Friday, December 08, 2006

BoA eyes Barclays according to research note

Well it seems FinancialTech Insider was not wrong about Bank of America wanting to buy a European bank. But judging by this posting on a Financial Times blog, it is the UK's Barclays bank, which is the object of Bank of America's attentions.

Last week over lunch a source hinted at Bank of America still wanting to buy in Europe, to which I said, 'I suppose it is looking at a UK bank such as Barclays or Lloyds.' The source however, started steering me in the direction of a Spanish bank.

But according to the FT blog posting, a very confident Merrill Lynch research note seems to indicate that Barclays may be the favourite. Bank of America of course continues to remain elusive on the subject.

It's time for 'better regulation'

In recent months there appears to have been somewhat of a backlash against over-regulation. The US is indulging in some long overdue navel gazing with US Treasury Secretary Henry Paulson weighing in on the debate by saying that the US capital markets "face significant challenges" and that Sarbanes-Oxley may have gone too far.

The Committee on Capital Markets Regulation further inflamed the debate with its publication of 32 recommendations for making US capital markets more internationally competitive. It also published some startling figures which suggested that over a period of five years, the value of global initial public offerings raised in the US had declined from 50% in 2000, to 5% in 2005.

Of course, the US is only probably just waking up to the fact that they are no longer the epicentre of capital raising for companies and that listing on an exchange is not quite the badge of honour it used to be for companies particularly in those markets where compliance is onerous.

I think it may be a slight overreaction given that US investment firms like Goldman Sachs, JPMorgan et al still underwrite a number of the deals that take place, but the competition as to where to list may be hotting up again and the US may not necessarily be able to have it all their own way.

The Committee on Capital Markets Regulation may have some problems getting its recommendations drafted into law, as there is only two years of the Bush administration left to serve and me thinks Bush junior may have his hands full 'cherry picking' from another set of recommendations on how to get the US out of Iraq without any more egg on their face.

At least the SEC has correctly gauged the general mood and is expected to announce on 13 December revisions to the onerous Section 404 of the Sarbanes-Oxley Act (SOX), which requires companies to audit the effectiveness of their financial control procedures. Also it is expected to announce that it will make it easier for foreign companies with more than 300 shareholders that are US residents, to withdraw from US regulatory oversight if they wish to do so.

Interestingly, before SOX came into effect, the SEC was by law required to conduct a cost/benefit analysis of the regulation's impact. But it appears no analysis anticipated the spiralling costs associated with Section 404 compliance.

Could all of this hold some interesting lessons for the UK and European markets where regulations such as MiFID, which comes into effect next November, could cause the same backlash as SOX has in the US?

Like the SEC, the FSA is also required to conduct a cost/benefit analysis of regulations. It has done that for MiFID estimating that there will be a "one-off" cost of between £870 million and £1 billion with ongoing costs of around an extra £100 million a year, although this is likely to vary from firm to firm. Click here for more info on the FSA's analysis of MiFID.

According to the FSA, some of the largest MiFID-related compliance costs are one-off costs arising from the introduction of changes to client categorisation and best execution requirements. However, the benefits in all these cases are difficult to quantify as the rationale behind implementing regulations such as SOX and MiFID is to protect the investor not to make life easier for the companies that service these investors.

While no one will argue that greater transparency is needed around the costs of trade execution, will MiFID like SOX go too far and force companies to spend more time on compliance than actually running their business? Furthermore, whilst the UK and the US conduct cost/benefit analyses before regulation is implemented, other European regulators are not required to do so. Surely that has to change.

The International Securities Market Association appears to be on the right track with its 10 "Principles for better regulation," which has been endorsed by the International Capital Market Association. The principles are based on the belief that in the case of a market failure, regulators should determine whether current regulations or market forces will sort the problem out before putting pen to paper on a new set of regulations. The question now is, will the International Organisation of Securities Commissions (IOSCO) support these principles?

Wednesday, December 06, 2006

Are money laundering solutions really working?

A few weeks back I commented on the research of a Dr Jackie Harvey at Newcastle Business School who concluded that there was not enough evidence to back up data about the volumes of money being laundered. Click here to read the post.

She was basically saying that it suited the authorities to inflate the figures pertaining to the incidence of money laundering for their own political ends, and we mustn't forget the 'war on terror'.

I am currently reading a fascinating book, "The Washing Machine," by Nick Kochan,an investigative journalist who has written for the likes of The Economist and The Financial Times. His book is on money laundering and it makes a very strong argument about the self perpetuating cycle of money laundering, encouraged by corrupt governments and politicians, as well as the forces of globalisation itself exposing developing countries to the forces of black money.

More importantly, though the book reinforces some of the points I was trying to make in my earlier post about some of the hype around money laundering and how the banks are bearing the brunt of the cost of having to comply with anti-money laundering legislation, which arguably has been relatively unsuccessful in reducing the incidence of money laundering by terrorists or other dubious individuals.

Kochan's point in the book is that terrorist money being spent to buy arms, for example, is unlikely to be detected by conventional anti-money laundering solutions as the deals are often not done not through conventional financial or payment channels, but on the black market. Furthermore, he says the small amounts of money used to support terrorists while they may be preparing for an "illegal act," are unlikely to raise alarm bells.

Effectively, he says, today's anti-money laundering policies are "convenient and cheap for governments as they place most of the burden on the legitimate banking and financial system." He argues that intelligence agencies working with police are likely to be more effective in stopping terrorist trade than banks.

Whey then did we have intelligent agencies monitoring SWIFT network traffic in the hope that they were going to find some unusual financing activity which may lead them to the nearest terrorist cell? Let's face it most of the payments on SWIFT are high value anyway, how are you going to distinguish what is an unusually high payment, let alone one that in most cases is more likely to occur on the black market than through conventional payment channels?

We know why banks are spending money on AML software. Their hand is being forced by the regulators. But is it money well spent? Are the banks getting value for money from these solutions? Are their AML compliance solutions helping detect and reduce the incidence of fraud; is it assisting George Bush and Tony Blair in their dubious 'war on terror'?

AML solultions may help banks demonstrate compliance, but no matter how sophisticated or intelligent they become, are they going to be able to detect Al Qaida money raised in Africa's diamond markets or money paid for arms or explosives, when these transactions are not financed by conventional means?

Thursday, November 30, 2006

Is Bank of America in an acquisitive mood?

No doubt you have probably read the media speculation in recent weeks surrounding the Bank of America's expansion into Europe and Asia. The bank's CEO Ken Lewis has made no secret of the fact that he wants to expand the bank's credit card and corporate and investment banking business in Europe, and the bank is tipped to spend $500 million over the next four years doing just that. Click here for more.

Lewis has persistently denied rumours that acquiring a European bank is part of its expansion strategy. Mind you it wouldn't be the first time that a major US bank has eyed the European market only to find that the cultural and political barriers to cross-border M&A are too cumbersome to pull it off.

Nevertheless, despite the obstacles and Lewis' denials, rumours persist that a potential acquisition in Europe may be on the cards, and on 29 November at market close, Bank of America's market cap at $243.71 billion inched ahead of Citigroup's $243.52 billion.

It may have the market cap, but unlike Citigroup, Bank of America lacks a truly global footprint, despite its $3 billion acquisition of a 9% stake in China Construction bank. Lewis reportedly told The Wall Street Journal he didn't "see the strategic imperative of being on the ground in Europe." But according to an industry source I had lunch with the other day, the bank could still be eyeing a potential acquisition in Europe.

The UK banking sector is certainly ripe for consolidation with potential targets such as Barclays or Lloyds TSB. But given its associations with the Latin American market, perhaps a major Spanish bank like Banco Santander for example, would make an interesting partner for Bank of America in Europe?

In October, in an effort to strengthen its foothold in the Latin American market, Santander Central Hispano acquired private banking and premiere banking assets from Bank of America's wealth management portfolio. According to Latin the transaction involves the "potential transfer" of customer holdings valued at approximately $4 billion from Bank of America to Santander Private Banking. The holdings consist of accounts of residents in Latin American markets such as Mexico, Argentina, Uruguay, Chile, Brazil and Venezuela.

Wednesday, November 29, 2006

Liquid assets

With all the media hoopla (including my own verbal diarrhoea) surrounding the announcement of multilateral trading facilities (MTFs) like Project Turquoise emerging in response to MiFID, it is easy to get carried away with the newness of it all. After all, it gives us hacks something to write about.

'MTF backed by investment banks challenges exchange monopoly' is a headline few hardened hacks would find difficult to ignore. But perhaps I have been a little premature in espousing the virtues of these alternative trading venues and the competitive threat they pose to the exchanges.

The reason I say that is because this morning I listened intently as market participants at a breakfast briefing hosted by Interactive Data, commented on whether they believed these new execution venues would be successful in attracting liquidity. Liquidity is after all the end game, and if these alternative execution venues don't attract their lion's share of it, then they will be remembered as those that tried to topple the 'emperor' but failed in their 'coup' attempt.

"If they can slash costs in a monopoly industry, then they [MTFs] will succeed," says
Dr Paul Lynch, managing partner, PE Lynch, a UK-based algorithmic trading specialist. However, Lynch believes it is unlikely these new platforms will attract 50% of the London Stock Exchange's liquidity within the first three months. It all boils down to whether these MTFs create better market spreads, he says.

