Saturday, September 29, 2007

Innovation comes from within

Our first guest blogger for Sibos in Boston is Tim Lind, who during his time at TowerGroup did a 'Heidi Miller' on the securities industry with his aptly titled, "A Eulogy for STP and the Asset Manager," which blamed poor STP on custodians' inability to understand what fund managers really cared about, alpha.

Lind is now managing director, strategic planning, for post-trade pre-settlement solutions provider Omgeo, and ahead of his "intellectual battle" on Tuesday in the Sibos Fund & Investment Management Forum debate, Lind calls on the industry not to rely on regulation for innovation.

On Tuesday, I will be speaking on a SIBOS panel, against the need for more prescriptive regulation. Whilst I am sure it will be entertaining for the purposes of the debate to be on the side of good versus evil, we all know that it isn’t that clear cut. Whilst no one wants to be burdened by onerous rules and regulations, guidance from regulators plays an important role in shaping behaviour in the securities industry.

But it’s not just the role of the regulators to initiate transformation. The institutions that drive our industry must show leadership in putting the interests of the investor first and foremost. Just as doctors are bound by a ‘Hippocratic Oath’ to do no harm to their patients, shouldn’t we expect the leadership of our industry to uphold the interests of the investor with the same zealousness?

Current discussions around the pros and cons of principles- versus rules-based regulation are turning attention away from the industry‘s responsibilities. It may appear easy to criticise the SEC for implementing a regulatory overload, or to praise the FSA for its apparently more enlightened approach, but the responsibility for identifying pockets of risk and initiating ‘palatable’ change lies with securities firms and industry bodies as well as regulators.

In a 2004 speech addressing the mutual fund scandals in the US, William Donaldson, then chairman of the SEC, summarised the point beautifully. “Opportunity may only knock once, but temptation leans on the doorbell. As much as we may wish to, we will never be able to set and enforce rules that govern every situation in which an investment adviser’s employees might be tempted…”

The SEC has made it clear they expect the industry to follow the highest level of ethics, not because they should fear enforcement (which of course they should) but because it’s their responsibility as a fiduciary.

That said, threats of regulation, rather than regulation itself, have proved effective in the past. Rather than issue an edict, the Federal Reserve threatened to intervene unless the world’s biggest banks reduced their credit derivative processing backlog by 30%. The banks responded to the threat, achieving this goal and even outlining their own new target of cutting the backlog of unconfirmed credit derivative trades by 70% in a letter to the Fed.

The European Commission took a similar approach when it decided against issuing regulation to increase transparency in European Clearing and Settlement. Instead it issued a Code of Conduct which seems to be working.

I admit that it doesn’t always happen this way. The Canadian regulator, the CCMA, having seen no evidence of self-transformation, decided to tackle one of the most risk-laden spaces in the trade life cycle. The regulation, known as National Instrument 24-101, mandates that institutional trade matching, or same day affirmation (SDA), be adopted by investment managers in the Canadian financial market by the summer of 2008, via STP. However, by having the option of a phased approach over a few years, firms have at least been given time to get their back-offices in order.

As a community, the securities industry is evolving at a faster rate than ever before. Technology is empowering the rate of innovation, and it is clear that the entire industry must constantly review ways to ensure that this change can continue safely, preventing systemic and market risk. It’s not just a question of rules vs. principles, it’s a question of responsibility.

A different perspective on Sibos

The last time SWIFT's annual user conference was in the US in Atlanta, Heidi Miller, executive vice president and head of JPMorgan Chase Treasury & Securities Services, lambasted the banking community for "being a long way from STP" and the "glacial pace" at which banks moved, weighed down by legacy investments, regulation and compliance.

Are banks at the epicentre of the transaction services industry as secure as banks think, Miller posed? Well it is three years since Miller made that speech and those that saw it have been dining out on it for some time. It struck a chord - bankers were surprised at someone in their own camp being so forthright about banks and SWIFT needing to raise their own game, when normally Sibos is as an opportunity for bankers to pat themselves on the back.

