ISJ025

VOLUME 4 No. 25 - 2007

INVESTORSERVICES

JOURNAL

THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

ISJNEWS.COMGBP 25 - UK, ROWUSD 45 - America

EUR 35 - EMEA

LEGAL ISSUES - REG NMS VS MIFIDANALYSE THIS - SECLEND TECHNOLOGYPANEL DISCUSSION - CEE CUSTODY PAYMENTS - TARGET2

PAINTINGA BETTER PICTURE

Has the EDM Council gone from concept to reality?

CHANNEL ISLANDS - FUNDS MARKETRUSSIAN MARKET- CUSTODY FOCUS

SIBOS ROUNDUP - TECHNOLOGYMERITON OF GOLDENSOURCE - CEO PROFILE

ISJ25 Cover 19/10/07 4:59 pm

ISJ25 Cover 19/10/07 4:59 pm

INVESTOR SERVICES JOURNAL

Editor: Virginie O’Shea ([email protected]) Senior reporter: Jamie Darlow ([email protected])Contributing editor: Giles Turner ([email protected]) Contributors: Brian Bollen, Fabien Buliard, Nicholas Pratt

Publisher: Justin Lawson ([email protected]) Publishing manager: Monique Theart ([email protected]) Account managers: Peter Lines ([email protected]), Kaz Ayoade ([email protected]) Directory sales: Craig McCartney ([email protected])Systems manager: Jon Gunnarsson ([email protected])Operations manager: Sue Whittle ([email protected])Sales administration: Kim van Berkel ([email protected])

Chairman: Mark Latham ([email protected])

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VOL 4 No. 25 - 2007

INVESTORSERVICES

JOURNAL Sibos is done and dusted for anotheryear and, along with the jetlag, wehave been left with many issues to

ponder – not least of which is how Swiftwill pursue its new commerciallyassertive agenda. Lázaro Campos’sopening plenary speech certainly left animpression on the delegation: his use ofwords such as “offensive” and“aggressive” suggest that it’s going to bea year of vigorous campaigning forSwift over 2008. We briefly look at themain issues of the conference (and sharea few select snaps of the social events)on page 56.

This month’s cover feature deals withanother industry group that hasgarnered its fair share of criticism: theEDM Council. Given that there are alarge number of vendors involved, manyhave been quick to accuse the council ofpushing a suspicious agenda – namely tofoist so-called EDM “solutions” onunsuspecting practitioners. However,following the recent involvement of anumber of large banks in the EDMagenda, this may now be a falseassumption. You decide (see page 16).

We also took the time out to interviewa leading figure in the EDM vendorcommunity, Mike Meriton, CEO ofGoldenSource, about his perspectives onthe data dilemma (see page 14).

When there is market data discussed,MiFID is never far behind. And as it isnot only the year of the MiFID, but it isnow the month of MiFID, we decided totake a quick look at how it compares tothe regulatory regime across the pond in

our feature on page 61.As well as a focus on data, this issue

could also be termed the Europeanemerging markets issue, with our featureon the shape of Russian custody (seepage 35) and our panel discussion on theCentral and Eastern European markets.According to our panel of experts, theCEE custody markets are continuing toevolve up the value chain from basicsafekeeping and settlement to fundadministration, as the demands formutual funds and pension servicesincrease. Read more on page 38.

I should also take a brief moment tomention that pen manufacturer Crosshas been kind enough to sponsor ourletters to the editor page. Thus you nowhave a proper incentive to get writing inwith your comments and criticisms tome at [email protected]. The carrotis always preferable to the stick(although Commissioner McCreevy maydisagree with me on that).

The ISJ team should also be out inforce at FIMA this month, so if youspot one of us, you may be able todeliver your letters personally!

Virginie O’SheaEditor

Aggressively entrepreneurial

HEADS UP

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CONTENTS

2 INVESTOR SERVICES JOURNAL

Data services:Has the EDM Councilfinally moved fromconcept to reality?

1 Heads upEditor’s letter

4 LettersPoints of view

■ News

6 Global snapshots & mandates Round up of securities servicesheadlines from isjnews.com

10 News analysisReading between the lines

14 CEO profileMike Meriton of GoldenSource

■ Special Report

16 Data servicesEDM in the spotlight

20 FIMA vendor profilesThe key vendors attending

■ Funds

22 Channel Islands fundsRegulatory upgrades

28 South African fundsRoaring ahead

32 Domiciles reportsIsle of Man and Guernsey

■ Custody

33 Spanish custodyBuilding for the future

35 Russian custodyDealing with an image crisis

38 Panel discussionA focus on Central and Eastern European custody

51 Transfer agencyA new business model?

■ Technology

56 Sibos 2007 reportThe lowdown on Boston

58 Target2Nearing completion

■ Securities lending

60 Northern Rock affairWhat does it mean for the future?

■ Legal

61 Reg NMS vs MiFIDUgly siblings?

■ Regulars

62 Analyse thisSecurities lending technology

68 People Moves

80 Hindsight/ForesightCalpers

■ ISJ Directory

69 The directory of securitiesServices providers

Safe haven? 22

28

16

Roaring ahead

VOL 4 No. 25 - 2007

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Is it all semantics?

Amid the Northern Rockmeltdown we can expectrenewed debate on the role of

the government in capital markets,how to harmonise global regulation,and whether more prescriptive rulesshould be adopted by the FSA.However, the rules versus principles,or the SEC versus FSA, debate isgreatly exaggerated and takes us intoa whirlpool of semantics from whichwe will never escape.

The SEC acknowledges that asmuch as they might wish to, they willnever be able to set and enforce rulesthat govern every situation. For asupposedly rules-based regulatormost enforcement actions taken bythe SEC arise from basic principles inthe Exchange Act forbidding deceitand false claims of material facts.The FSA, on the other hand, hasplenty of prescriptive rules. I have nodoubt that those who feeloverburdened by regulation will arguefor a more principles-basedframework, while others will argue formore specific guidance and rules inthe wake of negative spikes in themarket or some other crisis inconfidence.

Pro-regulation advocates may seizethe sub-prime mess in the US and itssubsequent aftershocks in overseascredit markets as a justification fornew rules. Were we really surprisedthat lending money at adjustablerates to people with a bad credithistory would lead to default risk?What is it about the term “sub-prime” that we didn’t understand?Would you eat sub-prime beef?Would you fly on a sub-prime plane?I’m sure the prices would beattractive but what is the real cost?

Most national regulatorsacknowledge that regulation is mosteffective when it is instigated as

LETTERS TO THE EDITOR


could be 30 different sets ofrequirements – one for eachjurisdiction. It also increases thelikelihood that one of the majorobjectives of MiFID could becompromised: that of markettransparency.

If we can’t even rely on using thesame set of instrument codes acrossthe 30 MiFID countries, how can thisinformation be consolidated? And if itcan’t, then surely the whole conceptof market transparency is fatallycompromised. The lack of clarityregarding exactly this set ofparameters has led many of the biginvestments banks to do very little,one bank describing it to us as:“papering over the cracks on existingsystems”.

Perhaps this is unwise? Verypossibly, papering over the cracks inan existing system is not going tomeet even the initial requirements,let alone deal with subsequentmodifications required by regulators.As these requirements shake downand as other instrument classes (suchas bonds and derivatives) are addedto the MiFID transparency checklist,better home improvement now maymean you don’t have to re-plaster thewhole wall tomorrow.

Mike Hill, marketing director, Gissing Software

The pen is mightier than the sword...If you are affected by, orhave an opinion on, any aspect of investor services pleasewrite to us at [email protected] and enter into the runningto win an exclusive Cross pen.

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Winning Letter closely as possible to the regulatedactivity. By definition, the mosteffective form of control starts withinthe four walls of the financialinstitution itself. The primaryobjective of this industry is not toencourage regulation but to pre-emptregulation. We pre-empt regulation byacting in accordance with ourinvestor’s interests and givingregulators confidence that ourinternal risk controls are effective.

It’s up to us as a community tosustain investor confidence by takingresponsibility for our own ethicalstandards. It comes down to thesimple question – do you want toshape the direction of your industryor do you want it dictated to youthrough more prescriptive regulation?

Tim Lind, managing director, Omgeo

Replastering required?

ISJ’s focus on MiFID in Septemberhad some interesting views fromacross the market regarding

market readiness to adopt MiFID.Another reason for the slowpreparations by banks is the lack oftransparency in the rules of aregulation that, somewhat ironically,is all about transparency. In May2007, CESR issued what it saidwould be its “last set of guidance” onMiFID Level 3 regulation. Thisguidance however, failed to fullydefine the unanswered issues fromthe previous MiFID Level 2 Guidance.

The questions of exactly how manyfields of data are to be reported to acompetent authority and, importantly,what specifically should be reportedin those fields have been leftsomewhat opaque. The implication ofthese omissions is that both the datafields (beyond the basic 23 specifiedin the Level 2 Guidance), and theactual content of each field will bespecified by each country regulator.This raises the possibility that there

ISJ25 pp1-21 ML 19/10/07 6:33 pm Page 4

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CUSTODY, CLEARING ANDSETTLEMENTBoston - JPMorgan WorldwideSecurities Services hasintegrated and upgraded itsUS and internationalGlobeClear clearance serviceto improve processingefficiency. JPMorgan has madea multi-million dollarinvestment in its US AgentBank Clearing product toexpand its core clearance andcustody systems to improvesettlement of securitiesprocesses through theDepository Trust & ClearingCorporation (DTCC). Thebank says clients can now:segregate participant accounts,eliminating traditionallimitations of omnibus accountstructures; minimise deliveryfails and their associatedfinancing; rehypothecate,permitting straight throughprocessing of all repurchasesand loans; automaticallyprocess equities throughsecurities payment orders; useSwift messaging, expanded toimprove access to settlementstatus and corporate actioninformation and incomeinformation on rehypothecatedpositions. Ed Corral, Clearanceand Settlement Businessexecutive at JPMorganWorldwide Securities Services,says: “JPMorgan has long beena participant in US domesticoff-exchange clearance, andthis investment and upgradeenables us to offer what webelieve is a new standard forintegrated global clearance. Asmarkets continue to becomeglobal, the convergencebetween US and internationalclearance becomes increasinglyimportant.”

Boston - Bank of New YorkMellon Asset Managementsubsidiary Boston Company AssetManagement has lost two publicpension fund mandates jointlyworth USD2.2 billion becauseof under-performance. The

Pennsylvania Public SchoolEmployees Retirement System,which has USD64 billion inassets under management,terminated Boston Company,which managed an active non-US equities portfolio worthabout USD1 billion. ThePennsylvania termination camea day after Boston Companylost another billion dollarmandate. The MassachusettsPension Reserves InvestmentManagement, which overseesfunds with USD48.2 billion inassets, took the firm off aUSD1.2 billion European,Australian and Far East equityportfolio that it co-managedwith Wellington Management.

FUNDS & ADMINISTRATIONNew York - Man Group is lookingfor opportunities to buyindependent rivals in the hedgefund space that have becomemore amenable to approachesin the wake of the summermarket turmoil, according tochief executive Peter Clarke.Clarke said Man Group alwayshas an eye for acquisitions, butis aware of far more targetsbecoming available since hedgefunds’ volatile investmentperformance in late July andAugust. He said prices hadcome down and looked cheap,adding it would be no surpriseif some small independentfirms sought to be taken overby Man Group. Clarke said heexpected to win staff andclients as a result of dis-appointing performance bysome hedge funds. He said thefirm had not reduced leverageon any of its funds, and thisallowed it to profit from therebound that followed.

New York - Fund of hedgefunds Morgan Creek CapitalManagement has opened aBeijing office to oversee itsinvestments in the region as itembarks on global expansion.Jason Zhang, previously anemployee of StanfordManagement Company, wasappointed to head up the officeand will be in charge of

investments in the region. TheBeijing office could changelocation to Hong Kong orShanghai or both after theOlympics next summer. Nextyear, the company intends tomove one of its senior staffmembers over to the Chinaoffice. North Carolina-basedMorgan Creek currently hasUSD6 billion in assets undermanagement, with up to 4% inChinese investments.According to Mike Hennessy,Morgan Creek’s managingdirector of investments, thecompany wants to grow itsstake from 10% to 20%.

Dublin - PFPC has launcheddepositary services inLuxembourg and now offers afull range of services to clientswith Luxembourg domiciledfunds. Luxembourg is Europe'sleading domicile for traditionalinvestment funds and thesecond largest worldwidedomicile for funds after theUnited States. In early 2007,Luxembourg made a series ofchanges to its investmentregulations, including theintroduction of the newspecialised investment funds(SIFs). As a direct result, anincrease in alternative assetclass activity in addition to thecontinued growth in thetraditional and long only assetclasses is expected. PFPC nowprovides transfer agency,depositary, middle office, fundaccounting and administrationand risk management servicesin Luxembourg.

Paris - Asset managementcompany Euragone hasmandated Société GénéraleSecurities Services (SGSS) forthe launch of its new Frenchreal estate mutual fund(OPCI), a new type ofinvestment vehicle for realestate professionals andindividuals designed to boostthe non-listed paper real estatemarket and recently launchedin France. SGSS has beeninvolved in market discussionsfor the launch of OPCIs over

the past three years. SGSSprovides tailor made servicescovering trustee anddepositary, custody andholdings, transfer agency andfund administration.

LEGAL AND COMPLIANCELondon - Public disclosure andvoluntary restrictions on theuse of voting shares has beenproposed for hedge funds by aworking group chaired byformer Bank of Englanddeputy governor Sir AndrewLarge. The proposition came aspart of a wide rangingconsultation report on bestpractice standards for theindustry. The report, publishedfor public consultation afterbeing written with 14 hedgefund managers, advocatesincreased disclosure as a meansto ensure that hedge fundsaddress their responsibilities,which, the report says, havegrown as their influence hasexpanded. This includesresponsibilities to investors,regulators and the widerpublic. Improved disclosure toinvestors lies at the heart ofits recommendations, and thereport encourages investors topush for any changes theywant. The authors said theyhoped this would help addresswider issues of stability in thefinancial system. The reportalso proposes that hedge fundmanagers voluntarily agreenot to exercise their right tovote using stock that they haveonly borrowed.

London - The EuropeanCommission is continuing itsreview of the USD17.4 billiondeal to combine Thomson andReuters, with the Commissionmoving into Phase 2 to studyits competitive impact, the twocompanies said in a jointstatement. The Commissionhas 90 days to complete thereview, which will push themerger into the first quarter of2008. Also, the US Dept. ofJustice has agreed to render adecision on its competitionreview by 15 January.

News

NEWS

6 INVESTOR SERVICES JOURNAL NEWS DAILY AT WWW.ISJNEWS.COM

��

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London - Omgeo’s regulatoryreporting service, OmgeoTransaction Report, has beenupdated to meet new MiFIDrequirements, as set out by theFinancial Services Authority(FSA). The service has beencertified by the FSA as anApproved ReportingMechanism (ARM) and will letOmgeo clients comply with thenew transaction reportingregulations. MiFID requirestransactions of all instrumentsadmitted to trading on aregulated market to bereported to the localcompetent authority. The FSAhas extended the UK regimeto include commodity, interestrate and foreign exchangederivative contracts. Eachtransaction must be reportedto the competent authority byno later than the close ofbusiness on the following day.Omgeo Transaction Reportwill report all types oftransactions by T+1 to meetthe FSA’s Full Approvalrequirements.

London - More than 61% ofbanks are incorporating newsourcing strategies into theirplans in the run up to SEPA,according to a survey of topindustry executives conductedat Sibos 2007 in Boston. Thesurvey, conducted byCapgemini, also found banksthroughout Europe widelysupport a new European bankcard programme that would

replace existing national onesand provide an Any Card atAny Terminal field.

MARKET INFRASTRUCTURENew York - Citigroup, Bank ofAmerica and JPMorgan haveunveiled plans for an USD80billion fund to buy bondswhose values have fallen in thewake of the credit crisis. Thebanks hope to strengthen themarket for short termborrowing and prevent a firesale in markets that have yet tosee the full extent of losses.The arrangement was agreedto with the involvement of theTreasury Department, whichhad been concerned thatfurther troubles in the bondmarket could force banks tocurtail their lending. The planwill help to foster orderlycapital markets, the Treasurysaid in a statement. However,there was some concern thatthe new fund might distort themarket and prevent banksfrom spotting troubled assets,covering up the extent of thecrisis. Some industry expertshave said this lack oftransparency caused the crisisin the first place.

London - Royal Bank ofScotland’s Johnny Cameron,chief executive of corporatemarkets, has drawn up achecklist to integrate ABNAMRO’s wholesale banking division, and has 45 days tochoose which parts RBS

wants and which staff toretain. Cameron has drawn upa list of 118 initiatives toensure the rapid integrationof the Dutch bank’swholesale banking division,which could lead to hundredsof job losses. Last week RBSgained control of ABNAMRO in a EUR 71 billionacquisition with fellowconsortium membersSantander and Fortis. Eachinitiative spans ABN’swholesale operations in 53countries, including thoseacquired by RBS in Asia,central and Eastern Europeand Latin America, excludingthe Brazilian business, whichhas been sold to Santander.

Shanghai - Nasdaq and theShenzhen Stock Exchange haveagreed to expand theirbusiness cooperation andinformation sharing, accordingto the Chinese bourse generalmanager Zhang Yujun, asChina prepares to launch amarket for start-up firms thisyear. Nasdaq expected theShenzhen bourse, which waspreparing to launch China’ssecond board market, wouldintroduce domestic small andmedium sized companies to liston Nasdaq in the future, saidRobert Greifeld, Nasdaq’s chiefexecutive. Last month, Nasdaqwon approval from the ChinaSecurities RegulatoryCommission to set up arepresentative office in Beijing.

Nasdaq is hoping to encourageChinese firms to list on itstechnology focused stockexchange.

SECURITIES LENDINGBoston - Lehman Brothers haswon the majority of asecurities lending auction fromCalpers totalling USD 4 billionin US equity and non-US fixedincome securities. LehmanBrothers will retain exclusiveborrowing rights to theportfolios for the term of theagreement, according toeSecLending, which awardedthe securities lending deal tothe bank. Citi’s Prime FinanceDivision was previouslyawarded access to twosignificant portfolios in 2006and chose to extend theirrelationship for another year.BNP Paribas also won exclusiverights to access portions of thefixed income funds. Four major financial institutionssubmitted winning principalbids for exclusive borrowingrights to the securities in thisyear’s auction. Calpers alsoawarded a portion of the USequity assets to Boston GlobalAdvisors, part of GoldmanSachs, to lend on an agencybasis. “Our lendingprogramme is activelymanaged and by repeatedlyreauctioning our lendableassets,” says Dan Kiefer,opportunistic portfolioManager for Calpers. ■

Mandates roundup of awards

NEWS

8 INVESTOR SERVICES JOURNAL NEWS DAILY AT WWW.ISJNEWS.COM

JPMorgan stands out in September and October,winning close to USD200 billion in mandates over thetwo months. American Century Investmentsconsolidated the asset servicing mandates for its fundsand institutional accounts with JPMorgan WorldwideSecurities Services in October. The bank was previouslythe primary custodian and securities lending agent forAmerican Century, but these services have now beenextended to include fund accounting, financialreporting and tax services, pending contractfinalisation. The deal encompasses approximatelyUSD100 billion in total assets.

The rearrangement with American Century follows anew contract win for JPMorgan to act as sole custodianand securities services provider for USD82 billion inassets held by the Washington State Investment Board(WSIB). The mandate covers 16 separate stateemployee retirement funds and 21 other public funds,including insurance and trust vehicles.

JPMorgan Hedge Fund Services also won a contractwith Financial Risk Management (FRM) in Septemberto provide fund administration and custody services toseveral FRM funds, around USD10 billion of assets (seemandates table overleaf).

ISJ25 pp1-21 ML 19/10/07 6:33 pm Page 8

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NEWS ANALYSIS


Eating inWith the battle for ABNAMRO finally over, thepie must be divided up

At long last, the tussle for ABNAMRO has drawn to a close as theconsortium of banks led by Royal

Bank of Scotland (RBS) declared itsUSD99.3 billion bid for the Dutch bankunconditional in the second week ofOctober, sealing the largest takeover everin the financial industry.

The drama began in March as the RBSconsortium tabled a rival offer to that ofBarclays, which saw its final bid fail a weekbefore the successful RBS bid. As ISJ wentto press, payment for the 86% of sharestendered in RBS’s EUR70.4 billion offer Not black

and whiteIs hedge fund regulationan oxymoron?

For the dust to settle after thepresent financial troubles, ascapegoat needs to be found. Hedge

funds are always an easy target. Rich,successful, expensive and secretive, theyare ripe for condemnation. The UKFinancial Services Authority (FSA) plansover the next month to discuss several

were due to be settled on 17 October, theconsortium had said in a statement.

While Barclays had intended to mergethe two operations to create one enormousbanking powerhouse, the RBS-led groupis expected to divide up the 183 year oldABN AMRO.

Fortis is expected to take ABN AMRO’sDutch operations, Santander is interestedin its Brazilian and Italian arms, and RBSintends to take the remainder, whichincludes operations in Europe, Asia andthe Americas and ABN AMRO’s bankingdivision investment banking arm. Theconsortium is expected to release detailedplans of the restructure in the comingweeks.

RBS has appointed one of its mostsenior investment bankers to oversee theintegration, highlighting the importancethat the bank places on the investmentbanking division. Brian Crowe hasrelinquished his role as chief executive ofglobal banking and markets at RBS andjoined the managing board of ABNAMRO to take responsibility for theinvestment and retail banking businesses.

Crowe will lead the acquisition,reporting to Mark Fisher, who has movedfrom his role of chief executive of RBS’smanufacturing division to replaceRijkman Groenink as chairman of ABN’smanaging board.

RBS has 45 working days from 11October to write and submit a transitionplan to the Dutch National Bank (DNB).The DNB then has a month to approve theplan, leaving RBS free to start formalintegration on 1 January 2008.

“During the first 45 days [of ownership]we intend to validate our base line plans forthe changes intended for ABN AMRO andthe transfer of businesses to theappropriate consortium partner,” the RBS-led group said. “We expect this plan willform the basis for continued consultationwith employee bodies and regulators withwhom there have been extensive andongoing discussions.”

Meanwhile, there had been concernsfrom the ABN AMRO staff council that amerger would lead to job losses aroundthe globe. The RBS consortium has said itplans to add jobs in the long term, but willmake cuts in the short term. It said itdidn’t plan any forced reductions in theNetherlands, where jobs will be lost due tooverlap between Fortis and ABN. ■

Mandates awarded in September and October 2007

Month Winner Client Location Assignment Mandate sizeOctober Citi FCSS Luxembourg Custody Services n/aOctober ABN AMRO Mellon Bpf Meubel Amsterdam Custody Services EUR1.5bnOctober BNY Mellon Popular Espanol Madrid Custody Services USD2bnOctober RBC Dexia Bridgewater Calgary Custody/Reporting n/aOctober BNY Mellon Sicav San Marino Custody Services n/aOctober RBC Dexia IA Clarington Montreal Custody Services CAD5bnOctober JPMorgan American Century Kansas City Custody/Sec lending USD100bnSeptember Handelsbanken Tapiola Stockholm Custody Services EUR10bnSeptember BNY Mellon PCA Asset London Custody Services n/aSeptember JPMorgan Washington State Washington Custody Services USD82bnSeptember State Street ADIC Abu Dhabi Custody Services n/aSeptember JPMorgan FRM New York Custody Services USD10bn

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NEWS ANALYSIS

options to increase transparency withinthe hedge fund arena. The headline news isthat companies could be given greaterpowers to force hedge funds to disclosetheir stakes held in derivatives contracts.

Not wanting to wait around lettingothers change the very meaning of hedgefunds, the biggest funds in Londonrecently came together in an attempt topre-empt the regulators. The Hedge FundWorking Group (HFWG) produced adoorstep report in an attempt to addressmany problems that have been floatingabout regarding best practice standardswithin the industry.

Sir Andrew Large, chairman of theHFWG, stated: “This is a significant stepin that it is the first time a group ofleading hedge funds have come together togive real substance as to how they willcomply with FSA principles. It shows thatthe industry recognises its responsibilitiesas a significant force in the financialsystem.”

The new voluntary standards, open fordebate until 14 December, after which afinal report will be submitted in January,focus particularly on valuation, riskmanagement, disclosure and fundgovernance. The working group has alsorecommended that hedge fund managersdisclose more information about

themselves on their websites and thatmore information about the industry ismade available collectively to the public.

The FSA has encouraged the industry toproduce standards, and the HFWG hasbased its code heavily on the FSA'sregulatory principles. FSA chief executiveHector Sants said in an email he welcomedthe group's work and, in particular, thereport's focus on issues such astransparency and valuation.

The responsibilities of hedge funds haveincreased dramatically over recent years, aspension funds invest in alternative fundmanagers. Gone are the days when theaverage Joe could dismiss hedge fund

losses as sad, but largely isolated incidentswhere a select number of very wealthyindividuals lost out – anyone with apension now has cause for concern and anearful for the regulators.

In July, the Massachusetts state pensionsystem lost USD30 million following thecollapse of Sowood Capital Management,which told investors it had lost around50% in July - around USD1.5 billion.Earlier in the year, Opers committedUSD50 million to investing in hedgefunds, and Calpers committed USD350million to invest in new hedge funds. Lastyear, the Californian teachers fund Calstrsvoted to shift its portfolio towards morerisky investments.

So, is the alternative funds industryrunning scared that increased scrutiny willhurt its profits and prevent it fromfunctioning as it would like? Yes, andjustifiably so.

As always with regulation, voluntary orotherwise, there must be a level of balancebetween protecting investors and lettingmanagement maximise profits. In this case,however, the balance should perhaps beweighted more in favour of profits, ashedge funds are by nature risky animals –what is the point of investing in analternative fund if it behaves as atraditional manager? ■

The Isle of Man benefits from a strong reputation.

It is home to a well regulated professional infrastructure – including world-class advisers, wealth managers and corporate & trust service providers – allowing you to manage your business and personal wealth with the help of peerless professionalism and expertise.

The triple ‘A’ rated jurisdiction* is committed to wealth creation and preservation. Businesses benefit from a zero rate of corporate tax. Personal tax is very low, with liability capped at £100,000, and there are no wealth, inheritance or capital gains taxes.

The Island provides the freedom to flourish making it the natural choice for you and your business.

To find out how the Isle of Man can enhance your personal and business wealth, please contact Isle of Man Finance on 01624 686400.

(*Standard & Poor’s and Moody’s)

www.isleofmanfinance.gov.im

“Where can I find the international financialservices and professional supportinfrastructure my business and I need?”

You can in the Isle of Man

ISJ25 pp1-21 ML 19/10/07 5:26 pm Page 12

ISJ25 pp1-21 ML 19/10/07 6:18 pm Page 13

CEO PROFILE - GOLDENSOURCE


Michael Meriton, CEO of data services vendor GoldenSource, explains toISJ his views on EDM and the future of the market

Data guru

Michael Meriton is a truebeliever in the power ofenterprise data

management (EDM). In fact, he isconsidered to be a leading lightinvolved in the work of the EDMCouncil, which was formed in 2005and is engaged in raising the profileof data management across theindustry. “One of the things that Ithought was imperative, two yearsafter I joined GoldenSource, was toencourage the industry to listen tothis mission critical endeavourthrough a three letter term thatcould galvanise people and workwith other major companies. Withthis in mind we created andsponsored an industry council thatis known today as the EDMCouncil,” Meriton elaborates.

When the council was firstformed it consisted of 11 companieswith 22 executives represented byC-level officers, such as the chiefinformation officer of DeutscheBank, chief architect of Bank ofAmerica, chief operating officer of Franklin Templeton andchief operating officer of Citigroup, he says. However, from thisinitial meeting, the EDM Council has now grown organically toinclude 150 firms and over 450 executives.

Meriton is passionate about the importance of EDM for thefuture of the industry: “One of the most rewarding parts of mycareer was being part of the foundation of the EDM Counciland helping to get EDM defined and recognised as an industryterm and a critical business issue. Having helped launch thiswith GoldenSource and our other founder partners, IBM,SunGard, Bearing Point and Cicada, it has definitely been adefining moment of my working life.”

Five years ago data was a back office, non-strategic, highlyfragmented activity, but the EDM Council has built marketawareness while working with data executives to drive theindustry’s EDM agenda, he explains. This has led to many firmsnow appointing a chief data officer (CDO) or a global head ofenterprise data management. These roles have been elevated toreport into the chief information officer or chief operatingofficer under a structured data management strategy that isgoverned in a serious way at these institutions. “We also wantedto make the council a neutral body open to both a combination of institutions and vendors to focus on the issue ofEDM,” he adds.

Meriton has always been keen torise to a challenge; his early careerexperiences at mid-market systemsintegration company JGI/BAAN aretestament to this. “The firstchallenge in my career atJGI/BAAN was to develop a soundbusiness case and model and tosecure funding for the business. ERPofferings, which at the time hadcracked open the tier one of themanufacturing marketplace, thenhad an opportunity to move into themid-market. Our business model wasto take one of the best in class ERPsystems and have a systemsintegration team rapidly install itinto mid-market manufacturers. Weinitially received funding of USD6million and then went on to face thechallenges of properly executing thebusiness plan,” he elaborates.

The project turned out to be asuccess: “We had to hire in a team ofcustomer-centric professionals withproven experience and customersuccess. During this time we coined

the phrase ‘reference factory’: when any customer installationwas completed quickly, that customer would then serve as areference and create more momentum for the next customer.The program proved to be very successful: we were able to hirethe team and execute with upwards of 20 mid-marketmanufacturer client references within 18 months.”

Following his time at JGI/BAAN, Meriton moved on to fulfila number of leadership roles at other vendors including D&BCorporation, Oracle and Automatic Data Processing (ADP). Histime at ADP also brought with it a number of key challenges,including being able to rapidly implement a customer on theADP offering. “The way the business was organised at the timewas very siloed. The sales team would go out and identify leadsand opportunities, then work with executives to move thecontract forward. Once that had occurred, a separate team undera separate manager would come in to complete the installation,”he explains.

“During this time I was named as a new type of manager: newclient acquisition team manager. My direct reports included acombination of both direct sales and direct implementers on onecommon team. The idea was to take the new client process andbe able to rapidly understand the opportunity, speed up theexecution time and deliver exactly what the client bought in thesales cycle. We found that this approach increased confidence on

ISJ25 pp1-21 ML 19/10/07 4:55 pm Page 14

CEO PROFILE - GOLDENSOURCE

INVESTOR SERVICES JOURNAL 15

the client side and enabled us to deliveron the objectives established in the salescycle, during the implementation stagesof the project. The end result was fasterimplementations of exactly what theyrequested,” he adds.