The recently announced MTF projects are still unknown quantities and only time will tell what impact they will have in terms of fragmenting liquidity within Europe. Jon Carp, head, electronic brokerage and execution sales, Europe, Crédit Agricole Cheuvreux International Ltd, said he had seriously considered whether Cheuvreux's deal flow justified setting up an MTF or whether it should partner with a consortium of investment banks like Project Turquoise? At the end of the day, it is a business decision a number of brokerages must be mulling over with MiFID looming on the horizon.

Nevertheless, Carp believes that if the LSE were to drastically slash costs in the face of heightened competition, that may encourage some sell-side firms to stay put. "If the cost of trading comes down, it will be more attractive for the banks to say they don't have to build Project Turquoise," he says. But now that the investment banks have partially dipped their toes in the water and found that the temperature is too their liking, will they want to totally submerge themselves in the new competitive landscape that beckons or will they need to be thrown a life raft?

Arguably, it's a win-win situation for the investment banks regardless of whether Project Turquoise gets off the ground or not. Even if they don't attract liquidity, one thing they will have succeeded in doing is forcing the exchanges to reduce costs. Costs will inevitably come down. But if the investment banks do succeed, and surely we can expect to see more MTF announcements on the not too distant horizon, then what impact will all these venues have on already ballooning market data volumes?

According to Octavio Marenzi, CEO, Celent, who chaired the Interactive Data debate, MiFID says post-trade data can be published on web sites as long as it is "machine readable". 'Does that mean that there will be 60 different data sources?' he asked the esteemed panel. Danny Moore, COO, Wombat Financial Software, hinted that there could be real problems with 'symbology' if post-trade data can be published anywhere. "Symbology is a huge issue," he said. "It would be easier if everyone used the same symbology but somebody has to do the conversion. We can't do that as a vendor so it is pushed back onto the clients."

Monday, November 27, 2006

Looking for Mr Chips

Having commented ad nauseam last week about the spate of new high speed trading execution venues emerging in Europe to challenge the traditional stock exchanges, on Monday evening I found myself seated in front of a panel, which included some of the protagonists involved in the unravelling of Europe's trading landscape post-MiFID (Markets in Financial Instruments Directive).

Representatives from leading investment banks Credit Suisse (one of the seven banks behind the announced pan-European MTF otherwise known as Project Turquoise), Lehman Brothers, the London Stock Exchange, AtosEuronext, Reuters and BT Radianz, had assembled on the top floor of The Gherkin (architect Norman Foster's homage to the pickled vegetable) in London's CBD as part of Intel's Faster City launch to celebrate the release of its Quad-Core Xeon Processor 5300 series.

Intel delivered the Quad-Core Xeon processors earlier than anticipated having recently launched its Dual-Core Xeon Processor. With customers such as investment banks and market data providers requiring even faster processing speeds and computational capabilities, Richard Curran, vice president, European operations, Intel, told attendees that Intel planned to reduce the number of man years it took to launch the next generation of its micro-architecture, which is scheduled for 2008.

Intel was obviously keen to enlighten the assembled investment bankers and exchanges as to how Quad-Core and Dual-Core Xeon Processors could help them reduce latency through faster processing speeds (4.5 times performance gain), whilst not hitting firms where it hurts the most in terms of reduced power consumption (from 110W to 80W) and maximising the use of scarce real estate for housing server farms.

In an effort perhaps to demonstrate the point, parked outside The Gherkin were a series of four or five scooters trailing Intel billboards that read something like, 'Good things come in small packages'. Perhaps a racing car would have been more appropriate though as the theme of the evening was 'the need for speed'.

Peter Moss, global head, enterprise solutions, Reuters, chipped in that a year ago when it was benchmarking microprocessors in its labs, AMD chips were faster than Intel's. But recent studies at its Securities Technology Analysis Centre of the Linux version of Reuters' Market Data System running on a HP server using Dual-Core Intel Xeon processors, found that Intel had the edge.

The evening's host, Nigel Woodward, head, financial services, Intel, led a panel debate about the 'need for speed' amongst investment banks, exchanges and market data providers in the City of London. He joked that he did not want to turn the discussion into a debate on MiFID, but he may as well have as the list of panellists he had assembled (investment banks, exchanges, market data providers) meant it was difficult to ignore the heightened competition that is rapidly emerging amongst all of them.

Credit Suisse and Lehman Brothers are already competitors, but if they become systematic internalisers under MiFID or band together to form rival execution venues, which at least one of them has done, then they pose a serious competitive threat to the LSE, Deutsche Bourse and Euronext who will also be competing with one another for business under MiFID.

The question is will Intel Quad-Core Xeon processors be an essential part of each firms' armoury in the new competitive landscape that beckons? Kevin Covington, head, new product development, global network provider, BT Radianz, likened the quest for speed spurred on by the rise of algorithmic trading, which is only likely to increase under MiFID, to an "arms race".

Whilst the issue of latency dominated the debate, the panellists tippy-toed around the real implications of faster trading and execution times. Ultimately it is about customers wanting trades to be executed more quickly and cheaply, but the upshot of all that is a new competitive landscape where the exchanges will be seriously challenged by supposedly higher speed and cheaper alternative execution venues. Broker-dealers will also have to constantly prove that they are faster and better than the next guy.

PJ DiGiammarino, CEO of JWG-IT alluded to the scale of change likely to occur under MiFID when he said he expected 2007 - the year of MiFID - to be the most "memorable of our lives". "Costs have got to come down," he said. John Goodie, global head, exchange business unit, AtosEuronext, didn't beat around the bush saying that exchange consolidation and price wars were definitely on the cards.

Not surprisingly perhaps, the LSE's representative, CTO Robin Paine played his cards close to his chest hinting at the new competitive landscape that was emerging in the form of Project Turquoise. "The ability to continue to innovate and deliver consistency and predictability in terms of latency," are the challenges ahead for the LSE, he said. But surely it is difficult for any 'monopoly' to innovate to the extent that may be required?

One thing perhaps that we can be certain of is that post-MiFID, don't be surprised if you look under the hood of trading engines that you find Intel Quad-Core Xeon processors ticking over.

When is ESP not ESP?

Whenever a new concept in technology makes it onto the radar screens of analysts and a few forward thinking companies, vendors tend to want to share in some of the limelight. That is why, for example, after Gartner analysts coined the phrase, Enterprise Service Bus (ESB) and it gained significant notoriety and publicity, even mainstream EAI vendors that initially rejected the ESB concept, were champing at the bit to say, 'We've got an ESB offering too.'

It appears that the same thing may be happening in the event stream processing (ESP) space. In my last post I covered off on ESP, a relatively nascent market, and how it was being used in trading applications, logistics and company supply chains to enable companies to respond and act on real-time streaming data and events.

A word of warning, however, is that as ESP is a relatively immature market, definitions of what constitutes ESP differ from vendor to vendor. Phil Howard, research director at Bloor Group, defines an event, as "an event of some importance." In other words, an event stream processing application is not interested in every event that may occur.

Events for example, can come from transaction databases, Bloomberg or Reuters market data feeds or RFID tags on boxes of books. Event processing is also about managing exceptions such as credit card fraud detection. The next step up from that is complex event processing (CEP), which Howard says is managing 'a set of different exceptions.' "It is easiest to think of ESP as a pipe with water flowing through it and onto that pipe are placed fine mesh grills," Howard explains. "The water flows through those mesh grills, which are not fixed but interchangeable."

In its SOA maturity model, Oracle apparently puts CEP at Level 5, indicating that for most companies it is something that they consider implementing much later on if at all.

However, as Howard points out, firms can implement CEP without having to go down the service-oriented architecture route. In algorithmic trading, for example, which uses event stream processing to detect movements in stocks based on pre-configured algorithms, firms have not necessarily implemented an SOA.

Whilst event stream processing is about handling throughput of data, when it comes to complex event processing, Howard says it is all about implementing technology that can handle complex data streams. Traditional relational databases are less favored in this environment as the perception is that they fall far short of the requirements for responding to incoming data streams in a timely fashion.

By now you are probably thinking isn't ESP or CEP just another form of business intelligence? Well, yes of sorts. According to Howard, event processing incorporates real-time operational business intelligence. However, he adds, some of the core business intelligence software vendors such as Business Objects, have technology that is not "process aware", which is needed if companies want to build operational business intelligence platforms based on CEP or ESP.

Howard says some of the database vendors are looking to embed more intelligence into their data warehousing offerings. He cites the example of Sybase, which he says is looking to partner with an event processing vendor on the front end so it can offer a complete solution. IBM's WebSphere Front Office for Financial Markets allows companies to combine and filter data feeds, and although it may act as a front-end to an event processing engine, according to Bloor Group it is not an event processing solution as such. Click here for more of Bloor's insights.

Wednesday, November 22, 2006

Dealing with complexity

Ok folks here goes. The next big thing according to those in the know (analysts) is CEP and ESP on an ESB or SOA for real-time business intelligence or BAM. I thought I would try and cram as many three letter acronyms into one sentence as possible to show how ridiculous analysts' obsession with three letter acronyms has become.

By now you are probably thinking here we go again. First it was ESB (enterprise service bus),then SOA (service-oriented architecture), now its CEP (complex event processing). As one journalist from Information Age quipped recently at a Progress Software press event about event processing (an umbrella term used to talk about CEP and ESP-event stream processing),'Everyone is bored of SOA, we've heard it all before,' and by the way is anyone actually doing it? So is CEP or ESP just another three letter acronym destined for the same fate?

