1. Design of Clearing and settlement operations: A case study in business process modelling and evaluation with Petri nets

2. Introduction Name : Pieter Kwantes Work at ING Bank, Wholesale Securities department My contribution is based on my master thesis Computer Science (Leiden University. Jetty Kleijn) finished May 2006

3. Content of this presentation Motivation behind the case study Case study –Problem statement –Approach and research questions –Execution of the case study Concluding remarks

4. Motivation –Choice between different process design alternatives, is often based on intuition, expert opinion. Tools: MS-word and power point. –The question is whether a formal approach based on Petri nets might do better –Try it out in a realistic case study

5. Problem statement (1) Clearing and settlement = processing of transactions on the secondary capital market –Primary capital market : issue of new securities –Secondary capital market : trading of already issued securities

6. Problem statement (2) processing of transactions on secondary capital market SettlementTradingClearingCustody

7. Problem statement (3) Problem : how to design a business process able to deliver Clearing and settlement services ? This resulted in 2 design alternatives How to decide which one is the best, before starting implementation?

8. Approach: the basic idea Make a Petri net model of each alternative process design Calculate the performance of each model Choose the design showing the best performance for implementation

9. Approach:steps Acquire informal description process designs Establish performance criteria Formalize descriptions with Petri nets Validate formal description Measure performance (Implement best process design)

10. Questions Questions: –Are Petri nets suitable to describe critical properties of the subject domain : C&S ? – Are graphical representation and animation enabled by Petri nets helpful for validation purposes? –Is it possible and feasible to decide between two process designs of C&S using Petri nets –(Can PN-based models be used as a specification/blueprint to guide implementation?)

11. Content of this presentation Motivation behind the case study Case study –Problem statement –Approach and research questions –Execution of the case study Concluding remarks.

12. Approach:steps Acquire informal description process design Establish performance criteria Formalize description with Petri nets Validate formal description Measure performance (Implement best process design)

13. Informal description (1) Two different institutional arrangements for secondary capital markets: –“Over the counter” markets –Formalized exchanges

14. Informal description (2) Trading Member Firm 1 Trading Member Firm 2 100 units Shell Settle ment TradingClearingCustody

15. Informal description (3) Trading Member Firm 1 Trading Member Firm 2 100 units Shell Clearing Central Counter party 100 units Shell Settle ment TradingClearingCustody

16. Informal description (4) Trading Member Firm 1 Trading Member Firm 2 200 units Shell Clearing Member Firm B Clearing Member Firm A Central Counter party 200 units Shell Settle ment TradingClearingCustody

17. Informal description (5) Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 0 Trading Member Firm 1 100 200 0 0 200 units Shell -Invariance Settle ment TradingClearingCustody 0 Clearing Member Firm Clearing Member Firm 0 00 Power of attorney

18. Informal description (6) Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 0 Trading Member Firm 1 0 100 0 0 200 units Shell -Invariance Settle ment TradingClearingCustody 100 Clearing Member Firm Clearing Member Firm 0 0100 Power of attorney

19. Informal description (7) Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 Trading Member Firm 1 0 100 0 0 200 units Shell -Invariance Settle ment TradingClearingCustody 0 Clearing Member Firm Clearing Member Firm 0 00 Power of attorney

20. Informal description (8) Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 0 Trading Member Firm 1 0 100 0 0 200 units Shell -Invariance Settle ment TradingClearingCustody 0 Clearing Member Firm Clearing Member Firm 0 1000 Power of attorney

21. Informal description (9) Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 0 Trading Member Firm 1 0 100 0 200 units Shell -Invariance Settle ment TradingClearingCustody 0 Clearing Member Firm Clearing Member Firm 100 00 Power of attorney

22. Informal description (10) design alternative Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 0 Trading Member Firm 1 100 2000 0 200 units Shell -Invariance Settle ment TradingClearingCustody Clearing Member Firm Power of attorney

23. Informal description (11) design alternative Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 200 Trading Member Firm 1 (-100) 00 0 Time : S Power of attorney -Timing -Power of attorney Settle ment TradingClearingCustody 200 units Shell -Invariance Clearing Member Firm

24. Informal description (12) design alternative Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 100 0 Trading Member Firm 1 (-100) 0200 Settle ment TradingClearingCustody 200 units Shell

25. Informal description (13) design alternative Custody Custodian CSD Trading Member Firm 3 Central Counter party Trading Member Firm 2 0 Trading Member Firm 1 0 0200 Settle ment TradingClearingCustody 0

26. Design 1 has 2 extra steps before final settlement with CCP, so –decision to borrow earlier –more failure due to late receiving OTC-trades Informal description difference between design 1 and 2 SS - t Design 1 Design 2 CCP Late received OTC-trades S – ½ t

27. Clearing Member Firm Central Counter party Central Securities Depository OTC- Market Exchange Custodian 1 2 8 4 12 10 Lending Firm 3 7 13 14 15 6 9 5 11 Informal description DFD : design alternative 1

28. Clearing Member Firm Central Counter party Central Securities Depository OTC- Market Exchange Custodian Lending Firm 21 22 23 24 25 2 1 3 4 29 30 28 27 26 13 20 31 Informal description DFD: design alternative 2

29. Approach:steps Acquire informal description process design Establish performance criteria Formalize description with Petri nets Validate formal description Evaluate process design (Implement process design)

30. Basic purpose of Clearing and settlement to complete a transaction according to what has been agreed upon (amount, prices, time of delivery) Performance criterium is – % of traded securities delivered in time –amount of borrowing Performance criteria

31. Approach:steps Acquire informal description process design Establish performance criteria Formalize description with Petri nets Validate formal description Evaluate process design (Implement process design)

32. Design 1

33. Design 2

34. Sub net of the CCP

35. Sub net fragment of the Custodian

36. Approach:steps Acquire informal description process design Establish performance criteria Formalize description with Petri nets Validate formal description Evaluate process design (Implement process design)

37. Approach:steps Acquire informal description process design Establish performance criteria Formalize description with Petri nets Validate formal description Evaluate process design (Implement process design)

38. Evaluate process design Measurements design 1 1 cycle

39. Evaluate process design Measurements design 1 (2 accounts) Borrowing cost Settlement failure

40. Evaluate process design Measurements design 2 (1 account) Borrowing cost Settlement failure

41. Content of this presentation Motivation behind the case study Case study –Problem statement –Approach and research questions –Execution of the case study Concluding remarks.

42. Concluding remarks Suitability of HTCP-nets for modelling Clearing and settlement process Decentralized control/communication Complexity Time critical Issues: –Modelling of priorities –Modelling of dataflow/datastructure

43. Concluding remarks Validation of the HTCPN model Graphical representation Animation Issues: –Snap shot animation, lose view of entire OS –Local state change, snap shots of entire net –Animation of high level nets –Domain specific presentation layer –Extraction of performance information

44. Concluding remarks Suitability for design evaluation What-if analysis Visualisation of alternatives Issues –Support for model variants Reusable model fragments