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INVESTOR S ERVICES
JOURNAL
VOLUME 2 No. 5 - MAR/APR 2005

THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL Fund Structure; Fund Administration; Information & Data Providers; Custody; STP & Technology; Trading Services & Outsourcing; Corporate Actions; Hedge Funds; Prime Brokerage; Settlement & Clearing; Securities Lending; Reference Data; Transfer Agency; Legal & Compliance WWW.ISJFORUM.COM

BUBBLE OR SEACHANGE?
FUND ADMINISTRATION REVIEW
OFFSHORE CENTRES – BRAZEN BEACONS PRIME BROKERAGE – IN IT TO WIN IT HEDGE FUNDS – THE RIGHT INCENTIVE INVESTMENT ANALYTICS – FAIR GAME CUSTODY – SECURITIES SERVICES IN GERMANY PLUS: LUXEMBOURG – CENTRE OF STRENGTH TRANSFER AGENCY – 21ST CENTURY SYSTEMS CORPORATE ACTIONS – THE QUEST STP & AUTOMATION – PAPERWAIT

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Editorial & Contents

INVESTOR S ERVICES
JOURNAL
THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL Fund Structure; Fund Administration; Information & Data Providers; Custody; STP & Technology; Trading Services & Outsourcing; Corporate Actions; Hedge Funds; Prime Brokerage; Settlement & Clearing; Securities Lending; Reference Data; Transfer Agency; Legal & Compliance WWW.ISJFORUM.COM

Buy In, Bow Out?
Would the last independent fund administrator please stand up? This request would be met with limited response from the financial services industry, considering the exciting opportunities currently presented by the alternative investment world. As more assets flow into alternative funds, the revenue made from servicing them has prompted banks enter the world of administration. The latest acquisition of Derivatives Portfolio Management by Mellon proves the administrator buy-out trend will continue until the number of independent administrators become an extinct species. Thanks to recent regulatory changes, alternative funds have earned the acceptance of many an institutional investor. These days, investors do not have to move offshore to get a taste of the risks in investing. Onshore regulators have clubbed together with the service providers to relax the rules relating to alternative investment, allowing for more esoteric funds to be set up, including SICAVs, SICARs and property funds. Onshore centres are the current winners in the investment funds landscape, including those who provide tax amnesty for investors whose investments were previously held offshore. This bodes well for service providers who are already in these onshore centres, and who have the scale and the global reach to be able to service different types of funds. Luxembourg and Dublin are still the overall winners in the race for funds domiciliation and administration, while offshore centres in the Western Hemisphere are playing catch up. In Europe, thanks to UCITS III the possibilities are endless, not to mention the possibility of funds distribution from one country into the next. The only proviso is that funds submit frequent NAVs and investment reports as frequently as possible. The investment made in fulfilling this requirement is considerable and a further watering down of the market of providers who are able to do this is inevitable. But traditional custodians and fund administrators should be aware. Their turf is keenly observed by non-custodians, such as technology vendors, which have the latest tools available to provide investors with timely NAVs, consolidated investment reports and tax-related information for certain countries. This form of competition has a domino effect on the entire securities services industry. These custodian banks, who feel slightly threatened, will endeavour to become all things to all people, including safekeeper, administrator, technology provider and transfer agent. Essay Prize Amidst all of this competition, another first for ISJ. It is important to give voice to future leaders in the securities services industry and so we launched an essay competition to recognise tomorrow’s stars. Details are on page 71, you or your team members can apply on ISJforum.com. Janet Du Chenne - Editor

VOLUME 2 No. 5 - MAR/APR 2005
INVESTOR S ERVICES
JOURNAL
VOLUME 2 No. 5 - MAR/APR 2005

FUND ADMINISTRATION REVIEW
OFFSHORE CENTRES – BRAZEN BEACONS PRIME BROKERAGE – IN IT TO WIN IT HEDGE FUNDS – THE RIGHT INCENTIVE INVESTMENT ANALYTICS – FAIR GAME CUSTODY – SECURITIES SERVICES IN GERMANY

BUBBLE OR SEACHANGE?

PLUS: LUXEMBOURG – CENTRE OF STRENGTH TRANSFER AGENCY – 21ST CENTURY SYSTEMS CORPORATE ACTIONS – THE QUEST STP & AUTOMATION – PAPERWAIT

INCLUDING THE ISJ SECURITIES LENDING REVIEW 2005
ISJ

2005 SECURITIES LENDING REVIEW
VOLUME 2 - 5 - MAR/APR 2005

TRANSPARENCY - CLEAR AS MUD? ANALYSIS - LATEST PERFORMANCE FIGURES DEBATE - TRANSPARENCY, REGULATION, AUTOMATION AUTOMATION - TALKING TECHNOLOGY MARKET VIEW - NOMURA ITALY - MEETING THE MARKET

BENEATH THE SURFACE
GROWTH, REGULATION AND TRANSPARANCY
WWW.ISJFORUM.COM

Contents
6 World News 12 Vive La Difference 16 Centre of Strength 26 Analyse This… Luxembourg 30 A Question of Trust 32 Brazen Beacons WWW.ISJFORUM.COM
The latest securities services news The Credo of a first-class global custodian Service providers on why it’s good in Luxembourg Financial professionals answer a range of questions about the Luxmebourg funds industry Regulation - cornerstone of trust in Luxembourg How are offshore centres of the Western Hemisphere bearing up against the competition? Continued

INVESTOR SERVICES JOURNAL 1

Contents

INVESTOR S ERVICES
JOURNAL
THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL Fund Structure; Fund Administration; Information & Data Providers; Custody; STP & Technology; Trading Services & Outsourcing; Corporate Actions; Hedge Funds; Prime Brokerage; Settlement & Clearing; Securities Lending; Reference Data; Transfer Agency; Legal & Compliance WWW.ISJFORUM.COM

Continued from page 1

38 The Right Incentive 40 In it to Win It 43 Transfer Agency Systems for the 21st Century 46 Weighing in the Risk 48 Hedge fund index up

An analysis of hedge fund equalisation techniques Hedge funds continue to present prime brokers with a host of opportunities Barrington Partners analyses the latest transfer agency systems Determining risk exposure is important when entering new markets ISJ presents the latest hedge fund performance results Investment manager monitoring can ensure benchmarks are met DPM’s Alan Tooker examines the complexity of hedge funds administration What does the acquisition of a hedge fund administrator entail? US custodians continue to dominate news in Europe Service providers in Germany are confident of a brighter future Financial professionals in Germany debate the latest trends and future opportunities Rekha Menon highlights recent efforts to standardise corporate actions FT Interactive Data on a possible solution to the corporate actions conundrum - Intelligent Document format ISJ present presents the latest efforst intended to automate securities processing Automation is within reach, writes Clearstream’s Bruno Zutterling Digest of the securities lending industry’s conferences Movers and shakers in the global securities industry A-Z list of investor services companies and contact information

INVESTOR S ERVICES
JOURNAL
VOLUME 2 No. 5 - MAR/APR 2005

FUND ADMINISTRATION REVIEW
OFFSHORE CENTRES – BRAZEN BEACONS PRIME BROKERAGE – IN IT TO WIN IT HEDGE FUNDS – THE RIGHT INCENTIVE INVESTMENT ANALYTICS – FAIR GAME CUSTODY – SECURITIES SERVICES IN GERMANY

BUBBLE OR SEACHANGE?

50 Fair Game 52 Staying Ahead 54 Setting the Scene 56 US giants win in EU 58 Race against Time 63 Germany Panel Debate 72 The Quest for Standards 78 Issuers in the Limelight? 80 Discarding the Paperweight 82 Strengthening the Link 86 Come Together 92 People Moves

PLUS: LUXEMBOURG – CENTRE OF STRENGTH TRANSFER AGENCY – 21ST CENTURY SYSTEMS CORPORATE ACTIONS – THE QUEST STP & AUTOMATION – PAPERWAIT

WWW.ISJFORUM.COM

94 ISJ Directory

2 INVESTOR SERVICES JOURNAL

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Letters to the Editor

INVESTOR S ERVICES
JOURNAL
Janet Du Chenne
Editor [email protected]

Write to [email protected]
Perfect Harmony
A possible takeover of the London Stock Exchange by Deutsche Börse or Euronext is more exciting, indeed, than harmonising and standardising corporate actions processing throughout Europe. Yet, I would argue, the latter is more important to achieve the goal of a sub-

Julia Svetlichnaja News Editor [email protected]
Design NatterJack Design [email protected]

“The need for a quantum leap in efficiency gains is located at the post trade part of the value chain.”
stantial reduction of cost and risk, to make meaningful progress towards an internationally competitive pan-European capital market. The need for a quantum leap in efficiency gains is located at the post trade part of the value chain. The European Commission has therefore established the Clearing and Settlement Advisory and Monitoring Expert Group (CESAME) to foster the process of change. Charlie McCreevy, the new EU Commissioner for Internal Market and Services has named clearing and settlement a priority in the field of financial services in Europe. An increasing number of private sector organisations get engaged in the work to harmonise and standardise the current highly fragmented and inefficient cross border clearing and settlement. To be successful, a close and effective cooperation between private and public sector institutions will be required as the complexity and the interdependence of barriers caused by market practices on the one hand and by legal, fiscal and regulatory diversities on the other, are high. Werner Frey, CEO, European Securities Forum

ply than compliance”. Improving technology will continue to necessitate the need for more comprehensive protocols that might ultimately prove incompatible with older operating systems. Working with multiple messaging standards should not impede an improvement to trade processing efficiency. Existing data transformation / translation middleware such as that incorporated within FMC’s own post-trade FMCNet, already manages that challenge. There is no need to mandate any messaging standard, the quick win is clearly to

“Working with multiple messaging standards should not impede an improvement to trade processing efficiency.”
harmonise what we already have. Isn’t it time to “get tangible”? Phil Banas, managing director, Financial Models Corporation Ltd

Contributors Brian Bollen, Rekha Menon

Missing the Boat
(From Helen Stephenson) The recent proposals from the UK’s Financial Services Authority (FSA) on the implementation of the Simplified Prospectus, show that the UK Regulator has once again missed a valuable opportunity. The European directive had all the promise of providing consumers with easy to understand information about products and charges, but the FSA’s interpretation has resulted in complex and unwieldy proposals. Not only does the Regulator feel it necessary to run the existing key features requirements alongside the new prospectus, but it also wants to go above and beyond the scope of the Simplified Prospectus rules, making UK implementation

Justin Lawson
Publishing Director [email protected] Jon Dunham Executive Publisher [email protected] Heidi Mumford Associate Publisher [email protected] Kenny Thomas Associate Publisher [email protected] Investor Services Journal 11 B Fitzroy Square London W1T 6BU, UK T: +44 (0) 20 7388 9000 F: +44 (0) 20 7388 6699
Published by Investor Intelligence Chairman Mark Latham
© 2005 Investor Intelligence Limited All rights reserved. No part of this publication may be reproduced, in whole or in part, without prior written permission from the publisher. Printed in the UK by Pensord Press. ISSN 1744-151X

Tangible Thinking
A lot of authoritative ink is being used in highlighting the need to achieve post-trade message standardisation, but little pragmatic advice on how to accomplish it. History shows that any standard will evolve with technology, becoming redundant or superseded within five years. Unfortunately, the industry as a whole has often proven itself too measured in its approach when trying to keep pace with change. If we are to have a reasonable chance of attaining a single global STP standard devoid of regional or commercial vested interest, we must first acknowledge that for a majority of organisations, it’s their legacy systems that will continue to dictate their preferred communications protocol. As Francis Remacle notes in the SWIFT consultation paper ‘The proposal for the removal of Barrier 1 of the Giovannini Report’ [i.e. elimination of paper and automated communication…], it’s “more a willingness to com-

“The European directive had all the promise of providing customers with easy to understand information about products and charges, but the FSA’s interpretation has resulted in complex and unwieldy proposals.”
super-equivalent to the EU directive. A particular bone of contention is how charges are displayed. The directive stipulates that investment funds should use the internationally recognised and standardised method of calculating charges, the Total Expense Ratio (TER). By applying this universal method, investors would be able to accurately compare the charges of all funds domiciled in Europe, making comparisons simple, straightforward and accurate. (Continued page 89)

WWW.ISJFORUM.COM

4 INVESTOR SERVICES JOURNAL

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You & Us

© UBS 2005. The key symbol and UBS are registered and unregistered trademarks of UBS. All rights reserved.

News - Europe Middle East Africa

Custody & Outsourcing
London - Insight Investment and Northern Trust have entered into exclusive negotiations for Insight to outsource its back and middle office investment operation to Northern Trust. The range of services to be outsourced by Insight under the proposed agreement are: trade matching, confirmation and settlement, investment record keeping, entitlement processing, pricing, asset set-up, reconciliation, client reporting, valuations and performance analysis. The agreement, which is subject to further due diligence and contract negotiations, is expected to be completed in the second quarter of 2005. London - Old Mutual Asset Managers ("OMAM") has appointed RBC Global Services to act as its UK fund administrator, global administrator, fund accountant and global custodian, alongside The Royal Bank of Scotland plc, Trustee & Depositary Services as Trustee provider. RBC will provide all fund administration and fund accounting for OMAM's UK Unit Trust range, and global administration for a further group of funds with combined AUA of £3.5 bn. RBC's offering will also extend to trade order management services for all funds and foreign exchange facilities on selected funds. London - State Street has been appointed by Brandywine Asset Management, a wholly-owned subsidiary of Legg Mason, Inc. to provide managed account outsourcing services for several billion dollars in assets. State Street will provide accounting, performance measurement, portfolio administration, trade support and investor reporting services for Brandywine’s managed account portfolios.

headed by Richard Bolton who has over 14 years experience in the industry, with particular expertise in the areas of private equity and fund of funds, gained through his previous senior management positions in leading fund administration companies on the island. London - The Bank of New York has acquired Continental Fund Services (CFS), a Luxembourg PSF (Professional of the Financial Sector). Financial terms were not disclosed. CFS provides retail transfer agency and registrar services to Luxembourg SICAVs run by two US fund management companies, Davis Selected Advisers and Alger Associates, as well as sub-transfer agency and sub-registrar services to European shareholders of Alger US domestic funds. CFS administers the accounts of approximately 32,000 shareholders in such funds. London - Northern Trust has been selected by KBL Investment Funds Ltd, which trades under the name Solus and is a subsidiary of private bank Brown Shipley, to provide fund accounting and global custody services to the Solus funds, with funds under management totalling £325m. KBL has also appointed Royal Bank of Scotland to provide trustee and depositary services for the Solus funds. “We aim to continue the growth we are currently enjoying within

Technology
Geneva - SunGard Software and Processing has reorganised its global structure, creating SunGard Europe, a new operating group. The new European operating group will be led by Harold Finders, who commented that the reason for the reorganisation was to better adapt SunGard’s services to the way its clients are structured. The European group will deliver four types of services, namely Trading, Treasury and Risk, Insurance & Benefit Administration, Wealth Management and Institutional Asset Management & Securities Servicing.

Market Infrastructure
Frankfurt - Banco Bilbao Vizcaya Argentaria (BBVA) has signed up to implement Vestima+, Clearstream’s new investment service. BBVA is one of Spain's biggest banks and a proponent of the open architecture model that is a key element of Clearstream's new service. Clearstream launched the Vestima+ service in January 2005. London - CRESTCo, at the request of the Irish Stock Exchange, has agreed to offer services for the clearing and settlement of Irish equity trades netted through a central counterparty (CCP), subject to conclusion of contractual arrangements. The Irish Stock Exchange has informed CRESTCo of its decision to use Eurex Clearing as the CCP. London - Initiated by European Securities Forum, an Industry Working Group has proposed the dematerialisation of share certificates and the opportunity for further enfranchisement of shareholders in the UK. The Working Group, led by UBS Investment Bank and including representatives from the broker community, the registrars, LSE, CrestCo and industry associations has discussed the issues arising from an inefficient and paper-based process involving share certificates and transfer forms.
DAILY NEWS AT WWW.ISJFORUM.COM

Jeremy Hester

Funds & Administration
Isle of Man - Anglo Irish in the Isle of Man has launched Anglo Irish Fund Services to provide full administrative services to offshore collective investment schemes. This new service is

our Global Fund Services (GFS) business, which is in line with our strategy to increase the breadth of service capabilities to the UK and European makets in new areas like UK fund accounting,” said Jeremy Hester, head of GFS Business Development at Northern Trust in London.

6 INVESTOR SERVICES JOURNAL

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News - Americas

Funds & Administration
Boston/New Jersey – The Asset Servicing group of Mellon Financial Corporation has signed an agreement to acquire Derivatives Portfolio Management, a Somerset, New Jerseybased hedge fund administrator that oversees $30 bn in assets for 91 clients. Its services also include middle- and back-office outsourcing and transparency services. Terms of the transaction, scheduled to close by the end of the first quarter of 2005, were not disclosed. “The institutional asset management industry is demanding a growing breadth of services from its providers, and this investment helps bolster our position at the forefront of the asset servicing industry,” said James P. Palermo, president of Mellon Global Securities Services.

multi-year systems redesign project aimed at consolidating its separate underwriting, reorganisation and dividend processing systems onto a single processing platform. “This initiative will deliver major efficiencies to DTCC and the industry, streamlining processes, eliminating redundancies and offering greater operational flexibility,” said John Colangelo, DTCC managing director of Operations and Customer Service. “It will also deliver a number of enhancements, including new international processing capabilities and enhanced reporting features using ISO 15022 message standards.” New York - Wachovia Corporation, has selected Asset Control, a data management solutions provider, to manage price data for risk management operations within its corporate investment bank. The implementation is scheduled to be in production in the first quarter of 2005. “The Asset Control technology being deployed on this project will improve our risk management and research capability,” said Barry Fenwick, divisional information officer of Wachovia Corporate Investment Bank. “The new platform will allow us to leverage our comprehensive market history and provide additional analytical services to our clients.” Boston - Thomson TradeWeb, the trading network for fixed income markets, is the latest company to join the Omgeo STP Partners Program. Under the agreement, the companies plan to further automate fixed income trade processing through the creation of electronic links between TradeWeb and certain Omgeo services. Initially, Omgeo and Thomson TradeWeb will link TradeXpress, TradeWeb’s online STP network that enables institutions and dealers to allocate and confirm trades, with OASYS, Omgeo’s US domestic trade allocation and acceptance service. This will enable investment managers and their broker/dealer counterparts to electronically exchange and manage allocation information regardless of whether allocations are generated on

either TradeXpress or OASYS. This new consolidated feed and online allocation management tool provides broker/dealers with an opportunity to reduce trade processing costs by further eliminating error prone manual processing. New York - The Securities Industry Association has entered into an agreement with MCI to offer Internet services to its nearly 600 member firms. Under terms of the agreement, MCI will deliver a wide range of Internet related services, including managed hosting, Internet access, security, Private IP, video and Net Conferencing solutions, to help SIA members conduct business more effectively through better technology utilisation. SIA and MCI will work closely to help SIA members better utilise Internet technology to conduct electronic transactions, process and share confidential documents, research market trends, host Web-based meetings, and enhance communications with customers.

