Some IT outsourcers will "cease to exist"

I keep banging on about a strategic shift in firms' appetite for traditional outsourcing, but with good reason it seems. In its Top Predictions for IT Organisations and Users, 2007 and Beyond, Gartner paints a not too rosy picture for the Top 10 IT outsourcers.

According to Gartner, the reduced number of large contracts above $250 million, increased competition, and a reduction in contract sizes have placed great pressure on traditional "takeover outsourcing" providers, and the move towards selective outsourcing has paved the way for non-traditional providers(software-as-a-service, utility computing, managed services and specialised hosters) to enter the bidding.

"Through 2009, at least three of the top 10 IT outsourcers will cease to exist in name, with their services and product portfolios divided into spin-off companies, divestitures, longtime partners and faceless third-party aggregators. Providers of all sizes will rationalize portfolios based on desired regions, service lines and vertical industries," says Gartner.

It is no secret that revenue growth for the top IT outsourcers in Western Europe, North America and Japan has been slowing and contract terms and values have been declining.

Interestingly, while revenue margins for Indian IT outsourcing firms such as Tata Consultancy Services and Infosys have been increasing, Gartner predicts that only one Asia/Pacific-based service provider will make the global top 20 IT service providers (based on IT services revenue) through 2010. Currently, Fujitsu is the only Asia/Pacific vendor in the global top 20 based on revenue.

Gartner says Tata Consulting Services (TCS) is the only Asia/Pacific-based service provider in the global top 50. Infosys is close behind, but at its current growth rate, Gartner predicts that it will likely be in the top 50 in the next two years.

"Indian service providers generally have been growing 30% to 40% annually and are gaining market share. However, this growth is difficult to sustain and would still not be enough to put TCS or Infosys in the global top 20 without a major acquisition," says Gartner.

Data privacy back on the agenda

Last year, revelations that SWIFT had allowed US intelligence agencies access to data pertaining to financial transactions on it network, created a furore with data privacy groups.

SWIFT's assurances at the time that it had only shared limited sets of data with US Treasury failed to assuage the concerns of data privacy groups and led to calls for clearer guidelines on privacy laws and counter-terrorism procedures. Privacy groups expressed concerns that the SWIFT data could be used for non-terrorism related purposes such as taxation monitoring and espionage.

Well, this week the EU and the US reached an agreement on sharing of bank data with the US. That agreement says that SWIFT data can only be used for "counter-terrorism purposes" and kept for a maximum of five years. A European representative will be appointed to monitor how that data is used.

Vice President Frattini, Commissioner responsible for Justice, Freedom and Security, stated: "The EU will have now the necessary guarantees that US Treasury processes data it receives from Swift's mirror server in the USA in a way which takes account of EU data protection principles."

But what does "counter-terrorism purposes" actually mean as when the initial use of SWIFT data was revealed in US newspapers last year, US agencies maintained that they needed to monitor this data to combat terrorist financing.

However, one has to ask, how effective has monitoring of SWIFT data been in combating terrorist financing given that such financing has tended to use non-bank channels such as mobile phones? Furthermore, why does the US even require access to SWIFT data given that banks are meant to have by law, rigorous anti-money laundering measures in place?

In order to bring its own operations in line with EU data protection laws, SWIFT has joined the EU-US Safe Harbor Agreement, which provides a framework for ensuring that customers' data located in the US is protected under similar data privacy principles as those in Europe.

SWIFT has established a data privacy group and also announced a "system re-architecture" yet to be approved by its Board, which means "intra-European messages" will be stored only in Europe and the US. Currently, messages are processed simultaneously at SWIFT's European and US operations centres to prevent data loss.

Firms increase adoption of Linux

The open source software movement has certainly come a long way from its early days when vendors such as Microsoft painted it as a 'pariah' of the software industry.

Undoubtedly, Microsoft is not the open source software movement's hugest fan, however even it has been forced to acknowledge increasing industry traction and appetite for open source software by forming a business and strategic partnership with one of Linux's biggest proponents, Novell.

Awareness and uptake of open source software has also increased amongst IT and business users in industry sectors such as financial services firms according to Actuate's 2007 Open Source Software Survey, which surveyed UK, North American and German firms across industry sectors. The survey was first conducted in 2005 and this year's results demonstrated that the proportion of financial services respondents using open source software had increased from 38.8% in 2005 to 45.8% in 2007.

More than 50% of respondents are using Linux open source software with more than 64% of firms perceiving the main benefits to be no licence costs. Other perceived benefits included not being locked into Microsoft (45.2%), vendor independence (43.5%), access to source code (42.6%), flexibility (39.1%) and open platforms (37.4%).

However, despite increasing industry traction and software vendor support for Linux, the survey indicated that challenges remain around long-term support and maintenance, the lack of in-house open source software skills and incompatibility with existing applications, which was highlighted by almost half of respondents.

