ISJ032

Fitter, Faster, SEPA The future of European payments

Regulation - UCITS IV Panel - Corporate ActionsAnalyse this - CustodyRisk - Technology

Plus

Markets Analysis - SpainIn Focus - Fee BillingEurope - Target2-SecuritiesNews Analysis - ARS

Volume 5 No. 32 - 2008

www.ISJ.tv

GDB 25 - UK, ROWUSD 45 - AmericaEUR 35 - EMEA

Front Cover.indd 3 22/8/08 18:01:16

Investor Services Journal

Group editor: Giles Turner ([email protected]),Deputy editor: Ben Roberts ([email protected]),Reporters: Joe Corcos ([email protected]), Catherine Kemp ([email protected]),Contributors: Brian Bollen, Anthony Harrington

Design: David Copsey ([email protected])

Associate publisher: Justin Lawson ([email protected]),Publishing manager: Monique Labuschagne ([email protected]),Account managers: Peter Lines ([email protected]), Craig McCartney ([email protected]), Mohammed Malik ([email protected]), Tarik Rekiouak ([email protected]), Oliver Blennerhassett ([email protected]),Operations manager: Sue Whittle ([email protected])

CEO: Mark Latham ([email protected])

Investor Intelligence partnership 16-17 Little Portland Street, London W1W 8BPT: +44 (0) 20 7299 7700 F: +44 (0) 20 7636 6044 W: www.ISJtv.com

© 2008 Investor Intelligence. All rights reserved. No part of this publication may be reproduced, in whole or in part, without prior written permission from the publishers. Thanks to Juliette, Sophie, Calypso and Electra. ISSN 1744-151X. Printed in the UK by Pensord Press.

Cruel summerEditor’s Letter

A brace of anniversaries in August saw the credit crunch pass its first year and Investor Services Journal celebrate its fourth. Both time periods have initiated remarkable changes – with any luck all concerned will continue to grow in wisdom. For private equity, however, the last tumultuous few months must have felt more like Christmas. TPG Capital and Blackstone among others have continually seized headlines with their moves to swoop on ailing banks and mortgage lenders – all the time enhancing their position in the chess game of market share. With an endorsement from Ben Bernanke, chairman of the US Federal Reserve, private equity looks set to shape the fortunes of even more institutions.

The last year has transformed the way many companies and their practices are perceived. Even the subject matter has reversed: Teo Swee Lian, managing director of MOS, asks why those who prescribed less regulation are the first to question how everyone “could have missed the elephant in the room” and by not scrutinising the risk of mortgage-based trades. Read his comments in Giles Turner’s article on risk on page 58. On the subject of trading, Turquoise, a new stock exchange, went live – a further threat to the traditional order.

Spain is sure to be one country that will be glad to see the back of the last year. A real estate crash has contributed to a country on the brink of recession. See Catherine Kemp’s analysis of its securities lending market on page 72.

The world of finance is ever-shrinking. Many people who spoke to Investor Services Journal have attested to this in their respective fields. In European payments the single Euro payments area (SEPA) legislation passed in January sought to bring countries closer to a common understanding. Further, there has been a convergence of corporate client demand and new systems developed to respond to that demand, says Paul Taylor of VocaLink, where markets need faster, safer services. Turn to page 16 to read how and why. Hannu Syrjala, CEO of TietoEnator, also sees that the business styles between the US, Europe and Asia now have “more similarities than dissimilarities”. His career and business goals are explored on page 111. In custody, too, the divide between Western, Central and Eastern Europe is dissolving, with Austrian banks set to profit as the gateway of business flows between these investment spaces. We start this coverage on page 30, following a special Analyse This on other custody markets undergoing change. Ben Roberts, deputy editor

pp. 1

ISJ | Investor Services Journal

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p. 2 Contents

NEWS

p. 4 Letters to the editor

p. 6 News

p. 8 News and mandates

p. 10 News analysis

p. 14 Executive profile: Goran Fors of SEB

p. 94 People moves

p. 96 Statistics

p. 111 Running a company – Hannu Syrjala, CEO of TietoEnator

COVER STORY - Paymentsp. 16 Fitter, faster, SEPA

CUSTODY

p. 22 ‘Analyse This’: Switzerland, Sweden, Netherlands,

Turkey, South Africa

p. 30 Austria

p. 33 Africa

LEGAL AND COMPLIANCE

p. 34 Assume the recovery position, by Goal Group

p. 38 Panel debate – corporate actions

TECHNOLOGY

p. 53 The streamlined solution to Substantial Shareholder

Reporting, by Aquin

p. 55 E-invoicing, by Equens

p. 58 From the roots up – risk technology

MARKET

p. 63 Fee billing in focus - CheckFree

p. 66 Target driven – clearance and settlement

SECURITIES LENDING

p. 72 Breaking the bottleneck – Spanish market

p. 78 Enhancing profitability through an integrated securities

lending solution, with Sungard’s Jane Milner

p. 80 The rise and sprawl of multi-listed securities, by Euroclear’s Eamonn Ryan

DATA

p. 82 Uncovering buried treasuries, by Business Control

Solutions’s Nigel Walder

p. 86 Reference data update: Standard Chartered

and Exchange Data

p. 90 Managed Accounts: An Industry Defined by Growth, Complexity—and No Margin for Error, by Redi2’s Seth Johnson

isj.tv

Goran Fors, p. 14 Payments, p. 16

van Houwelingen, p. 29 Austria, p30

Panel debate, p. 38 Dave Rietveld, p55

Eamonn Ryan, p. 80Geoff harries, p. 63

Hannu Syrjala, p. 111

A global player in asset servicing...O� ering leading value in investor services demands constant

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CACEIS, your comprehensive securities servicing partner.

... and climbing.

Custody-Depositary / TrusteeFund AdministrationCorporate TrustCACEIS benefi ts from an S&P AA- rating

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A global player in asset servicing...O� ering leading value in investor services demands constant

evolution. At CACEIS, our strategy of sustained growth is helping

customers meet competitive challenges on a global scale. Find out

how our highly adapted investor services can keep you a leap ahead.

CACEIS, your comprehensive securities servicing partner.

... and climbing.

Custody-Depositary / TrusteeFund AdministrationCorporate TrustCACEIS benefi ts from an S&P AA- rating

www.caceis.com

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Caceis adv climb EN 203x267H.indd 1 8/04/08 14:20:011-114-PDF FINAL NEW .indd 3 16/1/09 15:40:50

Letters to Editor

Asian securities lendingrepresents nothing but opportunity

pp. 4

Dear ISJ,

State Street believes securities lending is important to markets in at least two ways. First, we believe it is a mechanism that provides essential liquidity to countries. Liquidity is a necessary ingredient for market efficiency and, thus, is beneficial to the participants in those markets.

Secondly, it is a way to provide risk-adjusted returns both to institutional investors within those markets and to foreign institutions that invest in them. To the extent investors from the host countries can participate in securities lending, they will be able to use their portfolios of securities and earn incremental returns.

Foreign investors entering the Asian markets should not see the structure of working through a central exchange as a hindrance. State Street supports the markets that are opening to securities lending and sees the changes taking place positively. The use of a central agency does not pose barriers and it is a way some markets look to embark on securities lending while gaining comfort with it.

Francesco Squillacioti, Senior managing director and Asia-Paific regional business director for securities finance, State Street

Emerging markets optimise through STP

Dear ISJ,

Although September’s SIBOS conference will be held in Western Europe, the straight through processing (STP) community should pay close attention to lessons learned in emerging markets. Provisioning a front-to-back office that lowers cost, mitigates risk, and supports a growing compliance spectrum is the oft stated nirvana of STP. Emerging markets are now positioned to best achieve STP’s full promise for three reasons:

Firstly, the silos that block cross-departmental collaboration are less entrenched in many emerging market organisations. Instead, they have a unique opportunity to implement systems unencumbered by aged organisational boundaries.

Secondly, the traditional STP business process - including order entry, execution, clearance and settlement - has now been extended to include post-settlement account certification. This allows emerging market players to incorporate improved internal controls that better satisfy compliance requirements.

Thirdly, emerging market entities are entering the game at a time when interoperability, connectivity, and computing power are capable of delivering high-volume solutions covering more asset classes with better risk management.

This convergence of technical and functional STP maturity allows emerging market participants an unprecedented advantage in “getting it right”.

Tom McEvillySales director, UKCheckFree

SEB is the leading provider of custody and clearing services in the Nordic/Baltic region.

Business is built on long standing partnerships with our clients. Our commitments are efficiency, reliability and providing the highest service quality.

For further information please contact: Global Head of Custody Services: Göran Fors, [email protected]. Head of Sub-Custody Client Relations: Ulf Norén, [email protected].

ISJ_SEB_Eye_Map_203x267.indd 1 07-07-13 07.58.431-114-PDF FINAL NEW .indd 4 16/1/09 15:40:52

SEB is the leading provider of custody and clearing services in the Nordic/Baltic region.

Business is built on long standing partnerships with our clients. Our commitments are efficiency, reliability and providing the highest service quality.

For further information please contact: Global Head of Custody Services: Göran Fors, [email protected]. Head of Sub-Custody Client Relations: Ulf Norén, [email protected].

ISJ_SEB_Eye_Map_203x267.indd 1 07-07-13 07.58.431-114-PDF FINAL NEW .indd 5 16/1/09 15:40:54


p. 6

NewsNews

Custody, Clearing, Settlement Zagreb - BNY Mellon Asset Servicing has been appointed to provide global custody and related services by Privredna Banka Zagreb (PBZ), Croatia’s second largest bank, for assets valued at over USD200 million.

PBZ’s Croatian client base has expanded heavily into emerging market assets and BNY Mellon will provide global custody for 27 foreign markets.

London - Northern Trust has been selected to provide fund accounting, trade execution and custody services for the recently launched Legal & General Multi Manager Unit Trust range.

The trusts have assets totalling approximately GBP380 million (USD757 million).

London - State Street Corporation has been reappointed to provide an integrated range of investment services to the USD1 billion London Borough of Enfield Superannuation Fund.

In addition to global custody, investment accounting, performance measurement and foreign exchange services, State Street will also provide the fund with securities lending services. The fund was advised by Hewitt Associates during a competitive re-bid process.

London - Omgeo has announced that it has made functionality improvements to the settlement notification feature of its core central matching platform, Omgeo Central Trade Manager (Omgeo CTM).

The system now provides the ability to send a copy of a settlement notification to multiple third parties for informational purposes, in addition to the custodian notification for settlement.

Funds and administrationLondon - iShares, the provider of Exchange Traded Funds (ETFs) has announced its iShares S&P 500 fund has gone through USD5 billion in assets under management.

The fund, which is listed on seven local ex-changes throughout Europe, provides a means for gaining exposure to a diversified basket of US equity securities.

Moscow - At the end of June, KIT Fortis Investments launched its first Russian equity fund for Japanese retail clients in partnership with Sumitomo Mitsui Asset Management Company, Limited (SMAM) and Toyo Securi-ties.

The fund, which is legally managed by SMAM and advised by KIT Fortis Investments.

London - The London Stock Exchange today welcomed nineteen new Exchange Traded Funds (ETFs) onto its Main Market, the busi-est ever day for new ETF admissions on the Exchange.

The new funds, which cover a range of equity and bond indices, take the total number of ETFs on the Exchange to 166, from five dif-ferent issuers. In addition, the Exchange also now offers access to trading in 122 Exchange Traded Commodities (ETCs).

Market infrastructureLondon - GL TRADE has signed a partnership agreement with the Tokyo Financial Exchange (TFX), which will allow remote members to execute orders on Japan’s largest financial futures exchange. TFX saw the volume for its main product, Euroyen Three Month Futures, grow by 23.7% between 2006 and 2007 and in September 2007, TFX transformed from a financial futures exchange into a more comprehensive exchange that can handle various financial products. In January 2008, TFX announced its intention to introduce a Remote Membership program and is therefore the first Japanese exchange to implement such a program.

Lagos - Citi Global Transactions Services will now be providing direct custody and clearing

services to clients investing in Nigeria. Lee Waite, Managing Director and Global Head of Citi’s Direct Custody and Clearing/ Interme-diaries business, said, “As the ninth open-ing in two years, this is testament to Citi’s unrivalled ability to support our clients as the globalization of capital markets continues. We are delighted to be extending our reach to the Nigerian market.”

Madrid - Société Générale has begun trad-ing 199 warrants on the Spanish Exchange today, bringing the total number of warrants on the market so far this year to 5,768, up 31% from a year earlier. The new warrants are linked to domestic and foreign shares and indices as well as commodities and exchange rates. 129 warrants were issued on the fol-lowing Spanish shares: Abengoa, Abertis, Acciona, Acerinox, ACS, BBVA, Banco de Sabadell, Banesto, Banco Pastor, Banco Popu-lar, Bankinter, Bolsas y Mercados Españoles (BME), Cintra, Enagás, FCC, Gas Natural, Te-lecinco, Grifols, Catalana Occidente, Ferrovial, Iberdrola, Iberia, Indra, Inditex, La Seda de Barcelona, NH Hoteles, REE, Repsol, Sacyr Vallehermoso, Santander, Sol Meliá, Solaria, Telefónica and Zeltia.

New York - MSCI Barra has announced that it has launched the MSCI Global Currency Indi-ces, which may be licensed for use for portfo-lio management and benchmarking purposes, as well as to serve as the basis of structured products and other index-linked investment vehicles such as ETFs. The MSCI Global Cur-rency Indices reflect the performance of both the currency and interest rate returns of the developed and emerging market currencies in regional or composite MSCI equity indices.

Legal and ComplianceNew York - The US Securities and Exchange Commission (the “SEC”) has recently proposed amendments (the “Proposed Amendments”) to Rule 15a-6, its rule under the Securities Exchange Act of 1934 (the “Exchange Act”) that exempts foreign broker-dealers who solicit certain U.S. investors, or who engage in certain other activities with U.S. contacts, from the broker-dealer registration require-ments of the Exchange Act.[1] Comments on the Proposed Amendments are due by September 8, 2008.

The world is full of opportunities.Discover them!

We take pride in developing fl exible and innovative solutions that focus exclusively on your individual requirements. After all, we both

share a common goal: striving for success. With your BHF-BANK skipper at the wheel, you can rest assured that experience, expertise and a highly creative

approach will steer you a safe course through the waters of custody business.

We are dedicated to service – welcome on board !

For further information please contact Cornelia Keth on +49 69 718-3738, [email protected] or visit us at www.bhf-bank.com

0109_InvServJ_203x267_4c.indd 1 11.08.2008 15:10:36 Uhr


News

The world is full of opportunities.Discover them!

We take pride in developing fl exible and innovative solutions that focus exclusively on your individual requirements. After all, we both

share a common goal: striving for success. With your BHF-BANK skipper at the wheel, you can rest assured that experience, expertise and a highly creative

approach will steer you a safe course through the waters of custody business.

We are dedicated to service – welcome on board !

For further information please contact Cornelia Keth on +49 69 718-3738, [email protected] or visit us at www.bhf-bank.com

0109_InvServJ_203x267_4c.indd 1 11.08.2008 15:10:36 Uhr


p. 8


p. 8 News and Mandates

MandatesJuly saw BNY Mellon continue to pick up mandates at a healthy rate. The Wall Street bank won a mandate from Bangkok Bank, the largest bank in Thailand, to be the outfit’s overseas custodian. Bangkok Bank has branches in China, Hong Kong, Japan and Indonesia. Meanwhile, State Street did well by snagging a sizable mandate from Lazard.

So far August has seen BNY Mellon dominating once again, winning mandates from Dubai-based Gulf Reinsurance and expanding into central and Eastern Europe by winning a mandate from Privredna Banka Zagreb, Croatia’s second-largest bank. Northern Trust also captured a valuable custody mandate from Legal & General, to the tune of USD757. Among the services provided by Northern Trust will be fund accounting, trade execution and custody services. The company will be servicing L&G’s Multi Manager Unit Trust range. This month also saw State Street run away with a mandate from Sun Life’s UK operation. State Street will supply unit pricing, regulatory reporting, global custody, compliance monitoring, performance measurement, derivatives pricing and processing and collateral management. State Street was also buoyed by the news that the USD1 billion London Borough of Enfield Superannuation Fund has reappointed the firm to provide investment services.

Month Winner Client Location Assignment Mandate size

August BNY Mellon Gulf Reinsurance Dubai Custody USD400 million

August BNY Mellon Privredna Banka Zagreb Zagreb Custody USD200 million

August Northern Trust Legal & General London Custody USD757 million

August State Street Sun Life London Investment admin USD15 billion

July State Street Lazard Boston Trade settlement USD134.1 billion

July BNY Mellon Bangkok Bank Bangkok Custody undisclosed

July Nedgroup Attica Vermogensbeheer London Investment USD9 million

Inspired. Motivated. Involved.

As the leading regional custody provider in Sub�Saharan Africa, we

offer more than just the technology and resources needed

for business in Africa. We also have the best people across the continent;

with the specific talent and experience to not only grow your business

but more importantly, to partner with you along the way.

The best part about our range of products and services,

is the people that provide them.

Authorised financial services providerThe Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). SBSA 808564 08/06

808564-806701 267x203.indd 1 6/7/07 1:40:10 PM1-114-PDF FINAL NEW .indd 8 16/1/09 15:41:01

Inspired. Motivated. Involved.

As the leading regional custody provider in Sub�Saharan Africa, we

offer more than just the technology and resources needed

for business in Africa. We also have the best people across the continent;

with the specific talent and experience to not only grow your business

but more importantly, to partner with you along the way.

The best part about our range of products and services,

is the people that provide them.

Authorised financial services providerThe Standard Bank of South Africa Limited (Reg. No. 1962/000738/06). SBSA 808564 08/06

808564-806701 267x203.indd 1 6/7/07 1:40:10 PM1-114-PDF FINAL NEW .indd 9 16/1/09 15:41:02


Lapping at the shores of dry land

News Analysis

In a survey of 141 US public pension funds, endowments and foundations conducted by Greenwich Associates, 45% said that they are either planning to, or are in the process of, a review of their securities lending programs. This is after a significant number of participants reported suffering either an unexpected interruption in liquidity or unanticipated risks and credit exposures in securities lending pools and short-term investment funds during the credit crunch. And a relatively small number of institutions were even forced to realise losses.

The survey also found that some institutions had become lax in their oversight of investment practices within these funds prior to the start of the global credit crisis in 2007, and that some master trusts and custodian banks were not being sufficiently proactive in terms of communicating information about portfolio composition and performance to clients.

Institutions were also, apparently, either considering or already implementing changes in the internal policies related to their securities lending programs or short-term investment programmes by:

-Evaluating the costs and benefits of the programmes and discontinuing or modifying it if the risks seem to outweigh return potential.

-Stepping up their oversight of fund investment practices, and increasing the frequency of communications with managers and more carefully reviewing regular statements.

- Tightening investment guidelines by restricting investment in SIVs, CDOs and other structured or securitized product or limiting investment to government securities.

Dev Clifford, a Greenwich Associates, consultant said:

“When markets were historically strong it became easy for parties on both sides to accept the status quo - and the incremental investment returns. Now that the bubble

has burst, institutions are returning to the practical steps that should be part of basic due diligence.”

This is all well and good. However, there is an extent to which one would question why these organisations were ever allowed to have lending pools and short-term investment funds in this first place, if their risk processes weren’t stringent enough?

Before the credit crunch, the market was highly liquid and it is believed people were more concerned with chasing alpha than monitoring risk. Now that we have seen the damage of not evaluating risk, it is a logical process to implement more stringent rules about the oversight of investment practices.

And while the custodians were not sufficiently proactive in terms of communicating information about portfolio composition and performance, some say the pension funds should have been more demanding about receiving that information. But with or without overall market sentiment as bullish or bearish, where the public’s hard earned cash is concerned the basic steps of due diligence should have been fully implemented from day one and these funds should be more stringently regulated.

The potential reduction in the volumes of available liquidity in the market as a result of these pension funds removing lending programmes may concern securities lending organisations. Securities lending is an essential part of the financial system some say, and the importance of securities lending for the health of financial markets has already been widely asserted by securities lending bodies.

A report by the chairwoman of the Australian Securities Lending Association (ASLA), Natalie Floate, stressed the distinction between securities lending, short selling and margin lending.

“ASLA is concerned that securities lending is not well understood and its resulting benefits have been overlooked within the current market pessimism...ASLA acknowledges there are concerns regarding transparency of on loan positions and is

working closely with regulators to address these concerns,” she said.

Similarly, David Rule chairman of International Securities Lending Association (ISLA), writing in Investor Services Journal’s 2009 Securities Lending Market Guide expresses a similar concern that the value of securities lending was not widely understood:

“Raising the profile of securities lending is one of our priorities for 2008, to ensure that policymakers, regulators and commentators understand its importance to the wider liquidity of modern financial markets, we need to do more to get that message across.”

Greenwich Associates survey of 141 institutions: Unexpected Risk and Liquidity Interruptions

· More than 47% say they experienced un-anticipated risk or credit exposure in their securities lending collateral pools over the past year - a proportion that increases to more than half among those with more than $5 billion in assets.

· More than 20% say they experienced an unanticipated lack of liquidity in their securities lending collateral pools in the last year. More than a quarter of public pension funds report an unexpected interruption in liquidity, as did almost the same proportion of the country’s largest corporate pension funds.

· Nearly one third say they experienced unexpected risk or credit exposure in short-term investment funds over the past 12 months. More than 40% of corporate funds with more than $5 billion in assets say they experienced unanticipated risks or exposures, as did nearly the same share of endowments and foundations with more than $1 billion in assets.

· More than 45% say they are currently reviewing internal policies related to their securities lending programs or short-term investment programs.

p. 10

Why weren’t US public pension funds more careful in the first place?

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p. 11

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p. 12

isj.tv

News Analysis

Pain in the ARS

In the latest chapter of the credit crunch, several

financial giants have been forced to buy back billions

in auction-rate securities (ARS) from investors, and

have been hit with a round of fines from regulators.

ARS are not the more widely known of instruments.

In essence an ARS is a debt security with a relatively

long-term nominal maturity where the interest rate

is periodically reset through an auction. During the

auction process, brokers and dealers submit bids for

buyers and sellers, then the auction agent sets the

next interest rate based on the bids. The rate will be

the lowest rate to match supply and demand. ARS

are attractive as they usually offer superior to money

market funds.

Traditionally the ARS market has been dominated

by institutional buyers. But as the liquidity crisis

gathered steam, they stopped showing up. So the big

players started to unload the securities on individual

investors, assuring them that they were virtually cash,

when they knew better. Most of those who invested

in ARS thought they were purchasing safety and

liquidity. In order to keep the auctions from failing the

banks themselves bought much of the debt, propping

up the market. But in February the ARS market

virtually collapsed, leaving thousands of investors with

securities they could not sell.

It could be argued that the banks propped up the

market in the belief it would rebound, and the whole

thing was a simple miscalculation. However this

doesn’t explain a group of UBS executives getting rid

of their own ARS before the market collapse. Indeed,

seven of the executives that sold their ARS were

members of the auction rate securities working group

formed specifically to examine the gaps in the market.

At the end of the day it is obvious the banks knew

what was coming.

Now Citigroup and Merrill Lynch will be forced to

buy back at least USD20 billion worth of ARS between

them, while JP Morgan and Morgan Stanley are to buy

back over USD10 billion combined. UBS will buy back

USD8.2 billion. Moreover, regulators are to fine the

firms involved for misrepresenting ARS as more liquid

than they actually were. Citigroup and UBS are to

be fined USD250 million between them, while JP

Morgan will be hit for USD25 million and Morgan

Stanley for USD35 million.

None of the entities that have been caught out have

admitted their wrong doing, issued an apology, or

anything of the like. But nor have they denied any

wrong doing and all will pay their fines.

The man who is going after the banks with the most

gusto on the matter of ARS is New York’s attorney

general, Robert Cuomo. Such vigorous pursuit of

justice usually smacks of political ambition, but it

cannot be denied that comeuppance is due. Cuomo

has said that Merrill’s commitment to buy back USD10

million of ARS from investors isn’t enough. He has left

the ball in Merrill’s court by not delineating precisely

what will be enough – some may say he knows that

Merrill knows what the fair amount is.

The criminal complaint that Cuomo has lodged against

UBS states: “UBS has committed a multi-billion dollar

consumer and securities fraud on the investing public

by falsely selling securities facing mounting liquidity

risk as cash equivalents. Customers typically invested

in what they believed were cash equivalents because

they thought they would need the money in a near-

term basis. Individual investors planned to use what

they believed was cash safely stored at a reputable bank

for health care costs, tax payments and tuition costs,

among others.”

Again naïve investors have been harshly reminded that

securities touted as being akin to cash are not, in fact,

cash. Some may argue this has again exposed banks as

lacking integrity and holding Joe Investor in disregard.

Financial firms forced to buy back auction-rate securities


p. 13


At long last Turquoise has gone live. Cue angelic choirs

and general rejoicing (by some). The share-trading

platform owned by nine investment banks including

Goldman Sachs, Deutsche Bank and Citigroup, has

successfully kicked off operations by offering trading in

fi ve ultra liquid stocks in the UK and fi ve in Germany.

The project tried to tone down the launch, stressing

that the full launch on 5 September will be much

more signifi cant. However much as those behind the

platform may want to divert undue judgment, beady

eyes around Europe will certainly be paying close

attention to the progress of the ambitious project.

The purpose behind Turquoise is to offer less expensive

trading than current exchanges, and over the coming

weeks its will expand its offerings to include 1,300

stocks in 13 markets across Europe. The ultimate

success of the venture will certainly not be able to be

judged until several months down the road, but hopes

are sky-high.

According to the project’s chief executive, Eli

Lederman, 14 clients have so far put in couple of

thousand buy and sell transactions and all has gone

smoothly.

Acting as the clearing house for Turquoise is the

European Central Counterparty Limited (EuroCCP),

a subsidiary of the Depository Trust & Clearing

Corporation. Soon EuroCCP will be providing clearing

in up to 20 different markets in Europe, and currently

claims to offer the lowest clearing fees across the

continent.

Turquoise was originally planned to go live almost

one year ago, but was beset by a host of quandaries

such as selecting proper trading engines and a proper

management structure.

With these problems accounted for, the platform

now joins Chi-X as the latest in new generation

of upstart exchanges challenging the old order of

European incumbents. Several factors have allowed

this to happen. Exchange technology has become

cheaper and at the same time more advanced. MiFID,

the directive passed last year in order to harmonise

regulation across Europe has also aided the creation

of the new exchanges. Part of the reason the European

Commission pushed MiFID through was the belief

that costs of clearing and settlement were too high.

Now the name of the game is speed and being able to

offer lower prices.

Peter Randall, vice president at Chi-X, says: “Clearly

the market is embracing new alternatives. Not only

is there an appetite but also a demonstrable move

towards faster, cheaper and smarter venues which offer

an alternative to training on the incumbent exchanges.”