Robert Aaron

Regulation
Washington - The Securities and Exchange Commission has filed separate settled civil actions against Morgan Stanley & Co. Incorporated (Morgan Stanley) and Goldman, Sachs & Co. (Goldman Sachs) relating to the firms' allocations of stock to institutional customers in initial public offerings (IPOs) underwritten by the firms during 1999 and 2000. Under the terms of the settlements, a judgment will be entered against each firm enjoining it from violating Rule 101 of the Commission's Regulation M and ordering each firm to pay a $40 million civil penalty. The settlement terms are subject to court approval. In its complaints, the Commission alleges that Morgan Stanley and Goldman Sachs violated Rule 101 of Regulation M under the Securities Exchange Act of 1934 by attempting to induce certain customers who received allocations of IPOs to place purchase orders for additional shares in the aftermarket.
DAILY NEWS AT WWW.ISJFORUM.COM

“Joining Mellon’s Asset Servicing group will enable us to better serve the growing number of hedge funds that are coming under the umbrellas of large institutional asset managers,” said Robert M. Aaron, who will remain chief executive officer of the new Mellon subsidiary within Mellon’s Asset Servicing business. “As hedge fund managers are becoming more institutionalised, they are turning to administrators that are part of large, wellregarded financial institutions that can provide the transparency they require.” Boston - The CSFB/Tremont Hedge Fund Index is up 1.61 per cent for December 2004. Major US equity indices ended the month in positive territory, with managers generating returns on the long side of their portfolios.

Technology
New York - DTCC has launched a

8 INVESTOR SERVICES JOURNAL

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News - Asia Pacific

Funds & Administration
Shenzen - UBS and the State Development Investment Corporation (SDIC) will form a joint venture funds management company through the purchase by UBS of a 49 per cent stake in Shenzhen-based China Dragon Fund Management Company Ltd (China Dragon), subject to approval by the China Securities Regulatory Commission (CSRC). China Dragon will be restructured as a joint venture between SDIC Hongtai Trust & Investment Co. Ltd, a wholly-owned subsidiary of SDIC, and UBS. The application to the CSRC follows the signing of a Shareholder Agreement and a Sales & Purchase Agreement by UBS, SDIC and its affiliates. The partners propose to use the existing China Dragon platform to launch new mutual funds and, as regulations permit, pursue discretionary investment management mandates. As market liberalisation continues, the partners expect the joint venture to capture new opportunities in the Chinese investment management market. China Dragon, currently 100 per cent-owned by SDIC, manages RMB3.2 bn in mutual funds assets ($386 million). Subject to CSRC approval, the joint venture will be one of the first to allow the new maximum 49 per cent foreign partner-holding in a Chinese fund management company. The financial terms for the proposed change in ownership of China Dragon will not be released.

cent of the turnover of Linedata Services, making it the biggest operating unit in the group, with over 350 employees. CMS provides sell side solutions in Australasia and the Far East. Established in 2003, through a management buy-out of the Asia Pacific operations of Misys Securities Trading Systems, CMS now employs 90 people across five offices in the region. The company has recently established an asset management arm, where focus will be on the sales and marketing of Linedata Services’ LongView Trading and Linedata Compliance products. Sydney – DST International (DSTi), a business solutions provider for the investment management industry, has confirmed that boutique investment manager Perennial Investment Partners (Perennial) will be converting to HiPortfolio/3, an investment administration platform. Perennial’s latest investment in technology is designed to provide improved Straight Through Processing (STP) capabilities, upgraded client reporting functionality and personalised customer service for its investment administration activities in the future. Perennial recently completed a strategic review of its technology-derived business benefits and assessed the opportunity cost of implementing HiPortfolio/3 technology immediately

capabilities. Their focus on STP from a truly functional and industry-wide perspective will no doubt pay off for them in the long run.” Tokyo - The Bank of Tokyo-Mitsubishi has gone live with the Cognotec Market Rate Manager (MRM), a solution from Cognotec, provider of foreign exchange trading solutions to the financial community. For the past four years BTM have deployed Cognotec AutoDeal solutions to provide automated trading to proprietary clients on the FX@BTM service and also to provide automated pricing capability to the FXall multibank portal. BTM is using MRM to provide a single source of bank-specific market rates to various internal bank systems, in addition to the FX@BTM service and to FXall. The introduction of MRM provides dealing room workflow efficiencies as well as providing complete dealer transparency of the rates being provided to all systems that require an FX Rate.

Market Infrastructure
Tokyo - JASDEC has introduced a BookEntry Transfer System for corporate bonds and has asked issuers to submit their prior consent on the handling of book-entry transfer bonds at JASDEC by the end of 2005. The system is intended to enable right transfers of corporate bonds in a paperless environment, by electronically recording the increase and decrease in the Transfer Account Book at Book-Entry Transfer Institution or at Account Management Institution. Preferential tax treatment to investors (e.g. tax exempt corporation and the “Maruyu” tax exempt savings system) will only be applied to book-entry transfer bonds. Outstanding issued bonds can be converted to book-entry transfer bonds. JASDEC shall obtain prior consent from issuers on handling newly issued book-entry transfer bonds and on converting outstanding issued recorded and physical bonds to book-entry transfer bonds.
DAILY NEWS AT WWW.ISJFORUM.COM

Technology
Australasia & the Far East - Linedata Services, a provider of software and services to the global financial services marketplace, has signed an agency agreement with Capital Market Solutions Limited (CMS). Under the terms of this agreement, CMS will be marketing, selling and supporting Linedata Services’ asset management software products in the Australasian and the Far Eastern markets. Linedata Services’ Asset Management division accounts for more than 54 per

Ian Mathieson

versus a three to five year timeframe. Ian Mathieson, DSTi’s Australasian CEO said: “We now consider Perennial a leader in high technology adoption and its conversion to HiPortfolio/3 definitely positions them at the head of the queue for investment management

10 INVESTOR SERVICES JOURNAL

CEO - BNP Paribas Securities Services

New Directions
Jacques-Phillipe Marson

In just five years BNP Paribas Securities Services can claim membership of the biggestproviders-in-the-world club. But its approach to expansion is radically different to that adopted by the big guns. Who better to devise that approach than Jacques-Philippe Marson, a man whose career includes contracts with the cream of American and European service providers.
Component based outsourcing may be on the rise
and specialised services are fast becoming the order of the day. But in an industry built on trust, size is a major requirement to stay in business. Despite a developing appreciation of outsourcing, clients still prefer to entrust their assets and back office processes to the largest custodians in the market. This preference is largely responsible for the transformation of securities services at Paribas Bank, from an average French provider in the mid-1990s to one of the largest in the world at the end of 2004. It is hardly surprising that the man responsible for this transformation is one who began his career with the likes of global players such as JP Morgan and State Street. Jacques-Philippe Marson’s banking career commenced in 1976, when he joined Morgan Guaranty Trust Company (now JP Morgan) as part of a trainee programme for MBA students. His 12-year employment with Morgan included an assignment with the Bank’s former subsidiary Euroclear. “Morgan placed significant emphasis on financial analysis, the cost of capital and the understanding of financial statements,” says Marson. “However, when I entered Euroclear my focus shifted to operations. Euroclear was initially a divi-

Westward ho!

“This is a low margin business, but one that incurs revenue on a recurring basis”
sion (Euroclear Operations Centre) of Morgan’s Belgian branch, created in 1968 to help grow the newly created eurobond market. In 2000 Euroclear became a bank when Morgan relinquished its operating contract with what had become a “securities settlement system”. With a background in engineering, Marson was assigned to build the Euclid system in the mid-1970s, to

12 INVESTOR SERVICES JOURNAL

CEO - BNP Paribas Securities Services

ensure electronic connectivity between Euroclear and its clients. “Euroclear was one of the first organisations to spend the time, effort and money to ensure an STP process with its clients,” says Marson. “The transaction flows to and from Euroclear were mainly STP (-based), on

“Custody and global custody are also an evolution of the banking business, built on the concept of trust”
proprietary standards though.” Marson left Morgan in 1987 after being invited by former CEO of SWIFT, Bessel Kok to join his organisation and to create a for-profit unit, called SWIFT Service Partners (SSP). While SWIFT was solely focused on payment messages, SSP began to explore other areas of the financial services industry. With Marson’s previous knowledge, securities became the first port of call. “We had to open up the SWIFT membership to non-banks, including broker-dealers, asset managers, trustees and a number of other institutions who needed to be “eligible” to the system, in order to create STP efficiency among industry participants.” While a change in SWIFT’s bylaws required 75 per cent of shareholder votes, Marson succeeded in approving four categories of new participants, including broker dealers, investment banks, International Central Securities Depositories and trustee services providers. But despite efforts to extend SWIFT’s reach, the organisation lacked the participation of the investment managers. “Their participation was rejected by the UK and US banks, which for protective reasons, were unwilling to open up the network to these organisations,” explains Marson. “But subsequent pressure from other standards bodies such as the Industry Standardisation for Institutional Trade Communication (ISITC) and transaction flow operators such as OMGEO convinced SWIFT to open its membership to investment managers. This was an important inflexion point in SWIFT’s life. While it welcomed new users, it did not create any competitive advantage other than reduce costs for all participants”.

Clearing & Settlement Following his short-term employment with SWIFT, Marson joined Cedel (now Clearstream) as general manager. His main task was to address the ‘bridge’ or the means of securities delivery between Euroclear and Clearstream. “The agreement formed between Morgan, the operator of Euroclear, and Cedel when the “electronic” bridge was established, appeared to be largely in favour of Morgan,” explains Marson. “Some large financial institutions were using the bridge to arbitrage the two utilities. Indeed, under the new agreement, Cedel had to deliver securities the night before settlement date. “Debiting the securities from their clients’ accounts the day before settlement date meant they had to provide the cash the day before too. “This technicality became a free-financing opportunity for some institutions and an important issue to address when I arrived.” Custody Following his achievements at Cedel, Marson joined State Street in 1991 at the invitation of then chief executive officer Marsh Carter and executive vice president Albert Petersen. Before taking responsibility for the international business of State Street, Marson engaged the bank in a major operational reengineering process. “This project significantly reduced the costs of State Street’s international operations,” says Marson. Value Creation Marson left State Street in 1998 and joined France’s very own Paribas Bank in July of the same year. His primary objective was to create a major European bank in the securities servicing industry. This ambitious plan was first initiated when Paribas acquired the clearing business of Morgan in 1996. “Morgan hung on to Euroclear and decided to sell the rest,” says Marson. “Morgan’s global custody business was sold to the Bank of New York, which still operates what was then JP Morgan in Brussels. Paribas acquired the clearing business in Belgium, Italy, Spain and Germany. Paribas’ securities service business line had been in place since 1992 and included securities lending. The Bank leveraged the securities services tools in the investment bank and private equity business to service other companies.”

Paribas acquired clients such as Clearstream and State Street, who still use the organisation today. The Bank provided local custody for global custodians as well as local clearing for investment banks. “Clearing presented the Bank with a lot of intraday risk because the proceeds from one sale were expected to finance the next transaction,” says Marson. In 1997, Paribas completed the integration of Morgan’s business and had developed modern connectivity tools for its clients. Paribas securities services, a newly created business line, was to leverage the acquisition of Morgan’s business. But despite serving a few institutional clients, the securities services business was dwarfed by Paribas’ function as investment bank. Enter Marson, whose ambitious securities services project received immediate backing from Paribas’ then chairman and vice chairman. “The project was to create a major European bank, by aligning with the leaders in every major European market.” The first markets to be included within Marson’s strategy were London, Frankfurt and Paris, followed by Eastern Europe, Scandinavia and southern Europe. “The plan was to find another European bank and I began that conquest with Royal Trust in the UK in 1998. But rather than pay for that business, we wished to create a partnership. If we bought the business of a UK bank, a large percentage of the clients would flee to another UK bank. Instead, we wanted to integrate the institutional servicing business of a UK,

“If we bought the business of a UK bank, a large percentage of the clients would flee to another UK bank”
German or Italian bank in order provide a local touch when servicing local clients. As part of the strategy, we would ensure equal rights of ownership and governance between ourselves and our partner.” Paribas’ hopes of a partnership with Royal Trust were dashed when the UK player received an offer from the Bank of New York. Paribas then set its sights on Dresdner Bank, but the German provider was already strategically aligned with

INVESTOR SERVICES JOURNAL 13

CEO - BNP Paribas Securities Services

Banque Nationale de Paris (BNP) and could not partner with Paribas. At the beginning of 1999, BNP launched a hostile bid for Societe Generale and Paribas and by March of the same year, the Bank assumed ownership of Paribas. “In terms of value creation, this was one of the most successful mergers in banking history,” says Marson. “An important differentiating factor among continental banks emerged at the time of the merger, when I convinced senior group management to establish a separate securities service for the bank’s retail network. This resulted in a joint technical venture between BNP Paribas and Credit Agricole Indosuez.” The Beginning BNP Paribas Securities Services was created in 2000, a day before the merger of BNP and Paribas. Explaining its origins, Marson says: “We took a group investment bank structure called Banexi (Banque pour l’ Expansion Industrielle) and renamed it. We developed the bank in France and created branches across Europe. In 2002, the last building block was in place and a branch was established in Luxembourg.” In addition to its position as an ambitious European player, Marson began to focus on BNP Paribas Securities Services’ position on the world stage. “Today, the bank is number one in France, number one in Europe and number five/six (depending on the euro/dollar exchange rate) in the world (asset under custody),” he says. “We are sticking to our partnership strategy while focusing on growing our market share in all segments of our business. Securities services is a low margin business, but one that incurs revenue on a recurring basis. Gaining market share is important, in order to increase the number of assets one has to service. Market share can be acquired by partnering with other organisations, while creating value through revenues and costs synergies. In a business where significant technology-spend is needed for processing functions, size, best practice and operating discipline are important.” Pillars According to Marson, transaction processing and custody are the two pillars of banking. By 2000, the multiple movements of cash and securities between banks had become a complex task, even in domestic markets. While cash systems

could be implemented with ease, securities systems were only adopted much later. “The creation of infrastructures such as central securities depositories by the banks, happened only within the past 40 years and was in fact self disintermediation from custody - by moving securi-

and Asia-Pacific institutional investors such as pension funds, asset managers and insurance companies in their global investment requirements. We aim to serve those who perform investment activity within Europe and in Asia-Pacific as well as those who have inbound investment activity into European countries.” European Consolidation As a result of lower market valuations, assets in portfolios have significantly decreased over the last few years, triggering consolidation in the financial services industry. “These events have also triggered a thought process among European banks about partnerships,” says Marson. “Of course, all institutions want to be equal partners, but the cost for the smaller players to be or equal partners has become too high. Consequently, many have decided to sell their business and/or to outsource. The European consolidation has mainly benefited the large US custodian banks, which have a buying power that none of the European consolidators could match. BP2S is an actor in this consolidation process. We made a number of small to medium large acquisitions – the larger being Cogent - and we have increased our market share by winning business from existing clients and from new clients. In the context of European consolidation, new opportunities arise from those who are selling their business. Indeed, their clients take the opportunity to review their available options. This has been a significant means of winning new business. For example, when Dresdner sold their domestic custody business to Deutsche Bank, many of their clients came to us and found BP2S to be a reasonable alternative, which was already well established in Germany”. Outsourcing In the midst of headline grabbing mandates, outsourcing is often referred to as an evolution of the custody business. Marson explains: “Custody and global custody are also an evolution of the banking business, built on the concept of trust. Trust carries a legal connotation and a perception that banks are institutions that can be trusted. Custody is a banking business and involves protecting the investor and their ownership of assets. The settlement process itself is a way of “guaranteeing” the finality of exchanging ownership of assets, while

“In a business where significant technology spend is needed for processing functions, size, best practice and operating discipline are important”
ties from their vaults and into a central hub,” explains Marson. “Securities services came about when banks realised the substantial technology investment required to sustain a viable presence and therefore outsourced non-core functions to other banks to invest in and to focus on operating processes. This process began in the US, which enjoys the largest domestic market in the world.” Consolidation In light of the investment required to provide custody and settlement services, the securities services industry rapidly consolidated, creating giants such as State Street, the Bank of New York, JP Morgan Chase and Citibank. As a subsidiary of BNP Paribas, BP2S is emerging among the leaders. It has created a full set of business lines to provide clearing, settlement, custody, financing and liquidity, global fund services and “value added” banking and information services. “We are engaging in transaction banking and liquidity banking on behalf of our clients and on the basis of transaction flows originating from those clients,” says Marson. “We are uniquely positioned to serve both the buy side and the sell side.” By the end of 2004, BP2S totaled EUR2,475 bn in securities under custody with locations in Australia, Belgium, France, Germany, Greece, Ireland, Italy, Jersey, Luxembourg, Netherlands, New Zealand, Portugal, Spain, Switzerland, UK and US. “We are a global player with a regional focus on Europe,” explains Marson. “We service inbound investment flows into Europe as well as European

14 INVESTOR SERVICES JOURNAL

CEO - BNP Paribas Securities Services

custody ensures the rights protection for the owner (right of income, right to vote, right to exercise a change in the nature of the assets in corporate actions and the right to pay or reclaim tax). The Americans expanded their services beyond the scope of banking, starting with accounting for collective investment schemes. Indeed, fund accounting has prompted banks to move outside of their traditional borders of custody services. The banks then moved further into nonbanking by providing performance measurement and risk modeling. More recently we witnessed specialist/boutique types of acquisitions. This trend is accelerating among hedge fund accounting

“Essentially, we are dealing with one raw material, namely data,” he says. The main challenge for securities service providers is to service the transaction lifecycle. “If your business relies on assets represented by computer bytes and transactions represented by strings of bytes, you have a good case to achieve STP through the use of technology,” says Marson. “The issue, though, is scale and speed. The technology, therefore, needs to involve large databases and real time processing.” Forward Thinking Although BP2S, along with most of its competitors, has endured a period of dif-

Biography
Jacques-Philippe Marson is President & CEO of BNP Paribas Securities Services, a fully owned subsidiary of the BNP Paribas Group, and a member of the Group Management Board. He joined Paribas as head of Global Securities Services and member of the Investment Bank Management Board in July 1998. Marson joined Paribas from State Street where he was Executive Vice President and head of the Global Investors Services Group - International, re-grouping all Financial Asset Services business units outside the United States. In July, 1992 Marson joined State Street as Senior Vice President and head of International Operations. In July 1993, after engaging the bank in a fundamental re-engineering program, he was appointed Director of International Financial Asset Services. Marson joined State Street from Cedel, one of the two International Clearing Organisations, where he was a member of the Management Board and Executive Vice President in charge of Business Development, Operations and Treasury. Mr. Marson was also Chairman of Cedel’s Credit Committee. Prior to that he was associated with the SWIFT group where he lead one of its subsidiaries providing value added services to financial institutions. Prior to SWIFT, he spent 12 years with JP Morgan. During his stay in the US, Marson was General Consul of Luxembourg for Massachusetts. Marson is a member of the Board of Euroclear, a member of the Board SWIFT SC, a member of the Board OMGEO (UK), a member of the Board of Trustee of the International Charter School of New England, and the European Chairman of the International Securities Services Association. Marson is a citizen of the Grand Duchy of Luxembourg. He received his BA in Finance from Hautes Etudes Commerciales (HEC). He holds a Master of Computer Science from St. Louis Graduate School of Business, and an MBA from University of Leuven.

