'Egging' them on

Well we knew something was afoot with Citi as indicated in our post of the 18 January, which states that the US bank was on the acquisition trail in Europe.

Late on Monday, Citi announced its acquisition of Prudential's UK online banking outfit, Egg Banking for £575 million ($1.13 billion) in cash. Citi was quoted as saying that the acquisition is expected to boost earnings in the first year, but I must confess it has left FinancialTech Insider and some analysts we spoke to slightly befuddled.

The acquisition itself was not surprising given that other American banks particularly Bank of America was embroiled in speculation back in December that it was seeking a European acquisition. Citi has also come under scrutiny recently for earnings below its peers in some of its banking divisions and its high level of expenses.


So where does Egg fit into all of this? Ralph Silva, senior analyst, TowerGroup, says retail banking comprises 80% of most European banks profits so it is a business Citi needs to be in. However, unlike a bricks and mortar high street banking acquisition, which some expected Citi to opt for, it has gone for a "single channel" bank, Egg, which has had mixed fortunes over the years in terms of profitability. Overall group profit for Egg in the nine months ended 30 September 2005, was £33 million, compared with a loss of £106 million in Q3 2004.

Prudential's CEO Mark Tucker commented that Citigroup saw "enormous opportunities" in developing Egg's credit card business in the UK, but if the Egg acquisition is viewed purely on the revenue earning potential of its credit card business alone, then Silva says the price Citi paid for Egg is a "little bit expensive", given that Egg's traditional customer demographic has not necessarily been a highly profitable one.

Only time will tell what Citi's plans are for Egg and whether it will introduce more products and services so Egg can increase market share for each customer. On the surface, however, it appears that Egg may gain more from the deal than Citi.

Silva says Citi's foray into UK retail banking could hurt its treasury business which is looking to expand its partnerships and alliances with local banks in Europe so it can process more transactions using Citi's back end infrastructure. As retail banking is generally a bank's most profitable business, Silva says some banks may be reluctant to partner with Citi on the treasury side if they think it is a potential threat to their retail business.

Furthermore, Citi does not have a strong track record as a major retail brand in European cities, with Silva saying it closed its retail banking operations in France because it didn't understand the market. In order to ensure success in the UK, he says Citi will need to ensure it does not introduce "US-style" management into Egg.

A Perfect Vista?

Today in the hallowed surrounds of the British Library, Microsoft unveiled "the future of interactive, personalised connected experiences,” Windows Vista and Microsoft Office 2007. A lot of the launch centred around the richer, visual experience end users can gain from applications built on Windows Vista, which brings music, TV and movies, games and photography, and personal or work documents "vibrantly to life".

Guests got a sneak preview of a new British Library technology,‘Turning The Pages 2.0’, which uses Windows Vista technology to bring two of Leonardo da Vinci’s notebooks, the Codices, to life.

Windows Vista is Microsoft's response to Web 2.0 and aims to provide end users with a richer, more dynamic and user friendly computing experience. Those of us who have poked holes in the security of Windows operating systems are also meant to feel safer with Vista, which includes a filter to protect against illegal web sites (this is all stuff you have always been able to purchase separately from software security experts such as McAfee, but now Microsoft has decided to build it in).

But while it may mean a richer user experience for consumers, businesses seem less bedazzled by Vista? Scott Dodds, head of small and medium business, Microsoft UK, says that Windows Vista will make running IT and computer systems easier to manage so small businesses can focus on the more important things in life, such as selling to customers.

But while Microsoft was effusing about the "personalised connected experiences" of Vista, emedia's RapidResearch released findings from its quarterly survey of over 150 UK IT directors indicating that almost 50% anticipated that upgrading to Windows Vista would distract from more important business issues- such as actually running the business.

Fifty-four percent highlighted application incompatibility as one of the "pains" of migrating to Microsoft's latest operating system, while 63% also cited cost pressures. Just under 50% of respondents expect their organisation will migrate to Vista in the foreseeable future.

While Vista may enhance security, optimise desktop infrastructure,help in the retrieval and use of information and enable a mobile workforce, let's not forget the headaches and disruption migrating to a new operating system means for a lot of businesses.

Perhaps in addition to having "dazzling visuals" demonstrating the user rich experience of Windows Vista at the British Library, they should have also had a couple of IT directors sitting in the corner tinkering away trying to integrate Vista with their legacy applications.

The cost of compliance

Various media reports in the last few months have contemplated the demise of New York as a major financial center, with US Treasury Secretary Henry Paulson, blaming over-regulation in the form of Sarbanes-Oxley and others pointing to the litigious environment in the US. Are there any lessons for Europe to heed in all of this?

The London Stock Exchange has been a major beneficiary of companies' decision to choose European markets over the US for capital raising. And it seems that US banks and other interested parties are closely watching how the Markets in Financial Instruments Directive (MiFID) plays out in Europe.

With MiFID granting investment firms a European passport for selling investment services and competition between national exchanges and multilateral trading facilities expected to increase significantly in Europe, American investment banks are watching with interest, having witnessed it all before in the US market where the emergence of ECNs threatened the hegemony of the NYSE and Nasdaq.

Interestingly, those ECNs left standing (ArcaEX and INET)have since been swallowed up by the very exchanges they threatened. Are we likely to see the same events unfold in Europe in response to MiFID? Will Project Turquoise, if it ever gets off the ground, eventually be bought by the LSE or Deutsche Bourse?

The bigger question however, is what impact will MiFID have on the international competitiveness of the European securities markets? Will MiFID create a more cost effective and efficient securities market that gives Europe a competitive edge over the US as a major financial centre? Or are we in danger of repeating the mistakes the Americans made with over-regulation of financial and capital markets?

