Financial Product Development: Gaining a Competitive Advantage in a Global World 1/27 Warren Edwardes Financial Product Development: Gaining a Competitive Advantage in a Global World Warren Edwardes, ceo, Delphi Risk Management Ltd Presentation to MEFTEC 2006 Bahrain, Tuesday 14 February 2006 Full speech on: dc3.co.uk/creative.htm and dc3.co.uk/innovation.htm Islamic banking news: dc3.co.uk/ibnews

Financial Product Development: Gaining a Competitive Advantage in a Global World 2/27 Warren Edwardes Key financial instruments –This article and speech is based on chapters 2 and 3 of the book: –"Key financial instruments: understanding and innovating in the world of derivatives" (Financial Times Prentice Hall)

Financial Product Development: Gaining a Competitive Advantage in a Global World 3/27 Warren Edwardes Key financial instruments How to capture the big new IDEA? Seven Pillars of Financial Innovation

Financial Product Development: Gaining a Competitive Advantage in a Global World 4/27 Warren Edwardes How to capture the big new IDEA? Why Creativity? –If you try to do things, sometimes you’ll get it wrong. –If you execute everybody who tries to do something and gets it wrong, pretty soon you’ll have nobody who tries to do anything. That’s exactly the wrong way around. –Peter Burt, chief executive of Bank of Scotland

Financial Product Development: Gaining a Competitive Advantage in a Global World 5/27 Warren Edwardes Key financial instruments But Creativity is not about inventing products from scratch. Many useful financial products are in use elsewhere or went out of use perhaps because of regulation or tax considerations. "guerra de supercuentas" or the super-account war in Spain "current account mortgages" were launched by Virgin Direct in the UK – the Virgin One Account.

Financial Product Development: Gaining a Competitive Advantage in a Global World 6/27 Warren Edwardes Key financial instruments Always waiting for another firm to introduce a product first in a game of catch-up may be fine, but short-sighted, in retail financial products. Plain-vanilla or standard financial product expertise is simply not good enough in the capital markets.

Financial Product Development: Gaining a Competitive Advantage in a Global World 7/27 Warren Edwardes The Big IDEA - Impossible Think like a child Polaroid Case New entrants

Financial Product Development: Gaining a Competitive Advantage in a Global World 8/27 Warren Edwardes The Big IDEA - Disasters PostIt Note SCOUT Remember the two benefits of failure. First, if you do fail, you learn what doesn't work; and second, the failure gives you the opportunity to try a new approach. - Roger von Oech

Financial Product Development: Gaining a Competitive Advantage in a Global World 9/27 Warren Edwardes The Big IDEA - Everywhere Velcro case Walking Conferences

Financial Product Development: Gaining a Competitive Advantage in a Global World 10/27 Warren Edwardes The Big IDEA - Archive Write it down Everything has been thought of before, but the problem is to think of it again. – Goethe the Delphi Thought Pad. Beware of leaking information

Financial Product Development: Gaining a Competitive Advantage in a Global World 11/27 Warren Edwardes The Big IDEA The Big IDEA - Impossible The Big IDEA - Disasters The Big IDEA – Everywhere The Big IDEA - Archive

Financial Product Development: Gaining a Competitive Advantage in a Global World 12/27 Warren Edwardes Seven Pillars of Innovation Six people seated around the walls of a darkened room. In the open middle space is a chair. Who finds it? Those that sat still and philosophised about where chairs are usually placed in rooms? The innovator who would locate it is the one who'd get up, walk and stumble until he discovered it. Nobody ever found anything whilst sitting down. So QED don’t be afraid to stumble. - Charles Kettering Ease of entry / Copyright

Financial Product Development: Gaining a Competitive Advantage in a Global World 13/27 Warren Edwardes Seven Pillars of Innovation 1.Competitive Innovation 2.Regulatory Innovation 3.Accounting Innovation 4.Taxation Innovation 5.Religious Innovation 6.Ignorance Innovation 7.Technological innovation

Financial Product Development: Gaining a Competitive Advantage in a Global World 14/27 Warren Edwardes Seven Pillars of Innovation 1 Competitive Innovation Price Service

Financial Product Development: Gaining a Competitive Advantage in a Global World 15/27 Warren Edwardes Seven Pillars of Innovation 2 Regulatory Innovation Basel / Basle II Credit derivatives Insurance derivatives Hybrid securities –Look like bonds for investors –and equities for Tier 1 Capital

Financial Product Development: Gaining a Competitive Advantage in a Global World 16/27 Warren Edwardes Seven Pillars of Innovation 3 Accounting Innovation IASB Does Accounting treatment reflect value?

Financial Product Development: Gaining a Competitive Advantage in a Global World 17/27 Warren Edwardes Seven Pillars of Innovation 4 Taxation Innovation Capital Gains Tax – zero coupons Dividends Tax Changes Retrospective legislation

Financial Product Development: Gaining a Competitive Advantage in a Global World 18/27 Warren Edwardes Seven Pillars of Innovation 5 Religious Innovation Ethical Funds Usury Laws Islamic Banking

Financial Product Development: Gaining a Competitive Advantage in a Global World 19/27 Warren Edwardes Seven Pillars of Innovation 6 Ignorance Innovation Just cheating Bankers Trust /Proctor and Gamble / Gibson Greetings Structured Financial Products

Financial Product Development: Gaining a Competitive Advantage in a Global World 20/27 Warren Edwardes Seven Pillars of Innovation 7 Technological innovation Cash Points Computer software for derivatives Credit risk valuation Internet Visit the Exhibition

Financial Product Development: Gaining a Competitive Advantage in a Global World 21/27 Warren Edwardes Financial Product Development: Gaining a Competitive Advantage in a Global World Warren Edwardes, ceo, Delphi Risk Management Ltd Presentation to MEFTEC 2006 Bahrain, Tuesday 14 February 2006 Full speech on: dc3.co.uk/creative.htm and dc3.co.uk/innovation.htm Islamic banking news: dc3.co.uk/ibnews