BANQUE &
FINANCE
THE MAGAZINE OF THE SWISS FINANCIAL CENTER Banking Solutions 2012
Cloud, outsourcing, e- and mobile banking, new trends in practice
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Financial innovations for a safe drive
tax agreements Burden or new deal? How Fatca and Rubik impact IT systems
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Editor’s comment
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FINANCE
Managing Publisher and Editor-in-chief Frédéric Barillet Outline and Layout Emilie Hébrard, Lucile Dubost Marketing Florence Ray Advertising Médiapresse Pub SA Rue de la Vigie 3 1001 Lausanne Tel. +41 21 321 30 77 Fax +41 21 321 30 69 In charge: Roye Yarden, Pierre Chappuis Subscriptions E-mail: abo@banque-finance.ch CCP: 12-17931-5 1 year subscription (6 issues) CHF 70.2 year subscription (12 issues) CHF 100.Tel. +41 22 809 94 53 In charge: Maïssa Naufal Published by Alter Ego Médias Boulevard Georges Favon 43 1204 Genève Tel. +41 22 501 70 15 E-mail: info@banque-finance.ch Banque&Finance magazine is issued 4 times per year and publishes 2 supplements per year. © Alter Ego Médias - October 2012
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Chasing butterflies
hat is an image that arises when talking today about the thorny problem of the survival of Swiss banking secrecy. The crisis, which has affected the world for almost five years, has such far-reaching consequences on western nations that they are reduced to hunting their own nationals, whose financial wealth has escaped, for various reasons, outside their borders. Butterflies are thus pursued, net in hand (the handcuffs would have been a rather aggressive image for the cover page of this magazine)! Some people see it as social justice, others as revenge. Various governments consider it as a means to obtaining quick cash in order to reduce (by a very small percentage) the enormous debts they have accumulated over the past thirty years. For Switzerland, where respect for the private sphere is not a figment of the imagination but an intrinsic part of the country’s genetic code, the time is ripe for questions. In search of a bit of serenity, what should the country do to escape the meshes of the nets thrown by politicians all around the world? Should it accept being defeated by Brussels and Washington, where the advocates of transparency are pushing for automatic data exchange of information, which for them would be the easiest way to be able to tax assets managed outside of their territories? Should it negotiate bilateral agreements to ensure compliance by all foreign customers without, however, falling within the scope of such automated processes? Or should it refuse any compromise, considering that it is a serious problem indeed, but transitory, and that the good times will some day return, once the sirens have been silenced? The debate is on. In any case, since the rejection of the draft referendum, it seems that the intermediate solution, known as Facta for the USA and as Rubik agreements for everywhere else, is the most likely. A boon for IT specialists who have understood that banks, willy-nilly, will have to update their information systems in order to ensure compliance and will pay for specific developments adapted to each country. When it comes to chasing butterflies, it’s always better to hold the net than to be the bug. n frÉDÉRIC BARILLET f.barillet@banque-finance.ch
BANQUE&FINANCE banking solutions 2012
Photo: Lucile Dubost
THE MAGAZINE OF THE SWISS FINANCIAL CENTER
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Contents
.07
.33
Regulatory compliance, burden or new deal?
Cloud, outsourcing, mobility new trends in practice
Cover illustration: ©Porteador
.36 Your magazine on the web www.banque-finance.ch
.53 Financial innovations for a safe drive
Banking solutions 2012
Prochain numéro / Next issue Gestion alternative et Hedge Funds
#118
Où en est la Suisse? De réelles perspectives d’avenir?
marché des PME
L’état des lieux Comment elles gèrent les risques économiques
BANQUE&FINANCE banking solutions 2012
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2012 Contributors
Sanaa Behar
ENZO GIANNINI
Per Prod’hom
Marc Spaelti
Senior Consultant Antaes Consulting
Head of Client Services, SunGard Ambit Private Banking
Certified tax expert and avocat Baker & McKenzie, Geneva
First Vice President / COO RM & Brokerage department Dukascopy Bank
Jean Marc Bost
Nicholas HackinG
Robert Rümmler
Andreas Toggwyler
Head of Security division Elca Informatique
Director Sales ERI Bancaire SA
Senior Manager Ernst & Young
Partner Ernst & Young
Christine Mar Ciriani
Herbert Jäggi
Etienne Savatier
Peter Welch
Partner Capco
Key Account Manager Banking Elca Informatique
Associate Partner Sterci
Senior Consultant Antaes Consulting
Marco Dottarelli
Yoann Le Corvic
Alexis Sikorsky
Arno Zanetti
Managing Director Equinix (Switzerland)
Senior Security Engineer e-Xpert Solutions
Chairman New Access SA
Business Partner Zurich SpeciTec
Laurent Franceschetti
RAFFAEL MAIO
Philip Smith
Nikolaos Zorbas
Strategy and operations consultant SettleNext, Geneva
CEO / COO, Founder NetGuardians
Director SpeciTec
IMSplus Business Unit Manager PROFILE Software
BANQUE&FINANCE banking solutions 2012
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.07 .7
IT Changes
Regulatory compliance, burden or new deal?
Illustrations ©Retrorocket
.08 Christine Mar Ciriani .12 Nicholas HackinG .14 Sanaa Behar
& Peter Welch
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Laurent Franceschetti & Per Prod’hom
Andreas Toggwyler & Robert Rümmler
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Alexis Sikorsky
CAPCO
ERI BANCAIRE
ANTAES CONSULTING
Settlenext baker & mcKENZIE
Ernst & Young
NEW ACCESS
BANQUE&FINANCE banking solutions 2012
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IT Changes
Readiness for impending and imperative regulatory challenges The latest fiscal regulations - bilateral tax treaties (e.g. Rubik) and Fatcademonstrate the tight relationship between politics and finance, and put technology and business process to the test.
Y
ou cannot avoid it. If you are in financial services, taking a standpoint on financial transparency is no longer an option. Fiscal regulations have dominated both the political and change agenda, with projects linked to the need to meet ever-evolving regulatory Christine Mar Ciriani requirements consuming an increasing portion of bank spend on change - up to 70% for some banks. Partner Capco The focus has shifted from data and client protection to tax evasion prevention. From a customer point of christine.ciriani@capco.com view, you might actually still choose to disregard such obligations. According to Rubik a client who refuses to either disclose or settle past and future tax will have to close their Swiss accounts; whereas according to Fatca, a foreign financial institution that does not enter into an agreement with the IRS will have to disinvest in US products. From a bank point of view, there are BANQUE&FINANCE banking solutions 2012
two main areas to consider: given other constraints, how much does the bank want to spend in complying with the regulation; and how much are they willing to impact client experience and efficiency to get there? In brief, which standard should the bank target to reach? And if they set their sights on the ‘gold’ standard, can they afford to get there? It’s perhaps not surprising, then, that financial institutions are taking very different standpoints. Some are insistent that they do not want to impact the client experience and therefore do not want to change existing onboarding processes, relying on technology and other processes to look for insignia after a client has been onboarded. Others are radically changing their client onboarding process and supporting technology. At a minimum, client onboarding forms are being re-defined to integrate latest requirements
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that reflect the new set of processes for handling the documentation of new and existing clients. Fiscally Aware The impact of regulations will of course be twofold. On the one side there will be a paradigm change: the clients’ performance evaluation will have to be calculated post tax. Clearly the first challenge is ensuring an accurate calculation is provided to the client. Additionally, the investment strategy will have to take into account the impact the country of residence has on the tax-efficiency of a product. So, who should provide tax advice to the client – the bank or an external tax advisor? Is it appropriate for a financial institution to provide such type of advice in the name of the client’s best interest – and then again, is the client’s best interest equal to “tax optimization”? Will regulation force this into the direction of the bank?
The performance evaluation will have to be calculated post tax and the investment strategy will have to take into account the impact of the client’s country of residence.
Platform Pressures… and the train has left the station It’s not so long - only a decade, in fact - since a trade ticket was written on paper. Technology has now automated this process. And what about client onboarding and client identification? Even with tablet technologies, this information is still often paper-based, which makes remediation often more costly than implementing compliance for new clients. Even if banks have equipped themselves to scan through paper-based files to identify clients, this information is often not easily stored in existing systems. Focus on Know Your Client and related client categorisation has been a common focus of both Rubik and Fatca but also other regulation around client suitability and investor protection. Focus on client identification - and related platform enhancements - means that the changes can be uu
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IT Changes
FATCA
Bilateral Tax Agreements
Who? IRS vs. foreign financial institutions (FFIs)
Switzerland and some European Countries (AT, DE and UK so far)
What? An instrument of US tax legislation A complement to the European Union Savings Directive An extension of the Qualified Intermediary (QI) regime Bilateral tax agreements When? Mid-year 2013 Reduce tax evasion of US citizens
January 1, 2013 Settle past and future tax liabilities of foreign residents
How? Requires FFIs to carry out due diligence procedures Regularize untaxed assets held by banks in Switzerland by settto determine US accounts and report specific informa- ling the past by a one-off payment and the future by paying a tion on such account holders to the IRS withholding tax uu performed in conjunction with the increasing requirements around suitability. Once the client identification and suitability requirements are addressed, withholding tax calculations is the next challenge. Architecturally, different options exist for providing the new tax capabilities. An external vendor solution can be chosen or the internal systems can be leveraged to either enhance the existing tax engines or build a centralized tax engine. One tax solution can be combined with other solutions – often tactical – to help create a more strategic and transparent approach. However, if it was only about selecting a package to calculate withholding tax, banks would have solved the fiscal regulatory challenges by now and would not be worried about hitting the impending deadlines. Data flow will have to be consistent across all applications to ensure information management and reporting. This will have to be made possible over an extended period of time to allow taking into account historical data. At the same time, the appropriate level of integration will have to be sought together with the flexibility required by updates in data (in case of reversed transactions for example). Asset classification may require review to ensure that the combination with the client status triggers appropriate reporting across different systems. These regulations have never ending complexities: preparation of data by asset class to ensure correct withholding calculation, ability to hold data which can be calculated differently by country of residence / citizenship, ability to hold a wider definition of documentation to identify and categorise clients properly……the list goes on…. and the dates keep getting closer. But for some banks - there is something to celebrate. Those financial institutions who have invested in their operations and IT platforms over the last decade have reaped the benefits of investing in systems where mining data is less of a challenge. For banks who considered tax a strategy domain for the bank, and therefore started a few years ago in developing solutions which support tax reporting, implementing these regulations is much easier. BANQUE&FINANCE banking solutions 2012
The IT department will have to work closely with the Front Office, Product Specialists, Operations, Tax and Compliance experts.
WORKING TOGETHER Towards a Common Objective The technology decisions that an institution makes also depend on a number of other factors that – in a context where legal regulation is everevolving – need to be agreed up front. Ownership for these projects are typically the compliance or tax department, although in our experience it can also be operations or IT. Governance of these projects adds additional complexity as these decisions require collaboration across entities and at the same time require swift decision making. All departments within the institution will have to interact and communicate in order to reach the an agreed set of decisions: IT must work closely with the Front Office, Product Specialists, Operations, Tax and Compliance experts – communication must keep on flowing as legislation shapes up. Depending on the maturity of the bank in working in cross-functionally, this could be a painful exercise. However, this coordination will help not only in project mode but also in production mode, as banks will most likely look to re-define processes, teams and tools to work more seamlessly together to support the process going forward. In terms of organization, tax competency could be centralized or also attributed separately to each team whereas Operations, for instance, will have to know how to treat transactions in light of tax consequences. Already other governments are expressing an interest in implementing similar regulation and therefore the changes required in implementing these regulations only look like the start of a wider trend. Due to impending deadlines combined with cost pressures, banks have to chose between implementing tax transparency more holistically or complying with the latest approved referendum. If banks focused more on the spirit of the law, they not only would be less reactive to small changes in the regulation but their solutions will also be more flexible and ready for the next Fatca UK, Fatca Germany, Fatca France...because if these regulations have shown us anything, it is that nothing is certain but death and taxes. n CMC
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IT Changes
Rubik? Fatca? What else? What more? Banks are going to be confronted with a level of confusion regarding the details of the implementation of those tax agreements. But just as in other such legislative changes in the past, the operational requirements will no doubt get worked out (and probably changed again) over the coming months.
T
here are many issues facing banks today. Of these quite a few relate to regulatory and fiscal changes. Not only do banks have to monitor and adapt to changes taking place in the countries and legal systems where they are based or have operations, but in addition now have Nicholas HackinG to be aware of changes in the regulatory, fiscal, and legal systems of the countries where their customers Director Sales ERI Bancaire and correspondents are operating or are domiciled. Of course there are other industries that are impacted Nicholas.Hacking@gva-eri.ch in a similar way, but there are not that many, and it is far from clear that the average consumer, banking customer, or indeed voter, really appreciates the efforts and costs that the banking industry is being asked to bear (and which will of course need to get passed on in one way or another) in their name. One of the most recent examples of this is the Fatca legislation. This, as most people in the industry now know, is a piece of American law which will impact most banks in almost every country worldwide. That a single government can pass legislation that will impact so many countries, with such a high cost, which will need to be passed on to so many, continues to amaze many of us! But we would suggest not only do we need to get used to it, but that there will be further examples of a similar sort in the future. Another, domestic, example of this would be the so-called Rubik agreements which Switzerland is entering into with various countries. In the case of the Fatca legislation, this is due to take effect over a fairly lengthy time period, and banks are currently confronted with an amount of uncertainty regarding some of the operational procedures and reporting rules which will be required. On the other hand, it would seem that the Rubik requirements will not only BANQUE&FINANCE banking solutions 2012
vary from one country to another, but in some cases could be called into question, even when one may think that everything is clear, often due to a degree of manoeuvring in the political sphere. As the vendor of a core banking application, we are of course obliged to ensure that we are in a position to offer to our clients a complete solution to each of these challenges as they arrive. We are however divided as to whether we should be thanking the politicians for creating all this work for us, or criticising them for not making things more standard, and of course much clearer from the outset! NOT THE END OF THE STORY Looking at the situation today, it is clear in our view that while banks need to put in place, and have operational on the relevant date, changes to their systems to take account of these fiscal and legal changes, it is highly unlikely that this will be the end of the story. In the case of both Fatca and Rubik the industry will, hopefully temporarily, be confronted with a level of confusion regarding the details of the implementation, but just as in other such legislative changes in the past, the operational requirements will no doubt get worked out (and probably changed again) over the coming months. But we would argue that banks also need to bear in mind that both of these challenges came about due to changes in the expectations of society generally and of course due to a variety of political pressures. As such, we would also contend that banks should expect more of the same (or very similar) in the years to come. If you make the assumption that where pioneers have gone others will not fear to tread, it is then a reasonable supposition to say that banks’ IT systems will have to adapt to many more, but possibly
.13
similar, requirements in the near to medium term. As such, when reviewing IT systems and the associated operating procedures, banks should try to ensure that any changes that are made are not done simply by way of bringing a point solution to a current requirement, but are implemented as part of an integrated, coherent, set of changes consistently across all the relevant core systems, databases, etc. In our view this continuing pressure to change, in many cases with relatively tight deadlines, combined with operational requirements which are in some cases at best unclear at the start, indicate clearly that banks need to have in place systems which allow for changes to be made as much as possible via parameterisation rather than development. It also means that implementation of such changes can have effects across a number of different areas of systems and operations. IT COSTS UNDER INCREASING SCRUTINY Therefore, in order to retain maximum flexibility in the future, so as to adapt both to additional requirements and to changes in existing (known) legislation, while at the same time trying to balance these obligations against continuing pressure from many parties to reduce costs, it is essential that changes, whether through parameterisation or through development, are kept to a minimum and where possible - are implemented in an integrated core system. The advantages of maximising the use of an integrated core system are even clearer when considering the impact of changes such as those dictated by Fatca and Rubik. Being able to implement most of the required changes in one single place, in a consistent way, clearly has significant cost as
Banks should choose architectures and solutions which will allow not only the changes of which we are aware of today, but also those which are very likely to appear on the horizon tomorrow.
well as time advantages when compared to having to change a large number of disparate systems and their associated interfaces together with the complex project and vendor management that the latter alternative would require. When considering their options, our view would be that banks should therefore choose architectures and solutions which will allow not only those changes of which we are aware of today, but also those which are very likely to appear on the horizon tomorrow, in a way that is both consistent and cost-effective. This of course strongly argues not only for a “package’ approach to systems, so benefiting from the mutualisation of the costs of the modifications, but also underlines the likely gains in time and automation from rolling out as many of the changes as possible in the core system. Of course, these changes in systems and operating procedures will also have a knock-on impact in terms of the reporting which will need to be done, not only to the relevant authorities, but also to the clients themselves. Furthermore, as clients look to their banks to provide multiple channels for such reporting any changes in the reporting need to take account both of the data that needs to be provided to clients, and the frequency of that provision, but also the channel to be used. And both these aspects are surely also going to be the subject of significant changes over time. As the title implies, there is undoubtedly more to come, possibly much of the same, but whatever happens IT systems will need to continue to change, but in an environment where IT costs themselves will be under increasing scrutiny. This in turn argues to a significant re-think of IT systems, their complexity, and their associated costs. n BANQUE&FINANCE banking solutions 2012
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IT Changes
Render unto Caesar what is Caesar’s The new tax regulatory requirements are defined progressively with in force dates which require short deadlines. This will lead to a non-conventional project management style where a high level of flexibility, agility, fast tracking and ability to progress in a context of sparse information will be the factors which determine success.
