FinancialTech Insider

FinancialTech Insider has moved

2010-08-26T12:47:00.001+01:00

For those of you that have followed financial-i's blog FinancialTech Insider and want to continue to follow it, we have integrated the blog within financial-i's redesigned web site. Go to www.financial-i.com for news and comment on issues pertaining to cash management, payments, trade finance, asset servicing and business solutions in the transaction banking space.

What EU airport regulators can and should learn from SEPA

2010-04-22T12:36:00.001+01:00

"The European single sky". In the wake of the volcanic ash disaster that brought European skies to a standstill, experts are calling for a more united approach across Europe's aviation regulators.

The handling of airport closures across Europe highlighted the fragmented approach that exists among European governments, airport regulators and air traffic control. Commentators now suggest that a more harmonised approach to air traffic control and airport safety across the EU is needed.

What has this got to do with transaction banking, you may ask? Well efforts to unite Europe's skies reminded me about efforts to unite European payments under the Single Euro Payments Area (SEPA) initiative. And if SEPA is anything to go by airport regulators could have their job cut out for them.

Of course, SEPA not only tried to harmonise existing European payment schemes, but instead proposed replacing them with new pan-European schemes for cross-border credit transfers and direct debits, which end users have been slow to adopt. No one is proposing a new EU-wide airport traffic control system per se, but linking airport traffic control systems across Europe does present its challenges, and one can already hear the national politicking and objections that are likely to emerge as different national regulators and interests jockey for position.

Europe may have a single currency, but it appears that the EU is far from united when it comes to most other things and EU-wide payment mechanisms or airport traffic control systems, are no exception. While these concepts may sound good on paper, in reality they are difficult to implement and are often hijacked or impeded by parochial interests.

Paying the price of electronic payments

2010-04-14T15:21:00.000+01:00

Cash is no longer king, despite the fact that for the last decade or so we have heard transaction banks bang on about the supremacy of cash, at least to corporate treasurers that are cash-rich or looking to unlock cash trapped in inefficient parts of their business.

However, a report published by the UK Payments Council, concludes that cash's reign as king is over with cash usage rising just 7% over 10 years and comprising just 59% of all transactions (down from 73% a decade ago), with more consumers using electronic forms of payment such as debit cards, online payments or contactless cards.

Unlike the US, which while declining year on year, still has some challenges in terms of weaning companies and their customers off paper cheques, by 2018 the Payments Council predicts that fewer than 1% of UK payments will be made by cheque.

Yet, with the increasing use of electronic payments whether it is debit or credit cards, ACH or online, comes the increased risk or threat of fraud, particularly as transaction volumes rise. Jim Woodworth, head of business services at payments software provider, ACI Worldwide says financial institutions need to ensure that their systems are able to support the growth in the number of electronic payments, while reducing the risk of fraud.

Nick Ogden, founder and CEO of Voice Commerce, which provides voice authentication solutions for payments, also highlighted the heightened fraud implications associated with increased use of electronic payments whether it is cards or mobile. "The threat of fraud and identity theft becomes more prevalent as hackers get better at cracking these new payment technologies," he says.

This highlights the need for the industry to devise more secure means of authentication, that are cost effective and non-intrusive for the user. So as more payments are made online, banks not only face the challenge of ensuring their legacy payments infrastructure, some of which dates back 30 years or more, is up to scratch, but also that they are able to monitor and detect potentially fraudulent transactions in real time and to ascertain someone is who they say they are when making a payment without the user having to jump through too many onerous hoops.

And as electronic solutions revolutionize the way we pay, are consumers and companies likely to place more onus not only the speed and efficiency with which they can make a payment, but also how secure it is? In other words when we shop around for payment services will security be more front of mind than it has been historically?

Transaction processing in microseconds?

2010-03-30T23:34:00.002+01:00

I attended an Intel Faster City event this evening, the 17th such event, in which Intel talks about its latest faster, more efficient processors and its technology partners and customers talk about how increased processing and compute power is`helping them in their everyday business applications.

The aspect I associate most with Intel's Faster City events is firms like Nomura talking about how faster processors are helping them win the so-called arms race, by reducing latency in algorithmic trading and high-velocity Direct Market Access trading applications.

Ken Robson, chief algo trading architect, Nomura, reeled off a list of benefits his firm had gained from using faster Intel processors; putting multiple strategies on a single box, compressing ticker plants; but the thing that struck me the most was his comment that why they do not break the bank, his department pretty much has free rein when it comes to technology spend.

That contrasts sharply with the middle and back office, which as we know historically has not matched the level of technology investment that the front office has enjoyed. Yet, as the crisis reminded us, while the front office talked in microseconds, back-office risk and reference data management systems struggled to keep up with their batch processing systems.

You don't hear reference data managers talking in microseconds, nor do you hear transaction banks or payment processors boasting that it only took them a microsecond to transmit a payment to a customer.

However, it appears that may be changing. With data management and risk management being the 'fall guys' of the financial crisis, the expectation now is that they will be among the largest areas of IT investment in the coming months as the fallout from the financial crisis forces banks to step up investment in these areas.

Nigel Matthews of Thomson Reuters told attendees at Intel Faster City that next-generation data management was not about batch processes but would be more near real time and event driven and that front-office technologies were slowly starting to penetrate the middle and back offices.

This can only be good news, particularly when it comes to reference data management and ensuring that the back and middle-office is keeping pace with what is happening in the front office. But I cannot help thinking when is the payments business likely to benefit from these technologies?

While there have been developments in reducing payment processing times, particularly with the advent of UK Faster Payments, which has reduced clearing times for low value payments from three days to "near real time", payments are still largely batch processed.

Although not all payments are time sensitive, there are certainly customers that would benefit from speedier payments and there are certainly banks that would benefit from being able to process more transactions per second using dual or multi-core processors. So why is it that most firms are still using single-core processors?

But has the financial crisis really changed anything in terms of the clout back-office reference data managers have when it comes to getting a larger share of the IT begging bowl so they too can try and win the "arms race". We'd like to hear from reference data managers that are able to say with the same confidence as Nomura's chief algo architect, that they have carte blanche when it comes to technology spend.

Data analytics not for "rocket scientists"

2010-03-15T17:19:00.001Z

We’ve all read the reports that in the wake of the financial crisis, risk management and analytics needs to move to the top of the corporate agenda and that risk managers should be viewed not as the bogeyman trying to rein in the profit-hungry trading desk’s excessive risk taking, but more as a strategic asset within the bank that has the ear of the CEO, CFO and CIO.

While risk managers within some banks did spot the early warning signs of a pending crisis, the risk models and analysis used have also come under harsh criticism in the wake of the crisis, particularly for their inability to speak to senior executives in a language that they clearly understood. In other words, if you take this level of exposure in your CDS portfolio, this, this and this will happen and oh by the way, i have sliced and diced the data for you and presented it in a rather colourful line graph or pie chart, that can be quickly read and interpreted, not some complex mathematical formula.

What the financial crisis boils down to, notes Venkat Mullur, senior director, industry solutions, TIBCO Spotfire, is that “People who were making the decisions didn’t understand what Value at Risk (VAR) meant,” – VaR being a common risk modelling technique used by banks. “There was a cognitive gap between the model and analysis and consumers of that data,” not all of whom were mathematical geniuses.

Post-crisis I think we can safely assume there were too few so-called "geniuses" within banks, as there was a lot of exposure to things banks did not really understand. If only someone had bothered to portray the risk analysis for them in a more easily digestible manner than perhaps they would not have been all so keen to pile into CDS. The question is what to do about it?

Going forward if all parts of the businesses within a bank are to understand the outcomes of data analysis across all lines of the business, Mullur argues that data or business intelligence needs to be presented in a more easily digestible, flexible and dynamic format.

Business users also need to be able to perform on-the-fly data analysis on a whole host of different data without having to revert back to IT. TIBCO’s answer to this dilemma is to leverage the business intelligence and predictive analytics capabilities within its in-memory Spotfire 3.1 platform. Spotfire uses a range of data visualization techniqes such as “conditional coloring and lasso and axis marking that allow for better data analysis of patterns, clusters and correlations among sets of variables. Multiple scale bar charts and combination bar and line plots can also be used to analyse unstructured, ‘free-dimensional’ data to identify key trends (see diagram).

“Spotfire allows users to analyse data in a more intuitive way and to make better sense of the data needed to predict future events,” says Mullur. Analyst firm Forrester has given Spotfire the thumbs up saying that it “puts the power of predictive analytics into the hands of any business user, with data visualizations they can understand, and a level of interactivity unmatched by traditional business intelligence (BI). That means, says Forrester, that statisticians and business analysts can “prototype, test, and deploy analytics much faster than with alternative statistical modelling environments,” such as spreadsheets, which do not easily allow for ad hoc analysis by business users.

It’s easy to see why TIBCO and Forrester are bullish about Spotfire, particularly when advanced data analytics of the past has been the preserve of “rocket scientists”. So there will be no excuses now for banking CEOs to say they did not understand the risks the business was undertaking in a particular investment portfolio or line of business when their risk or business manager presents them with colourful line graphs and pie charts of various statistical analyses they have performed.

And it is not just commercial banks that are likely to benefit. Mullur says it is also working with global regulators to help them get a better handle on risk analysis.

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

2010-02-05T11:24:00.002Z

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.

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

2010-02-03T18:32:00.018Z

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.

The worst of regulatory oversight for banks is yet to come

2010-02-01T11:22:00.005Z

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.

Good bank, bad bank

2010-01-22T17:49:00.000Z

While financial stocks are reeling in the wake of U.S. president Barack Obama's announcement that he wants to limit the scope and size of banks and their trading activities, their must be mixed feelings amongst banks about this announcement and what it means for certain parts of the bank.

Trading, hedge funds, private equiy and investment banking look as if they could be the hardest hit particularly as much of the U.S. government's rhetoric is around those banks that have become more than just deposit takers and are indulging in risky trading activity on their own books (and still expecting to be bailed out by the government). According to a WSJ.com article, one White House spokesman said that banks that received a "backstop" from the taxpayer shouldn't be able to make a profit off their own investing."

It goes back to the co-mingling of clients' funds with the banks' money, but as early newspaper reports suggest trying to disentangle one from the other could be tricky unless you clearly separate good old fashioned banking (lending and deposit taking) from proprietary trading. That smacks of Glass-Steagall.

Most banks will be reluctant to separate investment banking or proprietary trading from the rest of the bank and will argue that one feeds into the other in terms of cross-selling opportunities. After all investment banking or proprietary trading, although high risk, made a substantial contribution to banks' balance sheets prior to the recent crisis and in its wake.

But what does this mean for the less riskier parts of a bank's business, for example, transaction banking? Does Obama's clampdown on banks mean that transaction banking - which is less volatile and a relatively stable business in good times or bad - will become the most prized of all the banks' businesses?

We are certainly seeing that with the likes of Citi, which has divided itself into "good bank", "bad bank", putting its more core, stable and profitable businesses such as GTB into a separate unit called Citicorp and riskier non-core assets into Citi Holdings. Are other banks going to have to follow this example in order to comply with Obama's requirements? And if they don't is transaction banking in danger of being polluted or fouled by the mistakes or errors of judgement of its riskier investment banking counterparts?

Transaction banks vye for a slice of the remittances market

2010-01-22T16:20:00.000Z

One aspect of the cross-border payments business that global transaction banks have failed to monopolise is remittances. Estimates from the World Bank suggest that the global remittance market increased 63% in the five years leading up to 2009 with more than $550 billion worth of funds remitted by immigrants living abroad in 2008.

Any bank can see the huge revenue potential if they are able to capture a substantial share of the global remittances market. However, the global remittances business is still dominated by non-bank money transfer providers such as Western Union and MoneyGram. One of the reasons for that is that remittances tend to touch the "unbanked" in emerging markets - people that don't have a bank account or ready access to one.

Banks, also being risk averse, have hesitated to enter this space particularly given the onerous regulatory requirements it entails for them in terms of compliance with Know Your Customer (KYC) and Anti-Money Laundering legislation. That perhaps explains why figures suggest that, in the US market at least, there are only about 100 banks that offer consumer remittance services with any meaninful volumes.

Yet, some banks like Citi and Bank of America have made forays into the remittances space, either alone or in conjunction with partner banks to offer consumer remittances at a lower cost than the traditional money transfer agencies.

Deutsche Bank is the latest entrant to this space. While it has no interest in selling remittance services to consumers directly, as part of its growth strategy for its Global Transaction Banking business, this week the German bank announced a strengthening of ties with payments network Eurogiro, which connects postal organisations globally.

Deutsche has taken an 8% equity stake in Eurogiro and plans to expand its offering to Eurogiro's network of postal organisations, post banks and othe financial institutions beyond US settlement services to encompass multicurency services. In return Deutsche gains access to Eurogiro's enviable global footprint across emerging markets without having to build a bricks and mortar presence itself.

Paul Camp, head, cash management, financial institutions at Deutsche Bank says the strategic investment in Eurogiro is part of Deutsche's Global Remittance initiative which combines Eurogiro's reach with the bank's existing capabilities as well as its plans to leverage mobile and SMS.

Camp was coy about Deutsche and banks' overall share of the global remittances space, but said its overall share was quite small (Deutsche's share of total cross-border payments globally is 5% based on SWIFT traffic volumes) but that it was looking to grow its presence. "However it is not a risk free market," he says, "given the AML and KYC issues."

Deutsche will be relying on the partner banks and postal organisations within Eurogiro to have the right risk controls in place while it will provide them with multicurrency settlement capabilities. It is also working with mobile technology provider Luup to expand its mobile payments capabilities particularly in the B2B space. Mobile is deemed to be a useful technology in the remittances space because it allows people without bank accounts to receive money.

On the whole whoever, both banks and the money transfer agencies have been slow to leverage mobile technologies in the remittances space. They have been pipped to the post by telecom companies like Vodafone which partnered with Safari.com in Kenya to launch M-PESA, a mobile money transfer system which has more than 7 million subscribers.

The banks have yet to clearly demonstrate what additional value they can bring to the remittances space, however, the gloves are off, and Western Union and MoneyGram can expect increased competition from banks, telcos and pre-paid card providers.

More corporates are joining SWIFT, but some warn it could become an inflexible "monolith"

2009-10-27T18:42:00.000Z

As corporates, particularly those that are multibanked, spend considerable time and money trying to integrate their systems with the multitude of proprietary banking platforms that are out there, Eurofinance's organisers felt it pertinent to ask whether banks should have developed a common non-proprietary solution.

Unsurprisingly 75% of corporates surveyed at the Eurofinance conference in Copenhagen last week favoured a common banking platform, while just over 50% of banks favoured a collective solution. The truth is that banks continue to see their proprietary treasury management platforms as a key differentiator and continue to invest millions in these platforms.

Two good examples of this is Citi with its recent announcement at Sibos in Hong Kong of its next gen treasury management platform, CitiDirect Banking Evolution, and Bank of America Merrill Lynch's CashPro Online. Bothleverage Web 2.0 technologies and aim to set the standard for other banks to follow when it comes to the next generation of treasury management applications.

Both banks invested substantial sums in these solutions, so corporates telling them that they would prefer a common solution across all banks is not what the banks really want to hear, although they maintain that these platforms are where they can truly differentiate their service offerings in terms of delivering value-added services and that they can collaborate in other areas such as standards, electronic bank account management and SWIFT connectivity for corporates.

Marilyn Spearing, managing director, global head of trade finance and cash management, corporates, Deutsche Bank, believes banks need to do a lot more on SWIFT if they want to ease the complexities for their corporate customers.

However, Catherine Bessant, president, Global Corporate Banking, Bank of America Merrill Lynch USA, does not believe SWIFT is the be all and end all and warned of the problems that can stem from creating "monoliths" that are inflexible, not that innovative and have too much power. "I am a fan of what SWIFT has done," but she says we should not presume that SWIFT is the best collective solution.

Spearing, who is on the board of SWIFT, leapt to the banking network's defence, saying that it it is not a monolith as it would only be used for messaging and connectivity amongst corporates.

Historically, however, connecting to SWIFT has been the preserve of large Fortune 500 companies that have the patience, financial wherewithal and inhouse IT infrastructure to support such a mammoth undertaking. Yet, more recently SWIFT has targeted smaller companies that do not have the transaction or messaging volumes of the larger players but still want the STP benefits of connecting to SWIFT with its "SWIFT-on-a-USB-stick" solution.

Cash may be king, but it won't all be plain sailing for transaction banks

2009-10-27T17:55:00.000Z

"Payment systems did not slip up at any time during the [recent financial] crisis. Payment systems were resilient and strong." This is a common refrain you will hear from global transaction banks who appear to have absolved themselves of any responsibility for the financial crisis.

While it is true to say that the recent credit crunch and liquidity crisis did not stem from the transaction banking side of the business but from the more nefarious side of the business where mortgages were bundled into complex securitiized products that were resold, global transaction banks cannot completely absolve themselves of any wrongdoing throughout the crisis.

The crisis may not have stemmed from the activities that underpin global transaction banking; namely faciliating cross-border payments, cash management and trade finance and the safekeeping of securities, to some extent; however the behaviour of transaction banks, which provide credit or financing to corporates and other banks based around the provision of other transactional services and processing capabilities, has been called into question throughout the crisis.

Corporate treasurers in particular appeared to have lost faith in their transaction banks, who have reduced credit lines or increased margins making it more expensive to obtain credit. At Eurofinance in Copenhagen last week, approximately 60% of corporates at one of the sessions said banks were not delivering acceptable lending terms. Unsurprisingly, 84% of bankers maintained that they had not used the crisis to unfairly set higher prices.

There appears to be a collective denial among most transaction banks, even those that have had to scale down their global ambitions in light of opting for a substantial chunk of taxpayers' money, when it comes to acknowledging that corporates have lost of faith in them as a result of their behaviour post-crisis.

Most transaction banks at Eurofinance were keen to point out that the infrastructure did not at any point fail throughout the crisis; payments continued to be made and processed. While corporates acknowledge this what they are alluding to is perhaps a breakdown in the relationship a lot of them have spent years building with some of their major transaction providers in Europe or the US.

And while corporates were eager to make banks more accountable with 58% of those companies surveyed at Eurofinance saying the G20 should be concerned about bankers’ bonuses, bankers did not see bonuses or even deposit protection as the real issue, despite the fact that during the height of the crisis there must have been quite a few treasurers worryingly scratching their heads worrying about substantial sums of money they may have deposited with a bank that was teetering on the brink of failure.

Marilyn Spearing, managing director, global head of trade finance and cash management, corporates, Deutsche Bank, said she worried about more regulation creating excess costs, which inevitably will be passed on to corporates. Yet, while the transaction banking business in general may escape the mightly flourish of the regulatory pen, corporates are going to demand greater levels of transparency and accountability from their transaction banks, particularly in terms of assessing counterparty risk based on CDS spreads and banks' Tier 1 capital ratios.

If cash is truly king as everyone keeps saying, corporates are also going to demand morereal-time information pertaining to payment flows into and out of accounts from their banks and the ability to track payments from initiation through to delivery into the receipient's bank account in real time. Those transaction banks that do not have the wherewithal to deliver these kinds of services are likely to find themselves at the bottom of the pile.

While transaction bankers may be smiling given that most of their businesses continued to deliver double digit percentage growth throughout the crisis, they cannot and should not rest on their laurels. There is still considerable work to be done to ease the concerns of corporate treasurers, who are going to find it easier to switch banking relationships in future given that more and more are communicating with multiple banks via SWIFT or SWIFT service bureaux and standards for automating Electronic Bank Account Management, which will reduce the time taken to open new bank accounts, become more widely implemented.

2009-09-17T16:40:00.014+01:00

The worst of the financial crisis and the typhoon that threatened Sibos in Hong Kong may have passed, but guest blogger, Andy Schmidt of TowerGroup, says considerable uncertainty surrounding certain aspects of the financial services industry remains.

And so we find ourselves at the end of another successful Sibos. One year (and one typhoon!) after the fall of Lehman, despite being humbled, the financial services industry is peering out at the world with an air of cautious optimism.

Of course, there’s a lot of work still to do to recover. Significant challenges with respect to transparency and liquidity can still wreak havoc in the marketplace. Financial market harmonisation remains more a dream than reality, and regulations like SEPA are still without a final implementation date. Therefore, uncertainty of all kinds will continue to challenge the financial services community for the foreseeable future.

Therein lays the point. The financial services industry is a community whose members rely on one another for survival and success, now more than ever. We’ve survived — especially in the payments sector — because of our ability to work together. And as a community, we’re looking at ways to work together that we would never have considered before the crisis, considering approaches like collaboration, competition, and joint ventures that were “unnatural acts” a short 12 months ago.

Broader standards adoption will certainly ease the transition toward shared infrastructures, and innovation will uncover new ways to achieve greater efficiencies in serving our clients and partners.

However, it’s the ability, opportunity, and (dare I say) responsibility of the financial services community to speak to the regulators in simple language that will provide us the greatest opportunity to shape our collective future. Remember, the regulators need our input to better understand where the risks truly are, and engagement with the regulators provides us a voice in the direction our industry heads.

So when we reconvene, I expect we’ll have stories (and perhaps even case studies) to share on how the market has evolved and improved in 12 months’ time, showing how, together, we can create a stronger, better industry. See you in Amsterdam!

2009-09-17T09:59:00.000+01:00

Another Sibos is over and the big debate is not the fallout from the GFC (global financial crisis) or whether SWIFT can truly trim EUR 30 million off its bottom line (although if the sliver of a sandwich the journalists were fed in the press room is anything to go by, the McKinsey consultants have certainly been cutting a swathe through SWIFT's balance sheet).

The bigger story, other than the typhoon that wasn't really a typhoon, was whether there really was 5,000 delegates in attendance. At the opening plenary, SWIFT claimed that more than 5,000 people were attending Sibos in Hong kong, yet the exhibition floor looked thin on the ground most days (particularly the one on the third floor which saw less foot traffic than those lucky exhibitiors with first floor stands.

However, today, suddenly from out of nowhere hundreds (not thousands) of bankers converged on the closing plenary. Where had they been all week? Well with a convention centre so spread out you needed to run a marathon to get from one room to the next, looks may be deceiving. Maybe there really were 5,000 registered delegates (there also seemed to be an awful lot of people employed to wipe drops of water off air conditioning systems with long mops - presumably they were not counted as delegates).

Anyway, jokes aside, keeping with the innovation theme SWIFT introduced at Sibos last year in Vienna, the closing guest speaker was Guy Kawasaki, ex-Apple and now running his own technology venture company. He boasted about how the "egomaniacs" at Apple flew first class (on flights longer than two hours), drank fresh orange juice and had a Bodendorf piano. Those were the days and perhaps there were a few bankers in the audience also lamenting the loss of first class travel and fresh orange juice.

Kawasaki trawled through his 10 ways for companies to be innovative - none of the corporate names he mentioned however were banks. Funny that. Despite all the Innotribe sessions in the world, I doubt there will be many bannks at Sibos next year with all their apps hosted in the cloud or providing financial services linked into social networking sites.

The sheer weight of the legacy infrastructure banks (particularly those large global networked banks) have to live with, makes innovation of the Apple and Guy Kawasaki kind difficult for banks, even if they did have fresh orange juice or Bodendorf pianos in their office.

People spoke about social networking and collaborative technologies but I saw very few real-world examples of banks using these technologies in the B2B space. I cannot see it getting past most boards, although Citi's Banking Evolution platform, announced at Sibos, was an example of one bold move in that direction. But then Citi is a technology start-up more than it is a bank.

Yes it handles transactions and enables customers to send and receive money from around the world, but it differentiates itself in terms of technology, and if it has its way, all the smaller and medium-sized banks will be white labelling its technology.

The Citi view of banking is that you don't need to manufacture the parts in order to be a transaction bank. You can insource them and assemble them and still call yourself a transaction bank, although I do expect that transaction banking in the future will be less about owning the payment or moving money, and more about what you do with the information associated with those payments and the customer making them.

The open account challenge

2009-09-17T08:19:00.000+01:00

When the president of the United States and the UK chancellor, Alistair Darling, start mentioning trade finance you know that a subject most transaction banks took for granted has suddenly been elevated to a new level of importance.

"Everybody is talking about trade finance," says Kah Chye Tan, global head of trade finance, Standard Chartered Bank. Thanks to the financial crisis, trade finance, which has oiled the wheels of global trade for hundreds of years, is sexy again.

But despite what some banks are saying about traditional trade finance instruments such as Letters of Credit being on the uptick again, Tan says that is not the true picture.

Although the risk mitigation benefits of LCs were appreciated more during the crisis, in 2008 overall LC volumes declined by 13%, said Tan. "If you look at 2008 the dollar value of LCs shot through the roof as commodity prices increased. Because the dollar value went up people thought LCs were back in favour."

While LCs will always be a part of the trade finance business, open account trading is here to stay (Tan says it makes up approximately 95% of the $14 trillion a year in world trade). After all why would a company want to pay $1 million to mitigate risk against non-payment using an LC when an open account trade may only cost $30?

The challenge now for the banking industry, says Chan, is to bring the same risk mitigant benefits the LC provides to open account trading. So far, however, he says banks have done a pretty poor job of that. "It will be another five to 10 years before banks come up with a solution that the market needs," says Tan.

The problem is that open account does not just mean one product. For example, it can encompass receivables discounting, supply chain financing and accounts payable financing. "Open account means different things to different banks," says Tan.

In the run up to the global financial crisis (now referred to as GFC, which is the three letter acronymn doing the rounds at Sibos this year), most of the transaction banks were eager to talk about supply chain financing. And two Siboses ago it was a fairly universal theme on exhibition stands.

Although supply chain is still topical at Sibos this year, Tan says some banks were talking the talk but not walking the walk because the provision of supply chain financing on a cross-border basis is problematic for them as they do not own the local relationship with SMEs or suppliers and feel more comfortable financing domestic transactions. "Banks may say they are a global network bank, but in reality there are a lot of silos in banks," said Tan. "A lot of banks are shying away from cross-border [supply chain financing] transactions."

SWIFT in the retail network space?

2009-09-17T07:21:00.003+01:00

SWIFT would like banks and other financial intermediaries to use its IP network more, particularly when the banking co-operative has not had such a good year in terms of traffic. While SWIFT chairman Yawar Shah said in the opening plenary that SWIFT should focus on those areas where it is more likely to succeed, the banking-owned network is eyeing up opportunities in the retail network space.