Microsoft's strategic partnership with Novell was aimed at addressing some of the interoperability issues around firms wanting to operate Windows servers in a Linux environment. Other vendors such as Oracle have also nnounced enterprise level support for Linux in the form of its Enterprise Linux Program.

It ain't easy being 'green'

With political leaders and even the UK's royal family paying lip service to reducing their carbon footprint, businesses appear to be struggling with how to reduce the carbon footprint of their energy intensive IT systems.

The UK Government has set a target of a 20% reduction in greenhouse gas emissions by 2010, but what does this actually mean for business and IT managers? Recent news reports indicated that Prince Charles had reduced his travel carbon footprint by 9%, but how significant is that in terms of the overall reduction required to effectively combat the impact of greenhouse gas emissions on the environment?

A recent survey conducted by the UK-based Green Technology Initiative found that whilst 90% of UK businesses felt that tackling the carbon footprint of IT systems was integral to an overall green strategy, 70% had no concrete plans in place to reduce their carbon emissions.

So whilst businesses may support the concept of 'greening' IT, there is no clear
cut guidance on how they can achieve that. The knowledge gap is clearly highlighted by the fact that 95% of survey respondents did not know how energy efficient their
IT systems were because they had no means of measuring it.

“What we are doing in IT today is not sustainable. Systems efficiency is the cheapest and easiest way of reducing the carbon footprint of the work you do and delivered properly it has the benefit of bringing down costs across the board. Whilst undoubtedly UK enterprises are willing to take action, many lack the incentive, knowledge and resources to make immediate changes,” says Dan Sutherland, founder and acting chair of the Green Technology Initiative.

When reducing a company's carbon emissions can be as simple as flicking a switch in terms of switching off systems that are not in use, it appears that firms are relying on software vendors, governments and manufacturers to take the lead without considering what they can do themselves to reduce their carbon emissions. More than 50% of respondents to Green Technology Initiative's survey had still not caught on to the idea of reducing power costs and energy consumption by turning off unused systems.

With so much media attention on high carbon emitters, it appears that the penny has not dropped in terms of how businesses in general can contribute to the battle to reduce carbon emissions without relatively little upfront investment.

The LSE expands into Europe

I have been particularly vocal about the London Stock Exchange's 'go-it-alone' strategy in light of trans-Atlantic consolidation between competing exchanges NYSE-Euronext and Nasdaq OMX, as well as the increasing threat of competition from emerging MTFs such as Project Turquoise.

Well the latest news is that the LSE instead of pursuing mergers with its larger rivals has decided to expand into Europe by buying Milan's Borsa Italiana for approximately £1.1bn. The question is, will it be enough to fend off competition from its larger consolidated European rivals and emerging competitors such as Project Turquoise which is in advanced negotiations with the Nordic Exchange's OMX Group to use it as its sole technology partner.

However, some bloggers, including myself, question whether the LSE's expansion strategy is a viable one going forward given that Borsa Italiana will not give the London exchange the global leverage cross-Atlantic mergers have given Euronext and now OMX.

For more opinions on the LSE's new-found expansion strategy, which some believe will not be enough to counter the threat from Project Turquoise, go to The CityUnslicker.

Move over traditional outsourcing

I have been watching the outsourcing market with interest for some months and am somewhat bemused by the conflicting stories one reads about firms' appetite for outsourcing, particularly offshore outsourcing.

As the initial hype around outsourcing has died down and firms that were early adopters have had the chance to learn from and share their experiences, there is no doubt that some of the lustre has gone off outsourcing in terms of the initial 50% cost savings some firms touted and the "hidden costs" that have emerged when it comes to the need to actively manage and monitor offshore outsourcing relationships.

Data privacy concerns have also been raised following allegations that offshore call centres were selling customer data. Eager to preserve its reputation as a major outsourcing and offshoring centre, India recently announced the formation of the Data Security Council of India (DSCI), a self-regulatory member organisation that will be run by the Indian IT and software association, Nasscom.

Arguably the Council's formation is a long overdue measure that recognises the concerns of foreign firms outsourcing customer data to India. The National Outsourcing Association says concerns have grown over the past few years over data security lapses that have occurred, fuelled by 'mud slinging' by the British tabloid press about alleged security breaches.

Although the NOA says that security breaches are few and far between it stated that the Indian government - and the governments of other offshore and nearshore destinations - needed to openly demonstrate that they recognise the problems around data security and are actively doing something about it.

Securing data that is outsourced or offshored to a third party provider is even more important now that the next wave of outsourcing is encompassing content and document management, as well as “knowledge process outsourcing” or KPO.

According to EquaTerra research, KPO, which encompasses a broad range of processes such as market research, financial analysis, M&A due diligence and related M&A legal work, is gathering momentum.

While the Indian market may be suited to this form of outsourcing, with some major investment banks outsourcing financial analysis and research to India in recent months, KPO is a surprising trend given banks' general reluctant to outsource data, which is the lifeblood of most companies.

