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

# JOURNAL of Applied IT and Investment Management

Volume 2 路 No. 2 路August 2010

Merele A. May Senior Vice President American Century Investments

ENABLING GROWTH THROUGH BEST-PRACTICE IT The SWIFT case for ISO 20022

RAISING THE BAR WITH ADAPTATION OF NEW MESSAGING STANDARDS Karel Lannoo Chief Executive Officer Centre for European Policy Studies

THE FUND MANAGEMENT INDUSTRY AND THE FINANCIAL CRISIS Alex Buffet, Head of Market Data and Asset Servicing, SGSS Christian Wutz, Managing Director SGSS Deutschland

CHOOSING THE OPTIMAL IT PLATFORM FOR BEST-OF-BREED ASSET SERVICING MITIGATE RISK

REDUCE COST

ENABLE GROWTH

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

CEO COMMENT:

Taking growth a step further

by CEO Peter L. Ravn We at SimCorp view risk, cost and growth as the key strategic drivers of the financial industry. It is our mission to help corporate clients identify ways to mitigate risk, reduce cost and enable growth in the global investment manage­ment industry.

Sharing this mission is SimCorp Stra­tegy­Lab. As an independent research in­sti­tution, it recently published its 'Report on Global Investment Man­age­­ment Growth Survey 2010. Among the interesting con­clusions was that after a long period with focus on mitigating risk and managing cost, growth now seems to be the first strategic priority among investment management companies. Based on its findings, the survey concludes that companies with higher annual revenues, a clear strategic focus on growth and a significant proportion of MBAs/finance degrees among staff – all factors in evidence at SimCorp incidentally – likely will continue to enjoy the above-average growth rates they have experienced in the past.

What it also shows is that companies that focus on growth tend to achieve it, whereas a primary focus on cost – to cite just one example – does not necessarily produce the same results. Perhaps equally important, larger investment management companies seem to have more confidence in their IT infrastructure than their smaller counterparts.

Given the wave of regulatory initiatives currently underway, the survey indicates that the above trends can be expected to accelerate. The larger a company is, the better educated workforce, the better IT infrastructure, the better positioned for new regulatory requirements, the better it will be capable of offering competitive products at competitive prices and achieving profitable growth due to economies of scope and scale.

Along with the survey, SimCorp StrategyLab has published its latest volume on the global asset management industry. In ‘Growth and value creation in asset management’, professionals and experts from the investment management industry and research share their views and insights.

They address such key issues as what it takes to implement successful growth strategies, how value can be created in a durable and sustainable way and what the future implications of operational challenges and IT architecture are. SimCorp StrategyLab has already published two essential volumes: one on risk and one on cost.

With this third and final volume on growth, SimCorp StrategyLab has taken a step further in its mission to identify the key parameters driving the industry today.

Growth and value creation will also be on the agenda at the SimCorp Dimension International User Community Meeting (IUCM) on 8-10 September in Berlin.

Among the conference programme highlights are sharing ideas about excellence offered by industry leaders and participating in workshops about industry sector challenges and best practices. I certainly look forward to seeing many of our clients there.

Peter L. Ravn, Ph.D., is CEO at SimCorp.

SimCorp

CONTENTS # E NABLING GROWTH THROUGH BEST-PRACTICE IT: A NORTH AMERICAN EXAMPLE IN A GLOBAL CONTEXT

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# GLOBAL SURVEY: SIZE MATTERS – LARGE INVESTMENT MANAGERS OUTPERFORM THEIR SMALLER COUNTERPARTS

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# RAISING THE BAR WITH ADOPTION OF NEW MESSAGING STANDARDS: THE SWIFT CASE FOR ISO 20022

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# THE FUND MANAGEMENT INDUSTRY AND THE FINANCIAL CRISIS: REGULATORY CHALLENGES AND OPPORTUNITIES

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# CHOOSING THE OPTIMAL IT PLATFORM FOR BEST-OF-BREED ASSET SERVICING: A EUROPEAN CASE STUDY

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# IFRS 9: THE CHANGES AND IT CHALLENGES IN STORE

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# NEW SIMCORP STRATEGYLAB VOLUME ON GROWTH AND VALUE CREATION IN ASSET MANAGEMENT

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# BOOK REVIEWS

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# REGULATORY UPDATE

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# RECENT RESEARCH AND WHITE PAPERS

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SUBSCRIPTION Subscription to the journal is free of charge for members of the industry, associated institutions and academics. To subscribe, please visit www.simcorp.com/journal.

Change of address should be e-mailed to journal@simcorp.com.

EDITOR-IN-CHIEF Lars Bjørn Falkenberg, Senior Vice President, SimCorp A/S 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: 13,500.

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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# Enabling growth through best-practice IT: a North American

example in a global context

In today's dynamic post-crisis financial environment, as fast-paced change spawns both fresh opportunities and challenges, investment management companies need innovative approaches for transforming growth strategies into reality. Taking a different approach can unleash the power of creatively leveraging new technologies.

W Merele A. May, Senior Vice President of Investment Operations, American Century Investments, Kansas City, USA.

ith its corporate head­ quarters located at 4500 Main Street, Kansas City, Missouri, American Century Investments prides itself in being more ‘Main Street’ than ‘Wall Street’. As a premier investment manager with an expanding range of financial products and services for institutions, investment professionals and individuals, it has been a fixture of the US investment management scene since 1958 when it was founded by James E. Stowers, Jr. with $107,000 in capital and only 24 investors. From these modest beginnings, American Century Investments has grown to become one of the top asset management firms in the USA, managing approximately $90 billion in assets for individual and institutional investors and employing more than 1,300 persons.

range of investment disciplines for clients, including:

Since American Century Investments was founded, the company has grown to become an experienced investment manager offering its clients a broad array of investment products across a variety of investment disciplines. One central belief, shared by every person at American Century Investments, guides the work ethic: the company succeeds when its investors succeed.

Investment Performance oversees the creation and management of investment strategies for the company by striving to produce outstanding investment results and innovative products for clients and investors. The investment management activities are divided as follows: American Century Research Center; Asset Allocation, Fixed Income, Global Trading; International Equity; Investment Business Management; Port­­ folio Advisory Group; Quantitative Equity; US Growth Equity and US Value Equity. Combined in the Marketing Performance group are all corporate, product and channel marketing and

The company’s management teams are guided by well-defined, repeatable invest­ment processes and are dedicated to fully invested, active management approaches. Offered is a comprehensive

• • • • • •

US Growth Equity; US Value Equity; Fixed Income; Quantitative Equity; Global and Non-US Equity; Asset Allocation.

In terms of corporate organisation, American Century Investments is organised around five performance groups – Client, Investment, Marketing, Opera­ ting and People. This structure ensures alignment, accountability and allocation of resources based on company priorities.

The Client Performance group unifies and integrates all of the company sales operations. Its areas include: Institutional Sales; Intermediary Sales; and Global and Non-US Distribution.

related functions to create a clientdriven marketing organisation. The teams here include: Brand and Advertising; Corporate Communications; Direct Sales & Service; Marketing Communication; Corporate Strategy; Product Management; Client Marketing; Creative Services; Public Relations and Acquisitions.

The Operating Performance group consists of departments that provide stra­ tegic services to the company and its clients. Operating Performance group areas are: Client Operations; Finance; Information Technology; Investment Operations; Internal Audit; Facilities and Legal & Compliance.

The People Performance group combines functions that help leverage people resources in support of business strategy and values-based culture. This area includes: Compensation & Benefits; Talent Management; Staffing and Com­ munity Investments.

GROWTH BEYOND THE US But American Century has not confined its growth to the US market alone.

As part of its objective to become a global provider of investment management products and services, the company has expanded its non-US presence to include offices in Hong Kong and London. This complements its US activities, which in addition to its Kansas City corporate headquarters also include offices in Moun­ tain View, California and New York.

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# Enabling growth through best-practice IT: a North American

example in a global context From its Asia Pacific sales office, opened in Hong Kong in May 2009, American Century is extending its investment management capabilities to financial inter­ mediaries and institutional investors across Asia Pacific, including Australia and New Zealand. The primary objective is to continue to deliver superior investment performance with a focus on risk management and quality security selection.

The development into the Asia Pacific region followed on from the successful opening of a London office in 2008. Increasingly, non-US investors are recognising the applicability of American Century’s investment approach to their portfolios, which has created a tremendous opportunity for expansion. The Hong Kong opening complements the company’s commitment to execute a high-quality proactive strategy to serve its expanding client base of non-US investors more effectively and to grow its international distribution.

“Increasingly, non-US investors are recognising the applicability of American Century’s investment approach to their portfolios, which has created a tremendous opportunity for expansion.”

The London office is initially focusing on delivering the company’s equity growth strategies across global growth and US growth equity sectors. Whereas all asset management responsibilities continue to be managed in the USA, the

London sales team targets financial intermediaries and institutional investors across the United Kingdom, Europe and the Middle East.

Also in 2009, American Century received regulatory approval in Luxembourg and the United Kingdom to sell open-ended mutual funds throughout Western Europe. In addition, it signed a strategic agreement with Zurich Finan­ cial Services Group to bring American Century’s mutual funds to Australia.

The strategic reasoning behind all these moves is that greater exposure to international markets will help the company to diversify and avoid unnecessary volatility in assets under management.

CALIBRATING TO THE HIGHEST STANDARDS But the type of growth that American Century is pursuing also brings challenges in addition to creating opportunities. Internationally, it is really focused on the institutional investor. In the belief that the institutional investor is the most demanding, American Century is trying to calibrate the company to the highest standards in everything it does.

While the firm already has attracted billions of dollars from non-US clients, it realises the institutional sales cycle is normally slow and that achieving success requires patience and a long-term perspective.

While American Century offers a range of investment strategies, non-US clients are most interested in the firm’s unique philosophy of growth investing, which is founded on the belief that accelera­ ting growth in earnings and revenues is more highly correlated to stock price performance than the absolute level of growth. This philosophy often directs the company to research different companies than other growth managers, as American Century does not require an absolute threshold of earnings or reve-

nue growth. This enables its investment managers to take advantage of both the normal price appreciation that results from a company’s earning growth, plus the market’s re-rating of a company’s price-to-earnings multiple.

In this context of calibration and correlation, the Investment Operations business unit of American Century plays a pivotal role in this area. With a staff of just 45 persons, which is small by relative standards, the unit’s principal activities entail mutual fund accounting for the company’s range of retail funds, which include overseeing the mutual fund accounting that has been outsourced to JP Morgan; assuming tax-related responsibilities for the mutual fund side of the business; mutual fund reporting and the actual accounting for institutional products. In the last instance, American Century deploys the integrated investment management system embodied in SimCorp Dimension.

The business unit also has clearly delineated data management responsibilities.

These include: setting up the security attributes for all portfolios and instrument types used by the company’s portfolio managers; ensuring that trades settle; reconciling with front-office systems to make sure positions and cash are tied out and aligned; and investment reporting (i.e. portfolio characte­ ristics, performance, holdings).

As part of its role in helping to fulfil the company’s growth objectives, the primary goal of the Investment Operations business unit is to act as an authoritative source of data, ensuring that data is accurate, preventing errors in front-toback office operations and providing full support to the investment management teams. This entails providing them with cash information and accurate and timely data as and when it is needed.

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“In this context of calibration and correlation, the Investment Operations business unit of American Century plays a pivotal role in this area.”

'Profits with a Purpose': Through American Century Investments' ownership structure, more than 40% of company profits support research to help find cures for gene-based diseases such as cancer. The company also supports LIVESTRONG, the foundation established by Lance Armstrong (Armstrong's cycling gear is exhibited in the company's lobby).

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# Enabling growth through best-practice IT: a North American

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There is a major responsibility involved in providing sales channels with the right data they need to service and main­ tain existing American Century clients or to go out and acquire new clients.

This has become all the more apparent in the present financial environment where a harsher business climate has generated reductions in staffing levels and other cost efficiencies.

“In the spotlight were scalability and best of breed in the market to maintain data accuracy, to scale, to add new products in a timely fashion in such a way that mitigated the operational risk associated with supporting the business.”

GEARING UP FOR GROWTH With a growth strategy in place that demanded that international expansion play an integral part in meeting the company’s business objectives, the time had come to evaluate the environment

for enabling and supporting that growth.

The main criteria were as follows: • s upport international expansion (i.e. via Hong Kong and London); • remove the risk of bottlenecks in the introduction of new institutional products and services; • expedite time-to-market for the addition of new financial instruments; • a im to become more self-reliant and not always be overly dependent on IT for changes that needed to be made to the system; • maintain data accuracy to mitigate operational risk of using inaccurate data in the back office.

Opening new offices in London and Hong Kong with a view to moving more into the institutional space meant that the client portfolios under management would be faced with other reporting requirements, such as being denominated in currencies other than the US dollar.

Additionally, the ability was required to scale the business without increasing the headcount or overloading the existing infrastructure. The company’s accounting system was built for precision and accuracy, and from an accounting perspective, American Century was comfortable that it could deliver the right data to its users.

But then the question was how best could it incorporate the new reporting requirements within the existing accounting infrastructure? How could Investment Operations ramp up to support the expansion of the company’s institutional and international business activities? With the old system, the

time-to-market to add new products or instruments was not as quick as it could be. Because of the language of the current proprietary system, code changes would have to be made and tested to accom­modate new holdings, new pro­ ducts, new instruments, etc. The old infrastructure was based on a sturdy mainframe COBOL system and it had served its purpose well over the years.

American Century then started taking a look at all its internal systems. It enjoyed a reputation of being known in the industry for building its own high-quality in-house systems. As the markets changed and with the arrival of new leadership within the company, it was decided to broaden horizons and start examining potential partners in different areas that would make sense for the business. In the spotlight were scalability and best of breed in the market to maintain data accuracy, to scale, to add new products in a timely fashion in such a way that mitigated the operational risk associated with supporting the business.