E
ver increasing levels of fiscal monitoring and control are here with us to stay. The predictability of this is easily appreciated at least at the macro level, as the outcome of Sanaa Behar a basic law which closed systems obey, namely that Senior Consultant over time the entropy or disorder, if you like, of closed Antaes Consulting systems irreversibly increases. The reason why we do not experience total chaos or maximum anarchy is because we are able to forecast the future and organise ourselves into social systems with laws, finance, education, legal and economic structures. However this requires a certain amount of energy and moreover, these organisations are themselves systems. At the micro level however, some of the forces behind the generation of this aforementioned entropy are due Peter Welch to the differences in perceptions about how and what Senior Consultant we forecast and the way and cost of how we organise Antaes Consulting ourselves. Let us consider Fatca. BANQUE&FINANCE banking solutions 2012
Fatca stands for Foreign Account Tax Compliant Act. It was enacted in March 18th, 2010 by President Obama and goes one step further than the former QI agreement which it extends. Under the Old QI agreement of 2000, a financial institution would enter into an agreement with the competent fiscal authority of the US, the IRS. Under such an arrangement a financial institution sees reduced complexity in its reporting requirements if it signs the agreements and accepts a certain policing role for its accounts which received US source income on specific kinds of financial instruments. At the same time the QI (qualified intermediary) does not have to divulge the names of its clients to withholding agents who may compete with it for the said clients. After all, a business is a going concern. Fatca requires that all foreign financial institutions (FFI) divulge the names of “US specified persons with accounts above certain thresholds�, receiving or making payments, on US
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source income and for a wider class of financial instruments. If these FFI do not comply, they face a withholding tax of 30% on income and gross proceeds on a wide class of transactions. You may not agree with this taxation and you, - government individuals or moral persons)-, may have reasonable and defendable arguments to support your position. However, the US Fiscal authority has also defendable arguments. Specifically the tenets of optimal taxation with due consideration to vertical and horizontal equity in allocating the tax burden. It is no surprise that President Sarkozy at this time of the French economic conjuncture opted for an increase in the TVA whilst President Obama opted for a call for reviewing the equity in the structure of income taxes in the American economy, which is at a different stage of the economic cycle to that of France. financial engineering What we are suggesting here is that the high indebtedness of the western countries and near insolvency of some others will last for some years to put pressure on fiscal systems to continue to increase their monitoring and collection activity in an attempt to be economically optimal. Note that there are rumours that the French are also considering their own version of Fatca. The consequence of this will accelerate the development of markets in financial engineering for specialised products with country specific exposures and which have at the same time no content from that specific country. Note that the existence and growth of the Euro market was largely caused by the American Interest Equalization Tax. The long shot of all of this is that Swiss banking and financial arena at large, going forward for many years to come, will face an environment of ever increasing hostility and operational risk of doing business and will therefore be severely affected. This may come from countries other than the United States as the forces which we described above come into play in other countries. The price tag is enormous. We have seen price tags of 780 million for UBS’s litigation with the IRS and a price tag of at least 700 million, up front for the Rubik agreement with the United Kingdom. As we speak, the Rubik agreement with Germany is under ratification. Mifid II, Basel III and AIFM are waiting in the wings. Some of these forces have driven the acquisition of Wegelin by the bank Raffeisen.
Being compliant could be a great opportunity to review and simplify the underlying business procedures and solutions that cover all client and transactional information systems.
A NEED FOR COORDINATED APPROACHES Being compliant in such a world requires as we hinted the energy of great effort, as the implications are that the triad of structure, function and process are all simultaneously impacted by the evolution of this entropy. Does one refuse Us clients? Does one become compliant? Does one refuse to be compliant? Answering these questions requires coordinated systems and information management approaches at every level of the organisation, which are adapted to complex analysis and that can thereby help businesses to prepare their organisation for the above eventualities. It behoves us and is logical then that businesses seek out those companies which have experience and comparative advantage in such information management techniques and have resources with the relevant polyvalence and experience. Companies who choose to be compliant with the IRS might see Fatca as just another regulatory requirement to meet with concomitant cost, tight deadlines and resource burdens. Others may foresee a great opportunity to review and simplify the underlying business procedures and solutions that cover all their client and transactional information systems, resulting in long term cost savings, economy of scale and streamlined business procedures. Adopting the latter approach will raise the maturity level of their information systems and bring competitive advantages. Indeed, being compliant with Fatca will lay the foundation of a client tax solution with the ability to calculate the capital gain using multiple cost basis methodology (Lifo, Fifo, average‌). This will engender the flexibility and agility to conform to most of all tax regulation requirements that are, and /or will be, upcoming in the very near future. Being a visionary should not occult the great challenges that one needs to overcome. Indeed, all of these tax regulatory requirements are defined progressively with in force dates which are defined upfront and require short deadlines for adapting legacy systems. This fact will lead to a non-conventional project management style where a high level of flexibility, agility, fast tracking and ability to progress in a context of sparse information are the factors which determine success. But who says no pain, no gain? n
BANQUE&FINANCE banking solutions 2012
.16
IT Changes
©Jean Netuschil
The Rubik Agreements and their Impact on banking organization
Laurent Franceschetti Strategy and operations consultant SettleNext, Geneva
laurent.franceschetti@settlenext.com
Per Prod’hom Certified tax expert and avocat Baker & McKenzie, Geneva
per.prodhom@bakermckenzie.com
I
t is very possible that the withholding tax on foreign clients’ assets in Switzerland - the so-called “Rubik agreements”- will enter into force on the 1st of January 2013, as the parliaments of Switzerland, United Kingdom and Austria have already ratified the agreements. There are however still obstacles to be overcome: as of this writing, it is not yet certain whether a sufficient number of valid signatures have been collected in Switzerland in order to launch a referendum on the subject; should that be the case, the Swiss people might still have to vote in November 2012. Furthermore, the position of the German parliament will be known only in November because of a strong opposition in the Bundesrat. Nevertheless, all Swiss paying agents (banks and asset dealers) are preparing for its implementation, as there is no other option. The “Rubik agreements” will affect clients in two ways: 1-a one-off regularization payment will be levied for past; 2-income, capital gains, as well as other forms of income will be subject to tax as from the 1st of January 2013. In practice, clients will have the option to either voluntarily agree to disclose their assets to their country of residence, or to keep their anonymity in the future while contributing taxes to their country of residence. In the latter case, a paying agent (generally
BANQUE&FINANCE banking solutions 2012
a bank or a securities dealer) will withhold the tax, which will then be transferred to the country of residence via the Federal Tax Administration. All things considered, these agreements may prove beneficial to foreign clients, since they solve the issue of past undeclared assets, without the legal risks and administrative costs involved in a direct disclosure to the tax authorities. They also provide a good opportunity to regularise inherited assets. Finally, they will give increased safety to banks and their employees. Contrary to common belief, banking secrecy will be preserved to a large extent, as all signatory countries explicitly declared that a withholding tax is a longstanding alternative to an automatic exchange of information. The benefit of anonymity will probably be durable for clients residing in the UK and in Austria. It might persist even if the owner of the assets passes away, since the agreements with these two countries do not require a Swiss paying agent to levy any estate tax in such a circumstance. It is true that the heirs could become subject to an information request if they reside in the UK, but only if the British authorities have valid reasons to believe that part of the assets have not already been declared. In contrast, German residents will only be able to maintain the benefit of anonymity during the lifetime of the original beneficial owner. The reason is that if the heirs decide not to declare the funds to their own authorities, the Swiss financial uu
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uu institution will have to withhold a hefty estate tax of 50 percent. Hence, voluntary disclosure in case of inheritances might become the rule for German residents. For Swiss financial institutions, whose profit margins are already affected by the economic downturn, correctly implementing these agreements will be a massive challenge due to the intrinsic complexity of the agreements and the very short timeframe. From an organisational viewpoint, it is a transversal project involving most of their departments and presenting several key challenges: defining a general strategy, getting in touch with the clients, securing internal resources (having enough trained staff available), significantly upgrading software applications and, last but not least, managing clients’ historical data. Adequate communication is a key to client retention The first organisational measure for each bank is to identify the relevant persons, namely the taxable clients: residents of Germany, Austria and the United Kingdom (the “Continental Shelf” and Northern Ireland). The concept of relevant person, in the sense of the «Rubik agreements», refers to individuals owning direct or indirect investments deposited with a Swiss paying agent. It is also important to identify as “in-scope” the citizens of those countries residing abroad and outside Switzerland, as they might become taxable if they fail to provide a valid residence certificate. identify the relevant persons Contrary to the EU Savings Tax introduced back in 2005, the “Rubik agreements» also apply to investments held through “domicile companies” (legal entities with no real substance), trusts, foundations and other pass through entities. For the regularisation of past income, the relevant date of ownership is 31th December 2010, providing the assets are still with the Swiss paying agent on the 1st of January 2013 for Germany and Austria, and the 31st of May 2013 for the UK (by contrast, the withholding tax will depend on the situation of the person at the time of the transaction). In the agreements with Germany and Austria, the heirs of a client automatically take the place of the deceased. In practice, a bank should be able to identify the relevant persons as the beneficial owners of portfolios, through its Compliance and Central File departments (supported by IT). Fortunately, they should be able to rely on the data already at hand in the files, obtained through the Due Diligence rules (CDB 08). Only in some exceptional BANQUE&FINANCE banking solutions 2012
IT Changes
circumstances where a bank loses track of the beneficial owners, does it become necessary to take additional reasonable measures to further identify them. Fortunately, the work should have already been largely performed for the EU Savings Tax, at least for portfolios belonging to a private person: the necessary relationships between persons and portfolios are likely to be found in the core banking system. This is however not the case for portfolios where the account holder is a legal entity. The effort should nevertheless be manageable, provided that all data is already available from a computer database. If the information is “on paper” or cannot be easily cross-related, the workload might be significantly higher.
Particular attention should be paid to portfolios which present difficulties, especially when positions are illiquid, when they might incur prohibitive taxation in the future, or when acquisition prices are too difficult to determine.
AS EARLY AS POSSIBLE As to communication with the clients, each financial institution is free to manage it as it sees it fits, provided that the clients are informed about the contents of the agreements and their own rights and duties, before the end of February 2013. In our view, the most important organizational measure to retain the relationship with clients is to have them adequately informed well before that deadline. Therefore, banks should take appropriate measures to communicate as early as possible. Particular attention should be paid to portfolios which present difficulties, especially when positions are illiquid, when they might incur prohibitive taxation in the future, or when acquisition prices are too difficult to determine. In case a client is opting for a one-off payment for the regularisation of past income, it is important to create sufficient liquidity, since banks are required to withhold taxes due on the 31st of May 2013, with a maximum extension of eight weeks. In the absence of sufficient cash in the client’s account, a bank would have no choice but to disclose the name of the client to the tax authorities – unless of course it was willing to extend a Lombard loan. The Swiss Banking Association actually recommends sending two letters to clients. The first should inform them well beforehand about the agreements and the effects of the new taxation, leaving them the option to either declare the assets or withhold the taxes as of the 1st of January 2013 (the suggested deadline for an answer is the 31st of October 2012). To be able to do so, the paying agent should of course have prepared its internal organization and IT systems. The second letter should be sent after the 1st of January 2013 and would request clients to either disclose their account information or accept the uu
Industrialization and Private Banking: Today’s Reality Michel Mathys Strategic Marketing Manager Avaloq Evolution AG
B
Private jets have not been handcrafted for many years. However, they still allow the delivery of up-to-date individualized and customized services. Customers expect high quality, reliability and a good cost service ratio.Why should private banking services be any different?
y definition, private banking stands for a high degree of service customization. The relationship between the banker and his or her client is the result of a long-term common interest. However, each interaction is characterized by unforeseen circumstances and an ability to quickly react to changing demands. This includes such elements as a change in the fundamental rules, e.g. risk acceptance levels, modification of time horizons, full delegation mandates suddenly transformed into purely advisory types of management, or interest in a new financial product. On the other side stands industrialization which aims at producing short-term, cost-efficient, high volume standardized products. This brings to mind the car industry where the customer can order a completely customized car from a large volume car producer. The challenge is how to implement the individual desires of the customers in the value chain and still deliver the expected quality, services and costs. In private banking, the front office is the place where all customization requests are generated. This client-facing layer of the organization should be in a position to deliver all the services that have been provided in the private banking industry for years. Industrialization starts just behind the front desk using the middle and ultimately the back office systems. Why is it necessary to industrialize private banking all of a sudden? This industry has existed for centuries with almost no industrialization. Why should this suddenly become a priority? There are many excellent reasons for this. One of them is the massive reduction of the cost income ratio, recently coming up from 50–60% to 70–80%. Another reason is the increasing underlying complexity of the products sold to the customer following the new regulations and rules of compliance. For most banks, processing activities are not a factor of differentiation, they are a commodity. Industrialization is thus the obvious answer. Assuming that the bank agrees with the need for automation along the industrialization model, the next question in the process is how to move forward. At the front office level, a particularly event-driven area, the requests are twofold: allowing the capture of specific customer expectations and then delivering customized services. This is the Alpha and Omega of all banking production. In between, there are all the other important steps consisting of the integration of the customized rules into the standardized processes. One of the key ratios of efficiency in automation is the STP (straight-through processing) rate which highlights the capabilities of a bank to absorb customized requests in the automated processes. If these requests are well integrated, then the STP rate is close to 100%. To achieve such a high level of excellence, the bank must align its organizational and IT models. The processes should be driven by a BPM system, which must be fully integrated with all the components of the IT platform, including the front and middle office layers. Generally speaking, the front office is the generating party of a process. This then
weaves its way through the bank’s entire organization, even including external parties if the outsourcing of activities is also implemented. A very common example of specific requirements is the management of customized fee conditions. Other examples are the current concerns of many banks looking for more efficiency: automation of corporate action operations, term-based operations such as the automatic renewal of deposits, monitoring regulatory and compliance rules within the processing of all transactions, as well as periodic checks of customer assets and liabilities. Outsourcing is very attractive and not only in IT (ITO, ASP), but increasingly also for banking services (BPO). The reason for this interest is the possibility of getting the best expertise at reasonable cost using both the technical (banking telecommunication outsourcing) and banking platforms (bank for bank, global custodian). The challenge for any bank in selecting BPO services is their integration with its own banking processes. The operative model, including the IT platform, must be able to integrate external sub-processes and at the same time aim at 100% STP. The most modern IT platforms, such as the Avaloq Banking System, are fully compatible with this approach. The bank can dynamically decide to outsource activities while keeping full control of the processes via the integrated BPM engine. As a front-to-back platform, it provides all the organizational layers with comprehensive cockpit and processing capabilities: relationship managers, portfolio managers, risk managers, middle and back office employees. Considering the reasons for industrialization and the current possibilities on offer, there are still many banks who have not yet realized its potential. Perhaps this is due to the recent changes resulting from the financial crisis in the first decade of the new millennium. While yesterday it was still possible to disguise the costs of banking production, it is now a major risk not to quickly address them with the right solutions. And what comes next? If the level of industrialization is high enough, we could expect to have an increased delegation of activities between banks and other service providers. Private bankers will still be in charge of customers and their assets, but they will use best-in-class providers to process specific parts of their operations. The required technology is already mature in many areas, but we can still expect improvements in terms of communications transparency and easier and more secure integration capabilities. Today’s step towards industrialization is definitively the right investment in order to participate in the next wave of efficiency. Avaloq is proud that it has been supporting more than 80 banks for many years in becoming more efficient, industrialized and open to the future trends in banking. michel.mathys@avaloq.com
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uu withholding tax. In the absence of a definite reply, the withholding tax option would prevail. Considering the importance of such choices for the clients, it will be wise to ensure that clients receive their communications in time, particularly those who requested to receive them as «hold mail».In practice, clients have a number of options before the end of the 2012. Those who have already declared their assets to the country of residence will logically authorize their bank to disclose again their account information. Those who had undeclared assets will have the following options for the regularization: 1-one-off payment 2-voluntary disclosure 3-voluntary disclosure using the «Liechtenstein disclosure facility» (for UK residents); 4-move their assets out of Switzerland. If they chose do so, they should however be warned that severing a bank relationship could require a few weeks Furthermore, the new location might soon be targeted by tax transparency campaigns, at which point they might no longer find a similar chance to regularize the past. For that purpose, Swiss banks will have to communicate the main countries of destination of the funds withdrawn before the entry into force of the agreements (though not the names of the individuals). In our view, adequate communication and fair treatment of the clients are two requisites for safeguarding the good reputation of the Swiss financial marketplace. Should a limited number of clients not accept to regularize their situation and prefer to run away, it would undoubtedly be a loss. It would however be much more embarrassing if a Swiss bank was tempted to render such departure difficult and this should be strictly avoided. Operational taxation: the art of managing complexity and internal resources The withholding tax for future revenues (applicable on portfolio profits as from 1st of January) presents a wholly different set of issues. In the first place, is not a “traditional” tax applied on cash balances or on the value of bank portfolios, but a rather new concept for Switzerland: operational taxation, a method centred on transactions, with a focus on calculating acquisition costs of individual positions and separating types of profit. Clients will also have to opt between immediately paying the tax and a voluntary disclosure at the end of the year. Taxes BANQUE&FINANCE banking solutions 2012
IT Changes
Operational taxation requires a combination of three skills: knowledge of the tax regulations, experience on financial products and their settlement process -only available in back offices-, as well as a good understanding of software applications.