Well, unless you design trading algorithms or are a logistics company tracking goods throughout the supply chain, you probably have not heard of CEP or ESP, therefore your boredom threshold is unlikely to have been maxed out yet. And as for whether people are actually doing it, well, the short answer, very few. According to Mark Palmer, general manager, Apama division, Progress Software, the Event Driven Architecture market is currently worth $30 to $50 million, small fry by software standards.

A lot of these three letter acronymns tend to be the 'love child' of computer boffins who spend most of their lives in laboratories dreaming up great whizz bang technologies that rarely find it into every day application. You could say event processing is one of these technologies having been pioneered by boffins at Stanford and Cambridge universities. However, Phil Howard, research director at Bloor Research, believes that event processing will be widely used, but that adoption will be gradual. After all, event processing has yet to reach the peak of its hype cycle on Gartner's adoption curve before it descends into the 'trough of disillusionment'.

Having said that, Dr Giles Nelson, director of technology, Progress Software and co-founder of Apama, a Cambridge UK startup (bought by Progress) that developed one of the first CEP engines, did a good job of explaining why you may want to think about adopting event processing some time in the not too distant future, particularly if you are a business that needs to make rapid decisions on streaming data (tick prices, for example) that is "constantly changing". According to Dr Giles, putting the complexities of the technology itself aside, the nuts and bolts of event processing "is about being able to understand information in real time."

This information could be coming from multiple sources both within and outside the company, RFID tags for example on cases of goods. But Nelson made the clear distinction between business intelligence software, which tends to be based on historical data and doesn't allow someone to act on that data in real time, and ESP. Unlike conventional data management models, where data is indexed and stored and then request/response queries are made on it, if a company needs to act on information in real time, Nelson says there is no time to index data. "That is why SQL is unsuitable for this," he adds. Also vendors like Progress Software tend to favour object oriented databases as opposed to relational for ESP.

In a nutshell, ESP says Nelson, is about storing queries and then flowing data (both historical and real-time) across them. Great you say, but what would I use it for? Well, it has long been used by algorithmic traders who want to test out VWAP and other trading strategies on real-time and historical data. It could also find application under regulations such as MiFID in Europe and RegNMS in the US, where the emphasis is on achieving best price for clients and smart order routing to the cheapest execution venue. As best price is a constantly changing variable, according to Progress it is suited to ESP.

Big Brother is watching

When quizzed at Sibos as to whether he would have done things differently regarding SWIFT allowing US intelligence agencies to monitor traffic on its network, Leonard Schrank said he never expected the Brussels banking co-operative to end up on the front page of major newspapers.

The bank owned financial messaging network has tended to avoid mainstream publicity and gone quietly about its business without the average Joe on the street knowing or caring what really goes on in its La Hulpe headquarters. Well, not for much longer it seems. SWIFT had better get used to the publicity it seems with the Wall Street Journal carrying a report on Tuesday that the EU was likely to concur with the Belgian Privacy Commission's ruling that SWIFT violated European privacy laws when it allowed intelligence agencies to monitor transactions on its network.

SWIFT hopes that the global community can agree on a set of data privacy standards to help organisations like itself in this situation. In its legal rebuttal to the Belgian Privacy Commission's ruling, SWIFT argues that "the boundary between security and data privacy must be defined by governments."

It did not take too kindly to the Privacy Commission's finding that SWIFT had "committed a serious error of judgement". SWIFT's argument is that as it simply transmits financial messages on behalf of financial institutions based on their instructions and does not access the data in financial messages, it is merely a "data controller" rather than a "data processor" and therefore as a "data controller" it has complied with Belgian privacy law.

The question is though should SWIFT be granting US intelligence agents access to the data in those messages without the permission of the banks sending them. Financial-i carried a report in its last issue saying that whilst SWIFT had alerted the G10 banks to its decision to allow US intelligence agents access to the messages, it had not informed its member banks. Obviously with 7000 member banks, informing all of them would be an onerous task.

But surely, the major banks with the most traffic on SWIFT deserved to be informed? After all SWIFT prides itself on the security of its network and therefore banks using that network assume that the messages they transmit on it are not going to be seen or tampered with by unauthorised parties.

SWIFT is correct in saying that a global data privacy framework needs to be formulated so that inconsistencies of interpretation where one country says it is OK to monitor transactions on a private network and another says it is not, does not arise again. However, by the same token, SWIFT perhaps also needs to address its own internal governance in terms of letting its member banks know what it is doing regardless of whether it is forced by certain laws in a particular country in which it operates to allow access to the transactions it carries.

Much like a packet of cigarettes carries a warning about the health risks, perhaps financial messaging networks should come with the warning that transactions transmitted on its network may be monitored for intelligence and surveillance purposes. After all isn't this the Big Brother era we live in?

Monday, November 20, 2006

Train wreck ahead chapter 2

At the Sibos conference in Sydney, Karen Cone CEO of TowerGroup described the lack of automation in the derivatives space as a "train wreck waiting to happen". Click here to see post.

Analysts like to use colourful language when it comes to describing processing inefficiencies and regulators don't like to mince their words when it comes to calling on banks to automate or else.

The reason for all the concern. Well derivatives volumes are growing at a 'meteoric' (I thought I would try to be as colourful as the analysts) rate, with business in credit default swaps increasing by 52% in the first six months of this year to $26 trillion, according to ISDA figures.

When any business that is complex and not automated grows at such a rate, the regulators start biting their fingernails, then it is left to the industry to work out a way to help the regulators sleep at night.

Such is the case with OTC derivatives. However, the conclusions drawn from a recent roundtable event sponsored by enterprise content manager provider Interwoven and comprising representatives from buy-side firms, suggests that regulators' blanket approach to automation, may be ignoring some of the finer points and idiosyncrasies that make OTC derivatives 'unique'.

The roundtable concluded that the proliferation of initiatives to automate OTC derivatives had failed to consider the systemic risk implications. In other words, as buy side firms are not well acquainted with the "structuring" of OTC derivatives, automating them may lull firms into a false sense of security about the level of risk exposure.

"The discussion on automation has to have a huge caveat against it because there is systemic risk in automating a product [firms] do not truly understand," said Jos Stoop, general manager, financial services solutions, Interwoven. The roundtable stressed that OTC derivatives are "unique, bespoke products" and that automation may seek to standardise where no ‘standard’ exists.

Despite efforts to tackle the backlog of confirmations for "vanilla" credit derivatives, roundtable participants indicated that there may be a "two year time lag" between new products being developed and participants agreeing on processes and standards for automating confirmations.

Some indication of the complexities associated with automating derivates was given by Bill Stenning, vice president, business development of the DTCC's Deriv/SERV. Whilst the DTCC has been successful in deploying master confirmations to cover credit default swaps, he said that it was difficult to produce standards for the more structured end of the market, which was always one step ahead of standard setters.

According to Stoop, automating derivatives confirmations is not just about standardising data but standardising communication and then leaving it to counterparties to agree on what the data should mean.

LSE does it again

Only just the other day I remarked that in the ongoing exchange consolidation wars, the London Stock Exchange and Deutsche Bourse stood out like pimples on a pumpkin in failing to elicit greater economies of scale.

Deutsche Bourse's failure is not for lack of trying; it has courted the LSE on more than one occasion and then Euronext, but it was rebuked. While Deutsche Bourse is the rebuked, the LSE on the other hand, seems to be comfortable playing the role of the 'rebuker', having just rejected Nasdaq's bid for the second time according to FT reports.

After the failure of its first bid, which valued the LSE at 950 pence a share, Nasdaq CEO Robert Greifeld pitted his luck on his second round offer of 1,243 pence a share, which he described as a "full and fair offer." Well, try and tell that to Clara Furse, CEO of the LSE, who appears to be hedging her bets. Either she is happy for the exchange to go it alone in the ongoing exchange consolidation battle or she is waiting for a better offer?

Octavio Marenzi, CEO, Celent, says that the LSE has staked out a fiercely independent path and its recent outstanding earnings mean that Furse feels under no pressure to be bought out by anyone. "Firms making bids for the London Stock Exchange continue to show rather odd behaviour," says Marenzi. "Most notably, there is the tendency to make offers below the current market value of the exchange. Nasdaq appears to be attempting this again, with predictable consequences -- either the bid must be raised or it will fail."

Will Nasdaq retreat from its current bid like Deutsche Bourse has from its attempts to court Euronext? It is anyone's guess. However, despite healthy earnings at the LSE, can it afford to go it alone for much longer in view of recent announcements by Equiduct that it will establish a pan-European exchange and that seven investment banks will build an MTF?

As firms gear up for MiFID, a somewhat different trading landscape awaits the national exchanges, which have enjoyed monopoly status. But as rival "high speed" execution venues emerge offering lower trading tariffs and cheaper post-trade reporting services than the LSE, can Furse and the LSE's shareholders sustain their go-it-alone stance?

Wednesday, November 15, 2006

Equiduct responds to MTF announcement

Below I have pasted Bob Fuller, CEO of Equiduct's response to the announcement by seven leading investment banks that they will launch an electronic trading platform to rival the leading European exchanges.