“I believe technology will dramatically change the business of securities services providers”
specialists, who are selling their businesses to global custodians.” According to Marson, the securities services industry business case is simple: transform clients’ fixed cost base into a variable cost base. “That is what outsourcing is all about,” he says. “It saves clients from investing in IT and running large operations. Outsourcing provides an opportunity for clients to pay only for a fraction of the cost of their initial cost base.” Investment The common themes presiding over banks’ moves into non-banking services are operations and technology. “Clients, who are also in the business of operations, are complaining about rules and regulations that require continual investment,” says Marson. “For the past 50 years, most investment banks and asset management firms have outsourced their custodial activities. Indeed, clearing and settlement activities require connectivity to central banks and to central securities depositories, which involves heavy technology and operations investment. Outsourcing is a natural step within the functions of processing and IT management. Operations and IT have become the core business of specialist banks such as ourselves.” STP STP is often dubbed the impossible dream of most. But according to Marson, the term becomes realistically feasible in an industry such as financial services. ficult markets, its strategy paints a hopeful picture for the future. BP2S remains committed to its clients and to the markets in which it operates. “Our motto, “the closer the better” means that we want to be close to the clients in the markets where they do business,” says Marson. “We decided to operate a decentralised strategy in order to increase efficiency. We believe the winners are going to be the quality service providers. The industry has already recognised the quality of our 3,500 people. One of the greatest temptations during the recent difficult period has been to centralise. As a matter of fact, if you want to reduce costs you centralise processing activities. However, this is usually done at a cost of reducing service quality and responsiveness to client requirements”. Going forward, the key question Marson poses to financial organisations is “how is technology going to change your business?” “I believe technology will dramatically change the business of securities services providers,” he says. “The requirement for a banking license in order to provide securities services may also be the next industry evolution”. With a significant global reach already in place, there are no limits to BNP Paribas Securities Services’ plans for the future. And the direction of such global thinkers as Jacques-Philippe Marson places the organisation in good stead for opportunities arising from consolidation, outsourcing and fund servicing.

INVESTOR SERVICES JOURNAL 15

Fund Centres - Luxembourg

Luxembourg - Centre of Strength
As a pioneer of investment fund regulation in Europe, Luxembourg remains well ahead of its competitors. Service providers attest to the key selling points of their domicile and pin high hopes on the year ahead.

Hubba hubba

16 INVESTOR SERVICES JOURNAL

Fund Centres - Luxembourg

In January this year, Europe’s leaders assembled in
Toulouse, France to marvel at Europe’s latest collaborative project, the A380 Airbus plane. If this form of collaboration is anything to go by, then anything is possible in other areas of business, including financial services. To a certain extent, investment fund regulation could be referred to as the Airbus of financial services, responsible for unifying the cross border market place. The Architect, Luxembourg, was one of the first European countries to benefit from the implementation of UCITS III and the subsequent provisions for hedge funds. The Grand Duchy was also the first country to transpose the UCITS directive of 1985 into national law. As if this agility were not enough, Luxembourg is also known for its convenient geographical location and highly qualified work force, which comprises nationals from Belgium, France and Germany. “The foreign languages spoken in Luxembourg is an important factor when applying the UCITS directive, which specifies that funds registered in one EU country can be sold and marketed to any country in the European Union, provided they stick to some rules,” explains Stephane Ries, head of relationship management at the Investment Fund & Global Custody Department of Kredietbank S.A. Luxembourgeoise. “As Luxembourg was the first jurisdiction to permit the cross border distribution of funds, a lot of fund promoters came to the Grand Duchy to register their funds. The funds of these promoters are sold all over Europe, while Luxembourg is regarded as the distribution hub. For example, a German fund promoter could choose Luxembourg in order to sell funds into Germany, Austria and Switzerland.” Apart from UCITS III, Luxembourg's banking secrecy laws and tax efficient investment structures have also attracted a lot of interest from fund promoters. “Although these factors helped Luxembourg to become a financial centre for investment funds, our success can be
Fund Promoters with fund assets domiciled in Luxembourg - in US$ bn
Fund Promoter UBS JPMorgan Fleming Pioneer Investments Credit Suisse DGZ-DekaBank Deutsche Bank/DWS Fortis Inv Mgmt Fidelity Investments Fideuram Group Union Investment Dec 2003 119.2 73.1 52.1 51.4 48.6 42.2 40.8 40.5 38.6 31.6 Dec 2002 93.2 55.7 33.9 46.5 34.7 34 27.2 24.2 26.9 22.9 TOTAL Funds of Funds Protected Capital Others Equity Funds Bond Funds Cash Funds

more accurately attributed to the available expertise,” says Ries. “80 per cent of funds, which are sold in three countries or more in Europe, are domiciled in Luxembourg. This is down to our geographical location and the skills available here,” says Ries. Opportunities Luxembourg was one of the first countries to transpose UCITS III into national law in December 2002. The Directive contained certain product features, which were

“80 per cent of funds, which are sold in more than three countries in Europe, are domiciled in Luxembourg”
welcomed by fund promoters. “Compared to UCITS I, the latest directive allows for the launch of money market funds, which can benefit from the European passport. This was not the case before. Nowadays, if a fund of fund, which was previously categorised as a non-UCITS fund, invests 70 per cent of its assets in UCITS funds, it can qualify as a UCITS fund. Index-tracking funds, which specify in their prospectus that they will track an index, can also qualify as UCITS funds. Today, a fund tracking the Finnish Index may hold NOKIA shares for over 35 per cent of the net assets provided this holding is stated in the funds prospectus. UCITS III funds can of course benefit from the European passport. Luxembourg welcomes umbrella fund structures, including sub-funds with different investment policies such as funds of funds, money market funds and index tracking funds Therefore, a lot of fund promoters register their fund family in Luxembourg so that they can add sub-funds.”

Trends in total net assets for largest asset classes of Luxembourg-domiciled funds
US$ billion Dec 1998 Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003

154.50 194.10 131.00 7.70 22.10 65.00 574.40

287.50 194.30 133.50 21.80 24.00 85.90 747.00

339.00 186.80 123.60 45.10 24.00 98.80 817.30

291.00 189.30 175.90 51.80 21.90 92.90 822.80

242.80 242.60 219.60 58.30 23.60 96.30 883.20

370.70 324.20 274.10 78.70 31.10 120.90 1199.70

Source: Fitzrovia, Luxembourg Fund Encyclopaedia

Fitzrovia, Luxembourg Fund Encyclopaedia

INVESTOR SERVICES JOURNAL 17

Fund Centres - Luxembourg

Hedge Funds An investment circular, published by the Commission de Surveillance du Secteur Financier (CSSF) in 2002, contributed to the transformation of Luxembourg into a hedge fund centre. “We are administering about EUR 46 bn of fund of hedge fund assets and EUR 10 bn of direct hedge fund assets,” says Ries. “For the time being, we are specialising in the fund of hedge funds business. Direct hedge fund administration and custody is increasing, but the circular for Luxembourg domiciled hedge funds is less than satisfactory for some promoters as they cannot do what they would like to do. As a consequence, these promoters keep their funds in domiciles such as the BVI, while we perform the central administration for those

“Our success can be more accurately attributed to the available expertise”
funds here in Luxembourg. A substantial amount of fund of hedge funds are domiciled and administered in Luxembourg. The business is growing, assets are increasing and new funds are being launched. The CSSF circular was not a huge success at first, but more fund of hedge funds business is coming to Luxembourg. We are administering funds that are domiciled outside of Luxembourg.” The circulars from the CSSF have added to Luxembourg's appeal as a centre for investment funds. Similarly, standards for market practice remain extremely high. “At the beginning of the year, we abolished the subscription tax (“taxe d'abonnement”) for AAA-rated cash funds that are exclusively for institutional investors,” says Ries. “This change implies that an industrial company, which would like to efficiently manage its cash investment, could create a Luxembourg fund. If this fund invests only in cash or money market instruments with a weighted residual portfolio maturity of less than 90 days and with the highest possible ranking, it would not have to pay any taxe d'abonnement on its assets. In this instance, Luxembourg abolished the taxe d'abonnement to attract more institutional money.” Pensions In 1999, Luxembourg introduced a law to enable the launch of pension funds. However, only 11 pension funds were launched since the creation of this law. It appears the main obstacle to the launch of pension funds in Europe is taxation. “Taxation hinders the creation of cross-border pension funds,” says Ries. “Luxembourg acknowledged it could not attract many multinational pension funds and began to focus on getting the assets of those funds into the domicile. Nowadays, if a multinational company is running several pension funds for the benefit of its employees, it can create a single investment fund in Luxembourg in order to leverage off economies of scale in pensions man-

agement. Luxembourg has just introduced an exemption from the taxe d'abonnement for these funds, which are also called pension-pooling vehicles.” As of last year, foreign funds and hedge funds can also be quoted on the Luxembourg Stock Exchange. “This is a good selling point, which may appeal to institutional investors who are only allowed to invest in listed companies or in listed hedge funds. This is a good piece of marketing for promoters who have funds listed in Luxembourg,” says Ries. To further enhance the credibility of Luxembourg as an investment centre, the CSSF introduced the Long Form Report in addition to the annual report on an investment fund. “The analysis in the Long Form Report gives the regulator a good idea of what has been going on in the fund for a certain year,” says Ries. “The CSSF also issued a circular on late trading and market timing. While these rules may not be very cost efficient, we have to use them as marketing tools, in order to show the world we are well organised and properly supervised.” Distribution By virtue of its geography and regulatory approach, Luxembourg is ideally positioned to support panEuropean distribution. “Our people are experienced in cross-border distribution, we know how to accommodate the local distribution laws in the different countries and can work around any complications that may arise from cross-border distribution,” says Christophe Lentschat, head of product development and marketing at European Fund Administration (EFA). “We have multilingual staff, who are able to deal with funds that are distributed in different countries and who can provide multilingual investment reports. We also have systems with multilingual and multicurrency capacity, and the ability to handle the high volumes presented by the retail investor. Several providers in Luxembourg have had these systems in place for quite a while.”

Net Assets under Management in Luxembourg in Euro bn
2002 Others
3.263 3.321

2003

SICAV

405.475 483.759

FCP

435.77 466.222

0

50 100 150 200 250 300 350 400 450 500
Source: ALFI

18 INVESTOR SERVICES JOURNAL

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Fund Centres - Luxembourg

Service providers such as EFA have welcomed the launch of new investment funds, which take advantage of the ‘product’ provisions of the UCITS III directive. EFA has recorded an increase in the number of hedge funds administered in Luxembourg. “I wouldn't say the growth is wholly down to the CSSF circular for hedge funds,” says Lentschat. “We would have experienced this growth anyway. The circular is simply a regulatory change aimed at defining the rules of the game. Most of our fund sponsor clients have said they would launch funds here regardless of regulation.” Investments One of EFA’s clients, a major pension and investment company, has based its pension-pooling vehicle in

“The CSSF circular was not a huge success at first, but more fund of hedge funds business is coming to Luxembourg”
Luxembourg. “We expect to have more of these vehicles in the future,” says Lentschat. “The exemption from the taxe d'abonnement for funds is one of the main advantages for promoters establishing their pension funds in Luxembourg.” Apart from pension fund pooling vehicles, EFA has recording a high demand for the SICAR. The demand for this vehicle, according to Lentschat, is directly linked to the interest in private equity and venture capital as asset classes. “The demand is also due to the administrative simplification and flexibility offered by these products. Promoters who want to run SICAVs face strict qualification requirements, but the requirements for SICARs are a lot lighter, this is counterbalanced by requirements on the investor’s eligibility.”

For most service providers in Luxembourg, UCITS III presents a range of opportunities. “We now have the possibility of launching new products, but there are certain requirements to be met in the areas of corporate governance and investor protection,” says Lentschat. “We want our clients to comply with the new requirements in the easiest possible way and do not want the regulations for the investment funds industry to appear too burdensome. We also have to be ready for the possibilities created by UCITS III. We cannot afford a situation where funds are barred from distribution in other countries in Europe because we weren't ready. It is a huge challenge for our company and a priority for the entire industry.” The retail distribution opportunities for fund managers as a result of UCITS III was significantly highlighted with the launch of the first UCITS III compliant mutual fund by European Credit Management (ECM), an independent fund management company. The Luxembourg-based European Credit Fund (ECF), a self-managed SICAV, can be sold to retail, as well as institutional, investors across the European Union because the Luxembourg regulator has registered the fund as UCITS III compliant. The fund was approved by the CSSF, the Luxembourg securities regulator, as UCITS III compliant in January 2005 through the “grandfathering” provisions, having been originally established in 2003. ECF has about EUR 1 bn of assets and invests in fixed income securities and derivatives. Its assets will be managed and distributed by ECM, while mutual fund service provider The Directors' Office, which was launched by Patrick Zurstrassen (formerly of Indosuez and Credit Agricole), will handle the negotiations with the CSSF, and ensure the fund meets the latest mutual fund corporate governance standards.

2000 1800 1600 1400 1200 1000 800 600 400 200 0

The Luxembourg Investment Fund Industry in 2004 - number of funds
1963 1955 1944 1936 1924 1909 1910 1904 1898 1892 1869 June February May July September November March April October January August

Source: ALFI

20 INVESTOR SERVICES JOURNAL

Fund Centres - Luxembourg

“the increasingly global nature of the funds industry is prompting continual investment in this business”

1,200

The Luxembourg Investment Fund Industry in 2004 - net assets in EUR bn
1,090.8 1,072 1,058.9 1,053 1,039.1 1,046.8 1,026.6 1,037.3 1,032.7 1,006.1 987.6 June February April May July September November October March January August

1,000 800 600 400 200 0

Source: ALFI

Agility Compared to other European countries, Luxembourg is nimble in its implementation of regulatory directives. According to David Claus, head of business development at the Bank of New York, the speed of implementation in Luxembourg is particularly true for UCITS III. “The business Luxembourg got from implementing the first UCITS directive probably triggered a speedy implementation of the third directive,” he says. “The funds industry seems to recognise that UCITS still leaves some freedom for implementation, as evident in certain countries. Many countries have interpreted the directive in different ways. More co-ordination and effort is therefore required on a pan-European basis to ensure we get closer to a single market. The single market can only by achieved on a pan-European basis and a number of decisions have to be made so that countries can implement UCITS III more consistently. More co-ordination is needed to enable the directive to accomplish that which it was intended for. At the end of the day, we are all working for the end investor, who can also benefit by increasing the size of their fund across borders.” For most service providers in Luxembourg, the 'new' hedge fund law made explicit what was already implicit in Luxembourg before. Previously, a large number of hedge funds were unwelcome in Luxembourg, but there was no specific law defining what was possible and what was not possible. “Promoters who were active in the hedge funds area knew they could employ the criteria used by the CSSF,” explains Claus. “Owing to the implicit nature of the hedge funds industry prior to regulation, promoters did not think Luxembourg was in this business at all. Fund sponsors would therefore recommend Dublin for hedge funds and money market funds. But Luxembourg is trying to fight back by abolishing the taxe d'abonnement so that countries can implement UCITS III more consistently for institutional money market funds.”