Will there be a lot of back patting at Sibos 2007 in Boston? Well this year the opening plenary features a new SWIFT CEO Lazaro Campos and Ken Lewis, chairman and CEO of Bank of America. Those of us that have attended more opening plenaries at Sibos than we care to remember would like to think that the industry has heeded Miller's message got their act together and moved swiftly to up their game.

But with an industry still overburdened by legacy systems, the unfulfilled promise of service-oriented architecture, dwindling payment volumes and even more regulation, as well as the global fallout from the recent credit crunch, is innovation and banking an oxymoron or has the industry really 'gained momentum,' to borrow SWIFT's theme?

In the coming week we will be covering of on the major themes of Sibos 2007 in Boston - corporate access on SWIFT, and the ongoing automation and regulatory challenges faced by the investment and fund landscape. A different guest blogger from TowerGroup will be joining us each day to share their thoughts on some of the main issues raised throughout the day's events. And I as usual will be wading through the mines of nonsensical press releases to try and provide you with a different perspective on Sibos.

Wednesday, September 26, 2007

Berlin's stock exchange looks to Equiduct

While Project Turquoise may still be looking for a CEO (well they were the last time we checked), the "pan-European exchange," Equiduct is looking to shore up market share by getting into bed with Börse Berlin.

Börse Berlin announced this week that it had taken a majority stake in Easdaq, which trades as Equiduct. Equiduct revived the old Easdaq trading platform in response to the removal of the 'concentration rule' under the Markets in Financial Instruments Directive (MiFID), which effectively means trading of equities on the Continent is no longer confined to national exchanges.

Under MiFID, exchanges like Börse Berlin are tipped to be part of a dying breed as supposedly faster and cheaper multilateral trading facilities, ECNs and alternative trading venues emerge post-MiFID to try and steal market share from 'dinosaur' exchanges. However, as we reported in the latest issue of Financial-i, few contenders other than Equiduct, Chi-X and Project Turquoise (which has yet to find a CEO) have thrown their hat into the ring.

According to the PR blurb the deal between Börse Berlin and Equiduct will provide their customers with "unrivalled access to trading in a broad category of European financial instruments." As to what this precisely means has yet to be revealed but Equiduct believes it has the "state-of-the-art" trading system and Börse Berlin has the "broadest range of securities" and experience in secondary exchange trading.

Thursday, September 20, 2007

ME exchanges battle for dominance

The long suffering Nasdaq which was unsuccessful in its bid to court the London Stock Exchange (LSE) and looked like suffering a similar setback in its pursuit of OMX Group in the Nordic countries, appears to have reached an interesting comprise.

Bourse Dubai, the other suitor for OMX, has agreed to let Nasdaq have OMX, while the Dubai exchange has agreed to take on Nasdaq's stake in the LSE, as well as a 20% stake in Nasdaq itself. It is all starting to sound rather incestuous in the world of exchanges - everybody is hopping into bed with one another in their bid to go global.

As part of the deal Bourse Dubai has agreed to give Nasdaq a share in the fledgling Dubai International Financial Exchange, which will now carry the Nasdaq name and use both Nasdaq and OMX market technology. Is it a 'win-win' for all parties? Well the LSE and Middle Eastern sceptics in Washington may not be cracking open the champagne bottles just yet.

As some pundits suggest, a government-owned UAE exchange owning a stake in a US brand name like Nasdaq may rise the ire of those that are not in favour of any Middle Eastern company owning anything American. One only has to recall Dubai Ports World's decision to sell off its US operations to an American owner following pressure from Congress. Is the US Congress likely to have similar feelings of discomfort about Bourse Dubai owning a stake in Nasdaq?

Similarly those that nurse nationalistic sentiments about the LSE may be equally miffed by the deal. This was borne out by the LSE's response to Qatar making an offer for Nasdaq's 31% stake in the LSE. According to a report in The Times, the LSE welcomed the Qatari investment as a "long-term" play. No such sentiments were ascribed to Dubai's stake in the LSE.

Now it appears the battle lines have been drawn between Dubai and Qatar with the latter making an overnight raid to acquire an almost 10% stake in OMX. Few could have predicted that the fate of the LSE and Nasdaq would lie in the hands of Middle Eastern exchanges.