Unlike the consortium of investment banks, which will build a multilateral trading facility or MTF, Equiduct, which will also launch in 2007, aims to provide a pan-European platform for trading liquid shares post-MiFID. Although the announcement by the consortium of Tier 1 investment banks signals that they will build their own solution, Fuller anticipates that there will be enough appetite for its pan-European platform amongst Tier 2 and Tier 3 investment banks that do not want to shoulder the upfront investment costs associated with MiFID compliance.

"Today's announcement that a group of seven leading investment banks will confirm detailed plans to launch a trading rival to the London Stock Exchange is exciting news, and confirms the growing market requirement for alternative solutions to help meet the challenge of MiFID implementation within Europe," says Fuller.

"At Equiduct we believe that their announcement validates our analysis on the need for MiFID-compliant, Europe-wide trading. However it's interesting that they've decided to go down the MTF route, rather than opting as Equiduct has done to set up as a fully regulated pan-European electronic platform.

"This, coupled with our open access to clearing and settlement providers, gives us a distinctive proposition. We'll also be interested to see how the European marketplace relates to an offering owned by a small number of Tier-1 banks.

"With Equiduct we'll be primarily focusing on the significant number of Tier-2 and Tier-3 investment banks that can't afford to build their own solutions, however we also expect that we'll be continuing our discussions with Tier-1 investment banks including many of those currently involved in other projects as we're finding that our platform brings solutions regarding MiFID best execution that cannot easily be replicated

Investment banks take on Europe's exchanges

The onset of MiFID in Europe's capital markets and the indecision of Europe's stock exchanges over whom they should merge with appears to be fuelling discontent amongst the world's largest investment banks.

Tired of waiting for consolidation talks between the big three exchanges, the LSE, Euronext and Deutsche Borse to bear fruit, leading investment banks such as Goldman Sachs, UBS, Merrill Lynch and Morgan Stanley have taken matters into their own hands, announcing the formation of a new "high speed" electronic trading system for European shares, which will launch in 2007. The platform will offer trading at tariffs lower than those provided by Europe's leading exchanges.

You don't need to be a rocket scientist to have seen this one coming, although that doesn't seem to have prevented the exchanges from dragging their feet. Many analysts predicted that MiFID, which removes the 'concentration rule' that forced trades in a number of countries to be conducted on national exchanges, would result in alternative trading venues being established by third parties, including investment banks.

Just recently, EASDAQ rose phoenix-like from the ashes with the announcement of a new pan-European exchange Equiduct, also launching next year, leveraging EASDAQ technology, which will provide a single point of connectivity for trading "liquid shares".

Surely the LSE, Deutsche Bourse and Europe's other myriad exchanges can no longer avoid the inevitable; consolidation and tariff reductions? The question is can Europe afford to support all the national exchanges plus new trading facilities that are likely to emerge post-MiFID? And what does this mean in terms of fragmenting liquidity? Presumably, trade flows will eventually gravitate towards those platforms that are not only cheaper, but faster, more cost effective and can provide best execution and a whole raft of services around pre- and post-trade transparency.

But for now poor old Deutsche Borse, which can't seem to find anyone that wants to merge with it, the LSE, and Euronext to a lesser extent as it looks like it will accept the NYSE's bid, are out in the cold in terms of finding suitable bedfellows to shack up with and to help deliver greater economies of scale.

Tuesday, November 14, 2006

IBM in bid for Chinese bank

Bloomberg carried an interesting tidbit of news yesterday regarding rumours that IBM would join Citigroup's $3 billion bid for China's Guangdong Development Bank. For the full story on Bloomberg click here.

According to the Bloomberg report, two unnamed sources said IBM may take a 5% stake in the Guangdong bank, which would help it in its efforts to win a contract from the Chinese bank to upgrade its IT systems. If the deal goes ahead, it will certainly signal the start of an interesting trend in IT services delivery, particularly in the fast growing Chinese market, where a number of major IT services providers are eager to win new business.

It does raise a number of questions though. If IBM were to gain a 5% stake in Guangdong Development Bank, does that mean that it would have first right of refusal over any IT work that needs to be done within the bank? And what would this mean for other IT services providers that may also want to bid for business with the bank?

Admittedly 5% is not a controlling stake, and arguably a company of IBM's scale with a strong IT services and software business devoted to the financial services sector would have a lot to offer a Chinese bank looking to upgrade its IT systems. But isn't it more a question of if Big Blue buys a stake in a bank it wants to do business with, does that give it an unfair advantage over other IT services providers seeking to win business from the same Chinese bank?

In a separate development, the Bloomberg report went on to talk about allegations that IBM paid $225,000 to a sales agent who is accused of bribing the former chairman of China Construction Bank, the country's fourth largest bank. According to FT reports, Zhang Enzhao, former chairman of China Construction Bank, was jailed for 15 years last week after being convicted of taking bribes in return for granting information technology contracts.

Monday, November 13, 2006

Claims and counterclaims in VoIP space

The tendency for some software and hardware providers to claim that they are first with something, always sets alarm bells ringing in my head.

Recently we published an article in financial-i magazine on the use of Voice over IP in financial institution's business continuity strategies. Obviously miffed that they were not mentioned in the piece, IPC Systems, a leading provider of VoIP turrets to trading floors, got in contact saying they were first in this area and were disappointed they were not mentioned.

Financial-i has covered the VoIP market since 2000. However, sometimes the way vendors evangelise about the very technologies they are promoting, can be somewhat misleading. VoIP on the trading floor is gaining wider acceptance amongst financial institutions, and there is no doubt that for those firms wanting to set up a robust communications infrastructure incorporating remote and mobile trading facilities, VoIP ticks a lot of the boxes.

My understanding of IPC Systems is that they offer an IP only solution, having installed IP at 40,000 desktops. The flip side of that however, is that not all companies want just an IP solution. Some want to maintain their legacy TDM (Time Division Multiplexing) applications and migrate gradually to IP. There are also concerns about voice quality of IP networks over longer distances, particularly when you start talking about cross-border installations. Taking all of this into consideration, is an IP only approach to VoIP on the trading floor the best approach?

Some competing vendors of IPC Systems have told me that whilst its IP only approach may work in the US, it does not necessarily fly on this side of the Atlantic. Despite the merits of VoIP technology it does not guarantee overnight adoption. Although I have heard of some companies moving totally to IP, a hybrid approach combining TDM and IP appears to works best for other companies.

Also there seems to be some confusion around who was first to offer a combined TDM and IP solution. Last year Etrali (now called Orange Business Services Trading Solutions) announced that it would offer traders a choice of both TDM and IP. BT Trading Systems also made a similar announcement. What is the difference between the two?

Well according to Orange Business Services, what sets them apart from BT Radianz is that they offer both TDM and IP as standard within the turret, meaning that nothing has to be changed when companies decide to migrate from TDM to IP.

As the hype around VoIP reaches fever pitch, it is all to easy to prescribe it as an antidote for all of a company's network's connectivity and communication needs. But maybe we need to take a step back, read the fine print as to what the technology can and cannot do and what vendors in this space are offering, before we all clamber aboard the bandwagon.

Wednesday, November 08, 2006

Hats off to Red Hat

What a month it has been for the Linux or open source software movement. Software companies that were slow to heed the open source mantra: providing open access to the source code of software applications so that it could be changed, improved on and altered by other software developers; are now embracing Linux with new found religious zeal.

At Oracle OpenWorld 2006 recently, CEO Larry Ellison, intent on world domination in the enterprise application software space, announced enterprise level support for Linux in the form of its Enterprise Linux Program. Some commentators billed the announcement as Ellison living up to his 'pirate of Silicon Valley' reputation. For more on this visit Network World.

Oracle's announcement has re-ignited the debate around patent infringement in open source software development. In 2003, SCO Group slapped a $3 billion lawsuit on IBM alleging that Big Blue had illegally copied SCO's proprietary UNIX code into its Linux operating system. In order to head off any patent infringement allegations from the major software vendors, Red Hat told its customers it would rewrite code found to violate another's intellectual property.

Late last week Microsoft, a long standing critic of the open source software movement got into bed with Novell, which following its acquisition of Ximian and SUSE, shifted its allegiances from the Unix to the Linux camp. In an effort to preserve the dominance of its Windows servers and operating system Microsoft has long resisted the allure of the open source movement.

But with Ellison upping the stakes in terms of Oracle's enterprise application support for Linux, Microsoft obviously twigged that it could not afford to maintain its nonchalant stance towards Linux for much longer so it jumped into bed with one of Linux's biggest proponents, Novell.

Microsoft's business and strategic partnership with Novell is meant to help solve integration issues for those customers running Windows and Linux environments. These customers are likely to benefit the most from the Microsoft/Novell announcement which addresses some of the key interoperability challenges that have prevented Linux from gaining wider market traction. The Oracle and Microsoft announcements should also mean more widespread availability of products and enterprise applications that have Linux embedded in them.

But for the true proponents of Linux, those that have always believed software should be for the people by the people, what will they make of Microsoft's sudden about face on Linux and Ellison's efforts to hijack a technology which truly innovative software companies like Red Hat helped pioneer?

While no software company should be exempt from competition, does Microsoft and Oracle's increasing stranglehold on Linux seriously challenge the true essence of the open source software movement; open access to code, free redistribution of software, and for any software modifications to be readily distributed under the same conditions as the original software license? For more information on the core principles of open source software click here.

