When the sleeping dragon awakes

Western sell-side firms have been champing at the bit to obtain a slice of the action in the Chinese brokerage market. Swiss-based UBS bank was amongst the first through the door with its purchase of a 20% stake in Beijing Securities. As part of China's entry into WTO it committed itself to allowing foreign partners to take an almost 33% stake in a joint venture brokerage in China.

According to the China Daily, following the announcement on July 2002 that joint venture brokers were permitted, only five have been established, including an arrangement between Goldman Sachs and Beijing Gaohua Securities.

China's myriad retail brokerages have been plagued by irregularities and a lack of corporate governance. The Chinese government classifies brokers into three main types: innovation brokers, standard brokers and problem brokers. At the end of 2005, 14 firms were classified as 'innovation brokers' and about 20 problematic brokers have been closed down or taken over by other firms, according to the China Daily.

Tim Marsh (ex UBS investment bank), chairman, Hong Kong-based Serisys Solutions, which provides IT services to China's capital and banking markets, anticipates that from October 2007, more foreign brokerage firms will enter the Chinese market as from that date they will be permitted to gain management control of Chinese brokers. But it is not just foreign brokers that are eager to penetrate the challenging Chinese market.

Transaction processing vendors are also eager to sell their securities processing solutions to China's capital markets firms to help local firms process the anticipated rise in volumes from the emergence of wholesale brokerage in China and to assist China's 'innovation' or 'modern'(meaning well-run) brokers in their global expansion.

Based on his experience in rolling out back office processing systems for UBS, Marsh and his company Serisys is putting its money on Syn~, the securities transaction processing platform of Coexis, a more than 30-year-old IT provider which originally sold its legacy back office processing solution CMP to investment firms such as Merrill Lynch, Goldman Sachs and CSFB. CMP and its client base was later sold to transaction processing systems provider ADP Wilco, but Coexis has since launched its "next generation" transaction processing and settlement system, Syn~.

Over crispy duck pancakes and prawns with lemongrass at London's Imperial City Restaurant, the location for Coexis' announcement of its strategic partnership with Serisys in Asia Pac, Marsh was effusive about the workflow capabilities embedded within Syn~.

Ply anybody with good Chinese grub and they are likely to be effusive about anything, but Marsh says the business process and rules-based transaction processing engine within Syn~ is unrivalled in the marketplace in terms of its adaptability, scalability and flexibility, the ability to isolate data from the underlying application so it can be used by other applications, and ease of integration as it sits on top of existing applications.

While competing systems such as ADP's Gloss may take a year to implement in complex operational environments, according to Marsh, Syn~ can be implemented in six to nine months. Serisys will support Syn~ in China and Asia Pac as an in-house solution or on an ASP basis.

Both Coexis and Serisys are working on translating Syn~ to Chinese and hope to add all the necessary functionality for the Chinese market by the end of this year. Coexis and Serisys will initially target the solution at the 18 'modern' brokers identified by the Chinese authorities as well as smaller brokers, which it anticipates will opt for an ASP offering.

But what about the global brokerages looking to enter the Chinese market? Won't they want to support their own in house transaction processing systems which they already run on a global basis or competing vendor's systems such as ADP Wilco's Gloss?

Marsh maintains that competing vendors such as SunGard and ADP Wilco do not have "transportable" securities processing solutions that will readily adapt to the Chinese market. "I don't see how foreign brokers will be able to squeeze their systems into Chinese brokers," he says. "It doesn't make any sense."

Serisys believes its local market knowledge combined with Coexis' next generation platform will prove a winning combination and is aiming to capture a 33% market share of the Chinese transaction processing market. Syn~ will be hosted in a development centre within the Hong Kong Science and Technology Park, five miles from the Chinese border. Marsh says this will also enable capital markets firms to comply with Chinese regulations regarding maintaining of customer data.

Overzealous regulators

Aah! What a difference five years of hindsight and a loss in US market competitiveness as a result of overzealous regulation can make. Most of us have been following the recent backlash against Sarbanes-Oxley (SOX), particularly Section 404 of the act, which requires companies to certify and assess the effectiveness of its financial controls.

Whilst the SEC has not totally repealed the controversial act, in light of a marked decline in companies looking to list in the US, which a number attribute to the onerous task of having to comply with regulations such as SOX, it has announced amendments to the controversial SOX legislation.

Yet, the greatest moment of clarity regarding SOX has to be a recent comment made by House Financial Services Committee chairman Barney Frank at a Council for Institutional Investors' meeting in the US last week. According to an article in the Investment News, Frank, alluding to the over enthusiasm of accountants drafting the SOX act stated:

"The accountants probably, in helping draft 404 regulations, overdid it a little bit, and we violated a very important principle: Never ask your barber if you need a haircut."

