positions. I I I -Condition transmission and I recommendations for line implementers. I I I Ic -Conditions for decentralizing products, I I I I decentralizing brands. I------------------------------------------------------------------------------Ia Affiliated sub director IR IGlobal I I Idealing Ib -Forming, installing, and managing position I Imanagement I policy of global products. I I I I -Macro hedge of entire bank position. I I II Ic -Global position of entire bank. I I -Position allocation condition. I I------------------------------------------------------------------------------IR Ia A head of each branch, line controller IKey point I I Idealing Ib -Implementing of operations controls I Imanagement I within units set as goals in the I I I position-taking targets assigned by I RMC. I I II I Ic -Global-setting conditions for position I taking. I ------------------------------------------------------------------------------note; Q---quarterly,M---monthly,W---weekly,D---daily R---on-line request base risk cover rate= (interest risk amount+position risk amount)/equity risk profit rate= profit/(interest risk amount+position risk amount) interest risk amount=(sum of the gap between assets and liability by interest sensitivity) position risk amoumt=(sum of position by products) risk-taking value is measured in terms of interest risk amount and position risk amount.

I

44 2-5 OPERATION FUNCTION AND INFORMATION The following pages pertain to breaking down the market risk management process indicated by the management process into operation functions. The necessary information is indicated with regard to conducting these functions. 1)

Function chart (2-5-1) The function chart concentrates on the "What it done" rather than the "How to" for the operation function, and is described in terms of a top down approach. With the top down approach, all possible choices are included. The chart is read from right to left, top to bottom.

2)

Data model/data entity outline (2-5-2) The data model is a systematization of the necessary information for implementing investment bank operations. Here, the range of data required as seen from the operation side and the correlations between the data are defined.

3)

Function/data matrix (2-5-3) Function/data matrix is utilized to clarify the relationship between operation function and data entities indicated in 1) and 2). Therefore, it indicates the relationships of related data for executing each operation function. With this establishment of relevancy between data and function, system allocation and application divisions can be determined. (The "R" is read only and "U" is update.)

45 2-5-1 Function chart --- Setting risk taking policy

I---Risk distribution/goal establishment I Risk management ------ I function I---Implementation/control of risk taking

---Monitoring of status of risk-taking implementation

46 Analysis of present condition

----Analysis of I environment I

----Internal --- Risk exposure by product I analysis I Result & forecast I of profit I I--Risk exposure by currency I I Result & forecast I of profit -- Risk exposure

by area Result & forecast of profit --External------------- Long/mid term analysis I market forecast I------- Market information ---Policy approaches/ simulation

----Forming------------Forming product currency mix policy I I approaches policy --Simulation

--

Setting scenario

I- Potential risk

analysis - Impact analysis A-1-Setting risk ----Evaluation/setting of policy approaches I taking policyl I--Setting risk value framework I I I I--Setting risk profit ratio I--Setting risk cover ratio I

--Setting policy for risk taking share

I-Reevaluating ----Reevaluating ---Reevaluating due date, I deposit loan I capital allocation policy I risk I management I management I --Revaluating interest I frame I linkage/portfolio categories I I I

--Reevaluating ---By product I position segmenting I--By currency --By area

--Setting policy for risk taking by department

47 ----Setting deposit ------ Information---------- ----Forecast of interest I analysis I I loan structural I--Forecast of the I goals I I tendency by each I customer segment --Comprehending I execution I capabilities for I futures --Comprehending market procurement capabilities B--- I ---Setting deposit loan structure policy

----Setting each type of index

----Setting position--- ----- Information---------Risk position I by product analysis I I Result of profit --Risk position I by currency I Result of profit I--Risk position I by area I Result of profit 1--Short term market I forecast --market information I-Setting risk distribution policy I by product/currency I Setting position risk frame I by product -Setting risk distribution policy by product/area Key point framework and break down to global frame of positioning for each product

48 ---- Management of -- ----- Implementation --------------- Information I analysis I and management deposit loan I I marketing of I structure I 1--Setting deposit I loan structure I policy 1--Implementation I of marketing --Monitoring of deposit loan C--I structure goalsetting conditions --Implementation------------------Information I analysis and management I of market I--Setting application capital I procurement transaction I structure for I following week 1--Implementation and I management of I market capital I transaction --Monitoring of goalsetting conditions ----Management of ---Position ----------------------- Information I analysis position risk I management by I--Setting the position I area I risk goals I--Implementation--->E I of operation I transaction --Monitoring of the position by area I--Management of --------------- Information I analysis I global position I--Setting the global I position risk goals I--Implementation of I global dealing --Monitoring of the global position --Review by RMC ------------- Review of position I by product/currency I--Comprehending I abnormal I transactions I and positions --Recommendation of cancelling of position

49

D --------- I

----Monitoring of -------- Monitoring of deposit loan risk taking I structure I condition --Monitoring of position risk taking

----Report to management

----Capital dealing

--------- >F

I----Bond dealing

--------- >G

I ----Investment

E---------I I----Exchange currency dealing

----CD/CP dealing

50 ----Information ---Front I analysis I office I operation

----Data I gathering --Analysis simulation

F--I

----Customer/interest I information I-Volatility --Deposit loan ----Optimal I procurement I simulation I--Arbitration I conditions I analysis --Calculation of hedge ratio

I--Setting the I goals

----- Setting the goals about I profit,risk and hedging etc. I -Setting the goals by individual dealers

--Implementation I of dealing

----- Management of fundamental I information I-Request agreement processing I-Replacement of the position data

I

-----Capital operation ----- Balance --Dealing I position I management management I management & evaluation --Individual capital pools ----- Abnormal I-Risk I transaction I management I management I --Hedge condition I ----- profit/loss I-profit managemen t I management I--Performance management ------- Management of --Back fundamental I office information operation I I--Agreement management I--Balance management 1--Management of capital settlement I--Management of collateral notes I--Ledger management

------ Management of agreement details/ settlement date ------ Management of deposit with financial institution

51 ---Front I office I operation

----Information analysis I

----- Data I gathering

----Information from overseas branches, previous day installment

--Analysis simulation

G--I I--Setting the I goals

------ Setting the goals about I profit, risk and hedging etc. -Setting the goals by individual dealers

I--Implementation I of dealing

--Dealing management & evaluation

------ Management of fundamental I information I-Inquiry I-Agreement ------ Balance ------- Position I management classification I ------ Abnormal I-Risk I transaction I management I management I --Hedge condition I I-profit ----profit/loss I management management I--Performance management

------ Management of --Back I fundamental office information operation I--Agreement management

------ Agreement details management by brand /by customer

I--Balance management I--Management of incoming/out coming inventory I and delivery I--Interest/redemption fund management I--Capital settlement management I--Ledger management

52 2-5-2 Data model/data entity outline 1)Data model

1) Overview of APPLICATION SYSTEM Total risk management system Commercial banking ALM system

Investment banking portfolio ris

Dealing front system Swap Capital Foreign exchsnge Bond(yen) Foreign bond

Bond portfolio Stock portfolio Designated money in trust

Back office system Swap Yen fund Foreign currency/capital exchange NCD CP Bond Stock

New product development

54 2) Data entity outline Data entity 1. Risk taking

Outline -Information concerning distribution and policy risk frame of entire bank as well as dealers, traders, department, regions, products/brands -Information concerning risk cover rates, risk profit rates based on each of the above indicated risk allowance limit values -Information concerning risk hedge policy

2. Risk taking goal

-Information concerning risk taking goal of entire bank as well as deal traders, department, regions, products/brands (example) Short term capital operating goal -Information concerning risk profit ratio and risk cover ratio goal as well as deal traders, department, regions, products/brands (example) With risk profit rate as a structural element, goals concerning increased purchasing and selling, rotation rate risk mix, etc. -Information concerning risk hedge goal

3. Profit goal goal

-Information concerning profit goal as well as deal traders, department, regions, products/brands

4. Forecast data

-Information concerning various type of forecast data (example) Stock/bond value fluctuation forecast, issue market forecast, legislation forecast,etc.

5. Region

-Regional classification of North America/ Europe, etc.

55 Data entity

Outline

6. Market information

-Information concerning each financial market for sites,transaction rules, etc. -Information concerning each transaction location such as sites, transaction rules

7. Product/ brand information

-Information concerning product, brand and currency

8. Price/ interest rate information

-History concerning interest rate,bond values and stock values

9. Inquiry information

-Information concerning inquiry conditions for inquiry values categorized by products, customers

1O.Customer information

-Customer information

1l.Dealer/ trader information

-Information on dealer team, classes, etc.

12.Fund manager information

-Information on teams, classes, management funds, etc.

13.Broker information

-Information such as fee,limited attribute concerning broker

14.Issue body

-Information concerning issue body such as name, trust degree etc.

15.Transaction information

-Specific information concerning transaction of options,spot goods and futures of capital, foreign currency and marketable securities.

(example) Position classification by utilization goals, dealer trader, etc.

(example) Customer classification, deposit loan transaction money classification

(example) Specifics of individual transaction parties, agreement note content by product/currency, delivery date, agreement date,etc.

56

Outline 16.Settlement delivery information

-Information concerning settlement date, due date, location

17.Interest/ redemption fund/ dividend information

-Information concerning interest/redemption fund/dividend

18.Collateral

-Information concerning collateral such as consignment guarantee money,etc.

19.Portfolio information

-Information concerning portfolio such as balance by brand, yield,etc.

20.Position information

-Information concerning position balance as well as product, brand, region, dealer/ trader ,etc.