Meriton’s experiences at D&B andOracle exposed him to a market trend

that ultimately attracted him toGoldenSource: the ability to witness thewhole transformational revolution ofERP in every market except forsecurities. “Oracle was the horizontaldatabase with applications on top of it,and while their offering was simple, atthe time it was innovative and unique,” heexplains. “It was a platform that wouldintegrate data across applications andhave a common application andprocessing architecture. As a result,anything you would do for ordermanagement would update inventorythat in turn would update financials,which would then update humanresources, so everything was integrated.”

What ultimately attracted Meriton toGoldenSource was the high percentage offinancial services clients at D&B: around70% of the customers were in thefinancial services market. These includedlarge organisations such as Citigroup,Metlife, Prudential and Merrill Lynchthat were users of D&B best of breedfinancial applications. “I learned that inthat market best of breed was good andcompetitive, but in the end, integratedapplications were the preferredapproach,” he explains.

“I then saw a diamond in the rough:GoldenSource. GoldenSource was acompany that spearheaded a jointventure of half a dozen global bankseach contributing their requirements todefine a common data architecture acrossthe different lines of business in thesecurities industry. These includedprivate banking, asset management,investment banking, wealthmanagement, trust, custody and securityservices firms,” he says.

“In addition to the common dataarchitecture, there was a need to build

business engines and software that wouldget data in and out and handleexceptions. So what I saw was a uniqueopportunity for GoldenSource toleverage, at the time, more than USD200million in research and development thathad been invested in the product in anindustry that uses data as its fundamental

asset,” he continues.Unlike manufacturing and engineering

everything that happens in the securitiesmarket is ultimately powered by data,adds Meriton, yet data had beenrelegated to a back office function thatwas highly fragmented and distributedwith a lack of common governance.“With GoldenSource, I felt that we hadthe best opportunity to crack the lastbastion business vertical in the worldthat did not have a platform withintegrated data and processes at theheart of it,” he says.

Meriton sums up his current aims: “I’mlooking to use my 20 years of businessexperience in taking ERP from earlyadopter to later stage mass adoption. AtGoldenSource, there is an opportunitywith this technology to help lead asimilar transformation for the securitiesindustry. We are already seeing the earlyadopters of EDM moving to early massadoption.”

The EDM journey is still evolving.The industry has seen EDM movethrough the early adoption stage, but thething that keeps Meriton awake at nightnow is the move to early mass adoption.Mass adoption has some prerequisites: apredictable result for a predictable pricein a predictable timeframe. According toMeriton, the nirvana for EDM would bea company identifying its underlyingdata sources, the quality assuranceslevels it is seeking and the systems itwants to power. If all of those answerscould result in a platform that is fullyoperational for its institution globallyand could happen in weeks and months, this would result in massadoption, he says.

“I would categorise our productimplementations and those of our

competitors five years ago as taking ayear or more, while two years ago it wasmultiple quarters, and today we aregenerally looking at months. Whatdrives this as a prerequisite for massadoption is looking at every bit of thechallenge and what can be pre-configured, for example the inbound

connections, how many can we haveoperational and maintained byGoldenSource, so our clients do not haveto worry about mapping in their ownfeeds and maintaining others,” hecontends.

The second prerequisite to massadoption is in the platform itself: theindustry must be able to simplify andautomate workflow and data exceptionproblem resolution. “We also took thisplatform and developed strategicrelationships with IBM and Broadridge.They use GoldenSource as a processingarchitecture where they can squeeze outthe cost of operating, managing andcleansing exceptions and provide a valueadd outsourced service to their clientspowered by GoldenSource technology,”he explains.

GoldenSource is already seeingtremendous interest from financialinstitutions, especially in light of thecurrent sub-prime mortgage crisis, hesays. This has had an effect on virtuallyevery global financial firm and has nowput a cost pressure on them, so anythingthat can be properly outsourced isgaining high attention right now.

Despite the hard work, Meriton issatisfied that progress is finallyhappening: “This is the hardest job I haveever done, but also the most rewarding. Itis incredibly meaningful and complex.It’s complex in areas such as the increasein major issues including instrumentsmarketed, trading volumes that havegrown substantially, increasingregulatory and compliance issues – this make this the hardest industry toserve. The irony is all of these issues canbe resolved with good data man-agement. EDM is here and is not goingto go away.” ■

The nirvana for EDM would be a company identifying its underlying data sources, thequality assurances levels it is seeking and the systems it wants to power

ISJ25 pp1-21 ML 19/10/07 4:55 pm Page 15

The latest enterprise datamanagement (EDM) survey,commissioned by Reuters, listed six

main categories of EDM drivers:competitive advantage, ability to manageregulations and compliance, enhanced riskmanagement, increased operational andworkflow efficiencies, more stabletechnology, and increased data technology.These drivers have been lurking under thebed for years and financial institutions haveeffectively ignored them, instead preferringto concentrate on where the money ismade. But at last we may be on the cusp ofreal change, as EDM moves from conceptto reality.

Reuters’ survey, which was publishedglobally in September, questioned industryconsultants, banks and investment banks,investment managers and globalcustodians and found 75% of respondentssaid their EDM projects were on schedule,with only 8% saying they were not. Theremaining 17% indicated that they werestill defining a strategy. However, it shouldbe noted that the survey was restricted tothose actively taking part in an EDMproject.

The survey was commissioned to test thefollowing premise: “The EDM market has

evolved over the last five years. Firmsparticipating in capital markets havegrowing awareness of the competitiveedge that maintaining consistent,comprehensive, clean data can offer. Theyare also realising, to achieve the firm’sgoals, EDM solutions need to be businessdriven, technology enabled, andoperationally supported. Do you agree?”

Perhaps unsurprisingly, 100% ofparticipants validated and agreed with thissomewhat leading hypothesis and oneexplicitly added: “EDM supports datastrategy, creates a high level of dataquality, and makes data an enterprise asset.”

Of course, enterprise data managementmay be the best and perhaps the onlyapproach to the efficient storage, recall andmanagement of data – more on this in aminute – but the current response fromvendors indicates the industry may not beas interested as they perhaps should be.Outsourcing has floundered in many areasand Adam Honoré, senior analyst at AiteGroup, compares the choice betweenbuilding in-house and outsourcing to thetussle between VHS and Beta in the 1980s.“Beta was higher quality, but it lost for noapparent logic. Outsourcing is suffering thesame problem,” he says.

“Capco seems to have found a niche in themarket, but Accenture has dropped it andBroadridge has yet to sign an externalclient,” Honoré explains. “Whereoutsourcing has been successful is the datacleansing for counterparty scrubbing. Thebusiness process of that effort has beenfarmed out to firms like CounterpartyLink,Avox, Reuters, CreditDimensions, andothers.”

Most financial services firms do notquestion that the concept of EDM is agood thing and that it is the best approachto solving the increasingly complex datademands on organisations. Honoré says theprocess should be “evangelised” due to thecritical nature of data and its history ofbeing ignored by senior management. Themajority of firms still operate separate,multiple systems that function in the back,middle and front offices. They often alsomaintain separate systems supporting eachasset class, such as fixed income, derivativesand equities, particularly where the firm isfunctionally organised by asset class.

“The problem with this situation is thateach separate system requires its own set ofmarket data feeds, individual data storesand warehouses, and data administrationteams,” explains Mario Orphanou, product

DATA SERVICES - EDM COUNCIL


Painting a better picture?

The issue ofenterprise data

managementand the work of theEDM Council havecome under some

criticism in the past,but is the industrynow ready to deal

with data? JamieDarlow investigates

ISJ25 pp1-21 ML 19/10/07 4:55 pm Page 16



manager at data vendor Odyssey. “This canlead to a lack of consistent informationacross transactional applications, includingdifferences in pricing, ratings and names, alack of automated processes or controls tovalidate and manage data and different datastandards applied in different silos,creating inconsistencies. This results inincreased data costs and administrationdue to the duplication of effort, which putsa considerable strain on existing resourcesand infrastructure.”

Odyssey’s software is an effective tool forcleansing and administering data across afirm, bringing reduced risk and costsavings of up to 50% on data servicebudgets. But what the vendor does notrepresent is a fundamental shift byparticipants in the way data is stored andmanaged – something largely unpopularwith banks and custodians. Honoré says:“There’s an awful lot of legacy code outthere connecting into old systems. It willtake years, more like tens of years, toeliminate silos for large enterprises.”

Unfortunately the industry does nothave 10 years to get over the problem. Lessthan a decade ago, US market data vendorswere able to aggregate real time marketdata for major exchanges on one T1 circuit– this is out of the question today, asmarket data itself has increased by twoorders of magnitude. And it continues toincrease.

While data itself increases in volume, itseems today’s markets require even morequotes to make trading happen. Eurexreported it received eight times as manyquotes per trade in 2006 as in 2001, whilethe ICE Futures exchange has seen a 275%increase in traded volume over the pasttwo years. Transaction volume itself –representing all message types – hasgrown 2700% over the same period.

High frequency trading systems andauto quoting options are partially to blamefor what has oft been termed the marketdata tsunami. “A single price movement inthe underlying security may cause thesystem’s logic to re-quote every strike forevery month in the options series,”explains Tom Haldes, senior productmanager for automated trading at TradingTechnologies International. “Now assumethe underlying security is also beingquoted by high frequency black boxes, suchas index or statistical arbitrage systems,with each new quote from the black boxapplications potentially resulting in re-

quotes of hundreds of strikes in theoptions series, and you can begin tounderstand why data is becoming such anissue for exchanges, vendors and tradingfirms alike.”

An overload of data has already causedseveral high profile exchange failures. TheTokyo Stock Exchange (TSE) was forcedto close early in January 2006 because itstrading system was unable to cope with asurge in sell orders. The TSE suffered itsworst ever systems failure that haltedtrading for more than four hours on 1November 2005. The exchange laterblamed Fujitsu for the crash. TSEannounced last year Fujitsu would developits next generation trading system andsaid at the time it would spend over half abillion dollars over the next three yearsimproving its electronic trading systems.Data, it seems, is an issue that cannot beignored.

The number of participants generatingdata has also increased as the technologyfor high frequency trading becomes morereadily available. High performancetrading systems are no longer strictly inthe domain of the world’s largest banksand funds, instead many smaller funds arechoosing to go down this road. Pensionfunds, for example, have diversified inrecent years, investing in more risky andsecretive hedge funds. For some, theinvestment failed to pay off – theMassachusetts state pension system lostUSD30 million in July, following thecollapse of Sowood Capital Management.The Boston-based hedge fund informedinvestors it had lost around 50% in July,around USD1.5 billion.

Earlier this year, Ohio Public EmployeesRetirement System (Opers) committedUSD50 million to investing in hedge funds,while Calpers committed USD350 millionto invest in new hedge funds. Last year, theCalifornian teachers’ retirement fund(Calstrs) voted to shift its portfolio towardmore risky investments. It remains to beseen whether funds will be scared off bythis summer’s turmoil, or decide thepayoffs justify the risks. Either way, data isset to increase in volume and,fundamentally, firms are going to have tostore more of it.

Yet the fortunes of EDM may be aboutto change, as Swift’s Sibos conference inBoston this year witnessed the entry ofReuters into the EDM space, wherepreviously it had only provided the data.

Reuters’ Enterprise Platform has beendeveloped for financial institutions tointegrate both real-time and referentialdata on an open source platform, fromfront to back office. The platform is aresponse to customers’ concerns that thereis no set of definitions for EDM andvendors are largely providing productstackling issues surrounding data storage,Reuters says. The entrance of one of theworld’s biggest data suppliers onto theEDM scene can only be a good thing, as faras driving forward the automation of theprocess and offering institutions with aneffective and scalable EDM product. Just ascritically, the development of the platformat customers’ behest must also signify agrowing demand for EDM.

It seems some major firms have beenquietly taking note of the symptoms ofdata’s illness and potential treatments overthe past 12 months and demand is growingfor these. Not only have big firms begun toappoint senior managers to titles such as‘global head of data’, they have also begunlong term, big spend projects to bring theirdata into line. JPMorgan Chase hasestablished a centralised operationalinfrastructure for reference data; Citiannounced in August it was implementinga project to define data standardsenterprise wide, a project headed byBalakrishnan Nayar, vice president ofbusiness architecture and standards at CitiFinance; and now UBS is going live withthe first infrastructure release of its multi-year global client data transformationprogramme.

“On our global client datatransformation programme, we are goinglive with our first release with a newsoftware and infrastructure over the nexttwo weeks,” reports David Goldberg,Americas head of client counterparty andinstrument data for UBS. “In Novemberthere will be a subsequent release,continuing into 2009. We are reallymoving into the execution stage. The firstrelease has really focused on supportingour on-boarding function for anti-moneylaundering and compliance and workflowassociated with those functions. In thesecond part of the initial release we areseeing enhanced workflow and STPautomation in the account maintenanceprocess. Both will impact primarily dataoperations and the client on-boardingfunctions.”

This increased ability, not only to store ��

ISJ25 pp1-21 ML 19/10/07 4:55 pm Page 17



data across businesses, but also to recall itand manage it, will benefit firms like UBSwhen dealing with regulatory pressures.The raft of new regulations hitting theindustry has already had some positiveimpact on the market and this is set tocontinue as MiFID finally hits our screensthis autumn. “Basel, MiFID, KYC, andother regulatory requirements have been abig benefit to EDM,” says Honoré. “Thenice thing about regulatory initiatives isthey can’t be ignored by senior managersand tend to require cross functionalsupport by nature. Once people have thesystems in place, the next challenge isproving out the value beyond the initialdeployment and spreading the datathrough the enterprise.”

Basel II is set to drag Europe up to thebanking standards level of the US, which

has the advantage of the Federal ReserveBank and the DTC setting nationwidestandards. Europe is following suit,defining how much capital financial firmsneed to put aside to guard against the typesof financial and operational risks they face.In practice, this means local regulators areempowered to set up risk and capitalmanagement requirements, the aim beingto ensure capital allocation is more risksensitive; separating operational risk fromcredit risk, and quantifying both; andattempting to align economic andregulatory capital more closely to reducethe scope for regulatory arbitrage.

This has a considerable impact on datamanagement, explains Orphanou. “Basel IIis exposing significant issues with datamanagement. Under the AdvancedMeasurement Approach of the accord,banks must be able to identify and trackkey operational risk factors reflecting theirbusiness environments and internalcontrols. Complying with Basel II requiresa significant history of consistent, accurateand granular data. For those firms stillusing a siloed data management approach,this represents a major stumbling block.Systems that centrally collect, manage andretain critical operational data will helppractitioners to analyse and make betterdecisions about their credit risk exposure. Such a system also makes itpossible to audit data from the point of

origin to consumption.”He continues: “Basel II leaves EDM

databases and associated market datasystems largely unchanged. This is unlessa decision is made to expand the EDMbeyond basic market data requirementsand to store information about firm capital,capital reserves, firm exposure, and so on,in the database. In most cases, thisexpansion would require the addition ofsubject areas, tables, and stored proceduresto the database, in short, additional dataarchitecture for the EDM system.”

Gary Barr, head of EDM at Reuters,says EDM directly answers the criticalneeds of risk managers tasked withmonitoring and managing their firm’smarket and credit risk exposure. “Thisresults in solutions that allow them toproperly navigate their data, measure and

manage their risk, and transparentlyaddress risk regulations such as Basel II.In doing so, they protect their reputationand their customers’ interests, andminimise their financial risk through theeffective and timely management ofcustomer and financial data.”

MiFID also requires the storage andmanagement of vast quantities of data tobe able to prove best execution going backfive years. In short, EDM systems willhelp comply with regulatory standards.This is something the EDM Council hasbeen promoting since its inception twoyears ago.

The latest report from the EDMCouncil’s managing director MichaelAtkin, published in July, summarised theprogress made over the past year – chieflythat financial institutions have made thetransition from cost to risk mitigation,which represents the current driver. Datacontent as a key business enablerrepresents the next phase, the report says.After all, there is no value in the data itselfbut there is value in the things it can do.More firms are jumping on the datamanagement bandwagon and its visibilityis increasing, Atkin says. “We expect to seemore professionals anointed as head ofenterprise data management or CDO with a full time mandate, a budget and aseat at the board table to ‘get the job done’.EDM is on its way toward becoming a

‘core value’.”Of course Atkin’s eyes are also open to

where the council has fallen short in thepast. He is the first to admit the there hasbeen a failure to achieve trueorganisational alignment, despite newlyfound orientation on the concepts ofholistic data governance. “I note aseemingly broad shift taking place acrossthe industry as it relates to governance,” heexplains. “Many of the initial datamanagement projects were started toaddress a clear and specific problem – andthe spectrum of problems are broad.Those high priority (but frequentlyisolated) projects have now given way tothe creation of a new data managementgroup – which in itself could be a positivedevelopment.”

However, Aite’s Honoré says the council

does not do enough to promote thelandscape of vendors across datamanagement issues. “There has been anawareness problem that solutions existedto help people with their challenges. Thecounterparty space and risk is a perfectexample.” Consequently, the council hasfailed to have a major impact, he continues.“This is a heads down effort and peopledon’t really care about data standards andgroup initiatives when they’re engaged in aproject,” Honoré says. “The council hashelped foster discussions and moredialogue between firms, but they are notmoving the industry on their agenda.”

There has also been a smattering ofcries from the industry that the council ispursuing the agenda of the data vendors –namely to push expensive and timeconsuming products onto beleagueredpractitioners. This impression has notbeen helped by the composition of theboard, which has largely consisted ofvendors themselves. But this is set tochange on 24 October, when the EDMboard meets to allow more practitioners tojoin. The new makeup is under wraps atpresent, but rumours suggest the topglobal banks will be represented. UBS’sGoldberg does not currently sit on theboard, but has been solicited to join.

Goldberg also refutes claims the councilis weighted in favour of vendors. “Thevendor participation, and, in particular,

I would like to see the council and the industry do more collectively. Is it realistic wecould be doing more than has been done? I’m not so sure

��

ISJ25 pp1-21 ML 19/10/07 4:56 pm Page 18

Across the globe, thousands of leading financialinstitutions work with Interactive Data to help ensuresuccess across their front, middle and back officeoperations. We’re a trusted source of mission-critical,high quality financial information and value-addedservices, including real-time data, pricing and evaluations,reference data, sophisticated analytics and innovativemarket data managed solutions.

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ISJ25 pp1-21 ML 19/10/07 4:56 pm Page 19

DATA SERVICES


that of the consulting firms, is very valuable because they haveresources to work on the project and an incentive to do so. But I don’tthink the council, or any of the working groups I’ve been on, areunduly influenced by either consulting firms or vendors. The counciland its members, the meetings we’ve had and working groups have allbeen independently minded, looking for industry solutions.”

He praises the role and actions of the council for bringing visibilityto the EDM problem: “Active participation from major financialinstitutions, as well as vendors and consultancy firms, has beenextensive. In fact there’s a meeting today [11 October] in New York,hosted by Credit Suisse. It’s a broad based coalition.”

Goldberg continues: “I would like to see the council and the industrydo more collectively. Is it realistic we could be doing more than has beendone? I’m not so sure – it takes many years and a lot of activeparticipation by people who have full time jobs, to get together for thegreater good of our industry. In one sense I’m pleased at what thecouncil has achieved and, in another, we’re not quite to the point wherethe EDM Council is a fully effective voice of the industry. Someorganisations have more of a formal mandate and the industry hasbought into them. The EDM Council is still trying to figure out howto effectively move an agenda along.”

In it’s short life, the EDM Council has been actively pursuing andevangelising the goal of uniting a firm’s data across its businesses and offices. Its success depends on active involvement in the process,perhaps reflecting its good intentions and level of progressiveinfluence on those it actually reaches. For those not actively involvedin EDM projects (and there are many), the influence of the council may have gone unnoticed until now. The next 12 months willsee the fortunes change for both the council and the principle ofEDM as visibility grows. ■

EDM to the rescueAlexis Calmon, SmartCo

The crisis in sub-prime mortgage market, and itscontamination worldwide raised a new information challenge.Indeed, the lack of information instantaneously available forall the actors involved contributed strongly to the devastatingconsequences on the financial markets and global lossesthat early estimates evaluate at USD250 billion.The loss of trust and a fear of the unknown or of uncertainlosses at financial institutions and their counterparts wascompounding the problem. No one had a clear assessmentof the size of the questionable assets, and nobody knewwhere the risks were.

Along with the complexity and multiplicity of the tradedinstruments, financial institutions deal with an increasinginterdependency and correlation between their components.Therefore, data quality and availability is critical and thedecision makers need immediate access to clean andcentralised data through a powerful, flexible andcustomisable financial data management system.This crisis emphasises the need for reactive informationmanagement. Financial institutions have created complexinstruments and packages. In case of securitised mortgagessuch as ABS, it is necessary to obtain detailed informationon the bundled package, to store it and to manage it in asuitable information system. The complete modelling of asecuritisation process requires adapted and flexible tools andis therefore difficult to integrate in most existing and notflexible front office or back office applications. Financialinstitutions need software with capacity to integrate, such asnew quality processes or new financial instruments models.

AEMS is the leading global provider of technology solutionsfor exchanges, clearing houses, banks, brokers, andintermediaries.

As market leaders, we value the insight of our clients andas their technology requirements develop, we collaborate tofind the most suitable product solutions for their needs.

AEMS is committed to one key objective – providing themost innovative, scalable, efficient technology solutions atthe best price points possible.

We serve global markets throughout the trading process -banks, brokers, asset managers and intermediaries;exchanges; clearing houses and CSDs.

We employ 1,300 industry experts worldwide and haveoffices in London, Paris, Brussels, Chicago, Dubai, andHong Kong.

EVENT ORGANISERHAZEL HARDIN, COMMUNICATIONS CO-ORDINATORT: 020 7655 7025 E: [email protected]

ON-SITE CONTACTNIGEL MATTHEWS, SALES MANAGER, CAPITAL MARKETST: 07841 673 425 E: [email protected]

Forward FocusNat Sey, reference data business manager, Interactive Data

To a large extent, I believe that the industry landscape isunlikely to change significantly from what we have seenthroughout 2007. During that period, market participants havebeen busy trying to understand their new regulatory obligationsand then, increasingly, seeking to make provision for them.Few consider the European Commission's Financial Services

Action Plan (FSAP) to be complete, so the smart money is onthe emergence of more regulatory challenges over the nextcouple of years.

Some might consider corporate actions to be the grandfatherof regulatory threat. For years now, the concern has been that ifthe industry cannot improve the transparency of the processingcycle and in particular, reduce the degree of requiredinterpretation of notifications, then a regulatory mandate mayneed to be brought to bear. Whether 2008 will make this morelikely is unclear at present. What is certain, though, is thatsome firms are sure to be trying harder than ever before to avertsuch an outcome by proactively addressing the underlyingproblems. Such an endeavour is Swift's planned introduction ofthe Software Testing and Qualification Service (STaQS). It ishoped that this will allow users of the network to have theirinbound communications pre-validated by softwarecomponents on the network, which will check for standards andmarket practice conformance. While this cannot hope to solve the challenge of engaging issuers in to the standards process, it is hoped that it will create an environmentwhere we see increased standards’ adherence and fewerexceptions as a result.

ISJ25 pp1-21 ML 19/10/07 4:56 pm Page 20

FIMA VENDOR PROFILES


SmartCo is a leading provider of data management solutionsfor the financial industry.

SmartCo’s software, Smart Financial Data Hub, covers allthe data area, including financial instruments, market data,third parties, funds, transactions, and provides fullconnectivity, a powerful and user friendly front-end,traceability, quality control, data enrichment andcustomisable workflow.Our solutions are based on SmartPlanet, an innovativetechnology focused on data management, and able to meetevolving business requirements.

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ISJ25 pp1-21 ML 19/10/07 9:54 pm Page 21

The Channel Islandsof Guernsey andJersey have shakenup their regulatoryenvironments inrecent years toattract new andestablished funds.Jamie Darlow reports

CHANNEL ISLANDS FUNDS


Less than five years ago, theChannel Islands were underthreat not from reduced interest

in investing in the domicile, but from theEuropean Union’s increased scrutiny oftheir tax regimes. In five short years theislands have resolved the concerns ofthe EU and introduced a swathe ofregulatory changes, prompting around 25% growth in assets under management over the 12 monthsto June 2007.

The EU had effectively threatened toend the Channel Islands’ status as a taxhaven, criticising the practice ofexempting foreign companies fromtaxation while levying a 20% rate ondomestic companies. The EU hadtermed this ‘discriminatory’ and whilethe expected response was to hike taxesacross the board, Jersey and Guernseydid the reverse, imposing a ‘zero-ten’policy exempting both domestic andforeign players from tax. Guernsey willput the policy into effect next year, withJersey following suit in 2009, and theshortfall in tax revenue is expected to bepicked up by a 10% tax demand onregulated financial services firms.

Jersey and Guernsey’s efforts to re-establish themselves as specialist fund

domiciles have been relatively impressiveas the domicile steps away from whatsome have termed an overly zealousfocus from the EU. Both domicilesshowed strong growth in the 12 monthsto June 2007, with the Channel Islandsrecording the establishment of 308 newfunds: 151 in Guernsey and 157 inJersey. Over the same period, Guernseywas up 26% from GBP93 billion ofassets under management to GBP125billion, and Jersey up 24% from GBP160billion to GBP210 billion.

This is all the more impressive whenyou consider Jersey and Guernsey werealready established players in the field ofoffshore funds servicing. Compare thisto the recently emerging Isle of Man asan offshore domicile – domesticgovernment statistics predict the islandwill see a 17% change from 2009-2010,up from USD85.3 billion to USD100billion. It’s sometimes harder to keepbuilding and maintaining success than itis to begin from scratch.

Part of this performance comes frommanaging funds held in other domiciles,explains Horace Camp, head of fundservices in Guernsey for KleinwortBenson. “The value of funds establishedin other jurisdictions but managed in

Guernsey has this year risen to aGBP30.7 billion high – a testament tothe level of expertise to be found in theChannel Islands,” he says.

Guernsey and Jersey were essentiallyfaced with two choices: accept the statusquo and fade into obscurity as theplethora of established domiciles such asthe Cayman Islands or the newlyemerging jurisdictions such as Maltaand Dublin take over; or shake things upand redesign the regulation surroundingthe funds business. The Channel Islandschose the latter. The regulators in bothislands, Guernsey more so than Jersey,are now following the general policy ofregulating the service providers ratherthan the funds themselves. Funds aregiven more regulatory freedom whilestill under the auspices of regularchecks and audits by the regulators.

The advantage of this practice is thattime is saved in the approval and take-onof funds, as Linda Pearson, consultant atMorse Jersey, explains. Guernsey’s newclosed ended ‘registered fund’ regimewas introduced on 1 February 2007 tostreamline the process of consent,making domiciling funds in the islandsimpler and quicker, she says. “Theresponsibility for reviewing the

Safehavens?

ISJ25 pp22-37 ML 19/10/07 6:25 pm Page 22



promoter, the investment manager andthe prospectus or admission documenthas been moved from the GuernseyFinancial Services Commission (GFSC)to the Guernsey licensed fundadministrator, allowing fast track fundset up, which can now be complete in aslittle as three working days.”

Pearson continues, of the registeredclosed ended investment fund regimeused extensively by local fundadministrators: “By 30 June 2007, a totalof 37 registered closed-endedinvestment funds had received consentunder this regime. The effect has been tocompound the resource, operatingmodel and systems pressures.”

The registered fund regime in theBailiwick grew out of the overarchingshake up of regulation on the island,termed the Qualifying Investor FundRegime (QIF), in February 2005 and a

total of 35 funds were approved in theyear to 30 June 2007.

Gavin Farrell, partner at law firmOzannes, agrees that recent regulatorychanges have contributed to thecontinuing increase of the funds sectorin the Channel Islands. “Guernsey inparticular has had a surge of businessfor registered closed ended funds,” hesays. “The regulatory changes havecertainly continued to put Guernsey onthe map and are important in continuingthe upward trend.”

Farrell also hints at forthcomingamendments to regulation: “We arecurrently trying to review the potentialfor Guernsey as a jurisdiction for purehedge funds.”

Camp expects the GuernseyRegistered Funds’ fast track service tocontinue gaining in importance overtime. “It does not require prior approvalfrom the regulator and is aimed atexperienced investors and promoters. Itis early days at the moment but weexpect take up to strengthen over time,”

he says.Not to be outdone, Jersey has also

seen a raft of changes over the pastyears with the launch of the expertfunds regime in February 2004. Underthis umbrella come changes including anextension of the list of approveddomiciles for managers wishing tolaunch an expert fund, and the launch ofa listed funds guide, which allows evenmore flexible regulation for fundslooking to list and that meet specificcriteria.

There has also been a relaxation ofregulation pertaining to non-Jerseydomiciled funds – board meetings cannow be held in Jersey without the fundbeing deemed to be managed fromJersey and therefore treated as Jerseydomiciled, for example.

Further amendments are planned inthe shape of a proposed introduction

from the first quarter of 2008 of twounregulated fund products – one forprofessional investors and one for listedfunds, explains Natalie Sullivan, partnerat Maples & Calder. “Assuming the fundmeets the relevant criteria, a simpledeclaration is filed by the manager andthere is no regulation applicable inJersey,” she says.

Sullivan summarises Jersey’s fundsindustry as extremely healthy with agrowing number of fundestablishments, as well as a rapidexpansion in local businesses providingfunds services. “While there are anumber of local fund administrators,there is also a wealth of expertise andsupport in the island and a very crediblebusiness in terms of managers,investment managers, custodians,bankers, registrars, directors,accountants, auditors and lawyers toname but a few,” says Sullivan.

A further breakdown of the ChannelIslands’ performance reveals that, of theGBP335.4 billion of growth seen

during the year ending 30 June 2007, byfar the strongest sector was in expertfunds in Jersey and domiciled closedended funds in Guernsey.

During the year ended 30 June 2007the net asset value (NAV) of funds underadministration in Jersey rose byGBP50.7 billion (31.8%) to GBP210.4billion and the number of expert fundshas grown by 105 to 319 (49.1%). TheNAV increased by GBP16.6 billion(76.6%) to GBP38.3 billion, while theNAV of equity funds increased byGBP15.6 billion (28.5%) to GBP70.2billion. Over the same time period,Guernsey saw the NAV of funds underadministration rise by GBP32.3 billion(34.8%) to GBP125 billion with thedomiciled closed ended funds increasingGBP23.7 billion (61.3%) to GBP62.4billion. In short, the largest areas ofgrowth are coming from the areas where

the most regulatory change has beenmade.