Perhaps other overzealous regulators should heed Frank's pertinent remarks.

Not up for sale

The rumour mill is rife with speculation concerning cross-border mergers between European banks. Publicity surrounding potential merger discussions between Barclays and ABN Amro has led some to speculate that it may force the hand of some of the big American banks (namely Bank of America) looking for potential acquisitions in Europe.

Interestingly, while Barclays may be in acquisitive mode, some analysts suggest that it is a potential acquisition target itself. At the start of the year rumours were rife that Bank of America was interested in Barclays. And now according to a Wall Street Journal report, there are certain factions within Citigroup putting pressure on chairman and CEO Charles Prince to put in a hostile bid for ABN Amro, despite Citigroup earlier stating that it was more interested in emerging markets acquisitions.

Others it seems are more concerned about denying rumours that they may be potential acquisition targets. On Thursday, Belgium's second largest bank, KBC Group issued a press statement saying that despite rumours regarding ING seeking a Benelux alliance, it was not up for sale, or its exact words, "it [KBC] attaches a lot of importance to [its] standalone position, and has a core shareholder group which backs this strategy."

Flying the flag of independence, KBC Group says it aims to be an independent, medium-sized, bancassurer for private persons and medium-sized enterprises, and is investing substantially in developing its UK investment banking and private clients business.

But in this era of renewed pressures for consolidation particularly from shareholders seeking higher returns and greater economies of scale, can any bank really afford to say they are not up for sale?

Core banking systems - A necessary evil?

Upgrading core banking systems is not something any banks does lightly. Migration to new systems can take years to bed down and 'Big Bang' migrations have more often than not resulted in disaster.

So if one of the major banking and payments technologies providers in the US, Metavante Corporation and one of Europe's leading core banking systems vendors, Temenos, starts telling US top-tier retail and commercial banks, that time is running out and that 20 to 30 year-old legacy systems need to be upgraded, do you sit up and take notice or bury your head in the sand for another 10 years?

So far most banks in developed markets have opted for the 'ignore it and it will go away' approach to core banking systems replacement. According to a 2006 study conducted by Aite Group, approximately 12% of U.S. banks and the top 500 credit unions have reached a critical point for core system replacement. "They are paying high maintenance costs, and they suffer from slow product launches and an inability to easily integrate third-party applications or access information for compliance to new regulations," Aite writes.

Yet, despite the need for new systems, only 4% of U.S. banks and top 500 credit unions were expected to deploy a new core banking system in 2006. Of these deployments, 90% were by small U.S. banks and credit unions. Hardly a resounding vote of confidence in core banking systems replacement, which means any vendor trying to penetrate the US market may run into a brick wall.

Despite these challenges, Temenos, a leading European and emerging markets provider of core banking software, with a relatively small footprint in the US market, has set its sights on growing its US market share. However, recognising the "barriers to entry" in the US, it opted not to go it alone. Instead it is partnering with US-based Metavante Corporation, which provides banking and payments technologies to more than 8600 financial services firms worldwide.

Metavante counts 91 of the top 100 US financial institutions as its customers and as part of its strategic alliance with Temenos, it will "co-develop" an "advanced US global banking platform," based on Temenos' TCB retail processing solution for large-scale retail and commercial banks. Michael D. Hayford, COO and CFO of Metavante said they were attracted to Temenos' technology because of its multilingual, multicurrency, 24 x 7 processing capabilities, components US banks were missing.

Metavante will be the exclusive US provider of the "new advanced TCB platform," and in those banks that already use Metavante's core banking software, it will be replaced with components from the TCB product. Temenos and Metavante will initially target the top 50 US financial service providers with their new US global banking platform, which can be licensed or outsourced via a service bureau.

But what makes Temenos and Metavante think that their offering will be enough to convince US banks to upgrade 20 to 30-year-old legacy systems? By combining Temenos' advanced technology with Metavante's US banking knowledge, existing customer base and outsourcing experience, both companies believe it is a recipe for success.

Metavante and Temenos' approach in the US market is to encourage banks to replace core banking systems, component-by-component rather than a more riskier 'Big Bang' approach. And its outsourcing offering will certainly reduce the upfront investment for some banks.

Metavante maintains US banks no longer have any choice but to upgrade. "Large US banks have invested in nice front ends and bolted on interfaces to hide this back office functionality which is still running the way it has for a long time," says James Dempster, CTO, Metavante.

