Journal of Applied IT & Investment Management - Vol.2,No.1 by SimCorp

# JOURNAL of Applied IT and Investment Management

Volume 2 路 No. 1 路April 2010

Roman G. Trageiser Spokesman of the Board of the Managing Directors Dealis

IN THE PURSUIT OF GROWTH: A BEST-PRACTICE IT PLATFORM CASE Alexander Poppe Managing Director HSBC INKA

GEARING UP INVESTMENT MANAGEMENT SYSTEM FOR UCITS IV Cornel Bender Managing Partner Capco

POST-CRISIS FINANCIAL ORDER SETS NEW IT SYSTEM CRITERIA MITIGATE RISK

REDUCE COST

ENABLE GROWTH

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

CEO COMMENT:

Welcome to the ‘new normal’ by CEO Peter L. Ravn Given the vulnerable state of the financial markets in 2009 and the harsh conditions in which many of our clients had to operate, SimCorp produced results for the year that were good on the whole considering the more challenging and volatile climate. As one investment analyst observed at a recent presentation of our annual accounts, SimCorp’s business model has been stress-tested throughout the past year and results have lived up to expectations. Viewed historically the investment management industry has performed well and acted as a driver for growth. But the financial crisis of 2007-09 was a wakeup call for the industry, challenging existing norms and codes of behaviour. If anything the crisis brought home the fact that from a corporate perspective, what is now needed is an organisation that is flexible and quick to respond to an accelerated pace of change. ‘Business unusual’ is the new norm – not ‘business as usual’. In this rapidly changing and more hostile environment we have observed a slight shift in the decision-making process in terms of somewhat prolonged buying processes and increased involvement of top-tier management. We see these tendencies as a positive sign that the industry is maturing; investments in IT have never been of more strategic relevance than now. Analysts agree that making the right IT decisions is paramount and will eventually sort the winners from the losers in the struggle for capturing a profitable share of future growth, and for creating the kind of value for investors they are striving for in the ‘new normal’. In this light, the crisis has increased the proportion of financial institutions that request solutions on a strategic level. At SimCorp we are geared up to meet these institutions with a whole range of initiatives. Among these initiatives and in addition to constantly enhancing SimCorp’s enterprise solution for investment managers, SimCorp Dimension, we are continuingly investing in industry best-practice research through funding SimCorp StrategyLab, SimCorp’s independent research institution. On that note, I am looking forward in 2010 to presenting the results of the work of 12 international bestpractice research committees, consisting of academics and industry representatives. Supplementary to our research activities, we also provide a series of service offerings through SimCorp Services, that individually or in any combination, enable institutions to further streamline their business operations or their complete operating model, resulting in sometimes quite significantly increased competitiveness. As one example, within the area of operational services, by deploying SimCorp’s certified SimCorp Dimension specialists, we are now capable of taking on the responsibility of managing system problems and incidents from the client’s side as part of the client’s team.

Peter L. Ravn, Ph.D., is CEO at SimCorp A/S.

SimCorp

CONTENTS # I N THE PURSUIT OF GROWTH: A BEST-PRACTICE IT PLATFORM CASE

# G EARING UP INVESTMENT MANAGEMENT SYSTEM FOR UCITS IV: ONE GERMAN VIEWPOINT

# T HOUGHT LEADERSHIP IN INVESTMENT MANAGEMENT: SIMCORP STRATEGYLAB RESEARCH PROGRAMME 2010 –11

# P OST-CRISIS FINANCIAL ORDER SETS NEW IT SYSTEM CRITERIA

# A SSET MANAGERS: NEW REQUIREMENTS IN LIGHT OF THE FINANCIAL CRISIS

# O PERATIONAL PLATFORM: A STRATEGIC ASSET THAT SUPPORTS BUSINESS GOALS

# C OUNTDOWN TO SOLVENCY II: A CHECK- LIST OF IT CHALLENGES FACING INVEST- MENT MANAGERS

# REGULATORY UPDATE

# BOOK REVIEWS

# 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, Vice President, SimCorp A/S larsbjorn.falkenberg@simcorp.com EDITORIAL ASSISTANT Mette Trier, 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 quarterly publication, published and distributed globally by SimCorp A/S. Print run: 11,000. SUBMISSION GUIDELINES Articles, book reviews, new reports and information on recent research can be submitted for review to Editorial Assistant 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. © 2010 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

Read the journal online at www.simcorp.com/journal

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April 2010

# In the pursuit of growth:

a best-practice IT platform case As the dust settles in the wake of the financial crisis, growth has reemerged at the top of the agenda for investment management companies. We spoke to Roman G. Trageiser, Spokesman of the Board of the Managing Directors, Dealis, about the strategic goals the company has set and how a successfully integrated and scalable IT platform is instrumental in enabling growth.

I Michael Metcalfe is a German-based financial journalist who has worked in the Luxembourg financial sector for more than 15 years.

nvestment management in Germany is based on a triangular relationship of investor, investment company and custodian (more commonly referred to in Germany as Depotbank) that is unique in its scope. Investment companies serve as suppliers of investment funds and manage fund assets provided by the investors. It is the task of the Depotbank to take care of the custodianship of fund assets, calculate the share price each trading day, as well as to monitor compliance with investment guidelines. In the additional interests of investors, the country’s financial supervisory authorit y – the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) – serves as the supreme regulating authority, supervising all the parties involved. The investment company in turn reflects a value chain with links composed of selection, purchase and sale of shares, interest-bearing securities or real estate and extending to regular reporting on activities and fund developments. It is a current trend in Germany that parts of this value chain are increasingly being outsourced to competent, specialised service providers. One prominent example of this is Dealis Fund Operations GmbH, which with around €325bn in assets under management (AUM) in around 2,500 funds is the largest provider of fund accounting and fund administration services in Germany. Dealis is the joint venture of two of Germany’s foremost investment man-

agement companies, Allianz Global Investors and DekaBank. Allianz Global Investors Germany is Germany’s largest investment management company, expanding its market leading position with the acquisition of fellow German investment management company cominvest early in 2009. DekaBank serves as the central investment management company for the German savings banks, federal state banks (Landesbanken) and other networks. AN AGENDA GEARED TO GROWTH In the relatively short time since the two investment management companies agreed to pool resources and found Germany’s largest fund administrator in January 2009, Dealis has pursued a busy agenda geared to growth. Important milestones along the way for the joint venture, according to Roman G. Trageiser, include:

form in July 2009 was one of the most important building blocks for ensuring the growth of the young company. As Mr. Trageiser explains: “Successful use of the uniform system platform engendered in SimCorp Dimension afforded maximum flexibility so that processes can be systematically adjusted to suit our individual client requirements. To ensure operational stability in the best interests of clients, the first days of production using the new system were initially run in parallel with the old system. Fund valuations for the migrated funds are now run only on the new platform. It is foreseen that all DekaBank funds will have been migrated by the end of 2010.”

• m igration of the first of DekaBank and cominvest funds to a common IT platform; • integration of new employees to bring the current total to around 400; • creation of a Luxembourg-based sub sidiary; • relocation to a new head office in Frankfurt.

Moreover, and in parallel, the first cominvest funds were successfully migrated to the SimCorp Dimension platform by mid-2009. This was in the context of Allianz Global Investors’ integration of cominvest, which entailed administration of the German cominvest funds being outsourced to Dealis. As Mr. Trageiser adds: “To migrate the funds of three major investment management companies to a common IT platform was a real ordeal by fire. But we accomplished it thanks to the excellent cooperation of the entire Dealis team. All cominvest funds are scheduled to be migrated by mid-2010.”

Of these moves, the successful migration of the first DekaBank funds to the integrated SimCorp Dimension plat-

Another important landmark was the creation of a Luxembourg-based subsidiary in the form of Dealis Fund Op-

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SimCorp

# In the pursuit of growth:

a best-practice IT platform case

erations S.A., which commenced operations in June 2009. Headquartered in Luxembourg City, a total of 47 employees manage the funds of the Luxembourg DekaBank Group in Luxembourg. The migration of these funds has just started. As of mid-July 2009, staff drawn from various premises in Frankfurt were relocated under the single roof of the Herriot’s office complex in the Frankfurt suburb of Niederrad. In addition to the Frankfurt and Luxembourg offices, Dealis has a presence in Leipzig and Munich. Overall, the joint company is staffed by around 400 employees recruited from the back office units of Allianz Global Investors and DekaBank. For Mr. Trageiser, this marks another milestone: “With the support of our parent companies we have in addition to the daily operations at project level accomplished a great deal in a very short time. With these initial moves, we have laid the foundations for our future development and growth. We must now build on this momentum for the tasks and challenges that lie ahead.”

“In view of the sharp drop in fund volumes as a result of the financial crisis, many investment managers are now confronted with the question of what direction their future business strategy should take.”

CREATING THE RIGHT GROWTH FRAMEWORK Since it was created, Dealis has, as stated before in detail, primarily used the past few months to build the new company in terms of its infrastructure and work processes. With the help of market and competitive analyses, as well as a costbased price/performance survey currently being undertaken, the basic framework is now being created with which to acquire new business. In Mr. Trageiser’s words: “The increased volatility observed in financial markets makes us very optimistic about the successful exploitation of new business. Precisely because of this volatility, investment managers will be led to increasingly focus on their core competencies and seek out high-performance partners in order to outsource what they regard as non-core activities, such as fund accounting and fund administration.” As Mr. Trageiser goes on to explain: “Already today Dealis has successfully positioned itself as such a specialised service partner guided by two strategic goals: firstly, to be a stable and reliable partner for our clients; and secondly, to help our clients to be even more successful. We will achieve the first goal through our unique ownership structure: with over 50 years of financial experience and the industry know-how of two of Germany’s largest investment managers as shareholders, our business model is safeguarded and sustainable. Therefore the foundations are laid to offer our clients particularly stable and industrialised production processes that are state of the art.” The second and related goal Dealis aspires to achieve is to allow its clients to offload specific working tasks. By outsourcing parts of the value chain that do not belong to core business, such as fund accounting and fund administration, Dealis enables its clients to focus more

on their core competencies and excellence in daily business operations. In Mr. Trageiser’s words: “With the help of our high-performance SimCorp Dimension platform we can always ensure that we tailor our services to serving the needs of our clients and at the same time reflect the latest legal requirements as well as financial instruments.” An essential part of the customised service Dealis provides is the close dialogue and coordination it pursues with its clients. As Mr. Trageiser explains: “To this end, there are service review meetings held regularly with each individual client, as well as advisory meetings scheduled with all clients. For instance, the further development of our platform, i.e. in the form of software patches, is jointly coordinated, planned and budgeted. This coupled with annual release changes puts us in a position to book and administer all the desired financial instruments, e.g. of one of the world’s largest bond managers.” CHALLENGES FACING THE INDUSTRY TODAY Nevertheless, and despite the fast-track growth Dealis is intent on pursuing, Mr. Trageiser is quick to admit that there are a number of challenges facing the investment management industry today. These include how best to achieve growth and value-creation in the postcrisis environment, whether it be through economies of scale and a lowcost leadership strategy, product differentiation or growth acceleration. However, some of the challenges, including an increasing flow of regulatory requirements and the greater need for flexibility and scalability with regard to operational platforms, were already in evidence before the crisis broke. As Mr. Trageiser observes: “Even before the financial crisis erupted the German investment management in-

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April 2010

“… we have laid the foundations for our future development and growth. We must now build on this momentum for the tasks and challenges that lie ahead.” Roman G. Trageiser

As a trained banker and certified EFFAS financial analyst, Roman G. Trageiser has more than 17 years of experience in asset management. dustry was faced with the challenge of implementing as quickly as possible regulatory frameworks that were constantly changing, quite apart from having to deal with product innovation. And this in an environment that for years had been characterised by a steady erosion of margins on the one hand, and

on the other, by a labour market that was short on specialist skills (particularly with respect to tax and IFRS know-how).” In view of the sharp drop in fund volumes as a result of the financial crisis, many investment managers are now

confronted with the question of what direction their future business strategy should take. Should they position themselves as a niche player with specialised product knowledge or as a full services provider, capable of plausibly catering for all asset classes and investment styles?

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SimCorp

# In the pursuit of growth:

a best-practice IT platform case

Irrespective of the answer to that question, Mr. Trageiser stresses that: “Focusing on the core competency of ‘fund management’ is an essential element in the argument – and hence a preoccupation with the subject of ‘outsourcing’. Only in such a case will most fund managers be in a position to master both the regulatory and legal requirements as well as striving for innovation. For the insourcer, however, this demands a flexible and more or less infinitely scalable platform, as well as the ability to provide clients with resources that are always dedicated to innovation.” PRECONDITIONS FOR CREATING DEALIS In the specific case of Allianz Global Investors and DekaBank, both companies had recognised independently of one another that they barely had room for further efficiency improvements in their already highly efficient back office units. Following successful introduction of the SimCorp Dimension platform in 2005, Allianz Global Investors was in the position that only a massive increase

Dimension can accommodate if and when the need arises. Mr. Trageiser goes on to explain: “Simultaneously DekaBank found itself in the situation of having created with Deka Fund Master a specialised and legally independent back office unit as insourcer for the investment management activities of the Deka Group; also within the framework of outsourcing internal controlling, all processing aspects were on the point of being made more transparent and where necessary improved. As the time approached for the maintenance contract with the existing back office system to expire and the decision was made to use SimCorp Dimension as the targeted platform, it became an obvious step for DekaBank to carry out the forthcoming migration with a partner who already had extensive experience with SimCorp Dimension.” For both companies – Allianz Global Investors and DekaBank – the resulting partnership as reflected in Dealis produced precisely the optimisation possibilities that were sought after: higher processing volumes with the same opportunity of being able to share future IT costs, as well as to enhance intellectual property synergies.

