Friday, February 05, 2010

Sybase-Aleri deal plays to the advantage of remaining pure-play CEP vendors

I remember writing about the burgeoning Complex Event Processing (CEP) market two or three years ago when their were a handful of vendors; StreamBase, Coral8, Aleri, Progress Apama,; all vying for market share and using CEP to service different parts of the market. Some like Progress Apama were focused on CEP and its application in the algo trading space, while Aleri was more focused on the liquidity management side.

With this week's announcement that Sybase had finalised an asset purchase agreement with Aleri, the CEP pure-play market has virtually shrunk overnight. Sybase was already using Coral8's CEP in its real-time analytics or RAP platform and had a reseller agreement with Coral8.

However, Coral8 was bought by Aleri back in 2008 giving Aleri essentially three CEP products, its own, Coral8's and OHIO, the project name for its attempt to integrate Coral8 with Aleri's CEP engine. Meanwhile since 2008, Sybase had a reseller agreement  to offer the Coral8 engine and portal as a general purpose CEP platform "in conjunction with any Sybase solution globally".

There is a lot of speculation on the web about why Aleri sold up to Sybase, including an article on Wall Street & Technology speculating that maybe Aleri was having financial difficulties. However,   the truth may lie somewhere in the complicated morass of reseller agreements and the fact that having acquired Coral8, Aleri was also planning to sell its technology, which Sybase was also reselling.

The official line from Sybase this week is that the Aleri acquisition will position it as a "clear market leader in CEP" and help strengthen its RAP platform with the addition of Aleri's Liquidity Risk Management and Liquidity Management Suite.

However, some commentators I spoke to say that Sybase is unlikely to be a serious contender in the CEP space and that under Sybase's stewardship the Aleri platform could wane, which may be a problem for existing customers.

Furthermore the so-called OHIO project for merging Coral8 CEP with Aleri CEP also seems unlikely to continue. Hence why StreamBase is rubbing its hands together coming out with the statement that customers of Aleri-Coral8 or Sybase-RAP can trade-in their products and move over to its platform.

Richard Tibbetts, CTO at StreamBase, said, “It’s unlikely that Sybase will maintain four separate products.Aleri had three separate CEP product initiatives; Coral8, Aleri, plus OHIO. Sybase’s CEP product RAP is yet a fourth code base. As a result, we’ve been approached by customers of all these products and asked to provide migration strategies to StreamBase."

It seems that the  true winners out of this deal in the CEP pure-play space are likely to be StreamBase and Progress Apama. It appears that Sybase sees CEP not as the be-all and end-all on its own, but as part of an integrated offering that supports analytics and data repositories. To that extent it is unlikely to go head-to-head with StreamBase and Progress Apama on the CEP piece.

Wednesday, February 03, 2010

Clearstream no longer thinks of itself as just a depository but as a commercial bank

At the London Capital Club, Jeffrey Tessler, CEO of Clearstream International, the Luxembourg-based ICSD, painted its competitor, Euroclear, the other half of the ICSD (International Central Securities Depository) duopoly, as being in a much weaker position - directly exposed to the failure of broker/dealer clients during the crisis, a number of changes at top management level including the impending arrival of a new CEO, and still stuck in the mindset of a utility, not a commercial bank that is moving up the value chain.

One could be forgiven for thinking that old rivalries between the ICSD duopoly, which go back decades, have never really dissipated. However, Tessler was also complementary towards his Brussels-based counterparts saying that it too recognised the importance of interoperability amongst CSDs (although the jury is still out on whether Euroclear is likely to join Clearstream's Link Up Markets).

He complemented Euroclear for the work it had done in integrating the CSDs within the Euronext markets into one with its Euroclear Settlement of Euronext-zone Securities (ESES). Yet he added that  it would be difficult for Euroclear to extend its single platform concept beyond the Euronext markets, so it would have to embrace interoperability and hopefully join Link Up Markets.

When I spoke to outgoing Euroclear CEO Pierre Francotte at Sibos in Hong Kong last September, he said Euroclear was looking at Link Up Markets, but he remained non-commital. It will be interesting to see how Euroclear's new CEO, Tim Howell, approaches the issue of interoperability and Link Up Markets when he finally  takes the helm at the Brussels-based ICSD.

If Euroclear decides not to join Link Up Markets, which has built a converter for fostering interoperability between different domestic CSDs, Tessler said you could still have bilateral links in all major markets. However, from Link Up Markets' perspective its ambition is to provide a single point of access into multiple markets."We believe interoperability as a strategy going forward is the right one," says Tessler. "Regulation is moving in that direction. Instead of destroying local market infrastructure, we want to leverage the infrastructure that exists." For more on Link Up Markets as a single pipe, listen to Jeffrey Tessler.