John Boyle, EquaTerra’s managing director, Financial Services, says:

“The growth in KPO is intriguing because it involves work that was traditionally viewed as too strategic to outsource, or where outsourcing was not viable because candidate services providers lacked the skills or experience required to perform the work. But these perceptions are changing. While in most cases KPO today involves rote work and number crunching, the breadth and depth of work being performed is expanding as buyers gain comfort with the model and suppliers’ skills and levels of context improve."

However, instead of directly outsourcing KPO work to an offshore third party provider, Boyle says financial services firms still prefer to manage the process themselves by establishing captive operations to perform KPO and related work in offshore locations. Increasingly it seems traditional outsourcing models are being challenged by alternative approaches such as captives and shared service operations.

More banks may join Project Turquoise

So much for sabre rattling. The prospect of multilateral trading facilities setting up in opposition to the national exchanges is not just a bunch of the world's leading investment banks making a lot of noise in order to get the national exchange monopolies to drop their trading costs.

When Project Turquoise, the MTF announced by seven leading investment banks to challenge the monopoly on equity trading by the national exchanges, was first announced, some suggested it was merely a ploy by the investment banks to get the stock exchanges to reduce their trading costs. Once the exchanges had dropped their tariffs, it would disappear into thin air.

Well some of the exchanges are already reviewing their tariffs and having announced the appointment of EuroCCP (European Central Counterparty), a subsidiary of the DTCC, as its clearing agent, Project Turquoise, appears to be a goer. According to a Financial News report, Société Générale and BNP Paribas may also be joining Project Turquoise.

All Project Turquoise has to do now is choose a trading platform (believed to be a toss up between the Nordic Exchange Group OMX's technology and Instinet's Chi-X), appoint a CEO, attract sufficient liquidity and Bob's your uncle.

The 'Project Turquoise' of payments

Lafferty Group has an interesting news story on its web site about European banks being in "secret discussions" to set up a pan-European debit card scheme to rival Visa's and MasterCard's.

According to the report on Lafferty, the banks involved in the discussions are Societe Generale, Deutsche Bank, Dresdner Bank, Commerzbank, ABN AMRO, ING and Rabobank. The report states that they are "unhappy" with the likelihood that MasterCard's Maestro may become the dominant provider of debit card network services in Europe.

The European Commission and the European Central Bank have also expressed concerns about competition in the debit cards space in Europe. The Lafferty report says discussions amongst the banks are in the formative stages and that they are considering leveraging the work already done by the Euro Alliance of Payment Schemes, which has established bilateral links between domestic card processors.

There has been a lot of activity on the card processing side in preparation for the Single Euro Payment Area, with Voca joining forces with Link to give it card processing capabilities so it can compete more effectively with the likes of Equens in the Netherlands. US-based First Data is also looking to become a leading global card processor and has made a number of European acquisitions in the last 12 to 18 months.

Italy's SIA-SSB, the result of a merger between Società Interbancaria per l’Automazione – Cedborsa S.p.A. and Società per I Servizi Bancari – SSB S.p.A., is also a leading European debit and credit card processor with 48 million payment cards issued and more than three billion transactions managed in 2006. It also recently acquired Hungarian card processor, GBC.

The Lafferty Report says that "there are contrasting opinions" on the level of progress achieved by the banks holding the secret discussions, which suggests that not much progress has been achieved at all. This is not the first time that banks have considered setting up a rival debit card scheme, but previously there was not enough support from the banks to do anything.

What is different this time? Well SEPA is in the air, anything is possible, but banks in the payments space have not been as fleet of foot as their investment bank counterparts when it comes to setting up rival market schemes and infrastructures.

We have seen Project Turquoise, a multi-lateral trading facility set up by seven leading investment banks to rival the domestic exchanges in response to regulatory pressures from MiFID. Are we likely to see the 'Project Turquoise' of the debit card world being announced by leading European payment banks any time soon? It seems unlikely.

MiFID readiness - a long way off

Having attended more than my fair share of events on the Markets in Financial Instruments Directive (MiFID), one has grown a little tired of hearing consultants' rhetoric that sell-side firms should not treat MiFID as yet another compliance issue, but in terms of the strategic benefits it could bring to their business.

Let's be frank; apart from the large sell-side firms which see MiFID as an opportunity to widen the gap between them and their nearest competitors, most firms are still treating MiFID as a compliance issue. Cultural and market differences also appear to play a part in how MiFID is perceived by firms and national regulators.

As a lot of Europe's stock trading activity is concentrated in financial centres such as London, it is no surprise that the UK was amongst the three member states to transpose MiFID into national law by the 31 January deadline. All other member states, including key financial centres such as France and Germany have dragged their heels.