“For both companies – Allianz Global Investors and DekaBank – the resulting partnership as reflected in Dealis produced precisely the optimisation possibilities that were sought after ...” in processing volumes, e.g. through a joint venture, would create significant synergies – circumstances that SimCorp

CHOOSING THE RIGHT GROWTH ALTERNATIVE According to Mr. Trageiser: “Since the main obligation here was that the existing service maintained the same degree of excellence as before, the second course of action was chosen. No external providers would have been able to ensure in such a certain way that, to cite just one example, the highly complex require-

ments of the IFRS accounting procedures of the Allianz Group as the largest institutional investor in Germany were met in the short term, as well as in the medium and long terms.” DekaBank meanwhile was faced with the prospect of replacing its existing back office platform. Not only did it wish to migrate with SimCorp Dimension as the most powerful system, it also wanted to preserve the most appropriate parametric setups for its own requirements. And it was precisely these requirements that Allianz Global Investors as its later joint venture partner was able to fulfil in its already established SimCorp Dimension platform. Furthermore the creation of Dealis placed both joint venture partners in the position of leaving their own mark on the more or less inconclusive discussions concerning the outsourcing trend that have been rumbling on in Germany for years. Adds Mr Trageiser: “Both our shareholders and my fellow management board members and I are firmly convinced that some other German or Luxembourg investment management firms will follow this example and that we will be able to welcome further clients in the near future. And, unlike before our creation, there now exists in the market a service provider in the form of Dealis that can satisfy even the complex needs of large clients.” A CLEARLY DELINEATED VALUE CHAIN In its relatively short existence Dealis has already taken a number of IT measures to ensure that its operational platform can support and enable its fastpaced growth strategy. The standard SimCorp Dimension system platform Dealis uses allows it to make processes even more client-oriented and suited to its specialised needs. Thus SimCorp solutions play an integral role in Dealis’s

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overall business model in terms of correctly aligning IT systems to combine the best features from the perspective of efficiencies and synergies.

that with SimCorp we are in very good hands.”

In Mr. Trageiser’s words: “We at Dealis are a highly specialised service provider, which very deliberately busies itself with only a single clearly delineated part of the value chain in investment management: providing services in the area of fund accounting and fund administration at home and abroad. This also includes the maintenance of financial assets and other services related to the above activities, with the exception of such transactions that require a licence under the German Banking Act or the Investment Act.” He continues: “Our work begins precisely at that point when a transaction that is broker matched and compliance checked is recorded by the middle office of our clients via a data interface with our SimCorp Dimension infrastructure. Our work ends with the transmission of fund-relevant data via an interface from SimCorp Dimension into the reporting systems of our clients. These fund-relevant data include the share price, securities holdings and cash balances, as well as the transactions booked.” The process is best described with an analogy as used by Mr. Trageiser: “If one compares our work to that of a factory, SimCorp Dimension would be our assembly line. And precisely this production line was selected because, on the one hand, no other system is as scalable and, on the other, as individually adjustable. Another important aspect is sustainability. In our mission statement we stress that we want to be a stable and reliable partner for our clients. Consequently, we are also dependent on a systems supplier that provides us with sufficient certainty to work successfully with it over the long term. Here we feel

Compared with other investment management systems, Dealis also regards SimCorp Dimension as the most attractive solution offered on the market because it offers comprehensive, guaranteed up-to-date functionality and fully meets its specific demands for flexibility, scalability, usability, customisation, performance and reliability – all in an extremely configurable and fully integrated, modular operational platform. Mr. Trageiser adds: “Dealis is confident that SimCorp Dimension is uniquely capable of supporting our current and future strategic and tactical initiatives and will continuously enable our growth strategies in the years to come.” IT AS A PLATFORM FOR ENABLING GROWTH In describing the results Dealis has achieved from using the IT platform with regard to enabling growth, Mr. Trageiser lists as follows: • fl exibility and scalability in seizing growth opportunities; • integrated services offered to internal and external clients; • consistently high and reliable service levels; • measurable productivity gains and cost reductions. Explains Mr. Trageiser: “When we originally planned the project to migrate DekaBank investment funds, we worked on the premise that the total number of migrant funds would be more limited than in fact turned out to be the case. However, launches of new funds meant that the figure climbed once again. The integration of cominvest into Allianz Global Investors in turn added the German funds

April 2010

of cominvest. All in all, we are migrating a total of approximately twice as many funds on our platform than was previously thought. This is a project that has no equal in its scope – both in terms of the number of funds as well as the classes of recorded securities.” At the same time Dealis also has to attend to its day-to-day business in the

“ ... we are migrating a total of approximately twice as many funds on our platform than was previously thought. This is a project that has no equal in its scope ...” Roman G. Trageiser

framework of which it administers the funds of Allianz Global Investors with a consistently high degree of service and quality. Taken altogether, Mr. Trageiser estimates that Dealis will administer approximately 2,500 funds on a single SimCorp Dimension platform by year-end. Migration projects and daily operations are one thing – responding to changing needs is another. Explains Mr. Trageiser: “Almost on a weekly basis we receive from our clients change requests for newly administered instruments, primarily in the area of over-the-counter (OTC) derivatives, as well as newly booked IFRS-holding categories, and the like. And also prevalent here is the expectation that the ‘time-to-market’ for successfully responding to these requirements is in no way worse than be-

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# In the pursuit of growth:

a best-practice IT platform case

fore the joint venture was created. And so far we have not run into any systemic bottlenecks. I think that speaks clearly for the performance of our software provider SimCorp, as well as our internal project management expertise.” In Mr. Trageiser’s view, this profound knowledge is also one of Dealis’s unique features. “No other service provider has such resources in the form of dedicated specialists for financial instruments, accounting according to HGB, IFRS and US GAAP rules, investment tax issues, as well as outsourcing-controlling, IT

“We do not wish to be recognised by the endinvestors of our clients. But at the same time we would like to relieve our clients from an activity for which they can obtain no price increases from their customers and also earn no laurels.” Roman G. Trageiser

security – the list could go on and on. I think we can rightly say that our unique expertise makes us the single point of

contact for all questions concerning the outsourcing process,” adds Mr. Trageiser. PLANNING FOR FUTURE CONTINGENCIES Looking to the future, Mr. Trageiser states that different growth strategies are currently under consideration. “In all our efforts to attract new clients it is always very important for us that we do not compete with them and that they can maintain their special unique features. This is another reason why we specialise in a particular part of the value chain. For both the institutional and the retail end-investors of our clients, it is totally irrelevant who calculates the share prices of their funds. That the price for this service should tend to be cheaper if far more than 2,500 funds are available – as is the case with us at Dealis – is obvious,” argues Mr. Trageiser. In his view, even at the pre- and posttrade review of asset limits things looks quite different. “Here there are very significant differences for any investment manager to examine, and that is possibly a unique feature. Exactly the same applies in the execution of commercial transactions in buy-side trading. The executed trade is a unique feature. Equal to the ensuing downstream process is the monitoring of correct business practices. Also for purely organisational reasons, the responsible unit should be in close proximity with the trading unit, as experience shows that too many questions can arise in this area. Also these are good reasons why we do not want to change our business model in that direction,” states Mr. Trageiser. Briefly expressed, Mr. Trageiser concludes that Dealis’s strategy looks like this: “We do not wish to be recognised by the end-investors of our clients. But at the same time we would like to relieve our clients from an activity for which

they can obtain no price increases from their customers and also earn no laurels. With this strategy, we feel we are very well positioned for growth in the coming years.” Roman G. Trageiser was appointed Spokesman of the Board of the Managing Directors of Dealis Fund Operations GmbH 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 €325bn in assets under management in around 2,500 mutual and special funds (as at 31 December 2009), Dealis groups together all 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. Dealis uses the integrated investment management system SimCorp Dimension. This uniform system platform offers maximum flexibility so that processes can be systematically adjusted to suit individual client requirements.

Qualify for the

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# Gearing up investment management system for UCITS IV: one German viewpoint

The countdown to legal implementation of Undertakings for Collective Investment in Transferable Securities (UCITS) IV in July 2011 is compelling the investment management industry to shift into higher gear the tasks of aligning business models and making operational structures more efficient. In this context, it is worth examining the challenges and opportunities presented by the latest evolution of the UCITS framework and exploring the significance for the German asset management industry.

W Alexander Poppe, Managing Director, Internationale Kapitalanlagegesellschaft mbH – HSBC INKA, Germany.

ith UCITS IV set to be written into the national legislation of all 27 EU member states by 1 July 2011, an assessment of the likely impact of the directive and the strategies that fund companies should adopt has become more pressing. The potential capability for easing access across European borders engendered in the UCITS IV directive provides opportunities to achieve greater efficiencies across a wider horizon. But there are also challenges to be taken into consideration. The aim of UCITS IV is clear: to increase economies of scale and reduce costs for UCITS investors by introducing an improved regulatory environment that will increase cross-border efficiencies while enhancing choice, transparency and investor protection. In addition, the range of UCITS funds

“Changes under the directive will improve distribution opportunities, bringing speedier entry into new markets ...”

will widen to include some alternative fund products. However, what is less clear is the way in which implementation will pan out in the operational and administrative spheres. In these areas it will be crucial to have the right IT platform.

managers through a more scalable fund range. Changes under the directive will improve distribution opportunities, bringing speedier entry into new markets and that should be the leading driver for managers distributing products across borders.

ALIGNING BUSINESS MODELS IS KEY According to a report published by Ernst & Young in January, business model alignment with UCITS IV will compel companies to improve their operating models. In a survey of 98 European investment funds, 49% indicated that business model alignment with UCITS IV was the biggest driver for improving their operating models. This compared with 37% that identified cost efficiency as the biggest driver.

Although the implementation deadline for UCITS IV is July 2011, the survey showed that with less than 18 months to go, a fifth of funds had not started work in this area. Less than a third had already started work on implementation, either by appointing a steering committee or conducting high-level analysis.

However, the survey also revealed that UCITS IV is not bringing the operational cost reductions many European investment managers assumed. According to Ernst & Young UCITS IV leader Crispin Rolt, the focus has turned to using UCITS IV to optimise the operating model and fund ranges, to align better with the business strategy of the organisation. The report indicated that operational efficiency was a key feature of UCITS IV and that it would bring benefits to

THE KEY FEATURES OF UCITS IV One of the main objectives of UCITS IV is to address what have been perceived as the structural inefficiencies of the UCITS framework. UCITS IV contains six provisions that are intended to increase the efficiency of the current legislative framework by allowing UCITS managers to more easily trade cross-border and drive down the costs of management, while improving investor protection. These key elements are: • i ntroduction of the management company passport (MCP), enabling funds to be managed by a company located in any EU member state; • simplifying and speeding up the UCITS notification procedure;

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• c larifying the rules for cross-border mergers between UCITS funds; • introducing rules to create UCITS master-feeder (pooling) structures; • replacing the simplified prospectus with a ‘Key Investor Information’ (KII) factsheet; • reinforcing existing regulatory requirements, such as organisational requirements and rules of conduct for management companies.

• I n clarifying the rules for UCITS mergers investment mergers have the greatest potential scope for delivering efficiencies. Full mergers eliminate more costs than entity pooling structures because the result is a single fund vehicle, with one prospectus and one interface with one primary regulator. However, given the differences in Europe’s national tax frameworks, including the tax treatment of mergers, it will prove difficult for UCITS managers to merge funds on the scale originally envisaged. • Master-feeder (pooling) structures provide very important flexibility. There are a variety of ways in which UCITS managers could in practice use master-feeder structures, which can be introduced for either umbrella or sub-funds. Most obviously, a UCITS manager could decide to have a European hub in one particular centre and to run all of its EU feeder funds into that master. • Like the simplified prospectus, the KII document requires updating annually, or more frequently in the event of a material change to the contents, with updates sent to home and host regulator. It will also have to be translated into the language of every country (or into English if approved) in which the fund is marketed and made available on the management company’s website, so incurring extra costs. • Strengthening current regulatory requirements should make it easier for UCITS managers to consolidate their cross-border activities, thereby creating savings and significantly improving the ability of a fund promoter based in one country to distribute and market funds in other member states.

THE MAIN IMPLICATIONS OF UCITS IV Through UCITS IV, the European Commission aims to increase economies of scale and to reduce costs for Europe’s UCITS investors by improving cross-border efficiency. Improved efficiency should in turn result in improved investor returns. The main implications of the directive’s six provisions as outlined above are foreseen as the following: • I mplementing the management company passport will have to take into consideration the tax implications. The profits of the management company will be taxed in the tax domicile of the management company. Given the differing corporation tax rates across the EU, certain domiciles may be favoured over others. Also the regulatory framework may differ from one location to another. • The new notification procedure is a definite improvement, but it does not apply to marketing material, which many fund groups choose to publish in order to define how they add value, nor to changes to an existing prospectus. The electronic transmission of documents will considerably reduce the administrative burden of the notification process, as would the establishment of a central electronic database to warehouse all fund documentation – a proposal that is currently under consideration.

CHALLENGES AND OPPORTUNITIES By now it is clear that UCITS IV will

April 2010

“The aim of UCITS IV is clear: to increase economies of scale and reduce costs for UCITS investors by introducing an improved regulatory environment ...” pose a number of administrative challenges and opportunities, not least in the IT area. This could trigger a rethink of current business and IT models if investment managers choose to centralise their UCITS management companies or establish a master-feeder structure, allowing cost efficiencies to be gained by having the same service provider in different jurisdictions. Overall, the real challenge facing the investment management industry will be to identify the optimal operating model afforded to it by the new possibilities under UCITS IV, while at the same time refocusing on meeting the needs of investors. While the full impact of UCITS IV implementation on the fund administration market remains unclear, this area is already an important focus of attention for investment managers. In parallel, there is a growing trend towards creating more efficient administrative models with institutions streamlining and consolidating operational processes and IT platforms. Other factors driving this

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# Gearing up investment â&#x20AC;&#x201A; management system for UCITS IV: one German viewpoint

Managing Director Alexander Poppe at the headquarters of HSBC INKA in DĂźsseldorf, Germany.

trend include cost pressures, increased competition, increased product complexity and growing regulatory and disclosure requirements. Investment management companies are increasingly seeking to outsource non-core activities (such as back-office services) and sharpen their focus on investment management.

Investment managers face a wide range of administrative options. While some may choose to handle this function completely in-house, others will use a single external service provider or multiple providers. There is also an appetite for partially outsourcing transfer agency activities to experienced transfer agents

that could help asset managers distribute products in new markets and extend their fund distribution channels. An increase in cross-border markets targeted by UCITS managers is likely to accelerate the trend to transfer agency outsourcing given the complexity of crossborder distribution.