The London Stock Exchange (LSE) especially will be

keeping a wary eye on the progress of Turquoise.

The two trading platforms clashed at the end of July

over Turquoise’s trading of Italian equities. Turquoise

claimed that the Italian depository Monte Titoli, which

is owned by the LSE, will not link with EuroCCP, which

is the only way that Turquoise will be able to trade in

Italian equities. The LSE has claimed that Monte Titoli

was never even approached by Turquoise.

It is no wonder the LSE is perturbed. Already

Turquoise’s contemporary, Chi-X has claimed a fair

chunk of the LSE’s trading volume. Earlier this month

20% of all trades of FTSE 100 stocks were executed on

Chi-X’s system. Turquoise’s Lederman has predicted

that over the next 12 to 18 months incumbent markets

could lose up to 50% of their market share to the

newcomers.

He says: “The gates have opened and people are

charging through. The invitation to competition

has been there for a while because you have these

organisations and incumbent exchanges that certainly

represent a ripe target.”

News Analysis

The young pretender Turquoise goes live


T he mid 80s was an age of discovery. The wreak of the Titanic was discovered, the hole in the ozone

was found, but for Goran Fors, it was coincidental move from tax advice that allowed him to discover the world of securities administration. Fors took over as head of securities administration at Gota Bank, now part of Nordea (but at the time an independent, mid sized bank), after working in the banks tax advice section. This was a period where securities lending started to take off in the Swedish market. In 1994 he moved to Swed Bank where Fors became head of custody, then in 1997 he moved to SEB, his present abode.

SEB holds a special place within the Nordic custody market. Refusing to sell-off or consolidate has been something of a constant evaluation for the bank, and in the face of some tough competition from incoming US custodians, SEB has managed to carve a role for itself within the Swedish market, and is also growing healthily in Finland. Fors states that: “On the sub-custody side there is even more of a growth scenario because you need to be a fairly big player in sub-custody to be able to compete. We have therefore decided to grow on a regional basis.”

On the sub-custody side you need to be a multi-country provider and be able to draw in significant volumes to keep a sustainable profit level. It is therefore becoming increasingly difficult for custodians to offer only one region to their customers. It is not surprising to hear Fors expounding his firm belief in the multi-market product: “SEB is a dominant player in the region and securities and custody have always been an important part of the bank; it’s something where senior management and board level understand custody, which is not always the case for other companies. But in SEB it’s a very important business.”

Not only multi-markets products are increasingly important, but custodians are also moving towards derivatives through fund of funds. There has been an explosion in markets and products in recent years. For Fors: “The challenge is mainly to keep up with demands on reporting and to have systems that can accommodate these types of asset classes that have more advanced reporting needs. It’s both the detail

of the reporting and the frequency. I think there is still a need for us to keep developing. We might team up with someone else to build a reporting service, particularly for hedge funds.”The hedge fund industry has always been a big focus for SEB, both from the custody side and the bank in general. Hedge funds have been of significant importance in the Swedish market for a long time. This is a trend that Fors has seen coming, along with the need to develop a fund administration product. However real pressure is being exerted on the established exchange trade structure from MTFs and as a result the Nordic post-trade industry is being threatened by alternative places to clear and settle.According to Fors: “I think we’ll see continuous fragmentation driven by MiFID and the MTFs and CCPs that pop up everywhere making it more demanding for us to be able to support that. You have to be able to connect to the infrastructure, especially in the post-trade area, particularly with the CCPs, which makes it increasingly complicated. I think we will also see the environment in the Nordic area move more towards CCPs, which will be a novel situation. I think that will drive the development in the local market for the traditional exchanges to be able to compete. Only time will tell. I don’t see the traditional exchanges fading away, despite the new competition.”

The devil makes work for idle hands, but after expanding into the Nordic/Baltic, SEB has stayed on the good and narrow and is now entering the Russian market in the autumn of this year. “A custodian today needs to be in more and more markets, growing in volumes. As we have a presence in Russia as a bank commercially, it’s a natural step to include custody as an offering. We’ve done the same in the Ukraine, the Baltic’s and Germany,” explains Fors.

There is also nothing but enthusiasm from Fors, perhaps a significant reason for his success. “In the last twenty-five years there are always things changing and developing,” he states. “It’s a fantastic business to be in. It’s a challenging in the need to develop your product, and at the same time it’s a challenge to work with all these clients across a variety of financial institutions. I think especially the trends of global expansion and cross border trading make it a fascinating industry to be in.”

CEO Goren Fors

A trans-national agendaGiles Turner speaks to Goran Fors, head of custody services at SEB, about the expanding world of Scandinavian custody

pp. 14

ISJ | Investor Services Journal isj.tv



Fitter, faster, SEPAPayments

The Single Euro Payments Area (SEPA)

is arguably the most signifi cant effort to

harmonise European fi nance since the

introduction of the Euro. The European

Community’s initiative to effectively

make all cross border payments domestic

payments – cutting transaction costs and

spurring the adjacent drive to speed up

money transfers – has presented challenges

and opportunities in equal measure.

The link between banks, corporates

and the service providers that work as

intermediaries to the transference of funds

between them will be forever altered.

The objective of SEPA was to take out the

payments cost, advance communication

and create a more level playing fi eld

through equal processing times. Where

the market for payments had become

increasingly fragmented – and banks

have certainly been challenged by the

multitude of payment forms from their

clients – the initiative sought to develop a

united payment system. The result would

be a single set of payment instructions

that could send cashless monies anywhere

within the area. It is the latest development

towards monetary harmonisation in a

decade that began with the European

Services Action Plan – the Lisbon Agenda of

2000 – through to the 2006 EC Regulation

2560 cap increase of transactions up to

EUR50,000. On 28th January 2008 the

SEPA pan-European payment instruments

for cross border credit payments were

brought into line with those domestic. In

the next few months it will be rolled out for

direct debits. The legal basis for the plan

is in the form of the Payments Services

Directive (PSD), developed by the European

Community after protracted discussion.

For banks, the build up to SEPA provoked

a new way of seeing money transfer. This

has been partly due to the revenue that

would be lost from charges for cross-

border payments no longer applying. This

would be on top of, some have argued,

the revenue lost from closing down the

‘fl oat’ period between the payment and

settlement – another aspect that has varied

greatly across Europe. Gene Neyer, global

product manager at Fundtech, explains:

“The PSD now requires that funds be made

immediately available to the consumer. In

the past, it was common practice to hold

onto the funds for several days to gain the

benefi t of extra interest income and the

stability of the asset base.”

For the companies that provide payment

systems – whether installed in a bank,

outsourced or acting as the bridge between

banks and corporates – these are interesting

times. Providers such as Currencies Direct,

Sterling Commerce, Fundtech and VocaLink

that have crafted a niche in the industry for

the last few years and have products in line

with SEPA’s ethos of speed, reliability and

accountability. Neyer describes SEPA as “a

grand experiment”. Fundtech provides a

neutral payment platform for banks that he

sees are too big as institutions to outsource

their payments. The system – Global

Pay Plus - can converge the multitude of

payment systems the bank may already

be using to create a single format for data

transfer. In effect this streamlines the

payment process and reduces transfer

time – much as SEPA advocates would

wish. “Fundtech breaks down the barriers

between urgent and non urgent payments,

as they have to go through the same

process anyway,” says Neyer. “I think from

Fundtech’s perspective we’ve done our little

bit in converging the work.”

Neyer explains that a key strength of

Global Pay Plus is that it is scaleable.

“GPP is suitable to run the entire payment

operation of even the largest bank. At the

same time, GPP has been cost effectively

deployed at banks that only make several

hundred payments a day. Thus, the bank

can start small and add capacity in small

(or large) increments, as needed to support

the business growth.”

In June 2008 Fundtech conducted a survey

to gauge banks’ reaction to SEPA. Sixty-

three per cent of respondents believed SEPA

pricing mandates and a reduced payment

times would have considerable impact on

company profi ts, with 44% predicting it

would take longer than fi ve years to replace

the lost revenue resulting from the SEPA

pricing mandates. Thirteen percent said

isj.tv

pp. 16

Fierce services competition is defi ning European payments and banks had better shape up, says Ben Roberts


they will never be able to recover the lost

revenue. This gloomy outlook was expected,

says Fundtech’s George Ravich, but it allows

room for opportunity. “The results of

our survey were simple confirmation, the

answers were not surprising.”

Richard Spong, managing director of

Sterling Commerce, explains: “Banks are

losing out from SEPA due to the lack of

revenue their getting to charge for cross

border payments. SEPA had the consumer

in mind and immigrants, such as those

living in Switzerland and working in

Germany. Banks could justify charging

for payment transaction because it was a

complex process using different systems.

Now, if they comply with SEPA, everything

is treated as domestic in an effort for

European economic cohesion and they lose

revenue, they have taken quite a hit.”

However, services providing neutral

platforms, faster payments, open reporting

and straight through processing (STP)

have all seen a steady increase in take-up.

The Fundtech survey found that 59% of

respondents have better than 70% STP

rates, and 13% say they have a 90%-

or-better rate. Like Fundtech, Sterling

Commerce provides a solution to funnel

disparate payment systems into a single

channel. But instead of combining the

payments solutions of a bank’s in-house

systems, it acts as a decoder of the different

payment systems used by corporate clients

transferring money into the bank. “Bank

clients are using their own systems for

payments that best suit them,” says Spong.

“Because of this, banks will be receiving

data from these clients in different

forms. Sterling Commerce works as an

intermediary between the clients and banks

to translate the data that comes in into a

one-system form of data that can then be

used when the banks moves that money

data on to other banks.” He adds that data

communication is a key challenge in today’s

linked up markets – something SEPA, along

with these payment intermediaries, seeks to

address.

Spong believes that although there has

been a degree of “dragging of heels”

among banks over SEPA, some firms are

seeing the upside. For example, he says,

the rise of automatic, cashless, STP money

transfers means that there is less manual

processing. This has two consequences: the

bank can reduce both staff numbers and

risk. He agrees that although banks would

rue the loss of payment transfer revenue

– particularly amid lean times in the

banking sector – those that grasp the nettle

and update their systems in-line with SEPA

will identify these longer term gains.

Reducing risk is a vital selling point

in developing relationships with new

corporate clients. Paul Taylor, managing

director for Europe for VocaLink, a software

provider that has a special range of SEPA-

compliant products, explains that payment

systems like VocaLink must enhance a

bank’s standing in the eyes of the corporate

client. “We can take the payments and

process them on behalf of the bank,” he

says. “To do that our systems will have to

work with those of the banks, but that’s

removing a huge amount of cost from the

bank and removing risk as well. If we can

modify our existing products to suit the

new schemes then obviously the banks can

offer them more broadly.

“We’ve been able to gather and interpret

these different requirements and feed that

back to the company to make sure our

products are in line with what they are

asking for. That’s my concern – to make the

banks more valuable to their customers.”

VocaLink as a brand is effectively invisible,

explains Taylor, because the screen on

which the client would make a payment

takes the form of the bank’s online screen

– “a Barclays customer would simply think

they were using the Barclays system”. The

company’s faster payments software, he

adds, is congruous with a growing need to

literally keep up to speed with customer

demand. “There is the acknowledgement

among banks that the market has moved

on, that the channels that the customers

expect has advanced,” he says. “Customers

want channels that are more responsive. I

think faster payments is the banking world’s

response to the change in the customer

space.”

Taylor adds that banks are wary of the

systems they adopt as there is no guarantee

the corporate clients will take to them. “If

these instruments are not taken up then

there’s no business case for the banks,” he

says. However, he is confident that the value

added services of using a single channel to

make transfers and view liquidity positions

will see a high take up. Further, SEPA may

also enhance the adoption of mobile phone

payments, which Taylor believes has been

underwhelming so far. However, he puts

forward a very different view to Richard

Spong as to banks’ acceptance of SEPA. “I

struggle to see how the banks have failed to

respond to SEPA. On January 28th nearly

every bank I know was compliant and had

the service – whether or not they were

marketing the service I don’t know.”

There is certainly fierce competition for

corporate clients if banks do not refine

their offerings. Currencies Direct is a

foreign exchange specialist that competes

against banks for the most competitive

rates of currency conversion. Mark O’

Sullivan, director of dealings, explains that

the service can take quotes from clients,

make and clear the trade and provide the

necessary currency to the client in the same

day in the same place. “The big benefit

of using us is that we have the foreign

exchange trade and the payment trade just a

few metres apart from one another,” he says.

“A lot of banks are still very siloed and there

is less direct connection between the foreign

exchange side and the payment side. We can

minimise the gap and we are in control of

risk and can view any point of the payment

cycle. We offer a tailored service - if one

client wants a certain amount in a certain

currency at the beginning of the day they

can have it at the end of the day.”

He explains that Currencies Direct can

develop contacts with clients of the bank

and make proposals to lock in future

business. “For example, we can say ‘here’s

USD3 billion over the next year’ and they

can take it or leave it.” He says corporates

are becoming more discerning about the

take up of payment services – an echo of

Paul Taylor’s point about the risk of banks

offering services. “In this day and age clients


Paymentspp. 18


pp. 19

are more educated and are making more

valued judgements,” says O’ Sullivan.

Neyer and Ravich at Fundtech explain

that an additional technological offering

– called STP@source - fits the SEPA

drive for transparency. STP@source is a

checking device that enables users to see

the status of a payment at any point in the

transaction. “STP focuses on the linkage

between linkages to be able to check that

are being paid in are correct,” explains

Neyer. Fundtech in particular are looking

beyond SEPA to what is termed e-SEPA.

“Although e-SEPA is a next step, it will be

taken before SEPA will be considered to

have achieved ‘critical mass’,” says Neyer,

adding that this is scheduled for 2012, but

that date is currently very much in doubt.

“For example, e-mandates (one component

of e-SEPA) is a necessary ingredient in

achieving the critical mass of adoption and

removal of the national ACH instruments

in geographies that currently do not require

paper mandates. A key step towards the

e-SEPA environment is the adoption of

electronic invoicing.”

For now, the parallel forces of changing

demands and new services is creating a

The numbers game – what European bankers told Fundtech

63% SEPA would have a considerable impact on company profits

44% It would take more than five years to recoup the loss

13% Banks will never recoup the loss

61% Electronic invoice presentment and payments (EIPP)

is a cost-saving opportunity

38% customers will adopt EIPP

34% it will take three to five years for mobile phone payments

to be a significant addition to a company’s bottom line

22% mobile phone payments will never be significant

convergence, believes Taylor. “There is a

coming together of the market expectations

in terms of what’s available online and

through mobile phones and through other

a channels with the new technology to

support it. I think it will change the way we

think about payments in the future.”

and straight through processing (STP) have

all seen a steady increase in take-up. The

Fundtech survey found that 59% of respon-

dents have better than 70% STP rates, and

13% say they have a 90%-or-better rate.

Like Fundtech, Sterling Commerce provides

a solution to funnel disparate payment

systems into a single channel. But instead

of combining the payments solutions of a

bank’s in-house systems, it acts as a decoder

of the different payment systems used by

corporate clients transferring money into

the bank. “Bank clients are using their own

systems for payments that best suit them,”

says Spong. “Because of this, banks will be

receiving data from these clients in differ-

ent forms. Sterling Commerce works as an

l

ll

l

l

Official exhibitor 2008


p. 20


intermediary between the clients and banks

to translate the data that comes in into a

one-system form of data that can then be

used when the banks moves that money

data on to other banks.” He adds that data

communication is a key challenge in today’s

linked up markets – something SEPA, along

with these payment intermediaries, seeks to

address.

Spong believes that although there has

been a degree of “dragging of heels”

among banks over SEPA, some firms are

seeing the upside. For example, he says,

the rise of automatic, cashless, STP money

transfers means that there is less manual

processing. This has two consequences: the

bank can reduce both staff numbers and

risk. He agrees that although banks would

rue the loss of payment transfer revenue

– particularly amid lean times in the

banking sector – those that grasp the nettle

and update their systems in-line with SEPA

will identify these longer term gains.

Reducing risk is a vital selling point

in developing relationships with new

corporate clients. Paul Taylor, managing

director for Europe for VocaLink, a software

provider that has a special range of SEPA-

compliant products, explains that payment

systems like VocaLink must enhance a

bank’s standing in the eyes of the corporate

client. “We can take the payments and

process them on behalf of the bank,” he

says. “To do that our systems will have to

work with those of the banks, but that’s

removing a huge amount of cost from the

bank and removing risk as well. If we can

modify our existing products to suit the

new schemes then obviously the banks can

offer them more broadly.

“We’ve been able to gather and interpret

these different requirements and feed that

back to the company to make sure our

products are in line with what they are

asking for. That’s my concern – to make the

banks more valuable to their customers.”

VocaLink as a brand is effectively invisible,

explains Taylor, because the screen on

which the client would make a payment

takes the form of the bank’s online screen

– “a Barclays customer would simply think

they were using the Barclays system”. The

company’s faster payments software, he

adds, is congruous with a growing need to

literally keep up to speed with customer

demand. “There is the acknowledgement

among banks that the market has moved

on, that the channels that the customers

expect has advanced,” he says. “Customers

want channels that are more responsive. I

think faster payments is the banking world’s

response to the change in the customer

space.”

Taylor adds that banks are wary of the

systems they adopt as there is no guarantee

the corporate clients will take to them. “If

these instruments are not taken up then

there’s no business case for the banks,” he

says. However, he is confident that the value

added services of using a single channel to

make transfers and view liquidity positions

will see a high take up. Further, SEPA may

also enhance the adoption of mobile phone

payments, which Taylor believes has been

underwhelming so far. However, he puts

forward a very different view to Richard

Spong as to banks’ acceptance of SEPA. “I

struggle to see how the banks have failed to

respond to SEPA. On January 28th nearly

every bank I know was compliant and had

the service – whether or not they were

marketing the service I don’t know.”

There is certainly fierce competition for

corporate clients if banks do not refine

their offerings. Currencies Direct is a

foreign exchange specialist that competes

against banks for the most competitive

rates of currency conversion. Mark O’

Sullivan, director of dealings, explains that

the service can take quotes from clients,

make and clear the trade and provide the

necessary currency to the client in the same

day in the same place. “The big benefit

of using us is that we have the foreign

exchange trade and the payment trade just a

few metres apart from one another,” he says.

“A lot of banks are still very siloed and there

is less direct connection between the foreign

exchange side and the payment side. We can

minimise the gap and we are in control of

risk and can view any point of the payment

cycle. We offer a tailored service - if one

client wants a certain amount in a certain

currency at the beginning of the day they

can have it at the end of the day.”

He explains that Currencies Direct can

develop contacts with clients of the bank

and make proposals to lock in future

business. “For example, we can say ‘here’s

USD3 billion over the next year’ and they

can take it or leave it.” He says corporates

are becoming more discerning about the

take up of payment services – an echo of

Paul Taylor’s point about the risk of banks

offering services. “In this day and age clients

are more educated and are making more

valued judgements,” says O’ Sullivan.

Neyer and Ravich at Fundtech explain

that an additional technological offering

– called STP@source - fits the SEPA

drive for transparency. STP@source is a

checking device that enables users to see

the status of a payment at any point in the

transaction. “STP focuses on the linkage

between linkages to be able to check that

are being paid in are correct,” explains

Neyer. Fundtech in particular are looking

beyond SEPA to what is termed e-SEPA.

“Although e-SEPA is a next step, it will be

taken before SEPA will be considered to

have achieved ‘critical mass’,” says Neyer,

adding that this is scheduled for 2012, but

that date is currently very much in doubt.

“For example, e-mandates (one component

of e-SEPA) is a necessary ingredient in

achieving the critical mass of adoption and

removal of the national ACH instruments

in geographies that currently do not require

paper mandates. A key step towards the

e-SEPA environment is the adoption of

electronic invoicing.”

For now, the parallel forces of changing

demands and new services is creating a

convergence, believes Taylor. “There is a

coming together of the market expectations

in terms of what’s available online and

through mobile phones and through other

a channels with the new technology to

support it. I think it will change the way we

think about payments in the future.”


www.danskebank.com

Issued by Danske Bank, Copenhagen and approved by Danske Bank, London Branch, 75 King William Street, London EC4N 7DT, which is regulated by the Securities and Futures Authority for the conduct of investment business in the UK, and is a member of the London Stock Exchange. The rules and regulations made under the Financial Services Act 1986 for the protection of investors may not apply to investment business carried out from offices outside the UK.

Designing custody solutions – for the Nordic region

Take advantage of Danske Bank's special brand of expertise

and commitment. We offer streamlined solutions with simple

and efficient functionalities meeting today’s custody needs.

The leading Danish custodian can open the door to the entire

Nordic region.

One region • One custodian • One point of entry

For further information, please e-mail us at

[email protected]

203x267 Nordic Custodian ALTO.in1 1 04/03/08 9:28:55

A willingness to embrace innovation has long been a hallmark of the Dutch financial services market, but even by its own standards over the past year it has seen significant developments within the pension fund and financial institutions sectors. These changes have clear implications for asset servicing providers in this key European market.

In the pensions sphere, the trend certainly among smaller and medium sized plans is towards greater efficiencies, as many are struggling in the face of new rules around asset/liability matching. Having traditionally favoured a ‘principles based’ approach to regulation, the Dutch Central Bank (DNB) has been taking an increasingly keen interest in public and private sector pension scheme solvency to ensure individual schemes maintain a prudent coverage ratio [assets vs. liabilities] year-to-year. Key to this was the introduction in 2006 of the Financieel Toetsingskader (FTK) legislation,

In early August, Absa Bank Ltd (Absa), a leading South African financial services provider and member of the Barclays Group (Barclays), released its interim results for the six months to June 2008. At the results presentation, John Vitalo, chief executive officer of Absa Capital highlighted how Absa Capital Investor Services (ACIS), provider of custodial, clearing and settlement services, had delivered a solid performance and continued to win new mandates.

Following the acquisition of a majority stake in Absa by Barclays in 2005, ACIS underwent a complete metamorphosis - changing its focus to include international mandates.

Since ACIS broadened its focus beyond the domestic South African institutional client it has, through Barclays Securities Administration, expanded into 15 additional African countries including Egypt, Morocco and Nigeria.

ACIS, through Absa Capital and its affiliation with Barclays Capital, provides clients with both local and international expertise. Its business model is supported by products

Analyse This Global Custodyp. 22

offers extensive opportunity to integrate between Absa Capital and the client, and purely focused on service delivery.The project is anticipated to be complete by the end of 2009.

There are also market developments at play acting as a catalyst for further change at ACIS. South Africa’s multi-billion rand a month money market is being switched from paper to electronic settlement. It is anticipated that, from the second quarter of 2009 a large portion of money market instruments would be issued, cleared and settled electronically.

ACIS actively participated in promoting this change owing to the enhanced straight through processing and reduction of operational risk.

Other initiatives are also being looked at where repository and settlement processes are largely manually recorded and undertaken. ACIS is participating in the bond enhancement project which is looking to benchmark services against international best practice.

Ultimately the real challenge lies in the settlement of equities. The Financial Service Board has mandated the JSE Ltd in conjunction with Strate to look into the feasibility of settling equities on ‘trade plus 3’ basis. Currently equities are settled on a ‘trade plus 5’ basis. Ideally it should be changed.

ACIS is up for the challenge, and more, owing to its pioneering spirit and client focus supported by a financial services provider with deep South African roots and global reach.

clearing and settlement services. With technology changing, for the better, almost on a daily basis, the pioneering spirit of ACIS drives the team to continually adapt and remain ahead of the game.

Trustee Services forms a vital part of ACIS’s structure, both from an operational and system infrastructure perspective. ACIS acts as trustee in accordance with the provisions of the Collective Investment Schemes Control Act No. 45 of 2002 and associated notices, the trust deed and the classifications of the Association Collective Investment Schemes.

The trustee maintains independent records from those of the fund manager, and is able to independently verify that the financial statements and returns of the fund are a fair representation of the assets, liabilities, income and expenses of the scheme.

ACIS has pioneered the use of the Sungard InvestOne accounting product for Trustee Services in South Africa, as well as Charles River, the leader in international compliance systems.

Likewise ACIS will be upgrading the current technological platform used in its custody business. The new system, called Megara and supplied by Vermeg, is one of the most sought-after software systems on the globe.

Essentially it will help ACIS ensure superior service delivery, but there are a host of other benefits including the fact that it is: an internationally recognised system; offers cutting edge custody technology;

and services that match the increasingly sophisticated demands of the market, with access to pioneering technology and product expertise.

In short, ACIS provides comprehensive custodial, clearing, settlement and value added services to clients.

Primary custodial services offered by ACIS incorporates trade settlement and safe custody of equities, bonds and fixed income products as well as money market instruments. These instruments may either be held electronically or in physical form. The opening and maintenance of cash accounts forms an integral part of the service.

Post trade services and/or asset administration includes income collection and distribution, administration of corporate events, proxy voting and comprehensive reporting tailored to meet each client’s individual needs. ACIS is also able to offer a comprehensive fund accounting, compliance monitoring and performance measurement services.

ACIS acts as trustee to a large number of South African management companies which have established schemes under the Collective Investment Schemes Control Act.

Beyond expanding across the African continent, ACIS has overhauled and continues to overhaul its information technology systems to ensure it remains a pioneer in the market. ACIS is constantly looking for sure-fire, innovative ways to improve its services offering. Technology has become a fundamental and inescapable part of every aspect of custodial,

What are the challenges in the African market? By Bennie van der Westhuizen



p. 23



TitleSecond Stand

Running Header


The securities and custody business in the Nordic region has seen several changes during 2008 that have affect both the individual providers and the market overall.

Euroclear bought the NCSD (the CSD for Finland and Sweden), and the Norwegian and Danish counterparts VPS and VP have opted for Clearstream and LinkUp. Nordea’s exit from the global custody business has also led to a new player, JP Morgan, entering the market. This new competition will stimulate the Nordic players to continue to develop and expand their offerings.

It is not only within the CSD that there has been consolidation. As OMX and Nasdaq build on their common future we see the Nordic market adjusting to a European and international market place. Where local ownership was once a primary issue in the Nordics we now have to build on the closer cooperation with the security markets in Europe and the US.

Despite consolidation, we must not forget that the Nordic market remains four different markets and that differences between the four do exist. Although a global provider brings strengths and advantages, there are times when the knowledge of a local provider is important and significant in ensuring that our end-client receives the best service.

The most apparent of these differences is the fact that the four countries still have four separate currencies, which

is something that has also affected the implementation of T2S. It has meant that the carrying out of T2S may well differ throughout the region, as Finland is the only one of the four countries which is today a part of the Euro markets. Currently Denmark and Sweden are members of the EU, but are not part of the EUM.

There are also infrastructural differences between the different countries. The CSD’s operate with four different systems, there are four central banks and four different regulatory bodies albeit with similar regulations, but they do still diverge in several areas.

