# JOURNAL of Applied IT and Investment Management
Choosing a winning strategy to stay competitive
Taking control of operational costs Controlling operational costs CHOOSING THE RIGHT IT STRATEGY TO MANAGE COSTS
Making the leap from burning IT platform to safe cost haven HOW STANDING STILL IS NOT AN OPTION Cost strategy in action HARVESTING THE BENEFITS OF AN INTEGRATED FINANCIAL SOFTWARE SOLUTION Operational cost processes COST MANAGEMENT AS A STRATEGIC TOOL Making the right strategic cost choices SOURCING, RESOURCING OR OUTSOURCING OPERATIONS To SaaS or not to SaaS THE QUESTION OF CHOOSING SOFTWARE AS A SERVICE TO DELIVER COST EFFICIENCIES
Volume 3 路 No. 3 路 December 2011
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CEO COMMENT:
CONTENTS
Moving out of the shadow of financial crisis
3 Controlling operational costs: choosing the right IT strategy to manage costs
by CEO Peter L. Ravn
When the current financial crisis broke in 2008, few could foresee the enormous repercussions this would have on our industry. With the collapse of some major financial institutions, confidence in the industry declined and as a direct result, we have seen a wave – one might even call it tsunami – of regulatory reform sweeping over us. In the wake of this wave, the current more hostile business climate first and foremost calls for greater transparency across the board, whether in the area of products, processes or costs. Lack of transparency, particularly in gauging operational costs, frequently leads to uncertainty and loss of confidence. A clear approach is necessary to ensure long-term sustainable cost savings and the role of the IT platform is vital in the overall operational strategy. As global investment management companies battle on all fronts in the prevailing climate, structured investment strategies have become part of the overall business strategy in many companies, and a range of alternatives have come into focus, e.g. outsourcing, SaaS, BPM, cloud computing, etc., as examined in more detail in our lead article on pp. 3–6 and in subsequent external contributions to this issue. In order to move out of the shadow of the financial crisis, we need to start considering a related and equally important question: how is faith in our industry restored? How do we as the buy-side community regain the confidence of the market? What can we as solution providers, investment managers, industry practitioners and the like do to help drive investment performance? Restoring confidence in the industry is in my mind strongly dependent on our ability as a market-leading financial software provider to come up with solutions that can reconcile cost with growth and establish the parameters for improved transparency in all elements of the investment process. Continuously being able to deliver solutions to control and indeed reduce operational cost is a key ingredient in these efforts to improve efficiency and generate better returns. SimCorp’s commitment to delivering solutions and sharing knowledge in an open manner was clearly reflected in the SimCorp Dimension International User Community Meeting (IUCM) in Stockholm on 28–30 September. Theme of the 14th consecutive conference was ‘Rising to the future’ and the event was attended by no less than 382 external delegates, which marked a 35% increase on 2010 levels. As reported in greater detail in our feature article on pp. 25–27, the event encompassed an unprecedented number of popular pre-conference focus groups, plenary sessions, workshops and domain breakout streams, proving fertile ground for the next event, to be held in Switzerland. The conference programme also showcased the SimCorp StrategyLab award for excellence in growth management, which this year went to Dealis Fund Operations GmbH, and which is the focus of a separate article on pp. 28–29. With great anticipation of and confidence in another year of exciting and challenging developments, I would like to wish all our readers a happy and prosperous 2012 on behalf of everyone at SimCorp. Peter L. Ravn, Ph.D., is CEO at SimCorp.
8 Making the leap from burning IT platform to safe cost haven: how standing still is not an option 12 Cost strategy in action: harvesting the benefits of an integrated financial software solution 15 Operational cost processes: cost management as a strategic tool 18 Making the right strategic cost choices: sourcing, resourcing or outsourcing operations 21 To SaaS or not to SaaS: the question of choosing Software as a Service to deliver cost efficiencies 25 Rising to the future of investment management: SimCorp hosts seminal industry event 28 Excellence in growth management: Dealis Fund Operations GmbH 30 CXO Corner: Dr Frank Wellhöfer, Managing Director, MEAG 32 Book reviews 34 Regulatory update 38 Recent research and white papers SUBSCRIPTION Subscription to the Journal is free of charge for members of the industry, associated institutions and academics. To subscribe, please visit www.simcorp.com/journal. Change of address should be e-mailed to journal@simcorp.com. EDITOR-IN-CHIEF Lars Bjørn Falkenberg, Senior Vice President, SimCorp A/S. E-mail: larsbjorn.falkenberg@simcorp.com CO-EDITORS Michael Metcalfe, Financial Journalist, michael.metcalfe@gmx.de Mette Trier, Copy & Translations Manager, SimCorp A/S, mette.trier@simcorp.com PUBLISHER SimCorp A/S, Weidekampsgade 16, 2300 Copenhagen S, Denmark, phone: +45 35 44 88 00. Journal of Applied IT and Investment Management is a financial industry periodical, published and distributed globally by SimCorp A/S. Print run: 24,000. SUBMISSION GUIDELINES Articles, book reviews, new reports and information on recent research can be submitted for review to Co-Editor Mette Trier, mette.trier@simcorp.com. For submission guidelines, please visit www.simcorp.com/journal. LEGAL NOTICE The contents of this publication are for general information and illustrative purposes only and are used at the reader’s own risk. SimCorp uses all reasonable endeavours to ensure the accuracy of the information. However, SimCorp does not guarantee or warrant the accuracy or completeness, factual correctness or reliability of any information in this publication and does not accept liability for errors, omissions, inaccuracies or typographical errors. The views and opinions expressed in this publication are not necessarily those of SimCorp. © 2011 SimCorp A/S. All rights reserved. Without limiting rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form, by any means (electronic, mechanical, photocopying, recording or otherwise) or for any purpose without the express written permission of SimCorp A/S. SimCorp, the SimCorp logo, SimCorp Dimension and SimCorp Services are either registered trademarks or trademarks of SimCorp A/S in Denmark and/or other countries. Refer to www.simcorp.com/trademarks for a full list of SimCorp A/S trademarks. Other trademarks referred to in this document are the property of their respective owners. ISSN 1903-6914
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# Controlling operational costs: choosing the right IT strategy to manage costs
Many investment management organisations are responding to the harsher global financial climate by focusing resources on short-term tactical solutions to control their operational costs. Those with a more strategic approach to cost management are assessing a range of more sustainable alternatives to introduce long-term cost savings. Drawing on contributions published elsewhere in this issue, this article outlines a number of strategic approaches and software solutions designed to help contain costs over the longer term, and not least the impact on opportunities for growth.
A Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management.
s the financial crisis rumbles on across the globe, investment management companies find themselves operating in a more hostile environment in which they face a number of significant challenges. Of these, perhaps the most pressing is that profit margins are being squeezed and likely to remain so in the foreseeable future. The reasons for this are twofold. First, revenues are down and increasingly difficult to forecast. And second, a more complex and highly regulated market is pushing operational costs up. High fixed costs and variable revenues make for a dangerous cocktail. Given the difficulty of ensuring persistent outperformance in returns, costs and their containment have emerged as a critical competitive element that is high on the agenda of most investment management companies.
“To obtain a sufficiently effective cut in total IT expenditure, it is paramount to first identify the major cost areas.” With IT operational costs widely viewed as the most strategically important cost to consider as a means to maintain a competitive cost position in increasingly complex global investment management
operations, companies need to put into place the right IT cost management strategy – supported by the right financial software solution – in order to exercise control over the operational cost base. Here the difficult question is how to establish a clear and transparent cost overview, as examined in greater detail by Ulrik Modigh, Head of Asset Management Operations, Nordea Asset Management, on pp. 15–17 of this issue of the Journal. To obtain a sufficiently effective cut in total IT expenditure, it is paramount to first identify the major cost areas. Among the winners in the industry will rank those companies that have the ability to accurately assess, gauge and monitor their operational costs with the support and assistance of suitably applied investment management systems and processes. As a relatively high proportion of the traditional investment management company’s IT budget is spent on internal staff and external consultants, trimming some of the staff costs could hence be attractive. A financial software solution with fewer integration points and enabling a fully automated workflow allows staff costs to be lowered. To measure the effect of the cost-savings, a normal return-oninvestment (ROI) analysis can be performed for the automated components, putting the savings on staff in relation to the cost for the automation. In the same way, the ROI analysis can be conducted for savings in integration costs. According to Peter Ellis, Managing Director of investment management
consultancy Investit, it is crucial to take a value-based approach to this analysis. Cost containment is a key consideration but it should not necessarily be the sole one. “There is no point in having low operating costs if the service delivered by the operating platform is unacceptable,” he notes. Also, scalability can be more important than cost, in the sense that delivering more for the same cost may prove more important than reducing costs in an absolute way. With mounting pressure to ensure competitive operational costs in the long term, pursuing a course of ‘business as usual’ is no longer an option. If companies are to succeed in increasing – or at least protecting – revenues, they need to reappraise their operational setup, consider the option of acquiring an upto-date and fully supported investment management system with running upgrades, or perhaps seek out a new breed of solutions; just carrying on with the current operational setup is unlikely to be sufficient to ensure survival for all in the long run. STRATEGIC APPROACH AS PREFERRED CHOICE In assessing the alternatives available for introducing operational cost control, what would be an investment management company’s best approach? Should it be strategic in nature or more tactically based? Whereas a tactical approach looking at isolated processes can help to mitigate short-term disturbances and disruptions, for long-term cost containment, a strategic, holistic view, which looks at the en-
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# Controlling operational costs: choosing the right IT strategy to manage costs tire value chain, is imperative. In a volatile environment like the current one, quick wins are a tempting trap to fall into, but the winners emerging from this troubled period will be the companies that take the bull by the horns and aim for a clear and sustainable cost control strategy.
“And as the need to support more complex investment strategies has increased, the need to have greater integration within operating processes has grown.” One of the problems with pursuing a tactical approach is that it tends to impede future growth potential by cutting skilled staff and other resources needed to promote expansion. In conditions where increased pressure on IT expenditure prevails, it is important to identify areas with the least impact on future growth and take the appropriate remedial action. This enables the company to build up a strong balance sheet and still have an agile organisation in place. In a rapidly changing world, those investment management organisations that are agile are more likely to emerge as winners because they have the ability to outmanoeuvre their less agile rivals when growth prospects eventually brighten. This is one of the main conclusions of the report ‘The Agile Asset Manager’, published in 2011 by management consultancy KPMG, which cited replacement of legacy platforms to improve responsiveness and agility as a key factor in re-engineering core processes from the operating model perspective. “By putting in place more agile operating platforms, processes and structures, important benefits include not only increased operational efficiency and effectiveness, but also increased control over key value
drivers and KPIs such as cost, profitability and capacity,” the report noted. In another report, ‘Going for Growth: The Role of Price and Cost in Driving High Performance in a Volatile Global Economy’, also published in 2011, management consultancy Accenture found that in an economic environment that is still volatile and uncertain, understanding and maximising the factors that drive growth becomes even more important than during more predictable and robust economies. “Specifically, companies must identify and build on those things that differentiate themselves from competitors from a revenue (or demand) and cost (or supply) perspective, and that enable them to more strongly connect with fickle customers before other competitors do,” the report commented. So the best approach to controlling operational costs clearly comes out as a strategic one. “The first thing companies need to do is stop thinking in a disconnected way about systems and the business processes they support,” observes Peter Ellis. In his opinion, operating platforms is the way companies need to think, where an operating platform comprises an integrated collection of business processes, organisational structures (teams, responsibilities, and ownership), systems (applications and infrastructure), and data management processes (governance, collection, validation, storage, and distribution). INTEGRATED OPERATING PLATFORM However, the reality looks a little different, with a fragmented operating platform appearing to be more the rule than the exception among investment management companies nowadays. Business processes, people, systems and data management processes are all structured as silos, each of which is aligned along a vertical business function. In the past, this has allowed individual business functions within investment management companies to develop their operating platforms in parallel, and so move their businesses forward quickly, at the same time, on a number of different fronts.
But, according to Peter Ellis, the cracks are beginning to show in this strategy. As individual components of best-of-breed system architectures are upgraded to support new functionality, the time and effort required to consolidate data and maintain the cohesiveness of the whole operating platform have increased significantly. And as the need to support more complex investment strategies has increased, the need to have greater integration within operational processes has grown. So, at a time when the pressure is on investment management companies to reduce the time to market, as well as the cost of supporting new capabilities in investment, distribution and operations, many are finding that the opposite is happening. The costs of operating platforms are escalating and the ability to adapt and enhance them quickly is diminishing. These trends confirm the need to think more strategically to reduce the fragmentation in operating platforms. Required is a move away from best-ofbreed architectures towards more integrated systems and data architectures. Standing still on the ‘burning platform’ is no longer an option, as explained in more detail in the contribution by Investit’s Doug Neill to this issue of the Journal on pp. 8–11. CONSIDERATIONS TO MAKE ABOUT SOFTWARE SOLUTIONS In choosing from the various financial software alternatives with the aim of better controlling cost, be it through new service delivery mechanisms, such as cloud computing and Software as a Service (SaaS), or by means of IT outsourcing, offshoring and managed services, it is crucial to look at the entire value chain. It is not enough to buy a state-of-the-art system that only covers some isolated part of the value chain. A need for add-on systems means more integration points, which in turn mean higher maintenance costs and risk of errors. As Ulrik Modigh stresses in his article: “Obtaining a clearer insight into which
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links in the value chain are absorbing the main resources and costs to produce the different product offerings is a categorical cost imperative that the industry simply cannot ignore in the present difficult circumstances.” With the right financial software solution in the form of a fully integrated and automated front-to-back solution installed for core operational processes, the required valuable data becomes more transparent, facilitating the task of clearly identifying and estimating the cost drivers across the entire value chain of the operational process.
ronment. Traditional software providers deliver upgrades and leave it to the buyer to install and implement these on-premises. With SaaS, this becomes an out-of-thebox functionality, which reduces overhead and shortens time to market.”
Another important consideration is the upgrading frequency. In his article on pp. 21–24 of this issue, SimCorp’s Klaus S. Arfelt makes a case for more frequent upgrading with the use of an on-demand software solution like SaaS. In his view: “The key value driver for SaaS is the fact that the service provider constantly updates the solution in order to accommodate changes in the business or technical envi-
Average priority rating
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Notwithstanding the risk issue associated with SaaS transferring operational risk from the investment manager to the service provider, adopting an on-demand solution like SaaS can also save money by saving time. For instance, managers are relieved of the need to allocate time to overseeing operational processes, and instead can focus on more important areas of the business such as customer relationship management, business analytics, and decision-making. On the other hand, choosing in-house IT development may look tempting for some. But generally the cost of developing and maintaining systems consumes a large amount of time, attention and resources – not to mention the depend-
ency on individual employees, all of whom have unique expertise, and which might be lost if they leave the company. The result in many cases is a patchwork of typically complex software, hardware and process environments that require cohorts of IT staff to operate. STRATEGIC APPROACHES TO ADOPT Having considered the key aspects of integration, automation and upgrading, three alternatives essentially emerge to choose from among the various strategic approaches investment management companies can adopt to control their cost of operations. In the first instance, a company can rationalise its number of system and data components. However, while this allows an incremental approach to be taken in which efforts can be prioritised in the most important areas, it may take time to deliver significant improvements and incur high costs in the long term.
IT drivers and strategy: IT objectives Increasing efficiency remains the primary driver behind IT strategy in 2011, although institutions have a greater focus on supporting revenue growth, with regulatory demands also a stronger driver. 2011 Please rate the importance of the following objectives to your IT investment strategy in 2011. 2010 (data from 2010 study) Please rate on a scale from 1 to 4 where 1 is not an objective and 4 is a top priority.
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The second alternative is to replace the fragmented system and data components with a single, fully integrated platform. The upfront costs of this can appear daunting and it requires a big-bang approach, which can appear risky. However, it can prove more cost-effective over the lifetime of the platform and it can deliver significant improvements sooner. The third strategic option is to increase the degree of outsourcing of the operating platform. Operating platforms can be entirely internal or outsourced to some extent. According to Peter Ellis, there are two approaches to an internal platform solution: 1) best of breed, which entails multiple systems and data management components; and 2) integrated, which is characterised by a single system and a unique database component. BEST-OF-BREED SOLUTION AS ALTERNATIVE The best-of-breed approach has proved very popular with investment management companies, mainly owing to the nature of the internal processing opportunities in this type of setup. A best-ofbreed solution has typically been adopted by investment managers, who invest in different asset classes and who have to be able to process these different categories in fundamentally different ways. Despite the solution’s popularity, going for a best-of-breed solution can pose challenges, such as increased staff training and support, complex interfaces with other systems, duplicate and error-prone manual data entry, and redundant data storage.
3.0
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1.0 Raise efficiency
Achieve or maintain regulatory compliance
Increase customer satisfaction
Increase revenues
Cut costs
Improve supplier relationships
Figure 1. Increasing efficiency remains the primary driver behind IT strategy in 2011. Source: Ovum. Study based on 67 interviews with investment managers and hedge funds. Regions: North America (34%), Europe (40%), and Asia-Pacific (26%).
