Wednesday, March 28, 2007

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.

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