When the sleeping dragon awakes

Western sell-side firms have been champing at the bit to obtain a slice of the action in the Chinese brokerage market. Swiss-based UBS bank was amongst the first through the door with its purchase of a 20% stake in Beijing Securities. As part of China's entry into WTO it committed itself to allowing foreign partners to take an almost 33% stake in a joint venture brokerage in China.

According to the China Daily, following the announcement on July 2002 that joint venture brokers were permitted, only five have been established, including an arrangement between Goldman Sachs and Beijing Gaohua Securities.

China's myriad retail brokerages have been plagued by irregularities and a lack of corporate governance. The Chinese government classifies brokers into three main types: innovation brokers, standard brokers and problem brokers. At the end of 2005, 14 firms were classified as 'innovation brokers' and about 20 problematic brokers have been closed down or taken over by other firms, according to the China Daily.

Tim Marsh (ex UBS investment bank), chairman, Hong Kong-based Serisys Solutions, which provides IT services to China's capital and banking markets, anticipates that from October 2007, more foreign brokerage firms will enter the Chinese market as from that date they will be permitted to gain management control of Chinese brokers. But it is not just foreign brokers that are eager to penetrate the challenging Chinese market.

Transaction processing vendors are also eager to sell their securities processing solutions to China's capital markets firms to help local firms process the anticipated rise in volumes from the emergence of wholesale brokerage in China and to assist China's 'innovation' or 'modern'(meaning well-run) brokers in their global expansion.

Based on his experience in rolling out back office processing systems for UBS, Marsh and his company Serisys is putting its money on Syn~, the securities transaction processing platform of Coexis, a more than 30-year-old IT provider which originally sold its legacy back office processing solution CMP to investment firms such as Merrill Lynch, Goldman Sachs and CSFB. CMP and its client base was later sold to transaction processing systems provider ADP Wilco, but Coexis has since launched its "next generation" transaction processing and settlement system, Syn~.

Over crispy duck pancakes and prawns with lemongrass at London's Imperial City Restaurant, the location for Coexis' announcement of its strategic partnership with Serisys in Asia Pac, Marsh was effusive about the workflow capabilities embedded within Syn~.

Ply anybody with good Chinese grub and they are likely to be effusive about anything, but Marsh says the business process and rules-based transaction processing engine within Syn~ is unrivalled in the marketplace in terms of its adaptability, scalability and flexibility, the ability to isolate data from the underlying application so it can be used by other applications, and ease of integration as it sits on top of existing applications.

While competing systems such as ADP's Gloss may take a year to implement in complex operational environments, according to Marsh, Syn~ can be implemented in six to nine months. Serisys will support Syn~ in China and Asia Pac as an in-house solution or on an ASP basis.

Both Coexis and Serisys are working on translating Syn~ to Chinese and hope to add all the necessary functionality for the Chinese market by the end of this year. Coexis and Serisys will initially target the solution at the 18 'modern' brokers identified by the Chinese authorities as well as smaller brokers, which it anticipates will opt for an ASP offering.

But what about the global brokerages looking to enter the Chinese market? Won't they want to support their own in house transaction processing systems which they already run on a global basis or competing vendor's systems such as ADP Wilco's Gloss?

Marsh maintains that competing vendors such as SunGard and ADP Wilco do not have "transportable" securities processing solutions that will readily adapt to the Chinese market. "I don't see how foreign brokers will be able to squeeze their systems into Chinese brokers," he says. "It doesn't make any sense."

Serisys believes its local market knowledge combined with Coexis' next generation platform will prove a winning combination and is aiming to capture a 33% market share of the Chinese transaction processing market. Syn~ will be hosted in a development centre within the Hong Kong Science and Technology Park, five miles from the Chinese border. Marsh says this will also enable capital markets firms to comply with Chinese regulations regarding maintaining of customer data.

Overzealous regulators

Aah! What a difference five years of hindsight and a loss in US market competitiveness as a result of overzealous regulation can make. Most of us have been following the recent backlash against Sarbanes-Oxley (SOX), particularly Section 404 of the act, which requires companies to certify and assess the effectiveness of its financial controls.