Unfortunately, the true software innovators like Red Hat are likely to be overshadowed or swallowed up by their far bigger and wealthier competitors; the very companies that first shunned open source developers as 'pond life' on the outer edges of the software development community.

I wonder what Linus Torvalds, the father of the open source software movement, makes of all this? Would he it see as a boon for Linux or a retrograde step?

The illustration above first appeared in Le Virus Informatique hors serie numero 01. For more humourous illustrations on Linux and Microsoft, click here.

Tuesday, November 07, 2006

The 'no frills' network provider

Last night I attended a function for luminaries of London's banking and financial services industry. Surrounded by bankers and technologists, one attendee remarked to me 'Isn't this a little dry for you?' One doesn't make a habit of attending after hours functions frequented by City bankers talking shop.

However, on this occasion I was motivated not only by the prospect of some banker letting slip a little tidbit of information, which may give me something to share with you on the blog. The main reason for me attending was to hear SWIFT CEO Leonard Schrank speak in less formal surroundings than the Sibos conference (yes, I know I am a glutton for punishment, as if I hadn't heard enough SWIFT speak at Sibos in Sydney). Away from the rehearsed script and glitzy video presentations, I thought Mr Schrank may make an off-the-cuff remark that would have his PR people tearing their hair out.

I have to say I was disappointed. Lenny as he prefers to be called in less formal surroundings, delivered a précis of the opening plenary speech he made at Sibos in Sydney, interspersed with a few personal anecdotes. It was along the lines that SWIFT's future growth strategy hinges on being able to conquer the BRIC countries, standardising derivatives contracts and enhancing corporate access to its network.

We had heard it all before, but Mr Schrank admitted that his own personal knowledge of the derivatives industry was limited (it appears some people would not know a credit default swap if it jumped up and bit them on the nose). But given SWIFT's successful track record in standards development, it does not see any reason why it cannot standardise a derivatives contract.

One of the questions from the audience was whether SWIFT would take the next step of allowing interoperability between corporates without them having to join a Closed User Group (CUGs)? It seems however that SWIFT is only focused on the Top 2000 corporates, the GE's, Microsoft's and IBM's of the world that are multi-banked and can afford to participate in CUGs. SMEs do not figure in its 2010 growth strategy.

Interestingly, at most banking events these days, the name PayPal rears its head. Bankers like to punish themselves by saying, 'Why didn't we think of that?' Well you didn't think of it, so get over it and move on, or take a leaf out of SWIFT's book. Apparently SWIFT executives do not lose sleep at night worrying whether PayPal is going to be the next biggest online threat to their business.

But it does raise an interesting question. Where is SWIFT's next biggest threat going to come from? Schrank did allude to the card providers such as Visa, but it is owned by the banks, and as we know banks are not known for moving quickly or being innovative. Some of the dinner guests also reminded me that SWIFT is a monopoly and despite the annual rebate carrot it likes to wave in front of its members, it is expensive compared to other IP networks.

A charming banker from India sitting next to me said he did not think SWIFT would be successful in expanding its network into emerging markets as most of India's domestic banks could not afford to connect to SWIFT. Furthermore, he said, India already had its own TCP/IP network, INFINET (Indian Financial Network), which is used for messaging, electronic debit and clearing, online processing, trade in government securities, centralised funds and inter-branch reconciliation.

I asked another gentleman at my dinner table as to why given the proliferation of internet bandwidth and the ubiquitousness of the internet, there were no serious contenders to SWIFT. He replied that there would be, comparing it to what had happened in the airline industry with low cost 'no frills' airlines emerging to challenge the hegemony of airlines like British Airways.

But there are already IP network providers that could challenge the dominance of SWIFT as the major financial messaging network. Looking at the intelligence Cisco Systems is embedding in its network, anything is possible. But why are networks like Cisco, BT Radianz and Savvis not providing a serious alternative to SWIFT? Part of the reason appears to be security. As SWIFT likes to remind its members, who may be tempted to jump ship to another network, in its more than 30 years of operations, no one has seriously cracked its multiple layers of authentication.

For now SWIFT can continue to rely on the robustness of its network. However, as a leading figure from UK bank Barclays pointed out, at some point the Belgian banking co-op may need to address splitting the standards it carries on its network from its governance. That however is unlikely to happen any time soon.

Although SWIFT may be happy to carry other standards on its network, like FpML for example (one audience member remarked it had no choice), Schrank does not believe its future lies in just providing the bandwidth or the pipeline that carries financial messages. With Schrank scheduled to retire next year, one wonders what his successor will make of all this? Will it be more of the same from SWIFT or a fresh approach?

Friday, November 03, 2006

EASDAQ makes a comeback

This is an important postscript to my rant earlier this week on the emergence of a new pan-European exchange Equiduct.

Equiduct, is a new offering spearheaded by Bob Fuller, ex-Dresdner and the Joint Working Group on the IT implications of MiFID. Due to go live in the second quarter of next year, the Belgian-regulated electronic platform will provide pre- and post-trade services in accordance with MiFID guidelines. It aims to be a single point of connectivity European-wide for investment banks that operate as 'systematic internalisers', small exchanges or banks that want to establish their own MiFID compliant trading facilities, but don't want to make the upfront investment.

In my earlier post I mentioned that Equiduct will be based on the technology platform used by NASDAQ Europe, formerly EASDAQ. Last year EASDAQ sold the rights to its trading platform to NASDAQ in North America. Now it appears it is rising from the ashes in the guise of Equiduct.

This comment from Dr Jos B. Peeters, president of EASDAQ suggests that Equiduct is EASDAQ's latest attempt at reviving its pan-European platform (all be it an upgraded version) in response to MiFID. "We are delighted that Bob has accepted to spearhead our Equiduct initiative," said Dr Peters. "He brings a vast experience with trading infrastructure and the implications of MiFID to the table."

Thursday, November 02, 2006

I'll have some intelligence with my data

For many years (some may argue it still is) banking was all about products, locking the customer in for life to a particular bank's you beaut online cash management application or securities servicing offering.

Ultimately, however, customers have come to realise that as the business of banking (moving money and securities around) has become commoditised, a lot of these 'you beaut' banking products all start to look the same; they all provide similar levels of functionality, albeit packaged perhaps somewhat differently.

The banks however have been a lot slower than the customers to cotton onto this. In fact, a constant gripe of corporate customers is that banks still continue to push proprietary solutions at them.

The real value for the banks is not their products, they are unlikely to admit that though. It is difficult to picture a candid banker telling a corporate customer, 'Well actually our products are mediocre, but hey our mining of customer data and how we leverage that to provide you with a better level of customer service, is amazing.'

I would maintain (that is perhaps why I am not a banker) that more banks should be having conversations like this with their customers. Banks go on a lot about how much data they collect about customers, their transaction histories. But few banks are leveraging this data in any meaningful or value-added way.

There are many reasons for this: legacy technology investments which means a lot of this data is stored in silos in different departments that do not talk to one another. It is the good old integrate your silos argument. However, the banks are not going to be able to use that excuse for much longer as a lot of the hype and promise around service-oriented architectures, data mining and customer intelligence becomes reality.

Let's be honest though, whilst banks are large users of technology and large portions of their businesses are wholly reliant on it for their everyday operations, banks have not fully grasped the real potential of intelligent and media rich IP-based technologies.

The analyst community predicts that rich media applications such as video and broadband connectivity will add a new dimension to data aggregation and management.
To some extent online sites like Amazon have given us a taster of the potential for gathering customer intelligence via the web and then regurgitating it back at us in the form of personalised information and book or DVD selections based on our buying history. Increasingly, the internet is becoming an experience that is not only interactive but tailored to our specific tastes and interests.

Why can't banking be like this too. I am not talking about simplistic banking applications that customise data pertaining to a corporate treasurer's most recent transactions or their global liquidity position. Some banks may argue it is difficult to drill down into legacy systems and provide this level of information.

However, the banking experience in general is nowhere near as interactive or engaging as it could be. It doesn't really leverage any of the intelligence that banks gather on their customers, to provide an experience that is not only richer but tailor-made to suit a particular customer's needs, whether it is buying FX, selling securities, or transferring money half way round the world.

Isn't it time that banks actually started doing something intelligent and clever with all the information they gather on their customers, customised down to the individual or group level, rather than trying to flog to customers the latest ubiquitous banking application?

Tuesday, October 31, 2006

A new 'pan-European exchange' - Is it what the regulators ordered?

Hot off the presses. A rival pan-European exchange has emerged challenging the dominance of national exchanges in securities trading in a post-MiFID world.

As the November 2007 deadline for MiFID implementation looms, it appears that investment firms are tired of letting the exchanges have it all their own way (in the UK investment firms and alternative trading venues are required to report all trades, including off-exchange trades to the London Stock Exchange, a privilege they pay for handsomely.

Some market players, tired of waiting for European exchanges to put aside their national and political differences, have taken the matter into their own hands by establishing a rival platform that will directly compete with Europe's national exchanges.

“MiFID is intended to promote cost effective pan-European trading, not trading in isolated national exchanges," says Bob Fuller, the newly appointed CEO of Equiduct, which aims to provide investment banks and smaller exchanges with a single point of connectivity for trading equities cross-border. Fuller, as you may know, has been outspoken about the market implications of MiFID as a former director of IT Strategy at Dresdner Kleinwort and former co-chair of the MiFID Joint Working Group IT Sub Group.