The recent launch of several MTFs has also challenged the established market place and changed the entire infrastructure of how securities are traded. Handelsbanken has together with group of ten leading Nordic banks and broker/dealers launched an MTF for mid-cap Nordic listed securities, Burgundy. Burgundy’s purpose is to provide high liquidity, low transaction costs, short response time and best execution together with an aim to reach a leading position on the Nordic securities market and also to strengthen the Nordic region as a financial market place.

We have also seen increased demand from both domestic and international clients for more sophisticated products and services. There is currently too little to differentiate the different custody service providers, clients want tailor-made services and value added products that

Analyse This Global Custody

How has consolidation and Target2-Securities altered Swedish custody?Luciana Hygrell, head of Nordic custody services

p. 24

decide which provider a client will choose. We have seen an increased interest in areas such as securities borrowing and lending, compliance and trustee services and working with more complicated instruments such as derivatives and similar instruments. Handelsbanken works with several of these issues and have recently completed development of a sophisticated trustee service that covers the requirements set up by the financial authorities and local laws. For this purpose we have built a specially designed system that supports compliance reporting throughout the Nordic markets.

In order to ensure that Handelsbanken can offer a complete range of services we have chosen to develop a strategic partnership with Northern Trust where we can utilise the strengths of a global custodian and the expertise of a local player. We feel that this partnership is an optimal solution in order to ensure that our Tier 1 clients receive the highest and broadest quality of service available in the market.

In this evolving custody landscape lies an enormous opportunity and potential for our future custody business.



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A willingness to embrace innovation has long been a hallmark of the Dutch financial services market, but even by its own standards over the past year it has seen significant developments within the pension fund and financial institutions sectors. These changes have clear implications for asset servicing providers in this key European market.

In the pensions sphere, the trend certainly among smaller and medium sized plans is towards greater efficiencies, as many are struggling in the face of new rules around asset/liability matching. Having traditionally favoured a ‘principles based’ approach to regulation, the Dutch Central Bank (DNB) has been taking an increasingly keen interest in public and private sector pension scheme solvency to ensure individual schemes maintain a prudent coverage ratio [assets vs. liabilities] year-to-year. Key to this was the introduction in 2006 of the Financieel Toetsingskader (FTK) legislation,

Paul Bodart, executive vice president, Brussels office, BNY Mellon

investing outside Switzerland, particularly the biggest ones such as Nestle, so that’s why we need exposure to this market. Some plans are looking to Asia, too, so that leaves us well placed to service them as we have a presence in Asia.”

Switzerland was however caught in the credit crunch, and the country’s famous secrecy is coming under international scrutiny following the collective demand for greater banking transparency. Recently, the Union Bank of Switzerland surprised many with the extent of its net outflows in for the second quarter of 2008.

Bodart says there has been a change in the overall investment approach in the country, in particular a shift from equities to bonds. Cash portfolios are also higher than historically as more plans are looking for the market to stabilise. Seeburger adds that qualitative service demands are also changing. “There is a trend towards more transparency and high-quality services at competitive prices. By signing the European Code of Conduct on clearing and settlement, we committed ourselves not to offer any cross-subsidised services and products.” She says SIS offers an unbundled (asset custody, securities lending and cash management, for example, are separate) service to clients.

Bodart says the prospective BNY Mellon office will be small, with a focused group of sales people and relationship management to win new business and maintain contacts. “It is seen as a closed market but we are looking forward to the entrance.”

next few years. “Our competitors are active in the market and we are facing up to this competition.”

On the custody side it has been a challenge, even for global banks, to enter the Swiss the market. Often international banks will provide services to the SIS Group, and only occasionally the major Swiss banks. Paul Bodart, executive vice president of BNY Mellon Asset Servicing, says: “Switzerland is very interesting. It’s servicing is dominated by SIS which provides custody and security services. But we provide an option for them, for example, for Swiss banks that want custody for US assets.” He explains that SIS has a link with the US market, and that BNY Mellon is looking to open a small office in the country soon, often working in tandem with other banks. “Linking with other custodians using the same technology and service structure means that you can drive down the cost of service,” he says. “One client may use different custodians and it is convenient for them that their servers operate in a similar way.”

Ursula Seeburger of SIS says: “In foreign markets we work either via direct links or with renowned custodian banks, such as Citibank, OeKB, Hong Kong and Shanghai Banking Corp., BNP Paribas Securities Services, Brown Brothers Harriman and ANZ Custodian Services.”

Bodart adds that a presence in Switzerland will be significant for the bank given the numerous business opportunities. “There are lots of opportunities as Switzerland is one of the biggest countries for private banking and for vehicles such as Oeics. BNY Mellon can provide accounting, net asset valuation and can monitor performance. Further, there are more pension plans

Switzerland’s financial reputation has been built around its status as one of the world’s biggest private banking destinations. The multilingual nation is ideally placed for close relations with many European countries, and regulation is strict but stable.

For the custody and clearing of securities it has been a self-serviced market, particularly since the establishment of the Swiss Securities Clearing Corporation (SEGA) in 1970 that developed a central clearing system. In 1999 a merger between SEGA and INTERSETTLE created SIS SegaInterSettle, and in 2003 SIS x-clear went live as the country’s central counterparty. Now, the SIS Group contains four organisations: SIS SegaInterSettle AG, SIS x-clear AG, SAG SIS Aktienregister AG, SIS Systems AG.

On 4th August 2008 SIS Group extended its services to provide clearing for SWX Swiss Block, the non-displayed liquidity service from SWX Europe. Marco Strimer, CEO of SIS x-clear AG, said: “In an increasingly competitive market the demand for alternative execution venues is rising steadily. As a user-owned, user-governed organisation we develop the services our clients want us to and are seeing huge interest in this burgeoning arena.

“Clients executing trades through the new SWX Swiss Block service will be able to clear and settle as they would through our traditional channels, with the benefit of post-trade anonymity and robust risk management naturally provided by our services

Despite the challenge in entering the market, Seeburger is nevertheless anticipating the additional competition in the

What are the challenges of those entering the Swiss custody space?


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Türkiye Bankası (bank) was established by the founder of the republic, M. Kemal Atatürk, in 1924 with a mission to develop the Republic’s banking system and provide financial sources for the industry, both as a creditor and through direct equity investments. The bank tops the list of Turkey’s most respected and trusted enterprises, while carving itself a place among the world’s largest corporations.

bank, a publicly traded firm since its inception enjoys a peerless stakeholder base. To this day the employees’ pension fund has brokered the offering of stock options to employees and retired staff in the company which has reached 41.5%. As of July 2008 41.5% of bank shares are held by bank’s own private Pension Fund, 28.1% are Atatürk’s shares that are represented by Republican People’s Party and 30.4% are free float. In May 1998, 12.3% of the Bank’s total shares previously held by the Turkish Treasury have been sold to national and international investors in a highly successful public offering. Today

By Nilufer Basarir, assistant manager of the bank capital markets department in the custody division

bank is the Turkish sub-custodian for the Bank of New York Mellon and has been a Clearstream partner for nearly 15 years. We focus on maintaining strong partnerships with the bank’s current clients, but the are growing as the Turkish expands.

bank has also recently been granted a license to operate as a custody institution regarding the custody of assets subject to retail portfolio management of portfolio management companies, within the framework of the article nr.18 of the ‘Communiqué on Principles Regarding Portfolio Management Activities and Institutions Which are Authorized to Provide Portfolio Management Services.’ İ

bank believes that “if you are providing a quality product, your clients will not go away”. As the Turkish economy is getting bigger and attracting more new clients, then it means new clients for us. As we always say, “We take care of Turkey’s assets thoroughly but we still have much space for yours”.

the shares are listed on the Istanbul (ISE) and London Stock Exchanges. bank is a multi-branch Turkish bank and retail banking products and services lie among its core activities. In this frame, bank provides full custody and settlement services. Prior to the establishment of a separate central securities depository in turkey, the bank acted as the central depositary and settlement agency; therefore, custody and settlement is considered to be one of bank’s core services. Since the modernisation of Istanbul’s stock exchange, bank has been widely selected as custodian for hundreds of thousands of individual and institutional investors. Today, nearly 40% of equity investors’ custody accounts are opened at bank.

Custodial services fall under the capital markets department of the bank. This department offers services for local and international customers and separate sub-divisions are established for these customer groups.

As an SEC qualified bank, bank is one of the main providers of custodial services to non-resident investors. Securities settlement and clearing, safekeeping, extensive SWIFT reporting, prudent cash management, foreign exchange transactions, corporate action processing/income collection, proxy voting, assistance on tax issues and providing up-to-date market information are offered to non-resident institutional investors.

Being an indigenous sub-custodian bank, bank closely follows the market and provides all necessary market information (tax regulations, market operation regulations, etc.) to international investors.

How has Bank adapted to change and driven the development of Turkish custody?



Title Second Stand

Running header Austrian custodianspp. 29 pp. 29

How has Bank adapted to change and driven the development of Turkish custody?

Analyse This Global Custody

By Leonique van Houwelingen, head of relationship management, continental Europe, at BNY Mellon Asset Servicing

type capacity. Pension funds in the Netherlands are making wider use of derivatives to help facilitate changes in the risk profile and the duration of their portfolios as well as to take advantage of their liquidity.

This has prompted the DNB to focus on the management of risk in respect of these investments and stipulate more detailed reporting and stress testing of portfolios. The administration and particularly the valuation of these complex off-balance instruments is challenging, and accordingly pension funds stand to benefit from partnering with an asset service provider that can take on the role of an administrator and offer independent valuation of derivatives and provide collateral management solutions as well as servicing their more mainstream assets.

BNY Mellon, for instance, was last month appointed to provide OTC derivatives processing and fund administration services for APG’s managed Global Tactical Asset Allocation portfolios. The demand for both greater transparency and a more accurate asset/liability matching picture means custodians must be able to offer the robust, transparent and sophisticated solutions required to handle and present the supporting data and services.

In the financial institutions space, meanwhile, consolidation is the order of the day: SNS, Axa and Zwitserleven, Postbank/ING, ABN AMRO Bank and Fortis are some notable examples. As a result of this ongoing merger and acquisition activity, competition between custodians is ramping up as they seek to be retained as the incumbent provider post merger/acquisition. The victors in that tussle will be those providers that can offer daily NAV before exchange opening, which demands flexibility on the part of the provider, so those that possess

The regulators also favour a segregation of functions, with a splitting of the pension fund on the one hand and a separate execution company on the other. Our Heerlen-based client ABP is a good example, having established APG Investments as a standalone entity tasked with handling investment management and administration duties. This separate execution company is also free to sell its services to external third party plans. To ensure that administration of assets within the various plans is as transparent as possible, it is most likely that entities like APG will set up a Fonds voor Gemene Rekening (FvGR) structure.

This encroachment by pension funds into the asset management realm, and in particular the establishment of FvGRs, is putting the onus on custodians to provide asset pooling solutions, fund administration, fund accounting and transfer agency services. We expect to see a big split within the custodial world, with some providers maintaining the status quo and continuing to offer traditional services, while others – ourselves included – will broaden their asset servicing remit to encompass an administrator

Where once the focus was on creating alpha and ensuring the pension fund could meet its liabilities after 30 years, today liabilities are measured on an annual basis and risk management is more of a priority. Asset/liability matching is used in a more dynamic way than in the past, and as such it drills down far deeper into how controls are implemented, where risks lie, how they are covered, and what worst-case scenario contingencies are in place. Given the extra onus on meeting liabilities, a more conservative approach to asset classes is the order of the day with a concomitant shift towards fixed income instruments, which typically offer a long-term, stable and predictable option.

Those plans are taking the fiduciary manager (manager of managers) route. A fiduciary manager will take charge of defining strategic asset allocation in conjunction with the plans’ Board and will execute the strategy accordingly – for instance, via the selection and monitoring of specialised asset managers. It will also liaise with the custodian and offer ancillary services such as performance measurement and analytics.

What have been the pension fund developments in the Netherlands?

24/7, ‘follow the sun’ operational capabilities will be at a clear advantage.

While fund processing is principally about volume, for larger Dutch insurance companies in particular it is also about efficiencies, not least those companies that have been involved in merger and acquisition activity and who now have transition and integration projects to undertake, they will be looking to rationalise a fragmented business infrastructure into a more streamlined and cohesive whole combining multiple smaller funds into a reduced subset of larger vehicles – again, this favours the larger providers who have scale, a large geographic footprint and a broad product set. There is also a shift among financial institutions to become reconfigure disparate businesses within a ‘one stop shop’ structure, which is further speeding market shrinkage, and these larger consolidated entities will favour bigger asset servicing providers, who can partner with them in a consultative capacity.

Looking at the trends within both segments, it is clear there is a dovetailing of service requirements between the two. Pension funds segregate execution companies, which pitch for other pension funds’ assets and set up FvGRs meanwhile, financial institutions are also adopting FvGR structures. These developments present a major opportunity for those asset servicers that can offer an integrated package of fund administration, fund accounting, transfer agency and asset pooling engines, and – crucially – who can show their commitment to the market through sustained and significant reinvestment in their business.


p. 30

isj.tvISJ | Investor Services Journal

Austrian custodians

Gatekeepers in the tale of two EuropesAustrian custodians have transformed their small market into a vital link between western, central and eastern Europe

The market is small but growing

Austria occupies a unique position in European custody. By the admittance of its local banks a small market, it acts as a vital sub custody gateway for Western developed markets to enter central and eastern Europe (CEE) due to its well-established connections developed from gradually buying up regional banks. And according to Alexander Schleifer, head of custody at Erste Bank, the traffic is now coming the other way. Many pension and insurance funds from Romania, Czech and surrounding countries are looking to diversify and enter into Western markets. He revealed that 70% of the bank’s entire revenue comes from CEE markets. But whichever sides the clients are coming from – not to mention the domestic business – Austria is limbering up to fulfil its potential, combining sound regulation with business opportunism.

Though more globalised banks are entering Austria’s custody space, many are still requesting the services of the three main players: Erste Bank, Creditanstalte and Bank Austria - the latter operating as part of the Unicredit group. Schleifer explains that Erste Group AG has a strong position in asset servicing for international and domestic corporate custody clients, with competitors currently ahead in the volumes of transactions overseen. “Our market share based on asset under custody is near to 50% because we do have large clients, but the other two have 60% based on transactions because they do have clients from the broker-dealer community – there is no official source about such figures available in the market.” Bank Austria’s Schnaitt says: “Bank Austria is the biggest custodian for international brokers such as State Street and HSBC – particularly for remote clearing.” Michelle Grundmann of BNY Mellon says: “BNY Mellon uses Bank Austria among others and acts as a global custody for them. The market is still small but it’s growing.” She adds that the regulation in the country is similar to Germany – another plus point in increasing Austria’s revenue to woo foreign business. Gerald Noltsch, head of location, Germany, BNP Paribas agrees that this legislative similarity – among others – has been beneficial to Austria’s growth. Speaking on the bank’s relationship with Austria, he says: “We had to naturally adapt our own internal systems and operation flows to the Austrian specificities, but in general we did benefit from cultural, language, legal and system infrastructure proximity.”

Austrian banks have gradually increased their market share in CEE by buying up regional banks in the countries. Erste Bank, for example, purchased ten banks in the last ten years across the region. When Western banks enter the Austrian market – due in the last few years to undervalued assets on the Vienna Stock Exchange, according to Gunter Schnaitt, director

of industry affairs and clearing services of custody in central and Eastern Europe for Bank Austria – they then start to look further east to the increasingly liquid markets of Romania, Croatia, Czech, Serbia and Poland. Austrian banks’ presence in these countries makes them the first port of call for Western interest. Gerald Noltsch has been impressed by this strategic forward-thinking: “In the last years Austria has been very pro-active in positioning itself as the entry point to Central and Eastern Europe. This set-up will be successful in the minor markets.” Schleifer explains that the success in servicing domestic and foreign investors in their home markets means that the bank can now base its future growth on them. “Clients are using the banks we acquired for several securities services, we developed the custody services in these new countries, we see interest and demands from our existing clients.”

He adds that Austrian banks had been so swift ten years ago in capitalising on the opportunities in CEE that even Germany, its neighbour and dominant rival in all other aspects of finance, is using Austrian banks to access these countries. In a recent letter to shareholders on the back of Q2 results, Ertse Bank CEO Andreas Treichl wrote: “Operating profit reached a record EUR1.5 billion in the first half of 2008, while net income came in at EUR637 million, equally an all-time high. Continued strong economic growth across Central and Eastern Europe as well as a favourable interest rate environment, most notably in the key Czech and Romanian markets, were the key contributors.”

One service that is being offered is brokerage. Erste Bank uses its own brokers whenever possible in markets such as Hungary and Romania. The system for trading securities is electronic, which Schleifer explains is vital in providing competitive settlement fees to clients. He says these services are often the first on offer; it is only later that a full custody service can be developed in the CEE. “The CEE banks we bought up were more or less retail banks, so we have a strong retail base of domestic clients investing in the home market but also abroad and using the Erste Group for securities services. This is currently one of the big projects, to further develop the custody service they offer to domestic clients and to foreign clients and this is how we as an Austrian based company expanded our regional approach.” He adds that the mountainous bureaucracy is often difficult when moving into markets such as the Ukraine.

Schnaitt of Unicredit, as a direct rival, offers two services to foreign clients entering CEE. In the ‘hub’ service, clients can access CEE markets via their account with Bank Austria. There is a single point of


p. 31 Austrian custodians

contact for settlements corporate actions. The client may instead seek direct access with the CEE markets. “The contacts for Bank Austria is then with the local custody, such as Hungary, and agreements have to be signed locally. Bank Austria also offers relationship management for clients which use the banks in more than one market out of Vienna.”

Schnaitt explains that, for all the apparent initiative shown by Austrian banks to develop a custody network in the further reaches of Europe, much of the time it is the demand that spurs progress. He believes that niche providers serving a single market with a limited range of services will find the near future difficult if they do not expand into new markets, although adds: “You have a good chance as a sub-custodian as there are not many global players in sub-custody.” Schleifer takes a stronger stance, and cites the advancement of the Target2-Securities legislation as an ominous warning for custodians that are not quick to expand. “As Target2-Securities has the green light I think it will lead to further consolidation. It will be hard for pure local custodians to survive. In the future there will be regional custodians and the global custodians, then there will be the central securities depositories (CSD) because of their central role as supplier of infrastructure and supported by Target2-Securities and projects like Link-up markets. It depends for the niche players as to whether they can develop new and interesting products, if they have other areas of business. If not, the pure local custodians might disappear.” Mark Kerns, managing director for Standard Bank’s corporate and investment banking investor services division, believes that the future of niche providers of custody is uncertain, and is in some ways “horses for courses” depending on the service. However, he adds that in the long run consolidation will continue, particularly as more of the global banks develop specialist areas within their setup to rival the tailored offering of niche providers.

Many believe the emergence of low-cost trading platforms such as Chi-X and project Turquoise that boast faster trade execution will be a critical stress-test for the flexibility of Austrian custodians. Rather than using the Vienna Stock Exchange as a central clearing agent, trades on Turquoise are cleared on Euro CCP. Normally, trading on the Vienna Stock Exchange, a client (perhaps a US bank) would instruct their Austrian custodian as to the settlement. With Turquoise, Euro CCP will send settlement instruction to the Austrian bank for the trade of the bank’s client. The trade will be settled on the account of the client even though the clients did not instruct the settlement. This process takes a swift and streamlined service from the custodian, “quick response time, very good

reporting, quick STP performance reporting, quick settlement info near cut off times,” as Schleifer defines it. Schnaitt claims that this is possible for Bank Austria, and adds that the bank also offers the full bundle service, if desired – securities lending, collateral management and stock coverage.

BNP Paribas’s Noltsch says the interest among the biggest banks to enter CEE (through the Austrian market) and the parallel growth in these countries has created a kind of trade off. The Western banks see decent returns in undervalued stocks, and the emerging markets develop their wider contacts. “This is significant for both parties, the foreign participants have a main interest in having a direct presence, as well as the internal market players and institutions having an interest in positioning themselves as independent and developed markets.”

He goes on to explain that there will be infrastructure and legislative changes in the CEE countries. Erste Bank’s Schleifer reveals that the bank often has to bolster the resources of the CEE banks it takes over, including improving IT, risk management and reporting. He believes that this will pay dividends for servicing CEE clients looking east in the mid to long term. “There is a big market there which is not that developed and people will come to reach a similar level to other countries in the west and invest a lot of money in equities Erste Bank will be there to serve these clients and that makes it a fantastic position for us.”

Domestically, Austria can arguably serve as an appropriate model for any emerging economy. Michelle Grundmann says the long-standing special purpose vehicles for Austrian investors allow them to make a saving in capital gains tax (CGT) whereby a CGT payment is only made upon the distribution of the fund, so capital can be built up over time. It is a system set up between the KAG, an investor setting up the vehicle and a licensed bank. The system beneficial for pension funds including private plans, insurance funds. Any external bank wanting to set up an SPV they would need to be licensed, something few global banks entering the market have. This gives an added monopoly to the Austrian banks. Schleifer claims that Austria has one of the most technologically advanced CSDs in the world, and cites the low market risks and high settlement rate as key elements of its growing reputation. “The big banks in the market do have electronic matching, there is very little phone matching, it’s just exception handling, everything that is important for a modern market.” And, as with much of the custody world, local knowledge and direct relationships further enhance the banks in maintaining market share despite the entrance of global banks.

As Target 2 has the green light I think it will lead to further



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UCITS IV

ISJISJ | Investor Services Journal


p. 33 CUS

Africa’s golden year

Vodia describes frontier Africa as first and foremost

a story of growth: these nations and now their equity

markets are developing rapidly based on local trends

and are gaining international interest. They have

expanding GDPs and stock exchange capitalisations,

both with strong upswings in the last five years. “The

13 investable markets referred to earlier cover much of

sub-Saharan Africa and West Africa, the report notes.

Five years ago it was considered hard to even get a

local broker on the phone; today, though challenges

exist, access is improving. Exchanges are becoming

more liquid and custody and settlement systems are

developing rapidly.

“On 9th June of this year, the world saw the first

major frontier African IPO: Safaricom, the Kenyan

state-owned mobile telephone service provider, went

public on the Nairobi Stock Exchange amid great

fanfare. Investors applied for four times the quantity

of shares offered by the government. The new listing

gained 47% in its first day of trading as international

fund managers as well as Kenyan investors snapped

up shares. The IPO was a world-class affair, handled

locally by the Dyer & Blain Investment Bank based

in Nairobi and internationally by Morgan Stanley.

Deloitte and Touche was the accountant firm for the

IPO and PricewaterhouseCoopers the independent

auditor. It appears to have been the first time that a

frontier African company broke into the consciousness

of the global investment community, and it brought

the world’s attention to the Nairobi Stock Exchange;

trading volume on the exchange tripled in the wake of

the IPO.”

The investment attractions of Africa come under

the microscope in a recent research report from

Massachusetts-based Vodia Group LLC (Trading and

Custody in Frontier Markets: The Case of Africa).

Highlights from the report include the statistic

showing that Africa increased 24% for the last 12

months, compared to a drop of 23% for developed

markets and a drop of 10% for emerging markets.

“Frontier Africa exchanges have been growing rapidly

driven primarily by local investor interest, with total

market cap expanding 480% between 2000 and 2006,”

calculates Vodia. “Trading turnover in frontier Africa

rose from USD653 million in 2000 to USD5.3 billion

in 2006. We estimate the frontier markets will reach

the current level of development of emerging markets

in 15 years, with electronic access, developed securities

servicing and full prime brokerage coverage,” adds

Vodia. “Custody and central securities depositories are

growing.”

In spite of its limitations, Africa in particular is seeing

unprecedented levels of new investor interest. Nigeria,

with its energy reserves, growing economy and large

population, is commonly identified as one of the next

BRICs, continues Vodia. “By our count there are 13

investable frontier African equity markets, difficult to

access and still largely undeveloped, but with strong

returns and high potential. Some push the border

of an investable market: they are paper-based, cash

settled, and have floor access exchanges with limited

liquidity. Even so, with investors worldwide looking

for alpha-generating opportunities, global attention is

shifting to these outposts of equity investment.”

isj.tvISJ | Investor Services Journal



p. 34

isj.tv

Goal

Assume the recovery positionStephen Everard, managing director of GOAL Group, investigates class actions participation and withholding tax reclamation – two prime opportunities to boost investor returns in the credit crunch

Between 2000 and 2007 institutional investors’ failing to participate in US securities class

actions resulted in nearly USD12 billion being left on the tableinstitutional investors’

failing to participate in US securities class actions resulted in nearly USD12 billion being

left on the table

W itholding tax reclamation and class action participation are two areas of investor services

that are increasingly brought into the spotlight as fund managers realise the extent of the opportunity to boost returns in turbulent times. GOAL Group’s calculations, based on extensive third-party research and our historical records of reclaims and filings, shows that between 2000 and 2007 institutional investors’ failing to participate in US securities class actions resulted in nearly USD12 billion being left on the table. Some USD3.6 billion of this can be attributed to European investors.

Around the millennium, corporate governance scandals such as Enron were the main instigator of class actions, but the mantle has since passed to the subprime mortgage market crisis. Similarly, the latest figures (2006) show that USD10.5 billion of global investors’ rightful returns from their foreign shares and bonds were wasted, because withholding tax on dividends and income is not being properly reclaimed. This represents around a quarter of all withheld tax on foreign securities. On average, lost returns through unreclaimed tax have escalated by more than 80% since 2003.

Call to actionLet us first take a closer look at the area of class actions. In the US, class action litigation has been used by groups of shareholders to recover losses stemming from fraud and misgovernance for decades. But in the absence of a class action mechanism in most other legislatures (with the exception of Australia), the turn of the millennium saw European (US-listed) companies being called to account in the US courts; and subsequently foreign investors began to file lead plaintiff motions in cases against both European and US firms. Well-known European firms that have come before the US courts include Parmalat, Royal Dutch Shell, Vivendi and Daimler Chrysler. RiskMetrics (formerly Institutional Shareholder Services - “Accountability Goes Global”, May 2007) notes that in each year since 2002, international institutional investors have filed lead plaintiff motions in over 5% of all US class actions, with investors from Germany and Austria submitting the most filings. Last year, the first UK local authority pension fund (Avon) was appointed in the case against GlaxoSmithKline. These precedents are surely a wake-up call for foreign firms and investors to ensure they are not foregoing their legal right to claim damages through the US courts.

The staggering losses for defendant firms in class action lawsuits are enough to make any fund manager sit up and take notice. If we include the so-called ‘mega’ settlements into our calculations, then the average class action securities settlement up to end 2007 sits at some USD54 million. Furthermore, average settlements are on the rise - Cornerstone Research notes in their 2008 Mid-Year Assessment: “Market capitalisation losses [...] in the first half of 2008 were higher than the average semiannual losses in the eleven preceding years”. A downturn in filings between mid-2005 and mid-2007 prompted many commentators to speculate on the demise of US class actions. But from mid-2007, there has been a significant rebound, with the main data sources in this area showing lawsuits filed in 2007 to be up by

Doremus Unicredit ISJ Custody Sibos 267x203 UMI 02 I51048a Proof 02 12-08-2008

MAYBE IT’S TIME FORA DIFFERENTAPPROACH TO INVESTMENT BANKING.