,UXEMBOURG &RANCE )RELAND 3PAIN )TALY .ETHERLANDS (ONG+ONG 3INGAPORE 3WITZERLAND "ELGIUM #AYMAN)SLANDS

'LOBAL #USTODY &UND !DMINISTRATION 4RANSFER !GENCY

0EOPLE

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Fund Centres - Luxembourg

Regulation Despite their location and experience in financial services, Luxembourg service providers have endured their fair share of challenges. “The last year has been interesting in terms of financial market conditions,” says Claus. “In addition to UCITS, we also faced the European Union Savings Directive, the International Accounting Standards and the new German tax legislation. Adhering to these laws means continual investment in the business. As soon as the bar is raised, the number of providers who are willing to stay in this business decreases. There are over 70 fund service providers in Luxembourg. The EUR 15 bn administered by the average provider is a fairly small figure and there are a number of providers who will struggle. Funds administration is global business. An increasing number of European sponsors are running Luxembourg SICARs, but these assets are managed out of Asia and Europe. This arrangement places additional strain on the service provider to be able to service asset managers and distributors in multiple time zones. Service providers have to be more local in terms of client servicing, adding to the cost of being in the business. Apart from regulation, the increasingly global nature of the funds industry is prompting continual investment in this business.” To further commit to the funds servicing business, BNY recently acquired Luxembourg-based Continental Fund Services (CFS). CFS provides retail transfer agency and registrar services to Luxembourg SICAVs run by two US fund management companies, Davis Selected Advisers and Alger Associates, as well as sub-transfer agency and sub-registrar services to European shareholders of Alger U.S. domestic funds. CFS administers the accounts of approximately 32,000 shareholders in such funds. Commenting on the acquisition, Claus says: “In an operational business such as this, accounting, custody and transfer agency are operational issues. People don't really consider operations to be an issue, as long as it all works. If the rules of the game were to change thanks to regulation, financial institutions will be faced

Key Advisor Analysis
Luxembourg administrators at December 2003 - value of assets under administration in US $bn
Fastnet - $73.6 bn UBS Fund Services - $120.9 bn Dexia BIL - $84.7 bn

European Fund Admin. (EFA) - $86.1 bn

JP Morgan Bank - $117.8 bn
Source: Fitzrovia, Luxembourg Fund Encyclopaedia

Luxembourg auditors at December 2003 - number of funds served
BDO Cie Fiduciaire - 197 KPMG - 1,146 PricewaterhouseCoopers - 3,255

Deloitte - 1,302

Ernst & Young/Cie de Revision - 1,507
Source: Fitzrovia, Luxembourg Fund Encyclopaedia

Luxembourg custodians at December 2003 - value of assets under custody in US$ bn
Citibank - $82.9 bn JP Morgan Bank - $142 bn Dexia BIL - $90.1 bn

BBH - $114.3 bn

UBS - $120.9 bn
Fitzrovia, Luxembourg Fund Encyclopaedia

Luxembourg legal advisers at December 2003 - number of funds served
Kremer Associés & Clifford Chance - 323 Bonn Schmitt Steichen - 492 Elvinger Hoss & Prussen - 1,744

Linklaters Loesch - 578

Arendt & Medernach - 1,475
Source: Fitzrovia, Luxembourg Fund Encyclopaedia

22 INVESTOR SERVICES JOURNAL

Fund Centres - Luxembourg

with the question of whether to buy a new system or to invest in an old one. These are interesting times when tough decisions are made.” Value Added From a legal perspective, Luxembourg introduced its new hedge fund regulation after realising it could achieve a lot more than simply providing a platform for UCITS funds. “We were confident that our expertise could also be applied to alternative funds,” says Claude Kremer, partner at Arendt & Medernach, a Luxembourg-based law firm. “We developed hedge funds and SICARs and have done quite well so far. We significantly increased assets and numbers in the hedge funds and fund of funds arena in 2004. The overall message we project is that Luxembourg can be used for non-UCITS funds too. This message has been well received by the market.” Together with Ireland, Luxembourg has taken the lead on competitive hedge fund regulation in Europe. Kremer explains: “The Germans have developed legislation but their taxes imposed on hedge funds to become compliant are huge. We are not sure whether Germans can launch hedge funds in Germany or whether they can use the Luxembourg funds. The French have not really devised any competing regulation for hedge funds. Although Ireland was the first to introduce hedge fund regulation, we have become a competing jurisdiction to the classical Irish hedge funds.” SICARs and property funds have also given Luxembourg service providers a lot to be thankful for. “Property is an extremely well developing segment and Luxembourg has a flexible regulatory environment to support these funds,” says Kremer. “The structuring of these funds through Luxembourg vehicles has proved to be extremely tax efficient for the investor. Luxembourg service providers have to become more specialised in order to service these types of funds because there are a lot of opportunities.”

Number of investment funds in Luxembourg
Others 28 25 896 888 1017 957 0 200 400 600 800 1000 1200 2002 2003

SICAV

FCP

Source: ALFI

INVESTOR SERVICES JOURNAL 23

Fund Centres - Luxembourg

The changes to Luxembourg’s investment fund regulation have prompted service providers to specialise in their service offerings. “This specialisation will make it possible for providers to service new funds,” says Kremer. “Alternative funds, in particular, behave differently to ordinary funds. The service provider has to monitor the underlying value of the assets in hedge funds. Reporting for fund of hedge funds requires the value of the target funds from the relevant service providers of these funds. Service providers face the challenge of achieving a degree of specialisation to meet the high expectations of promoters. They have to invest in the business, declare their areas of specialisation and offer their services in a cost competitive manner.”

Net Assets under Management - Luxembourg in Euro bn
2002 Institutional funds 2003

Part II Law 2002

Part I Law 1988

0

100

200 300 400 500 600 700 800
Source: ALFI

NEWS Luxembourg, February 2005 – FUNDsoft and Protracs have signed a strategic agreement, covering FUNDsoft’s complete solution range which includes the COBAS Bureau Service for outsourced IT of funds administration as a range of components for workflow and document management. Commenting on the agreement, Mark Culham, FUNDsoft’s client and partners manager, said, “Both our companies are perfect complements to each other; Protracs is a niche services provider in the Luxembourg and Pan European market and FUNDsoft is a dynamic provider of solutions for the fund administration and financial marketplace. Both companies have a wealth of experience in operating in this sector and their combination provides unique opportunities for existing and new clients to access the latest technology and services for areas such as a range of Bureau solutions, fund supermarkets, transfer agency, pooled pensions, and a range of other investment vehicles” Under the terms of the agreement, FUNDsoft’s range of solutions, based on the COBAS platform, will be delivered into the European marketplace by a number of partners, such as Protracs, through application management, licensing, or fully outsourced services, including FUNDsoft’s recently launched Bureau service. The agreement marks the beginning of a long-term strategy between the two businesses. “We are committed to providing our users with a complete solution for all aspects of fund administration. The barriers for distributing funds on a pan-European basis are coming down but technology has not delivered the cost savings that most fund administrators require. We intend to significantly change that,” stated Culham. “Protracs is a rapidly expanding professional services organisation and the employees have years experience between them in the European funds industry. FUNDsoft offers best-of-breed solutions which will have a significant impact on this market,” said Robert de Yong, managing director of Protracs. “Protracs is delighted to have been chosen as the first strategic partner of Fundsoft in Luxembourg; our combined expertise offers a unique range of services and solutions for the funds industry throughout Europe”.
2004

1200 1000 800 600 400 200 0

Net Assets under Management - Luxembourg in Euro bn

2003

January February March

April

May

June

July

August SeptemberOctober November
Source: ALFI

24 INVESTOR SERVICES JOURNAL

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Analyse This...Luxembourg
After several years of regulatory change, Luxembourg and its service providers seem well prepared to attract new business. ISJ readers put them to test with a host of questions about their existing fund regime

Nicole Pauquet

Johnny Yip

Comment on the outlook for investor services outsourcing in Luxembourg.
Answered by Nicole Pauquet, managing director of UNICO Financial Services S.A. Increasing pressure on the profit margins of asset managers is the driving force behind outsourcing in the investment fund industry. As a consequence of this pressure, asset managers tend to focus on their core business, seeking ways to cut their operational costs by transforming fixed costs into variable costs. The range of outsourcing extends from single IT-platform outsourcing to the entire back- and middle office value chain. However, the demand for component-based outsourcing is, in my opinion, an indication that some asset managers have not yet taken a final decision about the definition of their core business. In such a situation, the following criteria appear as barriers to a complete outsourcing decision: existing in-house service centres, concern about the effectiveness of cost reduction, concern about the quality of services and limited supply of credible service providers operating in a global European market. However, partial or component-based outsourcing does not deliver a taste of the key outsourcing benefits, which include: the replacement of fixed costs by a higher grade of variable costs; the reduction of capital tied up in administration operations; the fact that investment costs are borne by the outsourcer; economies of scale by using scalable IT-platforms; sharing of product development costs for industry-wide changes across a wide customer basis and the flexibility of personnel deployment, avoiding redundancies especially for high qualified personnel. In conclusion, there will be some component-based outsourcing deals, but I would see them as a transitory phenomenon, paving the way for more lift out deals. This trend will accelerate as the European market expands. Local differences will remain, but we can expect an increasing grade of regulatory harmonisation, as well as product harmonisation. The Luxembourg fund administration outsourcing market can profitably grow with the acceleration of cross border outsourcing, when these decisions are taken on board by the head offices of big the European asset managers. This will be the main challenge for the Luxembourg fund industry within the coming years.

Is the existing funds regime intrusive or fair and will the existing rules lead to further back office outsourcing?
Answered by Johnny Yip, partner, Deloitte Luxembourg Over the last few years the entire financial services industry has faced an increasing number of new prudential regulations. This trend is likely to continue as regulators try to improve corporate governance. Luxembourg’s appeal may be explained by its regulated environment and investor confidence in the “Luxembourg Brand”. The qualitative aspect of the industry’s track record is not the result of a “bullying” style by the omnipresent CSSF (Commission de Surveillance du Secteur Financier). Instead, Luxembourg singles itself out from other jurisdictions by the close working relationship between the regulator and the industry, grouped under the Luxembourg Association of Investment Funds (ALFI). Every draft law or regulation is debated and discussed via working groups and committees by representatives of the lawmakers and the industry. The main concern is the impact of implementing the new prudential regulations. There is no single player in Luxembourg who is not aware that the CSSF recruited 15 additional staff in 2004 as a result of increased workload. It is very difficult to convince the most optimistic fund administrator of the positive aspects of the introduction of Long Form audit reporting. Increased operating costs and professional indemnity cover will surely make the players rethink their business model. Currently there are about 70 fund administrators that provide back-office functions and most of them also provide custody services. There have been some major outsourcing deals amongst some big players in the industry, driven mainly by strategic positioning. So far, increasing prudential regulations has not been a compelling reason to outsource further back office functions. As of January 1, 2005 the CSSF reported a total of 25 authorised UCITS III management companies and most of them are a spin off of existing fund administrators. Clearly, the industry could end up with as many management companies as fund administrators. We expect increased outsourcing activities in this segment of the market, largely driven by the regulations for minimum substance and the ease of transferring labourintensive functions to exotic outsourcing havens. The smaller players will no doubt face serious difficulties to keep pace with increasing operating costs and remain competitive. We could witness an accelerated flight to the “niche market”.

26 INVESTOR SERVICES JOURNAL

Analyse This...Luxembourg

Jean-Jacques Picard

Thomas F. Langer

What does 2005 hold for the Luxembourg Funds Industry and what factors will act in its favour?
Answered by Jean-Jacques Picard, public relations director, Association of the Luxembourg Fund Industry (ALFI) The Luxembourg funds industry accelerated its growth in 2004. During the first eleven months of the year, Luxembourg saw the net creation of no less than 320 new fund units, bringing the total number of portfolios offered to private and institutional investors around the world to more than 7,800. During the same period, net assets under management in Luxembourg-based investment funds increased by Euro 130.5 bn or 14.4 per cent. The Association of the Luxembourg Fund Industry (ALFI) believes that this positive development will continue in 2005. Many of its members have new investment fund products in the pipeline. Furthermore, fund promoters that are not yet present in Luxembourg are increasingly interested in setting up funds in the Grand Duchy. This is particularly true for hedge funds, where a clear trend to domicile this type of fund in a more regulated jurisdiction is observed. Since the Luxembourg regulator issued specific hedge fund regulation at the close of 2002, both the number of hedge funds and the assets under management in these funds have shown steady growth. Private equity and venture capital funds are another growth area since the Grand Duchy offers a legal and fiscal environment that takes into account the specific needs of this category of investment vehicle. Whereas real estate funds used to be set up by specialised promoters for a specific type of investment clientele, large retail fund promoters are now starting to turn towards these products. By reducing to nil the annual subscription tax on pension pooling vehicles, a highly attractive scheme for a tax efficient and cost-effective grouping of pension funds was created in May 2004. One of ALFI’s working groups is currently investigating the extent to which the March 2004 Law on Securitisation can lead to the creation of new types of investment funds. The Association is also thinking about measures that could be taken to render Luxembourg an attractive centre for socially responsible investment (SRI) funds in general and microfinance funds in particular.

What impact has the implementation of UCITS III had on asset managers in Luxembourg so far?
Answered by Thomas F. Langer, Dresdner Bank Luxembourg S.A., Chief Investment Officer With the introduction of the new EU directive, investors can look forward to a broader range of more sophisticated products coming out of Luxembourg, including funds structured around a total return approach. UCITS III allows providers to offer funds out of Luxembourg with an enlarged range of underlying securities and the possibility of short selling. This helps firms to meet the demand for more refined products that will provide better returns in the current, uncertain economic environment. The fund manager now has new opportunities to make funds more attractive for investors. In general, EU-countries have enacted their UCITS III legislation, but each country has read the new directive from its own point of view. Luxembourg had a lot to lose, but less to win. The competition with Dublin led to a good, but not optimal, result. From now on, a fund manager can use currency derivatives for purposes other than hedging. This means that a fund could be invested in long/ short currencies to profit from movements in the currency market only. Leveraging is permitted to a certain extent, to improve performance. By selling uncovered derivatives, the fund manager can shorten underlying markets without having the long position to take advantage of decreasing market prices. Different types of underlying securities can be combined. A so-called super fund can be composed of stocks, bonds, mutual funds, futures and options. The fund manager can decide which product gives them the right exposure at the best price. Depending on the clients’ demand, the fund manager has to identify the investment products that offer them the expected return. Former stock pickers have to explore whether the direct investment or an investment via a discount certificate offers the best opportunities. To profit from UCITS III, both the managers and the investors have to be aware of their aims. Fund managers will better meet the expectations of their clients, who will receive better products at lower costs. While this is the theory, only reality will prove it.

INVESTOR SERVICES JOURNAL 27

Analyse This...Luxembourg

Sheenagh Gordon-Hart

Patrick Zurstrassen

Can service providers in Luxembourg expect any opportunities from the creation of pension fund pooling vehicles and the abolition of the tax d'abonment?
Answered by Sheenagh Gordon-Hart, vice president, head of Strategy & Reseach, EMEA at JP Morgan Investor Services Pension fund pooling – it’s the ‘Holy Grail’ for service providers. For years, legal and tax experts, consultants and practitioners have worked on finding a solution to the diseconomies of scale that arise from having a hugely fragmented pensions picture in Europe and across the world. Just when one problem appears to be capable of solution, so yet another obstacle seems to emerge. However, the pressure is now on to transform this situation: the unstoppable inversion of the population pyramid demands radical action. In Europe, attempts are being made to address this in terms of growth, market efficiencies, and in a myriad of other ways. For those that provide services and to end investors alike, the benefits that pension fund pooling can offer will be significant. Already, but to a very limited extent, pooling is available; the big prize will be efficient cross-border pooling. In Luxembourg, all the signs are that the Flexible Corporate Pension (FCP) structure will thrive as a pooling vehicle. That is not to say there will be no challenges; there are still many unknowns and the industry will have to move forward with a degree of uncertainty around, for example the domestic tax/stamp duty treatment of assets transferred in specie. Additionally, a crossborder pooled vehicle will look fairly complex with a range of share classes representing the potential need to observe a range of asset allocation rules and/or tax profiles of investors. However, service providers in Luxembourg are used to dealing with such complexity. The tax challenge will remain as pioneers seek the multiple jurisdictional rulings recognising the FCP as tax transparent and thus eligible for favourable treatment. Over time, however, such vehicles are likely to prove themselves as efficient vehicles for the management of pension assets and that is a market whose growth is assured. The abolition of the taxe d’abonnement for institutional investors is welcome; but should be the beginning of the end for this tax: its continued existence is a distraction.

What opportunities does the UCITS III law for Sicavs and open ended investment companies present to fund promoters and to fund service providers?
Answered by Patrick Zurstrassen, chairman and founder of The Directors’ Office The UCITS III law for Sicavs and open-ended investment companies presents a change in the investment funds regime. Within a few months, fund promoters and fund managers will not have a choice between UCITS I and UCITS III. The Committee of European Securities Regulators (CESR) has just published its final recommendations on how to manage the transition from UCITS I to UCITS III. For many funds, the Committee has shortened the grandfathering period of UCITS funds to one year, rather than close to three years. Most of them will have to comply at the latest in March of next year. This transformation would impact the entire European market, be it cross-border or for all practical purposes domestic, broadening the range of possible investments and fostering fund governance. About 30,000 funds in Europe will thus have to convert to UCITS III in the coming months. The spirit of the Directive is to provide managers with a much broader range of investment possibilities than those available in 1985 when the first UCITS directive was drafted. The first UCITS directive is very much long-only equity driven. Those securities, including bonds or equities, had to be listed on the stock exchange. We are now moving into a more open field and overthe-counter instruments are allowed under certain conditions of law. There is also the the possibility to invest in other funds, the possibility to invest in money market instruments, collateralised securities and the possibility to buy and sell derivates, not only for hedging an exposure but also for picking an exposure, thereby achieving greater leverage. But nothing is perfect - some might say UCITS III should have included possibilities for master-feeder funds or real estate funds. One of the first firms to have completed the transition from UCITS I to UCITS III for their Luxembourg Sicav is European Credit Management. This achievement has been completed thanks to the local support of The Directors' Office.

28 INVESTOR SERVICES JOURNAL

Analyse This...Luxembourg

Robert de Jong

Marc Schammo

What opportunities exist for fund managers, promoters and distributors to outsource their administration?
Answered by Robert de Jong, managing director of Protracs Outsourcing is definitively a trend to monitor in the Luxembourg market. The new provisions for hedge funds have increased the competitiveness of the Luxembourg market, but current systems and workflows are not always adapted to handle the complexity of these financial instruments. This also applies to the regulatory requirements and risk management measures required for UCITS III compliance. As most transfer agency and fund administration application providers still focus their efforts on the implementation of an EU Savings Directive, compliant release for July 2005, financial institutions are looking to fill the gap by outsourcing or by integrating specialised packages, to offer additional products such as hedge funds and funds of hedge funds. But changing regulations are not the only outsourcing drivers. Financial institutions have since the beginning of this century been looking for ways to reduce overall operating costs, and outsourcing, although sometimes thought as controversial in the long term, is seen by many as cost reducing measure. Increasing competition and client awareness of financial markets and products are pressuring profit margins to a minimum and obliges market players to offer a wide range of services to avoid dependency on one single product or service. As such, market consolidation will probably continue in 2005 and 2006 and the smaller niche players may have difficulties to survive under these circumstances, unless perhaps they consider outsourcing specific activities to profit from economies of scale. In order to offer a full range of diversified products and services, investment in best of breed solutions becomes almost inevitable, but these solutions are not cheap. Not only should purchase and maintenance fees be considered, but integration costs and middleware requirements need to be carefully analysed before opting for a best of breed solution scenario. Companies like Fundsoft have recognised the potential of the Luxembourg market and are establishing local presence here today.