INTEGRATED SOLUTION AS ALTERNATIVE On the other hand, choosing an integrated, automated and fully supported internal investment management system based on a single database can reduce the amount of costs and time spent on both integrating different areas and on upgrading, which is done on a frequent and guaranteed regular basis. Achieving the benefits of an internal integrated approach does not mean that
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“To manage growing operational complexity, yesterday’s operating dashboard is insufficient to support tomorrow’s business operations.” Rodney Nelsestuen, Senior Research Director, Financial Services, TowerGroup.
the investment management company needs to compromise, for example, on the coverage of asset classes, as described in a more detailed account by Edmond de Rothschild Asset Management’s Cédric Le Moan and Laurence Adam on pp. 12–14 of this issue. OUTSOURCING THE OPERATIONS COMPONENT As discussed earlier, the degree of outsourcing may vary among investment management companies. “The more that investment management companies use outsourcing services and system providers in their operating platforms, the more they are able to transfer some of the responsibility, and long-term costs, for ensuring that their platforms continue to support current market needs in a cohesive and consistent way,” explains Peter Ellis. The main benefits of this are: 1) service and system providers operate in a competing marketplace and so there is commercial pressure on them to maintain the cost-competitiveness of their offerings; and 2) they are able to spread the costs of achieving this across multiple clients. The most common component of the operating platform to be outsourced is the operations component. This is because the business processes in operations are largely generic across different investment management companies. In other words, they are industry-standard rather than company- or client-specific. To this effect, service providers can execute higher volumes of processing, without operational errors, in a more cost-efficient way. TOWARDS A SINGLE INTERNAL SYSTEM When evaluating the attractions of outsourcing, the overall trends appearing in the investment management industry need to be taken into account. To manage growing operational complexity,
yesterday’s operating dashboard is insufficient to support tomorrow’s business operations, as illustrated in more detail by TowerGroup’s Rodney Nelsestuen on pp. 18–20 of this issue of the Journal. “With the addition of discrete cloud services under a hybrid model, companies will need an integrated view of many more components of their operations,” argues Rodney Nelsestuen. As the public cloud becomes mainstream, in his opinion, the challenge of integrating all services will grow exponentially. Certainly, outsourcing providers will continue to offer large-block services for the foreseeable future. But as they begin to parse these larger services into smaller, on-demand cloud-based options, companies will find themselves connecting to more – not fewer – service providers. The whole task of controlling operational costs becomes even more complex and arduous when companies have outsourced several functions, because not only are there multiple systems, but systems that the company does not own, and which are operated by a variety of providers under different approaches. This creates an opaque situation when what in fact the company needs is clarity in execution, operation and approach. Moreover, a single provider can offer essentially the same service in any of these functions and systems or in integrated combinations.
although institutions have a greater focus on supporting revenue growth, with regulatory demands also cited as a stronger driver (see Figure 1 on p. 5). The Ovum study also indicated that the increasing maturity of sourcing-led strategies, such as business process outsourcing (BPO), means that IT goals have shifted toward systems standardisation and simplification initiatives, although security remains the top primary goal. KEY COMPONENTS IN SYSTEM STRUCTURE A combination of adaptability, speed of execution, reliability and versatility comprise the key components in a software system’s structure to best assist the company in its cost of operations. It has to be adaptable in the sense that as a company organisation changes, client demands change or regulatory requirements change, the structure’s modularity makes it possible to plug new functional products into the already implemented solution. In other words, a company can purchase and implement the functionality it needs as dictated by changing operating conditions.
In a research study entitled ‘Business Trends: Buy-side Technology Investment Strategies’, published in October 2011 by consultancy company Ovum, one of the main findings indicated that investment management companies are beginning to move away from outsourcing and towards upgrading, improving, or changing their IT platform.
CLEAR VALUE PROPOSITIONS TO CONTROL COST To thrive in today’s harsher business climate, investment management companies must be able to derive greater value from existing and future-planned investments, while continuously improving their quality of service. “In creating a permanently low-cost, efficient and scalable operating model, organisations should remember that cost is not simply a by-product of doing business, but a vital weapon for competitive advantage,” observes management consultancy Ernst & Young in its report ‘From cost reduction to cost optimisation’.
Increasing efficiency remains the primary driver behind IT strategy in 2011,
“When a company develops a deep understanding of how its different cus-
tomers and customer segments perceive value in what the company offers, and then uses that insight to variablise its cost structure so costs can remain in synch with revenue and value, it is better positioned to grow profitably in what is likely to remain a volatile economy for some time to come,” notes Accenture in its report. The importance of convincing clients that operational cost control – and the investment management software system supporting it – lies close to the heart of an investment manager’s strategy, is surely more crucial today than before the financial turmoil set in. This dimension of investment management lies at the core of any credible and durable strategy in this industry, and one that will translate into an equally convincing growth profile for the company that chooses to go down this road. Winning the race to the finishing line will be those investment management companies that have stolen a march on their competitors and already embarked on a course of action to promote cost-effectiveness with the careful and calculated choice and implementation of a single, agile and fully supported internal investment management system, bolstered by the secure alignment of the system with business and IT strategies over a longer horizon. Michael Metcalfe is Co-Editor of the Journal of Applied IT and Investment Management. A financial journalist by profession, he has worked for such publications as The Economist, Financial Times and International Herald Tribune. Based in Germany, he also worked in the Luxembourg financial sector for 10 years, including tenures with Nordea Investment Funds S.A. and Lombard International Assurance S.A.
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# Making the leap from burning IT platform to safe cost haven: how standing still is not an option
Moving from a legacy IT platform to a system supported and regularly updated with new functionality can make an investment management company more efficient. Despite costing more in the short run, it can prove more cost-efficient in the long term. This is one of the conclusions of a recent Australian survey by consultancy company Investit, which in this article focuses on how replacing an outmoded system with an enterprise solution is a viable option for investment management companies to consider and adopt.
A Doug Neill is Principal at Investit, Sydney, Australia.
s the global competition among the outsourcers of investment operations intensifies, one of the main conclusions to be drawn by the industry is that investment management companies must prepare for disruptions and often change as the outsourcers seek efficiencies through consolidating their local operations into global operating models. This affects not just the services delivered but also the means of delivery, which must include how the technology platforms are structured and run – an area that all investment managers are keenly interested in.
is less significant than most believe. Instead of focusing exclusively on cost, companies are well advised to consider how their IT systems, including the core operational systems, contribute to the execution of their overall business strategy. Investment management companies must also consider other consequences of their choices. For example, managing an outsourced relationship can be extremely complex and not necessarily an advantage in terms of cost savings. On the other hand, the cost of a retained
“The managers’ highest ranked reason (for not outsourcing their investment management operations) was the need to keep flexibility and agility. This reflects the difficulties in managing a changing business through an outsource arrangement.” If Australia is taken as a local example, the inevitability of consolidation among outsourcers demands that investment management companies evaluate their operational cost strategies sooner rather than later, and it may come as a surprise that the cost difference between outsourcing and internal operations
operation can quickly escalate if the right people and management structure are not in place. Taking this into account, the best results will be achieved when investment operations are selected and executed based on long-term strategies, rather than short-term cost or convenience considerations.
AUSTRALIAN SURVEY RESULTS WITH GLOBAL IMPLICATIONS At investment management consultancy Investit, we have recently performed an independent survey into the future of investment operations. Confined to the Australian market but with global implications as well, the survey consisted of more than 40 in-depth interviews conducted with Australian investment managers, service providers and software suppliers between July and September 2011. The survey revealed that as Australia’s investment management sector enters a phase of increased investment operations activity, managers must make an informed decision about their underlying operations strategy. With the average investment operations outsourcing project taking at least 12 months, and probably much longer for more complex businesses, investment managers need to act now so they have discretion and choice and are not forced to leap from the burning platform. Since the introduction of compulsory superannuation in 1992, Australia has developed a sophisticated investment industry worth an estimated A$1.23 trillion. Although the market is mature and operates within the frameworks of the developed world, it is small in global terms. The market is also extremely concentrated with 50% of the total assets under management held by the top 10 investment managers and 75% across the top 30.
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58%
Keeping flexibility/agility Having specialist capabilities which outsourcers do not have
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Figure 1. Reasons not to outsource. Unlike other mature markets, the Australian investment sector has a substantial amount of funds investing in other funds, rather than through portfolio structures. Australian investment managers are also affected by local taxation rules that must be strictly provided for. These specific taxation rules are challenging for both software providers and service providers. Meeting these requirements is both a barrier to entry for new providers and a challenge for existing providers. Outsourcing suppliers catering for bespoke service requirements experience increased risks and costs. Investments managers are, therefore, frequently forced to retain additional internal staff to cope with customised system operation solutions. COST NOT DEEMED PRIME DRIVER IN OUTSOURCING The Australian outsourcing market has only really developed in little over a decade. This has presented an alternative for investment management companies, which previously had to manage their own internal operations and systems. Currently, these companies have a choice of selecting their investment operations from a range of seven global outsourcing suppliers, two software providers, one local outsourcing supplier or from a number of smaller boutique outsourcing providers. The managers’ highest ranked reason (for not outsourcing their investment management operations) was the need to
keep flexibility and agility. This reflects the difficulties in managing a changing business through an outsourcing arrangement. This is in line with outsourcing providers, who are even firmer in the belief that outsourcing is shunned by companies requiring sufficient agility and flexibility in their operations. The managers who considered what factors would lead them to run an internal operation ranked keeping flexibility and agility as their top priority (58%) as shown in Figure 1. Over half (53%) ranked the ability of specialist resources to be their second highest factor when choosing to run an internal operation. For those investment managers who choose to outsource, a number highlighted the challenge for outsourcing providers to transfer functions to their global centres of excellence, without losing their ability to provide local thought leadership. Despite the perception that the cost of outsourcing is lower, the findings of the survey indicate that the total cost of operations does not differ significantly between investment management companies that outsource (2.9 basis points) and those who manage their systems internally (4.0 basis points) as illustrated in Figure 2 on p. 10. Although the motivation to outsource may be to enable the company to allocate more resources and time to areas of the business that contribute to the bottom line, the results of the survey suggest that
the reality for most is that there is some frustration that the cost and size of their retained function is growing. RETAINED FUNCTION: THE ‘SPIRAL OF DECLINE’ The research results show a growing concern by some companies which opt for outsourcing, particularly among those running complex investment strategies and multi-jurisdictional businesses, that the size and cost of the retained operation are mounting and in some instances are already too large. According to the indications, this growth is occurring for two reasons; the first is because of the outsourcing suppliers’ reluctance to absorb the cost or risk of providing bespoke solutions; the second derives from an inability by investment managers and outsourcing providers to reestablish sufficient trust after an error has occurred, prompting the client companies to increase their checking processes. Checking and validating data is a common practice in the investment management industry. There is a fine line between checking and validating the outsourcer’s position and a duplication of processes. It is easy to see how the trust between investment managers and their providers can quickly deteriorate if the investment manager is spending undue time and resources checking data. This situation may also lead the outsourcing provider to believe that the issues are resolved and subsequently back away from the problem altogether.
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# Making the leap from burning IT platform to safe cost haven: how standing still is not an option 2.9 bp
Figure 2. Actual costs of investment operations.
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Figure 3. Operations head count difference between internal and outsourcing operations.
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5%
Outsourcing
10%
15%
6 bp
7 bp
8 bp
9 bp
10 bp
23%
20%
25%
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This continual process of checking for errors and the gradual shift in responsibility for data quality from the provider to the client is referred to as the ‘spiral of decline’. Once this process of data validation has commenced, it is exceedingly challenging for the provider to reestablish trust in the quality of their data.
“The recommendation to investment management companies that demand a guarantee that they will be supported by a modern platform must therefore be to manage their operational requirements internally.” COST AS DIFFERENTIATOR RATHER THAN MOTIVATOR The effects of the ‘spiral of decline’, and subsequent need for client companies to maintain a hands-on approach with their outsourcing providers, can be seen in the difference in staffing levels between
those that outsource and those that manage their systems internally. According to the survey performed, average staffing levels between those that outsource (15%) and those that manage investment operations internally (23%) differed by only 8% as shown in Figure 3. While the survey demonstrated that cost is not typically a motivator for investment management companies when selecting investment operations systems, it is certainly a differentiator. There is a palpable lack of historical experience, data and information for companies to utilise when estimating the long-term costs of outsourcing operation requirements. Where some companies have preferred to outsource to reduce their total head count by almost a quarter, the marginal difference in head count between those that outsource and those that insource shows this is frequently not the case. However, the decline in outsourcing relationships is not always the fault of the provider. This highlights the need of both the provider and the investment manager to ensure that they implement the most appropriate structures with the relevant staff in place to make the relationship work. Managing an outsourcing provider requires a different set of skills and organisational
ONE VIEW OF THE FUTURE As investment management companies recognise that there are internal challenges in managing an outsourcing arrangement, they are also aware that the industry is entering a period of change. A decade ago, when the outsourcing providers first entered the Australian market, the only way to build market share was to develop a local presence, with local systems and processes. Outsourcing providers are now under increasing pressure to migrate to global operating models to reduce their operating costs. This, coupled with pressure from other providers perhaps better positioned to service the Australian market with their global capabilities, accelerates the decision by some outsourcing providers to reduce their local footprint and to leverage their own global operating model. The research results show that 43% of the investment management companies surveyed rated as very likely, and 57% as likely, that the investment management sector will see consolidation among outsourcers. When asked about what outsourcing providers will need to do in the future, 69% of the respondents felt it was very likely that the outsourcers would need to leverage their global capabilities. A further 73% of the companies surveyed believed outsourcers would need to increase their efficiency locally. One possible conclusion to draw from this is that the Australian investment management sector should prepare for the creation of new service models from outsourcing providers, with a broader range of products and functionalities available. The most likely scenarios will include a strong middle-office focus.
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A move away from best-of-breed architectures towards more integrated systems and data architectures is required, argues Doug Neill, Principal and Head of Investit's Australian operations. According to Investit, standing still on the ‘ burning platform’ is no longer an option. LEAPING FROM THE BURNING PLATFORM As the industry enters a phase of increased investment operations activity, it is vital that investment management companies take stock, assess and plan for their future strategy. In the survey performed, investment managers consistently ranked robustness of systems architecture as a top priority when considering the services provided by outsourcers. When asked what would make them consider changing their investment operations strategy, corporate changes among outsourcing providers ranked as the number one reason (37%). Service issues, such as errors and relationship concerns, only accounted for 16% of investment managers’ reasons to change strategies. These errors would also need to be regarded as catastrophic for investment managers to take action. The recommendation to investment management companies that demand a
guarantee that they will be supported by a modern platform must therefore be to manage their operational requirements internally. Having the ability to perform non-standard operations and to maintain specialist capabilities in-house – listed as prime drivers against outsourcing among surveyed companies – add to the argument of replacing a legacy system with a new internal system. However, the solution to this challenge for Australian investment management companies is not as simple as choosing between outsourcing providers or internal management. For some, the decision will be to run an internal investment operations function to ensure flexibility, fixed future costs, specialisation and scalability. Those that choose to outsource will need to meet and support similar business needs and objectives but must also consider how the provider will manage the product they are buying. The priority for all Australian investment management companies, and indeed for companies elsewhere on the
globe, must be to maintain a programme of awareness to anticipate changes, allowing them to develop a coordinated and aligned IT strategy for future business success. Doug Neill heads Investit’s Australian operations, working with clients in Australia and Asia to build efficient and effective investment organisations. He has extensive experience in working with clients to assess, plan and implement operational and systems solutions. Doug Neill formed the Chief Operating Officers’ forum in Australia to facilitate the collective discussion about local and global issues affecting the industry as a whole. He is a regular contributor to the Investit Intelligence service. Prior to joining Investit Doug Neill held senior IT positions within the investment management industry in the UK and Australia.
Investit Investit is an integrated investment management consultancy, providing specialised advice, project management, recruitment and research services exclusively to the investment management industry. Founded in 1998, Investit offers a range of services, from front to back office, drawing on five specialist consultancy practices: Investment, Client, Performance, Operations and Systems. Investit Benchmark and Investit Intelligence completes the offering with a range of tools and research services. More information at www.investit.com.
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# Cost strategy in action:
harvesting the benefits of an integrated financial software solution To support its ambitious international growth strategy while exerting an absolute degree of control over cost of operations, Edmond de Rothschild Asset Management needed a software system that lived up to its demanding requirements. This article examines how the French asset management company moved from a legacy platform to an integrated system, using a due diligence process to select a seamless solution to enhance transparency and control cost.
A
t a time when the investment management industry is contending with a host of pressing business issues, including rapid changes in regulatory requirements and investment techniques, as well as the imperative of keeping operational costs under strict control, the use of a flexible financial software solution that can be highly agile and adaptable is the guarantee of a client-oriented and cost-conscious business strategy.
Cédric Le Moan is Project Director, Edmond de Rothschild Asset Management, Paris, France. Laurence Adam is Head of Operations, Edmond de Rothschild Asset Management, Paris, France.