will be levied mostly on transactions that involve an inflow of cash: sales/redemptions, corporate actions with some form of cash gain, as well as profits associated to derivative operations. Other tax-neutral transactions, particularly acquisitions, subscriptions and other corporate actions, contribute to form the acquisition costs of positions, essential to calculate the capital gain. Since it is very time-consuming to perform those tax calculations manually, it becomes necessary to automate them as soon as volumes exceed a few dozen transactions. It is true that the introduction of the EU Savings Tax played a role of “dress rehearsal” for calculating tax on transactions, but there are major differences. That former agreement only applied to a reduced set of interest-bearing products and there were 12 to 18 months available to implement the regulations. The “Rubik agreements», in contrast, affect almost all financial products on a portfolio and there is not one common set of rules applying to all countries but three, a distinct one for each. Contrary to popular belief, whether the client chooses the payment or the voluntary disclosure does not impact the amount of calculations to perform. The real difference in the second case is that the bank does not need to debit immediately the account of the client, thus reducing the time pressure and the risks. Operational taxation thus requires a combination of three skills: knowledge of the tax regulations, experience on financial products and their settlement process (only available in back offices), as well as a good understanding of software applications. People who are knowledgeable in all three fields are of course difficult to find. To give a measure of the complexity of the tasks involved, the provisional directive from the Swiss Federal Tax Administration represents over 200 pages (five times more than for the EU Savings Tax). To make things worse, the timeframe is exceedingly short: banks have a little more than eight months to seriously prepare, and several only started in the summer of 2012. The issue of software applications From an IT perspective, “Rubik” is fare more complex than the EU Savings Tax and traditional software vendors of core banking systems generally do not have the internal competencies needed for tax issues,. In addition, several of these softwares are over fifteen years old and were not designed to support the complexity of calculations and the level of accuracy required by operational taxation. They also follow older development methods, longer and
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costlier – the presence of a recent user interface with a web browser should not hide that fact. Another issue is that developers for older technologies are no longer easy to find in Switzerland, which is one of the reasons why some of the software vendors have to outsource new developments to “off-shore” countries. Upon the other hand, the complexity of the tax calculations has made it almost imperative to carry out developments in Switzerland, or at least in western European centres, where similar experience with operational taxation exists (such as Luxemburg or Germany). All these circumstances created a unique opportunity for experienced vendors of external tax engines. That being said, a few vendors of core banking systems, particularly the most modern ones, have pursued the efforts of integrating the tax engine inside their own application. In any case, since it is difficult to compress development times beyond a certain point
Structured Trade Finance Structured Trade Finance Structured Trade Finance
and IT staff cannot be added overnight, securing an early installation date is critical. While some larger banks are performing the installation and early tests of the tax engine as of this writing, it is very possible that the latest deliveries of the software will take place in November, December or even during the first quarter of 2013. Due to shortage of staff, banks should not have too high expectations in terms of delivery deadlines. The challenge of data quality Since the withholding tax will apply to transactions, the correctness of the type and form of each transaction recorded in the IT systems will become very relevant. It will also be necessary to accurately fit the financial products concerned in the proper tax category. While vanilla shares or bonds are fairly easy to determine, the details of funds or structured products may be much more intricate. uu
MIT (MICRO INFORMATIQUE & TECHNOLOGIES SA) Rue de l’Industrie 58 • 1030 Bussigny - Switzerland Tel : +41 (21) 318 81 81 • Fax : + 41 (21) 318 81 99 E-mail : sales@mitsa.ch - URL : www.mitsa.ch
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uu Furthermore, some countries have clauses on “grand-fathering” (i.e. exemption of older products or positions), or distinct tax rates, clauses that depend on several factors such as issue date, type of underlying, reporting status, etc. As a principle, banks should not rely on internal categories, but on the official tax classifications, as provided by authorized data providers. Two of them are SIX, the central market provider for Switzerland, and WM Daten for Germany (SIX is capable to include fund data from WM Daten in their own «VDF feed»). If a paying agent decides to take a different decision on a product (for products which are non standard, insufficiently documented or internal), the decision should be taken carefully and be well documented, in the event of a tax inspection. Banks should also carefully plan in advance the countries for which they want Rubik-specific information. Since SIX Financial Information offers access to the “Withholding tax” service for free and without commitment until the end of 2012, it would be a good idea for banks to take advantage of that possibility. One further challenge connected with core banking systems is that the history of transactions may not reflect the actual economic purpose of a transaction, because of so-called “workarounds”. In particular, it is not unusual that some types of corporate actions are recorded as receipts or deliveries free of payment, as well as cash movements. As a matter of course, no computer system would be able to correct such transactions in an automated manner. As a result, the tax on positions involving those transactions will be either missing or incorrect. In the best case, the tax engines will be able to detect that something is wrong and send the faulty transactions to a repair queue. Solving those cases will necessarily be a manual process and may become an increasingly important issue as the year 2013 unfolds. We might then see a new type of software component: “tax pre-processors”, rulesbased engines whose purpose will be to automate the correction of specific categories of transactions before they enter the tax engine, thus reducing the workload for staff. Conclusion Managing a project like implementation of the “Rubik agreements» will be a quantum leap compared to the EU Savings Tax in 2005. In the first place, it has a strategic component, as every bank has to determine which country markets they want to retain. The most urgent task for the BANQUE&FINANCE banking solutions 2012
IT Changes
The most urgent task for the top management is to take all remaining strategic decisions and to allocate the necessary resources to the project.
top management is to take all remaining strategic decisions and to allocate the necessary resources to the project. The staff should not be left in a position where its members are forced to take decisions by themselves that will impact the future of the whole institution. Then, the first challenge will be to manage the client relationship. It requires a good amount of diplomacy and practical mindset in order to retain the clients, keep them satisfied and at the same time ensure that the «Rubik agreements» will be correctly implemented. With regard to technical implementation, our recommendation is to carefully select the tax engine to be used, carefully ascertain what types of «workarounds» were being used in the past to solve issues with corporate actions, and consider implementing a tax pre-processor to avoid manually correcting too many transactions on a case-by-case basis. The general market conditions are not what they were five years ago. Deadlines are shorter and budgets are smaller. It will be essential to be pragmatic and to distinguish between what is feasible and what is not. As perfection is unattainable, it will be practically impossible to automate all the tax requirements at an acceptable cost and within the deadlines. It will therefore be necessary to carefully balance between quality, costs, delays, internal resources and external support. Another word of caution: it is common wisdom that 80 percent of project leaders discover they are late when they have already spent 90 percent of their budget and allocated time. This cannot be allowed to happen in a regulatory project such as “Rubik” where deadlines are fixed. In that context, solid planning and proper execution are of the utmost importance in order to reduce the risk of delays and miscalculations of the taxes. If no full time project manager is available internally, hiring an experienced one for the duration of the project could make all the difference. More generally, financial institutions will have to shift their attention to operational excellence, not only to face this challenge of operational taxation, but also as a strategic target for their future survival. Raising the quality of transaction data to satisfactory levels will be a long struggle that will continue well after 2013. In the meantime, banks will have to concentrate their efforts on increasing staff competency on operational taxation, by engaging in large scale training programmes. n LF & PP
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The IT cost of regulatory change in Swiss banking The banking industry has a long history of regulatory changes, many of which are impacting business processes and IT. The upcoming regulatory challenges have a greater impact than ever before: regulatory IT spend consumes 25% to 50% of the bank’s overall project budget. Why do these requirements trigger such high levels of investment?
F
ew of the past regulatory changes have impacted IT as much as Fatca, Rubik and Mifid II do. Two main factors are driving the significant investment levels. Firstly, the fact that the latest regulatory changes are requiring more and better quality data not only obliges banks to Andreas Toggwyler enrich their databases after having gone through paper based customer files, but also to reach out to their Partner Ernst & Young customer base to ask for missing information. On the IT side, changes are made to expand data structures andreas.toggwyler@ch.ey.com of customer information files, for example, to allow the formalization of a second or third nationality. Secondly, changes in IT supported business processes are needed to comply with the rules and regulations. As a consequence of Fatca, for example, the processing of transactions needs to be modified to allow a differentiated operation taking US tax citizenship and product properties into account. While banks Robert Rümmler could deal with prior regulatory requirements with the implementation of specific reporting capabilities, Senior Manager these new changes are imposing in-depth changes Ernst & Young impacting data and application architectures. robert.ruemmler@ch.ey.com Several years ago, banks started to distinguish between project-related IT spend (often referred to as “Changethe-Bank”) and IT expenditures required to keep the lights on (“Run-the-Bank”). Based on a market study Ernst & Young is currently performing, Swiss banks are, on average, spending 70% on Run-the-Bank and 30% on Change-the-Bank. This split may vary depending on many factors, including the type of IT environment the banks are operating in. Internally developed software requires the highest level of investment, and packaged solutions the least. A closer look on the Change-the-Bank budget is required in order to understand the impact regulatory changes have on IT BANQUE&FINANCE banking solutions 2012
spend. In current times, where margins are eroding at the same time as the assets under management are diminishing, IT costs are highly scrutinized - often through tight budgeting processes forcing multiple iterations of prioritization until the final budgets get approved. Banks are typically running on a constant year-on-year total IT budget or a slightly declining IT spend. Considering that Run-the-Bank budgets will remain more or less unchanged, and a increasing part of the Change-the-Bank budgets will be spent on implementing the regulatory agenda, many banks are faced with minimal residual budgets available for pure discretionary spend, limiting their ability to invest in business-driven innovation. Based on Ernst & Young’s market research Swiss bank’s spending priorities are geared firstly towards regulatory spend, and then to improving IT security capabilities. During interviews conducted when running this study, banks commented that regulatory changes, mandatory technology upgrades and the closing of audit points are given priority over businessdriven spend. Sometimes tactical solutions are favored to limit Change-the-Bank spend, often with negative impacts on subsequent Run-the-Bank costs. Cost drivers to watch How is it that some banks are “only” spending 20% of their Change-the-Bank budget on regulatory change while others have half of their budgets allocated to it? Multiple factors may have caused an increased need for funding to adapt to regulatory changes, a few of which are briefly discussed here: - Complexity of the IT infrastructure. Internally developed systems using legacy technology, both on an application and database level, are often more
.25 Swiss bank’s spending priorities Ensuring regulatory compliance
96%
Increasing information protection
87%
Back office process automation & improvement
33%
46%
Improving IT staff skills
8%
Performance & Capacity management
29%
Outsourcing / insourcing of business functions
27%
Could computing implementation
4% 0%
complex and onerous to change. Different data with similar content, spread across multiple applications and platforms, make the implementation of the target design more onerous, as if a bank can leverage a “golden data source”. But also IT security improvements, absorbing considerable investments in recent years, can add to the overall system complexity. IT security considerations can multiply the effort needed to cope with the highly segregated environments that typically isolate customer information from transactional systems. - Availability and quality of historic data. Banks that have gone through core banking migrations or mergers and acquisitions in the past ten years are frequently faced with data challenges due to missing, incomplete or hard-to-access historic data. - Sourcing model. The implications of managing regulatory IT change vary depending on whether a bank is developing, operating and maintaining its own systems, or working with a service provider Annonce_secur_200x55:Ann_secur managing and operating the IT platform15.10.2012 on behalf of
14%
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4%
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Upgrading desktops/laptops
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the bank. In the first case, the bank is in direct control of the changes, while in the second case, close vendor management is required, acknowledging the fact that providers face the same challenges as banks in making the regulatory changes. It is important to precisely understand what the provider is going to deliver and what parts remain to be adapted on the bank’s side. Compliance with Fatca and Rubik is typically not achieved through a simple systems update. - IT cost management. Few banks are willing to increase the overall IT budget to allow for coping with the additional efforts caused by the implementation of regulatory change. In cases of fixed budget ceilings, banks are often tempted to implement tactical solutions rather than to go for a sustainable strategic solution driven by a consistent architecture strategy. Is there a better, smarter way to go about IT spend in relation to regulatory changes? Banks can manage their IT spend on regulatory changes more uu
022 827 80 25 info@securarchiv.ch www.securarchiv.ch
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IT Changes
uu intelligently in two ways - either by increasing the efficiency of achieving compliance with regulations, or by uncovering the business value of regulatory change, i.e. by focusing less on pure compliance and more on the business opportunities that regulatory changes offer. While the first approach (i.e. increasing efficiency) is more straightforward, it is the second approach (focusing on business opportunities “beyond compliance”) that has the most potential - however requiring a “paradigm shift” in how banking institutions approach regulatory change. - Holistic approach toward regulatory change. Typically, banks react to upcoming regulations by forming individual projects which view regulatory requirements (i.e. Fatca, Mifid II etc.) in isolation. As a result, there are multiple independently run projects which have only minimal interactions and touch-points. This can lead to situations, for example, where the organization reaches out to clients multiple times in order to complement missing information in their customer information file. This is clearly not ideal from an operational standpoint, as well as from a client interaction standpoint. It would be much more efficient to identify commonly required actions between different regulatory projects, and then to build a target data, application and systems architecture that is capable of addressing the regulatory change agenda holistically. - Firm-wide integration. Most banks react to new regulatory requirements by creating a task force whose job it is to analyze the impact and to define the changes required in response to regulatory change. Some banks take a centralized approach (i.e. the task force is made up of employees from the Corporate Center, e.g. Group Finance or Group Risk for Basel III), while others tend to prefer a more decentralized approach (i.e. the task force includes centralized functions as well as representatives from the main impacted business lines). Both of these approaches have their limitations. An alternative could be to create a centralized unit that is fully focused on the regulatory change agenda. The purpose of this unit would be to find optimized ways for the organization to achieve compliance at minimal
cost. Such a unit would not only make it easier to realize synergies between multiple regulatory-driven change initiatives, but also foster organizational learning so that the bank becomes more efficient in responding to the “regulatory tsunami”. - Thinking long-term. Taking a more long-term view will allow to build sustainable solutions that are efficient to operate. Too many banks, pressured by time and with the sole purpose of achieving “compliance” independent of long-term cost, end up with ad-hoc solutions that are costly to implement, costly to operate and typically stay in place for longer than anticipated. Thinking long-term can be best achieved by creating a forward-looking strategic target state, and only implementing tactical solutions compatible with this target state. This could for example result in centrally assessing all change requests submitted by individual business areas, mapping them to the target state and packaging functional and regulatory requests where appropriate - “Beyond compliance”, looking at business opportunities that regulatory changes have to offer. Few banks are looking at regulatory change as an opportunity that may allow for improved market access (e.g. thanks to Mifid), new business models (e.g. offering Fatca compliant custodian services to banks), or by improving the client service offerings. Doing so requires a change in mindset away from pure compliance, and towards uncovering the business opportunities that regulations may have to offer. In difficult market conditions, banks that combine regulatory compliance with opportunity-driven business transformation (i.e. adapting their service offerings to clients as well as changing their business models) have a distinct competitive advantage in the marketplace because this maximizes the return on investment due to regulatory change. In conclusion, reacting to regulatory changes can be done more intelligently by viewing regulatory requirements not only as a “necessary evil” but as an opportunity to transform the business in a way that adds value to the organization while at the same time achieving regulatory compliance. n AT & RR
Typical IT spend patterns © Ernst & Young - 2012
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European cohesion is something which concerns us all – on the basis of different currencies if necessary. RÜDIGER HELMOLD FREIHERR VON ROSEN, Prof. Dr., Chairman of the Deutschen Aktieninstitut
As the first independent Swiss corporation with a banking and securities trader licence, InCore Bank AG offers complete banking services for other banks and securities traders.