It is kind of ironic that SWIFT feels it can be successful in the retail space, when on the face of it managing a closed network with just 8000 banks on it, hardly equates to a successful network business, particularly when your pricing is not necessarily as cost competitive with other IP-based networks that have substantially higher volumes and carry more transactions.

Francesco Lanza, marketing manager, network services for SIA-SSB was a little bemused to hear about SWIFT's plans to move into the retail space. SIA-SSB, which is owned by leading Italian banks such as UniCredit, has 550 banks on SIAnet, which handles wholesale, capital markets and retail traffic (payment cards) on its network, providing connectivity to STEP2 in Europe, to SWIFTNet for Italian banks and to multilateral trading facilities in Europe.

Lanza says that SWIFT could have its work cut out for it in the retail networking space. "Retail traffic is huge compared to wholesale and it requires a different service model." And unlike SWIFT, which saw network traffic decline in the wake of the crisis, SIA-SSB saw double percentage increases in network traffic across most months last year, largely because it carries not just wholesale traffic, but also retail.

According to Lanza, SWIFT's "central hub" network approach is unsuited to the retail environment where a peer-to-peer topology works better. SIAnet works on the basis of network nodes, which are able to reach out to other nodes not requiring a central hub, which means government agencies are unable to pry into information carried on its network, says Lanza.

SWIFT found itself in hot water with data privacy organisations a couple of years back after it allowed US intelligence agencies to look into messages carried on its network. In response to that SWIFT is looking at developing a mirrored data environment located in Europe for European traffic. However, Lanza says that means additional cost.

It raises the question yet again as to whether SWIFT should be in the network business. While it may have started out as a replacement for the telex, with the advent of the internet and global IP networks, is running a network (despite all the stuff about non-repudiation) really SWIFT's core business. Arguably in the retail space the same level of non-repudiation is not needed and SWIFT's network is likely to be perceived as being too closed.

How much more regulation can the industry take?

2009-09-17T04:54:00.000+01:00

As regulators are about to unleash even more regulation on the financial services industry in the wake of the financial crisis, guest blogger, Gareth Lodge of TowerGroup, says they should stop and think carefully about whether more regulation is going to have the desired effect?

I’ve just been enjoying the Big Issues debate on transaction banking, chaired by TowerGroup CEO Karen Cone. I may be somewhat biased when I say how interesting it was!

What continues to strike me is how transaction banking has emerged successfully from the financial crisis. There are some good reasons for that success. Bankers and other observers sometimes forget that global transaction banking isn’t one “thing” but actually comprises multiple businesses. As a whole, however, transaction banking emerged as one of the few areas of the bank to have grown in the last year. Transaction banking is all about helping the banks’ customers manage risk. The help may be as straightforward as a letter of credit designed to take the risk out of international trade or as highly sophisticated as the systems and processes that flawlessly move billions of transactions and trillions in currency value. The recent market uncertainty has therefore been good for the transaction banking business in many ways.

At least in some parts of the bank such as global transaction banking, banks have managed risk extremely well, I think. The policies and processes put in place meant that no payment system failed, which is why many are surprised about the threat of increased regulation. This concern stems from the open question as to whether existing regulations — and regulators — are effective. Many banks, particularly in Europe, have come to see regulation as unavoidable and in effect simply an increasingly large cost of doing business. What has always been a concern, and is becoming of even greater one, is the perceived lack of benefit and value in the regulations. The proportional cost of IT spend related in some way to regulation is already large and is rising.

The cost is starting to have a material impact on some banks, with results contrary to what the regulator wished. In essence, much of the regulation addressing competition and risk levels the playing field. One consequence seems to be that some banks suffering from the burden of spending on regulatory compliance are outsourcing to larger banks, with the converse and unintended consequence of reducing competition and concentrating risk.

Of course, not all will agree with this view, each “group” having a different opinion as to the view’s truth and merits. Although there is no easy solution, it would seem beneficial to all to provide greater clarity and governance of regulation before embarking on yet more. Defining and agreeing what is required and how success should be measured surely should be the basis on which any project should be undertaken.

Can banks move beyond the limitations of legacy?

2009-09-16T09:53:00.001+01:00

Coming to Sibos for the last 10 years it tends to feel like Groundhog Day (weren't banks debating the same issues three or four Siboses ago?), but one good aspect of that is that you are able to pick up on how far the industry and therefore the debate has really moved on.

A good example of that was at this afternoon's corporates forum, where an old Sibos attendee, David Blair, former corporate treasurer at Nokia and now vice president, treasury, Huawei, appeared to adopt a less aggressive stance with the banks than he had at previous Siboses.

The forum's moderator kindly reminded Blair of what he had asked for from banks at Sibos in Singapore six years ago: an 18 character Universal Remittance Identifier (URI) that enabled corporates in the high-tech industry to reconcile an invoice with a payment. Sounds like a simple request, but having become somewhat of a Sibos mainstay myself, I know only too well how slowly banks move when corporates ask them for something.

Blair and other high-tech corporates went on to develop RosettaNet, the 18-character URI themselves, and perhaps if they had waited for the banks to come up with it they would still be debating the nuances of it at Sibos in Hong Kong.

Blair reminded the banks that sometimes their defensive stance means they can misinterpret what corporates are actually asking for and he said contrary to what banks thought, RosettaNet was not trying to replace SWIFT or compete with banks.

Another interesting attendee on the corporate panel was no other than Vipul Shah, senior director and head of financial services at PayPal/eBay; that company that banks spent many a Sibos accusing of stealing their business. Now PayPal is attending Sibos and talking about using SWIFT.

PayPal at Sibos? Well given that SWIFT chairman Yawar Shah said at the opening plenary that companies need to use SWIFT more, the Brussels-based banking co-operative eager to reverse the trend of declining wholesale volumes on its network is contemplating entering the retail space (more on that later).

As a global online payment provider, PayPal has its challenges when it comes to working with multiple clearing systems and banks. "Clearing systems are not able to accommodate a unique remittance identifier," said Shah.

It is not only the clearing systems that have their challenges. I left the corporate forum with the overarching impression that although corporates may demand a lot from their banks, the pace of change is significantly hampered by bank legacy infrastructure and inertia.

Not only are banks still trying to leverage next generation apps on legacy infrastructures that are at least 30 years old, but banks are also failing to uniformly apply standards that exist, which means the experience for the corporate customer is inconsistent from one banking provider to the next.

While we heard that there are opportunities for banks, for example in the cash flow forecasting space, to organise themselves and deliver a range of capabilities in an integrated way, the banks conceded it was not easy; not easy because of their legacy infrastructure which is "disaggregated."

Picking up on the theme that banks' payments and transaction banking infrastructure is outmoded and siloed, a number of software providers at Sibos are touting payment hub solutions or the next generation of payment platforms that integrate both wholesale and retail payments and aim to help banks overcome the limitations of their legacy siloed infrastructure by providing a "unified platform" whereby banks can deploy payments functionality (whether it is credit cards, ACH, cheques, mobile payments, real-time payments) as a service on a single platform using service-oriented architecture.

Trade finance - A "rude awakening" for banks as they seek to innovate

2009-09-16T05:21:00.001+01:00

A show of hands for those corporates that have lost trust in their banks post-financial crisis. At this morning's conference session at Sibos in Hong Kong on the shortage of trade credit, the vote was fairly overwhelming with a show of red cards from those corporates in the audience.

The leading trade finance bankers on the panel had no choice but to acknowledge that they have some work to do to restore corporates' trust. "Corporates believe trust has been damaged," said Kah Chye Tan, global head of trade finance, Standard Chartered Bank. However, he added that banks also had a responsibility to be prudent.

"Trust has dissipated," said Lawrence Webb, global head of trade and supply chain, HSBC. "However, I don't think clients distrust banks at the transaction level. But we have some way to go to rebuilding trust at an industry level."

John Ahearn, managing director, supply chain managment, structured trade and asset optimisation, Citi, was more inclined to apportion the blame equally between banks and corporates, saying that corporates are largely sophisticated buyers that should have understood what they were buying. "We [still] have clients coming to us asking to borrow enormous amounts of money [based on] thin prices." When it comes to apportioning blame, Ahearn says "we (banks and corporates) all got drunk together, but now the party is over.

While it may not be the best time for new clients to approach banks asking for credit, Webb said that HSBC's trade weighted index indicated that Hong Kong companies were expecting increased access to trade finance in the months ahead. But what about those banks that now have substantial government stakeholdings? Will they be extending credit in the wake of the financial crisis? Tan of Standard Chartered seems to think that they will be forced to withdraw to their home market and therefore reduce lending.

Ahearn, representing Citi, which the US government has a more than 3o% stake in (apparently the US government has announced it wants to sell its stake) asked whether the UK government would be happy with RBS lending money in Singapore? The same could be asked of Citi, although the US government's stakeholding in Citi is much less than the UK's 70% shareholding in RBS. Tan ventured that the money governments pumped into banks to prop them up during the crisis equated to a form of protectionism or a form of subsidy.

In an effort to plug the gap in the secondary trade finance markets, The International Finance Corporation with the support of the G20 group of countries set up the Global Liquidity Program, yet it is unclear whether the millions pledged to that program have filtered through to those banks or companies that actually need it. There also appears to be an enlarged role for Export Credit Agencies to play, however, they appear to be playing catch up.

"We need to make sure these [IFC] initiatives are in place on a long-term basis," said Webb of HSBC, "as opposed to being reactive." The challenge for the banks in the trade finance space is not only restoring credit but also being able to move with companies as their supply chains evolve.

Tan said banks needed to move with companies as they expanded their global supply chains and not just provide domestic solutions. However, Ahearn cautioned that banks should not underestimate the risks in terms of tax and financing issues in cross-border supply chain or trade finance. "They may be in for a rude awakening if the regulators look at this," he said.

The Prime Brokerage Business: One Year Out, Where Are We?

2009-09-15T18:41:00.000+01:00

Dushyant Shahrawat, senior research director, securities and investments, TowerGroup, examines the fall out for the prime brokerage business one year after the collapse of Lehman Brothers.

It has been one year since the collapse of Lehman Brothers, the fall of Bear Stearns and the hectic sale of Merrill Lynch to Bank of America. One can argue that the biggest impact of this string of events within the financial industry has been on the prime brokerage business. What has changed? The prime brokerage business has been impacted and has changed in the following ways:

1) The demise of two major prime brokers (in Lehman Brothers and Bear Stearns) has shaken hedge funds’ confidence in their prime brokerage providers

2) The events of just a few months have dramatically changed the relationship between hedge funds and their prime brokers for a long time to come. Cosy relationships have been questioned, and both hedge firms and prime brokers are re-evaluating their mutual association.

3) The competitive dynamic of this business has changed, with Goldman Sachs and Morgan Stanley dropping in market share from an estimated 52% of the global prime brokerage business in 2007 to under 35% in 2009. New players such as Fidelity Investments are entering, and several other firms are waiting on the sidelines.

4) Large Wall Street brokers have been deprived of a major and steady stream of revenue from the prime brokerage business. The estimated $12.5 billion that US brokerage firms make from the prime brokerage business may well see a 20% cut in the next few years.

5) Client perceptions and attitudes about their prime brokers have changed drastically during the crisis. Hedge funds have become more sensitive to the stability of their prime brokers and are demanding their prime brokers segregate client assets so that they are not overly exposed to the prime broker.

6) Finally, a major trend that has emerged is the shift to a "multiprime broker" model. That is, hedge funds that used to rely overwhelmingly on one or two prime brokers are now hiring multiple prime brokers to spread the risk of doing too much with particular firms. Is the trend towards multiprime brokers a flash in the pan, or is it here to stay? We think this is a longer-term trend and will not reverse itself anytime in the future.

SWIFT TSU passes the all-important 100 mark

2009-09-15T09:38:00.000+01:00

SWIFT's Trade Services Utility (TSU), which is a central matching utility designed to standardise the process between banks for matching purchase order and invoice information, was first announced at Sibos in Atlanta.

It was initially designed to help banks become more relevant in the open account trading space, which makes up more than 80% of cross-border trade. While the TSU attracted some early adopters, until recently it looked set to become a non-starter as few banks signed up to the utility. But oh what a difference a financial crisis and changes in the trade finance market make.

Today SWIFT announced that the TSU passed the all-important 100 mark in terms of bank membership with recent signings including Barclays Commercial Bank, Yapi Kredi Bankasi, Banco de Crédito del Peru, Bank of China Hong Kong, Shin Kong Bank and Taishin Bank.

Those banks that recently signed up to the TSU are hoping it will be one of the key lynchpins for developing the next generation of trade finance solutions. However, the TSU still has its sceptics, with corporates saying it offers little in terms of direct value to them.

And although trade finance is sexy again given that most banks have witnessed increased trade finance activity as buyers and suppliers look to mitigate counterparty risk, working out how they can successfully re-integrate themselves into corporates' supply chains is still challenging for most banks.

Euroclear and Link Up Markets continue dialogue

2009-09-15T09:12:00.000+01:00

Twelve months ago at Sibos in Vienna when Tomas Kindler, managing director of Link Up Markets, the joint venture between eight European CSDs, said that it would go live in early 2009 with its central mapping engine to foster interoperability between different CSDs, most people probably thought he was mad.

Kindler himself even admits that there were some doubters, however, in March this year, Link Up Markets officially went live. The main benefit it will deliver for participating CSDs is that it fosters interoperabilty by converting domestic messaging formats used by national CSDs into a common ISO-compliant standard.

Although the joint CSD initiative started out with a largely European focus, it is has since expanded beyond Europe with South African CSD, Strate, becoming the ninth CSD to join Link Up Markets. "Strate want to extend their business model and position themselves as a hub in the region," said Kindler, and he says we could see some of the Asian CSDs doing the same.

Kindler says the Asian Development Bank (ADB) and a group of experts comprising regional CSDs and custodians are looking at a Giovannini-type exercise for the ASEAN markets. China, Korea and Japan are believed to be looking at a regional settlement solution or an Asian ICSD.

However, unlike Europe which benefits from having a single currency, Asia's securities settlement infrastructure is even more highly fragmented and is characterised by varying levels of sophistication. "The ADB is not the European Central Bank in terms of influence and policy making, so I think its ambitions are more of a long-term initiative," said Kindler.

The pressure [for CSD] to change is also more prounounced in Europe, given the requirements of the Code of Conduct for Clearing & Settlement which calls for interoperability and the launch of the European Central Bank's TARGET2-Securities (T2S) initiative which will consolidate settlement of eurozone securities in central bank money on a single platform.

Closer to home Link Up Markets is also in discussions with Brussels ICSD Euroclear. If Euroclear were to join it would be a major coup for Link Up Markets given that Euroclear incorporates seven markets and has substantial volumes. Pierre Francotte, CEO of Euroclear, says Link Up Markets would be considered on its merits and that the real value for SWIFT in joining would be to link into markets not covered by its seven CSDs.

For CSDs in Europe faced with the prospect of having to outsource securities settlement to T2S when it goes live in 2013, there are essentially only two games in town: join Link Up Markets or become part of the Euroclear Group Monte Titoli in Italyis the exception in that it developed a joint partnership with a global custodian, but Kindler says he hasn't seen a lot of developmen around that. "The options for [European] CSDs are limited," he says, "however, there is no right or wrong approach."

The next phase for Link Up Markets is to leverage its joint-CSD infrastructure to develop additional services such as pooling collateral across participating CSDs. Kindler also hopes that it will become an attractive proposition for CSDs looking to connect to T2S, which will require an element of conversion.

Citi looks to social networking and YouTube in new banking platform launch

2009-09-15T07:50:00.005+01:00

In the aftermath of the current financial crisis it would be easy to write off any innovation coming from transaction banks as most of them for the last few months have been hoarding capital to appease regulators and hunkering down as banking "goes back to basics".

A number of consultant studies also suggest that innovation, at least in the payments space, is more likely to come from companies like Google, Microsoft and WalMart. However, some of the transaction banks exhibiting at Sibos this year are eager to stress that the banks should not be written off yet when it comes to innovation.

One of those banks is Citi, which launched its "next generation collaborative online banking platform", CitiDirect BE (Banking Evolution) at Sibos in Hong Kong today. With Francesco Vanni d'Archirafi, CEO of Citi Global Transaction Services (GTS) describing the bank as a $9 billion technology start-up, Citi has a strong track record of producing award-winning technologies such as its online banking plaftorm CitiDirect, which back in 1999 when it was launched set the benchmark for the many online banking platforms from other providers that followed.

In 2005 Citi also launched its TreasuryVision portal, which combined information with analytics to enable corporate treasurers to gain greater visibility over their cash, risk and global liquidity positions. Despite the well publicised financial difficulties Citi has had in the last 18 months, Gary Greenwald, chief innovation officer, Citi GTS, said that the bank spends more than $1 billion on technology annually and that this year's IT budget was marginally higher than last year's.

Recognising that some aspects of its CitiDirect platform had become commoditised as other transaction banks developed online banking platforms that benefited from subsequent developments in technology, CitiDirect BE is the next incarnation of where Citi believes treasury and payments functionality is headed.

Interestingly, while Citi has historically targeted its solutions at top-tier corporates and other banks, CitiDirect BE will be initially rolled out to the SME market in Poland.It will also be sold as a white-labelled solution to other banks.

CitiDirect BE builds on lessons learned from developing TreasuryVision and embraces the latest in social networking, collaborative and Web 2.0 technologies to provide treasurers of both large companies and SMEs with a more intuitive, customisable interface for doing a whole bunch of things, above and beyond initiating payments, trade finance and FX transactions. CitiDirect BE is built on Microsoft .Net and Microsoft Office SharePoint Server 2007 Enterprise Edition. "SharePoint is a portal which allows us to deliver a new web services architecture," Greenwald explains. "Within the portal, we have a modular platform that allows different back-end technologies to come together at the front end."

Recognising that banks have been sitting on a lot of transaction-related information that they were unable to harness before in a meaninful way and push out to customers, Greenwald said CitiDirect BE builds on the analytics and information contained within its TreasuryVision platform to provide treasurers with data that can help them achieve greater insight into their accounts receivable and collections, as well as data that supports activities such as supply chain financing.

Pushing more data out to treasurers, says Greenwald, is not so much about having a "pretty dashboard" but about normalising and cleansing data from multiple back-ends to provide treasurers with quality and timely data. "We have taken the analytical processing and slice and dice capabilities within TreasuryVision and combined it with different sets of data around payment transactions and account openings," Greenwald explains. "So, for example, if you are running a large shared service centre you can look at the efficiency of your payment processes over time."

CitiDirect BE also incorporates the work Citi has done with major multinationals around Electronic Bank Account Management, combining digital signature technology with the ability to automate the currently manually-intensive process many corporate treasurers with multiple banking relationships face when it comes to changing account signatories and bank mandate management.

But perhaps one of the more unusual features of CitiDirect BE is the degree to which it embraces social networking and collaborative online technologies including a media channel, which Greenwald compares to YouTube, as it allows Citi execs in any country to develop a video library harnessing their expertise. Treasurers can search the video library and pre-register topics of interest. "If you look at social networking sites such as Twitter it took us some time work out how that makes sense in a B2B world," said Greenwald. To take a look at how CitiDirect BE's media channel and other functionlaith within the next generation banking platform works, click here.

Commenting on the launch of CitiDirect BE Jerry Norton, director of strategy, global financial services, Logica, said it was an exciting development, however it masks the complexities that still exist on the back-end in terms of the different interbank market infrastructures for processing cheques, card payments, high value and low value payments.

The need to innovate

2009-09-14T11:03:00.006+01:00

Guest blogger, Gareth Lodge of TowerGroup, says the financial industry appears to be turning a corner and that innovation or the art of doing things differently will be key to recovery.

It's true, SIBOS is here — two parties already and a looming happy hour are testament to that! But as I sit waiting for the opening plenary session to begin, I reflect on the year that has passed. I suspect many in the industry wondered at least once in the last year whether they or even the industry would survive. It has certainly changed the focus of the banks since that point.

When I first saw the agenda for Sibos, I was slightly surprised to see the Innotribe track. I should say, that having previously worked at an innovations consultancy, that I believe in both innovation and its benefits. But innovation has certainly suffered in the last year, as budgets are frozen or cut across the bank, making its inclusion on the agenda a bold move.

There is a general feeling over the past few months and certainly heard in the conversations I've had today, that we're turning a corner. Banks are planning for 2010, for at least a form of business as usual. That's why innovation is important. Innovation is synonymous with cutting-edge technology.

In reality, innovation can be considered to be the art of doing something differently. Technology may play a part but isn't the answer. Technology without an application is just technology. Why do I raise this point? Because the world has changed. Don't banks therefore need to change as a result? If clients' demands have changed, banks need to respond. Now more than ever is the time that banks need to innovate. What is needed is a much a cultural change as any other kind of change.

Innovation begins in the thinking and approach of an individual, not in a piece of technology. The key objective has to become how to deliver value to the customer. Innovation for innovations sake is a luxury. Retaining customers is essential for survival of the firm or institution. I encourage you all to attend the Innotribe stream today. To respond to the world tomorrow, you need to start today.

The new lean and mean SWIFT

2009-09-14T10:47:00.003+01:00

A more sombre tone characterised the opening plenary at Sibos in Hong Kong. Last year in Vienna, the opening plenary coincided with the collapse of Lehman Brothers. This year the only bad news delegates had to face was the threat of a typhoon level eight warning, which meant we may be bunkered down at the Hong Kong Convention Centre for longer than expected.

Also this year there was not the usual announcement by SWIFT of a rebate to its members. With year-to-date volumes on SWIFTNet down by 2.5% and SWIFT 11% off its budget target in view of the banking network's first ever volume decrease, the rhetoric of previous years where one gained the impression that SWIFT was trying to be everything to everybody, was usurped by a more pragmatic realisation that SWIFT needs to focus on those things it is good at.

"What is new [this year]?" asked SWIFT chairman, Yawar Shah. "Not much. It is about making sure SWIFT works. We don't expect SWIFT to sizzle in banks' boadrooms. We are just getting on with things, which should give us peace of mind."

Like its banking members, it appears SWIFT is going back to basics, and like some financial services companies and even media outlets, in these troubled times where everyone is trying to get more bang for their buck, SWIFT has called in McKinsey to see where it can make further cost savings and efficiencies. SWIFT's CEO Lázaro Campos expanded on "Lean@SWIFT", which he said is a two-year project overseen by SWIFT's CFO, Francis Vanbever in conjunction with McKinsey.

SWIFT hopes to make targeted efficiency gains of 30% without downgrading its service. Campos said SWIFT remained committed to price reductions for members and innovation, yet, given that SWIFT's pricing model is geared more favorably towards increased traffic, when volumes are down, the banking co-operative is unable to deliver on its cost-savings promise. However, using other means such as offshoring and vendor re-negotiation, Campos said SWIFT had already saved EUR 30 million.

In future, Shah said there would be no "hobbies" for SWIFT (one only has to think of SWIFT's failed epaymentsPLUS initiative during the dot.com boom). I got the impression that there had been some refocusing at SWIFT with Shah saying that 500 corporates on SWIFTNet, while encouraging, was still a dip in the ocean.

Shah also alluded to the potential for SWIFT in the securities space; namely its recent activity in the area of corporate actions. Yet at Sibos last year, and in previous years, the attendance by securities market participants has always been dismally low, which seems to suggest that gaining traction in that space is still challenging for the Brussels-based co-operative - it is probably hoping that the renewed focus on standards, STP and automation will change that.

Shah also alluded to the role for SWIFT in reinsurance and managed identity services stressing the need for SWIFT to "go beyond messaging services". "SWIFT should be the shared service infrastructure as it is bank owned and governed," he said.

Does SWIFT really need to look that far to realise why banks and other financial market participants are not using it more? SWIFT has always been deemed as expensive when compared with other IP networks and it has to get its own house, in terms of internal cost savings and efficiencies in order, before it can expect banks, corporates and other financial intermediaries to start using it more.

Don't gear regulation towards attracting "top shop" names

2009-09-14T08:40:00.003+01:00

CCPs or central clearing counterparts cannot save the world from another financial crisis, we heard earlier today, although they can do a darn good job of trying at least for those instruments that are more standardised. Keeping with that theme, Joseph Yam, chief executive of the Hong Kong Monetary Authority (HKMA) who delivered the welcoming address on the first day of Sibos at the Hong Kong Convention and Exhibition Centre, said that the regulators could not save the markets from another financial crisis.

"It is difficult to find a text-book perfect market," said Yam. "We [the regulators] are not perfect. Markets do fail; market intermediation is always controversial. We learned that in 1998 [following the Asian financial crisis]."

In the wake of the current financial crisis and the billions that went towards bailing out the banks, Yam had a slight dig at his Western counterparts who he said appeared to be moving from an Anglo-Saxon model to a socialist model. He was also critical of those emerging markets that promoted regulatory rules that were "unsustainable" for domestic circumstances (in other words too accommodating of foreign investors). He said such markets bred "unethical behaviour" .

The secret it seems is to get the degree of financial openness right without causing financial instability. "The financial system's primary focus is financial intermediation that supports the economy," said Yam. And not financial openness that is geared towards attracting the "top shop" names in your own backyard because those so-called "top shops" may also bring with them financial innovations, which are toxic.

Eager to point out Hong Kong redeeming features, Yam said that the HKMA had introduced RTGS for the Hong Kong dollar, euro, US dollar and renminbi with payment-versus-payment settlement which was linked to its debt clearing system. He invited market participants to become either direct or indirect participants or to link into Hong Kong's clearing and settlement systems.

With all these developments occurring in the Hong Kong market, Yam queried why it had taken SWIFT so long to restage Sibos here. "It has taken you [Sibos] 18 years to come back. What took you so long? A lot has happened here to interest you enough to have come back earlier."

No CCPs can't save the world

2009-09-14T05:34:00.001+01:00

With the financial markets in recovery mode, following last year's annus horribilus, the question everyone, particularly the regulators are asking, is can CCPs save the world?

That was the title of one of the morning sessions on the opening day of the Sibos conference in Hong Kong and by the time I managed to find my way to the conference hall where the debate was taking place, it appeared that most of the panellists were saying what most people at the coalface already knew, that CCPs can only reduce risk for those instruments that are standardised.

"The ability to determine price is important to the central clearing function," said Kim Taylor, president of Chicago-based CME Clearing. "We want to be able to determine price, have a good knowledge of the forward looking risk and be able to set standards in terms of who can participate. Given these three elements CCPs in standardised markets do provide enhanced efficiency."