In the current difficult business environment, asset management clients have become more discerning, demanding product innovation and a constant upgrading in the quality of the service their providers are capable of offering. This does not come without a cost, and asset management companies need to take this into account when planning their investment management systems. Edmond de Rothschild Asset Management is one of those companies that have turned this challenge into a competitive advantage in prospecting new clients and markets. In the past 12 months, the company has opened two new offices outside France, one in Frankfurt and the other
“The preferred choice was a fully integrated system focused exclusively on asset management.”
in Madrid. The Frankfurt office covers fund and asset management and commercial distribution, while the Madrid office focuses on distribution. Assets under management are approximately a current €13 billion, and here it is significant that it has expanded the assets in the institutional sphere, winning several high-volume mandates. RATIONALE BEHIND SYSTEM CHOICE Three years ago, Edmond de Rothschild Asset Management embarked on a path of finding a new software solution because it was proving a problem to track and accommodate new regulatory issues and procedures with the existing system. It was also proving difficult to maintain the growth in assets the company desired because the system fell short of expanding risk management requirements. The purpose was to be able to follow in real time all the risk issues with the same data used by the funds and the middle office. The third issue was client support, which is a key business consideration when a company starts to develop its institutional business. Institutional clients demand sophisticated and highly customised reports quickly and efficiently. In addition to the risk management and client support factors, the strategic impetus behind the drive was a combination of promoting international expansion and controlling operational costs. The expansion in international growth required substantial development in production tools, and a system was
needed to be able to manage this more effectively. In view of this rapid expansion, it is important to industrialise the process, and to increase the level of automation. With an integrated approach, it is easier to manage the workflow and control the cost. Edmond de Rothschild Asset Management’s priorities included the capacity to grow without system limitation; capacity to expand worldwide; ability to anticipate business changes; manage all asset classes without limitation; capacity to control IT costs; ability to mitigate operational risk; and finally to offer its clients full transparency. The preferred choice was a fully integrated system focused exclusively on asset management; process and instrument coverage; local national coverage (of particular interest being Germany and Hong Kong); involvement and understanding of asset management business; structure and organisation (staff development, strong consulting staff); and finally a proven track record in attracting high-end clientele. PHASED DUE DILIGENCE PROCESS In the due diligence process Edmond de Rothschild Asset Management adopted to select its financial software solution, the first phase entailed creation of internal workshops to draw up a list of all its processes and functionalities and to decide what should be retained and what should be discarded. It then had the necessary roadmap with which to
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“The speed of adaptation is a key competitive advantage, permitting the company to quickly roll out a development in a new zone or for a new client type.” proceed with selection of the system it wanted to implement internally. The next step was to send out requests for procurement, examining 14 systems available on the market. Here the criteria included reliability, capability and standing in the marketplace. The list was then narrowed down to four service providers, organising workshops with all the operational teams involved during a period of one month, which eventually resulted in a shortlist of two. During the third phase, a scenario was compiled of mechanisms, tools and instruments the company wanted to have implemented, including random data and portfolios. Another month was spent working closely together with each of the two final contenders, examining what they had done with the system requirements and data. In the end, SimCorp Dimension was the preferred choice. The first phase of mapping out every process internally took four months, and then allowing for an overlap of one month in the final selection process, the overall period stretched to eight months and was finalised in March 2009. Implementation of the project started in April 2009, with 10 funds in production by December 2009 and full migration of all funds to the new platform completed in July 2010. DEPLOYMENT IN FOUR KEY AREAS Edmond de Rothschild Asset Management’s adopted IT architecture is based on an integrated f inancial software
solution, which features the following functional applications: order transmission, position-keeping, middle office, risk management, performance calculation and client reporting. The investment software is deployed in the following four key areas: Front Office • Portfolio Workbench • Order Blotter • Short-Term Cash Management Middle Office • Payment Reconciliation • General Reconciliation • Corporate Action Manager • Swift and Communication Server • NAV and Portfolio Calculation Risk Measurement • Limit Monitor • Value-at-risk (VaR) Calculation • Performance Calculation Reporting • Report Book Manager SEAMLESS SOFTWARE SOLUTION The IT architecture in the form of a seamless software solution provides Edmond de Rothschild Asset Management with the capability to ensure uninterrupted reliability, efficiency and implementation of processes. The software platform enables the company to frame and structure its international expansion, develop investment management techniques like derivative products and overlay management, run a top-grade
risk-control system and provide clients with the type of high-calibre services they demand. The software solution is also sufficiently flexible to adjust to the various regulatory constraints of all client types, irrespective of their geographical origins. When a country- or client-specific item is added, for example, it may be re-used or adapted for another country or client type. This enriches best practice in the base and allows Edmond de Rothschild Asset Management to improve its investment and service standards and help all clients benefit from these changes. SINGLE REFERENCE TOOL The software architecture uses a single, reliable and controlled reference tool and a process and client reporting system that is shared by all the company’s business lines. This ensures a transparent environment that guarantees reliable data and precise analysis and client reports. This integrated solution enables Edmond de Rothschild Asset Management to ensure the same quality of investment, services and risk management throughout its various entities. With an integrated processing tool it is better to have a single data management team for all the business departments, which all work on the same synchronised data. This helps to control operational costs, as well as to promote international expansion, creating new products and attracting new clients. The type of institutional clients Edmond de Rothschild Asset Management is now increasingly attracting are very demanding and it is
crucial to have the right kind of tools in place to support their requests. Here the ability to link the right client with the right administrator also plays a vital role in terms of controlling costs of implementation. The tool also supports Edmond de Rothschild Asset Management in its development strategy. For example, the tool can be used throughout the growing international network of offices so that whether it is Frankfurt, Hong Kong, Madrid or Paris, all are working on the same system. The same applies in the investment strategy – it facilitates the process of investing in new products and instruments, as well as responding effectively and efficiently to the requests of new clients. SPEED OF ADAPTATION The software system’s modular structure allows the company to very rapidly adapt to new client demands, specific investment issues in product innovation and particular client or regulatory requests. The speed of adaptation is a key competitive advantage, permitting the company to quickly roll out a development in a new zone or for a new client type. To meet any future marketing expansion, it may add other modules to the existing platform and reinforce them with specific features if and where needed. However, a precise methodology has to be applied to the modular structure. For example, the methodology applied in the front-, middle- or back-office operations is not always one and the same. Edmond de Rothschild Asset Management works
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# Cost strategy in action:
harvesting the benefits of an integrated financial software solution
closely with its service provider to ensure that the same methodology is applied throughout the system. This in turn improves transparency and homogeneity. Each module has to be treated separately because a single point of entry for the data is required for the same treatment to be applied. While speed of execution plays a very important role, Edmond de Rothschild Asset Management needs to be able to use the system to administer
and Projects department at Edmond de Rothschild Asset Management and comprises four internal staff and four external contractors in Paris, one contractor in Hong Kong and one in Frankfurt, and who are responsible for training, updating or enhancing the investment management software’s business features. La Compagnie Financière Edmond de Rothschild’s Group IT department is in charge of infrastructure and OMS
“The software architecture uses a single, reliable and controlled reference tool and a process and client reporting system that is shared by all the company’s business lines.” the increasing number of portfolios it is seeing. The growing volume of net asset value (NAV) positions has to be calculated in a very rapid and effective way, and also in a manner that is clear and transparent for the client. It is also very important to provide the fund manager with a global real-time view of all the fund components he manages in order for him to be able to take swift buy-and-sell decisions. SUPPORT AT DIFFERENT LEVELS The software system is based on a service level agreement (SLA) between the two contracting parties and is supported at different levels. Support at the first level is part of the Business Management
support and based in Paris. Providing second level support is the software provider based in Paris and Brussels and which is also responsible for escalation of any pressing issues to its head office in Copenhagen. One of the reasons why the current provider was chosen was its expertise in the asset management sector – it is focused on the buy side and this suits Edmond de Rothschild Asset Management very well. A second consideration was the number of developers the provider has at its disposal in Copenhagen and Kiev. This fitted in well with the strategic decision to outsource this side of the business so that the company can concentrate its strengths on producing and delivering
funds and to ensure that the operational and market risks are reduced to minimum levels.
He joined Rothschild in 2008 as Director of the Department of Work and Master of Information Systems.
INHERENT FLEXIBILITY Generally, the software system has responded well to the functional requirements of Edmond de Rothschild Asset Management’s operations, ranging from the asset transmission and evaluation to the reporting. The system allows many processes to be automated and control over the overall workflow is increased. As a result, operational risk has been reduced and at the same time activity increased, while reconciliation and control have been improved. During the current year, six new funds were launched with full fund administration and custodian collateral without any impact in the middle-office and risk development areas.
Laurence Adam joined Edmond de Roth schild Asset Management in February 2008 as Chief Operating Officer. She has over 12 years of experience in the field of asset management, a large part in hedge funds. She began in 1998 at Barep Asset Management, a subsidiary of Société Générale, where she spent three years in the middle-office department. In 2001, she joined Systeia Capital Management, a subsidiary of Credit Agricole and managed the middle office there for seven years. At Systeia Capital Management, she participated in the creation and development of the middle office and performance measurement department.
Some specific processes had to be reconfigured in order to standardise as much as possible with a view to increasing the overall level of automation. Some aspects of the workflow had to be customised. But the net result has been a clear and measurable improvement in operational costs. And there has been no increase in the overall operational and IT headcount. Cédric Le Moan is Project Director at Edmond de Rothschild Asset Management. An engineer by training, he graduated from ESME SUDRIA in 1998. From 1998 to 2000, he worked as e-commerce consultant at Andersen Consulting and then transferred to Fortuneo-ProCapital as Head of Engineering. From 2001 to 2007, he held various positions in the BNP Paribas group including Deputy Head for Information Systems Group at BNP Paribas Asset Management and heading information systems for the front office and risk management. From March 2007, he worked at BNP Paribas Asset Management Sgr Milan.
Edmond de Rothschild Asset Management Edmond de Rothschild Asset Management is an affiliate of La Compagnie Financière Edmond de Rothschild, the French arm of the Edmond de Rothschild Group, specialising in managing equities, convertible bonds and asset allocation for institutional investors, banking and insurance company partners and distribution platforms across the globe. With 143 employees and 42 portfolio managers/analysts, Edmond de Rothschild Asset Management had €13.8 billion in assets under management as at endAugust 2011. More information at www.edram.fr.
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# Operational cost processes: cost management as a strategic tool
For global investment management companies generally, and asset managers in particular, it is essential that they maintain a competitive cost position in their global operational sphere. This article discusses how implementing the right cost management strategy, supported by the right financial software solution can ensure a decisive measure of control over the operational cost base.
A Ulrik Modigh is Head of Asset Management Operations, Nordea Asset Management (AM), Copenhagen, Denmark.
midst the unremitting global financial malaise, of which the erupting European debt crisis is but one symptom, many investment management companies are facing a declining asset base driven mainly by outflow and the general decrease in asset market value. This development is putting pressure on many asset managers within the industry to place an increased focus on cost and efficiency in the production value chain. For asset managers to maintain a competitive cost position in their global operations, they need to put into place the right cost management strategy in order to exercise control over the operational cost base. Here the difficult question is how to establish a cost overview that provides the necessary insight into the operational cost drivers within the production platform as a basis for improving the cost position. Further going down
this path, asset managers have to decide whether overhead costs (i.e. platform costs, server costs, etc.) should form part of this cost allocation exercise, or whether the allocation should only cover direct production costs. COST TRANSPARENCY ACROSS THE VALUE CHAIN Viewed in the historical perspective, asset managers have typically run their businesses by monitoring and following up on total income (i.e. fees) and functional cost (i.e. investments, back office, middle office, fund accounting, etc.), which when combined gauge the temperature of the enterprise’s ability to generate gross income and net income. However, when faced with the swathe of new challenges rolling out in the current market environment, whether of a competitive, regulatory or financial nature, there is a need to improve the understanding of cost drivers in the un-
derlying production processes. Obtaining a clearer insight into which links in the value chain are absorbing the main resources and costs to produce the different product offerings is a categorical cost imperative that the industry simply cannot ignore in the present difficult circumstances. If we look at the generic value chain set out in Figure 1 we have quite a good overview of the cost components for each step, but very little overview of the cost per product, because each individual product is using a small fraction of the resources in each step of the value chain. Typically in cases like these, there is no cost follow-up on processes across the value chain, which basically means that there is no indication of the overall cost or the average cost of each product running through the value chain, and (if this is the case) only vague information about the product profitability. Furthermore, a
IT and platform costs Products A,B,C ... Investments Portfolio management
Trading
Back office
Middle office
Fund Accounting
Settlement, reconciliation
Risk management
NAV calculations
Figure 1. Attributing cost drivers across the value chain. Source: Nordea Asset Management.
Transfer agency
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“… with the right financial software solution in the form of a fully integrated and automated front-to-back solution installed for core operational processes, the required valuable information (…) is present ...”
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Operations Fund Accounting
Back Office/Middle Office Functional cost teams A,B,C ... EUR’000
Functional cost teams A,B,C ... EUR’000
Total personnel expenses
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Total personnel expenses
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Direct IT expenses
Y
Direct IT expenses
Y
Other expenses
Z
Other expenses
Z
Total team costs
Sum
Total team costs
Sum
Each team’s functional costs are allocated to each product based on the product’s cost drivers
Figure 2. Identifying and estimating cost drivers, including all expenses. Source: Nordea Asset Management.
possible consequence of the above is that the ability to make precise cost calculations of product offerings will be made on an overall estimation rather than reflecting the true cost related to the actual production cost. COST ESTIMATION ACROSS THE VALUE CHAIN It can be a cumbersome exercise to allocate functional costs across the value chain, because typically there is no interconnection between the fund accounting systems and the backbone portfolio management systems (see Figure 2). However, with the right financial software solution in the form of a fully integrated and automated front-to-back solution installed for core operational processes, the required valuable information (i.e. in the way of stored transaction records) is present, creating the basis for identifying and estimating the cost drivers within the production platform. Figure 3 contains a hypothetical example of the average cost per product in the value chain by combining traditional functional cost information with information on transactions taken from the production platform. If we take the settlement process in back office as an example, the historical trade flow over 12–24 months is analysed to identify
which products are the main users of the settlement services. This exercise shows that the trading activity is much higher in equity products than in fixed-income products. The internal straight-through-processing (STP) rates on main markets were also analysed and compared with each product’s trading patterns. This was done in order to identify the differences in the resources required for settling standard European securities and those needed for settlement in exotic markets where less automation and lower STP rates proved the rule.
comparison a Danish f ixed-income product has only one account), thereby requiring far more resources from the reconciliation team. Having an overview of the total and average cost per product makes it possible to estimate the overall profitability per product, but also allows comparison with the average cost per product, ensuring that the margin generated at the mandate level produces an adequate gross margin to cover overhead costs (i.e. IT platform costs, etc.) as well.
Combining this information makes it possible to identify the main cost drivers in the settlement process and estimate the total and average resource consumed by each product. The same exercise was conducted for each link in the value chain within back office, middle office, fund accounting, etc.
Such an overview also provides important input in general discussions on the scale of gross margins in the overall product mix and mandate size, ensuring that the type of complex products that are heavy users of production platform resources can also generate higher margins in relation to simple products with a smaller share of the resource consumption in the value chain.
If we examine the resource consumption per product for the reconciliation process, for example, the main cost drivers identified were the number of accounts/ custody accounts per product. The more accounts the reconciliation process needs to cover, the more resources are needed to support this process. Global equity products have long-range cash accounts for each market covered (whereas by
A STRATEGIC APPROACH TO COST CONTROL By way of conclusion, it is generally true that all mandates or products need to generate sufficient gross margins, which can contribute to covering the overhead cost. If we look at typical asset management operations in the investment management industry, IT platform development costs can easily account for
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up to 30% of the total cost base. If these costs are allocated to the lowest level, several individual mandates or maybe even product groups will end up having negative profit margins.
Ulrik Modigh has been Head of Asset Management Operations at Nordea Asset Management (AM) since 2004. Graduating with an MBA in Finance from Copenhagen Business School (CBS) in 1992, he has held various senior positions including Risk Manager and Head of Middle Office at Nordea Markets, Consultant and Manager at KPMG Financial Services and Head of Back Office at Danish pension fund ATP.
If mandates with negative product margins are closed down for reasons of profitability (or the lack of it), the overhead costs will be allocated to fewer mandates and/or products; in a worstcase scenario, this exercise will end up generating even more mandates with negative profit margins. On the other hand, including the entire cost base in the allocation process can provide important input for a number of strategic discussions about such issues as: • D o we have the right gross margin on products with high production cost consumption? • Do we have the necessary operational efficiency in specific products? • Do we have the right critical mass in some products areas (i.e. are they too costly to run and too small to justify the investment required to improve operating efficiency)? • Should we consider changing our product mix, adding higher margin products to the platform, increasing overall prof itability and obtaining better utilisation of production capacity?
Aggregated composite
Nordea Asset Managment (AM) With around €110 billion in assets under management, Nordea Asset Management (AM) is the leading Nordic asset manager, providing products and competence within equities, fixed-income products and alternative investments. With more than 530 employees across the Nordic countries, New York, London and Frankfurt, Nordea AM is one of three business divisions within the business area Wealth Management. More information at www.nordea.com.
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“Including the entire cost base in the allocation process can provide important input for a number of strategic discussions …”
Middle Office
Reconciliation
Settlement
Corporate Derivaactions tives
Total production costs
Perform- Benchance mark
Limit
Valuation Total production costs
NAV calculation
Total production costs
Fixed income
Danish Fixed Income Swedish Fixed Income Norwegian Fixed Income Product C Product D Product E
-182 -625 -324 -408 -893 -839
-597 -64 -762 -850 -80 -540
-789 -351 -886 -438 -583 -705
-991 -412 -71 -597 -979 -497
-2.559 -1.452 -2.043 -2.293 -2.534 -2.581
-713 -723 -391 -849 -481 -336
-799 -976 -818 -207 -159 -86
-223 -798 -497 -382 -97 -790
-791 -987 -429 -863 -984 -748
-2.527 -3.483 -2.134 -2.301 -1.721 -1.960
-379 -222 -732 -558 -657 -713
-5.465 -5.158 -4.909 -5.151 -4.912 -5.255
Equities
Swedish Equities Danish Equities Finnish Equities Norwegian Equities Product F Product G Product H
-221 -942 -566 -3 -797 -406 -637
-247 -274 -724 -748 -178 -421 -68
-551 -626 -816 -169 -350 -921 -373
-160 -955 -941 -92 -986 -65 -114
-1.179 -2.797 -3.048 -1.012 -2.311 -1.814 -1.193
-821 -624 -562 -983 -366 -267 -314
-93 -735 -922 -6 -509 -593 -971
-358 -539 -801 -240 -445 -189 -923
-513 -737 -80 -385 -351 -18 -350
-1.786 -2.634 -2.364 -1.613 -1.671 -1.067 -2.557
-679 -267 -863 -942 -644 -699 -843
-3.644 -5.698 -6.275 -3.567 -4.626 -3.580 -4.592
Hedge funds
Product I Product J Product K
-724 -467 -784
-112 -576 -367
-266 -434 -15
-74 -47 -104
-1.176 -1.525 -1.271
-989 -591 -202
-6 -981 -335
-712 -128 -768
-949 -786 -25
-2.656 -2.487 -1.330
-953 -176 -25
-4.785 -4.187 -2.626
Fund of funds (FoF) Product L Product M
-101 -299
-335 -642
-887 -313
-917 -981
-2.240 -2.235
-580 -187
-270 -903
-106 -722
-675 -581
-1.632 -2.393
-271 -102
-4.143 -4.730
Figure 3. Cost allocation over the operational value chain (fictive numbers). Source: Nordea Asset Management.