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InCore Bank AG P.O.Box Dreikönigstrasse 8 CH-8022 Zürich +41 44 286 21 21 www.incorebank.ch
Our insourcing and brokerage customers are able to lower their costs considerably through targeted outsourcing of certain business units while at the same time increasing the quality of their own services.
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IT Changes
The paradigm shift of the second decade After becoming the best in the world at delivering, in a very unique way, services to their clients, will Swiss private bankers have to learn a complete different way of doing their job?
A
s you go around talking to bankers, regulators and even clients, you are left with a strong feeling that the Swiss Private Banking is facing its biggest change of direction in a very long time. And if it is the case, what can we do in the banking Alexis Sikorsky technology industry to accompany this evolution? As far as our collective memory can reach, Chairman New Access Switzerland has always been associated with banking, and vice-versa. Talk to any Ultra High Net alexis.sikorsky@newaccess.ch Worth individual, anywhere in the world, and you will find that he either has some of his wealth in a Swiss Bank or would like to. During the second half of the 20th century the model was stable and everyone was going to live happily ever after. But then came the 21st century‌ And with it, out of the blue, creating a shockwave through the private banking system, came something new: firm and serious regulation. It started with anti-money laundering, then came KYC and soon Mifid, Basel II and III, and last but not the least, Fatca‌ As a key consequence, relationship managers now have to perform a tremendous number of tasks that are not directly related to their core business and that do not bring perceived added-value to their clients. A large part of the time they spend with their clients has to be dedicated to asking for documents, proofs, justification, and then, some more documents, proofs and justification. uu BANQUE&FINANCE banking solutions 2012
Bundled Core Competences Banks are struggling with increasing demands for critical mass, the flood of regulatory requirements and margin pressure. This is particularly challenging for banks with less than 200 employees. They can afford neither a large IT department, nor a comprehensive compliance team. The cooperation between InCore Bank AG and Inventx AG offers the complete solution. Concentration on core competences: this corporate strategy is now also to be applied to InCore. “We now want to apply to ourselves the strategy we have preached to our clients”, explains Mark Dambacher, Deputy CEO of the transaction bank, InCore.
the banking platform, infrastructure and systems through to applications management are guaranteed by Inventx. This gives the client access to two specialists on the same platform: InCore for the transaction business and Inventx for the overall IT area.
Working on the principle that every crisis also brings opportunities, if these are used to implement improvements, then activities which are not core should be outsourced accordingly. Up until recently, InCore was itself active with Legando in the development and distribution of banking software.
Employees from InCore and Inventx work on the same platform. “This facilitates the work enormously and creates reater economies of scale”, explains Mark Dambacher. The various tax treaties with England, Germany, Austria and Italy require quite different compliance and settlement procedures. Specialists with full knowledge of these areas are rare and expensive. What’s more, they would not be fully utilized in a small private bank. Solutions such as those offered by Inventx together with InCore, can be made available to several clients at a time. This reduces their costs (economies of scale) whilst increasing the quality of the services provided.
InCore has changed its strategy and has decided on the standard banking package of Finnova and a close partnership with the application service provider, Inventx. This way, the transaction bank is consistently concentrating on its core competences: i.e. brokerage, custody business, corporate actions, compliance and back-office services. Strategic partnership is providing returns “The core competence of Inventx is IT, the core competence of InCore is transaction business”, confirms Gregor Stücheli, Chairman of the Board and Managing Partner of Inventx. His company, an IT service provider for banks, focusing on application management and IT operations, offers banks threatened with exploding costs an alternative to an inhouse IT department. Inventx has many years of experience in introducing and operating standard banking software packages, such as Finnova. But that is not all: with its exclusive focus on the financial sector, Inventx is familiar with the specific requirements of banks and can best fulfil these using modern IT solutions. This not only saves costs, but also provides the basis for adding new distribution channels. The managements of smaller and mediumsized banks can focus on fulfilling client requirements and product development. A reliable external partner should be enlisted for technology and applications management. The cooperation between Inventx and InCore provides the perfect combination of the IT and banking worlds. Both companies contribute their own expertise and are perfectly complementary from the client’s perspective. Compliance cost avalanche MiFID, FATCA and additional requirements are providing banks with a real flood of regulatory issues. Only recently the Association of Swiss Cantonal Banks indicated in a press release that insufficient differentiation in regulation is leading to an above average burden for the cantonal banks. As a consequence, there is a danger that they will have to withdraw from some business areas due to cost considerations. “Other banks cannot estimate what will be the real effect for them yet”, explains Mark Dambacher of InCore. Thanks to its banking licence, InCore can act as a fully-fledged counterparty to its clients and take over and implement a large part of the regulatory measures. InCore is supervised by FINMA. That means that regulations implemented by InCore are verified by FINMA. This makes everything easier, and guarantees careful and professional handling of the whole transaction business, whilst operation and maintenance of
“If a custody account statement has to be changed due to a new regulation, then this can be redeveloped and produced simultaneously for all other client banks“, explains Gregor Stücheli. “Data security and access control are also key issues. Here too Inventx can offer high security as a result of its long experience and Swiss ownership structure. All of our data processing centres are in Switzerland, and all our employees only access this data from Switzerland using a procedure subject to the highest security standards.” New outsourcing solution is highly sought after Several banks have already been migrated on to the new Finnova platform within a very short period of time. These banks can significantly improve their efficiency and service quality due to these outsourced procedures, whilst at the same time reducing costs and risks. The strategic partnership with Inventx is already providing returns. As a transaction bank, InCore concentrates on the outsourcing of the banking processes and on providing business services, whilst based on Finnova, Inventx focuses on application management including IT operations and maintenance. Mark Dambacher is convinced that even a bank with ten or twelve employees can survive today if the back-office, transactions business and technical operations are fully outsourced. “There are many medium-sized banking institutions that burden themselves far too much with operating and administrative processes, instead of fully devoting themselves to client advisory services.” A bank with only ten employees using outsourcing can potentially handle higher volumes than banks with 40 employees burdened with administrative tasks on the traditional business model. Critical mass will always be an issue if a bank cannot or will not consider outsourcing. InCore Bank AG Dreikönigstrasse 8 CH-8022 Zürich www.incorebank.ch
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uu They started to run the risk of not only losing productivity in their daily tasks, but also to lose the clients’ interest. This was the paradigm shift of the industry in the first decade of the century. As banking software companies, we reacted to this shift by developing solutions to help our clients comply with the new regulations and to increase work efficiency in a more complex environment. We started by developing Document Management Systems that were robust and powerful enough to comply with the huge and ever changing requirements of the authorities. We developed Customer Relationship Management Systems to solve KYC and AML needs. We developed Portfolio Management tools to help with investment restrictions. And then, we brought all these functionalities together in unified front ends to solve the trickiest issues like Fatca or Mifid. In 2012, banks have a choice of solutions available on the market, out of the box or bespoke, to help them solve these issues. Today, most banks have spent the time and money required to be compliant with these regulations. The decade to come, however, will bring a shift that will be much more challenging. If the past regulatory modifications have been difficult for the industry, creating pressure on margins, it didn’t change the business fundamentals. Painful as is was, the necessary investments have been quite minimal compare to what is to come. The agreements that the Swiss Confederation are entering into with the rest of the world will be a major game changer for private banks. This is already leading to a significant transformation of the Swiss banking industry: the offshore market is slowly shrinking and will be progressively replaced by an onshore business model. Until now, the offshore market has been very profitable for Swiss banks, because on top of their core added value, the ability to manage wealth, they were able to offer their clients another Unique Selling Proposition: confidentiality. For many years, this meant that the Swiss banks did not have to be aggressive in terms of client acquisition strategies or take risks in asset management. But in the next few years, the way the very wealthy look at their strategies for managing BANQUE&FINANCE banking solutions 2012
IT Changes
Swiss banks will have to find the right balance between very tailored and sophisticated – but very costly – services and some level of service automation for smaller accounts.
their money will be fundamentally altered. The previously unreported assets will have to find a home. Banking centers, such as Geneva, London, Luxembourg, Singapore, Hong Kong, etc. will now compete on skills, efficiency and customer service. As a result, the industry will have to significantly improve its service offering. The ability to generate strong risk/return ratios will obviously be a key factor. However, in terms of wealth management, the Swiss banking industry is quite sophisticated in the product range it can offer its clients and certainly competitive in that regard. Another important factor will be the ability to provide strong reporting to clients. This is generally speaking still a relatively weak competitive point for Swiss banks. Demanding clients will now want to be more involved in the way their wealth is managed and will require advanced reporting. They will integrate items such as detailed performance reporting, risk reporting, and multi-portfolio consolidation. In the future, the ability to compete will come from reaching a new client base. While the margins of the High and Ultra High Net Worth markets continue to drop, Swiss private banks will have to go for new market segments, such as mass affluent clients. These are typically working professionals that have accumulated wealth in the range of half a million to two millions dollars and that have not found a home for their wealth in private banks. They often stay in traditional retail banks that have not necessarily offered them the best services. This segment is huge, growing worldwide at an amazingly fast pace and is in the process of being very well treated by Asian banks, among others. But to achieve success in this new market, Swiss banks will have to find the right balance between very tailored and sophisticated – but very costly – services and some level of service automation for smaller accounts. Banking software has already started to evolve in that direction, with strong advances in the client management workflows that will help these banks strike the right balance between tailored service and efficiency. At the end of the day, technology will play a significant role in the banks’ abilities to reinvent themselves and offer better client services at lower costs. n AS
Customer relationship: a profitable investment In a rapidly changing environment, private banks are investing in customer relationship to adapt their organisation and prepare for the future. But what are the obstacles ahead and the benefits to expect? Here is a brief overview.
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as banking secrecy, and with it the Swiss model of wealth management, come to an end? While this question is certainly not easily answered, professionals in the field, who are already seeing an increase in regulatory costs and an erosion of profitability, are looking for solutions. One of the approaches being explored by most people we talk to involves investing in a safe bet: customer relationship. In this context, numerous CRM initiatives have emerged, aiming at helping organisations adapt to new legal constraints and providing better support for key customer relationship processes. The first phase of these projects is often to review the status quo and to rationalise existing systems, before considering more ambitious programmes. In this respect, it is interesting to note that most private banks face the same problems, and among these are: • The coexistence of multiple applications for addressing different customer segments. Deployed in silos, these applications do not generally allow transverse analyses which could provide a basis for creating profitable synergies; • The profusion of customer databases associated with these applications usually complicates synchronous updates, creates useless duplicates and ultimately deteriorates the customer data quality; • The under-utilisation of CRM solutions, which, despite their extensive functional scope, are too often confined to the role of an address book or a contact history (emails, visits). Of course, the reasons for these problems are often complex – security, resistance to change, etc. – but the current changes provide a unique opportunity to overcome these obstacles and to exploit CRM tools to their fullest extent. So, what business benefits can private banks expect to achieve by investing in customer relationship management? Consider three examples: • Mobile applications are often designed to boost bank image among technophile customers. If these mobile applications were integrated to the CRM, the system could analyse customer’s browsing behaviour in real time and send alerts to wealth managers. They could then contact the client in a proactive way and make relevant investment proposals in a favourable context;
Romain Raynal CRM Consultant ELCA Informatique
romain.raynal@elca.ch
• The job of wealth managers is changing and becoming more complex. This situation requires them to increasingly collaborate with a network of experts (lawyers, tax specialists; etc.), in order to deliver accurate answers to their clients. Whether at the prospect stage or in the course of a business relationship, the CRM solution could very well improve the collaborative process and ease the conversation around client cases. This would reduce response times and increase customer satisfaction; • Recent CRM applications have the advantage of helping wealth managers personalise the customer relationship, while facilitating processes automation. The client on boarding process is a good example. It is the opportunity to make a good impression but also an increasingly complex legal procedure. The role of CRM is then to create enough flexibility (usability, collaboration) within a sufficiently rigid framework (document workflow, validation cycle, etc.) to make the customer experience as personal as possible while reducing related administrative costs. Without under-estimating the magnitude of such changes and their complexity, a CRM programme can be profitable if it is implemented according to the following approach: 1. Define a CRM vision for the short and medium term; 2. Imagine how the customer experience should evolve; 3. Analyse the impact on processes and internal collaboration; 4. Consolidate customer databases while ensuring maximum security; 5. Choose the right solution and technical architecture. ELCA can provide assistance in the implementation of this approach. Our experienced CRM consultants are familiar with wealth management and can help your company define a vision, integrate a proprietary solution, develop custom tools or manage your applications.
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Risk Management
Cloud, outsourcing, mobility new trends in practice
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NIKOLAOS ZORBAS
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JEAN MARC BOST & Herbert Jäggi
STERCI
SUNGARD AMBIT
NETGUARDIANS
E-XPERT SOLUTIONS
PROFILE SOFTWARE
ELCA
BANQUE&FINANCE BANQUE&FINANCE N°117 I SEPTEMBRE-NOVEMBRE banking solutions 2012
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Risk Management
Financial messaging: to be or not to be in the Cloud ?