Domiciles have always preferred thosefunds prepared to establish themselvespermanently in a jurisdiction and act astrue fund managers, rather thandodging around for the best tax rates.For this reason Jersey and Guernseyhave preferred to play host to fundmanagers rather than fund servicesproviders and the Channel Islands canstill be considered more than justdomiciles for fund administrators.Under Jersey Law, Jersey domiciledfunds are required to be administered onthe island and there is even a proposal tointroduce an ‘unregulated fund’, whichwill allow Jersey funds to beadministered in other jurisdictions.While in Guernsey, non-domesticschemes, for which some aspect ofmanagement or administration iscarried out in the Bailiwick, increased byGBP8.5 billion (38.2%) to GBP62.6billion over the year to 30 June 2007,demonstrating the jurisdiction’s

The key challenge for Channel Islands fund administrators is to support this continuedgrowth with limited resources by continual improvement through efficiency in processes,

new technology, outsourcing of back office functions and retention of key staff

ISJ25 pp22-37 ML 19/10/07 6:25 pm Page 23


stickiness.The changing regulatory

environment in the Channel Islands isclearly aimed at increasing the numbersof funds establishing themselves in thejurisdiction. All well and good, but thereis a genuine worry that relaxing

regulation may undermine thereputation of Jersey and Guernsey as areliable and safe domicile. Placing theonus on administrators may meanstandards are not consistentlymaintained across the islands.

Kleinwort Benson says it enjoys theextra flexibility this gives investorsfrom regulators. “However, we are alsovery much aware of the extraresponsibility of due diligence andcompliance placed on the administrator,”Camp explains. “Registered funds inGuernsey and the new non-regulatedfund in Jersey are recent examples.”Those looking to gain fund approval ineither Jersey or Guernsey shouldeffectively regulate themselves, giventhat their reputations are just as muchon the line, perhaps even more so, thanthe jurisdictions themselves, the theorygoes.

But Alan Smith, chairman of the Isleof Man Fund Management Association,feels the service providers will pay theprice for any mistakes made. “If the

service providers muck up, then it’s aserious damage to reputation.Interestingly, the reputational trend ismoving more to the legal and regulatoryissues – Cayman and the liquidation ofthe Bear Stearns funds, for example –what is the legal remedy in Cayman for

the US action on extraterritoriality andwhat are the Cayman regulators doingor saying? And as standards of thirdparty service providers continue todecline due to capacity issues – a nonEU European time zone (truly offshore)location will become more attractive tohedge fund managers – a longercommunication day than EST.”

Flexible regulation worked in the pastfor Jersey and Guernsey, opening up theChannel Islands to real estateinvestment opportunities for fundmanagers seeking diverse investmentstrategies or looking to segregate assetclasses. Mike Spittal, managing directorof Investec Trust (Jersey), sees the useof protected cell companies (PCC) andincorporated cell companies (ICCs)continuing as offshore structuring toolsin the funds area. “The demand forproperty funds administered from theChannel Islands is still high. With anexceptionally high demand from fundsinvesting in Eastern Europe.”

Guernsey launched PCCs in 1997,

initially as a carrot to bring insurancework to Guernsey – they provedpopular and versatile as a vehicle incollective investment funds. Jerseyfollowed suit in the adoption of PCCs,as did others including the Isle of Man.Jersey also introduced the ICC, designedsimilarly to a PCC but separating theassets and liabilities of each cell. By 30June 2007, Guernsey had 96 registeredPCCs.

Morse’s Pearson explains the effectthis has had on Jersey and Guernsey:“Since the introduction of the new fundregimes, the Channel Islands hasenjoyed a huge surge in theestablishment of new funds investing inUK and non-UK property. In the year to30 June 2007, Jersey saw property fundsincrease by GBP8.2 billion (35.3%) andGuernsey saw the number of closedended property funds increase by 45(64.3%) to 115.”

Pearson continues: “Changescontained in the March 2006 UK budgetincluded draft legislation introducing anew UK property holding vehicle, thereal estate investment trust (REIT),which to some extent threaten theChannel Islands’ property fund industry.However, following the introduction ofthe REIT in January 2007, the use ofthe Jersey Property Unit Trusts(JPUTs) and other offshore vehiclescontinues to remain an attractivealternative.”

The USD64,000 question must be,will the recent regulatory changes proveas successful in drawing hedge fundsand alternative asset managers to theChannel Islands as property assetclasses have been in attracting propertyfunds? To date, hedge funds have

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Morse’s Pearson says this hasbenefited the funds industry byproviding investors with competitivepricing, fast turnaround and consistencyof approach. “Vehicles that are createdin the jurisdiction are subject to lessregulation than other European stockexchanges as it is not an EU regulatedmarket and they have the advantage ofbeing officially recognised by otherexchanges,” she explains.

The Channel Islands are in a strongposition to build on the successes seenover recent years and regulatorychanges have done much to promote thejurisdiction as a viable domicile for manytypes of funds, but has it gone farenough in striking its balance betweenover and under regulation? The Channel Islands must remain flexible, asnew jurisdictions look for footholds inthis competitive environment, with the recent emergence of the Isle ofMan, Malta and, perhaps in the not too distant future, Edinburgh ifScotland gains independence fromBritish sovereignty. ■

initiatives from the Channel Islands thathave spurred on growth. “The keychallenge for Channel Islands fundadministrators is how to support thiscontinued grow with limited resourcesby continual improvement throughefficiency in processes, new technology,outsourcing of back office functions andretention of key staff. Jersey andGuernsey Finance will continue topromote the Channel Islands financeindustry and develop relationships withother key jurisdiction such as the MiddleEast, Hong Kong, Singapore and China.”

Smith applauds the changes made inthe Channel Islands, which are seriouslythreatening Cayman’s fund domicileposition, he says. Cayman has lost and islosing a significant share of the domicilemarket to Jersey, around 7% last year,

Smith continues, with the Isle of Manand Channel Islands making richpickings. “I think Jersey and Guernseyare getting it right on regulation as itrelates to gaining domiciled funds fromCayman, but I would say that theyshould have gone further andderegulated closed ended schemes andnot kept the COBO regime in a watereddown form,” he explains. “They shouldalso have allowed funds domiciled inJersey or Guernsey to be administeredanywhere acceptable – like Dublin –without undue control. If they wantCaymans domicile business, then justadopt the Cayman model.”

Part of the success the ChannelIslands have seen must come from theintroduction of a local vehicle in whichto make investments through. TheChannel Islands Stock Exchange (CISX)was introduced in 1998 and is nowattracting listings from key jurisdictionsacross the globe such as England,Cayman, Jersey, Luxembourg, Irelandand Bermuda. The regulation lightappeal of the CISX has attracted over2,000 securities approved by the marketauthority, since inception less than adecade ago. Of the 676 securitiescurrently listed, only 29.1% areGuernsey domiciled.

preferred tried and tested centres suchas Dublin and, of course, the Cayman‘Goliath’. Opinion is mixed as towhether ‘David’ can perform, but wemust remember it was not so long agoBahamas was considered untouchable.

Ozannes’ Farrell opines that theChannel Islands are not in a position tocompete directly with Cayman, whichboasts the established Caribbean hedgefund structure. Sullivan from Maples &Calder concedes that Jersey is notnecessarily expecting the re-domiciliation of existing funds fromother jurisdictions, but will seek toattract new business, whether that isfrom new funds for existing managers ornew managers. Jersey offers viablealternatives and advantages includingimproved regulation or zero regulation,

proximity to London and Europe, and amodern and robust legal framework, sheexplains. “Jersey is also broadening itsappeal to the wider world anddeveloping business from NorthAmerica, the Middle East and Asia, aswell as the traditional markets of theUK and Europe.”

Kleinwort Benson’s Camp voices amore measured opinion, pointing outmany fund administration companieshave adopted a multi-jurisdictionalapproach with offices in multiplecountries. “The competition betweenjurisdictions and the difference inproduct offerings keeps the product mixvery much alive and healthy,” he says.

While Spittal’s belief is that theislands can challenge other domiciles.“In relation to Cayman, the ChannelIslands have a similar or even betterfinancial infrastructure without thedanger of disruption of service due toadverse weather conditions,” he says.“Although Dublin has an advantage as alower cost base jurisdiction, we believethat the funds expertise and financialinfrastructure of the Channel Islands ismore advanced than Dublin.”

Pearson is less committal, pointingout that it is both patchy performancefrom other domiciles and aggressive

Growth rates for the yearending 30 June 2007

- Jersey and Guernsey’s NAV offunds under management wasGBP335.4 billion, an increase ofGBP83 billion (25%)- Jersey’s NAV of funds underadministration has risen byGBP50.7 billion (31.8%) toGBP210.4- Jersey’s expert funds grew by105 to 319 (49.1%) and theNAV increased by GBP16.6billion (76.6%) to GBP38.3billion- Jersey’s NAV of equity fundsincreased by GBP15.6 billion(28.5%) to GBP70.2 billion- Guernsey’s NAV of funds underadministration has risen byGBP32.3 billion (34.8%) toGBP125 billion- Guernsey domiciled closedended funds saw continuedgrowth, with increases ofGBP23.7 billion (61.3%) toGBP62.4 billion- Guernsey domiciled open endedfund grew by GBP8.6 billion(15.9%) to GBP62.6 billion

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ISJ25 pp22-37 ML 19/10/07 6:25 pm Page 26

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SOUTH AFRICAN FUNDS


The South African funds market hasexperienced a healthy growth rate over the

last few years. Fabien Buliard reports

boutique managers.”Another trend is the emergence of

‘black economically empowered’ assetmanagers, as part of a large socialredevelopment programme aimed atproviding economic opportunities togroups penalised by Apartheid.

For Knibbs, certain characteristics ofthe South African funds marketsomewhat limit its potential. “The firstand obvious one is scale,” he says. “Theopportunity set in South Africa is afraction of what you find for a Frankfurtor New York domiciled assetmanagement business, for a number ofreasons. When you look at theJohannesburg Stock Exchange’s all shareindex, which is the broadest based, itconsists of 163 stocks. If you comparethat to a Russell 3000, you can get a feelfor the size limit.”

Another differentiating factor is SouthAfrica’s regulatory environment, devisedin a large part by the country’s FinancialServices Board (FSB), whose function issimilar to that of the UK’s FSA or theUS’s SEC. “The FSB is pretty good atwhat it does, but it is a follower ofdevelopments in Australia and the UK, interms of regulatory oversight,” Knibbsexplains. “I would say we lag behind theinnovation of regulators in other parts ofthe world.”

Knibbs considers that regulatorydiscrepancies, notably compared withUCITS, or in terms of hedge fundregulation, as well as the limited size ifthe market, are the main reasons for thesmall number of foreign players in thelocal funds space. “Most Europeaninvestment firms who have alsoregistered to do business in South Africaare under a UCITS structure,” Turpinpoints out. “The South African regulatorhas allowed these firms to do businesshere despite a previous anomaly inlegislation between UCITS and theSouth African Collective InvestmentSchemes Control Act, as otherwise thesefirms may have had to pull out. Now,legislation for local funds will be broughtin line too.”

Turpin also points out that a lot ofoffshore business is conducted through alife wrapper, which has less regulationattached to it, and therefore makes entrance to the South Africanmarket easier.

While foreign firms do set up shop in

In terms of the demand for funds, DiTurpin, chief executive of theAssociation of Collective Investments(ACI), says a great deal of money andattention has been directed at the fixedinterest sector. “Dividend income, target,absolute and real return funds are alsopopular, only just over 30% are held inpure equity funds.”

The main players in the local fundsmarket are largely local firms owned bymajor South African banks, such as RMBAsset Management, controlled by FirstNational Bank, or Stanlib, controlled byStandard Bank. Other major playersinclude independent firms such as AllanGray, Sanlam or Investec. Philip Knibbs,sales director for the retail market atRMB, says a major trend over the lastfive years has been the emergence ofsmall boutique asset management firms.

“They are individuals who havemanaged money for the large firms, madesome money themselves and have thefinancial independence to start their ownsmall firm,” he explains. “Today, whilelarge players still dominate the market interms of assets under management, theydo not dominate the victories in newmandates from the likes of pension fundsanymore. They are given to smaller

With an economy benefitingfrom a yearly growth rate ofabout 6%, driven by

commodities such as gold and platinum,as well as strong manufacturing andagricultural sectors, South Africa hasbecome an attractive destination forforeign investors, who currently ownabout half of the country’s equitymarket.

Moreover, unlike many emergingmarkets, South Africa boasts a modernfinancial infrastructure, with advancedtechnology, process automation anddematerialisation. In that context, SouthAfrica offers huge potential for the localfunds industry, dominated by domesticplayers and currently aimed mainly atdomestic asset classes, due to strictcurrency regulations.

According to Mathieu Maurier,managing director of Société GénéraleSecurities Services (SGSS) for SouthAfrica, the country’s funds market isalready well developed but there is a lotof room for its growth to intensify. “Yousee a lot of unit trusts, with a marketrepresenting about EUR70 million. Thelargest asset class remains equities, withrelatively little sophistication in assetmanagement strategies,” he says.

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SOUTH AFRICAN FUNDS


South Africa, they tend to be more activeoutside of the funds managementbusiness, for example on the sell side,with presence from the likes of DeutscheBank, JPMorgan or UBS. “However, youare seeing a proliferation of foreignplayers in the wealth management game,”Knibbs adds. “It is the advisory functionof the business where the presence offoreign firms is growing. That is becausethe population of dollar-basedmillionaires in South Africa is one of thefastest growing in the world. I think thewealth management element is a lot moreattractive than the fund managementfunction for the larger firms.”

Another regulatory limit on the fundmarket’s potential is the strict currencyexchange controls imposed on SouthAfrican residents, with an allowance foroffshore investments capped at ZAR2million (about EUR200,000). This meansthe market’s primary focus is on domesticstocks and bonds. “There is limiteddemand for offshore funds, with higherdemand from institutional investors, likepensions funds or unit trusts,” Mauriersays. “They, too, are subject to limitsranging between 15% (for pension funds)to 25% (for insurance companies) of theirportfolios.”

Turpin believes the consequences ofcurrency controls on the demand forforeign investment products are fairlylimited, at least in the retail space: “MostSouth Africans are well catered for by theindividual foreign exchange allowanceand they also appear to be moreinterested in investing locally thanoffshore on the whole. This has probablybeen as a result of excellent localperformance over a good many years.”

Knibbs also considers that currencycontrols only affect very wealthyindividuals: “It is more of an issue for thefirms doing business globally. For ourcorporate development, our geographiceconomic growth, is it a big problem.”

Yet, despite some challenges, the SouthAfrican funds market continues to showstrong potential, with the retirementmarket expected to be one of the mainareas of growth in coming months. ForMaurier, there remains a lot of untappedpotential in terms of retail demand.“There is still a lot of work to be done inthe field of pension financing in SouthAfrica,” he says. “The populationcurrently has a very low propensity to

save money. While consumer spendingfuels economic growth, there is still avery large untapped potential for thefunds market. This trend should shiftonce the government starts encouragingretirement savings through compulsorycontributions to an employer’s pensionfund.”

Indeed, the country’s 50 year oldpension fund legislation is under review,as South Africa currently offers verylittle in terms of state pension benefits.“We have a welfare system that reallytargets the poorest of the poor,” Knibbsexplains. “There are proposals tointroduce a compulsory social scheme, sothat every single person will contributeto a government controlled socialsecurity system.”

The changes in legislation could createa wealth of opportunities for SouthAfrican players and the industry isprepared to play a major part. “Thecollective investment scheme industrybelieves that it will be able to play a moreactive role in any future pension fundstructures as they are currently fairlylimited in what they may offer,” Turpinsays.

Although the traditional fund businessremains promising, alternative forms ofinvestment management have notdeveloped quite as fast as in othermarkets. “In the last few years, we haveseen the emergence of moresophisticated, alternative management,and the appearance of hedge funds,”Maurier says. “However, that market isstill in its infancy compared to Europeanmarketplaces.”

While the alternative investmentindustry is already fairly active in SouthAfrica, it has so far experienced relativelylow demand, due in large part to a lack ofregulation. “Hedge funds are in theprocess of being regulated and there arecurrently strict limits as to the exposurepension funds are allowed to have to thatasset class,” Maurier continues.

Another major reason for the limiteddemand for these strategies is the strongperformance of the South African equitymarket, with the JSE’s main indexposting yearly growth of 30% to 40%over the last three years. “With thesekinds of returns, investors do not reallyhave a strong need for a moresophisticated asset managementapproach, which would probably not

perform as well in the current context,”Maurier says. “I think we will probablyreach a peak in coming years and thegrowth potential of more complexinvestment approaches will thencertainly become more attractive. Thehedge fund market is already showing avery positive trend, which will acceleratewhen the market experiences adownturn.”

Turpin points out that while somehedge fund managers would like to offera regulated product, others don’t. Sheadds that the ACI has been attempting towork with the Alternative InvestmentManagement Association and the FSB todevelop a framework for a retail hedgefund offering but says that a number ofobstacles have presented themselves overthe years.

The development of the South Africanfunds market naturally provides businessopportunities for the securities servicesplayers, but the market is already highlycompetitive with strong pressure onprices. “We are one of six players on arelatively small market, compared tolarge international marketplaces,” saysMaurier. The French bank, which hasacted as a custodian in South Africa since1991, is one of two foreign companies onthe local clearing and settlement market,with Australian player Computershare.The other four competitors are localbanks: Nedbank, Standard Bank, Absaand FNB. The six firms are the only onesto have an account with South Africa’scentral securities depository, Strate.

The development of alternativeinvestment management strategies is alsofuelling demand for securities lending.Maurier says his bank has experiencedstrong growth in that field, mainly withlocal clients. “Several hedge funds focuson a long/short strategy and thereforeneed to borrow securities that have beenshorted on the market,” he explains.“There currently is a shortage in thesupply of securities lending, whichimplies strong demand from hedge fundsand prime brokers.”

Despite the growth in the fundsmarket, Maurier does not expect to seeany new entrants in the South Africancustody space. “Given the competitivepressure on margins and the technologyinvestments required for such activities,”he says. “I would rather expect aconsolidation in that market.” ■

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 30

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 31

seminar entitled “Demystifying funds inGuernsey”, was staged in Manchester,Leeds and Edinburgh.

So far the feedback from these regionsand the Guernsey industry participantswho attended is that it was a greatsuccess. There were strong attendances,the delegates reported that they foundthe sessions informative and stimulatingand there has been genuine interest –including from those that have not usedGuernsey previously – about establishinginvestment funds in the island.

The message that the industrydelivered was very clear – Guernsey islooking to increase business flows in thisalready booming part of its business,borne out by the statistics with thequarter ending 30 June 2007, showing atotal of GBP155.6 billion, an increase ofGBP15.2 billion over that quarter.

At each seminar a panel of expertsfrom Guernsey’s funds industrydiscussed private and public fundstructures in Guernsey, illustrated by aworking example of property as anincreasingly popular asset class. Theseinteractive seminars also included aquestion and answer session to ensurethat delegates got the most out of theevent.

The roadshow gave industryrepresentatives the opportunity to talkface to face with existing and potentialGuernsey clients. For example, one ofthe delegates from Huddersfield, whoseclients have used various Guernseystructures, was reported to have said: “Inan ever more sophisticated financialworld, one looks for stability, reliabilityand experience and that was portrayed bythis presentation, where the emphasis onthese qualities was reinforced.”

The audiences was left in no doubt thatGuernsey is very much open for qualitybusiness and is now looking to extendintroducers of business to the island fromthe major financial centres in the UK.

As a result, Guernsey’s fund industrywill be reviewing the initiative with aview to taking its message further afieldin the near future, to key Europeanregions and beyond.Ian Burns, group managing director of

the Anson Group

DOMICILES REPORT


Funds reviewIn March this year, Treasury Minister,Allan Bell MHK, announced thecompletion of a major review of the Isleof Man’s funds sector in order to secureits long term prospects and make theisland the preferred offshore jurisdictionfor fund activity.

The review was commissioned againsta background of considerable growth inthe funds sector between 2003 and 2006,when the level of funds underadministration more than tripled. Inresponse to this, the Isle of Man FundManagement Association (FMA)announced ambitious growth targets forreaching USD50 billion of funds undermanagement and USD100 billion offunds under administration on the islandby 2010.

The results of the funds review wereproduced in the form of a report entitledthe Smith Report, which includedrecommendations for regulatory andlegislative changes, as well as theintroduction of a new suite of funds toraise the profile of the island as anattractive location for the establishmentof front, middle and back office fundoperations.

On 20 September 2007, the Isle ofMan’s new funds regime, as outlined inthe report, was officially launched byleading funds expert and Funds ReviewGroup chairman Paul Smith and theFMA. The new regime reflects a dynamicand comprehensive funds proposition,offering a new and enhanced suite offund categories, including the specialistfund (SF) product, which will be effectivefrom 1 November.

The SF category is for distribution toinstitutional and high net worthinvestors. It offers maximum flexibilityon strategy and asset allocation, for

example a minimum initialsubscription of USD100,000 and norequirement for any regulatory pre-approvals.

The funds initiative positions the Isleof Man as a highly cost effective and zerotax location for fund managers andincludes a major new focus on alternativefunds in order to secure business for theincorporation, domiciliation andestablishment of fund managementoperations in the Isle of Man.

To complement the initiative, increasedmarketing efforts on the part ofgovernment and industry will raiseawareness of the Isle of Man as a fundcentre and promote the island on aninternational stage.

The Isle of Man’s new funds regimeillustrates the island’s strategy to be atthe forefront of global developments andthe willingness of both public and privatesector to adapt in order to maintain andextend our competitive edge bydeveloping new platforms for growth.

Brian Donegan, director of ForeignDirect Investment, Isle of Man Finance

UK regions roadshowProfessionals from the UK regions learntat first hand during September aboutestablishing investment funds inGuernsey and the potential benefits ofdoing so for themselves and their clients.Prior to this, Guernsey had focused itspromotional efforts on the City ofLondon and relevant conferences andexhibitions targeting the European andother overseas markets.

The new regional initiative in the UKwas targeted at the growing number ofpotential promoters outside of thecapital. Jointly hosted by GuernseyFinance and the island’s InvestmentFunds Association (GIFA), a masterclass

Isle of Man and Guernseyreport on their domicilesReview and report

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 32

SPANISH CUSTODY


Economic growth in Spain hasaveraged more than 3% a yearsince it joined the EU in 1986 and

GDP per head currently totals almost92% of the euro zone average. Thisgrowth has largely been fuelled by theextraordinary performance of theproperty market – testament to this is thefact that house prices have more thandoubled since 1997. Spanish companieshave also gained more financial clout anda rising number of Spanish quotedcompanies are becoming global, forexample Telefonica, Banco Santander,BBVA, and Repsol. “This reality and thefact that those companies are an easy wayto channel investments to South Americawill increase the interest in the Spanishstock exchange,” says José Maria Alonso-Gamo, managing director, RBC DexiaSpain.

The positive economic climate hascontributed to the success of the Spanishstock markets operator, Bolsas yMercados Españoles (BME). Accordingto BME figures, the exchange’s netprofits in the first half of 2007 increased66.1% from the year before, toEUR102.98 million. The stockexchanges operator was created tointegrate in one single unit for action,decision and coordination: Madrid StockExchange, Barcelona Stock Exchange,Valencia Stock Exchange, Bilbao StockExchange, MF Mercados Financierosand Iberclear.

Alonso-Gamo believes that this moverepresents significant costs savings and

consequently allows for biggerinvestments and an integratedmanagement of the activity in all fourbusiness areas: equities, derivatives, fixedincome instruments, and clearing andsettlement. “With one single society andone single managing body, the Spanishmarkets are now more powerful whenestablishing alliances or agreements withother European or worldwide markets,”he says.

The BME presents a solid image of theSpanish financial markets to theinternational financial community andthis has definitely attracted additionalinvestment in Spain, adds Sally Maddick,head of sales and relationshipmanagement, Financial Intermediaries,BNP Paribas. There are also rumours inthe national press that BME is in talkswith Spanish economic minister PedroSolbes and CNMV chairman ManuelConthe about negotiating a possiblemerger with Deutsche Börse. Set againstthe backdrop of intense M&A activity inthe global exchanges landscape this year,this seems to be a rather sensible move.

Infrastructural improvements havepicked up pace over the last couple ofyears in Spain, for example centralsecurities depository (CSD) Ibercleardecided last year to move away fromproprietary communication protocols toISO 15022 and implement a singlecommunications window for users. “Theadoption of ISO 15022 standards hasmade possible a more efficient treatmentof the instructions and more accurate

information concerning the tradesprocessed. Moreover, monitoring andcontrol on the full trades process havebeen improved,” says Alonso-Gamo.

Paloma Pedrola, head of InvestorServices in Spain for Société GénéraleSecurities Services (SGSS), feels thelatest developments implemented byIberclear have been decisive: “The rollout of the SUC system (UniqueMatching System) to the fixed incomeproducts in March 2007, the further toroll out for equities and loans, areinteresting not only for securitiesservices providers, but also for investors.”

From a service provider’s perspective,some of the possibilities implemented,such as a pre-matching facility, avoidingphone pre-matching between marketparticipants, makes processing easier andallows productivity to increase, she says.From a technical point of view, themodernisation of communications on toSwiftNet-based protocols, allow morereliable communications betweenIberclear and its members. “Iberclear hasdemonstrated its willingness to complywith European technical standards as perrecommended by ECSDA,” she adds.

In addition, the migration to an IP-based communication protocol, to befinalised by end of November 2007 toremove the X25 line, will also contributeto make the local markets more reliable,efficient and able to absorb additionalvolumes, says Pedrola. “For investors andinternational financial institutions, theuse of ISO 15022 protocol makes the

A booming economy has allowed the Spanishcapital markets sector to experience

significant growth and the country hasinvested in its infrastructure accordingly.

Virginie O’Shea reports

Building it up

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 33

SPANISH CUSTODY


On the other hand, foreign playersmaintaining a local Spanish unit of theirglobal securities services networkmainly serve non-resident clients –broker-dealers, commercial banks, andsometimes global custodians – and tendto deploy their global suite of productslocally. “For instance, the fast growingonshore hedge fund industry would findmore adapted skills with those locallyinstalled non-resident players that canroll out their expertise already developedin Luxembourg or Dublin, than with bigSpanish banks limiting their custodybusiness to Spain,” says Pedrola.

With this in mind, she believes thatforeign banks focused on securitiesservices in Spain are in a better positionto take advantage of the modernisationtrend starting on the Spanish market,whether in terms of business practicesor products. “In the medium term, wecan even forecast that some mediumsized Spanish players will exit thesecurities services business as not beinga core business for them, and therefore give room for external growthfor international securities servicesplayers to reinforce their local franchise,”she adds.

A note of caution should also be raisedgiven the recent global economic climate.There are serious fears in the domesticmarket that the Spanish economic bubbleis about to burst. The threat of aproperty crash has been adding to thepressure on the capital markets sectorand raising questions about its economicresilience. For example, in April thisyear, there was a fall in the stock marketas a result of concerns that a crash wasimminent (and that was even before thesub-prime debacle in the US).

However, it is important to note thatthe pension fund sector is currentlyperforming well and the trade balance isin surplus, and that inflation seems to belargely under control. The Spanishmarket is well known for the controlsand the level of security and protectionit brings to investors, says Pedrola.“While maintaining this level ofprotection, Iberclear and regulatory bodies have demonstratedtheir willingness to bring flexibility to the system,” she adds. Andthis level of flexibility should standthem in good stead to face the challengesof the future. ■

local market easier to manage and moreconsistent with what they are used to inother countries. Besides, thoseimprovements could be considered partof the initial stages to facilitate Europeancooperation. Indeed, as Spain belongs tothe Target2-Securities project, thoseenhancements could facilitate furtherharmonisation projects at a Europeanlevel,” she continues.

However, there is still work to be done,says Maddick: “Although thecommunication system used for fixedincome and equities is now the same, thelogic which is applied to the settlementprocess is still different in each marketsegment and, in this respect, the marketremains fragmented.”

As well as infrastructural issues, theSpanish regulatory environment has beenchallenging for both domestic andinternational investors. Highlyprescriptive regulation in the traderegistration process, for example, hasproved a dampener for foreigninvestment and this is not likely tochange for the time being. “Despite thepressure from the international marketplayers to change the registrationprocedures’ regulations, no changes areforeseen so far,” says Alonso-Gamo.

The regulation is unchanged withrespect to the obligation of maintainingthe registration component at settlementlevel and, consequently, its control in theentire post-trading process. Maddickelaborates on the impact of this: “Thishas had an important effect, especially forthose custodians unable to manage highvolumes, and has a high impact inregistration controls. Trade registrationhas historically caused significantconcern and hindered non-residentinvestors who now represent over 50% ofthe investment carried out in the Spanishmarket.”

Pedrola agrees that the traderegistration process is still to beconsidered carefully when processingportfolio migration from one provider toanother. She believes that it definitelymakes a change of providers moreexpensive than in other markets. “Butmore generally speaking, the registrationreference process does not stop Spanishmarket modernisation. For instance, theETFs, and shortly the certificates, will beimplemented within the local market,even if processed via registration

references. As a market leader forwarrants, and now ETFs and certificates,SGSS has fully integrated theregistration reference process within itspaying agent and liaison agent services tomake it transparent for its clients issuers,in compliance with Iberclear regulation,”she explains.

Certain regulations have, however,been revised in light of competitiveconcerns, says Maddick: “Changes in theregulations in Spain for both investmentfunds and pension funds have meant thatasset managers and insurance companieshave been able to diversify theirinvestment and have more sophisticatedportfolios. These entities thereforerequire more specialised providers incustody and depository services. BNPParibas Securities Services Madrid hastherefore put together a bundled productoffering of depository bank and fundadministration and some added valueservices for portfolio accounting, such asforex and securities lending.”

BNP Paribas is one of the main non-resident players in the Spanish custodymarket, which also include SGSS andCiti. RBC Dexia’s Alonso-Gamo believesBNP Paribas, Banco Santander CentralHispano and BBVA are the dominantplayers in the market: “In our opinion,their success in the custody business isdue to strategic and political agreementswith other international groups withinterest in Spain and the businessreciprocity derived from theseagreements.”

Pedrola elaborates on her view of themarket: “The Spanish custody market isdominated by a mix of important localplayers who are backing their securitiesservices with their strong bankingfranchise: SCH, BBVA, Caixa, BancoSabadell, RBC Dexia (Bancoval); andforeign institutions maintaining localoffices within their global securitiesservices business lines.”

The two groups have different profilesin the market, says Pedrola. Spanishplayers are mainly doing custody for theirhome bank assets – investment banks,retail banks, asset management. Theyalso provide local banks that cannotafford to maintain a global agent banknetwork with global custody services,and they deliver agent bank services toforeign ICSDs or some big internationalglobal custodians.

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 34

RUSSIAN CUSTODY


It still seems unavoidable to talk about Russia withoutfirst mentioning the USD40 billion default in 1998. Forthe past decade, the default has lurked in the corner,

scaring potential investment away. At present however,investors are desperate to part with their money in order toenter the Russian market and, as a result, Russiancompanies are taking loans at minimal rates above Libor.