Whilst the SEC has not totally repealed the controversial act, in light of a marked decline in companies looking to list in the US, which a number attribute to the onerous task of having to comply with regulations such as SOX, it has announced amendments to the controversial SOX legislation.

Yet, the greatest moment of clarity regarding SOX has to be a recent comment made by House Financial Services Committee chairman Barney Frank at a Council for Institutional Investors' meeting in the US last week. According to an article in the Investment News, Frank, alluding to the over enthusiasm of accountants drafting the SOX act stated:

"The accountants probably, in helping draft 404 regulations, overdid it a little bit, and we violated a very important principle: Never ask your barber if you need a haircut."

Perhaps other overzealous regulators should heed Frank's pertinent remarks.

Not up for sale

The rumour mill is rife with speculation concerning cross-border mergers between European banks. Publicity surrounding potential merger discussions between Barclays and ABN Amro has led some to speculate that it may force the hand of some of the big American banks (namely Bank of America) looking for potential acquisitions in Europe.

Interestingly, while Barclays may be in acquisitive mode, some analysts suggest that it is a potential acquisition target itself. At the start of the year rumours were rife that Bank of America was interested in Barclays. And now according to a Wall Street Journal report, there are certain factions within Citigroup putting pressure on chairman and CEO Charles Prince to put in a hostile bid for ABN Amro, despite Citigroup earlier stating that it was more interested in emerging markets acquisitions.

Others it seems are more concerned about denying rumours that they may be potential acquisition targets. On Thursday, Belgium's second largest bank, KBC Group issued a press statement saying that despite rumours regarding ING seeking a Benelux alliance, it was not up for sale, or its exact words, "it [KBC] attaches a lot of importance to [its] standalone position, and has a core shareholder group which backs this strategy."

Flying the flag of independence, KBC Group says it aims to be an independent, medium-sized, bancassurer for private persons and medium-sized enterprises, and is investing substantially in developing its UK investment banking and private clients business.

But in this era of renewed pressures for consolidation particularly from shareholders seeking higher returns and greater economies of scale, can any bank really afford to say they are not up for sale?

Core banking systems - A necessary evil?

Upgrading core banking systems is not something any banks does lightly. Migration to new systems can take years to bed down and 'Big Bang' migrations have more often than not resulted in disaster.

So if one of the major banking and payments technologies providers in the US, Metavante Corporation and one of Europe's leading core banking systems vendors, Temenos, starts telling US top-tier retail and commercial banks, that time is running out and that 20 to 30 year-old legacy systems need to be upgraded, do you sit up and take notice or bury your head in the sand for another 10 years?

So far most banks in developed markets have opted for the 'ignore it and it will go away' approach to core banking systems replacement. According to a 2006 study conducted by Aite Group, approximately 12% of U.S. banks and the top 500 credit unions have reached a critical point for core system replacement. "They are paying high maintenance costs, and they suffer from slow product launches and an inability to easily integrate third-party applications or access information for compliance to new regulations," Aite writes.

Yet, despite the need for new systems, only 4% of U.S. banks and top 500 credit unions were expected to deploy a new core banking system in 2006. Of these deployments, 90% were by small U.S. banks and credit unions. Hardly a resounding vote of confidence in core banking systems replacement, which means any vendor trying to penetrate the US market may run into a brick wall.

Despite these challenges, Temenos, a leading European and emerging markets provider of core banking software, with a relatively small footprint in the US market, has set its sights on growing its US market share. However, recognising the "barriers to entry" in the US, it opted not to go it alone. Instead it is partnering with US-based Metavante Corporation, which provides banking and payments technologies to more than 8600 financial services firms worldwide.

Metavante counts 91 of the top 100 US financial institutions as its customers and as part of its strategic alliance with Temenos, it will "co-develop" an "advanced US global banking platform," based on Temenos' TCB retail processing solution for large-scale retail and commercial banks. Michael D. Hayford, COO and CFO of Metavante said they were attracted to Temenos' technology because of its multilingual, multicurrency, 24 x 7 processing capabilities, components US banks were missing.