Tuesday, September 18, 2007

Banks should talk to procurement

We have all heard about the benefits of electronic invoicing - replacing manually intensive paper-based invoicing with electronic machine-readable invoices could save the industry EUR 100 billion a year. Yet, the reality is that only 2% of total invoices are transmitted electronically.

So why despite the overwhelming business case for e-invoicing are companies dragging their feet when it comes to actual implementation. At the 16th Eurofinance International Cash & Treasury Management Conference in Vienna, Kjell Gunnar Gustafasson, chief purchasing officer, E.ON Sverige AB in Sweden said that what was missing was a total end-to-end e-invoicing solution that was well integrated with companies' back-end systems.

When it comes to e-invoicing, companies like E.ON do not want to see a myriad of proprietary e-invoicing solutions. "We want to see a solution similar to roaming," said Gustafasson, drawing parallels between pan-European e-invoicing solutions and pan-European roaming in the mobile telephone market.

Gustafasson challenged the e-invoicing industry to abandon its proprietary mentality and support standardisation. He also called on the banks to play an enlarged role by developing "inter-banking" arrangements which he said had a better chance of encouraging supplier adoption of e-invoicing rather than single bank solutions.

"I would like to see the banks and bankers learn more about the purchasing process and engage in their customers' every day processes," he said.

"Banks only talk to treasurers," said Patricia Pittomvils, vice president, payments, cash management and cards, TietoEnator UK. "They should also talk to procurement people."

But it appears it is not all bad news for companies trying to establish a business case for e-invoicing. After a slow start, Pittomvils said "The good news is that banks are becoming more interested in e-invoicing." An example of this she said was the European Banking Association's Stakeholder Forum, which is looking at e-invoicing as part of SEPA. Vendors such as TietoEnator are also members of an e-invoicing Interoperability Club.

But it appears vendors and companies are waiting for the banks to fully grasp the enlarged role they can play in e-invoicing by re-using existing banking channels and leveraging banks' "credibility". I posed this question to Marilyn Spearing, global head, trade finance and corporate cash management, Deutsche Bank, who said that while it had invested in its electronic bill presentment and payment solution, it had yet to see significant traction by corporate customers. "The fact that corporates need to change their whole processing has meant slower adoption of e-invoicing," she said.

Surely then it is up to the banks working with vendors to simplify that process.

Making 'bold' SEPA predictions

Just as the banks like to make 'bold' statements about how they are using regulatory imperatives such as SEPA (Single Euro Payments Area) to transform their payments offerings, you can always rely on a consultant to come and put a spanner in the works as it were.

While the major global cash management banks have not been shy about advertising their SEPA-readiness, interestingly not everyone believes they are going to win the lion's share of SEPA payment volumes. Wouter de Ploey, senior partner at McKinsey & Co., Belgium, boldly predicted at Eurofinance's 16th International Cash and Treasury Management Conference in Vienna that smaller regional banks were the most likely to benefit from SEPA.

"I don't think the global banks will be the big winners as they are more sensitive to loss of revenues in their cross-border flows." De Ploey maintains that regional European banks are likely to "move more aggressively" into the corporate banking space as the move to standardised credit transfers and direct debits under SEPA will lower the barriers to entry for these banks to develop pan-European instruments for corporate customers.

Meanwhile, the larger global payment providers' mantra is 'volume, volume, volume' - those that can process the most payment volumes are more likely to deliver the greatest cost savings and efficiencies.

Whether SEPA will force banks to converge towards a single pricing model is uncertain, says de Ploey as banks in different regions derived their payments revenues from different sources. For example, he said some banks generated the bulk of their revenues from the retail banking side and therefore may be less inclined to offer reduced pricing under SEPA to corporates.

De Ploey said the focus on Additional Optional Services (AOSs) by banks looking to make up the billions in revenue that will be lost by standardising payments under SEPA, could result in "non-standardisation" meaning banks could charge more for value-added services as a means of recouping some of their lost revenue.

Anne Boden, head, transaction banking, Europe, ABN AMRO, said that AOSs that meant additional functionality for certain customer or corporate groups with specialist requirements was a good thing. "However, AOSs which are country specific are not in accordance with the objectives of SEPA," she said.

