FBE 525



FBE 525 - Class Objectives

J. K. Dietrich

Week 7 – October 5, 2006

Goals and Objectives

1) Analyze the supply and demand for transaction services, relate to the economics of public goods, and discuss the implications for economically efficient pricing of transaction services

2) Provide examples of transaction processing from financial services industry and discuss the provision of these services from traditional financial service firms (e.g. checking accounts by banks)

3) Discuss the elements determining the value of loan-servicing portfolios and factors which affect the value of those portfolios

4) Discuss the major participants in a transaction-processing system and how they relate in different clearing and settlement systems

State Street Bank and Trust Company: New Product Development -- Discussion Questions

The purpose of this case is to provide a discussion focus for the many aspects of value creation in transaction processing services. After analyzing and discussing this case, students should understand the relevance of transaction processing to other financial services and the basic source of value and profits in providing these services, as well as have insights into the determinants of market power and competitive advantage. Some general questions to keep in mind in reading the case are:

1) How has the market for custodial and transactions services evolved in the last twenty years and what recent trends have emerged that will influence demand and supply in the market for transactions services?

2) What has State Street’s financial performance been in the past and what has been the cause of that performance? What is happening to pricing and competition in this market and how can you explain the underlying dynamic affecting the returns to investment in this industry? How is State Street responding?

3) What synergies are there between transaction processing and other financial services? How are these synergies related to the needs of customers using transaction processing?

4) What is the size of the markets in which State Street competes and what is its share of the market? How does one define market size and share and what are the implications for the assessment of market size for financial services students are analyzing as part of Analysis 2 of the group project?

5) What types of resources are necessary to compete in the markets State Street competes in and how can firms develop and maintain a comparative advantage?

Important Vocabulary List from Class

DEMAND AND SUPPLY OF TRANSACTIONS

PUBLIC GOODS

MARGINAL COST AND BENEFIT OF TRANSACTIONS

EFFICIENT VOLUME OF TRANSACTIONS, EFFICIENT PRICING

LOAN SERVICING, LOAN SERVICING FEES

MEMBERS OF A CLEARING SYSTEM

CORRESPONDENTS

CLEARING HOUSES

CLEARING AND SETTLEMENT

BATCHED VERSUS OFFSETTING TRANSACTIONS

DAYLIGHT OVERDRAFTS

Suggested Wall Street Journal (WSJ) or other Articles

September 22, 2006

“Blood Money: Murdered Regulator In Russia Made Plenty of Enemies” (A1) – Major insight into regulatory risks and challenges to making financial system reforms, relevant to Russian-based strategies for financial service firms

“Amaranth To Discuss Losses With Clients” (C1) – Discussion with investors reveals how to unwind assets under stressful circumstances and danger of failure

“Citigroup Manager’s Exit Underscores Banks’ Struggle to Crack Hedge Funds” (C1) – Another example of culture clashes between banks and their acquisitions in different financial services

September 23-24, 2006

“Wall Street: Being Ready In Case of Crisis” (A2) – Good story on regulatory vigilance in case of disaster and growing concerns about credit derivatives, provoked by Amaranth problems

“Finding Good, Cheap Advice” (B1) – The asset management and investment advisory services are challenged to meet rapidly growing new customer education and marketing needs

“At Hedge Funds, Study Exit Guidelines” (B4) and “Amaranth CEO Issues His Regrets” (B5) – Good discussions of issues in hedge-fund financing and reporting practices and illustrating that not all limited partners may be equal

“Senate Passes Bill to Make SEC Regulator or Credit-Rating Firms” (B5) – Change in regulation of financial information service provider illustrates role of regulatory risk in financial services

September 25 , 2006

“Credit Firms Push to Thwart Fraud” (C1) – Further aspects on credit-card lending and processing businesses impinging on their profitability, pricing, and risks

“Algorithmic Trading Inflates Costs” (C3) – Evolution of trading technology has major impact on exchanges and financial information services, like Bloomberg we discuss later this semester

September 26 , 2006

“Pirate Capital Draws SEC Focus” (C1) – Discussion of aggressive asset-management strategy under examination by regulators

“Merger Trend Sweeping Big Exchanges Cascades Toward ‘Interdealer Brokers’” (C1) –Developments in exchange consolidation extend to other aspects of institutional trading

“Tracking the Numbers: SEC Financial-Reports Database To Undergo $54 Million Upgrade” (C3) – Improvement in EDGAR used by students and data vending firm will make it easier to search SEC filings

“Santander Purchase Boosts U.S. Presence” (C4) – Large Spanish bank with major operations in Latin America expands its role in U.S. through purchase of auto lender

September 27 , 2006

“Pitching 401(k)s to Generation Y Is a Tough Sell” (B1) – Marketing asset-management services to new job market entrants is a challenge

“Tracking the Numbers: Is Energy trade on OTC Platform Too Wild?” (C1) – Importance of trading rules (maximum position size) discussed in article concerning failure of Amaranth

“Wall Street Firms Plan New Service for Block Trades” (C4) – An electronic alternative to negotiated “second” market discussed by major brokers

“High Court Will Examine Role Of Credit Ratings on Insurance” (A6) – Increasing use of credit ratings in casualty policy pricing

September 28 , 2006

“Town’s Residents Say They Were Targets of Big Mortgage Fraud” (A1) – Good story on the importance of underwriting consumer-credit loans and how fraud can survive even with new technology

“Credit-Derivatives Backlog Is Cut” (C5) – Good example of importance of clearing systems and role regulator can play in influencing market micro-structure

September 29 , 2006

“Riding the Beast: As Stocks Near a High, Pressure Builds for a Professional Investor” (A1) – Feature story provides good description of challenges in succeeding in the asset-management business while detailing daily routines

September 30-October 1 , 2006

“Repair Job: Billionaire Investor Drives Overhaul of Auto-Parts Giant” (A1) – Role of active hedge-fund in corporate governance and restructuring of Delphi

“Low-Initial Payment Mortgages Draw Stricter U.S. Guidelines” (A5) – Role of regulation in consumer-product definition illustrated

“Your Portfolio on Autopilot” (B1) – Algorithmic trading at the retail level offered by a variety of brokers

“Amaranth Halts Withdrawals; Talks With Citigroup Falter” (B3) – Unwinding private-equity capital limited partnerships offers insights into risks for hedge-fund investors

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