News Highlights from the Sibos conference and exhibition
TORONTO—Much of the securities-related news from SWIFT’s Sibos conference in Toronto last week targets the conundrum of firms facing increased competitive pressures externally and more cost-cutting and high performance demands internally.To ease the conundrum, SWIFT has been focusing on bringing down the costs of its services while revamping its value proposition as detailed by Lázaro Campos, SWIFT’s CEO, in the opening plenary at Sibos.
In fact, early next year, SWIFT customers will be getting a rebate of 16 percent on their use of the cooperative’s messaging services during 2011, SWIFT announced at Sibos. This will return approximately €52 million to SWIFT users and will be paid in January 2012.
The rebate follows a 20 percent price cut in FIN messaging pricing,
Lazaro Campos, CEO, SWIFT
introduced this past January, which SWIFT officials say is one of the largest cuts ever given to SWIFT clients. The reduction has resulted in annual recurring savings of €70 million. SWIFT says it has been able to slash its fees because of a major restructuring begun two years ago and which continues to the present in cost management.
“Three years ago, I promised you greater simplicity and an even more commercially run organization,” Campos said at Sibos in Toronto. “Two years ago, as the world collapsed around us—and I have to say that, coming up to Sibos Toronto, it feels the same way; it feels that the perfect storm is brewing. In fact, it is like having a second child. With the first child, you are full of excitement and you discover as you go along; with the second, you know exactly what to expect, and the fear factor goes up. That is what a second crisis will do to us all.”
After the 2008-09 collapse, the cooperative launched its SWIFT 2015 strategy last year to focus on “simplicity, efficiency, cost-effectiveness, and a renewed focus on our core business,” Campos said.
Campos pointed to the results so far from the 2015 strategy:
- SWIFT Lite: “Over the past four years, we have added a less complex, simple interface to the SWIFT network: Lite. It is a way to integrate more easily with your back office. To date, over 500 of you are connecting to SWIFT through Lite.”
- InterAct and FileAct: “SWIFTNet InterAct and FileAct have gone from being marginal contributors to accounting for 35% of our messaging revenue. FileAct is growing at 40% year on year. We are making progress.”
- Regionalization and Decentralization: “We have regionalized and decentralized our structure to be closer to you. In fact, we have opened new offices in Brazil, Austria, Dubai, Korea and Russia. We have opened a second office in Shanghai and in South Africa.”
- Corporates: “Corporates went from a few to almost 1,000 companies connected to the SWIFT network, representing tens of thousands of legal entities, and their traffic contribution has grown tenfold.”
- New Products: “We have added securities-matching, business intelligence, reference data directories, 3SKey [digital identity solution] and consulting services—a significant number of new products—to limit the dependence we have on messaging revenue, so that we can keep bringing those messaging prices down. We have a full pipeline of ideas and new services, starting with sanctions, remote servicing, Lite version 2, and many more that are in the pipeline and ready to roll out.”
- Arkelis: “We also completed our first acquisition and launched the Arkelis brand of messaging solutions for our top 50 customers.”
- Cost Reduction: “Last but not least, we reduced our costs by 20%—the first in SWIFT’s history. All of that has helped us reduce our prices by over 50%. We also introduced a very interesting scheme for larger customers, whereby we fix the fees that they pay on a three-year basis, with almost unlimited growth capability. That is just a brief headline summary of four years. We have been busy.”
Arkelis
In keeping with the cost-cutting theme, the SWIFT subsidiary Arkelis launched its Outsourced Messaging service at Sibos. The new offering will target Tier 1 firms and will be operational next year.
The new Arkelis service targets big firms that have to process heavy volumes of messages that have high availability and operational requirements. A customizable service, Outsourced Messaging can be used to outsource a financial messaging infrastructure that includes application software, SWIFTNet links and other networks.
“Two years ago, as the world collapsed around us—and I have to say that, coming up to Sibos Toronto, it feels the same way; it feels that the perfect storm is brewing.”
—Lázaro Campos, SWIFT’s CEO
The outsourced offering is based on Arkelis’ flagship offering, the Advanced Messaging Hub (AMH), a multi-network messaging hub, intended to offer high levels of availability, scalability and resilience.
In related news, Arkelis is providing the SWIFT messaging infrastructure for German bank Commerzbank, officials say. Commerzbank has a Frankfurt-based global messaging platform for the financial messaging needs of its divisions and global locations. The platform processes the bank’s SWIFT traffic such as the FIN messaging.
Corporate Actions Vendors
Corporate actions processing vendor XSP unveiled at Sibos a way to let users build their own dashboards for notification and response processing. By leveraging the XSP GO! framework, eTRAN+ provides a customizable user interface that lets clients arrange and customize components for major corporate actions from the core XSP v5 product.
With eTRAN+, clients no longer have to contact XSP to make modifications to their interfaces, and they can create white-labeling solutions on their own, says Daniel E. Retzer, managing director and chief technology officer at XSP.
In other news, XSP has signed a Certified Software Partner agreement with DTCC Solutions that enables the XSP v5 platform and XSP GO! Product Suite to support the DTCC’s GCA Validation Service, which includes corporate action feeds that conform to the ISO 15022 standard. DTCC Solutions is a subsidiary of The Depository Trust & Clearing Corp. (DTCC).
XSP has also renewed its Microsoft Gold Certified Partner status for the XSP v5 platform. The certification requires the XSP v5 platform to have a service‐oriented architecture (SOA) that exploits Microsoft .NET components and Web Services.