Yet with so many CCPs popping up as multilateral trading facilities continue to multiply, some maintain that the multitude of emerging CCPs could create even more risk. "I don't think any of us take lightly our obligation to reduce systemic risk," Taylor riposted, adding that there was a danger of heightened risk if the markets tried to push every instrument into a clearing house. "We need to focus on the more standardised end of the curve."

Alberto Pravettoni, managing director, group corporate strategy for LCH.Clearnet, said that it had sufficient mechanisms in place to ensure it did not take excessive risk. But while CCPs may want to differentiate on what is standardised and what is not when it comes to central clearing, the regulators may have a different idea. Some see central clearing as a panacea for the market's current woes. And as academic Craig Pirrong, from the University of Houston pointed out during the panel debate, it may be difficult to distinguish between what you can and what you cannot clear.

Pravettoni believes there is an opportunity to put more products (namely, some equity and fixed income instruments) through clearing houses. But for the end users of clearing houses there is an increasingly confusing array of CCPs to choose from.

The question is how many clearing houses should there be? In the FX markets, Rob Close, president & CEO of CLS Bank, said there probably should only be two or three. However, markets like Korea and Singapore have mooted the idea of setting up local clearing houses for OTC derivatives. The latter did not appear to go down too well with Monday's panellists who all pretty much agreed that given the global nature of the markets, global clearing solutions, not local market-specific solutions, were needed. "Trying to force these products to go through local clearing routes would be counterproductive from a risk management standpoint," said Pravettoni.

SEPA back on the menu again for banks looking to grab market share

2009-09-14T05:13:00.002+01:00

Two hours into the first day of the Sibos conference in Hong Kong and already I am inspired to blog about something, which is pretty unusual. My first meeting of the day was with Sentenial, a direct debit solutions provider to leading European banks looking to prepare for SEPA.

I know the Single Euro Payments Area (SEPA) is so yesterday's news but Sentential believes that some life is being breathed back into the flagging project by those banks that see SEPA and the looming introduction of SEPA Direct Debits (SDDs) as a means of winning new business. At Sibos last year in Vienna, just before the financial crisis claimed some of its more high profile victims, SEPA moved to the bottom of the agenda as banks focused on shoring up their capital reserves.

This year, the guys at Sentenial claim that the focus is back on SEPA with leading banks like Deutsche setting the standard for others to follow. Brian Hanrahan, executive vice president, sales & product management, Sentenial, said leading banks like Deutsche see SEPA and SDDs as core to its payments business and are not just treating it as a compliance issue."Other banks are playing catch up [with Deutsche]," says Hanrahan, "but they don't necessarily understand the mechanisms they can use to catch up."

Sean Fitzgerald, CEO, Sentenial, says the aggressive "land grab" by leading cash management banks is forcing Tier 2 and Tier 3 banks to start thinking about SEPA and their SDD strategy. "The more aggressive players see SDDs as an opportunity to gain market share," says Fitzgerald. "Payments makes up a significant portion of their operating profits and the refocus [post-financial crisis] is back on payments."

Although the binding date for reachability for SDDs has been pushed back to November 2010, with the French banks saying they are not going to be ready until then, Sentenial says the leading banks are already well on the way in terms of their preparations and see it as an opportunity to differentiate themselves. These "SEPA pioneers", says Fitzgerald, are likely to force further consolidation in the payments space and are likely to dominate SDD flows once corporate appetite for the new instrument takes hold, which is not likely to happen until after November 2010.

While SEPA Credit Transfers were a new way of doing something that already existed, SDDs or pan-European direct debits are a completely new instrument for corporates and Hanrahan says they are looking for banks that demonstrate leadership on this issue, particularly around direct debit mandate management, which is particularly challenging in terms of moving existing mandates over to the new SEPA standards.

DTCC abandons merger with LCH.Clearnet

2009-04-29T15:52:00.005+01:00

The Depository Trust & Clearing Corporation (DTCC) has abandoned its proposed merger with LCH.Clearnet saying it saw no choice but to pursue other strategic alternatives.

The DTCC, which owns EuroCCP, first mooted a merger with LCH.Clearnet back in October 2008. However, a bank-led consortium including participants such as interdealer broker, Icap, threw its hat into the ring.

A statement released by the DTCC appeared to lay the blame for the failed merger at the feet of LCH.Clearnet saying it had not agreed on a basis for "consummating" the proposed merger, which left the DTCC with no choice but to pursue an alternative strategy in its quest to develop transatlantic clearing services.

As to what those alternative strategies are is anyone's guess, but the general thinking, at least among market participants, is that there are too many CCPs (central clearing counterparts) in Europe. In addition to LCH.Clearnet and the DTCC's European subsidiary, EuroCCP, there is Eurex Clearing, the London Stock Exchange's Italian clearer CC&G, SIS x-clear and EMCF, which is owned by Fortis and exchange group Nasdaq OMX.

The Code of Conduct for Clearing and Settlement was meant to encourage interoperability between clearing providers, but that has not happened and most believe the only way to reduce the numbers is through consolidation, not interoperability, which can lead to greater risks.

But with some exchanges keen to own CCPs and other countries that lacked a CCP setting up ones in the wake of the Lehman collapse, consolidation does not appear to be on the cards right now.

Wake-up call for banks about cost of new liquidity regime

2009-04-21T10:20:00.005+01:00

The New World regulatory order that is likely to be ushered in as a result of the recent financial crisis, not only means more regulation for banks, but also more cost.

Experts are already warning banks that the UK Financial Service Authority's (FSA) new requirements around strengthening liquidity standards will overload banks with reporting requirements, and as think tank JWG-IT points out, the level of reporting is on such a scale that even the regulators may not be able to understand it or use all of it. Therein lie the dangers of over-regulation.

What got us into this mess is that the regulators did not understand what they were regulating. Are they in danger of treading the same path when it comes to the new liquidity standards that will be imposed on banks and building societies as of next year?

According to JWG-IT, the FSA's survey of more than 30 firms has put the potential incremental costs of implementing the new "liquidity reporting regime" at more than £2.4 billion (JWG-IT arrived at this figure, which the FSA confirmed, based on its own analysis of the FSA survey), orders of magnitude higher than the FSA's original overall estimate of £150-£250 million.

JWG-IT says that the implementation challenges around the new liquidity standards and reporting requirements are unprecedented and that the FSA's estimates "overwhelm" the estimated costs (between £870 million and £1 billion) from one year ahead of the Markets in Financial Instruments Directive (MiFID) implementation.

It is symbolic of the afterthought regulators often pay to cost; let's implement the regulation so we are seen to be doing something and worry about the cost later. But how are firms going to fund this level of investment? And is it so onerous that banks are likely to implement piecemeal solutions or even delay liquidity risk projects further?

The comparison with MiFID is illuminating given that the cost estimates for that regulation were based on a regulatory framework that was more clearly defined. The new liquidity risk regime is less finalised than MiFID and has a much shorter implementation time frame (March 2010).

The FSA says that the more than 600 firms that will be impacted by its new liquidity reporting regime will need to devote resources to change their systems and hire more staff, which is ironic given that in the current climate banks have been shedding staff, particularly in IT departments, which will have their work cut out trying to implement the new liquidity requirements, which require "granular quantitative liquidity data" on a daily basis.

In its second consultative paper on Strengthening Liquidity Standards, the FSA estimates that the resource and staffing changes required could result in average one-off costs for UK banks of approximately £3.3 million and up to £7.4 million for "full-scope" investment firms. The UK branches of foreign banks will not escape unscathed either and could be looking at a bill of more than £500,000 each. On an ongoing basis, estimates suggest that banks will need to spend anywhere from £517,000 and £775 million, dependent on the level of "crisis reporting" required.

While the FSA's analysis of the impact the new liquidity reporting regime is likely to have on firms, "should be taken with a grain of salt" as it was prepared quickly, PJ DiGiammarino, CEO of JWG-IT, says that the cost estimates should serve as a wake-up call to banks.

He argues that global liquidity standards are needed for firms to more quickly and cost effectively implement the new regime. The Financial Stability Board, which extends the mandate of the Financial Stability Forum, is looking at the development of global standards for liquidity reporting, in addition to the reviews being undertaken by the US and the EU.

Equens and Fed Banks join forces on cross-border payments

2009-04-09T08:28:00.004+01:00

As banks lick their wounds in the wake of the subprime crisis and assess which transaction-related businesses they wish to remain in, the Federal Reserve Banks in the US and European payments processor Equens have joined forces to provide a low cost channel for processing payments between Europe and the US.

Cross-border payment volumes are relatively low compared with domestic payments and have high fixed costs associated with them. The new cross-border service will provide a standardised channel for processing low-value payments in multiple currencies, including the USD and euro, and forms part of the FedGlobal ACH Services that were announced at the Payments 2009 conference in Orlando, Florida recently.

Both Equens and the Federal Reserve Banks are part of the International Payments Framework, which aims to use the latest industry standards that are part of the Single Euro Payments Area (SEPA) to increase efficiency and lower cost in the processing of global cross-border low value payments.

While the announcement by Equens and the Federal Reserve Banks is geared towards banks looking for a more cost efficient channel for processing low value cross-border payments, some banks will not be happy about ACHs treading on their toes or challenging traditional cross-border business models.

Smarter regulation, not more regulation

2009-03-30T14:39:00.006+01:00

With many expecting the imminent meeting of the G20 group of countries to shake up the financial regulatory landscape, commentators believe that the rest of the world will follow the UK's call for broader financial services reforms.

PJ DiGiammarino of think tank, JWG-IT, expects that there will be a "big push" by the G20 to support the de Larosière and Lord Adair Turner (chairman of the FSA) recommendations. " A serious rework of capital adequacy, liquidity, hedge fund control, offshore oversight, remuneration and the supervisory architecture is now on the cards - starting this year," he states.

The UK financial services regulator, the FSA, has indicated that in future regulatory supervision will take the form of "making judgments on the judgments of senior management". The US is talking about the need for firms to be able to measure their counterparty exposure enterprise-wide within a matter of hours, not days or weeks. However, there are those that maintain it is about smarter regulation, not more regulation, says Charles Ilako, partner, global regulatory practice, PricewaterhouseCoopers.

Sceptics, including myself, believe that little 'meat' is likely to come out of this week's G20 meeting. Those looking for specifics are likely to be disappointed as the G20 group of countries is hardly in agreement on many matters, with countries like China and Brazil apportioning most of the blame for the current crisis on Western governments, regulators and financial service providers.

And despite utterances to the contrary, protectionism is likely to creep in as national governments and regulators look to prop up domestic institutions at the expense of foreign financial service providers.

Pricewaterhouse calls for a global financial regulatory body to coordinate regulation globally, but there are many unresolved questions as to how such an arrangement could work in terms of governance and structure (will certain countries have more say or be given more weighting than others, for example).

PricewaterhouseCoopers suggests making global the European Systemic Risk Council, but regulatory supervision will still be required at the national level and the enforceability of anything a global or supra-national regulator says or recommends is questionable and likely to be at the behest of national regulatory bodies.

While the new world of financial regulation is raising the bar, all this talk of enterprise-wide risk management does not bode well for banks, who let's face it do not have a true enterprise-wide view of their risk or exposure, as this tends to be measured in operational silos.

"We typically find the trader doesn't have a detailed view of the stress tests, the CFO doesn't know the reliability of the reference data and nobody knows who owns the record," says DiGiammarino. "Key information needed for integrated risk management and regulatory compliance is locked in isolated silos and no single individual, or even a single operating committee, has an overall view."

Liquidity standards - The FSA is on the war path

2009-02-17T14:05:00.009Z

It seems that the UK financial services regulator, the Financial Services Authority (FSA) much maligned by the media and the public in the wake of banking failures under its watch, is eager to restore its credibility by wielding the heavy hand of regulation in the form of its onerous requirements for strengthening standards around liquidity risk.

The FSA is the first regulator to issue a consultation paper (CP 08/22) on strengthening liquidity standards and has set the rather ambitious deadline of October this year for banks, investment banks and building societies to comply with its new liquidity risk standards, which does not leave firms much time for planning, selecting solutions, building interfaces, testing and firm-wide education, says Selwyn Blair-Ford, senior domain expert, UK & Ireland, Financial Reporting Services, FRS Global, particularly given that the FSA is not expected to finalize the new rules until April.

Reading between the lines of the Consultation Paper (CP 08/22), one can see that the FSA is eager to come down hard on those banks with business models characterised by unsustainable lending practices and a reliance on wholesale funding or funding from foreign subsidiaries rather than retail deposits.

One of the key tenets under the new liquidity risk standards is that banks will need to maintain "adequate" liquidity at all times without relying on other parts of the group. Blair-Ford says this requirement will "break up" the centralised treasury management model that most banks operate under and will require liquidity to be held locally, which is an expensive undertaking. This appears to be specifically aimed at preventing what happened in the case of Lehman Brothers, where the illiquid US operation reportedly "sucked" all the liquidity out of its European offices.

As a result of the FSA's new requirements around managing liquidity risk the FSA anticipates that "...many institutions will need to significantly reshape their business model over the next few years as a result. Current agreements and practices will have to be reviewed and the status quo may no longer be acceptable. In line with our objectives, our regime will continue to put the responsibility of adopting a sound approach to liquidity risk management on firms and their senior management".

"There is an arms race to see who is the toughest [regulator]," says Blair-Ford of FRS Global. He anticipates that the cost of complying with the new liquidity risk standards will make banking less profitable, not exactly what the beleaguered banking sector wants to hear, but then it seems the FSA wants to change the face of banking, at least when it comes to stemming the systemic implications of liquidity risk, and if it has to claim a few scalps along the way or force further bank consolidation then so be it.

In its consultation paper, the FSA estimates that IT, reporting and training costs for the new liquidity risk standards will cost firms between £150 million to £200 million, however industry feedback suggests that the FSA has underestimated the "true" costs to the industry.

Regardless, the FSA makes no apologies for its ambitious implementation time frame or what it terms "tough prudential standards", and while it may be tempting to think that the regulator will at worst fine firms for non-compliance with the new liquidity risk standards, according to FRS Global, the penalties are likely to be more severe and could take the form of bank directors (bank chairmen, executive and non-executive board members) being "disbarred".

It appears that the FSA is on the war path eager to make amends for the unwanted media and public attention it has received for falling asleep at the wheel and it will be interesting to see which firm or firms are first in the firing line. Could it be a US bank? After all, many think this is largely a US banking problem that spread to other markets, and it seems the FSA is keen to extend its regulatory tentacles beyond UK shores.

Strengthening or weakening liquidity standards?

2009-02-12T14:19:00.008Z

The UK financial services regulator, the Financial Services Authority (FSA) has been consulting with banks and financial market participants on its response to the so-called liquidity crisis.

Boasting the memorable title of CP08/22:Strengthening Liquidity Standards, the FSA consultation paper talks about "high-level" requirements for banks to maintain "adequate" liquidity at all times without relying on other parts of the group.

The consultation paper also mentions the need for adequate systems and controls for liquidity management; quantitative standards for liquidity; standards around quality and quantity of liquid assets and the requirement for a liquidity buffer of "high quality unencumbered assets"; as well as data pertaining to a "firm-specific" and "market-wide view" of liquidity risk.

It sounds reminiscent of Basel II in that the consultation paper talks about qualitative and quantitative standards. I would not be surprised if the FSA's consultation paper gives rise to a cottage industry of conferences, vendor solutions and consultants, all eager to plug their FSA- friendly liquidity risk management expertise.

While the FSA proposes that it will conduct a supervisory liquidity review of each firm, alarm bells start ringing when one reads that the FSA is still pursuing a "high-level" principles-based approach to regulation.

In light of recent market events, which clearly demonstrate that the banks themselves and the regulators got it so horribly wrong, one has to question whether a wholly principles-based approach to regulation works. The FSA also mentions that responsibility for liquidity risk lies with the banks themselves, not the central banks or regulators, but haven't we seen the devastating consequences of what happens when banks are left to their own devices?

Some risk management consultants I have spoken to have also expressed misgivings about the consultation paper (CP08/24) that the FSA published on stress and scenario testing back in December 2008.

The FSA proposes to introduce a "reverse-stress test" requirement for banks, building societies, investment firms and insurers, requiring firms to consider "the scenarios most likely to cause their current business model to become "unviable".

Sounds great in theory, but as one risk management consultant pointed out to me, the banking industry and the FSA are not "up to speed" on scenario planning, unlike the oil and aerospace industries which have 40 years of experience. So what chances do we have of the banks and the FSA, who are part of the problem, getting it right?

The consultant said the current risk management strategies banks use such as Value at Risk (VaR) were no good at predicting extreme events. Using the example of a plastic ruler being bent, the consultant said while mathematics could calculate how much the ruler would bend, it could not predict at which point it would snap. "[The collapse of] Lehman Brothers was like the ruler snapping," he said. Yet, standard risk models failed to predict the point at which Lehman's would snap, let alone the consequences that ensued.

While placing more emphasis on stress testing and scenario planning in terms of contemplating a myriad of "what if" scenarios may help firms better anticipate the unexpected, the consultant said that the problem with the FSA's approach is that it was taking the standard risk models (how much the ruler is bending) and applying them to something that only matters when the ruler snaps.

Neither clear nor settled

2009-02-05T17:19:00.005Z

At a much scaled down Finexpo (which is perhaps a sign of the times) in London today, those regulators and market participants that have watched on in frustration at the slow pace of consolidation and interoperability among European securities settlement and clearing providers, were told they "should be careful what they wished for".

Those were the words of Simon Wheatley, director of regulatory liaison, LCH. Clearnet, which signed a "non-binding" agreement to merge with the US-based Depository Trust & Clearing Corporation (DTCC) in October last year, only to attract another suitor, interdealer broker Icap and a consortium of investment banks who are believed to also be in discussions with LCH.Clearnet.

Referring to the European Code of Conduct for Clearing and Settlement which looks to promote certain standards in terms of price transparency, access, interoperability and service unbundling, Wheatley said that "competition" [between clearers at least] did not come free.

Asked whether a single clearer in the form of the US-style DTCC model would increase risk or reduce risk, Wheatley said that while it may take away some issues, it would introduce others, and that one size did not necessarily fit all.

Marco Strimer, CEO, SIX x-clear said that ultimately the Code of Conduct was about consolidation and that not everyone would make it to the finishing line. However, he added that consolidation of central counterparties (CCP) also meant that all market participants would need to change their systems. In other words consolidation, while seemingly desirable does have its costs, particularly for those that have to adapt to accommodate it.

On the settlement side, things seem to be moving more quickly with ICSD Euroclear consolidating settlement platforms and harmonizing market practices in three markets
as part of its Single Platform initiative, which will eventually encompass seven CSDs.

The European Central Bank is also looking to standardize settlement of euro denominated securities on its yet-to-be completed TARGET2-Securities (T2S) platform, but while the ECB received indications of intent from most of Europe's CSDs that they would use T2S once it went live, it has yet to secure legally binding commitments from them, which could take much longer than anticipated.

Ilse Peeters, director of public affairs at ICSD Euroclear said that she did not expect the ECB would receive legally binding commitments by March as there were still outstanding questions regarding the governance, pricing structure and legal aspects of T2S. John Tanner, head of equity post-trade service development at the London Stock Exchange said that questions also remained regarding the Bank of England and sterling's participation in T2S.

So it seems all is not clear nor settled by any means in Europe's fragmented clearing and settlement landscape.

Clearstream is in "good shape" says CEO

2009-01-28T17:56:00.004Z

At a press briefing this morning in London, Clearstream International CEO, Jeffrey Tessler, quashed ongoing rumours that Deutsche Börse may "spin off" its ICSD.

Back in 2007, at the time that much of the transatlantic consolidation between national exchanges was kicking off and Deutsche Börse had made numerous failed bids for the London Stock Exchange, FinancialTech Insider reported rumours suggesting that the German exchange could sell off parts of its business, including the ICSD Clearstream.

According to newspaper reports at the time, Atticus Capital, which held an 11.68% stake in Deutsche Börse,was keen to see it separate Luxembourg-based Clearstream International from the exchange and return cash to shareholders.

Today in London, Tessler said the board of Deutsche Börse remained committed to the existing business model and that there were no current plans to spin off the ICSD, although it was open to any future debate and discussion regarding this.

Despite ongoing challenges in the credit markets, Tessler said Clearstream was in relatively good shape (it is one of the few custodian banks that is still AA rated, he said) and that, unlike its competitors, it had not been directly exposed to the failure of major sell-side firms such as Bear Stearns and Lehman Brothers as it never had broker dealers as client.

Tessler said Clearstream had witnessed an "explosion" in cash balances, which had tripled as investors perceived the ICSD as a "safe haven". Despite declines in mutual fund settlement as German retail investors shied away from equities, Tessler said Clearstream's main business, Eurobonds, remained promising as debt issuance from both governments and corporates is expected to rise substantially outstripping the capacity of domestic markets, thereby benefiting the international market that the ICSD services.

Despite the difficult economic climate, Tessler reiterated the benefits of Clearstream's strategy of pursuing "interoperability" rather than a single settlement engine, which its competitor, Euroclear is building.

Clearstream Banking Frankfurt is spearheading the Link Up Markets initiative, which will build a format converter to facilitate interoperability between the seven participating securities depositories. Tessler said Link Up Markets would be able to "plug into" any system around the world and would allow CSDs to feel comfortable in a post-TARGET2-Securities world.

Clearstream also appears to be advantaging from the increased uptake of securities financing, which saw its Global Securities Financing business grow by 24%. Clearstream is looking to increase its basket of eligible securities that can be used as collateral by opening it up not just to bonds, but also equities. It has also developed a central bank pledging facility allowing collateral within Clearstream to be used to access central bank money. It is also exploring the use of investment funds for collateral purposes.

Accuracy and quality of payment data

2009-01-28T17:28:00.007Z

In these credit challenged and uncertain times,ensuring payments are processed on time without the need for manual repair at additional cost, has perhaps never been more important. After all who wants to be on the receiving end of a payment that is held up because it does not contain the correct Bank Identifier Code (BIC) or International Bank Account Number (IBAN), particularly if that person is relying on that payment to finance some other aspect of its business.

In that respect the accuracy and quality of payments reference data has become increasingly important. It should come as no surprise then that the rumor mill has been working overtime regarding a potential tie-up between payment reference data provider CB.Net and Accuity, a leading provider of payment routing data and AML software.

CB.Net's flagship product is its Standing Settlement Instructions (SSI) database, BankSearchPlus, which also validates and links IBANs to BICs, which is important in the context of the Single Euro Payments Area for straight-through processing of payments.

Accuity also has Reference Directories which are used to increase STP in payments and to facilitate the efficient processing of cheques and wire transfers, so the tie-up with CB.Net seems a logical one as banks, regulators and vendors look to make cross-border payments processing more efficient and cost effective.

SEPA is stalling

2009-01-21T11:46:00.003Z

Guest blogger, Paul Styles, business solutions manager, ACI Worldwide, comments on the increasing unrest amongst European banks regarding SEPA's slow progress.

The slow implementation of the SEPA project so far has culminated in a statement from the French Banking Federation (FBF), announcing that its members are ‘downing tools’ on preparation for the introduction of SEPA Direct Debits (SDDs) in November 2009.

As dramatic as this statement may sound, it actually reflects general and widespread stirrings of unrest from Europe’s banks regarding the SEPA project. In fact, as early as September 2008, the FBF warned that they would suspend their SEPA Direct Debit projects in reaction to the European Commission's unclear stance on interchange fees, which they believe threatens their current economic model.

The EC and the European Central Bank (ECB) have stated that banks can use interchange fees on Direct Debits only for an "interim period" and if it is justified. However, French banks point out that the interchange fee system is the "only tried and tested cooperative model" to achieve the financing of SEPA infrastructure investments and maintenance costs. If interchange fees are to be scrapped, then the ECB needs to come up with a long term solution, and quickly.

Nevertheless, whilst the French banks are unwilling to commit to the ECB’s provisional timetable, it seems unlikely that they will completely halt their work on SEPA projects as many have wider European operations. Yet, demand for SDDs in a cross-border context is yet to be proven, and with SDDs due to go live in November, this statement from the FBF speaks volumes that the French banks are not expecting a wholesale shift from their domestic Direct Debits processes to the new SEPA instruments.

While the statement from the FBF may have little impact on the overall roll-out of SDDs, it serves to highlight the fact that the SEPA project is stalling. Without strong customer demand, achieving SEPA through self-regulation will remain problematic. As such, appropriate levels of regulation would help the progress of SEPA implementation and help deliver the much-needed clarification of rules for the financial services industry and its corporate customers.

The FBF statement has served to put further pressure on the European banking industry to set an end-date for the retirement of the legacy payment instruments, which can be no bad thing. The ECB has acknowledged this requirement and has stated that it ‘will work on the modalities – self-regulation or regulation – as well as the end-date itself’. Without such a deadline achieved by some degree of consensus, the FBF refusal to commit to provisional timetables may be just the tip of the iceberg vis-à-vis SEPA challenges.

What credit crisis?

2008-12-12T09:01:00.005Z

For the last few months we have all been inundated with news stories telling us that the interbank lending market has dried up, along with bank lending in general and that commercial paper markets have virtually ground to a halt.

But there are some dissenting voices emerging from the wilderness to tell us that all is not as it seems; that the figures don't support the US Federal Reserve's and Treasury Secretary's assertions about the dire state of bank lending.

Yesterday, Octavio Marenzi with analyst firm Celent, released a report aptly titled: Flawed Assumptions About the Credit Crisis, which makes no bones about the fact that Ben Bernanke, Federal Reserve chairman and Hank Paulson's comments about the so-called credit crisis are incorrect as they are not backed up by publicly available data, including stats provided by the Federal Reserve Bank itself.

Marenzi does not discount the fact that we are in a deep financial crisis with banks failing and countries teetering close to collapse. However, he says US lending markets are in "good health" and lending by US commercial banks increased 15% during the credit crisis. In fact it says an all-time record high in US commercial bank credit (more than $7.2 trillion) was reached in October 2008.

Marenzi contends that:

Interbank lending reached its highest level ever in September 2008, and since the beginning of the credit crisis, it has increased approximately 22%. The cost of interbank lending also remains at low levels, he says.

Contrary to the assertion that commercial paper markets had stopped functioning or become prohibitively expensive, Celent says outstanding volumes in the commercial paper market for non-financials are higher now than at any point since early 2004 and that the cost of borrowing in that market has dropped to at least 10-year lows for non-financials.