A number of US banks probably subscribe to the belief, 'If it ain't broke don't fix it.' Yet Dempster maintains that the "new cheque paradigm" in the US, and the move towards more electronic forms of payment, as well as the competitive threat posed by other banks and non-bank providers (for example, Wal-Mart), means US banks will be forced to move to a "continuous processing model" in order to compete and provide more competitive products.

Other global banking solution providers such as SAP/Accenture, Infosys/Finnacle and Oracle/i-flex are also looking to penetrate the US market. And whilst Metavante and Temenos believe their US market knowledge gives them a critical advantage over these providers, one cannot ignore the the 'stack' approach of competitors such as Oracle which is stitching different applications together including CRM, ERP and core banking software as part of its Fusion middleware strategy.

Mere mention of Oracle, however, is always guaranteed to arouse a passionate response. Alex Groenendyk, president, Americas, Temenos, maintains that Oracle is not a favoured supplier to the financial services industry and that Metavante's knowledge of the US banking market is unrivalled.

Dempster of Metavante expanded the point further saying, "Large US banks do not want an enterprise model. They want modular components that will interoperate with their existing architecture." Dempster believes that Oracle and SAP will suffer from their "tight connection" to Fusion and NetWeaver.

Andreades of Temenos is more passionate in his response to the competitive threat posed by Oracle/i-flex. "If you give your database model and applications to a single vendor (namely Oracle), you have given your business to that vendor to run. We don't believe the stack is the way to go."

I Can't Get No Satisfaction

Now that the outsourcing trend has well and truly passed the 'hype cycle' and plunged into the proverbial 'trough of disillusionment', global outsourcing advisory firm TPI has shed some light on why firms are becoming increasingly dissatisfied with outsourcing.

For those non-believers that strongly contest firms' dissatisfaction with outsourcing, TPI says it witnessed "a record number of re-negotiations" of outsourcing contracts in 2006, representing almost a quarter of all commercial contract awards made during 2006. "And this trend shows no sign of abating," according to TPI partner Stuart Harris.

TPI's summer 2006 survey of 40 international firms on their experiences of restructuring or renegotiating outsourcing contracts, found that 28% of respondents achieved less value than originally anticipated from outsourcing, with some companies restructuring their agreements within 18 months of having signed them.

But while it may be easy to point the finger at outsourcing providers as the source of dissatisfaction, TPI's research found that 61% of firms conceded that they had placed more emphasis on setting up the outsourcing contract rather than on managing it, and another 52% of respondents blamed their own "unrealistic expectations" as a key barrier to success.

Almost half of the companies surveyed by TPI blamed their "inexperience" in managing outsourcing and 46% said they had failed to fully implement a proper governance structure, with 35% failing to convene regular meetings of governance boards. It harks back to the age old adage, 'You may outsource the problem, but you still need to manage it.'

Yet, while firms have been remiss in terms of their expectations and ability to manage the outsourcing process, outsourcing providers are not entirely blameless. Historically, they have tended to emphasise the 'pros' as opposed to the 'cons' of outsourcing, by highlighting aspects such as cost savings in the region of 50%, without underlining the 'hidden costs' often involved in outsourcing.

Yet, whilst dissatisfaction with outsourcing contracts may be at an all time high, few firms surveyed by TPI had actually severed their relationships. Of the 42% that considered soliciting bids from other outsourcing providers during renegotiation, only 18% actually did so. Similarly, 41% said they considered bringing some of their outsourced work back in-house, but only 13% did.

Yet, as any bank or asset manager will know, moving to a new outsourcing service provider is not as easy as it sounds. "TPI has found that the friction typically involved in making the switch can be quite considerable,” says Harris. And as providers of outsourcing services are aware of buyers' 'weaknesses' when it comes to managing outsourcing contracts, Harris says that perhaps explains why 29% of buyers surveyed said they found their bargaining position weakened at renegotiation, compared with when the deal was originally struck.

It would seem that some outsourcing providers have firms over a barrel as once they are in the relationship, depending on how deep it is and the services it encompasses, it may be difficult for some firms to get out out of a dissatisfying outsourcing contract. And while we occasionally hear of outsourcing deals gone sour, they are just the publicised ones, and are perhaps not a true reflection of the general level of dissatisfaction firms may feel about outsourcing.

The SQL debate continues

In response to my earlier post on the debate surrounding the use of SQL in complex event processing (CEP) applications, Mark Tsimelzon, CTO of CEP vendor Coral8, has written something himself on the subject entitled, CEP and SQL: The Top Five Myths.

Make your own minds up.

The SQL debate

Having opened a veritable 'can of worms' with my post dated the 2 March entitled, Event Processing gets 'complex', my curiosity regarding the debate surrounding the use of Structured Query Language (SQL) in some complex event processing (CEP) applications, was further aroused.