CHOOSING A FULLY INTEGRATED AND FLEXIBLE IT PLATFORM American Century went live with SimCorp Dimension in May 2010, deploying modules covering back-office accounting, performance, and certain aspects of reconciliation. Taking part in the selection process at American Century was the Senior Vice President of Investment Operations, Vice President of Investment Operations and Assistant Treasurer, SVP and Chief Technology Officer, the respective Vice Presidents of Application Development and Institu-

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

“In order to reconcile cash and positions every day without adding staff, an efficient system is required ...” tional Client Strategy, as well as IT and business project managers.

Among the functionalities that initially stood out was a greater ease of use by accountants who report that it is now much easier to investigate and find the information they need. There is no longer any need for SQL queries to obtain the data required.

The business unit found itself in a position where only certain individuals knew how to run the correct SQL queries to obtain the data required from the old system. But with staffing reductions, this became a challenge, with the burden of responsibility resting with just one to two persons.

With a fully integrated and flexible system in place, following the initial training it is now much easier for the entire operations and institutional team to obtain the data required without encumbering one or two persons to run SQL queries on their behalf. It is now much easier for the average user to work independently and be more productive. In addition, team members no longer need to be physically in the office to price and portfolios can be calculated daily on an automated basis.

Another important factor is that before moving to a new system, American Century was a lot more reliant on IT to make changes that were required in relation to the old system.

While IT is still needed to undertake certain responsibilities like transport data, there is a great deal more that can be done now without having to join the queue.

ENABLING GROWTH THROUGH BEST PRACTICE Of immediate advantage in terms of enabling growth is the value added that use of a fully integrated and scalable system brings to help make American Century’s institutional and international expansion succeed. Its sales force will be the ultimate beneficiary. Of paramount importance is the need to be able to account for whatever new business they bring in and report it accurately.

As the business is ramped up and new clients brought in, the lead-time to launch new products will be reduced considerably. The sales force can now assure new clients that they have the necessary backup and support to take them on with a business system in place

that provides a 360-degree view of what is going on in investment operations.

The sales team can also reassure clients that they benefit from a personalised service with customised reporting that is attuned to and aligned with their requirements. The idea is to be more flexible and agile in responding to client requests. With a new system based on a highly configurable and fully integrated modular solution as an important contributing factor in its IT infrastructure, American Century is in more of a position to tailor its services to a client’s needs.

One example of value-added customised reporting is the use of multi-currencies.

With the old system, the Investment Operations business unit was not in a position to account for currencies denominated other than in the US dollar.

Operating in a multi-currency accounting mode was a bene­fit that use of a configurable and scalable system immediately brought to the table. Whereas previously there were challen­ges in providing clients with the type of currency reporting they wanted, with use of the new system this is now possible.

Enabling growth is not only an external function. All companies have their ‘internal customers and stakeholders’ to consider as well. In the case of American Century’s Investment Operations business unit, it was now in a position to tell its ‘internal customers’ that it did not simply go out and initiate the new sys-

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# Enabling growth through best-practice IT: a North American example in a global context tems project for use in operations alone.

This was more about the sales force expressing a desire for the business unit to improve its client reporting capabilities, as well as its ability to expedite support for new products and new services.

The unit also internally referenced the project as an accounting and reporting project. Along with Investment Operations, the Institutional Sales group is a co-owner of the project.

“Having a system where the quality of data is never subject to question and which can be easily navigated, researched and relied upon instils confidence, creates peace of mind ...”

COST EFFICIENCIES AND SYNERGIES Reducing costs and creating synergies were also important considerations in the choice of a modular solution. When the old system was examined to ascertain precisely which processes and applications were slow or deficient, it was discovered that in the area of derivatives, whether it was swaps or another instrument, American Century was not as automated as it wished to be. So when investment managers now bring in a new

product, a flexible and scalable system allows American Century to account for it without having to interrupt proceedings and get IT involved in writing and testing new codes. This means that the company is now in a much better position for quick turnarounds to support new products as and when they are introduced. Also, IT resources can be utilised by other parts of the business in support of the firm’s growth.

In order to reconcile cash and positions every day without adding staff, an efficient system is required so that accountants have time to reconcile cash, holdings and the like in order to avoid putting trading managers in the uncomfortable position where they are trading on bad positions, bad cash, etc.

The use and application of up-to-date and accurate data go a long way towards mitigating operational risk. Having a system where the quality of data is never subject to question and which can be easily navigated, researched and relied upon instils confidence, creates peace of mind and helps the entire investment process to be more efficient.

When the Investment Operations business unit ran a five-year forecast on the likely return of investment engendered in the use of the new system, the numbers turned out to make sense. Concluded was a break-even point after five years; but perhaps more importantly the numbers indicated that its use would put American Century in a position to grow.

The number of system end-users at American Century currently runs to 25, split among accounting, data management, custody, institutional sales and information technology. American Century sees a potential in expanding the use of such solutions within the company to embrace the London and Hong Kong offices.

Merele A. May is Senior Vice President of Investment Operations at American Century Investments. He leads a department that has responsibility for mutual fund accounting, institutional accounting, investment reporting, financial reporting, data management and custody operations. He is a member of the company’s senior leadership team and has served as Controller responsible for all aspects of accounting related to 1940 Act mutual funds. Prior to joining American Century in 1987, he was an Audit Senior with Arthur Young & Co., working exten­sively with mutual fund, banking, and government clients. He earned his Bachelor of Science degree in accounting from the University of Missouri, Kansas City.

American Century Investments American Century Investments is a leading privately controlled and independent asset management firm, committed to delivering superior investment performance and building long-term client relationships. Serving investment professionals, institutions, corporations and individual investors, American Century Investments offers a variety of actively managed investment disciplines through an array of products including mutual funds, institutional separate accounts, commingled trusts and sub-advisory accounts. Founded in 1958 and based in Kansas City, Missouri, the company manages approximately $90 billion in assets with a workforce of 1,300.

Imagine we could start again Many decisions in life, once taken, are unfortunately irreversible. In the aftermath of the crisis, many investment management firms agree that were it not for past operational decisions, more firms could be better strategically positioned for whatever the future may hold.

However, evident to most, adapting to the near future requires a significantly improved ability to mitigate risk, reduce cost and capture a profitable part of future growth. Some decisions can actually be corrected. In many cases they ought to be. Think strategically when investing in software.

SimCorp Dimension is a scalable and modular STP front-to-back enterprise system for the investment management industry that enables 足institutions to mitigate risk and reduce cost while enabling growth.

www.simcorp.com MITIGATE RISK

REDUCE COST

ENABLE GROWTH

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# Global survey:

size matters – large investment managers outperform their smaller counterparts With financial markets showing strong signs of recovery and a more optimistic mood prevailing in the investment management industry, the 'Report on Global Investment Management Growth Survey 2010' by SimCorp StrategyLab shows that focus is shifting from risk management and cost control toward growth. Larger companies are in the best position to capitalise on this growth due to economies of scale, investment in infrastructure, global reach and a highly educated workforce.

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arger companies (defined as those with 1,000 employees or more) have weathered the recent crisis somewhat better than their smaller counterparts. In 2009, four in ten companies managed to grow their revenue by 3% or more.

However, 60% of larger companies achieved this level of growth, while only 33% of smaller companies did so.

A similar pattern applies to earnings (EBIT): twice as many larger companies grew their EBIT by 3% when compared to the smaller companies.

Dave Beveridge, MBA, Research Consultant, SimCorp StrategyLab. Lars Falkenberg, Assistant Director, SimCorp StrategyLab.

The past year has been quite hard on the respondents: more than half experienced negative or negligible (under 2%) growth in both revenue and earnings (EBIT).

The outlook for the upcoming year is a bit more positive, with only about a third of respondents expecting to grow revenue/EBIT by less than 2%. A series of trends are apparent with respect to respondents’ growth plans going forward. Most (84%) of the businesses surveyed indicate that they have a growth strategy and that this strategy is reviewed at least once a year. More than half see growth as having increased strategic importance, and almost one in two see growth as a higher priority than either risk management or cost control.

Almost all (87%) see IT infrastructure as important in supporting growth.

What are the characteristics of a successful high-growth investment man-

agement institution? While there are always exceptions to any rule, a clear tendency emerges with respect to the profile of a successful, high-growth investment management company. Such a company typically has over 1,000 employees, at least $1 billion in annual revenue and a clear emphasis on growth in revenue, earnings and assets under man­agement , as well as a high concentration of MBAs or finance degrees.

Why is this the case? The survey results show that past revenue/EBIT growth is much better for companies with more than 1,000 employees than for smaller companies (see above). Similarly, companies with $1 billion or more in annual revenue are roughly twice as likely to have grown both revenue and EBIT by 3% and up when compared to their counterparts with less annual revenue.

Whether comparing by employee count or annual revenue, growth projections are decidedly more optimistic among the larger companies. A clear emphasis on growth also helps; those companies rating growth as strategically important and/or high priority have significantly better growth rates than companies in which growth is less prominent. The findings also demonstrate a clear correlation between a company’s past and future growth and how many MBAs/ masters of finance they have on staff: the more highly educated its staff, the more likely a company is to achieve high growth rates.

Report on Global Investment Management Growth Survey 2010.

Download the full report and learn more about enabling growth at www.simcorp.com/enablegrowth.

GLOBALISATION IS KEY AMONG BUSINESSES IN NORTH AMERICA AND ASIA While size and growth focus undoubtedly matter, the impact of globalisation should not be overlooked. The survey shows that while only one in three European companies intends to open a new location or locations by 2011, the desire to do so in other parts of the world is at least twice as strong. This is reflected by the fact that North American/Asian respondents are more likely to see geographic expansion as a growth driver than European businesses are. As opportunities in domestic markets be-

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

Figure 1. Primary objectives As the investment management industry emerges from the financial crisis, increased emphasis is placed on enabling growth versus risk mitigation or cost control.

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Mitigating risk Managing cost Preparing for growth 1st Rank

30%

2nd Rank

23%

47%

32%

44%

38%

3nd Rank

0%

24%

33% 20%

40%

29% 60%

80%

100%

5 4 3 2 1 Don’t know 1=Not at all 5=To a very high degree

Figure 2. Factors for future growth There are many factors for future growth, almost all of which are considered highly or very highly important by at least two-thirds of respondents.

Regaining client confidence Ability to change

26% 20%

Scalability

24%

Capital strength

28%

Strong risk management capability

23%

36%

24%

Marketing and sales skills

22%

45%

Product breadth and consistency

26%

40%

24%

34%

46%

High customer service quality

0%

10%

51%

20%

30%

3.9

4% 4%

3.8

3%11

3.8

4% 2

3.8

4% 4%

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4.1

2

3.9

5% 2

3.8

13%

3% 2

4.1

90%

100%

26%

31%

40%

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80%

3.9 3.8

27%

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Avg

4% 1 2

16%

53%

22%

2

3% 3%1

35% 44%

18%

6%

28% 46%

24%

Significant distribution in leading markets

19%

45%

25%

Financial market stability

Technology investment capability and skills

47%

Avg Low price and production cost

17%

47%

22%

Strong brand

47%

Organisational/management capability

27%

Ability to attract talented motivated staff

29%

Ability to implement increased/tighter regulation/compliance

Adequate liquidity and reserve capital

44%

26%

20% 20%

Budget availability for expansion/growth

19%

0%

44%

4.0

21%

4%

4.0

23%

3%

4.0

5% 2 1

3.8

6%

3.9

24% 34%

42%

26%

53%

23%

20%

30%

Learn more about SimCorp StrategyLab at www.simcorpstrategylab.com

40%

30%

50%

60%

70%

3.7

6% 3%1

3.7

4%

31%

45%

21

6%

48%

10%

12

25%

37%

22%

Increased focus on costs

24%

46%

20%

Ability of IT systems to scale

3.9

47%

23%

Ability to meet demands from clients

Avoidance of an extended real economic, stock market or financial market slump

3.7

3% 1

27%

46%

27%

Ability to meet increased competition

5% 4% 2

25%

80%

90%

3.9

1

3.9

5% 1

3.8

100%

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# Global survey:

size matters – large investment managers outperform their smaller counterparts Figure 3. Expected annual revenue growth crossed with top corporate priority Companies prioritising cost management over risk mitigation and growth are far less likely to achieve meaningful revenue growth rates going forward.

Mitigating risk Managing cost Preparing for growth Negative

3%

0-2%

30% 36%

3-5%

23%

35%

23%

6-8%

7%

9%

48%

13%

9% or more

20% 21%

Don’t know

6%

9%

13%

3%

Prefer not to disclose

0%

10%

gin to dry up, there is an inexorable movement towards expansion beyond national/regional borders, particularly from North America and Asia into other geographical markets.

COMPANIES THAT PUT EMPHASIS ON GROWTH ARE MOST LIKELY TO ACHIEVE IT Despite the fact it may seem obvious, there is a causal connection between the prioritisation of growth and the growth rates a company expects to achieve.

Companies placing the highest level of strategic importance on their growth efforts are also those companies likely to have both a growth strategy and a formal growth framework in place.

These factors, combined with growth acceleration strategies such as new products or launching into new segments, show that these businesses are among the top performers in 2009 and expect to assume the same position again in 2010-2011. In fact, three times (36%) as many companies rating growth as very strategically important antici-

20%

30%

40%

50%

pate double-digit revenue growth than companies with less of a focus on growth (11%).

COST MANAGEMENT AS PRIMARY FOCUS IS ANALOGOUS TO LOW REVENUE AND EBIT GROWTH In a sign that better times are ahead, 55% of the businesses surveyed indicated that growth has taken on more strategic importance in the current environment, with only 7% indicating the opposite. In fact, 47% of all businesses surveyed identified growth as their top priority going forward, relegating risk management and cost control to second and third place respectively. However, given the current economic environment of falling or flat GDP and financial markets in various stages of recovery, this tendency will lead to increased competition and incite corporate Darwinism.