Bank real estate lending also reached a record high in October 2008 and has grown consistently during and before the crisis

Marenzi proffers two possible explanations for the huge discrepancies between what Federal Reserve and government figures are saying and publicly available data. Perhaps Mr Paulson and Bernanke have additional data available to them that supports their assertion that credit markets are in trouble, although Celent is sceptical that such data is available.

The only other explanation, says Marenzi, is "that policymakers are reacting to the situation of a particular set of businesses and financial institutions, and are incorrectly generalising this to
the market as a whole. If this is the case, the policy tools being employed may well be the wrong ones."

Celent was inspired to publish its report following publication of a paper in October 2008, Facts and Myths about the Credit Crisis, which was written by three researchers at the Federal Reserve Bank of Minneapolis. According to Marenzi, the paper claimed that there appeared to
be an abundance of credit flowing in the US market and that the researchers were critical of US policymakers' lack of serious analysis and of "substituting hard data with their own speculation."

Marenzi also looked at commercial lending in Europe and said the data shows no evidence of a credit crisis with consumer lending in France and Italy continuing on the same trajectory since the beginning of 2003, while in Germany, consumer lending has been flat for some years. Commercial lending to non-financials in the three major eurozone economies was also at its highest ever levels at the end of October 2008, having shown steady growth since late 2005.

Based on Bank of England data and its own analysis, Celent also says that lending by UK banks is at its highest levels ever, growing at a rate of 12% annually since 1994. So it appears that the financial crisis has not translated into a general credit crisis, although we are being told differently.

UK Prime Minister Gordon Brown who accidentally remarked that he had saved the world by pumping billions into the UK economy to get credit flowing again, may be eating humble pie alongside various other political leaders.

Risk management in your Xmas stocking

2008-12-11T17:09:00.002Z

Go to a Christmas lunch these days and most people will be talking about what they are filling their Christmas stockings with or how they are looking forward to eating turkey yet again for the fourth time in a week.

While the conversation at business intelligence and analytics vendor, SAS's Christmas press lunch today may have been peppered with such conversational tid bits, the subject of the lunch was for SAS to publicise its recent foray into the capital markets space.

Building on its already strong base in the retail banking sector, particularly in the areas of operational risk, credit risk, market risk and financial crime, SAS has put together a team based in the UK that is wholly focused on selling its analytics and risk management solutions to capital markets firms.

2009 is likely to see increased regulatory oversight, particularly when it comes to the overlooked areas of liquidity and counterparty risk; and not one too miss an opportunity, SAS is eager to sell its solutions to a business that is drowning in information, but not quite sure what to do with it or how to make sense of it in order to determine risk, fraud liability etc.

It seems the poor old trader is likely to come under increasing surveillance with intelligent software algorithms monitoring their every move and looking for unusual patterns of behaviour (the ability to match seemingly unrelated events across different parts of the business). The technology is certainly to provide such surveillance, but the cynic in me says most banks are only likely to embrace these technologies as a 'box ticking' exercise in order to comply with regulation, rather than seeing it as good business per se.

Risk management is suddenly the business to be in, but one has to wonder where was all this wonderful bells and whistles technology when things started going wrong in capital markets? And at the end of the day technology can only do so much.

If the people in charge still view "betting on the bank" as a necessary part of making money, or don't want to listen to those 'little voices' in their risk department warning them that something bad is about to happen; then no amount of technology can account for the fact that the culture within firms has to fundamentally change if risk management is to be viewed as a strategic asset and not something that is ferreted away in a back office somewhere filing reports to regulators that no one really concerns themselves with.

Interestingly, while we only get to hear about the multi-billion dollar losses racked up by rogue traders like Jerome Kerviel, there are plenty of other million dollar losses within banks, which occur on an almost daily basis (be they the result of human error or internal fraud) that we don't get to hear about.

Mark Hudson, industry consultant, Capital Markets, SAS, believes if firms can start minimising those million dollar losses we don't get to hear about via market or trader surveillance technologies then perhaps the industry will have achieved something.

Surely saving the bank a few 'mill' from combating accidental or internal fraud is going to make a CFO's ears prick up in this challenging business climate? And even if it doesn't, then Hudson believes the banks' customers and may be even their shareholders (which lets face it is the government these days) may insist on more risk management oversight.

Desperately seeking an "enterprise-wide" view of risk

2008-11-21T17:29:00.005Z

One of the consequences of the current economic crisis is that banks' risk management practices - or lack of them - have been exposed. Like peeling back the various layers of an onion only to find that the inner layer is rotting, the more so-called risk experts have delved into the risk management practices of banks, they have not liked what they have seen.

Something is rotten in the state of financial risk management, and there should be no surprises that banks' siloed view of risk based on asset class or geography has played a rather significant hand in the dire predicament they now find themselves in. Not only do banks not have an enterprise-wide view of risk across asset classes and geographies, they apparently also find it difficult to stop or prioritise payment flows. Few banks it seems had the ability to stop payments going to ailing investment bank Lehman's Brother as it collapsed.

"How many banks have the ability to say I don't have enough cash in nostro A , but there is plenty in nostro B, so I can re-route payments?", asked an executive from complex event processing vendor, Aleri, during a recent webinar it hosted on liquidity risk management.

Not only are banks' risk management systems siloed, the experts say, they also do not speak to liquidity management and collateral management systems. Liquidity management was traditionally seen as the preserve of a bank's treasury department, but Bob McDowall, a research director with TowerGroup in Europe, says that has to change.

McDowall said forthcoming regulation in the wake of the current crisis meant that banks would need to develop the capability to measure and manage liquidity risk on an enterprise-wide basis. Aleri says complex event processing is one technology that can help pull together disparate sources of information together without having to connect to the different silos within banks.

"At any time, banks need to be able to take a view as to what their risks and liabilities are up-to-the minute, not at the end of the day or periodically throughout the day," said McDowall.
He anticipates that banks will need to move from real-time to "predictive" risk management based on analysis of prices and behavioural patterns.

The national financial regulators are also going to have to pull their socks up it seems, as McDowall says that in order to monitor how well banks are managing liquidity risk, they will need to take a more "forensic" approach to risk management and build systems that enable them to share information with one another.

According to Tony White, managing director, product and R&D, Wall Street Systems, "next generation" liquidity management systems will need to provide a quick overview of everything and be tied to front office systems. They cannot be product agnostic as they will need to understand the product if banks want to combine collateral and cash. Liquidity management policies will also need to be reflected in these systems and stress testing of different scenarios will need to be done in minutes not months.

Sounds like banks are going to have their hands full over the next few months, but one wonders how many banks will actually achieve a truly enterprise-wide view of their risk, given that risk management projects have tended not to receive that much support from senior banking executives.

Citi shareholders need reality check

2008-11-21T16:46:00.004Z

As speculation continues to mount around the future of Citi's various business units, Bob McDowall, a research director with TowerGroup in Europe, remarked that investors needed to understand that banks were a long-term stock pick.

In the last two days, Citi's share price has slumped more than 20% forcing the hand of the bank's board members who are meeting today to discuss options for restoring investors' confidence. Despite talk of an increased injection of capital by Citi's main investor, Prince Alwaleed Bin Talal, Citi's shares continued to fall.

There is speculation that Citi may sell of one or more of its businesses to help shore up capital and investor confidence. Business lines it is likely to consider selling include its investment banking business and special investment vehicles. McDowall said that Citi's global transaction banking, wealth management and international branch network remained relatively good value, so it is unlikely to dispose of those.

But given that now is not a good time to be selling, given low valuations, McDowall said Citi's options were limited. He said governments could not continue to be seen to be pumping money into ailing banks as that would further erode customer and shareholders' confidence in the US financial system.

But McDowall takes a dim view of the pressure shareholders are putting on Citi to deliver more value in the current depressed economic environment. "Shareholders have to understand that banks are a long-term stock peg," he said. "Having had a good feast on banking dividends for the last five years, now it is time for a little bit of famine."

McDowall believes that the much maligned sovereign wealth funds, which have invested in banks like Citi, have a much better attitude towards investing in banking stocks; they tend to take a longer-term view and see the current share price of Citi as an opportunity to buy not sell.

According to a Reuters report, Citi's CEO Vikram Pandit has indicated he wants to hold onto the banks' Smith Barney brokerage business, and said that employees should not focus on Citi's falling share price as it is well capitalised.

A single bank seems likely to take on a merger with a bank of Citi's size - that would be too much to digest, although that may be an option if the government is forced to step in. One also has to wonder whether the US authorities will relax investment restrictions for foreign investors in US banks, given that Middle Eastern investors have demonstrated that they are only too willing to hold stocks like Citi.

Data management projects still a hard sell

2008-11-12T16:31:00.009Z

Front office trading applications and risk management have garnered a lot of media attention during the recent credit crunch. But one ingredient that feeds both front office trading applications and risk management, data, which is the "lifeblood" of most companies, is still getting short shrift when it comes to funding.

Data governance and quality should be right up there on the list of things that financial service providers need to work on because if they are taking in poor quality data then they are going to be spitting out poor trading and risk management decisions based on erroneous data.

But it seems data management in general is not at the top of most banking CEO and CFO's agenda, at least that is the impression I got sitting in on a panel discussion on the funding process for data management in a turbulent financial market at FIMA Europe 2008 in Olympia, London.

While most companies recognize that data is a "strategic asset", getting funding for data management projects appears to be as difficult as pulling teeth, according to the esteemed panel of EDM, client and customer accounts operations heads from Citi, HSBC and Dresdner Kleinwort.

And while the credit crunch has shone a light onto the once mysterious backwater of reference data management - regulators are likely to start enforcing standards around data quality and management - data specialists do not expect funding for major reference data projects to get easier any time soon.

"It is difficult to get management buy-in [when it comes to data management]," said Sally Hinds, global head of EDM, HSBC investment bank. One trick, said Hind was to ask for the same budget as 2007 so it didn't look like reference data management was gobbling up even more of increasingly scarce budget resources.

Hinds stressed that the EDM department within HSBC was relatively new and that the recent global market turmoil highlighted that data still resided in many different, often siloed locations, and that sometimes there were mismatches between front and back office views of data.

"Citi is incredibly siloed," said Julia Sutton, global head, customer accounts operations for Citi. "We are trying to break down these silos, but it is difficult." Sutton said as her function was placed within the capital markets division of the bank it was viewed with mistrust by other business lines. And whilst her business has senior management buy-in, she said there has been a major influx of new management recently. "They haven't been there long enough to know how important it[customer data] is to them," she said.

Sutton said her department had to try various methods in order to get funded. In the end instead of getting funding from the individual business lines, they obtained funding centrally as the customer data it manages crosses various business lines including global banking, investment banking and treasury.

Instead of managing data in silos, enterprise data management or EDM, encourages firms to move to an enterprise-wide data management fabric. But it appears that the reality on the ground for most firms is still very much silo-based. "We have a long history of acquisition, but a short history of integration," said Sutton. Hinds of HSBC said it is working on a project called, "one HSBC", which aims to reduce [data] duplication across asset management, investment and private banking.

Sadly it seems, the only thing that seems to truly motivate most banks to embark on major reference data management projects is the threat of regulatory oversight. Most of the panelists agreed that regulations such as Basel II and MiFID had provided them with opportunities to get projects funded.

Summit told Citi may not be profitable for several years

2008-11-11T09:33:00.003Z

The transition for Wall Street Banks, Goldman Sachs and Morgan Stanley to bank holding companies, will be "painful", Oppenheimer & Co analyst Meredith Whitney told Reuters Global Finance Summit held in New York, London and Hong Kong recently.

Whitney also said that Citi, which was one of the casualties of the subprime crisis, was unlikely to be profitable for several years and needed to reinvent itself, either by buying another US retail bank or losing some of its businesses.

While Citi's Global Transaction Banking business continues to be profitable, Whitney said that opportunities for cross-selling to clients across Citi's myriad financial services businesses, was not happening because the bank had not invested enough in "integrating different units' computer and risk management systems".

She also stated that losses in the bank's consumer loans business in emerging markets such as Mexico and India were rising and that an accounting rule change would bring credit card loans packaged into bonds back onto Citigroup's balance sheet forcing the bank to set aside an additional $7 billion to $10 billion to cover loan losses, Reuters Global Finance Summit reported.

Citi lost its bid for Wachovia Bank, the US's fourth-largest bank by market value, to Wells Fargo in early October. The deal would have helped to increase its deposit base, which is considered crucial in these credit challenged times. Reuters Global Finance Summit reported that Citigroup relied more on borrowing in the bond market than competitors, particularly in the US, which increased its funding costs.

"If they want to grow their US business, they're going to have to fund it differently," Whitney told the Finance Summit.

Having lost the Wachovia deal, Citi is believed to be seeking other acquisitions.

Who is holding SEPA back?

2008-10-28T11:53:00.003Z

Given current economic conditions and the precarious financial situation some banks have found themselves in, is now really the best time to be forcing banks to invest in SEPA?

Well it seems the European Central Bank is keen to press ahead with SEPA regardless of external conditions. In a newspaper interview last Sunday, Gertrude Tumpel-Gugerell, ECB Executive Board Member, said that an end date for SEPA to be the only bank payments system in Europe needed to be set.

Many banks and corporates will welcome that statement as SEPA Credit Transfers, which make up less than 1% of total credit transfers, have not been the success some hoped for, with The European Associations of Corporate Treasurers (EACT) blaming that on the lack of an end date for SEPA implementation, which makes it difficult for corporate treasurers to convince their CFOs they need to budget for SEPA.

Tumpel-Gugerell was quoted as saying that, "When SEPA is the only system working, bank commissions will fall further, which will be an advantage for all clients." I am not quite so sure that the banks will look on it so favourably as innovation or disruptive innovation, is not something banks in general are very good at, particularly in a recession.

During the third edition of the International Payments Summit “Do You SEPA?”,held in Milan on Monday, Renzo Vanetti, SIA-SSB’s CEO said that the adoption of new technology solutions and the creation of new services and business models under SEPA and the Payment Services Directive (PSD), represented an opportunity to contribute to a "rapid solution" of the current system crisis. But that it needed to be an integrated and complete vision for change with the authorities acting as the catalyst.

In other words somebody needs to pull it all together. The banks are not going to do it on their own. But is heavy handed regulatory pressure or intervention the way to do it, as some banks clearly do not see the business case for full SEPA migration, particularly when it is likely to erode their existing payments revenues?

Going forward if SEPA is to work, the Do You SEPA payments event in Milan heard that there needed to be a high degree of harmonisation in terms of how member states implemented the PSD, which provides the legal framework for SEPA.

Carlo Tresoldi, SIA-SSB chairman, also pointed the finger at the public sector saying they needed to adopt the new SEPA payment instruments. "At European level these public authority bodies alone account for 20% of all payments in euros and 40% of GDP," he said. "In addition, public authorities represent 15% of market share in the area of credit transfers and collections”.

But are public authorities the real problem? Sure it would be good if governments used SEPA instruments, just as it would be good if corporates did. But when you have a number of banks still not fully implementing SEPA or adapting their payment systems fully to handle SEPA payment instruments, one has to ask who is really holding SEPA back; the public authorities or the banks?

DTCC and LCH.Clearnet to merge

2008-10-22T09:55:00.003+01:00

We've had transatlantic exchange mergers, now it seems that securities clearing houses are tying the knot with the DTCC and LCH.Clearnet announcing their intentions to merge.

The merger has been a long time coming, given the fragmentation within securities clearing in Europe and the lack of "interoperability" in the clearing layer, which is one of the conditions set down by the European Code of Conduct for Clearing and Settlement.

Interestingly, the DTCC revived the old Nasdaq Europe platform, EuroCCP, in an effort to give firms a choice of where they clear and to break away from the model of clearing being a "proprietary function of vertical exchanges".

Following resolution of certain key commercial, legal, tax and regulatory issues, it is intended that DTCC’s existing European subsidiary, EuroCCP, will join with the new LCH.Clearnet HoldCo to form a single European clearing business.

It kind of makes you wonder why the DTCC bothered setting up EuroCCP in the first place as merger discussions with LCH.Clearnet have been ongoing for some time, and perhaps in this current economic environment where risk management and cost savings are uppermost in people's minds, LCH.Clearnet finally caved.

It is unclear which technology platform will predominate, but it is anticipated that the proposed merger will result in efficiency gains, largely derived from technology savings, as well as economies of scale as both the US and Europe would be supported by a common infrastructure. As such "further reductions in the costs of LCH.Clearnet’s and DTCC’s services", most notably for equities in both Europe and America, are anticipated. Other markets will also be covered including, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps and credit default swaps.

The formal announcement from the DTCC said that LCH.Clearnet would move to an at-cost based structure comparable to DTCC’s within three years. It is believed Euroclear, which has a 15.8% holding in LCH.Clearnet supports the transaction in principle and will remain a shareholder.

A "binding" agreement between the DTCC and LCH.Clearnet is subject to a number of conditions including; consultation with the Works Council in the French subsidiary of LCH.Clearnet, the approval of shareholders, and the relevant regulators and tax authorities.

SWIFT misses open standards opportunity

2008-10-22T09:19:00.004+01:00

SWIFT's relationship with its member banks is entering an interesting phase, particularly as the Brussels-based banking co-operative courts corporates as customers.

At Sibos some of SWIFT's member banks expressed their discomfort at the announcement of Alliance Lite, SWIFT's new low cost means of connecting to SWIFTNet, which "is as easy as logging onto a web site".

Alliance Lite was developed as a lower cost alternative for corporates, banks and investment managers that don't have the volumes of traffic to justify managing their own SWIFT infrastructure and want to get up an running on SWIFTNet in days rather than months.

However, within the Alliance Lite web browser corporates for example are able to initiate payments, which mirrors the functionality banks provide in their own online proprietary banking applications. So needless to say the banks were not happy with SWIFT treading on their toes. We also hear on the grapevine that the banks have told SWIFT they want to leverage their existing investment in IdenTrust for authentication and do not want SWIFT to reinvent the wheel with some other form of PKI.

But it raises an interesting challenge for SWIFT and its member banks as SWIFT moves into the solutions space and becomes focused on the agenda it wants to push, which is not necessarily that of the banks or corporates.

In a recent research note, analyst firm Financial Insights points out that while SWIFT was busy "selling itself through rebates and fee cuts for users, as well as a few new initiatives like a workers' remittance program and Alliance Lite," it missed an opportunity to promote the ISO 20022 standard and how banks could "leverage open standards to create new business opportunities".

SWIFT is the Registration Authority for ISO 20022 or the UNIFI standard as it is otherwise known, and although usage of the XML-based standard is not widespread, it does form the messaging foundation for the new SEPA payment instruments.

Financial Insights believes that ISO 20022 is the "leading candidate for standardization of corporate-to-bank messaging" but that only a handful of banks (notably Citi and JPMorgan Chase) had thrown their weight behind it, while other banks saw problems in meeting demands for "open messaging standards" unless the large volumes of new business are already there.

It is the old chicken and egg syndrome; banks don't want to develop new solutions based on open messaging standards unless their is significant customer demand and corporates believe that banks should want to fund new developments in order to keep their business.

At Sibos in Vienna, SWIFT had an opportunity to really sell ISO 20022 to the banks, but they were too busy it seems selling themselves. "SWIFT had the attention of the world's bankers at Sibos and failed to take advantage of it to promote a standard that could change the structure of the banking industry," said Financial Insights analysts.

But then of course would banks have had the appetite for such an initiative? After all, as Financial Insights points out, open standards would enable corporates to switch banks more easily. "For ISO 20022 to succeed, SWIFT and other industry players, including leading banks and technology vendors, have to coalesce around a set of new business opportunities like financial supply chain management and quantify the opportunities. Only then will banks be able to justify moving to open standards," Financial Insights concludes.

PSD implementation likely to be pushed back

2008-10-20T15:51:00.008+01:00

In the midst of a global credit crunch, the continued roll-out of SEPA (Single Euro Payments Area) and compliance with the European Commission's Payment Services Directive (PSD) are probably the last things on banks' minds.

A Capgemini survey of more than 60 banks at this year's Sibos conference found that 80% had established specific initiatives to address the upcoming PSD which banks must comply with by November, 2009. (One has to question though what will happen to these initiatives given the nationalization of some banks and/or the reassessment of funding priorities in the wake of the credit crunch).

Not surprisingly, almost half of the banks surveyed believe that the scheduled PSD implementation target of November 2009 will be pushed back and given the lack of take-up for SEPA Credit Transfers and uncertainties surrounding SEPA Direct Debits, scheduled for implementation in 2009, almost 70% of banks said they believe a “hard” SEPA end date is required in order to make SEPA a success.

According to Capgemini's survey, more than half of the banks surveyed cited harmonized implementation of the PSD across the EU as the biggest challenge. The PSD is estimated to have a €1 billion impact on banks' business as a whole with lost profit from value dating cited as the main concern.

In an effort to eliminate "float" the PSD prohibits value dating.While banks expect the PSD to lead to new payment services such as direct debit mandate management, this is hardly the level or kinds of innovation that the PSD is really seeking.

Having earned money off the status quo for some time, banks are finding it hard to come to terms with the new world of payments that the PSD beckons in. And the credit crunch is only likely to widen the gap between customers' expectations and banks' ability to deliver new payment services and products.

What are the technology vendors to do?

2008-09-18T16:32:00.006+01:00

When I agreed again to write this blog, I thought about the previous year’s challenge of identifying appropriate stories to reflect upon. So many announcements come out at Sibos and so much networking goes on that it’s hard to see patterns until the dust has settled. Little did I expect that stories outside the exhibition hall would dominate. Indeed, in my first blog of the week, written just hours before Sibos started, the anger that seems almost understated.

So what does this all mean? A theme that has begun to emerge over the week is the need to change the business model. The traditional “You buy, I sell” will become even more difficult as the banks start to say, actually, “We have no money to buy” or even “Bye-bye” (sorry, a terrible pun). How do technology suppliers ensure they can maintain their share of the banks’ IT investment budgets in an increasingly competitive marketplace?

If we look at other industries, we see that much innovation has occurred in the business models under which they operate. Consider the product-bundling innovations of operators in the telco market. (Note that the telco market was commoditised long before the payments market, and yet operators grow and prosper.) The internet has created all sorts of more radical models, from “reverse auctions” to the “freemium” model, whereby users get the basic service for free but pay small incremental charges for additional services.

So what can vendors do? In reality, we’re seeing some innovations. For example, delivering a service by ASP or SaaS necessarily shifts the model. And the fixed-fee model of SWIFT itself is a form of price bundling. That model has definite appeal with its lower-up front costs and “pay-as-you-go” mentality.

But that isn’t enough. Or rather, some vendors have an opportunity to move from the role of trusted supplier to trusted partner. Cost is a key element, but not the only one. Risk is a key element. Structuring the deal in such a way that the technology supplier has “skin in the game” shares the risk but also the reward.

A supplier’s showing faith and conviction in its own ability to deliver the vision and solution changes the banks’ perception of the supplier. We’re seeing this effect in some companies already but it is a well-kept secret. Those companies are now aiming for the next step — moving from trusted partner to trusted advisor.

The next generation of bankers

2008-09-18T15:40:00.011+01:00

Given what has gone on in the banking industry this week, it appears that SWIFT had to "re-write" its closing plenary session at the last minute.

Instead of looking to the current generation of bankers (nodding off in the back after a week of heavy networking and deal-making) who got it horribly wrong, Don Tapscott, author of Wikinomics, suggests the bankers of tomorrow are likely to be today's tech-savvy teenagers who can multi-task on multiple digital devices and are not afraid of collaboration.

Given the financial meltdown that has occurred this week, something certainly needs to change in the world of banking, and it is not more regulation. It is what Tapscott refers to as a "generational change".

"A new [financial services] model is necessary," said Tapscott. I don't think anybody would disagree with him, but I am not quite sure if the world of banking as we know it is quite ready for "Generation Y" teenagers or "system administrators" that can operate multiple digital devices (i-pod, television, web-based collaboration) while doing their homework or "toasters that initiate a financial transaction on the web."

There has been a lot of talk of Web 2.0 at this year's Sibos as SWIFT tries to tap into "Generation Y", but somehow it does not look so cool when you have a bunch of last generation's bankers sitting there scratching their heads because they did not pip technology providers like PayPal to the post when it came to devising new and innovative ways of making payments.

May be banks and trading departments in 20 years time will be run by a bunch of Xbox gamers and Facebook social networkers who are not afraid to collaborate or admit that they don't know everything about risk management, and will instead insource or outsource that capability to a community of non-specialists on a social networking site.

We live in difficult times, which requires some radical re-thinking of how financial services are managed and delivered, but I am not quite sure the banking world is ready for Banking 2.0.

"Computer companies don't make computers any more," said Tapscott. Well banks have stopped providing credit to one another and they are slowly coming to the realisation that they do not need to build or own everything themselves - they can insource it from somewhere else, or outsource it to a third party. But somehow, I don't think this is the kind of radical change or transformation Tapscott is talking about.

Let's see if the next generation of bankers have something better to offer.

SEPA disappointment

2008-09-18T13:10:00.010+01:00

It is the last day of Sibos and as the crisis in the global banking sector continues to unravel, banks are also having to acknowledge their failure in another area - SEPA.

While it may be a little too harsh to attribute the lack of uptake of SEPA Credit Transfers (SCTs) wholly to the banks, it does demonstrate the drawbacks of trying to fend off further regulation by devising new payment instruments that nobody wants to use.

With SCTs making up less than 1% of total credit transfers, it is difficult to call SEPA anything other than a failure at this point, although 78% of Sibos delegates surveyed by ACI Worldwide preferred to say that the migration to SEPA instruments had been "disappointing".

SEPA Direct Debits, which are more challenging to implement, are unlikely to enjoy any greater success when they go live next year. "SEPA Direct Debits are a 20th century solution for the 21st century," says Eric Sepkes, chairman of Gresham Computing, but perhaps better known in his former role as a payments industry specialist at Citi. "A three day clearing cycle for [SDDs}, that in itself is criminal," he said.

Sepkes appears to be enjoying his new-found role sitting on the other side of the fence selling technology to the banks he used to work for. It also gives him an opportunity to cast a more critical eye over SEPA than what he would have been able to do if he was still sitting behind his desk at Citi.

Sepkes says the industry has got it the wrong way round and that they should have "eletronified" the supply chain first and then built a solution for direct debits that fits within that world.