At SunGard's annual European client event yesterday in Lake Como, Italy, the findings of a survey of 200 German investment firms and their preparedness for MiFID were presented. The survey was conducted in February this year following on from a similar survey a year earlier.

While more than 50% of firms reported that they were "very familiar" with MiFID in the 2007 survey, compared with 15% in 2006, when it comes to budget planning and seeking new solutions to address the impact of best execution requirements under MiFID on their IT strategies, the figures were less impressive. With the 1 November deadline for MiFID a mere four and a half months away, only 44% of German firms were in the implementation phase and 47.5% had analysed the impact of MiFID on their business strategy.

The point is that whilst a handful of investment firms may view MiFID as a strategic opportunity and may be further advanced in their preparations, firms in other European countries do not view it as strategically and it is doubtful that they will even want to become 'systematic internalisers' under MiFID. Hence they are likely to invest less time and money on MiFID than say top tier investment firms.

Another factor is that outside of the UK, a number of European markets support the concentration rule, which demands that all trading activity occur on the national exchange. Under MiFID the concentration rule will be removed, but there are concerns that in an effort to preserve the status quo, some European securities regulators will just "cherry pick" bits of MiFID to enforce.

The EC certainly have a job ahead of them to ensure that MiFID is implemented consistently and in a harmonised fashion across all member states. Not only that, the Commission's commencement of infringement proceedings against member states that failed to transpose MiFID into national law by the 31 January, is unlikely to have the desired effect.

Taking member states to court is typically a lengthy process, which is not going to speed up MiFID's implementation. Perhaps that is why the Commission has resorted to "naming and shaming" techniques such as publishing information pertaining to member states' progress as well as league tables. 2007 may be the year of MiFID's introduction, but it is hardly the "year of the MiFID" as most firms and member states "have a long way to go before [they] can talk about MiFID readiness."

SunGard is "stronger" since going private

Oh what a difference private equity investment makes. At least that is the message SunGard's CEO Chris Conde was keen to impart at its annual European customer event SunGard Europa, which is being held on the shores of Lake Como, Italy.

In 2005 SunGard was acquired by a consortium of private equity investors led by Silver Lake Partners, and Conde appears to be prefer life as the CEO of a private company, saying that SunGard was stronger since it went private, growing by a factor of three. Total number of employees at SunGard has increased to 18,000 and it has made approximately 20 acquisitions since going private.

Harold Finders, division CEO, Financial Systems, SunGard, said since going private, SunGard had 50 R&D programs up and running at the same time, compared with 10 when it was a public company.

However, with so many solutions servicing different product silos within financial services firms, one of the chief criticisms of SunGard has been its 'siloed' approach to product development.

Today at Lake Como, SunGard was keen to challenge that perception by emphasizing its Common Services Architectures (CSA), which allows it to deliver more "flexible" software solutions by bringing together applications developed in different parts of SunGard's business.

For example, using CSA, the SunGard STeP and AvantGard businesses developed its new Real-Time Liquidity Management solution, which combines aspects of AvantGard's liquidity management capabilities with STep's exception management solutions.

Other examples of SunGard's CSA include its new Asset Arena solution, which maps different asset management workflows and pulls together its various asset management solutions "in a more integrated way". "[CSA] will turn SunGard from a siloed organisation into a more integrated one," remarked Hugh Grant, director, global IT, Credit Suisse and a member of SunGard's CSA Customer Advisory Board.

Using Business Process Modelling, service-oriented architecture (SOA) and its CSA, Finders said SunGard would be able to bring solutions to market more quickly, and lower total cost of ownership for customers.

Darren Wesemann, CTO, Financial Systems, SunGard, also highlighted SunGard's Infinity platform for delivering Software as a Service (Saas) or solutions on-demand. Using Infinity, he said SunGard would be able to leverage its solutions/assets on-demand and using a business modelling process engine, develop solutions that were more compatible with client's business needs.

Eating humble pie

Although the ink is not quite dry on the recent announcement that Nasdaq and the OMX Nordic Exchange will join forces to create yet another trans-Atlantic exchange, the real news surely is what does this mean for the 'go-it-alone' London Stock Exchange (LSE)?

With the NYSE Euronext deal completed and the Nasdaq OMX combination giving both exchanges a strong technology and derivatives card to play, isn't it time that the LSE "swallowed its pride," stopped being a "prima donna" and secured a pan-European or cross-Atlantic merger of its own.

Operating profit (up 55% to £185.6 million for the year ended 31 March 2007) and primary market activity on the exchange may be healthy, but Frédéric Ponzo, managing director of consultancy, NET2S, believes the competitive landscape will change next year as NYSE Euronext and Nasdaq OMX look to increase their global market share and new market entrants such as Project Turquoise makes its presence felt.

Although Ponzo does not believe that the competition from ECNs and multilateral trading facilities will be as fierce as some anticipate, by 'going it alone' the LSE currently does not have the global reach of the trans-Atlantic exchanges, nor does it have their derivatives capabilities.