You live in an era of extraordinary change. With change comes opportunity. To make the most of this you need a partner you can really rely on. One who not only understands your business but also has your best interests at heart. Who has a unique footprint in Europe.

n Unique Central & Eastern European strength in 23 home markets n Award winning custody

n Unrivalled reach in the region n Leading frontier market experts

n Committed local know how n Partnership approach to clients

Custody www.unicreditmib.eu


Doremus Unicredit ISJ Custody Sibos 267x203 UMI 02 I51048a Proof 02 12-08-2008

MAYBE IT’S TIME FORA DIFFERENTAPPROACH TO INVESTMENT BANKING.

You live in an era of extraordinary change. With change comes opportunity. To make the most of this you need a partner you can really rely on. One who not only understands your business but also has your best interests at heart. Who has a unique footprint in Europe.

n Unique Central & Eastern European strength in 23 home markets n Award winning custody

n Unrivalled reach in the region n Leading frontier market experts

n Committed local know how n Partnership approach to clients

Custody www.unicreditmib.eu


p. 36 Goal

43%-58% (definitions vary) on 2006. Figures from Cornerstone Research also show that this upturn has continued into 2008, with 110 filings compared to 107 during the last half of 2007. They note that around half of these filings so far in 2008 has been driven by the subprime mortgage crisis, which is likely to remain the catalyst for class action lawsuits over the coming years. So not only is the volume of lawsuits increasing, but the average filing loss is also on the rise.

A taxing challengeThe second area that presents huge opportunity for fund managers and custodian banks is that of tax reclamation. Income earned on foreign securities attracts a withholding tax in the country of origin. However, some of that may be reclaimed by custodians for their clients. Investor losses due to non-reclamation have increased substantially since GOAL’s second market analysis in 2003. There are numerous reasons for this; for instance, the proportion of cross-border shares holdings is increasingly globally, and dividend yields have become a highly scrutinised element of investors’ portfolios, with consequent pressure on fund managers to maximise this element of return. The real impact of non-reclamation in today’s investment environment is that a significant proportion of investors’ rightful returns are languishing in foreign tax systems.

Furthermore, it is now estimated that the global market for withholding tax reclamation services by custodian banks is worth around USD860 million. Many leading custodians have already recognised the market opening represented by effective tax reclamation services, both for their fund management clients, and as an interbank services opportunity. But with around 25% of reclaimable withholding tax still unreclaimed every year, there is a clear opportunity for custodians to increase the scope and efficiency of reclamation services. Technology to enable the taskIncreasingly savvy investors, in markets where high yield investments are harder to come by, are putting the fund management community under growing pressure to maximise their investment returns. But fund managers and service providers still have a long way to go in both the areas discussed above. Many seem to believe that the cost and time taken to undertake these tasks is likely to outweigh the benefits from potential settlement recoveries or tax reclaims – a myth that we have exposed by putting figures on the potential financial rewards.

When it comes to class actions, keeping track of the opportunities to make a claim, and the processes required to do so successfully, can be a complicated and daunting task, particularly for European investors. Such an undertaking requires timely and accurate

information about the relative merits and procedural processes of the actions. It also requires the time and resources to review and evaluate relevant settlement provisions. Investors must then cross-reference these outputs against extensive individual trading activity data and then compile and submit the often complex paperwork necessary to make a valid claim. The demand for efficient and affordable means of participating in securities class actions and recoveries has inspired the development of outsourced services that overcome the claim processing complexities. These services combine legal and procedural expertise, with a shared knowledge bank and alert facility. The key processes comprise: pinpointing and informing investors of portfolio losses suffered allegedly due to corporate fraud or malfeasance; delivering accurate and appropriate legal advice concerning US law, investors’ legal rights and their legal options; tracking and monitoring securities class actions in the US legal system; and putting strategies and procedures into action for investors’ to submit valid claims and recover settled funds.

Similarly, when it comes to recouping withholding tax, technology is now widely available to automatically perform the highly complex task of submitting claims, a process which has to incorporate varying data, formats and procedures from many different legislatures around the globe.

It has never been more pressing for institutional investors find ways of accelerating their returns. Thanks to the latest recovery technology and services, the financial rewards gained by reclaiming withholding tax from cross-border securities returns and by participating in US securities class actions far outweigh the time and cost involved in submitting the required claims. The continued growth of mega-settlements in class actions, as well as the upward trend in filings, is leading more and more investors to consider playing an active role in US litigation. In the early millennium, corporate fraud was the main instigator of class actions; the mantle now seems to be passing to cases born out of the recent international credit crisis. In both areas, there is an urgent need (indeed, legal obligation) for institutional investors to make claims on behalf of their clients and to ensure that they are maximising their potential returns.

A copy of GOAL’s most recent report into Class Actions, “A Class Act?” can be obtained by emailing [email protected]


The Logical Solutions Provider

Don’t Get Burnt By Bad Corporate Actions Data

www.dtcc.com

Having to validate thousands of corporate actions each week can expose you to significant costs and risks. That’s why you need global experts like DTCC in your corner.

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services

countries

standards

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Clearance and

Asset Servicing

OTC Derivatives

Mutual Funds

Managed Accounts

Alternative

Global Corporate Actions


The Logical Solutions Provider

Don’t Get Burnt By Bad Corporate Actions Data

www.dtcc.com

Having to validate thousands of corporate actions each week can expose you to significant costs and risks. That’s why you need global experts like DTCC in your corner.

With DTCC’s Global Corporate Actions Validation Service you get:

services

countries

standards

For more information, contact DTCC Solutions LLC at New York:

London: Shanghai:

Clearance and

Asset Servicing

OTC Derivatives

Mutual Funds

Managed Accounts

Alternative

Global Corporate Actions


Panel Debatep. 38

BRETT LANCASTER, Vice President, Global Asset Solutions, LLC The Depository Trust & Clearing Corporation. Brett Lancaster is the Business Manager of Global Asset Solutions, LLC, a wholly owned subsidiary of DTCC, which was created to deliver specialized business-processing outsourcing solutions to financial intermediaries globally. The major product offering of Global Asset Solutions is DTCC’s Global Corporate Action Validation Service.

Christopher Madigan is the vice president and head of global sales and marketing for Fidelity ActionsXchange, a leading provider of global corporate action solutions for many of the world’s top asset managers, hedge funds and broker dealers. He has more than 15 years of financial services experience in sales, marketing, client management and the administration of global retail/institutional assets.

John Byrne has over 20 years experience in the IT industry, co-founding one of Ireland’s first university campus companies in 1985 directly after graduating as an electronic engineer. He helped build-up this Company to be a European leader in its field in the power automation sector and successfully sold out of this business in 1995. He founded Information Mosaic in 1997 to develop Internet applications in the Capital Markets sector.


Nat Sey is reference data business manager, Interactive Data (Europe). Nat is a member of ISITC Europe, the Reference Data User Group (RDUG) and its corporate actions working group. He is also Interactive Data’s representative and co-chair of the Market Data Provider User Group (MDPUG), as well as one of the representatives on the MiFID Joint Working Group.

Mr. Jan Jørgensen, Nordic Head of Corporate Actions, Nordea ́s Securities Services Jan Jørgensen has over 14 years of experience from financial services and banking. He has worked in different positions within Nordea. His latest position has been working with process development in relation to settlement and corporate actions in Nordea. Currently he is responsible for managing corporate actions services in Sub- custody and Clearing in Nordea.

Corporate Actions Discussion

No

rde

a Ban

k AB

(pu

bl)

Spot-on custody services.Do you need custody services in the Nordic region?

Or are you looking to take advantage of market

conditions in Denmark, Finland, Sweden or Norway

individually? Then it pays to talk to Nordea.

We are the leading financial services group in these

countries and provide you with in-depth knowledge

and custody services in each market as well as the

entire region.

Our comprehensive services include extensive

reporting, corporate actions services and proxy

voting, securities lending and borrowing services,

issuer services and market information covering the

whole region. We also offer a single point of entry to

the Nordic region through a dedicated relationship

manager supported by a Nordic team of specialists.

We currently have assets under custody twice

as large as our nearest competitor. If you want to

capitalise on our experience, please contact

Ms. Anne-Lise Kristiansen tel +47 2248 6238,

email: [email protected]

Making it possible


No

rde

a Ban

k AB

(pu

bl)

Spot-on custody services.Do you need custody services in the Nordic region?

Or are you looking to take advantage of market

conditions in Denmark, Finland, Sweden or Norway

individually? Then it pays to talk to Nordea.

We are the leading financial services group in these

countries and provide you with in-depth knowledge

and custody services in each market as well as the

entire region.

Our comprehensive services include extensive

reporting, corporate actions services and proxy

voting, securities lending and borrowing services,

issuer services and market information covering the

whole region. We also offer a single point of entry to

the Nordic region through a dedicated relationship

manager supported by a Nordic team of specialists.

We currently have assets under custody twice

as large as our nearest competitor. If you want to

capitalise on our experience, please contact

Ms. Anne-Lise Kristiansen tel +47 2248 6238,

email: [email protected]

Making it possible


Panel Debatep. 40

1. Positions in corporate actions now require an increasingly complex and esoteric set of skills – is there a shortage of qualified people for these roles? What can be done to mitigate this shortage?

Nat Sey: Those working in corporate actions processing roles are often unsung heroes. The difficulty is that these roles require people who understand the markets – and if those markets are to be covered adequately (and who is not global these days?) one also needs to throw a healthy dose of language skills into the mix. There might always be a shortage of such skills as it’s a difficult balance to achieve. Some firms have experimented with placing staff in lower cost locations and offshoring, but that doesn’t always solve the problem. You need people who understand the local markets and their nuances, so hiring people thousands of miles away may not be helpful in the long run. John Byrne: As in all industries the best qualified individuals are always at a premium – they are scarce and costly. As corporate action activity gets more complex, so does the need to support the process in a more structured, automated and efficient manner; while providing the decision maker the correct information and maximum time to make a fully informed decision. By increasing the level of systemic and automated processes a firm should be able to free up its key resources to focus on the implications of the corporate actions and its key risk areas. These needs and challenges have been recognised by software vendors, such as Information Mosaic (IM) and we are actively working with clients to identify standards and automation capabilities to process these complex corporate actions, produce accurate and informed data, while mitigating the risks of mistakes. Systems will never fully replace the abilities of an experienced corporate actions person, but they already help them to ensure corporate actions details and calculations are correct. They have also added a great deal of value to the election process and to automating the transfer of data and decisions. These systems have reduced the need to review every standard corporate actions and given the key and scares resource the time to focus on the more complex ones.

Jan Jørgensen: Is there a shortage of qualified people to take up positions in corporate actions? The answer to this depends on two main factors. First it depends on how you define the required skills and competencies to take up positions to handle corporate actions and secondly on the capabilities in the financial institutions to develop and educate new staff to work with corporate actions. If skills and competencies are defined as number of years of experience working with corporate actions and the institutions do not have resources or capabilities to develop and educate new staff, yes, then I think we see a shortage of people to take up positions in the Nordic markets. But to mitigate this shortage requires that organisations are aware of this risk and have the capacity to handle this. The shortage should not be a big surprise for anyone being working in corporate actions or in any kind of operations that require specialist staff. Staff turnover, new technology and changes in the complexity in corporate actions and volumes - just to mention some of the challenges and changes we are facing – require that the organisation and the management have the focus and resources as well as updated and defined procedures in place to handle these challenges.

Christopher Madigan: Operations groups today find themselves having to do more work with less people. As a result, many organizations are taking a second look at resource draining functions such as corporate actions processing which continues to be a highly manual and costly activity. Firms are looking for cost-effective options such as working with external providers who can handle a piece or all of the corporate actions function. Fidelity ActionsXchange has experienced this first-hand with a record increase in our client base over the past few years. Firms turn to us to for cleansed and validated corporate actions information as well as exception processing solutions. This allows our clients to receive and utilize comprehensive and accurate global corporate action information in a timely manner without adding staff or technology to their front and back office operations.

Brett Lancaster: Yes, there is a shortage of qualified people with the right skills. For securities organisations, the management of corporate actions through their lifecycle is still complex, risky and highly manual. Simply getting hold of good, “clean” data that is comprehensive is very challenging. The skill set needed to manage the data is very specific, and very deep. To illustrate, we find that it takes us 20 times the effort to clean-up a voluntary corporate action than it does to clean up a cash dividend announcement. Also, as portfolios become more geographically diverse, we find that it takes us five times the effort to clean-up an corporate action event from outside the US than it does to clean up a US-based announcement. For the emerging markets, that factor jumps to 25 times. The extra effort is needed because these events are complex, the market practice rules are less mature and the data is less readily available.In addition, we see cyclic peaks and troughs reflecting the swings in volumes of events being announced by the market. Volumes can easily double, and sometimes treble, between quiet and busy periods, especially during “European dividend season,” which runs from February through May.All of these factors need to be managed, and firms only have two choices. Either, they manage the complexity and effort themselves, or they outsource the effort to an experienced third party. If they do the work themselves, then independent studies, for example those carried out by CityIQ, have shown that across a sample of hundreds of firms, both large and small, the average number of resources needed is between 15 and 20 FTEs (full time equivalents). For every firm to get hold of this number of qualified people is, to say the least, challenging. Alternatively, firms can mitigate this issue by engaging with a third-party expert that acts as a centralized “data scrubbing” outsourcing provider. As well as helping firms manage the risk, outsourcing also enables firms to reassign operations staff to other duties. There are two prominent outsourcing candidates, Fidelity’ ActionsXchange and DTCC’s GCA Validation Service, both of which provide “scrubbed” corporate action announcement information, on a range of global securities.


Intelligence in ActionCorporate Action Solutions for the Global Economy

For decades, financial institutions have relied on imprecise and incomplete

options for corporate actions processing. The result? Frequently flawed

intelligence leading to potentially ill-informed business decisions. That’s

a lot of risk to your bottom line and your reputation.

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coverage and improves accuracy. Our innovative solutions leverage multiple

best-of-breed commercial data feeds and other direct data sources, along

with rigorous analysis and support, to deliver superior results.

Dozens of the world’s financial industry leaders place their trust in

Fidelity ActionsXchange. With so much riding on your investment

decisions, isn’t it time for you to take action?

Learn more at www.actionsxchange.com

For more information contact us at 877.777.5838


Intelligence in ActionCorporate Action Solutions for the Global Economy

For decades, financial institutions have relied on imprecise and incomplete

options for corporate actions processing. The result? Frequently flawed

intelligence leading to potentially ill-informed business decisions. That’s

a lot of risk to your bottom line and your reputation.

Fidelity ActionsXchange pioneered a new model for managing and

acting on critical corporate action information that reduces risk, broadens

coverage and improves accuracy. Our innovative solutions leverage multiple

best-of-breed commercial data feeds and other direct data sources, along

with rigorous analysis and support, to deliver superior results.

Dozens of the world’s financial industry leaders place their trust in

Fidelity ActionsXchange. With so much riding on your investment

decisions, isn’t it time for you to take action?

Learn more at www.actionsxchange.com

For more information contact us at 877.777.5838


2. The volume of corporate actions has continued to increase over the last few years, and this summer’s business news has been dominated with stake-buying, rights issues and underwriting. What implication does this have for the financial industry?

Christopher Madigan: Increasing global corporate action volumes combined with growing complexity are causing financial services firms to re-evaluate their internal processes and systems. As a result, we are seeing more organizations move from using in-house systems and resources to implementing third-party corporate actions solutions. Firms are looking to partner with providers who can deliver robust corporate action solutions to gain efficiencies, save money, reduce risk and add value to the trading and investment process.

Nat Sey: A simple analysis of the situation might suggest that unless the capacity of corporate actions processing departments has grown by a similar margin, then the risk associated with either processing a corporate actions event incorrectly – or missing it altogether – has also risen over that time. It is unlikely that the not-so-widely acknowledged ‘contingency funds’ that exist to rectify the ramifications of processing errors have increased in size over that time. The net result is a potential for even greater risk – and less means to deal with it if that risk is realised.

John Byrne: More volume or more complex Corporate action activity simply increases the risk and cost to all those involved. This is an area where throwing bodies at the problem doesn’t work. Systems need to be enhanced or replaced to control that risk and cost. The systems today need to have more features than previously and must cover the entire spectrum of Corporate Action processing. The complexity, risk and market impact of a number of the more recent and high profile corporate actions has only highlighted the need for corporate action management applications to not only process the event but to aid the company in monitoring and mitigating the risk. Together with analysing and reviewing market impact as it happens

Panel Debatep. 42

to ensure the right decision is made for the good of the beneficial owner.

Jan Jørgensen: Being a regional custodian implicates that the capability to handle new types of corporate actions is in place. The automation of the existing corporate action flow and the flexibility of the systems certainly will and has implicated, that we have a higher operational risk. But again this is a part of the sub-custody challenges we have to handle.

Brett Lancaster: The volumes of unique corporate action announcements (i.e., those that are actively announced to the market as a press release, a prospectus or a filing by the issuer or agent) rather than scheduled payments (i.e., those that are systematically generated from a Security Master File) have been growing steadily for a number of years. Whilst volumes fluctuate from month to month, the background growth rate since 2003 is about 5% across the globe across all event types. In 2007, the volume of unique announcements, disregarding updates to existing announcements, was almost 1.1 million. In terms of the impact on corporate actions, the uncertainty in the current marketplace manifests itself in a number of ways. Firstly, a weak economy caused by weak results from individual firms means that more companies are looking to bolster their financial backbone from their existing shareholders using a rights offering corporate action event. Secondly, weak results from individual firms may make the firm vulnerable to a takeover or merger event. Thirdly, weak results, in their extreme, will result in a liquidation or bankruptcy event. On the flip side, in a weak economy, firms often decide not to pursue effort consuming and costly takeovers or mergers, but decide to ride the uncertain times sitting on their money.

3. Why were Morgan Stanley and Dresdner Kleinwort able to short sell the stock in HBOS given that they were acting as underwriters and were privy to exclusive information that usually cannot be used for financial gain? Is more transparency needed in this area?

John Byrne: The transparency of information between different areas within an organizations trading and corporate finance division is well managed and defined by the FSA. The fact that these firms went short on HBOS were, I’m sure, based on standard and fully informed trading decisions. The ability to track and support these types of positions as part of the corporate action process is vital to maintain this transparency. The use of an automated corporate action processing applications such as IM’s camaTM application ensures this transparency is maintained and reconciliation issues are reduced. This is through the continuous tracking of all associated transactions, be they selling short, borrowing, lending etc; then maintaining that transaction link with the corporate action and overall firm position. This link maintenance eliminates any associated reconciliation breaks and maintains the transparency to the user of the overall position. Changes are tracked and updated immediately and further automation is maintained.

4. How can companies cut down on the risks associated with some corporate actions?

Christopher Madigan: Because of their manually-intensive nature, corporate actions represent a significant area of risk. The first step toward mitigating this risk is having a clean corporate actions data set that can interface with key internal applications. Many firms have an over-reliance on a single source of information despite the fact that no one data vendor has a monopoly on accuracy and global coverage. Firms looking to alleviate many of the risk factors inherent in corporate actions should take a multi-vendor approach. That being said, they can either use their own resources to compare multiple sources and manually cleanse the data for exceptions or source their data from a provider who offers cleansed corporate actions information. This will ensure the most accurate and comprehensive gathering of data significantly cutting down the risk involved.

Jan Jørgensen: Depending on the complexity and the frequency of each corporate action type, one obvious action would be to ensure a higher automation in



the process. This will also give the possibility to differentiate between diverse positions to handle corporate actions. Depending on the level of automation, it will give the operations an opportunity to work more efficiently, by giving them more time to certain corporate actions types that need special attention due to the complexity or lower frequency.Another major risk is the capability to interpret each type of corporate action. This is especially the case if the market does not have any kind of standardisation (eg format, communications form, time of the announcement) of the announcement or a data supplier. Therefore standardisation would also be something that would minimise the risk.

Brett Lancaster: Companies can reduce their risk associated with corporate actions by following some best practices that we observe in the market:Either select multiple reputable data sources from specialized corporate actions vendors and then employ sufficient skilled staff to validate and scrub the data. Overlay this data stream with announcements from the firms’ custodians and sub-custodian network. If the firm elects to ‘buy’ rather than ‘build,’ use a tried and tested off-the-shelf corporate action system that will allow staff to scrub the incoming data. The firm needs to re-align its processes around the off-the-shelf tool, not the other way round, as making sizable changes to the tool may not be realistic.Alternatively, outsource the announcement validation function to an experienced third party. Before selecting the provider, ensure adequacy of the portfolio coverage, physical office presence and language skills for the markets in question and, ensure service delivery against contractual Service Level AgreementsEnsure that the validated data, once inside the firm, is centralized, accessible to all users and integrated to all necessary internal systems. This is easy to say, but much harder to achieve in reality, as our experience shows that most (but not all) firms have multiple systems and multiple teams across multiple business lines, due to physical geography or acquisition. To manage this risk, plan big, start small and only scale once it works.

Build in systemic monitoring and reporting to independently verify coverage, timeliness and accuracy

John Byrne: Risks are always a factor when processing and tracking complex corporate actions. To mitigate these risk companies need to be able to proactively track and analyse the corporate actions as its happening. IT’s vital for them to be able to view issues and resolve them as easily and quickly as possible. The use of the MT56X message range has in no doubt aided companies in managing this risk. Corporate actions systems have also continued this through the introduction of automated corporate action data management and processing applications that track the issues and highlight the risks and problems to a user immediately. This ensures the decision maker is accurately informed of the corporate action data in a much faster manner. This alone will not fully reduce risk. We at IM are also researching the capabilities to analyse and track other risk associated with the corporate action including price fluctuation risk, Election management analysis and risk alerts. These functions will all help to ensure the corporate action is tracked and managed correctly and risk reduced.

Nat Sey: Unfortunately, there is no magic bullet. The simple answer is to spend more time and more skilled resource concentrating on the types of events that are more likely to cause the pain. How does one stretch an already ‘at capacity’ corporate actions processing department further? Automating the events that are more straightforward – mandatory income events spring to mind – can provide the headroom to be able to deal with the more challenging periods, such as regional income seasons, and enable extra scrutiny of the more esoteric events that can be an increasing cause for concern.

5. Is standardisation of communication – particularly in the form of data – possible in a global network?

Brett Lancaster: Data standardisation on a global basis is not only ‘possible’, it is also a ‘must have’. Currently, the global standard for corporate actions is ISO 15022, with

message types MT-564 and MT-568 covering the “announcement.” Arguably, ISO 15022 in its present form is a good start, but does not cover all corporate action event types and does not cover all necessary data elements to be considered complete. We believe ISO 15022 does, perhaps, 70% of the job needed. For the standard to be complete, and, importantly, for the standard to be used, sweeping changes will have to take place within the industry. These changes can only be addressed by big and bold, industry-wide initiatives. This is a challenging objective, but the tide is turning.Firstly, industry organisations such as the DTCC, SWIFT Standards, Market Practice Group ISITC, SIFMA and key global custodians and broker/dealers are actively working with the ISO organization to enhance ISO 15022. Collectively, across all stakeholders, there are about 200 data elements that will need to be added to the existing standard over the next few releases of the standard. Once it is complete, ISO 15022 will be replaced with ISO 20022. ISO 20022 will be the holistic, global, standard that will be entirely based on ISO 15022 fields and structure, but will use XML messaging rather than a file-based format. We understand that the first release of ISO20022 is targeted for November 2010, and there will be a coexistence period with ISO 15022 of at least three years.Secondly, DTCC is undertaking its Corporate Actions Re-engineering Initiative. This is a major, multi-year, project to rewrite all DTCC’s corporate action systems, covering announcements, elections and payments. Initially, the new system will create corporate action announcements in both ISO 15022 and XML formats, with the aim of migrating to ISO 20022. This change is important, because it ensures that all of DTCC’s participant clients, which are essentially all of the North American market, will actively use industry standards. The first release is scheduled for 2010.These initiatives ensure that standardization is global and holistic, and, at least in the North American market, that standardization is actively used, rather than ignored.

Christopher Madigan: SWIFT has made great strides in the development of its ISO format.

Panel Debatep. 44



The problem, therefore, is not necessarily with standardization, but rather adoption. Universal adoption without regulation is highly unlikely because there is no incentive for firms to build or purchase new systems or retrofit existing systems in order to accept a global data standard.

Nat Sey: The short answer is yes. The qualified answer is only if all the parties are willing to do so, and importantly, are willing to compromise. One industry working group member once explained to me how everyone in this space was thinking: “Global standardisation [of corporate actions] requires a great deal of compromise, but if I am negotiating with a competitor in a working group I don’t want to be the one to compromise – I want the other guy to!”. We all carry our regional, technical and political baggage. What standardisation asks us to do is to check that baggage in at the door and proceed with an open mind.

John Byrne: The globalisation of markets and communications is continuing to accelerate within the financial services sector. It can be seen with the take up of the ISO 15022 MT56X message that the standardisation of communication has been, and continues to be, embraced across multiple markets. This can be seen with the decision by the DTCC and other CSD’s to use these communications methods and message formats to announce corporate actions. More and more sectors including Investment Banking, Brokerage and Asset Management have seen the benefits of using standard methods of communication in automating the process and reducing the risk associated with corporate actions. IM believe this will continue and the introduction of ISO 20022 messages will continue to increase the levels of standardisation.

6. ISO 1522 is a respected system with increasing integration in the US – a vital market. Some say, however, that it is over-flexible, and some data content can have different interpretations. What alterations could improve it?

Christopher Madigan: SWIFT’s Securities Market Practice Group continually solicits feedback from end-users and incorporates

their recommendations into new releases of the ISO 15022 format which have allowed it to improve every year. Still concerns remain over the lack of granularity. Data in the current ISO format is available only at a high level and it is difficult to drill down into more specific areas. Providing greater detail by incorporating more fields and event types can certainly help to make data more meaningful and useful to end-users.

Brett Lancaster: In its current form, ISO 15022 is both incomplete, as discussed above, and open to abuse. In a simple illustration, our experience shows that many custodians transmit corporate action events in a message structure that is ISO 15022-compliant. However, rather than enhancing STP rates, we find that custodians use the flexible nature of the current standard by tagging events as ‘OTHE’ (for ‘other’), rather than tagging the event with its correct event type. OTHE simply forces the event to go through a manual exception process so that it can correctly assigned. Of all the scores and scores of different event types in use, OTHE is ranked number three in terms of volumes. As described above, industry organizations such as the DTCC, SWIFT Standards, Market Practice Group ISITC, SIFMA and key global custodians and broker/dealers are actively working with the ISO organization to enhance ISO 15022, as necessary.