Rusal, the world’s biggest aluminium producer, obtaineda loan in August for only 70 basis points above Libor for thefirst three years on a USD2 billion loan. OAO GMK NorilskNickel, the world’s largest producer of nickel, borrowedUSD6 billion at 52.5 basis points also for the first threeyears. These are minimal rates compared to the US forexample, where US Steel Corp took a loan with a spread of125 basis points in August. Money is cheap in Russia, evenwith the present credit crunch. According to David Bassett,global head of market loans for Royal Bank of Scotland:“Russia is less affected by liquidity issues in the leveragedmarket.” Good news for custodians wanting a route intoRussia. Bad news for those left waiting at the door.

The recent Russian rejuvenation stems heavily from theincreasing price of oil and natural gas. In 1998, the price ofoil was less than USD14 a barrel. At the time of writing, theprice of Nymex crude oil futures reached a recordUSD79.02. This has allowed Russia to build up foreigncurrency reserves of around USD400 billion. While thisimmense sum seems surprising, economically it makesperfect sense. The global balance of payment is a zero sumgain. For every minus, there must be an equal plussomewhere in the global accounts.

While America’s current account deficit is mired indomestic debt and the consequences of its foreign policy,the emerging markets, namely China and Russia, have beenkeeping their cash under the mattress. Now that domesticreturns in America have dried up, many custodians arelooking abroad to tout their services and find a way intothese current account surpluses, hence the low basis pointsfor loans directed towards Russia.

Like every Russian epic, there is always a twist. InSeptember, the credit crunch managed to worm itself intothe mindsets of Russian boardrooms. Rusal decided to delayits initial public offering that hoped to raise around USD7.5billion on the London market. According to the investmentbanking research company Dealogic, only USD529 millionhas been raised through share offerings in the third quarterby Russian companies. Compare this to USD10.8 billion inthe same period for 2006.

According to Maxim Seltzer, general director at Nomurafor the post-Soviet region: “People are much more choosynow and it is clearly a buyer’s market, unlike in the past.” Soat present we have a buyer’s market, but excessively cheaploans seem to point towards an extended seller’s market. Aconfusing situation.

Perhaps some of the confusion regarding evaluatingRussia as economic opportunity is the method of itsgrowth. The Russian capital market most certainly enjoysgrowth, but its breakneck speed means that the market’sinfrastructure simply can’t cope. Already fragmented andunderdeveloped, rapid growth is simply exacerbating the

MotherRussia

Giles Turner examinesthe popularity of

Russia against thebackground of thisyear’s credit crisis

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 35

RUSSIAN CUSTODY


the WTO. These conditions mayinfluence local banks to become acquiredby large international financialinstitutions that shall cause a strongdesegregation impact. At the same time, asignificant decrease in the quantity ofbanks will ease the building of an efficientand centralised state cash clearingnetwork.” It will be interesting to seewhether Russia is willing to be at thebehest of a supranational body, or perhapsit will be the other way around?

Much will depend on how thegovernmental bodies react to thechanging marketplace. A large proportionof cash liquidity is concentrated within asmall number of sizeable institutionscontrolled by the state. Due to the lack oftransparency in Russia, it is difficult to seewho isn’t controlled by the state and towhat level state intervention takes. Shadystories of Soviet subterfuge are alwaysworming their way into the press.

A recent survey for the ForeignInvestment Advisory Council (FIAC) of106 foreign companies investing in Russiafound that 72% highlighted combatingbureaucracy as one area the presentgovernment should focus on improving.Furthermore, a World Bank report placesRussia 106 out of 178 counties regarding

ease of doingbusiness, which is10 places lowerthan it was in2006.

On the plus side,the FIAC surveyalso indic-ated that82% of investorswere eithermoderately orhighly satisfiedwith Russia as awhole. The market has both potential androom for improvement but a major stickingpoint to progress will be its image.Slipping from 126 to 143 out of the 180countries polled in the annual CorruptionsPerceptions Index will not help its cause.Moreover, while it is good for Russia toreceive cheap loans, the infrastructure toreap the benefits needs to be installedbefore the system overloads. ■

problem. Valery Merkushkin, head ofsecurities, operations and custody,Raiffeisenbank in Russia, highlights amajor problem: “Russia still lacks acentral securities depository (CSD);though its creation is eagerly awaited by

all market participants. The CSD bill islikely to be approved in the near futureand is expected to cover such aspects asshareholding, risk management andcorporate governance requirements. Thecreation of the CSD will be a challengefor Russian custodians operating in themarket as it will significantly modify thecurrent range of services they provide toinvestors, especially associated with re-registration of rights to securities.”

He continues: “Under the draft law,depositories will be required to acquire aspecialised licence of a settlementdepository authorising them to settleexchange traded stock, to act as anominee with securities registrars, and toopen and maintain nominee accounts onbehalf of foreign depositories. Custodianbanks will no longer be permitted to hold

nominee accounts with registrars directly.Under this structure, custodians willservice only beneficial owners ofsecurities. It is clear now that all the saidchanges in the current infrastructuresetup will stimulate custodians toreconsider the scope and quality ofservices they provide to clients.”

To put the lack of a CSD intoperspective, imagine the chaos that wouldoccur if you took away the US DepositoryTrust Company (DTC). This is not theonly problem facing the custody business:there is also no delivery versus paymentsystem, mainly due to the lack of acentralised clearing and settlementinfrastructure, and there is a problemregarding legal clarity. Moreover,according to Merkushkin, the problem isexacerbated by: “The absence ofuniformity as well as a centralcounterparty concept backed by aguarantee fund that would facilitate

mandatory payment in rubles.”The difficulties facing Russian custody

have not stopped the rating agencyMoody’s claiming that Russian banks willface positive ratings pressure in the nearfuture, due to the favourable

macroeconomic environment. At present,the Russian banks’ financial ratings rangefrom ‘E+’ to ‘D+’. Moody’s also believes,that the relatively low penetration in thebanking system is acting as a constrainton further lending.

However, Natalia Sidorova, director ofsecurities services at ING, Eurasia,disagrees: “Actually, the relatively lowpenetration is a very good opportunity forbanks that are actively developing thissegment of business. The unoccupied andvast area remains a good chance forfurther expansion to mid and small capcorporate lending. At the same time,volumes lent to retail customers throughmortgage loans are now estimated to beless than 1% of the country’s GDP, whichis extremely low if compared to CEErates. This trend is especially relevant for

the situation outside large cities, such asMoscow and Saint Petersburg.” Theexpected development into internetbanking over the next few years shouldalso help to open up these untappedmarkets and overcome further constraintson lending.

As any market develops, consolidationbecomes a powerful factor. Thefragmented Russian market will be noexception to this rule. If anything, it willbe a model example. The main players inthe market are well known and mergersoften involve a Moscow-based bank and asmaller, regional bank. Regarding atimeframe, Merkushkin of Raiffeisenbanksees consolidation as an evolving processover the next decade.

ING’s Sidorova brings up an importantpoint regarding catalysts forconsolidation: “The future of Russianbanking system soundly depends on whatthe conditions will be for Russia to enter

Russia still lacks a CSD, though its creation is eagerlyawaited by all market participants

“The relatively low penetration is a very good opportunity for banks that are activelydeveloping this segment of business” Natalia Sidorova, ING

Natalia Sidorova, ING

ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 36

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ISJ25 pp22-37 ML 19/10/07 6:26 pm Page 37

PANEL DEBATE - CEE CUSTODY


ISJ PANEL DEBATECentral and EasternEuropean Custody

Bloc partyOur panel of

experts debate thedevelopments within

CEE custody

Renata Mudrova, CSOB Renata Mudrova is a PhD graduate from the Universityof Economics in Prague in the field of international trade. Since 2006, shehas been working at CSOB in Prague in the Custody Department.

Ramy Bourgi, Société Générale Securities Services Ramy Bourgi has been head ofEmerging Markets Development for Société Générale Securities Servicessince September 2007. Bourgi began his career in 1986 as a financial analystfor Dar Al-Handasah Consultants.

Nikolay Egorov, The National Depository Centre With over 15 years of experience inthe financial and IT industry, Nikolay Egorov is currently the NDC director,MICEX senior vice president and member of the MICEX executive board.

Kristi Sisa, SEB Eesti Ühispank Kristi Sisa is head of Custody Services at SEBin Estonia. She has 10 years of experience in the securities industry,including with international banking groups. SEB is a leading provider ofcustody services in the Baltics and Nordic region.

Lilla Juranyi, ING Lilla Juranyi is the global head of Custody at ING WholesaleBanking Securities Services. She has been in this position since September2006. Juranyi is also a member of the Settlement Committee of the BudapestStock Exchange and one of the members of the SMPG in Ukraine from herregional position.

Jarkko Järvitalo, Handelsbanken Jarkko Järvitalo is the head of Global CustodyProducts at Handelsbanken and is also heading up Handelsbanken’s launch ofcustody services in the Baltics. Järvitalo has been with the company since 2004.

David Penstone, Unicredit David Penstone is director and global head of GroupSales and Business Development at Unicredit. He has been in the custodyindustry since 1988, having started in settlements at a large Canadian broker.

ISJ25 pp38-55 ML 19/10/07 8:20 pm Page 38


How has the CEE custody market evolved overthe last year? Which countries have seen themost progress and why?Mudrova: The Czech Republic in particularhas been experiencing an increasing trendin terms of the volume of invested funds,for example two new IPOs were launchedat the end of last year, and another one hascome up recently (AAA). This is still notall, since some other IPOs are plannedbefore the end of 2007. However, theCzech Republic still cannot beat Poland oreven Hungary, whose markets have beenmuch more dynamic with regard to IPOs.We can also clearly notice growth in thedemand for global custody products.Taking into account the interests of ourclients, I would say the most progress hasbeen seen in countries like Romania orBulgaria.

Järvitalo: We have seen a growing interestfor custody within the CEE markets. Fromour domestic clients we have especiallyseen an increased interest in Poland,Hungary, the Czech Republic, Slovakia,Ukraine, Romania, Bulgaria and Turkey.We are also seeing a better awarenessregarding the Baltic countries where therehave been a couple of silent years.Handelsbanken became a member of boththe stock exchange and the local CSD inEstonia during 2007. The driving forcewas the growing demand among bothlocal and international players.

Egorov: As for the Russian market, the bestprogress has been achieved in thetechnological development of interactionwith registrars based on the close to ISO15022 standard. During the year, share ofoperations supported by electronicdocument interchange reached 79.5% ofall NDC operations with registrars (31%

at the beginning of the year). NDCactively promotes the necessity ofestablishing EDI between Russianinfrastructure participants meetingapproval from the Federal SecuritiesMarket Commission and some leadingprofessional associations. On the otherhand, registrars themselves have becomemore interested in this moderntechnology and more proactive.

Bourgi: CEE custody markets continue toevolve up the value chain from basicsafekeeping and settlement to fundadministration, as the demands for mutualfunds and pension services are increasing.If we look at the growth of activitieswithin our local branches, the progresshas been spread across a number ofmarkets.

Sisa: The CEE markets with an SEBinvolvement are the three Baltic markets(Estonia, Latvia and Lithuania) andUkraine. The Baltic markets continue togrow in 2007, though not at anoutperforming rate in comparison withthe Nordic markets. It has, during the lastyear, been encouraging to see the numberof new client relationships opening up andmany international players are nowestablished with a structure to deal withBaltic activity when it comes.

We have seen the most rapiddevelopment in Ukraine. This is indeedexpected as one of the largest nations inEurope in terms of population continuesto develop. The underlying factors forgrowth are certainly in place and with acontinued positive political and regulatorydevelopment, we foresee very rapidgrowth in the brokerage, assetmanagement, insurance and wealthmanagement sectors; all very important

for a healthy custody development. On thepositive side, we see growth in GDP,modernisation programmes in manysectors and reforms driving pillar twotype private pension plans. On thenegative side, we see a lack of consistentregulatory environments, an absence ofasset servicing guidelines, the lack of aDVP environment, obstacles relating tocurrency regulation, and the comparablyunstable political environment.

Penstone: In the frontier markets ofemerging Europe, progress is relative tothe country’s individual current stage ofevolution and willingness to change. InBosnia, for example, the recognition ofthe role of the custodian was a majorachievement, whereas in the Ukraine itwas an achievement just to establish aSecurities Market Practice Group.

Poland and Hungary have had themost time to align themselves tointernational standards and have themost competitively neutral practicegroups. By definition these markets havecreated a culture of change and havebenefited by being the most progressive.

Russia is perhaps the market that willexperience the most material changes over the next two to three years,as the consolidation process of theexchanges and local depositories is onlya matter of time.

Serbia is an extremely good exampleof what can be achieved when global custodians, sub-custodians andthe local depository band together for acommon goal. In 2002, our groupcollaborated with a US-based global custodian and the local depositoryin lobbying the market to recognise therole of custodian banks in theinvestment cycle.

Flexibility on a solid groundTo keep the customer infocus. That is one of thecornerstones atHandelsbanken. We do notsimply sell products, weprovide you with theservices you need andwant.

Because of a decentralisedstructure, we ensure aflexible and quick decision-making process, and ithelps us to create tailor-made services, as well asnew market solutions tomeet your expectations.

Handelsbanken is one bankthroughout the region –with the same organisation,management and culture,and one of the highestrated private banks inEurope.

As the first bank to providelocal in-house custody in allNordic markets, we have aset-up that allows the samehigh level of servicethroughout the region.

We offer flexibility on a solidground.

HandelsbankenNordic Custody Services

www.handelsbanken.com/nordic_custody_services

ISJ25 pp38-55 ML 19/10/07 8:20 pm Page 39



E

Juranyi: I would clearly say that in Centraland Eastern Europe there is a cleardifference in the progress between thesmaller matured markets, such as Slovakiaand Hungary, and the ‘growth’ emergingmarket of Eastern Europe. The highestincrease in interest, as well as realisedbusiness, is from Russia, Ukraine andRomania. In each country we see newbusiness and also newcomers, who want toenter into the securities market only now.At the beginning of the year, Romania andBulgaria joined the EU, and within thepreparation phase, similar interest couldbe seen from foreign investors. However,the experience in 2007 to date shows thatRomania is far ahead of Bulgaria, which isstill a sleeping beauty.

Has the high level of growth in the economyfiltered down to domestic infrastructureinvestment and encouraged a greater appetitefor custodial services? Which services arebeing demanded in particular?Mudrova: In the last decade, the majority ofassets of individuals and firms were heldon current accounts, terms accounts andsavings accounts. Recently, a strong shiftin this trend towards other possibilities ofpreserving free financial resources hasbeen apparent. This is particularly true inthe context of the marked economicgrowth of the Czech Republic, theincrease in the standard of living and theaccumulation of holdings of thesesubjects. The products of financialmarkets have started playing an importantrole, including stocks, obligations andother forms of collective investments,which – on the other hand – have had apositive impact on the custody business.This trend is also a significant sign thatthe Czech Republic has been approachingWestern Europe as regards the structureof household investment.

Järvitalo: Yes, the growth in localeconomies is noticeable also within thecustody market. Developing stock marketsand increased currency flows, bothinternationally and domestically,especially within the former Sovietrepublics, have meant a growing demandfor custody, and settlement services. In theCEE markets it has started to show inparticular when it comes to savings forpensions. This would of course call forglobal custody services and fundmanagement services. However, the CEE

countries also enjoy spectacular interestfrom international investors and also inthe sub-custody area there are big growthopportunities in these markets.

Egorov: In 2006 and 2007, the Russiancapital market enjoyed vigorous growth,thus market activities demonstrated asignificant increase. The historicalmaximum value of the MICEX Index atthe close (1821.21 points) was recorded on8 October 2007. Thus, I would say theRussian market has remained stableagainst the deterioration of the situationon world stock market, caused mainly bythe crisis of the US market for mortgageloans. The fast market growth hasincreased demands on the market’sinfrastructure services. NDC plans tobroaden its presence in the internationalmarkets. The main task for us is to extendour relations with European and CISdepositories, so that allows NDC toincrease its service offering. To date, NDChas direct accounts with ClearstreamBanking, Euroclear Bank, NDC ofAzerbaijan, CSD of Kazakhstan, and hassigned a memorandum of understandingwith the Central Depository of theRepublic of Belarus.

Bourgi: Better infrastructure coupled withimproved pension regulation is helping tobuild a framework within whichprofessional custody services and fundadministration can work to offerimproved local services. Fundadministration, trustee, custody servicesand securities lending are all important forall markets. Clearly though, some marketsare advanced more than others.

Sisa: The major infrastructure investmentsin the three Baltic markets were taken inconnection with OMX’s acquisitions ofthe exchanges and CSDs and no majorinvestment has been made ininfrastructure during the past 12 months.In Ukraine, the expected consolidation ofthe exchanges and trading platforms isslow, but consolidation of trading volumeshas already happened to a great extent.The creation of a CSD with real CSDfeatures is expected within the next 12month period.

Clients are looking into a regionalassimilation of services, expecting theservice levels and level of commitment inthe Baltics to mirror those of the Nordics.

We also see a renewed drive for non-Nordic broker-dealers to become remotemembers, a development that would bevery good for the markets as a whole. Forus as the leading remote membershipagent on the OMX and NOREXexchanges, this is a very favourabledevelopment.

Penstone: Record growth across the entireregion over the past four years hasdefinitely filtered down to the domesticinfrastructure. One must note thatalthough the countries of emergingEurope may have experienced recordgrowth, these markets remain relativelysmall in terms of market capitalisation.Local demand for custody is steadily risingand foreign investors are pushing forinternational standards as their portfoliosgrow. Nevertheless, services demandedtend to remain plain vanilla, mostly due tothe early stages of development. Themarkets must first address risks inherentin their local practices or, moreimportantly, the lack of local practices.The pace of change is extremely rapid andinvestors are looking to mature marketsfor best of breed practices

Juranyi: Which services are beingdemanded in particular? It is interestingto see that the growth markets show someinfrastructural improvement as well, butnot to the extent as would be required.The regulations in most [growth]countries reflect similar developments asseen in the mature Central Europeanmarkets, but in daily life, there are a lot ofdifficulties with quite simple actions, suchas account opening and clientidentification (with heavy documentationrequirements). The progress ininfrastructure is slow: in some countriesthere are talks about the need for a centraldepository, but no actual steps have beentaken to improve this. There are somefeatures of the emerged markets that aretotally unknown to these countries. Thespecial status of special investor types, forexample funds or trustees, sometimescauses a lot of difficulties to the investor,to the global custodian and to the sub-custodian as well. Not surprisingly, thestatus of global custodians is notrecognised at all. The nominee concept iseither not acknowledged or notacknowledged for foreign institutions andthis makes life quite difficult.

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Who are the main regional domestic andinternational players in the market and howare they competing with each other?

Mudrova: There are four main custodyplayers in the Czech Republic – CSOB,Citi, HVB Bank, and ING Bank. CSOBwas the first bank that started the custodybusiness in the Czech Republic, whichbrings us the advantage of longexperience, an extensive client base andlong term personal contacts. Citi has areputation as a large global custodian witha worldwide network. HVB Bank (now amember of Unicredito) has had a longterm focus on Central Europe thanks toCreditanstalt, and finally, ING Bank hasalso been involved in Eastern and CentralEurope for a long time. The two other bigplayers in the Czech banking sector –Komercni banka and Ceska sporitelna arenot involved in custody as much as theabove mentioned banks.

Järvitalo: In the more exotic markets wenow see that some of the big players haveentered locally, but there is still a lack ofcompetition. For example, there is onlyone international custodian in Kazakhstanand none in Uzbekistan or Georgia.

Egorov: To date, NDC is the largestRussian settlement depository performingas CSD de jure on the government debtmarket and CSD de facto in servicingcorporate debt securities. The segment ofservicing shares is still competitive.Among the biggest Russian settlementdepositories are NDC, DepositoryClearing Company CJSC and Settlementand Depository Company CJSC. NDC’sleadership among settlement depositorieshas been confirmed by an industryranking entitled “Russia’s 30 LargestDepositories”. NDC’s share calculated onthe basis of the value of securities ondeposit for 2006 reached 54% or RUR3.34trillion. Obviously, NDC is mindful ofmarket needs and aims to cooperate withdomestic players. The competitorsunderstand the important role played byNDC and DCC in the Russian securitiesmarket and the necessity of increasing theresponsibility of management andshareholders of these organisations forthe Russian securities market’s future.Recently the NDC-DCC ‘bridge’ (inter-depository link) has been improved interms of working hours and the list of

securities accepted for circulation.Bourgi: I do not believe that there is onedominant player in the market. Localplayers still dominate their own marketswith one or two foreign players dabblingonly in custody services in some markets.

Sisa: In our four CEE markets, thecompetitive situation is materiallydifferent from the one we see in the Nordicregion, where the competitive playingfield long term is an SEB/Nordea matter.Starting with the three Baltic markets(Estonia, Latvia and Lithuania), thecompetitive playing field for sub-custodyconsists of SEB and Hansabank on theground and with UniCredit (through theVienna hub solution) and Nordea (throughthe Helsinki window) as challengers. Thelocal presence of other players is startingto materialise but as can be seen in the newentrants section, it will be difficult to havea significant bearing on the picture.

In Ukraine, the custody competitivesituation is evolving, with ING as thelargest player, followed by UniCredit,RZB, SEB and Citi. We do expect thecompetitive landscape to be furtherenriched by international playersestablishing a presence, while the domesticcustodian presence must consolidate a lotfurther.

Domestically, we believe that the localplayers will have a competitive challengeversus the regional players, as the regionalplayers benefit from the scale advantagesof parent organisations, both when itcomes to the volume game, as well as forthe availability of IT and processinvestment dollars, client base knowledgeand share of wallet aspects. Also,contractual choices become greater and itis our estimate that sub-custody andglobal custody clients tend to opt for abalance sheet risk of an establishedregional player rather than a stand alonedomestic one. The demand for seamlessservice is evident all across the region andthe desired investment need per market isturning out to be more or less the same, nomatter the size and revenue production ofthe market.

Penstone: For UniCredit, it is difficult topigeon hole our group as eitherinternational or domestic. Unlike ourcompetition, the CEE region is our home.We follow an extremely focused strategyof being the best provider in the CEE;

when we buy banks it is within the regionand not on the other side of the earth.In emerging Europe, UniCredit, Citibankand ING are the most experienced.However, both Citibank and ING havechosen not to pursue a region-widestrategy and can’t be purely defined asregional players. Deutsche Bank has re-invented itself as a multi-market sub-custodian, but they have also pursued a‘cherry picking’ approach. Single marketdomestic players are facing increasingcompetition as regional or quasi-regionalplayers offer standardised services andprice incentives across multiple markets.

Juranyi: There are a few internationalplayers with good regional coverage inCEE. ING is one of the top ones, and themajor competitors are Citibank, UniCreditand, in some countries, Deutsche Bank hasquite good position, but not with fullcoverage in the region. In some countriesthere are also a few local players, but inmost cases their clients are the localinvestors, mainly investment funds andpension funds. The custody business isvery competitive in the whole region; insome countries there are too manycustodians, while in others where themarket has been attractive only in the pastfew years there are newcomers.Occasionally it takes several months afterthe decision before a new bank can launchits operations and the process can betroublesome, requiring huge numbers ofdocuments.

Competition is fierce in the region, butoccasionally that also helps to make jointlobbying efforts possible, as the difficultiesand problems are identical for all of us. Itrust the common effort and commontarget can be more useful than anyindividual lobbying. That is how theSecurities Market Practice Group(SMPG) was established in Ukraine byfour banks: ING, Citibank, UniCredit andSEB. The SMPG’s target is to harmonisethe documentation requirements and also,as a next step, to have the market make itmore flexible and require only thosedocuments that are internationallystandard.

How are new entrants into the marketdifferentiating themselves and establishing acustomer base?Mudrova: The Czech market is quitesaturated regarding custody. There is very

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intense competition amongst existingplayers and not much space for newentrants. One way to keep clients or togain new clients is to maintain a highstandard of service quality, whilelowering fees and further expanding thescope of services.

Järvitalo: At the moment, Handelsbankenonly has experience of establishingourselves in Estonia, where we became amember of the national CSD this autumn.Our intention is to be the firstinternational player in the market,providing global custody for local playersas well as sub-custody for internationalplayers. This is done in cooperation withour Estonian branch, which wasestablished in 2006. Branches have beenestablished also in Poland, but currentlywe have no plans for offering custody inthat market.

Egorov: In view of Federal FinancialMarket Services’ projects to facilitatedirect trading of foreign securities inRussia, as well as introducing the RussianDepository Receipts, NDC foresees newchallenges coming to the market andexpects to service the instruments of alarge number of entrants unknown beforeto the Russian public issuers. This requiresintensive developments, both operationaland in the sphere of cooperation, as wellas communications. NDC’s efforts arepressing towards establishing cooperationwith international organisations in orderto study the experience gained by thedeveloped markets. On the recent ECSDAmeeting hosted by NDC in St Petersburg,it was generally agreed that NDC hasbecome an equal partner by the EuropeanCSDs in discussing solutions ofharmonisation of market practices.

Bourgi: Clearly each foreign player willhave their own market entry strategycapitalising on their strengths; SociétéGénérale has a big footprint in CEEmarkets with local expertise and knowhow. Our strategy, at SGSS, is to capitaliseon this know how and couple it with ourinternational expertise. SGSS is adedicated business line (not just forinternal needs) with clear commitment tothe industry and an ambitiousdevelopment strategy.

Sisa: In the Baltic markets, we have not

seen any new entrants and there aremultiple reasons for that. The two mainones are the small size of each of themarkets, with market capitalisationranging from EUR2 billion in Latvia, viaEUR5 billion in Estonia and EUR9 billionin Lithuania. Advancing up the marketshare ladder is difficult in any market andtwo players that are highly quality rateddominate the picture. The revenuepotential, relative to the size of theinvestment and the management effortsrequired, does not seem to provide anattractive business case. We continue tosee competition from ‘regional windows’using the services of the two establishedsub-custody providers.

In the Ukraine, we are a new entrantourselves, together with many more.What we see here is that providers withoutspoken regional ambitions are the ones

establishing themselves and therebyintroducing features of conformity in anotherwise far from conformedenvironment. SEB has, together with ING,Citi and UniCredit, established a forum forbest market practice and nourishes highhopes for this forum to make a differencein introducing further internationallyaccepted mechanisms into this interestingmarket. We expect the Ukrainian marketto add more foreign suppliers to thepamphlet and that a consolidation willonly happen once the market has reachedmore of its full potential.

Penstone: Unfortunately, some of the newentrants (well established brands inWestern Europe) and late starters (newnames with no material experience in theregion) have the tendency to underminevalue in the CEE markets in a desperateattempt to buy market share. However,one new entrant is more clever and isattempting to compete at all levels –service, commitment, full product palletswhile leveraging pre-existing experiencein Germany.

Whether they will be able tosuccessfully establish a solid customerbase has yet to be evidenced but the regionhas perhaps become the most competitive

in the world.At UniCredit, we continue to pursue a

business model, which began in Austriaand Hungary in 1991, and differentiationbased on delivery and experiencecontinues to be the secret of our success.

Juranyi: I cannot tell from a personal view,as ING is one of the players that hasoffered custody services in the region fromthe mid 90s. But I think that thenewcomers are not in an easy situation.The foreign investors that have ties togood custodians do not move easily. Ofcourse, price is a factor and that isbeneficial for investors. A custodian –either a newcomer or an agent for a longtime – can offer value added services thatattract clients and that is a differentiator.First of all reporting, but also veryproactive staff and any new initiatives to

assist with smooth processing, are wellappreciated by clients.

As an emerging market, what are the mainrestricting factors that remain and what canbe done to tackle these? Mudrova: One of the biggest issues of thelast few years remains the creation of acentral securities depository (CSD) in theCzech Republic. Currently, the CentralSecurities Register, SCP, is considered asan ‘eligible securities depository’, however,under Czech law (the Capital Market Act)the CSD is expected to undertake the SCProle. All accounts and securities databases,as well as all past records, will betransferred from the SCP to the CSD onceit becomes operational. Originally, theCSD should have taken over the SCP atthe beginning of this year, however, theissuers, securities owners and otherentities entitled to maintain records havestill been waiting in vain for the decisionon its creation.

Järvitalo: The main restricting factors areto a great extent administrative andoperational. For example, the lack ofnominee registration requires individualaccounts in most of the markets and theaccount opening procedures are time

In the frontier markets of emerging Europe, progress isrelative to the country’s individual current stage ofevolution and willingness to change

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consuming. These markets have a lot ofoperational risks due to the lack ofstandardisation at all levels of the valuechain, especially in Kazakhstan andUkraine.

Egorov: The Russian capital market facesno dematerialisation problem, like mostEuropean ones, but requires fundamentallegislative improvements. Up to this day, acentral depository is absent in Russia,although its need has long beenrecognised by market participants. Thecentral depository bill is to be consideredby the State Duma in the near future andwill probably include shareholding, riskmanagement and corporate governancerequirements. The CSD is supposed to beestablished in Russia by the middle of2011, after several years of consolidation.

Bourgi: The CEE markets have evolvedwell and there are no obstacles as such.The key will be to bring localinfrastructure to international levels.

Sisa: These factors in the Baltics include:the reliance on the euro implementationspower to address overall shortcomingsand the delay of implementationheightens the FX risk; rising imbalances;and signs of moving in the wrongdirection from a macro perspective withsavings deficits, credit growth, wagegrowth, declining real interest rates andthe wrong policy mix. Here we wouldwish for a slower credit growth andtighter fiscal policy.

For the Baltics, the limited size of themarkets and low market cap of the listedcompanies is a restraining factor. Thelargest Baltic company (Mazeikiy Nafta)has a market cap of only EUR2 billion.The micro cap size of companies makesgood, new, listings easy targets for crossborder takeovers. The lack of qualityissuers (especially in Latvia) and limitedneed for further privatisations is ahindrance of development in size.

All three markets have insufficientauthority focus on assimilating to greaterEuropean wide initiatives.

For the Ukraine, the major restrictingfactors are: the lack of a consistentregulatory environment; the absence ofasset servicing guidelines; the lack of aDVP environment; obstacles relating tocurrency regulation; and the comparableinstability of the political environment.

The documentary nightmare in order toestablish client custody business is holdingmany institutions back and this, inaddition to the very high risk profilefollowing lack of regulatory consistency,is the largest hindrance for a furtherwidening of the sub-custody client base inthis market.

For all four of our markets, a generalrestricting factor is some difficulties infinding staff with the required experienceand expertise profile.

Penstone: Frontier markets, while offeringvery attractive returns, oftenunintentionally restrict entry through acomplicated account opening process ordissuade investment through punitive taxprocedures. Consequently, investors oftendetermine that entering a specific marketis not worth the effort and choosealternative markets or depository receipts.Account structures and account openingdocumentation continues to the mostquoted reason for not opening a market.