There is a real danger of the cost of compliance with regulations such as MiFID outweighing the benefits. Will MiFID and the spate of other regulations designed to impose harmonisation and standardisation on a fragmented Europe, discourage companies from wanting to list, invest or do business in the UK and other major European financial centres?

Further to that point, the FT reported this week that European investment banking lobby groups would join forces to state their case to the European Commission and the Committee of European Securities Regulators, which may be a step in the right direction if Europe is to avoid over-regulation.

'All singin' all dancin' solutions

All it takes is an all-encompassing regulation like MiFID for consultants and vendors with 'MiFID-ready' solutions to come crawling out of the woodwork. That was the case on Wednesday at Finexpo in London where a multitude of vendors were touting the latest and greatest solution to help firms comply with MiFID.

Microsoft announced its "Mix and Match" MiFID solutions suite comprising eight different technology solutions developed in conjunction with IT partners (Aleri Labs, BearingPoint, C.O.S., Debug Software Tailoring, Fintecs, Gissing Software, HCL, HP, Progress Apama, Qumas, Rapid Addition, Singularity, SunGard, SuperDerivatives, TAP Solutions and Xenomorph).

Microsoft's MiFID solutions suite aims to help firms address planning and testing, client classification, best execution, reporting, market connectivity, reference data and trade history, systematic internalisation and systems integration.

Similarly, GoldenGate Software was showcasing how its data management platform, "quickly and easily" addresses requirements for transactional data integration, consolidation, publishing and reporting under MiFID. Sound familiar?

One major software vendor even said to me, "It's [MiFID] great for us." Apart from a few top tier investment banks that must be rubbing their hands with glee and the league of consultants being paid considerable sums to help firms get to grips with MiFID, and we must not forget the vendors hoping to cash in on the 'compliance showboat', they must be among the minority thinking, 'Bring MiFID on.'

Yet, with only nine months to go before MiFID becomes law, haven't the vendors left their run a little too late? Most of the top tier firms' preparations are arguably well underway, smaller mid-sized firms are probably scratching their heads wondering if they should build, buy, outsource or sell up altogether.

While it may be tempting to think that compliance with MiFID is as easy as melding together a couple off-the-shelf solutions, and 'hey presto,' unfortunately it is not going to be as simple as that.

No one can say with any certainty that the vendor solutions being touted today are actually what the market is looking for given that there is still considerable uncertainty and confusion, even amongst Europe's myriad securities regulators, as to how MiFID will finally play out. "There is no 'all-singin' all-dancin' solution," for MiFID said one industry thought leader, and few vendors appear to be talking about the CRM and Know Your Customer aspects of MiFID, which was highlighted by various industry working groups from day one.

Details around best execution under MiFID are still unclear. "There is no definition of best execution," says Dr Giles Nelson, director of technology, Progress Software, which has incorporated the complex event processing and business activity monitoring components of its Apama platform within Microsoft's MiFID solution suite to help firms monitor best execution. "It [best execution] will require providing sufficient visibility to the end customer about how their best execution policy is being met, which means firms need to be able to gather that information and store it persistently," he says.

But are any firms, except perhaps for the top tier investment banks that are going to be clear winners from MiFID, making IT investment decisions when there is insufficient clarity around some of the fundamental aspects of MiFID? PJ DiGiammarino, CEO, JWG-IT, says when it comes to MiFID, most firms' back offices remain a "Bermuda Triangle," with the operational, technology and legal/compliance silos unaligned.

No one knows for certain how many execution venues firms will need to monitor, let alone integrate with. Will the exchanges consolidate? Perhaps. "Consolidation [amongst exchanges] in Europe didn't happen in 1999," says Jim Gollan, chairman, virt-x, referring to Deutsche Bourse's original failed bid for the LSE. And even if it happens this time round, will it be good for the industry?

Gollan says the "paradox" of exchange consolidation is that, on the one hand, more competition means less monopolisation of the business by national exchanges. On the other hand, any form of consolidation as we have witnessed in recent weeks with the wrangling between Nasdaq and the LSE, is more likely to be shareholder driven. "There will be slim pickings for users as a result of exchange consolidation," Gollan said at Finexpo on Wednesday. "It may result in less competition and constrain exchanges from making pricing cuts."

There is still considerable speculation in the market as to whether Project Turquoise is a clear statement of intent or just an exercise in "sabre rattling" by the major investment banks in an effort to drive execution prices on the exchanges down. But if Project Turquoise gets off the ground, Gollan says the banks behind it need to be careful that they don't end up erasing any cost savings through high market impact costs caused by liquidity fragmentation.

Alice in Wonderland

The 'Day of the MiFID' may be looming, but there is still considerable uncertainty about the final shape of the regulation, particularly in terms of what constitutes 'best execution' and how many member states and firms will be ready for "transposition" to MiFID from November this year.

At Finexpo in London on Wednesday, Anthony Belchambers, chairman, Futures and Options Association and MiFID Connect,said that "Alice in Wonderland" views existed in the marketplace about firms' and member states' ability to comply with MiFID.

The general perception is that three of four European member states including the UK and France, will be ready for transposition to MiFID by November. However, Belchambers believes that member states will be reluctant to face the umbrage of the European Commission for not meeting the deadline, although he adds, it is unlikely that any action taken by the Commission will end up in court. "Most member states will be careful about taking enforcement proceedings," he says.

Once MiFID comes into effect from November, Investment Services Directive (ISD was the predecessor to MiFID) passports will be switched off. But what will happen in those member states that have not transposed to MiFID by the November deadline, Belchambers asks? Whilst an ISD passport covers a number of areas included under MiFID,there are aspects unique to MiFID which will not be covered by an ISD passport.