Simply put, the growth-focussed companies’ ambitions to increase the size and scope of their business above market growth rates will come at the ex-

60%

pense of those companies less prepared to grow. Companies prioritising growth tended to have marginally higher growth rates (revenue and EBIT) in the most recent year compared to risk-focussed companies and much higher growth rates versus cost-focussed companies.

This legacy of results carries forward into the present, with growth-focussed companies expecting higher revenue and EBIT growth rates in the upcoming year and with the proportion of risk and cost-focussed businesses expecting future growth to more or less mirror the previous year’s results.

A WELL-EDUCATED WORKFORCE IS A GROWTHENABLED WORKFORCE Companies with a high proportion of MBA and finance degree holders are in a better position for growth, which may be why well over half of the respondents are looking to increase the number of MBAs employed by their organisation.

The survey shows that those companies

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looking to expand geographically have the highest proportion of MBAs among their staff: over a third of these companies have at least 31% of their workforce holding an MBA. The implication is that advanced business acumen is needed if a company has aspirations of capturing share outside its traditional geogra­ phical markets.

gain market share is certainly enhanced by a higher presence of MBA and finance degree holders.

Growth-driven companies employ a higher complement of MBA/finance degree holders than do their counterparts that are driven primarily by risk management and cost control. One in three growth-driven companies have at least 30% of staff holding an MBA, versus one in four of risk-driven companies and only one in twelve of cost-driven companies. It is very tempting to conclude that companies with a high concentration of staff with MBA and finance degrees have higher growth ambitions and are more focussed on business and value creation.

When this observation is coupled with the earlier findings that growth- and risk-centric companies were much more likely to achieve revenue growth than cost-driven companies, it can be stated that holistic business acumen – expres­ sed as a percentage of MBAs in an orga­ nisation – is a key harbinger of growth.

Put another way, curtailing investment and reducing spending is not the stra­ tegy to focus on if meaningful growth is to be achieved: more emphasis should be placed on business and value creation as opposed to cost management.

The revenue growth projections also support the contention that growth is more likely with a well-educated workforce. As an example, one in five respondents projecting at least 6% revenue growth have two-thirds of their staff holding MBAs. Only one respondent of 26 with 3%-5% projected growth can boast of a similar proportion, while not a single one of the respondents with low (less than 2%) revenue growth projection can claim to have as many as 61% of their staff with MBA degrees. The numbers are not radically different for those with a master’s degree in finance.

It seems that while business and finance degrees may not be a panacea to ensure growth, a company’s ability to grow and

IT INFRASTRUCTURE IS KEY IN SUPPORTING GROWTH OBJECTIVES Having an IT infrastructure capable of supporting a company’s growth efforts is essential. Only one respondent out of 100 believed that IT infrastructure was not at all important in supporting growth; 87% had the opposite view. The ‘importance of IT’ and ‘capability of IT to support growth strategy’ ratings across various parameters such as revenue, geography and growth strategy were fairly homogenous, although a couple of points do stand out.

In particular, the survey showed that risk-centric companies were significantly more pessimistic when it comes to assessing the capability of their IT infrastructure to support growth. This is likely a reflection of the increase in legislation and regulation – both real and anticipated – and its impact on a company’s ability to grow in the face of more stringent compliance requirements.

Once again, size is a factor: smaller companies tend to have less confidence in their IT infrastructure than the larger companies do. Larger companies tend to have the resources to invest in their IT infrastructure and are therefore better positioned to exploit growth opportunities than smaller companies with less comprehensive infrastructure. Ostensibly this means that large companies can automate several processes that the smaller companies will have to do manually. The consequence is that the smaller companies will be spending time on error handling, administration and other routine activities rather than creating additional value for their business.

Where geographies are concerned, all regions believe that IT infrastructure is critical to realising their growth strategies. In general, European respondents are more sceptical than their North American and Asian counterparts when it comes to the capability of their current IT infrastructure to support growth.

Finally, the survey results indicate that the majority of respondents are satisfied

to a high or very high degree with their investment management system. In general, companies placing the highest degree of strategic importance on growth tend to have lower satisfaction ratings for their investment management system than those respondents placing less emphasis on growth. This is a byproduct of the fact that companies with aggressive growth strategies tend to have more demanding requirements for their investment management system.

GROWTH IS A BY-PRODUCT OF STRATEGY AS OPPOSED TO A STRATEGY IN AND OF ITSELF There is general consensus that focus on growth is important: five out of six businesses have a growth strategy in place.

Of these, 95% review their growth strategy at least once every second year.

However, it is not exactly clear what this strategy is, given that less than 30% of businesses have a growth framework or methodology in place. This indicates that while many businesses have aspirations of growth, there are not that many that have concrete strategies in place to promote and manage growth.

In other words, the prevailing sentiment is that growth is the result of other wellexecuted strategies (e.g. geographic expansion, new products, merger and acqui­ sition) as opposed to a strategy on its own.

Growth is to be achieved in a number of ways. The most common growth acceleration strategies mentioned are introduction of new products (65%) and new client segments (60%); at least a third of businesses surveyed also listed expansion into new regions (37%) and new industry segments (36%) as well. Three of four businesses surveyed target a broad array of investment management market segments; only 19% have a focussed strategy that is concentrated on a narrow segment or segments.

CLIENT RELATIONSHIP IS NOT A KEY FACTOR IN GROWTH PROSPECTS Most (69%) businesses see their key differentiators in the area of product innovation versus low-cost leadership (22%).

The innovators (88%) are much more likely to have a growth strategy than their low-cost counterparts (68%) and

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13

see growth factors such as client confidence, branding, attracting motivated staff and avoiding another economic slump as much more important. Despite these differences, the percentage growth in revenue, EBIT and assets under management (AUM) – both in the past year and expected for next year – are very similar in nature.

CONCLUSION AND ADDITIONAL REMARKS Based on the results, it can be concluded that companies with higher annual reve­nues, a clear focus on growth and a significant proportion of MBAs/­ finance degrees on staff will continue to enjoy the above-average growth rates that they have experienced in the past.

To be blunt, there are valid reasons why some small- and medium-sized companies grow up to be large, multi-national conglomerates, not the least of which is a willingness to invest in growth, hire competent business-minded personnel and capitalise on value creation, as well as having the right focus at the right time.

Having said that, it is not always readily apparent how companies expect to grow, given that relatively few have any framework in place to achieve it. There are a plethora of initiatives to expand the business and capture share; it can be argued that growth in revenue, EBIT and AUM is the result of well-executed corporate strategies as opposed to a con­ certed effort to grow. In any case, the evidence is in place that those companies placing high strategic importance on growing their business as opposed to managing it are likely to grow at a greater rate than their counterparts whose focus is elsewhere (i.e. on risk and cost management).

The market is becoming increasingly predatory in a post-crisis environment where weak players fall by the wayside and the strong, growth-focussed companies capture the market share that the smaller, resource-poor companies are unable to defend. The bottom line is that large companies performed better than the smaller companies in 2009 and expect to do so again in the upcoming years, proving that size matters.

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# Raising the bar with adoption of new messaging standards: the SWIFT case for ISO 20022

Consistency in communication connectivity oils the cogs of the investment management industry. Adoption of the ISO 20022 messaging standard offers a key example of providing standardised messaging to ensure consistency as an essential prerequisite for efficient risk management, cost effectiveness and business growth.

C

entral to the communications model of many of the leading players in the invest­ ment management industry are standards to ensure the smooth and consistent flow of financial data. While the industry’s various infrastructures benefit from improved productivity and operational efficiencies associated with standardisation, all participants extending to the end-client gain from the resul­ ting reduction in risk and lower costs for domestic and cross-border transactions.

Arun Aggarwal, Managing Director, UK, Ireland & Nordics, SWIFT, London, UK. Sophie Bertin, Global Head of Asset Servicing and Custodians, SWIFT, London, UK. Hervé Valentin, Senior Business Development Manager, Marketing, SWIFT, Brussels, Belgium.

Standards are a core element of the business activities of SWIFT, the conduit through which the financial sector conducts its business operations with the speed, certainty and confidence it requires. Providing a range of standards-related products, tools and services to support the investment management industry, SWIFT collaborates in efforts to ensure the interoperability of standards, so that the community at large can also benefit from potential cost savings, eliminate inefficiencies and smoothly expand into previously untapped markets.

Specifically designed to help industry developers implement standards easily, while reducing implementation costs, SWIFT has developed a coherent and cohesive set of electronic standards resources. This range of products helps customers to implement standards efficiently and easily. Standards are deve­loped in response to user community business and regulatory requirements. They are available for the community to transport across whatever system is chosen.

A SINGLE STANDARD AS GOAL Currently there are numerous messaging standards and standardisation ini­ tiatives addressing financial information flows. SWIFT is working towards a rationalisation of standards and to facilitate interoperability and consistency between standards developed by different standards bodies.'

In a drive to offer a better, cheaper and faster way of developing and implementing message standards, SWIFT has been heavily involved in the establishment and implementation of the socalled ISO 20022 standardised messaging infrastructure. SWIFT uses the ISO 20022 modelling methodology in its standards development and promotes its adoption globally. Further evidence of SWIFT’s commitment to standardisation is in its role as a registration authority, where it acts as the guardian of ISO 20022’s integrity.

ISO 20022 is instrumental for financial institutions that want to streamline their communication infrastructure and associated costs by opting for a single, common language – or lingua franca – for all financial communications, whatever the business domain, the communication network and the counterparty (other financial institutions, clients, suppliers and market infrastructures).

It is targeted at these standards initiatives that are generally driven by communities of users looking for more costeffective communications to support specific financial business processes

with a particular view to facilitate interoperability with other existing protocols.

ISO 20022: HISTORICAL CONTEXT The financial world is built on highly reliable, fast, auditable and seamlessly processable intra- and inter-company communications of instructions to enable business transactions. Money moves financial assets. Historically these move­ments (or messages) evolved into standard formats based on national or regional boundaries, market participant initiatives, or standards mandated by specific industry utilities like SWIFT. These message standards developed around silos of automation based on market practice or geographical locations, and the message standards were not compatible.

In order to address this compatibility challenge, the International Organization for Standardization (ISO), the world’s largest developer and publisher of international standards, developed the International Standard ISO 20022 – Universal financial industry message scheme (since abbreviated to ISO 20022). Initially developed to adhere to the ISO 7775 standard and to support the functionality used by SWIFT for their telex messages from around 1977, it grew out of the ISO 150022 standard of the 1990s and hence into a type of second edition also known as SWIFTML, which covered just securities. In 2004 the scope was expanded to include a broader remit of all financial services.

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The need for an ISO 20022 standard arose in the early 2000s with the widespread growth of Internet Protocol (IP) networking, the emergence of eXtensible Mark-up Language (XML) as the de facto open technical standard for electronic communications, and the appearance of a multitude of uncoordinated XML-based standardisation initiatives, each having their own ‘XML dialect’.

On top of offering a common way of using XML, the new standard shields investments from future syntax changes by proposing a common business modelling methodology (using Universal Modelling Language or UML) to capture, analyse and syntax-independently describe the business processes of potential users and their information needs.

ISO 20022 is a standard for standards – a methodology for the creation of consistent message standards using data to describe data and interactions. This flexible framework allows communities of users and message development organisations to define message sets according to an internationally agreed approach and to migrate to the use of common XML-based syn­tax. It is essentially the roadmap to establishing a consistent lingua franca in global financial markets.

ISO 20022: A WORKING DEFINITION ISO 20022 is the international standard that defines the ISO platform for the development of financial message stan­ dards. Its business modelling approach allows users and developers to represent financial business processes and underlying transactions in a formal but syntaxindependent notation. These business transaction models are the ‘real’ business standards. They can be converted into physical messages in the desired syntax. At the time ISO 20022 was deve­ loped, XML was already the preferred syntax for electronic communication.

The ISO 20022 standard provides the financial industry with a common platform for the development of messages in a standardised XML syntax, using: • a modelling methodology (based on UML) to capture in a syntax-independent way financial business areas, business transactions and associated message flows; • a set of XML design rules to convert the messages described in UML into XML schemas.

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tion, while new MX messages to support corporate actions and securities settlement are set to go live in 2010. The range of MX messages of direct interest to the investment management community, notably for securities settlement and corporate actions, will broaden dramatically over the next year and beyond.

Reflecting this development, SWIFT has linked up with SimCorp in an

“Central to the communications model of many of the leading players in the investment management industry are standards to ensure the smooth and consistent flow of financial data.”

In developing business standards to support transactions in the financial markets for payments, securities, treasury and trade services, traditional MT messages are complemented by the new ISO 20022 XML-based (MX) messages, which enable the transfer of richer data for more complex business transactions. For transport across SWIFTNet, messages are either wrapped inside a SWIFTNet FileAct envelope, or pack­ aged in one of the growing range of solutions that SWIFT provides.

MX messages are increasingly used in the securities industry, with adoption extending beyond Europe to Asia and the USA. MX messages offer more clarity and have wider application than earlier protocols, so their use enables investment managers to improve straightthrough-processing (STP) rates. Consequently they can drive down costs, reduce operational risk and readily accommodate increased volumes as their businesses grow.

SWIFT BOOSTS MX USUAGE In the specific case of SWIFT, MX messages usage is steadily increasing for mutual and pension fund flows automa-

agreement to use SimCorp Dimension as an integrated and scalable solution to accept, process and transmit SWIFT ISO 20022 MX messages. The proof of concept involved bringing together SWIFT’s Alliance Integrator, the configurable SWIFT-specific integration platform, and SimCorp in a combined solution, which will be complemented in future by one based solely around SimCorp Dimension. As a long-standing member of SWIFT's partner programme, SimCorp is geared up to position itself as a leading software provider in terms of MX adoption.