21.Cash flow information

-Information concerning cash in/out flow

22.Capital pool information

-Information concerning each pool of regulated interest, set interest, free interest, etc.

23.Profit/ loss information

-Information concerning profit/loss as well as product,brand, region, due date ,dealer/ trader, etc.

24.Deposit loan

-Specific information on deposit loan transactions

2-5-3 Function date entity matrix ENT ITY UCTIO

--

1

c 4 5 7 1011

--

1213

4151

2

7

8

-

LL---------------------M

1 LL---------------------M

2

C

1

4 59

-M

18

-LL.LL

22 __

1MMMIMMM 1 kiMMI1M1

13

19

D

1 2 -

2

B

(R-read only,U-update)

b

1

A

6-7J

23

1 2

LI

LLJLLL

LIL

MML

1

EMiMi MM[

ENT ITY

A

12

11

10

, FUNCT IONI

e

d

c

13

10

13

14

1 2

11

1

4 LLL

2

1

B

L

2

Cl

_

4

L1

HL.

.L

1-

=---------IP-II

5

10

.L.

13-14

r,

_-

-m

F.--

A.EE-E-MM

19

__

D

_23

1 2

L

ummmmm

15

22

LL

~'

-

-

-

-

L

--

-

59 (Note) A --Setting risk taking policy -1 --Analysis of present condition -2 --Setting risk taking policy --Reevaluating risk management -3 --Setting policy for risk taking by department -4 B --Risk distribution/goal establishment -1 --Setting deposit loan structural goal -2 --Setting position C --Implementation/control of risk taking -1 --Implementation and management of marketing -2 --Implementation and management of market capital transaction --Position management by area -3 -4 --Information analysis --Setting the global position risk goals -5 --Implementation of operation -6 --Dealing (Yen capital) -7 -8 --Dealing (Foreign currency) -9 --Dealing (Foreign exchange) -10 --Dealing (Yen bond) -11 --Portfolio (Yen bond) -12 --Dealing (Foreign bond) -13 --Portfolio (Foreign bond) -14 --Stock investment -15 --Political stock holding -16 --Dealing (CD/CP) -17 --Trustee of bonds -18 --Custodian -19 --Dealing (Swap) -20 --Future -21 --Monitoring of the global position -22 --Implementation of global dealing -23 --Review by Risk Management Committee D --Monitoring of risk taking implementation -1 --Monitoring of risk taking condition -2 --Report to management a --Policy/goal -1 --Risk taking policy -2 --Profit goal -3 --Risk taking goal b --Transaction -1 --Capital (Yen--spot/future/option) --Capital (Foreign--spot/future/option) -2 --Foreign exchange (spot/future/option) -3 -4 --Bond (Yen dealing--spot/future/option) --Bond (Yen portfolio--spot/future/option) -5 -6 --Bond (Foreign dealing--spot/future/option) --Bond (Foreign portfolio-spot/future/option) -7 -8 --Stock (Investment) --Stock (holding) -9 -10 --CD/CP -11 --Trustee and underwriting of bonds

60 -12 --Custodian -13 --Swap -14 --Future -15 --Deposit/loan c --Products and customer -1 --Product brand information -2 --Price/interest rate information --Price/interest rate information (Bond) -3 -4 --Inquiry information -5 --Region --Market information -6 --Exchange -7 --Customer information -8 --Counter party -9 -10 --Issue body -11 --Broker -12 --Dealer/trader information -13 --Controller -14 --Fund manager information d --Profit/loss/risk condition -1 --Portfolio information (Yen bond) -2 --Portfolio information (Foreign bond) --Portfolio information (Stock) -3 -4 --Cash flow -5 --Capital pool -6 --Collateral --Interest/redemption/fund/dividend information -7 -8 --Settlement delivery information -9 --Position information -10 --Profit loss information -11 --Summary data e --Forecast data --Interest -1 -2 --price --Fundamentals -3 --Others -4

61 2-5-4 Insuring manageability of massive amounts of data As we have seen up to this point, analysis of the data and technical characteristics of each application demonstrate that in risk management systems the treatment of data is an extremely important consideration. Therefore, lets us go on to examine technology applicable to data management. When it comes to system for customer management, profit risk management, administrative information management, etc., it is imperative to have access to an exhaustive, comprehensively inclusive source of information on a nationwide scale that also includes information from overseas. Therefore, the amount of data to be managed is immense, and the operations of selection and compilation require a considerable amount of power. On the one hand, middle office type systems and cross application type systems must be able to analyze a series of data from a variety of aspects, so they need a flexible data structure. In addition, the possibility exists that each piece of data to be analyzed may be located physically in any of several different areas, and yet that data must be handled in an integrated manner. Furthermore, in cases that require a quick response, an appropriately high speed for accessing and processing data is essential. In order to satisfy the need for massive data capacity, diversity, and high speed, the following technologies may be of use. -Large capacity data base technology -Relational data base technology -Distributed relational data base technology -Data base machine technology 1) Large capacity data base technology As more data is put on data bases, it is only natural that the amount of data to be managed by the DBMS (data base management system) increases. It becomes imperative that this kind of multi-G byte, large capacity data base which can still process at a high speed be realized. To achieve this, it is important to optimize the DBMS external environment by increasing functions such as extending the operating system addressing mode, speeding up hardware components, etc., but there are data base management systems on the market, in addition to the general purpose ones, that have been especially designed for the purpose of processing large amounts of data at high speeds. Generally speaking, relational data base in the past have needed a huge resource CPU in comparison to hierarchical data bases. Until today, they have been deemed appropriate only for medium scale information oriented systems that did not particularly high performance. Recently,however, as in the case of IBM's DB2, where the upgrade was accompanied by a 50% increase in the rate of resource usage, relational data bases have shown a tendency to make remarkable increases in processing speed. In terms of capacity, the same product can handle a table as large as 64 G bytes. 2) Relational data base technology In the past, the method of accessing a data base or file has involved input/output operations for every single physical record unit. The relational data base, however, as is represented in SQL language, records the processing requests for the whole file and carries out operations in non procedural language.

62 With the regulation of SQL under ANSI standards, there is movement toward standardization of interface language as well, and it appears that almost all RDBMS's will run on SQL. Also in terms of data preservation, primitive RDBMS's were limited to simple surface operations, and they depended on the user to insure the integrity of the data. But now, products have appeared where the DBMS controls the data's referential integrity. 3) Distributed relational data base technology

A distributed relational data base allows the processing functions to be carried out by multiple-site, geographically separated computers linked by communication circuits, which can access the whole bank of data from each site. Some of the merits gained by this technology are as follows; a) Distribution of the processing load over multiple processors b) Reduction in excessive data maintenance c) Localization of problems d) Even extension capability across the system Research on distributed relational data base technology has continued for a long time. Very few products have been available, however, because difficulties could not be overcome in processing capability, procedures for system restoration when there is a problem,etc. The socalled distributed relational data base management system available are touted and sold in the form that supports only a limited number of functions that distributed relational data base actually possess. 4) Data base machine technology

As the amount of data increases, the resource CPU used by the DBMS to process that data base become extremely large. One answer to this problem takes the form of processing through distribution of data. Another approach involves concentrating the data and providing only the required amount of processor capacity. Investment in normal usage processors is growing more and more expensive, but general usage machines are not necessarily needed to carry out dedicated data base processing. For that reason, dedicated data base processing machines have appears which use a general purpose machine in the background or a network

file server. Among data base machines, there are many that have optimized data base processing by joining a general purpose machine with a disk cache apparatus, etc. In recent years, dedicated systems that combine hardware and software into one have appeared on the market.

63 2-6 APPLICATION SYSTEM

With application consideration established in the previous section, the following application system is formed. The application system is, -the standard for determining design/development, and -an extremely important item for defining expansion capability and flexibility, in the sense that it defines the units for application additions and changes for corresponding changes and additions made in operations. All functions share profit loss/risk information, productcustomer information, etc. taken from the function/data matrix mentioned previously. With each product, the transactions for spot goods, futures and options are all shared. From these items, a common system for price information management (outside information management system) and customer management (customer management system) must be established. Furthermore, because the front system must have smooth operating capabilities for consolidation of risk management items such as spot goods, futures and options, it must be able to operate in terms of products (for yen bonds, spot goods,futures and options are one group). The back office must take into account similarities of procedures in terms of settlement mechanism and transaction location units. Furthermore, it is necessary to consider a systematization of futures which extends to products in terms of transaction location. From this standpoint the application system is as follows.

1) Overview of APPLICATION SYSTEM Total risk management system Commercial banking ALM system

Investment banking portfolio ris

Dealing front system Swap Capital Foreign exchsnge Bond(yen) Foreign bond

Bond portfolio Stock portfolio Designated money in trust New product 1N

Back office system Swap Yen fund Foreign currency/capital exchange NCD CP Bond Stock

development 4

65 2)Outline by function The following indicate the function outline of each application with regard to the presented application system. The target range for each application will be then covered. Application

system

Outline

Main function

Total risk management system

Support implementation of risk tasking strategies for entire bank by accumulating information on risk and profit conditions of entire bank

-Risk management (Comprehending currency risk/ profitability of risk asset distribution, management of overall risk level, etc.) -Simulation -Plan implementation management

commercial banking ALM system

Categorized capital into pools by interest fluctuation characteristics, etc. and supports procurement cost and matching management for each pool

-Gap management by capital pool -Hedge support -Capital cost management -Plan and management

Investment banking profit risk management system

Accumulates risk and profit conditions of each product within the stock headquarters. Supports management of risk exposure of entire stock headquarters and management of plan setting conditions.