John Byrne: The market practice groups work continuously to address the issues with the over flexibility of ISO 15022 messages and try to create specific market practice guidelines for each Corporate Action Type. There are 65 as at (SR2008) listed by SWIFT/ISO and clearly this means enormous flexibility must exist to support all the nuances. A template based approach is what everyone strives for but with market differences it is unlikely that all Markets will agree to a more rigid structure entirely. As with everything though, the 80/20 rule should apply. Extremely good automation rates can be achieved by automating 80% of Corporate Actions and that has to be an attractive option for most firms. SWIFT are also working to ensure SMPG guidelines are complied with; particularly with regard to the software vendor community through

their SWIFTReady accreditation. A similar accreditation for the senders of these messages i.e. custodians, data vendors etc would also go a long way toward a standardised SMPG Compliant output and interpretation. The more the custodians and other senders of messages comply with SMPG guidelines and are measured based on their compliance, the greater the level of automation clearer communication.

Nat Sey: One might assert that it is a little unfair to blame a standard’s designers for making that standard too flexible, when the various eventual consumers of that standard originally encouraged the designers to build in flexibility so as to be able to accommodate all the various nuances of regional market practices. ISO 15022 is what it is: a flexible, comprehensive standard. But standards are never enough by themselves. Market practice is always required to document the nuances. I would be more inclined to blame the lack of across the board adoption of the Global Market Practice guidelines than the standard on which they were built.

Jan Jørgensen: As a sub custodian covering the Nordic markets, we can and will improve it by ensuring that we are supporting the ISO standard not only in one market but in all Nordic markets. But working with an “over-flexible” system also requires that all custodians ensure correct interpretations of eg each corporate action type is being done in a similar way not only in one but all markets. But then who does the interpretations? Staff working with corporate actions! Does the financial industry support with the same or enough possibilities to ensure that it is being done in a similar way? My impression is that we could benefit from the system on a higher level just by ensuring that the staff has the skills to use it and that each operation has their system designed to support the ISO standard.

Panel Debatep. 45



UCITS on the blockUCITS

P erhaps one day there will be a genuine

common European marketplace for

the fund sector, where regulation and

the bureaucracy involved will run ultra

smoothly and everything will resemble

tea-time at Lollipop Junction. But until

this happens, there is still much work to be

done. The recent progress of the Ucits IV

proposals is the latest building block in the

hoped for edifice of a pan-European fund

marketplace. To an observer, the proposals,

which contain genuinely needed reforms

to the fund structure, are proceeding on a

tortuous path slowed up by various political

and industry-related wrangles. But in fact

progress has been relatively smooth so

far, when one takes into consideration the

arcane, intricate path an EU directive must

tread before it is ratified. But the clock is

ticking on Ucits IV and there are still issues

to be resolved. For the sake of the health of

the industry this directive must be approved

on time.

The Ucits directive is certainly one of

Europe’s success stories. Since it was first

devised in 1985, the uptake of the Ucits

fund structure has grown rapidly. There

is now over EUR6.4 trillion of assets in

Ucits funds in Europe – the equivalent of

about half the EU’s GDP. And Ireland has

grown to be one of Europe’s premier fund

centres on the back of the directive, with

over 80% of NAV of funds in the country

using the Ucits structure. In order for

Europe to remain competitive with the US,

where the average fund is three times the

size of its European counterpart with half

the management fees, the continuation and

evolution of the Ucits brand is essential

- this much is obvious.

The latest incarnation of the

directive, Ucits III, has proven to be

generally well constructed, useful, and

popular across the board. It allows the free

marketing of funds across Europe, and

more freedom for long/short strategies and

leveraging than under Ucits I. However, the

process of their construction is so long and

arduous, they can often become obsolescent

almost as soon as they are released.

Peter O’Dwyer, director at Trinity Fund

Administration in Dublin, says: “Given

the speed with which the investment

management industry evolves and the

Ucits IV proposals• Remove administrative barriers to

cross-border distribution of Ucits funds

• Create framework for mergers between

Ucits funds that allows the user of

master-feeder structures

• Harmonise authorisation procedure

• Harmonise required level of information

available to investors

• Replace Simplified Prospectus with new concept

of Key Investor Information (KII), a short

document conveying key facts to retail investors.

• Improve cooperation mechanisms between

national supervisors.


pp. 46

Joe Corcos gauges the progress of Ucits IV, the latest step in the journey towards a pan-European funds marketplace


p. 47

resulting product obsolescence, the UCITS

product inevitably often seems to be

facilitating what the industry wanted to

do five years ago. Having said that, there’s

no doubt that UCITS as a brand has

been incredibly successful and not just in

Europe.”

But the continuing prosperity

of the Ucits brand depends largely upon it

advancing through its evolutionary cycle.

Successful though it was, most will agree

that it is past time to retire Ucits III and

usher in the age of Ucits IV post haste.

This is of course more easily

said than done. Because Ucits IV is an EU

directive, it is subject to more squabbling,

tears and tantrums than a favoured toy

in a pre-school playground. The sheer

amount of agendas and opinions at play is

enough to make Job himself throw up his

hands and call it a day. Luckily the man in

charge is Charlie McCreevy, a hard-nosed

Irishman who has forged a reputation for

outspokenness since assuming the post

of the EU’s top financial regulator. This

is the pro-enterprise commissioner on a

commission largely made up of socialists,

who told the EU Parliament last year that

hedge funds were in no further need of

regulation, despite the fact that a baying

mob of EU politicians were calling for just

that. In July the leader of the EU’s socialists,

Martin Shultz, called for McCreevy’s

resignation after the commissioner

commented that “no sane person” would

read the Lisbon Treaty.

Already Ucits IV has presented

McCreevy with a headache over the

question of whether to include the

controversial company management

passport, a proposal which if ratified would

allow a fund management company to be

authorised and regulated in a different EU

country than where its funds are domiciled.

Essentially this would leave the regulators in

that country rather circumvented. The fund

sector is almost unanimously behind the

passport, but unsurprisingly regulators in

Dublin and Luxembourg are leery.

Many in the EU and Europe’s

fund sector had expected the Ucits IV

draft proposals to be released earlier than

they were. Some have suggested McCreevy

purposefully delayed the proposals, so that

had they included the passport, (which

would in some eyes undermine Dublin as a

fund centre), they could not have been used

as ammunition by those against the Lisbon

Treaty. Of course this argument is now

academic. As it turns out the Irish rejected

the treaty anyway, and when the proposals

did come out on July 16th the company

passport was omitted and the matter sent

to the Committee of European Securities

Regulators (CESR) to mull over. CESR

has until November to come up with a

solution. The formal proposals for the new

directive are due in May 2009. It is almost

unthinkable that some form of the passport

will not to be included.

Sending the passport to CESR was

the correct decision by McCreevy. Though

the company management passport is

a good idea in theory and will go some

ways to furthering the free operation

of collective investment schemes across

Europe, the practicalities of implementing

it have clearly not been thought through

sufficiently. One issue that concerns

regulators is that of the status of funds

that are set up contractually, such as unit

trusts, and have no legal identity separate

from their management company. Were the

management company passport to pass,

the question would arise as to who would

be responsible for the supervision of these

funds.

Technically it is only the unit

trusts that require a management company.

Ucits that are variable capital investment

companies function their own manager,

though of course some Ucits funds of this

type do enlist management companies.

Martina Kelly of the Irish

financial regulator, says: “There are mixed

views in Ireland because some people in

the jurisdiction would actually say that the

management passport is good because the

management can all be done from here

anyway.”

Her colleague in Luxembourg,

Irmine Greischer, head of the Department

of Supervision of Undertakings for

Collective Investment (UCI) at the

Luxembourg regulator, CSSF, agrees:

“What will be the nationality of these

legal constructions? So far they have the

nationality of their management company.

With the passport the nationality could

change from one day to another.”

Greischer goes on to point out

that should the passport be implemented,

it would be a reversal of what was decided

under Ucits III, which was that investment

funds should have a certain substance in the

member state they are set up in.

There is the feeling among

the regulators, which is valid, that not

enough has been done to nail down the

specifications of how the passport will

function.

Greischer adds: “Its not that

we are against it [company management

passport], it’s just happening too quickly. A

change from substance to passport with no

discussion or cooperation is not as easy as

that.

“There are mixed views in Ireland

because some people in the jurisdiction

would actually say that the management

passport is good because the management

can all be done from here anyway.”

Jean-Baptiste de Franssu, the

CEO of Invesco Europe, agrees that more

time should have been devoted to the issue

of the passport.

“I think one of the reasons

why we are where we are today is because

probably we did not spend enough

time earlier discussing the company

management passport”, he says.

“We have not spent enough time

on the company management passport

during the last two or three years and a lot

of the conversation is now taking place,

which has led to a number of uncertainties

being raised in the last six months because

there was still some misunderstanding on

where the company management passport

starts and stops, and so forth.”

Like most in the funds industry, de Franssu

believes that any problems concerning

the passport can be solved in time for the

formal proposal in May.


UCITS pp. 47


Mona Patel, a spokesperson for the

Investment Management Association,

says: “We’re fully in support of having a

management company passport, and we

definitely wouldn’t support something that

would reduce consumer protection. Some

of the countries are against it because they

think there are some regulatory issues in

terms of introducing the passport. But

these issues are not insurmountable and

they’re not major barriers to introducing

the passport.”

A partial passport has been

proposed in order to mollify Dublin and

Luxembourg, and others who are no doubt

opposed to the passport that haven’t raised

their heads above the parapet yet. The

partial passport would require just some of

the management functions, such as NAV, to

be based in the country where the fund is

located.

Dublin and Luxembourg are

behind the partial passport option, and

it is probable that it is some form of this

anaemic version of the passport that will be

recommended by CESR.

MEP Dr Wolf Klinz, a member

of the committee on economic and

monetary affairs, says: “My guess right now

is that we will not have a full management

passport. All functions being performed

with a management passport outside

the jurisdiction I think will prove to be

impossible.

“We will probably see a first step

that will open a door into this direction,

then once the regulators and supervisors

have developed a way to work closely

together constructively and productively,

maybe we can shift more of those functions

to other areas”.

Opposition from Ireland and

Luxembourg does not simply stem from

regulation concerns. Both fund centres

could theoretically have much to lose if

the full passport was agreed, and various

national agendas play into the issue.

The UK, France and Germany

are siding with the industry in favour of

the passport, and the fact that the French

currently hold the presidency of the EU

could lend influence to the passport’s

progress.

“It is probably not a coincidence that the

countries who came down in favour of a

full passport regime are primarily where

the asset managers are located and those

countries which favoured partial passport

are the asset servicing/fund administration

centres”, says BNY Mellon’s head of offshore

management,

Ross Whitehill.

“Both Luxembourg and Ireland have been

lobbying hard to oppose the concept of an

EU-wide fund management passport. Some

believe that both Ireland and Luxembourg

are worried that a full passport could erode

their dominance.”

Whether the management

company passport genuinely would

undermine Dublin or Luxembourg is

perhaps doubtful. Both locations, with

their strong infrastructure, are viable

management locales.

O’Dwyer says: “There are

mixed views in Ireland because people

in the jurisdiction may actually say the

management passport is good because we

can manage all these things from here

anyway.”

Amid the conflict surrounding

the passport it is important not to ignore

the fact that Ucits IV includes several other

crucial proposals that make its ratification

desirable, irrespective of the passport.

Among the proposals is one that

would cut down on the amount of

red-tape involved in the cross-border

distribution of Ucits funds by making the

notification procedure a simple electronic

communication between regulators. The

European Commission has estimated this

will save approximately EUR45 billion.

Additionally, the prospectus would be

slimmed down from its current bulky

incarnation, which differs from country to

country, into a document of two pages.

Perhaps most importantly, the new

Ucits would allow for cross-border

mergers between funds, including the

harmonization of their authorisation

procedure, and the use of a Ucits fund as

UCITS

Jean Baptiste de Franssu, Chief executive officer, Invesco Europe

p. 48


a feeder, investing its assets into another

such fund, a master. The authorization

procedure for these funds will also be

harmonised. It has been estimated that

these measures will save up to EUR6 billion,

possibly translating into lower costs for

investors.

Meanwhile, the wrangles over

Ucits IV and of course the ubiquitous

credit crunch have all highlighted the need

for Europe’s regulatory agencies to work

in increasing harmony with one another

and the industry itself. While it is obvious

that the agencies are communicating

and cooperating, this needs to speed up

significantly.

Klinz says: “In the future I see

a college of supervisors working closely

together. I see the exchange of information

becoming a more normal activity.

Increasingly they will consider themselves

colleagues working for the same cause. And

even though legally they will be still be

independent, de facto there will be much

closer cooperation than there is today.”

Come May it is important that

the formal proposal for the new directive

is delivered on time, includes the passport,

and has no major weaknesses. The company

passport will help in the road towards a

completely open European market, but if

it is devised in a hurry or without proper

discussions and consultations, it will not be

ratified. And the clock is ticking.

De Franssu says: “The calendar is very tight.

This is why the industry is already working

on potential solutions, a day is a day in the

process we have ahead of us, it’s a question

of running, not of walking.

“But I think its doable, but it’s

a tight window that we have to work with

here. Given where we are today I don’t look

at it as being a possibility that there will be

no reference to the passport.”

Of course the overall concern

with the passport is that Ucits’ successful

brand of consumer protection not

be damaged. Hopefully CESR will be

able to devise a version of the passport

which allows for gradual migration of

management functions inside a structure

where regulatory responsibility is clearly

delineated. What cannot happen is that

Ucits IV go the way of Ucits II, which got so

bogged down in EU bureaucracy that it was

enveloped into Ucits III.

The industry needs Ucits IV and

can’t afford to wait for Ucits V.

UCITS

Because Ucits IV is an EU directive, it is subject to more squabbling, tears and tantrums than a favoured toy in a pre-school playground



Accuity will showcase a range of offerings at Sibos 2008 including its Compliance Suite, Strategic Services and Payments Solutions. Accu-ity’s Compliance Suite offers a range of caution lists and screening tools that defend against participation in illicit financial activities. The Strategic Services Group provides businesses with consulting and services to help optimise operational goals and meet AML compliance and payments objectives.

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Sibos Attendants:

1. Malcolm Taylor – Managing Director, EMEA and Asia Pacific 2. Robert McKay – Managing Director of Business Development 3. Edward Lloyd – Sales Director, EMEA and Asia Pacific 4. Victoria Lumb – Business Development Manager 5. Adrien Lolly – Business Development Manager 6. Greg Leech – Business Development Manager

Stand: B524

Contact & Address:Susan [email protected] Quality CourtChancery LaneLondon WC2A 1HRUnited Kingdom

AT&T is the world largest telecommunications company by revenue with extensive experience in managing the design, implementation and operations of integrated SWIFT connectivity solutions for the global financial sector. AT&T was accredited in 2003 as a preferred global partner for the provision of data communication services to the SWIFT user community for accessing the SWIFTNet application, and now operates more than 1,100 network connections in over 60 countries. AT&T’s SWIFTNet connectivity solutions are based on AT&T’s advanced global IP network offering Financial Institu-tions consistent, resilient and standardized IP services around the world. AT&T’s global network offers industry-leading service level agreements providing end-to-end performance guarantees of up to 99.999%. In March 2008 Fortune magazine named AT&T the World’s Most Admired Telecommunications Company.

Contact: [email protected]

SIBOS stand: C611United Kingdom

CB.Net is a payments reference data provider dedicated to the deliv-ery of data solutions to the payments community. The availability of reliable reference data in payment operations is critical in achiev-ing: efficiency, cost savings and to meet compliance requirements. CB.Net’s Mission is to work with partners to provide the world’s best global payments reference data service.

CB.Net is the official provider of the EPC SEPA Adherence database, the EBA Priority Payments Central Repository and is an active mem-ber of SWIFT Partner Solutions as well as an associate member of the EBA.

Contact details is address belowCB.NetMarket House124 Middlesex StreetLondonE1 7HY+44(0)20 7522 6094Sibos Stand: B725www.cbnet.info

Sibosp. 50

Standard Bank is the largest custodian in South Africa by market share, with around R2 trillion in assets under custody. It offers a sophisticated range of products and services to institutional and corporate clients, in 12 markets in Sub-Saharan Africa.SIBOS Stand 315, Hall B

An expansive network strategically positions Standard Bank to capture flows and, together with its easily administered Regional Custody Network solution, offers clients an attractive package.

Mark KernsManaging Director, Global [email protected]+44 20 7815 5518

Fiona Green Head, Client Relationship [email protected]+27 11 636 0531


p. 51

ISJ | Investers Services Journal

Information Mosaic is a global provider of advanced custody, corpo-rate actions and wealth management solutions to the global securi-ties industry. Information Mosaic’s business professionals leverage decades of financial industry expertise and technical knowledge to deliver complex projects on time and within budget. Since inception, the company has utilized the most modern technology to develop solutions to run on a scalable, single platform. Today, Information Mosaic’s supports clients from offices in Boston, Dublin, London, Luxembourg, New York and Singapore. Currently, six of the top 10 global custodians deploy Information Mosaic solutions worldwide.

For more information on Information Mosaic, please visit our website: www.informationmosaic.com

Global: [email protected]: [email protected]: [email protected]: [email protected] Enquires: [email protected] Stand A709

Over 21 years experience of close collaboration with the Capital Markets’ industry key players have positioned Murex as the leading provider of cross-asset trading, risk management and processing so-lutions for the world’s top financial institutions, hedge funds, asset management companies and corporations.Our thorough experience in back office processes combined with an ambitious architecture design position our latest solution MX.3 as the leading platform for multi-entity and multi-asset class process-ing.A team of over 1000 specialists, located in Europe, America and Asia are dedicated to providing clients with the best support in the industry.For further information on our company and products or to schedule a meeting with our representatives, kindly contact us at HYPERLINK “mailto:[email protected]” [email protected].

Stand number: B224

peterevans is a leading independent provider of front to back office solutions for the financial services sector. Clearly focused on the securities and investment market, and building on over 24 years ex-perience of providing award winning solutions, peterevans presents its new suite of applications – xanite.

xanite offers a comprehensive, configurable, fully integrated, browser based, front to back solution that can be either deployed as a single application or integrated as components into your existing platform. xanite provides multi-entity, multi- currency, and multi-language support.

Each module can de delivered via an ASP or self-hosted. Covering wealth management, custody, corporate actions, clearing and settle-ment, private client and on-line stock broking with full operational and administrative support, the suite gives full but controlled access – on line anywhere and everywhere.

Sibos Stand Number B528

SMA Financial (Sibos Booth No. C215) is the UK’s premier provider of SWIFT services and a long standing business partner of SWIFT. SMA’s vast experience in the banking and securities industry has provided high quality provision of SWIFT related consultancy, training, system care and bureau services which is second to none. SMA prides itself on their in-depth and highly experienced team of consultants chosen from the banking and securities industry. The introduction of the SWIFT bureau service has witnessed much success by providing cost effective and quality hosted connectivity services to many satisfied clients.

Contact details :Stand: C215Simon MurbyManaging DirectorSMA Financial LimitedTelephone : +44 (0)20 7940 4200Bramah House,65-71 Bermondsey Street,London. SE1 3XFWebsite: www.sma.co.uk

Sibos



VocaLink is the payment transaction specialist, processing over 90 million automated payments on a peak day. The VocaLink EuroCSM delivers reach for our clients throughout the SEPA and beyond, with a range of value-added SEPA Direct Debit and SEPA Credit Transfer services that leverage our knowledge and technical capabilities. We are the leading provider of ATM services and power the world’s busiest ATM network. Our Real-Time Payments Platform provides the central infrastructure for the UK Faster Payments service. This year, Bankgirocentralen (BGC) outsourced processing of the bulk of Sweden’s automated payments to VocaLink. Find out how we can help your business at HYPERLINK “http://www.vocalink.com” www.vocalink.com, or come and visit us at Sibos at stand A514.

VocaLinkDrake HouseThree Rivers CourtHomestead RoadRickmansworthHertfordshireWD3 1FX

Stand: A514

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

=

SmartCo provides Smart Financial Data Hub, a leading global data management solution covering all the data area, including market data, corporate actions, indexes and benchmarks, third parties, funds and mandates, financial analysis, etc., as well as operational data for positions and transactions. Its innovative and scalable technology accelerate design and deployment of durable, upgradeable solutions, and allows financial institutions to model and centralise data, to distribute or give access to the whole data universe, to optimize data quality, data administration workflow and data governance, and to urbanise their information system. With its cutting-edge solution and technology, SmartCo has been selected and recognized by large financial institutions as a strategic solu-tion to reduce their risks, optimize their processes, meet regulatory expectations, accelerate the delivery of new products, and better serve their clients.

The contact details :Sales France and Southern Europe : Jean-Bapiste Ledantec, +33 1 58 22 29 65Sales UK and Northern Europe : Patrick Archer, +33 1 58 22 29 67

Address:37 rue de Liège75008 PARISFrance

Tel: +33 1 58 22 29 60Fax: +33 6 30 08 68 20Email: [email protected]: www.smartco-software.comSibos stand number: B504

Broadridge Financial Solutions is a leading global provider of technology-based outsourcing solutions to the financial services industry. Our international systems and services include global securities processing, investor communications and a SWIFT bureau. Broadridge’s market-leading international securities processing solutions deliver extensive market-proven functionality and straight through processing for institutional and retail securities operations. Broadridge offers comprehensive investor communications and proxy processing services for international banks and brokers, institutions, and for corporate issuers and their agents.

EUROPE: +44 20 7551 3000NORTH AMERICA: +1 888 237 1900ASIA PACIFIC: +852 2869 6393E: [email protected] number: B504

Sibos

RBC Dexia Investor Services offers a complete range of investor services to institutions worldwide. Established in January 2006, the company is equally owned by RBC and Dexia. We rank among the world’s top 10 global custodians, with USD 2.9 trillion in client assets under administration.

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SIBOS stand: A108


p. 53

ISJ | Investor Services Journalisj.tv

K eeping up with the requirements for substantial

shareholding reporting (SSR) can be a complex, time-consuming task for fund managers due to the variety of national thresholds and reporting rules.

In the US, reporting of substantial shareholding regulations have been part of the Securities Industry Act since 1998 and since the EU Directive 2004/109/EU shareholders have been required to report to the relevant regulatory authority or stock exchange, and the respective company, whenever upper or lower limits of substantial shareholding are exceeded.

The directive replaced and standardised the various national guidelines in Europe and attempted to put a more robust framework in place for reporting. It states that reporting is mandatory, across the Member

States, when the shareholding proportion reaches, exceeds or falls below the thresholds of 5 %, 10 %, 15 %, 20 %, 25 %, 30 %, 50 % and 75 %.

However, the global shareholder limits, before regulatory reporting is required, still vary from country to country, starting from as a little as two per cent. The reporting thresholds and posting requirements, laid down by different countries are subject to change from time to time. To add greater complexity to the task, some countries require shareholder reporting when holdings have increased, or decreased, by just a percentage, while others by ten or fifteen per cent.

The SSR requirements can also differ by country from an email, a specific report, to a full set of documentation that needs to be filled in and approved. Another variable, that is country-specific, is the reporting timeframe,

which can vary from the same day (e.g. in Denmark), to four working days, as stated in the EU Directive, to anything up to seven days (e.g. in Bulgaria).

The regulatory requirement to disclose substantial shareholdings, and any incremental changes to those holdings, stems from the need for transparency for shares traded on regulated markets, to which voting rights are attached. These disclosures ensure that investors and issuers can accurately determine the voting structure of an issuer’s capital, enhancing transparency of important capital movements.

The biggest driver that is making SSR much more complex is the fact that fund managers need to invest further afield to get the same kind of returns on their funds as they once did from domestic markets. Emerging markets are increasingly appealing to fund managers and investors but it is inevitable that the regulatory environments in the various emerging markets constantly change and update as these markets develop.

Fund managers operating in these markets must keep abreast of these changes and ensure their systems are flexible enough to adapt to regulators’ demands or they run the risk of incurring additional costs and reputation damage from public reprimands and fines from the regulators.

Another issue when investing in emerging markets is that companies tend to be much smaller and this inevitably makes it easier to take a larger share of the company, and reach the reporting thresholds faster, with

a much smaller investment than in larger multi-nationals. For this reason the emerging markets funds are finding they are suddenly buying up large chunks of shares and having to report their shareholding to unfamiliar stock exchanges like Malaysia, Vietnam and Indonesia.

But even investors who stick to more traditional markets may find it difficult to keep track of shareholding limits. Large asset managers, for instance, might focus on more conservative investments but tend to hold stakes in hundreds of funds and usually buy in large quantities. They have to monitor limits on a company level, making sure they don’t exceed allowed thresholds.

Aquin has developed a system that automates SSR and helps compliance officers cover compliance regimes of new jurisdictions quicker. Aquin’s SSR LawCard® service provides a predefined set of rules that monitors when SSR limits are reached on a per country basis, at fund level or aggregated at company level, across Europe and most financial jurisdictions around the world.

Aquin identified the gap in the market for a comprehensive SSR solution and customised and extended its compliance and monitoring solution, MIG21, to develop the SSR LawCard as a standalone product. MIG21 has an adaptable rules engine that is designed to function in a changing regulatory environment with comprehensive oversight for all new and existing asset classes. It checks legal, contractual and internal investment guidelines, post-trade, in a single system

Aquin International

The streamlined solution to Substantial Shareholding ReportingSubstantial Shareholding Reporting (SSR) is a mandatory requirement for hedge funds, asset managers, trustees, and fund administrators. Andrew White, managing director at London-based compliance IT firm, Aquin International, explains how LawCard can make it easier.



a review of its literature on Major Shareholding Notification (MSN) disclosure and the theoretical impact on price formation. The regulator has found that, in relation to voting rights, evidence suggests that MSN disclosures are of value to the market, and are particularly important in the context of takeover situations, where lack of disclosure of significant holdings can discourage other potential bidders from entering a contest.

As a result, in July 2008, the FSA published an update for disclosure for CfDs referenced to UK shares, implementing a general disclosure regime for long CfD positions to address concerns in relation to voting rights and corporate influence. Existing share and CfD holdings, in the same company, should now be aggregated for disclosure purposes. The disclosure threshold will be at 3%, in line with the existing disclosure rules. The FSA will publish a Policy Statement in September 2008 and final rules will be issued in February 2009.

All these ever changing regulations make it all the more important to have a flexible compliance monitoring solution in place. Any system must be adaptable enough to cope with the situation that is settled upon, with provision for further change to occur in the near future. Aquin’s MIG21 and its unique LawCard service provide a highly flexible investment compliance solution. Aquin’s LawCards are constantly updated and revised by a team of experts to ensure that changes in law or market practice are incorporated immediately. Thus, investors can always be on top of the latest regulatory requirements.

right up to the reporting limits, to maximise the information they have access to.

Launched in June this year, the new SSR LawCard has already three users, two hedge funds in the UK and a German asset manager. At present, there is no real competing product to the Aquin SSR LawCard, and so fund managers have to employ staff to track limits and requirements internally.