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Ongoing consolidation of the fund administration business should lead to greater levels of standardisation and automation in the industry. As UCITS IV approaches there is some evidence that asset managers are considering their administration options. Beside the clients, the winners of the new UCITS IV regulations will be those custodians and fund administrators that have sufficient size and either act on a European scale or are leading specialists for their home market.

industry association – the Bundesverband Investment und Asset Management eV (BVI) – are administered through a Master-KAG, and the proportion of such funds has increased steadily in recent years.

CAPITALISING ON A UNIQUE SYSTEM The asset management value chain in Germany is modular, with most funds contracting a number of services externally. A minority of special funds, mutual funds and free assets use the same provider for asset management and administration services. This modularisation of the value chain is facilitated by German investment law, which allows investment companies (known as Kapitalanlagegesellschaft or KAG) to outsource almost all of their non-core services, provided supervision by the country’s financial supervisory authority – the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) – remains unaffected. Core services, which must not be outsourced, include the supervision of the investment process and the preparation of annual reports. A unique element common to the German market is the Master Investment Company, known as ‘Master-KAG’. This form of investment management company was established to consolidate reporting across various portfolios under different asset managers, standardising the reports that investors receive. This vehicle is increasingly popular. Today, half of all investment funds registered with the German investment fund

It remains to be seen precisely how Master-KAGs will fare under UCITS IV. It has been suggested that these companies, which are unique to the German market, will find themselves exposed to the new regulations, as Master-KAGs have been specifically created to cater for the German market. However, their degree of specialisation suggests that no direct repercussions are to be expected. It is even predicted in some circles that the idea of the MasterKAG will spread across Europe, as this is the ideal format for assets pooled internationally that require consolidated reporting.

April 2010

with subsidiaries abroad a holistic – not just national – form of administration. In this regard those Master-KAGs that have both the technical and human resources to provide an infrastructure for a complete range of administrative services i.e. from Germany and Luxembourg, and in addition form part of an international network, are very well positioned for all developments encompassing UCITS IV. FUTURE OF THE GERMAN DEPOTBANK Similarly divided is the opinion concerning the future of the German-specific Depotbank. Under German law,

“Importantly, scale will help investment servicing companies make the substantial IT investments needed to keep abreast of change ...”

As far as the administration of special funds from national institutional investors are concerned, no direct changes are expected through UCITS IV. Special funds are a typical German product. By contrast, UCITS IV regulates the mutual funds embodied in undertakings for collective investment in transferable securities (UCITS), particularly their related cross-border activities.

Indirectly UCITS IV could drive the trend towards large specialised MasterKAGs even further to encompass a cross-border component for institutional clients: Master-KAGs, which due to their involvement in a European group have the appropriate expertise and reflect a system supporting the various international legal norms, might in future also offer institutional investors

investors must designate a Depotbank to do the settlement, monitor the investment limits, reconcile the net asset value and control the activities of the investment company. Rising costs, tighter margins and greater demand for additional services could see a sizeable chunk of the market volume opening up for competitors when smaller providers are squeezed out of the market. UCITS IV throws up another challenge for Depotbanks: although UCITS IV requires a custodian in each country where a fund operates, custodians operating exclusively in Germany may find

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# Gearing up investment management system for UCITS IV: one German viewpoint

themselves less attractive than those which can offer services throughout the EU. Reporting obligations might require cross-border knowledge, and clients might prefer to centralise services providers rather than to deal with a bunch of different custodians. One solution for local custodians could be to specialise in their home market and to become the leading provider within the national boundaries. These smaller niche players will be able to pro-

providers with a strong position in their national markets. CHOOSING THE RIGHT PARTNER One of the main aims of UCITS IV is to increase the efficiency of Europe’s fund industry by reducing the number of funds, as we have seen, either through fund mergers or master-feeder structures. As fund ranges are rationalised, so UCITS managers are likely to consolidate their service provider relationships.

“Asset managers should undertake holistic cost-benefit analyses, looking not only at how they can optimise their fund ranges but also at how they might rationalise the structures of their management companies.” vide services in a form large companies are not able to do. These aspects include personal service, more flexibility and individual solutions. Another solution might be to form crossborder alliances to provide the international service required under UCITS IV. Despite the increasing internationalisation of the European fund industry under UCITS IV, a deep understanding of the local markets will always be crucial. As the European investment management environment becomes increasingly complex, the need for specialists with a thorough understanding of local affairs will only grow. This will leave room for

Needless to say, UCITS investment managers will prefer those investment servicing providers offering the best quality of service at the lowest cost. They will want intelligence from all of the countries where they have funds to keep them up to date with local regulatory changes. They will also want access to the greatest available economies of scale. Importantly, scale will help investment servicing companies make the substantial IT investments needed to keep abreast of change, including forthcoming amendments to tax legislation in some countries. For large pan-European UCITS managers, selecting the right provider will be essential if they are to realise the full potential cost efficiency. As these groups decide how best to structure their fund ranges and management companies, they will need providers that can offer them as much flexibility as possible. In general, the large fund groups will gravitate toward providers with panEuropean infrastructures. So investment servicing companies will need to be able to provide local services at the individual country level where the

UCITS fund is domiciled, as well as the wider range of servicing solutions, wherever they make most sense to the fund company. Additionally, they may need to be able to provide labour-intensive processes, such as fund accounting, from cost-efficient centres. A BLUEPRINT FOR ACTION By making it easier for the investment management industry to launch and operate fund products across a range of product types and countries, including certain types of alternative investment strategies, the UCITS IV directive will further enrich investor choice. In addition, UCITS IV will enable investment management companies to streamline their operating models, with consequent benefits for profitability. Asset managers should undertake holistic cost-benefit analyses, looking not only at how they can optimise their fund ranges but also at how they might rationalise the structures of their management companies. When making these assessments, they should take into account tax and regulatory implications, where their valuable intellectual talent is based and what the cost of making far-reaching changes is likely to be. Investment managers should also consider the role of their service providers in ensuring that they obtain the full benefit from the opportunities on offer. What type of asset administrators and auditors do they need in practice? What IT infrastructures will prove best suited to tackle the demands of UCITS IV? As noted, pan-European investment managers will be likely to consolidate their service provider relationships, selecting companies that can provide flexible, cost-efficient and forward-thinking services and IT infrastructures across Europe. Given the complexity of the issues surrounding UCITS IV, and the strong

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desire of the Commission to make Europe’s investment management industry more efficient, UCITS IV marks only one step further down the road to consolidation and harmonisation. For now, implementing UCITS IV is the task at hand. In view of the many critical factors, whether fiscal, regulatory or operational, which have to taken into consideration when implementing the directive, and with the clock ticking inexorably towards July 2011, the time to act is sooner rather than later.

Managing Director Alexander Poppe has been with HSBC INKA since 2002, from 2007 as a management member. Mr. Poppe, who holds a Master in Finance and Accounting, is a German Certified Tax Advisor and has previously worked for five years in KPMG’s Financial Services department.

April 2010

INKA Internationale Kapitalanlagegesellschaft mbH Internationale Kapitalanlagegesellschaft mbH – HSBC INKA is one of Germany’s foremost capital investment companies (Master-KAGs), administrating approximately €64bn in assets under management in mutual and special funds (as at 31 January 2010). Based in Düsseldorf, Germany, and specialising in fund administration since its creation in 1968, HSBC INKA aggregates all back and middle office services required in the fund management business. HSBC INKA is wholly owned by HSBC Trinkaus & Burkhardt AG, part of the HSBC Group.

SIMCORP DIMENSION INTERNATIONAL USER COMMUNITY MEETING 2010, 9–10 SEPTEMBER BERLIN SimCorp is pleased to announce its annual summit industry conference: SimCorp Dimension International User Community Meeting 2010. The gathering of clients to share knowledge and best practices is the most efficient way of learning from the experiences, mistakes and successes of others and is a key to any organisation’s success in achieving longterm strategic goals for growth, while on the short term facing changing priorities and new challenges in the market.

SimCorp offers its valued clients an exclusive opportunity to: • participate in workshops focusing on major challenges and best practices in the global investment management industry; • share experiences, discuss subjects of mutual interest and network during breakout streams and a spectacular social event; • discuss recently released functionality and to gain unique insight into SimCorp Dimension development plans.

IUCM is by invitation only

www.simcorp.com MITIGATE RISK

REDUCE COST

ENABLE GROWTH

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# Thought leadership in investment management: SimCorp StrategyLab research programme 2010–11 In direct response to a new agenda in the investment management industry, with increased focus on risk management, cost control and growth opportunities, SimCorp established its independent research institution, SimCorp StrategyLab, in December 2008. Through its extensive research and know-how, the institution’s aim is to provide insight into some of the many challenges facing professional asset managers throughout the world. Going forward SimCorp StrategyLab will continue to seek to suggest ways to meet the challenges and to share best practices.

T Lars Falkenberg, Assistant Director of SimCorp StrategyLab.

o find appropriate solutions and to gather relevant best practices for the top strategic institutional levels of the investment management industry, SimCorp StrategyLab carries out its own research and analysis of trends and challenges in the financial sector. The research programme is carried out in close collaboration with internationally recognised academics and established industry experts. As a result, SimCorp StrategyLab is able to contribute competent suggestions for best practices, which are intended to minimise risk, to find ways to achieve sustainable cost savings and to enable growth. Figure 1 outlines the mission and the vision of SimCorp StrategyLab.

ORGANISATION SimCorp StrategyLab is formally organised under the management of a board of directors. The chairman of SimCorp StrategyLab’s board is the CEO of SimCorp, Peter L. Ravn (Ph.D.). SimCorp StrategyLab is headed by the renowned Ingo Walter, Seymour Milstein Professor at the Stern School of Business, New York University, who is in charge of the research institution’s academic affiliations and oversees the quality of its research work and related activities. Along with SimCorp StrategyLab’s partners, and building bridges between theory and practice, are leading academics, industry experts and executives who contribute to its research programme and other activities.

Ingo Walter, Director of SimCorp StrategyLab, is Vice Dean of Faculty and Seymour Milstein Professor at the Stern School of Business, NYU. Professor Walter has had visiting professorial appointments worldwide and remains a Visiting Professor at INSEAD in Fontainebleau, France. Professor Walter's principal areas of academic activity include international trade policy, international banking, environmental economics and economics of multinational corporate operations.

MISSION

VISION

The mission of SimCorp StrategyLab is to contribute to identifying ways of mitigating risk, reducing cost and enabling growth in the global investment management industry.

The vision of SimCorp StrategyLab is to become a renowned and trusted thought leader in the investment management industry through the contribution of applicable research and knowledge within matters of strategic importance for IT and investment management.

Figure 1. SimCorp StrategyLab: mission and vision

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April 2010

2008-09 activities

As influential outcomes of this research, SimCorp StrategyLab published two outstanding survey reports: ‘Report on Global Investment Management Risk Survey 2009’ and ‘Report on Global Investment Management Cost Survey 2009’. A third report based on a survey about enabling growth will be published in April 2010, entitled ‘Report on Global Investment Management Growth Survey 2010’. Correspondingly and with the top strategic institutional levels of

the investment management industry in mind, the institution also published two books; one on risk – ‘Understanding the financial crisis: investment, risk and governance’ – and one on costs – ‘Operational control in asset management: processes and costs’. A third book in the same series, dealing with the subject of growth, initiated in 2009 and to be published in the early summer of 2010, is entitled ‘Growth and value creation in asset management’. The valuable findings of the surveys and research work have created media headlines and cover stories in leading publications like the Financial Times’s FTfm section. Among SimCorp StrategyLab’s other activities, an executive master class on Due April 2010

SimCorp StrategyLab reports and books 2008– 09 To learn more about and order the publications, go to www.simcorpstrategylab.com.

growth in the investment management industry was performed by SimCorp StrategyLab Director Ingo Walter in connection with SimCorp’s annual industry summit conference: SimCorp Dimension International User Community Meeting 2009. This event also hosted the announcement of MEAG as the winner of the SimCorp StrategyLab Risk Management Excellence Award 2009 at a ceremony in Luxembourg on 17 September 2009, with an audience of 200 senior delegates of the international investment management industry. This award has been established for the purpose of rewarding and promoting best practice within risk management in the global investment management industry.

Professor Ingo Walter, Director of SimCorp StrategyLab (third from left), presents MEAG representatives (from left) Claudio-Peter Prutz, Head of IT and Organisation, Dr. Peter Schenk, Head of Investment Controlling, and Günter Manuel Giehr, Managing Director with the Risk Management Excellence Award 2009.

Due June 2010

In its first year of existence, SimCorp StrategyLab’s research focused, in line with the institution’s mission, on the three fundamental drivers of the institutional asset management industry: risk, cost and growth.

2010-11 activities The second period of SimCorp StrategyLab’s research activities will focus on the four major sectors of the global asset management industry: • • • •

investment funds asset management (notably discretionary asset pools) pension funds insurance funds.

The guiding perception is that these sectors, which all face a set of strategic and tactical challenges, along with wrenching changes in the economic, financial and regulatory environment, can benefit from useful insights achieved from SimCorp StrategyLab’s work on risk, cost and growth issues within each of these individual sectors.

Rather than taking a descriptive approach, efforts will focus on a more prescriptive angle in order to define industry best-practice. The work will be based on primary and secondary research and industry practices. With these efforts in mind, a number of small teams of leading thinkers from the academic world and the financial industry will examine the sector/issue intersections (Figure 2). The examination of the intersections by the teams will result in four white papers, which will seek to convey the current state of knowledge within the four sectors and point the way forward from a management-strategy and public-policy perspective. The white papers debating the key industry issues for the im-

mediate and medium-term future, options and recommendations will be published at regular intervals throughout 2010 and early 2011. Among SimCorp StrategyLab’s other activities for the 2010-11 period and following up on the SimCorp StrategyLab Risk Mangement Award 2009, SimCorp StrategyLab is seeking applicants for the SimCorp Strategy Excellence Awards 2010, which will award outstanding and innovative leaders in the ability to mitigate risk, reduce cost and enable growth. The three winners will be announced at a ceremony on 9 September 2010 at the SimCorp Dimension International User Community Meeting 2010 in Berlin.