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# Making the right strategic cost choices: sourcing, resourcing or outsourcing operations
A relentless pressure to reduce costs will drive many global investment management companies to increase the outsourcing of their operations. While cost reduction remains a central goal, new trends and opportunities are emerging that extend the concept of outsourcing. Cost reduction, recognised as a bottom-line issue, can with new options appearing also contribute to top-line revenue. However, resources required to handle the data management issues that come with outsourcing must also be considered carefully. This article examines the trends and the pros and cons of outsourcing opportunities under a new business paradigm.
A Rodney Nelsestuen is Senior Research Director, Financial Services, TowerGroup, USA.
s the investment management industry battles back from recession in the midst of continuing uncertainty, a new wave of issues is augmenting the time-honoured challenges of competing effectively and efficiently in the marketplace. Increasing regulatory costs are emerging at the same time that clients are demanding more from their investment companies. Trust is no longer taken for granted and companies are obliged to spend more high-quality (and costly) time with clients to maintain relationships. In addition, investment management companies are revisiting their products and services in an effort to rationalise their business while scaling it appropriately to capital and risk constraints. While it is clear that costs must be reduced, these factors also require higher performance of the business as a whole, an area that outsourcing can contribute to, but not without changing traditional
thinking and approaches, as well as balancing advantages and disadvantages.
sustain other operational improvements as part of the compensation model.
OUTSOURCING REQUIRES HOLISTIC VIEW Through 2015, the outsourcing of both operational services and technology will increase at a rate more than twice that of overall spending on information techno logy. Reasons to outsource have grown in number. While cost reduction remains a fundamental goal, many companies are seeking service providers who can also deliver the latest technologies, state-ofthe-art business processes, and who are committed to continuous upgrades of both.
Over the next five years, business process outsourcing (BPO) and information technology outsourcing (ITO) will increasingly be bundled together. In addition, the resurgence of managed services and the entry of cloud services will increase the offloading of operational costs, but in different ways. Service providers will continuously improve the technology supporting outsourced processes. This will allow companies to see technology as a strategic differentiator but under either a variable cost, on-demand cloud model, or in the case of more utility-based services, a low-bid fixed-price model.
Today, another reason for outsourcing is to tap into innovation. Innovations in both pricing and the delivery of bundled IT and service options will significantly alter the nature of outsourcing. These include risk-taking where the service provider contractually agrees to reducing errors, financial losses, or to make and
“Companies should seek out providers that are capable of deploying flexible, real-time business intelligence to manage the growing complexity with a holistic view of front-to-back operations.”
Worth noting here is that ‘low cost’ will be transformed around these improvements. These improvements are not free, and to the untrained eye may seem more expensive than managing the technology in house. However, outsourcing avoids the costs of ownership, which involves a significant amount of administration and overhead that extends beyond service usage. Outsourcing today requires a complete understanding of the goals and objectives the company is pursuing. Without a holistic view of what is to be accomplished, outsourcing becomes only a low-cost bidder game. Figure 1 provides one method of evaluating outsourcing objectives.
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1
Cost reduction
2
3
4
5
Productivity improvement Process change Technology upgrade Free management time Other 1 = Low value, 5 = high value
The quantification of the value proposition in outsourcing is but one element of the
business case. Understanding and placing a value on several key objectives will reveal a more holistic and thorough understanding of the ‘what’ and ‘why’ of a firm’s decision to outsource operations.
Figure 1. Visual scorecard for outsourcing decisions. Source: TowerGroup, 2011. The quantification of the value proposition in outsourcing is but one element of the business case. Understanding and placing a value on several key objectives will reveal a more holistic and thorough understanding of the ‘what’ and ‘why’ of a firm’s decision to outsource operations. MANAGING GROWING COMPLEXITY The combination of large-block services with on-demand services will create new risks. Specifically, more connections from more providers make the integration of disparate services difficult, and lack of integration increases operational risk. To manage that complexity, yesterday’s dashboard is insufficient to support tomorrow’s business operations. With the addition of discrete cloud services under a hybrid model, companies will need an integrated view of many more components of their operations. As the public cloud becomes mainstream, the challenge of integrating all services will grow exponentially. Certainly, outsourcing providers will continue to offer large-block services for the foreseeable future. But as they begin to parse these larger services into smaller, on-demand cloud-based options, companies will find themselves connecting to more – not fewer – service providers. To manage growing outsourcing complexity, companies are seeking to partner with fewer large-contract providers while still being open to accessing discrete on-demand services from the best source. Companies should seek out providers that are capable of deploying flexible, real-time business intelligence
to manage the growing complexity with a holistic view of front-to-back operations. Innovation includes the ability to conduct applied research, offer centre-ofexcellence (COE) leadership, leverage new infrastructure to improve delivery, and redesign services and processes that have an impact on client experience. These are all increasingly competitive factors among service providers and are also key value points sought by investment management companies. With more aspects of financial services moving to real time, anytime, anywhere service standards, business transformation has become the battleground for operational excellence. Since changing the business internally is costly, time consuming, and a high-risk endeavour, the option to outsource more functions seems a logical choice, as outsourcing forces change and adaptation by the enterprise. As more services are outsourced, the integration of the service provider with the enterprise acquires a new significance. While integration has its positive side, it also has its drawbacks in the form of increased interdependencies. As companies demand better service, they are also seeking providers with greater business acumen and domain knowledge. Investment managers rely on providers to have first-hand, industryleading knowledge of sophisticated outsourced processes. They expect providers to have the resources to back up this knowledge, and they will look for the outsourcer to demonstrate the ability to collaborate with both other provid-
ers and the company itself in creating a seamless service delivery model. CONVERGENCE OF OUTSOURCING SEGMENTS Traditionally there have been four wellknown segments to outsourcing: application development and maintenance (ADM); infrastructure outsourcing (ITO) including collocation services; business process outsourcing (BPO); and managed services (including application service providers, or ASPs). With the foreseen rise of outsourcing as a proportion of IT spending, the distribution of the types of outsourcing will change as technology and operations become more integrated and software is embedded with infrastructure, bundled with managed services, and provided
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sion of software and hardware in BPO services, the extension of ITO beyond processing, the expansion of cloud computing to include more software as a service (SaaS) offerings, and the redistribution of some ADM spending to platform as a service (PaaS), and the growth of managed services (which can include IT, ADM, and BPO). KNOWLEDGE PROCESS OUTSOURCING INTEGRAL As the outsourcing industry grows, intellectual capital or knowledge process outsourcing will become an integral part of most all services. As the financial crisis deteriorated, many investment management companies reduced their manning levels. As of 2011, more cuts are in store. This creates a shortage of people who can apply strategic thinking to operations
“The decision to outsource must include the ability for a supplier to provide data in the form, format and frequency required by the company for both internal and external purposes, whether for market growth or customer service, or to meet regulatory reporting requirements.” through both on-demand cloud services and more offerings of platform-based business process outsourcing. On top of change in traditional models, the cloud is rapidly becoming a key source of discrete services, with the result that these approaches are undergoing significant change as illustrated in Figure 2. The distinctions between the types of outsourcing spending will become less important as services converge. The lines of demarcation between the five modes of outsourcing as detailed in Figure 2 will be blurred if not erased by inclu-
given the ‘lights-on’ spending limits most companies have maintained. The improvement in outsourcers’ skill levels creates an opportunity for investment management companies to examine afresh the entirety of their operational needs throughout the enterprise. They can then determine which needs to fill in house and which to fill with outsourced services based on a strategic view of business operations, and in light of the enhanced skills that many prov iders have accumulated. All this, coupled with better collaborative
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SimCorp
Cloud computing is a growing and soon to be mainstream option based on an on-demand delivery and pricing model, and supplanting other forms of outsourcing. ADM
ITO
Application development and maintenance (ADM) is the traditional and largest segment of outsourcing, one that is being dis-intermediated by new combinations of the other modes of outsourcing.
Infrastructure outsourcing (ITO) is evolving beyond mere processing to include new standards for speed of execution and is embedding more software into the hardware for best execution of utility services.
BPO
Managed services
Business process outsourcing (BPO) was historically the outsourcing of operational needs and not IT – but increasingly includes the bundling of applications and IT with the processed services.
Managed services, an extension of BPO as an endto-end service or technological process, is turned over completely to the vendor. It combines both IT and operations, often in a black box environment.
Figure 2. The changing, expanding outsourcing ecosystem. Source: TowerGroup, 2011. capabilities, will create better operational synergies and knowledge management.
allows the provider to contribute expertise more directly and in the manner that the provider finds most efficacious.
GOVERNANCE MODELS NEED UPDATING As more functions are outsourced and as the business value of those functions increases, the traditional governance models for outsourcing are no longer adequate to meet business needs. To manage under this new paradigm, collaboration has entered the governance lexicon as illustrated in Figure 3.
COST-CUTTING AS MAJOR OPERATIONAL GOAL Cost reduction has emerged as a major operational objective throughout the global investment management industry. Driving more companies not only to outsource standard and generic functions but also consider accessing more discrete and specialised services, this will make outsourcing more varied in its options, and more complex. Investment management companies must rethink traditional approaches to evaluating, selecting, and managing their service provider relationships.
Collaboration helps overcome complexity. As delivery options increase to include on-demand services, the importance of governance will also increase. Rather than managing the process, investment companies will need to manage the expectations. Governing for outcomes
However, multiple systems create multiple sources of data. This complicates
Traditional governance model
Modern governance (increasing collaboration)
– – – –
– – – –
Included key players only Suffered from narrow focus Delegated to empowered teams Established specific goals (service-level agreements) – Was about big decisions: ‘what’ to accomplish, not ‘how’ to accomplish the objective
Includes multiple decision makers Focuses on broader business fit Relies on diverse teams, more stakeholders Tactical decisions matter, but outcomes matter more – About both small and big decisions: ‘what’ still matters, but ‘how’ determines efficacy
Figure 3. Governance of outsourcing in the 21st century: collaborate with the supplier or fail. Source: TowerGroup, 2011.
the ability for a company to both obtain the right data and then to harvest the insight which data can provide through analytics. Moreover, with increasing regulatory demands for more data and at a more granular level, the intermediate collection of data is often slow, complex, and fraught with error – an issue that regulators have little tolerance for in today’s regulatory climate. Thus, as complexity increases, firms must rethink traditional approaches to evaluating, selecting, and managing service providers, seeking those with superior technology and industry expertise, and an abiding knowledge of your business. Rodney Nelsestuen is a Senior Research Director with TowerGroup, a Corporate Executive Board Company, in the Financial Services practices. He conducts research on business and IT strategies, emerging trends, growth strategies, and issues germane to all verticals across the financial services industry. With more than two decades in financial services, he spent over eight years as CEO of a commercial lending institution and six years as an enterprise-level CIO. In addition, he has served in diverse finance, marketing, credit, operations, and technology roles at both the operational and executive levels. He holds an MBA, a Graduate Certificate in Information Systems Management, has completed the Graduate School of Banking, and an MFA in writing. He joined Tower Group in 2006.
TowerGroup TowerGroup, a Corporate Exe cutive Board Company, is a leading research and advisory services company focused exclusively on the global financial services industry. For more than a decade, it has provided the world’s top financial services, technology, and professional services companies with advice and information. Its team of analysts and specialised advisers covers the business and technological issues impacting the entire financial services sector. More information at www. towergroup.com.
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# To SaaS or not to SaaS:
the question of choosing Software as a Service to deliver cost efficiencies One growing trend in controlling operational costs is to use Software as a Service (SaaS) as a full end-user application compared to an on-premises solution. This article outlines how SaaS is an option for investment managers to consider, examining the pros and cons of SaaS, what the short- and long-term benefits are, and how SimCorp as a global provider of financial software and services draws on research and client surveys to offer different operating models to fit different needs.
W Klaus Søren Arfelt is Vice President and Manager of Product Services, SimCorp, Copenhagen, Denmark.
ith resurgent turmoil enveloping global financial markets these days, adopting the right operating model as a means to manage cost has returned to top the agenda for most investment management companies. Adding urgency to this drive is the need to ensure sustainable profitability, more intensive competition and stricter regulations. Thus investment managers are advised to reappraise their current system and, if deciding on a new solution, evaluate which of the available options they find most attractive for their particular line of business and company size. Augmented by the current focus on cost control, there is a proven need in the investment management industry to continually renew and overhaul its software, hardware and processing f lexibility. Technological evolution drives hardware updating, as do new infrastructure products. The industry’s history is a patchwork of systems implementation and change management projects of any conceivable nature or size.
The result in many cases is typically complex software, as well as hardware and process environments that require cohorts of IT staff to operate. Not to speak of change. When the system implementation teams leave the scene, the new solutions adopted face the risk of mutating into black boxes if knowledge management is not handled professionally. CONTINUOUS CLIENT-DRIVEN SOFTWARE DEVELOPMENT Software and services companies like SimCorp must constantly be at the forefront of investment management technology to be able to adapt their offerings to the industry’s players. Individual businesses, be they investment funds, asset managers, or pension and insurance funds, have individual operating needs – also depending on the size of their operations. Based on exhaustive research and surveys of clients’ business needs and operating requirements, as illustrated in more detail later on in this article, SimCorp gears its significant knowledge-based
“... adopting a SaaS approach represents an opportunity to shift attention from complex technical environments, prepare for change and to increase corporate agility – all at one and the same time and all in one go.”
resources to continuously finding new ways for financial companies to control costs while also providing different operating models. As an example of its commitment to providing different operating models to suit different needs, SimCorp offers a software service variant of its investment management system, SimCorp Dimension, which is a software onpremises (SoP) solution provided in a variety of setups. By contrast, a typical on-demand solution very much resembles the setup illustrated in Figure 1 on p. 22, which by way of example shows how the SimCorp Dimension as a Service Programme works. The illustration depicts how the end-user receives the SaaS service as one single application accessed via a portal embedded in the on-premises infrastructure. This kind of on-demand solution provides an end-to-end service that includes technical infrastructure, WAN lines, third-party integration, as well as other required components that are predefined to match specific business areas. SOFTWARE AS A SERVICE (SAAS) SaaS, also called on-demand software, is a standardised software service offered to clients via internet browsers. Because the applications are hosted, this eliminates the need to install and run applications on client computers, or even servers, as well as maintenance and support. What
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follows is a more general discussion of the pros and cons of SaaS as an alternative software solution in terms of shortand long-term benefits.
or a combination of short- and long-term cost improvements. Agility to adapt to changes and act on opportunities is key, and complex operations can block otherwise attractive opportunities.
While service providers argue that SaaS helps to control costs and increase efficiencies, it is not the best choice for all investment management operations, however. Due to the challenges that face companies regarding outsourcing, such as communication interruptions and security, SaaS still represents a question mark for large parts of the investment management industry. For many investment management companies, an on-premises as opposed to on-demand solution remains the preferred option.
THE PROS OF A SAAS APPROACH With this in mind, adopting a SaaS approach represents an opportunity to shift attention from complex technical environments, prepare for change and increase corporate agility – all at one and the same time and all in one go. It puts focus on the income-generating aspect of the business, and reduces software, hardware and process support to secondary, business-facilitating components. In a nutshell, SaaS simplifies.
UNIQUE DEMANDS REQUIRE UNIQUE RESPONSES Every investment management company has its own unique challenges, and therefore any single software application or SaaS provider may or may not prove a good fit with respect to the specific business processes and goals of that company as there can be many different motivations for introducing cost-control initiatives.
In this context, SaaS is defined as a business logic-enriched software, which runs remotely and which is serviced by the provider. In the classic software context, the buyer has to add hardware, IT operations, upgrades, patches, configurations, etc., on a continuous basis to benefit from the functionality provided. With SaaS, these are out-of-the-box services.
framework. The modules must be additive for starting out with a subset and then expanding as demand changes. As demand materialises and hopefully expands, it must be possible to add or expand components as required.
its data. While some providers claim otherwise, many companies find that the provider owns their processes, and switching back to on-premises software or to another provider may prove as cumbersome as a complete reimplementation.
The obvious value driver for SaaS is economies of scale; via standardisation, it becomes possible to operate a number of installations with the same effort it would take to manage a single environment in a traditional setup. Yet another key feature is the quality perspective: the more volume on the basis of a standard solution, the less likely errors are to occur. When volume rises, obstacles are eroded.
In addition, not all SaaS applications represent a cheaper option over time. Most charge a fee on a per user, per month basis and some providers require lengthy contracts stretching over three years or more. First, the investment management company has to measure the tangible benefits of what it is paying for over the entire length of the contract, as it might prove a larger financial commitment than initially factored in.
Yet the key value driver for SaaS is the fact that the service provider constantly updates the solution in order to accommodate changes in the business or technical environment. Traditional software providers deliver upgrades and leave it to the buyer to install and implement these on-premises. With SaaS, this becomes an out-of-the-box functionality, which reduces overhead and shortens time to market.
The SimCorp Dimension as as Service Programme Solution components SaaS on-boarding ‒ Migration ‒ Connectivity ‒ Training
Application Equipos CTM
SWIFT SimCorp Dimension
LexiFi
SaaS services - Transition - Operation - ...
:::::::::::::::::::::::: User
Client IT
Bloomberg
APT
...
SAP SimCorp Dimension user portal
WAN
Data centre
Data warehouse ...
Technical services
Third parties ‒ Data vendors ‒ Brokers
IT services
Figure 1. How a typical SaaS solution works in practice. Source: SimCorp.