The investment management industry’s ability to measure the progress of automation and standardisation in crossborder fund order processing has received a significant boost as a result of a

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# Raising the bar with adoption of new messaging standards: the SWIFT case for ISO 20022

regular annual survey jointly carried out by SWIFT and the European Fund and Asset Management Association (EFAMA), the representative association of the European investment management industry. According to the survey findings for 2008, key success factors include adoption of the new ISO 20022-based single template for fund orders, implementation of EFAMA’s best-practice recommendations for fund processing, as well as use of focused and large-scale standardisation campaigns by fund managers, transfer agents (TAs) and platforms.

to 45% in volume terms. This is an increase of 4.3 percentage points compared to 2008. EFAMA’s Fund Processing Standardisation Group has issued recommendations to guide industry best practice, serving as a leading advocate of ISO 20022 as the single European standard for fund messaging and as the basis for electronic communi­ cation in processing investment funds.

EFAMA has proposed that ISO 20022 should be advanced as promptly as possible as a basis for interoperability and that proprietary message standards between client- and fundside institutions should be avoided. In line with this objective and to encourage a prompt and efficient transition from manual proces­sing to ISO standard automation, SWIFT has announced a set of milestones to guide migration to ISO 20022 fund messaging over the SWIFT network, culminating in full adoption by late 2012.

“... leading Spanish fund manager and distributor AC Gestión opted for ISO 20022 to support the business growth of its guided architecture platform.”

An ongoing priority is to force the pace of adoption and to reach the levels of standardisation that have been attained for other securities. According to the latest survey covering 2009, the percentage of automated orders based on the ISO messaging standard increased

A STANDARD TO SUPPORT GROWTH In one corporate example of migration to ISO 20022, leading Spanish fund manager and distributor AC Gestión opted for ISO 20022 to support the business growth of its guided architecture platform. It was able to reuse the SWIFT infrastructure of sister company Ahorro Corporacion

Financiera, meaning it could minimise IT infrastructure costs and achieve a faster time to market.

AC Gestión sees a very powerful benefit in the automation of status messages, which confirm that the content of an order is approved and will be executed.

Most TAs generate status messages within minutes of order receipt, meaning they are received well before cut-off time, supporting timely identification and resolution of any problems.

In another example, UK-based investment management company Legal & General Investment Management (LGIM) was one of the early adopters of ISO 20022 messages within the pensions industry, setting a precedent for how fund management firms can maximise efficiency while reducing costs and risks by automating fund processing operations. Despite the 2008-09 financial crisis and the general downturn in market conditions, LGIM’s business has continued to grow, with the number of transactions growing by over 25% in 2009 alone. It was able to absorb this growth without any headcount increase and projections indicate that it will continue to do this.

For LGIM, automated processes involve a significant number of rule checks. This means that manual intervention is only required for exceptions, which represent a very small proportion of the orders processed. LGIM has been able to use economies of scale for the support of its SWIFT infrastruc-

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“Adoption of ISO 20022 is not a big-bang approach, but more a market-driven migration to a common language.” ture as this is used across the entire business, i.e. for custody and settlement. The main drivers of the LGIM ISO 20022 business case have been: risk reduction by continuing to drive error rates down; service by enabling STP to enhance the service proposition to counterparties; and scalability by benefitting in terms of cost containment while enjoying substantial business growth.

To understand the effects of mandated change, a current example of application is found in the payment standards used by the Single Euro Payment Area (SEPA) initiative. Here it is clear that there will be a transition period of coexistence of at least two years and possibly longer during which existing systems will be required to support both legacy and new standards.

MAPPING OUT ISO 20022 ADOPTION It has long been recognised that the simple existence of an ISO standard does not ensure that it will be utilised by industry participants in a consistent, coherent and cohesive way. Adopting a harmonised single template for ISO 20022 messaging is key to ensuring efficient use of this message standard across the industry.

Most investment management companies have already drawn the conclusion that adoption of ISO 20022 has reached the point of no return.

Mandated change is initiated by regulation, through migration by network providers such as SWIFT from the old MT to the new MX standards, or by demands of the business to support new transaction flows only available in ISO 20022. While it will increase costs in the short term, ISO 20022 also offers opportunity for competitive advantage.

Business transactions based on the ISO 20022 standard increase the reach of companies to more clients in more locations with less concern for national boundaries and local legacy standards.

This also allows more companies to reach into new markets with lower barriers to entry.

All industry players realise they need a cohesive plan for how they will support both legacy standards and new standards during the transition period. One option is to simply trust that their vendor suppliers have the answers. If this is the case, companies should be sure to ask them for a roadmap.

Alternatively, and more advisedly, companies should have an architectural roadmap that capitalises on reusing ISO 20022 messaging and integration services.

They should look to use standards-based integration technologies that support the legacy and the new XML-based merging standards, as well as solutions that provide platform-neutral deployment technologies to use with existing computing infrastructure. Adoption of ISO 20022 is not a big-bang approach, but more a market-driven migration to a common language.

Arun Aggarwal is Managing Director, UK, Ireland & Nordics at SWIFT. He joined from Tata Consultancy Service Limited where he held the position of Head of Global Consulting Practice, EMEA. Before his tenure at Tata Consultancy, Arun was a Managing Director at LCH Clearnet Group Ltd. Arun began his career at Price Waterhouse in 1979. Arun earned a BSc (Hons) Mathematics from the Imperial College London, is a qualified Chartered Accountant (FCA) and an Honorary Member of the Association of Corporate Treasurers.

Sophie Bertin is Global Head of Asset Servicing and Custodians within SWIFT. Prior to joining SWIFT, Sophie worked for The Bank of New York, where she held different management roles. Before The Bank of New York, she worked for six years at McKinsey, where she specialised in the Financial Institutions Group and the Corporate Finance & Strategy Practice. Sophie holds an MBA from INSEAD and graduated from the Ecole Supérieure de Commerce de Paris, with a major in Corporate Finance.

Hervé Valentin is Senior Business Develop­ ment Manager in the Marketing division of SWIFT. Before joining SWIFT in 2001, he worked for JP Morgan and Euroclear Bank managing the network of custodians banks and CSDs. Hervé holds a Master degree in Management Engineering (Ingénieur Commercial) from Université Catholique de Louvain in 1995, and holds Certificates from International Capital Market Asso­ ciation and Solvay Business School in Belgium.

SWIFT SWIFT is a member-owned cooperative that provides the communications platform, products and services to connect over 9,000 banking organisations, securities institutions and corporate customers in 209 countries.

SWIFT enables its users to exchange automated, standardised financial information securely and reliably, thereby lowering costs, reducing operational risk and eliminating operational inefficiencies. SWIFT also brings the financial community together to work collaboratively to shape market practice, define standards and debate issues of mutual interest.

More information at www.swift.com.

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# The fund management industry and the financial crisis:

regulatory challenges and opportunities

The EU fund management industry faces challenges that are similar to other areas of the financial sector in the emerging post-crisis environment: a new regulatory wave and tighter supervision. This article gives a brief overview of the main elements of the changes to come and the related opportunities.

A Karel Lannoo is Chief Executive Officer of the Centre for European Policy Studies (CEPS).

s in other sectors of the financial industry, the fund market can expect more and more detailed regulation and supervision in the years to come. Although the European regulated fund market has not been in the centre of attention of the financial crisis, it will have to cope with new rules and stricter enforcement. The latter will result from the creation of new authorities, essentially the European Securities Market Authority (ESMA), the former as a result of issues which have come up

9,000 8,000

during the financial crisis, such as the role of depositaries and the definition of money market funds, and the implementation of UCITS IV, which was proposed just before the crisis erupted.

But there is also more regulation to come for the non-regulated side of the industry in the Alternative Investment Fund Managers (AIFM) directive, which will level the playing field in terms of regulated funds.

2008 saw a massive outflow of funds in the regulated fund sector, as well on

both sides of the Atlantic. Although the regulatory frameworks and issues differ considerably, it is remarkable that 1) both sectors have acquired similar sizes (see Figure 1 below); 2) both have seen a big drop in 2008, which has only been partially restored in 2009; 3) similar problems have arisen in the asset allocation of money market funds, although these were much more debated in the USA than in the EU. Assets managed by the EU and US regulated fund industries amount to 88% of the global fund management industry (according to ICI).

EU USA

7,000 6,000 5,000 4,000 3,000 2,000 1,000 0

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Figure 1. European and US total net fund assests compared Data sources are the European Fund and Asset Management Association (EFAMA) and the US Investment Company Institute (ICI). European data include UCITS (about 75%) and regulated special funds (including a limited number of hedge funds). US data include primarily mutual funds (about 90%), closed-ended funds, exchange-traded funds and units of investment trusts, following the 1940 Investment Company Act.

2009

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The Lehman collapse and the Madoff fraud revealed an interesting regulatory difference between the EU and the USA in the segregation between asset safekeeping and fund management. This is an obligation in the EU accor­ding to the UCITS directive – although probably not always well-respected – but not in the USA. It is clear that this has become an important issue in the post-crisis debate, as the EU Commission has already indicated with the public consultation on UCITS depositaries.

TOWARDS UCITS IV The new UCITS IV directive will allow for fund sector consolidation and rationalisation and give a new boost to the European fund sector. The directive further completes the UCITS framework, which started in 1985 with the first EU directive covering investments funds, the so-called Undertakings for Collective Investment in Transferable Securities (UCITS). UCITS IV must be implemented by July 2011 at the latest.

The UCITS IV rules follow for the first time in the sector the ‘Lamfalussy’ approach, meaning that not only primary but also secondary legislation is largely harmonised at European level. These so-called implementing measures, which were published by the European Commission in July 2010, are another 100 pages plus of rules, detailing the core new elements of directive. It concerns: • d etailed conduct of business rules for fund managers, covering conflicts of interest, governance and the relationship with depositaries; • the content of the key investor information document (KID) and the use of electronic media for dissemination. The regulation specifies methodologies on calculating a fund's level of risk and charges;

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August 2010

“The new UCITS IV directive will allow for fund sector consolidation and rationalisation and give a new boost to the European fund sector.”

• f und mergers and master-feeder struc­t ures. The measures detail certain investor protection measures in relation to asset pooling techniques, and establish a common approach to the sharing of information between master and feeder UCITS. It also covers detailed rules on the liquidation, merger or division of a master UCITS; • supervisory issues and notification procedure, such as the form and contents of standardised notification and attestation letters, procedures for onthe-spot verifications and investigations, and the exchange of information between competent authorities.

The upshot of the new rules should not necessarily be negative, on the contrary.

More harmonised rules should ease the operational conditions for large fund managers in the EU’s single market, which is what is expected to emerge from UCITS IV. The new UCITS will for the first time allow for the separation between authorisation of fund registration and fund management in the ‘management company passport’, which fund managers are busily preparing for. To date, the member states could require fund management to happen in the same state as the registration of funds, which was an

advantage for countries such as Ireland and Luxembourg. Now that this obligation is lifted, fund management can be expected to reap scale economies and converge in a few financial centres, which will benefit large well-organised players.

A related change is the facilitation of fund mergers across borders, which should reduce the sub-optimal size of the fund sector in Europe, and again facilitate scale enlargement. These changes can be expected to unleash further dynamic processes, with more investment in technology to cope with the new rules, but also to gain strategic advantage as was the case with the Markets in Financial Instruments Directive (MiFID), covering broker dealers and exchanges.1 THE RELATIONSHIP WITH AIFM AND MIFID At the other end of the spectrum is the much more debated hedge funds directive, or Alternative Investment Fund Managers (AIFM) directive. Although the final form of the directive is not yet known, it is clear that legislation of this largely unregulated part of the fund industry is now definitely coming.

This changes two facts for the regulated fund sector: 1) it levels the playing field, and will probably dampen the strong growth which the alternative invest-

1. See by the same author The MiFID Metamorphosis, ECMI Policy Brief no. 16, April 2010, available from www.eurocapitalmarkets.com

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# The fund management industry and the financial crisis:

regulatory challenges and opportunities

2. See Diego Valiante, MiFID Real Implementation, ECMI Policy Brief, forthcoming with www.eurocapitalmarkets.com

ment fund sector had seen over the last years, and 2) it opens the way for wellestablished fund managers to also offer funds using alternative investment techniques to their regular outlets, with a single licence for the whole of the EU, and with grosso modo the same rules for investor information and reporting to the authorities.

The big outstanding issues for the sector remain fund distribution rules and taxation. Although fund distribution falls largely under the EU’s MiFID directive, with rules covering suitability and appropriateness, tackling conflicts of interest (including retrocession fees) and price/fee transparency, the rules seem to have been badly implemented so far, 2 and cover only fund products distributed by banks or investment firms, not insurance companies, for example. The expected reduction in size of the banking sector following the crisis may lead to a re-emergence of independent intermediaries, reducing the market power of the bank’s retail networks, but this will take a long time.

More tax harmonisation, on the other hand, is not on the agenda. Tax avoidance has been tackled in the EU’s savings tax directive, but tax rates and deductions remain an entre national competence and very divergent.

The creation of the European Securities Market Authority (ESMA) by the end of 2010 should ensure that the regulatory framework will be effectively the same all over Europe, but also that supervision can be streamlined in a global industry such as fund management.

ESMA will have the facility to mediate between EU member states supervisory authorities, and to delegate supervisory tasks between them. ESMA will participate in the supervisory collegiates of international fund managers and act to comply supervisory databases.

CONCLUSION In a period of 25 years, the fund industry has seen a huge development, from an essentially nationally-based industry to a largely European-wide organised sector. EU regulation, primarily the UCITS directive, has been a huge contributor to this process, to the degree that it is seen as one of the most successful EU directives in the area of financial markets.

UCITS IV should give a new boost to the permanence of the UCITS brand, leading to further internationalisation, but at a cost of further rules and complexity.

The challenge for the industry is to turn this into a benefit.

“In a period of 25 years, the fund industry has seen a huge development, from an essentially nationally based industry to a largely European-wide organised sector.”