Could it be that the LSE may have to eat humble pie and seriously reconsider merging with the likes of Deutsche Börse in order to sustain its foothold not only in the UK but the European, if not global market? Or will national pride and cultural differences continue to stand in the way of a deal that could make sense in the longer term if not in the short term?

The next generation

Further to my post of the 14 May entitled, My Generation, outlining how Ajax is being used to build richer web applications particularly for trading front-ends, Caplin Systems announced the launch of such an application, Caplin Trader, today.

Caplin Trader is described as an "ready-made application that enables banks to build high-function multi-product trading portals in FX and fixed income." A major bank is deploying Caplin Trader, details of which are expected to be announced at SIFMA's Technology Management Conference in June.

"We are seeing a lot more people saying that in fixed income a bank portal is a requirement, which follows what happened in FX," says Paul Caplin, CEO, Caplin Systems. And although a number of banks already have web-based FX trading portals, Caplin says it is seeing a "refresh" of single bank FX portals banks built three or four years ago.

Caplin Trader, which sits on top of Caplin's integrated data and messaging platform, is targeted at the next generation of trading front-ends, which Caplin says will be much richer applications in terms of look, feel and functionality thanks to new technologies such as Ajax.

"There seems to be a lot of customers that want trading functionality integrated with useful information (prices, research, news), which is a way for banks to entice cutomers to trade directly with them," Caplin explains.

Caplin Trader's "drag-and-drop Ajax framework" includes standard components such as product grids, trading panels, trade blotters, trading tickets, product and instrument search, charts and news displays. Banks can more easily aggregate various sources of content on one screen by pulling it together in a browser. This is what is referred to in the biz as "mashups."

SEPA slippage

After much stalling and compromising, the Payment Services Directive (PSD), which is the legal framework for the Single Euro Payments Area (SEPA) has finally been passed. But when you think that the PSD was first published in 2005 and it has taken two years to agree on the content of it, there appears to be some 'slippage' around SEPA.

The PSD will now be transposed into national law by 1 November 2009 instead of November 2007, but the transition to SEPA will begin from 1 January 2008. The 'slippage' is even more apparent when one considers that SEPA as a concept has been on the table since 2000, and what has the industry got to show for it?

Apart from STEP2, some ACHs with pan-European ambitions and talk of SEPA-compliant instruments, not a hell of a lot says some banks, who according to a knowledgeable industry source, are starting to draw comparisons between SEPA and that other much-talked about EC regulation, MiFID.

The Markets in Financial Instruments Directive had leading investment banks announcing the development of Project Boat, a pre- and post-trade reporting service for off-exchange equity trades, and Project Turquoise, a multi-lateral trading facility.

No such announcements have been made by the leading payment banks for SEPA. However, according to the same knowledgeable source, there is talk of a Project Turquoise for bilateral clearing between banks. This would effectively mean that some of Europe's major payment processors could club together to provide cross-border clearing for their own pan-European direct debits instead of using the pan-European ACHs; STEP 2, VocaLink and Equens, which are hoping to capture a share of this business.

But given the different competitive dynamics between the worlds of payments and investment banking, and the ability of investment banks to move much more quickly, none of us are holding our breaths when it comes to the payments' equivalent of Project Turquoise emerging any time soon.

My generation

Despite all the hoopla around the internet it is only in the last four to five years that online trading of FX and equities has really taken off. Even then, despite the proliferation of online platforms for trading FX, as I reported from Miami a few weeks back, a surprising number of companies still prefer the sound of a voice on the other end of the phone rather than the click of a mouse.

Having said that, it seems the e-trading 'bug' is catching on and is encompassing other asset classes such as fixed income, at least that is what Paul Caplin, CEO, Caplin Systems is telling us. "We are seeing a wider requirement particularly in fixed income and FX for a high-function web front-end for trading," says Caplin.

But hang on a minute, haven't most banks already built web trading front ends particularly in the FX space where there is a multitude of single bank and multi-bank sites for trading FX online? Well, yes, says Caplin, but he describes some of these single bank web front-ends as 'primitive', mainly because they only support Request For Quote (RFQ) when the market is moving towards 'streaming' prices.

Also he says a number of traditional web trading applications were built using Java, which, according to Caplin, is considered to be no longer viable for trading front-ends.

Caplin says the next generation of e-trading platforms will feature richer web applications but around AJAX and "enterprise mashups" or web aggregation where multiple content is aggregated on one screen or web browser.

What all this amounts to effectively is that the next gen of e-trading applications are likely to be much more richer in functionality, with banks being able to more easily and dynamically display multiple content (prices, research, news) on one screen across multiple products (FX, fixed income).

Press embargoes prevent me from going into any more detail at this stage, but Caplin will be making an announcement on Monday concerning the next generation of e-trading applications it is working on.

