There is an ever-increasing amount of material on SEPA - the Single Euro Payments Area. One can only expect that below the waterline this particular iceberg will keep growing as we move closer to the deadline of January 2008. However, a worrying pattern is emerging most of the material is either about the bank or the payments infrastructure. Isn’t there someone missing from all of this – the customer? The European Commission has defined “SEPA for Citizens” to address the consumer marketplace. But so far there is no “SEPA for Business”. Is the business marketplace assumed to be such an obvious beneficiary that it’s not worth spelling it out? It is anticipated that the business and corporate customer will have most to gain from SEPA. But apart from some fairly obvious “requirements” many business groups have yet to participate in SEPA and certainly yet to understand what it means. Without acceptance and buy-in from businesses, no matter how much regulation is introduced, a programme of this size and complexity will not meet expectations. If, as widely predicted, SEPA has a dramatic effect on banks’ payments revenues and margins, then in order to recoup lost income they must answer the forgotten customer’s needs.
Jerry Norton, Director, Strategy, Global Financial Services, LogicaCMG
MANAGING RISK
Today's prolonged low interest rate environment has forced investors into exploring non-traditional asset classes in their never-ending quest for greater yield. As a result, buy-side institutions are now exposed to a much greater variety of market, credit and liquidity risks than ever before. Last spring I spoke with Rekha Menon about the increased focus on risk management by buy-side firms. Since then, I've witnessed significant evidence of this important trend. Increasingly savvy clients are insisting on greater returns from institutional investors yet, at the same time, are demanding preservation of their capital in volatile markets. Buy-side firms now see significant competitive advantages in demonstrating proficiency in risk management. The middle office is increasingly required to capture and report risk at the enterprise level, spanning all funds, risk factors and asset classes. At the same time, the front office is now beginning to fully engrain risk into its decision support and portfolio construction processes. This penetration of risk analytics into the overall investment process will provide portfolio managers with a robust portfolio modeling environment enabling them to do risk optimization and what-if analyses, to compare and organize different strategies, and finally, to send routing instructions to order management systems The key driver in our recent strong growth in this market is the value our clients have placed on leveraging a single risk infrastructure to support all of their combined front- and middle-office risk requirements. This has enabled buy-side firms to dramatically reduce their support costs by replacing multiple technology solutions with a single consistent risk platform.
Andrew Aziz, Managing Director, Market Risk and Buy-Side Solutions, Algorithmics Incorporated
THE MIFID TEST BEGINS
Under the joint auspices of FIX Protocol Ltd, ISITC Europe, the Reference Data User Group and SIIA/FISD, a MiFID (Markets in Financial Instruments Directive) joint working group has been established to look at the implications of the directive for firms. The group consists of five sub groups – Reference Data, IT, Real-Time Market Data, Best Execution and Standard Protocols. More information on the groups can be found at http://www.MiFID.com As with other European Directives, Telekurs Financial aims to provide the highest level of support to all of its clients. The company is taking an active role in all the meetings of the sub groups of the MiFID joint working group and has been in consultation with the Financial Services Authority on the matter. The implementation date for the Directive is 30 April 2007. Telekurs Financial will of course continue to update its clients with its planned response to MiFID and the Directive will become the subject of Breakfast Briefings later in 2005 or early 2006. Telekurs Financial is playing an active role in a number of industry groups examining the Markets in Financial Instruments Directive (MiFID) in order to help assess the impact of the directive and to formulate a response to it. As always, the company is looking to provide a robust, client focussed solution, which will help clients meet the demands of the directive.
Product Development Department, Telekurs Financial (U.K.) Ltd
BPM FIRST
It is an inherent feature of the investment industry that processes cut across many departments and silos within financial institutions. Demanding business, economic and regulatory pressures are forcing financial services companies to evaluate every facet of their business and operations. Executives are constantly searching for opportunities to reduce cost structures and increase profitability all the while improving internal and external customer service. Outsourcing is often raised as a potential option. Yet there has been a growing perception in recent times that outsourcing is not delivering the major cost savings previously hoped for. So, does that mean financial companies should abandon outsourcing altogether? Absolutely not but before going down the outsourcing route, they first need to understand their business. A large (and growing) number of financial services companies are using Business Process Management (BPM) tools to get under the skin of their processes, allowing them to make informed decisions about what to outsource. More importantly, BPM enables companies to understand exactly which processes are unique to them, and how these can be optimised, in house, to generate real competitive advantage.
