Securities Industry Outlook for 2008
Turquoise Tests Known Strengths in New Arena | ATSs Gear Up for Global Fragmentation | Interdealer Platforms Point the Way | IT Rising to Asset Servicing Challenges | Finra Is Proving 'Principled' |
IT Rising to Asset Servicing Challenges
Operational obstacles top list of technology demands in new year
January 7, 2008
"The art of progress is to preserve order amid change and to preserve change amid order," said Alfred North Whitehead, a 19th century British mathematician and philosopher. The asset servicing industry, which includes some of the world's largest banks, investment operations outsourcing agents and securities depositories, may be taking such advice to heart this year following a tumultuous 2007.
While Bank of New York Co. was merging with Mellon Financial Corp. and State Street Corp. with Investors Financial Services Corp., spikes in trading volume and market volatility were rekindling talk about separating alpha from beta--delivering market outperformance through manager skill as opposed to simple market-sector allocation.
As investors have moved toward inexpensive financial products that capture beta, traditional asset managers in pursuit of alpha have adopted strategies such as short-extension funds and liability-driven investing. Add to that the growing use of over-the-counter derivatives and other exotic instruments by hedge funds, and the road ahead may be difficult for asset servicing providers.
"There will be a need to service the new investments with the same level of transparency and reporting capabilities as their long-only vehicles," says Paul Sutton, partner with management consultancy Morse in London. "The requirements will be accelerated by an increase in the scope of middle- and back-office operations by traditional and hedge fund managers."
Meanwhile, securities depositories--once limited to basic settlement services but acting more and more like custodian banks--are encountering technological obstacles to operational efficiency. Such is the case in Europe, where regulators are pressuring financial institutions to create harmonized market practices to reduce the skyrocketing costs of settling cross-border transactions.
The European Union's code of conduct for market infrastructures to ensure transparency and interoperability and the European Central Bank's (ECB) plans to take over the settlement functions of national securities depositories through a centralized settlement platform will heat up competition between local custodians and depositories for new services, say observers. International depositories Euroclear Bank in Brussels and Clearstream International in Luxembourg could end up in the catbird's seat.
"Depositories will be spending to ensure interoperability and accessibility to non-local investors, and must figure out how to prepare for the ECB's new platform with most of the technical details unclear," says Mayiz Habbal, managing director of securities and investments research for Boston-based Celent.
Funding Stays Level
Few asset servicing executives will disclose how much of their operational expenses are devoted to technology, but there is no scarcity of funding. Many say that technology dollars in 2008 will be at least equal to prior years, and will be spent more efficiently.
"Improved productivity will drive a significant reduction in the amount of technology spend we need on day-to-day production, so the investment in new services is greater than it was in the past, even with the same funding," says Conrad Kozak, SVP and global head of the fund administration and custody business of JP Morgan Worldwide Securities Services, which will spend about $600 million on IT in 2008.
State Street vice chairman Joseph Antonellis estimates that the percentage of operating expenses allocated to IT will remain constant--about 25 percent--but the bank will spend more of that on newer projects. "Four years ago the discretionary IT budget was 25 percent of the total IT budget, but it has now been increased to 35 percent," he says.