It appears Fuller and others are adamant that post-MiFID, trading volumes will not automatically flow to the existing national exchanges. In a clear riposte to the major European exchanges currently mired in ongoing consolidation negotiations, Fuller says Equiduct's objective is to achieve a consolidated Europe by connecting not buying everything.

Equiduct bills itself as a truly "pan-European exchange", the idea being that instead of having to connect to all 28 European exchanges or different exchanges to trade Polish, Czech and French securities, brokers can use Equiduct as a single point of connectivity. Equiduct will initially focus on trading 'liquid' shares as defined by the European Commission.

In the run-up to MiFID, there was talk of the major investment firms, particularly those that intended to be 'systematic internalisers' clubbing together to build alternative trading platforms or execution venues, which is pretty much what has happened in the US market.

There is still a chance this may happen. As Richard Balarkas, co-chair of the Global Steering Committee for the FIX Protocol, and managing director, head of Equity Trading Services, Credit Suisse, points out, MiFID is likely to result in liquidity fragmentation in Europe, similar to what has happened in the US.

However, Equiduct is pinning its hopes on the fact that not all investment firms or multilateral trading venues will want to bear the costs of MiFID compliance themselves and will therefore use its platform to provide services such as pre- and post-trade transparency or best execution. In other words, good old 'white labelling'.

Due to go live in the second quarter next year, subject to regulatory approval and customer prepardness, Equiduct's objective is to not only steal the limelight from Europe's stock exchanges, which let's face it, are fully immersed in national and shareholder politics. According to Equiduct, trading equities post-MiFID is all about low-cost and low-latency (less than 10 millisecond turnaround time for accessing pools of liquidity, to be exact).

Interestingly, the platform Equiduct is using to provide pre- and post-trade transparency and best execution for liquid European equities is an upgraded version of the exchange technology platform that was used by NASDAQ Deutschland and NASDAQ Europe, formerly EASDAQ, the troubled pan-European technology exchange which met its demise. Equiduct no doubt will be hoping that it has better success than EASDAQ or NASDAQ Europe in attracting much needed liquidity.

Tuesday, October 24, 2006

A lot of fuss about nothing?

For all you bankers out there losing sleep at night over whether your anti-money laundering (AML) measures comply with regulatory requirements, according to a noteworthy academic, Dr Jackie Harvey, a principal lecturer in Accounting and Financial Management at Newcastle Business School, Northumbria University in the UK, who has been researching the costs and benefits of AML regulatory compliance since 2001, it appears the threat of AML has been somewhat overstated.

Interestingly, according to the PR blurb accompanying the publication of Dr Harvey's research, as long as compliance officers are personally liable under AML legislation, they "will continue to report everything to cover their backs," which makes it even more difficult to assess the real threat of AML, as opposed to the perceived threat.

According to Harvey, there is "absolutely no evidence" to back up the data on the volume of money being laundered – but it suits the authorities to keep it as high as possible, she suggests. Surely not, the authorities talking up the threat of AML? Is it a classic example of banks being held to ransom by the regulators applying pressure on financial service providers to address a threat, which is non-existent or at best, a relatively low-scale threat?

The over-inflated importance given to AML monitoring software smacks of President George Bush and his fight against terror, which we have all seen takes on strange and varied forms; are the banks essentially doing the work of the CIA and other intelligence agencies in Bush's never ending 'war against terror'?

Well if Bush can get Iraq wrong; as we all know there were no weapons of mass destruction; it is not too much of a stretch of the imagination to suggest that perhaps he and the authors of the Patriot Act, which first thrust AML into the spotlight, may have also got it wrong in terms of overstating the threat of money laundering?

You may laugh, but having spoken with a software vendor recently who specialised in AML, I am convinced that AML monitoring is a lot of work and expense for what? Financial service firms have grappled with the high fail rates of AML monitoring software, which often throws up names that are similar to those on OFAC wanted lists, but are not the actual person wanted.

Dr Harvey more or less says as much by concluding from her research that, regulators unable to quantify the effectiveness of legislation in deterring money laundering, have adopted what she terms a 'second best' approach, with emphasis on the demonstration of compliance with systems and procedures (the 'tick-box' culture).

She goes on to say that the benefits of AML (taken from Government impact assessment reports of legislation) are non quantifiable and generally 'fudged'. Meanwhile the financial services sector is bearing the brunt of the cost of compliance with AML, whilst reaping very little if at all any quantifiable benefit.

Thursday, October 19, 2006

Stalking the stalkers

When you start a blog you get the unusually persistent PR representatives that see it as an opportunity to plug the companies they are working for. As if we are not inundated enough with meaningless press releases about version 5.0 of the latest banking integration application, along comes a PR person (or persons) that have a part-time career in telephone stalking.

Particularly since I invested in caller ID I have managed to identify a regular group of PR stalkers that often ring six times a day at 15 to 30 minute intervals and leave no message.

When pressed as to why they exhibit such stalking tendencies, one PR person said to me that they don't leave messages because journalists never return calls (well they cannot return a call if you don't leave a message, and if they don't return the call, wouldn't that suggest to any sane person that the journalist is not interested)?

Some have also suggested that a number of PR companies encourage their employees to exhibit stalking behaviour until it gets a result; not quite sure what they class as a result though as stalking more often than not is likely to result in a rebuff. Particularly around conference time, the stalking behaviour of PR executives reaches fever pitch.

So for all you banks and IT companies out there trying to get your message across, can I suggest that employing PR executives that moonlight as stalkers is not the way forward. Not only does it have a whiff of desperation about it, but more often than not, it is likely to incur the wrath of said journalist, who instead of listening to your corporate message across is more likely to say f... off!

Tuesday, October 17, 2006

Euroclear ups the ante over Target2 for Securities

Last week at the Sibos conference in Sydney, Australia, Jean-Michel Godeffroy, director general, payment systems, the European Central Bank (ECB) was seen loitering nervously near the exhibition stand of international central securities depositary, Euroclear.

Apparently a member of the Euroclear staff asked him if he was OK, to which Mr Godeffroy replied, 'I have an appointment with Pierre Francotte,' Euroclear's CEO.

And the relevance of this you may ask, well, I am sure ECB staff do not make a habit of loitering near the exhibition stands of financial service providers unless they have something serious to discuss.

Godeffroy was later ushered into a meeting room where, without the benefit of being a fly on the wall, the conversation perhaps went something like this (although it would have been in French and Belgian and perhaps peppered with more expletives);

Francotte: Bonjour Jean-Michel

Godeffroy: Bonjour Pierre

Polite conservation ensues for a few minutes

Francotte (in a polite but raised voice) to Godeffroy: What is the ECB trying to achieve with its Target2 for Securities Jean-Michel. Surely, this can only lead to further market fragmentation within Europe.

Euroclear is less than pleased with the ECB's plans to use Target2, the ECB's payment system for high value payments in euro, as the predominant system for DVP settlement in euro in central bank money for equities, corporate and government fixed income transactions.

Currently CSDs use national payment systems to settle the payment leg of securities transactions or in the case of Euroclear, Euroclear Bank performs that function. However, according to Euroclear, the ECB's Target2 for Securities or T2S proposal means that national CSDs would no longer be able to settle in central bank money; that would be "outsourced" to T2S; they would be required to settle in commercial bank money only.

T2S is a classic example of how regulators and central bankers tend to work. Come up with an idea, which in theory may sound great (after all Europe's clearing and settlement infrastructure is fragmented, why not try to force consolidation by using Target2), but do not consult the market first before you put it out there.

Consolidation of Europe's fragmented clearing and settlement infrastructure is already a political 'hot potato' and securities depositories like Euroclear obviously has its own nest to feather in terms of its plans to consolidate five settlement platforms into its Single Settlement Engine. Euroclear's argument is that they and the market in general are already making significant inroads by standardising securities settlement platforms and market rules governing corporate actions. Then along comes the ECB with plans of its own. Is it a recipe for disaster in terms of creating more market fragmentation?

T2S, Euroclear argues, could damage the work that is already being done by market participants to harmonise Europe's clearing and settlement infrastructure. "There is a risk that commitment to [harmonisation] and commitment to invest in change will fall away if the markets see a risk of double migration in the T2S proposal," Euroclear states.

Whilst the ECB may be trying to encourage further harmonisation of Europe's disparate clearing and settlement infrastructure, the question is to what extent is it willing to go to achieve this? Will T2S transform the ECB into "a full CSD" which would replace eurozone CSDs altogether?

Euroclear has called for further clarification of the ECB's T2S proposal, particularly in terms of whether it would generate additional cost, complexity and inefficiency and whether migration to T2S would be mandatory or voluntary; the latter it says raises doubts as to whether T2S would gain the critical mass required to warrant investment by the CSDs.

Thursday, October 12, 2006

Train wreck ahead

One of the things analysts are good for is the colourful language they use to get us all excited about a subject. Believe you me, sometimes they are stretching it. I find it difficult to get excited about derivatives at the best of times, but at today's closing session of the Sibos conference in Sydney, Karen Cone, CEO of TowerGroup certainly aroused my fast waning interest in a video appearance where she compared derivatives to a "train wreck waiting to happen."