MiFID - It's as easy as 123

Last week I managed to muster up the energy to attend yet another event on MiFID (Markets in Financial Instruments Directive). With the November deadline for MiFID's implementation looming, everyone seems eager to jump aboard the MiFID 'gravy train' as last minute preparations grind into gear.

Last week's event, which was hosted by the MiFID think tank, JWG-IT,had the interesting working title of, "MiFID 123 Go," which could be misinterpreted given that the 70 or so people that turned up for the event were probably hoping to hear something along the lines of,'MiFID, it's as easy as 123."

The 123 was in fact a reference to how many days remaining till the November live date, and given that MiFID is what the industry terms a "principles-based" regulation, PJ DiGiammarino, CEO of JWG-IT, informed the gathered 'hordes' that they could not necessarily rely on the regulators to provide them with much guidance (no surprises there then), and that it would take three to four years before the MiFID transition was completed.

"Regulators are not going to comment in any great detail on what firms are going to do," Di Giammarino stated. "Firms may want a benchmark on best execution, but it is not going to happen."

With that in mind, Di Giammarino kicked the evening off on a 'light' note telling firms how they could "stay out of jail," pointing to a recent example of a major US sell-side firm that was fined $8 million for "failure of price transparency".

DiGiammarino joked that at least with Sarbanes-Oxley, another piece of controversial regulation,it was only the CFO that could go to jail if financial and accounting practices were not compliant. However, with MiFID it is not just one person that could be in the firing line.

It all started to sound like a game of monopoly. 'Do not pass go, go straight to jail,' but perhaps that is an indication of how real MiFID has suddenly become for a number of firms and countries that its seems are ill-prepared and equipped to cope with the all-encompassing MiFID regulation.

Seventy-five percent of EU member countries did not make the 31 January deadline for transposing MiFID into national law, and European Commissioner for Internal Market and Services, Charlie McCreevy has threatened stragglers with "infringement" proceedings.

"US firms are pretty far up the curve and are forcing the buy side along with them," said DiGiammarino. Yet, with different EU member states transposing to MiFID at different times (Sweden in August, Netherlands in November and Spain after November), it could be a potential recipe for disaster.

According to PJ, any big market [like the Netherlands] that waits till the end to transpose, risks creating a "hybrid" environment, which in the event of a bear market, could result in a very "fragmented Europe." He cited the example of Sweden, which provides transaction reporting support for the rest of the Nordic countries. If it does not make the August 2007 transposition date, then there will be repercussions for the wider market.

What will the bank of the future look like?

JPMorgan has always been one for making acquisitions that cause other banks to sit up and take notice, even though they may scratch their heads, thinking, 'How does that fit within banking?'

The first one, that perhaps caused other banks to pay attention, was the JPMorgan's $129 million acquisition of Vastera, a global trade management software and service applications provider (otherwise known as trade logistics). Given Vastera's focus on the physical supply chain, some competing banks questioned the value of a bank moving beyond its traditional financing role into the physical supply chain .

JPMorgan has since stated that the Vastera acquisition is not about being in the logistics business, but about positioning the bank and its trade services business, which the Vastera business is integrated with, much earlier in the supply chain to provide firms with greater transparency and visibility around documentary compliance governing the inward and outward flow of goods into particular countries.

Well, as Aite Group points out, information pertaining to the movement of goods can have a knock-on effect on a company's working capital:

"Tying the physical movement of goods to the financial activity surrounding them provides very valuable information to treasurers regarding expected cash flows;this is referred to as the “order-to-cash” cycle."

Not all banks, however, agree with JPMorgan's approach and some have questioned the value of the Vastera acquisition, particularly in terms of whether the bank will gain enough customers from the deal to recoup its investment.

JPMorgan's buying spree in the "order-to-cash" cycle has not stopped there. Recently it announced its acquisition of the business settlement network, Xign, which links suppliers with buyers. JPMorgan already worked with Xign, which provided the e-invoicing component for the bank's proprietary Order-to-Pay Solution. But by buying the business settlement network it has effectively shut out the other banks (Citi, Wachovia, Wells Fargo, et al) that Xign also worked with.

By fully acquiring Xign, JPMorgan Chase is positioned to take advantage of the wide and deep flows of information that are generated by Xign’s network and technology. Assuming JPMorgan Chase can tap into that data with the permission of the trading parties, they are positioned to leverage Xign’s capabilities in ways that other participating banks cannot," Aite Group writes.

For a 'conservative' Wall Street bank, JPMorgan appears to be 'thinking outside the box'. One senior exec within the bank remarked to me recently about the 'strange' things the bank was doing in terms of pursuing non-traditional business lines, including the Vastera acquisition and the bank's foray into document (invoices and cheques) printing and archiving.

It is no secret why banks want to embed themselves deeper into companies' supply chains; they want to make up for revenues lost through declining letter of credit volumes; and they also want the opportunity to sell financing to their customer's (the buyer) suppliers.