-Management of position concerning entire headquarters as well as operations within headquarters, risk position, cost, profit/ loss, risk asset. -Simulation of risk profit conditions based on interest fluctuation estimate -Analysis of market share

66 Application

systemn

Outline

Main function

Capital dealing front system

-Front office support of agreement processing, position management of capital data, analysis, etc -Includes all currencies -Handles spot goods, futures, options, etc. -Includes inter bank/open

-Agreement processing -Position management -Capital movement management -ALM support(gap management,etc.) -Credit line management

Swap dealing front system

-Front office support of agreement processing, position, cash flow management, profit loss analysis, etc. -Conducts swap profit simulation for supporting agreements of dealers. -Handles swap interest futures/options,bonds, etc.

-Agreement processing -Position management -Hedge support -Profit simulation -Customer information management

Foreign exchange front system

-Front office support of transaction deal processing, position management, analysis, etc. -Handles spot goods, reservation, futures, swaps, options,etc.

-Transaction deal processing -Credit line management -Rate transmission -Support of branch operation

Bond dealing front system

-Front office support of agreement processing, position management, analysis, plan management -Handles spot goods, futures,and options

-Position operation -Risk simulation Hedge ratio calculation -Management of customer buy/sell condition

Bond portfolio system

-Support of agreement processing of bond portfolio, position management, analysis

-Risk condition monitoring -Duration,matching control -Chart analysis

67 Application

system

Outline

Main function

Stock portfolio system

-Support of agreement processing of bond portfolio, position management, analysis

-Position profit/ loss management -Issue body/ security company management -Agreement input, clip creation

Designated money in trust

-Support of fund management, portfolio analysis

-Fund management -Management of brands, position for each stock

Yen fund back office system

-Support of balance processing, settlement management, management of collateral notes -Handles interbank spot goods

-Capital settlement management -Deposit money management -Ledger management

NCD back office system

-NCD buy/sell operation process -Handles NCD new releases/ immediate sellout and repurchase agreement

-NCD management of balance/due date/transfer ledger management -Transfer/ installment

CP back office system

-Support of balance due processing related to cp distribution and support of compilation of customer labelling records

-Due date management -Ledger management

Foreign currency capital/ exchange back office

-Bookkeeping of foreign currency capital/exchange, settlement process

-Transaction deal management -Settlement processing -Corresponding contract balance due management

Swap back office

-Support of swap bookkeeping process, settlement process, daily readjustment

-Transaction deal management -Value adjustment

68 Application

Main function

system

Bond back office system

-Support of balance management,l edger management -Handles spot goods of domestic, foreign loans

-Redemption management -Collateral management

Stock back office system

-Support agreement processing of stock investment operation, ledger management

-Dividend management -Capital increase management -Management of lending stocks

Future back office system

-Support of settlement management as well as agreement management concerning bank futures dealing as well as commission to customer

-Warrant money management -Settle management -Balance/account management

Option back office system

-Conducts processing for bank's own option dealing as well as bookkeeping, settlements, etc. for commissions to customer

-Warrant money management -Balance/account management

Outside information accumulation system

-Obtain price information, economic information,etc. from outside transaction locations,information vendors (Reuters, Telerate etc.) and DB services; accumulates and transmits information to each front system.

-Gathering and Accumulation of information

Customer management system

-The loan management is divided into global and regional bases -The customer information level differs depending on segment

-Management of use conditions, etc. for loan limit -Fundamental information accumulation system interface -Account system interface

69 Application

system

Outline

Main function

New products development support system

-Offers environment for conducting simulation of various types for development of new product and new method

-What if analysis linear programming -Summary of conditions extract

custodian service

-Support of account management

-Management of securities in trust -Delivery process

Information service for customer

-Support for obtaining and transmitting for customers and agreement carried out, with customers by systems

-Offering information (input communication of market mood, comments,etc.)

Settlement net interface

-Support of data transmission with back office, outside network system

-Transmission -Reception

Window distribution system

-Agreement processing of public bond sales in branch, safe deposit details due date management

-Delivery management -Due date management of principle and interest money -Management of buy/ sell unit price

70 3. TECHNICAL CONSIDERATION AND LOGICAL ARCHITECTURE On the basis of the operations considerations examined in the previous chapter, I will try in this chapter to extract the technical considerations and present a logical architecture. 3-1. TECHNICAL CONSIDERATION In this section the risk management system will be divided into process modes. My study will be organized in the following order: -Classification of process modes and its outline -Comprehending systematization considerations and technical considerations for required specifications 3-1-1. Classification of process modes After analyzing mode of each application system for the risk management system, the following 5 main process modes can be divided (The following titles do not indicate organizational distinctions but rather indicate a functional classification). Front input system Middle office analysis system Back office bookkeeping system Application intersection system Global network system

Middle office analysis system

72 1) Front input system The front office system is represented by the dealing support system. The system is focused on front office data input. [Main process operations] -Input of basic plan information -Input of outside information in real time -Market analysis support -Agreement input -Support of real time comprehension of position 2) Middle office analysis system Middle office system focussed on portfolio, simulation, etc. With system for staff support at each operation department, various analyses are carried out by the specialized use of databases of portfolio analysis and back office systems. [Main process operations] -Closing estimate/analysis -Profit estimate/analysis -Goal management -Risk analysis method trial -Management reporting -Portfolio simulation 3) Back office bookkeeping system Bookkeeping series system focussed on large scale batch processing for mainly batch office items after operation hours. [Main process operations] -Basic information input -Agreement detail management -Spot goods management -Balance management -Processing of various types of accounts -Capital settlement 4) Application intersection system The system which gathers and analyzes information that applies to more than one application, and the system for management at back office. Conducts gathering, analysis and management of various types of information while interfacing with each application. [Main process operations] -Comprehending information by customer -Comprehending information by product -Comprehending information by transaction location -Comprehending information by settlement mechanism -Comprehending information by operational organization

73 5) Global network system The network system which serves as the foundation for global development of applications and the network system for connecting the headquarters system to the overseas system; infrastructure for global development in aspects such as front input system, back office bookkeeping system, etc. The structural component is large and can be classified into lines, network control machines and application system. It is important that connection quality is guaranteed and with regard to other design policies. They should be considered with each application type separately. [Main process operations] -Communication control system for global development of each application

74 3-1-2 Comprehending systematization considerations and technical considerations for required specifications With regard to each of 5 process modes, the systematization considerations, the operation considerations which serve as the foundation for these considerations and technical considerations should be clarified. 1) Front input system --------------------------------------------------------------------Iiii) Iii)Operation consideration I i)Systematization I foundation as serve I which I consideration I--------------------------------------------------------------------------------------------I IA to able be must dealer I a.The 11.High speed processing I on dealing concentrate I data I of large scale input I I I I-Particular emphasis on I I I agreement primary input I I responses I must bottlenecks I -System I-With regard to other I avoided be I absolutely I input, smooth I of I -The higher the number I operational response are I I agreements in an active I required I I market, the higher degree I-Use of architecture I I of response required I which can respond to I I I increase in data volume I I b.Normal response for I both in stages and I I secondary input and basic I locally I I planning information input I I is sufficient I -Secondary input for I agreements and basic I planning information input I are not urgent operations, I so only a smooth response I for operations is required --------------------------------------------------------------------------(Note) iii)---Technical concideration,A-High speed gurantee B--Maintaining operation capability for large scale data,C-Offering integrated image of system, D-End user interface technology E-High availavility,F-Realization of high function capabilities, G-Security technology.

I I I I I I

I I I I I I I I I I I I I I I | I I I I I I I I I I

75

I i)Systematization I consideration

Iii)Operation consideration I which serve as foundation

Iiii) I

I-------------------------------------------------------------------------IB la.the position data must be

12.Immediate update position I data.

I managed in real time.

I-Necessity of an immediate I update of position data I of each dealer following I agreement primary input I-Necessity of summary I account of position data I in different categories I such as by dealer, by I group, etc.

I-The position by dealer I must be managed in real I time I-The deal position summaries I of chief dealers and I controllers must be carried I out within second I -Position for other I classification should be I at the very least managed I on a request basis

13.Capability to handle I information from Stock I Exchange/Reuter/Telerate, I etc. in real.

la.Necessity to monitor the I most recent outside inforI mation (market conditions) I constantly.

I-Necessity of capability I to take in outside I information and broadcast I to all terminals I-Various chart can be I displayed based on I outside information I-Support for market I analysis can be conducted I by processing of outside I information I-Necessity of capability to I display different types of I information on same screen

Ib.Adjustment of all positions I based on most recent prices I and values is required. Ic.Necessity to analyze market I movement and conduct future I price fluctuation estimates Id.Necessity of capability to I combine freely price I information on various I market products le.Necessity to reference I various type of I information simultaneously

ID

I I

76

I i)Systematization I consideration

lii)Operation consideration I which serve as foundation

Iiii) I

14.Simplification of input I operation

la.Capability to enable smooth I dealer

ID

I-Necessity to utilize a I special input method with I few key strokes, in order I to be able to handle large I scale data as efficiently I as possible I-Necessity to consider a I design which has I capability to batch input I several agreements and I update the information all I at once I-Necessity to design a I system operation which can I be easily learned by new I dealers

Ib.While maintaining the I dealers' operating I capabilities, primary input I work load should be I decreased

I -Necessity to establish a I system which allows batch I processing, data back up I file reediting,etc. for 24 I hour on-line operation I-Method for delayed on-line I use,etc. are also necessar

la.24 hour global dealing set I up I

I -24 hours a day, there is I always a market open someI where in the world I-Flashing headline report I during should be supported I (close time of each market I ,etc.)