RELATED TO

MITIGATING RISK, REDUCING COST AND ENABLING GROWTH

Asset management

(notably discretionary asset pools)

Pension funds

Among the designated sector-leaders from Stern School of Business, NYU, who will team-up with distinguished European academics conducting research in the area as well as industry specialists in charge of examining the four industry sectors, are: Investment funds Professor Martin M. Gruber (Stern School of Business, NYU); Massimo Massa (INSEAD) Asset management (notably discretionary asset pools) Professor Stephen J. Brown (Stern School of Business, NYU); Tarun Ramadorai (Oxford University) Pension funds Professor Ingo Walter (Stern School of Business, NYU); Anthony Neuberger (Warwick University, UK)

BEST PRACTICES

Mutual funds

Four-sector research programme 2010-11

Insurance-related asset pools

Figure 2. Sector/issue intersections to be examined by teams of leading thinkers from the academic world and the financial industry as part of SimCorp StrategyLab activities 2010-11

Insurance funds Executive-in-Residence and Adjunct Professor of Finance John Biggs (Stern School of Business, NYU); Sylvio Borner (University of Basel, Switzerland)

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# Post-crisis financial order sets new IT systems criteria Intent on rebuilding profitability after a turbulent 2008 and tough 2009, investment management firms must consider restructuring their cost base in their choice of IT platform to become more flexible and profitable. Amid tightening regulations, the ‘new normal’ raises the bar in distribution, and investment managers must adapt to a more challenging environment.

he investment management industry is currently under attack on several fronts. Although the threats were already discernible prior to the financial crisis, it intensified the shortcomings and the need to act. Faced with a loss in investor trust, investment managers have had to handle an enormous reduction in assets under management (AUM). Cornel Bender, Managing Partner, Capco, Germany

Instead of trying to do and offer everything, investment managers need to focus on core competencies and to automate workflows. Additionally they have to create transparency to meet regulatory requirements and to regain investors’ trust. What is required is a strict industrialisation of all processes including an improvement in risk management and reporting, supported by an agile IT platform. Establishing the right platform will also help to cope with future regulatory requirements as yet unknown but certain to come. DEALING WITH THE CRISIS The capital markets have been dealing with the financial crisis for well over a year now. The good news is that the impact on investment managers has not been as dramatic as on many investment bankers. The bad news is that it remains a major threat. Nevertheless the crisis can also be seen as an opportunity. It clearly points out the shortcomings in the investment

management industry – already known for almost a decade – and therefore serves as a catalyst to spur pressing action to be taken in specific areas such as focusing on core competencies, improving processes and workflows, reducing costs, and creating more transparency. But how specifically has the crisis impacted investment managers? The first and also biggest is the vast reduction in AUM. This owes to different factors: • I nvestors’ loss of confidence and faith in the markets (private investors as well as institutional). • Various market crashes sparking weak fund performance and resulting withdrawal of investor capital. • Investors’ mistrust in derivatives allocated in funds. The belief that investment managers were able to understand and handle the risks was tarnished. The table in Figure 1 gives an indication of the reduction in AUM for the German market. Although the number of funds (apart from institutional funds) increased between 2007 and 2008 by roughly 640, total AUM decreased by around €205bn. Of course the reduction in available investment capital increased competition among market participants. But also the competition among different products on offer has become more intense. The struggle between tra-

ditional funds, certificates and exchange-traded funds (ETFs), which already began before the crisis, grew more intense during the crisis as investment capital dried up. What has the investment management industry done so far? The main response has been to reduce costs. This has varied from curbing internal services to initiating huge outsourcing projects. In addition to this, some banks have sold off their asset management businesses. But for any one party selling, there is also one who buys. And these are clearly using the crisis to strengthen their market position. SPECIALISATION WILL CONTINUE In the post-crisis environment it will be mission critical to identify core competencies. Based on this strategic decision, specialisation and outsourcing of noncore competencies have to be realised in order to reduce internal costs. Certainly this trend will continue. We see the most crucial specialisation categories as follows: • B outiques focusing on portfolio management. These companies are known to have a high competency in research and portfolio management and an excellent market reputation. Nevertheless they will have issues achieving critical AUM mass and face high processing costs due to lack of scale.

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German retail funds

Luxembourg and other foreign retail funds sold in Germany

All retail funds

German and foreign institutional funds sold in Germany

All funds in total

Year

Number AUM in €m

2006 2007 2008

1,473 1,806 2,059

2,820 3,513 4,137

4,293 5,319 6,196

4,372 4,223 3,993

8,665 9,542 10,189

348,187 350,251 269,679

• S pecialists focusing on sales and distribution. Additional specialisation could either take the form of product offerings (i.e. retail funds, hedge funds, fund administration), investors (agent pools, online banks, institutional investors), or even just one service provider. For these specialists it will be crucial to find a suitable selection of products and back office service providers. • Big players in the market. The industry agrees that the biggest investment management players will have AUM of over $1.5trn in the near future. This will be the result of ongoing mergers and acquisitions as well as organic growth. Big players have the advantage of critical mass in every area in order to achieve economies of scale and cost advantages. However, the downsides are lack of specialisation and often highly complex portfolio management. • Back office insourcers. Of the four categories, these have the most need to build a processing factory. As they are at the lower end of the value chain, they have to be highly client oriented and face low margins. What will be the impact of this specialisation process on IT? First of all it is important to note that an IT platform always has a history. Built often over decades the platform is usually very complex. Replacement is costly and difficult and therefore often avoided. But redefining the business model can also

335,236 380,877 306,148

683,423 731,128 575,827

be seen as a chance for optimising the IT architecture. And it is vital for reducing costs as the business is mainly driven by IT processes. Often enough a selected IT application defines the business processes. But the urgent need to adapt to markets means that investment management requires systems that support future processing needs. The new system’s flexibility and ease of integration will be key to the industrialisation of investment management. INDUSTRIALISATION OF INVESTMENT MANAGEMENT The industrialisation of investment management will go hand in hand with specialisation and it will be vital for back office insourcers to build up a processing factory. According to the ‘Report on Global Investment Management Cost Survey 2009’ published by SimCorp StrategyLab, 41% of industry decisionmakers think that automation of processes is the most important cost-cutting strategy over the coming three-year period. Several high-volume lowmargin industries like the food industry went the same route: a few years ago they industrialised their processes in order to cope with squeezed margins.

669,512 691,618 641,651

1,352,935 1,422,746 1,217,478

April 2010

Figure 1. Funds and AUM in Germany from 2006-2009. Source: Zeitreihe Fondsvermögen/Mittelaufkommen 1950 – April 2009 (http://www.bvi.de/de/ statistikwelt/Investmentstatistik/ download/zrfvma_dt_invbr_1950Apr2009.pdf )

rising profitability and freeing up resources for core investment management work. We see the biggest potential for automation for the big players and back office insourcers. As their main focus is to realise economies of scale, they are dependent on a consistent and integrated backbone implementation. In the back office area securities settlement and processing are already highly standardised. However, a great deal of manual processing is still evident. The processes for less complex over-thecounter (OTC) products have a high straight-through-processing (STP) rate and also external service providers are in place. The highest potential and need for automation are for complex OTC derivatives. The processes here are very

“Through automation of processes, investment management will be able to boost productivity, thereby leading to rising profitability and freeing up resources for core investment management work.”

Through automation of processes, investment management will be able to boost productivity, thereby leading to

often complex and manually driven. Some service providers have set the first standards for matching, settling and handling of documentation. Automation requires an open, flexible and integrated state-of-the-art IT platform. A back office insourcer will com-

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# Post-crisis financial order sets new IT systems criteria municate with several external parties. Therefore interfaces and protocols are unavoidable and the use of standards is self-evident. A high STP rate is vital as manual processes are always cost intensive and error prone and especially their business will be high volume. It would be a clear advantage if the involved parties use the same standard software as the data model would be identical and complex mapping could be avoided. It is also important to note that from a reporting perspective a well-organised data warehouse is essential to meet existing and upcoming requirements. Due to the fact that most IT platforms are rather heterogeneous, it is usually quite challenging to identify and gather the necessary data from the right source with the proper timing. Often the gathering process and respective interfaces include a great deal of business logic to provide the required data (i.e. regula-

business logic can be integrated. Now the different reports can either build a fourth tier or take the data directly as required. RETURN OF THE INVESTOR We know it will be a hard job to win back investor trust. In addition to basic prerequisites, such as excellent decisions in portfolio management and allocation, investment management will have to focus on two areas to regain and prove their credibility: • risk management • reporting Risk management is well established in the investment management industry. Nevertheless it will be vital to improve methodology and to convince clients that the industry is able to handle the risks. A state-of-the-art application is as mandatory as adequate and understandable reporting. In addition the new product process will come to the fore. New products frequently imply new structures, new components and require complete implementation in all relevant areas. Impacted are very often front office, middle office, back office, risk and compliance.

“The strategic choice of a particular IT platform depends on the positioning of the investment management company.” tory reporting, IFRS, Basel II, factsheets, individual client and internal reports). As the basic data is needed for several purposes it makes sense to organise the data warehouse in different tiers. The first one should be a ‘simple’ gathering tier, where the data is captured from the source applications as it is. On a second level it can be clustered (i.e. P&L figures, accounting figures, static data), and on a third level the

It will be vital to process products in a coherent way so that the components and respective figures are distributed properly. In an ideal world it would be possible to enter the components individually as part of a superordinate product. For the processing, each downstream department can decide if it requires the data and figures at component level (i.e. risk management, IFRS reporting) or aggregated for the superordinate product. Again we see how important a flexible and integrated IT

platform is to provide the necessary STP support. Also collateral management and other risk-mitigating measurements (i.e. break clauses, netting) will be important steps to reduce market risk as well as counterparty risk. Reporting will be an important instrument to re-establish investor trust as this is one of the very few ways to be in direct touch with the investor. Hence a glossy marketing flyer is not enough; delivering the facts and demonstrating transparency are essential. Explanations of the product strategy have to be made understandable as well as the risk strategy and the respective figures. With the Internet in everyday use, it is very easy nowadays to compare data and to obtain additional information, so overtly dressing up figures will be quickly seen and penalised by the market. Transparency and ease of fund choice are also important. Simply too many funds have been produced in the past. Due to the crisis and resulting drop in AUM many funds have already been merged or even closed. Nevertheless fund offerings remain excessive and this complicates the selection for investors. CHOOSING THE RIGHT IT PLATFORM We have seen in the past that standard software applications have become more and more powerful. This applies to IT applications, which were part of a best-of-breed solution, as well as all-inone solutions, which embrace several business areas such as order management, portfolio management, matching and settling, risk management, compliance, collateral management, fund accounting, etc. The strategic choice of a particular IT platform depends on the positioning of the investment management company. The business functionalities comprise one major criterion for determining if a best-

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of-breed or all-in-one solution is preferred. From a technical point of view additional criteria are the in-house integration (this is relevant for the STP rate; in general a best-of-breed solution also requires good middleware), as well as communication with third parties (external interfaces). This might tip the scales in favour of a system that is already used by several external parties. Also if a system is very common in the marketplace there is a greater chance of finding trained staff than for a system that is less common.

ture, precisely whom the participants will be and therefore how liquid the markets will be. Politicians are still discussing different scenarios for regulating the markets and its participants. But investment management and asset allocation are certain to be impacted.

The discussion about best-of-breed and all-in-one solutions is hardly new, and each solution has advantages as well as disadvantages. But with respect to what we have stated before, the all-in-one solution has one major advantage in the form of an integrated data warehouse/ pool. This provides a good consistent basis for risk management or reporting and also leads to a reduction in internal interfaces and complex reconciliation processes. It is important that the applications are integrated in the whole IT landscape with a high STP rate and that they are sufficiently flexible to quickly adopt new products. FINANCIAL MARKETS IN THE POST-CRISIS ERA US President Barack Obama’s proposal to limit the size and complexity of banks, as unveiled in January, bars commercial banks from owning or investing in hedge funds and private equity companies, or running a proprietary trading desk. It also foresees a market share limit for banks so that there will be no ‘too big to fail’ any more. Although it remains unclear if the proposal will become law, it already shows the direction things are going. The Financial Stability Board (FSB) is singing the same song and it indicates that the financial markets are in for change. Certainly it remains to be seen how the financial markets will look in the fu-

MAIN AREAS FOR ACTION The past was a golden era for the investment management industry. Already a few years before the crisis this era was beginning to fade. New products like certificates and ETFs forced the industry to take a closer look at costs and specialised providers offered services at lower prices. The crisis has increased these cost pressures and forced the industry to act. We see three main areas where the industry has to act: • specialisation • industrialisation • rebuilding investor confidence It will be vital to identify core competencies and to automate processes and workflows. This requires flexible and integrated IT platforms, not only to cover existing needs but also to be able to accommodate future and as yet unknown requirements. These may come from new products as well as from regulatory authorities, for example, in the form of European harmonisation and standardisation. Winning back investors will be tough and also mission critical. The keyword here is transparency. Investors have to feel confident that the industry is capable of handling the risks. This has to be communicated in a clear and understandable way. In addition, reporting requirements for private investors have to be enhanced. A simple factsheet will not suffice any longer. The investment management industry faces many challenges, but it is our view that they are manageable. Old structures

April 2010

“The investment management industry faces many challenges, but it is our view that they are manageable. Old structures have to be discarded. IT platforms have to be adjusted accordingly and (...) the solution has to be agile.” have to be discarded. IT platforms have to be adjusted accordingly and – we cannot stress it often enough – the solution has to be agile. This is a healthy process. It will help the industry to position itself and build a stress-tested business model. The crisis presents a unique opportunity for investment managers to review what they do, adjust their business models and ensure the viability of their institutions for the future. Cornel Bender is Managing Partner for Capco in Germany. In addition to heading the CEE region of the Package Integration business unit, his responsibilities cover the capital markets industry, including asset management, exchanges/infrastructure and investment banking. One of his major consulting areas is the asset management/investment fund segment with its high demand for strategic business and IT decisions that are reflected in process redesign, blueprints and systems-implementation. Cornel Bender joined Capco from KPMG Consulting/BearingPoint where he was head of Capital Markets EMEA.

Capco Capco is a leading global provider of integrated consulting, technology, and transformation services dedicated solely to the financial services industry. Our professionals combine innovative thinking with our unrivalled first-hand industry knowledge to offer our clients consulting expertise, complex technology and package integration, and managed services to move their organisations forward. Through our collaborative and efficient approach, we help our clients successfully increase revenue, manage risk and regulatory change, reduce costs and enhance control.