Metavante will be the exclusive US provider of the "new advanced TCB platform," and in those banks that already use Metavante's core banking software, it will be replaced with components from the TCB product. Temenos and Metavante will initially target the top 50 US financial service providers with their new US global banking platform, which can be licensed or outsourced via a service bureau.

But what makes Temenos and Metavante think that their offering will be enough to convince US banks to upgrade 20 to 30-year-old legacy systems? By combining Temenos' advanced technology with Metavante's US banking knowledge, existing customer base and outsourcing experience, both companies believe it is a recipe for success.

Metavante and Temenos' approach in the US market is to encourage banks to replace core banking systems, component-by-component rather than a more riskier 'Big Bang' approach. And its outsourcing offering will certainly reduce the upfront investment for some banks.

Metavante maintains US banks no longer have any choice but to upgrade. "Large US banks have invested in nice front ends and bolted on interfaces to hide this back office functionality which is still running the way it has for a long time," says James Dempster, CTO, Metavante.

A number of US banks probably subscribe to the belief, 'If it ain't broke don't fix it.' Yet Dempster maintains that the "new cheque paradigm" in the US, and the move towards more electronic forms of payment, as well as the competitive threat posed by other banks and non-bank providers (for example, Wal-Mart), means US banks will be forced to move to a "continuous processing model" in order to compete and provide more competitive products.

Other global banking solution providers such as SAP/Accenture, Infosys/Finnacle and Oracle/i-flex are also looking to penetrate the US market. And whilst Metavante and Temenos believe their US market knowledge gives them a critical advantage over these providers, one cannot ignore the the 'stack' approach of competitors such as Oracle which is stitching different applications together including CRM, ERP and core banking software as part of its Fusion middleware strategy.

Mere mention of Oracle, however, is always guaranteed to arouse a passionate response. Alex Groenendyk, president, Americas, Temenos, maintains that Oracle is not a favoured supplier to the financial services industry and that Metavante's knowledge of the US banking market is unrivalled.

Dempster of Metavante expanded the point further saying, "Large US banks do not want an enterprise model. They want modular components that will interoperate with their existing architecture." Dempster believes that Oracle and SAP will suffer from their "tight connection" to Fusion and NetWeaver.

Andreades of Temenos is more passionate in his response to the competitive threat posed by Oracle/i-flex. "If you give your database model and applications to a single vendor (namely Oracle), you have given your business to that vendor to run. We don't believe the stack is the way to go."

I Can't Get No Satisfaction

Now that the outsourcing trend has well and truly passed the 'hype cycle' and plunged into the proverbial 'trough of disillusionment', global outsourcing advisory firm TPI has shed some light on why firms are becoming increasingly dissatisfied with outsourcing.

For those non-believers that strongly contest firms' dissatisfaction with outsourcing, TPI says it witnessed "a record number of re-negotiations" of outsourcing contracts in 2006, representing almost a quarter of all commercial contract awards made during 2006. "And this trend shows no sign of abating," according to TPI partner Stuart Harris.

TPI's summer 2006 survey of 40 international firms on their experiences of restructuring or renegotiating outsourcing contracts, found that 28% of respondents achieved less value than originally anticipated from outsourcing, with some companies restructuring their agreements within 18 months of having signed them.

But while it may be easy to point the finger at outsourcing providers as the source of dissatisfaction, TPI's research found that 61% of firms conceded that they had placed more emphasis on setting up the outsourcing contract rather than on managing it, and another 52% of respondents blamed their own "unrealistic expectations" as a key barrier to success.

Almost half of the companies surveyed by TPI blamed their "inexperience" in managing outsourcing and 46% said they had failed to fully implement a proper governance structure, with 35% failing to convene regular meetings of governance boards. It harks back to the age old adage, 'You may outsource the problem, but you still need to manage it.'

Yet, while firms have been remiss in terms of their expectations and ability to manage the outsourcing process, outsourcing providers are not entirely blameless. Historically, they have tended to emphasise the 'pros' as opposed to the 'cons' of outsourcing, by highlighting aspects such as cost savings in the region of 50%, without underlining the 'hidden costs' often involved in outsourcing.