It can be extremely difficult and time consuming to keep track of every issuer’s percentage, especially if a hedge fund is investing in 20 or 30 different countries. Investors can interrogate their compliance database manually to find out about the voting share. However, they would also have to incorporate and update country-specific regulations referring to derivatives or other asset classes, which is a labour-intensive task and prone to miscalculations.

A small hedge fund does not tend to have this expertise in-house, to be able to circumnavigate the reporting requirements worldwide, especially in Asian countries where language barriers and lack of local expertise can hinder the information gathering process as these limits are not always published or made available online.

Large asset managers, on the other hand, buy in such large volumes that they are in constant danger of exceeding the allowed threshold on company level without knowing it. Without a tool like MIG21 and the SSR LawCard, keeping on top of the company’s limit is an almost impossible task. One recent customer of Aquin’s, a London-based hedge fund, had two staff working full time, with Excel spreadsheets, to keep on top of the limits and fill-in the reporting requirements

to reduce the cost and time associated with investment process controls

The new SSR LawCard for MIG21 automates SSR and protects fund managers from the consequences of not reporting substantial shareholding thresholds in a timely manner. It tracks any changes in share voting rights automatically ensuring alterations are in line with laws and regulations. It also covers country-specific requirements, such as whether equity rights or derivatives on securities need to be included.A major move in a shareholding will automatically generate a PDF report to the compliance

officer so the fund can see which issuer, which limits, and in which country the limits have been breached. The alert will also present the compliance officer with the relevant regulatory filing forms, such as TR-1. This means that acquiring local knowledge of the regulatory frameworks of the emerging markets they are investing in is not necessary for fund managers.

Aquin does this research instead and maintains contacts with the regulators to continuously monitor and revise the LawCards so that changes in law or market practice are incorporated immediately. For more comprehensive documentation and news feeds, LawCard users are offered access to Aquin’s LawCard Portal.Another benefit of using the Aquin SSR LawCard service is that funds can purchase shares

It is inevitable that the regulation in emerging markets changes constantly as these markets develop.

manually. By using Aquin’s SSR LawCard and MIG21, it could enhance the efficiency and reliability of its regulatory reporting processes and greatly minimise the risk of incorrect or missing reports.

However, more changes to disclosure requirements are afoot, in order to include other instruments. In January 2007, responsibility for the major shareholding notification regime in the UK passed from the Department of Trade & Industry to the Financial Services Authority (FSA). This meant that the Companies Bill gave the FSA powers to extend the regime beyond the disclosure of ‘ownership’ of substantial equity positions to require the disclosure of substantial ‘economic interests’ in shares held through derivatives, such as Contracts for Difference (CfDs). CfDs are the instrument most widely used for holding an economic interest but until now they have usually remained outside the regulatory framework for disclosure.

Since November 2005 the Takeover Panel has required disclosure during an offer period of long interests, including economic interest (such as CfDs and other interests arising from derivatives) of 1% or more in the securities of a target company.

CfD writers and holders have been concerned that increased disclosure could make the market less efficient by introducing excessive or contradictory information. This could also damage liquidity in CfDs and therefore ultimately in the underlying equities as holders might seek to limit their holdings to avoid disclosure.

These concerns led to FSA conducting an evaluation of the market efficiency case for requiring disclosure of the pure economic interest of CfDs and

For more informatoin, visit www.aquin.com

Aquin International


A recent survey conducted by the Banks & Future Innovation Forum and initiated by the

Fraunhofer IAO in Stuttgart, Germany revealed that the market is ready for e-invoicing. In co-operation with several international banks and IT partners, this forum investigates interests and research issues regarding the current and future needs of banks. Equens has extended this survey with a number of specific questions to find out which services will fulfil the future needs of both clients – ie, banks – and their respective customers. The results are clear. for 75% of the respondents, e-invoicing is the most welcome innovation.

Debtors pay their bills soonerAnd indeed, e-invoicing or electronic billing is a field that potentially offers great opportunities. More than 90 percent of all invoicing worldwide is still performed on paper. This usually involves an extremely inefficient process of photocopying, distributing, and archiving paper and re-entering data. This can sometimes drive up the cost of an invoice (from sending to processing) to several tens of euros apiece. E-invoicing makes this process a lot cheaper and simpler through portal-based digital communication, e-mail and – particularly for the B2C market – with the help of online banking. Other benefits include easy archiving and the option to link the system to management information systems. Users are also able to add options to e-invoicing, such as dispute reports and enclosing electronic appendices. An added bonus is that debtors, thanks to the greater convenience offered by the system, actually pay their invoices sooner. In other words, e-invoicing is an extremely welcome tool for effective debt management. And by providing this service, financial services providers can distinguish themselves in the market.

A variety of initiativesA number of different e-invoicing initiatives have been launched in Europe varying in size and sophistication and focusing on across the business and consumer market. The companies providing these services are called ‘billing service providers’. Some of them are banks, while others may be major IT companies.

At a national level, they act as a ‘central invoicing facility’ for companies and their business and private customers.

B2B: Generic or individual siteThere are several different solutions for e-invoicing: a business-to-business (B2B) solution is a generic solution provided by the billing service provider. This is where companies store their invoices. Business debtors receive an e-mail – sometimes containing a hyperlink to the website – to alert them. They can use the service to retrieve the invoices, download them to their own accounting or ERP system and then continue to process in accordance with their own creditor procedures. Large companies that do not have the resources to invest in the system can also choose a solution on their own corporate site as an e-invoicing alternative. One advantage of this method is that the invoice function can then be provided entirely in the company’s look and feel.

B2C: Link to online bankingThe business-to-business consumer segment can choose between a number of digital solutions, whereby the invoice may be sent directly to the consumer’s online banking environment. This is effectively the digitised version of the paper giro slip, though unlike that somewhat antiquated payment method, the recipient does not actually have to copy the details on the invoice. This facilitates the payment process, rules out the possibility of errors and immediately provides the creditor with a reconciliation score of 100 per cent.

European Commission: looking for a European solutionAll the e-invoicing initiatives launched so far have been at the national level, because, until the introduction of SEPA, all payment systems were essentially established by the countries individually. For cross-border e-invoicing, the national payment processors (i.e. the hubs between the payers’ and the recipients’ banks) need to make substantial investments, as invoicing processes vary significantly from country to country. There are also differences in tax treatment. The European Commission is aware

E-invoicing in Europe

A world to be won Although the financial world has been abuzz with the Single Euro Payments Area (SEPA) for some time, it will take non-insiders a little longer to realise the benefits and potential offered by this system. But there are also trends and developments that provide substantial benefits that are immediately visible. One field in which banks – and particularly their clients – have their work cut out for them is e-invoicing, and European payment processor Equens intends to play a facilitating, leading role in this market in Europe. What makes e-invoicing ‘hot’, what are the benefits involved, and what exactly is this European initiative in which Equens is participating?

e-invoicing is an extremely welcome tool for effective debt management

Dave Rietveld - Equens

pp. 55



of these limitations and committed to fi nding a solution. At the end of 2007, it requested to assemble a small group of international experts, with the goal of identifying a European e-invoicing Framework that addresses the legal, operational and standardisation issues. Furthermore, Equens is an active participant in the EC Expert Group on e-invoicing. So in addition to being involved in developing rules, standards and protocols related to e-invoicing, we are very active in gaining experience in how to put into practice the theory of the European e-invoicing Framework.

International e�invoicing pilotEquens and three leading national billing service providers in three European countries recently announced they will set up a cross-border pilot project for these three countries. In this pilot, the internationally active customers of the three billing service providers will gain international reach in e-invoicing – and all they have to do to achieve that is sign an e-voicing contract with a single provider. As with the international (SEPA) payment system, Equens serves as a switch between the three parties. Going by the maxim ‘Billing should be as easy as paying’, it established the Equens Billing Grid, which companies from other European countries are also welcome to join.

European scaleThanks to its size and its status in Europe, Equens is ideally positioned to participate in these types of initiatives. As a pan-European full service payment processor, it offers a complete service portfolio with future-proof and SEPA compliant processing solutions for both payments and cards. The company has locations in the Netherlands, Germany and Finland, and already provides services to leading banks and large corporates in several European countries. Equens intends to expand its scale by establishing Equens Italia. With a market share of more than 15%, Equens is one of the largest payment processors in Europe and with 7.3 billion payments and 2.1 billion POS and ATM transactions per year.

Growth through innovationScale is a crucial element in the European payment processing market, and we pursue a clear growth strategy. It is generally believed that an annual transaction volume of EUR10 billion is necessary to survive. The number of transactions in the euro zone is approximately 50 billion per year. This means that, in the long term, three to fi ve players will remain in this market, and Equens is determined to be one of these

companies. The company’s scale allows it to provide a range of service at highly competitive prices, while at the same time investing in further innovation at these competitive prices.

International potentialIn addition to e-invoicing the organisation is pursuing a two-track innovation policy that incorporates innovation of the core business, payments and cards, with the systems and infrastructure SEPA compliant and SEPA-ready in time. Thanks to its broad knowledge of needs and requirements in the payment market, the company can afford to initiate or cooperate in innovations related to pure payment processing. These may be initiatives in line with Equens’ European strategy, such as the e-invoicing initiative, but they may also be national innovations that have the potential to be applied internationally.

Specifi c examplesWe provide all telecom providers in the Netherlands with a service with which consumers can easily and safely recharge their prepaid balance on their mobile phone. Prepaid gift cards are another example: paper vouchers are increasingly being replaced by electronic prepaid solutions. Equens has so far issued over 2.5 million prepaid gift cards. Both mobile payments and prepaid gift cards are business areas which will be further built out and developed in the future. A third example is the pilot Tip2Pay – pay with your fi ngertip – which is conducted in co-operation with Albert Heijn (Dutch Ahold’s largest supermarket chain). For a period of six months, customers of Albert Heijn will be able to pay for their shopping using their fi ngertips. The objective of the pilot is to investigate the potential of this technology as a new payment method and establish whether it is received positively by consumers. This is the fi rst pilot of its kind in the Netherlands.

Co-operation with partners and clientsEquens strongly believes that staying ahead in the European payments processing market requires looking beyond the payments discipline. It requires awareness of the future needs of banks and their customers, of technology and of applications. It also requires endurance and fi nancial solidity to guarantee continuity. We think the true source of innovations is a willingness to co-operate with partners, international organisations and governing bodies and – last but not least – clients.”

Dave Rietveld,General Manager New Business at Equens

E-invoicing in Europepp. 56

13577 INI fishing GFS ST3.ai 12/8/08 18:22:45


13577 INI fishing GFS ST3.ai 12/8/08 18:22:45



From the roots upGiles Turner explains why STP and automation are at the root of risk management

Risk technology

The word ‘risk’ has almost become an indefinite

article in the financial industry. From the securities

industry to the hedge fund world, all have become

morbidly fascinated. Hedge funds, the group some

see having escaped the worst of the credit crunch,

have become rapacious in their demand for risk

managers and technology. In recent weeks, Rogers

Investment Advisors, a Tokyo-based fund of hedge

funds, has hired Eric Chong as risk manager, and

hedge funds shop EIM has also added Paulo Peres.

London-based Polar Capital has hired Karim Vellani

to fill the newly created role of chief risk officer and

Ramius, which manages about USD12 billion in assets

across multi-strategy and single strategy hedge funds

and funds of hedge funds portfolios, has hired Vikas

Kapoor as risk manager. The list could go on, but most

importantly both the large and the small are taking

risk management ever more seriously. From Rogers

Investment Advisors, who stated after their recent hire

that their full time employees have now increased to

five, to EIM that employs over 210 people.

The securities finance industry also expects to

increase spending in trade and risk management

technology over the next 12 months, according to

research conducted by Sophis at a recent Lepus

business seminar. 69% of the respondents from

the aforementioned mentioned survey stated that

their trading and risk management requirements

had changed due to current market volatility, and a

significant 63% stated that their firms had increased

spending on trading and risk management technology

over the past year. This spending is set to rise, with

57% expecting to increase spending over the next 12

months.

This shift in the spending of budgets towards risk

management has come about after the purple run

of spectacular quarterly profits almost evaporated

overnight. Much of the terminology used when

discussing legal and regulatory challenges facing the

financial industry has also disappeared. Teo Swee

Lian, managing director, MOS, speaking at the Risk

Minds Asia Conference earlier this year, succinctly

highlighted: “It is interesting that not that long ago,

before the sub-prime crisis, the buzzwords in the

financial industry were ‘principles-based regulation’,

‘less prescription’, ‘more room for innovation’, ‘cost-

benefit analysis of regulation’ and ‘proportionality’.

What a difference a year makes. Now the same

commentators are asking how everyone could have

missed the elephant in the room, why did financial

authorities not act more quickly to curb risky lending

practices and why did they not have better oversight of

the CDO markets.”

What to blame and who to blame for it has been much

discussed in recent months, and many feel a more

hard hitting approach is needed to curb such problems

happening again. Luckily, a timely piece of regulation

is at hand. Basel II aims to improve regulatory capital

measures by requiring banks to distinguish among

the credit quality of individual borrowers. In other

words, those wanting to pursue more risk investment

options have to hold more capital. While this seems

like a good thing a little too late, any new regulation

comes up against the same problem, that for risks to be

successfully managed, they must first be identified and

measured. As Ben Bernanke so eloquently understated

at the Federal Reserve Bank of Chicago’s annual

conference in May: “Recent events have revealed

significant deficiencies in these areas.”

The question seems to be not what you measure, but

how you measure it. A report published in March

2008 by a group of supervisory agencies from France,

Germany, Switzerland, the United Kingdom and the

United States, called the Senior Supervisors Group

(SSG), stated that some institutions took an excessively

narrow perspective on risk without significant enough

appreciation of the need for a range of risk measures.

The reliance on models to analyse risk undid many

in the financial industry, and while quantitative tools

and models can and must play an important part in

effective risk management no model, regardless of

its cost, sophistication and size, can possibly hope to

capture all the risks an institution might face.

Key to effective risk management is stress testing and

valuation. Stress testing is an exemplary method for

highlighting possible events that may fall outside

those typically measured by statistical models, or

rather results outside the bell curve. However as recent

events have shown events falling outside the bell curve

are happening with greater probability than can be

expected. The ‘fat tails’ are often called ‘nine standard

deviation events’. One such event was the Amaranth

hedge fund collapse. Hilary Till of Premia Capital

Management said that the hedge fund collapse was

a nine standard deviation event. In other words it is

unlikely to happen again in the near future, statistically

speaking. That was in September 2006.

p. 58


p. 59

ISJ | Investers Services Journal



Nearly a year later, in August 2007, Goldman Sachs

flagship global equity fund had lost over 30% of its

value due to ‘hiccups’ with its computer model driven

trading strategies. These computers had failed to

predict the beginning of the credit crunch. Failed to

predict is something of a euphemism. The models

labelled the credit crunch a ‘25 standard deviation

event’, or rather something that only happens every

100,000 years. Not only did this happen once, but at

the time David Viniar, Goldman Sach’s chief financial

officer, stated that “We are seeing things that were 25-

standard deviation events, several days in a row”. That

‘hiccup’ forced Goldman Sachs to funnel USD2 billion

of its own capital into the fund.

However stress testing can only go so far, and it

goes against human nature to continually expect

the unexpected, especially in the recent bull market.

These situations breed complacency as well as over-

reliance on mathematical models based on standard

deviation, and eventually leads to a breakdown in the

understanding of risk. For stress testing to be of any

use, they have to have an impact on the management

decision making. It is unlikely that the phrase ‘stress-

testing’ ventured into the board-rooms of the large

financial institutions in 2006, apart from perhaps

assessing the accountants ability to compute the

management’s Christmas bonus.

Before you can effectively stress test your business

or portfolio, your ability to value the assets under

management is perhaps the most intrinsic cornerstone

to future success, especially in such a volatile market.

In the past, the success of some companies relied on

the valuations of in-house and third parties to test the

price of assets, a factor that the Hedge Fund Standards

Board (the custodian of the best practice standards

published by the Hedge Fund Working Group) is

aiming to become standard practice within the hedge

fund industry.

With efficient valuation comes the effective ability

to measure position risk. It is here where reduced

operational risk and improved settlement will lead

to a more efficient marketplace. Key to this is same

date affirmation (SDA) – the ability of the investment

manager and broker-dealer to match the details of a

trade on the day the trade is executed. According to

Simon Haggerty, managing director, UBS: “Same day

affirmation is arguably the single most important

initiative to process cross boarder securities’

productivity and risk management.”

Some might say it is a tenuous leap, to jump from

cataclysmic standard deviation leaps and the credit

crunch to SDA and automation, yet according to

Marianne C. Brown, president and CEO of Omgeo:

“If the turmoil experienced by the global financial

markets this year has taught us anything, it’s that

industry efforts towards market stability and reliability

should be paramount.” Market, position, counterparty

and liquidity risk all arise from failed or slow trading

ability (see box out). Everything, from credit default

swaps, plain vanilla equities to esoteric derivatives;

if you cannot be certain that the processes for trade

settlement are efficient and timely, then all other

platforms and foundations for good business will be

made redundant if another event occurs that falls

outside the hallowed bell curve, an occurrence that

should be measured in months, not eons.

Market risk, position risk. Market risk arises from fluctuations (volatility) in the market prices of securities from the time of trade execution to eventual settlement. Where the trade is in a foreign currency, the risk may be exacerbated by exchange rate fluctuations. Market risk corresponds to position risk to the extent that it relates to uncertainties in the long or short position in the securities that constitute the trade, which remain until the trade is settled and the securities delivered. For example, a seller may incur a loss if the price of the security has fallen and the seller has to find a replacement buyer at a lower price. Conversely, a buyer may incur a loss if the price of the security has risen and the buyer has to find a replacement seller at a higher price. Counterparty risk. At the most general level, any delays in settlement expose a trading party to the risk of non-fulfilment of the trade contract by the counterparty. The risk takes the form of market or position risk as well as liquidity risk (see below), which in turn could contribute to credit risk in the event of insolvency of the counterparty.Liquidity risk. Delayed settlement creates liquidity risk. For example, if the seller of a security does not receive payment when it is due, the seller may have to borrow or liquidate assets to complete other payments. There may also be a risk that the buyer does not receive delivery when it is due and may have to borrow the security in order to complete its own delivery obligation. Source: Building efficiencies in post-trade processing: The benefits of same-day affirmation, the Oxera report commissioned by Omgeo

In the current markets choppy waters, it seems that many firms risk management teams are sailing dinghies rather than destroyers.

Risk technologypp. 60

The European payments market is rapidly evolving.

New markets are opening up. Market needs

are shifting. And new technologies are con-

stantly being developed. Obviously, this presents

opportunities. But it also requires solutions that

are suitable for future market needs. That’s why at

Equens, we think ahead. We build on our extensive

experience in the payments industry. And aim

to discover the full potential of new transaction

types in several markets. This has resulted in an

ever-growing product line of innovative payment

solutions for a variety of industries including mobile

payments, e-invoicing and prepaid cards. That’s

why we’re now working on innovative payment

solutions that will enhace your business in the future.

www.equens.com

nothing

equals

The payments market is rapidly envolving.

So are we.

EQ8041 Corp_203x267+3mm.indd 1 25-07-2008 09:25:411-114-PDF FINAL NEW .indd 60 16/1/09 15:42:52

The European payments market is rapidly evolving.

New markets are opening up. Market needs

are shifting. And new technologies are con-

stantly being developed. Obviously, this presents

opportunities. But it also requires solutions that

are suitable for future market needs. That’s why at

Equens, we think ahead. We build on our extensive

experience in the payments industry. And aim

to discover the full potential of new transaction

types in several markets. This has resulted in an

ever-growing product line of innovative payment

solutions for a variety of industries including mobile

payments, e-invoicing and prepaid cards. That’s

why we’re now working on innovative payment

solutions that will enhace your business in the future.

www.equens.com

nothing

equals

The payments market is rapidly envolving.

So are we.

EQ8041 Corp_203x267+3mm.indd 1 25-07-2008 09:25:411-114-PDF FINAL NEW .indd 61 16/1/09 15:42:53


If you cannot be confident about your own ability

to trade your portfolio, then the problems will run.

During the recent bull market, liquidity was abundant,

so problems regarding risk management and trade

settlement were not as important as obtaining ‘alpha’

and topping the league tables. A fraction of a percent

of failed trades when the going is good factors little

in the quarterly report. Efficient settlement became

an important footnote, but a footnote none the less,

shown by the slimming of departments and the

decreasing amount of column inches dedicated to STP

in the business press. However when liquidity dries up,

the percentage of failed trades increases in importance

as the companies profit margin decreases. With

confidence at fragile levels, investors will be looking

at the structure of the organisation and its middle

and back office in greater detail, rather than trying

to jump onto the bandwagon of the latest star trader.

One major failed trade may end up being the last straw

on the camels back in regards to wooing a potential

investor.

This is not to say that the importance of STP wasn’t

recognised (see graph), but rather if a survey was

done today, operational cost and risk could well be

included in the same graph, as many seek to decrease

costs and increase operational efficient in hard times.

One of the benefits of efficient automation stated

in the report Building efficiencies in post-trade

processing: The benefits of same-day affirmation,

by Oxera – commissioned by Omgeo – is that:

“Automation allows firms to keep the number of staff

working on trade verification within the middle office

largely the same, despite significantly higher trade

volumes, or to reallocate resources previously focused

on repetitive manual tasks to more value-added

activities, such as exception processing, reporting on

internal performance or monitoring counterparty

performance.”

A good risk management system must take into

account the ability to settle the trades in question.

With increasing trade volumes in derivatives, exotic

instruments and structured products, the ability to

value and settle is of utmost importance. This is not

to say that good automation and STP will solve all

problems, or that getting settlement time down to

T1 will keep investors happy, or settling outstanding

credit default swaps and decreasing counterparty risk

will avoid another financial Armageddon, but it can’t

not help.

Unfortunately the problems with risk management run

deep. A recent report from Gartner (2008) highlighted

that those responsible for different areas of risk

management within a firm specialise to such a degree

that the language and definitions they use operate

independently from other areas of risk management

within the same firm. These specialised fragments of

various risk departments fail to share information or

record information using a standardised methodology.

These aren’t trading desks aiming to be the top earner,

but risk management teams, who should theoretically

all be in the same boat. In the current markets choppy

waters, it seems that many firms risk management

teams are sailing dinghies rather than destroyers.

Like all other areas of finance, modern risk architecture

will be decidedly different compared to pre-August

2007. Management culture, as well as improved

technology, will lead to the development of new

systems. The financial industry’s use of technology is

surprisingly underdeveloped in comparison to cars,

computer games and even Hollywood. According

to Gerard Rafie, vice president, marketing, Calypso

technology: “A global, real-time system needs to able

to accept trades, underlying assets and VaR vectors

from various systems in order to calculate risk. The

best systems can integrate risk measures from different

applications or calculate their own.”

But what about the human element? Rafie continues:

“Technology is a great enabler, but not the be-all and

end-all panacea to risk mitigation. The human factor

must be considered. In many financial organisations

the risk management department does not have

sufficient clout in the organisation to question the

strategies of a trader or a portfolio manger. There are

far more examples of warnings from risk management

being ignored than there are of risk management

departments falling asleep.”

The cynics among you may say that no matter what

precautions you take, the elephant is probably already

in the room, be it budgetary or not. You may be right,

but many do not want the past year’s difficult times

to come back and haunt them through repeated

carelessness. After all, Brutus did not die by someone

else’s sword, but from his own. It is more than

likely that those in the financial world wish to take

responsibility for their own actions and be judged on

future performance, rather than past mistakes. A good

risk management system, coupled with a healthy office

culture, should help avoid any such mistakes.

“Technology is a great enabler, but not the be-all and end-all panacea to risk mitigation. The human factor must be considered” - Gerard Rafie, vice president, Marketing, Calypso

Risk technologyp. 62


Fee billing in focus – CheckFreeBrian Bollen meets Geoff Harries, vice president for product strategy

Fee billing

Fee billing is crucial but often ignored topic during economic downturns. Cash is king – as the phrase goes - for financial institutions to maintain liquidity. Companies need to prevent revenue leakage; one way of accomplishing this is faster fee collection and reducing billing cycles to expedite and maintain cash flows. In this interview, Brian Bollen discusses the importance of efficient billing and revenue management processes for coping with compliance issues, complex fee structures and the growing trend for performance-based fee calculations with Geoff Harries, vice president product strategy at the London offices of CheckFree Corporation, part of the Wisconsin-based Fiserv business technology provider group.

Briawn Bollen: Can you tell me a bit about your background, and CheckFree?

Geoff Harries: We are predominantly focused on delivering solutions to the middle and back office in the investment management industry, including asset managers and asset services providers. In the USA, we run a platform for separately managed accounts, and are a leader in that space. My role is to add product management supervision to each product and to set strategy. Check Free has offices in the US and Asia, as well as in London.

BB: Can you name some of your clients in the asset services space?

GH: Only names that are already in the public domain. Those include HSBC Securities Services and BNP Paribas Securities Services. In all, we supply six of the top 10 asset services firms. It is a core competence for us.



pp. 64 Clearence and Settlement

BB: What would you identify as the big issues regarding fee billing in asset services?

GH: One issue over the years has been that because clients individually negotiate contracts mandate by mandate, there hasn’t been a commonality in terms of billing structures, fee schedules and account hierarchies. That increases the complexity of billing. The biggest current issue is in revenue management, to ensure you don’t have over-billing, or under-billing, or billing errors if you’re using spreadsheets for revenue billings. To streamline the process, we developed a solution based on data capture when the billing event occurs, and tracking through to the receipt of payment.

BB: Have the industry’s main concerns changed recently?

GH: In this pessimistic economic climate, everyone has to make sure they maximise cash fl ow. That is certainly more in vogue today than 15 to 18 months ago as people look for every opportunity to generate better cash fl ow.

BB: Could you give an example?

GH: The billing cycle might be too long, because the asset services provider sends out its invoices later than it should. We streamline the process to bring payment closer to when it should be made. That money can be redeployed to other uses.

BB: Surely that’s a very straightforward process?

GH: It’s not as simple as it might sound. At the front end we have to capture, enrich and aggregate date from multiple internal systems; we need to gain access to those systems to form the basic building blocks of the

process, then overlay schedules and hierarchies on that information. The presentation layer on the invoicing side gives transparency of fee and accrual calculations. If the person you are billing doesn’t understand the bill it will take longer to collect the money, especially with multi-layer nested calculations.

BB: Pardon?GH: You might have a calculation passed on to another as input for a further calculation; an asset might sit in a fund or a single stock line, and you need to be sure you’re not double counting or double billing. The key point is that you need transparency to enable the client to understand quickly what the invoice is for. They want to receive their bill on a timely basis, and to know when they should be making payment.