When it comes to migrating to SEPA, de Ploey outlined a number of options including a slow and gradual approach to SEPA adoption, the 'domino effect' and the 'Big Bang' approach. A slow and gradual approach was the least likely, he says, while banks tended to favour a regulatory-mandated 'Big Bang' transition to SEPA, which he said meant they could standardise as little as possible and provide more AOSs at a higher cost.

De Ploey believes the most likely SEPA migration scenario is the 'domino effect' where migration to SEPA starts off slowly and then increases rapidly. Either way he says banks in particular are going to find the transition to SEPA painful because of the "cross-subsidisation" of the payments business within Europe.

Boden of ABN AMRO said the SEPA migration for corporates and banks was complicated and could last well beyond 2011 with no clear end in sight for the switching off of existing national payment systems. Describing the SEPA migration process she said it was "like people deciding to change which side of the road they drove on at different times."

With such uncertainty and complexity surrounding migratinv to SEPA, Boden said it was important all parties kept the end game in sight. "SEPA is a good end game as we will be using the same set of standards across Europe. But getting there is going to be quite complex." Boden said she had every confidence that in the next two to three years the majority of ABN AMRO's clients would convert to SEPA.

WSS to support corporate demands for more streamlined digital identity management

I have been ranting a lot recently about digital signatures and certificates and the demand amongst major corporations such as Merck for a single non-proprietary digital identity managment solution that is interoperable between banks.

Well it now seems that treasury management system vendors are also starting to support their major corporate customers in this area with Wall Street Systems (WSS) announcing at Eurofinance's International Treasury & Cash Management Conference in Vienna that it is looking at incorporating digital signature functionality within its treasury management applications to address a wide range of corporate needs.

While corporates such as Merck have opted for the bank-issued digital identity credentials of IdenTrust, Terry Beadle, executive vice president, WSS said that its approach was not to align itself with a particular vendor. "We will find a generic point of integration and work with multiple vendors," he said. "When you look at it [digital identity] from a technology point of view, our customers are asking for different ways of doing things. We need to develop a [digital identity] solution that fits everybody."

Beadle said this was something it planned to deliver soon, and that it may also need to consider any identity management solution SWIFT devised as more corporates joined SWIFT MA-CUGs and SCORE to communicate with multiple banking providers.

WSS will also more heavily promote existing SWIFT connectivity embedded within its treasury management suite so that corporates can directly connect from their TMS to SWIFT without the need for any middleware.

The treasury management systems vendor also continues to invest heavily in ASP-enabling its applications, with its cross-asset investment and debt management solution, Wallstreet Suite, becoming the latest application to be ASP enabled. "Twenty percent of our customer base is now on ASP," said Beadle adding that its multiple instance ASP model is now the fastest growing part of its business with both top tier corporates such as Adidas and mid-tier corporates opting to have their treasury management functionality hosted by WSS, which provides the hosting in conjunction with network connectivity provider SAVVIS.

WSS maintains that corporate treasurers can save between 25% to 30% of the costs of hosting an application inhouse by outsourcing hosting to an ASP, which it says is a more attractive alternative, particularly for smaller treasury teams without a dedicated in-house IT department. WSS hopes to achieve an even 50/50 split between its ASP and traditional software licensing model.

Unlike 'pure-play' ASPs that provide a single instance of treasury management applications which multiple users connect to, Beadle said its multiple-instance ASP approach provided customers with more flexibility, enabling them to customise the application to suit their individual needs. He said it also lessened the "theoretical risk" of customer data being shared by maintaining separate databases.

Pulling SEPA out of the 'doldrums'

With migration to the Single Euro Payments Area (SEPA) compromising banks' traditional payments revenue (the World Payments Report 2006 estimates banks' direct revenues will be cut by approximately 38% to 62%), Deutsche Bank made the bold move of announcing that it would apply the same pricing to all payment transfers within the eurozone regardless of payment size.

SEPA applies to low value payments within the eurozone below the EUR50,000 threshold. However, at Eurofinance's International Treasury & Cash Management conference at the Austria Centre in Vienna today, Marilyn Spearing, global head, trade finance and cash management, corporates, Deutsche Bank Global Transaction Banking, said they would offer a "common price" for any payment transfer within the eurozone, effectively treating all payments the same and removing the distinction between high value and low value payments.