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# Asset managers: new requirements in light of the financial crisis While the unprecedented crisis of late 2008 revealed clear flaws in the banking system, the more robust asset management sector was also affected considerably. Assets under management (AUM) did shrink and there were individual cases of malpractice damaging investor confidence. The consequences of the crisis for the sector are likely to be felt at a profound level and for a long time. Changes in regulations, investor preferences and within the industry itself will provide a range of opportunities and challenges that no asset management firm can afford to ignore. Asset managers need to adapt to these changes that will put different demands on IT platform functionalities.

nvestors have great cause for grievance in the wake of the credit crisis, as many suffered sharp losses from banking products that were poorly understood by buyers and sellers. Investors will therefore expect more evidence of enhanced management of risk, in its broadest sense. Institutional investors will increase their due diligence efforts and retail investors will require suitable investments reflecting their risk profile. Particular attention will be paid to counterparty and liquidity risk. Ensuring that assets are segregated on the balance sheet of the counterpart will be critical and asset managers should be aware of the sensitivities. François Génaux Partner, Financial Services Consulting Leader Dariush Yazdani Director PricewaterhouseCoopers, Luxembourg © PricewaterhouseCoopers S.à.r.l – Photographer: Luc Deflorenne

At the same time, investors have suffered from limited liquidity in some of their investments. This will make them think twice about which asset classes and which asset managers to select. The ability to explain how risk is managed and controlled, including liquidity risk and how their assets are held, is now as important to sceptical investors as information about specific risk measures relating to asset classes and portfolio construction.

RETURN TO OPPORTUNISTIC INVESTMENTS While investors may remain suspicious of markets – particularly equity markets – for some time to come, allocations to equity investments are likely to increase as investors seek to rebalance their portfolios after a period of declining values in their equity allocations. Low interest rates are also fuelling this trend, with institutional investors looking for and rewarding high alpha performance. Going forward, asset managers are likely to see investors (especially institutional) making a strong distinction between those delivering alpha performance and dumping those who are not able to generate true alpha for certain products like exchange traded funds (ETFs), for example. The financial crisis has also been a rude awakening for retail investors, who have now turned ultra-conservative with a higher focus on asset preservation than on growth and a move towards simple and understandable products. This has resulted in a high inflow of capital to protected and guaranteed products (Figure 1).

This trend is set to remain for the future, not only due to the fear of another crisis but also the ageing European population, which will push asset consumption rather than asset accumulation to centre stage. PRESSURE TO REDUCE COSTS The financial crisis has led many asset managers to operate in survival mode and to examine ways of reducing costs in the short term to maintain profitability or contain losses. However, the pressure on reducing costs goes beyond the financial crisis. Proposals for stronger regulation, transparency and reporting requirements for the industry will impact the cost base. The mounting pressure on fees being driven by investments in low margin products, such as ETFs on the one hand and entrance of low fee asset managers on the other, will also put additional pressure on margins in the long term. This trend can already be seen in the US where investors tend to put their capital in funds with lower than average expense ratios (Figure 2). Asset managers will have to adapt to these pressures and assess exactly what sustainable cost management means for them.

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TRANSPARENCY AND REPORTING NEEDS In the wake of the crisis, liquidity and performance challenges have led to investors demanding greater transparency and improved reporting. In order to satisf y these needs and retain institutional investors, asset managers will need to offer deeper insight in their investment process, valuation methodology and holdings, as well as deliver a sophisticated and real-time reporting.

tablished the JPMorgan Academy, aimed at educating financial advisers to achieve a better understanding of investment products, free of charge.

On the retail side ‘easy-to-understand’ products and reporting will be key to attracting investor capital. The introduction of more and more hedge fundlike UCITS vehicles (Figure 3) demonstrates the move towards sophisticated vehicles with greater transparency and investor acceptance. DISTRIBUTION CHALLENGES The shift in investor demand (especially retail) is also posing new challenges for distribution of asset management products. Distributors see themselves faced with the challenge of giving good advice rather than focusing on ‘pushing’ products offering high retrocession fees. This demand forces distributors to have a more thorough understanding of the products, which could lead to distributors preferring in-house over thirdparty products where extensive knowhow and training offerings lie within the group. Hence the evolution towards a stronger open architecture model within the asset management industry in Europe seems to have fallen back a multiple of years. Third-party providers, who strive to be successful in such an environment, will need to offer comprehensive sales support to distributors including product trainings, information and help hotlines, timely and easy to understand reporting, marketing and sales documents. JPMorgan, for example, has es-

MOUNTING REGULATION The spectacular failures of global entities and fraud cases over the last couple of years have stirred world leaders to act to reform financial markets and increase regulatory scrutiny. But even before the crisis, regulators were working on increasing investor protection, transparency and reporting.

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buckets of assets rather than products for asset managers. Also under the directive, the asset manager will have to provide a Key Investor Information (KII) fact sheet, which will replace the simplified prospectus. This document targeting retail investors will explain the product and its risks in

“While the AIFM directive is still being heavily debated, the alternative investment fund industry is set to be more strongly regulated one way or the other ...”

While this should have increased investor confidence, so far it has essentially only increased the administrative burden of asset managers and distributors. These changes and burdens could even force them to change their business models. Hence the growing regulatory scrutiny also entails the threat of asset managers moving out of the EU to avoid such burdens on their business.

UCITS IV DIRECTIVE For UCITS funds, the new legislative framework of UCITS IV will impact all European UCITS management companies, allowing them to operate more centrally. Under UCITS IV, CESR recommends an assessment of all risks and their materiality within the overall risk profile of the UCITS. Liquidity and operational risks are explicitly designated to be material. VaR calculation methods will also be reviewed and CESR is set to issue guidance before July 2010. UCITS IV will also allow for cross-border master-feeder structures where one or more feeder funds can pool their assets into a single master fund, which would mean pooling

a non-technical language limited to two A4 pages with frequent updates. This means asset managers will have to adapt their procedures and systems to developing the new document in the future. ALTERNATIVE INVESTMENT FUND MANAGERS DIRECTIVE Under political pressure, regulators will target investment firms directly, predominantly those in the alternatives space. Many mainstream financial institutions may find that connections with ‘light-touch’ financial centres will no longer be commercially viable. The EU has already taken steps to impose regulation on alternative investment funds and managers, and this may be replicated elsewhere. On 29 April 2009, the EU Commission published the draft Alternative Invest-

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# Asset managers: new requirements in light of the financial crisis Figure 1. Breakdown of AUM of new funds launched at the end of each year of launch (UCITS and non-UCITS). Source: Lipper IM.

45%

2006 2007 2008 2009

40% 34%

35% 30% 25%

19%

20%

16%

15%

14%

10% 5%

5% 0%

Bond

Guaranteed/ Protected

Equity

Mixed assets

Money market

*) Absolute return includes hedge funds and fund of hedge funds.

Figure 2. Comparison of net new cash in stock funds to the average expense ratio percentage 1999–2008. Source: ICI Fact book.

Target maturity

Other

Absolute return*

REGULATING THE DERIVATIVES MARKET The value of outstanding over-thecounter (OTC) derivatives equals many times total global GDP (Figure 4), giving rise to concerns that the unravelling of some of these contracts could tip the fragile financial sector over the edge.

Percentage of net flows to funds with below (simple) average expense ratios Percentage of net flows to funds with above (simple) average expense ratios 102

103

–2

700 600

30,060

400

Actively managed funds

33,151

Index funds

45,000 36,322 35,210

646

560

33,664 30,000

450 357

300 200

–1

Number of hedge funds-like UCITS Number of UCITS funds

500

101

–3

All funds

Figure 3. Number of hedge funds-like UCITS compared to the whole UCITS market. Source: Lipper IM and EFAMA.

267 102

15,000

100 0

0 2005

*) Q3, 2009

2006

2007

2008

2009*

ment Fund Managers (AIFM) directive with the declared goal of creating a cohesive framework for high-risk activities in the financial markets. Under AIFM, alternative investment funds will be required to disclose details of the principal markets and investments in which they trade (including, on an aggregated basis, details of their principal exposures and concentrations) and details of their leverage through quarterly reporting to their regulators. While the AIFM directive is still being heavily debated, the alternative investment fund industry is set to be more strongly regulated one way or the other, forcing the players to adapt their processes to the new rules.

Recognising this potential danger, the US proposed a new regulation in May 2009 to force all ‘standardised’ OTC derivatives to be cleared through central clearing houses, in order to reduce the risk of investors being exposed to a single counterparty. These types of derivatives would also have to be traded on regulated exchanges via electronic systems. Firms that use derivatives may find that the sands shift beneath their feet while regulators around the world grapple with this issue. TAXATION ISSUES Taxes in the US, much of Europe and the UK will have to rise to repair their fiscal deficits. Asset managers, in line with the entire financial services sector, will be expected to contribute significantly to these efforts. They can also expect a more rigorous enforcement of

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tax rules, swifter closure of loopholes and a generally more adversarial environment including a stringent review of transfer pricing rules. There will be renewed focus on privacy laws and tax evasion, mainly relating to individuals. Only a few asset managers will be unaffected by this; either because of increased compliance requirements or changes in client preferences as a result of these developments. New US regulations set to be passed in the coming months have the same goal as the European Union Savings Directive in Europe: to identify the ultimate beneficial owners of the fund, their nationality and tax residency. These regulations will demand additional reporting and changes in withholding tax for asset managers who will have to adapt their IT systems accordingly. RETAIL DISTRIBUTION REVIEW PROPOSAL Regulators consider that inducements are one of the main sources of conflicts of interests in the context of portfolio management and merit specific regulation. The UK Retail Distribution Review (RDR) proposal aims to tackle this issue by simply prohibiting the payment of any retrocession or trailer fees by a product provider to advisors/distributors. In this respect the RDR is set to change the distribution and sales of funds and investment products in the UK. In order to operate successfully within such an environment, asset managers will need to collaborate with advisors/distributors by ensuring they receive the required relevant information (rather than a vast amount of unsystematic information) and reporting at the right time. Those asset managers who are able to invest in key areas such as compliance, risk management and reporting infrastructure to cope with changes in inves-

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US$trn 600 500

400

April 2010

Figure 4. Outstanding notional amounts of derivatives. Source: BIS.

Interest rate contrasts Foreign exchange contracts Credit default swaps Equity-linked contracts Commodity contracts Unallocated

300

200 Total global GDP = $55trn

100 0

1998

tor preferences and new regulation will derive a direct benefit. Financial intermediaries and other third-party distributors, especially banks, will have to restore trust and demonstrate their value added. Significantly, higher levels of professional and technical qualifications, as well as an adapted IT infrastructure, would be necessary to operate successfully in such an environment.

cluding specialised packaged systems, in-house developments, data warehouses and Excel sheets.

DEMANDS ON IT PLATFORMS While the above-described trends have highlighted clear requirements for the evolution of T systems and infrastructures, we would like to elaborate on some specific aspects affecting asset managers. Evidence of enhanced management of risk and its transparent communication to investors will be key determinants in the future. The ability of asset managers to satisfy these market requirements will decide over success or failure.

• S ystems should enable the asset manager to have quick access to all investor data with the appropriate level of detail in order to be in a position to have a timely communication with the right recipient. This will require transfer agents and distributors to closely observe and report on the

A precondition for an effective management and transparent reporting of risks is the access to and the consolidation of risk-relevant data. In today’s fund markets this data is collected by a number of legally independent entities, each of them providing a special contribution to the fund product. Data is collected and stored in a number of technically more or less sophisticated IT tools in-

1998

The effective management of risks requires an efficient upstream transfer of data from distribution entities, transfer agents and fund administrators to the asset managers. The main criteria are as follows:

“The effective management of risks requires an efficient upstream transfer of data from distribution entities, transfer agents and fund administrators to the asset managers.”

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# Asset managers: new requirements in light of the financial crisis investment behaviour. Through the provision of dashboards consolidating qualitative and quantitative investment data, transfer agents can support asset managers in the anticipation of investor demands and claims in case of crisis. • Centralisation of all data within one single platform to efficiently analyse any data relevant to the asset manager. • Ability to compute/analyse/report the level of risk taken by the asset manager and to disseminate this information in a consistent and precise manner in different reporting factsheets and marketing materials. The implementation of UCITS IV will require informing investors about the ‘essential elements’ of the product. These elements will have to be consolidated in the ‘KII’, enabling the investor

gree of precision allowing sound management decisions in crisis situations. This should include accurate data such as geographic areas of investment, industry sectors, issuers, underlying assets, location of deposits, valuation principles, etc. • Improved middle office system, enabling the clear identification and necessary analysis of counterparty risks. Neither the integration of systems nor the development of effective reporting tools are new concepts: the quest is as old as the IT-supported fund production itself. But it has never been thought through in an industry environment, which was characterised by sufficient liquidity, growth and focus on sophistication of products and services. We expect that increased focus on risk, liquidity squeezes, transparency and reactivity will lead to significantly higher cost pressures where these old concepts will become more fashionable than ever before.

“We expect that increased focus on risk, liquidity squeezes, transparency and reactivity will lead to significantly higher cost pressures ...” to easily make comparisons between different offerings. The creation of a ‘KII’, which will become a standard marketing tool, will have to address investor desire for increased risk transparency and frequent updates. • A complete and accurate securities master file, enabling detailed analysis and creating results with a high de-

The interconnectivity, mean ing that the systems communicate with each other, straight-through-processing (STP), or the seamless, electronic transfer of information to all parties involved utilising standardised information flows, technologies, and infrastructures, accuracy and flexibility of the various systems and tools: all these should be the key features of the IT infrastructure made available to asset managers in order to allow them to cope with upcoming challenges. However, this is not an easy fix. It will require some time, starting from a blank sheet of paper and rethinking the ideal interactions and functionalities of the different systems to achieve an efficient and flexible infrastructure.

François Génaux is partner at PricewaterhouseCoopers (PwC) in Luxembourg, leading the Financial Services Consulting Practice. He holds a masters degree in Finance and Economy from Louis Pasteur University of Strasbourg, France, and an MBA from Warwick University in the UK. Dariush Yazdani leads the Financial Services Research Unit at PwC Luxembourg with more than 14 years of experience in the financial services industry. He has led and contributed to various research and thought leadership studies for external clients and in support of other PwC Units. He holds an MBA from the University of Chicago GSB.