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inancial messaging necessitates an increasingly complex infrastructure to ensure the required combination of high availability, high performance, ongoing resilience, and flexibility. Only sizeable organisations can afford the luxury of investing in appropriate messaging infrastructures, with the trend for the medium to smaller players being to outsource to Cloud or “Service Bureau” operators in the Swift arena. Initially positioned to cater for small to medium sized institutions, Cloud providers have evolved and can now respond to the requirements of substantial volume Tier-2 banks. Cloud services for financial messaging now constitute a mature offering, delivering not only connectivity but also added value functions. With the legacy models of thirty years ago, every single Swift customer had its own interface or CBT (Computer Based Terminal). It is currently estimated that less than half of the 10,000 Swift customers manage their own connectivity directly, thereby leaving the majority of Swift users using Cloud Service Providers. Even Swift Etienne Savatier is currently proposing a solution (Alliance Lite 2) that could also be considered a Cloud product. Looking to Associate Partner Sterci the 300 strong Swiss banking market, no more than 50 of these banks connect directly to Swift and these etienne.savatier@sterci.com constitute the biggest players along with some private and foreign banks. The remaining 83% (specifically the Raiffaisen, the Regional Banks and most of all Cantonal Banks) have been using Cloud providers for some time. This volume is not astounding given the fact that the Service Bureau concept dates back 20 years, however there is a significant acceleration in outsourcing with recent migrations of high volume banks. So what is driving today’s strong adoption of Cloud services for financial messaging? The first driver BANQUE&FINANCE banking solutions 2012
is complexity: recent years have seen a growing complexity in the systems required to connect to the various networks, including sophisticated security features. Today’s messaging infrastructure consists of leased lines, network equipment, firewalls and security devices. The infrastructure must be highly resilient and feature an effortless switch to a backup and disaster recovery site in case of failure. Maintaining such an infrastructure requires in-house expertise which is inevitably expensive. This complexity fuels cost escalation. The current challenging economic climate has forced many companies to reduce spending while remaining competitive. Using a Cloud Service Provider for financial messaging allows organisations to reduce costs by employing a shared “pay per use” service infrastructure. Additionally the pricing model for Cloud service providers æ payment based on transaction volumes – hence if the transaction volume decreases, so does the cost. This is not the case for companies running their own systems. Furthermore, in addition to infrastructure and cost issues, organisations must ensure compliance not only with the various network standards but also with regulationary, market and technological evolution. Companies interacting with the Swift network for example, are mandated to be compliant with new Swift Releases on an annual basis. Additionally every two or three years sees the introduction of a major upgrade of a new market infrastructure like the current SEPA migration for payments in Euros or TARGET 2 Securities. In parallel, new initiatives and regulations have required technological advances with the adoption of XML- ISO 20022 messaging standards for payments, direct debits, and securities settlements. So why therefore has every bank not yet migrated to the Cloud? The reason is that some residual objections
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Financial messaging necessitates an increasingly complex infrastructure to ensure the required combination of high availability, high performance, ongoing resilience, and flexibility. Cloud services for financial messaging now constitute a mature offering, delivering not only connectivity but also added value functions.
and restrictions linger. The key objection cited is security: how can an organisation ensure that their data remains private and confidential without knowing where the data is located? Even if this objection is substantiated for public Cloud services where users don’t know where their information is held, this is certainly not the case with Private Banking Cloud Service Providers, who are capable of guaranteeing where the data will be stored. Furthermore, topical stories recently features in the news regarding the theft of data stored “in-house” by employees, demonstrates that data stored internally is not any safer than that stored by an external provider. reducing the cost Therefore the key objection can be addressed with ease using Private Banking Cloud Service Providers and such an approach can deliver substantial benefits. As outlined in the following paragraphs, this approach provides more (functionality) for less (cost). Firstly the Cloud service pricing model dictates that companies pay according to the usage of the service. This usage billing, based on pricing according to message volume, is very attractive as it enables companies to reduce their bottom line fixed cost while ensuring that their cost decreases in line with any decrease in business. This is not the case with standard pricing models where the infrastructure incurs costs – even if it is not being used. Secondly, Cloud providers can propose added value services in addition to Swift indirect connectivity. Such services may include format translation, connectivity to other networks (here other networks also refers to Sepa, Target 2, Fix, Fax), sanction list filtering and reconciliation.
For Swiss Banks, connectivity to the local market infrastructure is a requisite added value service since Swift is only used for foreign transactions. Incorporating the Swiss Value chain in a Could offering alleviates Swiss banks of the burden of processing local transactions. The Swiss value chain allows the complete electronic integration of securities trading, clearing and settlement as well as payments, thus ensuring efficient and safe settlement of securities transactions on the deliveryversus-payment principle and thereby eliminating settlement risk. The Swiss value chain necessitates a dedicated infrastructure to connect to the Finance IP network and implement the additional security features that are required by SIX. Sanction list filtering of financial messages is also mandatory for compliance with international regulations focused on combating money-laundering and terrorism financing. Consequently, it is of vital importance to be able to filter a given message based on sanction lists (such as EU, Ofac, HMT, and UN, third-party or internal watch lists) and to process the message appropriately i.e. stop the transaction and inform the authorities, or release the message in the case of a false positive hit. Technology used for the filtering of suspect messages is expensive as the ‘suspect’ lists must be updated on a regular basis. The Cloud approach eliminates this overhead and as such reduces the cost of filtering messages. Reconciliation is also an added value function that can be easily incorporated in a Financial Messaging Cloud. This is because financial messaging feeds the reconciliation process with each financial transaction being confirmed by one or several messages. On a daily basis a companies’ statement of accounts must be reconciled against the uu
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Using a Cloud Service Provider for financial messaging allows organisations to reduce costs by employing a shared “pay per use” service infrastructure.
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Risk Management
People Compliance • FINMA • AML • SEPA/Target 2 • ISAE3402
Business • Time to market • Flexibility • Scalabilty • Risk Management
• Know How • Training • Mastering the complexity
Technology • New mobile device • Internet • Interoperability • XML
Cloud Financial messaging
Costs • Usage billing • People costs • Infrastructure © Sterci - 2012
MAINCopyright DRIVERS SterciFOR 2012 CLOUD ADOPTION IN FINANCIAL MESSAGING
BANQUE&FINANCE banking solutions 2012
guarantees an unparalleled level of savoir-faire and confidence in the software which forms the foundation of the service. We conclude therefore, that maintaining an internal messaging structure no longer provides a competitive advantage for banks (except for Tier-1 banks). With messaging fast becoming a commodity, maintaining internal systems provides no differentiation between you and your competitors. Your customers will continue to demand Swift execution of payment instructions regardless of the channels and systems on which they were processed. If network connectivity is not your core business, then it is definitely a domain that readily lends itself to outsourcing. For our part, here at Sterci we are convinced that the Cloud model will continue to expand significantly in the future, even through financial crises. n ES
Operational Support Target 2 / Browse Data Management & Masterfile
FROM SERVICE BUREAU TO CLOUD PROVIDER
Reconciliation & Cash Management Sanction list filtering AML Transformation & Reporting Services
Multi- Network : SWIFT, SIC, EBICS
Multi - Formats :
Global : SWIFT, ISO XML Eurozone: SEPA Domestic : SIC, SECOM
Multi - Network : SWIFT, SIC, EBICS
Multi - Formats : Global : SWIFT, ISO XML Eurozone: SEPA Domestic : SIC, SECOM
SWIFT Gateway
SWIFT Gateway
SWIFT Gateway
Service bureau standard
Service bureau Extended level
Cloud provider
Copyright Sterci 2012
© Sterci - 2012
uu bookings in their General Ledger system at close of business. Given that financial transaction data is already in the messaging Cloud, reconciliation can be achieved with very little effort, by sending a daily extraction of bookings from the General Ledger System. Cloud reconciliation is simple to implement and can cover a vast array of business lines and market instruments including, cash, general ledger, bank accounts, securities transactions, custodians holdings, funds, treasury, foreign exchange, money markets and precious metals. Cloud providers may also propose data management and format transformation tools in order to facilitate interoperability between standards. As various messaging standards co-exist (such as Swift ISO 15022, ISO 20022, Sepa, Fix, FpML,...) it is important for true interoperability that a translation tool, capable of mapping and transforming a given format to another one, be provided. As we can see, an efficient and compliant messaging platform involves a combination of sophisticated technologies and significant expertise. For quite some time now, small and medium institutions have understood this. What’s new today is that Tier-2 banks are also considering the Cloud approach. In Switzerland, Banque Cantonale de Fribourg and Banque Cantonale de Genève have recently migrated to the Sterci Service Bureau. This confirms the maturity of the Cloud model which extends to Tier-2 banks with confidence. The adoption of the Cloud approach by these large players has been made possible due to the core aspects of the Cloud offering: high-end capacity and scalability of systems used in the bureau; full compliance with regulations and best practice standards such as AML, Finma, ISAE 3402, Swift Ready Connectivity; service bureau expertise and commitment to stay abreast of the changing market going forward. The key to success, in our view, is to be both Software Author and Cloud Service Operator as this offering
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Risk Management
Banking on the Cloud: storm or sunshine?
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ttitudes towards the cloud in the private banking industry are sceptical to say the least. This is understandably so, given that security and protection issues are more pronounced than in other industries. Data in the cloud is like money in the bank: A hundred or so years ago people weren’t overly eager in putting their money in the bank whereas nowadays you can take your credit card with you and pay wherever and whenever you want. The dilemma of cloud computing and data security is in a way very similar. combining The cloud and data security Security is of course an issue when it comes to private banks considering cloud services. Data theft is one of the most common types of organised crime today, undertaken by highly skilled individuals who can ENZO GIANNINI afford to employ the brightest minds to write code. This is a scary reality that is understandably impacting Head of Client Services, SunGard Ambit Private Banking banks’ eagerness to adopt cloud services. But when it comes to data security in the cloud, some ways to enzo.giannini@sungard.com house data are more secure than others. Putting data into a professional data centre where specialised people work under a specific infrastructure may just be more secure than a small data centre within a bank. Would you keep money under the bed or in the bank? Private banks’ behaviour toward the cloud is very much like the behaviour of people towards banks a century ago: They are approaching the new service with caution and care. Industry regulation is another fly in the ointment when it comes to private banks embracing the cloud. Take Switzerland as an example: Nowadays the sharing BANQUE&FINANCE banking solutions 2012
of information for tax purposes is one of the major issues. In the sense of a «compliant confidentiality», banks are required to be compliant with authorities when it comes to data whilst maintaining client confidentiality. In addition, an increase of data protection legislation will be expected in the future. What role does the cloud play here? Does it just further add to the compliance headache? While the cloud cannot solve regulatory requirements some may argue that it could make compliance more challenging because of the concerns around data location. On the other hand the increasing need to share information in a regulatory context may encourage more to consider the cloud. Private banks fear loss of control Private bankers also express concern around the loss of control when it comes to cloud computing. Many are reticent to let go of their role as technology integrators; they want to be able to manage the orchestration layer themselves and not lose that control and customisation in some respects. An example may illustrate the point: Using a taxi gives you less control over the vehicle than having your own car, as the latter is not always right there when you need it. And perhaps it’s also not the colour you would like it to be. However, this is only one side of the coin. The upside is that you only need to pay the taxi as you use it. And if it breaks down, it’s not your problem or on your expense, to fix it. The same holds true for cloud computing: a bank does not necessarily have the customisation control it would like, but it also doesn’t need to come up for the maintenance of the infrastructure. It’s really about being willing to give away some control and take the benefits of the service as you find it. Availability – for example the
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The arrival of cloud computing in banking has given rise to many a stormy debate among the industry amid data security concerns. Today, these concerns are still very much prevalent in banker’s dialogue about the cloud. But how real are the risks? Is the debate overshadowing the benefits of cloud computing?
potential for disruption of connectivity – is often seen as a further disadvantage of cloud services and the related risks. Trying to manage such risk creates another roadblock in the perception of cloud computing within banking. The risks around privacy, data sovereignty and disaster recovery are considerable when customer data is hosted offshore. What it all comes down to is the question about the role of industry regulators in the cloud computing debate: Will they create policies to help banks manage these risks successfully? Benefits are often overlooked While cloud computing does have some issues that need to be addressed, it also constitutes a great chance that can offer wide-reaching operational benefits. Unfortunately, these are sometimes overlooked because so much emphasis is placed on data security concerns. One of the key benefits is that it helps banks become more flexible, because on-demand services are scalable. Banks therefore stand to achieve huge cost savings on IT infrastructure through cloud services. In the face of dwindling returns on equity, banks are under pressure to drive down operating costs. IT infrastructure makes up around 15 per cent of these costs, which can be substantially reduced via the cloud. In addition, customers are demanding richer, online and real-time experiences, which increases private banks’ need to manage IT for value. Since cloud services free up infrastructure costs they offer a real alternative to an in-house data centre. Given the obvious benefits, the industry still seems largely pre-occupied with the issue of data security in the cloud. But banks should not let
security fears overshadow the cost efficiencies and flexibility that cloud computing has to offer. The future lies in collaboration When it comes to the implementation of cloud services, one point should not be neglected: this is the need for industry collaboration. Private banks need to work closely with their technology partners to assess their suitability for the cloud; the vendor community needs to continue to work hard to develop cloud solutions that deliver cost-effective infrastructures with the flexibility and scalability to support business growth. Cloud computing within banking is an evolution of outsourcing, which private banks are inevitably cautious to fully embrace. However, by partnering with cloud specialists, banks can take a manageable, step by step approach to implementing cloud solutions that will help improve their business in the long term. By taking a steady approach, banks should feel more confident about security issues, which with continued solutions development and industry experience, should become less prevalent over time. n
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When it comes to the implementation of cloud services, one point should not be neglected: this is the need for industry collaboration.
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Risk Management
Outsourcing to rescue competitiveness
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ollowing a series of crisis in recent years (Subprime, Sovereign debt, etc) we saw the advent of new compliance regulations that have become more demanding. This stringent regulatory environment places the Swiss financial sector under pressure. In addition, one of the undeniable competitive advantages of Swiss Financial center, Banking Secrecy, may erode in coming years. Such changes do not come without heavy implementation costs for financial institutions. The changes that have the strongest impact on Swiss banks are related to prudential standards (Basel III, Too big to fail), transparency requirements (United States: Dodd Frank Act - EU: guidelines Mifid, UCITS, AIFM, EMIR), remuneration systems and tax (OECD 26, Fatca RAFFAEL MAIO and the flat rate withholding tax). In the field of activity where Swiss Banks are in direct competition with CEO / COO, Founder other financial institutions, the operative regulations NetGuardians change the settings for Switzerland’s international maio@netguardians.ch competitiveness. At the same time, the costs of adapting to regulatory changes and the resulting structural inflation in operating costs are likely to influence the attractiveness of certain areas or certain operations. To maintain their position as global forerunners, Banks in Switzerland must find ways to reinvent themselves during this period of change to meet tomorrow’s challenges. Consequently, in order to improve their competitiveness, Banks must heed two major factors: - Cost Reduction, - Innovation. To reduce costs, the financial services industry was a latecomer to a practice that is widespread in other industry fields. It is called Outsourcing. Generally BANQUE&FINANCE banking solutions 2012
speaking, Banks expect the same benefits of outsourcing than other players in this field: - Lower labor cost, - Highly skilled personnel, - Technically qualified shared resources. To reduce cost and driven by economic pressure, other sectors have started much earlier to perceive the economic potential of outsourcing. Surprisingly enough, banks have turned to outsourcing relatively late. This can be explained by the fact that until recently the banking sector enjoyed particularly comfortable margins. They are now in their infancy in terms of outsourcing needs compared to the other sectors; therefore, they have important potential savings ahead. Today, financial institutions with less than 10 billion Swiss francs under management and with less than 200 employees are asking themselves the question: To outsource or not? To a Bank of small size, it has become more complicated to manage their own IT and Back Office given the growing standards and regulatory environment. Lately, some institutions have even decided to turn down certain customers of foreign nationalities so they do not have to report to onerous compliance rules that will fall on their organization. Regulation Imposed by the Finma Through its circular 2008/7, the Finma has put in place some safeguards in order to legislate the outsourcing of IT within the banks to avoid falling through the same problems that affected other sectors. This way the outsourcing conditions for banks will still satisfy the banking secrecy act while protecting confidentiality. From Finma’s perspective when a company delegates its essential activities to a third party to ensure its
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According to a recent study mandated by the Swiss Bankers Association, the Economic Research Institute BakBasel, claimed that Switzerland’s financial industry is one of the most important engines of the Swiss economy. Based on these assessments, the banking sector has been the largest contributor to the Swiss economic growth in the past 20 years.
independent and sustainable functioning, it is practicing outsourcing. For example we can list the “essential” benefits for services that can: «have an effect on the determination, limitation and risk control for credit and losses, risks related to market fluctuations, to the execution of transactions and the lack of liquidity, operational and legal risks as well as risks that could tarnish their reputation». The important points that emerged from this circular can be grouped into five categories: • Definition and control This category should contain a precise description of the activities to be outsourced as well as qualitative and quantitative controls with predefined criteria in order to measure or assess the provider. The delegate must also guarantee a secure and sustainable activity. The internal control system of the company should be extended to the domain of activities transferred to the outsourcer. • Responsibility It is important to note that the company continues to assume responsibility for the outsourced activities to the FINMA. • Security & data protection A specific component focuses on security and sensitive data protection. The customer data must be protected against any processing that is not authorized by organizational measures or the appropriate technical staff. Physical access should be specifically controlled and monitored. In addition, the professional secrecy must be assured by technical and organizational measures.