It is tempting to say that Sepkes has conviently changed his tune about the banks' response to SEPA as he is now trying to flog supply chain financing solutions in his new role at Gresham. But Sepkes says these are views he has held for some time, even before he took up the role at Gresham.

"Why spend money on something [SEPA] that may not be needed for another five years," he said. Given that banks and corporates are going through one of the worst economic slowdowns since the Great Depression, Sepkes says forcing banks and corporates to invest in SEPA is not the answer.

But looking for a solution to the current SEPA 'impasse' by going back to the very same people that helped architect it, is not the answer either. Forty-six percent of Sibos delegates surveyed by ACI Worldwide said there was nothing more that the banking industry’s self regulation of SEPA can deliver, although I am not quite sure that I agree with them when they say that the time is right for SWIFT to play a role in reversing the present situation.

Let's not forget that SWIFT is owned by the very banks that formulated the industry's response to the European Commission's SEPA vision. And while opening up the SWIFT network to corporates may facilitate higher levels of bank-to-corporate connectivity and the adoption of "end-to-end standards", SWIFT does not have all the answers. Neither do the banks it seems.

It is back to the drawing board for SEPA it seems, but in the current economic climate, the European Commission and the ECB, and those banks that have invested heavily in their SEPA payments infrastructure, may have to wait a lot longer than expected for market traction.

Back to the back office

2008-09-17T15:33:00.004+01:00

With banks' front offices copping most of the flak from the credit crunch (the trading room was always considered to the money-making machine while the back office was the expense centre), back office operations and processing is at the top of the agenda again.

Reconcilitiations, matching, confirmations, exceptions processing and settlement may not be sexy, but it appears banks are slowly waking up to the fact that if they had invested as much in their back office processing as they had in front office trading applications, then perhaps they wouldn't be in the mess they are in now.

The benefit of hindsight is a powerful thing, but nevertheless the back office operations guys, which are Sibos' bread and butter, are chomping at the bit to get their hands on some of the money that has historically gone to the front office.

"There was so much IT spend on the front office, that now needs to be rebalanced with more investment in controls, risk management, the effectiveness of the back office and improving support systems, because they are just out of control," says Ken Archer, CEO of SmartStream.

SmartStream is looking to extend its Transaction Lifecycle Management solutions for trade processing into the OTC derivatives space. With a lot of information pertaining to complex derivatives being stored on spreadsheets and new instruments being devised more quickly than the back office is able to process them, the challenges in the OTC post-trade space are not insignificant.

SmartStream says it will initially focus on bringing efficiencies to "vanilla" derivatives, and in the current climate where the unravelling of complex CDO deals got a considerable number of banks into hot water, Archer believes that there is likely to be a market backlash against more "esoteric" instruments.

Meanwhile, at a Sibos panel session entitled, Breaking the FX bottleneck, most of the panellists agreed that the operatinal capabilities and capacities of sell-side banks and the cost per ticket were creating bottlenecks in the FX market.

While FX trading volumes continue to rise on the back of the emergence of the FX prime brokerage market, retail and algo trading and increased trading of emerging market currencies, banks' back offices are struggling to keep up with the pace of change and the number of trading tickets.

Phil Brittan, global business manager for FX and Economics at Bloomberg summed the current market situation up by saying that unless the bottlenecks were addressed it could result in increased systemic risk. Sound familiar?

Rob Close, CEO of CLS Bank, was the only panel member that did not want to concede that a bottleneck already existed in the FX market. However, he added, "that if we don't do something as an industry, there could be restrictions on how the market grows."

One can only hope that in this current climate, CFOs and CEOs are not tempted to postpone some much-needed back office tinkering.

Alternatives to SWIFT

2008-09-17T13:32:00.006+01:00

With the credit crunch continuing to bite, a recurring theme at Sibos this year is reducing the cost of ownership of SWIFT. SWIFT has responded with its "SWIFT on a stick" solution.

Alliance Lite is SWIFT's "low cost" solution for smaller banks, corporates and investment managers that want to use a simple internet connection to connect to SWIFT, without having to manage and install a dedicated SWIFT infrastructure.

But if SWIFT thinks it is going to be that easy, it is wrong. Telcos and other network providers say they can connect banks and corporates to a larger user community for considerably less cost than SWIFT - it kind of makes you wonder why SWIFT is even bothering to try and compete in the network space.

Another challenger to SWIFT that is emerging is Italian-based payments, capital markets and network services provider, SIA-SSB. At Sibos this week, it launched its B-Gate solution, a network connectivity solution for bank to corporate communication.

In order to keep costs at the level of a standard internet connection and to leverage the faster speeds of the internet, B-Gate leverages ADSL and purports to offer the same level of security in the bank-to-corporate space as what already exists in national interbank networks.

Giacomo Buico of SIA-SSB says that B-Gate was developed in response to demand from banks in Europe wanting a lower cost alternative to SWIFT in the corporate-to-bank space. This was before SWIFT changed its tune about offering a connectivity solution for mid-sized corporates.

While SWIFT says its network has 100% availability and reliability and has never been hacked into, Buico says there is a need for a "back-up" network in Europe. "There are too many limitations [with SWIFT's network]," said Buico. "They need to stop it for maintenance. We run a card processing business and we cannot stop our network for maintenance."

"If a virus gets on the network, SWIFT is stopped. No one is immune from this problem," Buico continues. SIA-SSB will roll outs it B-Gate solution initially to banks, starting with its home market of Italy.

Its vision is to grow the number of users on the network across Europe, and to increase the number of service providers that can be accessed by partnering with other companies.

Buico is under no illusions that B-Gate will compete directly with SWIFTNet, which has a loyal customer base, albeit one that on a global or European scale is still relatively small in terms of the total number of end users it connects.

Buico claims its B-Gate network is key for the future development of SEPA, as it has the bandwith to carry not only payments messages, but also data pertaining to the exchange of electronic invoices, direct debit and reporting orders, but without the hassle and cost of having to manage network protocols "in a fully secure automated way".

Reshaping banks for the future

2008-09-17T13:30:00.002+01:00

In the current credit climate where banking CEOs may be having difficulties sleeping well at night, guest blogger, Guillermo Kopp of TowerGroup, says commonsense needs to prevail if banks are to reshape themselves for a brighter future.

Amid the turmoil in financial markets, one might think that a sense of fear or conscience would keep CEOs on edge around the clock. At a Sibos panel moderated by Juan Senor, several CEO-level executives shared their formula for a good night's sleep. They favoured the following approaches:

- Spreading the liquidity and credit risk, broadening the sources of funding with retail deposits, and protecting from the short-term shock

- Balancing defensive strategies with proactive innovation in business models and integrated processes

- Partnering with an ecosystem of industry providers that deliver optimal value to the end clients

- Revisiting the approach to risk management with the right people, skills and tools to balance risks versus rewards

- Rebuilding confidence and trust through more transparent valuations and asset pricing.

TowerGroup believes that common sense should prevail and that CEOs must focus on steering through the present turmoil with their view set on reshaping an interdependent industry for a brighter future.

Who is piloting the SEPA plane?

2008-09-17T08:57:00.007+01:00

I walked into this morning's payments session at Sibos on SEPA expecting the European Payments Council and the banks to pat themselves on the back for the 'successful' launch of SEPA Credit Transfers (SCTs) on 28 January.

But the panel was not in a self-congratulatory mood. No surprises really because if one peeks under the bonnet of SCTs and SEPA in general, all is not as it seems. OK 4,300 banks may support SCTs, but they constitute less than 1% of total credit transfer volumes.

So to use the 'plane' analogy that was the theme for today's Sibos session, the 'plane' (SEPA or SCTs) has taken off, but its course is unclear, customers (corporates, SMEs) did not get to choose a seat, the flight is short on cabin crew and no one is sure who is actually piloting the plane.

Jean-Michel Godeffroy, director general, Payment Systems and Market Infrastructures, European Central Bank, appeared to be under the impression that the European Payments Council (EPC), the group of European banks led by Gerard Hartsink of ABN AMRO, were piloting the plane. While the SCT 'plane' has taken off, Godeffroy said that a clear flight plan for SEPA Direct Debits (SDD)was missing and that the European Commission and the ECB would come to the rescue by drafting a SEPA Action Plan, scheduled for completion by the end of 2008.

A bit bloody late isn't it? Shouldn't the ECB have stepped in sooner when the banks wanted them to and drafted an action plan for migration to SEPA with more definitive deadlines in sight?

Hartsink seemed somewhat miffed by Godeffroy's suggestion that the EPC was the only SEPA pilot. "Key bodies such as ECOFIN (Economic Affairs Council) and the [Eurosystem] Governing Council are not always aligned and change the rules during the flight," said Hartsink.

Hartsink seemed to be passing the buck, saying there were more pilots (the ECB, public authorities, corporates) that needed to influence the direction of SEPA. It is all good and well to say that now, but when it comes to corporates and SMEs, banks in general and the EPC have not done a good job of selling SEPA or communicating its benefits to potential end-users.

"There is no public sector participation [in SEPA]," Hartsink said, adding that the EPC was in the process of publishing information to better educate the different end users about SCTs and SDDs. But why didn't the EPC do this sooner, and more importantly, is publishing a few documents going to really change anything, given the banks' poor job of marketing SEPA?

The only corporate on the panel, Olivier Brissaud, chairman of the European Associations of Corporate Treasurers, could have been more scathing in his assessment of SEPA to date, but instead he said that SCTs were almost there (corporates still want more information such as bank statements to be included in the messages), and as for SDDs, well no one is quite sure where that plane is headed.

"The SEPA plane needs a co-pilot, a first officer and a cabin crew to service the clients," exclaimed Michael Steinbach, chairman of the board of directors of Dutch payments processor, Equens. "To be successful, it needs strong collaboration between all parties; the EC, the ECB, clients and banks; working together."

Hmmm. Well isn't that what should have happened from day one? In its bid to self-regulate the EPC, which drafted the SEPA rule books for credit transfers and direct debits, has ended up "serving coffee" to the regulators, but forgot about all the other customers on board the plane.

Will giant new banks emerge in the UK?

2008-09-17T08:53:00.010+01:00

We live in unusual times, says guest blogger Carol Wheatcroft of TowerGroup commenting on the rapid consolidation that has kicked off in the UK mortgage lending market as a result of the subprime crisis.

Normally when Sibos takes place, the financial press is filled with the ins and outs of the day’s happenings, but external events seem to be taking center stage, given the huge and dramatic changes occurring in the world of global finance.

Today is the turn of HBOS in the United Kingdom. The share price of UK’s largest mortgage lender has come under considerable strain in recent days as a result of its perceived short-term liquidity problems, and the bank is now reported to be in advanced talks for a merger with LloydsTSB.

Assuming this will come to pass, and on top of other mergers and takeovers — Nationwide acquiring the Derbyshire and Cheshire Building Societies, Santander buying Alliance and Leicester — the number of players in the UK retail financial market is shrinking before our eyes.

In more normal circumstances, the UK Competition Commission would block a takeover such as that of HBOS because the deal will give LloydsTSB more than a 25% share of the UK mortgage lending market and a quarter of the market of bank and savings accounts.

But these are not normal times, and the need to instill trust, confidence, and stability in the financial system is paramount. Given the UK government’s choices as it watches HBOS struggle through another Northern Rock scenario in the form of nationalisation or finding safe harbor, regardless of the competition issues, the latter seems by far the better choice. At least no more taxpayers’ money will be involved.

So assuming LloydsTSB acquires HBOS — an event that can probably be expected to happen overnight — where does the outcome take us? The socio-political ramifications of this deal on top of all the other deals will mean that the considerable impact on jobs following massive branch closures and consolidation of call centers that might be expected may not occur, or at least not at their normal speed. Arrangements will have to be worked out if a significant increase in unemployment or strike action by disgruntled employees is to be avoided.

With such a consolidated industry, too much power will move to the banks at the expense of consumers. The UK market suddenly more than ever needs competition from foreign banks offering the consumer greater choice. This need offers a glimmer of hope for the UK financial technology industry now that it suddenly has far fewer customers.

Direct banks entering the UK market could create new opportunities. The UK consumer will be looking for new homes for deposits now that there is greater consumer awareness of the need to keep deposits below £35,000, the deposit insurance limit, in any one bank. Despite the consolidated banking market, the UK has a solid depositor base that foreign banks could seek to help shore up their own balance sheets.

Welcome them with open arms!

Tectonic shifts in international power

2008-09-16T16:21:00.002+01:00

Guest blogger, Guillermo Kopp, executive director and global research fellow, TowerGroup, says the banking industry has yet to wake up to the challenges of globalisation.

Is the global financial services industry plummeting in a tailspin dive? Or will a stubbornly resilient global economy survive the ripple effects of the financial crunch? The start of Sibos 2008 coincided with the casualties of Merrill Lynch, Lehman Brothers and Washington Mutual.

As international markets become increasingly interconnected, financial risks — especially shortfalls in liquidity — must be managed systemically and globally. The intrinsic vibrancy in European markets and emerging regions has challenged the role of the United States as a dominant financial centre.

A forum eliciting discussion by industry leaders from Europe, the Gulf, Singapore, India, and Russia moderated by Juan Senor pondered whether the end of the US dominance has begun, and what level of influence a whopping $3 trillion in sovereign wealth funds will have on the balance of power.

Globalisation has been picking up speed. The world's economies and financial systems are increasingly interconnected. But the growth in international economies and their interdependent roles has still to dawn on many players in mainstream markets.

Rather than expanding a domestic business model abroad or aggregating a collection of disparate local product and services offerings, internationally minded financial services institutions (FSIs) need to adopt a genuinely multi-directional global approach.

Too much leverage, concentrated risk, optimistic valuations of distressed assets, and over reliance on opaque hedge fund investments have rocked the stability of many FSIs. With due consideration to avoid stifling innovation, regulators must orchestrate a disciplined and consistent framework of sound principles and practical rules across the financial services industry.

For example, the Financial Stability Forum has been championing risk management and reporting standards that will extend to hedge funds. A broader challenge is to minimise the lag by local jurisdictions and the reluctance by some FSIs to implement global guidelines.

The US financial woes have raised doubts about global leadership, control, and manageability. Adequate transparency with timely disclosure of a vital set of common risk and liquidity indicators by all participants will be key to finding a balance between multiple and increasingly interdependent financial centres.

ACHs - Who will buy?

2008-09-16T15:50:00.007+01:00

"Don't write off ACHs," said Marion King, CEO of UK ACH VocaLink, which has its advertising plastered all over the exit of the U-bahn station that leads to the Messe Wien convention centre in Austria where the annual Sibos conference is being held.

VocaLink is obviously touting for business, particularly among the banks that are contemplating whether to maintain or outsource their payments processing business and SEPA compliance to a third party like VocaLink. We also understand that it has been seeking non-bank shareholders or investment, as in this climate banks want to see consolidation among domestic ACHs, and have threatened not to continue to invest in them.

VocaLink has also been instrumental in the launch of UK Faster Payments, a technology it is trying to sell to other banks outside the UK, with so we hear, mixed success. After all banks have other things to be worried about (SEPA Direct Debits, the Payment Services Directive, and the credit crunch that just won't go away).

Will Faster Payments be VocaLink's salvation? Well, according to King, even without dedicated marketing, the UK ACH has processed 30 million faster payments. Giving it the hard sell, King says Faster Payments takes away the need for exceptions management, which is a major headache for banks (however, it also adds the need for real-time fraud management, and let's be honest there were some delays in UK banks getting their systems ready for UK Faster Payments.

"Faster payments is a real-time payment mechanism that is 24 x 7 and will support debit card, ATM, Point of Sale, mobile and online banking," said King. "That is VocaLink's vision, however, to get there we will need global standards and interoperability."

Yet, King's pitch failed to convince Paul Inglis, head, payments risk & industry, ANZ Bank, who said no ACH was needed Down Under thank you very much as the banks had bilateral links with multilateral settlement, which worked very nicely, although modifications are likely to be made in response to regulatory demands and customer requests for richer data content and innovation.

John Chaplin, European Payments Advisor for card processing company First Data also gave ACHs the thumbs down saying that card processors already operated sophisticated real-time processing environments and could do ACH processing if they really wanted too.

Innovation "just in time"

2008-09-16T13:36:00.004+01:00

"If we fail to innovate, the risk is that we will lose business to third parties," said one panellist at today's panel session on "Payments at a tipping point". Here we go again, I thought.

How many Siboses does it take for banks to contemplate the competitive threat from non-banks (PayPal, Google, telco companies, internet portals) before they actually do something innovative in the payments space themselves.

It is abundantly clear that PayPal has been successful where banks could never have been - for one thing banks could never have thrown capital at such a project to get it off the ground, and in today's illiquid climate are banks any better placed to truly innovate?

SEPA and the Payment Services Directive (PSD), or "mandatory spend" may force change in the payments space, although it has to be said SEPA has not resulted in the innovations regulators and corporates hoped for. In fact a number of banks have not significantly invested in re-engineering their platforms for SEPA as they believe there is not enough market traction for the new SEPA payment instruments.

Banks are now talking about pan-European e-invoicing standards in the context of SEPA, but can that really be classed as innovation?

The Payment Services Directive provides the framework for the emergence of payment institutions that are non-banks, but is the threat of a Google or Yahoo offering payment solutions going to be enough for banks to stop talking about innovation and actually do some innovating themselves?

It is only now that mobile payments are starting to gain traction with the banks. Panel members also spoke about "just in time liquidity management", but these are services that have evolved slowly over time and it is only now that banks' legacy payments infrastructure is in a position to leverage these new technologies to deliver payment solutions in the peer-to-peer space.

My bet, howevever, is that lumbered with their legacy systems, a risk averse appetite and regulation, banks will not be able to innovate at the same pace as the Google's Yahoo's and telcos. There is another PayPal-like nemesis on the horizon , and guess what, it is highly unlikely that it will be developed by the banks.

Banks only hope now is to try and partner with the Google's and Yahoo's of the world in the hope that they can be part of the next wave of innovation in payments.

Lasagne or spaghetti?

2008-09-16T11:54:00.010+01:00

At previous Siboses Target2-Securities (T2S) the settlement platform in central bank money for euro denominated securities proposed by the Eurosystem has been a subject of much debate and consternation.

This year T2S is still on the agenda, but CSDs can no longer brush it off as something that may or may not happen. Like it or not T2S is here to say with the Eurosystem's Governing Council giving it the green light back in July. It is time now for a bit of serious navel gazing as custodian banks and CSDs reflect upon what it means for their existing business models.

If that was not enough change for the poor CSDs and the custodians to digest, there is also the Code of Conduct for Clearing and Settlement which calls for unbundling of services and greater price transparency, and last but not least, the Link Up Markets initiative for interoperability between seven European CSDs.

A dizzying array of change in Europe's settlement landscape beckons. However, while European CSDs may have given a non legally binding commitment that they would use
T2S when it goes live, there was considerable postulating at today's panel discussion aptly titled, European Custodians and CSDs: adapt or perish?, about the impact T2S is likely to have on CSDs.

Participants agreed that T2S was a "wake up call" for CSDs in terms of their existing business models.

With T2S looking to commoditise securities settlement, at least for euro denominated securities, CSDs in Europe, which have traditionally focused on settlement of domestic securities, will have to look for new ways of doing business, including the provision of cross-border asset servicing, something most do not offer today.

"Will CSDs become fully fledged custodians?" remarked Sveinung Dyrdal, executive vice president, head of securities services for the Norwegian CSD, Verdipapirsentralen. "I am not sure that is our strategy as we would need to make large investments and we may not have the balance sheet to do that."

Some of the panellists, which included CSDs and custodian banks, said that domestic investors may suffer as a result of T2S as increased competition between CSDs and custodian banks on the asset servicing side could be passed on to investors in the form of increased fees.

Just to confuse the issue, Euroclear, has stated that it supports a "user choice" approach, which gives its clients a choice of settling securities in central bank money on T2S or on its own platform.

"[Euroclear's user choice approach] does make it difficult to determine what volumes [will be settled] in T2S," said one of the panellists. Others said that Euroclear's user choice model would at least put pressure on the Eurosystem to ensure that T2S was low cost.

How much change can one market absorb? Obviously quite a lot as running in parallel to T2S and Euroclear's Single Platform initiative covering seven European markets, is Link Up Markets, which will see seven CSDs (more could join) interoperating around standards and formats. "Is it the spaghetti model" made up of bilateral links between CSDs, quipped panel moderator, Dominic Hobson, Editor-in-chief of Global Custodian.

The audience's vote was too close to call, but Dyrdal of the Norwegian CSD, which is a member of Link Up Markets, preferred to describe the interoperability initiative as "lasagne" rather than spaghetti.

'Spaghetti' is the colourful term often used to describe Europe's fragmented clearing and settlement landscape, but with so many initiatives running in parallel, albeit ones that seek to standardise and harmonise market practices, I am not so sure the 'spaghetti' analogy can be dispensed with quite yet.

Data management not on the agenda

2008-09-16T10:53:00.008+01:00

There may be a few bank or vendor exhibition booths missing this year at Sibos in Vienna thanks to the credit crunch and good old-fashioned consolidation. However, one noticeable absence is data management vendor, Asset Control.

Phil Lynch, CEO of Asset Control is attending the Sibos conference, but this year they decided not to have a booth at Sibos as they felt that when it came to the conference programming, there was not enough attention being paid to data management.

Arguably, he is right, there are no real conference sessions on data management per se, which is surprising given that poor data governance and data quality were at the heart of the subprime crisis.

Lynch alluded to the fact there seemed to be a lot of focus on payments at Sibos this year, which he said was important. Neverthless, managing counterparties and instrument risk is also important,he said. "There is a strong undercurrent of risk and data management, but it is not a distinct track at Sibos," said Lynch.

There is certainly plenty of work to be done when it comes to data quality and governance given that a lot of data is stored in disparate systems or on spreadsheets, where it is unclear who owns the data and what changes if any have been made to it.

Lynch says transparency of data is also important in terms of the inter-relationships between data, data sources and determining who owns the data. "Firms cannot outsource that work," says Lynch. "They need to do that themselves and form a unique view as opposed to a market view."

Missing in action

2008-09-15T16:38:00.006+01:00

Guest blogger Gareth Lodge, research director, European payments, TowerGroup, acknowledges those banks that are no longer with us as the credit crunch continues to bite, despite the healthy turnout at Sibos in Vienna.

It’s official – Sibos is upon us again. At first glance, the stands are bigger and better than ever, and the exhibit halls seem bigger and busier than ever. There is an air of determination to get business done.

Yet, the proverbial elephant in the room is still there – the credit crunch. It’s been an explicit topic in some of the conversations at TowerGroup's party last night, but it has also been an implicit undertone to them all. A few friendly faces are “missing in action”.

After last year's Sibos in Boston, I forecast that the shape of the European payments industry would start to change dramatically as we saw the consolidation of both the banks and their suppliers as the goals of SEPA started to be achieved.

I was spot on in many ways – no ABN AMRO stand is an obvious example. TowerGroup originally believed that the bigger players – whether bank or supplier - would try to gain both market share and a broader range of offerings. There have been some eye-opening mergers in the last 12 months which I’m sure no-one could have seen coming – HP buying EDS anyone? However I suspect that the economic conditions will start fuelling the changes further, but perhaps in a subtly different way.

It will be interesting to see during the course of the week who announces what deals. The party gossip suggests some significant deals, though banks seem reluctant to allow their vendors to announce details. However, if a vendor or a bank isn’t doing something, then both parties should probably be worried.

Banks may not have all the answers yet to SEPA Direct Debits compliance, but they should be on a path to getting there. Those banks yet to make a decision may find that the vendors who could have helped them are already engaged with their rivals.

Conversely, those banks with stronger balance sheets may also strike while the prices are low. Indeed, it could be said this is exactly what is happening in the German market. This of course has an impact on the ecosystem that supports that market.

Suddenly, some vendors may find that the main client that underpinned their business is gone. We believe that the vendors who exhibit in Hong Kong next year could be missing a few well known names. We certainly do live in interesting times.

SWIFT on a stick

2008-09-15T15:59:00.011+01:00

"SWIFT on the offensive" at Sibos in Vienna took the form of SWIFT CEO Lazaro Campos holding up a USB stick, heralding the official launch of Alliance Lite, a new means of connecting to SWIFTNet, which "is as easy as logging onto a web site".

Having addressed the total cost of ownership issues for large volume SWIFT users last year at Sibos in Boston with the announcement of fixed pricing schemes, which 55% (32 banks) of FIN traffic now uses, Campos said Alliance Lite was aimed at "low volume" users and would get them "up and running [on SWIFT] in days."

Alliance Lite will be initially rolled out to banks and corporates from 27 October, but Campos hinted at offering it as yet another channel for all SWIFT customers and partners.

Looking pretty pleased with himself, Campos then rolled off a host of other initiatives SWIFT had instigated to reduce total cost of ownership. Alliance Integrator will help banks map SWIFT standards to their back office formats. According to Campos vendors on the Sibos exhibition floor are already touting alternatives to Alliance Integrator, which is what SWIFT wanted to see. "Multiple middleware options" all the way, says Campos.

SWIFT is also looking at "fast tracking" standards implementation by developing a data dictionary and structured schemas, as well as guidance on target syntax (ISO standards)to help reduce the cost of deploying SWIFT ISO standards.

It has to be said, these are significant announcements that go beyond SWIFT's annual rebate announcement, which usually results in a resounding, 'whoopee' from most banks as it does not deliver any real cost savings to them. Finally, SWIFT appears to get it that most banks do not care about annual rebates, but are more concerned with reducing the total cost of ownership of SWIFT.

Although rebates (20% in 2008) were of course on the agenda again, with SWIFT chairman Yawar Shah saying he had pushed the SWIFT Board to achieve an overall 50% reduction in SWIFT pricing ahead of schedule by the end of 2009, instead of 2011. "We need to make this co-operative more competitive," said Shah.

A 50% reduction however will not be enough if SWIFT is to seriously compete with the commercial telcos that claim they can offer cost reductions up to 90% less than SWIFT. And in the current economic climate where banks are continuing to be impacted by the credit crunch, one has to ask is a 50% reduction in the cost of SWIFT really going to have that much of an impact?

Campos boasted that the SWIFT network now carries 16 million messages a day, and has 360 corporate users interacting with 900 banks on SWIFTNet. However, that took 20 years to achieve. Is it going to take another 20 years to have all SWIFT member banks interacting with thousands of corporates on SWIFT?

Furthermore, SWIFT traffic stats pale into insignificance when you think of the traffic that is carried over the internet and on commercial telco networks every second. In that respect SWIFT is a small fish in a rather large pond.