The debate that post generated can more or less be summed up as the pro-SQL vs non-SQL camp, with CEP vendors like StreamBase Systems putting its case for an SQL-based standard for querying real-time event streams and stored data, while other vendors such as Kaskad and Progress Apama stated that there was little support for a SQL-based standard for event stream processing (in terms of companies offering this approach).

That may well be the case, but if so many CEP vendors do not support SQL, it made me wonder why some were sticking to their guns and implementing SQL-based languages anyway? I was interested to read an article penned by John Morrell of complex processing software provider, Coral8, reproduced on the Complex Event Processing web site.

Coral8 has developed an SQL-based Continuous Computation Language. In the article Morrell writes, "This [SQL] provides a familiar programming environment, speeding the creation of event processing applications." He later adds that as SQL is a 'pervasive' language, it lowers the learning curve for developers of CEP applications.

So there you have it. The highly competitive CEP space is dominated by vendors pushing different approaches, and after all choice is a good thing. But is there a right or wrong approach, and can SQL in CEP applications be discounted altogether if it does do what its proponents say it does in terms of speeding up development?

MiFID - Hit the ground running

Not a week goes by where there is not some news on MiFID. Today appears to be no exception. With eight months to go until the official launch date for MiFID, suddenly all the experts are crawling out of the woodwork..

One such expert is Marcus Hooper who has penned a white paper sponsored by Equiduct on firms' best execution requirements under MiFID. Apparently Hooper has trawled through reams of MiFID Level 1 and 2 documentation to try and make sense of 'best execution' requirements, one of the most controversial least understood aspects of the legislation. The white paper includes example scenarios to explain how best execution is expected to work in real-life trading situations.

"The reality of today's situation is that many firms are still confused about the most fundamental aspects of best execution, despite the fact that they will all have to implement systems, design business processes and comply with the new rules from November," says Hooper.

The white paper is one of six Equiduct is sponsoring in the run-up to MiFID. According to Bob Fuller, CEO, Equiduct, it is time for firms to hit the ground running. "If organisations are to make a success of MiFID they have got to move beyond opinion and actually determine what to do now to make sure their businesses are ready when the new rules become law on November 1st 2007."

The white paper on best execution will be available free for download from Equiduct's web site from Monday, 5 March.

Event processing gets 'complex'

The latest IT bandwagon that vendors are jumping all over is complex event processing, which promises to help firms make rapid decisions on streaming data (tick prices, for example)that is "constantly changing".

It is lumped into the broad category of 'business intelligence,' which is seeing a lot of activity of late with Oracle announcing its $3.3 billion acquisition of business intelligence (BI) vendor Hyperion, which it will combine with its own BI software to provide customers with tools for collecting and analysing information about their business.

What is the big deal about BI and complex event processing? Every firm has reams of customer, logistical and transactional data stored in silos, but this data is meaningless unless firms can glean some form of intelligence from it and use that to enhance customer service levels or gain a competitive advantage.

Event processing (EP) has found a natural home in the capital markets, where according to Brad Bailey, a senior analyst at Aite Group, "[it] has made an impressive showing in the algorithmic and strategy trading areas, and EP solutions are now migrating to other areas of the capital markets, such as data monitoring, compliance, Transaction Cost Analysis (TCA), risk management, proprietary data derivations, market making, and others."

A number of vendors are now claiming that event processing software is a 'must-have' component of firms' preparations for MiFID particularly when it comes to intelligent order routing and demonstrating best execution

Yet, making sense of what vendors are really offering in the event processing (EP) space is fraught with difficulty as not all of the firms in this space are specialists, they have merely added on BI or EP tools to existing data management applications.

Phil Howard, research director at Bloor Group cautions that "misleading claims" are being made about performance in the CEP space. There are claims and counterclaims about the speed and performance of various EP applications. There also appear to be some deep-rooted philosophical differences between vendors, which is only adding to the confusion for firms contemplating event processing for the first time.

Streambase Systems, designed its own language (StreamSQL) which adds time and event-based windows to standard SQL (Structured Query Language)to support live time queries on event streams. SQL has been used for many years to access and manipulate database systems.

Barry Morris, chairman and CEO of Streambase, says there is no other candidate than SQL, which is more widely used and understood than some of the proprietary technologies and languages competitors are developing.

Critics of SQL say it is not up to the job of performing real-time queries on streaming data, yet Morris maintains that it hasn't encountered any problem it hasn't been able to solve using StreamSQL. "StreamSQL allows firms to access static data that is on disk or in-memory in the same way that they access real-time data," he says. He claims that an "old fashioned" 'rules-engine' type approach, which some of its competitors offer, does not know how to handle static data.