Another corporate actions processing provider at Sibos, SmartStream launched TLM Corporate Actions Event Management On Demand as a hosted, software as a Service (SaaS) offering. SmartStream has targeted the new managed service for small to mid-sized firms as a cost-effective, event automation service.
The offering can be pre-populated with cleansed data from SmartStream’s Managed Data Services, officials say. It can also take in client feeds to formulate a single, rationalized event master or Golden Record that works in conjunction with custodian / prime broker specific deadline dates. The combination will drive workflow processes that populate and update the service’s integrated diary. The diary can also monitor and display all exceptions and tasks for each event and can produce in real time a prioritized list of activities.
OTC Operational Risks
Beyond corporate actions, firms have to get ready for processing centralized over-the-counter (OTC) derivatives, which will yield increased operational risks for most firms, says Gary Schwartzberg, a Sibos presenter who works in solution sales for Tata Consultancy Services (TCS) in North America.
The new landscape for OTC derivatives will feature daily reconciliations and reporting and new rules for account segregation and collateral management—just to name a few operational changes.
Schwartzberg urges firms to prepare now for the new OTC landscape and not wait for the regulators to finalize their actions on such matters as clearing and swaps execution facilities (SEFs). Custodians and broker/dealers, for instance, are readying value-added services.
A key area ripe for evaluation is bilateral and centralized clearing of OTC instruments, which will be a reality once the OTC overhaul is underway, Schwartzberg says. In fact, he predicts that there will be a battle between buy- and sell-side firms over account segregation.
“We improved our budget in scope with these regulations on the investment OTC side: on the OTC side focusing on the US, it is a three-digit million euro number that we have to invest, huge investments.”
— Werner Steinmueller, managing director, Deutsche Bank
Essentially, the buy side wants to isolate its risk and reduce its margin requirements by segregating its positions into bilateral and centralized categories before using a clearing service; the sell side would prefer an omnibus account management process. Ultimately, there will be a variety of solutions and both sides will have to hammer out agreements on frameworks and reusable processes for the new rules governing collateral and margins. “These are huge operational challenges,” Schwartzberg says.
In fact, the OTC overhaul will require major investments, says Werner Steinmueller, managing director, head of global transaction banking and member of the group executive committee at Deutsche Bank, who took part in another Sibos session, “Big issue debate 1: The post-Crisis Financial Transaction Infrastructure: What will it look like, and what do the changes mean for market participants?”
Steinmueller sees a clear trend from bilateral to central clearing, and to central counterparty clearinghouses (CCPs). “At first glance, it looks nice and
Sibos, Toronto
easy; everything is concentrated in one global system, but I also want to talk about what it means,” he says. “It is a concentration: concentration means more standardization and huge investments. We improved our budget in scope with these regulations on the investment OTC side: on the OTC side focusing on the US, it is a three-digit million euro number that we have to invest, huge investments. Additional cash collateral is needed: an additional two trillion cash or government bonds is needed.
“We also see more margin calls to make it safer, but you also get more volatility,” Steinmueller adds. “If you want an example: using Irish bonds as collateral for LCH, asking for more margin calls, it went up to 50% of the nominal value. Companies, specifically Irish banks who provided it, immediately needed liquidity, because of the margin calls. The margin calls are creating issues, and there are a lot of these things that mean we have to take care.”
The OTC overhaul will also present major, almost unlimited exposure and risk challenges because of CCPs. “What is happening is the CCP is failing: in 1987, the first financial crisis I remember after the Second World War in Hong Kong, the CCP failed,” Steinmueller says. “There are more examples of where CCPs have problems or have failed. We should think about what is happening and who is taking care, because we are creating some new systematic risk, and we have to tackle that.”
Aside from the systemic risk and collateral challenges, the OTC overhaul will bring automation for trade processing, trade data warehouses and repositories, real-time data flows, real-time data integration with collateral management and risk systems, data aggregation services, and the creation of repeatable processes and calculations throughout the lifecycle of these new OTC transactions.
“Electronic execution will drive all of the reengineering,” says Schwartzberg, who adds that the OTC overhaul will require firms to rethink their siloed IT and business process. “The goal is to have an end-to-end collateral management system.”
The use of XML-based programming languages may be the only issue without contention, Schwartzberg says. FpML is likely to be the standard for trading repositories and warehouses while FIXml is slated for use in swaps executions. “They can and will coexist,” he says.
When asked if politicians will derail the OTC regulatory overhaul, Schwartzberg says that while there are many groups in the industry are pushing for that “the regulators continue to work with industry participants to sure the regulations to come are not overly burdensome to operations.”
Gresham Computing
One way around the burdens of OTC and non-OTC transaction processing is to get more visibility into transactions by implanting real-time, business-driven controls as soon as a trade takes place, which Gresham Computing says it can do with Clareti Transaction Control (CTC).
Debuting at Sibos, CTC has a real-time, low-latency, in-memory matching engine that processes extremely high volumes of transactions, looking for errors can be identified and fixed as early as T+0, says Chris Errington, CEO of London-based Gresham Computing. “Tier-one banks can have literally thousands of known risk points in a transaction flow where something can silently go wrong,” says Errington in a prepared statement. CTC offers control from order execution to settlement. “Given the magnitude of loss events and the number of people involved in manual ‘sticking plaster’ solutions, we expect to deliver ROI for our customers within 12 months at most.”
CTC relies upon a grid-based cloud computing architecture with a Gresham-developed business rules engine enabling front, middle and back-office users to apply controls using business terminology not programming code.
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