Shah made a cryptic reference to SWIFT competing with third party vendors around shared services, saying that it presented an opportunity for everybody. There are those, i.e. the major telcos, that believe SWIFT should not be in the network space, as it can never come close to the economies of scale and cost savings large global telcos can provide simply through the sheer numbers of customers they connect.

"We [SWIFT] need to be seen as lean and mean as you are," said Campos, although it has to be said SWIFT's idea of "lean and mean" is far removed from the commercial realities of banking, where consolidation and rationalisation appears to be the order of the day

How can SWIFT reach more users?

2008-09-15T10:36:00.004+01:00

Ahead of SWIFT's official launch of its new low-cost internet-based solution for connecting to SWIFTNet, aimed at those banks, corporates and investment managers that habitually complain about the high cost attached to building a dedicated SWIFT connection, BT Global Services is stoking the competitive embers, saying SWIFT could reach more end users if it put its applications on other telco networks (BT, Orange, COLT).

Describing SWIFT Alliance Lite as "security on a stick", Chris Pickles, head of marketing, Investment Banking & Global Accounts, BT Global Financial Services, said if it brings down the cost of SWIFT that is great. However, he said it would not be a universal solution for bank or corporate connectivity.

Although SWIFT Alliance Lite could be viewed as SWIFT entering the competitive space of IT network connectivity which is dominated by the telcos, Pickles said SWIFT's Alliance Lite was still a niche solution and that the telcos would still be able to provide IP connectivity for considerably less cost (upwards of 70%)than SWIFT.

He said if SWIFT wanted to reach the vast majority of banks and corporates, why didn't it make applications such as SWIFT Alliance Lite available on the telco's networks? "On a revenue sharing basis, SWIFT could increase their user community and the market perception that it is the central standard for financial security, but they have to do it quickly because the market won't wait."

SEPA - no mass adoption

2008-09-09T16:40:00.007+01:00

The usual suspects (Gerard Hartsink - European Payments Council; Jean-Michel Godeffroy - ECB) will be lining up at Sibos in Vienna this year to debate the "root causes of the limited momentum in the SEPA (Single Euro Payments Area) migration."

SEPA Credit Transfers went live at the end of January, but so far uptake of the new SEPA instruments has been less than encouraging - not surprising given that banks did a poor job of selling SEPA to other FIs and corporates.

Given that the EPC (European Payments Council) has pretty much dominated the banks' response to SEPA and the development of the SEPA rule books, are they really the best group of people to drive the SEPA momentum forward and sell SEPA to corporates and public sector bodies?

After all the EPC is largely a conservative European banking organisation, which has focused solely on formulating the banks' response to SEPA without engaging in any meaningful collaboration or consultation with corporate users.

Also it has to be said that the EPC's SEPA vision is not necessarily the one promulgated by the European Commission or the European Central Bank, nor is it what corporates really want from SEPA. So will Jean-Michel Godeffroy be taking the banks to task at Sibos for failing to establish enough momentum behind SEPA?

There is enough evidence to suggest he should be wielding the stick. It appears the banks want clear deadlines for full migration to SEPA as the current environment where SEPA instruments and the existing national payment systems co-exist is likely to persist for some time unless there is a clear end in sight.

I doubt that the average bank (except for those that have made a strategic decision to invest in SEPA) is going to do much more to drive SEPA forward unless they are absolutely forced to.

We keep hearing a lot about the non-STP (straight-through processing) of cross-border payments in Europe, years after BIC and IBAN were introduced to try and enable banks to process these payments straight-through with no manual repairs at lower cost.

One has to wonder whether it is in the banks' interest to maintain a high number of non-STP payments as they can charge more for that, which could help make up some of the revenues lost through implementing SEPA in its entirety.

At a pre-Sibos press briefing, Deutsche Bank, which classes itself as the leading SEPA bank in Europe, said that banks could save billions by moving to full STP of cross-border payments.

Deutsche Bank anticipates its SEPA Credit Transfer volumes will triple by the end of this year, but that is coming from a low base and most of the current volumes are from financial institutions, not corporates or public sector organisations.

While Deutsche may have invested millions in building its SEPA payments engine, Michael Mueller, head of Wholesale Solutions, Deutsche Bank, said that many banks had just taken their existing payment systems and made some modifications to them for SEPA. "That approach will come to an end as soon as SEPA transactions ramp up in terms of volumes as legacy systems won't be able to process these types of transactions," he said.

Having obviously invested considerable sums in its own SEPA payments infrastructure, Deutsche Bank is keen to white label its SEPA solution to other banks to help recoup some of the money it has invested. But even the SEPA white labeling market has been slow to take hold as a number of banks are only now beginning to realise that they do not need to own and build everything themselves.

Yet, given that a number of banks still have not made a strategic decision regarding their SEPA payments infrastructure and that national clearing systems still exist, it could be some time before the economic benefits for corporates to move to SEPA are clear.

The lack of corporate appetite for SEPA was borne out recently by the findings of a VocaLink survey of corporate treasurers, which found that 35% had had no experience of SEPA and only 28% of respondents expect to use SEPA Direct Debits (SDD) by the end of 2009.

Financial software providers like Fundtech have launched a new Software as a Service (SaaS) platform which packages its payments platform PAYplus FTS with its SWIFT Service Bureau offering to provide banks with a low-cost option for upgrading their payments platform for SEPA and SWIFT payments.

That may help banks develop payment services that corporates want, but one has to ask why these kinds of platforms were not available sooner and why banks are really holding off on seizing the so-called opportunities that SEPA provides to offer new value-added payment services to their corporate customers?

Can Sibos restore confidence in banks?

2008-09-05T18:11:00.009+01:00

Guest blogger, Bob McDowall, research director, TowerGroup, asks have banks, technology and service vendors attending Sibos 2008 in Vienna, and even SWIFT itself, heeded the significance of events in the last 12 months in global credit markets?

From a business perspective Sibos 2008 will be a more sober affair than 2007, when the conventional view was that the credit crunch was a brief, albeit disruptive, episode in the life of the global financial system.

The challenge for all exhibitors, technology vendors, service providers and financial institutions, is how to contribute effectively to re-engendering trust and confidence in the financial institutions and global financial system while benefiting their clients and themselves.

The challenge should not be underestimated. In the western hemisphere, financial institutions individually and collectively have suffered a downturn in revenues. The liquidity famine in the wake of the credit crunch has led to disenchantment by investors and their loss of trust and confidence in financial institutions and the financial system.

Financial institutions have experienced reduction in revenues. Expectations and timing of growth are at best uncertain. In other geographic regions, financial institutions have not been as badly affected to date, but they anticipate lower growth and more modest increase in earnings.

Demonstrable, improved risk management will contribute to restoration of trust and confidence. Financial institutions have to implement permanent improvements in their risk management systems. Regulators have to make improvements in two of their roles; oversight of conduct of risk management by financial institutions and oversight of risk management in market clearing and settlement systems.

The central challenge to SWIFT, its membership, technology vendors, and service providers is delivering meaningful services that will contribute to these objectives.
SWIFT conveys transactions and data that support confirmation and settlement of transactions in banking and securities markets globally.

SWIFT’s financial institutional members, in concert with technology and services providers, deliver the information on which informed risk management decisions can be taken. They formulate, implement and control the timeliness, form efficiency, and cost of delivery of that information.

Sibos 2008 provides the premier venue for exhibitors to showcase their own competitive contributions to improved services to support quantitative and qualitative risk management by financial institutions and financial regulators.

Technology and service providers that fail to encapsulate the underlying message of restoration of trust and confidence in financial institutions and the global financial systems in their offerings signify that they have not appreciated the significance of the changes and the events of the past year.

Investors' and customers' confidence in financial institutions and global financial markets and systems has diminished. It has to be restored before financial institutions can restore their own fortunes. Successful exhibitors will embed the importance of restoration of trust and confidence in financial institutions and the global financial systems in their technology and service offerings.

SWIFT - All you can eat

2008-09-05T18:06:00.004+01:00

“For the first time, SWIFT ... has finally realised that it has competition.” Those were the words of FinancialTech Insider guest blogger, Ted Iacobuzio, managing director and practice leader, payments, TowerGroup, at Sibos in Boston last year. At last year’s event, new SWIFT CEO, Lazaro Campos, announced that from the 1 January 2008, high-volume customers of SWIFT could opt for a three-year fixed fee contract and that they could increase their messaging usage by 50% at no additional cost.

Building up to Sibos in Vienna this year, reducing the cost of ownership of SWIFT is likely to be a dominant theme. There will probably be the usual user rebate announcements, but this year will see the official launch of the new SWIFT “Lite” interface that Campos alluded to last year. “A SWIFT button on the fax machine,” he stated. “Beautiful simplicity. Simply SWIFT.”

As a network provider, SWIFT faces significant competition from commercial IP network providers (BT, Savvis et al) who claim that they can provide similar if not better levels of speed, reliability and value-added services for half the cost of SWIFT. “The threat to SWIFT is that people are rethinking flows that go over SWIFT and we have to be quick as an industry to respond to that,” said Gottfried Liebbrandt, head of markets, SWIFT, in the run up to Sibos in Vienna.

SWIFT’s weapon in its battle to remain the network of choice for banks and their customers is Alliance Lite, which is being piloted by more than 20 SWIFT customers. The first official release of Alliance Lite is scheduled for October.

Instead of having to install “SWIFT-specific connectivity” at their premises, Alliance Lite allows firms to connect to SWIFT via the internet at lower cost using a hardware security token. The jury is still out on whether this will be enough to stop network providers like BT Global Services crowing that it can offer connectivity to banks for half the price of SWIFT.

Liebbrandt said cost remained an issue, not just for emerging markets where SWIFT is focused on gaining greater traction, but for all users of SWIFT. “Total cost of ownership of SWIFT has come down,” he said, adding that he anticipates investment managers, some corporates and smaller banks will use Lite.

The good news for corporates is that SWIFT is looking at reducing the strict criteria for joining its SCOR (Standardised Corporate Environment) model, which enables corporates to interface with multiple banks via a single, standardised CUG (Closed User Group).

There are currently more than 30 corporates on SCORE, and more than 150 banks. However, at Sibos last year mid-sized corporates such as Virgin Atlantic stated that SWIFT was only viable for large corporates with “deep pockets” and the rest had no real choice in how they connected.

“We are looking at relaxing the criteria to join SCOR, which currently is tightly-defined (companies have to be listed on an exchange in FATF countries),” said Liebbrandt, adding that SWIFT had posted a discussion paper to obtain feedback as to who should be eligible for SCOR.

Yet, of the 8000 or so banks that are members of SWIFT, only 250 offer SWIFT corporate connectivity. Liebbrandt said the number of banks offering SWIFT corporate connectivity had doubled over the past two years, but that at the end of the day it was something SWIFT could not control. “We are seeing a lot of interest from UK banks,” said one SWIFT spokesman. “If they think they are losing business they will do it .”

Of SWIFT’s more than 8,400 customers, Liebbrandt said an increasing number were investment managers, stock exchanges, corporates and clearing and settlement providers. While half of the traffic on SWIFT is still payments, securities now comprise 40% and FX, 7%.

The largest growth in SWIFT volumes in the past year was in the area of treasury which grew by 29.4% as at April 2008. The next biggest area of growth was securities, which increased by 24.8%. Payments traffic grew by 12.4%.

Better risk management "is a cultural thing"

2008-06-24T09:38:00.005+01:00

With the theme of "Complexity, Compliance & Cost," SunGard Europa, the annual customer conference of financial software provider, SunGard, conducted a rather rigorous post-mortem of what had gone wrong in the lead up to the subprime crisis.

The guest speaker at SunGard Europa, which was held in Prague, was former Czech president Vaclav Havel, who spoke about the complexities of spearheading the "Velvet Revolution" in 1989, which eventually brought multi-party democracy to the country.

While the complexities Havel encountered seem far removed from those that investment banks now find themselves in as new and more complex instruments test risk models, one thing both events share is the need for clear and transparent information as to what is going on.

In the case of the recent sub-prime crisis, however, that information seems to have been compromised by an overemphasis on profits and growth.

Eager to deflect the blame from the automated risk management systems themselves, Value at Risk(VAR) as a measure of risk exposure and ratings agencies' modeling techniques, received a lot of flak from risk specialists for the sub-prime meltdown.

Commenting on the ratings agencies' models for structured investments, one leading chief credit officer said that, "you begin to wonder what they smoked". "How good is the work that ratings agencies do?" he asked.

With so much focus on growth and profitability, it appears risk management discipline within banks went out the window. "The risk function may have measured these risks, but at CEO level, you have to question whether these risks were accepted," said the credit officer.

The banks were also criticised for their overemphasis on VaR, which speakers concluded did not seem to tell us much, particularly when it comes to more complex instruments, such as derivatives.

Risk specialists at the conference stressed the need for more regular stress testing of risk models. "You can re-run the stock market crash of 1997," said a SunGard spokesman, "but the next catastrophe is not the same as the previous one. Firms need to look at their investment portfolios and say what is the worst that could happen, and take a view as to whether that is reasonable or not."

While a number of firms have broken down traditional silos between market and credit risk, the SunGard spokesman said that credit risk departments tended to say 'no' more often to the business than market risk. "Market risk says no less often to a trade. It is a cultural thing," which may have something to do with the fact that trading, historically, has been one of the most profitable parts of a banks' business.

Complex risk modeling techniques aside, it seems that managing risk sometimes can be as simple as just saying 'no'.

Key Themes at SIFMA 2008

2008-06-12T21:14:00.003+01:00

One could be forgiven for thinking that guest blogger Richard Muirhead of Tideway Systems is in Las Vegas sampling the technological delights and the latest must-have gadgets that are going to wow future generations of teenagers. Instead, he is at the SIFMA Technology Management Conference in New York (the final day no less) where it appears the future of trading resembles a PlayStation video game, and the gamers, Facebookers and tech-savvy teenagers of today are likely to be the future traders of tomorrow. Should we be worried?

Day three at the conference, and several key themes have emerged – this year’s most urgent issues for financial services' IT can be grouped under the following umbrellas:

Extreme Agility
If we now look at the rising expectations of the Facebook and Grand Theft Auto generation - and the fact that in a few short years they will be running the derivatives desk, and from there the bank - this pace of progress simply will not do!

They understand the rate of new features that their favourite websites deliver and have seen the demonstrations of the new handbag rental websites launched on the Amagoogle compute cloud with one dainty tap on the haptic keyboard on their iCommunicator.

Not So Much Efficiency as Survival!
Another thing we heard was there is a more black and white issue that demands attention and a new approach.

First data centres ran out of space, then they ran out of cooling, and now they are running out of power. For each $1 of spend on hardware and software, a further 50 cents is spent to power/cool them. For the 16 million servers across 7000 data centres in the US, that amounts to 350 billion KWhrs - or around 2% of all the electricity in the US.

In California, the sixth largest economy on the planet were it to be a stand alone country, they were recently 345 MW short of a rolling blackout. The average power consumption of new build data centres is 1000 MW so they were four data centres away from lights out.

Virtualisation allows a shift from coping with client estimated demands and the documented but inaccurate or irrelevant power consumption (and thermal output figures for the many infrastructure components required for their operation) - to an intelligent forecast of the non-functional requirements that a given application will place on a virtualised slice of the environment.

The difference could be between the 6000W max power draw documented for safety reasons where actual draw is around 2500W....so that is how cooling should be engineered. All of these allow for dramatic increases in energy, space and hardware efficiency - and virtualisation also means lower certification overhead for different hardware types to boot.

Data Centres Are For Life, Not Just For Christmas

These creatures stick around, sometimes grow into monsters and take a lot of care. Many large organisations have tens or hundreds of data centres....and many would like to consolidate them to single digits. It’s just not that easy. You can't just fire all the teams and you need some carefully engineered data centre redundancy for availability and indeed compliance. But you also need low-latency for trading apps; SaaS apps; or proximate data centres to support large file transfers around development environments, since the world is not yet fully wired with OC192’s.

The imperative for tomorrow’s data centre is to waste no software licenses; drive utilisation of the server estate from 10% up to 60%; keep within space and power constraints; all while ensuring you can quickly put apps into production for a given workforce up through automation.

Whatever the people are saying about the new build data centres, within a decade the contents will be obsolete. But once we know which data centres need to be kept and where the economics on a typical data centre build are, they can be improved by 150m on 350m by making that shift from 10% to 60%.

Complexity Beyond A Single Man’s Ken
Concatenation of behaviours that distributed applications and now virtualisation depends upon can lead to enormous systemic unpredictability. Soon we will be going from seven physical networks per server to one network with virtualised network I/O, where these then become software configurable.

Everything will be virtualised: NAS: load balancer ; LAN; SAN. So then everything can be software provisioned. Ports and servers are dead. As VMs allow application workloads to migrate freely around the estate and the configuration of the application infrastructure shifts into software at all layers, then the policies for network/storage configuration, Q0S and encryption need to match the application and also move with the application.

So the initiatives break down into Consolidate; Virtualise; Automate. But the biggest problem in all of this will be the silos that people currently work in. Shifting people from bragging about their deep abilities with a particular technology, product or vendor or the vast number of ports and servers under their management to the high levels of data center utilisation; extreme application availability and high velocity of application improvement, and all so that we can beat our highest score on Grand Theft Auto or make a (bigger) bonus this year.

Grand Theft Auto and Zero Tolerance

2008-06-11T20:58:00.001+01:00

The fun and games continue for guest blogger Richard Muirhead of Tideway Systems on day two of the SIFMA Technology Management Conference in New York, where he gets to grips with the latest data centre switching system from Cisco, which is finding use not only in banks.

SIFMA, day two. What have I learned? The Grand Theft Auto network incorporates the Cisco Nexus 7000. Operational features for preventing human error, including blinking port lights to guide cable swaps, are key.

What does this have to do with SIFMA? We all know how incredibly intense the world of banking has become. Partly due to mounting competition, partly due to existing or planned regulatory compliance as well as cost constraints, a big spadeful to do with mounting product complexity and market diversity and some (I hope at least a little) due to a contrite sense of obligation to the rest of the world to do a “better job” in the wake of the credit crisis. I hope.

So this bit of the Cisco briefing this morning was not news. Neither is the blissful state that application development and operations teams in financial services have been operating within. What do I mean by that? The business wants to deploy an app - well that will be 90 days for an existing app or five or six months for a new one.

And as Doug Gourlay, who runs marketing for Cisco’s Data Center Solutions practice noted, the 'killer' issue is how do you orchestrate multi-admin collaboration across server deployment, app server configuration, database tuning, storage provisioning, security auditing, HVAC installation, cabling and the rest of the gubbins that goes into making an application happen?

Boiled Sweets, Hand-Rolled Cigars and John McCain

2008-06-11T10:58:00.006+01:00

Guest blogger Richard Muirhead, CEO and founder of Tideway Systems reports from the SIFMA Technology Management Conference in New York where signs of a looming US recession appear to be masked by fancy cigars, the latest hand-held and software gimmicks and presidential hopefuls courting Wall Street bankers.

Apparently Wall Street technology budgets are in rude health - that is, if the array of attention-grabbing gimmicks at SIFMA today are anything to go by. Nintendo Wiis; iPod Touches; young ladies in Pink Fairy costumes; and our very own Dave Kirby will be thrilled to hear that one messaging vendor featured a dragon boat’s worth of booth attendants resplendent in tie-dye, trippy t-shirts. They stood out, but they were still not a patch on Dave’s tie-dye jumpsuit.

So such great lengths become necessary when all four floors of the exhibition are packed with vendors touting their wares and you are one of innumerable messaging vendors who appear to be one millisecond faster than one another. At that point perhaps it becomes more the battle of the brands than the technologies. Think of tennis for example; could you prove your game is better with a Head tennis racket than a Dunlop, or does it just matter which racket Federer uses?

Virtualisation was sprinkled around liberally also, from the likes of Sun, IBM, Novell and others. As long as it can resist being overshadowed or at least out-shouted by the crescendo of interest in cloud computing, which I think it shall, then I believe server virtualisation’s finest year is yet to come.

The theme of relentless demand for better infrastructures was a recurring one. Data centres are constrained by space, cooling and perhaps latency, which will have a bigger impact on the surge in new builds. Tracking friends via GPS on Helios; video calling on the new consumer friendly iPhone; computationally intensive derivatives portfolio calculations, could create the biggest strain. Have CFO’s accepted yet that the current acceleration in investment is not a blip, but the beginning of a trend?

Other noticeable themes were complex event processing and 'low-latency’; and I am not just referring to the adept networking of the regulars that make up the PR cognoscenti in the 'SIFMA set'.

So, there I was propping up the bar meeting various journalistic characters that were plucked from an Evelyn Waugh novel. That is until the bar opened and I was told that sitting there for 15 minutes without consuming alcohol was not doing my bit to support the US economy and I should move on.

But I was impressed by the number of people milling round the bar, taking it as clear evidence of frantic education and deal-making - or perhaps simply marketing budgets still bulging from the exuberant planning assumptions of 2008. Until, that is, out of the corner of my eye I caught sight of a neatly turned out, silver haired gentleman, sweeping from a bank of brass-clad lifts and softly holding court to his entourage.

The presumptive candidate and some might say now in the face of Barrack Obama’s rising tide of popularity, the presumptuous President: John McCain. What was striking was the relatively small number and indeed small stature of his group. That was until 25% of the bar revelers promptly switched off their secret-service earpieces and vanished into sweltering Sixth Avenue.

Today is to culminate in the parties. The largest, hosted by SunGard, great sushi, lashings of sake, but be careful not to drop your guard. The most exclusive, hosted by the unlikely bed fellows of Intel and Sun and featuring every successful executive’s favourite indulgence: hand rolled cigars. All of this nestling under a party theme of trade-processing power undiminished by prudent and conscientious data centre efficiency. A domani.

Sniffing out SIFMA

2008-06-06T13:45:00.002+01:00

While other more fortunate journos will be winging their way to New York in a day or two for the annual SIFMA Technology Management Conference, I have been excluded from such a coterie

However, FinancialTech Insider will be covering the buzz on the exhibition floor remotely with the help of Richard Muirhead, CEO of Tideway Systems, who will be filing his personal insights on the conference and exhibition on a daily basis.

Tideway Systems helps companies gain greater insight into their IT infrastructure and application dependencies. Richard is the brother of Charlie Muirhead who created software company Orchestream at the height of the dot.com boom. In five years Orchestream went from angel funding of £20,000 to a dual listing on Nasdaq and the London Stock Exchange, and a market cap of more than £1 billion. It was later sold to Metasolv in 2002 and then Oracle in 2006.

Rogue trading - not an isolated incident

2008-06-03T16:04:00.003+01:00

With rogue trading, data leakage and malicious attacks adding to banks' litany of reputational woes, it is no surprise to learn that banks are taking a peek 'under the bonnet' to see how well their risk management and detection systems are actually performing in today's more heightened regulatory environment.

When the SocGen rogue trading incident blew up earlier this year, other banks may have breathed a collective sigh of relief that it wasn't them receiving the unwelcome publicity, but at the same time they probably secretly acknowledged that rogue trading was not isolated to a single institution.

In fact it is probably fair to say that the bonus culture within most investment banks means they are unlikely to design and implement risk management systems that wholly curtail the creative urges of their traders.

Having said that,it is interesting to hear that an increasing number of firms (85%) plan on modifying internal controls in light of recent rogue trading incidents and that 60% have created special task forces in response to high-profile rogue trading incidents, according to Actimize's Rogue Trading Peer Review.

In order to keep the regulators at bay, banks need to be seen to be doing something to address what is at best an endemic problem. According to Actimize's review findings, more than 75% of respondents anticipate another large rogue trading fraud loss, worth more than $100 million to be uncovered at a large financial institution within the next 12 months.

An additional 50% indicated that rogue trading activities ranging from thousands to millions of dollars go unreported every year at their firms. One has to ask why these incidents are going unreported? Is it because risk management systems are not detecting them? Or is it a culture of silence fuelled by the bonus culture within investment firms that is preventing these incidents from being reported?

According to Actimize's review, 24% of respondents said they had experienced a case of trading fraud at their firms in the last 12 months, and 44% confirmed a case of employee fraud had occurred in the same period.

This confirms the increasing view that the greatest threat financial firms face is not external but internal, be it either unintentional (accidental data leakage from laptops, P2P technologies, USB sticks) or malicious (disgruntled employees, rogue traders).

When it comes to securing trading systems, Frédéric Ponzo, managing director of NET2S consultancy, says historically it has been a case of trying to make conventional security technologies (firewalls, anti-virus, anti-spyware, anti-keyloggers etc) work in a trading environment.

One of the biggest problems, he says is providing a secure infrastructure around "black box" trading terminals, some of which have email systems that do not necessarily fall within the usual security guidelines and policies of a company. These email systems remain vulnerable to attack or data leakage.

French IT security firm, SkyRecon Systems believes it has the answer in the form of its TradeShield solution, which aims to replace point-to-point security solutions in the trading environment with a "single agent, single management console" for managing system and user risk.

Designed specifically for the trading environment, TradeShield provides integrated protection including device control, data encryption, intrusion detection, firewall, network access control and centralised security policy enforcement.

Instead of having to enforce security policies and procedures for normal desktop computer use and trading applications, SkyRecon says that when a trading application is launched, for example, the computer cannot be used for anything else (for example, sending emails, personal instant messaging, peer-to-peer downloads).

The challenge for any solution in this space has to be providing the right level of control while enabling traders to have access to the tools they need (files, emails, IM) in order to trade effectively. Instead of completely "locking down" applications, SkyRecon says TradeShield allows applications to run but with the appropriate level of protection.

Real-time realities

2008-04-17T14:19:00.004+01:00

Guest blogger, Brussels ICSD, Euroclear, responds to news of Clearstream's new processing environment.

If memory serves me well, in 1998 both Clearstream and Euroclear (Euroclear Bank now) planned to launch real-time settlement platforms. Euroclear launched its daylight real-time settlement platform in 1999 and Clearstream postponed theirs indefinitely, citing other higher priorities such as Y2K.

Later, Clearstream launched its ‘continuous-batch’ daylight settlement platform called Creation for Clearstream Banking Luxembourg clients only; the CASCADE platform used by Clearstream Banking Frankfurt clients continues to operate today separately from Creation.