Culture continues to be one of the mostchallenging hurdles, whether it is localacceptance of foreign investors orconcerns over hostile takeovers by muchlarger multi-nationals.

In some markets, the securities industryis simply not high on the political agenda.In Bosnia for example, there is no debtmarket and the government is busyenough reconstructing the country.Nevertheless, our team has been successfulin pushing for change.

Education of local authorities alongsideour customers and hiring local staff witha ‘can do’ attitude are the only effectiveweapons to defeat these hurdles.

Juranyi: As mentioned above, the clearunderstanding of the status of globalcustodians, the status and relation of theunderlying clients with the custodians, thespecial types of investors, and the heavydocumentation requirements, arerestricting factors. The lack of flexibilityin the interpretation of requireddocuments, and required documentation isalso a restricting factor. For example, it isa very complicated situation in Russia –the cash account agreement should be aseparate one from the custodianagreement; it cannot be included in one,and that causes a lot of additional effortfrom all of the parties in the accountopening process.

The lack of a central course ofinformation for corporate actions is also aheadache for everybody and the missingstandardised procedures for corporateactions. Just a simple example: in a fewcountries you may never know when youwill get your dividend, it might even takea few years.

Some restrictions in connection withcash processing also make everybody’s lifedifficult. Long stories can be told about theRUB cash processing, with the obligatorypayment code requirements and the needfor transliteration of English Swiftinstructions into Russian.

What are the main challenges facinginternational players in the market?Mudrova: The major event in 2006 was thepreparation for the key changes associatedwith Basel II and the implementation ofthe Markets in Financial InstrumentsDirective (MiFID). This directive wasincorporated in the Capital Market ActAmendment effective as from 1 July 2007.The main changes include: a “passport”where firms covered by MiFID will beable to provide services in other EU stateswhile still being regulated in their homestate; new client categorisation – retailclients, professional clients and eligiblecounterparties – that will have varyinglevels of protection, starting with higherregulation in dealing with retail clients;more transparency both pre and post-trade with stricter price publishingrequirements and retention; and betterclient information capture to assure a firmis working in the best interests of clients.

Another important issue in the CzechRepublic is the new Income TaxAmendment and amendments to otherlegislation, that are part of the bill on thereform of public finance, which wasapproved by the Chamber of Deputies. Ifapproved by the senate and signed by thepresident, the corporate tax will bereduced to 21% in 2008, 20% in 2009 and19% in 2010. The WHT rates ondividends and interest income will bereduced to 12,5% starting in 2009.

The amendments extend the taxexemption for dividends received by aCzech parent company or a permanentestablishment of an EU company todistributions from subsidiaries that areresident in non-EU countries that haveentered into double taxation treaties withthe Czech Republic. A number of

ISJ25 pp38-55 ML 19/10/07 8:21 pm Page 46

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conditions have to be met, including arequirement that the subsidiary is subjectto income tax in the country of residenceof at least 12%.

Companies will be exempt fromcorporate tax on gains from the sale ofshares in a subsidiary resident in the EUor a country with which the CzechRepublic has concluded a double tax treaty,as long as the shares have been held for atleast 12 months. Qualifying holdings willbe defined in the same way as for thedividend exemption.

Järvitalo: For the countries of the formerSoviet Union, we see a very low level ofstandardisation also; of course, theregulatory aspects follow with this. As well

as the technical problems, these should notbe underestimated.

Egorov: As I see it, the main challenge weface is a standardisation barrier. Togetherwith Swift, we are working actively on ISOstandards to be implemented in theRussian market. This facilitates theimplementation of paperless documentflow and then the integration with theworld capital market infrastructure.

Bourgi: Challenges will not arise frominternal issues. It is a matter ofcapitalising on the internationaldevelopments in systems and know howand choosing the right internationalpartner to achieve their ambitions.

Sisa: The Baltic scene is relatively free fromsuch challenges. Only minor issuesrelating to the power of attorney structurein Lithuania for asset servicing issues andstrict Latvian rules for the establishmentof non-EFTA relationships are throwingsome shadows over these three markets.The newly implemented fierce finingsystem for late deliveries might have asetback, especially for one point of entryinitiatives to the three markets, but it is tooearly to say just yet.For Ukraine, the list of challenges islonger and considerably more complex:the absence of DVP settlement;sale/purchase agreement enclosed, thepayment is client responsibility, noguarantee fund; the absence of CSD; NDU

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and MFS might merge, but we foresee adependency on registrars for some time;the absence of a foreign nomineeconcept; the owner of account equalsowner of securities and the owner mustsign all documents; the lack of regulationsurrounding income and incomerepatriation; high risks concerning C/Ainformation, fragmented documentationneeds and different timings; informationon best effort basis, statutory documentrequirements, verified audit reportsnecessary in banks; the account openingprocess takes time and is not for the

impatient; and currently 19 documentsneed to be completed in SEB to open up arelationship and this is one of the mostefficient account opening processes in themarket.

Penstone: Local market risk is the mainchallenge facing custodians in the region.Whether it be a fractured infrastructure,as is the case in Russia, or undefined localmarket practices due to lack of realexperience, as in Kazakhstan, it isdifficult to identify all the risks in a givenmarket.

Second, bridging the gap between localmarket practices and internationalstandards remains challenging. What isstandard in mature markets is often notappreciated as being value added infrontier markets.

Transparency between the custodianand its customers is key to facing thesechallenges. End to end transparencybetween ourselves, our customers and theend investor is essential to ensuring thatall parties recognise local market nuancesor nuisances are recognised up front andwhat the local sub-custodian is doing toclose the gap or add value.

Knowledge remains key in mitigatingrisk and attaching value to servicesprovided.

How has the broader funds market developedin comparison to Western Europe?Mudrova: The origins of the Czechsecurities market and development of

funds markets are closely linked to themass voucher privatisation scheme, whichwas the main part of the government’seconomic reform programme in the early1990s. Recently, the EU-entry of theCzech Republic has had a significantinfluence on the development of thefunds market, especially in the field ofcollective investment. The advent ofbeing able to offer products and servicesin other EU member states under a singleEuropean licence has had the biggestimpact on collective investment.Likewise, the Czech capital market began

to be open to foreign entities and theforeign banks started offering funds fromall over the world. During 2006, thevolume of investment in open endedmutual funds increased by CZK13.5billion to CZK156.2 billion, according toa report by the CNB. Generally, the mostsignificant attention of investors isfocused on secured funds.

Järvitalo: This differs a lot from market tomarket, especially among the formerSoviet republics. Generally, there is astrong demand, as the need for custodialservices and financial services growswhen the domestic economies grow andget more integrated with the worldeconomy. The fund markets in the CEEcountries are less developed than inWestern Europe. In some markets, suchas Romania and Serbia, mandatorypension funds were only started in thelast few years. The most developedmarket is probably Poland, where thepension reform was done in 1999, sincethen, the assets have grown and we haveseen an increased interest in investmentfunds.

Bourgi: If we were to look at the gaps inwealth, pension funds usage, mutualfunds acceptance, saving rates, and levelsof pay, then it is understandable thatthere is a gap and in some cases a big one.However, on the positive side, the growthwill be far greater in CEE markets andlong term players will benefit greatly

from their current and futureinvestments.

Sisa: Looking at our four markets, theappetite for funds has been largest inEstonia, where investment funds andmutual funds, Estonian as well as foreigndomiciled ones, are increasingly popular.Investments into hedge funds to diversifyportfolios and increase returns are notunusual either. In both Latvia andLithuania the savings picture is moreconservative with the overwhelmingmajority of savings held as demand orterm deposits or in real estate. Theinvestment mentality is rapidly changinghowever, towards products in the moresophisticated end of the investment lineand especially mutual funds are gainingin popularity. In Ukraine, the investmentfund industry is still young. Thepercentage of savings being invested infunds is considerably lower than in theoverall CEE perspective. Theopportunities for growth both in theretail and wholesale segment areconsiderable. The private pension fundmarket is very small but expected togrow quickly.

Penstone: The local funds markets are stillevolving. Local investors need to beconvinced to move from cash savings intoan investment environment. Anycomparison to Western Europe would beunfair and would lead to misleadingresults. These markets need to evolve ontheir own time, some faster and someslower, however with the distinctadvantage of having Western Europe asan example of what to do right andwhere things can go wrong.

Juranyi: In the mature market, the fundsbusiness shows the increase – a bigvariety of funds were launched and newones established. Not only simple equityor money market funds, but the morecomplex hedge funds and also the realestate funds are quite popular. Not only have new local funds beenestablished, but also some foreign wellperforming funds have been introducedin the region. In some countries, however, the fund business is in its firststage and not significant today, but in these countries I think that will beone of the most significant developmentsin the future. ■


From our domestic clients, we have especially seen anincreased interest in Poland, Hungary, the CzechRepublic, Slovakia, Ukraine, Romania, Bulgaria and Turkey

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TRANSFER AGENCY


Who would be a transfer agent(TA)? They have fewercustomers thanks to the

ongoing consolidation in the investmentindustry and they face more competitionfrom multi-fund distributors. They arerequired less, thanks to the growingadoption of automation, which isdrastically reducing the revenue forthose operating in a market that waspreviously defined by its manualprocesses. And just to make thingsworse, the services they do provide haveto be far better than before, thanks tothe more discerning demands of theircustomer base. Things are not lookinggood for TAs.

This is at least one way of looking atthe TA market. “It is absolutely the casethat the market for transfer agents isdwindling. That is very clear and isdown to a number of reasons,” says PaulBratch, a director with Morse, a systemsmanagement consultant in the financialservices sector.

Bratch says that the larger providersare attempting to develop a biggermarket share in order to finance thenecessary investment and this issqueezing out some of the smallerplayers. Additionally, the greateradoption of automation is only justbeginning. “There is still a lot ofpotential for implementing more STPand I am still surprised at how littleautomation there is with the largeoperators,” he says.

Consequently, it is not surprising thatthe consolidation we have seenelsewhere in the investmentmanagement industry is also affectingthe TA market. Recently, a number ofTAs have been bought by the globalcustodians and asset servicing firms.Citi recently bought alternative fundsadministrator Bisys, while State Streethas entered into a 50/50 joint venturewith DST Systems called InternationalFinancial Data Services (IFDS).

“There is continual change in thecurrent TA market, be it throughregulation or the constant pressure oncosts and revenue, and the service leveldemands are constantly rising,” saysPaul Roberts, managing director, IFDS.

This rising expectation amongcustomers is putting a strain on TAsthat can only be relieved by seriousinvestment in systems and services, says

Roberts, and it is an investment that fewcan afford to maintain. “A TA can buildsome new technology, but unless theyare able to invest continually in newtechnology, it can be difficult to staycompetitive. You need shareholders thatsupport this view and, unless TA iscentral to what you do, it is hard tojustify the level of investment needed,”says Roberts.

If you are on the right side of theconsolidation trend, then you can still besuccessful and do a reasonable amount ofbusiness, he continues, but there simplyis not enough of a market to support,say 10 transfer agents, hence theimportance of consolidation. “Ourrevenue has gone up slightly over thelast four years and most of that hascome through acquiring greater marketshare. Revenue for existing clients isfalling at about 10% per annum, asclients move away to these multi-fundsplatforms,” he adds.

Acquiring market share and continualinvestment is one of only two optionsopen to transfer agents looking to keeptheir business viable, believes Roberts.The other option is to simply hang inthere and decide to offer a steady, nofrills, traditional service, where youconcentrate on not making any mistakesrather than trying to evolve the offeringto cover new areas.

A lot of the factors that have led todiminishing returns for TAs seem tocentre on efficiency – be it STP or amulti-fund platform. Consequently, saysRoberts, customers end up with a betterproduct at the end of the day. But thedownside is that there are many moremouths to feed in the administrationfood chain: the distributor, the fundplatform, the TA and the underlyingfund manager. Overall fund volumes andthe value of these funds are increasing,which means that this equation isworking at the moment, although it isquestionable how long it will besustainable.

So if the market starts to contracteven more, squeezing profit margins yetfurther, what other revenue generatingavenues can they explore? “Many TAswill recognise that they are professionalrecord keepers and just because, in thecase of the fund supermarkets, therecords are not kept with eachunderlying fund, does not invalidate

Weighingthe

optionsTo some, the

TA market may be dwindling,

but to others it is simply evolving.

Nicholas Prattexamines the

changes

ISJ25 pp38-55 ML 19/10/07 8:22 pm Page 51

their services.” In other words, if therecord keeping won’t come to the TAs,then the TAs must go to the platformsand provide these services for all of thefunds distributed through them.

Nevertheless, one man’s dwindlingmarket is another man’s opportunity andmany other TAs are bullish about theirprospects. “I would disagree that themarket is dwindling,” argues GertRautenberg, global head of transferagency services at Société GénéraleSecurities Services (SGSS). Much of it,he says, depends on interpretation andhow the activities of a modern day TAare defined. “There is a tendency for TAsto talk themselves down.”

If you look at the TA business assimply focused on record keeping,account administration and transactionprocessing, then yes it is becoming morestandardised and commoditised with areduced margin and fewer players, saysRautenberg. But, if you look at themarket as one that is changing andevolving, then it is possible to see thecommoditisation of the core activities asan opportunity to focus on more highvalue services, such as distributionsupport and hedge fund specific tasks,such as performance fee attribution, localcompliance guidance and web-basedfront end services. However, TAs are notalone in trying to target these services.

“As TAs, we have not had it very easyof late to clearly differentiate ourselvesfrom custodians and fundadministrators,” says Rautenberg. “Asthe needs of our clients are becomingwider and deeper, any successful TA willhave to understand those needs to besuccessful.”

Another potential rival to the TAs arethe multi-fund platforms or fundsupermarkets, such as CoFunds. But it isalso possible to forge a workingrelationship with the supermarkets,rather than simply go head to head forthe same business, says Rautenberg.

“From our point of view, these platformsare distributors and intermediariesbetween the TA and the widerdistribution chain, so our ability toprovide them with the right technicaldata, meet their information needs andoffer an efficient interface will be key todetermining the success of thisrelationship.”

It really depends on what kind ofbusiness a TA wants, Rautenberg says.Do they want to concentrate on highlycomplex but high margin activity or theless complex, lower margin areas? “Wesee ourselves as operating in the spacefocusing on providing high value addedservices and there are certainly otherplayers trying to position themselves aswe are. But there are still TAs that aresolely focused on the moreindustrialised, low value, low costapproach, but I am seeing less and less ofthose in today’s market.”

Josée Denis, global TA productmanager at BNY Mellon AssetServicing, principally covering Europeand Asia, also disagrees that there is adiminishing role for TA today. Shepoints to the emergence of moresophisticated investment products, notjust the hedge funds but also the realestate funds, as new avenues for TAs.

“We are in a healthy and growingfunds market and it is up to TAs to ridethat wave to ensure that they provide themost appropriate TA administration andquality of service to support the everevolving global fund distributionlandscape, regardless of the investmentfunds type and country and region ofdistribution,” she explains.

Denis feels that many fund managersare taking a dual approach to their TAappointments. While they are happy toappoint a third party TA for their retailinvestments, for the more sophisticatedalternative investments world, many areinitially performing the TA rolethemselves. They are then reviewing

what TA service providers out there aredoing in this space, before looking tothird party TAs.

Consequently, the more ambitious TAsare developing their alternativeinvestment arms, says Denis. Oneexample of this is Citi’s acquisition ofBisys. “In the future, there won’t be anyroom for niche players in the TA or fundadministration market,” says KarenTyrrell, managing director of Citi’sGlobal Transaction Services, Ireland.“Instead, there will be niche divisionswithin big firms. There will still be thoseinvestors that will only want to invest inhedge funds, but there will be a vastnumber of mutual funds investorslooking to work more with hedge fundsand I don’t think they will be looking touse two different TAs. Instead they willwant a one stop shop, this may explainthe consolidation that we have seen overthe last five years.”

However, this is not a foolproofanswer. “The mistake would be toassume that a big player could buy aniche operator and simply roll them overonto their systems. If that is done then itnegates any value added service that maybe provided by the niche player. It isimportant to recognise the reason forany acquisition and standardise thoseprocesses that are commoditised andbring some efficiency to bothorganisations but also identify thoseelements that create the added value andthat require different people anddifferent processes,” she says.

These types of investors moving intothe hedge fund space are seeking moretransparency and regular liquidity andreporting, says Tyrrell. Previously, ahedge fund would produce monthlyreports for its high net worth investorsbut this is not acceptable for theinstitutional investor seeking dailyliquidity and daily reporting. Investorsare also creating a hybrid market asconvergence between the traditional and

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ISJ25 pp38-55 ML 19/10/07 8:22 pm Page 52

TRANSFER AGENCY

alternative funds continues to flourishthrough products such as 130/30 andvarious UCITS-based products.

But even though the distance betweenthese funds may be diminishing, therestill remain some differentiatingcharacteristics for TAs to deal with, saysTyrrell: “One such difference is the legalstructure. There tends to be lessregulation and more of a master feederstructure, so the reporting for a TA isdifferent to that of a mutual fund. Andthen there are the fee calculations, whichtend to be different and potentially morecomplicated for hedge funds.”

As well as new fund types, TAs arealso benefiting from new geographies,notably in the Asian market. ScottMcLaren, head Asia Pacific, Sales andRelationship Management for RBCDexia, believes there is still some in-sourced activity in Asia, which will notbe able to sustain the technologyupgrades, regulatory changes, andvolume increases that characterise themodern TA market.

“The Asian market is still heavilymanual, particularly Singapore, HongKong and Thailand, but some marketslike China already have an automatedmodel, which is a blessing since there ishuge demand for mutual funds withmillions of trades coming in, sometimesdaily. These manual markets are goingto feel the pinch when volumes continueto go up, as they will have a heavy

reliance on a tight labour market, will beexposed to potentially failing to carryout all the trades in a day and thisrepresents a considerable risk,” saysMcLaren.

There is also a great deal of differencein the operating models of differentregions in Asia, says McLaren. “Thereare many, such as Taiwan, that have notyet fully accepted third partyadministrators to operate in the fundsmarket, therefore limiting the role ofany TA with global ambitions. And, ingeneral, when talking of the emergingmarkets, the price for the service can bevery competitive.”

RBC Dexia is not alone in targetingthe Asian market. Some of the key globalTA players have been operating in Asiafor over five to seven years already.

BNY Mellon’s Denis says: “If I have aclient distributing Luxembourgdomiciled funds in Hong Kong orTaiwan, I have to make sure I have anAsian dedicated hub located somewherein Asia that will allow us to service themin the appropriate time zone, languagecapabilities, and most importantly, be ableto deal with the cultural differences in thefunds world across the Asian market.”

The real opportunities in the TAmarket seem to lie where inefficiencystill remains. However, the TAs arguethat increased automation should beencouraged wherever possible. “If a TAfinds its volume is dwindling, it is

because either another entity is doingthe sub-agent work or has a betterservice offering,” says McLaren. “Forexample, a fund supermarket or platformmay have a performance measurementservice or better consolidation acrossmultiple funds that is taking businessaway from the TA.” An unsophisticatedTA will struggle to cope with highvolume retail, which is predominantlymanual and requires a high level ofaccuracy and a large dealing team. But,says McLaren, if a TA has the capacityand technology to deal with thecomplexity and volume of today’smarket, then there are countlessopportunities.

Likewise, the growth of STP shouldbe strongly encouraged, as shouldoutsourcing. “It very much depends onyour cost structure. For example, if youhave 20 people all involved in manualprocessing, it is a considerable cost inhuman resources, office space, insuranceand operational risk. So, whileautomation brings in efficiencies, it alsobreeds a better model and brings downthe risk profile and resultant cost of thebusiness. Anybody that understands thebusiness knows that more automation isbetter for everyone and the variousinitiatives in Asia need to get tractionand adoption by the industry at large both on the distribution side andwith the fund managers’ support,”concludes McLaren. ■

ISJ25 pp38-55 ML 19/10/07 8:22 pm Page 53


With the majority of Asianequity markets deliveringstellar, double digit

performance in 2007 year to date,institutional and individual investorsacross the region continue to flock to theliterally thousands of funds –predominantly European UCITs –available for purchase in Asia throughmyriad banks, brokers and insurancecompanies. Indeed, with US andEuropean GDP numbers paling incomparison to Asia’s emergingeconomies, where wealth creation hasbecome the norm, growth in offshoreinvesting continues to climb, with somemature markets such as Taiwanrecording 150% year over year.

Implications of growthWhile such phenomenal growth shouldbe viewed as beneficial for the underlyingemerging capital markets and investorsalike, the commensurate processingburden on many fund managers and theirdistribution channels can be huge,complex and costly. Buoyant marketsoften drive unexpected surges in tradevolumes, which can cause manually

fraught processes to buckle, fundmanagers to shudder and investors’returns to suffer.

In reality, the difference betweenhandling 50 and 500 trades per dayrequires a more automated operatingmodel that is efficient, scalable and routesmonies as quickly as possible to the hands– and imminent investment choices – ofthe fund manager, and then back(correctly) to the account ledger of theinvestor.

As they exist today in Asia, fundprocessing inefficiencies are due in largepart to the heavily fax and paper-basednature of the fund industry, coupled withits broad geographical footprint,disparate regulatory environments andconvoluted reporting requirements.Unfortunately, such inefficienciestranslate to an opportunity cost for fundmanagers, their funds’ performance and,in turn, their clients.

Consider how a faxed instructionsitting on a desk waiting to be inputtedinto a system impacts negatively the endto end cycle time of a transaction. Itprevents fund managers from knowinghow much new money will soon beavailable for investment, and it delaysinvestment opportunities – and possiblyreturns – for the end client.

The need to streamline communicationand service levels betweengeographically diverse, local fundprocessing centres in Asia, which areexperiencing rapid growth, and multipleoffshore fund manufacturing centres inEurope (for example, in the UK,Luxembourg and Ireland) has, therefore,never before been so critical.

In today’s world, real-time, transparentaccess to money flows across funds andgeographical markets is essential if afund manager wishes to maintain acompetitive edge. Choosing the optimumoperating model that gives real-timeaccess to such information is key.

Change in focusHistorically, a courageous handful oflarge fund houses chose not only to try tomanage money well and outperform theirbenchmarks, but to build the IT systems,processes and infrastructure required tomaintain shareholder records, includingpurchases, redemptions, transfers,account balances and NAVs. For most,this proved a substantial resource

commitment given the complexities ofoperating across time zones in multiplejurisdictions. It also helped propel manyfund houses down the expensive path ofIT development and maintenance,hypothetically detracting attention fromtheir core competency of fundmanagement.

So, the growing trend that emergedand continues today is for fundmanagement companies to outsourcesuch mechanics to reputable third partieswho have the expertise, systems, scaleand physical presence in key geographies – the operating model – required tomanage such matters efficiently and costeffectively.But what are the perceived obstacles to –and ultimate advantages of – adoptingsuch an enhanced operating model?

Possible reasons preventing changeIt is certainly understandable that thereexist coordination issues between thetechnical and operational staff withinmany fund houses, who have committedhuge resources over time to theirinternal systems, and external thirdparties who have sprung up over theyears to specialise in what has beentermed the transfer agency space.

While arguments abound as to whyfund houses should focus on managingfunds for optimal return and let thetechnical processes be managed byinstitutions who are better equipped tooffer scalable, state of the art and costeffective solutions, such lines ofreasoning are not always cogentlyaccepted, for two primary explanations.

First, a case could be made that manyfund houses that operate in both Europeand Asia foster and support two verydifferent and often competing sets ofmanagement objectives – two cultures atinadvertent odds within the sameorganisation. As such, attempting toimplement a new business model thatserves and achieves different markets’objectives through a standardisedapproach may be viewed as an inherentcompromise and, ultimately, not in thebest interest of each individual market.Moreover, if territories and assets weresuddenly combined into one masterplatform across multiple jurisdictions,then how would you attribute success,allocate rewards and compensatedisperse distribution channels correctly?

TRANSFER AGENCY IN ASIA

Casting awider net

Scott McLaren of RBCDexia explores howAsian asset growthhas been challengingthe status quo

ISJ25 pp38-55 ML 19/10/07 8:22 pm Page 54

TRANSFER AGENCY IN ASIA


And second, if one posits thatregulatory regimes are best understoodand navigated by local players with localinfluence, how could a single globalsolution possibly better position entitiesthat operate across multiplejurisdictions?

While both rationales posited abovemight have seemed legitimate at somepoint in the past, it is fair to say that theemergence of the “global transfer agent”model should overturn such thinking. Wewill examine how later. But, first, let usremind ourselves how most funddistribution business in Asia is arduouslyconducted today.

Current modelConsider a fund manager that distributesmultiple products across severalcountries in Asia and through a numberof distribution channels in each market.As funds trade on a daily basis, everysubscription, redemption or transfermade at the consumer level needs to bereceived, tallied and dispatched up theorganisation to be further aggregatedand passed along until it is finallysubmitted (within a rigorous timedeadline) and accepted and acted upon bythe fund manager. Then, of course, theprocess reverses and acknowledgment ofsuch actions are passed back down thechain to be reconciled and reported.

For all parties involved, this end to endcycle translates to a lack of transparencyat all stages and a nightmare of manualand error prone processes both on thesubmission and reconciliation ends. Forthe fund house, the administrative burdenquickly converts to higher expenses(especially in actively traded markets)and, by virtue of an inefficient operatingmodel and lack of standards andautomation, an inability to providequality customer service. For thedistribution channel, it can meandissatisfied customers and either tardy orinaccurate commission and trailing feecompensation.

Do such assertions require a realitycheck? You need only consider the plightof a pensioner whose timely instructionfor a lump sum distribution of his entirelife savings was submitted just as thestock market was peaking. Due toprocessing backlogs, however, his orderwas delayed several days and only actedupon once the market had significantly

corrected, resulting in far less of aredemption value than he had expected.Even worse, perhaps his cheque thenwent missing in the mail and he onlylearned of his missed opportunity weekslater. In such a scenario, the reputationalrisk to the fund management company farexceeds the actual, though not negligible,cost of correcting the situation.

Global model and its benefitsJust as a global transfer agency’s online,real-time platform allows fund managers,compliance officers, operational andcustomer service staff to slice and dicedifferent views of much of the sameinformation, and then act quicklythereon, the benefits of such aconsolidated, single view can beappreciated from many perspectives. Forinstance, faster and more accurate(automated) reconciliation of tradespleases all parties along the end to endtrade cycle. It drives down operationalcosts, thereby improving a fund’sperformance and gratifying the endinvestor, not to mention the distributionchannels’ sales people and other customerservice staff. It also largely eliminatesinput errors, exceptions processing andreconciliation risks, which no doubtpleases legal and compliancedepartments and regulators alike – inevery country involved. Distributionchannels delight as well, for theircommissions and trailing fees are paidout accurately and on a timely basis,which provides added incentive for futureasset gathering.

Paperless trade order aggregation andsubmission means the ability to extendtrading windows for distributionchannels, which results in less pressurefor support staff (who will thereforemake fewer errors and not violatesubmission deadlines) and faster andhigher AUM for fund managers. Onceagain, compliance officers are relieved,and regulators are sure to receive fewercomplaints from the disgruntledinvesting public.

A single, consolidated view acrossmultiple products allows clients to monitortheir positions in real time and makeinformed decisions about futuresubscriptions, transfers and redemptions,asset allocation and portfolio optimisation.

The introduction of operationalstandards (that automatically comply

with local practices and regulatory andtax reporting requirements) across ageographically diverse institution and itsdistribution channels removes subjectiveinterpretation of facts and resultantcalamities and claims.

Finally, local support across the tradecycle drives prompt servicing in keymarkets and time zones and gives fundmanagers the edge they need to investswiftly and accurately. In sum, a“harmonised” operational modelproduces exactly that sentiment in themany parties that use it and/or benefitfrom its use across the trade cycle.

The challengeConfronting the status quo and helpingclose the gap between what fund managersperceive may one day be possible througha global transfer agency operationalsolution and what is already availabletoday is an ongoing challenge for transfer agents, to be sure. At RBC Dexia,we believe the emerging, dominantoperating model for fund manufacturingcentres and their distribution channels isto offer consolidated, real-time access todata for fund managers and their clients and service staff – all ultimatelyaiming to protect investors and serve theirbest interests. ■

Scott McLaren,head of AsiaPacific, Salesand RelationshipManagement atRBC Dexia. ScottMcLaren of RBCDexia works withfund managersacross Asia toi m p l e m e n t

distribution solutions and optimisetheir operating models. RBC Dexiasupports lead fund managers globallythrough 15 locations in the NorthAmerica, Europe and Asia, and currently processes over 9 milliontransactions per year for some 6.4million shareholder accounts. Throughan integrated technology andinfrastructure, RBC Dexia is able to provide increased efficiencyand service quality while reducing costand risk.

ISJ25 pp38-55 ML 19/10/07 8:22 pm Page 55

SIBOS 2007 REPORT


Gaining momentum?Virginie O'Shea examines the main issues

discussed at this year's Sibos

This year's opening plenary speechby new CEO Lázaro Campos wasas slick as a well oiled machine.

His decision to opt for a walk among thedelegation conveyed (as I imagine wasintended) his desire to engage withSwift's customers and it certainly set thetone for the rest of the week.

Campos stressed the cooperative'sfocus on lifting the barriers to the use ofSwift for both new and existingcustomers. “Not everyone wants or needsa PhD in Swift. They just want a seamlessoperation. A Swift button on a faxmachine - beautiful simplicity,” hecontended. This is all part of the plan tobuild a different Swift (as detailed in ourlast issue): a Swift that has a deeperunderstanding of who its customers areand how to “delight” them. Part of thiswas the suggestion that Swift willintroduce a flat fee for a period of threeyears for its largest users (which wentdown rather well with the crowd).

He was also frank about Swift's lack oftraction in the fund managementindustry in terms of participants andacknowledged that unless cheaper andsimpler entry points to the network areintroduced, fund managers' participationwill remain “marginal”. To this end, itwas a lucky coincidence that this year'sconference was in the fund managementhub for the US, Boston. According toSwift, many local fund managers took theoption of a day pass to the conference,

which was a positive result for both thecooperative and the exhibitors alike.

The issue of devolution washighlighted by Campos when heannounced that the managementstructure and thus the decision makingprocess of the organisation will beregionalised. Three regions will thereforebecome the “cornerstone” of thereorganised Swift. “I want the decisionmaking process to be as close as possibleto where you and your businesses are. Noone should be kept waiting for a decisionfrom HQ,” he explained. Each regionalhead will be empowered to run the regionwith considerable autonomy but keyglobal clients will continue to have globalaccount relationships with Swift.