What challenges do open architecture models present, considering that Luxembourg's laws do not allow for certain functions to be carried out in other fund centres?
Answered by Marc Schammo, head of sales at Dexia Fund Services The Luxembourg authorities may have no problem with functions being performed elsewhere under certain circumstances. Major functions have to be performed here and there is no getting around that. We do not have it in writing that which can be outsourced and that which cannot. From my point of view, it would be risky to state which functions could be performed outside Luxembourg. Dexia Fund Services performs a number of activities out of Luxembourg for our subsidiaries in 11 jurisdictions. FETA (First European Transfer Agent) is doing the same for certain transfer agency activities. We try to centralise all functions in Luxembourg as far as possible. It is difficult to say whether more funds have been set up in Luxembourg as a result of recent regulatory changes, we do see new business come to Luxembourg on a regular basis. Whether new business is due to UCITS III is difficult to assess. Luxembourg can attribute its success to a stringent, yet flexible regulatory environment and to the expertise of the Luxembourg service providers. How much new business comes to Luxembourg because of these qualities and how much due to UCITS III is difficult to say. But generally speaking, UCITS III is not necessarily generating new business across the board. It certainly adds costs to the funds administration function, thus to the fund promoters and ultimately to the investors. Whether this may compel fund managers and promoters to go offshore, to a totally unregulated environment, is an interesting debate. Investors tend to buy products that are in safe havens. There is a trend towards unregulated structured products, which have, for some time, been offered to private banking clients. These don’t compare to investment funds but at the end of the day, could provide investors the same outcome. These products are often private placements, they undergo no regulatory control and are often totally illiquid. Investors increasingly buy such unregulated products from their local banker but not necessarily exotic investment funds from a source they know less.

INVESTOR SERVICES JOURNAL 29

Luxembourg Funds Industry

Luxembourg is often said to be over-regulated, but regulation is the cornerstone of trust that promoters and the investor community have built up over the years. Stephanie Grisius at UBS Fund Services explains the importance of regulation

A Question of Trust
Regulation provides a sound basis
for product innovation and professional fund servicing. Luxembourg has positioned itself successfully as the hub for international fund distribution. With more than 500 fund promoters, Luxembourg has attracted fund sponsors from all over the world. While standard UCITS funds represent a significant part of the Luxembourg investment fund market, more and more effort is being devoted to increasingly innovative solutions and the regulatory framework for complex products.

Stephanie Grisius and Jean-Paul Gennari

the Luxembourg FCP (Fonds Commun de Placement). In terms of flexibility, the Luxembourg solution offers more possibilities, both for investors and investment policies. Indeed, while only pension funds can invest in a Dublin CCF, the Luxembourg law has adopted a wider definition of who qualifies as a pension pool investor, for example, balance sheet assets held for pension purposes could also qualify. Similarly, in terms of investment policies, the CCF can only take the form of a UCITS fund, whereas the Luxembourg solution also allows non-UCITS structures, which could be used for master-feeder set-ups. By abolishing the subscription tax on corporate pension pooling vehicles, Luxembourg has further shifted the balance from the CCF to the FCP. The crux of pension pooling vehicles remains the issue of tax transparency. While discussions with different foreign tax authorities are still in progress, the FCP has the advantage of being an established and well-known product. The investment management community is certainly well aware of its potential: “Within UBS, we have received a number of enquiries regarding the possibilities of the Luxembourg vehicle for cross-border pension needs. We are confident that the Luxembourg platform offers a key building block for developing these vehicles on a pan-European basis. There are a number of challenges we will need to address, but this is certainly an area that will further develop in the future,” argues JeanPaul Gennari, head of UBS Fund Services in Luxembourg. “Even though the FCP may not have been given as much media attention as its Dublin counterpart, it stands the test in every respect. The possibilities of the FCP are wide and its tax transparency is, to a

“We have received a number of enquiries regarding the possibilities of the Luxembourg vehicle for cross-border pension needs”
Pension Pooling While Dublin has been good at marketing the CCF (Common Contractual Fund) as a pension-pooling vehicle, it is little more than a copy of large extent, better tested than that of the CCF. In addition, a cross-border pension solution would complement Luxembourg’s existing international fund distribution offering”.

30 INVESTOR SERVICES JOURNAL

Luxembourg Funds Industry

Regulated Centres While plain vanilla funds are successfully used as the building blocks in customer-oriented solutions, more complex, structured funds are also making progress in Luxembourg. Gilbert Schintgen, head of Compliance and Risk Management at UBS Fund Services in Luxembourg says: “Luxembourg sees a lot of hedge fund managers who are looking to onshore their hedge fund ranges from unregulated or less regulated offshore places to Luxembourg. The trust of their client base is an invaluable asset that outweighs regulatory constraints or slight add-on costs for doing business.” SICAR: in regulation we trust Three SICARs (Société d'Investissement en Capital à Risque) have been set up under the law of 15 June 2004. The purpose of the SICAR is to invest in “risk capital”, including venture capital and different forms of private equity, like convertible debt and mezzanine financing, offering a flexible wrapper for a large array of investments. Its legal and operational flexibility and different tax possibilities have sparked the interest of the financial community in Luxembourg. “The SICAR represents a very attractive vehicle for investments in private equity and venture capital. The financial community welcomes this new regulated product, which offers an attractive alternative to what would have formerly been set up as an unregulated limited partnership,” says Gilbert Schintgen. Securitisation Luxembourg offers a legally secure, yet flexible environment for the securitisation of a wide range of assets. The law of 22 March 2004 introduces securitisation vehicles in the corporate form as well as in the form of a securitisation fund. It offers maximum investors’ and creditors’ protection by securing their rights, allowing the use of separate asset classes and enhancing bankruptcy remoteness. Successful Servicing Innovative products also call for stateof-the-art servicing. While products are getting more and more complex, the

investment required for servicing these products is also increasing. Make or Buy? Outsourcing is already a reality in Luxembourg. More than half of the top 100 promoters - controlling 95 per cent of total assets in Luxembourg domiciled funds - outsource some or all their fund administration requirements to a third party. In terms of assets, these promoters represent more than a third of the total Luxembourg investment fund market. “Luxembourg has a very professional fund servicing industry. The choice and quality of specialists have facilitated the decision to outsource, particularly in the

“The SICAR represents a very attractive vehicle for investments in private equity and venture capital”
areas of fund administration and custody. Regulation, if anything, is going to further intensify this trend,” notes Jean-Paul Gennari. Promoters who only perform the fund administration of their in-house fund range are likely to either outsource or to start offering fund administration services to third-party clients. But the fund administration market is already very crowded and also very concentrated: “There are already more than 70 fund administrators in Luxembourg and the top 20 control more than 60 per cent of total assets. Competition is fierce and building up a third-party client base is tough under these conditions,” argues Jean-Paul Gennari, “Building up a fund administration operation from scratch is also challenging: in addition to prohibitively high set-up costs, it is difficult to build up and maintain the required local product, regulations and market expertise.” The Right Infrastructure A state-of-the-art fund administration architecture needs to accommodate the servicing requirements of innovative new investment products. “At UBS Fund Services, we have continuously invested in our people, processes and systems to offer high-quality fund administration services to be able to respond to the growing complexities of the investment products,”

says Jean-Paul Gennari. In addition, it is becoming increasingly important to be able to offer a unified, streamlined service across different locations. “We are particularly pleased with the successful introduction of a single, state-of-the-art administration platform for our centres in Luxembourg, Switzerland and the UK, allowing us to offer the same high-quality, consistent standard of processing regardless of where a fund is domiciled. Our clients will benefit from increased speed, accuracy and functionality in all areas of administration. The flexibility and connectivity of this new platform allows us to take on new mandates and respond to requests from existing clients more effectively,” says Gerhard Fusenig, head of Investment Fund Services. A New Service Dimension Successful fund administration goes well beyond accurate and timely NAV calculation. Increasingly, fund administrators are expected to assist and guide their clients in the changing regulatory environment. While increased regulation is often regarded as a burden, it also offers many opportunities that fund promoters are keen to seize as soon as they arise. Regular discussions and close interaction with the client allows faster time to market. “Having a state-of-the-art IT architecture is the cornerstone of a successful fund administration business, but we have taken our service offering one step further,” says Jean-Paul Gennari. “As a leading fund provider, we have in-depth product and market knowledge which we share with our clients. We assist our international client base from the early product development stages to the full administrative servicing, including tax and regulatory reporting in more than 25 target countries. Through regular discussions and proactive information provision, we help our clients in their strategic decision process. This regular exchange is key to our service offering and turns us from just a service provider to our clients’ partner.” Stephanie Grisius is responsible for business development initiatives at UBS Fund Services in Luxembourg.

INVESTOR SERVICES JOURNAL 31

Offshore Centres

The offshore centres of Bermuda, Cayman, Curaçao and Bahamas have endured testing times over the last year. ISJ finds out how service providers in these centres have overcome internal problems and competition from onshore centres.

As homes to the world’s largest concentration of hedge
funds, it is hard to imagine the offshore centres of the Caribbean and Bermuda going through a bad spell. But the events of the last year inflicted considerable havoc on their infrastructures. The impact of Hurricanes Ivan and Frances certainly put inhabitants in these centres through their paces. The scale of the disaster was also severe for organisations with businesses in these offshore centres. The Bank of New York, whose acquisition of International Fund Sean Flynn Administration in Bermuda added to its fund servicing status in North America, operates a trust company in Cayman and had to mobilise its contingency plan after the Hurricanes struck. “We temporarily took our representatives out of the Cayman Islands and put them into other offices where they carried out their business as usual,” explains David Aldrich, head of Securities Industry Banking at the Bank of New York. Regulation Apart from having to overcome the impact of the Hurricanes, the offshore centres in the Western hemisphere faced brutal regulatory arbitraging from the offshore centres located within Europe. Aldrich explains: “Everybody is trying to modify their own regulations to appear more attractive. Apart from Bermuda, Bahamas, Curaçao and Cayman, centres such as Jersey, Guernsey and the Isle of Man are also trying to attract the same business and are making their own regulatory changes in order to compete against each other.” Perhaps the most important weapon in the offshore centres' arsenal is reputation. “Bermuda, Cayman and the Bahamas all have a credible structure and a credible regulatory regime,” says Aldrich. “The offshore centres are increasingly competing against the onshore, more highly regulated centres such as Ireland and Luxembourg. At the same time, managers with a Cayman fund, a Bahamas fund and a Bermuda fund are considering whether they should 'redomicile' to one single centre and as a result, we are seeing a redomicilation of funds for administrative convenience. To a large extent, the recent regulatory changes are enabling those centres to remain in the game and protect their existing market share. The net result of this regulatory arbitraging is that none of these centres are able to move ahead of the pack, other than the Cayman Islands, which already stands proud. There is a lot of 'me-too' activity as far as launching funds in Cayman is concerned.” Regulation The offshore centres of Bermuda, Bahamas, Cayman and Curaçao have strengthened their regulatory regimes to attract more funds business. Fund service providers in these centres are responsible for the daily checking of all

Blazing Beacons

32 INVESTOR SERVICES JOURNAL

Offshore Centres

shareholders against the Office of Foreign Assets Control (OFAC) list. “Our job is to make sure we are fully compliant, and BNY has uniquely automated the difficult task of anti-money laundering and OFAC checking into a systems process run on a daily basis,” says Aldrich. Fund service providers are also adamant that onshore regulation such as the USA Patriot Act of 2001 did not inflict a move of administration services to the US. “The main reason we service clients out of our US offices is because certain managers there prefer a local service for their US investors,” says Aldrich. Overall, it is believed that increasing regulation has a mixed impact on offshore and onshore centres. Aldrich explains: “Promoters are seeking the regulated environment for their investors, who require the controls and procedures to be in place. The impact of regulation is not a negative thing. The regulatory overhead for an onshore fund is likely to remain higher than the overhead for an offshore fund. If you can avoid going to the onshore centres, you will.” Cayman Islands In comparing the offshore centres of the Western Hemisphere, the perception is that Cayman will remain the strongest player for some time. BNY is currently in talks with a fund manager who intends to launch six new Cayman funds in March 2005. “Cayman will remain the domicile of choice for about 80 per cent of hedge funds,” says Aldrich. As the heart of Cayman, Georgetown received minimal Hurricane damage in comparison to the rest of the Island. Citco, which has an office on Seven Mile Beach, was severely impacted but had a business continuity plan to get its services up and running after the Hurricane struck. “For the next two months, most of our accountants were sent to our Fort Lauderdale office and our investor relations staff were sent to offices in Curaçao,” says Patrick Agemian, managing director at Citco. Inspite of the damage caused, the Hurricane did little to thwart Cayman’s ability to compete head-on with other fund centres. To maintain Cayman’s status as a premiere offshore domicile, the government accepts a lot of advice from the private sector. Considering this form of co-operation, is little wonder that the number of hedge funds in Cayman has increased exponentially over the last year. “Almost 6000 hedge funds are registered in Cayman and this figure shows now sign of slowing down in terms of the number of hedge funds that are being set up and registered here,” says Agemian. “The laws are in place here to give promoters and managers piece of mind. The law and audit firms in the US are comfortable with Cayman structures and they will most likely recommend promoters to use Cayman. With of host of quality law firms, auditors and administrators present, everything is in place to make Cayman successful.” Citco provides fund administration from about several different centres. Consequently, its Cayman office adheres to many of the rules emanating from onshore jurisdic-

tions, including the USA Patriot Act. “As many offshore administrators adhere to these rules I do not anticipate a mass exodus of fund services to the US once the Patriot Act is fully implemented for hedge funds,” says Agemian. Agemian adopts a similar stance on competing jurisdictions such as the Channel Islands as well as European centres like Luxembourg and Dublin. “Our laws are in place, we have the reputation, our regulation is not onerous and the costs of setting up funds here would not be higher than any other jurisdiction,” he says. “Overall we have a good product, which other jurisdictions would like to emulate. Many (fund) promoters are happy and comfortable with the Cayman structure. Until that changes, we will keep our market share as an offshore funds jurisdiction.”

“Bermuda, Cayman and the Bahamas have a credible structure and a credible regulatory regime”
Consolidation While offshore service providers remain confident about competition from other fund centres, increasing consolidation within the fund servicing industry presents a different concern. “The disappearance of niche players is inevitable,” says Agemian. “I don’t think consolidation is a bad thing. There are a lot of hedge fund administrators out there. There is room for some of the smaller players. The bigger banks are seeing the potential out there and they are trying to get into the game. The most efficient way of getting into hedge funds administration is by going after someone who is already in the industry and who has the infrastructure. Mellon’s recent acquisition of Derivatives Portfolio Management provided the bank with

Number of Mutual Funds in the Cayman Islands at the end of 2004
6000 5000 4000 3000 2000 1000 0 2004 2003 2002 2001
Source: CIMA

5894 4808 4285 2989

INVESTOR SERVICES JOURNAL 33

Offshore Centres

easy access to the hedge fund market.” The hedge fund product has largely appealed to both the high net worth and institutional investors. “I suspect over the next few years the regulatory framework for establishing hedge funds will come into play in most European countries,” says Sean Flynn, managing director of UBS Hedge Fund Services “However, there will always be strong demand for products domiciled in the offshore centres because of the ease of set up and lack of investment restrictions. Asset management start-ups often need a track record in managing funds before they can get approval for sponsoring funds onshore. These managers will continue to domicile their hedge funds in offshore centres like Cayman.” According to Flynn, the increase in onshore hedge funds will not have a significant impact on the number of funds domiciled in offshore centres for a long period of time. “As

“The regulatory overhead for an onshore fund is likely to remain higher than the overhead for an offshore fund”
the hedge fund becomes more of a mainstream product, more investors, including retail investors, will want access to it, thus giving rise to an increasing number of onshore products,” he says. As further testimony to its reputation, the Cayman Islands’ stock exchange received formal recognition by the UK Inland Revenue in March 2004. The Revenue granted the Cayman Islands Stock Exchange (CSX) status as a “recognised stock exchange” under Section 841 of the Income and Corporation Taxes Act 1988. Commenting on this landmark announcement, Valia Theodoraki, CEO said: “This recognition of the CSX places the Exchange on the same footing with exchanges in other financial centres, such as the Irish, London and Luxembourg stock exchanges.” The recognition granted to the CSX also prompted three more entities to become listing agents on the CSX, which in turn brought more listings. By the end of 2004, listings on the CSX exceeded 850, compared to 735 listings at the beginning of 2004. Market capitalisation at the end of 2004 was $53.5 million, compared to $43.94 million at the beginning of 2004. “Much of the Exchange’s considerable growth can be attributed to the hedge funds that have listed on the Exchange since 2002,” says Theodoraki. Curaçao To compete with its offshore neighbours, Curaçao launched the National Ordinance on the Supervision of Investment Institutions and Administrators (NOSIIA) to regulate and supervise investment funds and administrators. The introduction of this legislation, according to Robert Chin, managing director of ATC Fund Services, results, among other things, from the move of investment funds into the retail marketplace. “Not too long ago, many investors did not think of investing in alternative invest-

ment funds,” says Chin. “These investors, including the retail investors, are now more attracted to these types of funds. Enhanced legislation and supervision is a positive development. Curaçao is in line with global moves to introduce good pieces of legislation to ensure the smaller investors' interests are being protected.” As a member of the Dutch Kingdom, Curaçao's legislation bears a strong resemblance to the law of the motherland. In fact, Dutch legislation was used as a platform for the implementation of NOSIIA in Curaçao. “It is still too early to say whether this piece of legislation has benefited Curaçao as a domicile, but it is a positive development for the service providers,” says Chin. “The receipt of a license from the Central Bank reassures investors and fund managers that they are dealing with a service provider who is regulated by the Central Bank of the Netherlands Antilles.” Despite its favourable position in the offshore funds industry, Curaçao does not compete with fellow jurisdictions on the basis of domiciliation. Chin explains: “Curaçao's strengths lie in the area of experienced fund administrators who have operated in this business for a long time and who have seen a wide variety of alternative investment products, both in terms of structure as well as investment strategy. Additionally, the low costs of living here, in comparison to other jurisdictions in the Western Hemisphere, have enabled Curaçao-based administrators to compete on price.” Onshore regulation, such as the USA Patriot Act, is also recognised by service providers in Curaçao. “I find it difficult to predict whether regulation will be beneficial or detrimental,” says Chin. “As the alternative investment fund industry matures and becomes more widely accepted by various types of investors, regulation will increase. Ultimately, all of the centres where fund administration is performed will have similar rules and regulations in place to compete with each other. What will prevail is the quality of the service provider in combination with the cost of providing these services. Additionally, the popularity of alternative investment funds has led to the acquisitions of the traditional hedge fund administrators. But the market is big enough and there are still enough opportunities for the smaller administrators, who can provide a lot of guidance in the pre-inception phase of the fund.” Bermuda As a pre-eminent offshore financial centre, Bermuda remains at the forefront of its competitors and drives developments occurring in the offshore financial services and insurance industries. “The mind, management and deep level of experience of professionals in this jurisdiction continues to keep Bermuda at the cutting edge of global industry and regulatory developments while establishing a solid sophisticated commercial environment from which to conduct business,” explains Greg Wojciechowski, chief executive officer of the Bermuda Stock Exchange. The Bermuda Stock Exchange provides a state of the art