PricewaterhouseCoopers PricewaterhouseCoopers Luxembourg employs more than 2,000 professionals from 53 different countries. PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. ‘PricewaterhouseCoopers’ refers to the group of independent firms that are members of PricewaterhouseCoopers International network, each of which is a separate and independent legal entity.

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# Operational platform: a strategic asset that supports business goals

Operational platforms in the asset management industry are treated very differently, but one fact is known by all asset managers: operational platforms are extremely costly. Many asset managers wrongly think that making two to three main statements that express general guidelines for their platforms is performing strategic management of their IT installation. In this article it is argued that this kind of management does not constitute strategic management of an operational platform. This management approach might be sufficient for simple and small asset managers, but for more complex businesses a more analytical approach is appropriate.

T Jacob Elsborg, MBA, M.Sc., Head of Technology, ATP Investment Area

he key goal of this article is to demonstrate why formulating and implementing an operational platform strategy is a valuable and necessary tool for an asset manager’s strategic management, and to illustrate which elements strategic management can consist of. The length of this article leaves no room for long discussions or analytical models or for explaining strategic drivers, so it only discusses a high-level approach to strategic management. This article’s main postulate is that an appropriate and well-defined strategic approach to an operational platform is economically beneficial and turns IT expenses from costs into a strategic investment. The definition of an operational platform (Elsborg, 2008) applied in this article is: An operational platform in the asset management industry is where the management of an organisation’s data and information takes place, together with the execution of decisions. THE OPERATIONAL PLATFORM AS A STRATEGIC MANAGEMENT TOOL The choice and design of an operational platform is not an isolated technical de-

cision. The platform is a strategic management tool that either supports the development of the business or creates obstacles. The operational platform can be seen as a way to gain competitive advantage through cost-efficient design, reliability, flexibility and scalability. The main goal for strategic management of the operational platform is to create alignment between the operational development of the platform and development of the business. This article outlines a simple, straightforward approach to strategic management of an operational platform. Firstly, a basic definition of the operational platform is required. This definition forms the basis of the strategy. Thereafter, the direction and drivers of the operational strategy are defined, which leads to the actual definition of an operational platform strategy. A gap analysis must then be conducted to define the need for development of the operational platform. The approach, however, can be more or less sophisticated, e.g. the basic model can be developed further according to the results of the analysis; the analytical approach is extendable; and the strategies and drivers of the platform are equally extendable. It is all a question of how complex a business the operational platform must support.

A general problem in the industry is that many asset managers do not distinguish between IT strategy and operational platform strategy. Far too often, making no differentiation between these strategies causes the operational set-up and the development of this setup to be based upon technical considerations stated in the IT strategy (if one such exists). By contrast, the operational platform strategy – as defined in this article – is formulated by the business unit using the platform, which ensures that the management of an operational platform becomes an integrated part of the business. The underlying technology processes such as network, communication and hardware are managed within the framework of the IT strategy, which of course must be aligned with the operational strategy. The author of this article acknowledges that the management of an IT strategy is of equal strategic importance (and often more complex). MODEL FRAMEWORK OF OPERATIONAL PLATFORM To implement a strategic approach to managing an operational platform, a functional model must be defined and in place. This model is the main outset for conducting analyses and for setting up a strategy for the operational platform.

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# Operational platform: a strategic asset that supports business goals

Decision making Pre-trade analytics Order execution

Defining the activities of an asset manager within the concept of a value chain (Sondhi, 1999) is an equally simple prerequisite. The value chain consists of three primary activities, which are the investment processes: 1. decision making 2. transaction processing 3. information delivery Using this definition of the activities of an asset manager with respect to an operational platform, a model in its simplest form can be defined as where the management of an organisation’s data and information takes place, together with the execution of decisions (Figure 1). To define a strategic approach to managing an operational platform, the primary activities in the value chain have to be defined separately. The next part of this article is dedicated to the analysis of the primary activities of an operating platform. Figure 2 gives a brief presentation of a functional model framework (Heyes, 2007; Elsborg, 2008) for the defined activities of an operational platform.

“A general problem in the industry is that many asset managers do not distinguish between IT strategy and operational platform strategy.”

Operational platform Data management Process management Information management System management Information delivery

Transaction processing

Compliance Performance analysis

Transaction processing Asset servicing Accounting

Figure 1. Operational platform In the framework in Figure 2, a differentiation based upon the characteristics of the instruments is suggested. The asset classes are: 1. Cash Cash instruments are equities, fixed income and FX cash instruments. 2. Exchange-traded derivatives (ETD) ETD instruments are listed futures and options on all underlying instruments. 3. OTC (named ‘Vanilla’ OTC) OTC products are instruments with standardised procedures. 4. Illiquid and private assets Illiquid and private assets are complex OTC derivatives and private or physical assets. The assets in each group have the same characteristics with regard to their defined main functions, and they are thus useful when analysing the operational platform. It is not the intent of this article to discuss in detail the characteristics of each asset class or how to use the various instruments in terms of portfolio management; however, one must be aware of the differentiation when defining a strategic model for the operational platform.

THE BASICS OF AN OPERATIONAL PLATFORM STRATEGY As stated above, the strategy of an operational platform has its origins in the overall business strategy. Figure 3 illustrates the alignment of the operational strategy. It is outside the scope of this article to define a business or investment strategy, which means it is impossible to define a specific operational platform strategy. However, it is possible to define basic operational drivers without having the precise strategic scope of the business, the investment or the operational platform strategy. The definition of a business strategy derives from the usual steps: analysis followed by definition of vision/mission, objectives, strategy and tactics (VMOST; Sondhi, 1999), which again leads to the definition of an investment strategy (it has been seen that the strategy and tactics definitions of the business strategy are the definition of the investment strategy). It is upon this basis that the strategy of the operational platform is defined. The implementation of the operational platform strategy thus becomes an integrated part of the implementation of the business strategy.

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The strategic direction of the platform has to be defined by developing an operational platform strategy. A useful framework for defining the strategic direction of the operational platform is Michael Porter’s competitive strategies (Porter, 1985) (Figure 4). The alignment between the strategic direction of an operational platform and

the business strategy is crucial because this direction has a direct impact on all levels of an operational platform strategy.

• flexibility • scalability • technology

Several drivers are reflected within an operational platform strategy depending on the business strategy on which it is based. Three main drivers that should be considered when developing an operational platform strategy are:

These drivers are highly dependent on the strategic direction defined for an operational platform.

Cash (Equity, fixed income and FX cash instruments) Decision making

Pre-trade analytics

Order and execution management

ETD (listed futures and options on all underlyings)

Transaction processing

Real-time position visibility

Quote maintenance and pricing

Market data

Trade cost data

Pre-trade compliance

Research management

What-if analysis

Order generation

Order management: splitting and amalgamation1

Execution: voice and electronic

Fees and commissions

Asset servicing

Allocation

Trade data confirmation: manual and electronic

Stock loan trade processing

Trade verification

Break investigation and resolution

Trade reporting to custodians

Break and fail management

Reconciliation of stock and cash

Custodian reporting

Cash management

Pre-settlement matching Auto-FX management Clearing and settlement

Information delivery

Stock loan coverage for short sales

Execution management: amalgamating and splitting

Trade capture position update Trade enrichment

Settlement and custody

Illiquid and private assets (complex OTC derivatives and private or physical assets)

Pre-trade decision support analysis

Order routing and pools of liquidity

Corporate events notification and processing

Margining Coupon processing

Dividend notification and processing

Derivative events processing proxy voting management

Performance and risk measurement

Independent price and sourcing management

Portfolio accounting and valuation

Reconciliation

Performance reporting and attribution

Information presentation

Information grouping

Portfolio risk monitoring and management

Performance reporting and attribution

As identified within the competitive scope above, costs can be considered as

Vanilla OTC (OTC instruments with standardised procedures)

Algorithmic trading

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Benchmarking Portfolio risk measurement

Figure 2. Functional model framework for an operational platform

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# Operational platform: a strategic asset that supports business goals

a separate driver or simply as a function of the drivers defined above. Having defined a functional model and strategic direction/drivers for a platform, a strategy for an operational platform can then easily be defined. Afterwards, a strategic fit between the existing operational platform and the strategy should be determined in order to decide on the future development of the operational platform. THE ANALYSIS As stated in the section above, the main purpose of the analysis is to determine the fit between the business demands defined in the business strategy and the existing operational platform. The outcome of the analysis decides the direction for development of the operational platform, instead of a day-to-day-driven method. This approach demands that the strategy of the operational platform is aligned with the business strategy. The analysis of the operational strategy is based on the objectives and strategic direction of an operational platform, which is again based on the overall business strategy. The critical success factors (CSFs) and the main drivers of the platform can be determined from this process, along with the key performance indicators (KPIs; Henley Management College, 2002). Figure 5 illustrates the flow of the analysis.

Having derived the KPIs from the operational strategy, an analysis of the fit with the existing setup can be performed. It is obvious that this analysis is meaningful when the business strategy is changed, and as a consequence the operational strategy is aligned. It can be expected that changes will result in gaps between future demands and existing set-up and thus changes to an operational platform. The analytical framework A basic analysis can be performed on the basis of the KPIs derived as mentioned above. The analysis comprises two steps based on two questions: • W hat information is required at what level (Kanter, 1987)? • Is the operational platform capable of performing the task (Wild, 2002)? Basic analytical framework: information analysis The main purpose of the information analysis is to define what information is required at what level (Kanter, 1987). This process must be performed for each of the main functions defined in the functional model (Figure 2). Also, the second target is to conduct a gap analysis to define the informational need (Henley Management College, 2002). The analysis is based on the KPIs defined in the strategy analysis outlined

Figure 3. Strategic alignment Figure 4. Michael Porter’s competitive strategy (Porter, 1985)

above. The structure of the analysis is described in Figure 6. The KPIs derive from the strategic analysis mentioned above, and they are used to decide the information requirements. These requirements are expressed as critical information sets (CISs) based on the KPIs. (A model for analysis is Anthony’s Triangle [Kanter, 1987].) The information gap is defined as what is lacking between the CISs, which are the information sets that the users of the operational platform require and the available information sets that are provided by the operational platform (Henley Management College, 2002). It is then a question of defining the added value of information to fill in the gaps. Basic analytical framework: process analysis The basic process analysis of an operational platform has the same basis as the information analysis. The analysis defined below is a simple process analysis, and it would only determine the basic operational parameters. Bringing the analysis to a higher level will depend on an actual operational platform, which thus determines the selection of analysis. The main approach is to perform an analysis of the gap between the KPIs and the existing processes. Figure 7 illustrates the flow of this analysis.

Advantage

Operational platform strategy

Investment strategy

Business strategy

Competitive scope

Low cost

Differentiation

Broad

Broad low cost

Broad differentiation

Narrow

Focused low cost

Focused differentiation

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Operational platform strategy – objectives and direction

Critical success factors

Main drivers

Key performance indicators (KPIs)

Information requirement/ critical information sets (CIS) Derived from Anthony’s Triangle

Key performance indicators

Process analysis

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Figure 5. Operational platform strategy analysis Figure 6. Basic information analysis Figure 7. Process gap analysis

Process gap

Available information sets

Information gap and the added value of extra information

The process analysis depends on the actual setup of an operational platform and its functions. A process analysis has two obvious layers (Wild, 2002): 1. process mapping 2. capacity analysis The process mapping defines each process on an operational platform in order to secure that all processes framed within the business strategy are handled in an acceptable manner, and in order to analyse how capacity against fluctuation in demand is handled. The capacity analysis and management is about handling the flow of information, orders, transactions and analysis. Wild (2002) defines the process thus: “The determination of capacity requires not only the estimation of steady-state or average demand levels but also decisions on how best to deal with demand level fluctuations.” The scope of the capacity analysis is to define where the capacity has bottlenecks and how they are managed. CONCLUSION Defining and implementing a strategic approach is not an easy task, which is why many asset managers choose the approach of using a technical IT strategy or some general statements as guidelines instead. Taking a strategic approach to managing the company’s operational platform is fairly time-consuming, not only with regard to defining the first strategy, but also with regard to aligning the business strategy and operational strategy with the gap analysis and maintaining the functional model of an operational platform. The value of defining and strategically managing the company’s operational

platform, however, exceeds the cost, with the following main benefits: • m anagement buys into the development of the operational platform through working with alignment between the operational strategy and the business strategy; • development of the operational platform is not driven by a day-to-day approach, but by defined long-term business goals; • the platform development processes become more precise and timely due to the integration on a strategic level with the business strategy, which leads to a decrease in cost; • a more stable platform results from the long-term perspective development and it is thus less of a ‘puttingout-the-fire’ platform; • a better understanding develops between the users and developers of the operational platform due to the strategic alignment; • on a strategic level, IT and operational management are separated, leaving the purely technical strategy and decisions to the technical staff and the operational strategy and decisions to the business unit. Depending on the size of the business, a strategic approach to management of the operational platform is beneficial in terms of development, stability and cost.

Jacob Elsborg is Head of Technology for ATP’s investment department, a position he has held since 2000. He holds a master’s degree in economics and mathematics from the Copenhagen Business School and an MBA from the Henley Management College in the UK. Jacob Elsborg previously worked as an IT economist for Danmarks Nationalbank, the central bank of Denmark, from 1995 until 2000. REFERENCES Elsborg, J. (2008), ‘The Operational Platform – A Way to Gain Competitive Advantage’, dissertation, Henley Management College. Henley Management College (2001), ‘Managing Performance’ (brochure). Henley Management College (2002), ‘Managing Information’ (brochure). Heyes, Richard (2007), ‘Example operating principle’, UBS Prime Brokerage Services. Kanter, J. and J. Miserendino (Nov 1987), ‘Systems architectures link business goals and IS strategies’, Data Management Magazine. Porter, Michael E. (1985), ‘Competitive Advantage: Creating and Sustaining Superior Performance’, Free Press. Slack, N.D.C. (2002), ‘Operations Strategy’, London: Financial Times/ Prentice Hall. Sondhi, Rakesh (1999), ‘Total Strategy’, Airworthy Publications International Limited. Wild, Ray (2002), ‘Operations Management’, Continuum.