Andrew Bailey, Snr. VP Worldwide Marketing, Commerce Quest
OVER TO THE SEC
The FSA published Policy Statement 05/9 (PS05/9) on Friday July 22. PS05/9 represents the final rules on bundled brokerage and soft commission arrangements, the culmination of the process started in 2003 with CP176. The FSA stated that its final rules will “…promote competition between those who produce investment research by removing the regulatory distinction between research services provided by brokers along with execution services...and research services provided by third-parties”. The Bank of New York has been at the forefront of the debate since its inception in 2001, campaigning continuously for increased transparency in the relationship between brokers and fund managers. The UK has made ground-breaking progress to get this far. The debate doesn’t end here. The Bank of New York has always believed that ‘independent research commissions’ more accurately reflect the sum paid for the acquisition of third party research services – whether they are from independent sources or third party brokers. We are encouraged that the FSA has moved away from the negative connotations implied by the phrase ‘soft commissions’. These final rules underscore the progress that the UK has made in responding to the FSA's original call for marketled transparency. We are hopeful that the rules will be instructive to the Securities Exchange Commission as they deliberate on this critical issue.
Gareth Jones, Managing Director, The Bank of New York
TIME TO COMPLY
The Markets in Financial Instruments Directive (MiFID) with which EU Financial Institutions will need to comply starting April 2007, will provide increased investor protection plus market harmonisation and transparency across Europe. Although MiFID is not yet finalised, it is clear that institutions must enhance their IT architecture to achieve compliance with, and competitive advantage from, MiFID. TIBCO Systems believes the major technology impact is in five areas, under MiFID: Institutions must publish and follow procedures to correctly classify their clients; Institutions must ensure that all investment advice and transactions are suitable for the client at the time of execution; Institutions must ensure that client orders are routed and executed in the most favourable way for the client, considering factors other than just price;Banks operating as "systematic internalisers" (internal exchanges), exchanges and alternative trading venues must publish firm quotes and report trades; and, Records must be retained for 5 years the complete history of every event and transaction must be recorded so that it can be “reconstituted.” Organisations that have implemented an Event Driven or Real Time Architecture across their enterprise, integrated with Business Process Management Tools will be best positioned to achieve MiFID compliance and competitive advantage.
David Darby, CTO for Financial Services for EMEA, TIBCO Systems Incorporated
FUNDAMENTAL FOCUS
With STP rates nearing 99 per cent for fixed-income and many equity trades, fund-transaction processing has been conspicuously inefficient by comparison. Granted, there are more parties involved, such as transfer agents, fund distributors, fund promoters and other service providers, but not until the past couple of years has the investment-fund market sensed the urgency to do something about it. We’ve seen evidence of this change in the growing volumes of business processed on Euroclear’s FundSettle. While the fund distributor leg of each transaction settles with STP rates of 100 per cent, it has taken transfer agents (TAs) longer to realise these benefits. We expect STP rates to reach 90 per cent by year-end 2005 among transfer agents processing transactions on FundSettle. This is a huge leap from only two years ago when STP rates barely reached 50 per cent. Can we then conclude that fund-transaction processing has become highly efficient? Absolutely not there is still a long way to go. STP is not only about order placement and confirmation (or dealing); it also includes cash settlement, reconciliation, corporate-action processing, NAV collection, data integration, and more. This is precisely why we are working actively with numerous industry organisations and working groups to standardise and automate the entire spectrum of back-office processes to offer a truly STP fund-processing environment.
Sébastien Chaker, Director, Investment Fund Product Management, Euroclear
TO OFFSHORE, OR NOT TO OFFSHORE?
The primary objective of offshoring is to reduce costs. Whatever is said when talking about quality in the Business Process Outsourcing space, it is still all around cost and it will be for some time to come. What any institution undertaking offshoring is seeking to accomplish, is the same task but with a less expensive labour supply. To answer the question of whether you can do that, you first have to answer a series of other questions. This is not linear: it is just that offshoring is a function which does not automatically guarantee that your costs will be lower. There are calculations that you have to go through. Firstly, what is the nature of the function? Can you find qualified people offshore to undertake it? If you can, then would it be acceptable to the organisation and to the end client to offshore the function? Is it the case that there are qualified people available, but the fit from a cultural or language standpoint isn't there? This involves a lot of discussion around intangibles and a couple of missed steps could erode the economic advantages very quickly. Additionally, you need to consider the view of the regulators. The regulator in your home market might not want to see the jobs move away and may try to prevent that from happening. You also want to avoid getting into a situation where processes are switching back and forth between different sites. This can get far too complex. Processes must be well defined, along with roles and responsibilities. Finally, the issue of control: if the institution doesn't have line of sight management, can it really say that it has control? Try as we might, there really is no straight-forward approach to offshoring.
Tom Abraham, Managing Director, Citigroup Global Transaction Services EMEA