From our 10 years of experience in operating a real-time platform at Euroclear Bank, and our understanding of how real-time settlement works at other Euroclear CSDs, we know that there are different ways to organise a real-time processing environment, for example, event driven or calendared. To the client, however, the end result is the same – real-time availability of cash and securities.

Because Europe’s capital markets do not yet operate with harmonised market rules and practices, each processing platform must accommodate the particularities of the market(s) served, so the right approach for one market may not be the best for another.

Therefore, assessing whether one system is lower in cost to run than another requires highly complex analysis, including factors such as market practices, system capacity, processing peaks, levels of data-protection and client business-continuity sophistication.

Obviously, upgrading an existing system and consolidating five separate platforms into a single platform are very different initiatives. It would be nonsensical to compare a system upgrade with an unprecedented programme of infrastructure redesign that will save clients more than EUR 300 million per year.

Euroclear’s new Single Platform will, of course, operate in real time. Of equal significance are the joint efforts by Euroclear and our clients in the group’s five European markets (Belgium, France, Ireland, the Netherlands and the UK) to profit from the efficiencies of harmonised market rules and practices within these markets, in accordance with the Giovannini Group recommendations.

We firmly believe that platform consolidation and market practice harmonisation - in parallel - will deliver the most meaningful operational efficiencies and savings to the market. In recognition of these benefits, Euroclear Bank is now working with Clearstream Banking Luxembourg to harmonise market rules and practices for the international securities market, through the International Securities Market Advisory Group.

The two ICSDs have an excellent track record in making regular improvements to the Bridge, which is often credited by market participants as a stellar example of interoperability. Discussions are ongoing between the two ICSDs to further enhance the Bridge; interoperability can be improved further now that both Euroclear Bank and Clearstream Banking Luxembourg are operating in real time.

Clearstream's new processing environment

2008-04-14T08:49:00.003+01:00

Well it certainly has been a busy few weeks for the world of European clearing and settlement. Not content with their trading counterparts stealing all the limelight in a post-MiFID world, the European CSDs announced their own 'Project Turquoise' in the form of the "Link Up Markets" initiative which will see seven European CSDs develop a common infrastructure for post-trade efficiency.

Fresh from that announcement, last week Clearstream the ICSD summoned a handful of journalists to its Canary Wharf headquarters in London to hear more details about the new generation of processing environment it announced back in March.

Instead of being courted with a glass of wine and a cocktail sausage, which we were told were being saved for all-important customers, we were given a detailed explanation of what Clearstream's new real-time processing environment really meant and how it provided a migration-free alternative to Euroclear's Single Settlement Engine (SSE), which aims to harmonise and improve settlement efficiency across five markets.

The move to a "real-time" processing environment is apparently part of a four-year strategic review that Jeffrey Tessler, president and CEO of Clearstream International initiated when he first joined the Luxembourg ICSD.

Philip Brown, relationship management, UK, Ireland & Nordics, Clearstream, said a number of market trends and requirements lead up to the new processing environment; a 25% increase per annum in custody volumes, increased complexity on the asset servicing side, investment fund volumes growing at a rate of 30% per annum, and the increasing move to same day repo which was putting pressure on clients to know where their collateral was and on ICSDs to support a same day settlement environment.

Brown said that Clearstream's new "real-time" processing environment would more tightly integrate settlement, custody and securities financing enabling clients to optimise their collateral by providing them with more timely information as to where their cash and securities are.

Clearstream's previous settlement engine was an overnight process which processed 95% of volumes efficiently. "It is the 5% we are trying to resolve by getting the market towards 100% efficiency" said Brown by providing same day settlement and financing.

Under the new processing environment, Clearstream will extend the settlement processing day from 4.30am to 6pm CET, which it said would not only optimise settlement efficiency by eliminating queuing times and enhanced fails management, but also minimise domestic turnaround times from three hours to three minutes, and optimise use of securities as collateral by enabling firms to hold less collateral.

"With event-driven real time processing we don't have a set time of day for starting processing," Brown explained. "Each cycle is driven by an event such as a corporate action or a bridge exchange file with Euroclear."

Commenting on its competitor Euroclear, Brown said that its processing environment was 'calendered' rather than event driven. I got the feeling that Clearstream also saw its new processing environment as an opportunity to steal some of the attention away from Euroclear's Single Settlement Engine project.

Brown was eager to point out that Clearstream was ready to switch on a real-time bridge between itself and Euroclear which would create the impression of a single processing environment, but that the Brussels ICSD was not quite ready yet.

"Euroclear's model is about the acquisition of CSDs around Europe for the creation of a single platform. Our solution is live now. Euroclear has not yet fully delivered its solution on a rolling basis," said Brown.

Arguably Euroclear's SSE, which requires platform consolidation in five markets, is a far more ambitious project than Clearstream's new processing environment. Brown would not be drawn on whether its processing environment was better than what Euroclear would offer. "I wouldn't say it is better or worse. We think you can get there quicker and more cheaply by using a robust infrastructure based on real-time processing."

European CSDs announce joint venture

2008-04-02T12:09:00.005+01:00

At Sibos in Boston last year, Pierre Slechten, CEO, Euroclear France said that the European Central Bank's (ECB) Target2-Securities (T2S) proposal would lead to further consolidation of CSDs in Europe and cause CSDs to readdress their strategy in terms of moving up the value chain in custody.

Well it seems Slechten's predictions were right; well at least the latter point anyway. Whilst there may not be consolidation per se (at least not at this stage), today seven European CSDs (Clearstream Banking Frankfurt,Hellenic Exchanges Greece, IBERCLEAR Spain, Oesterreichische Kontrollbank Austria, SIS SegaInterSettle Switzerland, VP Securities Services Denmark and VPS Norway)announced that they would develop a commonly owned and designed routing and messaging infrastructure aimed at improving post-trade processing efficiency in Europe.

"It is an initiative that capitalises on domestic infrastructure," explained Jeffrey Tessler, chairman, Clearstream Banking Frankfurt. "It is about leveraging what is already in place for improved access and interoperability as outlined in the Code of Conduct (for Clearing and Settlement)."

The European Code of Conduct for Clearing and Settlement requires signatories to meet standards around price transparency, access and interoperability and service unbundling and accounting separation.

Announcing their joint venture, slated to cost $10 million, the seven CSDs stressed that their initiative would not replace existing domestic infrastructure, but instead create a "linked up market between CSDs so that everyone could speak the same format to one another". Couched in a slightly different way, Tessler said it was about bringing the efficiency of the domestic securities markets to the cross-border world.

Tessler would not be drawn on the exact cost savings of such an initiative, but said they would be "extremely significant". The key question on most journalists' lips however was, is this merely the CSDs going on the defensive in response to the ECB's T2S proposal for settling securities in central bank money using the existing Target 2 system?

Tessler was somewhat measured in his response. At first he said T2S would provide settlement not custody and that the market would benefit by having a "single gateway" for custody services offered by European CSDs, in addition to having a "single window" into the ECB's T2S Settlement Engine. "We are not building a settlement engine," Tessler stressed.

But as one journalist asked, does the joint venture between the seven CSDs mean that T2S is no longer relevant? Tessler said he didn't think that was the case and that the market believed in the benefits of a settlement system operating in an integrated model. "We have had conversations with the ECB about our initiative," he said, "and they see it as a facilitator to T2S."

However, there is no doubt that without the Code of Conduct and T2S, the CSDs would not have been forced to work more closely together. Tessler said the joint initiative would prepare market participants for a T2S world.

But with Euroclear pursuing its own market harmonisation strategy via its Single Settlement Engine and the ECB intent on introducing T2S, will the joint venture between the seven CSDs see the emergence of yet another market infrastructure that market participants have to connect too?

Tessler said that the joint venture was purely a domestic CSD initiative and that Euroclear could participate via its domestic CSDs, such as Euroclear France or CREST in the UK.

But given the SSE strategy Euroclear the ICSD is pursuing, are they going to want to participate in the joint initiative at the domestic level, and if more domestic CSDs in Europe do not join the initiative, are the real cost benefits and economies of scale that such a venture promises unlikely to be fully realised?

For those agent banks that may be feeling a little nervous about CSDs joining forces to provide custody services, Tessler said that they would continue to use agent banks for services such as tax processing and for settlement in central bank money. But hang on a minute, isn't that what T2S is meant to be doing?

Despite Tessler's assurances, the role of agent banks going forward appears less than clear, and there is a danger that with so many different market initiatives for harmonising and standardising clearing and settlement in Europe, that the market will merely end up with a handful of competing and uninteroperable initiatives.

Are corporates being heard on e-invoicing?

2008-04-02T09:46:00.004+01:00

SEPA Credit Transfers are live and in recent months we have seen announcements from various vendors (Sterling Commerce's partnership with VAT and GST experts TrustWeaver, Fundtech's acquisition of Accountis)about their forays into the e-invoicing space, which is the 'e-SEPA' corporates often talk about.

Does that mean that banks are finally waking up to the fact that most corporates do not really give a damn about SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD), which lets face it are interbank instruments?

Not that there aren't advantages for companies using SCT and SDD, but that is not really what SEPA is about for most corporates. Corporate associations such as the European Associations of Corporate Treasurers (EACT)have been particularly vocal about their desire to leverage SEPA to overcome the remaining hurdles to pan-European e-invoicing.

The European Commission appeared to heed their call by setting up an Informal Task Force on e-Invoicing, which has issued recommendations for removing the remaining hurdles to pan-European e-invoicing.

While corporates are in dialogue with the EC Task Force, via a Corporate Supply Chain Panel set up by TWIST and EACT, we hear on the grapevine that any attempts by corporates to have a stronger voice in helping architect pan-European payment processing and e-invoicing standards, are being impeded by the Commission, or more correctly, the strongly represented and funded European banking lobby.

Some of the banks maintain that it is only a handful of larger corporates that want 'e-SEPA' and that to deliver what the corporates are asking for is all too difficult. Yet, just as banks(the European Payments Council) chose to sideline corporate opinions when they were drafting the frameworks for SCTs and SDDs, it seems they may be trying to do the same when it comes to pan-European e-invoicing.

The banks were so eager to be seen to be doing something about reducing the cost of cross-border euro payments, in order to avoid further regulation, that they only focused on the inter-bank processing aspects of SEPA rather than looking at the 'bigger picture' and the real opportunities SEPA presents to truly transform the European payments landscape.

Could this have something to do with banks wanting to tout their own proprietary e-invoicing solutions to corporates? After all, if they are losing so much revenue from standardising cross-border euro payments, they are going to have to make up the slack somewhere else, by trying to lock customers in somehow with proprietary solutions.

Yet, time and time again corporates, particularly those that are multi-banked, have said they don't want proprietary banking solutions; the same argument perhaps applies to e-invoicing. And while the banks maintain that they are best placed to drive widespread adoption of e-invoicing, corporates are far from convinced.

Despite all the rhetoric and the conciliatory attempts by the EC to engage corporate demands for pan-European e-invoicing, it appears that self-interest and preservation may be at work again and that SEPA merely represents a 'band aid' that banks have put over the existing infrastructure in their efforts to appease the regulators, rather than trying to treat what is intrinsically wrong with the existing infrastructure.

Me thinks that the European payments landscape may be setting itself up for its own 'Project Turquoise', except this time it won't be driven by banks but by corporates disgruntled with the status quo.

Playing with risk

2008-02-29T09:17:00.004Z

I received this rather intriguing email from Eurofinance, which organises conferences for corporate treasurers, regarding a new board game they are going to unleash at Eurofinance Miami 2008.

Called, 'Cash Flow at Risk', Eurofinance designed the game to teach treasurers how to come to grips with the cash flow, credit and liquidity uncertainties ahead. I do wonder though if they should be targeting it more at the banks, given that it was them that seemed to lose their way.

Apparently, HSBC uses the board game as part of its corporate training, although one wonders if a board game, let alone a major credit crunch, is really going to teach banks anything about risk.

You may think I am being a little harsh, but the other day a risk management consultant told me he had started a training company as a sideline for his consultancy business, as selling risk to banks was a bit of a difficult sell. No bank wanted to really think about risk too much as it might stem their financially motivated creative urges.

The board game requires participants to answer economic questions in order to progress, but one has a feeling for some participants it would be a case of "Do Not Pass Go, Do Not Collect $200".

Can a board game though really teach treasurers about the "dangers ahead"? Is a simple toss of the dice and answering a few economic questions going to resonate with financial managers sitting in boardrooms across the country, the very same managers who in the real world, and not one confined to a board game, perhaps saw the warning signs but chose to ignore them?

What went wrong at SocGen?

2008-02-21T14:04:00.006Z

Well, the SocGen saga continues, with the commercial and investment bank reportedly publishing a report in French detailing how the trader Jerome Kerviel managed to evade controls.

Following publication of the report, IBM, the latest vendor to jump on the What Went Wrong at SocGen bandwagon, sent out an email reiterating the question everyone has been asking: How can you manipulate tens of billions unnoticed?

As I do not read French I am going to have to rely on IBM's interpretation of SocGen's interim internal investigation report, which reportedly claims that Kerviel's "position keeping and risk systems were unable to report such a large exposure because they [failed] to capture distant forward, incomplete and modified trades, and they were known to function improperly and be prone to recurrent errors."

An IBM spokesperson expressed amazement that a sophisticated organization was not capable of managing and properly reporting such simple transactions as stock future purchases, on the account that they were following unusual trading patterns (distant forward dates, multiple modifications, cancellations and transfers.)

Risk consultants from IBM Business Consulting Services outlined some of the major causes of large trading losses and stated that the "quality, coherence, and integration of position keeping systems," was crucial in counteracting some of these causes. "Effective position keeping" it said could also address employees trying to conceal losses and that "oversight mechanisms" which integrated monitoring, governance, and compliance requirements into a "holistic, focused, and practical framework," needed to be put in place.

Arguably however, there is only so much technology can do, and at some point a human needs to intervene or manage the process in order to prevent people who are clever enough from fooling or overriding internal risk control procedures and systems.

This is borne out by an independent report, which reportedly concluded that while risk control procedures were followed, "compliance officers rarely went beyond routine checks and did not inform managers of anomalies." According to the independent report, 75 warning signs on the activities of rogue trader Jerome Kerviel, were overlooked.

Who will buy?

2008-02-21T09:05:00.005Z

It is no secret that Larry Ellison, Oracle's CEO is hell bent on world domination, and the other day I had the pleasure of seeing just how determined the man is to provide the complete software stack covering almost every permutation of financial services.

Over lunch an Oracle exec presented me with a 'place mat' - which I proceeded to eat my lunch on - demonstrating Oracle/i-flex solutions' banking footprint across retail, commercial and private wealth management.

With no fewer than 38 acquisitions under his belt, in the next issue of financial-i magazine, we look at the ramifications of Oracle's 'stack' approach for financial service providers.

Critics say that IBM tried it in the 1970s but failed. It is a question of who will buy, and of course with any software vendor that is so acquisitive in nature, customers are always going to be concerned about how well integrated its solutions are. Oracle's Fusion Middleware is an effort to pull the applications together, and the Oracle execs I met with were insistent that any company acquired by Oracle soon becomes part of the fold.

When it comes to Oracle/i-flex's existing banking footprint, most of the boxes on the place mat representing the customer experience, product and transaction processing, master data management, corporate admin, compliance, risk-based monitoring, analytics platforms and enterprise technology, were greyed out, meaning that Oracle already occupied that space.

The executive indicated that the white boxes were where Oracle would make its next acquisitive strike; in areas such as trade processing, securities trading, derivatives pricing, Lock Box, custody and structured derivatives.

Interestingly, Ellison has deep pockets and has financed acquisitions without having to resort to injections of private equity capital. The latest target is BEA Systems, which Oracle appears to be acquiring for its capital markets customer base.

Any guesses where Ellison is likely to strike next? But it seems not all banks are buying the stack approach. No bank is going to want to lock themselves into a single vendor, although the pace with which Oracle is acquiring companies they may be forced to. Additionally, some of the bigger banks still tend to favour building proprietary solutions in-house rather than buying something off-the-shelf.

Sovereign funds and banks

2008-02-20T12:57:00.002Z

Once the target of various takeover rumours, Barclays now appears to be setting its sights on filling the gap left by the US investment banks that have suffered billions in write downs associated with subprime losses.

Interestingly, a question I have been asking in recent weeks, is what would have happened if sovereign wealth funds (SWFs) from Singapore and Kuwait had not bailed out some of the American banks eager to replenish their liquidity following such massive write downs?

The answers have been varied, but the bail outs themselves signify a new world order that is emerging, or as McKinsey likes to refer to the sovereign wealth funds, they are new 'power brokers' alongside hedge funds and private equity.

In fact, estimates suggest that sovereign wealth funds, while they may have considerable sums to invest, are not as big as say the Top 10 asset managers who are valued at $13.4 trillion, followed by the Top 10 central banks with reserves worth $4.4 trillion, the Top 10 pension funds valued at $2.9 trillion, and the Top 10 SWFs valued at $2.3 trillion.

But regardless of where SWFs sit in the financial pecking order, the sentiment seems to be that without the investments from Kuwait Investment Authority, Temasek Holdings and other SWFs, that the major US banks would have been forced to consolidate.

Why settle for less, say Deloitte

2008-02-14T09:03:00.004Z

After the initial exuberance had died down, most companies that had embarked on major IT or business process outsourcing projects discovered that there were 'hidden costs' in outsourcing to a third party provider.

As time and experience of outsourcing wore on, companies realised it was not simply a case of outsourcing a process to a third party and watching the cost savings pour in. The outsourcing process itself needed to be managed, monitored and governed, which entailed costs in and of itself.

Well Deloitte has just published some interesting findings on outsourcing based on its survey of 300 executives involved in outsourcing worldwide. More than 80% of respondents to its survey indicated a return on their investment of more than 25%.

However, while 70% said they were satisfied or very satisfied with their outsourcing. 39% said they had terminated at least one contract, and 50% of those that reported dissatisfaction with outsourcing had brought the process back in-house. In the first year of the contract, 61% of firms also indicated that they had "escalated problems" to senior management.

Therein perhaps lies the greatest challenge for both outsourcers and the firms that employ them, demonstrating not only one-off process improvements, but ongoing improvements on a continuous basis that satisfies customers' expectations.

As Deloitte's findings bear out, firms that outsource while financially gratified, would like to see a lot more benefits stem from the arrangement in terms of access to new ideas and innovation and better quality communications.

More than 30% wished they had spent more time on evaluating vendors before signing contracts, and if they had their time over again, almost 50% said they would have better defined service levels in line with their business goals, which just goes to show that a lot of firms have rushed into outsourcing mesmerised by the potential cost savings, without considering the processes, workflow and governance that needs to be put in place to ensure a better outsourcing experience.

So those businesses thinking that outsourcing or offshoring may be the solution to all their problems, particularly in an economic downturn when reducing costs is paramount, think again. Outsourcing is not a panacea and often entails 'hidden costs' which need to be considered in the overall cost/benefit analysis.

Martyn Hart, chairman of the UK National Outsourcing Association, says we could see the nature of outsourcing deals change in light of a recession. "In the past couple of years the ‘mega-deal’ has largely been consigned to the outsourcing scrap heap, in favour of multi-shoring and choosing separate suppliers for each process. Organisations will have to balance how to do this in the most cost effective manner," he says.

With mega-outsourcing deals a thing of the past, fixed price contracts are also likely to be abandoned for a more utility-based approach based on cost per unit.

Still miffed by MiFID?

2008-02-06T16:08:00.003Z

I stole the title for this post from a panel discussion at Complinet's Compliance Conference in London today.

Judging by the number of people in the room (it was half full) they may not be that miffed about MiFID, or perhaps as most of the audience were risk and compliance officers, having to comply with non-prescriptive regulations is par for course.

Admittedly I walked in halfway through the debate, but judging by questions asked by the audience, it would appear that the Financial Service Authority's (FSA) principles-based approach to regulation, including MiFID, is causing consternation amongst risk and compliance officers, who would prefer a more prescriptive rules-based approach.

One compliance consultant chipped said that if firms went out and said what they think the rules mean (as they pertain to MiFID, then that would create a "stake in the ground," which is the safe way to develop compliance in a principles-based world.

Deborah Sabalot, a regulatory consultant, begged to differ however. She reminded the gathered risk, compliance and audit staff that the great thing about MiFID is that it was not non-prescriptive - in other words it gave firms the flexibility to design their own systems instead of being locked into something that was not of their making.

Still it didn't sound like that was what compliance officers wanted to hear. It seemed to be more a case of give us a set of rules we need to comply with and we can work with that, rather than making it up as we go along.

That may be the view of MiFID across the board, however, in the front office where the trading that MiFID regulates is executed, some firms clearly see MiFID as an opportunity to set their own benchmarks particularly around aspects of the regulation such as best execution.

However, for those that prefer the certainty of a prescriptive rules-based world, some form of best practice appears to be emerging, albeit slowly. Although it may take 12 to 18 months before firms' application of best execution under MiFID beds down, one spokesperson from UBS investment bank said any firm that takes a simplistic approach to execution by executing all of its trades on a single venue, are likely to find themselves under regulatory scrutiny.

That is pretty much a 'no brainer,' but other investment bankers raised concerns about additional taping requirements from CESR and the FSA and the extension of MiFID to commodities.

Lyndon Nelson, head of risk at the FSA, conceded it had been a difficult time for the organisation, particularly in view of the Northern Rock affair which it has received considerable flack over. Non-believers of a principles-based approach to regulation are likely to say that Northern Rock highlights the pitfalls of a principles-based approach to regulation.

However, Nelson said the FSA intended to stick to its non-prescriptive guns, albeit gaining some valuable lessons along the way from the Northern Rock Affair, and where requested, he said the FSA would provide market guidance by publishing more information gleaned from its risk assessment of firms, which could then be used by their peers to benchmark themselves against.

A new world order

2008-02-05T10:20:00.000Z

Oh how the mighty have fallen. According to a Bloomberg report, Chinese banks have toppled Citi from the top of the league tables based on market value.

Citi, which had long occupied the top position based on market cap, has been superseded by Industrial & Commercial Bank of China (ICBC), China Construction Bank and Bank of China. The three biggest Chinese banks are valued at $608 billion, says Bloomberg, compared to $496 billion for Bank of America, JPMorgan Chase and Citi.

ICBC leads the tables with a market value of $277 billion, $82 billion more than Bank of America, which is in second place, followed by HSBC in third place ahead of China Construction Bank and Wells Fargo, according to Bloomberg data. Citi is now in seventh position. Yet, it was only five years ago that 13 American banks featured in the top 20 banks by market cap.

Fragmentation is not a dirty word

2008-01-30T17:59:00.001Z

In the run up to the implementation of MiFID there was considerable 'umming' and 'aahing' about the impact the relaxation of the 'concentration rule' would have on the proliferation of trading venues and what that would mean in terms of fragmenting liquidity in Europe.

Those that were keen to see the status quo preserved in terms of liquidity residing largely with the national exchanges, painted a confusing picture of multiple trading venues springing up and the challenges of having to connect to all of these venues in order to demonstrate best execution.

Well it seems that debate has been quashed and smart order routing systems are helping "re-aggregate" liquidity.

"Fragmentation is good," said George Andreadis, head of AES, liquidity strategy, Europe, Credit Suisse at Finexpo in London. He then went on to cite a long list of reasons as to why it was good; less cost, lower latency trading, and attracting more liquidity into this space.

While Chi-X Europe may have been the only game in town, with its smarter, faster, cheaper model, Andreadis highlighted a whole host of planned MTFs looming on the horizon, including SmartPool, scheduled to launch in Q2 2008, Project Turquoise, and US "dark liquidity pools" such as BATS Trading and Pipeline, which are contemplating whether to launch this side of the pond.

It appears to be a very crowded and fragmented trading landscape emerging in Europe, mirroring what has already occurred in the US. Yet, Andreadis said that smart order routing technologies made it easier to determine where liquidity resided in 'dark pools'.

His mantra seemed to be that dark liquidity pools and MTFs were here to stay and that traders looking to demonstrate best execution ignored them at their peril. But the key to success in a market where liquidity is fragmented is the smartness of your order routing systems. "There is dumb order routing, smart order routing and very smart order routing," joked Andreadis.

Project Turquoise gives it the hard sell

2008-01-30T16:32:00.000Z

There was standing room only in the auditorium at the annual Finexpo event in London for the session on Project Turquoise presented by the MTF's CEO Eli Lederman.

After much fanfare and very little substance since the group of seven investment banks announced Project Turquoise back in 2006, Lederman seemed eager to dispel the notion that Turquoise was the mythical concoction of a bunch of investment bankers, rattling their sabres in the hope that the London Stock Exchange and others would reduce trading prices.

Well Project Turquoise has still not gone live, although Lederman was adamant that preparations for the launch date in September 2008 were well underway and that he was confident Turquoise would attract liquidity from day one. "We will have a lot of members, it is going to attract liquidity," Lederman kept repeating over and over.

And if that is not enough to convince those sceptics who are still doubtful as to whether Turquoise will get off the ground, Lederman was eager to stress that it had secured office premises. "We don't have marble steps or vaulted ceilings, but this is a modern exchange," he said.

Project Turquoise has chosen Swedish technology provider Cinnober (they also built Project Boat)to build its trading platform and Progress Apama is providing the CEP engine for the MTF's market surveillance system. But Lederman was short on the details regarding the trading platform. All he would say is that it will be an "integrated transparent order book with a dark pool."

It seems that the launch date for Project Turquoise may also be a moving target, as Lederman said that it was not focused on the date alone and that it was keen to implement a trading platform that was not a "monolithic purpose built system."

Yet, despite Lederman's efforts to reassure the market that Project Turquoise is "moving full steam ahead," anyone who has observed the Project Turquoise "showboat" for the past couple of years will probably be inclined to say, the proof is in the pudding. And after talking it up so much, almost to the point of evangelizing, Lederman better hope the pudding is worth eating.

Real-time volatility

2008-01-25T14:47:00.000Z

Those of you who read my "Crisis of Confidence" post will know that I have been questioning to what extent advanced risk measurement approaches and real-time data management technologies could have prevented the current crisis of confidence in the banking sector.

Could it for example have enabled SocGen to detect and even prevent its €5 billion of losses caused by a rogue trader dealing in European stock futures? Maybe not. But it appears that in a new post-MiFID world, with multiple MTFs springing up and all of them looking to compete with one another on speed of trading and cost, that market surveillance and risk management is becoming more of an issue.

Project Turquoise, the MTF set up by a consortium of investment banks, has announced that it will incorporate a "real-time" market surveillance system combining Progress Apama's Complex Event Processing (CEP) engine and Detica's market surveillance expertise.