Yet, whilst dissatisfaction with outsourcing contracts may be at an all time high, few firms surveyed by TPI had actually severed their relationships. Of the 42% that considered soliciting bids from other outsourcing providers during renegotiation, only 18% actually did so. Similarly, 41% said they considered bringing some of their outsourced work back in-house, but only 13% did.

Yet, as any bank or asset manager will know, moving to a new outsourcing service provider is not as easy as it sounds. "TPI has found that the friction typically involved in making the switch can be quite considerable,” says Harris. And as providers of outsourcing services are aware of buyers' 'weaknesses' when it comes to managing outsourcing contracts, Harris says that perhaps explains why 29% of buyers surveyed said they found their bargaining position weakened at renegotiation, compared with when the deal was originally struck.

It would seem that some outsourcing providers have firms over a barrel as once they are in the relationship, depending on how deep it is and the services it encompasses, it may be difficult for some firms to get out out of a dissatisfying outsourcing contract. And while we occasionally hear of outsourcing deals gone sour, they are just the publicised ones, and are perhaps not a true reflection of the general level of dissatisfaction firms may feel about outsourcing.

The SQL debate continues

In response to my earlier post on the debate surrounding the use of SQL in complex event processing (CEP) applications, Mark Tsimelzon, CTO of CEP vendor Coral8, has written something himself on the subject entitled, CEP and SQL: The Top Five Myths.

Make your own minds up.

The SQL debate

Having opened a veritable 'can of worms' with my post dated the 2 March entitled, Event Processing gets 'complex', my curiosity regarding the debate surrounding the use of Structured Query Language (SQL) in some complex event processing (CEP) applications, was further aroused.

The debate that post generated can more or less be summed up as the pro-SQL vs non-SQL camp, with CEP vendors like StreamBase Systems putting its case for an SQL-based standard for querying real-time event streams and stored data, while other vendors such as Kaskad and Progress Apama stated that there was little support for a SQL-based standard for event stream processing (in terms of companies offering this approach).

That may well be the case, but if so many CEP vendors do not support SQL, it made me wonder why some were sticking to their guns and implementing SQL-based languages anyway? I was interested to read an article penned by John Morrell of complex processing software provider, Coral8, reproduced on the Complex Event Processing web site.

Coral8 has developed an SQL-based Continuous Computation Language. In the article Morrell writes, "This [SQL] provides a familiar programming environment, speeding the creation of event processing applications." He later adds that as SQL is a 'pervasive' language, it lowers the learning curve for developers of CEP applications.

So there you have it. The highly competitive CEP space is dominated by vendors pushing different approaches, and after all choice is a good thing. But is there a right or wrong approach, and can SQL in CEP applications be discounted altogether if it does do what its proponents say it does in terms of speeding up development?

MiFID - Hit the ground running

Not a week goes by where there is not some news on MiFID. Today appears to be no exception. With eight months to go until the official launch date for MiFID, suddenly all the experts are crawling out of the woodwork..

One such expert is Marcus Hooper who has penned a white paper sponsored by Equiduct on firms' best execution requirements under MiFID. Apparently Hooper has trawled through reams of MiFID Level 1 and 2 documentation to try and make sense of 'best execution' requirements, one of the most controversial least understood aspects of the legislation. The white paper includes example scenarios to explain how best execution is expected to work in real-life trading situations.

"The reality of today's situation is that many firms are still confused about the most fundamental aspects of best execution, despite the fact that they will all have to implement systems, design business processes and comply with the new rules from November," says Hooper.

The white paper is one of six Equiduct is sponsoring in the run-up to MiFID. According to Bob Fuller, CEO, Equiduct, it is time for firms to hit the ground running. "If organisations are to make a success of MiFID they have got to move beyond opinion and actually determine what to do now to make sure their businesses are ready when the new rules become law on November 1st 2007."

The white paper on best execution will be available free for download from Equiduct's web site from Monday, 5 March.

Event processing gets 'complex'

The latest IT bandwagon that vendors are jumping all over is complex event processing, which promises to help firms make rapid decisions on streaming data (tick prices, for example)that is "constantly changing".