IE I I I I

I I I I I

I I I I

I I I I

I--------------------------------------------------------------------------

16.Non down system

I

Ic.Necessity to consider input I by other parties and other I methods

I--------------------------------------------------------------------------

15.24 hour non-stop system

I

I I

la.High reliability

I-Losses from system down I-Absolute necessity to I during market operation I prevent overall system I are large I shut down due to partial II I hardware failure I up to set I-Necessity I I contingency planning for I I items such as I response in I deterioration I I time during occurrence of I damage ----------------------------------------------------------------

IE I

I I I I I I I I

I I I I I | I I I I I

77

Iii)Operation consideration I which serve as foundation

I i)Systematization I consideration

Iiii) I

I--------------------------------------------------------------------------

17.Necessity of security I control I-Necessity to limit access I to dealing room I -Necessity to limit access I to dealing room with pass I word,etc.

la.Necessity of security

I-The effect of monetary I losses, losses in public I trust from illegal I utilization of dealing I system are extremely I detrimental

IG I I I I I I I

I-------------------------------------------------------

I I I I I I I I I

18.Outside connection I capabilities

la.Connection capability with I other systems

IC I

I I

I-Obtain connection with I bookkeeping system on a I daily basis I-Obtaining connection with I customer management system I ,profit risk management I system on a real time I basis

I-Agreement data is I transferred to bookkeeping I system I-Loan information is I transferred to customer I management system,profit I risk management system I-Necessity of sharing I information on inquiries, I trading volume, etc.

I I I I I I I I I I

I I I I I I I I I I

IIII

----------------------------------------

I---------------

19.Ease in development/ I maintenance I-Capability to utilize I application packages I-Necessity of easy updates I /additions to analysis Ilogic by user

Ia.Urgent development demand I I-In order to maintain a I dominant position in the I market , early stage I development system is I very significant I Ib.Ability to Renew/change I -Necessity to conduct I different analysis for I each dealer I-Necessity of capability to I change analysis methods, I etc,. in accordance with I environment

I

I I I I I I I I I I I I I I I I I I I

I I I I I I I I I I I I I I I I I I

78 2) Middle office analysis system liii) I

I I

I I I-------------------------------------------------------

I

I i)Systematization I consideration

Iii)Operation consideration I which serve as foundation

I1.Complex calculation I processing

la.Compatibility with diverse I analysis methods

I-Necessity to combine I calculation in complex I formats using CPU I Resource at high capacity I-Processing is free form I and by trial-and-error

I-Necessity to conduct I analyses of items such as I price information and I portfolio analysis by I utilizing statistical I methods such as regression I analysis and spread I analysis I -Large scale processing I which assumes calculation I of partial portfolio totals I of program deals

I----------------

---------------------------------------

IA I I I-Hardware configuration by I Iwhich CPU load from I Isimulation processing does I Inot affect other systems I I-Of the effects to be I Iconsidered, the biggest I Ieffect would be the I Ideterioration in response I -------------------------------------I------------lB Ia.Access to diverse data 13.Diverse access to diverse IC I data IF I-Many kind of data are I I needed for simulation; I-Access to databases,etc. I I +outside information such Ishould be flexible I I as market condition Iaccording to various types I I +position data Iof requests I I +Estimated interest entered I-Capability to access data I I from screen Ifrom other systems I I-Necessity of access to data I-Capability to access image I I from each front input Idata in order to utilize I I system for transactions Iimage analysis I I such as arbitration I I-----------------------------------------------------------------------12.Localization of CPU load

la.Minimized effect on other I systems I I-Necessity to prevent I Deterioration of responses I of other system processes I due to simulation I processing I I

I I I I I I I I I I I I

I I I I I I I I I I I I I

79

Iiii) Iii)Operation consideration I i)Systematization I I which serve as foundation I consideration III I-------------------------------------------------------------------------ID Ia.Output which utilizes 14.Application of graphic I I Diagrams and graphs I function II I I I-By utilization graphs and I-Necessity to support of I I tables effectively, the I graphics I I simulation results output I I should be easy to II I understand II IIII I-------------------------------------------------------------------------IC Ia.Connecting capability to 15.Outside connection I system other I I capability II I I I -Necessity to input large I-Maintaining connection I office back from data I scale I capability with back I for portfolio system I I office system on request I I simulation I basis I current to input I-Necessity I-Maintaining connection I I prices from outside I capability with outside I I information management I information management I I system I system on real time basis I I-Necessity to output data to I-Maintaining connection I I transaction site systems, I capability with outside I I etc. for automatic orders I connection system on real I I such as program dealing,etc. I time basis I-------------------------------------------------------------------------Ia.Emergency development 16.Ease of development/ I request I maintenance I I I-Necessity for early stage I-Application packages I development for this system I should be examined I especially in order to I whenever possible I maintain dominant position I-Utilization of language I I suitable for numerical Ib.Ease of modification I technical calculations I I-Utilization of highly I-Necessity of good I flexible design methods I responsiveness to change in I which can easily I items such as logic of I correspond to logic I I analysis methods I change I-Necessity of goodI I I responsiveness to additions I reports I in various essential I I I--------------------------------------------------------------------------

I

I I I

I I I

80 3)Back office bookkeeping system Iii)Operation consideration I i)Systematization I which serve as foundation I consideration I-------------------------------------------------------------------------la.Necessity for batch 1.Large scale processing of I management of agreement I same type data I data input at front input I system I-Necessity to process same I I type data on large scale Ib.Necessity to conduct design of DB -Necessity I I calculation and bookkeeping free stand with I which can I of account data based on middle at I from processing I information about various I office system I kinds of transactions I

I-----------------------------------------------------------------------la.Global responsiveness I I-Necessity to aggregate I information from overseas I branches on daily or I monthly basis and to I generate various kinds of I analytical materials I-------------------------------------------------------------------------la.Connection capability to 13.Outside connection I other system I capability

12.Utilization of I architecture which enables I access to DB on a global I basis

I-Maintaining connection I capability on daily basis I with front input system I-Maintaining connection I capability with outside I settlement system/account I system several times a day I-Maintaining connection I capability with systems I such as customer I management on real time I basis

I -Necessity to receive I agreement data from front I input system I-Necessity to deliver I various data to customer I management system for I warrant money management/ I settlement,etc. The timing I for this delivery must be I after completion of all I settlement for items such I as warrant money and before I the market opens the I following day I-Necessity to transfer I accounting information, I settlement information to I commercial banking system

I --------------------------------------------------------------------------

Iiii) I

I I

IA IB I I I I I I I I

I I I I I I I I I I

IB IC I I I I I I

I I I I I I I I

81

I i)Systematization I consideration

lOperation considerations I which serve as foundation

14.Various output interface

Ia.Data output

I-Depending on the I characteristics of output I data/records, there should I be capability for change I in print out destination I and other flexible I responsiveness I-Analyzed data should have I retrieval as well as I print out capability

I-Necessity to output various I analyzed data to I appropriate location with I appropriate format I-Necessity to eliminate I output such as paper I work as much as possible

I-Necessity for means to I make internal development I as easy as possible I-Utilization of flexible I architecture which can I easily respond to logic I additions/changes

I -Necessity for early stage I development of this system I especially to maintain I dominant position

I

Iiii) I I I I I I I I I I I I I I I

ID

I I I

I I I I I I I I I I I I I I

Ib.Slip output I -Necessity to compile and I output settlement/delivery I records I---------------------------------------------------------------------------------------------la.Emergency development 15.Ease of development/ I request Imaintenance

Ib.New product response I-Necessity to take into I consideration items such as I interconnection of products I ,swap. etc. I-System change corresponding I to product change must be I conducted smoothly

I---------------------------------------------------------------------------------------------

82 4) Application intersection system I i)Systematization I consideration

Iii)Operation consideration I which serve as foundation

Iiii) I

I I

I I----------------------------------------------------------------------------------------------

I

11.Localization of CPU I load

la.Mineralization of effects Ion other systems

IA I

I I

I

I

I I I I I I

I I I I I

IB I I I I I I I I I I

I I I I I | I I | I I

ID I I I I

I I I I I

IC I

I I

I I I I I I I I I I

I I I I

I-Utilization of I architecture by which one I section of processing does I not affect the performance I of other processes

I

I-Free from analysis I processes are forecast, but I this must not cause I response of other systems I to deteriorate

I --------------------------------------------------------------------------

12.Large scale data I processing I-Necessity to handle large I scale data I-Necessity to access data I in diverse forms according I to process configuration I-Data immediacy is not I required

Ia.In order to accumulate data I from other systems, DB must I have capability to handle I large scale data I I I I

la.Necessity of support I characteristics that I support output in forms I-Necessity to support graph I that top management can I output, graph printing,etc I understand I---------------------------------------------------------------------------------------------la.Diverse data resources 14.Outside connection Icapability 13.Support for diverse output

I-Connection capability to I front input series system I on real time or request I basis I-Maintaining connection I capability with back I office system on request I basis I-Necessity of banking I system or ALM system

I-This system, which has the I characteristics of a I securities information I system, must obtain its I data resources from I various diverse systems I I-Necessity of integration I with commercial banking I system