Depending on the circumstances, the objectives may include an immediate need to contain costs due to a sudden drop in revenue, a long-term strategic initiative to curb costs and improve margins through implementation of a new cost structure,
The prerequisite for successful SaaS offerings is an appropriate embedded business logic that covers the task at hand – end to end. The solution must be modular to enable treatment of varying client demands within a standardised
SimCorp
THE CONS OF A SAAS APPROACH One of the biggest perceived drawbacks to adopting a SaaS solution is that once all of the investment management company’s data is placed on a SaaS server, the company may find it difficult to access
SaaS is standardised software and application management. This means that the client has to comply with the core structures, processes and automations as defined by the provider. It places limitations on the integration into existing processes. Lastly, because most SaaS providers offer a single version of the application to everyone – customisation is much more difficult. If something specific to unique requirements is required, it may not be readily available or accessible. Moreover, many providers will only be interested in making a change if a substantial proportion of their users are requesting it. WEIGHING UP THE PROS AND CONS In assessing the advantages and disadvantages of adopting a SaaS solution, it can be argued in its favour that SaaS simplifies, adds value and generates quality improvements – all benefits that otherwise could be hard to achieve for investment managers without significant investments in internal systems. However, it also entails less control over data and processes, fees that do not necessarily fall over time and limited flexibility. This also means that SaaS when viewed in isolation can be costly, while on the other hand it can pay in the long run, as the expenditure stream becomes more predictable over time. The overall SaaS business case is easy to make: if business is good, the benefits are shared between service provider and client. TAKING A LONG-TERM PERSPECTIVE ON SOLUTION OPTIONS When considering the solution options that are available, whether it be an on-
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75%
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Figure 2. Expenditure on SimCorp Dimension by number of years in production. Source: SimCorp premises or on-demand alternative, a long-term perspective to deal with operational cost must be high on the agenda among global investment managers. In a recently published survey initiated by SimCorp, one of the main conclusions was that, the longer an on-premises solution is in production, the less SimCorp Dimension clients spend on IT budgets in percentage terms regarding all SimCorp Dimension-related costs (see Figure 2). While it has to be stressed here that the survey’s findings are based exclusively on responses from SimCorp Dimension clients, the goal of obtaining a clearer and more transparent picture of clients’ costs in relation to operating their on-premises investment management systems was achieved. Responses were received from a number of users worldwide, and a total of 137 clients each with at least one year’s production experience with an onpremises SimCorp Dimension solution were invited to participate in the survey. The client responses provided invaluable insights into their investments in on-premises investment management IT infrastructure. Moreover, several trends and tendencies were identified, allowing SimCorp to assess where and how clients allocate their operational costs, what the cost-related advantages are in utilising an on-premises solution, and how these costs develop. One of the survey’s key findings was that the majority of the surveyed organisations (60% of the polled clients) utilise a centralised on-premises installation, while the second most common configuration (26%) is a central installation in combination with virtualisation software. The respondents were almost evenly distributed among the three major IT deployment strategies: integrated en-
terprise solution primarily from one supplier (39%); a core system integrated with multiple add-on applications (34%); and best of breed – a patchwork of multiple provider solutions (27%). The indicated preference for a centralised on-premises solution suggests that security and reliability remain important concerns among investment management companies. Examining the cost-related aspects of the survey in more detail, the findings indicated a decrease in IT budget expenditure of 22% for clients in production between five and eight years compared to clients in production up to four years. That IT costs decline as the years in production mount is further proven by the fact that clients with an installation in production for nine or more years showed an additional three percentage points’ decline in expenditure. This decrease in IT costs over time argues the case for an on-premises application versus an on-demand application. Although on-demand applications eliminate substantial initial investments, they often include extra monthly fees for mobile access, industry-specific functionality, offline synchronisation, and extra storage. While return on investment (ROI) is realised relatively quickly with SaaS solutions, the indications are that the recurring monthly fees can make them a more expensive option in the long run. On the other hand, SaaS transfers operational risk from the investment manager to the service provider. This makes it difficult to compare the absolute figures in terms of SaaS versus SoP solutions. The two solutions simply represent different risk scenarios. To sum up, the right option for an investment manager
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33%
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70%
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Up to 4
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100%
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Indexed expenditure of IT budget
Figure 3. Expenditure on SimCorp Dimension by cost category and years in production. Source: SimCorp to choose from depends on the individual risk averseness that dictates the value of the risk transfer. Broken down into the different cost categories, the tendency is to spend proportionally less of the entire IT budget on own staff, external consultants and network application software related to SimCorp Dimension as the number of years in production increases. The expenditure on hardware and systems software shows a relatively flat or slightly increasing trend as the number of years in production increases (see Figure 3). The findings also indicate that when a client is in production over a longer period, the proportion of internal staff costs associated with implementation of new functionality decreases. Further, the survey findings point to two key factors. First, clients become more knowledgeable and establish best practice when implementing and/ or upgrading, thereby reducing the effort spent on these tasks. Second, more knowledgeable and productive staff lessen the need to engage external consultants, further reducing the proportion of IT budget spent on operating SimCorp Dimension as the number of years in production increases. Reflecting these two factors, on-premises solutions tend to provide more robust integration and greater flexibility than on-demand applications. Regarding the overall expenditure on application software, there is a tendency for larger organisations (based on the size of the overall IT budget) to spend proportionally less of their IT budget on application software. For organisations with less than €5 million in IT budget, the expenditure on application software was shown to be 29% of the IT budget,
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“In assessing the advantages and disadvantages of adopting a SaaS solution, it can be argued in its favour that SaaS simplifies, adds value and generates quality improvements ...” whereas for organisations with more than €10 million in IT budget, the expenditure was indicated as 14%. The two largest expenditures related to the organisations’ own (internal) staff equate to the same two largest expenditures for external consultants; namely the cost of implementing new functionality and the cost of upgrading. For internal staff, the third and fourth largest expenditures are production support and problem management, while for external consultants, the third and fourth largest expenditures are problem management and integration (See Figures 4 and 5).
Figure 4. Distribution of internal staff costs. Source: SimCorp.
The finding that clients spend proportionally less of the entire IT budget on their own staff, external consultants and network application software related to
Figure 5. Distribution of external consultant expenditures. Source: SimCorp.
Fig. 4
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SAAS AS A GOOD PLACE TO START By way of summary, in an economic environment where investment management companies are striving to find ways to contain costs while increasing business, many investment managers view SaaS as a good place to start. With manageable start-up costs, and an overall lower cost of ownership, adopting a SaaS solution can fit in well with an enterprise’s financial goals. Whereas in the case of adopting an on-premises solution like SimCorp Dimension, as the SimCorp client survey indicated, savings can be achieved over time in the areas of IT staff and infrastructure, maintenance fees, hardware and software maintenance and upgrades, firewall installation and more, an on-demand solution like SaaS can offer software costs that are reasonably consistent over time. Whether it be an on-premises or ondemand solution, the most operational efficiencies tend to be realised in the areas of internal and external staff costs. The bottom line in both instances is that organisations will best realise cost efficiencies as they accelerate along the learning curve while at the same time benefitting from economies of scale.
20% 0%
SimCorp Dimension as the number of years in production rises suggests that staff, consulting and network infrastructure are the most likely areas in which operational cost efficiencies can be gained.
Further, adopting either of the two solutions can save money by saving time. For instance, managers are relieved of the need to allocate time to overseeing operational processes, and instead can focus on more important areas of the business such as customer relationship management, business analytics, and decision-making.
Despite SaaS’s obvious attractions, however, challenges remain. Within the investment management industry, the move to a SaaS platform will remain a challenge in the foreseeable future. Data needs to be migrated, connectivity re-established and people need to be educated. Audit approvals must be established and security verified. The adaptability fully depends on the ability of the service provider to design solutions that are completely dedicated to the client tasks. To sum up, SaaS has the potential to revolutionise the use of software in the investment management industry. Its development marks one of the next big steps for the global software industry, and those that are able to bundle industry insights, user focus and standardisation within a flexible structure will have a very interesting product to offer. Klaus S. Arfelt is Vice President and Manager of Product Services at SimCorp and holds a master’s degree in finance. Since joining SimCorp in 1992, he has been active across all fields of the financial software development, deployment and maintenance business. Solid background from Nordic, Central European and Middle East investment management engagements provides the foundation for various corporate management positions. Klaus S. Arfelt programme-manages the SimCorp SaaS initiative.
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# Rising to the future of investment management: SimCorp hosts seminal industry event
Top investment management representatives linked up with renowned academics, industry experts and professionals in Stockholm for one of the leading industry conferences of 2011. Hosted by SimCorp, the 14th annual SimCorp Dimension International User Community Meeting (IUCM) provided the ideal forum for participants to discuss the main issues shaping the industry’s future. With the help of workshops, focus groups and breakout sessions, the ground-breaking event identified the key industry challenges of today, while charting the industry landscape of tomorrow, exploring the trends, risks and opportunities going forward.
C Rikke Baden, Reporter, Copenhagen, Denmark.
lose to 4 0 0 deleg ate s representing the global investment management industry gathered in the Swedish capital to discuss the challenges facing the business environment of today and tomorrow. The purpose of this year’s IUCM bearing the theme of ‘Rising to the future’ was to endow SimCorp Dimension users with the benefits and knowledge of a three-day programme of strategic, tactical and operational value in a forum of users, peers, product experts and partners.
“Restoring confidence in the industry requires persistent focus on operational risk and due diligence.” Keynote speaker, Professor Ingo Walter, Director of SimCorp StrategyLab.
For a couple of autumn days in September, Stockholm served as the perfect setting for the high-calibre event. SimCorp, a market-leading financial software and services provider, hosted the meeting, which proved an ideal opportunity for
delegates to reflect upon the challenges of today and chart the industry landscape of tomorrow. A pre-conference programme included a special Nordic pre-event and 13 very popular pre-conference focus groups with almost twice as high a participation rate as in 2010, followed by the two-day official programme of plenary sessions, workshops and domain breakout streams. All these outlets gave participants a splendid opportunity to gain insights from top industry experts, to share experiences with peers, to obtain highly important information about system requirements for meeting challenges and opportunities, and to network with the SimCorp Dimension community. MOVING OUT OF THE SHADOW OF FINANCIAL CRISIS With Norra Latin, a former grammar school dating from 1880, serving as an impressive setting, the host of the event, SimCorp CEO Peter L. Ravn, welcomed the audience, providing a brief review of SimCorp’s business in the past year. In particular, he noted that the continued financial crisis remained an immediate challenge for the industry amidst what he called ‘the tsunami of regulatory reform’ sweeping the industry. However, he also observed: “Now it is time we move out of the shadow of the financial crisis”.
In the conference’s first keynote speech, presented by Professor Ingo Walter, Director of SimCorp StrategyLab, the renowned academic provided highly interesting insights into the key challenges facing the industry, as well as illuminating figures and research to underline his key message: “Restoring confidence in the industry requires persistent focus on operational risk and due diligence”, which he described as the ‘ultimate source of alpha’. This recommendation, which was eagerly absorbed by the audience, covered the spectrum of the three main sectors of the industry: investment funds, pension and insurance funds, and asset management. Among other sources of reference, Ingo Walter cited three new sector-specific white papers produced by SimCorp StrategyLab and published in September 2011. ROLE OF IT PLATFORM IN GROWTH STRATEGIES In direct response to the first keynote speech, the second, which was presented by TowerGroup Senior Research Director Dushyant Shahrawat, focused on how responding to risk, cost and growth issues in the global investment management industry was likely to impact IT and operations. In an easily comprehensible manner, the researcher made five key observations about risk, cost and
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SimCorp
Focusing on this year’s conference theme, ‘Rising to the future’, close to 400 senior delegates gathered in Stockholm in September 2011 to discuss the key investment management industry challenges of today and tomorrow. growth, respectively, going on to discuss how they are all likely to impact IT and operations. With global investment managers needing to focus their strategic response and enhance operational and IT efficiencies, Dushyant Shahrawat went on to argue that: “The case for single, integrated investment management systems over best-of-breed is strengthened”. He also described how new service delivery mechanisms, such as cloud computing,
“The case for single, integrated investment management systems over best-of-breed is strengthened.” Keynote speaker, Dushyant Shahrawat, Senior Research Director, TowerGroup.
SaaS, ASP, etc. were recording growing interest, along with increased demand for outsourcing, offshoring and managed services. In the ensuing panel debate, SimCorp COO Torben Munch and CTO Georg Hetrodt discussed the theme as seen from a software provider’s point of view. They stressed SimCorp’s strong belief in the advantages of an integrated platform, and the fact that SimCorp will continue to invest heavily in its product to improve and enhance the software solution to fit different operating platforms. They went on to explain how development resources are adapted to meet the increased complexity of regulations and to ensure efficiency gains and cost reductions for clients by continuously expanding SimCorp’s product and business service offerings. In the future, clients will come to view SimCorp as a software and services company.
AWARDING GROWTH MANAGEMENT EXCELLENCE A recurring highlight of the IUCM annua l conference prog ramme is the announcement of the SimCorp StrategyLab Excellence Award winner. The award recognises and promotes best practice within risk, cost and growth management in the global investment management industry. This year’s award winner was Dealis Fund Operations GmbH, the joint venture company set up by Allianz Global Investors and DekaBank. In the award citation, SimCorp StrategyLab Director Ingo Walter observed: “Dealis Fund Operations has successfully been able to drive efficiency improvements in their already well-organised back-office units in order to achieve both optimisation and growth”. The rest of the day was dedicated to four hot-topic workshops. The topics ranged from practical sessions on how best to
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“While ‘rising to the future’ remains a key challenge for the global investment management industry, the SimCorp Dimension International User Community Meeting 2011 provided delegates with a solid head-start …” operate one’s investment management platform and managing operational costs, to more broad-spectrum discussions on meeting regulatory challenges and the move to platform consolidation and enterprise data management. DEVELOPING INVESTMENT MANAGEMENT SOFTWARE With participants already replete with fresh insights, the programme continued on the following day, beginning with a presentation of the product vision for the SimCorp Dimension software solution, on which conference participants base many of their essential investment activities. The overall product roadmap was rolled out, demonstrating how the development of the SimCorp Dimension software is built around specific drivers, including regulatory demands, increased risk awareness, cost
reduction pressures and how to position one’s business for growth. Following these were the domain breakout streams that individually discussed and presented specific functionality within the SimCorp software. This provided delegates with an excellent opportunity to share knowledge and best practices hands-on. NETWORKING IN FESTIVE SURROUNDINGS Another splendid and more informal occasion for networking was a festive dinner and social event, taking place at München Bryggeriet, one of the most characteristic elements of the Stockholm skyline, as well as a fond reminder of a distant industrial epoch, and now serving as an illustrious event venue. Guests were treated to a traditional Swedish
evening of shellfish and aquavit, followed by musical entertainment and communal singing. The convivial surroundings were ideal for socialising, sharing ideas and experiences across geographical borders and industry boundaries. While ‘rising to the future’ remains a key challenge for the global investment management industry, the SimCorp Dimension International User Community Meeting 2011 provided delegates with a solid head-start, allowing them to better address the professional issues related to being a global investment manager of tomorrow. As the event drew to an end, all were assured that preparations for next year’s meeting had already begun, and new and existing participants can look forward to meeting again in 2012 – this time in Switzerland.
IUCM 2011 at a glance Location: Stockholm Time: 28–30 September 2011
490 participants 382 delegates 22 speakers 18 nationalities 13 focus groups 12 breakout sessions 7 partners 4 workshops 2 Executive Roundtables 1 Executive Master Class
Keynote speakers
Professor Ingo Walter, Director of SimCorp StrategyLab Dushyant Shahrawat, Senior Research Director, TowerGroup
RISING TO THE FUTURE
Guest speakers
Professor Scott Moeller, Cass Business School Lars Eigen Møller, Executive Vice President, Danske Capital Merele A. May, Senior Vice President of Investment Operations at American Century Investments Sami Kinnala, Development Manager, Pohjola Asset Management Limited Patrick Gysin, Head of Investment Accounting, Baloise Asset Management Daniel Mayo, Practice Leader, Financial Services Technology, Ovum Zach Maupin, VP, Manager of Data Integrity and Operations Analytics, Nuveen Global Operations Bob McDowall, Senior Consulting Analyst, Aite Group Jacob Elsborg, Head of Technology, ATP Olivier Trine, Managing Director, AIM Software Manuel Tonz, Account Manager, AIM Software Josef Sommeregger, AIM Software
Winner of the SimCorp StrategyLab Growth Excellence Award 2011 Dealis Fund Operations GmbH
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# Excellence in growth management:
Dealis Fund Operations GmbH Dealis Fund Operations has successfully pursued a fast-track growth strategy, driving efficiency improvements in already well-organised back-office units to achieve both cost and growth optimisation. This article explains how the German company has grown at an impressive rate to position itself as a specialised service partner, handling approximately €340 billion in assets under management on a single platform since starting operations in 2009.
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Roman G. Trageiser is Spokesman of the Board of the Managing Directors, Dealis Fund Operations GmbH, Frankfurt, Germany.
hen two of Germany’s largest investment management companies − Allianz Global Investors and DekaBank – agreed back in 2008 to merge their back-office operations in a new company named Dealis Fund Operations, optimising growth and achieving cost efficiencies comprised two of the main strategic considerations behind the move. By grouping together their central back-office tasks, these leading German asset managers were able to obtain significant synergies through a massive increase in processing volumes.
of both system platform operation and its continuous further development.
Starting operations in January 2009, Dealis has grown into the largest provider of fund accounting and fund administration services in Germany. Its business model today is threefold structured in addressing different target groups. In addition to being a full service provider for fund accounting and fund administration, Dealis has also evolved into being an application service provider (ASP) and serving as a software system consultant. In all three areas, Dealis benefits from the expertise of many years
Starting with the administration of around €120 billion in 1,100 Allianz Global Investors funds, Dealis has grown to administer a total of approximately €340 billion in 2,500 funds. This goal was achieved by the end of 2010 and is the result of pursuing a fast-track growth strategy initiated at the beginning of 2009:
GROWTH IN CLIENT BASE AND VOLUME Since its inception, Dealis has succeeded in almost doubling the number and volume of funds managed for its initial clients Allianz Global Investors and Deka, as well as its latest clients cominvest and Deka International Luxemburg, all on a common system platform. A successful migration process was a cornerstone, which enabled growth right from the very creation of the joint venture company.