It is lumped into the broad category of 'business intelligence,' which is seeing a lot of activity of late with Oracle announcing its $3.3 billion acquisition of business intelligence (BI) vendor Hyperion, which it will combine with its own BI software to provide customers with tools for collecting and analysing information about their business.

What is the big deal about BI and complex event processing? Every firm has reams of customer, logistical and transactional data stored in silos, but this data is meaningless unless firms can glean some form of intelligence from it and use that to enhance customer service levels or gain a competitive advantage.

Event processing (EP) has found a natural home in the capital markets, where according to Brad Bailey, a senior analyst at Aite Group, "[it] has made an impressive showing in the algorithmic and strategy trading areas, and EP solutions are now migrating to other areas of the capital markets, such as data monitoring, compliance, Transaction Cost Analysis (TCA), risk management, proprietary data derivations, market making, and others."

A number of vendors are now claiming that event processing software is a 'must-have' component of firms' preparations for MiFID particularly when it comes to intelligent order routing and demonstrating best execution

Yet, making sense of what vendors are really offering in the event processing (EP) space is fraught with difficulty as not all of the firms in this space are specialists, they have merely added on BI or EP tools to existing data management applications.

Phil Howard, research director at Bloor Group cautions that "misleading claims" are being made about performance in the CEP space. There are claims and counterclaims about the speed and performance of various EP applications. There also appear to be some deep-rooted philosophical differences between vendors, which is only adding to the confusion for firms contemplating event processing for the first time.

Streambase Systems, designed its own language (StreamSQL) which adds time and event-based windows to standard SQL (Structured Query Language)to support live time queries on event streams. SQL has been used for many years to access and manipulate database systems.

Barry Morris, chairman and CEO of Streambase, says there is no other candidate than SQL, which is more widely used and understood than some of the proprietary technologies and languages competitors are developing.

Critics of SQL say it is not up to the job of performing real-time queries on streaming data, yet Morris maintains that it hasn't encountered any problem it hasn't been able to solve using StreamSQL. "StreamSQL allows firms to access static data that is on disk or in-memory in the same way that they access real-time data," he says. He claims that an "old fashioned" 'rules-engine' type approach, which some of its competitors offer, does not know how to handle static data.

Governance on-the-fly

Aah! Remember the days when service-oriented architecture (SOA) was being touted as the next big thing in enterprise application integration, a panacea if you like for companies' integration woes as it allowed them to re-use IT components or invoke them as part of a business service regardless of the technology platform or location underpinning them.

SOA is certainly not a new concept. It has been around for 15 years or more, but has come into its own in the last few years with the proliferation of web services standards. But like most technologies that are over-hyped, the initial fervour and enthusiasm soon gives way to the practical realities and considerations that accompany implementation.

It is only once companies started getting their hands dirty that the industry is now starting to have the debate about 'run-time governance and SOA'. Given that SOA allows anyone within an IT organisation to re-use IT components or invoke them as part of a new business service, their needs to be some form of overarching governance framework in place, otherwise the left hand is not really going to know what the right hand is doing.

Needless to say because vendors and companies have been learning 'on-the-job', it is only now with the benefit of hindsight and SOA implementations in place that some of the tarnish of service-oriented architectures is starting to wear off.

In a white paper on Runtime Governance and SOA, Progress Software makes the following comment:

"Many SOA implementations are just not working in production as designed or expected. Problems range from service interruptions to entire business processes failing, to compliance risks that generate costly delays and lengthy triage cycles."

Understandably firms that have or are in the process of implementing SOAs may be miffed that nobody warned them of the pitfalls beforehand. The industry has certainly done a good job of overhyping SOA and then almost as an afterthought, bothering to educate firms about governance and service re-usability issues within a SOA.

"Leading the charge for governance have been enterprise architects who know quite well that for SOA systems to deliver value, there must be control in areas ranging from how a service is built and the process of deployment, to granular
items such as schemas and WSDL creation," write Progress Software.