With the World Payments Report 2007 indicating that public sector organisations and corporates may need regulatory incentives in order for migration to the new SEPA payment instruments to achieve critical mass, Spearing said Deutsche Bank was dangling a 'carrot' in front of corporates and financial institutions in order to drive SEPA adoption.

This is quite a bold move given that other payment processors within Europe have not widely publicised their pricing models post-SEPA. Spearing said the announcement was part of the bank's strategy to establish itself as the dominant SEPA payment provider and to shore up payment volumes from both banks and corporates. "We want to get the maximum benefit from any changes we have invested in," Spearing explained, pointing to Deutsche's investment in its new single payments engine for processing all currencies.

Given that there will be no 'Big Bang' migration to SEPA from January 2008, Spearing said SEPA needed to be dragged out of the "doldrums," and corporates needed to act now in order to realise the gradual payment efficiencies that will come from SEPA.

In an effort to incentivise corporates to support SEPA, Deutsche also announced that it would continue to support existing international payment formats such as iDOC, CSV and EDIFACT, and will convert these formats to SEPA compliant XML formats without companies having to invest in and adopt XML themselves.

Deutsche will also accept SEPA payment transfers from any Deutsche account within the eurozone and the UK eliminating the need for customers to open new accounts to process SEPA payments. It will also "re-convert" BICs and IBANs back to national account numbers to aid reconciliation. "Corporates don't need to change their technology or their account structures," Spearing explains. "We want to make SEPA as simple as possible."

Spearing said by taking a more aggressive stance in driving SEPA adoption it hoped to avoid the need for further regulatory intervention in low value European payments.

Friday, September 14, 2007

Just say no to SEPA

Just when you thought there was nothing left to say about the Single Euro Payments Area (SEPA), there appears to be plenty. All this talk of SEPA and pan-European payment intrustments over the last few years anyone would have thought there would be an instant market for the instruments.

But as the January 2008 deadline for banks to start offering SEPA Credit Transfers approaches, it appears neither corporates or public sector organisations have much of an appetite for the new SEPA payment instruments. Corporates maintain that the new SEPA instruments are not a significant improvement on existing national instruments, so why should they adopt them?

This is borne out by the World Payments Report 2007 which after analysing SEPA migration plans and preparations in 13 of the eurozone contries, concluded that it is unlikely a critical mass of SEPA payment instruments will be achieved by 2011. The European Financial Management & Marketing Association (EFMA), one of the co-publishers of the report alongside Capgemini and ABN AMRO, has called for regulators to provide incentives in order to mobilise public sector companies and corporates.

But with the new SEPA payment instruments symbolising bank-to-bank standards, corporates have not been engaged enough by the banking community to fully participate in SEPA, and for them SEPA is not SEPA without add ons such as pan-European e-invoicing standards and banks dispensing with their support of proprietary standards and applications so corporates can more easily communicate with multiple banking providers.

So much for full transition to SEPA by 2010 it seems (most banks probably realised that the transition period would extend beyond 2010, however there appears to be no end in sight as to when banks will stop supporting the existing national payments infrastructure and move wholly to the new SEPA payment instruments).

The World Payments report indicates that some countries want to retain national payment systems as long as demand exists, but doesn't this defeat the original intent and purpose of SEPA, and how long can banks bear the brunt of the cost for running two systems in parallel?

Monday, September 10, 2007

Blogging Sibos

It is that time of year again when the spam filters on journalists' inboxes go into overdrive as invites to meet with companies at SWIFT's annual user conference, Sibos reaches fever pitch.

Following our launch at Sibos 2006 in Sydney Australia, FinancialTech Insider will be providing daily commentary, opinion and analysis of the goings on at the Sibos conference and exhibition. This year for the first time, Rob Hegarty, managing director, securities & investments, TowerGroup and Gareth Lodge, analyst, European Payments, TowerGroup, will be joining FinancialTech Insider to blog on the latest news from Sibos.

Join us for a different perspective on how far the industry has move on since Sibos in Sydney.