I

I I------------------------------------------------------------------------

I

I I I I I I

83

Iiii) Iii)Operation consideration Ii)Systematization I foundation as serve I which I consideration I------------------------------------------------------------------------I IF free require cases Ia.Some of development 15.Necessity I analysis I form I by user I I user for I-Necessity I-Necessity of program I conduct to Icapability I development by user I a to at will I analysis I within set range, in order I Icertain degree I to conduct free from I are I-Analysis contents I analysis I Irelatively sophisticated I-As opposed to normal end I I user computing, environment I I I I with high level coding is I I necessary I I I

I I I I I I I I I I I I I I I I I

84 5) Global network system I I

Iiii) Iii)Operation consideration I i)Systematization I I which serve as foundation I consideration I-------------------------------------------------------------------------IA la.Communication lines must I1.High speed capability I I not become bottleneck in I I I global development of each I-Necessity to install I I application I communication lines with I I I large data transfer I I capacity I I I-Necessity to maintain very I I I high speed processing by I I I key point network control I I machines I

I I I I I I I I I I I

IC I I I I I I I I

I I I I I I I I I

I I I I I I I

I I I I I I I

la.The processing volume for I network application systems I differs at each key point I -Necessity for network I I control machines to have Ib.For network key points I high connection capability I there are machines which I to each key point system I correspond to each I processing volume and system I type I-------------------------------------------------------------------------la.The information exchanged 13.Multi-media capability I between each key point I includes voice,telex, I -Necessity for global I facsimile,etc. I system to have capability I I to accommodate media other I I than computer data such as I I voice,telex and facsimile IIII I----------------------------------------------------------------Ia.By the very definition of I4.No down capability I communication lines, a line I down is absolutely I-Necessity for design with I prohibited I high redundancy such I I as overlapping, in order I I to prevent line down I I-Necessity to prevent I I spreading effect to I I overall network due to I I faulty key point network I I control machine IIII 12.Connection capability

I I I I I I I I I I I

I I I I I I I I I I

85 3-2 LOGICAL ARCHITECTURE

3-2-2 Identification of logical components The system process configuration was modeled into 5 process configuration in order to accommodate characteristics of risk management system such as qualitative/quantitative change, distributed development system, existence of applications that cut across system,etc. In this model, the "logical architecture" is shown by analyzing the pure process of each operation/application. In other words, "The logical architecture" offers a unified frame by reducing operations and applications to a general system description which does not specify working system configuration elements such as hardware. Here the processing types which from the frame and the specific categorized logical components are defined. First, the large framework of the system is locally divided into the following two categories: 1) Operation/application system 2) System support system The first are the items by which the overall operation or one section of an operation has been systematized in order to support operations. The second are support systems for supporting design/ development/application of systems supporting these operations. The types of processes conducted for operation/application systems are summarized in the diagrams on the following pages.

836

Starting request

Interaction/ display input

I\

Update(accumulation)

Processing

87 Processing begins with a process activating request (normal batch process) of the system, or a process request (normal on-line process) entered by the user. The process collects, processes and accumulates data into the system or responds to the user. If a distributed processing configuration is used here, it is possible that in this continuous series of processes the locations where processing is carried out may be remote from one another. Distributed processing is a necessary process structure for the risk management system. Therefore, the processing for connecting the remote distributed processes becomes an essential element in processing. Here this is included as "communications" in my logical architecture. Furthermore, input and output are lumped together as "interaction/ display' processes due to the fact that they are both mainly functions categories under interaction with the user. The systems support system is itself an application but it is not directly related to operation applications. The system is effective for carrying out operation application. From the standpoint of the overall system, it exists as the foundation for the formation of operation/application systems. The outside information process serves as an input source for various operations and is not necessarily associated with a particular operation department. It can be considered to be a shared process for all systems and applications. Therefore, though it is an application, it is in a different category compared to operations. Though the outside information process is an application, it will be treated as a logical component. With the above, the process types for logical architecture have been classified into 7 categories. The following pages indicate their general relationships.

I Application intersection system

/

Technical platform

Lb c de ------

--- ~~-ahusical ~~~

a--Outside information b--Interaction/display

c--Update d--Extract e--Processing

Logical component

89 (Note 1) Outside information Outside information processing can be considered to be an application which is realized as a combination of the other 6 process types. However, from the standpoint of other applications, it can be considered to be a shared function rather than another application. Therefore, this processing type can be considered as a logical component which formats operations applications. (Note 2) Relationship of process types 1) System support offers the foundation for the entire system. Both system support and outside information are actually a combination of various process but also serve as the premise for system development. The internal processing for support systems is completely black boxed with regard to application development and is treated simply as an environment background element. 2) Communication is a quasi-support process which ties together other processes. 3) With these two logical components as the basis, each application is displayed as a combination of the 5 processes: interaction/display, update, extract, processing and outside information.

90 The 7 process type are categorized according to each standard, and the following 17 logical components are identified: 1. Extract Classified by response configuration of extract result. 1) Retrieval 2) Extraction

:Results are immediately returned to requestor. :Extracted data is output as a transfer file to other components.

2. Update Classified by process timing 3) Immediate update 4) Message activating update

5) Batch update

:Executed as single operation unit from update completion.(Until update is completed, requestor is in waiting condition) :Executed as operation separate from update request input process. (Before update is completed, requestor is released from waiting condition and allowed to input) :Large scale update request message is batch update. (Note: With immediate update and message activating update, the update request itself operates as the process trigger, but with batch display each accumulated update request is entered, and processing activated by another trigger)

3. Processing Classification by typical patterns of internal processing of data within system. 6) Simulation

:Conclusion value is obtained by substituting values into equations determined deductively.

7) Analysis

:Equation and rules are determined inductively based on large scale data.

8) Editing

:Conducts processing for simple calculation, aggregation, etc.

9) Image processing

:Conduct graphic processing

4. Interaction display 10) Interaction/ display

:Conduct input/output operation

91 5. Communications Linking decentralized process locations. 11) Host/terminal connection

:All processing is conducted at host,and data

12) Data transfer

:Transfers data between locations.

13) Remote process request

:Activate remote location process and receives

14) Remote parity

:Conducts processing, data request and response communication in real time between two operations units existing simultaneously at remote locations.

input/output is conducted at terminal.

response from this process

6.Outside information 15) Outside information

:Application which conducts input,accumulation and presentation of outside information. realized by combination of other logical components.

7. System support Divided into system support information and tools which handle this information. 16) Repository

:This "Dynamic data dictionary" not only conducts management of the application resource (data, program,etc.) information of the previous data dictionary, but it also conducts management of locations, access method,etc. for each of these resources.

17) CASE

:Support design/development/application

92 3-2-2 Outline of logical component In this section I will explain each logical component. 1) Retrieval [Summary] Data accumulated inside system is retrieved in real time and simple calculation and editing are conducted accordingly. Responds back to requestor. [Characteristics] In the case of on-line retrieval results are displayed on output device (normally workstation, terminal,etc.). In the case of conducting secondary processing such as graphic display and report editing, the retrieval results are transferred to the components, and are displayed after they are processed. Retrieval in batch, for example, when data other than processing data is searched as reference data during data processing. With relational database, this process is equivalent to function which allows processing by SELECT term of search query language (SQL). Therefore, this includes post-retrieval processing to point of completion inside DBMS. [Application example] -Agreement query -Customer attribute query 2) Extract [Summary] According to given extract conditions, data base (or file) is extracted from data, and output to file. Calculation and editing of extracted data is conducted accordingly. [Characteristics] In the case of conducting collection of large scale data which cannot be processed in real time, this will be used as an asynchronous or batch process. While conducting each data extract process, it conducts simultaneous parallel multiple processing such as summary processing by various classifications, as opposed to "1)retrieval." [Application example] -Inventory analysis

93 3) Immediate update [Summary] With data input device, data is entered into system. Accumulation into system and update of pre-existing data is conducted in real time. Furthermore, because data device would be a large factor in the system both logically and physically, it must be handled as a separate logical component. [Characteristics] Processes from input to accumulation/update of data ar handled as a single logical operation unit. General synchronous on-line processing. Simple data entry for update of next batch is considered to be within the scope of this component. [Application example] -Agreement input/update -Basic information input 4) Message activating update [Summary] Receives message (interface data) transferred from other components and updates data. [Characteristics] There are other related components that send the massages. Also, this component itself can send messages. Different from "3)immediate update" in that data generation (input) and data update are completely separated, and this component does not have any relation to the configuration. The distinction to be made with "5) batch update" is that the message transfer works as the trigger to start the process. Generally, message transaction can consist of one to a few data items, which is much smaller in scale than the large scale transaction inputs for batch update. In the case that the entered data from the terminal for update processing takes time , or is inadequate for response, the input process and update process can be divided into 2 logical process units. With the input process unit sending an update request massage to the update process unit, the process is completed, and without waiting for the update process results the terminal can go into waiting mode for the next message input. [Application example] -Re-evaluation of position based on price fluctuation information -bookkeeping process 5) Batch update [Summary] Input large scale transaction data and conducts batch update of data. [Characteristics] Conduct process such as night batch processing and delayed on-line processing. Mainly process type utilized for back office type bookkeeping system. [Application example] -Various accounting processes -Basic information update