As with previous years, Swift's focusremained on engaging the corporatecommunity on the payments side of thebusiness and extending its reach into thefunds community on the securities side.Sessions were geared along these linesand payments panellists endlesslydebated how to improve their offeringsand remain competitive in acommoditised market. Luckily, as well asrepresentation from the local fundmanagement community, Sibos 2007 alsoboasted a record number of corporatedelegates, who were at hand to providesome answers.

The corporate panel urged banks to tryharder to understand corporate businessprocesses and adjust their offerings

accordingly. Walter Boileau, vicepresident and corporate treasurer ofSanmina-SCI, criticised banks' currentstandpoint: “Banks seem more interestedin getting the sale done than inunderstanding our business processes.”Doug Gerstle, assistant treasurer,Procter & Gamble, seconded this notionand was emphatic about what banksshould offer corporate customers: “Whena bank approaches me, I want to knowhow it can help me deliver against myobjectives, not the other way around. Iam the customer. Listen to me in order tohelp me achieve what I want to do.”

The payments industry delegationwas not alone in getting a dressingdown during the sessions, the securitiespanel on the future of the marketcriticised the market for letting the issueof T+0 fall off the radar. TillGuldimann, vice chairman of SunGard,called the delegation's attention to thefact that while North America andEurope are running the risks inherent inT+3 settlement, emerging markets suchas Shanghai and Moscow have adoptedT+0. Guldimann suggested that thismight become a severe competitivedisadvantage in the future, given thegrowth of these markets over recentyears.

It seems that Swift's ambitions to putthe customer at the centre of theequation and step up to the plate in termsof “aggressive leadership” are timely andin keeping with the general attitude ofthe financial services market. Given thatwe live in increasingly competitive times,being on the offensive seems the only wayto survive. ■

News of the weekBy far the most interesting news ofthe conference was theannouncement by Swift of its newpricing structure to encouragegrowth from its high volume users.These parties will now be given theoption of fixing the price of theirtraffic over Swift for the next threeyears, based on 95% of what theypaid in 2007. However, volumegrowth will be limited to amaximum of 50% a year. Thispricing will initially be targeted atSwift's top 60 customers, but thismay be extended to smallercustomers at a later date.

ISJ25 pp56-67 ML 19/10/07 8:52 pm Page 56

SIBOS 2007 REPORT


RBS provides the perfect getawayvehicle to the Sibos afterparty

ABN AMRO’s last stand Sibos souls brave the descent

Nat Sey, data doge

Lobster pink andwith its pincersrestrained, ISJ’svery own JustinLawson hefts acrustacean

BHF Bank’s booze cruise sortsthe wheat from the chaff

Candid camera

ISJ25 pp56-67 ML 19/10/07 8:52 pm Page 57

The payments environment inEurope has changed significantlysince the creation of the original

Trans-European Automated Real-timeGross settlement Express Transfersystem, commonly known as Target, in1999. According to the European CentralBank (ECB), the decision to update andupgrade the system was driven byrequests from users for a moreharmonised level of service. Target'sshortcomings in the area of cross borderpayments in particular, encouraged thecentral bank to begin work on theTarget2 system, which is due to go liveon 19 November this year.

Target is currently one of the threelargest payment systems in the world andit settles around EUR2.3 trillion everyday. It is a decentralised real-time grosssettlement (RTGS) system consisting of16 national RTGS systems, the ECBpayment mechanism and the Interlinkingsystem. Thus Target is not really a singlesystem but a collection of systems linkedtogether under the banner of one and ittherefore shares the inherent weaknessesof each of the underlying systems.

In view of this, and because of

developments such as the furtherenlargement of the euro area, the centralbank decided to build the secondgeneration of Target. Current Targetusers will migrate in different waves ontothe Target2 platform, beginning on the19 November go live date. Accordingly,Target2 will have completely replacedthe current decentralised infrastructureby 19 May 2008. The new and improvedsystem promises to provide a harmonisedservice level and a harmonised pricingscheme with a single technical platform:the Single Shared Platform (SSP).

In December 2004, the governingcouncil of the ECB approved the jointoffer made by three national centralbanks of the euro area - the DeutscheBundesbank, the Banque de France andthe Banca d'Italia - to build and operatethe SSP. Although the SSP is technicallya single platform (the name gives itaway), Target2 is legally structured as amultiplicity of RTGS systems. Eachcentral bank in a country thatparticipates in Target2 will thereforecontinue to have legal responsibility forthe business and legal relationships withthe domestic participants in the system.

The migration to the new system hasbeen arranged in four waves or countrygroups and the migration period islimited to six months. The fourth groupis reserved for contingency measures.Each wave consists of a group ofnational central banks and theirrespective Target user communities. AlanBuckland, vice president, Global ProductManagement at the Bank of New YorkMellon, elaborates on the migrationprocess: “Each country has its ownnational migration plan to move from theold local Target infrastructure. One ofthe key benefits will be the ability to haveuniform access to Target2 for pan-European operators - the systems accessrequirements will be the same regardlessof your location.”

To participate in Target2, a bank mustestablish a timeline for the existingnational RTGS clearings and on joining,must identify a suitable participationstructure and make any required internalchanges to support this. It must makechanges to its message handling, to sendand receive messages from the newTarget2 SSP, which will adopt SwiftNetFIN Y copy. The participant must thenregister with a participating central bankand take part in testing, training andimplementation tasks.

Buckland is positive about the impactof Target2 on the European paymentslandscape. “Given that Target2 willeffectively replace the old nationalinfrastructures, it will obviously reduceindustry costs at a macro or nationallevel, which can only be a positive result,”he says.

Antonella Vanara, payment systemsmarketing manager at SIA-SSB, adds:“Three categories of users will benefitfrom Target2: national central banks,credit institutions and ancillary systems,including retail payment systems; largevalue payment systems; central securitiesdepositories, international centralsecurities depositories, centralcounterparties, clearing houses, securitiessettlement systems, and foreign exchangesystems.” SIA-SSB is helping financialinstitutions to access Target2 and hasdeveloped the ancillary system interface(ASI) on behalf of Monte Titoli -Gruppo Borsa Italiana and e-MID, sheexplains.

Alan Koenigsberg, JPMorganTreasury Services' core cash product

TARGET2-PAYMENTS


The next generationEurope is witnessing

the final stages ofthe transition to theTarget2 system, butwhat will this mean

for the main playersin the market?

Virginie O'Sheainvestigates

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TARGET2-PAYMENTS


executive for EMEA and the Americas,agrees that Target2 will prove to be asignificant influence on the future shapeof the market. “Target2 is an extremelyinteresting development, moving Europetowards a harmonised processing andpricing model for RTGS payments withinan SSP. This consolidation andharmonisation will remove many of thefunctional and technical discrepanciesthat exist today. In this regard, thisinitiative should be seen as a majorcatalyst for change, allowing banks,particularly multi-country banks, torealise further efficiencies byrationalising the number of nationalclearing entry points. The Target2platform is designed on the best ofavailable national infrastructures withrefined capabilities and increasedresiliency,” he elaborates.

As Koenigsberg notes, the newfunctionalities of Target2 enable multi-country banks to consolidate theirinternal processes, such as treasury andback office functions, and to integratetheir euro liquidity management moresuccessfully. For example, participantsare able to group some of their accountsand to pool the available intradayliquidity for the benefit of all members ofthe group if the legal requirements arefulfilled. In addition, Target2 users haveuniform access to comprehensive onlineinformation and easy to use liquiditycontrol measures.

Target2 therefore provides anopportunity for further centralisation ofEuropean payment operations and torationalise clearing memberships. Newparticipation options, if used effectively,enable a multi-country bank to gain thedual benefits of centralisation whileavoiding any conflict with legacy nationalmarket practices, says Koenigsberg. Thepayment message flow between Target2participants will be more direct,particularly in the case of paymentsbetween different countries, providinggreater transparency and efficiency.

The system has been designed in amodular way and every module is closelyrelated to a particular service; forexample the Payments Module is,unsurprisingly, for the processing ofpayments. Some of the modules areoptional for central banks and those thatchoose not to use them can offer therespective services via proprietary

applications in their domestic technicalenvironments. These optional modulesinclude the Home Accounting Module,the Standing Facilities Module and theReserve Management Module.

The Target2 system uses Swiftstandards and services, such as FIN,InterAct and FileAct, to enablestandardised communication between thesystem and participants. Theseparticipants will be given a number ofoptions for access to the system,including direct and indirect access (via adirect participant). Another category ofaccess available will be Target2addressable Bank Identifier Codes (BICs).Any direct participant's correspondent orbranch that holds a BIC is eligible to belisted in the Target2 directory,irrespective of its place of establishment.Moreover, no financial or administrativecriteria have been established by thesystem for such addressable BICs,meaning that it will be up to the relevantdirect participant to define a marketingstrategy for offering such status.

Koenigsberg elaborates on some of theother features of the system: “The SSPoffers payment categories, reservationand limit setting capabilities, greatercontrols for payment queue management,further encouraging the use of highpriority payment instruments like theEBA Priority Payment Scheme. Pricingis standardised and a tiered structureensures lower costs for higher volumes.”

Target2 provides a harmonised set ofsettlement services in central bankmoney for all kinds of ancillary systems,such as retail payment systems, moneymarket systems, clearing houses andsecurities settlement systems. The mainadvantage for these systems is that theyare able to access any account on the SSPvia a standardised interface. In essence,this means that participants are providedwith liquidity optimisation opportunities.

As a result of this impact on ancillarysystems, Hans Cobben, chief operatingofficer of SunGard's AvantGardPayments division, believes that Target2will have an impact on the developmentsin the retail payments systemarchitecture under the Single EuroPayments Area (SEPA). “As one of thefirst SEPA implementation phases,Target 2 will clearly be both an acid testfor the readiness of the financialinstitutions to cope with the new

standards as it will have a 'dry run'function for the new pan EuropeanACHs. At the same time, we will seewhich banks will be taking the lead andpotentially become service providers fortier three and four institutions.”

The changes introduced by Target2are less significant from a legal andmonetary policy perspective, contendsJPMorgan's Koenigsberg. “At this levelthe infrastructure will remaindecentralised; for example it is still arequirement to hold a central bankaccount for holding minimum reserves ineach country that a bank operates in,there is no means yet to centralise this.Additionally, some central banks areintegrating their home accounts into theTarget2 platform; others are retainingtheir proprietary home account system.Similarly, ancillary systems areintegrating to the Target2 system atdiffering speeds for purposes of liquiditytransfer and settlement, creating furtherinconsistencies, often at a national level.In some instances banks are forced intoholding a Target2 account within aspecific country to meet nationalrequirements,” he explains.

Additional challenges have beenpresented for banks based in thosecountries such as Sweden and the UKthat have opted not to provide direct linksinto Target 2, says Koenigsberg. “Even atthe level of the basic paymentformatting, some national requirementswill remain, at least in the short term.For example, national balance ofpayment requirements and national codewords are required in some countries. Insome cases it has been a challenge tointegrate these national requirementsinto the more integrated platform. Thishas been particularly evident in the caseof multi-country banks, many of whichare centralising their treasury andoperations to gain increased efficienciesfrom the opportunities that Target2presents,” he continues.

Therefore, according to Koenigsberg,despite the efficiencies introduced byTarget2, there are still someinconsistencies to be tackled. “It remainsto be seen how quickly some of thenational features are addressed andremoved. So far these differences havemerely served to encourageconcentration of payment flows throughseveral key countries,” he concludes. ■

ISJ25 pp56-67 ML 19/10/07 8:52 pm Page 59

SECURITIES LENDING


Say that within earshot of anysecurities lending specialist andstand well back. Lighting the blue

touch paper on a super size firework islikely to have less of an explosive effectthan articulating such a thought. Thesharp spike in the volume of NorthernRock's market capitalisation out on loanin the summer was not a cause of theNorthern Rock crisis. As all keenstudents of history will surelyappreciate, it was an effect. As all keenlegal students will appreciate, hard casesmake bad law, and this is an open andshut hard case.

And, as data from Data Explorersshows, it was not an isolated blip but acontinuation of a trend dating backalmost two years. The volume ofNorthern Rock securities out on loan (6-7%) has been significantly above theaverage for the banking sector (2%) formuch of that time. “Activity really pickedup in February 2007, when it rose to10%, and then reached extraordinaryhighs in June and July,” explains JulianPittam, managing director at DataExplorers. At its absolute height, around22% of Northern Rock's marketcapitalisation was out on loan.

The BBC's take on the story, inevitablydumbed down for the broadercommunity, was that a single hedge fundwas said to have been behind almost halfthat position. “Data Explorers puts theoverall profits for those short sellers ofNorthern Rock shares back in June atsomewhere just north of GBP100million,” noted the BBC. “Others in thehedge fund community reckon the overallprofit from shorting Northern Rock ismuch higher, and could be as much asGBP1 billion.”

Whatever the precise levels of profitbooked, the consistent upward move inthe pattern indicates a degree of marketunease well before the refinancing crunchthat saw the first run on a British banksince the 1860s. Or, the more flippant

might say, since Mary Poppins first hitthe cinema screens in 1964. That uneasewill have been based on uncertaintybased on extensive (and expensive) firsthard research into the former buildingsociety's business model, say marketobservers.

Finding market participants willing totalk on the record about Northern Rockproved as difficult as finding hens' teeth.The guarantee of a cloak of invisibilitywas required by those who did agree toprovide a background, while othersissued uncharacteristically blunt refusalsto be interviewed. This makes it difficultto address the subject in a meaningfuland balanced way, but it is clear thatanyone who resurrects the debate aboutwhether securities lending is good or badbecause of Northern Rock will findthemselves accused of showing afundamental misunderstanding offinance.

“This is how free markets work,” saysone securities lending fan. “Do you wanta command and control market,collective farms and five year plans? Ordo you want free markets? Do you want

to be the City of London, attractingfinance from around the world, or do youwant to be Kuala Lumpur, and bansecurities lending? Look at how muchinternational capital it [Kuala Lumpur]has attracted over the years. Shouldwheat producers be banned from lockingin profit by selling forward? Should weban short futures? Should we ban indexfutures? Should we insist that everyoneinvest on a long only basis?”

The clear implied answers are, ofcourse: No. Yes. London. No. No. No.And finally, 'what on earth are you doingin the modern financial services industryif you have such a blinkered view of howit works?'

The fact is that however indignant thefinancial Luddites amongst us might be,hedge funds and other investors put theirmoney at risk every day, and were onlydoing their job by taking their profits.Moreover, the respected financialinstitutions that were lending thesecurities in question were doing theirjob by trying to boost overall portfolioreturns. Had they not lent, they couldconceivably have been found to bederelict in their duty to their endinvestors, especially at the height of thestorm, when the stock in question became special and attracted apremium price.

Then again, had they been carryingout their own investment analysis theymight have spotted for themselves theflaws in Northern Rock's business model.It is well known in the market that hedgefund investors had been sceptical aboutNorthern Rock's funding model for sometime. When it came to funding, NorthernRock was over-reliant on the short termcapital markets for its funding.

If any lessons are to be learnt fromthis affair, could one be that in-houseindependent analysis is fundamentally agood thing? Might another be that ifthere is borrowing demand for a stockthat an institution owns, should that initself not cause an amber light to flash?Might it not be a good idea to at leastconsider the idea of selling that stock atjust under GBP11 (which Northern Rockwas in June), rather than pocket a fewbasis points in fees and then be handedback a stock that is worth less thanGBP5, as Northern Rock was inSeptember, or even worse, GBP1.35 atthe time of writing in early October? ■

Seeing the lightThe Northern Rock affair demonstrates yetagain that securities lending is a bad thing,and must be forbidden, argues Brian Bollen

ISJ25 pp56-67 ML 19/10/07 8:53 pm Page 60

REG NMS VERSUS MIFID


Although they are not identicaltwins, the EuropeanCommission's Markets in

Financial Instruments Directive(MiFID) and the Securities andExchange Commission's (SEC)Regulation National Market System(Reg NMS) share the goal of creatingfairer and more efficient equity markets.Reg NMS represents an attempt by theSEC to modernise the US equitylandscape by improving share pricetransparency and encouraging theuptake of electronic trading. MiFID, onthe other hand, aims to harmonisesecurities regulations across the 25European Union member states, providegreater transparency and increasecompetition in the exchanges market.

Alasdair Haynes, CEO of agencybrokerage and technology firm ITG'sInternational Operations, believes thatthe longer term impacts of bothregulations may be similar. “Both RegNMS and MiFID have accelerated a

movement towards electronic trading,crossing networks and dark pools ofliquidity and the industry's perception ofthese as alternative trading destinationsis already growing. It is likely that withReg NMS and MiFID's implementation,more and more trading destinations willemerge, leading to enhanced competitionand a more level playing field where theproducts and systems that are innovativeand beneficial for their users that willthrive in the post-MiFID and post RegNMS world order,” he comments.

Eric de Nexon, head of Strategy forMarket Infrastructure, Société GénéraleSecurities Services (SGSS), believes thatone of the key similarities between theUS market structure and the Europeanone as a result of regulation will be theapparition in Europe of the multilateraltrading facilities (MTFs), which willcompete with the stock exchanges. “It isalso possible that in Europe, like in theUS a few years ago, the end of theconcentration obligation of the orders onthe stock markets will bring, in a firststep, a fragmentation of the market, andin a second step, a consolidation of thismarket,” he explains. In the longer term,both should reinforce the competition inthe market. The prices should be lowerand the firms should be able to developtheir services at a European level, deNexon adds.

Both regulations have also beenlambasted by leading industry figures forthe potentially negative impact that theypose to the financial markets. Evencurrent SEC commissioner Paul Atkinswas compelled to criticise the dangersinherent within Reg NMS in September2007: “In my view, Reg NMS representsa massive regulatory intrusion into oursecondary trading markets that wascompletely unwarranted, given the lackof evidence of market failure and theavailability of substantially less intrusivemeans to advance the purported goals.Reg NMS has the potential to dosignificant harm to our markets byunduly interfering with the operation ofcompetitive forces. Whatever itsjustification, Reg NMS is a carte blanchefor unsupervised meddling by the SECstaff in the marketplace for years tocome.”

Likewise, concerns were raised by thechairman of the UK Financial ServicesAuthority (FSA) Callum McCarthy

during preliminary discussions aboutMiFID in October 2003. It wassuggested that the directive might bemisguided and anti-competitive, and thatthe provisions could send GBP300million of business to New York.However, the long term benefits of theregulation have since been highlighted bythe regulator and, at the end of 2006, theFSA published a report assessing boththe costs and benefits of MiFID.

Hector Sants, FSA managing directorfor wholesale and institutional markets,commented at the release of the report:“As we have already foreshadowed, it isclear that the implementation of MiFIDrepresents a substantial cost to industryparticularly in the upfront years, but itdoes create the potential for revenueopportunities over the longer term. Wewould encourage firms to focus on theseopportunities.”

Reg NMS has not fared quite so wellover the last couple of months. Therecent closure of the Boston EquitiesExchange has been cited as proof thatthe regulation's goal of opening up theexchanges marketplace to smaller playershas failed. The exchange shut its doorsfor the final time after two years becauseit failed to gain sufficient market share. Itwas assumed that Reg NMS and its orderprotection rule would breathe new lifeinto regional exchanges, but this wasbased on the proviso that exchangescould attract liquidity and post the bestbid or offer consistently, which some havenot been able to achieve.

Although the issue of introducinggreater competition into the market canbe observed in both regulations, at a highlevel, MiFID is far broader than RegNMS. MiFID affects all financialinstruments across the EU, while RegNMS applies only to equities in the US.Haynes elaborates further on thedifferences: “Reg NMS aims to createfairer, more efficient US securitiesmarkets, while MiFID aims to end oldtrading monopolies, remove barriers toefficiency and heighten market scrutiny.MiFID essentially deals with crossborder regulation, aiming to create aunified market and allow consolidation ofservices across borders whereas becausethere is only one regulator in the US, theneed for harmonisation is not relevant.MiFID also has a very strong focus onthe end user.” ■

Uglytwins?

MiFID and Reg NMSare often cited as

having similar goals,but how close are

they really? Virginie O'Shea

investigates

ISJ25 pp56-67 ML 19/10/07 8:53 pm Page 61

ANALYSE THIS - SECURITIES LENDING TECHNOLOGY


Analysis: Latest securities lending technology

The answer is yes. It's a far cry from years gone by whenlending via a third party agent was seen as operationallyinefficient. Historically, technological linkages betweencustodians and third party firms were often sub-standardcausing the potential for increased risks and costs within anoperating model. Allied to this, many custodians, fearing thedeparture of lucrative lending revenues, were slow to react infacilitating the support of third party lending.

These factors have all changed significantly and today,third party lending is equal and competes evenly withcustodial programmes from operationals, risk and cost.

Advancements in technology have also helped to level theplaying field for third party securities lending providers. Thetechnology impact has primarily been on the operational sideof the business with the development of more standardisedmessaging, such as Swift, and straight through processingthat has allowed volumes to increase and third party lendingto be more viable.

Recognising the need for change and the breakdown ofhistoric barriers, many beneficial owners in the US, Asia, theMiddle East and Europe have successfully implementedsecurities lending programmes utilising both third party andcustodial agents. Beneficial owners are increasingly usingauctions and third party specialists to enhance returns ontheir most attractive assets, while continuing to utilise theircustodian to lend their general collateral assets via theagency queue.

Beneficial owners have been utilising multiple providersfor many years for investment management, brokerageexecution, and foreign exchange, even though these are allservices typically provided by custodian banks or theiraffiliates. As many beneficial owners are now understandingthat securities lending is primarily a trading and investmentmanagement function, they are choosing to optimise resultsby utilising specialists.

We are also seeing a continued trend by beneficial ownersto unbundle their securities lending and custody mandates inorder to increase transparency and returns and gain greatercontrol over their securities lending programmes. Many

beneficial owners have recently unbundled their custody andlending contracts to gain a better understanding and controlof their fees, and to more properly align the interests of theirservice providers. Transparency is also increasinglyimportant for senior management and boards, to ensure thattheir fund assets are earning the full and appropriate returnsfor any risks taken and to ensure that objective criteria is usedto award asset mandates.

Are more beneficialowners using thirdparty securitieslending agents overtraditional custodialagents?

LUKE MCCABE, MANAGING DIRECTOR, CLIENT RELATIONSHIPMANAGEMENT, ESECLENDING

Everyone knows technology is a good thing, right? So whyis it that so many firms are still struggling with manualprocesses in the middle and back office, inhibiting the scaleof their business? Maybe that is not so true in the USindustry where there is a unified regulatory approach, asingle currency and a central depository, however certainlywhen we think of Europe, none of that holds true.

There is often a funding battle within the middle andback office, a complex issue. It is easy to recognise thatsome business processes could be enhanced to provide astraight through process, but there is an inherent risk ofchange as the complexity of the process is often held asintellectual capital of the people currently managing thework. Additionally, the technology desired is deferredbecause the business processes require careful changemanagement in order to again reduce inherent risks.

Where does that leave us? The advantages ofintegration within the middle office allow theconcentration on value added business within the frontoffice. With the middle and back office managing thelifecycle of the trade and increased volumes due toadditional automation, activities such as mandatorycorporate actions are not missed, trades are compared withcounterparts and regulations will be adhered to.

The flip side is that tight integration can lead to systemsbeing inflexible. The agility of changes to industrypractice or internal processes requires the technologydevelopment cycle to add to the time to market.Additionally, the risks involved in changing business rulesare often difficult to quantify, and there is the potential of

What are the pros andcons of an integratedmiddle and backoffice?

BRIAN TRAQUAIR, PRESIDENT, CAPITAL MARKETS AND INVESTMENTBANKING, SUNGARD

ISJ25 pp56-67 ML 19/10/07 8:55 pm Page 62

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ISJ25 pp56-67 ML 19/10/07 8:55 pm Page 63



losing a knowledge source.The goal of moving trades and activities through the

multiple touch points and limiting as much manualintervention as possible, consequently adding scalability, isbest achieved by leveraging technology to interface andintegrate. It is clearly important to bear in mind thepotential changes in rules and industry regulations, andwhere possible, the use of standards and discretecomponents to give flexibility and agility.

Ultimately, integration can increase scale, allowingtechnology teams to work on the provision of a manageableand future proofed infrastructure.

Technology usage has not changed a great deal in the lastfew years within the securities finance arena but we areseeing signs of a transformation as new application anddevelopment standards are introduced into financialinstitutions. Like all sectors of finance, some organisationsare more cutting edge than others. Finding the correctbalance between a proven technology base and innovativesolutions can be tricky.

However, an analysis of some of the recent advances wehave seen in securities finance technology gives us someindication of the directions in which technology systemswill develop and the benefits these changes will bring.

First, the rise of exchange traded platforms, such asEquiLend and SecFinex, has seen a major shift on theborrower side to using automated borrowing processes toremove the day to day keying of tickets and to free up thetrading desk for the high value and low volume deals. Ifthis can be mirrored further on the lender side, then thenumber of automated transactions can increase drastically.This has enormous implications for the technologyplatforms and the level of real-time checks that need to be

Much more is yet to bedone to automate thesecurities lending andborrowing market

FRANCISCO GONZALEZ, HEAD OF EUREX SECLEND

falling over themselves to secure business from hedge fundsand other specialised investors, which continue to drivedemand for securities. The arrival of fresh lenders and theopening of new markets (for example, Asia) createpromising opportunities, but also complexity andoperational risks.

With this rising demand, automation, with fast marketinformation access and execution on a global basis, becomesa key success factor. That is where electronic marketplacescome into play. The one(s) with a broad post-trade network,which attracts deep and wide market liquidity, is in the poleposition for the next generation of SLB trading. Innovativetools and services must serve to simplify all aspects ofmarket processes. The list of innovations, such as globallocating facility, collateral standardisation and re-use, andthe auctioning of hard to borrow stocks, seems endless. Allthese endeavours are on the wish list of leading marketparticipants but, at the same time, face strong resistance tochange for many reasons. Ultimately, that remains thechallenge for electronic market providers to break thisslowly moving process in fast growing markets.

The state of market practices in international securitieslending and borrowing (SLB) has the most potential forimprovements. One might say that from a technology andprocessing point of view, it is still not that much advancedcompared to other financial market segments. In a time ofhigh profit growth and market penetration initiatives, SLBis in fact in a state of underdeveloped autoimmunisationand standardisation.

Traditionally, SLB loans have been negotiated betweencounterparties on the phone or by exchanging mails overcommon communication networks used in the financialindustry. As signs of technological developments, there isan increasing amount of automated borrowing wherebysecurities are matched as available. In typical electronic SLBmarkets, lenders publish their security inventory daily andselected borrowers compete to locate and borrow thosesecurities. More advanced electronic market places providereal value added, if a prime selection of pre and post-tradeservices are offered.

At present, market participants are tightly coupled to themarket of the related service organisations throughcontractual and financial arrangements. With itsfragmented settlement landscape, SLB markets in Europehave strong decentralised characteristics with limited crossborder activity. This has created many separated SLBmarkets.

But overall market interest and demand for SLB are onthe rise strongly. Asset managers and pension funds areincreasingly turning to lending as an important source ofrevenue and commercial banks and prime brokers are

How has technologyadvanced in thesecurities finance areaand what futurechanges are expected?

DARREN CROWTHER, PRE-SALES AND SUPPORT MANAGER, 4SIGHTFINANCIAL SOFTWARE

ISJ25 pp56-67 ML 19/10/07 8:55 pm Page 64

“Do you EquiLend?”

The ever-changing landscape of global securities finance calls for greater standardization and increased efficiencies. EquiLend evolves with the industry and helps to lead in the development of robust technology solutions. If scalability, risk mitigation, and cost containment are important factors in growing your business, then you should EquiLend. I invite you to discover more about why financial institutions throughout the securities finance world use EquiLend.

Born leaders choose EquiLend.

Melissa GowManaging DirectorEquiLend

North America +1 212 901 2200 | Europe +44 (20) 7743 9510 | www.equilend.com

EquiLend LLC and EquiLend Europe Limited are subsidiaries of EquiLend Holdings LLC. EquiLend LLC is a member of the FINRA and SIPC. EquiLend Europe Limited is authorized and regulated in the United Kingdom by the Financial Services Authority. All services offered by EquiLend are offered through EquiLend LLC and EquiLend Europe Limited using EquiLend proprietary technology and software. © 2001-2007 EquiLend Holdings LLC. All Rights Reserved.

ISJ25 pp56-67 ML 19/10/07 8:56 pm Page 65



business is the importance of being able to process largevolumes of transactions in an efficient, well controlledmanner. This is critical to the success of all lenders intoday's markets. With increasing loan volumes driven byhedge funds and downward pressure on spreads, we arebeing forced to push more activity through the 'factory' asefficiently and accurately as possible.

As agent lenders, we must be able to support multiplelending products for a population of unique and discerningclients. And we need the technology to do that. We requiretechnology that supports diverse lending products that, inturn, support a diverse community of borrowers andclients. It's true that the technology, at least on the lendingside, is maturing. There are many vendors and utilities inthe industry that support functions such as contractcompare, mark to market, billing compare, auto borrow,standards for transmitting messages, and so forth.

However, I believe we may see more of “the future” fortechnology in point to point processing - to automate theentire securities lending process. Of course, we will alwaysneed someone to handle the exceptions in our process flows;we will always need a trader to handle the lending of a hardto borrow stock. But our goal must be to automate theentire lifecycle of agency lending with controls thatguarantee the integrity of the loan from the initial trade toits return. Ideally, no one should have to touch a loan unlessthere's an exception. This process is driven by technology,and it's moving faster and faster every day.

But as I think more about technology's future, I keepcoming back to the same point: there can be no future fortechnology in any organisation without a solidinfrastructure. When you have robust infrastructure,strong security around your clients' data, and good BCPsolution, you can focus on building future solutions for yourclients and user community. Everything, even thetechnology, flows from a solid infrastructure.

Along with the need to increase productivity andcapacity, is the critical focus on ensuring that theconfidentiality of our clients' information is protected. Alsocritical is the provision for business continuity in the eventof weather or other disaster scenarios. For example, as arecipient of client information, we must always look to newtechnology to strengthen the information barriers we havearound our clients' data. We place the highest priority onour responsibility to protect the data our clients haveentrusted to us.

BCP continues to receive a great deal of attention andrightly so. An agent lender cannot afford a half hour or twohour delay in trading or other critical processes. As thetechnology supporting BCP evolves and becomes moresophisticated, we as agent lenders must take advantage of itto guarantee the integrity of our systems and makerecovery as quick and seamless as possible.

Technology forces us to think about our infrastructure,and vice versa. The future of each is tied to the other.Either way, I believe there is no end to the potential fortechnology in the agent lender community - at least forthose who have a solid infrastructure.

KP

performed for every new deal coming through.As this becomes standard, we will see more requests for

an automated internal market software solution in order toutilise the entire bank's asset pool before heading out to thestreet with automated borrow requests. Again, these typesof checks require information to be available real time andfor systems to be able to run allocation and utilisationprogrammes.