• Audit and monitoring Regarding monitoring and auditing, the company, under contraction agreement, has the right to make inspections, to give instructions and to carry out checks at any time without any limitations from the delegate. • Information & Contract This last category includes points related to the duty of informing the clients as well as the contracting parties that must take shape in the form of a written agreement. The contract must at least reiterate the points set out in the circular 2008/7 of FINMA.
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The outsourcing conditions for banks will still satisfy the banking secrecy act while protecting confidentiality
Carrying out its policy of outsourcing In order to successfully manage an outsource project analysts agreed on some fundamental practices that will ease your outsourced project and set it on the right path: • Set Clear Goals The first practice is to have the clarity around goals and objectives. Companies should focus on their own drivers and not rely only on external consultants. Unlike most typical IT projects, outsourcing not only changes processes and implements new technologies but also affects the daily operational activities of many employees. • Recognize your weaknesses Before starting your project, you should be aware of your strengths and weaknesses; this will tremendously help you negotiate with your partners. As in any IT project, a realistic view enables to get straight to the point, avoid mistakes and delays. uu BANQUE&FINANCE banking solutions 2012
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Risk Management
uu • Manage the Relationship According to a Gartner survey, relationship is an important factor to avoid problems. Managing a partner relationship requires special skills. It is important not to underestimate skills such as strategic understanding of IT goals, complex relationship, negotiation, and mediation capabilities. • Allow a period of adjustment Keep in mind that an outsourced process is something that will take time with few adjustments along the way. Do not forget to communicate and explain changes internally to your own staff. Good communication can rally people to your cause and make the transition smoother.
and activity outsourcing, banking institutions are capable today to re-channel their energy back on a typical Swiss know-how “Innovation and Creativity”. As stated by the WEF (World Economic Forum), Switzerland was recently established as number One in innovation. Switzerland will have to reinvent itself in the domain of finance in order to retain its place ahead of the increasingly competitive global market place. n RM
towards innovation and competitiveness
• Find the right partners Try to find the partners that will understand the best the activities that you will outsource. This will promote the communication, help in the transition phase and reduce the overhead of documentation. Moreover, it will reduce implementation time. Reduced operational risk and Bank outsourcing Every day, information systems are subject to thousands of threats: fraud, data theft, information leaks, and more. The system registers millions of business activities and audit trails each day - all of which contain relevant information. With intelligent screening technology, one can continuously track and extract audit trails from applications and IT infrastructure. Thanks to optimization, cost lowering
outsourcing of it essentials
Définition and Control
Information and Contract
Responsability Outsourcing
Audit and Monitoring
Sécurity and Data protection
BANQUE&FINANCE banking solutions 2012
NetGuardians is a leading software company recognized for its innovative solutions to keep operational risk under control. In processing this data NG|Screener makes it usable and understandable. Using smart behavioral analysis methods NG|Screener makes it extremely easy to identify atypical activity, to effectively control data leaks, and to alert potential internal frauds. In order to meet the daunting and challenging aspects described in this paper, NetGuardians along with Altea Business Services decided to join their efforts and knowledge to offer innovative outsourcing solutions to their customers. Altea Business Services is specialized in optimizing the use and the development of new technologies in order to improve productivity and competitiveness while ensuring security and business continuity to its customers. This newly formed business affair is pushing further the limits of the outsourcing. Jointly we demonstrate with a couple of clients that it is possible to reduce operational risks for the banks by outsourcing some of their internal point of controls. This joint effort, results by meeting all FINMA requirements and drastically reducing operational risk. A new ASP proposal offers a novel approach to fulfill the vision of streamlining costs and risk reduction.
Cambridge is about professionnal projeCt management
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Risk Management
Enable mobility, preserve security
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martphones are now part of the standard 21st century equipment. Those equipment nearly as powerful as desktop computers, always connected to the Internet became increasingly essential (not to say vital) to all individuals wishing to receive their emails, accessing their Facebook account, the news sites, their home network… It was just a matter of time before this trend makes it to the professional sphere. It happened, and is now accelerating. Accessing corporate resources from anywhere, anytime, with any device is now a preoccupation of many organizations. More than a business requirement it is now expected by most to be able to access email, applications, customer information, and intranet from the palm of the hand. Office in the “cloud” The mobility subject is part of the biggest Cloud Computing picture. The need to have a mobile device is reinforced by the wish to remain connected to all cloud based services, private and professional. In the professional environment organizations are, in a way, Yoann Le Corvic expected to provide an “Office as a Service” cloud, to extend the office out of company’s premises. Senior Security Engineer e-Xpert Solutions And this, using pretty much any type of terminal available on the market: Laptops, Tablets (iPad, Galaxy yoann.lecorvic@e-xpertsolutions.com Tab…), Smartphones (iPhone, Samsung, Blackberry…) A major shift is happening in the way of using IT facilities, and one major impact of this resides in the information security field. Safeguarding information within the company’s boundaries was already a challenging task. News headlines over the past few years highlighted that progress was still to be made in that field. To make this task even more challenging, risks related to the mobility trend will now have to be BANQUE&FINANCE banking solutions 2012
managed.What is so specific to mobile access? Why would this be source of additional risks? Consider how access to information is performed in a traditional environment : resources hosting sensitive information are located in secure datacenters, the users are within the company’s premises usually with physical security in places, PC are not leaving the premises (except for some very specific and duly justified situations) and can be permanently controlled to enforce a strict security policy. Users’ accesses can be easily monitored, and controlled. Mobile accesses on the other hand are provided through untrusted public network such as Wi-Fi hot spots, cyber cafes or directly through the mobile data network (3G, HSDPA, 4G…). None of which are managed by the corporate IT team. The information is potentially far more exposed in this environment than it would be within corporate premises. Theft is also a risk that is significantly increased when on the road with mobile devices. The high market value of laptops, smartphones and tablets makes them attractive targets. And of course those smaller devices are also more prone to loss. To illustrate those risks, a paper from Kensington Group (January 2012) states that 1 laptop is lost every 53 seconds, and the average estimated cost of a stolen laptop is $49’000. Furthermore, a Ponemon Institute survey, sponsored by McAfee in October 2011, showed that, on a panel of 439 US organizations: - over 142’000 smartphones were lost or stolen (and only 7% recovered) - 60% of those contained sensitive information - 57% of the lost or stolen devices did not have security features enabled. Last but not least, mobile devices are more and more “Cloud Aware”, and even “Cloud Enabled” by default.
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In today’s “always connected” world, ubiquitous access to email, applications and corporate information is becoming the new standard. But this trend comes also with its share of new challenges; especially when it comes to protecting corporate information. Here are a few pointers to safeguard this information while surfing on the mobility wave.
iCloud for Apple, Google for Android, keeping track have impact on processes (e.g. provisioning) and will of where your information is actually stored is not require evolution of existing security mechanisms (e.g. authentication). Without rigorous project trivial. management, the likelihood of never completing the implementation or ending up with a solution not The magic bullet… All industry sectors do not have the same approach matching original business requirements is much when it comes to enabling mobility. The banking higher. sector is generally not willing to allow mobile access corporate resources. But chances are the • Training and Awareness mobility wave will also hit banking sector in the The first line of defense to help protecting information (very) near future. Being ready for it requires strong is the end user. But often user’s behavior is not management involvement, and evolution of the going towards better security but rather increased IT environment. Unfortunately, there is no magic exposure. Those behaviors can be adjusted through bullet. Associating organizational and procedural proper training, both on general aspects of mobility changes with IT security technologies is required to risks, and technical training on mobile devices they are provided with. minimize exposure of your information asset. • Risk Management Risks induced when providing mobile IT services should be analyzed and included in the organization’s global risk picture, and taken into account in the decision process to initiate a project. • Management decision Enabling mobility requires resources, and mobilizing resources requires management decision and support. In the decision process, risk is a key element to consider with the same importance as business requirements or costs. • Project Management This may seem obvious, but mobility must be managed as a project with clear scope, target, deliverables and sufficient budget and human resources. And the first step of this project is to think through all ramifications, as enabling mobility will
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Chances are the mobility wave will also hit banking sector in the (very) near future.
• IT Security Solutions A wide array of IT security technologies is available today to help building secure mobility architectures. Authentication and Access Control. This wellknown security mechanism, traditionally based on a username and password, is a key one when it comes to mobility. But as the mobile user is working in a “hostile” environment, it is highly recommended to replace the username and password by strong authentication solutions (certificates, one time password delivered through SMS or tokens…) Endpoint security Smartphones or laptops, even if not permanently connected to the corporate network, should comply with the corporate policies in terms of malware protection, network access control. This is critical to ensure a satisfactory level of protection when connected to untrusted public networks. uu BANQUE&FINANCE banking solutions 2012
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Risk Management
the magic bullet uu Information leakage prevention Mobility introduces a environment for corporate information: outside corporate network, on a smartphone, tablet or laptop. Necessary measures must be taken not to increase exposure of sensitive information. Preventing roaming users to access sensitive information is usually not an option. The purpose of mobility is about working remotely, and many business tasks require access to sensitive information. Enabling encryption on mobile devices is a first step to protect sensitive information for roaming users. Isolation of corporate resources on the mobile device For smartphones, tools are available to build a secured professional environment within the smartphone, not relying simply on the smartphone security features (usually only a PIN code). To access the professional “safe”, authentication to corporate network is required. This technology also contributes to reducing information leakage risk. Traceability Keeping a detailed audit trail of users and administrators actions is crucial. This makes the analysis of an incident or troubleshooting much easier. Furthermore, this may be a sector specific regulatory requirement or even legal requirement. CYOD, BYOD To push the mobility concept even further, new mobility approaches have emerged: - “Chose Your Own Device” (aka CYOD) approach. Rather than having 1 or 2 models of mobile devices, the organization can provide more alternatives to choose from for employees. - “Bring Your Own Device” (aka BYOD) approach. Rather than providing corporate equipment to BANQUE&FINANCE banking solutions 2012
employees, as they usually already have laptops, smartphone and tablets, the organization makes use of them to allow access corporate information. The CYOD approach adds some burden to IT management as instead of managing one or two kinds of equipment, IT teams have to deal with 6, 7 or more. This also means that security mechanisms must be compatible with all of the systems and teams must be trained on all of them. The BYOD approach is different. The IT Team is not responsible for the device, but still has to provide necessary tools to allow secure access to corporate resources and secure storage of information on mobile devices. All this without impact on the employee’s private equipment, as it does not belong to the organization. Break the wave or surf the wave? Information leakage, intrusions and other security incidents are still common in news headlines. The “Information Security” equation gets yet another variable with mobility, making it even more complex. But the wave is there, and as a manager few options remain: - Break the wave (at least for your organization): do not follow the trend and cut the discussions short on mobility. This is usually a difficult position to defend, as managers are generally the first to express a need for mobile accesses, and are also the ones having access to the most sensitive information. - Surf the wave: define and formalize your strategy, and follow the few pointers presented in this paper. But do not underestimate the project size: the number of users is not what matters most; the sensitivity of the information that you give access to does. Building a secure mobility solution for 20 managers and directors is not necessarily much less work than for few hundreds users. n YLC
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Risk Management
Mobile applications for wealth managers and private bankers
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e are all experiencing the rapid emergence of software applications running on mobile devices such as smartphones and tablets lately. A wide spectrum of mobile applications is already available for a number of operating systems (or platforms), ranging from simple, personal, autonomous applications targeting individuals, to complex, specialized business-oriented ones targeting industry professionals and their clients. An example of the latter category includes mobile applications specifically developed for wealth managers and private bankers, as well as their wealthy clientele. But what are the highlevel business, technical and other requirements that a wealth manager or private banker should take into account in order to select the most appropriate mobile application for his/her organization?
SECURITY An obvious point to start with and a point of special concern of such financial institutions and their clients’ as well, is application security. Encrypted communications (ideally a multi-level encryption, e.g. HTTPS in addition to a proprietary protocol) between the mobile Nikolaos Zorbas application server and the devices is the foundation on which the application’s security layer is built. The IMSplus Business Unit Manager use of proprietary communication protocols by natively PROFILE Software developed mobile applications (in contrast to web-/ nzorbas@profilesw.com HTML-based applications), a registration process of a downloaded mobile application with the financial institution, centralized access control (e.g. through LDAP), two-factor authentication, use of one-time passwords, functional and data access levels of authorization, or even location-based services and remote device data management to lock or remove sensitive data from the device (where applicable) are the main features BANQUE&FINANCE banking solutions 2012
that usually comply with a financial institution’s security standards and determine a given user’s access level. Moreover, financial institutions are typically very cautious with respect to where and how their clients’ data get transmitted, appear and whether they remain stored. A generally good practice to apply is to use solely non-persistent data on the mobile device, i.e. data not saved on the device and no longer available on the device as soon as the application session ends or times out. Most institutions also prefer to use aliases instead of real client personal information and account numbers. Finally, as in every financial services application, full auditability and appropriate logging of information at the application’s server back-end are important and vital application features. FUNCTIONALITY AND USER-FRIENDLiness Equally important is the functionality provided by the application. A wealth management mobile application may deliver a wide range of functionalities depending on the type of the financial institution and the kind of services it provides. Such mobile applications typically provide access to business applications or to business-related content (e.g. documents) through a mobile digital channel. Indicative functions which are available on a typical mobile application covering several user roles (e.g. wealth managers and clients) may include: access to the clients’ information, holdings, transactions, portfolio profitability, performance and risk analysis reports, statements, alerts monitoring, CRM, trading/ order management, watchlist, financial planning, document management, access to news and market data. Additionally, a financial institution may decide to integrate proprietary content (like in-house research and market commentaries) alongside the above-mentioned information sourced by core systems, aiming to increase client loyalty and frequency of application usage. To
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A wide spectrum of mobile applications is already available for a number of operating systems (or platforms), ranging from simple, personal, autonomous applications targeting individuals, to complex, specialized business-oriented ones.
wrap-up, essential functionality for such an application should enable on one hand a wealth manager to closely collaborate with his/her clients, stay up-to-date with the markets and on the other hand a client to have access to his/her portfolios and the markets at any place and time. User friendliness is another major area of interest. By definition, mobile applications have introduced an enhanced, innovative user interface with unique characteristics when compared with more ‘traditional’ user interfaces we were used to in the past with desktop and webbased applications. Gestures and animated graphs are just a couple of examples of such enhancements. A well-designed mobile application is expected to take full advantage of the device capabilities when it comes to user interaction. Ergonomic design, ease of operation, intuitive application use based on the device’s user interface standards, are also signs of a well-designed mobile application. RELIABILITY AND INTEGRATION Other significant factors to consider when evaluating a mobile application include its reliability, performance, scalability, high availability, as well as its integration capabilities (e.g. through web services). With regards to technology in use, a natively developed application is generally preferred, as it exploits in full the potential of each mobile device operating system. Maintenance and support services provided by the software vendor should be taken also into account to assure smooth and regular product upgrades, maintenance of the installation and user support. BENEFITS The benefits of a mobile application are obvious: it enables industry professionals to provide valueadding services, assist them to better promote their
business, improve their productivity and effectiveness while being closer to their clientele. The use of mobility tools is expected to accelerate sales, simplify new clients’ acquisition process, strengthen existing clients’ loyalty, lead to a more direct, closer and eventually, more profitable relationship with clients. On the other hand, enhanced client experience and involvement, convenience, and transparency, increase client satisfaction. Apart from the business and technical requirements, any software evaluation should take into consideration the solution’s total cost of ownership and the vendor’s profile. A valuefor-money proposition is probably better suited for today’s volatile market environment and unstable economic conditions. In addition, the engagement of an experienced, knowledgeable, and focused on the specific business domain software vendor, is critical. conclusIONs To sum up, wealth managers and private bankers should evaluate several aspects of a mobile application offering, such as security and various business, technical, and technological requirements, costs incurred, as well as accompanying services, depending on the type of the financial institution, the kind of services the institution provides, and the institution’s specific business model. n
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The use of mobility tools is expected to accelerate sales, simplify new clients’ acquisition process, strengthen existing clients’ loyalty, lead to a more direct, closer and eventually, more profitable relationship with clients.