Karel Lannoo has been Chief Executive Officer of the Centre for European Policy Studies (CEPS) since 2000 and senior research fellow since 1997. Karel Lannoo has published books and numerous articles in specialised magazines and journals on general European policy, and specifically financial regulation and supervision matters. He is a regular speaker at international gatherings and in executive programmes.

Karel Lannoo holds a baccalaureate in philosophy, an M.A. in history from the University of Leuven in Belgium (1985) and obtained a postgra­duate in European studies (CEE) from the University of Nancy in France (1986).

Centre For European Policy Studies (CEPS) Founded in Brussels in 1983, the Centre for European Policy Studies (CEPS) ranks among the most experienced and authoritative think-tanks operating in the EU today. CEPS serves as a leading forum for debate on EU affairs, but its most distinguishing feature lies in its strong in-house research capacity, complemented by an extensive network of partner institutes throughout the world. CEPS organises a variety of activities, involving its members and other stakeholders in the European policy debate, including national and EU-level policy-makers, academics, corporate executives, NGOs and the media. More information at www.ceps.eu.

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# Choosing the optimal IT platform for best-of-breed asset servicing: a European case study

To excel in today’s difficult financial environment, investment managers must learn to grasp the opportunities and challenges of client service. Playing a key role in this task is asset servicing. With this acquired knowledge, the full benefits of a robust IT infrastructure that supports client-driven innovation and excellence can be derived.

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s one of the eurozone's leading banking and financial services companies, the French-based Société Générale group’s activities centre around three core businesses: Retail & Financial Services; Corporate & Investment Banking; and Global Investment Management Services.

Alex Buffet, Head of Market Data and Asset Servicing, Société Générale Securities Services (SGSS), Paris, France.

Christian Wutz, Managing Director, SGSS Deutschland KAG, Munich, Germany.

Of these three, the Global Investment Management Services division incorporates asset management, private banking, securities services and multi-asset brokerage. Responsible for securities services is Société Générale Securities Services (SGSS), which is established in 28 locations worldwide with more than 4,000 employees.

SGSS provides a full range of securities services that are adapted to the latest developments in financial markets and regulatory changes: clearing services, custody and trustee services, retail custody services, liquidity management, fund administration and asset servicing, fund distribution and global issuer services.

SGSS is the sixth-largest worldwide global custodian and the second largest in Europe with €3,246 billion of assets under custody (as at 31 March 2010), providing custody

and trustee services for 2,946 funds and the valuation of 4,555 funds, representing assets under administration of €459 billion. SGSS also ranks among the European leaders in stock-option management.

ASSET SERVICING: A WORKING DEFINITION Asset servicing encompasses a broad range of services for custody and corporate actions including safekeeping services for physical securities, data information for DTC-eligible securities, dividend, proxy and reorganisation services, restricted securities services, as well as the electronic registration and transfer of securities. As such, it can best be described as a core service provided by custodians. This service also includes collecting dividends and interest payments, processing corporate actions and applying for tax relief from foreign governments on behalf of customers. As investment management companies across the globe get to grips with the exigencies of the post-crisis financial environment, their ability to effectively service the assets placed under their control will in many cases be the single largest determinant as to whether or not they are successful in taking a deal through to completion. Companies will

find that access to scalable servicing operations capable of supporting rapid growth will give them significant advantages over their competitors.

Building asset servicing operations that meet these needs requires time and good planning, but is ultimately essential for any financial services company intent on establishing and maintaining a successful platform for asset management. Many financial institutions around the world have built their business origi­nating loans for their own balance sheet and have created servicing operations that meet their internal needs, but not necessarily those of structured finance investors and international rating agencies.

A CUSTOMISED OPERATING MODEL A scrutiny of core versus value-added capabilities can introduce alternatives in operating model delivery, with automation being one of the possible outcomes; the other being outsourcing. With the outsourcing market becoming more mature, providers are being challenged to offer a tailored operating model with the merits of competitive pricing and high service standards. Core services such as trade confirmation, investment ac-

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# Choosing the optimal IT platform for best-of-breed asset servicing: a European case study

Alex Buffet is Head of Market Data and Asset Servicing at SGSS and is based in Paris, France, having held a number of senior executive positions at Société Générale for over 25 years. counting, fund accounting, and securities lending proces­sing are now being offered as staple products with standard service level agreements and without premium pricing.

On the other hand, a situation has arisen where value-added services have evolved with the demands of investment managers, and now encompass middle- and front-office functions such as performance measurement, client reporting, compliance and data manage-

ment/technology. For these value-added services, standards and pricing vary for each investment manager. Overall, providers with increasing market share appear to be acquiring new skills and capabilities while continually investing in technology in order to remain ahead of the game.

The substantial growth in hedge funds and alternative investments witnessed in recent years has increased regulatory pressures, while the specialised labour

pool is on the decrease. Automation of the back office and outsourcing are anticipated in the near term to help close the widening gap or at least slow its growth. As settlement windows shorten and investments become more sophisticated, eliminating external-provider in­efficiencies should continue to be a priority. Focusing on top performing tech­nology/data vendors, outsourcing pro­ viders, global custodians and brokers can be mission-critical to capturing efficiencies in pre- and post- settlement services.

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Christian Wutz is Managing Director at SGSS Deutschland KAG and works out of Munich, Germany, with more than 15 years of experience in the international banking field.

TURNKEY OPERATIONAL SOLUTION In the specific case of SGSS, it has developed its asset servicing solutions over the past five years delivered out of Paris and Munich. These solutions can stand alone or form part of a more global package. They are based on a turnkey operational solution which includes pricing, middle-office services, perfor­ mance and risk measurement and attribution as a single package, all fully integrated with its extensive global custody

and/or fund administration services. In response to the increasing sophistication of financial instruments and management strategies, SGSS through its asset servicing capabilities provides assistance in accessing an adaptable technological solution that can be individually tailored to a client’s activities.

Another provision is an independent pricing of a client’s portfolio to assist in satisfying regulatory requirements. Its independent pricing service for OTC products (swaps, convertibles, high-

yield bonds, foreign exchange options) and complex products covers various asset classes (interest rate, inflation, equity, foreign exchange, commodity, credit, commo­dities and hybrids). It is based on a range of efficient tools monitored by a team of specialised financial engineers with hands-on experience in using quantitative analysis.

Professional trading desk standards such as front-to-back software are used for the valuation of plain vanilla products

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# Choosing the optimal IT platform for best-of-breed asset servicing: a European case study

“As investment management companies across the globe get to grips with the exigencies of the post-crisis financial environment, their ability to effectively service the assets placed under their control will in many cases be the single largest determinant as to whether or not they are successful in taking a deal through to completion.” as well as a range of proprietary and commercial analytics used for the valuation of structured products. The offering also relies on relevant market data sources that include partnership with OTC brokers and banks for complex

parameters such as implied volatilities or correlations as well as a database dedicated to the management of stan­ dard and exotic market parameters.

LEADING GERMAN POSITION In addition to being present in most of the important markets across Europe, SGSS also holds a leading asset servicing position in Germany through its sub­- si­diary SGSS Deutschland KAG. Here its customers include Pioneer Investments KAG (Germany), W&W Asset Management, Veritas Investment Trust and Avana Invest.

Its legal predecessor was Activest Investment KAG mbH, whose origins date from 1960, and which was owned by the German HypoVereinsbank group. With 50 years of experience in the German institutional fund business, it can draw on 30 years of cooperation with more than 100 leading asset managers, becoming part of the Société Générale group in December 2007.

With assets under administration totalling around €65 billion, funds under ad­mi­ n­istration numbering over 500 and struc­ tured products standing at around 1,500, SGSS Deutschland KAG combines two closely related business segments.

The one is providing Master-KAG services (i.e. special fund and white-labelling) for institutional investors and asset managers, including several DAX30-listed companies, medium-sized companies, non-profit organisations (i.e. churches, social associations, employer liability insurance associations), and financial service companies (asset

managers, insurance companies, banks and savings banks).

The other segment covers the provision of insourcing services such as fund administration, reporting and middle office for investment companies and asset managers. Here its customers include Pioneer Investments KAG (Germany), W&W Asset Management, Veritas Investment Trust and Avana Invest.

SGSS Deutschland KAG’s middle-office portfolio for complex products provides customised outsourcing solutions.

Together, the teams and technologies at the disposal of the German operations ensure an excellent level of operational support covering all functions essential to the processing of OTC instruments and structured products.

The middle-office services provided by the German operations are delivered over its own leading edge platform, which seamlessly manages trade support, compliance monitoring and collateral, while assuring the level of transparency required by regulators.

Incor­porating rigorous procedures for monitoring and comparison that ensure consistency and accuracy of results, the solution offers a full set of standard reporting formats for middle office, risk and payment systems, as well as fully customised reports.

A FULLY INTEGRATED APPLICATION The services offered to clients are modu­ lar and fully integrated, providing extensive flexibility and adaptability to every sourcing strategy. A full range of

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middle-office services (trade matching, settlement instructions and routing) is available either on a standalone basis – with very flexible connections and interfaces through an advanced connectivity hub – or in combination with other services such as front office ASP (automated flow).

and is used for all of the core business processes, comprehensively managed by the Cronacle scheduling system.

The Crystal Reports reporting engine embedded in the investment management system is used for all processing reports and standard reports (i.e. legal reports). The mapping of complex tax issues and specific figures are taken care of by an in-house developed application and data warehousing system, while a team of specialists deals with new instruments.

risk/return trade-off, and ex post analysis is applied in line with Global Investment Performance Stan­dards (GIPS).

PERFORMANCE AND RISK REPORTING In the area of performance and risk reporting, SGSS works to provide the control and visibility clients need to meet their investment goals, tracking the gross and net performance of funds and comparing the results with key benchmarks at any frequency desired.

In addition, VaR calculations can be com­ plemented by Conditional VaR (CVaR), which takes into account extreme events.

By choosing this combination, SGSS Deutschland KAG’s clients have access to an integrated application in the form of SimCorp Dimension, which offers an extensive range of functionalities including position-keeping, cash forecasts, simulations, analysis and order mana­ gement. Another benefit is an assortment of pre-customised templates, which is available and can be individualised on request.

As part of SGSS Deutschland KAG’s IT infrastructure, the highly configurable and flexible system largely supports trading, middle- and back-office servi­ces. Here the requirements are partly regulated by law, so that the services are standardised and have high-quality requirements.

The performance spectrum is extensive and the automation rate (STP) high.

However, the frequency of changes in this area is low, generated either by legislative changes or new customer requirements. In the case of special services (accounting reports, tax treatment and key ratios), the complexity is high.

In addition, the introduction of new financial instruments is gover­ned by a high frequency of change.

In terms of technical application, the scalable system is based on Oracle 10g

Performance results are analysed across a comprehensive range of criteria (geo­ graphies, sectors, interest curves, currencies, selection of key positions and more), based on the valued positions of client portfolios. SGSS’s performance attribution services provide complex breakdown and performance attribution that factors in a broad range of para­ meters, such as asset, country and sector allocation as well as stock-picking, and, for bond portfolios, currencies, interest rate curves, credit and selection.

Fast and accurate computation of market indicators and ratios (i.e. Sharpe, Information Ratio, Jensen, Treynor, alpha, beta, tracking error, volatility, corre­lation) provides invaluable information on the

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Risk is measured ex ante using the Value at Risk (VaR) method, and can be computed according to three approa­ches: parametric, deterministic, or Monte Carlo.

The SGSS solution complies with regulatory requirements, and measurement can be customised to precise requirements with stress testing and multiple criteria.

As with performance tracking, risk calculation (VaR, tracking error, volatility) is applied to each decision taken during the management process by asset type, geographies and sectors. In short, clients

“Focusing on top performing technology/data vendors, outsourcing providers, global custodians and brokers can be mission-critical to capturing efficiencies in pre- and post-settlement services.”

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# Choosing the optimal IT platform for best-of-breed asset servicing: a European case study

“Helping to set SGSS Deutschland KAG apart from its competitors is a combination of innovation, flexibility and client focus: innovation in the use of innovative solutions to help it stay ahead of the competition; flexibility as reflected in goal-oriented thinking and fast-track adaptability; and client focus to ensure that satisfied clients serve as the best reference.” benefit from the industry’s most comprehensive, accurate and flexible performance tracking solution covering measurement, analysis, attribution, and risk modelling.

extensions, short processing times and IT efficiencies, have contri­buted to a high degree of flexibility and added value for the client.

ASSET SERVICING BASED ON STRENGTH Helping to set SGSS Deutschland KAG apart from its competitors is a combination of innovation, flexibility and client focus: innovation in the use of innovative solutions to help it stay ahead of the competition; flexibility as reflected in goal-oriented thinking and fast-track adaptability; and client focus to ensure that satisfied clients serve as the best reference.

Finally, the development of customised solutions, promotion of a variety of cooperations and partnerships, the attention to a large and expanding number of existing contacts in the form of brokers, asset managers and custodians, as well as the application of proven and tested interfaces and processes have helped to create a service-oriented one-stop solution of benefit to clients.

Some 50 years of experience in the KAG business, combined with a proactive and inter-active working relationship with clients, have ensured a very high level of client satisfaction, with an estimated 80% of new clients won by word-of-mouth.

Secondly, the successful use of a sophisticated infrastructure, including in-house customising, individual interfaces, rapid

By building on this market-leading position, SGSS and its German asset servicing operations have derived the full benefits of a robust IT infrastructure that supports client-driven innovation and excellence, while also provi­ding flexibility, scalability, functionality and reliability.

Alex Buffet is Head of Market Data and Asset Servicing at Société Générale Securities Services (SGSS) and a member of its International Management Committee.

After holding a number of senior executive positions at Société Générale for nearly 25 years, Alex Buffet joined Société Générale Securities Services in December 2008, taking on the responsibility for creating a new division dedicated to Market Data and Asset Servicing. Alex Buffet is a graduate from the Institut d'Etudes Politiques in Paris.

