Better risk management "is a cultural thing"

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

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

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

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

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

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

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

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

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?

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

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?

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?

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

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

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?

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

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

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

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

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."