Also driving market efficiency is the requirement for pricetransparency and real-time client reporting. This isbecoming more important due to the recent marketconditions. If your systems are unable to interface with thedata or service providers or run real-time data reports thenthe level of service and up to date information that you canprovide to clients is reduced. For these reasons, batch basedsystems no longer fit in with the real-time market.

Another trend that will become more prevalent is themove from terminal-based applications to rich client andweb-based solutions. True front office securities financesolutions require a level of functionality and userinteraction that is still not currently available in a web-based deployment, however this will no doubt change overthe next few years. Middle and back office functions tend tobe less complex and a push in the near future to a full web-based solution is very realistic.

Future developments should also see the evolution of anda move towards service and modular oriented architecturesas institutions look to exploit the benefits of real-timemessaging between different systems, and improve on thespeed to market for new modules to fit in with constantlychanging market conditions. Flexibility and the ability torapidly implement change are, as always, the key to success.

When it comes totechnology, isinfrastructurefundamental for thefuture?

JIM HOOVER, VICE PRESIDENT AND TECHNOLOGY MANAGER OF THEAGENCY LENDING PROGRAMME AT GOLDMAN SACHS

When ISJ approached the Risk Management Association towrite an article on the future of technology for agentlenders, I first thought, how can I possibly predict that?After all, technology is an ever present and ever changingpart of our industry, and we have all come to rely on it forour daily processes and systems. As technology manager fora major non-custodian agent lender, I am keenly aware ofthe role technology plays in this business - and how itconstantly evolves. Can we really know where technology isgoing?

A core theme for technology and operations in our

ISJ25 pp56-67 ML 19/10/07 8:56 pm Page 66

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technology. He will oversee global tech-nology infrastructure, application devel-opment and systems architecture for allof State Street worldwide. Separately,State Street Global Markets, the invest-ment research and trading arm of StateStreet Corporation, has expanded itstransition management team in Londonwith the addition of three seniorappointments: Ian Barnes, Chris Martinand Ben Mooney.

London - UBS has appointed dedicatedheads of its European investment bank-ing arm followingthe resignation ofchairman Ken Costaand the posting ofa 43% growth infees from the busi-ness. HermannPrelle, UBS's headof German invest-ment banking, andSimon Warshaw,head of its UKbusiness, will take responsibility forEurope, the Middle East and Africa, 15months after the previous co-heads werepromoted to joint head of global invest-ment banking. Costa, the chairman ofUBS's European business, quit the bankafter more than 30 years to join Lazardto co-head its UK investment bankingdivision.

London - F&C has strengthened its sen-ior investment team with the recruit-ment of Paras Anand to the new position

of head ofEuropean Equitieswith overallresponsibility forF&C's continentalEuropean andpan-Europeanequities teams.Anand will joinF&C fromDeutsche AssetManagement,

where he has been director, EuropeanEquities. At F&C will report to RichardWilson, head of Equities.

PARAS ANAND

PEOPLE MOVES


MOVING & SHA INGKNew York - Blue Bay Asset Managementhas hired Deutsche Bank's London-based head of distressed debt trading,Simon Mullaly, as the hedge fund read-ies for an expected boom in corporatedefaults next year. So far, Blue Bay,which manages USD14 billion, hasfocused primarily on three classes ofdebt: investment grade corporatedebt; high yield; and emerging mar-kets debt. It has USD3.5 billion inEuropean distressed debt. Blue Baychief Gina Germano says of the dis-tressed business: “We consider it abusiness of great importance andopportunity for the firm."

Paris - BNP Paribas Securities Serviceshas appointed Sophie Gautié to head ofStrategy, Development and PublicAffairs, effective 1September. Shereports toFlorenceBonnevay, CFOand member ofthe executivecommittee.Gautié's appoint-ment bringstogether the teamin charge ofexternal growth and strategy withthat dedicated to relations with theEuropean regulators, the bank says.

London - State Street has appointedChristopher Perretta as executive vicepresident and chief information offi-cer with responsibility for the bank'sinformation technology businessesglobally. Perretta will report to vice

chairman JosephAntonellis, whohas also held theCIO positionsince 2002.Perretta will beresponsible forthe strategicdirection andmanagement ofState Street'sinformation

London - Citadel has appointed PeterLittle as CEO to lead the next phase ofthe company's strategic growth plans.Based in the London headquarters, hisinitial focus is on strengtheningCitadel's position across Europe andthe US.

Paris - Société Générale SecuritiesServices (SGSS) has appointed RamyBourgi to thenewly createdposition of headof EmergingMarketsDevelopment,SGSS. Based inLondon, Bourgiwill report toAlain Closier,global head ofSGSS and BrunoPrigent, head of Investor Services.Bourgi has close to 25 years experi-ence in the finance industry, 13 ofwhich he spent in managerial posi-tions at JPMorgan Chase Bank, devel-oping securities business in Europe,the Middle East and Africa.

Zurich - SWX Group, SIS Group andTelekurs Group have nominated UrsRüegsegger, head of the executivecommittee of the St GallerKantonalbank, as CEO of the soon tomerge combined enterprise.

Bedford, Massachusetts - InteractiveData has appointed Rona Fairhead tochairman of the company's board ofdirectors, effective immediately.Fairhead succeeds John Makinson,who has resigned from serving onInteractive Data's board. Fairhead hasserved as one of five Pearson affiliat-ed directors on the Interactive Databoard of directors since February2007. She will also serve as chair ofthe Nominating and CorporateGovernance Committee. PhilHoffman, a director on the InteractiveData board since February 2007, willreplace Makinson as chair of theCompensation Committee.

SOPHIE GAUTIÉ

RAMY BOURGI

KEN COSTA

CHRISTOPHER PERRETTA

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T: +44 (0) 844 499 6388C: David Monks, Saghar Bigwoodor Stephen EverardA: 10, Earl StreetLondon, EC2A 2AL.E: [email protected] [email protected] or [email protected] [email protected]

C: Professor Michael Mainelli,Executive ChairmanE: [email protected]: (Disaster Recovery and ProjectManagement): Keith Ford, Senior ConsultantE: [email protected]

T: +44 207-562-9562F: +44 207-628-6786W: www.zyen.com

GOAL is the widely-acknowledged industry leader in providing creative products,services and solutions to automate and optimise the global reclamation of withhold-ing tax and class action compensation. Our research has shown that in excess ofUS$6 billion of withholding tax remains unclaimed each year by the rightful ownersand beneficiaries and the amounts for class actions is even larger.

To establish your potential ability to reclaim over-withheld taxes and/or class actioncompensation GOAL provides a free proof of concept analysis. We simply require detailsof the income entitlement(s) and/or trade details together with the type and domicile ofthe underlying beneficiaries. We do not need the name(s) of the beneficiaries.

Our Products include GTRS, Class Actions, GQI, e-Reclaim, GOAL TaxBack, DMSand Bespoke Software Development.

Z/Yen helps organisations make better choices. Our name combines Zen and Yen -“a philosophical desire to succeed” - in a ratio, recognising that all decisions aretrade-offs. Z/Yen’s mission is to be the foremost risk/reward management firm. In the financial markets Z/Yen conducts numerous research projects on a variety ofwholesale and retail issues, as well as providing technical strategy, support and prediction systems. Z/Yen’s renowned annual studies include:

i. Global cost per trade benchmarks on equities, money markets and foreignexchange;

ii. Operational performance of broker ratings;iii. Operational performance of client (buy-side) ratings.

Asset Servicing

ISJ Directory of Services

Consultants

C: Cornelia Keth T: +49 69 718 3738F: +49 69 718 6050E: [email protected]: Moritz OstwaldT: +49 69 718 6838E: [email protected]: Strahlenbergerstraße 45,63067 Offenbach a.MainGermanyW: www.bhf-bank.com

International: Olivier Storme T: +352 4767 2847E: [email protected]

France: Patrick LemuetT: +33 (0)1 57 78 03 34E: [email protected]: www.caceis.com

www.dbs.com +65 6878-1830 +65 6878-4766 Ms Low Swee [email protected] Bank Ltd, Global Transaction Services,Securities Services,6 Shenton Way, #36-02,

DBS Building Tower 1 068809 Singapore

BHF-BANK is one of Germany's most prestigious private banks. Its roots date back to theyear 1854. As an advisory, service and sales & trading bank, we offer our discerning clientelea comprehensive array of customised solutions. BHF-BANK combines the strengths of a pri-vate bank with a long track record of capital market competence.

Trust, an individual approach and impartiality - these qualities are at the very heart of thelong-term guidance and advice we provide for our clients. Our bank's activities are groupedwithin the divisions Asset Management & Financial Services, Financial Markets & Corporatesand Private Banking.

The bank's longstanding experience in the German securities services market goes hand inhand with a corporate culture that values prompt acknowledgements and short decision-mak-ing channels.

BHF-Bank offers tailor-made custody services to meet its clients' particular requirements.It's reporting services include a comprehensive SWIFT reporting matrix as well as itsInternet-based reporting tool cds@web. Assets under Custody: EUR269 bn No of funds: 328

CACEIS is an Investor Services company with six offices across Europe. Owned inequal parts by Crédit Agricole and Natixis, CACEIS provides Custody, FundAdministration and Corporate Trust services to demanding Corporate andInstitutional clients. We have considerable expertise in Cross-Border FundDistribution Support as well as Alternative Investment and Private Equity servic-ing.

Our staff have the language skills and industry knowledge to develop businessrelationships into strong partnerships and our powerful IT systems are constantlyupdated to ensure high levels of process automation.

CACEIS is responsible for over EUR1.75 trillion held under custody, and overEUR850 billion under administration.

DBS offers a full range of custodial services including securities safekeeping, settlementof trades, corporate actions and market information updates. These services are available in Singapore, Hong Kong, Indonesia, India, China (A-shares) and other select-ed markets. DBS also offers short-term, highly liquid overnight facilities for its clients'accounts to earn daily interest on any excess funds.

With over 20 years of experience in the custody business, DBS' strengths lie in its abilityto provide quality services, in depth knowledge and expertise of the Asian markets, aswell as customized business solutions to support clients’ businesses. Its clientele comprises the global custodians, international central securities depositories, broker-dealers, financial institutions, insurance companies, investment managers, private banksand corporate.

Custody & Clearing


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DnB NOR is the largest and leading provider of Custody, Clearing andRemote Member Service in Norway In addition, DnB NOR provides a widerange of value added services to both Foreign and Domestic clients.Through an Alliance solution with banks in Sweden, Finland and Denmark,DnB NOR can offer seamless regional products, which can be customized toour client's needs.

Handelsbanken was the first Nordic bank to provide complete custody services in theentire Nordic region. We conduct in-house processing in each Nordic country, withwell-experienced staff with in-depth market knowledge and access to market information. Each client is allocated an account manager fully responsible for the day-to-day activities, as well as a regional relationship manager. Handelsbanken provides specialised and tailor-made custody services including complete corporateaction services, securities borrowing and lending for all Nordic countries, as well assettlement and clearing services to clients that are remote members of the Nordicstock exchanges.

Nordea is the leading financial services group in the Nordic and Baltic Sea regionand operates through three business areas: Nordic Banking, Banking & CapitalMarket Products and Savings & Life Products.

Nordea is the leading custody services provider in the region. Nordea provides highquality, tailor-made custody services for local and foreign investors dealing withNordic, Baltic or global securities.

- The leading financial services group in the Nordic and Baltis Sea region- A world-leading Internet banking and e-commerce operation- The largest customer base of any financial services group in the region- A leading asset manager in the Nordic financial market- The most comprehensive distribution network in the region

RBC Dexia Investor Services offers a complete range of investor services to institutions worldwide. Established in January 2006, we are equally owned by RoyalBank of Canada (RBC) and Dexia. We rank among the world's top 10 global custodians, with approximately USD 2.0 trillion in client assets under custody,including in-house assets of RBC and Dexia. Our innovative products and serviceshelp clients maximise operational efficiency, minimise risk and enhance portfolioreturns. And our 3,800 professionals in 15 markets offer proven expertise toenhance clients’ business performance.

Santander is Spain’s leading financial institution and the largest bank in the euro zoneby market capitalization. Our commitment and contribution to the securities industry iswell established after more than a century of providing services in this field.

Santander’s cutting edge technology enables it to offer a comprehensive array of inno-vative services in a broad range of markets. Santander currently has full local capabili-ties in Iberian and Latin American markets along with a franchised presence in manyothers. Santander`s experience and product range ensures that every aspect of thesecurities business is fully contemplated.

SEB is the leading provider of securities services in the Nordic and Baltic area. Weare committed to custody and clearing processes for the wholesale market. We holdsecurities worth over EUR 460 bn and provide services in more that 70 markets, 9of them under the SEB name (Sweden, Norway, Finland, Denmark, Luxembourg,Germany, Estonia, Latvia and Lithuania).

We offer a full range of securities services including corporate action and information services, securities lending and services to remote members of theNordic and Baltic stock exchanges. We continuously develop new products in connection with clients and partners to ensure we deliver the high-quality products our clients demand. We always strive to make the processes more efficient. With a history of 150 years in the securities industry; we know the marketand our clients well.

T: +47 22 94 92 95F: +47 22 48 28 46Contact: Bente I. HoemE: [email protected]: www.dnbnor.com

T: +46 8 701 2988F: +46 8 701 2990Contact: Johan WennerbergE: [email protected]: Blasieholmstorg 12,SE-106 70 Stockholm, Swedenwww.handelsbanken.com/nordic__custody_services

T: +47 2248 6238Contact: Anne-Lise KristiansenHead of Sub-custody andClearingE: [email protected]

T: +44 (0) 20 7653 4096F: +44 (0) 20 7248 3946Contact: Tony JohnsonHead, Sales & RelationshipManagementE: [email protected]: 71 Queen Victoria Street,London, EC4V 4DE, UK

T: Europe: (34) 91 2893932 / 28T: USA: (1212) 350 39 02 W: santanderglobal.comE: globalsecurities@

gruposantander.com

T: +46 8 763 5770F: +46 8 763 6930Contact: Goran ForsE: [email protected]: www.seb.se

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Sébastien DanloyGlobal Head of Sales,InvestorServicesSociété Générale SecuritiesServicesT: +33 (0)1 41 42 98 65E: [email protected]: www.sg-securities-services.com

A:Standard BankFinancial Asset Services 3rd Floor 25 Sauer Street Johannesburg 2107T: +2711 636 6615E: [email protected]: www.standardbank.co.za

C: Neil Daswani, Global Head, Securities ServicesT: +65 6517 0022E: [email protected]: www.standardchartered.com

T: +46 8 5859 1800F: +46 8 7237 147C: Neal Meacham, Head ofCustodyE: [email protected]: Stockholm SE 105 34Sweden

T: +43 50505-58510F: +43 50505-58579C: Andreas Petzl , Head of Salesand Relationship ManagementE: [email protected]: www.hvb-custody.com/

Interactive Data (Europe) LtdA: European HeadquartersFitzroy House, 13-17 EpworthStreet, London EC2A 4DLT: +44 (0)20 7825 7800F: +44 (0)20 7608 3514E: [email protected]: www.interactivedata.comC: Brendan Beith – EuropeanSales Director

Société Générale Securities Services offers institutional investors, asset man-agers and financial intermediaries a comprehensive range of financial securitiesservices: custody, clearing & trustee services, fund administration, asset servic-ing and transfer agency. SGSS currently ranks 3rd European custodian and 9thworldwide custodian (Source: Globalcustody.net) with EUR 2,580* billion inassets held and valuates 4,354* funds representing assets of EUR 405* billion(as of June 2007).

Financial Asset Services is the custody and investments-servicing division ofStandard Bank, providing a unique suite of services to sophisticated investors inSouth Africa and eight sub-Saharan markets.

Standard Bank has assets under custody to the value of ZAR1.56 trillion and anoverall market share of approximately 40%.

Standard Bank's unique selling point lies in its consultative approach to relationships combined with the bank's commitment to custody and investmentadministration services.

Standard Chartered leading the way in Asia, Africa and the Middle East.

Standard Chartered has a history of over 150 years in banking and is in many of theworld's fastest-growing markets with an extensive global network of over 1,200branches (including subsidiaries, associates and joint ventures) in over 50 countriesin the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdomand the Americas.

As one of Asia's leading custodians, Standard Chartered has an impressive trackrecord across the 16 Asian markets in which it provides securities services. It servesglobal, regional and local custodians and broker-dealers, as well as local and regionalfund managers. The Bank plays a key role in promoting the development of thesemarkets and keeping the international investor community informed of industrydevelopments across the region.

Swedbank provides client-focused custody services to domestic and international secu-rities lending (including auto-borrow facilities), derivative clearing services, proxy vot-ing, full corporate actions and income service. Flexibility is an important aspect ofSwedbanks products and services. Our dedicated Client Relations Managers andAccount Managers are focused on personalized processing and reporting solutions.

Other Features:- ISO9001:2000 quality certification.- Swedbank Markets Online (SMO) internet information and reporting toolforCustody and Securities Lending.- Nordic Custody alliance with DnB NOR (Norway), OKO Bank (Finland) andAmagerbanken (Denmark) to offer regional custody product.

Institutional Assets under Custody: USD 70 billionNo. of Institutional Clients: 110

Unicredit Markets & Investment Banking (MIB) serves as UniCredit Group's globalproduct and competence center for global financial markets and investment bankingservices, including Custody throughout Central and Eastern Europe, including Austria.

Brand diversitiy under which the group operates (Bank Austria Creditanstalt, HVB,Bank BPH, Bank Pekao, Zagrebacka Banka and International Moscow Bank), has itsroots in local market presence and knowledge, contributing into a single unified product across the region. In 2006 the group was recognised by no less than 3 independent surveys as being the best region custodian

The group's ability to deliver service excellence across 13 markets is the cornerstone of our success. From participation in local market associations to our inter group training sessions, to a client consultative approach, the group continues to worktowards making a single impression - excellence.


Data Services . Interactive Data Corporation (NYSE: IDC) is a leading global provider of financial marketdata, analytics and related services to financial institutions, active traders and individualinvestors. The Company's businesses supply time-sensitive pricing, evaluations and reference data for more than 3.5 million securities traded around the world, includinghard-to-value instruments. Many of the world's best-known financial service and softwarecompanies subscribe to the Company's services in support of their trading, analysis, portfolio management and valuation activities. Through its businesses, Interactive DataPricing and Reference Data, Interactive Data Real-Time Services, Interactive Data FixedIncome Analytics, and eSignal, the Company has approximately 2,200 employees inoffices located throughout North America, Europe, Asia and Australia. The Company isheadquartered in Bedford, Mass.Pearson plc (NYSE: PSO; LSE: PSON), an international media company, whose businessesinclude the Financial Times Group, Pearson Education, and the Penguin Group, owns approximately 62 percent of the outstanding common stock of Interactive Data Corporation.

ISJ25 pp68-80 ML 19/10/07 10:21 pm Page 71


Our clients have access to a broad range of value added services and tailored solu-tions including global custody and fund administration services for funds domiciledin the Caribbean and Channel Islands.

Our services include Trustee, banking and credit facilities, treasury and foreignexchange, trade execution, financial accounting, corporate services, derivative sup-port services and online access, leveraging a custody network that covers 80 plusmarkets worldwide. Our service combines leading edge technology with professionalexpertise and a truly integrated service delivering creative, customised solutions.

C: Stuart MaugerT: +44 (0) 1481 744479F: +44 (0) 1481 744529E: [email protected]: PO Box 48 Canada Court St Peter Port Guernsey GY1 3BQ C: Deanna Bidwell (Cayman)T: +1 345 949 9107F: +1 345 946 1288E: [email protected]: www.rbcprivatebanking.com

PFPC is a premier provider of processing, technology and business solutions to theglobal investment industry. Our core offering includes accounting, administration,investor services, middle-office services and regulatory administration services. Whetheryour products are U.S. or non-U.S. domiciled funds, trust vehicles, limited partnershipsor commingled investment products, PFPC’s multi-jurisdictional, multi-fund capabilityallows us to process your complex fund structures - from hedge funds, fund of fundsand private equity funds to master/feeder and multi-managed funds.

PFPC offers personalized alternative investment solutions tailored to your uniqueneeds. With more than 30 years in the fund servicing industry, our seasoned andresponsive professionals bring you the know-how, focus and dedication to deliver theservices you need, when and where you need them, any way you want them.

Telekurs Financial, a company in the Telekurs Group, specializes in the procurement,processing and distribution of international financial information for investment adviso-ry services, portfolio management, financial analysis and securities administration. Aglobal network of local financial market specialists procures real-time stock exchangeinformation at source from the leading financial centres. Containing over 3 millionfinancial instruments, the database of structured, encoded securities information main-tained by Telekurs Financial and its ten representative offices abroad is unparalleledthroughout the world in terms of both depth and data coverage.Telekurs Financial is a founding member of the Association of National NumberingAgencies (ANNA) allocating Swiss security (Valor) numbers and leads the way in intro-ducing standards aimed at simplifying trading and securities administration.

Butterfield Fund Services (BFS) provides valuation, accounting, corporate secretarial,compliance, directorial and shareholder services to hedge funds, fund-of-funds, andmutual funds. BFS also services international pension & insurance trusts. Clientssuch as financial institutions, insurance companies, and institutional investors useButterfield Fund Services to set up and launch investment funds. BFS operates inBermuda, Bahamas, the Cayman Islands and Guernsey.

Whether a fund is just starting out or is well established, Butterfield Fund Servicescan provide complete solutions to help clients better service their investors. Withover $50 billion in assets under administration, many alternative funds have turnedto Butterfield Fund Services for timely and accurate administration services.

CACEIS is an Investor Services company with six offices across Europe. Owned inequal parts by Crédit Agricole and Natixis, CACEIS provides Custody, FundAdministration and Corporate Trust services to demanding Corporate andInstitutional clients. We have considerable expertise in Cross-Border FundDistribution Support as well as Alternative Investment and Private Equity servic-ing.

Our staff have the language skills and industry knowledge to develop businessrelationships into strong partnerships and our powerful IT systems are constantlyupdated to ensure high levels of process automation.

CACEIS is responsible for over EUR1.75 trillion held under custody, and overEUR850 billion under administration.

Established in 2002, IMFC Fund Services B.V. is a boutique hedge fund administrator and a trustee with its offices in Amsterdam and Sydney. IMFCoffers third parties administration and related services to all type of onshore andoffshore funds combining high quality, independency, technology, timely calcula-tion with flexibility, experience, custom-made solutions and competitive rates.

Our services include: fund set-up and corporate services, NAV calculation and other accounting services, R&T agent and other investors and complianceservices. For more information visit our website.

C: Fred W. Jacobs, IIIA: PFPC, 301 Bellevue Pkwy Wilmington, DE 19809 USAT: 302-791-2000F: 302-791-1570E: [email protected]

C: Fergus McKeon A: PFPC Riverside Two Sir John Rogerson’s Quay Dublin 2, IrelandT: +353-1-790-3500E: [email protected]

Telekurs (UK) Ltd15 Appold StreetLondonEC2A 2NEC: Kimberly NeumannT: +44 (0) 20 7550 5000F: +44 (0) 20 7550 5001E: [email protected]: www.telekurs.co.uk

Andrew Collins Managing DirectorT: 441-299-3954E: [email protected] Kowalski MarketingManager T: 441-278-6300E: [email protected]: Rosebank Centre 11Bermudiana Road, Pembroke,Bermuda HM 08 / P.O. Box HM195 Hamilton, Bermuda HM AX

International: Olivier Storme T: +352 4767 2847E: [email protected]

France: Patrick LemuetT: +33 (0)1 57 78 03 34E: [email protected]: www.caceis.com

www.imfcfundservices.com

t +31.20.644.4558f +31.20.644.2735Mrs. Consuelo [email protected]

Rivierstaete Building,Amsteldijk 166, 1079 LHAmsterdam, Netherlands

Fund Administration

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W: www.dpmmellon.comT: +1 732 667 1155F: +1 732 662 2650C: Skander AissaE: [email protected]: 400 Atrium Drive SomersetNew Jersey NJ 08873 USA

Sébastien DanloyGlobal Head of Sales,InvestorServicesSociété Générale SecuritiesServicesT: +33 (0)1 41 42 98 65E: [email protected]: www.sg-securities-services.com

Swiss Financial Services (Ireland) Ltd.

Block 4B,Cleaboy Business Park, Old Kilmeaden Road, Waterford, Ireland T: +353 51 351180F: +353 51 871595

Adrian Maher E: [email protected]

W: www.ubs.com/fundservicesC: Mr Gerhard FusenigT: +41 44 235 4992E: [email protected]: UBS Global AssetManagement, Fund Services,Stauffacherstrasse 41, PO Box,CH-8098, Zurich, Switzerland

Robert N. Chin, General ManagerT: (+) 5999 738 1351 ext 11E: [email protected]

Kedi J. Chang, Managing DirectorT: (+) 5999 738 1351 ext 10E: [email protected]

ATC Fund ServicesBon Bini Business Center, units2B2K & 2B2LSchottegatweg Oost 10Curaçao, Netherlands AntillesF: (+) 5999 738 1311W: www.atcgroup.info

DPM Mellon provides onshore and offshore alternative asset fund administration,back and middle office outsourcing, portfolio valuation, daily NAVs, risk administration and portfolio transparency solutions for fund managers, asset allocators, institutional investors and proprietary traders.

DPM Mellon’s services are designed to solve complex administrative needs andimprove operational efficiency. From the most basic reports to complex portfolio valuations, risk analysis and daily transparency, DPM has the systems, infrastructureand experience to handle your toughest administrative challenges.

DPM Mellon has a world-wide staff of approximately 200 employees. DPM Mellonis headquartered in Somerset, New Jersey with offices in London, the Bahamas, andthe Cayman Islands.

Société Générale Securities Services offers institutional investors, asset man-agers and financial intermediaries a comprehensive range of financial securitiesservices: custody, clearing & trustee services, fund administration, asset servic-ing and transfer agency. SGSS currently ranks 3rd European custodian and 9thworldwide custodian (Source: Globalcustody.net) with EUR 2,580* billion inassets held and valuates 4,354* funds representing assets of EUR 405* billion(as of June 2007).

Drawing upon an extensive track record of proficiency, dependability and responsiveness, Swiss Financial Services acts as administrator as well as registrarand transfer agent of funds investing in a broad range of financial instruments.These include futures, foreign exchange, equities, options, bonds and other funds.

We perform accounting and administration services for diverse fund types domi-ciled in, but not limited to, the United States, Bahamas, Cayman Islands, B.V.IandIreland.

Fund Services offers comprehensive fund administration services including fund set-up, registration and support around the world (currently 28 countries), fundaccounting, NAV calculation, compliance management, risk control and reporting.

We provide a flexible offering from the full range of services, including PrivateLabelling, to selected functions. Services are based on leading fund administrationarchitecture, multi-source pricing and powerful compliance tools.

Capabilities also extend to services for hedge funds through our teams in Cayman,Ireland and Canada.

In times when management attention is increasingly focused on value creation, itmay be rewarding to re-evaluate whether asset administration remains a strategiccore business to you.

Luxembourg: Jean-Paul Gennari, tel. +352-44-1010 1Switzerland: Markus Steiner, tel. +41-61-288 4910UK: Mark Porter, tel. +44-20-7901 5000

ATC Fund Services is a specialized hedge fund administrator who has consistentlyreceived excellent reviews from its clients. ATC provides full administration to hedgefunds, including daily processing of all funds’ activities, nav calculation on a daily,weekly or monthly basis and registrar & transfer agency services.

In addition, ATC takes a pro active approach in assisting start up hedge fund managers with the incorporation of their fund in jurisdictions such as the CaymanIslands, the British Virgin Islands and the Netherlands Antilles.

Custom House is one of the world’s largest independent alternative investment and hedge fund administrators and the first and only one to be awarded a Moody’sManagement Quality Rating.

Custom House offers a round-the-world, round-the-clock service from its office in Dublin and representative offices in Chicago and Singapore, enabling it to provide, not only complete global administration services, but also the ability to produce daily dealing NAVs.

Custom House is authorised by the Irish Financial Regulator under Section 10 of the Investment Intermediaries Act, 1995, which authorisation does not extend to the Chicago and Singapore representative offices.

Custom House Administration &Corporate Services LimitedA: 25 Eden Quay, Dublin 1,IrelandT: +(353) 1 878 0807F: +(353) 1 878 0827C: dermot.butler@

customhousegroup.comC: david.blair@

customhousegroup.comww.customhousegroup.com


Hedge Fund Administration

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Fimat Alternative Investment Solutions group is a global, multi-disciplinary, solutionproviding organisation dedicated to delivering innovative & superior prime brokerageservices to the alternative investment industry such as investors and fund managers.

Fimat AIS offers these services on all major asset classes and their related listed &OTC derivative products, as well as providing dedicated account management, cross-margining tools, hedge fund start-up services, quantitative information for investorsand Capital Introductions.

Fimat AIS is part of Fimat, which employs over 2,000 people in 29 market places,and is a member of 48 derivatives exchanges, and 20 stock exchanges worldwide.www.fimat.com

Eiger Systems solutions are designed to be best in class and are the leading productswithin their market sectors. Developed to meet the needs of organisations with complex ormission critical payment processes, our solutions interface easily with existing businessapplications and are available for all main operating systems.EigerPAY Gateway is a global payments platform which handles complex payment require-ments and multiple payment channels. Already the UK’s leading BACSTEL-IP solution,EigerPAY Gateway is ideally suited to organisations with one or more of the following:

• a mission critical reliance on payments• complex functional or technical requirements• a requirement for numerous communication channels such as

BACSTEL-IP, CHAPS, SWIFT, or PE-ACH connectivityEigerPAY Gateway’s flexible architecture enables organisations to integrate with themany new and developing payment systems, with minimal change to legacy systems.

Quintillion is a full service hedge fund administration specialist which supports all portfolio investment strategies and fund structures from its head office in Dublin'sInternational Financial Services Center (IFSC). The company has made a considerableinvestment in technology and operations expertise, to give clients the opportunity tomanage a range of funds with the support of a single administration partner. Key technologies are Advent Geneva, Koger NTAS and Paladyne.

Typical strategies supported include Convertible Arbitrage, Multi Strategy, DistressedSecurities, Global Macro, Fund of Hedge Funds, Market Neutral and Managed Futuresfunds. A comprehensive range of fund structures, currency classes and performance feemechanisms are also accommodated.

Hedge Fund Services, based in the Cayman Islands, Ireland and Canada holds aleading position in the area of hedge fund administration, offering a complete rangeof services including accounting, NAV computation, share holder services, bankingand credit facilities. With the dedication and experience of a professional team of200 and our state-of-the-art web reporting, accounting and shareholder systems, weare well positioned to provide clients with a first class service.