Christian Wutz is Managing Director of SGSS Deutschland KAG, responsible for Insourcing and the departments Asset Servicing, Product Management, IT, Customer Care and Client Projects. With more than 15 years of experience in the international banking field, he has held senior positions at HypoVereinsbank, Activest Investments and Pioneer Invest­ ments, prior to taking on the role as Managing Director of SGSS Deutschland KAG. He is a graduate of the LudwigMaximilians-University in Munich.

Société Générale Securities Services (SGSS) As a business division of major French bank Société Générale, SGSS is established in 28 locations worldwide with more than 4,000 employees. It provides a full range of securities services that are adapted to the latest financial markets and regulatory evolution: clearing services, custody and trustee services, retail custody services, liquidity management, fund administration and asset servicing, fund distribution and global issuer services.

SGSS is the sixth-largest worldwide global custodian and the second largest in Europe.

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# IFRS 9:

the changes and IT challenges in store The IFRS standard for accounting for financial instruments is changing. The new standard IFRS 9 will be succeeding the existing IAS 39. Not only does this mean that investment management organisations have to change their financial reporting in the future. For large parts of the investment management industry, the transition also requires a conversion of holding categories and of accounting values.

This article addresses the IT aspects of these conversion projects.

I

n 2009, the International Accounting Standards Board (IASB) embar­ked on a three-phase pro­ject to replace the current standard for financial instruments, IAS 39, with a completely new standard, which has been given the name IFRS 9. The three phases are: Arne E. Jørgensen, M.Sc., Domain Manager for Accounting, SimCorp.

• t he first, ‘Financial Instruments: Classification and Measurement’, was published in its final version in November 2009. Due to the review comments on the accounting for liabilities, the update of the rules for liabilities was spun off as a fourth phase of the project, ‘Phase 1A’; • the second, ‘Financial Instruments: Amortisation and Impairment’, was sent out for public comment in November 2009, with a deadline for comments set for 30 June 2010; • the third, ‘Financial Instruments: Hedge Accounting’, is expected to be sent out for public comment in the second half of 2010.

Although the introduction of IFRS 9 primarily is a business and procedural project, each phase also poses its specific challenges to IT systems and to IT project capabilities.

Organisations that have never used categories other than the fair value category would probably consider themselves very fortunate. They do not have to change or convert anything, provided

their accounting policies and business models remain unchanged.

PHASE 1; ‘FINANCIAL INSTRUMENTS: CLASSIFICATION AND MEASUREMENT’ LEGAL FRAMEWORK The timetable for IFRS 9 Phase 1 is that early adoption was permitted already for 2009 and that the standard will be mandatory for accounting periods starting on or after 1 January 2013. However, in spite of the original time pres-

sure put on the IASB to act fast, so far very few legislative and supervisory authorities have actually approved the use of IFRS 9 Phase 1 within their jurisdiction. The status of the EU endorsement process is just one example.

PROJECT FRAMEWORK The lack of legislative progress is worrying project planners, both on the business side and on the IT side, who are concerned that political pressure may result in last-minute modifications of the standard. Such uncertainty often causes decision-makers to delay the

“Although the introduction of IFRS 9 primarily is a business and procedural project, each phase also poses its specific challenges to IT systems and to IT project capabilities.”

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# IFRS 9:

the changes and IT challenges in store

“However, in spite of the original time pressure put on the IASB to act fast, so far very few legislative and supervisory authorities have actually approved the use of IFRS 9 phase 1 within their jurisdiction.” project start, which may result in a ‘ketchup’ effect where many projects will be starting at the same time, with a much shorter timeframe and in competition for internal and external resources.

IFRS 9 Phase 1 primarily entails a restructuring and reduction of the holding categories compared to IAS 39, most significantly abolishing the IAS 39 ‘Available For Sale’ category.

From an IT perspective, it is fortunate that the technical tools required for the new holding categories already were used by the old. The tools, such as amortisation and fair value adjustment, will simply be applied in new contexts.

CONVERSION PROJECT The decision concerning what from the old categories goes where in the new is a business decision, but may need IT support for ad-hoc analyses and data extracts. Determining the initial values to use in the new categories is also primarily a business task, which may also need some ad-hoc IT support.

The crucial question from an IT perspective is how the IFRS 9 categories and values are going to be implemented.

Two approaches come to mind: a period of parallel accounting or a ‘big-bang’ conversion.

The ‘big-bang’ conversion, where all assets and liabilities are transferred from one of the old categories to one of the new categories on the date of transition, requires very careful planning and an extensive test phase. There is no second chance if business is to resume the next day. The process must include an update of the booked values according to the IFRS 9 transition rules.

The construction of comparable IFRS 9 figures for previous years to use in the first two IFRS 9 reports will primarily be a manual task for the business side of the organisation, unless the conversion takes place under the (very) early adoption rules.

Accounting in parallel for IAS 39 and IFRS 9 for a period of time is less vulnerable to mistakes. The IAS 39 figures will still be present in an unchanged fashion and the IAS 39 results will be the official financial results for one or two reporting period before switching over.

The organisation can use the time to acquaint itself with IFRS 9, and the analysis of the effects of the differences between IAS 39 and IFRS 9 follows almost automatically.

Initialisation of the IFRS 9 framework can be done (for example, six months earlier) and can be repeated if necessary.

The comparable IFRS 9 figures from the parallel period are automatically available.

PHASE 1A: ‘FAIR VALUE OPTION FOR FINANCIAL LIABILITIES‘ This spinoff from Phase 1 was sent out as an exposure draft in May 2010 with a very short review deadline, i.e. 16 July 2010. For a 30-page document, the deadline is probably reasonable. An investment management system that can separate value changes due to changes in credit risk from the overall change in fair value will already have the technical tools to meet this challenge.

PHASE 2: ‘FINANCIAL INSTRUMENTS: AMORTISATION AND IMPAIRMENT‘ IFRS 9 Phase 2 is not finalised at this point. The final standard is expected in the second half of 2010 and the date from which it will be mandatory will be fixed in that final version. Given the comments as well as the meetings and other initiatives taken by IASB, it is almost certain that the final standard will differ from the exposure draft on seve­ ral points. The most disputed points seem to be the amortisation based on the expected cash flow and the impairment process.

Technically, the use of an expected cash flow means that an integrated investment management system must allow for two parallel cash flows for a given bond: the contractual cash flow, which still controls the payments (until the debtor actually fails to pay), and the expected cash flow for amortisation purposes. Two cash flows for the same bond, one of them potentially quite volatile, will probably pose an IT challenge. The resemblance to the treatment of impaired securitised debts under USGAAP’s EITF 99-20 may help in some circumstances.

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Nothing about IFRS 9 Phase 2 is certain for now. The final standard and any communication from IASB will be read eagerly in industry circles, both on the business side and on the IT side.

asked for his opinion, the author of this article would recommend a period of parallel accounting although this presents more pressing project deadlines.

PHASE 3: ‘FINANCIAL INSTRUMENTS: HEDGE ACCOUNTING‘ The exposure draft for IFRS 9 Phase 3 is currently expected to be sent out for comment in the second half of 2010.

Given the new holding categories (Phase 1), hedge accounting will probably apply to fewer cases under IFRS 9 than under IAS 39. The discussions and the preliminary information from IASB indicate that the only mechanism of hedge accounting will correspond to the current cash flow hedges.

An IT system that already supports cash flow hedges will probably only have minor challenges with Phase 3, although the context may change.

OUTLOOK Any organisation that currently uses the ‘Available For Sale‘ holding category under IAS 39 faces a challenging conversion project when implementing Phase 1 of IFRS 9.

There are three main challenges: the structure of the future financial reporting; the business challenge of the actual conversion (classification and initial values); and the technical IT challenge of the actual conversion.

The technical IT conversion for IFRS 9 Phase 1 depends on a crucial choice of conversion model – a business critical ‘big-bang’ or a period of parallel accounting before the transition date according to both IAS 39 and IFRS 9. If

The final formulation of IFRS 9 Phase 2 is still pending at the time of writing. If the rules suggested in the exposure draft from November 2009 become standard, there will be new challenges, both for the business side and for the IT side. The participants in the investment management industry should follow development of IFRS 9 Phase 2 with the greatest interest.

Only very preliminary information is currently available regarding IFRS 9 Phase 3. What is known so far indicates that IFRS9 Phase 3 will pose smaller challenges than Phase 1 and Phase 2.

We will know more by the end of the year.

Arne E. Jørgensen is domain manager for accounting in SimCorp. He holds an M.Sc. in Engineering from the Technical University of Denmark and a Diploma in Finance from Copenhagen Business School.

Prior to joining SimCorp in 1988, he worked with IT development at Copenhagen Handelsbank (now part of Danske Bank), and before that at the Danish consulting engineering company Carl Bro.

“An IT system that already supports cash flow hedges will probably only have minor challenges with phase 3, although the context may change.”

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# New SimCorp StrategyLab volume on growth and value creation in asset management A new SimCorp StrategyLab volume addresses key issues as to why and in what way investment managers must reassess their strategies to ensure value creation and growth in the new financial environment emerging in the global asset management industry after the financial crisis.

Professor Paul Verdin, Solvay Business School, Brussels, Belgium.

Mette Trier, MA, Office Manager, SimCorp StrategyLab.

H

are researchers or students. The insights presented can without doubt serve as a basis for future research and development as well as to stimulate new theoretical or empirical studies.

These questions are some of the key issues addressed in the latest volume on the global asset management industry published by SimCorp’s independent research arm SimCorp StrategyLab. In ‘Growth and value creation in asset management’, the third and final volume in a series on risk, cost and growth, professionals and experts from the invest­ment management industry and research centres share their views and insights.

DIVERSITY AND RICHNESS The volume’s aim is not to close the gap or fill the apparent void between growth ambition and specific growth strategies or frameworks, even less to provide a comprehensive coverage of all the strategic issues facing the asset management industry worldwide.

ow can investment mana­ gers win in the ‘new normal’ of the financial industry?

Will it be back to business as usual, or should new approaches be developed after the major ‘re-set’ witnessed in financial markets and asset management in particular? Will the winners of tomorrow be the same as those of yesterday or today? What does it take to implement successful growth strategies going forward in the investment management industry? How do investment managers create value in a durable, sustainable way that addresses the needs of clients, intermediaries, regulators, managers and shareholders?

What are the future implications of ope­ rational challenges and IT architecture?

The book has been written for the management of the global asset management industry. However, the issues raised and the findings reached will also be highly relevant for anyone with an interest in this industry, whether they

While each of the contributions has been selected for its originality and thoughtprovoking qualities, we believe the collection represents a diversity and richness of perspectives which are intended

“... the collection represents a diversity and richness of perspectives which are intended more as pointers to engage in further analysis and strategic reflection ...”

It is, however, the ambition to offer some rele­vant, possibly new approaches, insights and conclusions from recent and ongoing research and developments in the industry from a variety of vantage points, as these are emerging from the recent work of academics, think-tanks, consultants and industry experts.

more as pointers to engage in further analysis and strategic reflection rather than as ready-made answers to the various strategic questions and opportunities that are arising out of the current environment.

True to the nature of any strategic probing and strategy-making, we believe that ready-made answers and general prescriptions can never be offered in general discussions or publications anyhow, whatever their nature or objective.

Those answers can only be achieved in the specific context of any particular business and organisation and can only be successfully implemented by their own managers and executives.

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Available from amazon.co.uk and amazon.com

STRUCTURE, REGULATION AND BUSINESS MODELS The volume is divided into an introduction, three parts, and a conclusion, making up 11 chapters in all. Following the introduction, which provides the context and overview of the volume, Part 1 opens with a discussion in Chapter 2 of the industrial organisation and institutional development of the global asset management industry by Ingo Walter of the Stern School of Business at NYU and Director of SimCorp StrategyLab. Professor Walter argues that the asset management industry is likely to be one of the largest and most dynamic parts of the global financial services sector and explains why it is likely to resume its long-term growth after the impact of the recent crisis. At the same time, the chapter provides an overview of the major players on the buy side of the business (from pension, insurance and mutual funds and UCITS to private equity and hedge funds), and the main factors affecting them as a basis for the competitive dynamics observed in the industry and as a basis for future strategy development.

Massimo Massa, who is the Rothschild Chair Professor of Banking and Finance at INSEAD, takes us in Chapter 3 further into the inner sanctuaries of how the mutual fund industry is really functioning or dysfunctioning, separat-

“... the asset management industry is likely to be one of the largest and most dynamic parts of the global financial services sector ...”

Professor Ingo Walter, Director of SimCorp StrategyLab ing fact from fiction, and distinguishing between hope (what he calls ‘marketing’) and reality (read: ‘performance’).

These insights are based primarily on his own path-breaking academic research and that of his colleagues.

Given the growing importance of the European UCITS regime, not only on the European market, the largest regional asset management market so far, but increasingly also on the global scene, Karel Lannoo, chief executive of the Centre for European Policy Studies (CEPS), elaborates in Chapter 4 on pressures and opportunities coming from the regulatory side, particularly in view of the new UCITS IV European Directive and the continuing trends towards more or different regulations in the field, such as the controversial plans for new hedge fund regulation.

OPPORTUNITIES AND STRATEGIES The second part of the volume looks at the opportunities and strategies for growth in the new financial environment. Asset management is no longer the prodigal

son allowing for the easy business-asusual practice that is at least in part responsible for the inconsistencies, the oddities or the lack of sustainable stra­ tegies, which Massa so aptly points out.

Profits will not easily return and it will become harder to make a living.

Yet there is plenty of hope if one takes a look at the ‘new normal’ that Johannes Elsner, Martin Huber and Philipp Koch of McKinsey believe we have arrived at.

In Chapter 5 of the volume, the three authors argue that what they describe as ‘fake’ alpha will not do anymore – only true alpha entrepreneurs will remain, but as ‘boutique players’ alongside a few really large-scale beta factories. Key to survival, revival, and continued success, however, is to regain the trust from clients and investors, and to take the current crisis as an opportunity for strategic (re-) evaluation and reorientation.