94

6) Simulation [Summary] Conduct calculation by conducting changes in correlation for previously indicated equations, data substitution,etc. [Characteristics] In order to obtain indices for use in operational decisions, calculation processes are conducted deductively. Used mainly on local data. [Application example] -Optimal target value calculation -Loss profit divergent point calculation 7) Analysis [Summary] Statistical processing and estimating for complex numerical, etc. [Characteristics] Conducts compilation of fundamental data for "6) simulation" process by conducting inductive statistics process with mass element data basis. [Application examples] -Portfolio simulation 8) Editing [Summary] Reads original data, and according to the designated logic, generate appropriate data for operational goal. Conducts aggregation, simple operations, report editing,etc. for various sections. [Characteristics] Contains logic which generates data according to goal which is optimized for operation/application. In many cases, precedes or follows extraction or update processes. [Application example] -Various accounting processes 9) Image processing [Summary] Data processing results are expresses visually. Utilizing functions such as graphing software and graphic editor, image processing is carried out. [Characteristics] Compared to character data, several dozen or several hundred times more information is required. therefore, it requires high processing capability at location where process is executed. Recently the process has become divided with the improvement of work station capabilities, by which data processing is conducted by

95 the host machine, and user service such as image processing are conducted by the work station. [Application example] -Various simulation, analysis result display 10) Interaction/display [Summary] Up until recently the screen and keyboard were used as the only vehicles for various input/output operations linking the user and computer, and many of the decisions as well as operations were conducted by users. Therefore, it was essential that the user had the skill and "Know how" by which "experience" was a large element in operation. However now this skill and "kno how" is conducted on the computer side for user/computer interaction. Here, the ambiguous input/output operation is now logically clarified as a process type logical component. [Characteristics] Process component which improves input/output operation capability. Actualized by work station with intelligence. [Application example] -Program-type operator function -Presentation manager 11) Host/terminal connection [Summary] All processes and data are on host unit, and with special input/output protocol, input from terminal is received and output to terminal is requested by host unit. [Characteristics] Host terminal have main-subordinate relationship. For network communication, at least one host is necessary. Connection configured with existing centralized on-line process. Previously, special terminals for this configuration only were mainly used, but now terminal emulation with PC's and work stations is increasingly used. [Application example] -Time sharing service -Various on-line monitor 12)Data transfer [Summary] Conducts data transfer between locations of processes distributed at two locations. [Characteristics] For transmission, physical media or communication procedures between locations may be used. The former has limited use and is utilized for situations such as substitute procedures for emergency situations, data backup, and transfers of mass data with low priority. Here we will primarily concern ourselves with the latter case. Not only Must it be able to conduct byte as well as bit unit data transfer, but it must be able to conduct conversions between code systems used by different machine types.

96 [Application example] -Agreement bookkeeping process 13) Remote process request [Summary] Receives process command from other process locations, executes results at own location, or to requestor location, or location which indicated request location. [Characteristics] Remote operation related to process operation applied "12) data transfer." An asynchronous process activation with no synchronous control. [Application example] -Various analysis processes (High density numerical calculation, etc.) 14) Remote parity communication [Summary] Conduct request and response for processes and data in real time between processes existing simultaneously at 2 separate process locations. [Characteristics] The 2 processes can be synchronized. In order for the two processes to have parity interaction, the utilization of high degree protocol is necessary. Because of this, numerous complex protocol conversions become necessary in order to move along the processing while the processes with different protocols are interacting. [Application example] Global position management 15) Outside information [Summary] Enters and accumulates outside information from sources such as stock market,Reuters and Telerate. Also, data processing is conducted with display at terminal. Other functions include the compilation and delivery of transfer data to other components and services closely related to outside information data. [Characteristics] Data accumulated inside system not only consists of the most recent information, but also includes background information within a set period. There are two types of outside information: digital and video information. Data taken in from outside is not only accumulated in the component itself but also in some cases, transferred to other components in real time and processed. Data sharing and coexisting on global network level [Application example] -Incorporation of Tokyo stock market -Incorporation of current news

97 16) Repository [Summary] It is better to manage not only information of application resources such as data and program but also the resource locations and access method,etc. [Characteristics] It is utilized not only for development support management, but also has wide use in aspects with regard to applications when there have been environmental changes. In such cases the information is dispersed dynamically to the program without effecting in program,etc. [Application example] -CASE

98 17) CASE [Summary] System development is considered to be an application like risk management operations, and as a result a systematic approach of "software engineering" is taken. This system for automating development tasks as well as improving production capabilities is called, "Computer Aided Software Engineering" [Characteristics] Management of each phase for system life cycle is conducted individually as well as collectively. Dynamic dictionary known as repository is placed at nucleus. [Application example] -Design automation support tools -Program development support tools

The 17 data processing and data communication patterns have been indicated as logical components necessary for actualizing operation processes. The following correspondence table indicates the existence of each pattern in various processing configurations.

Process configuration versus Logical component Processdh section

a b

Logical

d c

e

f

x

x

h g

i

j

m

t

o

k

1

n

p

x

x

x

x

q

r

v

s

u

w

x

x

x

x

x

x

x

x

component Process

on f igurati on Front input system

x

x

Middle office analysis system Back office bookkeeping system

x

x

Application interaction system

x

x

Global network

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

x

100

a--- Extract b--- Retrieval c---Extract

d---Update e---Immediate update f---Message activating update g---Bach update h --- Processing i --- Simulation

j --- Analysis k---Editing 1---Image processing m --- Interaction/di splay

n---Interaction display o---Communication p---Host terminal connection q--- Data transfer r---Remote process request s---Remote parity communacation t---Outside information u---Outside information management v---System support w --- Repository

x---CASE

101

APPENDIX

102 TABLE 1 :Development of Online Network at Financial Institutions -------------------------------------------------------------------------------I Participantin financial IStart Networks I IType institution I Iperiod I I I--------------------------------------------------I IAII Banks,and saving banks IApr. IData Telecomunications System I Icredit associations,credit 11973 lof All Banks I lassociations,argricultural I I I Icooperatives:5,271 banking I I I linstitutions I I I I----------------------------------------------------------------------------I 1455 credit associatons: I Data Telacomunications System I INational Federation of I lof All Credit Asociations [Online ICredit Associations I I Isystem -----------------------------------------Ifor 1413 credit cooperatines: I IData Telecomunications System [bills INational Federation of I lof All Credit Cooperatives I¬e ICredit Cooperatives I I I I----------------------------------------------------------------------------I 147 labor credit associI Data Telecomunications System I lations;National Federation I lof All Labor Credit I lof Labor credit I ICooperatives I lAssociations I I I I----------------------------------------------------------------------------I INorin Chukin Bank,agricul I lOnline System of System I Itural cooperatives,fishery I IExchange Settlement I Icooperatives,Credit I I I IFederation of Agricultural I I I -----------------------------------------------113 city banks Jan. IBANKS(City Bank Cash Service) I I 11984 I I I---------------------------------------------------------------------------1 164 regional banks IOct. IACS (National CD Network I I 11980 IService for regional Banks) I 1I-----------------------------------------------------------------------------1 17 trust banks IApr. ISOCS(Online Cash Service for I 1 11983 ITrust Banks) I 1I---------------------------------------------------------------------------1 168 mutual loan & savings IOct. ISCS(National CD Networks ICD lbanks 11980 IService for Mutual Loan & lonline I I ISaving Banks) Itieup I-----------------------------------------------------I 1456 credit associations INov. ISNCS(Shinkin Network Cash I I 11980 IService) I -----------------------------------------------------------------------------1 149 credit cooperatives lAug. IShinkumi Net Cash Service I I 11985 1 1 -----------------------------------------------------------------------------1 147 labor credit IApr. IROCS(Rodo Kinko Online Cash lassociations I 1984 Service) I----------------------------------------------------------------------------I 14,036 agricultural IMar. INational Agricultural CooperaI Icooperatives I 1984 Itive Savings Network Service I --------------------------------------------------------------------------------

I I I I I I I I I I I I

I I I I

I

I

I I

I

103 TABLE 1 (continued)

I Type

I I

Networks

I INCS(Nippon Cash Service) I I I--------- I---------------------------------IPostal Savings Online National I Network Service 1I--------- I---------------------------------I ICMS Joint Center I I I I I1I I---------------------------------I I ICNS(regional Banking Data I ITransmission System) I I I I I---------------------------------I Farm ISDS(Sogo Bank Data Ibanking ITransmission System) I I I I I I---------------------------------I IShinkin Data Transmission I ISystem I | I--------- I----------------------------------ICredit CAFIS Network System I--------- I---------------------------------ILINC(Life Insurance Network IInsuICenter) I rance IVAN I INon-life Insurance Network I I I I--------- I---------------------------------ISecuriIJoint Securities ATM Network ISystem I ties 1I--------- I----------------------------------I Individual Credit Information CRIN I (Credit Information Network)

IStarting I period

I Participantin financial I institution

I 154 city banks,and mutual I Nov. I I 1975 Iloan & saving banks I---------- I-----------------------------I Aug. IPost offices 1 I 1978 I---------- I-----------------------------I 124 city banks,trust banks I Apr. I I 1987 I,long-term credit banks, I INorin Chukin Banks: I I 124 banking institutions I---------- I-----------------------------164 regional banks IDec. I I(securities companies, I 1984 I Ilife & non-life insurance I Icompanies) I I---------- I----------------------------I I Oct. 167 mutual loan & savings I I 1984 I(securities companies, Ilife & non-life insurance I I Icompanies) I I---------- I-----------------------------I 1455 credit associations I Mar. I I 1986 I(securities companies, 1 Ilife non-life insurance I I Icompanies) I---------- I-----------------------------I I Feb. 141 card companies I |(financial institutions, I 1984 I department stores,etc.) I---------- I-----------------------------I Feb. 126 life insurance Icompanies I 1986 I I I I Oct. 121 non-life insurance Icompanies I 1986 I I----------I ---------------------------I I Oct. 113 securities companies 1 I 1987 ---------- I----------------------------II I Mar. IAssociations of All Banks I I 1987 lin Japan,credit business I Ilndustry,consume finance I I Ilndustry,etc.