With specialist expertise in both single manager and fund of hedge fund adminis-tration, we provide facilities for both onshore and offshore funds.

Capabilities also extend to services for investment funds through our teams inLuxembourg, Switzerland and the UK.

Cayman Islands: Darren Stainrod, tel. +1-345-914 1076Ireland: Don McClean, tel. +353-1-436 3636Canada: Pearse Griffith, tel. +1-416-971 4702

The British Virgin Islands has created a progressive and transparent environment forthe establishment and regulation of mutual/hedge funds and their functionaries. Bythe end of Q3 2006 the BVI had recognised or registered more than 4,000 funds,and licensed some 700 managers and administrators, making the BVI a leadingdomicile of choice for investment business.

Benefits of conducting investment business in the BVI include:-Fast-track registration and licensing system - funds can be registered in a few days.-Presence of qualified, experienced legal, accounting & administration practitioners.-A well-developed corporate professional infrastructure.-Modern, robust and cost-effective regulatory and corporate regimes.-BVI private and professional funds fall outside the scope of the EU Savings taxation Directive.

-Segregated Portfolio Companies - also known as Protected Cell Companies - can nowbe formed as mutual funds under the BVI Business Companies Act 2004.

The DIFC is the world's newest international financial centre. It aims to develop thesame stature as New York, London and Hong Kong. It primarily serves the vastregion between Western Europe and East Asia.

Since it opened in September 2004, the DIFC has attracted high calibre firms fromaround the globe as well as its region. Firms operating in the DIFC are eligible forbenefits such as a zero tax rate on profits, 100 per cent foreign ownership, norestrictions on foreign exchange or repatriation of capital, operational support andbusiness continuity facilities.

Europe (London):Philippe Teilhard (44) 207 67685 36 - Duncan Crawford (44)207 676 85 04Americas (New York):Steve Solomon and Marc Cohen(1) 646 557 9002Asia (Hong Kong):Kirby Daley (852) 2848 3368 -Gregoire Dechy (852) 28483369

A: Eiger PointSwift ParkOld Leicester RoadRugbyCV21 1DZUnited KingdomT: + 44 (0) 1788 554800(Sales): +44 (0) 1788 554810

For further information, please contact:Joan KehoeChief Executive Officer E: [email protected]: + 353 1 523 8001Ken SomervilleHead of Business DevelopmentE: [email protected]: + 353 1 523 8003W: www.quintillion.ie

W: www.ubs.com/fundservicesC: Mr Gerhard FusenigT: +41 44 235 4992E: [email protected]: UBS Global AssetManagement, Fund Services,Stauffacherstrasse 41, PO Box,CH-8098, Zurich, Switzerland

British Virgin IslandsInternational Finance CentreHaycraft Building1 Pasea EstateRoad TownTortolaBritish Virgin IslandsT: +1 284 494 1509F: +1 284 494 1260W: www.bviifc.gov.vg

DIFCDubai International Financial CentreLevel 14, The GateP.O. Box 74777, Dubai, UAEE: [email protected]: +971 4 362 2450M: +971 50 4958902F: +971 4 362 2333W: www.difc.ae

International Finance Centres

Prime Brokerage

Payments & Settlement

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T: US- +1 617 204 4500T: UK- +44 (0)20 7469 6000C: Christopher JaynesE: [email protected]: www.eseclending.comA: 175 Federal Street, 11th FL,Boston, MA 02110, US A: 1st Floor, 10 King WilliamStreet, London EC4N 7TW, UK

W: www.eurexseclend.comT: +41 58 854 2424F: +41 58 854 2455E: [email protected]

Eurex Zurich Ltd., Selnaustrasse30, 8021 Zurich, Switzerland

A: Europe/Asia/Africa42 New Broad Street London EC2M 1SBUnited Kingdom

T: +44-207-588-1100F: +44-207-588-1155A: Americas30 Montgomery Street Suite 501 Jersey City, NJ 07302T: +1-201-946-1100F: +1-201-946-1313

VocaLinkDrake HouseThree Rivers CourtHomestead RoadRickmansworthHertfordshireWD3 1FX

T: +44(0)870 1650019F: [email protected]: www.vocalink.com

W: www.dataexplorers.comT: +44 (20) 7392 4000F: +44 (20) 7392 4004A: 155 Commercial Street,London E1 6BJ United Kingdom

London: Julian PittamT: +44 (20) 7392 5018E: [email protected]: Tim SmithT: + 1 (617) 973 5099E: [email protected]

T: +1 212 901 2224C: Michelle LindenbergerE: [email protected]/[email protected]: 17 State Street, 9th FloorNew York NY 10004T: +44 20 7743 9510A: 54 Lombard Street London EC3V 9EXW: www.equilend.com

eSecLending is a global securities lending manager and a leading provider andadministrator of customized securities lending programs. Its programs attractsome of the world’s largest and most sophisticated asset gatherers, includingpension funds, mutual funds, investment managers and insurance companies.The company has auctioned over $1. 3 trillion in assets and has achieved significant growth in its client base, lendable assets and assets on loan. The firmawards principal securities lending business through a competitive auctionprocess that has provided clients with higher returns compared to traditional program structures and improved transparency and objective criteria upon whichto make decisions. eSecLending maintains offices in Boston, London andBurlington, Vermont. Securities Finance Trust Company, an eSecLending company, performs all regulated business activities.

Eurex is the world’s leading futures and options market for euro-denominated deriva-tive instruments with market participants connected from 700 locations worldwide.Eurex also offers short term funding products, such as Eurex Repo. Eurex Repo isamong the forerunners in providing integrated trading and clearing for repo transac-tions. Eurex’s latest innovative marketplace is called Eurex SecLend.

Eurex SecLend. Europe’s leading investment banks participate as borrowers in theEurex SecLend marketplace, acting as principal brokers, dealers and intermediaries.Agent lenders and direct lenders, represented by numerous investment banks, privatebanks and the investment managers of insurance companies and pension funds, provide substantial availability in global fixed-income and equity names. They all benefit from Eurex’s leading state-of-the-art trading and processing services. ForEurex, service and technology innovation is not just a buzzword. New trends are beingtransformed into inventions through the adoption of advanced trading practices.

Find out more on www.eurexseclend.com.

Fundtech's payments solutions automate all aspects of the funds transfer and cus-tomer notification process, enabling straight-through-processing (STP) of payments.Fundtech also offers payments solutions for continuous linked settlement (CLS), nos-tro account management and enterprise-wide payments management.Global PAYplus - The enterprise-wide payments management solution for globalfinancial institutions.PAYplus RTGS - A fully integrated, multi-currency payment system for banks resid-ing in countries outside the U.S. that have established Real Time Gross Settlement(RTGS) standards.PAYplus USA - The leading payments solution for financial institutions in the US.

VocaLink is the transaction specialist. We pioneered electronic payments fourdecades ago and many of the world’s top banks have been relying on our servicesever since. Our automated payment system processes over 80 million transactionsper day and has the capacity to handle all of Europe's automated payments. Ourswitching platform powers the world’s busiest ATM network.

The VocaLink CSM delivers reach for our clients throughout the SEPA and beyondwith a range of value-added services that leverage our know-how and technical capa-bilities.

VocaLink is the partner of choice in the transactions business. Find out why atwww.vocalink.com

Data Explorers Limited, a specialist and independent company, offers impartialquantitative measurement of securities lending performance services to the globalsecurities financing industry. We help our clients monitor and understand the relative performance of their lending activity and risk, and turn raw lending, borrow-ing and collateral data into useful, actionable information. We also provide proxiesfor short selling information.

Working with the industry we ensure information flows are appropriate and peergroups relevant. We are not involved in transactions.

All of our services: Performance Explorer, Transaction Explorer, Risk Explorer,Index Explorer and Report Explorer are web based and available to clients over the internet.

EquiLend Holdings LLC was formed by a group of leading financial institutions todevelop a global platform for the automation of securities finance transactions.The EquiLend platform is designed to increase efficiency by standardizing, cen-tralizing and automating front and back office processes, while delivering globalaccess to liquidity, reduced risk and scalability. The EquiLend platform isdesigned to process equity and fixed income securities finance transactions on aglobal basis.

Investors include: Barclays Global Investors; Bear, Stearns & Co. Inc.; CreditSuisse; The Goldman Sachs Group, Inc.; J.P. Morgan Chase & Co.; LehmanBrothers; Merrill Lynch; Morgan Stanley; Northern Trust Corporation; State StreetCorporation; and UBS.


Securities Lending .

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FINACE® is the only fully integrated solution today which supports the future busi-ness model within the area of Securities Finance and Collateral Management. Thearchitecture of FINACE® is based on a stable, leading edge technology platform,which was developed with performance and robustness as the focus of design. Withflexibility at its core, customer-driven extensions and modifications can be quicklyand easily applied to the standard component set.

T: +41 (0)44 218 14 14F: +41 (0)44 218 14 18E: [email protected]: COMIT AG, Buckhauserstrasse11, CH-8048 Zurich, SwitzerlandW: www.finacesolution.com

T: +44 (0) 20 7521 5672F: +44 (0) 20 7521 2683C: Jonathan Cossey, Head ofEquity FinanceA: Nomura House, 1 St Martin's-le Grand, London,EC1A 4NP United KingdomW: www.nomura.com

Advent Software EMEA, established in 1998, provides trusted solutions for the frontthrough to back office operations, based on a true real-time fund/portfolio accounting platform, to the investment management community throughout Europe,Middle East and Africa. Advent has an established network of offices across theregion serving a growing client base of asset managers, hedge fund managers, primebrokers, fund administrators, wealth managers, private banks and family offices whocontinue to improve their businesses using Advent’s suite of integrated investmentmanagement solutions. Advent Software EMEA is part of Advent Software Inc.(Nasdaq: ADVS), a global organisation that has been providing solutions to theworld's leading financial professionals since 1983. Firms in more than 50 countriesusing Advent technology manage investments totaling more than US $8 trillion.

JPMorgan's Securities Lending program is unparalleled due in no small part to theFirm's breadth of capability, financial strength, professional expertise and seamlessoperations.

Our program enables investors to access a broad spectrum of lending markets, with adiverse borrower base, offering a broad indemnification against borrower default,while achieving very competitive bids for their securities - all of this in an environ-ment designed not to compromise the activities of their fund managers. .As one ofthe founding members of EquiLend, a global automated platform for borrowers andlenders, JPMorgan is at the forefront of technology and is ideally placed given itsintegrated lending, custody and accounting platforms.

Pirum provides a full suite of automated reconciliation and straight through process-ing (STP) services supporting Operations within the global securities finance industry. The company's on-line SBLREX service encompasses daily contract compare, monthly billing comparison, mark-to-market & exposure processing, pending trade comparison, income claims processing and custody reconciliation.

Subscribers to Pirum’s services significantly increase their operational efficiencyand reduce their risk by using Pirum’s solutions, as staff are able to focus on fixingthe exceptions instead of using their time to check and process routine business.These automated processes are more scalable and risk controlled too, allowing significantly higher volumes to be managed without corresponding increases in operations headcount.

T: +44 (0)20 7631 9240F: +44 (0)20 7631 9256E: [email protected]: One Bedford Avenue,London WC1B 3AU, UKW: www.advent.com

New York: William Smith T: 212-623-5664E: [email protected]

London: Michael Fox T: 44 207 742 0256E: [email protected]

Sydney: David Brown T: (61-2)92504606E: [email protected]

W: www.jpmorgan.com/wss

T: +44 20 7220 0961F: +44 20 7220 0977C: Rupert PerryE: [email protected]: Pirum Systems Limited37-39 Lime StreetLondon, EC3M 7AYW: www.pirum.com

Santander is the only Spanish financial institution with a team exclusively dedicatedto securities finance & with the purchase of Abbey in 2004 has expanded its capacity on a Global basis with trading teams in London (UK) & Connecticut (USA).

Santander's leading local capabilities in Spain, Portugal, UK, USA & Latin America,along with its solid balance sheet & combined with the state-of-the-art technology,provides its clients with the broadest range of solutions in securities lending &financing, including availability across all assets classes, as well as access touncommon emerging markets.

W: www.gruposantander.comT: (3491) 289 39 42/54E: securitieslending@

gruposantander.com

Nomura Group is a global investment bank dedicated to providing a broad range offinancial services for individual, institutional, corporate and government clients.The Group’s business activities include investment consultation and brokerage services for retail investors in Japan, and, on a global basis, brokerage services,securities underwriting, investment banking advisory services, merchant banking,and asset management.Nomura offers a full range of Equity Finance services to institutional participants in over thirty markets, through regional trading desks in London, New York, Tokyo and Hong Kong. Identifying client needs and providing bespoke solutions is our top priority.

Securities Lending .

Technology .

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Broadridge Financial SolutionsThe ISIS Building193 Marsh WallLondon E14 9SG UKT: +44 (0) 20 7551 3000E: [email protected]: www.broadridge.com

Broadridge Financial Solutions, formerly ADP Brokerage Services Group, with nearly$2.0 billion in revenues and more than 40 years of experience, is a leading globalprovider of technology-based outsourcing solutions to the financial services industry. Ourintegrated systems and services include international securities processing, investorcommunication and outsourcing solutions. We offer advanced, integrated systems andservices that are dependable, scalable and cost-efficient. Our systems help reduce theneed for clients to make significant capital investments in operations infrastructure,thereby allowing them to increase their focus on core business activities.

Proxy Edge – comprehensive solution for institutional global proxy voting management.Gloss – leading international STP system which automates the trade processing lifecycle fromtrade capture through confirmation, clearing agency reporting and settlement.Tarot - a UK retail and private client stockbroking, custody and fund management solution.Securities Data Management – outsourced data services for securities operations.

DST International is the world’s premier vendor of technology solutions to the globalinvestment management community with over 700 clients in 55 countries, and1500 employees in 19 of the world’s leading financial centres. Our wide range ofasset management solutions meet the needs of fund managers, dealers, settlementstaff, custodians and record keepers operating as international asset managers; fromfront office simulation, opinion management and modelling functions, through datamanagement, dealing and settlement to custody and corporate actions. The suite ofproducts can be used either as stand-alone applications or brought together in flexi-ble combinations according to specific needs.

Eagle Investment Systems LLC, a Mellon Financial CompanySM, is a global providerof financial services technology, serving the world's leading financial institutions.Eagle's Web-based systems support the internal straight-through processing requirements of firms of any size including money managers, mutual funds, hedgefunds, plan sponsors, banks, corporate trusts, and insurance companies. Eagle iscommitted to providing leading-edge technology, professional services, and globalsupport for portfolio management, investment accounting, performance measurement, attribution, reference data management, AIMR/GIPS compliance,reporting, and outsourcing.

T: UK +44 (0)20 8390 5000Boston +1 617 482 8800Hong Kong +85 225 812 880F: +44 (0)20 8390 7000E: [email protected]: DST House, St Mark’s Hill,Surbiton, Surrey, KT6 4QDW: www.dstinternational.com

W: www.eagleinvsys.com T: +44 (0) 20 7163 5700 F: +44 (0) 20 7163 5701 A: Mellon Financial Centre160 Queen Victoria StreetLondon, EC4V 4LA

Annette [email protected]: +49 69 21 93 66 600 F: +49 69 21 93 66 650Mainzer Landstr. 199 60326 Frankfurt am Main GermanyW: www.aquin.com

C: Belinda Hamer (US) E: [email protected]: +1 212 445 1076 F: +1 212 445 1079

C: Pascal Guignabaudet (EU)E: [email protected]: 54 Lombard Street,London, EC3P 3AH, UKT: +44 (0)20 7743 0320F: +44 (0)20 7743 0321W: www.asset-control.com

W: www.burns-stat.com T: +44 (0)20 8525 0696C: Patrick BurnsE: [email protected] Jodrell RoadLondonE3 2LA UK

Aquin Components ranks among the leading IT solution providers to the internationalasset management and fund industry. Its core competency comprises investmentcompliance and risk monitoring; trade and order management; data management;customized reporting; custodian reconciliation and management of software integration projects.

Aquin’s clients include the best-known asset management companies and custodiansin Europe and the USA. They benefit from substantial cost savings derived fromautomation of investment management processes supported by the choice of stand-alone products or integrated solutions. The company has its headquarters inFrankfurt am Main and subsidiaries in Zurich, Paris, Luxembourg, London, Dublinand New York.

Asset Control is the world's leading provider of Centralized Data Management (CDM)to financial industry firms. With a complete range of in-house and outsourcedoptions, Asset Control delivers a hybrid approach to data management. The selection of developer tools, turnkey software solutions and outsourced servicesenable users to optimize their investment data for efficiency, cost control, reducedoperational risk and increased value from their data.

Asset Control solutions manage prices, reference data, risk factors, credit risk data,corporate actions and research data. The solutions support market risk, Basel II,portfolio management, trading and enterprise-wide operational coherency.

Burns Statistics provides software and consulting services. We are focusing on ran-dom portfolios, a technique that provides significantly improved performance meas-urement. A particularly powerful feature is that the initial holdings of the portfoliocan be used in the performance analysis in order to gain even more precision.

Performance measurement is after the fact, but random portfolios also allow fundmanagers to test trading strategies before implementing them. There are many addi-tional uses of random portfolios as well, one is to objectively evaluate the effect ofconstraints on a portfolio.


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Lombard Risk is an innovative and established provider of financial trading systems,risk management software, regulatory software and independent valuation services.Our software solutions include Colline, a market leader in collateral management,and STB-Reporter, a market leader for regulatory reporting. We also provide enter-prise-wide trading and risk management solutions that allow you to value and man-age risk proactively across a broad range of financial instruments. Other solutionsinclude sophisticated anti-money laundering and financial crime detection software.Lombard Risk is a global company with offices in London, New York, Shanghai,Hong Kong, Singapore and Johannesburg.

For more information, please visit www.lombardrisk.com

Lombard Risk21st FloorEmpress State BuildingLillie RoadLondon SW6 1TRUKT: +44 (0)20 7384 5000F: +44 (0)20 7384 5140

www.lombardrisk.com

Building on over twenty years of experience in capital markets and cross-asset soft-ware solutions, Murex introduces Mx Asset Manager - a unique cross currency, crossasset fund management solution capable of handling the full range of products, fromplain vanilla to the most complex derivative products.

Coupled with a high degree of flexibility and customization, Mx Asset Manager fea-tures a multifaceted design catering to the needs of both service providers (primebrokers, administrators, asset servicing providers) and direct clients (portfolio man-agers for mutual, pension or hedge funds, insurance companies).

With so many new challenges presented to buy-side managers when integratingincreasingly-complex derivatives into their portfolios and funds, Mx Asset Managerrepresents a strong and reliable ally for dynamic position keeping and multi-dimen-sional risk management in a thriving market.

C: Hélène Desbiez Business Development ManagerT: +33 1 44 05 32 00E: [email protected]: www.murex.com

For more than a decade, administrators, managers, and advisors have reliedon KOGER for dependable software tools backed by extensive industryexperience and expertise. Now, for those who want to reduce costs andstreamline business processes, Koger offers Fully Integrated FundAdministrator, a vertically integrated suite serving the back-officesoftware needs of the fund industry.Fully Integrated Fund Administrator consists of three core programs:

~ NTAS, the New Transfer-agency System~ E*TAS, Electronic Transfer Agency System~ GRID, Global Reach Interface Daemon

Other programs, such as PTAS, KIT, and KORS available separately, complementthe core competency of Fully Integrated Fund Administrator.

T: 001-201-291-7747F: 001-201-291-7808C: Mr Ras SipkoE: [email protected] USA12 Route 17 NorthSuite 111ParamusNew Jersey, NJ 07652, USAW: www.kogerusa.com

W: www.f-tradeware.comT: +44 (0)20 7493 2773F: +44 (0)20 7495 4858C: GrahamBrightE: [email protected]: 31 Dover Street London W1S 4ND UK

Financial Tradeware provides integrated solutions for medium to small sizedInvestment Management firms, Fund Managers and Hedge Funds, covering the fulltrade life cycle. It is part of the Dharma Group of companies and benefits from thejoint contributions and experiences within the group of leading market traders, busi-ness analysts, financial services professionals and skilled Microsoft Certified pro-grammers. The company has developed a suite of applications that integrate andStraight Through Process (STP) real-time trading, back office administration,accounting and compliance. Ultra.net®, S-Messenger® and H-Fund® are the com-pany's flagship products all based on Microsoft.NET infrastructure. In addition thecompany offers a Member Administered Closed User Group (MA-CUG) service forSWIFT connectivity. For more information see: www.f-tradeware.com

Fingertip Developments LtdCurtain Court7 Curtain RoadLondon EC2A 3LT UK

T: +44 (0)20 7100 9280enquiries@fingertip-

developments.com

Elemes NM is your partner in global agent bank custodian network management pro-viding a global view of your relationship network in a powerful and easy to use pack-age. It includes diary, invoice verification, document management, multi-entityviews, reporting, account information incorporating fee and rate structures, contacts,notes and supports eFee – electronic fee invoicing technology.

Unrivalled extensibility allows you to develop your own functionality with your in-house development team.

Flexibility does not stop with the software, our commercial terms offer adaptablepricing to suit present and future requirements for all sizes of organisation.

IGEFI is the foremost provider of software solutions for international fund promoters, third-party service providers and fund managers. Its prestigious client-base is testimony to our commitment, service and quality with over 170 expert staff supporting clients from six offices worldwide including Bangalore,Boston, Frankfurt, Geneva, Luxembourg and Paris. MultiFonds is operational in more than 20 countries worldwide and support investment funds assets in excess of US$ 2 trillion.

MultiFonds Fund Accounting and MultiFonds Transfer Agency are developed on a “one system-one database” philosophy and provide significant advantages including reduced overhead and IT support costs and single look and feel reportingfor global clients.

A:IGEFI Group Sàrl - 7, Rue desPrimeurs, L-2361 StrassenT: +352 26 44 211 F: +352 26 44 21 44E: [email protected]: www.igefi.com

C: Mr. Jesper Steiness - Director,Business DevelopmentE: [email protected]

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T: +44 (0)20 7826 4470F: +44 (0)20 7826 4480C: Nick StevensE: [email protected]: Cable House, 4th Floor54-62 New Broad StreetLondon EC2M 1ST UKFurther Contacts:US T: +1 212 946 2685Singapore T: +65 9616 7732

T UK: +44 (0) 8452 303 065T US: 1-888-650-1831F: +44 (0) 8452 303 064E: [email protected]: FinTuition Ltd1 Berkeley StreetLondon W1J 8DJUnited KinddomW: http://www.fintuition.com

Over 100 Capital Markets firms worldwide rely on Singularity to achieve step-changeimprovements in efficiency and cost-effectiveness. Across front, middle and back officeoperations, Singularity's clients are improving performance by automating process andleveraging their human capital most effectively. Our process automation solutions com-bine deep knowledge and long-standing capital markets experience with award-winning technology. Clients include JPMorgan, Bank of Tokyo Mitsubishi UFJ, Raymond James,Prudential, Invesco, BNPParibas, Morgan Stanley, American Express and M&G.

By cutting latency in securities processing, our clients are recognising new efficien-cies, reducing costs and increasing throughput

By streamlining their customer on-boarding processes, our clients are gaining fasteraccess to fees, increasing customer satisfaction & gaining greater cross-sell opportunities.

By automating their KYC & other compliance processes, our clients & reducing risk.By improving collaboration in their client reporting cycle, our clients are providing

more timely and insightful investment performance information.

FinTuition is an international training company based in London specialising in thesecurities finance business: securities lending, equity finance, hedge funds, primebrokerage, repo and collateral management. FinTuition offers a regular schedule of open-enrolment courses from introductory toadvanced levels as well as tailor-made in-house training and consulting. We havecourse locations in Asia, Europe and North America.

FinTuition training relies heavily on exercises, role plays and case studies to pro-mote a better understanding of securities financing and trading concepts throughcontextually reinforced learning.

For more information about our courses, course dates and course directors, pleasevisit our website www.fintuition.com

peterevans is a leading provider of front to back office solutions for the financial servicessector. With 23 years experience peterevans takes a sophisticated and dynamicapproach to assist customers in reducing costs and witnessing an increase in margins byseamlessly replacing costly and restricting legacy platforms. peterevans works in a col-laborative manner and sees clients as partners to help meet all the demands in today’smarketplace. The xanite product suite offers a highly configurable, flexible and fullyintegrated, browser based, comprehensive front to back solution that complies with mes-sage standardization and settlement harmonization. Deployed as a single application orintegrated as components into your existing platform. Each of the xanite modules can dedelivered via an ASP or self-hosted. Covering: wealth management, custody corporateactions clearing and settlement private client and on-line stock broking Clients contin-ue to retain all control with their portfolio, fund and relationship managers, brokers,middle and back office operation – on line anywhere in the world.

Princeton Financial® Systems, a wholly owned subsidiary of State StreetCorporation, is a leading provider of investment management and accounting systems and ASP services for global institutional investors.Its flagship PAM® investment management systems provide comprehensive STP-ready functionality that can be licensed for in-house use or accessed via theInternet. PAM® systems are currently used worldwide by over 275 leading invest-ment managers, insurance companies, mutual funds and unit trusts, pension funds,hedge funds, endowments, banks and corporation, which manage combined totalassets over US $3 trillion.Princeton Financial has offices located throughout the United States, UnitedKingdom, Belgium, Australia, Singapore, Amsterdam and Canada. Form more information, visit Princeton Financial’s website.

Sectech Limited, established in 1998, provides comprehensive solutionsfor Custody, Settlement and Securities Back office automation to meet theneeds of custodians, fund managers, asset managers, and pension fundsmanagers.

The Custody 2000 suite of applications is a powerful and feature rich systemthat automates all areas of a securities back office operation. The systemis based on a multi-currency, multi product, and online real-time platform.Modules include settlements, corporate actions, cash management, orderexecution, compliance monitoring, performance measurement, investmentaccounting, certificate management, MIS, SWIFT messaging, email reporting,client billing, client query tracking and Market Interfaces.

peterevansNew Broad Street House35 New Broad StreetLondon EC2M 1NHT: +44 (0) 29 20 402200E: [email protected]: www.peterevans.com

T: +1 609-987-2400F: +1 609-514-4794C: Lorne Whitmore, VicePresident, Global Sales &Product ManagementE: [email protected]: 600 College Road East, Princeton, NJ 08540, USAW: www.pfs.com

T: +44 (0) 20 8289 8174F: +44 (0) 870762 6157C: Mr. Khalid MukhtarE: [email protected]: Sectech Limited204-206 High StreetBromley, KentBR1 1PW, UKW: www.sectech.com

SimCorp Dimension is a powerful, comprehensive and truly seamless investmentmanagement system. It can handle NAV and other calculations, with complete related accounting, for a huge variety of fund structures and product types, includingregional specialities. Support for broader functions, such as performance attributionand risk management, are particular strengths of the system.

SimCorp Dimension has been designed from scratch as an enterprise-wide system,handling all aspects of the investment management process, consistently. Data isrecorded into a core database so that reporting is made easy, there is no reconciliation of data and no duplication of procedures.

T: +44 (0)20 7260 1900 F: +44 (0)20 7260 1911C: Elizabeth Gee, Sales Directorof SimCorp DimensionE: [email protected], 100 Wood Street,London EC2V 7AN UK W: www.simcorpdimension.com

Training and Education .

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HINDSIGHT/FORESIGHT


How have investment management strategies evolved over thepast five years, with the benefit of hindsight?

Hindsight is a luxury that doesn't apply much to the real world,and we don't talk much about it here. Maybe that's the perspec-tive of a long term investor that's looking forward for a couple ofdecades. Of course, we could have gained assets had we done aparticular deal or initiated a particular strategy earlier than wedid, or abandoned an under performing fund or partner earlierthan we did. This is where a sound asset allocation strategycomes in - we know that we'll beat our actuarial target of 7.75%gain, annualised, on total retirement fund assets if we have a wellconstructed, diversified asset allocation strategy. Occasionally, wecongratulate ourselves for 'hindsight' great calls. The Calpersboard was aggressive and forward thinking in increasing com-mitments to real estate during that sector's market slump in theearly 1990s. It paid off in double digit returns that exceeded 30%in recent years when we were able to sell many of our US hold-ings. We took a 5.5% equity stake with Carlyle Group in 2001.While we don't disclose the current value of that deal, it's signif-icant. But we passed up increasing our equity stake when we hadan offer to do so in 2003 - mainly because we had lots on our platein private equity at the time and the timing wasn't right for theproper due diligence the deal would have required.

How have the lessons learnt impacted on the developmentof new and innovative strategies?

The mortgage re-pricing development has made real estate lessattractive than it has been in recent years. Yet we are movingaggressively forward with a restructuring of our real estate pro-gramme, with plans to hire new staff and expand internationalinvestments - at the very time that many other investors arepulling back from the real estate sector. We haven't forgottenhow a similar initiative in the down market of the early 1990shelped us achieve impressive gains later. We are always looking

Are hedge funds still alternative?Hedge funds are in our Global Equity programme. We havemore than USD5 billion in hedge funds and the Calpers boardrecently increased the potential allocation, at staff's discretion,to invest up to 8% of the Global Equity portfolio - more thanUSD10 billion for hedge funds possibly. Hedge funds haven'tbeen directly affected by the mortgage problem.Over the next few years where will the largest returns come from?We expect to see a greater share of returns coming from inter-national investments, particularly in Asia, and in energy andnatural resources related investing.What is the biggest risk you face?The greatest risk to a long term investor is looking in the rearview mirror or even looking only to the side or 10 feet down theroad. We want to be nimble to fast breaking market opportuni-ties but, with our size and perspective, we have to look fartherdown the road than today, next week, or even next month. ■

Calpers spokesman Clark McKinley,information officer for investments,provides the perspective of a pension fund on the past & future

FORESIGHT

for innovative strategies - regardless of what's happening in themarket - because we know that over time they may pay off bygiving us great results.

With the benefit of hindsight on market conditions and volatility, what would you do differently?

If we had the luxury of a retroactive crystal ball, we'd go backto buy, sell, and make deals to maximise gains and minimise loss-es. Of course, nobody has a crystal ball, so we instead trust ourlong term asset allocation strategy. We're always looking ahead,and not in the rear view mirror. For example, the Calpers board,in the coming months, will tweak our strategy, and add a fifthasset class ('Inflation-Linked' with infrastructure, commodities,timber, and inflation linked bonds components) to take advantageof what we believe are emerging opportunities related to energyand natural resources. We began a commodities pilot programmea few months ago with an initial USD450 million commitment.Many observers said Calpers was coming late to the party. Whenyou're a 75 year old investor with a USD245 billion portfolio, youcan afford to come late to the party. It's the long haul that counts.Even with three under-par years early in this decade (includingloss years in 2002 and 2003), we finished the 10 years that ended30 June with a 9.1 % return, annualised.

Through theeye in thepyramid

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