MiFID think tanks like JWG-IT, which are helping firms' navigate the murky waters of MiFID, have said that firms and member states' preparations for MiFID are not be helped by CESR (Committee of European Securities Regulators) missing five consultation deadlines for issuing its recommendations on what constitutes best execution under MiFID. "The 'known unknowns' are not going away," JWG-IT writes in its latest newsletter.

Although the major sell-side firms with strong algorithmic trading capabilities believe they already provide best execution of equity trades, there is still uncertainty as to how the regulators will treat the best execution requirement under MiFID. Will different member states say different things about it? Will best execution apply to every product in every market or should it only apply to the plain vanilla markets where it is easier to benchmark price?

Raising the competitive stakes

Further to my earlier post on State Street's acquisition of Currenex, I promised you a comment from Simon Wilson-Taylor, managing director and worldwide head, State Street Global Link. In response to my question as to what State Street's acquisition means for the remaining multibank platform FXall, Wilson-Taylor said he would rather have his job than Phil Weisberg's, FXall's CEO.

With State Street FX Connect exceeding $108 billion in a single day’s trading volume in December, combined with Currenex's highest daily trading volumes reaching roughly $58 billion, Wilson-Taylor says FX Connect/Currenex will clearly be the market leader in the online FX trading space. (Unlike FXall, State Street FX Connect does not regularly publish trading volumes.)

No one was available from FXall this afternoon to comment on the State Street acquisition of Currenex. Meanwhile Wilson-Taylor confirmed that Currenex and FX Connect will operate as separate platforms under the State Street Global Link multi-asset class platform, although for some clients, he says the two platforms may be more closely integrated.

Wilson-Taylor says it has already bundled applications connecting Currenex with FX Connect and it was from these projects that it got to know Currenex. "I always thought we would like to buy them," he told FinancialTech Insider.

Integration work between the two platforms will be carried out in the coming months, but Wilson-Taylor says it does not entail 'heavy lifting'. "There is very little incremental investment we will need to make that integration happen," he says. He envisages that State Street FX Connect and Currenex will provide different solutions for different markets, particularly in developing markets that are looking for infrastructure to trade FX.

State Street buys Currenex

Well my acquisitive radar has been picking up on lots of signals recently about potential acquisitions by banks. The latest announcement that State Street is buying independent online FX provider Currenex for $564 million probably comes as no surprise in light of the spate of consolidation the market witnessed last year with some of FXall's shareholder banks selling their interest to a private equity firm, Knight Capital buying Hotspot FX and Icap buying interbank FX provider EBS.

In an interview with financial-i magazine back in December, Simon Wilson-Taylor, worldwide head, State Street Global Link, which incorporates its online institutional dealing platform FX Connect, alluded to its desire to enter the active trading marketplace in FX, which the Currenex acquisition will provide them with.

In that interview, Wilson-Taylor said State Street Global Link would institute an active trading environment for FX in Q2 or Q3 this year, and now it seems the Currenex acquisition will form a key part of that. Currenex was also an early proponent of executable streaming prices in online trading, another capability State Street is looking to add.

The Currenex acquisition will allow State Street to diversify its platform beyond the institutional investor space which it has dominated to include active currency managers and hedge funds, meaning that is now has a lot more bases covered than before. But what will this mean for FXall, which is now the only multibank platform apart from FXConnect/Currenex left standing.

Remember, some of the banks that invested in FXall could no longer see the value in participating in a multibank platform whilst maintaining their own single bank sites and chose to sell their stake to Technology Crossover Ventures, which bought a minority stake in the bank-owned foreign exchange trading portal last July. Will the Currenex/State Street combination cause other shareholder member banks of FXall to explore their options?

FXall appears to be hedging its bets going after the corporate, active trader, asset manager and broker/dealer community. In January this year it announced that trading on its platform in 2006 exceeded $9.8 trillion, an increase of 45% on 2005's levels, with average daily volumes reaching $47 billion in December.

According to FXall most of the growth in trading activity on its platform came from investment managers, which it says account for almost 50% of volumes. Active traders and hedge funds have also increased their activity on FXall, with volumes 79% higher in Q4 last year than the previous year. Trading by asset managers, FXall says also increased by more than 70%.

State Street's FX Connect daily trading volumes are more impressive though, exceeding $108 billion in a single day’s trading back in December, and with Currenex's trade flows added to that, it will be a strong contender in the online FX space, not only for institutional investors but now also in the active trading space.

Stay tuned as I hope to be speaking with Simon Wilson-Taylor of State Street later this afternoon to get his comments on the deal.

Living up to the hype

Has IT and back office outsourcing surpassed the hype cycle and fallen into the trough of disillusionment? I keep hearing conflicting reports about companies' appetite for IT and traditional back office outsourcing.

In the early days a lot of the hype around outsourcing was centred round the cost savings with some estimates putting it in the region of 50%. No firm worth their salt could afford not to outsource, companies were told, prompting the mass exodus of Wall Street IT back offices to India.

Then came the backlash. Local unions were up in arms about jobs being outsourced to offshore centres and some early proponents found those 50% cost savings somewhat elusive when 'hidden costs' were factored in. There has also been a backlash against outsourcing call centres to India, following concerns over the privacy of customer data.



However, one only has to look at the financials of leading Indian BPO providers such as Infosys, Tata and Wipro to realise that Indian outsourcing companies seem to be defying the trend against outsourcing. Although the fourth quarter last year was the worst in five years in terms of the value of outsourcing contracts awarded, according to TPI's Quarterly Index, leading Indian outsourcing provider Tata Consultancy Services increased its revenues by more than 40% to $1.1 billion for the quarter ended 30 December 2006.

The value of new outsourcing contracts declined by 8% in 2006 from the previous year's levels but as more shorter and smaller outsourcing contracts were awarded, the total number of contracts agreed in 2006 increased from 341 in 2005 to 350 in 2006.