PROFILE Software and the mobile application of its flagship investment management platform, IMSplus Mobility (available in iOS and Android natively developed versions), offer an excellent choice. Leveraging the platform’s security infrastructure, rich functionality, modern technology, and open architecture, IMSplus Mobility enables wealth managers and their clients to have unrestricted access to appropriately authorized data and documents, whenever and wherever needed. BANQUE&FINANCE banking solutions 2012
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Risk Management
The security race of against the e-ghosts
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evelopers of e-banking security applications are locked in a continual battle against anonymous hackers, hidden around the world, whose constant aim is to divert vast sums of money from banks into their own coffers. In October 2010 a criminal organisation numbering 100 or so people used specific malware tools to steal US$70 million in the USA. More recently, a young Russian stole more than US$3 million over a period of about 6 months, by means of two wellknown and publicly available malware tools. While the hacker in the latter case was arrested, catching these criminal individuals and organisations is unfortunately the exception rather than the rule, and the methods they use to transfer money to their accounts are even cleverer than the methods used to steal it. One Jean Marc Bost procedure is to shift the money to a foreign account Head of Security division that belongs to a person who is ignorant of the crime, Elca Informatique rather than to the criminals themselves. The owner of jean-marc.bost@elca.ch a transmission account earns money by operating the account in a third country for someone unknown to him, and trying to trace the criminals behind such a scheme is usually hopeless. Globalisation and standardisation of payments has contributed significantly to the business of financial fraud and looting. Over time, some important things have been learned. One is that hackers never sleep: whatever effort is put into security, they soon have a new way to attack e-banking. Second, in real life, ghosts do exist: payloads installed by Trojans are infecting more and more Herbert Jäggi devices. And third, there are many different varieties of Trojan: Banker is a family of specialised malware Key Account Manager Banking Elca Informatique for stealing money from e-banking users. Zeus and SpyEye are probably the most famous representatives herbert.jaggi@elca.ch of this family, though many others exist. BANQUE&FINANCE banking solutions 2012
Malware like Zeus and SpyEye is not only used against banks. It supports advanced configuration schemes from a remote administration console in order to attack other targets, enabling it to steal credentials from websites such as Facebook, Google Mail or Windows Live. This is of great value for the criminals and also allows the malware to spread further. Such malware is also able to launch more targeted attacks on specific extranets or may simply sell the acquired data later in an underground marketplace. While the web is the primary target, FTP servers also fall within the scope of attacks. Credentials are valuable, as are credit card numbers and snapshots of pages visited by the victim, which can be used subsequently in other scams. Malware like that described above also exhibits advanced capabilities that allows it to remain in the shadows even when a user has installed the latest antivirus software and run specialised anti-malware tools. Based on best-of-breed rootkit techniques - the most advanced pieces of technology in terms of their efficiency in the persistence and stealth domains, they are often used to resist reboots and antivirus scanners. With such characteristics, ghosts survive long term as they can be neither found nor damaged. In conclusion, as it is possible for malware to be present on a computer, and yet be undetectable and impossible to eliminate, prevention of infection and keen observation of the computer’s behaviour is key. What preventive actions can you take? The most important preventive actions have been known for years. Malware is mostly distributed via e-mail or uploaded to a computer from infected Internet pages. It is activated using security holes in different software modules on a computer, which are
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People are using iPads or similar tablet devices in all sorts of ways. The greater number of these devices will make security harder to control, and will offer the hackers and criminals more ways to steal money. High priority therefore needs to be placed on the security aspects of banking applications.
found by hackers and sold on to criminals. Software vendors try to close these holes as soon as possible, and offer downloadable patches, so it is very important to download these software updates und install the patches as soon as they become available. The best approach is to allow your system to update your software modules automatically. As this may not be possible for all components, it is important to look for updates regularly. It is also essential to use strong virus- and malware-detection software. An even more important aspect is to take note of any unusual behaviour by your computer, and not to place all your trust in the protection mechanisms offered by software tools, hardware or the banks. While using e-banking facilities always be suspicious of anything unusual that occurs, and in the event of any irregularity, cancel your session immediately as a ghost or “man-in-the-middle� attack may be taking place. Requests by e-mail from a bank or any other organisation asking you to sign in or to supply personal and security information should never be answered and always be deleted. Attempts at manipulation are becoming ever more difficult to recognise as they have become more plausible. Information is collected from various sources such as Facebook, Google and others and then used by attackers to write very personal messages that appear to come from genuine contacts. What can be done on the technical side? To ensure that money cannot be stolen, banks need to ensure the authorisation of transactions, although this is not very user-friendly, as it requires the user to confirm each one. To reduce the burden on the user, additional confirmation is only requested for
unknown target accounts. Authorisation of a transfer is made by means of an additional security check via a device (e.g. RSA, code calculator, etc.) or by using an independent second channel, such as the mTAN solution that uses SMS for confirmation. However, this is not a guarantee of security: criminals have already found ways to manipulate the SMS process. The confirmation process can only be guaranteed if a completely secured second channel is used. Future trends in e-banking Today, most e-banking activities are carried out on private workstations or on computers in the workplace. Most of these machines are desktop or notebook computers running a Windows or Mac operating system, but this will change in the near future as the trend is more and more towards the use of portable devices such as intelligent smartphones and tablet computers. IDC forecasts that there will be more sales of tablet computers than of desktop or notebook PCs in the near future. People are using iPads or similar tablet devices in all sorts of ways, as well as looking for new and innovative banking applications. Given new functionalities it is possible that more and more banking applications will be available on these kinds of device and there is already demand for making financial transactions on them. The security challenges that will accompany such banking applications will be even more challenging than they are now in the world of personal computers. The greater number of these devices will make security harder to control, and will offer the hackers and criminals more ways to steal money. High priority therefore needs to be placed on the security aspects of banking applications for tablet computers, as well as addressing ease of use. n
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Today, most e-banking activities are carried out on private workstations or on computers in the workplace.
BANQUE&FINANCE banking solutions 2012
STERCi
Success is not just weathering the storm
Everyday, the world’s largest banking groups, financial institutions, monetary authorities and corporates rely on Sterci’s suite of financial messaging products and services. Our innovative solutions enable customers to improve efficiency, business agility, and to reduce costs and risks. To discover how Sterci can deliver measureable competitive advantages to your organisation, whatever the economic climate, visit www.sterci.com
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Tendencies
Financial innovations for a safe drive
Illustrations ©Photocanal25
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Philip Smith & Arno Zanetti
Meeting with Paul Cohen Dumani
MIT
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Marc Spaelti
DUKASCOPY
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Meeting with Michael Heijmeijer
CFINANCIALS.COM
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Marco Dottarelli
SPECITEC
EQUINIX
BANQUE&FINANCE BANQUE&FINANCE N°117 I SEPTEMBRE-NOVEMBRE banking solutions 2012
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Tendencies
The Private Banking Industry in Transition
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n Switzerland, still about a third of the world’s offshore wealth is managed. This enormous success is based primarily on four factors: • Unique know how of the Private Banking service • Very good economic and fiscal stability • High political and legal certainty, and • Banking secrecy. However, as we experienced during the last years the time has changed. The Private Banking Industry is now dealing with one of the most difficult situations. Risk of massive decrease of assets under management and significant margin erosion are the greatest challenges to manage for the Private Banks. Due to the changes in financial markets and the surprising toughness and speed with which the European Union is offending the Swiss banking secrecy, the pressure to Private Banks to align their business model to the new challenges is increasing. Moreover, the regulatory changes are enormous and require regardless of the profitability significant investments in the organization. This will, in a first step, have a negative impact on the cost income ratio. But
Philip Smith Director SpeciTec
Philip.Smith@specitec.com
Arno Zanetti Business Partner Zurich SpeciTec
Arno.Zanetti@specitec.com BANQUE&FINANCE banking solutions 2012
it opens also a lot of opportunities for the future if the Banks can readapt themselves and turn the new constraints in competitive advantages. New challenges : new key issues to manage • Cross-Border banking and regulatory compliance Private Banks needs to adapt their business models to the new reality. Tax neutral asset management is becoming a thing of the past. The transition to a new business model might be not easy but crucial to survive. Banks face fundamental decissions over their cross-border banking and client service model. Redefinition and adaptation of their business model and organisation is required to comply with the new regulations. • Withholding Tax regulation with United Kingdom, Germany and Austria The end of tax-induced offshore business has traditionally been an essential part of private banking and has recently come under increasing pressure. The EU have it made clear that they will no longer tolerate tax avoidance. The Withholding Tax regulation expected to come into force from January 1st. 2013 will have an signigificant impact on the organisation of the bank. The complexity of tax laws in general and in particular the new withholding tax regulations requires sufficient knowledge in order to inform clients wihtout proactively providing tax advisory service. • Operational Model Cost management must be driven by the business to ensure long-term-profitability. The ongoing pressure on margins and income will make it necessary to get costs down along the entire value chain. The investments made for new core banking systems and the unexpected cost-overuns of the migration to implement the new banking core systems can no longer be tolerated since this will causes a dremendous increase of recurring cost over the next coming years. To ensure profitability, cost reductions measurements must have the highest priorities. Open product architecture solutions will
be predominant to ensure that private banks can choose the best of breed products and are not dependend from their core banking system vendors. • Basel III The new provison of the capital adequacy rules will enter into force on January 1st. 2013 with a transitional deadline by the end of 2018. The new regulation will require additional eligible equity due to the adaption of the higher international risk weightings of certain assets. Basel III will not have a major impact for the Privat Banks but the regulations of Basel III will again be more restrictive. new opportunities In order to improve cost income ratio, Banks will need at the same time to optimize their costs but also increase their income. There are many ways to do it and it needs also to be carefully adapted to the know-how and to the market of each Private Bank. (See below some possible actions or solutions which can be analysed). The Private Bank of the future The traditional private banking model is under significant change. Banking secrecy is under pressure and in certain areas disappearing. Keeping up with all the new regulations is a big challenge for all Private Banks but it creates also new opportunities. Private Banks have to make sure that changes in the organisation and the business models are adjusted in order to be well prepared for their future. n
Possible solutions Use CRM tools to get a better knowledge of the clients and also be more reactive to their needs Use Ebanking system to provide a better service (24 hours a day) and presence Use tax optimization and simulation tools Use reactive portfolio management systems Simplify existing systems and automate the process Find less expansive solutions Increase polyvalence of staff
Executive MBA International Organisations MBA Bachelor en emploi Diplomas / Certificates in Advanced Studies En français
MBA Graduation Ceremony Special guest speaker: Management dans les institutions de santé Management des institutions sociales
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Sécurité de l’information Thursday, November 29, 2012 7 pm
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International Management Strategic Marketing Modern Management for Non-Profit Organizations
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Tracking and monitoring risk B&F: Can you give us a brief overview of the system? Paul Cohen Dumani: TRAC is a collateral management system enabling banks’ front-office (relationship managers), middle-office (credit risk managers) and top managers to monitor their risks appropriately. It was designed to replace the frequently-used Excel spreadsheet in the trade commodity finance sector.
Just two years ago, MIT* the Lausanne based Trade Finance software vendor, launched a new system called Trade Risk Active Control (TRAC). B&F recently spoke with Paul Cohen Dumani, General Manager of MIT.
B&F: Why do you believe TRAC should be seen as an innovation for commodity financing? PCD: It is true that banks nowadays are more or less well equipped with systems capable of supporting their back-office operations linked to financial instruments such as letters of credit, guarantees, and collections such as our own flagship product CREDOC, but it is not obviously the case for more complex financing, the monitoring of its allocated credit limits, and the management of collateral. In this case, the most frequently-used tool is an Excel spreadsheet. The spreadsheet offers great flexibility for relationship managers to follow the evolution of their transactions, and establish the global economic position of a customer at a given time. The position is calculated on the spreadsheet by consolidating data manually coming from heterogeneous sources. The global economic position supports the decision-making process of a relationship manager or a credit comity, when deciding whether or not to finance. Despite its proven flexibility, a spreadsheet has some limitations. It is not sufficiently secure as far as the reliability of the data presented is concerned. Spreadsheets also typically support the decision-making process for financing amounts up to seven or eight digits. Therefore, market demand is increasing for innovative dashboard tools that can be easily integrated into a bank’s IT infrastructure and are capable of automating the extraction of data coming from various systems in order to present a reliable, real-time view of a customer’s global economic position. In this regard, TRAC can be considered as an innovation in the trade finance industry. B&F: OK, but don’t you think standard back-office systems already include notions of limits, risks, and collaterals? PCD: Yes, they already do but bear in mind a trade finance back-office system or a loan system are designed to process, book, and follow up the financial instruments they automate, whether it is letters of credit, guarantees, collections, or loans. You already find notions of risks, limits, and collateral in such systems but only in the framework of one given operation. I will oppose here two notions: Transaction and Operation. A Transaction being made of several operations of purchases and sales BANQUE&FINANCE banking solutions 2012
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that can sometimes be linked to a documentary instrument such as an LC, but it is not always the case. Nowadays, banks are engaged in more complicated financing transactions involving many operations of purchases and sales linked to LCs (import or export), open account, or even cash. Therefore, a traditional back-office system often cannot give you the complete view of a more complex financing scheme, especially in terms of monitoring collateral and the different risks involved under one transaction. For this reason, we designed TRAC, which is a complementary but autonomous software to our core product, CREDOC. One must also bear in mind that the job tasks of a traditional back-office trade finance specialist are different from those of a front-office relationship manager. Indeed, the latter needs the appropriate tools to make decisions in terms of financing, while the former needs a tool to book and follow up its documentary business. B&F: You said TRAC is complementary but autonomous to CREDOC? Can you explain that? PCD: As already mentioned, the goal of TRAC is to calculate the global economic position of a customer at a given time. This can be done by aggregating data coming from a traditional trade finance back-end system such as CREDOC (eg., data on an import LC) and from a core banking system that supplies information on customers’ account balances. The industry of back-end trade finance software is quite mature, so our initial thinking was to design a system that could exchange information with CREDOC as well as with other trade finance software in the market so we could assist banks that already have a back-office system in place other than CREDOC. This gives us different options in the market. We can offer CREDOC without TRAC, TRAC without CREDOC, or both as an integrated solution. B&F: Do you already come across competition for TRAC? PCD: We’ve seen banks very interested in TRAC that have examined whether their own loan systems’ providers could cover the missing parts, such as transactional-based financing (multiple purchase and sales) and collateral BANQUE&FINANCE banking solutions 2012
Tendencies
management that are usually not covered by traditional loan systems. On the other hand, there are many collateral management systems in the market but very few designed specifically for banks’ trade commodity finance and structured trade finance activities. So, we believe that with CREDOC and TRAC, we have now a very unique and strong offering. At present, we can say that we are the only software vendor in the market that can provide both back and middle/front-end systems in regards to Trade Finance. B&F: Do you think there is a strong demand in the market for such a tool? PCD: In today’s current crisis climate, a major area of concern remains on the lips of bankers and software vendors: “How can we improve risk management?” Trade finance and commodities financing do not escape from such debate. Furthermore, Basel II regulations oblige banks to look more in-depth into how they evaluate their risks linked to trade finance, since it will have repercussions on capital requirements for this activity. For these reasons, and according to our own research, we believe there is a huge demand for tools such as TRAC, because reliance on an Excel spreadsheet increases operational risk and is no longer an acceptable solution for auditors. On top of that, we are seeing more and more financial institutions wanting to enter and compete in the Commodity Finance space, especially Asian and American banks that do not face a shortage of liquidity when it comes to lending in US dollars, and also do not face high exposure on sovereign debt. These Banks want to take market share from some European banks, historically the key players in this activity. One can actually see this trend in Switzerland and especially Geneva, which continues to be the biggest centre of excellence and commodities trading platform in the world, and obviously a key market for the commercialization of our Trade Finance systems. B&F: You mentioned Basel II, in what sense TRAC will help Banks make sure they comply with such regulation? PCD: Basel II has already set strict guidelines in terms of Capital requirements for Trade Finance. There will be even more constraints
with Basel III. Therefore, a Collateral Management system for Trade Finance needs to give a clear view to Trade Finance managers of the necessary capital required for this activity at any given time, and also where savings could be made to allocate more financing to increasingly demanding Customers. Precisely, TRAC enables the follow up of Collaterals with an evaluation on a mark to market basis, which is already a prerequisite for Basel II. It also enables to create specific statistics for Basel II and III calculations. The Basel module in fact enables to calculate the amount of capital required in the frame of Basel II requirements; it takes account of notions such as “Probability of Default (PD)”, “Loss Given Default (LGD)” and “Exposure at Default (EA)”. Furthermore, the system handles features such as Hedge, stock financing, as well as Counterparty, Country, and Commodity limits that are paramount notions for monitoring Trade risks in the frame of Basel II and III guidelines. B&F: TRAC is a fairly new system. Are you satisfied with the response from the market so far? PCD: We’ve been working actively for more than five years now on the issue of trade commodity finance automation because customers and prospects were pressing us to do something in this area. In 2011, Banque Cantonale de Genève, the first taker of TRAC, went live with the system. They reaped the benefit of having TRAC and CREDOC working as an integrated solution for their Trade Commodity Finance activity. Last year also, TRAC was selected by French bank Natixis, to support its Commodity Finance teams around the world. Natixis Paris already went live with the system at the end of June, and Asian branches (such as Singapore, Hong Kong, and Shanghai) are due to be connected to TRAC before the end of this year. Natixis New York should also roll out the system in 2013. Finally, we are expecting one to two more sales of TRAC before the end of 2012. When you look at it, it’s only been two years since we officially launched TRAC, so we can reasonably say that the success already encountered by the TRAC program is highly promising for the future. n
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Developments in online FX trading
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The challenge for the market as a whole is to streamline the overwhelming amount of information and services in a way in which etiquette and good conduct is preserved.