However, one has to ask whether some of the solutions banks are developing around the corporate supply chain are what companies are really looking for? Most corporates I have spoken to say they do not want banks to get more involved in their supply chains and that they understand their supply chains better than the banks.

So is all this 'hoopla' surrounding the corporate supply chain about what the banks want or is about solutions corporates are really looking for?

The MiFID debacle

I have managed to avoid writing anything about MiFID for the last few weeks, but I am forced to put pen to paper in light of recent speculation surrounding CESR's recommendations for best execution under MiFID, and an overwhelming perception that as far as regulation goes, MiFID has been a debacle from day one.

Bearing in mind that certain aspects of the regulation itself continue to suffer from a lack of regulatory clarity and detail, and the fear that some national regulators, particularly in those countries that will not transpose to MiFID on time, will lend a different interpretation to MiFID guidelines, it only serves to fuel my belief that the transition to MiFID will be anything but smooth.

With only three countries (including the UK) successfully transposing MiFID into national law by the 31 January deadline, how can regulators deem MiFID's implementation anything but a debacle of major proportions?

To add to their woes, SunGard and TradeTech have just released MiFID readiness survey findings which indicate that only 13% of financial services firms are confident that they are on track to meet new MiFID regulations. More than 60% of firms indicated that their preparations still required some work, which is hardly surprising.

Forty six percent of those surveyed by SunGard and TradeTech expressed concerns that their own national regulators would "add further complexity" to MiFID through the imposition of national laws and additional guidance.

Furthermore, whilst some clarity may have emerged surrounding best execution requirements under MiFID, rumour has is that the Committee of European Securities Regulators' (CESR) final recommendations on supervisory treatment of best execution under MiFID, are not in accordance with those of the UK's Financial Services Authority (FSA).

Apparently the UK is perceived to be way ahead of other European countries based on the government's acceptance of Paul Myners' recommendations for institutional investment decision making, and the belief is that it will take the rest of Europe a long time to catch up.

Furthermore, the mind can only boggle at the plethora of pre-trade reporting initiatives that may emerge post-MiFID and the implications for firms looking to consolidate all this data.

Marcus Hooper, who is the author of various white papers on MiFID published by Equiduct, says "few comprehensive solutions have appeared" with respect to the issue of managing increased fragmentation of pre-trade information under MiFID.

Hooper anticipates that firm’s sources of pre-trade information will "change significantly" under MiFID to encompass the existence of multiple systematic internalisers, who he says are not obligated to use identical
information distribution systems, increased multilateral trading facilities and firms with more than one secondary market listing.

The resulting connectivity diagram looks anything but streamlined and simplistic and Hooper says firms have one of two options; they can either find a way to
consolidate pre-trade information, or restrict information to a smaller number of "information delivery mechanisms", which may not be so desirable when it comes to demonstrating "superior execution".

Hooper's latest White Paper entitled: "Pre-trade information and the advantages of consolidated data" can be downloaded from Equiduct's web site.

Still confused about BICs and IBANs?

Following on from my comments last week about the mishandling and confusion surrounding correct usage of BICs and IBANs for eurozone payments, Eiger Systems, which provides a data validation solution for bank account identifiers and international bank account numbers, has added further fuel to the debate by saying that it is not enough to just have the correct IBAN (International Bank Account Number) on cross-border euro credit transfers.

From 1 January this year, the inclusion of BICs and IBANs became compulsory for cross-border credit transfers in the eurozone as well as countries such as Iceland, Liechtenstein, Norway and Switzerland. BICs and IBANs were introduced as a means of increasing the straight-through processing of cross-border payments in euro, thereby reducing the costs associated with manual repair and handling of payments.

Yet, whilst BIC and IBAN information is included on most bank account statements, and has been for some time, there still appears to be a general lack of understanding on both corporates' and banks' part as to correct format and handling of this information.

In my previous post, I remarked on LogicaCMG's survey findings which indicate that banks expect payment processing costs to increase in the first year of SEPA's introduction as they anticipate that not all cross-border transfers will contain the correct account ID information, which means payments will be delayed or require manual repair.

And whilst there are software solutions that enable companies to check the correct formatting of IBANs, Jonathan Williams, principal market strategist, Eiger Systems maintains that the accuracy of the IBAN data also needs to be checked - an extra layer of verification that not all software solutions provide, Williams claims.

There is a world of difference between correctly formatting an IBAN and ensuring that the data underlying the IBAN is correct, or even exists,” says Williams. “Banks and corporates must make this link between format validation and data validation. Only if the data is validated at the same time that the format is validated can corporates hope to avoid repair or rejection charges and the payment delays that inevitably result."

In in its efforts to streamline, standardise and make cross-border euro credit transfers more cost-effective (or the same as domestic transfers), the industry appears to have only added an additional layer of complexity for customers.