Once again a lot of the business was won by Indian providers such as Wipro, Tata, and Infosys, whose business models are geared towards "single-process" and specialist deals. According to TCI, these providers, alongside the Big Five in Europe and other smaller and niche providers, are stealing market share from the Big Six outsourcing companies (CSC, EDS, Accenture, HP, IBM, ACS). In 2006, the Indian-based providers achieved a total market share of 7%, a massive increase on 200's figures of less than half a percentage point.

The rise and rise of India Inc continues with companies like Infosys becoming the first Indian company to enter the elite Nasdaq-100 club back in December. And the pundits say we are likely to see the Indian providers seriously challenging the Big Six outsourcing providers for larger-scale outsourcing deals, although I must admit I have been hearing that for some time.

But is this trend of outsourcing to offshore centres such as India sustainable? Will labor costs in India remain as competitive as competing offshore centres in China and Central and Eastern Europe, and more importantly has outsourcing be it offshore or near shore, really lived up to the hype? The Indian outsourcing market has to peak at some point and level out. What then for the Wipro's, Infosys' and Tata's of the world?

On the acquisition trail

Well we had our fun with the Bank of New York Mellon merger and all the acronyms that gave rise to from BoNYM to MellB. The joke is getting a little tired now so it is time to sniff out some other acquisitions that may be on the horizon.

Once again the rumour mill has it that the major US banks JPMorgan Chase, Citi et al are sniffing around for acquisitions. Before Xmas, the rumour was that Bank of America was looking at Barclays.

With regulations such as SEPA, MiFID etc putting pressure on banks to consolidate in order to gain market traction or product expertise in a particular area, don't be surprised if we see some interesting cross-border amalgamations between US banks and European banks in the coming weeks and months.

The only thing is will it give rise to some interesting acronyms we can all have some fun with. And will the newly merged entity's headquarters be based "By the Rivers of Babylon?"

Crossing the divide

Analyst firms such as the Aite Group have been critical of the Enterprise Data Management or EDM Council, formed in 2005 by BearingPoint, Cicada, GoldenSource, IBM and SunGard, saying that its success depends on expanding its current user base. Well, someone appears to be listening.

Today the Council announced three new sponsors; ADP Brokerage Services, Deutsche Bourse/Avox, the first exchange to join the council, and the first market data vendor, Standard & Poor's. The three have become organisational sponsors of the Council, which has increased its membership from 45 firms to 76.

Leading financial institutions such as Credit Suisse, Citigroup, Pioneer Investment Management, Franklin Templeton Investments, State Street Bank & Trust, Deutsche Bank and Bank of America feature among the more than 70 financial institutions from all segments of the industry that are participating in the Council.

The Council stated that each new sponsor firm brings substantial experience in "various aspects of data processing, including client and counterparty, back office and clearing and settlement data issues that will prove invaluable as it evolves from EDM analysis to implementation of its four prioritised work streams: business metrics, best practice implementation, supply chain management and regulatory tracking.

But will it be enough to appease the analysts that say given the complexities of implementing an enterprise data management framework, EDM to date has been all talk and little action. Aite Group predicts high adoption in the EDM market this year and next, but to date, there have been few real world implementations and examples to draw on.

One glaring absence from the EDM Council is Asset Control, one of the most established providers in the data management space. Asset Control prefers the term Centralised Data Management (CDM), which has put it at odds with the Council's EDM terminology.

How significant Asset Control's absence from the EDM Council is will perhaps become clearer over time. But as Aite Group states, whilst the formation of the EDM Council is a good first step, it does not currently represent key players. "Those issues need to be worked out," it states in its Crossing the Data Management Divide 2006 report, "because the idea of a united front through a standardization council is a good one."

Standing out in the crowd

Gerard Hartsink chairman of the European Payments Council's comments that banks are unlikely to meet the 2008 deadline for SEPA direct debits because of European lawmakers failure to pass the Payment Services Directive legislation by the end of 2006, hardly comes as a surprise.

Doubts have been cast for months over banks' ability to meet the 2008 SEPA transition deadline anyway and there are still question marks over corporate and SME uptake of these new SEPA instruments. Now at least the banks have an excuse for a slower phasing in of SEPA direct debits, which were considered the most challenging given the different standards that exist across Europe.

In a payments magazine entitled "Speed", which seems somewhat of an oxymoron in the context of SEPA, Hartsink stated that existing national laws would work for SEPA credit transfers and cards but not direct debits. He says perhaps the earliest SEPA direct debits could be delivered is Q4 2008 if the current German EU presidency passes the PSD before April 2007.

Hartsink was mainly referring to the fact that the banks will not be offering pan-European direct debits from the 1 January 2008, but what about the PE-ACHs like STEP 2, which is geared up to have its SEPA Direct Debit Service in place in 2007, ahead of the European Commission deadline after seven leading Italian banks and 52 of the leading banks in Europe, agreed to develop a SEPA Direct Debit platform in partnership with EBA Clearing and SIA.

Equens (formerly Interpay) is already advertising its SEPA direct debits capability, which its promotional literature says will be available from the 1 January, 2008. Is it a case then of the banks finding an excuse to drag their heels on SEPA direct debits?

Given that banks will have to run legacy payments in parallel with the new SEPA instruments during the SEPA transition period from 2008 to 2010, which is a costly undertaking, is it any wonder that banks may welcome a delay of a few months in launching SEPA direct debits? The reason why I say that is because once all banks offer the new SEPA pan-European payment instruments, it will become increasingly difficult for them to differentiate themselves.

David Barrow, vice president, vision, solutions & architecture, Chordiant, likens SEPA to a town market where everyone is selling the same thing. “SEPA will utterly destroy a bank’s ability to compete on cross-border products by price or product type. For those that do continue to offer cross-border payment products, competition will have to be around more subtle areas such as customer service and efficiency," he says.