Marc Spaelti First Vice President / COO RM & Brokerage department Dukascopy Bank
marc.spalti@dukascopy.com BANQUE&FINANCE banking solutions 2012
he foreign exchange, or FX, market is widely considered as the largest and most liquid of the financial markets. For 2010, the Bank for International Settlements BIS reports FX volumes of 4 Trillion US Dollars every day, a 200% increase over the past 10 years. Despite these impressive numbers, certain investors remain oblivious to the many opportunities that FX trading has to offer, this is certainly due to the fact that the concept of foreign exchange movements is rather abstract. Moreover, and in contrast to traditional investments where assets may be held for months or even years, FX trading is often done as short-term speculation and with significant leverage. This short-term approach has been one major factor that a large part of the FX volume increase over the past decade can be attributed to online FX trading. In 2011, the Aite Group published a study highlighting the significant increase of the sector. Retail FX represents nearly 8% of the total turnover today, its market share has seen an exponential growth and this is for obvious reasons. With the introduction of retail FX margin accounts and the emergence of brokerages offering efficient electronic trading tools, the foreign exchange market has become easily accessible to the individual investor. The account opening procedure can take as little as a few hours and with a large choice of banks and brokers around the world offering their services, FX accounts can be held locally, often in the client’s home currency. A decade after the first retail FX brokers appeared, the market has seen a constant evolution in the variety of product offerings on one hand, and in the sophistication of clients on the other. increasing use of automated trading strategies Only a few years ago manual trade execution using a trading platform on a home-PC was the predominant way to access the market, but trading systems have dramatically improved, now giving the client a wide choice of possibilities to act in different ways. Widespread use of wireless internet and the arrival of smartphones has seen a surge in the development of suitable applications. If in the past only senior staff of major investment banks were able to keep informed of basic market movements using expensive mobile subscriptions to information services such as Reuters or Bloomberg, much more detailed information is now available to anybody and at virtually no additional cost. The Dukascopy Swiss Forex and trading applications are available for free and exist for iPhone and Android devices. Besides live price quotations and news alerts, they also include a range of analysis tools and video broadcasts; the trading app also provides direct access to the trading account. In fact, the application has become so popular that it has found widespread use from professional dealers. Another strong and ongoing tendency is the increasing use of automated trading strategies. Using a robot to execute trades according to a predefined logic addresses two major challenges that private investors are facing when trading FX: time constrictions, and the emotional aspects of currency speculation. Systems such as Metatrades MT4
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or Dukascopy JForex platforms have built-in capabilities to run custom built strategies. Clients that shy away from coding their own scripts can make use of a whole array of service providers that have emerged in recent years. The offer ranges from individual programming services, to ready built robots, trade helpers, and plug and play solutions that can either be added to existing platforms or that connect to an existing trading account. In addition and once again thanks to the capacity increases of the internet, clients can participate in forums, trading competitions, and interactive presentations or discussions on market events and trading opportunities. Clients entering the world of FX trading today are assured a comfortable head start compared with dealers 10 years ago. professionalization The challenge for the market as a whole is to streamline the overwhelming amount of information and services in a way in which etiquette and good conduct is preserved. Third party money management with a focus on FX is yet another area with significant ongoing growth prospects. Amidst the tightening of the regulatory environment in many countries, services that execute trades on behalf of a group of clients face much more stringent controls from compliance and legal officers. This has led to a professionalization of the sector as the cost increase due to regulatory changes has forced managers to extend their client base. Today it is nearly impossible for an unregistered individual to offer money management services, at the same time client demand for such products remains high. The institutionalisation of FX money management has in return helped retail brokerage gain leverage with traditional interbank participants. None of the large FX banks have made any considerable effort to cater to the retail market end user and in fact many professional traders belittled retail FX. In the mean time, trading volumes and market share of retail FX increased. While many do recognise the potential for business growth, slow changes to internal directives and the high investment needs to offer proprietary solutions hinder development. This has led to two further recent developments: high net worth individuals traditionally serviced by the private banking sector are turning to retail FX
to benefit from lower trade costs, and with arrangements where a client may separate custody of assets from the trade execution, there is no significant change in counter-party risk. Banks entering into white label agreements with an existing retail broker are another field of growth. This is a very cost effective way to add a completely new line of business into
an existing service network. After a decade of development and investments into trading platform and annex systems, the major retail FX brokers have extensive knowledge and a competitive edge in the sector. A strong white label partnership can help to even out such differences and propel a financial institution in front of its direct competitors. n
A sharp eye on financial products To harness the power of unlimited access to information in order to provide transparency in the world of financial products is the mission set to cfinancials.com
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he best innovative products are the ones that seem obvious the minute they are introduced. The kind of product that hits the nail on the head with such efficiency, that as soon as it’s out there, life without it seems unfathomable. Think Google. So here’s a simple concept: a search engine for all financial products, presenting the data in a clear standard format and assessing it according to one universal risk rating methodology. Imagine how accessible the capital markets would be with such a tool. Financial products would be made into a mere commodity, easy to examine and to understand‌ transparent. uu BANQUE&FINANCE banking solutions 2012
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uu This concept - to harness the power of unlimited access to information in order to provide transparency in the world of financial products - is the mission of cfinancials.com. The founder and CEO, Michael Heijmeijer, with twenty years of experience in capital markets, is not afraid to see big. ‘We want to completely change the landscape of financial products.’ It’s the trait of a leader in his field, to demonstrate the ability to break down the issues and elements of a complex sector into a simple vision that addresses the needs of all. Heijmeijer’s aim is to make cfinancials’com the reference for professionals, institutions and individuals alike. If his proprietary universal risk rating for financial products passes the test of time and gains the trust of such a broad audience, then who can blame him for thinking big? Cfinancials.com could indeed become the next Internet era revelation, the Google of the capital markets. That’s for the vision. In terms of delivery, cfinancials.com are well on their way. Launched in Switzerland in 2009, the company has succeeded, through significant investment, industry knowledge and contacts, in creating a unique database of 12 million financial products, enhanced with product intelligence and formatting. The company’s 27-strong team of developers, marketers and strategists has created an offering that is truly unique, for a number of reasons: - There is no other database so complete. Hundreds of product issuers, data companies and investment banks, including ThomsonReuters, Six Telekurs, Interactive Data Corporation and Dow Jones, contribute to Cfinancials’ database, making it the largest repository of financial product intelligence in the world. The time and investment that it has taken for the company to pull off such a feat puts them in a league of their own. 99% of products traded on standard platforms are shown on the site. - There is no other portal in this sector with such storage, technology and processing power. - There is nothing else out there to rival the concept of an objective, universal risk rating tool. Period. Cfinancials.com has developed a proprietary tool that computes price and BANQUE&FINANCE banking solutions 2012
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product risk and volatility triggers associated with financial products. It is effective because of the power of its technology and the sheer size of the database it feeds off. In addition, it takes into account modern media impact, integrating product-related information and news from all forms of media including tweets, blogs and forums into the analysis. “We don’t provide product recommendations. We don’t sell stories. This is raw, objective, cutting-edge product intelligence and it works”, states Heijmeijer. - The presentation and formatting of information delivered is equally important. Each financial product is broken down to display all its constituent parts - the underlying assets as well as the individual components of the structure are displayed. Each component is then evaluated with appropriate indicators such as price, yield to maturity, price differential, credit default swaps (CDS), earnings per share (EPS), volatility, price-earnings ratio (P/E), dividend yield, correlation and dividend payout. Each indicator is complemented with a visual representation and graphics such as pie charts. That is transparency for you. Heijmeijer draws the comparison between financial products and cars. You need to know the value and origin of every component to get the full view of the vehicle’s exact worth. What has been the response so far? A number of institutions, fund managers and investment banks have already bought into the
concept and purchased access to customized tools offered by cfinancials.com. The next phase will be to change the offering in order to make the Rating product accessible to all types of audience, online through the website. The search functionality across all financial products is already online, and can be used without the need to even create an account. Due to be re-launched by the end of the year, the website will still provide access on the one hand to its free search engine, which will then include the end-of-day risk rating. Access to the full Rating product will be available according to different subscriptions, punctual or monthly, and the pricing will make these accessible to every type of audience. In an industry already heavily regulated and under fire to become even stricter, a company such as cfinancials.com, offering a product that is aimed at both institutions and individuals, is advancing in choppy waters and has to be sure to run a tight ship. The Rating product is already compliant with MIFID directives. Furthermore, the company has generated interest from the people who are actually writing the rules on a European scale, and that has got to be a tough test. The potential of the Rating product in terms of one universal risk rating that can be attached to all financial products is clearly apparent for the regulating authorities. Watch this space. In the current climate of investment banker bashing, with the main criticism being lack of transparency, cfinancials.com appears as a knight in shining armour. Not only does this website aim to demystify the capital markets and ensure that everyone can find detailed, objective information on all financial products in one place. It also aims to give us a tool, the Rating, that could become so universally accepted that one might even imagine it as a tradable commodity in its own right. Best of all, cfinancials.com is proposing to do all this partly for free. If the company can pull this off financially, build the brand and gain essential consumer trust, there may come a day when we’ll have forgotten how financial products were ever traded without cfinancials.com. That’s a lot of coulds, aims and ifs - let’s hope cfinancials.com go all the way, because they advance brandishing transparency as the prize for all. n Charlotte Penet
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Colocating in the Swiss financial market
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ike most sectors, the financial services industry continues to face revenue and cost pressures as well as an increased need to operate globally. Exchanges have merged and relocated, new financial centers and trading venues have emerged, and the market share for incumbent players has declined. As a result, established players have been required to adjust both strategically and operationally to survive in this evolving marketplace, and many firms are rethinking their technological infrastructure and reevaluating colocated services. Demand for fast, reliable and cost-effective technology has grown significantly in the last decade. Reliability and throughput are more important than ever before, and firms that were once content to operate their own data centers or colocate infrastructure with a financial extranet are now evaluating their ability to maintain a competitive position at a manageable total cost of ownership. At the same time, there are even more options to consider when determining where an order may be best executed. As a result, the number of required connection points has grown. In this environment, the ability of network-rich data centers to connect to the various execution venues has made their value more apparent. Bringing together network providers, asset managers, brokerages, exchanges and trading platforms as well as market data and analytics providers, these data centers can dramatically lower the number and cost of high-speed interconnections. Although data centers owned by network providers currently provide a range of colocation services, they have proven ineffective when supporting traffic outside of their own network. This has led to network-neutral data centers emerging as a viable option for firms pursuing global markets across the evolving financial ecosystem. SWITZERLAND, One of the world’s largest financial centers The strategic central location of Equinix’s ZH4 International Business Exchange™ (IBX®) data center supports proximity colocation to the SIX Swiss Exchange AG, and offers finanBANQUE&FINANCE banking solutions 2012
cial market participants low latency access to this key trading platform. On April 23, 2012 SIX Swiss Exchange launched equity trading using the very latest technology. With this step, SIX Swiss Exchange is investing in the future and in the international growth of Switzerland as a highly successful trading center. Together with the new co-location service at Equinix’s IBX® data center ZH4 in Zurich, the system upgrade means that much higher order volumes (capacity) can be matched and executed in a significantly shorter time (latency). This is supported by the efficient and standardized trading protocols, which are also in use at various trading venues. Tests under trading conditions have shown that average roundtrip latency is just 37 microseconds. The strategic central location of Equinix’s ZH4 IBX® data center supports proximity colocation to the SIX Swiss Exchange AG, and offers financial market participants low latency access to this key trading platform. The SIX Swiss Exchange AG located in Zurich plays a fundamental role throughout the European market, as SIX Group provides infrastructure services to national and international participants of the Swiss financial center. The company is a globally operating market infrastructure provider that offers services including securities trading, securities services, financial market data information and payment transactions. In addition to offering proximity data center services to the SIX Swiss Exchange AG, Equinix also helps SIX Group to build financial communities of execution venues, buy and sell side firms, market data providers and financial networks within its global data center network. The platform has attracted the most comprehensive ecosystem of leading financial firms worldwide, with key market players choosing to locate within Equinix’s data centers to support highly reliable, secure, low latency connectivity. Equinix’s ZH4 data center is a state of the art facility that was built to meet the region’s rising demand for premium colocation and interconnection data center services, particularly from global and local network service providers and financial services firms. Prior to
ZH4’s opening, Equinix’s second IBX® data center in Geneva (GV2) opened in March 2010 to accommodate demand for premium colocation and data center services from both local and global corporations and banking organizations. Driven by customer demand Equinix has just announced the expansion in Geneva – the opening of GV2 phase II. The platform allows network service providers to find the industry’s densest concentration of potential customers and partners across a global platform of interconnected data centers. The interconnection tools and online marketplaces facilitate the assembly of best-in-class solutions, while providing the opportunity to rapidly grow revenue from Equinix’s on-site customer base. In the financial market, data center services are a viable option, providing increased power, redundancy, security and flexibility, particularly for hedge funds and investment firms. Recently, major regulatory proposals and tax changes sparked hedge fund migration within the US and EU, which highly influenced the investment management industry and investor community. In response, many alternative asset managers are moving from London and New York, and Switzerland is emerging as their preferred destination. For example one of the world’s largest publicly traded hedge fund, set up a base in the Alpine mountains of Switzerland several years ago, seeking lower taxes, less regulation and a welcoming environment far away from public anger over bonuses. It is for these reasons that Switzerland will continue to be a rapidly growing financial market for years to come. n
Marco Dottarelli Managing Director Equinix (Switzerland)
marco.dottarelli@eu.equinix.com
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