• I n addition to almost 1,000 Allianz Global Investors funds already run on the common SimCorp Dimension investment management software plat-
“Supported and enabled by an integrated and scalable investment management system, Dealis has carved out a position for itself as a full service partner ...”
form at the start of the joint venture, all 260 German funds of the new client cominvest were transferred to the platform from the previous systems Xentis and Cofias (a self-developed system). Meanwhile, cominvest was merged into Allianz Global Investors. • Successfully completing the migration of all German and Luxembourg Deka funds – originally administered on Sungard’s V3 – by the end of 2010, another 1,300 funds (thereof about 200 funds administered in Luxembourg by Dealis’s Luxembourg-based subsidiary Dealis Fund Operations S.A.) have been moved to the platform as the result of a gigantic migration project. • Since the end of 2010, Dealis administers, in terms of asset under management, a total of 2,500 German and Luxembourg funds with a volume of approximately €340 billion for all clients on a common software system. For both shareholder companies – Allianz Global Investors and Deka – Dealis produced precisely the optimisation in benefits that were sought after with the joint venture: growth in terms of higher processing volumes, cost optimisation in terms of shared IT costs, as well as maximised intellectual property synergies. Ref lecting this achievement, Dealis was awarded the SimCorp StrategyL ab Growth Management Excellence Award 2011 (see accompanying box and the IUCM 2011 article on pp. 25–27). ENABLING A FAST-PACED GROWTH STRATEGY The task of operating system platforms in the investment management industry is becoming increasingly complex, with
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Left to right: Ingo Walter, SimCorp StrategyLab Director and Professor, Stern School of Business at NYU; Peter L. Ravn, Chairman of the Board of SimCorp StrategyLab and CEO of SimCorp; and Roman G. Trageiser, Spokesman of the Board of the Managing Directors, Dealis Fund Operations GmbH.
SimCorp StrategyLab Growth Management Excellence Award 2011 Dealis Fund Operations GmbH was awarded the SimCorp Strategy Lab Growth Management Excellence Award 2011 at one of the leading investment management industry events, the SimCorp Dimension International User Community Meeting, in Stockholm on 29 September 2011. This is the third year that SimCorp Strategy Lab has presented its Excellence Awards in Risk Management, Cost Management, and Growth Management; previous winners were MEAG, Nordea Savings and Asset Management, and Edmond
new challenges constantly appearing on the industry’s horizon – even more so for Dealis administrating the large number of funds it already has with a growing volume on a single platform. In close collaboration with its system provider, Dealis has ensured that the software solution can support and enable its fastpaced growth strategy. The investment management system applied allows Dealis to make processes client-oriented and suited to specialised needs. Thus supporting future growth opportunities, the investment management solution plays an integral role in Dealis’s overall business model and strategy in addition to the perspective of efficiencies and synergies. Measurable productivity gains and cost reductions, as well as greater flexibility and scalability in seizing business growth opportunities as they arise, comprise some of the more notable growth-related benefits achieved by Dealis’s choice of the investment management software platform. This investment management software platform therefore has essential meaning for the type of fast-paced growth strategy
de Rothschild Asset Management, respectively. The awards have been established to acknowledge, reward and promote best practice within risk, cost and growth management in the global investment management industry. For more information on the awards and the private research institution SimCorp StrategyLab headed by Ingo Walter, Seymour Milstein Professor of Finance, Corporate Governance and Ethics at Stern School of Business, New York University, visit www.simcorpstrategylab.com.
Dealis wishes to pursue. That is why the company is continuously expanding its hardware and software infrastructure to meet future system requirements. With the help of annual release upgrades, patches and updates, as well as by implementing new modules and instruments, Dealis keeps the system up to date. This enables Dealis to handle far more than 1 million securities and fund trans actions per year, while administrating more than 43,000 categories of securities with 200,000 positions. SECURING ADVANTAGES FOR FUTURE GROWTH In its brief history, Dealis has already achieved several competitive advantages, laying the foundations for future expansion. These include economies of scale through more cost-efficient processing of large volumes, as well as the ability to provide customised solutions for its clients’ business. This will open up paths for further customisation in the provision of client services going forward. Furthermore, broad-scale and comprehensive fund administration services can be offered. Also guaranteeing future growth is the reliability of the company’s software
provider, which ensures continued and seamless support going forward, and thus gives Dealis an extra competitive advantage. In just a short period of time, then, Dealis has implemented a successful growth strategy, fully leveraging synergies and volumes in already efficient and smoothly running back-office units to achieve both cost optimisation and growth. Supported by an integrated and scalable investment management system, Dealis has carved out a position as being foremost a full-service provider for fund accounting and fund administration in addition to its other evolving and expanding business activities. And with a growing number of German fund managers looking to outsource back-off ice activities, the situation Dealis currently finds itself in bodes well for future growth as well.
Roman G. Trageiser was appointed Spokesman of the Board of the Managing Directors of Dealis Fund Operations GmbH on 1 January 2009. Mr Trageiser is also the chairman of the administrative board of Dealis’s Luxembourg-based subsidiary Dealis Fund Operations S.A.
Dealis Fund Operations GmbH Dealis Fund Operations GmbH is a joint venture company set up by Allianz Global Investors and DekaBank. Administrating approximately €340 billion in assets under management in around 2,500 mutual and special funds, Dealis groups together the central back-office tasks of the leading German asset managers. This makes it the largest provider of fund accounting and fund administration services in Germany. More information at www.dealis.de.
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# Dr Frank Wellhöfer, Managing Director, MEAG: promoting growth in a hostile climate
Frank Wellhöfer: In the current unstable global economic climate, the immediate future looks far from easy for the investment management industry as a whole. So in times like these, senior
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C # Journal: Handing over the word from Marc van den Berg, COO at PGGM, who launched our recurring column in the last issue of the Journal of Applied IT and Investment Management, we would like you to share some of your views on the best means of ensuring continued business growth. In a financial and economic climate that is likely to remain hostile for some time to come, the financial software system supporting investment managers’ business becomes even more critical in reaching this goal, and we would like to know what you see as the top priorities in this respect?
executives have to pay as much attention as possible to cost control. However, it is important to look at cost reduction in a long-term strategic perspective and not only with a view to quick and convenient solutions over the short term. We should always be in a position where we are prepared for the future – for instance, the German economy is performing quite well at the moment but we have to be prepared for any changes that may occur quite rapidly. # Journal: And in your view what should be the main investment management software building blocks in place for accomplishing this goal?
Frank Wellhöfer: It is important to regularly prioritise projects applying the
D r Fr a n k We l l h öf e r i s M a n a g i n g Director at MEAG. After studying business management and finishing his doctorate in Würzburg, Germany, Frank Wellhöfer began his professional career in 1992 at Ernst & Young, before moving to Oppenheim Kapitalanlagegesellschaft.
In 1999, he joined Generali Investments Deutschland Kapitalanlagegesellschaft, where he was in charge of the Risk Management, Back Office and Information Technology units, as Managing Director.
Since 1 October 2009, Frank Wellhöfer has been responsible for the Investment Controlling, Back Office and Information Technology divisions in his capacity as Managing Director at MEAG. Founded in 1999, MEAG is a leading independent asset management company for institutional and private investors. MEAG is responsible for the global assets of Munich Re Group and one of the leading asset managers in the European insurance landscape, currently managing assets of around €210 billion for Munich Re Group as well as private and institutional clients.
principle of cost efficiency. All projects have to be evaluated with a view to establishing which ones generate the best efficiencies. By these means we can identify low-value and no-value projects to determine which IT projects we should concentrate on. Here, it is important to establish a suitable framework for creating cost transparency and identifying cost drivers. In this way, costs can be managed actively. Strategic cost initiatives need to be implemented and reviewed regularly, and this is a decisive factor in having an integral and long-term view resting on future revenue growth and increased profitability. # Journal: If future revenue growth and increased profitability are to be safeguarded as you recommend with the help of strategic
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The global investment management industry faces a number of challenges going forward. In this regular column, we ask top executives to point the way ahead, sharing views and experiences in order to learn about best practices for meeting the challenges of both today and tomorrow.
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cost initiatives, what in your view is the best IT strategy to be applied to help achieve this?
Frank Wellhöfer: In order to ensure technical support to promote continued growth, an investment management company’s information technology and business strategy must be aligned. In my view, this goal can be best achieved by applying the leading high-quality investment management software that is focused on standard solutions. High quality in this respect means providing a stable, innovative and integrated platform based on state-of-the-art techno logy where the various functionalities are modular and based on a front-to-back approach. # Journal: If the appropriate investment management software system is one of the key criteria ensuring successful business operations, in what ways, drawing on your long professional experience, can it prove beneficial in helping to reduce cost and promote flexibility? Frank Wellhöfer: Quality, standardisation not excluding flexibility, integration and automation are key determinants here. Software enhancements have to be fully integrated in the standard platform and not only in isolated functionalities. The software processes must be easily comprehensible and transparent for the end-user. The software supplier must be able to react to changes in the short term and to provide flexible and adaptable solutions that are also designed for the long term. Systems performance level is always a topic in this respect and goes hand in hand with parallel demands for automation.
# Journal: While stressing these technical requirements, and agreeing that the right choice of investment management software system is key to promoting growth, would you agree with the proposition that it is not only the investment side of handling assets under management that has to be considered but also a software system for handling assets and liabilities?
Frank Wellhöfer: I absolutely agree that choosing the right investment management software system is crucial in these areas. The system must be efficient, capable of handling assets and liabilities, robust in structure and execution – here a standard approach is very important for me – as well as displaying innovation, speed and flexibility.
changes. Flexibility has to be established and then maintained to adapt to these changes, while at one and the same time finding the best means to drive operational costs down, or at least exercising a degree of control over the cost base. Maintaining flexibility also creates opportunities for growth, so striking the right balance is clearly the issue here.
# Journal: Adding to the current industry challenges already touched upon, the pattern of greater market volatility, increased financial instability and more regulatory change is also creating challenges as well as opportunities for the investment management industry. What in your view are the main drivers for success in this uncertain regulatory climate?
# Journal: With an already long career in leading investment management companies, what do you do to keep up to date with new insights and trends in your professional field of interest? Do you for instance participate in industry conferences and networks with peers and academics to share knowledge and experiences?
Frank Wellhöfer: One main driver for success is to establish an optimal IT infrastructure to reduce costs per item in terms of assets under management; it’s easier then to position oneself for new regulatory challenges as they emerge. Solvency II’s introduction in Europe is a case in point. Very important also is to have processes in place that anticipate cost challenges as they arise; and this applies equally to risk management. Therefore we have established an elaborate risk management process with well-documented tasks and areas of responsibility. So cost control and risk management are interconnected and interrelated. # Journal: Looking ahead, what do you foresee emerging as the main cost challenges and growth opportunities for investment management companies in general and for the pension and insurance funds industry in particular?
Frank Wellhöfer: Clearly one challenge here are the manifold regulatory requirements that the investment management industry currently has to deal with. The world is changing very rapidly these days and for the business, risk management and the IT structure have to be able to anticipate and accommodate these
Frank Wellhöfer: Here I pay special attention to keeping up with the qualifications and high skills of associates and key players in the industry. This involves a continuous process of further education, training and dialogue with peers. Cooperation with universities and research institutes is also a very important factor to take into consideration. In my experience, the means to accomplish this include participation in strategic workshops, key initiatives and industry conferences, as well as networking with peers.
# Journal: Thank you for your interesting observations. With a view to taking the discussion a step further in the next issue of CXO Corner, whom would you like to hand over the word to and what would you like this person to discuss?
Frank Wellhöfer: I would like to hand over the word to my colleague, Michael Jarzabek, General Manager at LBBW Asset Management Investmentgesellschaft mbH, who I would like to give his opinion on reconciling growth imperatives with cost constraints without jeopardising risk considerations.
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BOOK REVIEW:
# Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown
Detlev S. Schlichter, Wiley Business & Finance Publishing, 2011
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he recent financial crisis has exposed the instability of our financial system. While there is plenty of talk of reform, few commentators are yet willing to consider that the root cause could be the transition from commodity money to limitless paper money, although the track record of paper money systems is uniformly discouraging: Throughout human history, all paper money systems have either collapsed in chaos, or society has returned to commodity money (usually based on gold) before a total currency disaster occurred. Drawing upon ground-breaking new research, Paper Money Collapse conclusively demonstrates why paper money systems – those based on an elastic and constantly expanding supply of money, as opposed
to a system of commodity money of essentially fixed supply – are inherently unstable and why they must, by their very nature, lead to economic disorder. In an engaging style based on extensive study and analysis, this compelling new book exposes the fallacies of mainstream macroeconomics and debunks erroneous conventional wisdom. Paper Money Collapse shows in the starkest terms that the recent crisis is far from over and that the solutions presented by the advocates of paper money around the world are misguided and inherently flawed, in particular the current policy of accelerated paper money production to ‘stimulate’ the economy. If these policies are continued, a complete currency catastrophe will be inevitable according to Schlichter.
DETLEV S. SCHLICHTER is an author and Austrian School Economist. He has appeared as a commentator on television and radio (Sky News, Reuters TV), and his editorials have been published by The Wall Street Journal, TheStreet.com and mises. org. He is a senior fellow at the Cobden Centre, London, a free-market think tank devoted to issues of money and banking. Detlev Schlichter had a 19-year career in investment management. He worked at J.P. Morgan & Co. (1990-1998), Merrill Lynch Investment Managers (1998-2001) and Western Asset Management Co. (20012009). During his career, he has overseen billions in assets under management for institutional clients from around the world.
BOOK REVIEW:
# Understanding and Managing Model Risk: A Practical Guide for Quants, Traders and Validators
Massimo Morini, Wiley Business & Finance Publishing, 2011
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he proliferation of increasingly complex pricing models has vastly expanded the operational capabilities of financial institutions within financial markets. However, it has also increased the industry’s reliance on quantitative instruments, and created massive model risk. Consequently, model validation and model risk management are crucial tools for success in the market. Understanding and Managing Model Risk brings together a wide range of detailed realworld examples, quantitative analysis, and regulatory issues. It investigates the interaction between mathematics and the reality of markets, including the explanation of model errors and misunderstandings, providing readers with the operative indications and practical
insight to help mitigate the likelihood of model losses. In addition to examining the risks arising from the use of models in calibration, pricing, hedging, correlation modelling, extrapolation and statistical arbitrage, the book explores in detail examples from interest rate, credit and hybrid markets, covering also equity and cross-currency risks, as well as analysing and comparing a range of models. This book offers an in-depth understanding of the financial implications of mathematical assumptions, and provides the right tools to identify, quantify and manage the risks inherent in the use of quantitative models. MASSIMO MORINI is Head of Credit Models and Coordinator of Model Research at IMI Bank of Intesa San Paolo. He has
spent the last 10 years inventing new models, implementing them, and helping practitioners in using them for buying, selling, and hedging derivatives. This has exposed him to the most practical side of model risk, and has led him to investigate model uncertainty, model robustness, and the management of the risk of model losses. Massimo is also Professor of Fixed Income at Bocconi University. He regularly delivers advanced training on model risk management, credit modelling, interest rate models and correlation modelling. He has published papers in journals including Risk Magazine, Mathematical Finance, and the Journal of Derivatives.
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BOOK REVIEW:
# Basel III Credit Rating Systems: An Applied Guide to Quantitative and Qualitative Models
Luisa Izzi, Gianluca Oricchio and Laura Vitale, Palgrave Macmillan Finance and Capital Markets Series, 2011
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he market turmoil and the new Basel III capital requirements are re-shaping the financial competitive landscape. More than ever, banking competition is based on the ability to assess, to price and to manage the cost of credit risk. Bankers are increasingly called to manage a process of analysis of the customer in a more structured way. This book is a comprehensive guide to quantitative and qualitative credit rating models and covers all loan portfolios (Corporate, Retail, Banks, Sovereign and Specialized Lending). The credit rating models are illustrated in great detail and are based on the best practices currently in use in large international
banking groups. The book, published in the Palgrave Macmillan Finance and Capital Markets Series, also contains pricing tools for liquid and non-liquid markets and is one of the first books on credit risk management published since the crisis. LUISA IZZI is Head of Model Validation, BNL-BNP Paribas Group, Italy. She has worked in different areas of Risk Management in international banking groups, supporting the group-wide Basel implementation and validation processes. She is author of a number of scientific publications and revealing articles in Mathematical Finance and Economics. GIANLUCA ORICCHIO is Professor of Finance and Capital Mar-
kets, CBM University, Italy. He has held senior capital and risk management positions at several global financial institutions. He has been Head of ACPM in Capitalia Banking Group and Head of Group Credit Treasury at Unicredit Group. Gianluca Oricchio has written several books on financial markets, corporate finance and risk management. LAURA VITALE is Head of Internal Rating Agency, BNL-BNP Paribas Group, Italy. In the past she has worked for major Italian banks in ECM, Advisory & M&A, IPO/OPV. Whilst at the BNLBNP Paribas Group she has been Head of Origination in the Public Administration Sector and is now Head of the Judgmental Rating Department. She has also authored a large number of journal articles.
BOOK REVIEW:
# Ethics in Investment Banking
John N. Reynolds with Edmund Newell, Palgrave Macmillan, 2011
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he financial crisis has focused unprecedented attention on ethics and ethical failures in investment banking. Investment banks, as well as politicians and regulators, have accepted the need to revisit ethical standards. Ethics in Investment Banking explores the meaning of ‘ethics’ in investment banking and the capital markets and develops a framework for assessing and managing investment banking ethics. It provides a guide to the high-profile concerns arising from the financial crisis, as well as discussing day-to-day ethical challenges like balancing rights and duties, and exploring a new code for ethics in investment banking. The book is essential reading for investment bankers, MBA students, regulators, ethicists and those seeking to understand investment banking.