So the only way to stand out in a crowded marketplace, he says, is to provide a unique customer experience, which means leveraging customer and transaction data that resides in silos in such a way that each customer is treated like an individual.

It is the old CRM edict rearing its ugly head again, but one wonders whether this is factored into the banks' preparations for SEPA or if the need for good old-fashioned CRM has got lost in the overriding focus on the provision of SEPA payment instruments from 2008.

'BoNYM'

Since the announcement of the Bank of New York and Mellon Merger to create a banking giant with approximately $17 trillion in assets under custody, there have been a lot of murmurings in the marketplace as to the strategic value of the deal for customers.

The merger between the two banks has resulted in it earning the moniker, 'BoNYM' in reference to the German band of the 70s, Boney M. I first heard that joke at lunch with another leading global custodian not long after the BoNYM announcement was made. It has since spiralled. It makes you wonder whether the branding gurus had a hand in the merger - what better way to capture the market's attention than naming yourself after a band that manufactured "bubble gum" infectious pop music.

Some observers suggest that whilst there are cost synergies to be realised from the merger, all is not "Daddy Cool." According to Richard Hogsflesh, managing director of R&M Surveys, which compiles an annual ranking of the top 10 global custodians, big does not necessarily mean better when it comes to customer quality.

In the December/January issue of financial-i magazine,he says that the trillion dollar tie up may be a cause for concern for existing customers of both banks as the deal appears to be more "shareholder-driven" than "customer-driven".

Another custodian I was speaking to the other day said whilst he understood the cost synergies both banks would derive from the merger, particularly in the competitive US custody market, he did not see how the merger would benefit the bank's international business.

It appears that the jury is still out on what 'BoNYM' really means for the global custody business, if anything?

BoA eyes Barclays according to research note

Well it seems FinancialTech Insider was not wrong about Bank of America wanting to buy a European bank. But judging by this posting on a Financial Times blog, it is the UK's Barclays bank, which is the object of Bank of America's attentions.

Last week over lunch a source hinted at Bank of America still wanting to buy in Europe, to which I said, 'I suppose it is looking at a UK bank such as Barclays or Lloyds.' The source however, started steering me in the direction of a Spanish bank.

But according to the FT blog posting, a very confident Merrill Lynch research note seems to indicate that Barclays may be the favourite. Bank of America of course continues to remain elusive on the subject.

It's time for 'better regulation'

In recent months there appears to have been somewhat of a backlash against over-regulation. The US is indulging in some long overdue navel gazing with US Treasury Secretary Henry Paulson weighing in on the debate by saying that the US capital markets "face significant challenges" and that Sarbanes-Oxley may have gone too far.


laugh@noelford.co.uk

The Committee on Capital Markets Regulation further inflamed the debate with its publication of 32 recommendations for making US capital markets more internationally competitive. It also published some startling figures which suggested that over a period of five years, the value of global initial public offerings raised in the US had declined from 50% in 2000, to 5% in 2005.

Of course, the US is only probably just waking up to the fact that they are no longer the epicentre of capital raising for companies and that listing on an exchange is not quite the badge of honour it used to be for companies particularly in those markets where compliance is onerous.

I think it may be a slight overreaction given that US investment firms like Goldman Sachs, JPMorgan et al still underwrite a number of the deals that take place, but the competition as to where to list may be hotting up again and the US may not necessarily be able to have it all their own way.

The Committee on Capital Markets Regulation may have some problems getting its recommendations drafted into law, as there is only two years of the Bush administration left to serve and me thinks Bush junior may have his hands full 'cherry picking' from another set of recommendations on how to get the US out of Iraq without any more egg on their face.

At least the SEC has correctly gauged the general mood and is expected to announce on 13 December revisions to the onerous Section 404 of the Sarbanes-Oxley Act (SOX), which requires companies to audit the effectiveness of their financial control procedures. Also it is expected to announce that it will make it easier for foreign companies with more than 300 shareholders that are US residents, to withdraw from US regulatory oversight if they wish to do so.

Interestingly, before SOX came into effect, the SEC was by law required to conduct a cost/benefit analysis of the regulation's impact. But it appears no analysis anticipated the spiralling costs associated with Section 404 compliance.

Could all of this hold some interesting lessons for the UK and European markets where regulations such as MiFID, which comes into effect next November, could cause the same backlash as SOX has in the US?

Like the SEC, the FSA is also required to conduct a cost/benefit analysis of regulations. It has done that for MiFID estimating that there will be a "one-off" cost of between £870 million and £1 billion with ongoing costs of around an extra £100 million a year, although this is likely to vary from firm to firm. Click here for more info on the FSA's analysis of MiFID.

According to the FSA, some of the largest MiFID-related compliance costs are one-off costs arising from the introduction of changes to client categorisation and best execution requirements. However, the benefits in all these cases are difficult to quantify as the rationale behind implementing regulations such as SOX and MiFID is to protect the investor not to make life easier for the companies that service these investors.

While no one will argue that greater transparency is needed around the costs of trade execution, will MiFID like SOX go too far and force companies to spend more time on compliance than actually running their business? Furthermore, whilst the UK and the US conduct cost/benefit analyses before regulation is implemented, other European regulators are not required to do so. Surely that has to change.

The International Securities Market Association appears to be on the right track with its 10 "Principles for better regulation," which has been endorsed by the International Capital Market Association. The principles are based on the belief that in the case of a market failure, regulators should determine whether current regulations or market forces will sort the problem out before putting pen to paper on a new set of regulations. The question now is, will the International Organisation of Securities Commissions (IOSCO) support these principles?

Are money laundering solutions really working?