It reminds me of the Maturity Models that a number of vendors have published regarding SOA, which demonstrate the different levels of maturity of a SOA implementation, with most firms occupying the relatively immature stages striving to attain the peak level of maturity, which let's face it, is not going to happen overnight.

Could Clearstream be up for sale?

Out here in blogger land one does get a certain sense of satisfaction when the mainstream media picks up on themes we have been blogging about. Just to jog your memories, on the 6 February, FinancialTech Insider posted a comment entitled,Deutsche Börse's next move, which ventured whether given the failure of its merger attempts with other exchanges, would the German exchange sell off parts of its business, including the ICSD Clearstream?

Well according to a report in The Wall Street Journal,Atticus Capital,which holds an 11.68% stake in Deutsche Börse,is keen to see it separate Luxembourg-based Clearstream International from the exchange and return cash to shareholders.

In the forthcoming March issue of financial-i-magazine, I pose the same question to Clearstream International's CEO Jeffrey Tessler, who maintains that Clearstream is an integral part of Deutsche Börse group, comprising 40% of its revenues.

But in the rapidly evolving exchange landscape, anything is possible it seems and no one should underestimate the persuasiveness of an exchange's shareholders, particularly if other shareholders start making similar demands.

Fear and loathing on the acquisition trail

While the NYSE and Euronext put the final touches to their cross-Atlantic mega-merger, some may be thinking was the London Stock Exchange (LSE) right to slight the Nasdaq's advances.

Well apart from the obvious economies of scale and cost synergies that most mergers entail, it is easy to forget about the cultural and integration challenges that a merger on the scale of the NYSE's and Euronext's involves. Having cleared the regulatory hurdle, it is too soon to say whether they will clear the final hurdle, successfully integrating the two companies.

With that in mind then the LSE's 'go it alone' stance does not seem that brazen given that the London Stock Exchange is a revered institution and a merger with a US exchange would present significant cultural as well as technical challenges.

All is not necessarily lost though for those exchanges that say no to mergers. Acquisition is not the only option for the LSE or the Nasdaq looking to eke some value from its 29.16% minority investment in the LSE.

Bob McDowall, senior analyst, TowerGroup, believes that "interoperability" may be the "route to salvation for Nasdaq and the LSE."

In his latest research note, McDowall writes:

"Adopting a strategy of interoperability is a mutually co-operative, lower-risk approach to consolidation than acquisition, which carries reputational risk if it fails. However, for the LSE interoperability offers it the distinct business and technical benefits as a mechanism for the consolidation of exchanges without losing the independence a takeover removes."

According to McDowall, interoperability would allow the LSE to assess over time the extent to which it wants to work with other exchanges; it would also mean less
uncertainty for shareholders and stakeholders.

No rattling of sabres

Well there has been a lot of 'sabre rattling' going on around investment banks threatening to set up multilateral trading facilities to challenge the monopoly of Europe's exchanges.

However, one platform, Equiduct, which resurrected the old Easdaq pan-European exchange platform, appears to be doing a lot more than waving its sabre about provocatively. For those sceptics who thought it may not get off the ground (or was that Project Turquoise), Equiduct is demonstrating all the signs of a trading platform in the throes of going live.

Willy Van Stappen, ex LCH.Clearnet, has joined Equiduct as chief operating officer. He will be focused on the provision of 'best execution' services that Equiduct plans to offer including enabling firms to trade instruments listed across 29 markets via a single platform.

Equiduct has also secured its first round of funding from Belgium-based Bams Angels Fund and a group of London-based industry professionals (presumably that means investment banks or individuals that want to put the exchanges' noses out of joint). Market data service are scheduled for Q3 this year with trading on Equiduct expected to commence in Q1 2008.

The war of the MiFID

Heavy with flu I forced myself out of my codeine haze to digest the latest news on, you guessed it, MiFID.You may be thinking I have swallowed one to many cold and flu capsules, as I am about to launch into another rave about the Market in Financial Instruments Directive.