Clearstream Banking Frankfurt, which is the German domestic CSD within the Deutsche Bourse Group, sees its membership of Link Up Markets as a way of not only fostering interoperability among CSDs, but also moving up the value chain to prepare for a much-changed world post-TARGET2-Securities (T2S), which is the new settlement platform for euro-denominated securities due to go live now in 2014.
"T2S is like taking a chalkboard and erasing everything off of it," said Tessler. "Through Link Up Markets we will be able to access multiple markets through a single window. We are transforming Clearstream Banking Frankfurt from a domestic CSD into a hub for accessing multiple CSDs throughout Europe and the world."
 But Clearstream International, the ICSD part of the business, has far loftier ambitions. Tessler says it plans to become not just a depository but a commercial global custodian like J.P. Morgan or Bank of New York Mellon that provides value added services such as Global Securities Financing, which is an increasingly successful part of its business, going from has a 22% market share in 2002 to a 51% market share.

Interestingly, custodian banks are also customers of Clearstream, and when questioned on whether Clearstream would compete directly with its customers, Tessler said regional subcustodians that acted as an intermediary between the broker and the CSD, would find their business increasingly threatened. Increasingly, he says, brokers will ask themselves, 'Why do I need a subcustodian?'

Tessler says Clearstream is winning more securities financing business than its competitor Euroclear because of its vertical integration model which combines the trading functionalty of Deutsche Bourse, with the settlement and collateral management capabilities that also exist within the group, particularly Clearstream Frankfurt's direct links with the Deutsche Bundesbank. For more on why Clearstream has been successful in the securities financing space, listen to Jeffrey Tessler.

Monday, February 01, 2010

The worst of regulatory oversight for banks is yet to come

Those of you in the banking industry that thought Barack Obama's recent announcement about limiting the size and scope of banks and their trading activities was enough to make you want to leave a job in the City and become a yoga instructor, well it seems we haven't seen the worst of the regulatory backlash against banks yet.

That is the view of Oliver Wyman's Financial Services practice and is one of the key findings in its State of the Financial Services Industry 2010 report, which was released at Davos last week. The report, which is published annually, is based on feedback from 70 financial services firms globally.

While Obama's announcement signified that the period of  "temporary leniency" by regulators to enable banks to shore up  their capital reserves and balance sheets, may be over, Oliver Wyman says Obama's announcement was not that tough on the banks. "The big question now is how the industry will interface with regulators," says David Moloney, from Oliver Wyman's Sydney-based financial services practice. For more on regulation from David Moloney, listen to this voice grab.
Jamie White of Oliver Wyman in London, said that if Obama's definition of what constitutes proprietary trading is too wide, the regulation itself could be difficult to enforce as it could be argued by some that market making is proprietary trading, although outlawing that would have a detrimental impact on the market.

Yet, Obama is perhaps missing the point by focusing so much on proprietary trading, which Oliver Wyman maintains was not the root cause of the recent financial crisis. It also questions the "excessive faith" regulators are placing on regulatory capital as a source of systemic stability. Some of the high profile casualties of the financial crisis such as Bear Stearns were deemed to have more than their fair share of regulatory capital, yet that did not prevent it from collapsing.

Oliver Wyman believes the worst in terms of regulatory aggressiveness has yet to come in the form of initial proposals under consideration for Basle III.  Obama's "mini-Glass-Steagall", which is largely US focused, will seem like a walk in the park compared to some of the proposals under consideration as part of the revision of Basle's supervisory requirements.
White says the next incarnation of Basle could end up making some lines of a bank's business impossible. For example, he says initial proposals talk about getting rid of netting, which could in effect quadruple banks' exposures.
Although we would like to think that the worst of the crisis is over and that banks are in the "convalescence" stage, Oliver Wyman's report shows that while 57% of market value losses have been recovered by financial firms since the crisis began in 2007, these green shoots may be "astroturf" as there are still high levels of consumer debt and if government support of financial services firms is withdrawn too quickly, they could relapse. Moloney said Japanese and Scandinavian examples suggest that governments maintaining equity ownership of financial institutions can go on for longer than anticipated.

Te possibility of another "relapse" in the not too distant future can not be ruled out, with 32% of CEOs surveyed in is report saying there is a 32% chance of a double dip or "W-shaped recession". Relapse risk is highest in Continental Europe, says Mark Weill of Oliver Wyman, where there are still a large number of losses on banks' books, that have not been accounted fors.