A few weeks back I commented on the research of a Dr Jackie Harvey at Newcastle Business School who concluded that there was not enough evidence to back up data about the volumes of money being laundered. Click here to read the post.

She was basically saying that it suited the authorities to inflate the figures pertaining to the incidence of money laundering for their own political ends, and we mustn't forget the 'war on terror'.

I am currently reading a fascinating book, "The Washing Machine," by Nick Kochan,an investigative journalist who has written for the likes of The Economist and The Financial Times. His book is on money laundering and it makes a very strong argument about the self perpetuating cycle of money laundering, encouraged by corrupt governments and politicians, as well as the forces of globalisation itself exposing developing countries to the forces of black money.

More importantly, though the book reinforces some of the points I was trying to make in my earlier post about some of the hype around money laundering and how the banks are bearing the brunt of the cost of having to comply with anti-money laundering legislation, which arguably has been relatively unsuccessful in reducing the incidence of money laundering by terrorists or other dubious individuals.

Kochan's point in the book is that terrorist money being spent to buy arms, for example, is unlikely to be detected by conventional anti-money laundering solutions as the deals are often not done not through conventional financial or payment channels, but on the black market. Furthermore, he says the small amounts of money used to support terrorists while they may be preparing for an "illegal act," are unlikely to raise alarm bells.

Effectively, he says, today's anti-money laundering policies are "convenient and cheap for governments as they place most of the burden on the legitimate banking and financial system." He argues that intelligence agencies working with police are likely to be more effective in stopping terrorist trade than banks.

Whey then did we have intelligent agencies monitoring SWIFT network traffic in the hope that they were going to find some unusual financing activity which may lead them to the nearest terrorist cell? Let's face it most of the payments on SWIFT are high value anyway, how are you going to distinguish what is an unusually high payment, let alone one that in most cases is more likely to occur on the black market than through conventional payment channels?

We know why banks are spending money on AML software. Their hand is being forced by the regulators. But is it money well spent? Are the banks getting value for money from these solutions? Are their AML compliance solutions helping detect and reduce the incidence of fraud; is it assisting George Bush and Tony Blair in their dubious 'war on terror'?

AML solultions may help banks demonstrate compliance, but no matter how sophisticated or intelligent they become, are they going to be able to detect Al Qaida money raised in Africa's diamond markets or money paid for arms or explosives, when these transactions are not financed by conventional means?

Is Bank of America in an acquisitive mood?

No doubt you have probably read the media speculation in recent weeks surrounding the Bank of America's expansion into Europe and Asia. The bank's CEO Ken Lewis has made no secret of the fact that he wants to expand the bank's credit card and corporate and investment banking business in Europe, and the bank is tipped to spend $500 million over the next four years doing just that. Click here for more.

Lewis has persistently denied rumours that acquiring a European bank is part of its expansion strategy. Mind you it wouldn't be the first time that a major US bank has eyed the European market only to find that the cultural and political barriers to cross-border M&A are too cumbersome to pull it off.

Nevertheless, despite the obstacles and Lewis' denials, rumours persist that a potential acquisition in Europe may be on the cards, and on 29 November at market close, Bank of America's market cap at $243.71 billion inched ahead of Citigroup's $243.52 billion.

It may have the market cap, but unlike Citigroup, Bank of America lacks a truly global footprint, despite its $3 billion acquisition of a 9% stake in China Construction bank. Lewis reportedly told The Wall Street Journal he didn't "see the strategic imperative of being on the ground in Europe." But according to an industry source I had lunch with the other day, the bank could still be eyeing a potential acquisition in Europe.

The UK banking sector is certainly ripe for consolidation with potential targets such as Barclays or Lloyds TSB. But given its associations with the Latin American market, perhaps a major Spanish bank like Banco Santander for example, would make an interesting partner for Bank of America in Europe?

In October, in an effort to strengthen its foothold in the Latin American market, Santander Central Hispano acquired private banking and premiere banking assets from Bank of America's wealth management portfolio. According to Latin Counsel.com the transaction involves the "potential transfer" of customer holdings valued at approximately $4 billion from Bank of America to Santander Private Banking. The holdings consist of accounts of residents in Latin American markets such as Mexico, Argentina, Uruguay, Chile, Brazil and Venezuela.

Liquid assets

With all the media hoopla (including my own verbal diarrhoea) surrounding the announcement of multilateral trading facilities (MTFs) like Project Turquoise emerging in response to MiFID, it is easy to get carried away with the newness of it all. After all, it gives us hacks something to write about.

'MTF backed by investment banks challenges exchange monopoly' is a headline few hardened hacks would find difficult to ignore. But perhaps I have been a little premature in espousing the virtues of these alternative trading venues and the competitive threat they pose to the exchanges.

The reason I say that is because this morning I listened intently as market participants at a breakfast briefing hosted by Interactive Data, commented on whether they believed these new execution venues would be successful in attracting liquidity. Liquidity is after all the end game, and if these alternative execution venues don't attract their lion's share of it, then they will be remembered as those that tried to topple the 'emperor' but failed in their 'coup' attempt.

"If they can slash costs in a monopoly industry, then they [MTFs] will succeed," says
Dr Paul Lynch, managing partner, PE Lynch, a UK-based algorithmic trading specialist. However, Lynch believes it is unlikely these new platforms will attract 50% of the London Stock Exchange's liquidity within the first three months. It all boils down to whether these MTFs create better market spreads, he says.

The recently announced MTF projects are still unknown quantities and only time will tell what impact they will have in terms of fragmenting liquidity within Europe. Jon Carp, head, electronic brokerage and execution sales, Europe, Crédit Agricole Cheuvreux International Ltd, said he had seriously considered whether Cheuvreux's deal flow justified setting up an MTF or whether it should partner with a consortium of investment banks like Project Turquoise? At the end of the day, it is a business decision a number of brokerages must be mulling over with MiFID looming on the horizon.