ATP ATP is a statutory pension fund covering 4.6m members – virtually the entire adult population in Denmark. Together with the tax-financed basic pension, ATP provides basic income security in old age for the Danish population. ATP was established as an independent entity in 1964 and has since grown to become the largest pension fund in Denmark. ATP pensions are life-long, with profit annuities. Members accrue pension rights based on a collective insurance-based definedcontribution model. Pension rights are guaranteed promises. ATP Group assets amounted to approximately DKK417bn at yearend 2009. ATP invests in a wide variety of assets. Generally, investment categories are equities, interest, credit, inflation and commodities. The ATP Group invests both in domestic and foreign assets. In its investment practice, ATP demonstrates a long-standing commitment to codes on corporate governance as well as corporate social responsibility. ATP strives to increase awareness in both financial investors and companies of the financial and economic risk and opportunities associated with climate change.

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# Countdown to Solvency II:

a checklist of IT challenges facing investment managers

While the European Commission’s Solvency II directive, which is scheduled to go into effect in October 2012, is primarily aimed at European insurers, the investment management industry will feel its impact too. Key to successful Solvency II implementation will be quality data and IT processing systems.

S Michael Metcalfe is a German-based financial journalist who has worked in the Luxembourg financial sector for more than 15 years

olvency regulation for insurance companies in the EU is in the process of being fundamentally reformed. The European Commission’s Solvency II directive will introduce a new solvency regime, based on an integrated risk approach, with provision for these risks in the form of solvency capital. Solvency II is an evolution from Solvency I, adopted in 2003. Implementation of Solvency II is currently planned for October 2012 (Figure 1). The objectives behind Solvency II are consumer protection for policy-holders and assessing overall solvency of insurance companies using measures of solvency which, it is argued, better reflect the risks an insurer is exposed to. It is foreseen as leading to greater harmoni-

“Preparing for Solvency II may seem a daunting prospect. An effective and integrated solution will encompass all aspects of business and demands a systematic, structured and practical approach.” Frank Sommerfeld, Managing Director of German operations, EMB

sation across financial sectors and harmonisation of supervisory methods across Europe. It is based on a similar approach encapsulated in Basel II, which was introduced for the banking and securities industry in the EU from the beginning of 2008 through the Capital Requirements Directive. In the view of analysts and senior industry executives, Solvency II signals a fundamental shift towards a comprehensive enterprise risk management (ERM) culture. It requires risk management to be integrated into day-today business decisions, supported by quality data processing systems and enhanced IT infrastructures. “Preparing for Solvency II may seem a daunting prospect. An effective and integrated solution will encompass all aspects of business and demands a systematic, structured and practical approach. Successful delivery of a Solvency II programme needs the right partner,” says Frank Sommerfeld, Managing Director of the German operations of non-life actuarial software provider EMB. CHALLENGES AND OPPORTUNITIES Solvency II represents both challenges and opportunities alike for the European investment management industry, not least in terms of reviewing IT infrastructures to ensure they are capable of dealing with the host of additional reporting and regulatory requirements arising from Solvency II. “In this con-

text, the implementation of Solvency II should not be seen purely as a compliance exercise, but as a tremendous opportunity to improve business performance. The greatest competitive advantage will be achieved by those companies that position themselves early to take advantage of the coming regulatory changes,” says David Hush, Technology Infrastructure, PricewaterhouseCoopers. The onus will be on investment managers to map out a policy on data quality that meets their information needs. Many companies have some form of data quality policy and associated monitoring procedures in place. However, the formal mapping of sources, ownership and other key aspects of data governance may be lacking. Among the supplies of and users of information there is also varying understanding of what is meant by data quality, the tools in place to measure it and what should be done when deficiencies are detected. “Those investment management companies willing to take advantage of the challenges posed by Solvency II should focus on aligning their IT architecture, treating data as a strategic asset of potentially high quality, enabling advanced IT risk management tools, and promoting frictionless communication,” recommends Nicolas Michellod, senior analyst at research and advisory firm Celent.

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The Solvency II project was initiated by the European Commission in 2000 to implement a fundamental change to the current capital adequacy regime for European insurers. It is intended that Solvency II will produce a more harmonised, risk-orientated solvency regime across insurers and across the European region whilst also resulting in capital requirements that more reflect the risks being run by insurers.

ning immediately if they are to meet the October 2012 implementation date.

After intense negotiations, the European Parliament and Council finally reached agreement, with the Solvency II Framework Directive officially adopted in April 2009. There is now no reason to expect any delay in the targeted implementation date of October 2012. The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) is currently in the process of publishing three waves of advice on various topics, including calculation of technical provisions, calibration of the standard formula for the Solvency Capital Requirement (SCR), and further details on the requirements for internal model approval. SETTING OUT A ROADMAP Solvency II aims to establish a framework of capital adequacy, valuation techniques and risk management standards for European insurers and reinsurers. The proposed risk-based approach will transform the way insurance companies do business and revolutionise the industry by replacing multiple existing directives with one single global standard. In initiating Solvency II projects, insurers may want to develop detailed plans for each work stream and recognise that their investment will deliver not only regulatory compliance but also the benefits of a common framework for risk, capital, value and corporate governance. The directive was approved in April 2009, so companies must begin plan-

“Companies need to understand the scope of changes that will accompany Solvency II so that they can look beyond capital adequacy and focus on governance and broader business implications,” stresses Martin Bradley, who is responsible for Solvency II-related issues at advisory group Ernst & Young. For him, companies need to address the following critical points:

April 2010

Companies need to establish a risk management function, an actuarial function, a compliance function and an internal audit function. They must also demonstrate that they have an adequate and transparent organisational structure with clear allocation and segrega-

“Companies need to understand the scope of changes that will accompany Solvency II so that they can look beyond capital adequacy and focus on governance and broader business implications.”

• p reparation – develop a clear understanding of the necessary workflows and resources needed to develop Solvency II and align it with strategic vision; Martin Bradley, responsible for Solvency II-related issues, Ernst & Young • governance – establish responsibility for the delivery and executive sponsorship of tion of responsibilities, an effective sysSolvency II; tem for ensuring the transmission of • impact studies – understand the reinformation, and documented roles and quirements to put in place the sysresponsibilities. tems and processes to report the Solvency Capital Requirement (SCR) In addition to the annual reports stipuannually and the Minimum Capital lated by the regulations, there is also a Requirement (MCR) quarterly, and need to consider management informause projections to assess compliance tion requirements across the company prospectively in real time; as part of the risk management frame• internal models – decide whether to work. Typically, risk information is use an internal model to assess reguspread widely across the organisation latory capital requirements and noand is not always held electronically. tify the regulator of internal model Data integrity is crucial, and yet, not intentions; only integrating but also identifying the • business case – determine granular required data in the first place can be a plans, resource requirements, timechallenging and complicated process. line and budget. LIKELY CONSTRAINTS OF “Solvency II places as much stress on SOLVENCY II the evolution of a company’s risk manInvestment managers will have to offer agement and governance framework as alternatives to equities if they are to it does on the quantitative calculation of guarantee the best possible return for the capital,” argues Mr. Michellod. their investors under the likely con-

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straints of Solvency II, the author of a recent survey of French institutional investors claims. Richard Bruyere, president of asset management consultancy Image & Finance, warned French investors would not increase equity allocations despite strong 2009 performance because of the possible ramifications of Solvency II. This could lead investment managers to search for other means of return, away from equities, he argued. “It is up to investment managers to regain the trust of clients and to be able to provide and propose innovative solutions,” notes Mr. Bruyere. He lists liquid alternatives, absolute return products and more flexible investment products as possible sources of new opportunities. Reflecting many companies' doubts over how Solvency II will be implemented, Germany’s Allianz chief executive Michael Diekmann, while welcoming the framework in principle, has warned the proposals being considered

ternal models to manage risks and capital. The Solvency II rules for insurers are similar to the Basel II rules for banks in that companies that can demonstrate sophisticated risk management are treated differently to those that rely on a standard formula. CREATING THE RIGHT FOUNDATIONS The key foundations of improved decision-making and more efficient use of capital are reliable valuation systems, clear processes and sound controls. With Solvency II’s valuation bases moving in the same direction as the latest fiscal developments in IFRS Phase II for insurance contracts, companies are facing a fundamental and potentially costly overhaul of their reporting systems, which will inevitably compete for resources with other equally pressing demands. If approached holistically, however, the parallels between Solvency II and IFRS Phase II should enable companies to realise valuable synergies in data, modelling and information systems. This would improve the consistency of both internal and external reporting, while avoiding needless costs and disruptions. While synergies exist, companies need to anticipate and explain the new numbers, along with any differences between the IFRS and Solvency II assumptions and results, to possibly unfamiliar or even sceptical analysts and investors.

“Solvency II will also cast the spotlight on riskier and capitalintensive products. This may require significant modifications in prices and make-up of the product portfolio, as well as modifications to existing IT platforms.” risk burdening insurers with an exaggerated level of capital. Many of the leading players in the insurance sector hope to avoid the extra capital requirements by using more sophisticated in-

Solvency II will also cast the spotlight on riskier and capital-intensive products. This may require significant modifications in prices and make-up of the

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product portfolio, as well as modifications to existing IT platforms. However, it may also provide opportunities for portfolio optimisation, keener pricing and enhanced product profitability among companies with superior IT systems and well-embedded ERM capabilities. Addressing these issues will require a shift in the culture and mindset of the investment management business with important implications for strategic planning, management skills, incentives and organisational behaviour. Running what could be a much more elaborate infrastructure of risk, governance and capital management will lead to heightened competition for qualified personnel, leading to further pressure on the availability of already scarce talent as the deadline for implementation draws nearer. According to Mark Batten, Partner, PricewaterhouseCoopers, the timeline to achieve full compliance by 2012 is tight. “Companies would be wise to press ahead with initiatives designed to ensure robust plans are in place to meet the deadline as the new rules bring significant change. A well-planned approach could provide optimal capital, organisational and structural solutions,” he added. If the framework directive is adopted as planned, he anticipates that time is running out for identifying and implementing the measures companies need to have in place by October 2012.

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April 2010

Solvency II – Three-pillar approach

Solvency II – Key features

Solvency II – Timetable

The development of Solvency II is based on a three-pillar approach similar to the worldwide Basel II approach applicable to the banking and securities industry:

Solvency II is aimed at improving risk management across the insurance industry within the EU based on an integrated or enterprise risk management (ERM) approach. Solvency II is about principles, rather than being rules based. Insurers will need to be able to explicitly identify risk interdependencies, which will create incentives for insurers to develop their own internal risk models.

The development of Solvency II is following a Lamfalussy-type consultative process, similar to the CRD and MiFID, namely:

Pillar 1 Quantitative requirements (Solvency) – fi nancial data – internal models – expected losses Pillar 2 Qualitative requirements (Supervisory review) – r isk management function – assess and maintain capital Pillar 3 Market discipline (Disclosure and transparency)

Solvency calculations will be based on market-consistent valuation of assets and liabilities. Risk-based portfolio analysis is achieved by applying an integrated approach, taking into account dependencies between risk categories: – M inimum Capital Requirement (MCR), which is the level below which capital resources must not fall without posing an unacceptable risk to policy-holders; – Solvency Capital Requirement (SCR), sufficient capital to absorb significant unforeseen losses and assure policy-holders that payments will be made as they become due. SCR can be established by using: – standard formula – internal model – partial approach, i.e. a mix of internal model or standard formula according to the risk categories chosen by a firm.

Figure 1. Solvency II at a glance: three-pillar approach, key features and timetable

– L evel 1 – Directive = framework, agreed by Council, European Commission and European Parliament; – Level 2 – implementation, agreed by CEIOPS; – Level 3 – detailed implementation by national regulators. The key milestones and dates are: – 2 008 – Quantitative Impact Study 4 (QIS4) undertaken and evaluated; – November 2008 – Draft Solvency II Directive published; – 2009 – Implementation arrangements made by national regulators and insurers; – June-November 2010 – Model dry-run for those accepted for the ‘internal models’ approach; – 2011 – Formal submissions for those accepted for ‘internal models’ approach; – October 2012 – Full implementation of Solvency II. Although final implementation is currently planned for 2012, companies that wish to be accepted for the models-based approach must undertake a dry-run of their model in the second half of 2010, so time is running out. Planning for Solvency II should now be underway.

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Regulatory update This quarterly regulatory update covers major new regulatory requirements and substantial developments that affect the investment management industry.

II IMPLEMENTATION § SOLVENCY MEASURES

During the members meeting held on 26 and 27 January, CEIOPS, the Committee of European Insurance and Occupational Pensions Supervisors, adopted the third and final advices on Solvency II Level 2 implementing measures. The advices are based on 6,856 comments on the individual papers from 126 stakeholders from national and European associations and insurance undertakings (for example insurance companies, mutuals, law firms and investment banks). To view the advices go to: www.ceiops.eu/ content/view/706/330/.

§ WORKPLACE PENSION REFORM – UK

The final batch of regulations to deliver the ground breaking workplace pension reforms were unveiled 12 January 2010, reflecting the fact that the UK Government has worked closely with stakeholders and employers to maintain the consensus and ensure the regulations are responsive to their needs and concerns. Learn more about the reform at www.dwp.gov.uk/ policy/pensions-reform/.

COMPENSATION AND § ENHANCE CORPORATE GOVERNANCE DISCLOSURE – US

The SEC has adopted rules to enhance the compensation and corporate governance disclosures of public companies, including investment companies, in proxy statements and registration statements. The new rules include two categories of amendments specifically relating to investment company disclosures: (1) enhanced director and nominee disclosures; and (2) new disclosures concerning board leadership structure and the board's role in risk oversight. The new rules amend disclosures in fund proxy statements and information statements where action is to be taken with respect to the election of directors. Funds are also required to include expanded disclosures in their SAI. SEC Final Rule, Release Nos. 33-9089, 34-61175 and IC-29092 (available 16 December 2009). Compliance Date: Generally, 28 February 2010. The compliance date varies for new and existing funds – see http://sec.gov/ rules/.