BB: What impact is the prevailing economic situation having on this part of the fi nancial services industry? Won’t the fi nancial problems being faced militate against unbudgeted expenditure?GH: What we are seeing with asset servicers is the number of operational challenges they have, with corporate actions processing and over the counter derivatives automation as two high profi le examples. We are delivering solutions to our clients that solve those problems. One very strong factor acting in our favour is that when a company of any kind is looking to improve its cash fl ow it can be fairly easily to obtain approval for capital expenditure on software solutions that has a net positive demonstrable return on investment.

BB: Are you, then, enjoying something of a windfall because of the current climate?

GH: I wouldn’t describe it as a windfall, no, but there is no doubt that we are benefi tting from the new focus on improving cash fl ow and other business processes. We are seeing our solutions set building in the pipeline as activity increases. People recognise that it adds value, and we have a signifi cant installed client base. In our fi eld, we’re the street standard, as it were. Existing clients always tend to extend implementation; they might start with appointing us to their custody business, then extend us to securities lending, and then to other areas of asset services. Sometimes they have internal funds they are running, or other clients not tied to institutions. That might be the initial business driver behind taking our system; once they’ve seen it, it tends to be rolled out across different products and fees: custody fees, client monitoring fees, charging costs incurred on behalf of clients back to clients.BB: What are you seeing in the area of performance-based fees on the investment manager side of the industry rather than the asset servicer side?

GH: People are wary of paying a management fee charged purely on the basis of the value of the assets under management, especially in the current climate. They increasingly want to see active performance-based measurement. People are a lot more attuned as investors to looking at the underlying performance.

BB: What implications does this have?

GH: It adds to the complexity. You have a hybrid billing structure with a base line management fee and a performance-related fee, giving you several phase steps in the

The leading provider of Custody and Clearing Services in Norway

DnB NOR your Nordic Partner

Offering: Commitment, Knowledge, Experience and Excellent ServiceFor further information please contact:Head of Securities Services - Jan B. Penne: [email protected] of Global Relations and Network - Bente Hoem: [email protected]:

DnBNOR_nordicpartner.indd 1 29-02-08 10:30:15

billing cycle, with kickers for over-performance, under-performance and for benchmark performance. We are seeing more demand for our solutions as more investment mandates are written to include a performance-related element.

BB: I’m personally surprised that asset servicers outsource these tasks. I would have thought the work would represent a fundamental part of their own business model.

GH: I look at asset servicers and the ability we deliver to them. These are things that are fundamental to the way we operate. They offer the scale of operations to investment managers; that is their competence. Developing the solutions is what we do, not what the asset servicers do. The software we deliver might be core to their business but they don’t want to tie up time, money and IT people on it; we can do it better and get them to market quicker. Think about it from their perspective; you don’t want to delay offering a new service to a client just because you can’t bill them for it. We help them add new clients, new services, new mandates, without their having to go into a development cycle. Clients can take our technology and quickly implement it and customise it. That leaves them free to focus on other IT projects to deliver enhanced client services.

BB: So how would you briefl y describe the role you play?

GH: We underpin their core business.

BB: Revenue analysis is becoming increasingly fashionable, I believe?


The leading provider of Custody and Clearing Services in Norway

DnB NOR your Nordic Partner

Offering: Commitment, Knowledge, Experience and Excellent ServiceFor further information please contact:Head of Securities Services - Jan B. Penne: [email protected] of Global Relations and Network - Bente Hoem: [email protected]:

DnBNOR_nordicpartner.indd 1 29-02-08 10:30:15

Clearence and Settlement pp. 65

Fiserv completed its USD4.4 billion cash acquisition of CheckFre Corporation in December 2007. Combining the two companies’ broad ranges of market leading capabilities will provide a platform to deliver unprecedented innovation in fi nancial services technology, said Jeffery Yabuki, president and CEO of Fiserv, at the time. He identifi ed CheckFree’s key strengths as world-class products and a culture of dynamic innovation.

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When it comes to the effi ciency of its

securities settlement capabilities, it is vital

that Europe is competitive with the US.

Securities investment is a global game and

a plethora of local, national settlement

systems and markets, all with their own

quirks, drives up cross border transaction

costs that are today around fi ve times the

cost of internal domestic transactions in any

single European country. That is bad for

everyone.

So when the European Central Bank

decided to throw its weight and muscle

behind a pan European securities

settlement project, universally known as

Target2-Securities, to go live in 2013, the

ECB received approval in principle, with

varying degrees of enthusiasm, from all the

stakeholders, including the various central

securities depositories (CSDs) currently

running national settlement systems.

Writing the editorial for the ECB’s Target2-

Securities Newsletter, ECB Board member

TARGET DRIVENThe ECB’s initiative for the pan-European Target 2 Securities settlement project is a bold move hampered by uncertainty, writes Anthony Harrington

Clearance and Settlementp. 66


p. 68

Title Stand

Title


Gertrude Tumpel-Gugerell argues that

without Target2-Securities the European

Single Market “will be hampered – at

best postponed”. This claim gives a good

indication of how important the ECB and

the Governing Council of the Eurosystem

believe this project to be.

Tumpel-Gugerell’s editorial also provides

a response to the question of just why the

ECB has seen fit to launch Target2-Securities

at this moment in time, without being

pushed by any discernable new external

driver. After all, this is a huge and risky

project. The risk element comes not just

from the scale of the project. That risk could

be viewed as manageable; the ECB has some

big projects under its belt already. Instead,

the risk element is from the fact that T2S

cuts across a revenue earning service that

the CSDs enjoy at the same time as the ECB

requires their participation for T2S to work.

Bruno Rossignol, Clearstream spokesman,

says the ECB needs all the major securities

settlement providers in Europe to sign up

in order to achieve the goal of reducing

costs for cross border transactions while not

increasing costs for domestic transactions

It is not clear yet if the ECB sees itself as an “outsourcer” or the relationship as that between out-sourcer and client

at the same time. Right now, that is by

no means a done deal. One of the larger

challenges the ECB faces, without doubt, is

getting Euroclear to sign up on terms that

both it and the ECB find acceptable.

Euroclear provides a settlement system for

five European countries (Belgium, France,

Ireland, the Netherlands and the United

Kingdom) and recently signed an agreement

to acquire NCSD (Nordic Central Securities

Depository), comprising the Finnish and

Swedish central securities depositories. Paul

Symons, head of public affairs at Euroclear,

says the ECB assumes that once its new, pan

European settlement system is built, all the

CSDs will be able to decommission their

systems and take the ECB’s super efficient

system at a price that is probably roughly

comparable to (or at best much cheaper

than) their existing system (though the

exact charging mechanism, still a grey area,

remains a source of unease to many CSDs).

However, with two countries outside the

Eurozone to support, Euroclear does not

intend to decommission its securities

settlement infrastructure, he says. It will

be needed to support Sterling and Swedish


p. 70

Title Stand

Title


Kronor settlement at least. This gives

Euroclear a fundamentally different stance

on Target2-Securities than most other CSDs,

and since Euroclear is also the biggest single

regional settlement provider, if it ends up

deciding that it is not in its interests to sign

up for Target2-Securities, the project may be

gutted at birth.

Symons emphasises that this is not the

outcome that Euroclear is seeking. It has

no more love for a fragmented European

settlement system than anyone else.

Euroclear recently confirmed its support for

the continuation and finalisation of Target2-

Securities subject to conditions. If it can get

the terms it is seeking from the ECB, it will

be happy to sign up and (rather importantly

for the other CSDs) will be willing to bear

its share of the costs.

As it set out in its letter to the ECB,

Euroclear says it is in favour of Target2-

Securities in principle subject to the

following conditions: an appropriate legal

and contractual framework for Target2-

Securities and a governance structure

that safeguards the interests of CSDs as

outsourcers. Moreover, Euroclear wants a

model in which customers will be able to

decide whether to settle their transactions

using the Target2-Securities platform or the

Euroclear Single Platform. “Right now the

ECB wants and assumes that the decision

to opt in to Target2-Securities will be taken

on a country by country basis. So Spain,

for example, is either in or out. This is not

the way we would envisage the model to

function. We believe that each customer

should be able to choose when and how to

connect,” Symons says.

Euroclear sees T2S working as an outsource

service, with the operator of Target2-

Securities being the infrastructure supplier

to each of the current European settlement

providers. In principle, Symons says,

Euroclear does not have any problems

with the ECB’s position that taking away

settlement will leave the CSDs free to

concentrate on other, more lucrative value

added services. But, he says, “right now

settlement fees (and the ECB is only offering

a settlement service through Target2-

Securities) accounts for no more than five

to 10% of the post trade costs in Europe. So

although we would expect clients to choose

to use Target2-Securities going forward if

the ECB provides an efficient, pan European

system at a competitive cost, just reducing

settlement costs (while a very worthwhile

goal in itself) may not make a significant

difference to the overall costs of the post

trade landscape.”

However, it is not clear yet if the ECB sees

itself as an “outsourcer” or the relationship

as that between outsourcer and client - in

any event, it is a strange outsource service

that has no other possible provider in

the frame.

Another problem, not confined to Euroclear,

is that it is still not clear to many CSDs as to

who exactly the counterparty will be to any

legal agreement the CSDs sign. “We really

need the ECB to clarify as soon as possible

who or what the legal entity will be that we

would be signing a binding contract with.

Is it the ECB? Is it some new legal entity? Is

it the Euro System in some form or other?”

Symons says.

Others are disconcerted that the ECB should

have left such a fog of confusion over so

fundamental an area, particularly when it

is urging CSDs to sign binding agreements

with all possible dispatch. Even Clearstream,

which says that it is enthusiastically in

favour of T2S, finds the confusion over the

identity of the legal entity behind Target2-

Securities, baffling. Nor is it the only area

that is foggy and undefined. “The answer

to some fundamental questions is still

missing,” says Rossignol. “For example,

the governance and regulation of T2S has

yet to be defined. Who will be empowered

to oversee the ECB and how will the ECB

ensure a strict separation between its

Clearence and Settlement


different roles as system provider and its

own oversight functions? The budget for

the project and in consequences the pricing

toward the CSDs, too, remains undefined.

No matter how much we want to, we cannot

sign until we know what we are committing

ourselves to, and we cannot sign until we

know who the other party is,”

Rossignol says.

Clearstream also wants clear milestones to

be set out and it wants to know what it is

committed to. “What will the contractual

framework be for the build and operations

phase that the CSDs are going to be

expected to sign?” he asks.

These are fundamental issues, not mere

quibbles being used to punt Target2-

Securities into the long grass. “The big

picture is that Europe needs to have

financial markets that are as efficient as the

US,” says Rossignol. “Today, settlement in

Europe works fine on a country by country

basis, where it is as efficient, if not more

efficient, than the US, but as soon as you

trade cross border, the discrepancies are

huge. However, the comparison is not a

fair one. The US is one country with one

fiscal regime, one regulation, rule of law. We

have 20 different languages and 27 different

tax systems and every difference creates

frictions and costs for every process. There

is no doubt that the necessary legal and

regulatory harmonisation created by one big

settlement engine for all of Europe will drive

down the costs of cross border trading and

settlement.”

He points out that it is quite clear that there

is political will and muscle behind Target2-

Securities and that the project will happen.

“Because of this and the potential for

both Europe and Clearstream we are fully

committed to the initiative,” he says.

Clearstream wants to see all participating

CSDs signing a binding agreement as

soon as possible. Rossignol points out

that achieving critical mass is absolutely

fundamental and necessary, otherwise

“Target2-Securities will not achieve the

economies of scale that it needs. For the

economic business case to work Target2-

Securities needs to attract all the CSDs,

and certainly those that process sizeable

transaction volumes definitely need to be in.

Otherwise it will be much more costly for all

the other CSDs in the project,” he says.

However, Symons and Rossignol emphasise

that their criticisms of areas where the ECB

has not yet provided clarity should not be

taken to mean that they do not appreciate

the huge amount of work that has already

gone in to Target2-Securities, or the degree

of user involvement the ECB has sought in

specifying the project. “It is because of the

support and feedback from participating

CSDs that Target2-Securities has become

more rational as a project,” says Rossignol.

“In its early days it was presented as a

system with a very wide scope and masses of

proposed functionalities. However, because

it worked with market participants, the ECB

realised that it needed to narrow the scope

of the project and to sharpen and constrain

its functional specifications. We now have

much greater clarity around transaction

lifecycle management, trade matching

requirements and the like.”

Euroclear’s Symons sums up Target2-

Securities as “a highly important

development with a whole range of

challenges and advantages associated with

it”. He says that Euroclear has formally

agreed to begin contractual negotiations

with the ECB provided its conditions

are met.

Clearence and Settlement


p. 72

Title Stand

Title


Spain

Breaking the bottleneck Catherine Kemp discovers whether high stock lending demand for shares in property construction and real estate in Spain, has continued after the crash in the real estate market

pp. 72

In its 2007 Securities Lending Yearbook,

Spitalfi elds Advisors’ presents a divided

market opinion on the Spanish economy.

Some saw the crash in the property sector

coming; others thought that, despite

unsustainable property prices - the most

likely scenario was a ‘soft landing with

limited impact on the economy.’

According to the analysis, speculation on

the crash of Spanish real estate prices led

to high stock lending demand for shares

in the property, construction and banking

sectors, which in turn brought an increase

in margin and volume to the securities

fi nance business, as well as an increase in

the volatility of stock lending fees.

Since then the Spanish property boom has

ballooned into a bubble, and then burst,

and the credit crunch has infected Spain’s

property market causing massive problems

for the economy.

As cash strapped UK homeowners, sell

their Spanish vacation homes and stop

buying all together, Spain’s economy,

which is heavily reliant on other countries

investment in their real estate and service

industries, is falling apart. There has been a

massive depletion in the value of property

in Spain, and at least one large property

developer, Martinessa Fidessa, has had to

fi le for chapter 11 protection because local

banks refused to give them a bridging loan

of EUR150 million. The company already

owed the banks EUR5.4 billion in cash;

however, at the time of taking out these

cash borrowings they had assets of EUR9

billion, made up of land and property. Now

that the land and property has devalued the

company is in an unsustainable position.

Mortgage arrears in Spain are at the highest

in six years, according to Standard & Poor’s,

and Morgan Stanley has issued a major alert

on the health of Spanish banks, saying that

a replay of the exchange rate mechanism

(ERM) crisis is on the way as small lenders

exposed to the property crisis run out of

capital.

Spanish banks have so far been taking

advantage of the European Central Bank’s

(ECB) programme of swapping assets for

cash to ease their capital issues. Banks in

the Euro region can raise cash by handing

over assets, including mortgage-backed

securities, to the ECB, either agreeing to

buy them back later or pledging them as

collateral. Bonds from Banco Santander SA

are on the ECB’S list of eligible securities

that can be exchanged for loans. The bonds

are currently backed by mortgages that

exceed property values by as much as 24%.

As a result Spanish lenders have increased

their use of these three- and six-month

ECB loans to EUR 27.5 billion as of 30th

June, from EUR 2.4 billion a year earlier,

according to the country’s central bank.

But the situation has more than halved

economic growth in Spain to 1.8 % in 2008,

according to the International Monetary

Fund, and the Spanish fi nance Minister

Pedro Solbes has announced that there is a

high chance of zero growth in the future.

So, after much speculation is over, what

is the impact on the securities lending

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Spain

other markets is that domestic supply has

been absent from the market. Lenders in

Spain have tended to be offshore holders

of stock, like international funds. What’s

happening is that domestic holders of stock,

who are quite significant, have not been

allowed to lend stock.”

This affects the securities lending market

dramatically and not least for the hedge

funds market, that is frustrated by the lack

of liquidity in Spain.

“One hedge fund will speak to three prime

brokers asking to borrow stock to run a

short position, and so we’ll have three

prime brokers come along to us as a bank

looking for stock, within 30 seconds of

each other,” O’Donnell says. “They are also

asking other Spanish banks who come on

to us as well. The whole thing mushrooms,

so that you’ve gone one hedge fund looking

to do one order, and 15 people looking for

the stock. And because there is no depth

of liquidity it just pushes the price up.”

This means that whatever strategy they

wish to put on their books, long, short or

otherwise, the cost of borrowing is always

more expensive. The cost of borrowing

may make it much less attractive for hedge

funds to borrow in Spain than elsewhere in

Europe.

However, this situation will soon change as

the Spanish regulators are in a consultation

process about a change in the rules. They

are on the second draft of a document,

which when passed through parliament,

will allow Spanish UCITs funds to lend

securities. The first draft has been sent out

to market participants globally, including

ISLA. They are now waiting for queries

on the second draft and are hoping it will

be approved by parliament in September

2008, or at least before the end of the year.

And according to David Rule this should

be followed up with further regulations to

allow Spanish pension funds and insurance

companies to more easily lend securities.

The result should increase the market

liquidity by bringing new supply into the

market from domestic holders of stock now

able to lend, and generally make it much

more attractive for borrowers to enter the

market. The number of specials on the

Spanish stock exchange may also decrease

as a result. The special’s market is huge in

contrast with the US, UK or other leading

economies in Europe, as a result of the

lack of domestic supply. O’Donnell thinks

this will change with the new regulation,

although it will not fundamentally correct

the difference.

“I don’t think everything will go GC, there

will still be special names,” he says. “If you

look at the IBEX 35 right now, there are

probably half a dozen names trading at

1000 bases points or above, which is sort

of unheard for a country’s main index. Six

names out of an index of 35, so you are

talking like 16% of the market’s trading at

10,000 – you wouldn’t get that in the FTSE

100, or the S&P 500. So I think you will

still have special names, but I think the vast

majority will find a lower level at which to

trade.”

David Rule agrees that it is very likely

that there will still be quite a high level of

specials, but that most things will go down

to a lower level in price. He says: “it will

become a more developed market, like the

UK or the US. Broadly something goes

special if there’s high demand to borrow

it. If there is an increase in supply the

price adjusts and less things will tend to

go special. But you are always going to get

specials in markets in cases where there are

special situations, such as take-overs.”

Specials may make the market more

attractive for hedge funds who, may have

been deterred from borrowing in the

Spanish market because of the high cost

and lack of liquidity. Although according

to David Rule, “generally borrowing costs

do not determine what makes a trade fail

or succeed they are not significant enough

compared with the other elements of the

trade like whether stocks go up. But it is

true that at the margin, higher borrowing

costs may deter some trades, and so adding

liquidity will make the Spanish market

more efficient.”

One of the things that concerns O’Donnell

is whether the local asset managers are

equipped to open securities lending desks

and develop the infrastructure and systems.

“I think what will probably happen is that

some of the bigger ones will set up there up

their own stock lending desks, and some

of the mid-sized to smaller ones will look

to use a global custodian.” He adds that,

there are also asset managers waiting in the

wings, to move into the Spanish market.

“There are certainly people eagerly awaiting

the change in regulation. But in all fairness,”

he adds, “some of the local managers, are

much more aggressive than others. Some of

them will have done a bit of stock lending

already, all be it through derivatives,

because although they are not allowed to

lend stocks they are allowed to sell and buy

derivatives to hedge their performance. It is

these managers who will probably be more

geared up to do securities lending.”

According to O’Donnell, one of the

issues that came up in the discussions

surrounding the new regulation was

whether securities lending drives down

the price of shares because it allows people

to sell short. This is an interesting parallel

with the fears of regulators and/ or market

participants of other developing securities

lending markets around the world. In this

case, the Spanish regulator, the Comisión

Nacional del Mercado de Valores (CNMV)

has a very positive view of developing

the securities lending market, and David

Rule who has been working with the

Spanish authorities describes them as very

“motivated to make those changes, it’s a

good news story I think.”

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Spain

The bureaucratic complexities of its

settlement system is a peculiarity of the

market and may arguably be affecting its

development.

Spain has a requirement that borrowed

shares must be registered with IBERCLEAR,

which is the settlement system. CNMV then

publishes a list of what it regards as the

outstanding short positions in the market.

IBERCLEAR then penalise people for late

settlement.

David Rule describes two problems with

this system; “Firstly, market participants

don’t believe that the register is a fair

reflection of outstanding short positions in

the market. They believe it’s very difficult

to maintain an up-to-date list, when you’ve

got situations where, for example Morgan

Stanley has one client with a short position

who then closes it out, and another client

who enters into a short position. Morgan

Stanley doesn’t close-out the borrow, but

shifts it from one client to another. That

happens quite often in securities lending.

How that gets picked up on the register

is not straightforward because the legal

borrower is Morgan Stanley, and so people

think that the register creates misleading

information. Secondly, it adds a manual

element to the process of settlement, which

makes trading in Spain more costly for

prime brokers.”

This all creates overheads for market

participants because of the additional

manual processes involved, which broadly

speaking, means that settlement processes

in Spain are not in-line with other major

markets, and can mean that market

participants are driven away. Although the

system of putting all instructions through

IBERCLEAR, does mean that at any one

time, IBERCLEAR can tell you exactly the

volumes that are on loan, or how much of

the free float’s available, which means that

as a centralised clearing house it is one of

the most efficient.

It is difficult to determine, whether it is

the underlying structure of the securities

lending market, that has ensured the

continuation of high stock lending demand

for shares in Spain’s property, construction

and banking sectors, and the high cost of

stock lending fees, or whether it is hedge

funds wanting to borrow stocks that is

maintaining demand. In light of this, it

will be interesting to see what happens to

prices of shares when the new regulation

is promulgated, and whether the current

bottleneck relationship between supply

and demand in securities lending and

borrowing in Spain will disperse and

the market will develop. As to the failing

property market, borrowing from the ECB

has eased liquidity problems in the short

term. However as more and more securities

pile into the ECB’s coffers, in exchange for

cash, it is not surprising that regulators are

starting to grumble. Time will tell what

effect it will have long term.

p. 76

KOGER 11/10/05 12:04 pm Page 1


KOGER 11/10/05 12:04 pm Page 1



p. 78

Enhancing profitability through an integrated securities lending solution By Jane Milner, global product marketing manager, SunGard Securities Finance

Sungard Milner

The securities lending market is expected to grow by 5% in the US and 10% in Europe, according to a recent report by Towergroup, and the need to improve efficiency and reduce costs is never far from the mind of the business manager. International securities lending is an area in which there is still considerable scope for efficiency improvement as it is one of the last areas to have fully embraced automated processing. This has been largely due to the variable trades and the lack of market standards in the operational lifecycle.

While securities lending volumes and values continue to grow, there is the danger that revenue increases can be outstripped by cost increases that will compress overall profitability. Evidence suggests that there are still countless efficiencies that could be realised to hold down costs. This involves two distinct areas for improvement: enhanced processing and integration of IT solutions within an organisation, and increased efficiency of communication between counterparties. A securities lending trade duration can range from one day to weeks, months or years before completion, so maximising efficiency is vital.

Technology has already assisted with innovations in order routing and contract compare. But closer integration will be the key to real transformation and greater profitability. This will reduce costs and increase efficiency, and develop the scalability required to support increasing volumes. Integration is commonly one of the most costly, and least predictable elements of cost in a project’s budget, often eating up what can seem to be a disproportionate percentage of the overall budgeted cost.

The danger with automation of isolated parts of the process is that a bottleneck is simply moved further down in the processing cycle, or even worse, a new bottleneck is introduced. A solution needs to cater for straight-through processing (STP) from order entry, through each stage of the trade lifecycle, to maintenance of a firm’s core books and records. In today’s international markets, STP has been focused on electronic settlement, but there is still great scope for further integration to improve efficiency in many more of the front, middle and back office processes. Technology can deliver automation of manual, time consuming and error prone processes avoiding duplication of effort and allowing practitioners to get on with the more interesting, added value tasks.

Automation is appreciated by both the back and front offices. Securities financing is no longer a ‘service’ to other trading functions, and securities finance traders need to become more proactive and opportunistic in their approach. Greater efficiency requires more sophisticated decision support tools for price discovery, visibility of market volumes and trends, and a clear awareness of consolidated borrow requirements and securities availability.

With the front office equipped with more sophisticated tools to gain efficiencies and increase business, the back office must keep pace and maintain high levels of service. Back office automation required to manage this activity as efficiently and cheaply as possible. High volumes present significant challenges in manually intensive processes.

There are a number of potential efficiencies that can be driven from the functionality incorporated within a securities lending solution. Close integration between disparate systems is needed to fully reap the benefits of improved efficiency of process and support scalability, while helping to control risk and cost.

There are numerous ways in which integration between different systems can reduce inefficiencies and errors, these include:

• When a trade has been agreed in an order routing system, trades can be created automatically in the core record keeping and lifecycle management system• For trade reconciliation, any corrections carried out on the contract comparison component can automatically be updated in the record keeping system, thereby eliminating the need to manually post the changes in two places• Centrally generating marks to the trades of both participants ensures the trade remains in step, while at the same time the mark values can automatically update the recorded loan values• Recalls can be centrally routed and recalls and return activities can be booked to the trades automatically

Integration is commonly one of the most costly, and least predictable elements of cost in a project’s budget, often eating up what can seem to be a disproportionate percentage of the overall budgeted cost.

An integrated front-to-back office solution sourced through one vendor relationship can deliver many advantages with less of the complexity of multiple system integration. A single source solution can also best leverage the processing workflow and synergies between individual specialist components.

Until now, securities lending has often existed in isolation. However, institutions are increasingly realising the benefits of technology, and the more integration there is between systems, the greater the benefits these systems can offer.

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Get out of the queue.


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Europe +44 (0) 207.469.6000United States [email protected]

eSecLending provides services only to institutional investors and other persons who have professional investment experience. Neither the services offered by eSecLending nor this advertisement are directed at persons not possessing such experience. Securities Finance Trust Company, an eSecLending company, and/or eSecLending (Europe), authorised and regulated by the Financial Services Authority, performs all regulated business activities. Past performance is no guarantee of future results. Our services may not be suitable for all lenders.

Get out of the queue.