Nevertheless, Carp believes that if the LSE were to drastically slash costs in the face of heightened competition, that may encourage some sell-side firms to stay put. "If the cost of trading comes down, it will be more attractive for the banks to say they don't have to build Project Turquoise," he says. But now that the investment banks have partially dipped their toes in the water and found that the temperature is too their liking, will they want to totally submerge themselves in the new competitive landscape that beckons or will they need to be thrown a life raft?

Arguably, it's a win-win situation for the investment banks regardless of whether Project Turquoise gets off the ground or not. Even if they don't attract liquidity, one thing they will have succeeded in doing is forcing the exchanges to reduce costs. Costs will inevitably come down. But if the investment banks do succeed, and surely we can expect to see more MTF announcements on the not too distant horizon, then what impact will all these venues have on already ballooning market data volumes?

According to Octavio Marenzi, CEO, Celent, who chaired the Interactive Data debate, MiFID says post-trade data can be published on web sites as long as it is "machine readable". 'Does that mean that there will be 60 different data sources?' he asked the esteemed panel. Danny Moore, COO, Wombat Financial Software, hinted that there could be real problems with 'symbology' if post-trade data can be published anywhere. "Symbology is a huge issue," he said. "It would be easier if everyone used the same symbology but somebody has to do the conversion. We can't do that as a vendor so it is pushed back onto the clients."

Looking for Mr Chips

Having commented ad nauseam last week about the spate of new high speed trading execution venues emerging in Europe to challenge the traditional stock exchanges, on Monday evening I found myself seated in front of a panel, which included some of the protagonists involved in the unravelling of Europe's trading landscape post-MiFID (Markets in Financial Instruments Directive).

Representatives from leading investment banks Credit Suisse (one of the seven banks behind the announced pan-European MTF otherwise known as Project Turquoise), Lehman Brothers, the London Stock Exchange, AtosEuronext, Reuters and BT Radianz, had assembled on the top floor of The Gherkin (architect Norman Foster's homage to the pickled vegetable) in London's CBD as part of Intel's Faster City launch to celebrate the release of its Quad-Core Xeon Processor 5300 series.

Intel delivered the Quad-Core Xeon processors earlier than anticipated having recently launched its Dual-Core Xeon Processor. With customers such as investment banks and market data providers requiring even faster processing speeds and computational capabilities, Richard Curran, vice president, European operations, Intel, told attendees that Intel planned to reduce the number of man years it took to launch the next generation of its micro-architecture, which is scheduled for 2008.

Intel was obviously keen to enlighten the assembled investment bankers and exchanges as to how Quad-Core and Dual-Core Xeon Processors could help them reduce latency through faster processing speeds (4.5 times performance gain), whilst not hitting firms where it hurts the most in terms of reduced power consumption (from 110W to 80W) and maximising the use of scarce real estate for housing server farms.

In an effort perhaps to demonstrate the point, parked outside The Gherkin were a series of four or five scooters trailing Intel billboards that read something like, 'Good things come in small packages'. Perhaps a racing car would have been more appropriate though as the theme of the evening was 'the need for speed'.

Peter Moss, global head, enterprise solutions, Reuters, chipped in that a year ago when it was benchmarking microprocessors in its labs, AMD chips were faster than Intel's. But recent studies at its Securities Technology Analysis Centre of the Linux version of Reuters' Market Data System running on a HP server using Dual-Core Intel Xeon processors, found that Intel had the edge.

The evening's host, Nigel Woodward, head, financial services, Intel, led a panel debate about the 'need for speed' amongst investment banks, exchanges and market data providers in the City of London. He joked that he did not want to turn the discussion into a debate on MiFID, but he may as well have as the list of panellists he had assembled (investment banks, exchanges, market data providers) meant it was difficult to ignore the heightened competition that is rapidly emerging amongst all of them.

Credit Suisse and Lehman Brothers are already competitors, but if they become systematic internalisers under MiFID or band together to form rival execution venues, which at least one of them has done, then they pose a serious competitive threat to the LSE, Deutsche Bourse and Euronext who will also be competing with one another for business under MiFID.

The question is will Intel Quad-Core Xeon processors be an essential part of each firms' armoury in the new competitive landscape that beckons? Kevin Covington, head, new product development, global network provider, BT Radianz, likened the quest for speed spurred on by the rise of algorithmic trading, which is only likely to increase under MiFID, to an "arms race".

Whilst the issue of latency dominated the debate, the panellists tippy-toed around the real implications of faster trading and execution times. Ultimately it is about customers wanting trades to be executed more quickly and cheaply, but the upshot of all that is a new competitive landscape where the exchanges will be seriously challenged by supposedly higher speed and cheaper alternative execution venues. Broker-dealers will also have to constantly prove that they are faster and better than the next guy.

PJ DiGiammarino, CEO of JWG-IT alluded to the scale of change likely to occur under MiFID when he said he expected 2007 - the year of MiFID - to be the most "memorable of our lives". "Costs have got to come down," he said. John Goodie, global head, exchange business unit, AtosEuronext, didn't beat around the bush saying that exchange consolidation and price wars were definitely on the cards.

Not surprisingly perhaps, the LSE's representative, CTO Robin Paine played his cards close to his chest hinting at the new competitive landscape that was emerging in the form of Project Turquoise. "The ability to continue to innovate and deliver consistency and predictability in terms of latency," are the challenges ahead for the LSE, he said. But surely it is difficult for any 'monopoly' to innovate to the extent that may be required?

One thing perhaps that we can be certain of is that post-MiFID, don't be surprised if you look under the hood of trading engines that you find Intel Quad-Core Xeon processors ticking over.