Adam Schneider, Principal at Deloitte Consulting, elaborates in Chapter 6 on

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# New SimCorp StrategyLab volume on growth and value creation in asset management

“Asset management is no longer the prodigal son allowing for the easy business-as-usual practice that is at least in part responsible for the inconsistencies, the oddities or the lack of sustainable strategies ...” the innovation challenge by translating it into concrete trajectories, each of which can be seen as a strategic response to major trends he identifies in the investment management business today. In passing, these trends are generally in line with our claim of increasing competition in the business allow-

ing fewer and fewer opportunities for easy money-making.

of customer behaviour and its implications for product design and development.

The responses he proposes illustrate how creating more value for clients can be achieved by (1) delivering better, more transparent, more reliable and better-performing products; (2) focusing on profitable segments and client satisfaction (i.e. by better delivering them the value proposition they are willing to pay for and thus also finetuning the offer and the pricing); and (3) by streamlining organisation and processes (e.g. eliminating some of the unproductive waste or side-effects of behavioural and organisational dynamics identified in the Massa chapter).

STRATEGICALLY DRIVEN IT PLATFORM A strategically and business-driven IT architecture and platform that is focussed, flexible and cost-effective will obviously be critical in this information-driven business.

Massa’s contribution is quite complementary to the one in Chapter 7 written

by Alistair Byrne, Principal at Investit Consultancy, which looks not at what players in the industry say, but what in fact they do, and how this is affected by the organisational dynamics and ‘organisational behaviour’ within asset management businesses.

This is a new kind of ‘behavioural finance’, which we could call ‘organisational behaviour finance’ – to complement and join the growing ranks of the more traditional ‘behavioural finance’ contenders. Byrne, who has published more comprehensive reviews of ‘traditional’ behavioural finance findings elsewhere, exposes readers in his chapter to a more novel and path-breaking study

This point is aptly and strategically discussed in Chapter 8 by Pascal Wanner, Account Manager at SimCorp A/S, who highlights how strategic IT can and should be about securing and supporting growth going forward.

Effective and efficient IT investment has to be part of the overall business strategy. In today’s asset management environment, this requires regaining trust by delivering real value to clients.

The resulting approach necessitates a paradigm change in the qualification and quantification of IT investments in general. Focussing exclusively on cost will limit the potential, as clients also expect more and different sources of value added.

Jacob Elsborg, Head of Investment at ATP Investment, takes this further in Chapter 9, outlining the crucial role of defining and implementing an appropriate operational platform strategy – as distinct from an IT strategy, as it is generally known or referred to. When properly managed and conceived, the

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Ingo Walter, Director of SimCorp StrategyLab and Professor of the Stern School of Business at NYU, discusses in Chapter 2 the industrial and institutional development of the asset management industry.

Karel Lannoo, CEO of the Centre for European Policy Studies (CEPS), elaborates in Chapter 4 on pressures and opportunities in the global asset management industry originating from the regulatory side. (See also article

by Karel Lannoo on page 18.)

operational platform can even be considered a strategic asset, and should be managed as such.

and profitable. In fact, growth in and of itself is not really a strategy – it is the result of a good strategy: a strategy that refocuses on sustained value delivery to clients and appropriate ways to share that value fairly and sustainably with the client for the benefit of management, employees and shareholders.

Depending on the nature of the business activity, the relevant business model and the market in which players operate, this could indeed become a crucial element in differentiating oneself from the next competitor and in particular could act as a platform for growth.

A STRATEGIC PROSPECTIVE In the third part of the volume, Mathias Schmit and Lin-Sya Chao of the Solvay Brussels School of Economics and Management elaborate on this point in Chapter 10. On the basis of literature and empirical findings, they propose a pragmatic framework to better manage this ‘growth risk’ eminently present in any (growth) strategy. If we make big moves, if we chase growth for its own sake, even if we follow the proper path down the value curves and value segments, we should be aware of the risks we are taking. Sustainable growth and value creation can only be based on a sound control of costs and risks.

The basic premise in the concluding chapter 11 is that growth will not return by default if it is to be sustainable

The link between growth and value creation therefore seems essential. As argued in the concluding chapter, there is no going back to the old ‘business-asusual’ practice. Rather it means that one will need more and true innovation in terms of delivering value to the client if one is to win in this new and challenging environment.

The editor, Paul Verdin (Ph.D., Harvard), holds the Chair of Strategy and Organisation at Solvay Business School (ULB, Brussels) and is Professor of Strategy and International Management at KULeuven in Belgium. He is a former Distinguished Visiting Professor at INSEAD, where he has been on the faculty for over 15 years, and other international business schools, and has taught and consulted widely on strategic issues and processes in the financial sector (banking, insurance, asset management).

August 2010

Massimo Massa, Rothschild Chair Professor of Banking and Finance at INSEAD, discusses in Chapter 3 whether the mutual fund industry is really functioning or dysfunctioning.

“Sustainable growth and value creation can only be based on a sound control of costs and risks.”

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BOOK REVIEW:

# Growth and Value Creation in Asset Management: how to win in the 'new normal'

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Alfred Mettler, Clinical Associate Professor at Georgia State University, Atlanta, USA.

fter the substantial losses as a result of the global financial crisis and all the discussions about new regulations in financial services, it is tempting to ask (1) if and how asset management would be able to create value in the future, and (2) where potential future growth could come from.

Based on an interestingly assembled collection of original and thought-provoking articles, this book makes a convin­cing case that the current situation could allow for a true recovery and emergence of the asset management industry as one of the most dynamic parts of the global financial services sector.

First of all, it is argued that general trends like the movement towards professional management of discretionary household assets, the displacement of defined benefit pension plans, increases in individual wealth in various parts of the world, the reallocation of portfolios towards less risk exposure, and changes in various areas of regulation (for example UCITS IV in the EU) will be the underlying growth driver. On the other hand, industry consolidation could allow successful competitors to exploit economies of scale and operating cost efficiencies, and therefore potentially result in value creation for them as well as for their clients.

WINNERS AND LOSERS IN THE ‘NEW NORMAL’ The evolution of the asset management industry will – as another one of the articles predicts –lead to a ‘new normal’. A heavier regulatory hand, a pronounced differentiation between large-scale “beta factories” versus true “alpha entrepreneurs”, and a fight for regional as well as global pole positions will make the ‘new normal’ a very competitive place.

Growth, profitability, and market share will decide between winners and losers, and the main focus will increasingly be on client service/client profitability. Furthermore, it is predicted that in this environment it will be essential for asset management organisations to align IT with their business strategy and treat IT investments not just as cost reducers, but also as growth drivers.

Two interesting points are made about the investors. One deals with the “reluctant investor”, who has limited financial knowledge, does not want to make detailed investment decisions and would therefore prefer that experts do it on his/ her behalf. Based on findings from behavioural finance, it is recommended to focus on the development of a few welldesigned and effective products whose benefits are transparently communicated.

In a more general way, another article argues that performance evaluation of mu-

tual funds is mostly illusory. While in the past the non-performance of individual funds seems to have been counterbalanced by performance persistence at the fund family level, this could change in the future. Investors may find it more economical to either invest in cheaper index funds (beta strategies) or in better performing hedge funds (alpha strategies) than to stay with fund families.

As the final article points out, clients are no longer focused only on returns; they are also concerned about liquidity and transparency, which will of course change the value equation. Nevertheless, as the book concludes, “… sustained value creation and profitable growth will always result from strategies which create and deliver superior value to clients …”

There is no doubt that the ideas outlined in this book provide essential reading for the asset management community.

Alfred Mettler is a Clinical Associate Professor at Georgia State University, Atlanta, USA, and an Adjunct Professor with the Swiss Finance Institute. His principle interests are in selected areas of International Banking and Finance, Risk Management of Financial Institutions, and Financial Education. He is active in various Executive Education Programmes in Europe and the USA, and has consulted for numerous organisations.

The publication ‘Growth and value creation in asset management’ completes a trilogy by SimCorp StrategyLab, all written with management of the global asset management industry in mind. The contents of these volumes will also be highly relevant for anyone with an interest in this industry, whether they are researchers or students.

Title: Growth and value creation in asset management Other books in this series: Understanding the financial crisis: investment, risk and governance (July 2009). Operational control in asset management: processes and costs (January 2010) Editor: Professor Paul Verdin Solvay Business School and KULeuven No of pages: 224 Publisher: SimCorp StrategyLab Publication date: 30 June 2010 Available from amazon.co.uk and amazon.com

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JOURNAL OF APPLIED IT AND INVESTMENT MANAGEMENT

August 2010

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BOOK REVIEW:

# Euro Crash: The Implications of Monetary Failure in Europe Brendan Brown, Palgrave Macmillan, 2009.

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he book 'Euro Crash: Implications of Monetary Failure in Europe’ addres­ ses the number one issue in international economics and finance: the causes of the global credit bubble and bust. Among the current investigations to apportion blame and come up with remedies, European Mone­tary Union (EMU) and the European Central Bank (ECB) have hitherto remained outside the target areas for research.

The book, a sequel to the well-received Euro on Trial (hailed by Inter­­national Business Review as 'the euro-sceptic's bible'), corrects that omission, arguing that the launch of a deeply-flawed EMU, together with subsequent grave policy errors by the ECB, played key roles in providing fuel for the looming

economic and financial disasters.

Brown explores the possible remedies to improve the functioning of EMU, including a complete re-vamp of the ECB's monetary framework. In Brown’s opinion, the ordo-liberal order as expressed in total independence from the ECB has become a passport for monetary incompetence and should be replaced by the classical liberal tradition of the central bank residing within the democratic political process but with the aim of monetary stability established as a constitutional principle.

Such transformation would require a Second Treaty of Maastricht creating a greater degree of political union between the countries belonging to EMU.

BRENDAN BROWN is Director and Head of Economic Research, Mitsubishi UFJ Securities International plc. Based in the City of London, Dr. Brown has authored many previous books on international financial topics, including monetary problems in the USA, Europe and Japan and asset market pricing (including exchange rates) in a global context. The books have treated both contemporary trends and historical topics. The author’s postgraduate degrees are from the University of Chicago and London School of Economics. Dr. Brown is a regular contributor to the Japanese and European financial media.

BOOK REVIEW:

# Asia and the Subprime Crisis: Lifting the Veil on the Financial Tsunami Chi Lo, Palgrave Macmillan, 2009.

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his is not a normal crisis.

World growth may experience a structural downward shift for the next decade. Asia's export-led growth model is shattered, and has not changed fast enough to take on the new post-subprime paradigm. China is liberalising its insurance sector (seen as the 'goldmine' in the future of world financial development) and trying to develop financial derivatives for insurance products. Many analyses on the subprime crisis so far have insufficiencies, including a lack of integrated analysis from the Asian perspective, misunderstandings about the Asian and Chinese aspects of the subprime crisis, misplaced views on the nature of the crisis, ignorance of Asia’s contribution to the root of the subprime crisis, and erroneous analyses of the macro-policy impact on the global system in the aftermath of the crisis.

This book seeks to remedy these misconceptions, and is the first to place Asia - in particular China - and the developed world together in the subprime crisis context. Its integrated approach uses both macro (systemic) and micro (corporate) analysis to draw valuable conclusions from the disaster. The author uses a critical approach, questioning con­ventional wisdom at times, to assess the subprime crisis's causes and impact and to debunk misconceptions.

Cutting through hype and bias, Chi Lo discusses Asia's contribution to the root of the crisis, traces the regulatory and policy lessons to be learned and predicts the economic and financial aftermath.

Combining research thoughts, data, facts and economic logic with real world examples and anecdotes to elaborate on the arguments, this thought-provoking book lifts the veil on the 'financial tsunami' to expose Asia's economic life in the post-subprime world.

CHI LO is an economic strategist and head of investment research at a major asset man­ agement company based in Hong Kong.

His previous roles include China Director Research at HSBC, Asian Chief Economist at Standard Chartered Bank, Economic Advisor at the Canadian Deposit Insurance Corporation, and senior research positions at blue-chip investment banks and regulatory bodies in North America, the UK and Asia. In 2000 and 2006, he was listed as a member of the International Who's Who Professionals. Chi Lo has written several books on Asian and Chinese economic transformation, and highly acclaimed research pub­ lications in the international media and periodicals. He has taught applied economics, macro-economics and banking and finance at various universities in Asia and North America, and spoken at international semi­nars such as the Asian Development Bank and United Nations conferences.

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April 2010

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

UK GOVERNMENT TO DEVOLVE § NEW FSA, MAKING IT BANK OF ENGLAND SUBSIDIARY (UK)

In mid-June, new Chancellor of the Exchequer George Osborne announced sweeping changes to the UK financial regulatory apparatus, effectively abolishing the Financial Services Authority (FSA) and incorporating its mandate into a new subsidiary of the Bank of England (BoE). A new 'Consumer Protection and Markets Authority' will be created to regulate every firm providing financial services to consumers, and a new Financial Policy Committee within the BoE will be given the authority to examine "macro issues that may threaten economic and financial stability and take effective action in response". http://www.ft.com/cms/s/0/0203b99e-797f-11df-b063-00144feabdc0.html

REGULATORY FUNDS § EUROPEAN NEWS - MAY 2010

This update from Ernst & Young touches upon recent regulatory actions impacting the European fund industry. The update includes coverage of a new Irish law which allows non-Irish funds to migrate to Ireland without changing the corporate structure; the impact of the new Investment Fund Accounting and Valuation Ordinance (Investment-Rechnungslegungs- und Bewertungsverordnung: InvRBV) that the Federal Financial Super­visory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht: or BaFin) in Germany has instituted to provide uniform valuation of funds in that market; and an assessment of recent EU edicts regarding re-domiciling of investment funds in Europe. www.ey.com/Publication/vwLUAssets/European_regulated_ funds/$FILE/European_regulated.pdf

CATASTROPHE § STANDARDISED SCENARIOS FOR THE INSURANCE INDUSTRY

On 15 June, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) presented a final proposal on calibrations of Non Life and Health Catastrophe standardised scenarios. The proposal is the outcome of a joint industry and CEIOPS working group called the Catastrophe Task Force (CTF). The proposal provides a calibration of catastrophe risk at the 99.5% VaR for undertakings that are exposed to extreme or exceptional events. The proposal contains information on both how undertakings should apply the scenarios and how they have been calibrated. www.ceiops.eu/content/view/17/21/

POLITICAL CONTRIBUTION § SEC RULES FOR INVESTMENT ADVISERS (US)

The Securities and Exchange Commission (SEC) is adopting a new rule under the Investment Advisers Act of 1940 that prohibits an investment adviser from providing advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees make a contribution to certain elected officials or candidates.