Can the industry safely say that it has gone out of its way to adequately educate customers and banks about the correct use of BICs and IBANs? More importantly, are companies likely to face increased costs and inefficiencies pertaining to cross-border euro credit transfers post-SEPA because of incorrect account formatting?

Processing costs could rise under SEPA

Following on from the confusion amongst US companies about the use of BICs and IBANs when sending cross-border payments to the eurozone under the new SEPA framework, research commissioned by LogicaCMG, indicates that banks anticipate increased costs from incorrect addressing and routing of payments post-SEPA. And guess who is going to have to pay for that - undoubtedly the banks will pass on the costs to customers.

Based on a survey of more than 100 of the top 500 banks in the eurozone, as well as the UK and Sweden, Coleman Parks which conducted the research on behalf of LogicaCMG, found that 63% of banks anticipate increased costs from handling exceptions and 60% anticipate an increase in the number of payments returned to the originator.

The banks estimate that failed SEPA transactions and exceptions could cost them in the region of €1.3 billion (presuming an STP rate of 80%) in 2008, based on anticipated transaction volumes in the first year of SEPA's introduction.

Another 17% of banks surveyed expect difficulties in identifying the correct intermediary routing information for receiving banks, yet, according to the LogicaCMG study, only 60% of eurozone banks have plans in place to resolve the issue of IBAN and BIC transaction addressing and routing.

The whole issue of BICs and IBANs has been mishandled from day one, with banks not educating customers enough about the need to include correct account ID information in order to avoid repair costs and payments being held up. Furthermore, the concept of an International Bank Account Number is somewhat of a misnomer given that it is only recognised within Europe, and is not an internationally accepted account ID reference. In the US, for example, the IBAN contains too many characters to be accepted by local clearing systems.

LogicaCMG's findings indicate that the cost of cross-border payments is likely to increase in the months following SEPA's introduction as the number of failed transactions rises. This runs counter to what SEPA is all about in terms of reducing the cost of cross-border payments within the eurozone, and surely the industry only has itself to blame given that there is still widespread confusion amongst customers and banks about the correct use of BICs and IBANs.

Giving up the phone

The stats indicating uptake of online trading of FX certainly look impressive. Despite a slow start back in the late 1990s when online trading portals first came online, recent estimates indicate that more than half of all corporates execute foreign exchange trades online, particularly those companies that are "cash rich" or have revenues in excess of $1 billion.

The online trading phenomenon has given rise to various online portals for trading FX and money market instruments; traditional multibank providers like FXall and Currenex have now been complemented by specialist providers such as Hotspot FX, which targeted hedge funds with its anonymous ECN model, 360T which covers a wider range of asset classes including money markets and derivatives, and Reuters and the Chicago Mercantile Exchange's recently launched FXMarketSpace, which provides an exchange central counterparty clearing model for FX trading.

Not a day goes by without some new platform or additional functionality for trading FX-related instruments online emerging. Bearing that in mind I was surprised to find the general lack of adoption of web-based trading tools by US corporates attending EuroFinance's international cash management conference in Miami.

While all other indicators appeared to suggest that corporates favoured the price discovery and aggregated liquidity provided by trading FX on multibank web portals such as FXall and 360T, US corporates appeared to be less progressive than their European counterparts when it came to giving up the old-fashioned telephone.

Some US corporates were not convinced of the business benefits of moving their FX business online when compared to the more 'personal touch' of speaking to a trader on the telephone and leveraging the long standing credit relationships corporates enjoyed with a particular bank.

However, Christoph Perger, managing partner, of Frankfurt-headquartered 360T, was at pains to explain to US companies that online trading did not mean they had to give up the phone or entrenched banking relationships altogether.

"Automation is not drying out relationships.It is more of a hybrid approach [telephone and online trading]."

In addition to obvious benefits such as price transparency and the ability to access liquidity from multiple providers, as well as in the case of 360T's online platform, the ability to access multi-bank liquidity across multiple asset classes (FX, money markets, interest rate swaps, derivatives ) via a single web interface, Perger pointed out that online trading could also help companies with their Sarbanes-Oxley compliance by providing an electronic audit trail of FX deals and confirmations.

It appears that European corporates may be slightly ahead of their US counterparts, when it comes to realising the benefits of web-based trading tools for FX and other instruments, which I found slightly satisfying given that on the flight over to Miami I was bombarded by comments from an American tourist that had recently visited the UK about the differences in plumbing between the two countries.

I asked him what he thought of London, and instead of commenting on the virtues or otherwise of the usual tourist hot spots, he proceeded to tell me that he could not understand why there were two different taps for hot and cold water in the UK, whilst in the US one tap dispensed both at the same time which made it easier to wash your hands in warm water.

While European plumbing may be slightly archaic to some, it appears Europe has the upper hand when it comes to appreciating the finer points of web-based or electronic trading platforms.