Sometimes it does feel like groundhog day here at FinancialTech Insider but perhaps with good reason. PJ DiGiammarino and his team at JWG-IT, the think tank working with buy- and sell-side firms to make sense of MiFID, has gleaned from the 25 workshops it has held over the last few months with 30 financial institutions, 100 (only 100, you say?) MiFID decisions that firms need to make fairly soon before the day of transposition to MiFID in November.

Based on 150 days of collaborative research amongst the 30 firms that attended its workshops over a 12 month period, JWG-IT has identified the "known unknowns" of MiFID, which it colourfully equates with the 15th century's War of the Roses because of the loosely connected "fiefdoms" within Europe all vying for control over the evolving "common market."

JWG-IT's full report entitled, "MiFID: The roadmap to implementation," is somewhat of a 'Hitchiker's Guide to the Galaxy,' as it not only highlights where the current gaps exist in knowledge and preparation; best execution, trade and transaction reporting, MiFID's treatment of outsourcing, record keeping and customer data management; but it also provides reference implementation plans and frameworks.

And the aim of all this; well to put it bluntly, with less than 200 working days left until MiFID becomes law, it is a not so gentle reminder that firms need to pull their finger out of their proverbial ... They say it is time for action even on the 'known unknowns' (when someone has defined the known knowns of MiFID - the only known perhaps being that MiFID is going to happen - please let us know.)

David Seacombe a director of JWG-IT had this cautionary note for firms:

"Testing of new processes should start within the next two months but it will be very difficult to meet the required timetable, because many small firms still have no access to agreed architectures."

To download a free copy of the report go to www.jwg-it.eu and look under the MiFID docs section.

Just in time for MiFID

Just in time for MiFID and perhaps just in time for those sell-side firms that are contemplating setting up alternative execution venues to rival the exchanges, the London Stock Exchange (LSE) has finally announced what it plans to offer firms around the Markets in Financial Instruments Directive (MiFID).

Sell-side investment banks under the guise of Project Turquoise have threatened to set up a multilateral trading facility offering faster and cheaper execution of trades than the LSE. Also Equiduct, which is based on the old EASDAQ platform, has announced its plans to establish a pan-European exchange in response to MiFID.

The banks behind Project Turquoise have been accused by sceptics of "sabre rattling", and we may soon establish whether that is the case or not with the LSE dangling a rather 'attractive' carrot in the faces of the disgruntled sell-side firms with its latest announcement, which promises "new market leading technology, an enhanced suite of trading services" and, wait for it, "an attractive new tariff structure."


According to Computing, the LSE has been undergoing somewhat of an IT overhaul, implementing a "real-time" dashboard so LSE staff can better respond to customer enquiries. Apparently it has also implemented a new information reporting system, presumably in response to the pre- and post-trade reporting requirements under MiFID, and the piece de resistance, its new supposedly speedier trading platform, TradeElect.

In terms of pre-trade reporting, the LSE will extend its existing market making quoting facilities to encompass all EU securities, and on the post-trade side, it vaguely refers to enhancements, although with investment firms complaining about how much it costs to report trades to the exchange, it is questionable whether the LSE's efforts will be enough to prevent investment banks like Merrill and Citi going ahead with their alternative trade reporting system, Project Boat (where do investment banks come up with these names?)

Will the LSE's rather belated and vague MiFID announcement be enough to stop the sabre rattling of investment banks? It is anyone's guess, but me thinks it would be foolish for the investment banks, who have made a big deal about exchange tariffs to back down now before the Day of the M {MiFID} has even arrived.After all a little competition is always healthy, they say.

MiFID where art thou?

I am becoming increasingly sceptical of the IT vendors that are crawling out of the woodwork as the deadline for transposition to the Markets in Financial Instruments Directive looms.

As I reported a couple of weeks ago from Finexpo, even MiFID thought leaders like JWG-IT and MiFID Connect believe a number of key questions around MiFID still need to be clarified, not least the most fundamental component of the regulation, what constitutes best execution?

That hasn't prevented vendors from jumping on the MiFID bandwagon. The latest one is IT consultancy Fintecs which has launched a visual software aid, MiFIDMap Workbench, a heat mapping tool developed specifically to show compliance officers how MiFID is likely to impact their own trading processes and to what extent their business processes are compliant.