The rise and sprawl of multi-listed securitiesEamonn Ryan, director of Equities Product Management at Euroclear, describes how the difficulties of multi-deposited securities is prompting their decline

Sec Lending

The meaning of “multi-listed securities” may depend on whether you are working in the front or back office. Traders will refer to multi-listed securities as those that are listed and traded on more than one stock exchange; back-office professionals will refer to them as securities that are deposited in more than one central securities depository (CSD). Both meanings are correct: securities listed on several exchanges are deposited in several CSDs. However, the relationship between “multi-listed” securities, and what should rightly be called “multi-deposited” securities, may now be breaking down in Europe.Multi-listed securities will not disappear as long as issuing companies wish to gain access to larger pools of capital and exchanges wish to have the most popular stocks listed on their order books. So, equities from one domestic market will

continue to be listed on the exchanges of others. To accommodate this front-office diversity, the multi-listed security is deposited in “remote” CSDs – ie, those outside the issuer’s home market CSD. This makes sense because most domestic capital markets are organised operationally according to a vertical silo model (even if in terms of ownership, some markets are organised horizontally). The trade would be executed on an exchange, would be passed down to a central counterparty (CCP) to be cleared, and then passed along to the CSD of the local market of the exchange for settlement. Bringing a foreign security into a local market’s CSD enables members of the CSD to settle trades in that foreign security without having to change their CSD service provider or network relationships. Over the years, many of Europe’s issuing companies

have listed and deposited their shares in one or more remote markets in this way. Despite its popularity, there are a number of disadvantages to multi-depositing securities.Settlement Efficiency: For an international investor, having the same securities held in two or more locations reduces settlement efficiency because the securities may not be where they are needed, when they are needed.Asset Servicing: In terms of processing deadlines, services offered (e.g. tax reclaims, proxy voting) and corporate-action choices (e.g. the possibility to choose cash versus stock), the remote CSD may not offer as comprehensive a service as the issuer’s home market CSD. Cost: In terms of both safekeeping and settlement fees, the services offered by the remote CSD are typically more costly than the home market CSD for the same security.

p. 80


It can be expected that many of the existing CCPs in Europe will also link with CSDs outside of their home markets

Sec Lending

To alleviate these difficulties, many investors systematically realign multi-listed securities positions from the remote CSD to the home market CSD, a process that can become more urgent around important deadlines such as for corporate actions. Securities may also be realigned in the opposite direction in order for the investor to settle a securities delivery instruction in the remote CSD. For this reason, some service providers, such as Euroclear Bank, offer services to automate the realignment process. But will such a service always be necessary? Perhaps not - the one-to-one relationship between multi-listing and multi-depositing securities is starting to dissipate.So what has changed? For a start, MiFID has pulled apart the vertical silo model: new multi-lateral trading facilities (MTFs) such as Chi-X, Turquoise, BATS, Equiduct, Smartpool, and NASDAQ OMX PEM are being or have been set up. While some, such as Equiduct, will use the existing CCP of each listed security’s domestic market, others will use new CCPs like EMCF and EuroCCP. These new CCPs are linking with multiple CSDs and it can be expected that many of the existing CCPs in Europe will

also link with CSDs outside of their home markets. The upshot is that it will soon be possible to trade securities in a choice of venues without these multi-listed securities having to be deposited in several CSDs. These changes follow the increased consolidation among CSDs. For example, the Euroclear group will soon comprise CSDs of seven European markets, all of which ultimately will process client transactions on a single platform. The Belgian, Dutch and French CSD platforms are scheduled to operate on a single platform from November 2008. This will eliminate the need to multi-deposit securities issued and/or traded within these three markets among the three CSDs. Settlement efficiency will increase and back-office costs will decline. The number of multi-deposited securities will fall for the first time. There will be more choice, settlement efficiency will improve, costs will decrease and all shareholders will have access to the same asset servicing possibilities, no matter where they traded the security. So, if multi-deposited securities meant nothing to you before, it will mean even less in the future.

p. 81


p. 82


Treasurers have always been in the business of managing fi nancial risk. Recently the focus has expanded to cover holistic risk management across the organisation, including liquidity, operational and country risk – all of which have a bearing on the modern treasury department.

Market conditions are giving the wider fi nance team a renewed impetus in cost management and the treasury is a vital part of this. In a geographically diverse business, centralising operational and technical specialist processes can clearly deliver on that objective. But suppose the fi nance director is discussing the intended change with you and suggests taking the treasury operations team offshore with the fi nance “production” team.

isj.tv

UNCOVERING BURIED TREASURIESChanging market conditions demand balance sheet

integrity By Nigel Walder, CEO of Business Control Solutions

Euroclear Articlep. 82

Is any of this situation similar to your working life? As treasurer of Global Plc, what should your role be?

In a survey conducted in February 2008 commissioned by Business Control Solutions, the greatest issue facing fi nance departments was found to be managing the data and information. 94% of respondents found departmental workfl ow very challenging. A further 79% found diffi culties in achieving visibility and control effi ciency; 76% of respondents are hampered by a multitude of manual processes, and 58% are troubled by disparate systems.

Given these fi ndings, it’s no wonder account sign-off is tricky and time-consuming. Further survey results revealed:

* 69% ranked making improvements to control and reporting processes their highest priority remedial activity for 2008; * 55% said a lack of clear communication and its impact on visibility and control are the greatest risks when off-shoring; * 28% cited the resources and skills of offshore staff as high risk.

An over-arching control framework is needed for fi nance departments to overcome these challenges. Seeing the uncertainties around cash positions and a clear business line split gives direct understanding of the organisation’s liquidity.

During the recent years of expansion and growth the principal focus for treasurers has been on external opportunity. The current environment may be an opportune time to demonstrate value more widely across fi nance and ensure that control requirements specifi c to the treasury do not get overlooked in the drive to contain costs.

There are a number of concerns that could be raised: how do you maintain the control environment that you established by supervising directly and ensuring segregation of duties through a standard workfl ow, with timely, secure communication of issues as they arose? The integrity of the balance sheet is key in that assessment.

Imagine a senior manager within Global Plc is charged with the responsibility of account sign-off and it is becoming the bane of his life.

The balance sheet of Global Plc comprises thousands of accounts hit by millions of transactions resulting in assets and liabilities which run into the billions. Some of the assets under review are highly customised transactions with clients and it is diffi cult to agree a mark-to-market because... there is no market.

To further complicate the matter, the senior manager has been told that the cut-off data is incomplete because there are some cancellations that have not fed their way through yet. This job is hard enough without having inaccurate data.

The CEO is breathing down the manager’s neck because last month the trading statement told the City that prospects are looking good.

The senior manager is concerned. He’s suspicious of the business people responsible for the transactions that pass through these accounts. How can people get paid annual bonus on estimated P/L for transactions that stretch out 10 years or more?

The only thing the manager can do is rely on his people, which was fi ne when he could talk to them face to face but this is more diffi cult and unnerving now that 50% of his department is offshore.


UNCOVERING BURIED TREASURIESChanging market conditions demand balance sheet

integrity By Nigel Walder, CEO of Business Control Solutions



Data

Spontaneously, you would probably answer yes to this question - how could investment banks do without Security Reference Data? But the reality is that they do not allocate a significant portion of the budget to their Reference databases, so could reference data not be as important to them as vendors and others assert?

For the past few years, the global security industry has worked on straight-through processing (STP) projects and there has been a growing recognition of the benefits of this method in the trade processing routine. For optimal results, straight-through processing solutions require a clean database of high quality security reference data. The budgets respectively assigned to STP solutions and the provision of reference data should reflect this fundamental link. Spending millions in either outsourcing trade operations or creating a STP architecture without considering increasing the reference data budget is akin to buying a Ferrari without being able to insure it.

Is reference data essential to investment banking?By Jonathan Bloch, founder and CEO of Exchange Data International.

Accurate reference data helps reduce operational costs and risks by trimming down manual processes, and also has a considerable impact on the quality of query handling and settlement operations. High quality reference data enables prompt and accurate identification of securities that is critical to investment banks upholding their reputation and minimising their liability.To understand why investment banks do not necessarily invest in their reference data, we need to consider the fact that often Investment Banks have grown by mergers and acquisitions. They therefore have to deal with a multiplication of databases; one CIO admitted to the author that following several acquisitions he was responsible for using more than 200 different databases. Merging and cleaning these databases cannot be done solely by software: therefore human resources are required, adding costs and time. We would argue that dealing with several databases must generate duplication of work data errors, causing the service quality to suffer.

According to Mr Rafah Hanna, executive director and head of MTS Data at Euro MTS: “Many people are only now coming to the conclusion that maintaining accurate and complete reference data is critical to efficiency and profitability. This data can and does directly affect your bottom line. At MTS we have seen a growing demand for reference data; it is no longer the domain of the back office but must be considered in its own right as part of any professional market data strategy.”

It seems advantageous in the short term for major investment banks to be inefficient as they do not need to spend time and money on the standardisation of their multiple databases. But in the longer term, the expenses linked to this standardisation will be justified by the large return on investment. Small investment banks, on the other hand, would rapidly benefit from quality reference data.

p. 84



p. 86 Data

asset servicing industry has spent millions of

dollars on automating processes but continues

to grapple with inaccurate, untimely and

inconsistent reference data, arising mainly

from inconsistent data defi nitions across

multiple disparate systems.

Standard Chartered provide services across

17 markets, including Asia. The different

jurisdictions involved, from SOX and Basel

II, down to minute data differences between

Shanghai and Beijing, breeds complexity. The

bank adapts to frequent regulatory changes,

meaning that the back offi ce system is capable

of multi-market compliance. That comes

down to getting the reference data right.

Further, Standard Chartered’s clients are

growing in both number and activity - this

includes trading in more complex products

that require more data. The reduction of

settlement cycles and hedge funds’ propensity

to send instruction close to market cut-off

has put further pressure on the asset servicing

industry to get it right fi rst time.

The bank is also attracting larger and larger

mandates from fi nancial institutions – this

also complicates reference data. Essentially,

when you deal with a large client, it’s not

really one client you’re dealing with but many

underlying clients. Each department might

have its own way of dealing with reference

data, making the processing of intra-company

counterparty data, or third party data, a

tangled affair, especially around allocation.

These factors change the nature of the

back offi ce accounting systems. Standard

Chartered is in the middle of a programme

to draw together the reference data needs for

all our securities services businesses across

various activities from corporate actions

to clearing and settlement. The goal is to

create standardisation across a disparate

market place, a standard platform with a

reference data solution designed around a

central data repository and a golden copy

of our critical enterprise data. The reference

data solution aims to eliminate application

coupled, inconsistent and duplicate data. The

new architecture will provide end-to-end

data management through aggregation of

data accepted, followed by a scrubbing and

cleansing process in line with business rules.

The aim is to exploit the synergies between

cash and securities. The next intra-day

interfaces to be built are for cash and foreign

exchange, where all underlying client data

can be referenced from a single source. How

easy is that to achieve? We’re still at the design

stage, but this is our ambition and while

there’s no silver bullet it is an achievable

aspiration.

Turn up the volume By Neil Daswani, Global Head of Securities Services, Standard Chartered

R eference data has exploded in terms

of both volume and complexity in

recent years. This has created new

challenges for back offi ce systems across the

asset servicing industry, from trade capture to

clearing and settlement. Market volumes of

securities transactions in Asia, as measured by

SWIFT traffi c, have increased by an average

of 22%.

The need for greater, more timely and more

accurate reference data capture has been

driven by a number of underlying themes:

capital market growth; the surge of initial

public offerings; more clients investing into

Asia (requiring asset servicers to be able

to identify clients via standardised codes);

and a wider range of asset holdings today

then before requiring reference data capture

beyond just security and index name. The

portfolio investment fl ows of Asian domestic

funds are also crossing borders, meaning data

capture of overseas companies and securities

in addition to maintaining local (legacy) data

records.

Business volumes grew by as much as 60%

last year. This transaction volume growth has

brought a greater responsibility to process,

clear and ultimately settle these trades.

Others have grown too, but not as fast. The


Turn up the volume By Neil Daswani, Global Head of Securities Services, Standard Chartered



Managed Accounts: An Industry Defined by Growth, Complexity—and No Margin for ErrorWhen it comes to fee billing, there’s no margin for error—especially in managed accounts. Seth Johnson, CEO of Redi2 technologies discusses how effective fee billing management can mean the difference between maximised revenues and costly fee leakage.

Matt Bienfang, senior research director

with TowerGroup, the financial services

research and advisory firm, estimates that

fee slippage among managed account

sponsors within the industry can account

for as much as 1.7% of gross fees,

representing as much as USD306 million in

under or over payments annually.

Managed accounts offer investors

customised professional portfolio

management for a fee. The supply chain

from manager, overlay manager, custodian,

sponsor, financial adviser to buyer

(investor) lends itself to extraordinary

complexity in the fee billing process.

Investors have incorporated an ever-

widening spectrum of instruments into

their portfolios, making accounting and

fee management all the more challenging.

At the same time, account minimums

have dropped from USD1 million to

USD100,000 and lower at many firms,

driving processing volumes to challenging

levels for even the largest and most

operationally robust financial services

companies.

Growth of the MA industry has

significantly outpaced the mutual fund

markets in recent years. According to

industry estimates, MA assets, which now

stands at USD700 billion, up from USD400

billion six years ago. Managed account

assets are expected to continue to grow—a

trend fueled in part by the demographic

shift of “baby-boomers” funding retirement

vehicles.

With the advent of multiple style portfolios,

unified managed accounts, and unified

managed household programs, managed

account fee billing demands have outgrown

legacy manual-intensive processing. The

characteristics that define today’s MA

markets, including supply chain and fee

calculation complexity as well as rising

account volumes—make abundantly clear

why demand for automated fee billing

solutions is strong and growing.

Indeed, this combination of factors has

placed new pressure on account sponsors,

full-service broker/dealers, asset managers

and other financial services firmss to

fine-tune their fee billing practices and

procedures.

“To process increasing managed accounts

volumes on regular cycles as well as daily

to address compliance, cost management

controls, and improve cash flow, firms

will need to turn to vendor solutions,”

adds Bienfang, author of the June 2008

TowerGroup report: “Managed Account Fee

Management: Everybody Must Get Paid!”

“These solutions must not only offer the

required throughput but also manage the

extreme complexities that will continue to

emerge in the highly competitive managed

accounts industry.”

Fee billing software helps buy-side and sell-

side firms more easily manage the fee billing

process, from client account setup and

termination, multi-currency fee and accrual

calculations and revenue reconciliation

to invoice and advise generation, special

billing adjustments and reversals.

Advanced fee billing functionality

simplifies the processing of a wide array

of fee and payable calculations based on

master agreements that can otherwise be

extraordinarily complex. Companies can

calculate fees and payables based on assets,

transactions, performance or custom

services. Additionally, automated solutions

Redi2p. 88

Redi2 203x267 ML 18/4/08 11:51 Page 2


Redi2 203x267 ML 18/4/08 11:51 Page 2



p. 90

make it easier for firms to present summary

fees by client, account, program, invoice;

or study detailed fees for each investment,

sleeve or portfolio in an account or

program.

Automated fee billing solutions enable

financial services to attribute fees based on

a myriad of dimensions, such as investment

strategies for unified managed accounts,

or individual account sleeves assigned to

multiple managers. Systems that feature

full historical audit trails and management

by exception capabilities additionally

help firms meet increasingly rigorous

compliance and audit requirements.

Flexible fee billing solutions feature open

application programming interfaces and

compatibility with industry-standard

relational databases, servers and desktop

systems. This makes it possible to

seamlessly integrate more sophisticated fee

billing functionality into a firm’s existing

third-party solutions, such as accounting,

performance measurement and customer

relationship management (CRM) systems.

A user-friendly graphical user interface

and user-definable workflow and

calculation rules make it easier to define

product, account and organizational

hierarchies and other data mappings.

The challenge is to find a solution that

is easy to use and standards-based yet

powerfully sophisticated. For instance,

advanced analytics capabilities allow users

to slice, dice and analyze revenue and

accrual information at any level of the

organizational hierarchy, and to instantly

view information by user-defined attributes.

Another important attribute of an

automated billing solution is straight-

through processing functionality that

delivers exception-based intelligence to

expedite cases that need high-priority

and personal attention. Processing only

exceptions allows billing administrators to

expedite their billing cycles and cash flow.

It also provides more capacity for handling

growth in volumes.

An embedded rules-based engine lets firms

define rules to manage their fee billing

based on the way they do business—all

without custom coding. This level of firm-

specific fee billing process management

provides yet another competitive

advantage in the increasingly crowded MA

marketplace.

There is also growing pressure for robust

reporting and query capabilities to analyse

billing information to gain an overview of

revenues and improve strategic decision-

making. Beyond standard revenue reporting

functions, fee billing data is an excellent

source of data mining that can help

institutions better understand their account

base. For example, reports can be created to

show regional as well as advisor profitability

patterns.

The growth of the industry has been

accompanied by increased demand on the

part of investors, auditors and regulators

for increased transparency and improved

fee billing and payables reporting.

Companies can help to ensure accuracy and

transparency through automated fee billing

processes, such as audit trail capabilities

that automatically compare against existing

valuations in the system.

Equally useful are alerts that flag deltas

on valuations that have been used for

calculation or invoicing purposes so

that billing managers can take proactive

measures or resubmit invoices, if necessary.

The ability to customise all aspects of

the fee billing process for managed

accounts—including account enrollment,

maintenance and termination, complex

multi-currency fee and accrual calculations,

revenue reconciliation, invoice and advice

generation, special adjustments and

reversals - gives financial services firms

maximum leeway to suit their management

styles and preferences.

With increased demand for accurate and

customised fee-based investment strategies,

including managed accounts programs,

firms that implement robust solutions

can process fees more effectively at firm-,

manager- and account-specific levels. By

implementing standards-based software

based on user-defined rules and best

practices, financial services institutions can

significantly enhance their fee processing

while scaling their operations for growth.

ABOUT THE AUTHOR

Redi2 Technologies CEO Seth Johnson

is co-chair of the Money Management

Institute’s billing standards sub-committee.

Winner of Money Markets’ 2008 Innovation

Award, Redi2 Technologies ( HYPERLINK

“http://www.redi2.com” www.redi2.com)

is a leading provider of fee billing solutions

for the global financial services industry.

All figures referenced in this article are

denominated in USD.

“To process increasing managed accounts volumes on

regular cycles as well as daily to address compliance,

cost management controls, and improve cash flow,

firms will need to turn to vendor solutions,”

That’s certainty

TCS Financial Solutions introduces TCS B NCS, a comprehensive and integrated financial suite covering Payments, Securities Processing, Securities Trading, Treasury, Market Infrastructure, Corporate Actions, Compliance, Core Banking, Islamic Banking, Insurance and the TCS Aspire Service for Outsourced reconciliation processing. Across 240 financial institutions in over 80 countries, TCS B NCS drives customer growth, reduces total cost of ownership, enhances new product development and enables clients in banking, insurance and capital markets to experience certainty.

p. 90


That’s certainty

TCS Financial Solutions introduces TCS B NCS, a comprehensive and integrated financial suite covering Payments, Securities Processing, Securities Trading, Treasury, Market Infrastructure, Corporate Actions, Compliance, Core Banking, Islamic Banking, Insurance and the TCS Aspire Service for Outsourced reconciliation processing. Across 240 financial institutions in over 80 countries, TCS B NCS drives customer growth, reduces total cost of ownership, enhances new product development and enables clients in banking, insurance and capital markets to experience certainty.



People movesNews

Vhayu, the enterprise tick data solutions provider, announced the appointment of Tim King (above) to the position of director of sales for Europe, Middle East and Africa (EMEA) to support strong company growth in the region. With three European customers acquired in the first half of 2008, the appointment extends the London-based sales and services team and allows Vhayu to respond to increased market demand in the region.

“With the massive increase in market data volumes, fragmentation in liquidity accelerating the shift to electronic trading and new compliance requirements, all demanding systems capable of supporting this surge in data, there is an even greater need for financial services firms to look at how they process and store vital tick information,” says Vhayu president Shanti Dev. “Tim is an important addition to our team, and we look forward to building on this success together.

King said: “I’m thrilled to join Vhayu at such an exciting time in its growth.”

The Depository Trust & Clearing Corporation (DTCC) has appointed Jisun Burton to vice president of product risk and strategy. She will be responsible for the risk activities of DTCC

Deriv/SERV LLC, DTCC’s subsidiary supporting the fast-growing global over-the-counter (OTC) derivatives market. She will also be responsible for outreach efforts on behalf of DTCC’s Enterprise Risk Management (ERM) to industry groups and regulators.

Burton has been with DTCC since 1997, most recently as director of DTCC Risk Management, overseeing ERM Information Technology projects covering credit/market risk and securities valuation, quantitative analysis, and operational risk management.Prior to joining DTCC, Burton held positions with the Federal Reserve Bank of New York as a bank examiner from 1996 to 1997. From 1994 to 1995, she worked at Mabon Securities Corporation as the associate director for Risk Management. Burton also worked at Bear Stearns & Co., Inc. as a vice president from 1987 to 1994.

29West announced the expansion of its New York operations by hiring Michael Guse as director of software engineering, and Matt Saxe as director of east coast sales.

Guse will be in charge of building an integration consulting team and will focus on helping 29West customers during their selection and adoption of the 29West low-latency messaging products.

Of his appointment, Guse comments, “I am excited to join a company that has a proven and winning product in the low-latency messaging space - LBM and UME - and that continues to introduce more exciting features for their customers.”

BNY Mellon Wealth Management has appointed Joshi Gunputh (right) as client relationship manager to its Family Office Services group based in London. Gunputh will serve as the primary client contact and specialist resource across BNY Mellon Wealth Management for family offices and their advisers who are supported by the London-based team. FXall, the foreign exchange platform, has appointed Jerry Putnam and Eddie Wen to its board of directors, adding a wealth of experience to the company as it continues to drive innovation in the market. Jerry Putnam is currently a senior adviser to NYSE Euronext and was previously president and co-chief operating officer of NYSE Group, where he was responsible for the Group’s market operations, technology initiatives, new products, and information business. Prior to joining NYSE Group, Putman founded and served as chairman and CEO of Archipelago, the electronic exchange.Eddie Wen is a managing director at JP Morgan and the global head of FX eCommerce, where he is responsible for strategy and for algorithmic proprietary trading within the franchise business..Matt Frymier and Ray Kamrath were re-elected to the board. Frymier is a managing director and head of the Strategic Investments Group (SIG) at Bank of America, and Kamrath is a managing director at Goldman Sachs in the Fixed Income, Commodity, and Currency Division. The other members of the FXall Board are Henry Feinberg and Robert Trudeau of FXall shareholder Technology Crossover Ventures (TCV), and Phil Weisberg, CEO of FXall.

Saxo Bank has appointed Eric Rylberg and Karsten Poulsen to two new positions as chief executive director and deputy chief executive director respectively. While remaining joint CEOs and keeping all formal responsibilities, Kim Fournais and Lars Seier Christensen will leave the daily tasks of running the bank to the two new appointees with the senior executive management group reporting to them. Fournais and Christensen will focus on the strategic direction of Saxo Bank with growth and expansion as their primary interest and responsibility.

As the former CEO and CFO of ISS, a global service company with more than 300000 employees, Rylberg and Poulsen won wide recognition as two of the leading Danish executives and entrepreneurs who played a key role in the successful development of ISS.

Mercer, the human resource consulting, outsourcing and investment services provider, has appointed Steve Charlton as a principal within its retirement business, specialising in defined contribution (DC) pensions. Based in London, he will be part of the DC leadership team.

p. 92


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p. 96

Directory of Services


ISJ Directory of Services p. 97

Directory of Services



Hannu Syrjala, CEO of TietoEnatorRunning a Company

Hannu Syrjala is into his seventh month as CEO of TietoEnato, one of Europe’s leading IT service providers, including for financial services and insurance as well as telecommunications, healthcare, manufacturing and retail.

TietoEnator’s client base began in the Nordic region. It serves parts of the UK financial services industry and is looking to develop its selling bases across the world. “Our organic growth has been around 10%, in the last quarter 11% growth, the company is growing very well in financial services, offering services and product to banks and financial institutions,” says Syrjala. TietoEnator’s products range from the core banking solutions to card solutions and payment services. Syrjala explains thatTietoEnator is increasing its competitiveness by transferring some of the labour to more favourable cost locations, and lists offshore centres such as India, Czech Republic, the Baltic states and Belaruse specifically. He estimates that 25% of the workforce is in these new areas. “The market dynamics of the IT is changing and is open for global competition. Much of the new competition is coming from companies with offices in places in India.”

New countries are chosen strategically based on employee skills. “Highly qualified IT people in India still cost about one quarter of the people in the Nordic countries, ” he says. There is a constant challenge to ensure what he calls a global

delivery model to customers over these different countries. He says that other challenges include employee turnover and salary inflation – both of which are higher in India than in the Nordic region.

Customer service continues to underpin all that the company does. “Keeping the relationships and enhancing our work with

our customers is very important. It’s never an easy job. The strong customer focus but it is built into our culture.”

He explains that much of his approach to running a business came from his time at General Electrics, where he worked for five years in Wisconsin as a vice president and general manager of one of the divisions in its healthcare arm. “I found working in GE tremendously exciting in terms of learning. It’s very focused on discipline of execution, it employs a number of management techniques to make sure the strategy is implemented effectively. The HR practice employs policies that are world class.”

Back in Europe he is leveraging the skills learned at GE. His switch from healthcare was facilitated, he says, by the common factors needed to drive a company. “Remember that manufacturing industry globalised decades ago, IT services are only globalising now. So many of the things I’ve been able to observe are very much applicable to the services industry today.”

Syrjala can identify overall differences between different continents. “I worked a lot in the emerging markets in Asia where relationships are perhaps more dominant there than in anywhere in the world. In the US companies tend to be very structured, they tend to have stricter implementation of policies. European countries have to be a bit more flexible as we have to adapt our ways of working to different countries in a small area.”

However, he adds that globalisation has caused markets to have “more similarities than dissimilarities” in the last few years. “It’s a good thing; I find it tremendously exciting that the world is opening up for everyone, regardless of where you are from.”

TietoEnator – the financial offering, with Helene Helvik, head of capital markets sales, TietoEnator

Can you summarise what the Asset Wealth offering is and how it can benefit portfolio managers?Our solutions tailored towards Asset Wealth Managers meet the demands of asset, fund and portfolio managers alike. The solutions handle the administration of securities/funds transactions in an efficient manner.By using our solutions you will gain control, improve

routines and reduce risk....

Can you describe the STP tool on offer for front-to-back office clearing and settlement: who is currently using it, how long does it take to install, where is the next key market who may take it up? Our comprehensive solution for retail and institutional players in the market supports complete STP in all stages of the life cycle, from the origin of the trade to placing an order in the global market place and on to when the trade is settled in the local market. At the front end our solution’s standardised interface towards the FIX protocol enables global multi-market features like connecting to the MTFs now emerging in the market. For clearing and settlement, gateways adapting the ISO 15022 & 20022 standards secure straight through clearing and settlement with local and/or central clearing parties.

Currently around 50 of the largest capital market players in the Nordics depend on our solutions as their business critical solution and several of our clients operate on a global scale.

Implementation time for our solutions varies naturally depending on the complexity of the operation. If a client would like to take the solution “as is” and tailor it by means of table and parameter settings only, implementation can be done in six weeks. If development of new functionality is requested implementation time varies from six to 12 months.

In the coming years TietoEnator will look to build on the strong foot hold it has in the Nordic region in the capital markets space. TietoEnators strategy is to bring it’s tried and tested experience in these spaces to an increasing number of mainland Europe countries.

Has the client base with banks grown over the last few years? If so, has there been a difference in what they have been asking for as an IT solution, eg, reducing the manual input of trades and settlement, reducing risk, the simplicity of a single platform?The client base has grown significantly the last years, including banks as well as other financial institutions such as broker dealers and fund managers.Market participants are increasingly focusing on improving efficiency, as well as striving to be more agile than ever before. This focus has created a pressing need for solutions that offer one-time-entry including efficient integration to surrounding solutions. Furthermore, to be agile they need solutions that both support their business development with short time to market and quickly can be tailored to meet altered market requirements and new legislation.

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