Source : The Federation of Bankers Associations of JAPAN "Annual Report"

104

TABLE 2:

Mutual Penetration of Countries, Market by Financial Institutions and Securities Companies

(1) Number of offices established overseas IU.S.A. Britain 1W. ISwitzerlother lAsia rTotal I lEuropean I IGermany I land I I I I I Icountries I I I I------------ I-----------------------------------------------------------------------23 11 19 I 28 Overseas INo.of I Ibanks loffices I----------------------------------------------------------I-----lof 114 43 18 20 36 IJapanese INo. of I 98 loffices I Ibanks I I--------------------------------------------------------------------------------16 67 lNo. of 172 23 13 0 I Ibranches I 1 I--------- I----------------------------------------------------------------------I 47 20 20 20 5 I INo. of 126 I 1IIlocal I IsubsiI Idiaries I I I--------- I--------I ----------------------------------------------------------------------Foreign INo.of 1 19 5 6 30 15 20 I Ibanks Ibanks I-------------------------------------------------------------------lestab7 5 24 34 1 Ilished INo. of 1 35 8 in Japan offices I I I--------------------------------------------------------------------------------34 24 7 3 7 INo. of 129 I Ibranches I 1 I--------------------------------------------------------------------------------I 0 0 0 2 1 INo.of 1 6 I I Ilocal 1 I IsubsiI Idiaries I I I------------I -----------------------------------------------------------------------7 20 4 12 110 21 INo. of local I Isubsidiaries of I IJapanese I Isecurities I Icompanies I----------------- I-----------------------------------------------------------------------0 12 0 9 1 Ill INo. of foreign I Isecurities comI Ipanies with lbranches in Japan I Source : MOF "Annual report of International Finance Bureau"

I I I 29

1

390 1 206

1

184 1

79

1

33

I

124

I

9

82

1

I I

I 36 I

105

TABLE 2 (continued) (2) Office established overseas I

I

I._____.--------------------------

I I I I

I No. of Japanese I banks' overseas I offices I

I'76 I l'77 I 1'78 I '79

I I I II 1 I 1

1'80 1'81 I 1'82 I 1'83 I 1'84 I l'85 I l'86

Notes:

162

I

Securities companies

I

Banks

I

---. ---------------------------..

I INo. of foreign INo. of Japanese INo. of foreign I Ibanks' offices Isecurities Ibanks' offices I lin Japan Icompanies lin Japan I I loverseas offices I --------------------------------------------------I 75

I 26

2

1

178

81

1

31

2

194

81

I

37

4

I

200

85

I

38

4

I

1

213

85

1

42

5

I

1 I 1 I 1 I 1 I 1 I 1

232

94

I 45

6

I

254

100

1

50

7

I

270

103

I

52

9

I

294

108

I

56

11

1

346

117

1

62

22

I

390

124

1

82

36

I

1.Sources: MOF "Annual Report of International Finance Bureau". 2. The respective numbers of offices of Japanese and foreign banks equal offices the sum of their branch offices and local subsidiaries in which their equity holding exceeds 50%.

106

TABLE 3

Progress in Developement of Stocks (trillion yen,%)

I I II I175 I 176 I 177 I 178 I 179 I 180 1 181 I 182 I 183 I 184 I 185 I 186

IBalabce of public I Corporations' financial llndividual financial Ibonds I assets I assets I-----------------------------I---------------------I--------------------I B I I A I B I A I B I A I-----------------------------I---------------------I--------------------I 9.8 I 15 51.3 I 76 120.4 1 178 I 12.9 1 22 50.5 84 125.4 1 209 I 48.2 16.8 1 32 89 128.5 1 238 I 20.4 1 43 49.8 101 135.1 1 276 I 49.6 25.0 1 56 110 139.7 1 310 I 48.7 28.8 I 71 117 143.3 1 344 I 1 82 31.7 134 52.0 150.3 1 386 I 35.4 I 96 145 53.7 158.6 I 428 I 1 110 38.6 56.7 159 170.2 1 477 I 40.2 1 122 61.3 183 176.4 1 527 I 41.9 1 134 209 65.9 180.1 1 572 I 43.4 1 145 79.0 I 262 193.6 I 642

NOTES: A=balance,B=ratio of outstanding balance to GNP. SOURCE: BOJ "Flow of Funds Account,"EPA"Annual Report on Natinal Accounts,"

I I I I I I I I I I I I I I

107 TABLE 4: Diversification and Mutual Tie-ups in Financial Transactions I

IDomestic market

IOverseas market

I Tie-ups

ISettlement of ISecurities transactions IEstablishing overIFinancial Istock Iseas securities I(sale & dealing of linstitutions [transaction laffiliates. Ipublic bonds,dealing, I Ipayments. lbond futures)handling IDomestic sale of CDs I ITerm deposits I&commercial paper lin commercial paper I Iwith lissued overseas. I& privately offered I linsurance ITransaction in lbonds. I I"Relay I Ilnvestment consultation loverseas financial I Service". Ifutures & options. Isubsidialies. I I ----------------------------------------------------------------------------I IConcurrently opeIlncrease in ratios of I ICommercial I long-tenn loan & loans Irates trust I Ibanks I Ibusiness for Ito medium & small II I loverseas lenterprises. II I Isubsidiaries. Ilssues convertible II I Ibonds. II I---------------------------------------------------------------------------II"Wide"(competes with I I ILong-term I lindividual deposits). I Icredit I IIncrease in ratio of I lbanks I loans to small & I I I Imedium businesses. I -----------------------------------------------------------------------------ITime-limited I I"Big"(comoetes with I ITrust banks Ipension + I lindividual deposits). II Ilife-time I IIncrease loans to II Ilife I Ismall & medium II linsurance. I lenterprises. II I ---------------------------------------------------------------------------I"Sweep I Ilncrease in ratio of I Financial IAccount" I Ilong-term loans I linstitutions I(middle term I I ISpecializing Igovernment I I lin saving fund + Ibond I I Ismall & Iregular I I Imedium Ideposit) I I lenterprises I------------------------------------------------------------------------------I IPostal I ISale of government IPostal saving ISavings joint I lbond I Icard I I I SOURCE: The Federation of Bankers Association of JAPAN "Annual Report"

I I I I I I I

I I I I I I I I I I I

108 TABLE 4 (continued) I Tie-ups lOverseas market I Domestic market I I-------------------------------------------------------------------------------------------------------------ISettlement of IMiddle-term government IEstsblishing overISecurities Istock Ibond fund(compete with Iseas banks. Icompanies Itransaction ISale of CDs and lindividual deposite). I Ipayments. Icommercial paper ILoans with public I I"Sweep lissued overseas. bonds as collateral. I I Account." Overseas financial Brokerage for CDs, I Ilnterest from handling of commercial Ifutures & option I Igovemment Itransactions. Ipaper. I Ibond is used I IInvestment consulI Ito pay of Itation subsidisries. linsurance Ipremiums. I IBond investIment tmust +

linstallment Itype linsurance premiums. I IGovernment bond held Ilin trust + linstallment Itype Iliability I linsurance. IMedium-term Igovernment Ifund + credit Icards. I----------------------I-------------------------------I--------------I-----------------I I insurance I ----------------------------------------------------------------------------------------------------------ITerm deposits ISubparticipation ISaving type insurance I Ilife Iwith lin denominated I(endowment insurance I linsurance linsurance. 1with lump-sum payment Isyndicated loan. I Icompany Relay service Ilnvestment lof premiums) II ITime-limited Isubsidiary Ilnvestment consultatin SI Ipension + lestablished. Isubsidiaries II Ilife-time IHandle overseas I I I I I I Ifinancial Ilife Ifutures &options linsurance. I I I I I II IBond investI I I Iment trust+ linstallment I I Itype I I I I linsurance I I I premiums. I I I

I

I I I I I I I

I

I I

I I

I I

109 TABLE 4 (continued) IDomestic market

IOverseas market

ITie-ups

I---------------------------------------------------------------------------------------------------------------

ITerm deposit lOverseas financial ISaving type insurance. I ILiability Iwith IInvestment consultation Ifutures,option I linsurance linsurance. Itransaction. Isubsidialies. I Icompany Bond investI I II Iment trust + I II linstallment I I I Itype I II Iliability I I I linsurance. I I I I----------------------------------------------------------------------------------------------------------------IPostal saving I Credit card,prepaud IOthers ljoint card. I Icard,mortgage bond. IIMiddle-term I Igovemment lbond +

II

Icredit card.