HOUSE OF REPRESENTATIVES § US PASSES FINANCIAL SERVICES REFORM LEGISLATION

On 11 December 2009, the US House of Representatives approved H.R. 4173, the ‘Wall Street Reform and Consumer Protection Act of 2009.’ The legislation is designed to enhance federal regulation of the US financial system in response to the recent financial crisis. The legislation would create the Financial Services Oversight Council (Oversight Council), chaired by the Secretary of the Treasury, to advise Congress on financial, domestic and international regulatory developments, and to identify, monitor and address potential threats to the stability of the US financial system. The Wall Street Reform and Consumer Protection Act of 2009, H.R. 4173, 111th Cong. (2009); Beagan Wilcox Volz, ICI to Congress: Beware of Reform Bill's 'Adverse Consequences,' Ignites, 16 December 2009; ICI Memorandum No. 24036 (21 December 2009) (available at www.ici.org).

ADOPTS AMENDMENTS TO § SEC INVESTMENT ADVISER CUSTODY RULE – US

The SEC has adopted amendments to the investment adviser custody rule, Rule 206(4)-2 under the Investment Advisers Act, to provide additional safeguards when a registered adviser has custody of client assets and to encourage the use of independent custodians. ‘Custody of Funds or Securities of Clients by Investment Advisers’, SEC Release No. IA-2968 (30 December 2009) is available on the SEC’s website at http://sec.gov/rules/final/ia-2968.pdf.

§ UPDATE TO GIPS STANDARDS 2010

Based on the principles of fair representation and full disclosure, the Global Investment Performance Standards (GIPS®) provide an ethical framework for the calculation and presentation of investment performance for investment management firms. Firms that comply with the Standards provide investors with consistent and transparent presentations of the firm’s performance. The 2010 edition improves the consistency and precision of the Standards and introduces the concept of fair value and specific provisions related to risk. The revised version reflects the joint cooperation of 32 country sponsors of GIPS across Europe, the Middle East, North America, Africa and the Asia-Pacific region. Learn more at www.cfapubs.org/doi/abs/10.2469/ccb. v2010.n5.1.

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April 2010

BOOK REVIEW:

# Crisis: Cause, Containment and Cure Thomas F. Huertas, Palgrave Macmillan, 2010

‘C

risis: Cause, Containment and Cure’ explains how the global financial crisis of 2007-09 came about, how it is being contained and what steps should be taken to prevent such a crisis from happening again. Written by the Director of the Banking Sector at the Financial Services Authority of the UK, it gives a first-hand view of policymaking combined with rigorous economic analysis presented in an easily readable style. It is analytical – not anecdotal – based on up-to-date economic theory and recent policy pronouncements, including both macroeconomic

and financial sector aspects. There are numerous books on the crisis but few that have the breadth, analytical rigor and first-hand experience of policymaking offered here by Dr. Huertas. Enhanced with diagrams to illustrate key concepts, this book will be a valuable resource for banks, central banks, public policy-makers, banking regulators, law firms, securities associations, finance ministries, students of banking, finance and monetary economics and indeed anyone who seeks a balanced, comprehensive, global authoritative view of the crisis.

THOMAS F. HUERTAS is Director, Banking Sector for the Financial Services Authority, UK. Previously, he worked for Citigroup for nearly 30 years in various roles, including senior policy and business positions. He has written extensively on the current crisis, credit derivatives, insurance and retail banking.

BOOK REVIEW:

# Financial Instability: Toolkit for Interpreting Boom and Bust Cycles Vincenzo D’Apice and Giovanni Ferri, Palgrave Macmillan, 2010

hy have financial crises been increasingly frequent and severe in the last 30 years? How can financial crises be prevented? What role do governments and international institutions play in their prevention? How does the latest crisis fit in the long-term political economy cycle of finance? This book answers these questions, using three complementary parts: Part I provides the reader with the ‘toolkit’ necessary for understanding financial crises – explaining the essential elements of economic theory. In Part II the authors put these key theories in context, using them to illustrate the chief international crises since the

Great Depression of the 1930s and events that, since the 1980s, have triggered a high level of instability. Whenever appropriate, similarities and differences between these historic crises and the recent crisis are highlighted. Part III focuses on the global financial crisis of 2007-09, triggered by the turmoil in the subprime mortgage market of the USA. By offering a comprehensive explanation of the long-term dynamics of financial systems and by depicting the prototype of a financial crisis, the book enables an in-depth understanding of any specific crisis and gives models for identifying the crisis’s true origins and amplification channels. The book concludes with a discussion of ways to secure a stable, sustainable future for globalised finance.

VINCENZO D’APICE is Economist in the Research Department of the Italian Banking Association. His research interests include international finance, banking and regulation. He is currently undertaking economic research at the Instituto Einaudi, Italy. GIOVANNI FERRI is Chair of the Department of Economics, University of Bari, Italy. He previously worked for the World Bank and the Banca d ’Italia. He has published extensively on money and credit economics.

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Recent research and white papers

FUTURE OF INVESTMENT: THE NEXT MOVE?

Two of the four worst bear markets of the last 100 years ravaged the global asset management industry over a span of seven years in this decade. Indiscriminately, like a tsunami, the latest has wiped out some $15trn in asset values, causing havoc in every asset class, every market, every geography and every client segment: 15 years of capital gains were wiped out in 15 months. With the worst of this collateral damage now seemingly over, it is time for a stock-take and some scenario work. This study explores how the market dynamics of the fund business will change and how its business models will reshape.

Interviews with more than 40 investment professionals revealed widespread dissatisfaction with the current state of financial reporting. Many participants, especially life insurance analysts using IFRS, would like the IASB to move to a revised reporting framework as quickly as possible. While recognising the difficulties of developing solutions for such a diverse and complex industry, many would encourage standard setters to put pragmatism before theoretical precision.

‘Future of Investment: the next move?’, CREATE-Research 2009 www.create-research.co.uk/pubRes/prTxt.html#futureofinv CREATE-Research, 43 pages, June 2009

OPPORTUNITIES IN ADVERSITY: ASSET MANAGEMENT SURVEY SNAPSHOT The asset management industry is facing unprecedented challenges in the wake of the deep and prolonged global financial crisis and the accompanying credit crunch. Investment losses, widespread redemptions and damage to the industry’s reputation have combined with the looming threat of significant regulatory changes to pressure almost all industry participants. Asset management firms are now challenged to reassess their risk management strategies and to manage costs in new and innovative ways.

‘Making sense of the numbers: Analysts’ perspectives on current and future reporting in the insurance industry’, PwC 2009 www.pwc.com/gx/en/insurance/IFRS/publications/analyst-reporting-perspectives.jhtml PricewaterhouseCoopers, 16 pages, November 2009

‘Opportunities in adversity: Asset management survey snapshot’, Ernst & Young 2009 www.ey.com/Publication/vwLUAssets/Opportunities_in_adversity:_Asset_management_survey_ snapshot/$FILE/OIA_Asset%20mgmt%20survey%20snapshot.pdf Ernst & Young, 8 pages, July 2009

TRANSVERSING THE ROCKY ROAD OUT OF THE GLOBAL FINANCIAL RECESSION: STOP WAITING FOR THE TIP!

Traversing the rocky road to a sustainable economic recovery will require collaboration between governments, regulators, technology vendors, and most importantly, financial services institutions (FSIs) on a few bold steps. This TowerGroup Research Note analyses the strategic business framework and proposes steps that each of these stakeholders must take in helping the global financial services industry recover from its long and obscure night of crisis and recession. ‘Transversing the Rocky Road Out of the Global Financial Recession: Stop Waiting for the Tip!’, TowerGroup 2009 www.towergroup.com TowerGroup, 10 pages, October 2009

RENEWING THE PROMISE: TIME TO MEND RELATIONSHIPS IN INVESTMENT MANAGEMENT

‘Renewing the promise: Time to mend relationships in investment management’ was produced by KPMG with research and support from Datamonitor. This report draws on the findings of a global survey of 288 respondents representing the investment management industry and investors as well as in-depth interviews with senior executives working across the industry. ‘Renewing the promise: Time to mend relationships in investment management’, KPMG 2009 www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Renewing-the-promise.aspx KPMG, 40 pages, June 2009

MAKING SENSE OF THE NUMBERS: ANALYSTS’ PERSPECTIVES ON CURRENT AND FUTURE REPORTING IN THE INSURANCE INDUSTRY

THE FUTURE OF OTC DERIVATIVES: FIGHTING THROUGH FIVE KEY CHALLENGES

Firms that want to play in OTC derivatives will have to fund projects to implement the automation and process controls demanded by regulators and investors. In this report, TowerGroup encourages OTC derivatives technology teams to focus on front-to-back automation so as to reduce risk, improve operational efficiency and generate better valuations. To thrive in tomorrow’s new paradigm, institutions must address electronic trading of OTC derivatives, cross-asset-class trading and the real-time needs of counterparties and regulators. ‘The Future of OTC Derivatives: Fighting Through Five Key Challenges’ www.towergroup.com TowerGroup, 9 pages, June 2009

IFRS FUND SURVEY 2010

In the current economy, the importance of financial reporting has been thrown into the spotlight. There has been a profound impact on the asset management industry and, in particular, hedge funds received considerable criticism. This survey explores the current application of International Financial Reporting Standards (IFRS) by investment funds across Europe. ‘IFRS fund survey 2010’ www.ey.com/GL/en/Industries/Asset-Management/IFRS-fund-survey-2010-introduction Ernst & Young, 52 pages, January 2010

DELOITTE REVIEW – MONEY AND BORDERS: CROSS-BORDER INVESTMENTS IN A CHANGING GLOBAL MARKETPLACE

As conditions improve after the recession, it’s widely expected that government’s role in economies around the world will diminish. Firms that received government aid will buy back shares and pay off loans, stimulus spending will wind down, and protectionist impulses will recede. But is that the future? ‘Money and Borders: Cross-Border Investments In A Changing Global Marketplace’, Deloitte Review www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Deloitte%20Review/ US_deloittereview_Money_and_Borders_Jan10.pdf Deloitte, 15 pages, January 2010

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

FRONTIERS IN FINANCE – A NEW PICTURE

As the financial services industry moves into recovery, it is still facing many challenges and opportunities resulting from the economic crisis. Clarity on what the true picture will be is important to understanding how the industry will move forward. With a renewed focus on efficient capital allocation, risk management, transforming business models and cost optimisation, the industry is working towards reaching a ‘new normal’.

‘Frontiers in Finance – a new picture’, KPMG www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Frontiers-in-Finance/Pages/FiF-anew-picture.aspx KPMG, 48 pages, December 2009

TOP 10 CHALLENGES FOR INVESTMENT BANKS 2010 The global asset management business has had a wild ride in 2008 and 2009 with mutual fund assets and hedge fund assets declining precipitously. Although asset levels have rebounded smartly from their lows of March 2009 and the profit forecasts for 2010 look encouraging, investment firms will not forget the experience of the last two years. If 2009 was analogous to the dark ages for investment management firms, then 2010 will be the renaissance. This TowerGroup Research Note discusses the 10 most important business drivers and the strategic responses, and technology priorities spurred by them that asset managers will focus on in 2010. ‘2010 Top Ten Business Drivers, Strategic Responses and IT initiatives in Investment Management’, Tower Group www.towergroup.com Tower Group, 10 pages, December 2009

2010 TRENDS TO WATCH: FINANCIAL MARKETS TECHNOLOGY – OPPORTUNITIES IN THE RECOVERY

One year on from the financial crisis, the phoenix of the financial markets sector has emerged from the flames. With the sector renewed in capital strength and risk discipline, 2010 looks set to see a focus on opportunities rather than fire-fighting and survival. However, the crisis has not only changed the institutions themselves; it has also changed the landscape in which they operate and 2010 is set to be a period of uncharted territory for the industry. This brief maps out the likely evolution of the sector, following the key forces that will shape the market and drive business strategy. ‘2010 Trends to Watch: Financial Markets Technology – Opportunities in the Recovery’, Datamonitor www.datamonitor.com Datamonitor, 18 pages, December 2009

TOP 10 TRENDS IN CAPITAL MARKETS FOR 2010

A new report from Aite Group, LLC provides insight into 2010's top 10 key industry trends for asset managers, retail brokerage firms, exchanges, regulators and technologists in the capital markets. Aite Group sees the year ahead as one in which on-hold advances can finally move forward, while regulatory changes begin to reshape the financial services industry. The report is based largely on Aite Group's assessment of the past year's industry achievements and failures, as well as feedback from vendors and financial institutions ‘Top 10 Trends in Capital Markets for 2010’, Aite Group report www.aitegroup.com/reports/201001191.php Aite Group, 23 pages, 19 January 2010

April 2010

RETHINKING BUSINESS OPERATING MODELS IN INSURANCE: THE RIGHT COMBINATION

Over the past two years, many financial services institutions have been working towards one goal – survival. Like many others, insurers have come under great pressure the financial crisis. Compared to their banking counterparts, most insurers have come through in good shape. But ‘business as usual’ is unlikely in the foreseeable future. ‘Rethinking business operating models in insurance: The right combination’, Deloitte www.deloitte.com/view/en_GX/global/industries/financial-services/ ec90a3ef7be16210VgnVCM100000ba42f00aRCRD.htm Deloitte, January 2010

EUROPEAN INSURANCE OUTLOOK 2010

Insurers have fared better than the banks during the recent financial crisis but have still seen premiums drop by 6% for 2008 with no improvement in 2009. The authors of this article have identified seven post-crisis risks and opportunities for insurers in 2010. Among the risks and opportunities there are challenges like Rebuilding capital, developing a holistic approach to risk management, preparing for Solvency II implementation and handling an increasing complexity in a changing regulatory environment. ‘European insurance outlook 2010’, Ernst & Young www.ey.com/GL/en/Industries/Insurance Ernst & Young, 8 pages, January 2010

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SimCorp is a leading provider of highly specialised software and financial know-how for the financial sector. Established in 1971, with approximately 1,100 employees, SimCorp is listed on the NASDAQ OMX Copenhagen A/S stock exchange. The SimCorp investment management system, SimCorp Dimension, is developed, sold, implemented and supported by the head office in Copenhagen and the subsidiaries and branches in Amsterdam, Brussels, Frankfurt, Hong Kong, Kiev, London, Los Angeles, Munich, New York, Oslo, Paris, Singapore, Stockholm, Sydney, Toronto, Vienna and Zurich. www.simcorp.com