It wasn't that long ago that derivatives were the poor cousins of the securities world. Everybody else was so focused on equities and fixed income. Today credit derivatives volumes are growing faster than the economies of China and India combined, with business in credit default swaps growing by 52% in the first six months of this year to $26 trillion, according to ISDA.

But with "speculative fiascoes" such as those embodied by Enron and LTCM still fresh in the minds of regulators and those ever-cautious bankers that equate some aspects of the derivatives business with gambling, it seems the SWIFT banking community are getting a tad nervous.

In addition to "train wreck" other colourful adjectives that were used to pepper the debate about derivatives in the closing plenary included "a big mess," which was Jacques-Philippe Marson, president and CEO, BNP Paribas Securities Service's reference to certain aspects of the credit derivatives markets, which he said were largely dominated by hedge funds that were less concerned about the middle and back office (in other words automation and settlement risk).

SWIFT has established an Alternative Investment Advisory Group to look at risk and automation issues in areas such as derivatives.

The Depository Trust and Clearing Corporation in the US has announced plans to create a central information warehouse and support infrastructure for automating over-the-counter derivatives.

So are derivatives a train wreck waiting to happen or is the level of risk being over hyped by analysts? Post a comment by clicking on the link below.

Should you care about BICs and IBANs?

Okay it is the end of the day here in Australia and I am really flagging, so I am going to keep it short and sweet. In another demonstration of the banking industry's predilection for presuming that everybody knows it is talking about, the message about including BICs (Bank Identifier Codes) and IBANs(International Bank Account Numbers) on cross-border payments does not appear to have sunk in.

According to Jonathan Williams of Eiger Systems, which provides software for managing BICs and IBANs, the banks presumed that everybody knew about BICs and IBANs when they were first mentioned as a means of reducing the cost of cross-border payments in euro as part of the European Commission's 2001 Cross-border Payments Directive.

From 1 January this year, BICs and IBANs were made mandatory for European cross-border euro credit transfers, but according to one payments vendor, there are few payments within Europe that carry the requisite details, and therefore are not processed as cheaply as a domestic payment.

The upshot of all this however is that since 2003 when the Cross-Border Payments Directive took effect, banks have been charging extra to process payments that do not contain the correct BIC and IBAN details. "There are examples of companies being penalised £20 per transaction," says Williams.

However, he gives the Royal Bank of Scotland a pat on the back for being explicit about the charges it will levy on customers that don't include BICs and IBANs. Meanwhile, in the US it seems that companies there and banks doing business with Europe, do not give a monkeys about BICs and IBANs. "There is a lot of misunderstanding in the US about IBANs," says Williams. Quite frankly neither do corporates it would seem with one French corporate stating it had yet to be convinced of the business case and cost of implementing them.

Given the pressure on banks' revenue streams from competition and regulation, it would appear that not informing their customers adequately about BICs and IBANs is one sure way of making up dwindling revenues, until the banks can think of something better, like adding value.

The missing piece in SunGard's cash management puzzle

I didn't see this one coming, but then I am not psychic and the pace of consolidation occurring amongst software vendors these days is so frantic, that it is resulting in some interesting bedfellows.

The latest one is the SunGard and Trax merger. SunGard announced today that it had acquired Belgium-based financial messaging and payment processing software provider,Trax. Trax helps banks and corporates optimise their payment flows by facilitating connectivity between banks and corporates and transformation capabilities when it comes to financial messaging.

Last year, SunGard made a serious foray into the cash management space with its acquisition of GetPaid, which covers the order-to-cash cycle. The Trax acquisition, which will be incorporated within SunGard's AvantGard treasury management business, is the icing on the cake for the vendor in terms of being able to provide cash management workflow tools throughout the enterprise and higher levels of connectivity. "[Trax] gives us greater flexibility and the connectivity, which goes beyond what we could have done with our payment hub," says an AvantGard spokesman.

The two vendors had worked together on a number of cash management projects and the spokesman said the acquisition felt like a "natural fit", unlike those other kind of acquisitions which are more of a defensive play.

The banana of financial services

By now you are probably thinking I have totally lost my mind. First it was the hamburger and spring roll analogy earlier in the week to explain the concept of relationship based pricing, the spring roll representing a more integrated view of the customer's total value to the business and the hamburger of course, constituting a less integrated approach. (Please note all food analogies are not my own creation but that of vendors and analysts who spend a lot of time thinking about these things.)

Now it seems the banana's turn (which may be quite apt as Australia is currently facing a banana shortage thanks to last year's floods). According to Ralph Silva, research director, TowerGroup, most consumers of financial services (80%) would like to receive all of their financial services from one company, but only 12% believe that is currently possible.

It's this "financial supermarket" concept, which draws inevitable comparisons with Tesco's supermarket franchise in the UK. Silva believes that customers want the same level of consistency in their financial services as they have in their supermarket experience; "If you pick up a banana you know it is a Tesco banana," he says. Apparently, consumers want the same thing from their banks; consistency that is, not bananas.

Not as easy as it sounds though, after all haven't banks invested millions in CRM or something masquerading as CRM only to find it doesn't work. Silva says this is because banks are not very good at capturing the relevant customer information within their financial data.

We all know that banks have a lot of information on us, but they haven't really been able to leverage it successful to the extent say that an has by relaying our buying history to us every time we log on.

TowerGroup's CEO Karen Cone believes that SOA will make a difference here in terms of allowing banks to leverage their data silos.This perhaps explains why a number of software vendors including the likes of Fundtech, Misys, i-flex,Oracle and IBM are are SOA enabling their applications.

According to Cone, it is not just about knowing your customer's needs. In fact she goes as far to say that while banks need to listen more to their customers, they shouldn't listen too much. "Most customers don't necessarily know what they want," she says. "It is about being one step ahead of your customers and knowing what they want before they do."

Time to get serious about SEPA

The title of this post may sound like an oxymoron. After all, I have heard nothing but SEPA all this week at the Sibos conference in Sydney and I am suffering from SEPA fatigue. Is there anything left to say about SEPA?

Well it appears there is, or at least I have managed to interview somebody that has something else to say about SEPA that I thought you should all know. My judgement, however, may be clouded by now.

Anyways, as much as there is a strong whiff of SEPA in the air at Sibos, a number of observers believe that banks need a proverbial ... up their ... "The banks have got to get more serious about SEPA, otherwise the regulators are going to step in," says Karen Cone of TowerGroup.

A number of the larger global cash management banks (along with the vendors that all have SEPA solutions proudly on display promising a hassle free migration to SEPA - it is a bit like taking a headache tablet that makes the pain go away); appear to be rubbing their hands together with glee at the prospect of SEPA as the prediction is that it will be all about who has the greatest volume.

A number of these banks are also fairly well advanced in terms of consolidating their multitude of payment systems onto a single platform, which people like Joe Mazzetti of Fundtech believes is key to managing SEPA. "Our mantra is the convergence of payment systems to do one thing," says Mazzetti. The thinking is that low value and high value payments will merge so banks will only need a single platform for all payments.

Some believe, however, there is too much focus on the complexity and 'pain' of SEPA - just one of the hundreds of regulations that banks have to comply with - and not the opportunities it presents. "There should be more of a focus on how banks can take advantage of SEPA to differentiate their services," says Mazzetti.

Easier said than done though when SEPA to most banks constitutes further commoditisation of payments, declining revenues and a strategic re-engineering of their payments business.

Despite the many 'pain points' around SEPA, Ralph Silva, research director, TowerGroup, believes that banks have a "social responsibility" to make SEPA work.

TowerGroup CEO Karen Cone believes it is more about a fundamental cultural shift that needs to occur within banks. Although analyst outfits like TowerGroup hardly paint a rosy picture for the future of the payments business - by 2016 it predicts that 80% of the world's payments processing will be concentrated in the hands of 25 banks - it is not just about the big banks hoovering up the small fry.

Cone says it is much more about banks really coming to grips with the concept of white labelling to the extent that outsourcing their payments business to their competitor or another bank is a 'no brainer'. Banks can still compete but on the front-end customer channel, not the back end. It has been said before, but banks don't seem to have got their heads around this. It is time for some of them to eat humble pie.

How much should corporates buy into SWIFT?

SWIFT is looking pretty pleased with itself these days when it comes to the number of corporates it now has on its network. There are approximately 168 corporates connected to the SWIFT network, with major multinationals such as GE, Microsoft and IBM signing up for the SWIFT experience.

GE for example has replaced its 40 EDI connections with multiple closed user groups (CUGs) in an effort to standardise its connectivity with its global banks. But not everyone believes that GE's complete buy-in to SWIFT is the way forward. "GE's infrastructure buy-in to SWIFT is nuts," says Joe Mazzetti, executive vice president, Fundtech, adding that he doesn't see other companies rushing to do the same as they don't really want to know the ins and outs of SWIFT to the same extent that GE does.

Yet, whilst SWIFT may be satisfied with 168 corporates (or the Top 200 corporates which SWIFT CEO Leonard Schrank has alluded to), it is really a drop in the ocean when you consider how many corporates are out there. Also, what about smaller to mid-sized corporates that see Closed User Groups as too expensive and are precluded from participating in the 'exclusive' corporate participant category?

"SWIFT still has to get more corporates signed on," says Karen Cone, CEO of TowerGroup. "They should be more aggressive in the corporate space. The percentage of corporates signed on is still tiny."

The unspoken thing that nobody seems to be talking about - only in hushed whispers in corridors - is granting corporates direct connectivity with one another via SWIFT, without the need for an intermediary bank.