I I I I

I I I I

110 TABLE 5: Year I

Transition in Financial Deregulation

IGeneral financial 1&deposit markets

I Short-term lfinancial market

ISecurities I market

International market

I I

I 1,others I I-------------I--------------I------------------I-----------------------I 1Mar. I 11976 I I Recognition for I I

I I

I I

I bond repurchase I transactions

I I

I--------------I-------------------------I------------------I-----------------------Ma.r IJan. 1 11977

Self-imposed IIssuing of I I I control by Idiscount I I banks with Igovernment I I Ibonds started regard to I I overseas Apr. I I securities IGovernment I I Ibonds became investment I I abolished. Ifluid; now I I Ipossible to I I Iresale one I I Iyear after I I Iissue I I I---- --- ---------------------------------------------------Jan. I Jun. I 11978 I I I Quotation of IInterestIbearing I call rate made I I I I I more flexible Imiddle-term I I Igovernment I II Ibond issued I I II under a open I I II bidding ------------------------------- I-----------------------------------------I-------------------------------------May. I 1Mar. 1 11979 I I I Quotation of I Short-term impact loans I I I call rate I deregulated. I I I abolished I I IMay. I Bond I I I CD issues begin I repurchase I transactions I I IOct. I by nonI I I Rates on disI I I counting bills I residents I I I deregulated I deregulated Dec. S1 I I Foreign I 1 I I exchange& 1 I I S I I I foreign trade control law I I I I I revised Source : The Federation of Bankers Association of Japan "Annual Report"

I I I I I I I I I

I I I I I I I I I I I I I I I I

111 TABLE 5 (continued) -------------------------------------------------------------------------------IInternational ISecurities IYear IGeneral financial I Short-term I market I market I&deposit markets Ifinancial market I I I 1,others I I---------------------------I-----------------I IApr. 11980

Ilimits on selling Irelated to bond Irepurchases by Icity banks Iabolished INov. IRecognition of Isecurities compaInies taking in Icall money

-------------- I

-------------- I

Jan.

Dec.

I Sales of I middle-term Igovernment Ibond fund Istarted May. IRestriction Ion selling Iof government Ibonds Ishortened to Ithe time of Ilisting on Ithe market Dec. ISelection of Icost method Ion the part Iof banks Irecognized

IImpact loans I& residents' Iforeign Icurrency Ideposits Ideregulated

-------------------

11981

IApr. Jun. INew type of term I City banks' Irelease of call Ideposit with Idesignated with- Imoney & purI chasing of Idrawal date Irepurchase bonds Ilaunched. Irecognized INew loan trust May. Ilaunched IBOJ started INov. Iselling governINew interest Iment short-term Ibearing bank Isecurities in Idebenture Ithe market Ilaunched

IApr. IRestricted Iperiod on Iselling of Igovernment Ibond Ishortened to I3 months I I

I---------I--------------------------------------------------------------I I 11982 IApr.

INew Banking Low I Iput into effect ---------------------------------------------------------------IJan. I Jun. 11983 IQualification I ILoans by I Istandards for I Isecurities I Inon-secured I Icompanies I Iconvertible I public Iagainst I Ibonds eased I Ibonds as colI IApr. I lateral I IBanks started I Irecognized I Ito sell publi I I Ibonds I I I

I Jun.

IShort-term IEurm yen Iloans for Inon-residents Ideregulated I I I I

I I I I I

I

112 TABLE 5 (continued) IYear I

IGeneral financial I&deposit markets

I Short-term lfinancial market

I I,others I I-------------------------------I IJan. May. 11984

I "Report of the I Japanese-U.S. I Committee on the I Yen & Dollar" & I"The President I Situation & I Prospect on I Deregulation of

I Finance & interI nationalization Iof Yen" released

ISecurities I market

I --------------- I

I Reduction in the Iminimun unit for Iissue of CD I (500mil. yen I --300mil. yen) IJun. I Abolition I regulations Ion yen conversion I I I I I I I I I

I I

I ------------ I------------------I

IApr. I Qualification I standards for I issuing non-

I secured I convertible I bonds eased IJun. I Dealing in

I public bonds I by banks

I started

I I

I I I I I I I I I I

I---------I----------------I---------------I-

IInternational I market IApr. I The rule of I actual demand I for future I transactions I for foreign I exchange Iabolished. I Sales for I foreign CD's I & CPs in

I Japan started I Ten-dominated I overseas loan Ideregulated IJun.

IShort-term IEuro-yen I loans for I residents I deregurated IDec.

I Short-term IEuro-yen CD's Ideregulated ----------- I----------------I I IFeb.

11985

IMar.

IApr.

IApr.

I I I I I I I I I I I I I I I I I I I I

IMMC created. IJun. IEntry of foreign Ibanks to trust Ibanking business Iapproved IOct. IThe interest Ion large term Ideposits(of more Ithan 1 bil. yen Ideregulated) I I I I I I I I

IConditions for Iissuing of CD's Imade more Iflexible IJan. IYen-dominated Ibanker's accepItances market Iestablished ISecurities Icompanies started Ihandling distriIbution of CD's IJul. IHandling of Iunsecured Itransactions Iin the call Imarket started

IAn organ to Irank credit Irating of Ibonds Iestablished IJun. IBanks started Ifull dealing. IQualification Istandards for Iunsecured Iconvertible Ibonds eased IOct. IFutures Itransaction Ion bonds Istarted I I

IDirect Ibrokering of Iyen-dolloar Iexchange Istarted IApr. IMiddle & long Iterm Euro-yen Iloans Ideregulated IJul. IMiddle-& long I-term EuroI yen CD's Ideregulated Iup to 1year IApr.--Oct. IGuidelines on IEuro-bonds leased

I I I I I I I I I I I I I I I I

113 TABLE 5 (continued) ISecurities I Short-term Year IGeneral financial I market Ifinancial market I&deposit markets I I I I,others I I------------------------------I---------------I--------------I Jan. IFeb. 11986 IApr. IShort-term IBOJ started spot IMinimum deposit Igovernment Ioperations in Iunit for large Ibonds issued Igovernment shortIterm deposit Iin open Iterm securities Ilowered to 500 IMar. Ibidding. Imil. yen. IForeign IBOJ implemented IConditions for Isecurity ICD purchase IMMC made more Icompanies Ioperation IFlexible IApr. Iacquired ISep. Imembership of IIssuing condiIMinimun unit for ITokyo Stock Itions for CD's Ilarge term IExchange Imore flexible Ideposite IApr. I(minimun length 6 Ireduced to 300 IRestrictions I month -- 1 year) Imil. yen & MMC Ion sale of Ibrought down to Igovernment Ia minimum of 300 Ibonds eased Imil. yen IJul. I I Settlement I Iperiods for Ibond tansacI Itions ahorted I Ito maximum of I 120 days I ISep. I IMarket making I Iin general I Ibonds started I I---------I---------------------------I---------------I--------------I IFeb. IOct. 11987 IApr. IQualification ILimit on issues IMinimum unit for I Istandards for Iof CD abolished Ilarge term I Iunsecured Ifor now. Ideposit reduced I Ibonds eased IStamp tax on yen Ito 100 mil. yen I I Idominated IMMC's minimum I I Ibanker's accepIdeposit unit I I Itance reduced Ireduced & I I Iuniformly to Imaximum term I I 1200 yen Iextended I I INov. Jun. I I IDomestic cp IInvestment of I I Imarket Ifunds of postal I I Iestablished Isavings to cope I I Iwith financial I I I Ideregulation I Ibegian I

IInternational I market I ---------IMar. I Operating Irules for Ihandling Iforeign Isecurities by Ilife & nonIlife Iinsurance Icompanies Ieased IDec. I Tokyo off I shore Imarket Iopened I I I I I I I I I I I I I ------------IMay. ISelf-dealing Itransaction Iby financial Iinstitutions Iengaged in Ioverseas Ifuture Itransactions Idergulated Nov. IRestrictions Iin Euro-yen ICP's Idemgulated I I

I I I I

I I I I I I I I I I I I I I I I I

114 TABLE 5 (continued) ------------------------------------------------------------------------------IInternational I ISecurities I Short-term IGeneral financial IYear I I market I market lfinancial market I&deposit markets I I I I I I,others I --------------I--------I------ ---------.--------------- I---------------I I I IApr. I IOct. 11987 I I of Issuing I I deposit Minimum I I I I I convertible I I period for large I I I Ibonds by I Iterm deposit I I I Iregular banks I Ishortened to I I I lapproved I Imonth. I I I lApr. & Oct. I IMinimum deposit I I I ICommission on I Iunit of MMC I I I 1securities I Ireduced to 10 I I I Ireduced I Imil. yen & I I I IMay. I on limit Maximum I I I I IShort sole on I Ideposit I I I bonds II Iabolished. I I I tolerated I I IMMC with I I I Jun. I extenI automatic I I I IOsaka Stock I Ition launched I I I IExchange I I I I future began I I I I I transactions I I I I I lAug. I I I I IRestrictions I I I I Ion the sale I I I I I for period I I I I I government I I I I I Ibonds virtuaI I I I I Ily abolished I I --------- I I-------------I--------------I---------------I--------------I I IMar. IApr. IApr. IApr. 11988 I I Self-dealing office I Post for I Conditions INon-taxable I Itransactions I I& life Iissuing CDs eased Isavings system I Iby financial I Iinsurance I(Term:2 weeks-I changed. I Iinstitutions I Icompanies 1 2 years,minimum IThe minimum I Iengaged in I sales I began yen) mil. of 50 I Ideposit units I I Ioverseas government I of I term large for I I I Ioption Ibonds. I Ideposits reduced I Itransactions I IJul. I Ito 50 mil. yen I Ideregulated I IFutures tranI I I I sactions in 2 II I I Iyear I I I I Igovernment I I I I began. bonds I I I I I I ISep. I I I I IFutures I I I I Idealing I I I I on based I I I I Istockprice I I I I lindex I I

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