Turquoise's post-trade market surveillance system will capture breaches of trading rules, detect market irregularities and develop enhanced trading execution analytics. But given the risk failings that have been highlighted at individual banks recently, one has to ask how effective these technologies are.

The UK's Financial Services Authority (FSA) also worked with Progress Apama and Detica on its "next-generation market surveillance platform", called Sabre II, which also uses CEP to process and analyse real-time event streams. According to reports, the FSA's old market surveillance system only had "end-of-week" capabilities as opposed to the ability to detect market irregularities in real time.

If MTFs and the FSA are relying on CEP for market-compliance issues, is this likely to filter down to the individual bank level where risk management and detection systems are found to be wanting?

Giles Nelson, director of technology, Progress Software, says it is seeing an increasing number of organisations using technology to provide an integrated real-time view of their position and risk analytic systems, which he anticipates will only increase as electronic trading volumes increase.

"With the increasing pace of electronic trading it's vital that a real-time view is available. The volatility in markets over this last week demonstrates the need for this."

BIC and IBAN confusion persists

2008-01-25T11:02:00.000Z

With all the turmoil going on in the markets, the first official day of SEPA, 28 January 2008 when SEPA Credit Transfers became commercially available, may pass without much fanfare.

However, just to add to banks' woes, Compass Management Consulting estimates that despite there being a low number of non-STP cross-border payments in the eurozone, the 2% to 5% of non-STP payments that require manual intervention, are steadily eroding banks' trading profits.

Based on its analysis of European banks, Compass estimates that non-STP payments can reduce overall trading profits by up to 25%. To back up its claim, it cites its observation of a banking operation handling 300,000 transactions a day that generated 7,000 exceptions. "Despite the relatively low 2.3% exceptions rate, 270 full-time equivalent staff (FTEs) were required for manual processing of these payments, each of which costs between £25 to £40 to handle," said Richard Bissett, head of banking services at Compass.

Compass found that an average of 20% of all transactions fail requiring manual intervention. These 20% of transactions account for 80% of total back office costs. Bissett says 60% of exceptions could be fully automated. Yet, according to Compass' analysis, banks are only managing to automate 4% of exceptions.

Shedding some light on the results, Bissett said that the real question is why are there still non-STP payments when BICs and IBANs were introduced to try and increase the automated handling of cross-border payments in euro? He says corporates are still "totally confused" by BICs and IBANs and that of the 62,000 BICs, only 20,000 are connected (SWIFT network participants).

With SEPA placing further pressure on banks' payments processing margins, Compass anticipates that this will bring the challenge of exceptions processing into greater focus. It still doesn't resolve the rather confusing issue of BICs and IBANs though, and with cross-border payment volumes tipped to rise post-SEPA, one can only expect the number of exceptions to increase unless something is done to remedy this.

A crisis of confidence

2008-01-24T17:52:00.000Z

There is nothing like a whiff of a financial crisis, to inspire technology vendors to espouse such pearls of wisdom, which go something along the lines of, 'Well if they had implemented such and such a piece of software, that does so many millions of risk calculations per second, then they would have been able to calculate their real risk exposure much earlier on and perhaps prevented such a crisis.'

Some grid computing and data management vendors have been having a field day with the current crisis sweeping through the global credit markets. I for one remain sceptical as to whether technology can really overcome the financial markets' overwhelming desire to not only make money, but to behave like a pack of herd animals converging on a tasty corpse.

Although risk management and Basel II may be at the top of the agenda (well at least it is at the top of regulators' agenda), does any amount of technology and advanced risk measurement approaches really make a difference, or have recent events merely provided the stimulus that tipped over an already precarious house of cards? The apple was already rotten and recent events have only served to demonstrate how rotten it actually is.

Confidence in banks, particularly those that were considered to be financial heavyweights that could survive almost anything, including a nuclear holocaust, is at an all time low, and one has to ask have we only seen the beginning of the unsightly chinks in the banks' armour?

Then there was today's announcement by Société Générale that it had uncovered €5 billion of losses caused by a rogue trader dealing in European stock futures. Sound familiar? Nick Leeson of Barings Bank lost approximately £800 million in 1995 in rogue trades.

Commenting on the SocGen announcement, David Dearman a partner at accountants and business advisers, PKF had this to say:

"This fraud highlights the continuing lack of controls at some major financial institutions. The lessons of the Nick Leeson and Barings case in 1995 appear to have been forgotten by some. The scale of this clearly surpasses that fraud and is truly shocking."

According to Dearman, there was much "soul-searching" and review of procedures at financial institutions in the City of London following the Barings' incident, and procedures were tightened in a number of instances.

"I can only trust that the procedures adopted in the City a decade ago are working and being regularly reviewed, but there will undoubtedly be some very nervous senior people in the industry today," Dearman continues.

Interestingly, perhaps what both incidences highlight is the ability for someone with detailed knowledge of a bank's control systems to override those very systems put in place to prevent such an incident from occurring.

It reminds me of a comment one compliance consultant made not so long ago, that banks tend to focus more on external threats as opposed to internal threats. One has to ask though, would any amount of sophisticated risk management techniques and real-time data management technologies have uncovered or even been able to prevent someone using their knowledge of a company’s security systems to conceal fraudulent positions?

The 'superbanks' of tomorrow

2008-01-22T11:28:00.000Z

In recent months with bank stocks plummeting and the aftershocks of the US credit crunch continuing to resound in global markets, no one would be surprised if the outlook for the banking sector going forward was dire.

Yet, while our faith and confidence in banks may be at an all-time low, McKinsey believes banks will double their profits and revenues by 2016.

It predicts that global banking revenues will grow, on average, by a not too unhealthy 7.5% a year from 2006 to 2016, compared with an average of 8% a year from 2000 to 2006 (and 12.6% from 2002 to 2006). Although revenues are expected to slow somewhat, McKinsey says they will still exceed current forecasts for GDP growth by more than one-half of a percentage point a year over the 10 years from 2006 to 2016.

"Consequently, we expect the industry to generate $5.7 trillion in revenues and $1.8 trillion in after-tax profits by 2016 —more than twice the levels at the end of 2006."

How can this be, you may ask with household names such as Citi having to grovel to Middle Eastern sovereign wealth funds to help balance their balance sheets after significant write-downs in the current sub-prime debacle.

Well it seems part of the reason for McKinsey's rather bullish predictions for the banking sector is the growth in demand for banking and financial services in emerging markets, which it says will contribute roughly half of the absolute growth in new banking revenues from 2006 to 2016, while North America and Western Europe will account for 25% and 20%, respectively.

Russia, says McKinsey will be one of the fastest-growing large markets in the next few years, alongside China. More importantly perhaps, India is predicted to overtake Central and Eastern Europe. Those segments that are likely to be profitable include retail banking and investment banking, trading and securities services, which McKinsey says will provide a larger relative share of bank revenues.

But perhaps the biggest driver that may support McKinsey's predictions is the prospect of more consolidation in the banking sector to create "superbanks".

"Over the next five years, we expect a new wave of consolidation to speed the emergence of 'superbanks,' with more than $500 billion in market capitalization," says McKinsey.

Today, global banking is the least concentrated industry says McKinsey with the top 20 banks accounting for less than 40% of its global market cap, compared with an average of 67% in other key industries. Interestingly, those banks that are in the Top 20 today, are not guaranteed to be the 'superbanks' of tomorrow. "Even the current top European and US banks aren’t guaranteed to achieve 'superbank' status with their existing portfolios," says McKinsey.

Outsourcing crunch time

2008-01-22T09:02:00.000Z

Regular readers of this blog will know that I have regularly commented on the hype surrounding outsourcing. Outsourcing is definitely here to stay, but as firms' experiences of outsourcing have matured and some of the gloss has gone off outsourcing as being a cost-effective panacea for companies' woes, outsourcing entered the 'trough of disillusionment' for some firms.

Having said that, the latest quarterly stats from sourcing advisers, TPI, suggests that outsourcing is on the rise, particularly in Europe, which has now surpassed the US in terms of total number of contracts signed (220 valued at €32.7 billion) compared to 194 contracts signed in the US valued at €21.3 billion.

While in the past a significant portion of contracts signed were renewals of existing outsourcing business, according to TPI, in 2007, the annualised value of new contracts awarded in Europe was up almost 31% on 2006 levels, compared with an increase of 13% globally.

And it seems financial services firms are once again leading the way in the demand for outsourcing, representing more than 38% of the total value of outsourcing contracts signed. According to TPI, the worldwide market for Financial Service Operations (FSO) outsourcing has grown by 22.5% since 2003.

I think we have only seen the tip of the iceberg when it comes to outsourcing by financial service providers. A number of regulatory imperatives (Basel II, MiFID, SEPA) is placing significant demands on banks' back offices, and not all banks are well positioned to meet those demands in terms of their systems and investment capability.

Some difficult decisions have yet to be made by financial institutions regarding their back office processing, whether it is in the securities or payments business. Crunch time is rapidly approaching for them to decide what is strategic to their business and what they can outsource or white label.

Lunches, trains and automobiles

2008-01-16T17:12:00.000Z

Are we on the brink of a recession? Well even if we aren't, it seems like the markets are talking themselves into one, and it seems I am not alone in thinking that the market is panicking itself into a recession. Christmas sales haven't been what they used to be for retailers (although I think far too much weight is put on analysts' expectations especially when supermarket giants like Tesco still manage to record a 3.1% rise in Christmas trading, even though it was below analysts' expectations of 4%), and based on December figures the UK housing market is at its worst since the recession of 1992.

But retail earnings and housing slumps aside, some say a true sign that we are in a recession has to be the demise or otherwise of the business lunch and the number of people taking taxis.

I was just discussing this over a business lunch today, which lasted for a couple of hours - always a good sign that the days of the two-hour business junket are far from over. And judging by the busy lunchtime crowd that was in the restaurant, businesses are not battening down the hatches quite yet.

So it is official, while consumer confidence may be ebbing, all important business confidence is hanging on by the skin of its teeth, and those that work in the markets say, despite the credit crunch, trading volumes have not declined.

I feel another round of outsourcing coming on. The credit crunch may not mark the end of the business lunch, not yet anyway, but will it prompt banks to more seriously consider what is core to their business and what it is not and outsource the non- value-added menial tasks to high volume processors that benefit from economies of scale?

Compliance tops the agenda

2008-01-15T10:07:00.000Z

For those of you wanting to get a heads up on the post-MiFID environment, Basel II, the third Anti-Money Laundering Directive, what regulators may have in store for the hedge fund community or the next installment of 'MiFID-like' directives, Complinet is hosting its fifth annual Compliance Conference in London on the 6-7 February.

The conference program features some of the European Commission's and the FSA's leading lights who can fill banks in on the latest developments surrounding the MiFID Directive Level 3 (not so good news for those that thought MiFID had come and gone). The FSA's head of risk will happily share its vision of principles-based regulation and what it means in a post-MiFID environment, and why it is imposing so many fines for lack of compliance with Treating Customer Fairly breaches.

And if that wasn't enough to make any risk manager's head spin, there will also be sessions on how data protection laws and other regulatory requirements often result in competing and conflicting requirements (something I am particularly interested in). Do KYC requirements, for example, often conflict with firms' data protection obligations?

There will also be sessions on Basel II, the latest anti-money laundering edict handed down from on high, and leaping into the uncharted territory of principles-based regulation, which we know a number of financial service providers developed a distaste for in the run-up to MiFID's implementation.

Prudential - less than prudent with customer details

2008-01-14T10:22:00.000Z

Prior to Christmas the UK's HM Revenue & Customs lost the personal details of millions of child benefit recipients, and the latest data management debacle by institutions that consumers entrust with their data is Prudential, which has been less than prudent with their wealthiest customers' personal records.

According to the latest reports, a box containing premium customer details, including cheques and other sensitive information, was found on a roadside near Reading Berskhire by a vehicle recovery driver.

Apparently the box fell to the side of the road when it was being transported from Prudential's offices in Reading to a "secure" facility in Essex. In this day and age with electronic data storage facilities, image scanning and remote backup of data available, it seems astonishing that personal customer information is still being transported in paper format in boxes.

Even if the box had not been lost on the side of the road, anyone transporting the information could have easily photocopied some of the sensitive documents and used them for fraudulent purposes.

It begs the question, why are government departments and financial service providers opting for the least expensive and less safe option when it comes to protecting customers' personal data? There are really no excuses for these organisations who we entrust with our personal information to be reliant on such antiquated systems when it comes to data storage and protection. What is it going to take for these organisations to take data protection more seriously?

Fraud from within

2007-12-04T13:39:00.000Z

Judging by my last few posts, you are probably beginning to think that FinancialTech Insider has it in for anti-money laundering systems and the banks implementing them. Make no mistake, we do feel that banks have got the raw end of the deal with financial regulators and governments effectively forcing them to police every financial transactions on their watch.

It is no easy task and despite banks throwing millions at the latest and greatest AML solutions, can any bank really say they have got it well and truly 'sussed?' The regulatory burden is only increasing with the Third EU Money Laundering Directive due to be implemented in 2008.

And as recent events have demonstrated, preventing fraud and AML is not just about monitoring transactions and implementing technology. In fact Innovations Softwaretechnologie of Germany says that transaction monitoring should not only cover the threat of fraud being committed by an external perpetrator, but also employee conflicts of interest,insider trading and market abuse.

According to a poll by KPMG of more than 220 banks across more than 50 countries, 33% of banks are not satisfied with the effectiveness of their own transaction monitoring systems, and less than 25% have the capabilities to monitor the transactions and accounts of a single customer across multiple international borders.

Why then is so much of the onus for policing financial transactions on the banks, when banks do not have the adequate systems in place to meet these requirements, and the internal threat from their own employees is not being adequately addressed?

At a time when trust in banks and government departments is being eroded, isn't it time for regulators, governments and banks to engage in a more serious debate about the effectiveness of current approaches to transaction monitoring and money laundering, rather than adding more complexity to an already unworkable solution?

Making financial crime a priority

2007-11-28T11:39:00.000Z

Well it seems the HM Revenue & Customs (HMRC) incident where millions of customers personal and financial details stored on an unencrypted CD went amiss, has opened a veritable can of worms.

My inbox is suddenly being inundated with emails questioning how well customer data is protected not just by government departments, but banks and other companies.

The HMRC incident prompted the British Bankers Association (BBA)to publish these rather terse words for law enforcement officers:

"Looking at the wider context in which this unacceptable lack of sensible data protection took place, it is clear that the Government has not yet accepted properly the case for making fraud and financial crime a priority for law enforcement in its own right," says the BBA.

Not only are government departments it seems letting the side down by not adhering to the strictest data protection principles, but the very same government that requires banks to spend millions on anti-fraud and money laundering measures, is apparently not even bothering to allocate sufficient resources to law enforcement to tackle both money laundering and fraud risks, says the BBA.

“It is quite extraordinary that the industry does so much on anti-money laundering, on fraud prevention and on identifying suspicious transactions, and yet this doesn’t feature among the priorities the police has been given by the Home Office.”

Those of you who read this blog regularly will know that we have been particularly vocal about the cost/benefit of banks investing millions in AML solutions, when there is a very clear lack of transparency as to the success of these systems in accurately identifying suspicious transactions, and the percentage of transactions that lead to successful prosecutions.

Not only are the banks unwilling to talk about how many suspicious transactions they are actually reporting (although we hear the number of Suspicious Activity Reports have increased exponentially as compliance officers are reporting everything to cover their backs), but it appears the due diligence of law enforcement officers does not match the time and money being invested by banks in generating SARs.

Not only that it appears government departments appear to be giving potential fraudsters a hand-up by failing to adequately protect consumers' personal details. Surely the government needs to be made as accountable as the banks?

Thwarting fraudsters

2007-11-27T09:52:00.000Z

I have purposely avoided writing anything about the HM Revenue & Customs'(HMRC) data breach of millions of UK consumers personal and banking details, but I felt compelled to say something when I started seeing information security vendors leaping on the bandwagon.

While it may be true to say that "fraud is already firmly on the banking industry agenda," when information security vendors say that consumers should not lose sleep over the HM Revenue & Customs' debacle because banks have risk management systems in place, it does not really provide me with much comfort.

The fact remains that despite these systems, fraud and identity theft still occur on an ever increasing scale, and it is arguable whether banks' systems are adequate. Even if thieves cannot access a person's bank account directly, they could still use their name and address details to apply for a credit card or other forms of financing.

What is the most alarming thing about the HM Revenue & Customs data leak is that it reflects well entrenched practices within government departments of posting customer data on unencrypted CDs.

It strikes me as rather odd that on the one hand you have a government wanting ISP providers and banks to take more responsibility for protecting consumers' identity and personal details, but yet government departments which hold reams of information on millions of people, are not subject to the same levels of scrutiny or compliance.

According to Jeremy Smith, managing director of Jardine Lloyd Thompson’s Financial & Professional Risks division, the HMRC incident has prompted security experts to renew their request for the current law to be urgently reviewed for, unlike our American counterparts, the Data Protection Act does not currently compel companies to notify those affected by the loss of data.

Smith points to the almost £1 million fine levied by the FSA on the Nationwide Building Society for a laptop theft from an employee’s house. Yet, no such fines will be levied on government departments which do not face the same regulatory scrutiny as banks. Arguably however, as the government steps up its "Big Brother" campaign to collate as much information as possible on individuals, one has to seriously question the lack of government department accountability.

On the technology side, there has been so much focus on authenticating a customer's identity at the point of sale using chip or pin, but very little focus on securing the storage and transmission of customer data between government departments and banks that share this data and training employees to abide by the strictest codes when it comes to managing that data.

At this point, information security experts are going to proffer some kind of comment about the latest and greatest solutions that can help banks identify fraud before it occurs. One such comment in the wake of the HM Revenue & Customs' debacle was:

"By understanding customer behaviour across multiple payment channels in real time, banks will be able to identify irregular account activity that could potentially thwart fraudsters before they have even committed a crime.”

Sounds great in theory, but show me a bank that has the systems and business processes in place that they can accurately monitor and understand customer behaviour across multiple channels and product silos in real time. Even if such a bank exists I don't think they would be game to put their hand up for fear that they will be proven wrong.

The banking industry and government cannot afford to rest its laurels on the fact that banks have implemented a nice piece of software kit with bells and whistles, which is going to make everything alright. With banks, government departments and web sites collating unprecedented levels of personal information on consumers, is it any wonder that identity theft is on the rise. And no amount of banking software is going to change that.

Don't forget to switch off the lights

2007-11-01T09:09:00.000Z

"Have a green day," said BT Global Services CEO Francois Barrault as he introduced The Green Bank event at the Tate Modern in London yesterday. His remark is perhaps an indication of how far industry CEOs have come in embracing the environmental sustainability agenda.

After all, Barrault conceded when he first met environmental campaigner Al Gore, who proceeded to show him pictures of Arctic ice caps melting, he thought he was a little "crazy".

John Williams, head of group sustainable development at HSBC, which lays claim to being the world's first "carbon neutral" bank (whatever that means), said he was perceived initially as being somewhat of a "hippy", which is how the corporate world has always liked to portray those that express concern about business' impact on the environment.

One would have hoped that the so-called "Green Debate" had moved on from such redundant stereotypes, but it appears that the corporate world, while on the hand it is waking up to it environmental responsibilities, does not want to be associated too closely with the 'hippies' and 'tree huggers' who do not need a cost/benefit analysis, brand protection or new business opportunities to justify their passion for the environment.

So when a CEO of a major company says, "Have a green day" or HSBC says it is a "carbon-neutral" bank, what does that actually mean? There is no question that HSBC is a major investor in renewables, has project financing guidelines based on environmental principles and has constructed solar-powered buildings.

Yet they have also been accused of being one of the myriad number of banks that leave their office lights on all night at Canary Wharf, and they do not totally rule out providing project financing for environmental "dinosaurs" such as the coal industry.

So does being 'green mean saying one thing and doing another, or being 'green' part of the time and not for the rest of the time. There is no question that the industry has come a long way in terms of its support for "sustainability", but business and banking by its very nature contradicts a lot of sustainable principles.

After all banks are in the business of making money, and if it did not make business sense, win them customers or save them money, then they wouldn't 'green' their IT or use recycled paper, just for the sake of environmental sustainability.

At yesterday's event, HSBC and Morgan Stanley spoke about the dilemma of what to do about executives that need to travel. Both are looking at telepresence and the latest videoconferencing technologies as a way of reducing executive air travel, but I am dubious when banks say that for those carbon emissions they cannot reduce easily, they can merely offset it by buying carbon credits.

In that sense the "carbon-neutral" title is somewhat misleading as it appears to suggest that the bank has a zero carbon footprint, which is not entirely true.

A lot of yesterday's debate at the Tate Modern was spent showing graphs and theoretical proofs of concept around what is sustainability and what does it mean, when the reality of why banks and industry should be doing this was more succinctly put by the CIO of Morgan Stanley who said that if oil and commodity prices continue to rise, reducing energy consumption and their data centre footprint, was pretty much a 'no-brainer'.

A guy sitting next to me from Barclays Capital said he was a bit disappointed by yesterday's presentation. He wanted to hear what other banks were doing when it came to "greening" their IT and data centres, and thought the industry debate had moved on to more concrete tangibles rather than debating the vagaries of what sustainability means.

After all there are things firms can do now that will cut costs and save energy; turning office lights off, printing on both sides of the paper, using teleconferencing, virtualising servers, grid computing; without having to debate what sustainability means. That is just good business sense.

Yet while there certainly is an impetus amongst banks to sign up to being "green" for whatever reason, once they ascribe that label to themselves, it is not merely something that you can throw money or technology at and say you have done your bit.

"Being green" is an ongoing responsibility, after all if you are reducing the carbon footprint of your data centre, but then continuing to issue paper bank statements and faxes every day, forgetting to switch your office lights off or project financing major oil and coal projects, doesn't that mean companies are only being 'green' when it suits them?

Clients likely to challenge 'best execution'

2007-10-30T09:37:00.000Z

As the 1 November MiFID deadline is almost upon us, my inbox is being inundated with vendors' last minute words of wisdom regarding the much talked about Markets in Financial Instruments Directive.

One has to marvel at the PR strategies of some companies - bombard journalists with as many emails as possible, even if it is the same information that they were propagating about MiFID a few months back. Let's repackage it and hope no one notices, a bit like some of the so-called 'MiFID ready' solutions out there.

What surprises me though is that for a regulation that is lacking in "prescriptive" detail, vendors seem to know more about what firms need to comply with MiFID than firms do themselves. Is there a danger of firms installing all this whiz bang technology, only to find they did not need half of it?

Having said that Atos Origin's survey of the market suggests that firms have actually spent 20% to 25% less on MiFID than they initially intended and have not implemented smart order routing technologies, as suggested, because they are still unsure that liquidity will be as fragmented as some have suggested.

Vendors are eager to dispel the perception that they are flooding the market with technology which is simply a repackaging of existing solutions with a MiFID label slapped on it.

Some of them are even forming alliances (The Open MiFID Alliance comprising Allen Systems Group and vendors like Sun Microsystems, SAS and Gissing)where they purport to have put aside their "single-vendor" approaches and opted for a more "synergistic" approach.

I have to say though I am sceptical of some vendors trying to cash in on MiFID and the confusion that still reigns in the marketplace. But it appears no amount of "best-of-breed" technology is going to prevent firms from being fined for non-compliance with MiFID.

Well at least that is the expectation of firms surveyed by Thomson IFR which indicated that all firms expect fines for non-compliance as early as Q1 of next year, and 90% expect more fines every following quarter.

Despite all the rhetoric about "best execution" and what it means and solutions for addressing it, almost 70% of firms surveyed expect the first client to challenge their “best execution” in the first quarter of next year. Firms are not even confident about their own MiFID implementations, let alone the technology underpinning it.

Despite all the consultant-speak about MiFID being an opportunity to differentiate, it appears a number of firms are throwing technology at the problem and hoping it satisfies the regulators, without carefully considering what their strategy should be in a post-MiFID environment.

SEPA - a case of industry mismanagement

2007-10-26T10:38:00.000+01:00

Although they don't necessarily court publicity or boast about the innovative ways in which they are using technology, Nordic banks tend to have grasped the fundamentals of technology long before many other banks and do not approach it with the same level of fear or risk aversion.

That is why perhaps the Nordic payments infrastructure is considered to be 'light years' ahead of many other European states. It boasts a relatively efficient credit transfer system and the concept of "real time", which most other banks only pay lip service to, is enshrined in consumer internet payments which are credited same day. Float has also been reportedly done away with in domestic Norwegian transfers and internet banking uptake generally is much higher.

Some of these aspects are only now being considered on a European-wide scale as part of the Single Euro Payments Area, which in effect means European banks and their customers now have the opportunity to catch up with their Nordic counterparts, which have enjoyed these efficiencies for some time.

No surprises then that a lot of Nordic banks see SEPA as a step backwards for them. They already offer a relatively efficient cost-effective electronic payments infrastructure, which is linked in with value-added services such as e-invoicing.

I was having a discussion about SEPA via email with Bo Harald, ex e-banking guru for Nordea and now head of executive advisors at financial software provider, TietoEnator, which has helped Nordic banks build innovative e-invoicing solutions.

In his initial email he had this to say:

"The thing is we need to be rather forthright together with the ECB and the EU to get the banking community to move to new services. Having met people in London yesterday it did strike me how many still cling to the past(it has NEVER been a good business strategy) and try
to find reasons to delay starting reforms - only to have to do them later in gigantic panicky efforts without being properly prepared."

My remark to him was that the industry's tendency to want to preserve the 'status quo' meant that the only form of innovation at times was that forced by regulation, and that SEPA was a good example of that.

His reply was that "SEPA had in fact been an issue of industry mismanagement - by resisting the credit/debit part instead of steering it and promoting e-invoicing instead, the banking industry and thus its customers will have to invest and pay close to €10 billion and revenues will go down. Instead he says they could have invested very little and saved €200 billion plus the cost for EU enterprises and corresponding earnings."

It appears that "fostering creativity in payment services" through the introduction of SEPA-wide payment related services such as e-invoicing, is going to be the difficult part for banks.

SEPA Direct Debits and Credit Transfers is a start, but as we have been hearing from corporates, they have yet to be convinced of the business case for implementing these new instruments and where are the additional optional or value-added services that everyone is saying banks need to provide in order to make up for revenues lost through SEPA's implementation?