The new rule also prohibits an adviser from providing or agreeing to provide, directly or indirectly, payment to any third party for a solicitation of advisory business from any government entity on behalf of such adviser, unless such third parties are registered broker-dealers or registered investment advisers, in each case themselves subject to pay to play restrictions. Additionally, the new rule prevents an adviser from soliciting from others, or coordinating, contributions to certain elected officials or candidates or payments to political parties where the adviser is providing or seeking government business. www.sec.gov/rules/final/2010/ia-3043.pdf

RELEASES RESULTS OF § IASB PROJECT TO DEFINE A COMMON MEASURE OF FAIR VALUE IN COOPERATION WITH FASB

This comprehensive project summary, prepared by the International Accounting Standards Board (IASB) staff, provides the background of the IASB’s fair value measurement project and explains how the IASB plans to finalise an IFRS on fair value measurement. In March 2010 the IASB completed its initial discussions with the Financial Accounting Standards Board (FASB) to develop common requirements for measuring fair value and for disclosing information about fair value measurements.

Once the comment period ends (September 2010) and additional deliberations have been completed ( January 2011), it is anticipated that the IASB and FASB will publish a common set of IFRS and US GAAP fair value measurement standards. These standards are expected to be published by the end of March 2011. www.iasb.org/NR/rdonlyres/5179C9D9-F7D8-4742-939C2B6677F75FF7/0/FVMprojectsummaryJuly2010.pdf

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AMERICAN FINANCIAL § RESTORING STABILITY ACT OF 2010 (US)

The Stability Act of 2010 proposes broad changes to the existing regulatory structure, such as: creating a host of new agencies (while merging and removing others) in an effort to streamline the regulatory process; increasing oversight of specific institutions regarded as a systemic risk; amending the Federal Reserve Act; promoting transparency; and additional changes. banking.senate.gov/public/_files/ TheRestoringAmericanFinancialStabilityActof2010AYO10732_xml0.pdf

9 REPLACING IAS 39 § IFRS FINANCIAL INSTRUMENT

ACCOUNTING STANDARDS IN MULTI-PHASED APPROACH

The IFRS standard for financial instruments, IAS 39, is in the process of being replaced by a new standard, IFRS 9, in an approach over three phases.

The International Accounting Standards Board (IASB) issued IFRS 9 phase 1 (Classification & Measurement) in November 2009, allowing early adoption in 2010 and making it mandatory for 2013. The public review period for IFRS 9 phase 2 (Impairment Methodology) ended 30 June 2010 and the final version is expected in late 2010. The exposure draft for IFRS phase 3 (Hedge Accounting) is expected to be sent out for comment by the end of 2010. http://www.iasb.org/Current+Projects/IASB+Projects/Financial+Instrume nts+A+Replacement+of+IAS+39+Financial+Instruments+Recognitio/Fina ncial+Instruments+Replacement+of+IAS+39.htm

TO US GAAP STANDARDS § UPDATES ON FINANCIAL INSTRUMENT ACCOUNTING (US)

'The Financial Accounting Standards Board (FASB) issued an exposure draft in May 2010 proposing updates to the accounting for financial instruments (topic 825 in the Accounting Standards Codification) and for derivatives and hedging (topic 815 in the Accounting Standards Codification). The deadline for comments is 30 September 2010. Both the FASB and the IASB are encouraging users of IFRS also to review and comment to the FASB on this exposure draft, to the benefit of the two boards’ convergence project. http://www.fasb.org/cs/ ContentServer?c=FASBContent_C&pagename=FASB/FASBContent_C/ NewsPage&cid=1176156902600

April 2010

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Recent research and white papers

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ASSET MANAGEMENT NEWS Q1 2010

Just like the broader industry it serves, the asset management industry is returning to growth. Yet this growth is far from uniform – there are pockets of flourishing activity and areas of continuing weakness. Also included are asset management news updates from around the world.

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'Asset Management News Q1 2010', PwC 2010 www.pwc.com/gx/en/asset-management/assets/pdf/AMN0310.pdf PricewaterhouseCoopers, 28 pages, March 2010

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CHALLENGING THE DOMINANCE OF MUTUAL FUNDS? POSITIONING FOR A NEW FINANCIAL LANDSCAPE

This report provides background on Exchange-Traded Funds (ETFs). It describes how they are formed, and provides a comparison between ETFs and Mutual Funds (MFs). It also looks at the proposed changes in ETF regulations and what the future holds for ETFs. Lastly, it considers whether ETFs will challenge the dominance of MFs.

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‘Forward focus: 2010 Insurance M&A’, Howard Mills and David Simmons, Deloitte LLP and Deloitte Tax LLP 2010 www.deloitte.com/view/en_US/us/Industries/Insurance-Financial-Services/ c5b00af0fa077210VgnVCM200000bb42f00aRCRD.htm Deloitte, 12 pages, March 2010

This report outlines the steps required to achieve a new profitable business model, and outlines the important role that relationships will play in ensuring that hedge funds and their providers operate in a more networked manner.

GLOBAL IT SPENDING TRENDS IN FINANCIAL SERVICES THROUGH 2012 – SURPRISING OPTIMISM ON THE HORIZON

This Research Note presents TowerGroup's 2010 forecast of global IT spending in the financial services industry and identifies some of the principal macroeconomic and financial service industry drivers of this spending. Separate projections by major region and line of business are provided and discussed in the context of the rapidly changing macroeconomic climate.

‘Global IT Spending Trends in Financial Services through 2012 – Surprising Optimism on the Horizon', TowerGroup 2010 www.towergroup.com TowerGroup, March 2010

SPRING 2010 INSURANCE M&A: OVERCOMING THE CHALLENGES AND LEVERAGING THE LESSONS LEARNED FROM THE FINANCIAL CRISIS

The article raises challenges like evaluating risk, manoeuvring in an evolving regulatory environment and IFRS and tax issues in the context of mergers and acquisitions within the insurance industry. In the light of the recent financial crisis, the authors discuss how insurance companies might improve in mergers and acquisitions deal-making and integration activities and gain premium growth and a strong competitive advantage.

EVOLVING MODELS IN THE HEDGE FUND INDUSTRY

‘Evolving models in the hedge fund industry', Deloitte 2010 www.deloitte.com/view/en_GX/global/industries/financial-services/investment-management/ Deloitte, 24 pages, February 2010

Now that the securities and investments industry is emerging from the biggest financial crisis in recent memory and assets under management are beginning to climb back up for both traditional money managers and alternative asset managers, it is time to look at the future of asset management and the forces that will drive this business in the next few years. This TowerGroup ViewPoint discusses three major challenges facing the global active asset management business and offers brief recommendations for the industry going forward.

‘Post Financial Crisis Challenges Facing the Investment Management Business', TowerGroup 2010 www.towergroup.com TowerGroup, January 2010

‘Challenging the dominance of mutual funds? Positioning for a new financial landscape', Deloitte 2010 www.deloitte.com/view/en_GX/global/industries/financial-services/investment-management/ Deloitte, 24 pages, March 2010

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POST FINANCIAL CRISIS CHALLENGES FACING THE INVESTMENT MANAGEMENT BUSINESS

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TOP 10 TRENDS FOR HEALTH AND LIFE INSURANCE, 2010

A new report from Aite Group, LLC, presents the top 10 trends in the health and life insurance industries for 2010. Broken down into the top five trends in each category, the report sheds light on key areas of focus within rapidly changing market environments.

‘Top 10 Trends for Health and Life Insurance, 2010’, Aite Group 2010 www.aitegroup.com/reports/201003081.php Aite Group, 23 pages, March 2010

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2009 LIFE INSURANCE OPERATIONS BOOK OF METRICS: EXECUTIVE SUMMARY

Cost containment, as in prior years, remains paramount for insurers. Coupled with the fact that investment income has dropped significantly due to the economic crisis and robust growth continues to prove elusive, the result is a dire need for insurers to focus on efficiencies.

‘2009 Life Insurance Operations Book of Metrics: Executive Summary', Deloitte 2010 www.deloitte.com/view/en_US/us/Industries/Insurance-Financial-Services/article/ c1cd52d89c295210VgnVCM100000ba42f00aRCRD.htm?id=gfsi-list-ins Deloitte, 18 pages, January 2010

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ALPHA OR BETA: CHALLENGES AND OPPORTUNITIES FOR TRADITIONAL ACTIVE MANAGERS

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As the market continues to polarise, traditional active managers are facing choices between becoming an alpha or beta provider. Providing “beta” returns at “alpha” prices is no longer an option. Many traditional active managers face a choice between repositioning to become a volume-based “beta” provider; focus on high revenue generating “alpha” or; aim to provide a “total solution” providing both types of returns to providers.

‘Alpha or Beta: Challenges and Opportunities for Traditional Active Managers’, Deloitte 2010 www.deloitte.com/assets/Dcom-Global/Local%20Assets/Documents/Financial%20Services/ gfsi-1004-Alpha%20or%20Beta.pdf Deloitte, 20 pages, April 2010

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RISK MANAGEMENT FOR ASSET MANAGEMENT SURVEY 2010

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RUN-OFF SURVEY 2010

In a survey regarding the management of discontinued businesses (so-called runoff ) in the insurance industry, KPMG made a number of findings. The survey targeted 153 key decision-makers of insurers in Germany, Switzerland and Austria.

The survey included questions regarding run-off issues and the impact of Solvency II in that context. Some of the findings were that Solvency II may trigger more future transactions, and that due to knowledge of their own portfolios, many companies prefer in-house management to external providers. Another finding was that 85% of the participants were engaged in discontinued businesses.

‘Run-off survey 2010’, KPMG 2010 www.kpmg.com/EU/en/IssuesAndInsights/Articlespublications/Pages/Run-Off-Survey-2010.aspx KPMG, 28 pages, June 2010

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SPRING FINANCIAL STABILITY REPORT 2010

Ernst & Young’s ‘Risk Management for Asset Management 2010’ survey offers a revealing insight into the challenges confronting the industry's risk management professionals. In comparing the views of 29 heads of risk and chief risk officers at several leading asset managers in the UK and continental Europe, the survey provides indications about the future development of the continuing evolution and strategic importance of the risk function.

In a recent report, the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) presents developments within the insurance and occupational pension fund markets. The report covers market trends for the last few years and it also gives an outlook for the future. The report concludes for example that the insurance industry faces several risks and challenges regarding the risks for low or decreasing interest rates, depressed equity markets and volatility of credit spreads on bonds going forward. Another conclusion is that the recent financial crisis significantly impacted the consumer confidence for pension funds and also impacted them as institutional investors.

‘Risk Management for Asset Management Survey 2010’, Ernst & Young 2010 www.ey.com/Publication/vwLUAssets/Risk_Management_for_Asset_Management_ Survey_2010/$FILE/Risk_Management_for_Asset_Management_EY_Survey10.pdf Ernst & Young, 44 pages, May 2010

‘Spring financial stability report 2010’, CEIOPS 2010 www.ceiops.eu/media/files/publications/reports/Fin-Stability-2010-1/CEIOPS-Spring-2010Financial-Stability-Report.pdf CEIOPS, 45 pages, June 2010

SOLVENCY II IT VENDOR SPECTRUM

In this report, Celent presents a number of IT vendor solutions for insurance companies within risk management and compliance with Solvency II. Some of the vendors have a broad coverage of the areas within Solvency II, while others have solutions covering specific parts of Solvency II. The report emphasises that insurers must align their IT solutions within the framework of Solvency II. ‘Solvency II IT Vendor Spectrum', Celent 2010 www.celent.com/124_3042.htm Celent, 90 pages, April 2010

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REALITY-CHECKING THE EVOLUTION IN CORE INSURANCE SYSTEMS

In a recent report, Celent has researched a panel of more than 30 insurers about how to best partner with information system vendors. The partnership is considered both on the strategic level and the tactical level and also reactive and proactive approaches are considered. The author of the report thinks that legacy systems have a lot of valuable intellectual capital codified into them but these systems are also inflexible and unresponsive to ongoing changes in the environment. He draws the conclusion that vendors able to address these issues will be highly valued.

‘Reality-Checking the Evolution in Core Insurance Systems’, Celent 2010 www.celent.com/124_2903.htm Celent, 22 pages, April 2010

New reports published and information which could be relevant for listing can be submitted for review to: Editorial Assistant Mette Trier, mette.trier@simcorp.com

MITIGATE RISK

REDUCE COST

ENABLE GROWTH

SimCorp is a leading provider of highly specialised software and expertise for the investment industry. Established in 1971, with more than 1,100 employees, SimCorp is listed on the NASDAQ OMX Copenhagen A/S. SimCorp enables global investment management organisations to mitigate risk, reduce cost and enable growth through development and implementation of its integrated and market-leading financial software solution SimCorp Dimension. SimCorp is headquartered in Copenhagen with subsidiaries and branches in Amsterdam, Brussels, Frankfurt, Helsinki, Hong Kong, Kiev, London, Los Angeles, Munich, New York, Oslo, Paris, Singapore, Stockholm, Sydney, Toronto, Vienna and Zurich. www.simcorp.com