JOHN N. REYNOLDS has had a 20-year career in investment banking, spanning equity research, mergers & acquisitions, financial restructuring and principal investment. Prior to becoming an investment banker, John N. Reynolds studied theology at Cambridge University. From 2006 to 2011 he chaired the Church of England Ethical Investment Advisory Group, which advises the Church‘s major investment bodies on ethical and governance issues. The combination of a successful career in investment banking and the experience of leading an influential ethical investment body gives him a unique perspective on ethical questions facing investment bankers. EDMUND NEWELL studied Economics and Economic History at University College London and at Nuffield College in the University of Oxford, where he was both a Prize Research Fellow and British Acad-
emy Postdoctoral Fellow. Now a priest in the Church of England, he is Sub-Dean of Christ Church, Oxford, having previously been Chancellor of St Paul‘s Cathedral, London. He writes and speaks on issues to do with faith, ethics and economic life, and is a founder of the Faith and Work Forum, which provides resources for business people to explore workplace issues from a religious perspective.
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Regulatory update This regulatory update covers major new regulatory requirements and significant developments that affect the investment management industry.
UNVEILS FINAL MIFID II § COMMISSION PROPOSALS
On 20 October 2011, the European Commission published its long-awaited formal legislative proposals to amend the Markets in Financial Instruments Directive (MiFID II). MiFID II consists of two parallel pieces of legislation: a Directive repealing Directive 2004/39/EC, and a Regulation focusing primarily on all requirements relating to market and supervisory disclosure. The Commission, at the same time, issued its proposals for amending the EU’s market abuse regime. The original MiFID framework was geared towards improving market efficiency by breaking the dominance of national stock exchanges and enabling the development of new trading platforms. However, these changes coupled with technology advances, resulted in the fragmentation of market structures and data, and the financial crisis also surfaced other weaknesses in the regime. Therefore, MiFID II goes much further than the originally planned three-year refresh and, if enacted, will result in a ‘complete overhaul’ in the way in which financial markets operate, according to EU Internal Market and Services Commissioner Michel Barnier. It will bring light to many dark pools of liquidity and dark orders, regulation to high frequency trading, and an end to the ‘reign’ of over-the-counter (OTC) transactions. In addition to upgrading the current regime for equities markets, MiFID II proposes to extend this revised regime to a far wider range of product classes, including fixed-income products and derivatives, also covering commodities derivatives. It will pare down the existing exemptions from the regime so more financial market players will find themselves subject to the full regime. It will have significant strategic repercussions for firms undertaking investment business in all securities markets. http://www.pwc.com/gx/en/financial-services/issues/regulation /european-fs-regulation-update/updates/october-25-2011.jhtml
IASB PROPOSES AMENDMENT TO § THE ACCOUNTING FOR GOVERN MENT LOANS IN IFRS 1
On 20 October 2011, the International Accounting Standards Board (IASB) published for public comment a proposed amendment to IFRS 1 First-time Adoption of International Financial Reporting Standards. The proposed amendment sets out how a first-time adopter would account for a government loan with a below-market rate of interest when they transition to IFRSs. If adopted, this amendment would provide the same relief to first-time adopters as is granted to existing preparers of IFRS financial statements when applying IAS 20 Accounting for Government Grants and Disclosure of Government Assistance. The exposure draft, Government Loans (Proposed amendments to IFRS 1), can be accessed via the ‘Comment on a Proposal’ section. http://www.ifrs.org/News/Press+Releases /IFRS1+amendment+Oct+2011.htm
SHAKE-UP SEEN FOR RATING § EU AGENCIES
Sweeping changes to regulation of credit ratings are to be proposed by the European Commission that would deal a blow to the business models of the big three agencies that issue them. Under one of the most contentious proposals, European regulators would be given powers to suspend credit ratings of countries undergoing bailouts. But that measure, seen as impractical by industry executives, is just one of many reforms sought by the European Commission. Among the changes, Brussels is also seeking to force issuers of financial products in Europe to regularly change the ratings agency they are using, in a bid to open up competition and avoid conflicts of interest. On top of restructuring the business practices of the industry, the reforms propose giving wide-ranging powers to the European Securities and Markets Authority (ESMA), the European markets regulator, to approve ratings methods and ban sovereign ratings in “exceptional situations”. ESMA would be able to suspend ratings of countries in bailout programmes so that adverse ratings are not issued at “ inappropriate moments”. There is some confusion over how such a ban could be enforced, as ESMA would be unable to stop agencies outside the EU from issuing sovereign ratings on countries in bailout programmes. Credit ratings agencies are also likely to argue that a suspension would amount to a restriction of free speech as they consider their ratings to be opinions. The plan is the most intrusive and significant shake-up of the industry proposed by any international authority and will come as a shock to credit ratings agencies, which have become a favourite target of regulators since the 2008 financial crisis. The changes, if adopted by the European Parliament and EU member states, would also have a big impact on the customers of credit ratings agencies. Companies and banks issuing financial instruments will be required to obtain two ratings and will see the fees they pay published. http://www.ft.com/intl/cms/s/0 /204dd86c-fb3d-11e0-8df6-00144feab49a.html#axzz1bKjCnJEW
INVESTMENT MANAGEMENT § EFAMA FORUM
The European Fund and Asset Management Association (EFAMA) hosted an investment management forum titled ‘Challenges of the new regulatory and supervisory environment for the European investment management industry’ on 29-30 November in Brussels. The forum brought up topics like issues and priorities for the European investment management industry; the European Commission’s regulatory agenda; several panel discussions on hot issues with both EFAMA members and industry senior executives; and presentations by invited speakers. http://www.efama.org/index.php?option=com_docman&task=doc _download&gid=1563&Itemid=-99
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THE CUMULATIVE § ASSESSING IMPACT OF EUROPEAN REGULATIONS
The Economic and Monetary Affairs Committee (ECON) of the European Parliament has published a study assessing the likely impact on how the most important regulatory changes in Europe will contribute to various objectives (such as transparency and increasing consumer confidence), together with a joint impact assessment on all the regulation coming down the pipeline. Both assessments are informed from relevant research and some new empirical work. Regulatory items covered included revisions to the Capital Requirement Directive (CRD IV), regulation of over-thecounter (OTC) derivatives, short selling and credit default swaps (CDS), MiFID and the Financial Transaction Tax (FTT). In terms of the joint impact assessment, while it is non-scientific, it does provide an interesting take on how even policymakers are unsure on how different regulations will interact with each other following their implementation. Overall, the study notes that the regulations above are likely to reduce procyclicality, internalise the social costs associated with bank failures and create a level playing field across the single market. However, the report concludes that, apart from the Reform of Deposit Guarantee Schemes (DGS) and Reform of Investor Compensation Schemes (ICS), none of the regulations will increase consumer confidence in financial markets in a meaningful way. Regulatory regimes are now in flux. How the most important rule changes will impact financial institutions, markets, customers and the real economy is a pressing issue for many stakeholders. Understanding the cumulative impact of regulations, and how they interact with each other, is even more relevant as financial institutions face a plethora of regulatory changes in the coming years. Financial planning and business model restructuring need to take account of all the regulatory (and accounting and legal) changes that face their operations. Having the correct structures in place to navigate regulatory change will not only result in cost efficiencies but it can also put financial institutions in a better position to capitalise on the opportunities that the regulatory changes will trigger. http://www.pwc.com/gx/en/financial-services/issues/regulation /european-fs-regulation-update/updates/october-17-2011.jhtml#3
PUBLISHES 2ND PROGRESS REPORT § FSB ON OTC DERIVATIVES MARKET REFORMS IMPLEMENTATION
The Financial Stability Board (FSB) has published its second six-monthly progress report on implementation of over-the-counter (OTC) derivatives market reforms. The report provides a detailed review of progress toward meeting the commitment of G20 leaders at the Pittsburgh 2009 summit that, by end-2012, all standardised OTC derivative contracts must be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties; that OTC derivative contracts be reported to trade repositories; and that non-centrally cleared contracts be subject to higher capital requirements. For each of the G20 commitments, the report provides an assessment of progress in the three key steps that need to be taken: the development of international standards and policy; the adoption of legislative and regulatory frameworks; and actual implementation through changes in market practices. The report notes that, as of now, with only just over one year until the end-2012 deadline for implementing the G20 commitments, few FSB members have the legislation or regulations in place to provide the framework for operationalising the commitments. While recognising the implementation challenges and the complexity of the needed laws and regulations, the report concludes that jurisdictions should aggressively push forward to meet the G-20 end-2012 deadline in as many reform areas as possible. Consistency in implementation across jurisdictions is critical, and it is understandable that smaller markets want to see what frameworks the USA and EU put in place when developing their own frameworks. Nevertheless,
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it is important that all jurisdictions advance development of their legislative and regulatory frameworks as far as they are able even before finalisation of the US and EU regimes, to be in a position to act expeditiously once rules are finalised in these two largest OTC derivatives markets. http://www.financialstabilityboard.org/press/pr_111011b.pdf
FOR EUROPEAN § BLUEPRINT CONSOLIDATED TAPE
The European Fund and Asset Management Association (EFAMA) has published a blueprint for the establishment and operation of a European Consolidated Tape (ECT). The ECT should, according to EFAMA, greatly improve the quality of over-the-counter (OTC) post-trade data; post-trade data from trading venues and OTC should be made available to the ECT through regulated channels; post-trade data should be unbundled from pre-trade data and standards for post-trade data feeds should be created and enforced; prices of standardised post-trade data feeds should be regulated; and a single official European Consolidated Tape should be created. http://www.efama.org/index.php?option=com_docman&task=doc _download&gid=1444
PUBLISHES THIRD COUNTRY § ESMA AIFMD CONSULTATION
The European Securities and Markets Authority (ESMA) has published a second consultation paper on the implementation of the AIFMD rules, this time looking specifically at third-country funds. In the consultation, ESMA sets out its draft advice on the supervision of alternative investment fund managers (AIFMs) in third countries. This includes suggestions on how to implement the rules on delegation to entities established in a third country and on the “general criteria for assessing equivalence of the effective prudential regulation and supervision of third countries in the context of depositaries”. Within the section of the consultation that looks at “ delegation”, ESMA suggests that in order to comply with the rules of the AIFMD – specifically Article 20(1)(d) – a written agreement should exist between the regulator of the country from which the AIFM is based and the EU country into which it is passporting. Among other things, this agreement should include provisions which allow for site visits by the EUcompliant regulator, access to information on demand and assurance that action will be taken in cases where there has been a breach of regulation. The 30-page consultation document also explores a number of other areas, including the implementation of cooperation arrangements between EU and non-EU competent authorities, exchange of information between EU authorities and authorisation of member state AIFMs. ESMA is to produce a final recommendation to the European Commission on the implementation of AIFMD by 16 November 2011. http://www.international-adviser.com/article /esma-publishes-third-country-aifmd-consultation
BAN ON NAKED SHORT§ PERMANENT SELLING OF CDS BROKERED
The European Parliament and the Council of the EU have reached agreement on imposing a permanent EU-wide ban on naked credit default swaps (CDS) trading. The agreed curbs and limits in relation to the European Commission’s proposed regulation on short-selling and certain aspects of CDS will increase transparency and will also introduce restrictive rules on traders’ short-selling of bonds and shares which are admitted to trading on EU markets and in terms of buying credit insurance relating to EU sovereign debt. National regulators have the option to lift the ban
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temporarily in cases where its sovereign debt market ‘is no longer functioning properly’. While the suspensions are finite, the bans can be rolled over indefinitely and existing CDS positions can be grandfathered until they expire. For national regulators to invoke this ‘opt-out’ clause, they must submit a case to the European Securities and Markets Authority (ESMA) citing evidence of widening bond yield spreads, poor liquidity or exceptional market volatility. Under the proposals, ESMA will be given additional powers to act as an arbiter in instances where governments are seeking to introduce a short-selling ban and even require other authorities to introduce short-selling bans in stressed market conditions. This should allow for better coordination at the EU level in times of crisis, which was lacking following the collapse of Lehman Brothers in 2008. The deal arrived at by EU lawmakers followed a series of measures adopted by various EU members states such as Italy, Spain, Belgium and France, which on 25 August 2011 extended their bans or put in place an indefinite prohibition on short-selling, which ESMA reviewed and coordinated. The next step is for the Council and the European Parliament to ratify the agreement. The regulation is set to come into force in November 2012. http://www.pwc.com/gx/en/financial-services/issues/regulation /european-fs-regulation-update/updates/october-25-2011.jhtml#2
PENSIONS REGIME § PAN-EUROPEAN URGED AS WAY FORWARD
The European Commission (EC) should consider a pan-European pensions regime instead of individual national guidelines, Aon Hewitt has suggested. In its submission to the European Insurance and Occupational Pensions Authority (EIOPA), the consultancy argued that employers should be granted more freedom to design retirement programmes to better align them with their own corporate needs. It also urged the EC to reform the IORP directive to allow for a more business-friendly environment, guaranteeing the affordability of pension arrangements. Aon Hewitt’s submission to EIOPA follows its Call for Advice on changes to the IORP directive, with the UK’s National Association of Pension Funds having previously warned that the EC had failed to grasp the diversity of the European pensions system. The European Federation for Retirement Provision had also argued against the use of Solvency II as a basis for the new IORP directive, while warning against the use of the IORP label for the new east European pension systems, as it believes this could lead to further Hungary-style repossession of pension assets. http://www.ipe.com/news/aon-hewitt-pan-european-pensions-regime -could-be-way-forward_41774.php
COUNTRIES SEEN UNLIKELY TO § CEE COME UNDER IORP DIRECTIVE
The mandatory retirement pillars of central and eastern European (CEE) countries, as well as unfunded pension funds, will not be subject to a new IORP directive once the new draft is published, a member of the European Insurance and Occupational Pensions Authority (EIOPA) stakeholder group has predicted. Addressing the National Association of Pension Funds (NAPF) annual conference in Manchester, pensions lawyer Ruth Goldman gave her impressions of a recent meeting of the stakeholder group – where she represents occupational schemes – and criticised that the shift towards heavier regulation for funded schemes, with continued lack of regulation for unfunded pillars, made “absolutely no sense”. Highlighting some positive news, she also indicated that the European Commission was aware of the impact Solvency II would have on pension funds and their recovery plans, insisting there was sympathy for the situation in which this placed funds. Goldman, a partner at law firm Linklaters, said that her “steer” from EIOPA was that the mandatory pension pillars launched in CEE countries over the past decade or more would not fall under the new regime, due to a “strong political pushback”. The European Federation for Retirement Provision previously predicted that
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bringing the mandatory pillars under the IORP Directive would lead eastern European states to follow the Hungarian example of bringing private pension savings under control of the country’s treasury. http://www.ipe.com/news/cee-countries-unlikely-to-come-under-iorp -directive-predicts-eiopa-stakeholder-member_42561.php
FINALISES LARGE TRADER § SEC REPORTING LEGISLATION
In order to more closely monitor the activities of traders dealing in large volumes and/or market values in the US markets, the USA’s Securities and Exchange Commission (SEC) has passed a final rule whereby traders making in excess of US$20 million in trades per day/two million shares per day or US$200 million in trades/20 million shares in a calendar month must comply with more stringent reporting and disclosure guidelines. http://www.sec.gov/rules/final/2011/34-64976.pdf
PROPOSES RULE AS PART OF DODD§ SEC FRANK ACT SETTING LIMITS ON PROPRIETARY TRADING
The Dodd-Frank Act was enacted on July 21, 2010. Section 619 of the Dodd-Frank Act added a new section 13 to the Bank Holding Company Act of 1956 (‘BHC Act’) that generally prohibits any banking entity from engaging in proprietary trading or from acquiring or retaining an ownership interest in, sponsoring, or having certain relationships with a hedge fund or private equity fund (‘covered fund’), subject to certain exemptions. The new section 13 of the BHC Act also provides for non-bank financial companies supervised by the Board that engage in such activities or have such interests or relationships to be subject to additional capital requirements, quantitative limits, or other restrictions. Feedback from impacted stakeholders is solicited with a deadline of January 2012. http://www.sec.gov/rules/proposed/2011/34-65545.pdf
CITIZENS ABROAD CALL § AMERICAN FOR REPEAL OF FATCA
American Citizens Abroad, which calls itself “the voice of Americans overseas”, has written an open letter to US Treasury Secretary Timothy Geithner and other officials urging them to repeal the Foreign Accounts Tax Compliance Act (FATCA), saying it is “misconceived and will not attain its objectives.” “To the contrary, it leads to a two-tier banking system, which is self-defeating, as this creates a gaping loophole for those who wish to evade US taxes,” the Geneva-based ACA says in its letter. FATCA was passed in March 2010 as part of US efforts to crack down on the use of offshore accounts by US citizens to evade taxes. The act, which takes effect in 2013, has been criticised by spokesmen for many foreign financial institutions and even such firms as KPMG, who say it is likely to cause foreign businesses to avoid having any American clients at all, and for some investors to shun holding US assets. The letter goes on to call FATCA “dangerous for the US economy” because, ACA says, it will lead to “significant disinvestment out of the United States by foreigners” to the potential tune of “trillions of dollars”. It adds: “The FATCA requirement that 10% US ownership in a foreign non-listed company or partnership be reported to the IRS is shutting Americans out of partnerships and joint ventures with foreigners overseas. This will greatly handicap export development programs of small and medium-sized companies, as well as entrepreneurial activities of Americans on the worldwide scene.” http://www.international-adviser.com/article/american-citizens-abroad -call-for-repeal-of-fatca
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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT
ANALYSIS FOR IFRS 10 AND § EFFECT IFRS 11