Wednesday, October 11, 2006

No panacea for corporates

Its 4pm Wednesday afternoon and it seems that the debate about corporates on SWIFT is losing some of its lustre (did it ever have any?) at least for the less than 60 banks that bothered to show up for a session on corporates on SWIFT.

Suffering myself from a spate of afternoon malaise, I listened as HSBC bank, which proudly boasted that it was in the Top 3 globally in terms of banks connecting corporates via SWIFT, make joining SWIFT sound as easy as signing up for a gym membership.

The market feedback I have heard suggests the exact opposite: time consuming, expensive and a steep learning curve particularly for those corporates lumbered with banks that are not that experienced in connecting corporates to SWIFT. HSBC's Marcus Treacher said that moving on to SWIFT was not "IT intensive", which seems to conflict with corporate perceptions.

Treacher made a big deal about the fact that a survey it had conducted demonstrated that 39% of 200 corporates planned on implementing an MA-CUG in the next 12 months, compared to 31% in the same study the previous year, as if to suggest that SWIFT had significant corporate buy-in. Is 39% significant?

According to Christopher Ben, Standard Chartered Bank, corporates like GE and Arcelor had achieved ROI's of 406% and 605% respectively from standardising connectivity with their banks on SWIFT. Great, whilst no corporate or any sane person could dispute the cost savings of standardising connectivity (according to Ben, proprietary banking connections cost corporates EUR 100,000 a year to maintain), corporates need to read the fine print.

Beneath all the hype is that fact that standardised connectivity does not mean standardised formats. This mirrors a conversation I had with a senior European bank the other day, which said corporates using SWIFT had discovered it was not the panacea they thought it would be. Ben more or less conceded as much saying that he expected this would come as ISO 20022 standards were rolled out.

Let's be honest, though. How can SWIFT say it has made connecting to SWIFT easier for corporates when its new corporate participant category is only open to corporates that are members of stock exchanges in FATF countries? "FATF represents some challenges for banks like Standard Chartered that have a global footprint," conceded Ben.

A waiting game

In typical SWIFT fashion, the banking co-op has seized on reference data like it has most things; SEPA, derivatives processing, corporate actions; saying that it can bring the collaborative problem solving capabilities that are needed to resolve the reference data conundrum. A good example of its expertise in this area, it says is its experience in managing the BIC directory service, which also incorporates national clearing codes.

But is SWIFT really the answer to the problem of reference data, or is it part of the problem? The reason I say that is that companies like Asset Control have been in discussions about providing a joint reference data solution with SWIFT for the last two years. Reference data is one of the underlying themes of SWIFT's 2010 strategy, and Ger Rosenkamp, CEO of Asset Control, believes that his company of 16 years is the unequivocal choice in terms of who the banking co-operative should partner with in the area of reference data management.

Leveraging its centralised data management model, which encourages firms to dispense with multiple data silos, Asset Control joined forces with Accenture to develops its ACDEX outsourced data management solution for handling pricing, reference, counterparty and other data.

Asset Control provides the technology platform for ACDEX and Accenture provides the outsourcing service on top of that capturing Asset Control data which it then manually cleanses. Currently two customers have signed up for ACDEX, a third is expected to be announced soon. "The logical idea would be for SWIFT to provide the network that connects all the financial institutions," says Rosenkamp. But when has SWIFT and logical ever been synonymous?

In typical procrastination fashion (it is the usual joke about how swift is SWIFT), SWIFT is biding its time. "SWIFT needs to make a clear decision about what they want," said Rosenkamp. "What SWIFT wants is very ambitious," he says referring to its ambitions to manage a specific set of reference data around BICs. Yet, Rosenkamp says SWIFT's requirements do not go beyond those of its customers, which are largely Tier 1 firms.

Although banks are still getting to grips with the outsourced data management model, Rosenkamp believes that in five years, ACDEX will be the dominant player and says it has already proved it can increase the efficiency of reference data by 30%.

For Rosenkamp, the choice of who SWIFT should partner with in the reference data space is obvious. But as usual the market must wait for SWIFT to decide what direction it is going to take.

Alternatives to SWIFT

While SWIFT has the habit, like a number of so-called global banks, of beating its own drum and portraying itself as a truly global network, it is easy to overlook the fact that not every bank is on SWIFT and not every bank or corporate necessarily wants to use or join SWIFT.

The Sibos conference has been dominated by the usual PR fluff with IBM announcing that it would join the SWIFT network under the new corporate participant category. SWIFT CEO Leonard Schrank made it clear on the opening day of the conference that it has no ambitions beyond getting the top 200 corporates on the SWIFT network, so what about those other corporates, and the banks that find SWIFT an expensive option for their connectivity needs?

"We have to live with SWIFT," says Jerry Luckett, director, product & strategy, core banking, Misys Banking Systems, commenting that the migration to SWIFTNet was expensive for a number of its members. But Luckett believes it is important for customers to have alternatives to SWIFT.

The alternative to SWIFT brigade seems to be gaining momentum and Luckett believes it could be fuelled by banks rebuilding their payments infrastructure.

Following on from Schrank's comments on day one of the Sibos conference that SWIFT would deliver a further 50% reduction in costs to its members within five years, some say banks could have that 50% cost reduction now if they used alternative IP networks like BT Radianz (this is not a plug for BT Radianz by the way).

In what some see as a potential move to position itself as an alternative payments network provider, UK clearing house Voca will announce today (Wednesday)the opening of a SWIFTNet channel for banks to connect to its Payments Platform for bulk and real-time payments. Voca will establish a market infrastructure Closed User Group using SWIFTNet as a "multi-purpose channel" for its SWIFTNet Transmission Service, which supports its SEPA offering and its new real-time payment service scheduled to go live in November 2007.

Putting on a brave face

When your chairman is quoted as saying that your software is not as good as that of your competitors, it is difficult to hold your head high and carry on as if nothing has happened.

Mired in negative publicity over the last few months with respect to mismanagement of the company and failed takeover bids, the future of Misys Software is anything but certain.

At Sibos in Sydney where Misys has a rather imposing stand decorated in purple and white, its corporate colours, Jerry Luckett, director, product & strategy, core banking, Misys Banking Systems, was putting on a brave face. Luckett says chairman Dominic Cadbury's comments were taken out of context, but conceded that it was a topic that customers at the Sibos conference continued to raise. "We are getting on with doing business," he says. "That is what is important to our customers."

On the core banking systems front, recognising some shortfalls in its Equation and Midas applications, Luckett says Misys is "refreshing" its technology by breaking them down into components, which can be leveraged within an SOA environment.

Misys' competitors in the core banking systems market, more notably i-flex Solutions and Temenos, claim to have been winning business from Misys. Luckett maintains Misys is still winning business in branch banking applications. "The technology refresh recognises that people want open platforms and architectures," he says.

Misys Treasury Plus, the FX confirmations solution it provides to approximately 800 corporates, banks and fund managers, will also have new components added to it including cash management applications - the first piece being multibank and multicurrency reporting - that are not in development yet.

However, it is difficult to be certain about Misys' future direction let alone its foray into the cash management application space until Dominic Cadbury finds Misys a new CEO, following Kevin Lomax standing down as chairman and CEO of the company.

Tuesday, October 10, 2006

PDFs that talk

The ubiquitous PDF, we all use it, we all receive it for free when we buy a PC. With the purchasing of Macromedia, Adobe Systems, creators of the PDF format, have been able to embed more "intelligence" and multi-media capabilities into the once static PDF format.

Leveraging Macromedia technology, PDFs can now speak in the form of live video and audio incorporated within the document. Static diagrams embedded in PDFs can also be made more dynamic.

Adobe is also beginning to make its mark in financial services with its Adobe LiveCycle platform, which generates "intelligent" documents. As Anthony Giagnacovo, financial services, director, Adobe, explains, leveraging its ubiquitous PDF format, LiveCycle generates documents that contain a presentation layer (people to people), a business logic layer (people to machine)and an XML layer, which enables information contained in the PDF to be exported to ERP and CRM systems.

Adobe LiveCycle also includes bar coded forms, which means that even if people want to fax or print off information from a PDF, it can be easily re-entered into the system without manual re-keying by scanning the bar code.

Leveraging these capabilities Adobe is making forays into the trade finance space, which is arguably long overdue. Banks have been banging on about the lack of standards in terms of automating the purchase order and invoice in the trading process, and all along a solution has been staring them in the face; the PDF, which is on most people's desktop even a supplier in the outer reaches of China, for example.

In conjunction with e-document platform provider Tradocs, Adobe Systems has developed a Trade Services Utility Connector Suite which leverages all the intelligent document capabilities enshrined in LiveCycle. The Tradocs Connector Suite can convert any document to the "de-facto PDF standard" and then the information from the purchase order can be sent to SWIFT's Trade Services Utility (TSU) for matching and confirmation.

HSBC Bank has successfully piloted the Tradocs Connector Suite as part of its preparations for the going live of SWIFT's TSU, which is still in pilot phase. According to Adobe, the Tradocs Connector Suite, will enable banks to re-integrate themselves back into the corporate supply chain and open account trading between buyers and suppliers, by more readily capturing information from the purchase order and invoice, which are transmitted in PDF format and managed using LiveCycle, which is implemented on the bank's back-end.