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Offshore Centres

securities market environment for the Island. “It is used by brokers, both domestic and international, securities and funds,” explains Wojciechowski. “The BSX, like its corporate colleagues in mature financial centres, provides electronic trading, clearing, settlement and depository services for its clients. The infrastructure that is in place ensures integrity and security while providing essential risk mitigation elements. The BSX created a regulatory and operational platform which supports the domestic economy and welcomes international brokers, issuers and investors.” Net assets in Bermuda collective investment schemes increased to some $133 bn as at end-June 2004, almost three times the level at the end of 2000. In parallel, the development of the mutual fund sector in Bermuda has given rise to the growth of a major local fund administration industry, with a significant number of administration firms established locally. Bermuda determined in the 1990s that mutual funds should be subject to appropriate regulation. The result was the development of the Collective Investment Scheme Classification Regulations of 1998, which provided for a three-tier classification of funds – Recognised, Standard

and Institutional – reflecting the characteristics of the funds and the profile of the underlying investors. However, it became evident to the Bermuda Monetary Authority (BMA) that the existing legal provisions were not wholly satisfactory. In particular, they lacked certain powers necessary to ensure the Authority’s ability to obtain information and to intervene promptly and effec-

The development of the mutual fund sector in Bermuda has given rise to the growth of a major local fund administration industry
tively in the very small number of cases in which funds may encounter compliance or other serious problems. The BMA concluded that new primary legislation was required, in the form of a new Collective Investment Schemes Act. Mutual fund companies and unit trust companies will continue to be captured; but for the first time, the definitions in the Act will also seek to ensure that other entities, which provide for the pooling of investors’ funds for collective management purposes will similarly come within the scope of the provisions. A major new development is that the Act will, for the first time, require fund

Offshore Centres

Bermuda Collective Investment Schemes Statistics
2003-Q1 Mutual Funds Umbrella-Funds Sub-Funds Segregated Account Companies Segregated Accounts Total 758 52 459 3 7 1279 2003-Q2 763 53 436 6 21 1279 2003-Q3 759 56 407 9 35 1266 2003-Q4 817 57 395 9 43 1321 2004-Q1 849 62 422 13 46 1392 2004Q2 834 69 441 20 87 1451
Source: BMA

in place in many of the premier offshore jurisdictions. Offshore centres are not looking to provide ‘regulationfree’ services to compete against onshore jurisdictions. However any advantage or disadvantage, should onshore regulators seek to impose overly onerous requirements, would likely depend on the impact to the manager or his client base, including the cost and or time of meeting those requirements, versus being able to provide a similar product more efficiently to the same investors from an offshore base.” Bahamas In its own right, the Bahamas has for long had the ability to overcome those events which threaten the wellbeing of its funds industry. When Hurricane Frances hit the jurisdiction last year, Standard & Poor’s Credit Analyst Olga Kalinina said that the Hurricane should have no impact on either the attractiveness or financial health of the Bahamas' international financial sector. The Bahamas continues to take steps in enhancing its funds environment. In January 2005 for example, The Securities Commission of The Bahamas (SCB) published Guidelines providing direction for the fast tracking process of applications for investment funds that target accredited or high net worth investors. Under this process, the SCB guarantees approval of these categories of investment funds within 72 hours of receipt of a complete application. “This fast tracking process complements the ability of unrestricted fund administrators to immediately license funds targeting sophisticated clients, once the necessary due diligence and documentary requirements are met,” explains Wendy Warren, chief executive of the Bahamas Financial Services Board. The new fast tracking process uses a declaration, signed by either the lawyer or the administrator to the fund, certifying that the application and all supporting documentation are in compliance with the Investment Funds Act and Regulations of 2003. “The quick turnaround in establishing the fast track process and Guidelines reflects SCB’s continued preparedness to address the evolving requirements of the industry and the need for regulation that is relevant to the risk of each of the services offered by the Bahamian industry,” says Warren. “The Investment Funds Act 2003 updated the definitions and classes of funds recognised locally, and created a new style of fund, known as a SMART Fund.” While the Bahamas has gained credibility and recognition as a properly regulated environment for the establishment and operation of funds, the new Investment Funds Act was structured in light of the need to develop a riskbased system of regulation, and to deal with certain weaknesses in oversight. The introduction of the Segregated Accounts Company (SAC) Act in 2004 also strengthens the Bahamas comparative advantage in the securities and capital markets areas. An SAC allows the compartmentalisation of risks within a single corporate structure. As a result, the financial performance of an individual account does not affect any

Bermuda Collective Investment Schemes Statistics
2003-Q1 2003-Q2 2003-Q3 2003-Q4 2004-Q1 2004-Q2

Unit Trusts Umbrella Trusts Sub Trusts Total Unit Trusts

70 31 33 134

65 64 32 161

63 65 50 178

72 67 82 221

93 67 115 275

65 72 195 332
Source: BMA

administrators in Bermuda to be licensed. The Act will specify a set of minimum licensing criteria to be met by fund administrators, similar to those already detailed in other recent financial services legislation in Bermuda. The Act will also provide for the Authority to issue a

“Net assets in Bermuda collective investment schemes increased to some $133 bn as at end-June 2004, almost three times the level at the end of 2000”
Statement of Principles on its interpretation and approach under the Act, as well as Codes of Conduct for fund administrators. “The licensing of fund administrators on the island will hopefully further improve Bermuda’s profile as a premier domicile for funds and or administration activities,” says Paul Kneen, general manager of Bermuda Commercial Bank. When asked what impact the onshore regulations such as the Patriot Act have on offshore centres, the reply from service providers in Bermuda is perfectly candid: “Despite the initial concerns, the Patriot Act has had very little impact on the offshore centres,” says Kneen. “The majority of requirements being imposed by the Patriot Act with regards to anti-money laundering were already

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Offshore Centres

other accounts of the SAC itself. “Most companies in the Bahamas are pleased with the new regulation and have received positive feedback about the Investment Funds Act,” says Terah Rahming, president of Oceanic Fund Services. “We haven't been able to test the market's appetite for the new structure under the Investment Funds Act as yet. Our only form of participation with the new Act is to ensure that the funds we presently administer are compliant.” The Investment Funds Act enables The Bahamas to compete with the likes of Luxembourg and Dublin. “The Act is a step in the right direction,” says Rahming. “The industry and the regulator in the Bahamas considered the regulation that was in place in the Channel Islands and Dublin and tried to create a law that would give us a competitive edge. The new Act will put us in direct competition with other jurisdictions.” With further regulation for onshore jurisdictions on the cards, offshore centres of the Western Hemisphere are confident this trend will lead to further opportunities. “We expect the proposed registration for hedge funds managers in the US may become too onerous and these managers may move some of their business to the Bahamas,” concludes Rahming.

Bermuda Collective Investment Schemes Statistics
2003-Q1 2003-Q2 2003-Q3 2003-Q4 2004-Q1 2004-Q2

Unit Trusts Umbrella Trusts Sub Trusts Total Unit Trusts

70 31 33 134

65 64 32 161

63 65 50 178

72 67 82 221

93 67 115 275

65 72 195 332
Source: BMA

Hedge Funds – Performance Fees

Christophe Bodart

The Right Incentive
As an investor, one of your major concerns is getting the highest return on investment. As an asset manager, your main concern is to offer the highest return to those investors who entrusted you with part of their savings, and consequently be rewarded for the achieved performance. Christophe Bodart of Dexia Fund Services Luxembourg explains how both parties can be satisfied through equalisation methods.
38 INVESTOR SERVICES JOURNAL

During the penultimate decades of the second millennium, when markets were mainly bullish, the asset managers were compensated with management fees, usually expressed in basis points of assets under management. During that time, most of the asset managers of undertakings for collective investment schemes tried to beat a target benchmark, usually a single index, sometimes a compounded index, trading with long positions only. With falling markets, preceding an unexpected recession between 2000 and 2003, some independent asset managers have developed more complex asset management techniques, aimed at providing investors with positive returns during those periods of economic recessions. Even if hedge funds already existed at the time, these techniques really boosted the alternative investments sphere. We know those alternative investment management techniques make intensive use of leverage through borrowings, short sales, derivative instruments (regulated and/or over the counter instruments), etc. Competition amongst asset managers is such that the best ones must obviously be rewarded, according to their performance. The concept of performance fee (or “incentive fee”) now plays a crucial role in this area.
Performance Fees The performance fee is paid to the asset manager on a pre-agreed basis, as a percentage of the assets that performed (the rate usually fluctuates between 20 and 30 per cent of the performance of those assets). The asset manager also receives a management fee, independently of the performance. The performance fee is only due when the assets exceed a high-water-mark (HWM). Sometimes, a ‘hurdle rate’ is added to the HWM before accruing performance fees. This rate is premised on the payment of a performance fee only if an equivalent performance to a risk-free investment has been achieved. When informing fund shareholders of the amount of the performance fee paid to assets managers, we cannot compute the performance fee at the fund’s level. Indeed, this may result in discrimination in shareholder treatment, or even a lack of performance fee owed to the asset manager. To give an example, let us assume a shareholder subscribes to a fund at a net asset value below the HWM. They would benefit from a free ride until the NAV reaches the HWM of the fund. Accordingly, the asset manager would not receive the performance fee due on this free ride and lose revenues as a result. On the other hand, a shareholder who subscribes to a fund at a NAV above the

Hedge Funds – Performance Fees

HWM, would benefit from an unfair claw-back when the NAV comes back to a lower level. Indeed, the shareholder would benefit from a partial reversal of the accrued performance fee, even though he did not contribute to those accruals. Solution The performance fees equalisation technique is well placed to address the attribution issue, by computing the performance fee at the share class level, or at the shareholder level. There are currently three generic equalization methods available to enable the right attribution of performance fees. They are: 1. Series of shares 2. Equalization credit – Depreciation deposit 3. Equalization credit – Contingent liquidation Depending on various considerations, one might opt for one of these three methods. From a commercial point of view, it should be noted that performance fees equalization was historically developed for hedge funds, which were exclusively sold to institutional investors and high net worth investors. These two categories of investors were sufficiently aware of these techniques and were keen to get more accurate performance reading. In the case of retail fund distribution, these equalization techniques, to be disclosed within the fund prospectus, may have a negative impact on the marketing of the fund, thereby raising a host of questions from “non-professional” investors. For example, if the Equalization credit – Contingent liquidation method were used, retail investors may not understand why they are forced into a partial redemption, the proceeds of which are intended to pay a performance fee to the asset manager. Series of Shares On closer inspection of the three equalization methods, the ‘series of shares’ method appears to be the easiest one to understand and to implement. Any time the NAV is calculated, assuming there is

at least a subscription, a new share class is issued. In this respect, the equalization is performed at the share class level. Previously issued share classes that accrued performance fees will be converted into one single share class, in order to ‘crystallise’ the performance fee. It is important to note that share classes that did not perform will not be converted. Suffice it to say that daily NAVs could result in a large number of share classes being issued. As fund administrators, we could maintain a high number of different share classes, impacting on the underlying fees as supported by the fund (i.e. transfer agency fees, accounting fees, publication fees, etc.). For this reason, the ‘series of shares’ equalization method could be used for funds distributed to institutional investors only, and with a quarterly or even monthly NAV calculation. This method should not be used for retail funds and/or daily NAVs. Contingent liquidation should also be

Depreciation Deposit The depreciation deposit applies to any taxlot purchased when the fund GAV per share is below the fund’s HWM. This deposit looks like a performance fee prepayment, since it relates to the amount of performance fee that would be payable on the taxlot if, and when, the fund GAV per share rose again to the prior fund’s HWM. The depreciation deposit is deducted from the subscription amount paid by the investor, and is separated from the remaining amount booked within the Capital account of the fund. If the value of the fund exceeds the taxlot purchase price, either at redemption or at crystallization, the performance fee paid to the fund manager will first be paid out of the depreciation deposit, then from the subsequent accruals, if any. If the taxlot is redeemed at a price above the purchase price, but below the current fund HWM, then part of the depreciation deposit is paid to the fund manager while the

“The performance fees equalisation technique is well placed to address the attribution issue”
avoided for retail funds, due to forced redemptions that might frighten retail shareholders away. These redemptions will occur at crystallisation and impact negatively on retail shareholders who subscribed at a NAV below the HWM of the fund. Equalisation Credit Should the fund promoter choose to avoid the issuance of (too) many share classes, he will probably opt for the Equalization credit – Depreciation deposit method. When using this method, the shareholder pays at subscription level the NAV plus either an equalization credit or a depreciation deposit, depending on the subscription price, which is above, respectively the HWM. Equalization credit applies to any taxlot purchased when the fund’s GAV (Gross Asset Value, i.e. the NAV before accruing the performance fee) per share is higher than the fund’s HWM. Put simply, equalization credit is a prepayment of the performance fee owed to the fund manager, based on the positive difference between the present GAV and the HWM, should the performance fee be crystallized at that time. remaining amount is refunded to the investor as an additional cash payment. Finally, if the taxlot is redeemed at a price below the taxlot purchase price, then the entire depreciation deposit is refunded to the investor as an additional cash payment. From a conceptual point of view, as described above, equalization techniques ensure a fair treatment of the performance fees attribution. Needless to say that automated treatments are required to guarantee a proper equalization process, with no risk! Indeed, at subscription, one must determine the right amount of equalization credit or depreciation deposit to be paid. Any subsequent redemption requires browsing historical transactions of the shareholder in order to determine the right amount of performance fee, if any. At crystallization, a similar review of historical transactions must be performed. Manual treatments for addressing equalization could lead to unprecedented mistakes, swindling either the shareholder or the fund manager! Christophe Bodart is Head of Product Development at Dexia Fund Services Luxembourg

INVESTOR SERVICES JOURNAL 39

Prime Brokerage

Prime broking, it seems, is the new black, and everyone wants a piece of the action. The game continues to change as the industry grows, writes Brian Bollen.

In it to Win It

Growth David Aldrich, head of Securities Industry Banking for The Bank of New York in Europe, predicts that the hedge fund industry will experience continued massive growth and the significant technology investments being made by the larger service providers in both the prime broking and administration worlds will provide substantial returns for the banks involved. It is active investment management that will be the main loser from the continued growth of hedge funds, he says, pointing to the forecast made by Tremont Capital Management at the GAIM Invest conference in Geneva in November 2004, which says the size of the hedge fund industry will grow from $950 bn in 2004 to $2,350 bn by 2008. Is it purely the rise of the hedge fund that is driving this growth or are there significant other factors? The answer, it seems, is yes, and we have a classic “chicken and egg” scenario, according to Jim Conklin, FX portfolio manager, Southfield Corporation, and formerly assistant professor of economics at the University of Texas, Austin. “The economics driving the exodus of sophisticated speculative activities away from brokers (market makers) and asset managers (marketing and fund accounting organisations) centre upon the falling cost of establishing infrastructure. This is technology-related, but once it got started, prime brokers lowered the barriers to entry even further, enabling smaller and smaller players to become hedge funds.” Talent Pull The growth of the hedge fund sector is drawing talent away from the sell side (investment banks and brokers) and the most lucrative activity away from the traditional buyside: actively-managed investment vehicles, suggests Jim Conklin. He argues that the new model of investing for institutions will be, more or less, to park large amounts of assets in index funds; then overlay with hedge funds to beat the standard market benchmarks. “The old buy-side model is to blend exposure to large liquid indices with active management. When you blend the two, pricing gets blurred and your ability to monitor the performance of the active manager becomes more difficult. Financial conglomerates see this, and they don't want to miss the boat on this latest redistribution of specialisation in the asset management business. A prime broker is a financial institution that offers a hedge fund to essentially “draft” off of all their investment infrastructure and the associated benefits of credit quality that go along with it. That is, in the old days if a hedge fund wanted to trade it had to hammer out legal documentation with each of its trading counterparties, build a back office to calculate profit and loss and conduct payments, build and use risk management software, etc. Investment banks have all of this in place. A prime broker basically allows you to “rent” all of this infrastructure, outsource it, for a fee. So if Citibank is my prime broker, I do one agreement with them. From there on, I trade under Citibank's name and use all of their infrastructure to clear my trades. So now, UBS has no issue trading with me: I am a Citi-level credit. In the old days, I would have had to negotiate credit and trading agreements with every single counterparty. In the past three years, it has become possible to sign an agreement with just one financial institution and you're now up and running.