The International Accounting Standards Board (IASB) has issued two reports on the effect analysis for IFRS 10 Consolidated Financial Statements, which also includes the effect analysis for IFRS 12 Disclosure of Interests in Other Entities, and the effect analysis IFRS 11. The effect analyses provide detailed insights into the potential impacts of the new requirements using case studies and other quantitative and qualitative material, as appropriate. The analysis is undertaken by identifying typical scenarios to highlight those areas where the most significant effects are expected from applying IFRS 10, IFRS 11, and IFRS 12 respectively. http://www.ifrs.org/News/Announcements+and+Speeches/ EffectanaIFRS10_11.htm
TAXONOMY INTERIM RELEASE § IFRS FOR COMMON-PRACTICE CONCEPTS
On 1 September 2011, the IFRS Foundation, the oversight body of the International Accounting Standards Boards (IASB), completed the first part of its project to address requests by regulators and preparers for extensions to the full International Financial Reporting Standards (IFRS) XBRL Taxonomy. The IFRS XBRL Taxonomy is used to help those filing IFRS financial statements electronically to ‘tag’ the information with identification tags (called ‘concepts’ in an XBRL taxonomy). Currently, the IFRS taxonomy includes all core concepts included in IFRSs as issued by the IASB. However, preparers often need to provide more detailed financial information than is reflected in the core IFRS concepts. To ensure that those creating and using electronic filings do not need to create their own extensions to the IFRS taxonomy, the IFRS Foundation has created an ‘extension taxonomy’ by analysing and drawing from common practice. http://www.ifrs.org/News/XBRL/taxonomy+2011+interim+release +common+practice.htm
POLICY ORIENTATIONS ON § ESMA’S GUIDELINES FOR UCITS EXCHANGETRADED FUNDS AND STRUCTURED UCITS
Following the entry into force of the broader investment freedoms for UCITS under UCITS III and their further extension in the Eligible Assets Directive (2007/16/EC), UCITS funds started to implement new strategies, which are considered by some external stakeholders as innovative. It has often been suggested that by exploiting the new investment criteria and limits introduced by UCITS III, such funds pursue management strategies previously prohibited to them and more often associated with hedge funds. In certain cases, such funds may also be admitted to trading on some European regulated markets in the form of exchange-traded funds (ETFs). This discussion paper sets out ESMA’s policy orientations on possible guidelines on UCITS ETFs and structured UCITS, as well as examining possible measures that could be introduced to mitigate the risk that particularly complex products, which may be difficult to understand and evaluate, are made available to retail investors. http://www.esma.europa.eu/data/document/2011_220.pdf
REACTS TO FSA’S DELAY § EUROPE ANNOUNCEMENT
The announcement by the UK’s Financial Services Authority (FSA) on 4 October 2011 that it has revised its implementation assumptions for Solvency II may have implications for regulators across Europe. The FSA is
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proposing a ‘split’ implementation whereby responsibilities for supervisors and the European Insurance and Occupational Pensions Authority (EIOPA) will apply from 1 January 2013 and responsibilities for firms will apply from 1 January 2014. The FSA will only revisit these assumptions, “if there is a significant change in the dates to beyond 2014”. In response to the announcement, the European insurance and reinsurance federation CEA said: “Discussions are pointing to a ‘split’ implementation of Solvency II. The CEA is comfortable with this, provided that insurers get at least 18 months between the point at which reporting requirements under Level 3 are finalised and the point at which they are to be used by undertakings.” http://solvencyiiwire.com/solvency-ii-news-europe-reacts-to-fsas-delay -announcement/3492
PILLAR II PENSION FUNDS § GERMANY’S SEEN DESERVING THEIR OWN WATCHDOG
German Pillar II pension funds should get their own supervisory body, according to Peter Hadasch, board member at the association of German company pension schemes (VFPK). In the debate on Solvency II, the VFPK also demanded a clearer separation of regulations relating to occupational pension providers and those relating to insurers. Hadasch, who is also head of the Nestlé Pensionskasse in Germany, would even like to see the supervision of pension funds being separated from that of insurers. The rising level of European legislation to be integrated into the German regulatory framework would make it even more difficult for pension funds to identify the relevant passages. Like many industry representatives, Hadasch sees the danger of supervisors using insurance standards on insurance-based vehicles like Pensionskassen. He added that stakeholders such as unions and other employee representatives should be heard more by the German supervisor Bafin in discussions on guarantees, risks and safety in the second pillar. In Germany, Hadasch sees a “lack of clear separation” between the three pillars of the pension system. He argued that a strict definition of Pillar I as securing the bare minimum, Pillar II as enabling a certain standard of living, and the Pillar III as generating additional wealth would facilitate the separation of supervisory bodies. http://www.ipe.com/news/germanys-second-pillar-pension-funds -deserve-their-own-watchdog-vfpk_42427.php
ON THE CROSS-BORDER § REPORT COOPERATION MECHANISMS
BETWEEN INSURANCE GUARANTEE SCHEMES IN THE EU
The European Insurance and Occupational Pensions Authority (EIOPA) has issued a report to provide input to the European Commission’s policymaking on Insurance Guarantee Schemes (IGSs). The purpose of the report is to summarise the findings of a mapping exercise of the existing mechanisms for cross-border cooperation between Insurance Guarantee Schemes of EU member states and/or between Insurance Guarantee Schemes and national supervisory authorities, and to provide general recommendations to the European Commission in the area of cooperation between IGSs as well as between supervisors and IGSs. https://eiopa.europa.eu/fileadmin/tx_dam/files/publications/reports /EIOPA%20Report%20on%20Cross%20Border%20Cooperation%20 between%20IGS%20July%202011.pdf
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Recent research and white papers
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EXPERT GROUP ON MARKET INFRASTRUCTURES (EGMI) REPORT
The past 10 years have seen unprecedented focus placed on the importance of post-trade infrastructure to the European economy. This report provides a clear overview of how the efforts to develop a safe and efficient clearing and settlement infrastructure for the EU have progressed and gives an in-depth view of the posttrading landscape by asset class. Post-trade infrastructure is a difficult and complex subject where finding consensus on the issues and their solutions is challenging. This report makes it clear that despite the effort and resources invested in the past decade, there is still considerable work to be done to achieve a truly pan-European post-trade infrastructure that can drive Europe’s economic potential. ‘Expert Group on Market Infrastructures (EGMI) Report’, EFAMA 2011 http://ec.europa.eu/internal_market/financial-markets/docs/clearing/egmi/101011_report_en.pdf EGMI Group, 40 pages, October 2011
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As the economy moves toward a recovery and new regulations unfold, insurance executives are looking to their finance organisations to support operating strategies, provide meaningful data and insights, and deliver on core responsibilities. Like other organisations, insurers are looking to strategically improve processes or systems that might have been neglected by the business demands in more prosperous times, but do it with a holistic view of what their end-states should look like. To accomplish these objectives, some insurers are turning to a process known as finance transformation to help create more value by focusing on the four roles that CFOs play. These roles include: steward, operator, strategist and catalyst. As stewards and operators, CFOs fulfil a vital function by maintaining accurate financial records in a cost-effective manner. However, there may be additional opportunity for CFOs to drive value in organisations as strategists and catalysts by contributing to and leading company-wide dialogue and decision-making. This report describes how insurers can gain a distinct competitive advantage by reducing costs, improving controls, and providing high-quality service to stakeholders of their finance organisations. ‘Financial Foresight - Finance transformation for insurers: Recharge for the recovery’, Deloitte 2011 https://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI _FinancialForesightFinancetransformationforinsurers_041911.pdf Deloitte, 4 pages, 2011
The European Fund and Asset Management Association (EFAMA) published 14 October 2011 its latest Investment Fund Industry Fact Sheet. Entitled ‘Turmoil in financial markets sees investors retreat to safe havens in August 2011’, the fact sheet provides investment sales and asset data for August 2011. Associations representing more than 97% of total UCITS and non-UCITS assets at end August 2011 provided input regarding net sales and/or net assets data.
SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS (SIFI): WHETHER IN OR OUT, START PREPARING NOW
As more and more of the provisions included in the 2010 Dodd-Frank Act are clarified and put into practice, increasing attention needs to be paid to the actual impact on the US financial industry and on its domestic and international stakeholders. One of these impacts includes the definition of systemically important financial institutions (SIFI) and what this designation means to investment managers deemed to be a SIFI. This white paper defines the purview of SIFI and examines the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act’s explicit mandate to protect the US financial system from systemic risk. It also addresses questions such as how firms can measure up in terms of capital and infrastructure, and whether they can meet the need for a living wills regime, creditexposure reports and stress testing requirements.
The review of the Markets in Financial Instruments Directive (MiFID II) will impact investment firms and the overarching European securities markets structure fundamentally. In addition to upgrading the current regime for equities markets, MiFID II proposes to extend this revised regime to a far wider range of product classes, including over-the-counter (OTC) derivatives and fixed-income products. It will have significant strategic repercussions for firms undertaking investment business in all securities markets. In this paper, PwC provides an overview of the EC’s MiFID II consultation paper, highlighting key objectives and specific proposals. Also examined is the legislative process whereby these changes will be introduced identifying how firms can make sure their views or concerns are heard.
FINANCIAL FORESIGHT – FINANCE TRANSFORMATION FOR INSURERS: RECHARGE FOR THE RECOVERY
INVESTMENT FUND INDUSTRY FACT SHEET
‘Turmoil in financial markets sees investors retreat to safe havens in August 2011’, EFAMA, 2011 http://www.efama.org/index.php?option=com_docman&task=doc_download&gid=1469&Itemid=-99 EFAMA, 2 pages, October 2011
UNDERSTANDING MIFID II: DRIVING CHANGE IN THE EUROPEAN SECURITIES MARKETS
‘Understanding MiFID II: Driving change in the European securities markets’, PwC 2011 http://www.pwc.com/en_GX/gx/financial-services/issues/regulation/asstes/Understanding_MiFID _II_-_Managing_Regulatory_Change25082011.pdf PwC, 12 pages, July 2011
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‘SIFI: Whether in or out, start preparing now’, Deloitte, 2011 http://www.deloitte.com/view/en_US/us/Industries/Banking-Securities-Financial-Services/440d3cc7 17d31310VgnVCM1000001a56f00aRCRD.htm Deloitte, 8 pages, July 2011
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THE ARCHITECTURE OF INTEGRATION: AN ESSENTIAL GUIDE TO SUCCESSFUL MERGERS AND ACQUISITIONS IN FINANCIAL SERVICES
The report examines the main themes of the global financial services M&A market over the last three years, and looks forward to what the financial services sector might expect in the short to medium term. It focuses on the strategic priorities that have been driving financial services companies to dispose and acquire in this period, in an attempt to pin down the key factors that can distinguish successful transactions from potential failures. Some of the key findings include: the wave of deals following the recession is now at an end; there is a new wave coming; competition will come from Asia-Pacific buyers and from a resurgent Private Equity sector; cost cutting has given way to revenue growth as a primary deal driver; growing through acquisition is the new normal; markets are still sceptical of values based on revenue synergies, but they can be persuaded by a well-supported argument; old issues with poor planning, poor communications and lack of attention to cultural differences still persist; there is real value to be gained from solving these problems. ‘The architecture of integration: An essential guide to successful mergers and acquisitions in Financial Services’, KPMG 2011 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/integration-financial -services/Documents/architecture-of-integration-report.pdf KPMG, 36 pages, September 2011
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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT
EFAMA PUBLISHES LATEST STATISTICAL RELEASE
The latest quarterly (Q2) international statistical release published 20 October 2011 by the European Fund and Asset Management Association (EFAMA) revealed a number of findings regarding the worldwide asset management industry. The findings include the status of the global AUM for funds; inflow into long-term investment funds; inflow into money market funds; the distribution of equity funds, bond funds and money market funds; and the market share distribution geographically. The collection for the second quarter of 2011 contains statistics from 45 countries.
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‘Worldwide Investment Fund Assets and Flows – Trends in the Second Quarter 2011’, EFAMA, 2011 http://www.efama.org/index.php?option=com_docman&task=doc_download&gid=1561&Itemid=-99 EFAMA, 9 pages, October 2011
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THE AGILE ASSET MANAGER
Through case studies, interviews with C-level leaders at investment management companies and their own research/expertise, KPMG puts forth its views on how a focus on agility will help asset managers achieve competitive advantage. The white paper draws on the input of the C-level interviewees and makes strategic recommendations with respect to organisational structure and competency development. The intention is to stimulate debate on why agility is becoming an increasingly critical competence in helping asset managers outmanoeuvre and outperform the competition and discuss how agility can be created and deployed in support of developing and operationalising strategies. The white paper also includes a number of case studies, which bring to life how some of the 26 CEOs, 5 CFOs and 6 COOs of leading asset managers who have been interviewed are creating and deploying agility in the context of their strategic priorities.
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DODD-FRANK ACT: COULD THERE BE ACCOUNTING CONSEQUENCES?
The Dodd-Frank Act contains numerous provisions intended to strengthen corporate accountability that will affect all US public companies and many private ones. Among the provisions that are of immediate concern are those dealing with asset-backed securities, required disclosures relating to executive compensation, incentive compensation claw-back requirements under certain conditions, and OTC derivatives. Many of these also require new reporting practices or reports. Discussing some key aspects of the accounting and reporting implications of Dodd-Frank, this white paper examines the impact of these provisions and how to prepare. The publication can also work as a starting point for a dialogue about ways to evaluate and address possible vulnerabilities and risks facing these businesses. ‘Dodd-Frank Act – Could there be accounting consequences?’, KPMG 2011 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/dodd-frank -accounting-implications.aspx KPMG, 12 pages, September 2011
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HOW BANKS SHOULD LEVERAGE TECHNOLOGY TO CAPITALISE ON REGULATORY CHANGE: MOVING BEYOND COMPLIANCE
Over the next several years, regulators will implement a range of risk management reforms designed to lend greater transparency and stability to the global banking system. The new regulatory environment will have a significant impact on the industry, changing not just the way banks measure and manage risk but also how they run their businesses. From a technology perspective, the task of accommodating these new requirements is a steep challenge. This report assesses how banks can leverage their IT infrastructure to accommodate new regulations and capitalise on this change. The practical application — and benefits — of such an approach are illustrated by a case study of a major European bank that transformed its risk-IT architecture as part of an effort to enhance its approach to managing risk. ‘How Banks Should Leverage Technology to Capitalise on Regulatory Change: Moving Beyond Compliance’, BCG 2011 https://www.bcgperspectives.com/content/articles/financial_institutions_technology_moving_beyond _compliance/ Boston Consulting Group, October 2011
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ACCENTURE 2011 GLOBAL RISK MANAGEMENT STUDY: CAPITAL MARKETS INDUSTRY REPORT
As part of its 2011 global risk management survey, Accenture interviewed around 50 C-level executives from capital markets companies globally. The survey addresses risk management in these companies and how an effective risk management IT & organisational infrastructure can be leveraged as a source of competitive advantage. According to responses, risk management is a higher priority and source of competitive advantage and high performance in the capital markets industry. It is clear that the C-suite has bought into the idea that risk management has a vital role to play in ensuring long-term competitive advantage, and ultimately high performance, in what has become a very uncertain and competitive business environment. Despite this, however, the survey also reveals serious challenges. ‘Accenture 2011 Global Risk Management Study: Capital Markets Industry Report’, Accenture 2011 http://www.accenture.com/us-en/Pages/insight-risk-management-study-capital-markets-report.aspx Accenture, 12 pages, July 2011
‘The Agile Asset Manager’, KPMG 2011 http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/agile-asset-manager -full-report.aspx KPMG, 32 pages, August 2011
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December 2011
TECH TRENDS 2011: INSIGHTS FOR INSURERS ON THE NATURAL CONVERGENCE OF BUSINESS AND IT
The report shares the technology trends insurance company CIOs and business executives face today, with inputs from industry participants, analysts, alliances and academic leaders and subject matter advisers. The trends are clustered in two categories: ‘disruptive deployments’ present significant new opportunities to improve business processes, rethink operations or even enter into new business models - the technologies themselves may not be disruptive, but in being deployed they may well disrupt the cost, capabilities, or even the core operating model of IT and the business; and ‘(re)emerging enablers’ are trends that many technology executives have spent time, thought and resources on in the past but Deloitte argues they deserve another look due to specific factors in the technology or business environment. Woven through many of the trends is the growing convergence of cloud, social and mobile computing, analytics and cyber-security, fundamentally changing how information is accessed and used in business operations and decision-making. The focus is less on the mechanics of technology. The mentality of ‘there’s an app for that’ captures the essence of this change, engaging users wherever and whenever they choose. ‘Tech Trends 2011: Insights for Insurers on the Natural Convergence of Business and IT’, Deloitte 2011 https://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_consulting _Insurance_Technology_trends_061311.pdf Deloitte, 64 pages, 2011
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NINTH ANNUAL FAIR VALUE PRICING SURVEY: MANAGING RISK THROUGH TIME-TESTED PRACTICES
In the ninth annual Fair Value Pricing Survey, Deloitte presents a number of findings related to tracking valuation policies, industry practices, and governance and oversight procedures used by leading asset managers. One finding is that although several major international crises and other events occurred during the year that required the attention of asset managers, none of them had the same impact on the valuation process as the global credit crisis that preceded them. In the previous years, mutual fund groups have reported to continually make changes to their valuation policies and procedures, and these efforts appeared to bear fruit over the last year with only minimal adjustments. Summaries are included by four subject areas of certain noteworthy survey results: valuation governance, policies and procedures, pricing sources, and specific investment type fair value considerations. ‘Ninth Annual Fair Value Pricing Survey: Managing risk through time-tested practices’, Deloitte 2011 https://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/FSI/US_FSI _Ninth%20Annual%20Fair%20Value%20Pricing%20Survey_092011.pdf Deloitte, 12 pages, 2011
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