When is ESP not ESP?

Whenever a new concept in technology makes it onto the radar screens of analysts and a few forward thinking companies, vendors tend to want to share in some of the limelight. That is why, for example, after Gartner analysts coined the phrase, Enterprise Service Bus (ESB) and it gained significant notoriety and publicity, even mainstream EAI vendors that initially rejected the ESB concept, were champing at the bit to say, 'We've got an ESB offering too.'

It appears that the same thing may be happening in the event stream processing (ESP) space. In my last post I covered off on ESP, a relatively nascent market, and how it was being used in trading applications, logistics and company supply chains to enable companies to respond and act on real-time streaming data and events.

A word of warning, however, is that as ESP is a relatively immature market, definitions of what constitutes ESP differ from vendor to vendor. Phil Howard, research director at Bloor Group, defines an event, as "an event of some importance." In other words, an event stream processing application is not interested in every event that may occur.

Events for example, can come from transaction databases, Bloomberg or Reuters market data feeds or RFID tags on boxes of books. Event processing is also about managing exceptions such as credit card fraud detection. The next step up from that is complex event processing (CEP), which Howard says is managing 'a set of different exceptions.' "It is easiest to think of ESP as a pipe with water flowing through it and onto that pipe are placed fine mesh grills," Howard explains. "The water flows through those mesh grills, which are not fixed but interchangeable."

In its SOA maturity model, Oracle apparently puts CEP at Level 5, indicating that for most companies it is something that they consider implementing much later on if at all.

However, as Howard points out, firms can implement CEP without having to go down the service-oriented architecture route. In algorithmic trading, for example, which uses event stream processing to detect movements in stocks based on pre-configured algorithms, firms have not necessarily implemented an SOA.

Whilst event stream processing is about handling throughput of data, when it comes to complex event processing, Howard says it is all about implementing technology that can handle complex data streams. Traditional relational databases are less favored in this environment as the perception is that they fall far short of the requirements for responding to incoming data streams in a timely fashion.

By now you are probably thinking isn't ESP or CEP just another form of business intelligence? Well, yes of sorts. According to Howard, event processing incorporates real-time operational business intelligence. However, he adds, some of the core business intelligence software vendors such as Business Objects, have technology that is not "process aware", which is needed if companies want to build operational business intelligence platforms based on CEP or ESP.

Howard says some of the database vendors are looking to embed more intelligence into their data warehousing offerings. He cites the example of Sybase, which he says is looking to partner with an event processing vendor on the front end so it can offer a complete solution. IBM's WebSphere Front Office for Financial Markets allows companies to combine and filter data feeds, and although it may act as a front-end to an event processing engine, according to Bloor Group it is not an event processing solution as such. Click here for more of Bloor's insights.

Dealing with complexity

Ok folks here goes. The next big thing according to those in the know (analysts) is CEP and ESP on an ESB or SOA for real-time business intelligence or BAM. I thought I would try and cram as many three letter acronyms into one sentence as possible to show how ridiculous analysts' obsession with three letter acronyms has become.

By now you are probably thinking here we go again. First it was ESB (enterprise service bus),then SOA (service-oriented architecture), now its CEP (complex event processing). As one journalist from Information Age quipped recently at a Progress Software press event about event processing (an umbrella term used to talk about CEP and ESP-event stream processing),'Everyone is bored of SOA, we've heard it all before,' and by the way is anyone actually doing it? So is CEP or ESP just another three letter acronym destined for the same fate?

Well, unless you design trading algorithms or are a logistics company tracking goods throughout the supply chain, you probably have not heard of CEP or ESP, therefore your boredom threshold is unlikely to have been maxed out yet. And as for whether people are actually doing it, well, the short answer, very few. According to Mark Palmer, general manager, Apama division, Progress Software, the Event Driven Architecture market is currently worth $30 to $50 million, small fry by software standards.

A lot of these three letter acronymns tend to be the 'love child' of computer boffins who spend most of their lives in laboratories dreaming up great whizz bang technologies that rarely find it into every day application. You could say event processing is one of these technologies having been pioneered by boffins at Stanford and Cambridge universities. However, Phil Howard, research director at Bloor Research, believes that event processing will be widely used, but that adoption will be gradual. After all, event processing has yet to reach the peak of its hype cycle on Gartner's adoption curve before it descends into the 'trough of disillusionment'.

Having said that, Dr Giles Nelson, director of technology, Progress Software and co-founder of Apama, a Cambridge UK startup (bought by Progress) that developed one of the first CEP engines, did a good job of explaining why you may want to think about adopting event processing some time in the not too distant future, particularly if you are a business that needs to make rapid decisions on streaming data (tick prices, for example) that is "constantly changing". According to Dr Giles, putting the complexities of the technology itself aside, the nuts and bolts of event processing "is about being able to understand information in real time."

This information could be coming from multiple sources both within and outside the company, RFID tags for example on cases of goods. But Nelson made the clear distinction between business intelligence software, which tends to be based on historical data and doesn't allow someone to act on that data in real time, and ESP. Unlike conventional data management models, where data is indexed and stored and then request/response queries are made on it, if a company needs to act on information in real time, Nelson says there is no time to index data. "That is why SQL is unsuitable for this," he adds. Also vendors like Progress Software tend to favour object oriented databases as opposed to relational for ESP.

In a nutshell, ESP says Nelson, is about storing queries and then flowing data (both historical and real-time) across them. Great you say, but what would I use it for? Well, it has long been used by algorithmic traders who want to test out VWAP and other trading strategies on real-time and historical data. It could also find application under regulations such as MiFID in Europe and RegNMS in the US, where the emphasis is on achieving best price for clients and smart order routing to the cheapest execution venue. As best price is a constantly changing variable, according to Progress it is suited to ESP.