The idea behind the tool is to help companies in their planning and testing for MiFID compliance in the run-up to the November deadline, enabling companies to compare their own internal data against details of the MiFID Directives.

Anything that can help companies prepare for the minefield that is MiFID is not an unwelcome addition. However, the industry cannot afford to lull itself into a false sense of security that MiFID compliance is as straightforward as implementing a piece of software. And whilst MiFIDMap may be a helpful monitoring tool for compliance officers, unlike previous change events such as Y2K, MiFID entails changes across the business and a number of these changes are open to regulatory interpretation.

If all else fails, one can always turn to the latest tome penned by Chris Skinner, chairman of think tank Balatro Ltd. The book entitled,The future of investing in Europe's markets after MiFID, is published by Wiley.

Yes, it may be difficult to contemplate that MiFID has inspired a book, which is unlikely to knock Zadie Smith off the bestseller list any time soon. However, for those buy- and sell-side firms embroiled in MiFID and anyone interested in finding out how it will change the investment landscape in Europe, Skinner's tome provides a comprehensive overview of the regulation, how it will work, what impact it will have and the technology implications, with chapters contributed by leading industry thought leaders like MiFID Connect, Accenture, the European Commission and the MiFID Joint Working Group.

Stock exchanges need to up their game

In this climate of fundamental change and regulatory uncertainty, one would think that IT investment would be at the top of exchange CIO's list of priorities. After all isn't that why the NYSE bought ArcaEx and Nasdaq bought INET, for their technology.

It also perhaps explains why the US exchanges are going after their European counterparts. Not only are they looking to expand their footprint beyond the US into Europe where trading volumes are anticipated to rise. But let's face it European exchanges, at least the major ones that their US counterparts are looking to buy, have much more sophisticated electronic trading systems.

Given the acquisitive mood that the US exchanges appear to be in, is it any surprise that IT spending amongst global exchanges is growing slowly? TowerGroup estimates that exchanges globally spent $2.72 billion on IT in 2006 and that spending will grow at a rate of 3% through 2009 – breaking down to 4% in 2007 and slowing to 2% to 3% from 2007 to 2009.

Not surprisingly exchange IT spending is growing the slowest in the US, where analysts such as Larry Tabb have said that retaining NY's glory as an international financial centre is not just about reducing regulatory oversight, but also enhancing technology and connectivity in the US market.

According to TowerGroup, IT spending amongst European exchanges is growing moderately, while the burgeoning and flourishing exchanges of Asia, trying to cope with stock market 'bubbles', are growing the fastest.

Dushyant Shahrawat, research area director, Securities & Capital Markets, TowerGroup says:

"Of all the public exchanges, those in the United States are currently under the greatest pressure to reduce costs as they go electronic, in order to get their IT expense / revenue ratio in line with that of other financial firms and European counterparts."

Deutsche Boerse's next move

Amidst all the machinations we have witnessed in the last few weeks between the Nasdaq and the LSE, one has to ask what the Deutsche Boerse makes of all this.

The German stock exchange knows only too well what it is like to be turned down by the LSE on more than one occasion, having made various bids for the London exchange dating back to 2000.

Watching the protracted negotiations (if one can even call them that) between the LSE and the Nasdaq, one has to wonder what impact this is likely to have on Deutsche Boerse's strategy. The exchange has been unusually quiet in these last few weeks, going about its business. But is it regrouping its resources to launch another bid for the LSE or possibly another exchange, or is it a case of twice bitten ...?

In light of the competitive threat regulations such as MiFID poses for national exchanges and the impact the Code of Conduct on Clearing & Settlement is likely to have on exchanges' cosy arrangements with clearing houses and CSDs/ICSDs, some are suggesting that at some point, Deutsche Boerse may be forced to reassess its vertically integrated approach.

As the exchange and securities clearing and settlement landscape in Europe evolves in response to regulatory and market forces, some interested observers are asking what is Deutsche Boerse likely to do with its post-trade business, which includes the ICSD Clearstream? Will it form separate subsidiaries and then sell them off bit by bit? What is the exchange's next move likely to be?

'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.