The rapid growth in the number of
hedge funds and the diverse suite of services they require has placed a high level of demand on the infrastructure that prime brokers provide. Differing views between hedge funds and prime brokers have created a lucrative situation for prime brokers, but there are always caveats to be issued whenever a niche in the financial services world becomes the new must-have. As the landscape, rules and practices all change, one is on pretty safe ground in predicting that whatever else happens there will inevitably be tears by bedtime, for some at least. Pitfalls and elephant traps lie in wait not only for the unwary, but also for the wary.
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Prime Brokerage

“For many it has been a business for some time and they are expanding or defending market share. Major global brokerages who did not participate are now playing catchup. It is a very good way to become a hedge fund's “main bank” or preferred trading partner.” “Investors, speculators and index funds will in due course emerge as the winners. The increased specialisation in investment activity due to the hedge fund boom allows the most talented speculators to focus on what they do best, at a lower cost. It used to be the case that a pension fund or endowment had to go to JPMorgan-Fleming to get active stock management expertise. Now, that pensions can invest the bulk of their portfolio in an S&P index funds at no fee, and make smaller investments in hedge funds whose performance, expressed in “absolute return space”, are easy to monitor. Index funds will win since investors will migrate from actively managed “all-long” funds into index funds that complement hedge funds.” Traditional asset managers, by contrast, will be the losers, he predicts again. “Their talented portfolio managers will leave and set up their own hedge funds. The remaining, non-talented portfolio managers will be quickly out as clients discover they are paying fees for poor performance.” Sole-Sourcing Comments from elsewhere suggest that the traditional

proverb about not putting all one’s eggs in a single basket applies in prime broking as it does elsewhere. Although prime brokerage firms are adding services and are working towards becoming a one-stop shop for hedge funds, many hedge funds remain reluctant to sole-source their prime brokerage needs, says Kevin A. Pollack, a partner at Resurrection Advisors in New York, a hedge fund advisory firm. “Thus, some hedge funds handle several prime brokerage functions in-house, have multiple prime brokers or are using other service providers, including providers of technology and fund administrators, to handle some of the services offered by their main prime broker. In addition, different hedge funds have different needs, which Kevin Pollack are best served by several prime brokerage firms. In other words, no one single prime brokerage firm is best in servicing all of the needs of every hedge fund. “Some prime brokerage firms and other service providers run “hedge fund hotels” whereby they provide low cost space and other services to small hedge funds that they hope will grow to become large clients. However,

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Prime Brokerage

Bank of America recently announced its decision to exit this space given the high costs involved.” Costs Prime brokerage firms should expect to have increased costs as they expand their services, notes Pollack. “As the growth of new hedge funds slows and larger funds dominate the marketplace, prime brokerage firms should expect to see revenues contract as a natural progression of intense competition similar to what is seen on the retail side of the business. As a result, there is a race among firms to offer as comprehensive a suite of services as possible now to grow their infrastructure, market share and reputation. However, certain prime brokerage firms are targeting certain types of hedge funds. Other prime brokerage firms have a particular niche (one leading prime brokerage firm tends to have long-short hedge fund clients whereas another firm tends to

to gain market share against traditional asset managers.” Revenue Nicolas Breteau, chief executive officer at the UK branch of Fimat, part of the SocGen group, comments that prime brokerage is already one of the major revenue contributors of some investment banking divisions. Investment banks are getting closer than ever to the alternative industry because they want their share of the lucrative commissions paid-out from the trillion dollars of assets under management, he attests. “The fund managers have a huge turnover of positions and therefore pay a large amount of brokerage commissions. They also outsource part or all of their nontrading operation creating opportunities for more fees. Appetite is growing among investment banks because they realise that nowadays the big bulk of hedge funds strategies involve capturing market opportunities through market neutral arbitrage strategies, rather than “maverick” market speculation.” Future Prime brokerage as a service was conceived in the USA in the late 1980s to service hedge funds managers who had separated from large financial institutions and therefore did not have access to in-house clearing, settlement and custodial facilities. These funds developed relationships with broker-dealers, which were able to provide them with a services package providing all of these facilities. These funds managers were trading listed and unlisted products through numerous brokers so it made sense to appoint a “prime broker” whose mandate was to centralise the settlement, clearing and custody of these trades in a single account. Since these early days, services offered by prime brokers have evolved to encompass a whole range of financial and technical services: execution, clearing and settlement, custody, margin and leverage financing, reporting to the managers and administrators, customer services, and corporate actions processing. In addition, some prime brokers offer IT or risk in-sourcing, legal structuring or sometimes even premises for start-up funds. Last but not least, prime brokers are helping managers in their fund raising efforts by introducing them to potential investors. A prime broker needs to offer strong execution, clearing and custodial facilities coupled with additional ancillary services such as securities lending, leverage financing and risk reporting. Diversification of funds strategies in recent years means that it is now required to offer not only geographically diversified sophisticated products but also services across all asset classes. As a consequence, the barriers to entry are now very high, as this requires intensive IT systems and support, a strong balance sheet and highly skilled people. But will it all end in tears? “I think there will be an eventual consolidation in the number of hedge funds,” says John R Phillips. “So weak little guys will go away. Prime brokers may not get hurt, because the size of assets allocated to hedge funds is likely to grow, independent of the number of hedge funds. The tears will be those of investors and fund managers, not of prime brokers!”

Prime brokerage firms should expect to have increaseed costs as they expand their services
focus on futures and FX) and are sticking to what they know best. Regardless of the size of a prime brokerage firm, if it fails to customise solutions to the needs of its hedge fund clientele, it can expect to lose clients to a firm that can provide the value-add services sought.” Challenges In this rapidly evolving world, which often feels as if the Star Trek Genesis device has been detonated on it, bringing accelerated change and development, can investment banks win all around with prime brokers, in-house hedge funds, and purchased hedge funds? John R Phillips, managing director and chief investment officer of Philadelphia Capital Management LLC, is one man who believes they can. “The name of the game is edge and capacity. Finding funds that have a real edge in the market and having an ability to allocate large sums of capital are the two key drivers for the banks’ ultimate profitability. Investment banks can profit from direct ownership of hedge funds, and the prime broking business simply complements the package. The bank generates a profit by increasing its commissions and I think the biggest benefit is leveraging the equity lending business. For example, Bear Stearns provides the equity lending for 25-30 per cent of the NYSE short interest. This is a huge sum over which they capture a handsome spread, worth 300-400 basis points. There will be a tendency for prime brokers to provide more favourable terms to inhouse clients – so hedge fund managers will have to do their homework and be prepared to drive a fair market agreement to keep and even footing with the investment bank-owned hedge funds. Jim Conklin also says ‘Yes. “They were already running asset management firms and brokerages at the same time. Now, some portions of the investment banks' asset management businesses will migrate into their “alternative investment” divisions, as will some of their prop trading activity. If they do it right, the hedge fund “revolution” will really be just a rationalising reorganisation for the investment banks that, if done successfully, will allow them

42 INVESTOR SERVICES JOURNAL

Transfer Agency Review

The European fund market has changed rapidly since the creation of the EU. Accelerated by a series of UCITS directives, the European market is becoming increasingly unified and open, in a way that no other financial services market has ever been. Nii Tetteh of Barrington Partners analyses the impact of changes on transfer agency systems.

The acceptance of collective investment products as
the investment vehicle of choice has grown substantially. This growth is met with a wave of demand for enhanced product features and services. Increasingly, transfer agency systems have been pushed to provide more advanced functionality such as workflow management, online information and the capability to accept subscriptions and redemptions over the internet. This push has given rise to a new generation of transfer agency systems that are designed to allow investment managers to grow their business in multiple markets using one platform. The survivors in this market will be multi-domain, multi-lingual, multi-currency, and highly flexible with real-time processing capability. These transfer agency systems are being sponsored by software firms from several different regions, from North America to Europe to South Africa. Most notably, the development effort is utilising programmers from India, Russia and South Africa, further reducing development and support costs. A number of these growing, profitable software firms are not only supporting major multinational financial service firms, they are also starting to compete in markets other than their base market. In 2004, Barrington Partners, a firm specialising in the global financial services market, released the ‘Next Generation’ Transfer Agency Review, a focused, in-depth feedback-driven report to objectively assess the functional capabilities of these licensable, cross border transfer agency systems; systems that can handle around the clock trading, and support any range of commission structures, real time sorting/filtering of data, and provide greater automation, greater flexibility, faster development, higher operational efficiency and lower costs. The following are excerpts from the report:

Transfer Agency Systems for the 21st Century

The Bank of New York
In 1993 BONY originally developed the RUFUS system in London to support the in-house servicing of a UK client. RUFUS has since expanded its outsourcing service to the UK, Ireland and Luxembourg. The system is physically a set of 700 modules linked together, which users may configure and parameterise to tailor the application to their operations. Overall RUFUS has been built as an object-oriented, three tier application, using the C# programming language. The database is Microsoft SQL Server version 2000. Overall Strengths: Clients overall commented that RUFUS is a ‘great system’ offering ‘comprehensive functionality’ in a ‘user-friendly’ manner. Clients also noted that support is very good and proactive.

INVESTOR SERVICES JOURNAL 43

Transfer Agency Review

Envision Financial Systems, Inc.
Envision Financial Systems, Inc., a privately held firm headquartered in Tustin, California, sponsors the PowerAgent transfer agency system, which has been in commercial production since early 1997 and has focused on the US market. PowerAgent is a client/server application, developed with a Power Builder front-end and either MS SQL Server version 2000 on the Windows operating system, or Sybase for Unix platforms as the underlying relational database. Overall Strengths: Clients liked the overall flexibility and user-friendliness of the system, commenting that Envision’s strategic initiative of partnering with experts to gain additional functionality and a ‘best of breed’ approach is the right direction to be focused on.

Global Investment Systems
Global Investment Systems, Ltd. (‘GIS’), a privately held firm, is headquartered in Hackensack, New Jersey, and also maintains offices in Chicago and Dublin. MSHARE, the firm's transfer agency system, was released in 1999 and is designed as an enterprise-wide solution operating in a standard Microsoft Windows environment. It is written in Delphi v.4.0, and is an open-architecture, client/server-based system. The database is either the Oracle 9i SQL database or the Interbase 7.0 SQL database. MSHARE supports equalisation for the offshore market. MSHARE has clients in the US, European and offshore markets Overall Strengths: Overall, GIS clients interviewed cited vendor flexibility as an asset. Clients commented that GIS staff were responsive and diligent. Clients were also pleased with the strength and effectiveness of their relationships with the vendor.

IFDS Canada
Jointly owned by DST Systems Inc. and State Street Bank, International Financial Data Services, LP (‘IFDS’) is headquartered in Quincy, Massachusetts. IFDS Canada provides its iFAST transfer agency system for use globally. iFAST supports language and processing functionality for the Japanese marketplace, although this is not currently in production with any clients there. The system was developed as a Unix-based system written in Progress Software (now in version 10), and utilises an integrated Progress 9.1 Database. The GUI front-end was developed using Progress 9.1, C++ and Java. Although iFAST does not meet Barrington Partners’ strict definition of ‘Next Generation’ technology, it has been included because of its similarity to other ‘Next Generation’ competitors. The core iFAST system is not written as an object-oriented application although the GUI and e-Commerce surround functionality utilise common business objects as an underlying architecture. iFAST does not operate in an SQL data file structure. Overall Strengths: Clients generally observed that vendor viability and credibility were key strengths. Processing reliability and scalability, in combination with IFDS staff knowledge and performance were also noted strong points.

IGEFI, LTD
IGEFI, a privately held company with headquarters in Luxembourg, offers both transfer agency and fund accounting software for the financial services industry. The firm’s original product was MultiFonds, a fund accounting software, developed in an Oracle environment. Introduced in 1997, the MultiFonds Transfer Agent (‘MultiFonds TA’) supports the entire fund distribution infrastructure, including Sales Outlets, Fund Supermarkets, Fund Register, Fund Promoters and Correspondent Banking. MultiFonds TA uses Oracle development and database tools to ensure portability across hardware platforms, wide scalability, support for virtually unlimited transaction and database volumes. The firm maintains offices in Luxembourg, Geneva, Frankfurt, Paris, and Boston (USA). Overall Strengths: Clients generally commented that Multifonds was a “very powerful tool”. They believed the modern and flexible technology/architecture behind the system to be sound and scalable. Clients praised the system’s flexibility. Overall, IGEFI staff was commended for ‘strong relationships, responsive support and consultancy, with appropriate escalation as necessary’.

44 INVESTOR SERVICES JOURNAL

Transfer Agency Review

KOGER Inc.
KOGER Inc, (‘KOGER’) was formed as a privately held US corporation in 1991 and introduced its NTAS transfer agency system in 1994. NTAS was designed in a proprietary CASE tool that recognises objects at the database level and automatically generates the required source code in T-SQL language to maintain the objects (Select, Update, Insert and Delete), and can recognise database objects within Sybase, Microsoft SQL Server, or Sybase SQL Anywhere. The system was designed using Transact SQL for a multi-server environment. NTAS can support equalisation for the offshore market. KOGER is headquartered in Paramus, NJ, and also maintains offices in Dublin. NTAS was designed to specifically support the transfer agency functions required by offshore funds and supports equalisation. NTAS began supporting US-based hedge funds in 2001. Overall Strengths: Clients generally considered NTAS ‘extremely open and flexible, user-friendly, with a highly evolved equalisation capability and transfer agency functionality’. Some clients expressed the opinion that the system has more functional points than any other licensable system.

Mutual Fund Technologies Limited (MFT)
Mutual Fund Technologies (‘MFT’), a software and systems company, is a wholly owned subsidiary of Fidelity International. Fidelity originally developed the GFAS system in the mid 1990s. Now a multi-currency, multi-product transfer agency system, the existing GFAS Core module is AS/400 based using the interactive RISC based range. It is written in RPG400 with the data held in a DB2/400 database. Overall Strengths: Several clients commented that the system is highly scalable and commended its processing throughput capabilities. A number of clients also noted that from a scalability standpoint, the system is ‘substantially above all of the others that are available in the marketplace’. One client commented that MFT as an organisation provides very good support and has always responded when needed.

Riva Financial Systems Limited
Riva Financial Systems Limited, (‘Riva’), was incorporated in October 2002 in the Isle of Man, and maintains a branch office in Luxembourg. The firm announced its pan-European TA system, ‘Riva TA’ in August 2003. Riva TA is an object-based, tiered client/server solution provided on the scaleable IBM iSeries mid-range server. The business logic and GUI have been developed using IBM’s’ Websphere development environment. The vendor reports that the system has been well received by the market and has attracted much interest from a wide range of users. The firm currently has one European client. Overall Strengths: As the system is not yet in production at the time of review Barrington Partners was unable to conduct client interviews, which form the basis of a system’s overall strengths and weaknesses.

Silica Fund Administration Systems (Proprietary) Limited
Silica Fund Administration Systems (Proprietary) Limited, (‘Silica’), a privately held firm, was founded in 1998 as a spinoff of Investec’s alternative unit trust share administration operations in South Africa. The transfer agency system, Fiscus, was delivered to Investec in March 2001, and is used to support Investec’s UK offshore business in Guernsey and Dublin. The Fiscus system has a thin front-end developed in VB (Visual Basic 6.0) and operates on Windows. The logic or middle layer has been developed in C++ and can operate on UNIX (IBM IBX or Sun Solaris), NT on Windows 2000. Overall Strengths: Clients commented that Silica is flexible and helpful to their clients. It was observed that the system is very stable. The first user reports almost no downtime and a new client who is finalising their contract to use Fiscus reports that the firm was well organised, very professional and methodical throughout the selection process.

Transfer Solutions, Inc
Headquartered in Virginia, Transfer Solutions, Inc. (‘Transfer Solutions’ or ‘TSI’), offers the Visual FAST system. The original system, entitled FAST, was developed in 1972 as a proprietary product to support money market processing for the Reserve Funds. A rewrite in 1998 took the system from an Informix database environment utilising the programming language JAM, to a Visual Basic, SQL server and C++ environment. Overall Strengths: Clients consistently used the word ‘flexible’ to describe functions such as establishing a fund, a fund family, shareholder, dealer and representative requirements for fees, reporting and access. Overall system users found the system itself stable and problem-free in operation and upgrades.

INVESTOR SERVICES JOURNAL 45

Market Risk Ratings

Every year, thousands of investors pour their money
into emerging markets in the hope that this investment will prove to be a gold mine in later years. The purpose of this article is to highlight the risk exposures affecting institutional investors and funds investing overseas and to explain the relevance of custodian risk ratings and capital market infrastructure risk ratings in helping investors better understand their risk exposures. Asset owners or institutional investors and funds (collectively referred to in this article as “Funds”) suffer direct exposure to specific risks associated with their use of custodians and local capital market infrastructures when they invest in overseas stocks and shares. Exposure Risk exposures to global and sub-custodians can, to some degree, be negotiated away by a Fund with a proper understanding of competitive terms and a first class lawyer. This is essential if a Fund is to minimise, say, the risk of asset servicing losses associated with corporate action events being missed. Conversely, risk exposures to local capital market infrastructures, including central securities depositories, which occur when investing in local markets, cannot be reduced. It follows that regulators in many countries (for example the Securities and Exchange Commission’s 40’s Act rule 17f-7) require Funds to be aware of their capital market risk exposures. Contracts between institutions and their respective global custodians often leave considerable risk exposure with Funds. Determining the extent of this risk exposure requires careful analysis of the custodian and the contract under which services are provided. Minimising custodian risk exposure is best achieved by appointing a well-run custodian following effective contract and service level negotiations when competitive fees are agreed. Surveillance In response to the above, Thomas Murray has developed public and private custody risk ratings and surveillance tools, which examine four risks (i.e. Financial, Operational, Asset Servicing and Asset Safety) investors are exposed to when using a custodian. Funds receive these private ratings either monthly or quarterly. Monthly performance analysis on key functional indicators, including foreign exchange execution performance (where required), is tracked against Thomas Murray’s Funds universe of over EUR 300 bn of invested assets to identify areas of concern. Reports Funds, Central banks and Exchanges around the world use Capital Market Infrastructure Risk Ratings (CMIRR) reports to assess and monitor their risk exposure to local capital market infrastructures through which the settlement, safekeeping and ongoing servicing of assets take place. These are risks that are generally not intermediated by global custodians and fall on a Fund to bear alone. A CMIRR report assesses a Fund’s exposure, firstly at the country level and secondly, in more detail, at the individual risk exposure level where typically, but not always, the

“Determining the extent of this risk exposure requires careful analysis of the custodian and the contract under which services are provided”

What About the Risk?

A host of markets have, in the last three years, appeared on the investment radar, presenting opportunities for savvy institutional investors. But risk exposure is probably the most crucial spot check to be conducted before investing, writes Simon Thomas of Thomas Murray.
46 INVESTOR SERVICES JOURNAL

Market Risk Ratings

majority of risks reside. The ratings examine each local capital market infrastructure including the central securities depositories with a view to determining the degree of risk exposure suffered by investors across six Risk Exposure Assessments (REAs) – Asset Commitment, Liquidity, Counterparty, Asset Servicing, Financial and Operational. CMIRRs are based on an absolute and hence comparable ratings scale (standard AAA- C symbology is used). The ratings measure the capital market infrastructure risk exposure a Fund suffers irrespective of which infrastructure organisation is present in the country or the particular method adopted to settle and safe-keep securities. It is possible to compare the risk exposures which investors in the USA and Brazil are exposed to when buying, selling or holding securities in those markets. Market Structure Every market is structured differently, with each local capital market having different practices and arrangements, such as operating models, procedures, controls and inter-dependencies, which cannot easily be compared. It is worth bearing in mind, that a Fund which turns over its portfolio once a year is exposed to various settlement risks for, say, three days (or however long the settlement cycle is), but is exposed to various safekeeping and asset servicing risks for the remaining 362 days of the year. Settlement and safekeeping usually reside in the CSD, whose responsibilities may also include matching. The procedures for settlement and safekeeping can be highly automated through these organisations or they may be manual processes outside of these organisations (for example where over-the-counter trades settle between brokers). Thomas Murray’s custody and CMIRR risk ratings provide a solution to the CalPERs (US pension fund) issue of whether or not local capital market infrastructures, amongst other factors, are sufficiently well developed to justify direct investment. You will be aware that CalPERs’ approved emerging market list has for many years excluded markets including Argentina, Turkey, Morocco, Sri Lanka, Thailand, Colombia, China, Egypt, Pakistan, Russia, Venezuela and Indonesia plus many others. Simon Thomas is chief rating officer at Thomas Murray

Thomas Murray's Capital Market Infrastructure Risk Ratings are an opinion of the post trade risk exposures to which an asset owner (normally a fund) is exposed when buying or selling securities in local capital markets. The Risk Ratings have been developed in response to investors' demand for ratings on these risks, which are not mitigated by their global custodians. Capital Market Infrastructure Risk Ratings provide subscribers with a risk rating of local market settlement and custody infrastructures throughout the world. The Risk Ratings and associated Risk Exposure Assessments use the standard AAA through C rating symbology and are maintained daily. Notification of risk changes and how they impact an investor's risk exposures are e-mailed to clients daily. News LONDON – Thomas Murray Alternative Investment Services (TMAIS) has launched a Service Providers Request For Proposal e-Tool (e-RFP Tool) to support industry participants in the evaluation and selection of service providers in the hedge fund and fund of hedge fund arena. It is hoped that its launch will bring additional controls, rigour and transparency to the industry which is beginning to see a proliferation of RFPs as institutional investors increasingly invest in hedge funds. TMAIS has been working in close co-operation with major institutional funds, such as Railpen Investments and other groups including Man Investments, to develop and implement alternative investments specific evaluation and selection questionnaires, due diligence processes and rating methodologies. “To date over 75 service providers in the hedge funds industry have been reviewed using the TMAIS e-RFP Tool,” said Roger Fishwick, Director of Ratings, Thomas Murray. TMAIS’ service provider questionnaires currently cover custodial, fund accounting and transfer agency services. These questionnaires (which may be supplemented by user specific questions), together with the e-RFP Tool to issue questionnaires and hold the responses, are available to industry participants via http://ais.thomasmurray.com.

INVESTOR SERVICES JOURNAL 47

Hedge Fund Performance

Hedge Fund Index up 1.61% in month
ISJ presents the latest hedge fund performance results from CSGFB Tremont. Hedge funds continue to provide returns, despite fluctuating markets.

The CSFB/Tremont Hedge Fund Index rose 1.61
per cent for December 2004. “Major US equity indices ended the month in positive territory, with managers generating returns on the long side of their portfolios,” said Oliver Schupp, president of Credit Suisse First Boston Tremont Index LLC. “European and Asian equities were generally positive for the month as well, despite declining markets in China, contributing to the return of the Long/Short Equity sector. The CSFB/Tremont Hedge Fund Index was up 9.64 per cent for the year 2004.” “The Dedicated Short Bias sub strategy was hurt once again this month by the continuing bull market in equities, reporting a return of –4.87 per cent, and ended the year as the only negative sub strategy in 2004,” said Robert I. Schulman, co-chief executive officer of Tremont Capital Management, Inc. “Event Driven managers generally profited from long credit positions and distressed trades.” Performance for the CSFB/Tremont Hedge Fund Index and its ten sub strategies is calculated monthly. Composition The CSFB/Tremont Hedge Fund Index value is 314.55, returning 214.55 per cent for the 132-month period since inception (January 1, 1994 through December 31, 2004). The Index is comprised of 382 funds as of December 31, 2004. The Index is constructed using the TASS and CSFB/Tremont databases of more than 3,000 hedge funds. It includes both open and closed funds located in the U.S. and offshore, but does not include funds of funds. In order to qualify for inclusion in the index selection universe, a fund must have a minimum of $10 million under management, a 12-month track record, and audited financial statements. Index funds are selected using a formula based on assets under management that ensures the Index represents at least 85 per cent of total assets in each of ten strategy-based sectors in the selection universe. Once added, funds are not excluded until they liquidate or fail to meet the reporting requirements, in order to minimize survivorship bias. The Index is calculated as a total return index on a monthly basis, adjusted for asset in- and outflow, including a reselection according to the procedure outlined above on a quarterly basis. Investable Index The CSFB/Tremont Investable Hedge Fund Index is up an estimated 0.99 per cent for the month of December 2004. The confirmed performance for November is up 1.74 per cent net. Performance for the CSFB/Tremont Investable Hedge Fund Index and its ten sub strategies is calculated monthly. The returns shown are net of a 0.07 per cent

CSFB/Tremont Hedge Fund Index up 1.61% in December 2004
20% 15% 10% 5% 0% -5% -10% Convertible Arbitrage Dedicated Short Bias Fixed Income Arbitrage Global Macro Emerging Markets Equity Market Neutral CSFB/Tremont Index Long/Short Equity Event Driven Multi-Strategy

Dec 2004 Nov 2004 YTD 04

Source: CSFB Tremont Hedge Fund Index

Comparison of Indices
CSFB/Tremont Hedge Fund Index NASDAQ Composite US $ Index MSCI EAFE US $ Index* MSCI $ World Index* Dow Jones Industrial Index* 0% 5% 10% 15%

YTD 04 Nov 2004 Dec 2004

20%

Source: CSFB/ Tremont Hedge Index

48 INVESTOR SERVICES JOURNAL

Managed Futures

25%

Multi-Strategy

Event Driven

Risk Arbitrage

Distressed

Hedge Fund Performance

calculation fee. The CSFB/Tremont Investable Hedge Fund Index was launched with 60 funds across 10 style-based sectors. The Investable Index was set at 100 on August 1, 2003. As of December 31, 2004, the aggregate assets under management of the index constituents were over $95 bn. The CSFB/Tremont Investable Hedge Fund Index is designed to give investors broad exposure to hedge funds as an asset class. It fulfills investor demand for index-linked products created to reduce dependency on fund manager selection and fund concentration risk. The CSFB/Tremont Investable Hedge Fund Index is based on the broad CSFB/Tremont Hedge Fund Index, with $311 bn in assets managed by 382 funds as of December 31, 2004. The funds in the CSFB/Tremont Investable Index, selected from the funds included in the broad index, generally comprise the six largest funds that are open to investment and meet certain liquidity conditions in each of the 10 style-based sectors Sector Invest Performance for the CSFB/Tremont Sector Invest Indices is calculated monthly. The CSFB/Tremont Sector Invest Indices were launched with 114 funds across 10 style-based sectors. Each Sector Invest Index was set at 100 on October 1, 2004. As of December 31, 2004, the aggregate assets under management of the index constituents were over $134 bn. These new indices are constructed to provide objective benchmarks of the stylebased investment strategies in the hedge fund universe. They fulfill investor demand for index-linked products created to reduce dependency on fund manager selection and fund concentration risk while allowing investors to play an active role in their tactical asset allocation. The funds in the CSFB/Tremont Sector Invest Indices, selected from the funds included in the broad CSFB/Tremont Hedge Fund index, generally comprise the largest funds that are open to investment and meet certain liquidity conditions in each of the 10 style-based sectors. The fund selection rules can be found on www.hedgeindex.com and include the following criteria: • Funds are selected from the CSFB/Tremont Hedge Fund Index by an asset-based formula • The funds generally represent the largest eligible “open” funds in each of the ten sectors • The funds are determined by application of the construction rules • Member funds must provide timely performance reporting, audited financials and offering memorandum review for inclusion. The CSFB/Tremont Sector Invest Indices are calculated monthly and will be re-balanced semi-annually.

Returns for the CSFB/Tremont Investable Hedge Fund Index
20% 15% 10% 5% 0% -5% -10% -15% CSFB/Tremont Investable HFI Investable Convertible Arbitrage Investable Dedicated Short Bias Investable Managed Futures Investable Global Macro Investable Emerging Markets Investable Equity Market Neutral Investable Long/Short Equity Investable Fixed Income Arb. Investable Multi-Strategy Dec 2004 Nov 2004 YTD 2004 Sector Invest Convertible Arbitrage Sector Invest Global Macro Sector Invest Emerging Markets Sector Invest Equity Market Neut. Sector Invest Long/Short Equity Sector Invest Fixed Income Arb. Sector Invest Dedic. Short Bias Sector Invest Managed Futures Sector Invest Multi-Strategy Sector Invest Event Driven Investable Event Driven Dec 2004 Nov 2004 YTD 04

Source: CSFB Tremont Hedge Index

15% 10% 5% 0% -5% -10% -15%

Returns for the CSFB/Tremont Sector Invest Indices

Source: CSFB Tremont Hedge Index

INVESTOR SERVICES JOURNAL 49

Investment Analytics

As investment returns continue in their path of mediocrity, continual monitoring of the investment manager can ensure benchmarks are being met. Blair McPherson of RBC examines the value of investment analytics
Given that it has a vital role to play in
terms of revenue generation, asset retention and growth, it is no great surprise that investment analytics is one of a number of key operational areas now being reassessed by fund managers. Encompassing performance measurement, risk analysis and compliance monitoring, investment analytics offers significant benefits both in terms of the service fund managers provide to their clients and how they enhance their own internal processes and capabilities. Benefiting the Investor Investors, be they an institution or a retail client, are essentially looking to satisfy a specific risk/return profile. For a number of years now capital markets have not performed well, and consequently investor confidence has become an issue. Factor in various scandals, regulatory issues and a confusing proliferation of products alongside return volatility within the marketplace and it is little surprise that investors are somewhat edgy. The investor, therefore, wants more than ever to understand exactly what is going on with their investment. It is not just about returns, but how those returns have been achieved, the nature of the risks involved, whether their designated manager is adhering to the terms of the mandate, and as a result whether changes need to be made. Transparency and clarity are paramount. Simply put, it is less about information and more about being informed. Investment analytics is not merely about churning out numbers – while data is a vital ingredient, investment analytics is more about telling a story. For all the heat and light around the issue of returns and a manager’s ability to ‘hit the benchmark’, at the end of the day these measures of success are less than clear-cut. When we talk about performance, the real focus should be on whether the investor can derive the income to support their lifestyle or, from a pensions perspective, match their liabilities. After all, income that will be required in a year’s time is a very different matter from income required 20 years hence.

When it comes to servicing assets, the investment manager is there to manufacture performance and/or distribute products to the marketplace, and therefore tends to need more sophisticated and detailed reporting and a lot more quantitative analysis to allow them communicate their value to the end client and/or to better manage their business internally. Benefiting the Fund Manager There are two key areas where investment analytics deliver value to a fund manager’s business. First, it has the critical role of supporting the portfolio management process via the manufacturing of superior risk adjusted performance through stress testing scenarios, risk budgeting, attribution and style analysis. Second, it allows the fund manager to build a relationship with the investor and instil confidence in the services being provided to that investor – for instance, in the case of pension fund clients, by providing transparency in their quarterly and annual reviews. In addition, it allows managers to differentiate themselves from the competition for sales and distribution purposes by addressing a number of different value propositions, such as trust, performance or risk management capabilities. Cost and Scale The breadth of infrastructure required to capture, collate and exploit the vast reservoirs of market data that underpin any investment analytics offering is massive. In addition to the need for trained staff, there is the technology itself – the servers, databases, market feeds, calculating and reporting engines – required to combine the market and account data to provide the information that will enable the story of the portfolio to be told. A robust data warehouse structure that can integrate with different analytical modules is a key component. Such a structure will encompass the management of account data, including securities identification, market accruals, market values and cash flows, all of which are core to fund accounting. However, the larger component of data warehousing is a whole slew of market data-related management tasks: collating data on indices, financial ratios, credit ratings, pricing, yield curves and so forth, before passing that information through to some sort of engine which in turn effects the analytical process. Needless to say, the development, implementation and maintenance of such projects can draw away focus at a time that

Fair Game

Blair McPherson

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Investment Analytics

the investment manager should be concentrating on manufacturing value for the end investor. Consequently, while it is clear there is much work to be done around investment analytics, it is less clear which business model is best placed to meet that obligation. One option is to outsource the investment analytics function. Outsourcing and ASP Outsourcing the investment analytics function can offer benefits with respect to costs, functional capability, and brand enhancement. Cost areas include data management, people, systems and technology, reporting and the future development of new analytical tools. However, the provider must also possess a sound business model, with sufficient capital for continued investment in the future capabilities required to meet the needs of their clients. An outsourcing provider, able to leverage a broad client base, will be in a position to deliver an equally broad range of functional capabilities and hence accommodate flexible product and service offerings. In addition to possessing the flexibility to meet the diverse needs of the varied users of investment analytics, the provider must also have the scalability to grow with the fund manager’s business, including the ability to accommodate the integration of new analytical tools/products in a straightforward manner. Finally, the provider should both maintain and enhance a fund manager’s ‘brand’. To this end, it will provide independent third party verification, Global Investment Performance Standards (GIPS) and the Association for Investment Management and Research (AIMR) compliant methodologies and reporting, as well as advanced calculation and reporting capabilities. A critical area to the outsource model is the servicing component. The outsource provider must also be able to offer a flexible client servicing model, with clear processes around communication with the fund manager. No two clients are the same, but a provider with a diverse client base should be able to leverage this capability and knowledge and pass on those benefits to each individual client. A structured service model with clear service levels standards should be a primary focus. However, full outsourcing is best suited to more standardised functions such as standard management reporting or end client reporting. For some fund manager segments in the market, the full outsource model makes sense. However, while a

strong service model and flexible technology should allow for a degree of customisation, most often a large fund manager will also need some in-house capabilities. This is down both to their needs for analytical capabilities in the front office to support the investment decision-making process, and also for demanding and unique ‘after the fact’ reporting driven by management or end clients. These cannot be efficiently provided through a full outsource offering. At this juncture, the fund manager can opt for one of a range of business models: insourcing using desktop solutions or Excel; full outsourcing; an insource/outsource combination; a pure ASP approach; or an ASP/outsource combination. The ASP approach obviates the need for the client to invest in a local install of software, servers, and databases – all those components of the technology are ‘outsourced’ in the ASP model, and the user simply utilises the Internet to access the system.

disciplines as part of a seamless reporting structure generates a powerful suite of analytical tools which will help clients optimise the value of their assets, a particularly important consideration given the less than ideal market conditions witnessed in recent years. Custodians have unparalleled access to three critical resources – intellectual capital; advanced technologies; and the vast reservoirs of data accreted as part of the day-today business of transaction processing. Investment in technologies such as data warehousing and reference data management – the wellspring of straight-through processing – has further strengthened their skill set. They have also hired staff that possess strong middle and front office competencies and can liaise with the chief investment officer as opposed to merely the back office. As a result, there are a number of providers capable of leveraging ‘best of

“Outsourcing the investment analytics function can offer benefits with respect to costs, functional capability, and brand enhancement.”
The market is moving toward a combined offering both of reporting services, and ASP technology – which is itself a technology outsource – to carry out front office functions ad hoc reporting. A provider who can offer a data warehouse solution that supports both the standard outsourcing reporting functions and an ASP capability automatically connected to the data warehouse is an ideal offering for a fund manager organisation with a breadth of analytical needs. RBC Global Services’ own Benchmark Riskmanager product, through our partnership with Riskmetrics, is an example of such a solution. Custodian as ideal outsource/ASP provider Given that they are sitting on the investor’s assets, custodians are ideally placed to monitor portfolio flows and capture those within a data warehouse structure on behalf of a manager or pension fund. Custodians have invested significant resources in an effort to meet the needs of managers with respect to investment analytics outsourcing solutions. Increasingly, they are taking a ‘big picture’ approach, drawing together a formerly disparate jumble of analytical products and combining them under one umbrella. This melding of breed’ solutions while delivering a ‘total solution’ – global custody, cash management, forex – in line with clients’ aspirations in respect of efficiency, cost savings, global reach and breadth of product offering. Investment analytics has a vital role to play in enhancing service levels and transparency, but it also poses a number of challenges to fund managers – for example the current cost dynamics, operational issues and risks in this area. Managers need to recognise the importance of data warehousing and analytical capabilities, and how those analytics are required to support the portfolio management process on the one hand and the sales and marketing effort on the other. Accordingly, they must choose which of a number of approaches – insource, outsource, ASP – is optimal for their business. Whichever model they choose, there are clear benefits associated with working in partnership with a third-party provider that can offer a scaleable and flexible solution. Blair McPherson is head of RBC BENCHMARK, U.K., Europe & Middle East, for RBC Global Services, Institutional and Investor Services (IIS).

INVESTOR SERVICES JOURNAL 51

Alternative Fund Services

In light of various opportunities created by hedge funds, the skills required to service these funds should not be underestimated. Alan Tooker of Derivatives Portfolio Management explains just how crucial knowledge, experience and technology are in the world of administration.

As the hedge fund industry grows and matures, so the administration of hedge funds becomes more complex. The complexity comes from a variety of sources. To mention just a handful: regulators in offshore domiciles have always provided a close oversight of the offshore part of the industry, and now regulators in major jurisdictions such as the USA and the UK are, rightly, following suit; institutional investors such as pension funds are demanding high standards of risk management and transparency; multi-manager hedge fund platforms have continued to grow; weekly and daily dealing for investors wishing to invest in or redeem from hedge funds is now offered by a number of managers; profit equalisation is pretty much de rigueur for both offshore and European hedge funds; more complex over-the-counter (OTC) transactions ensure that pricing continues to be a challenging topic; the development of multi-cell investment vehicles in some offshore jurisdictions maintains the requirement to ensure adequacy of segregation; and so the list goes on.
Keeping Pace How do hedge fund administrators continue to keep pace with the rapidly evolving developments in the hedge fund universe? Three key areas, critical to their ability to offer operational excellence, are knowledge, experience and technology. First and foremost, administrators must ensure they keep their knowledge current. This is no mean feat, given, for example, the wide range of jurisdictions that hedge funds embrace, from the domiciles of the hedge fund and hedge fund manager to that of the investors in the fund. There are legal and regulatory issues that must be considered for all the jurisdictions, ranging from the segregation issues arising in the domiciles of the hedge fund vehicles to the anti-money laundering requirements in the jurisdictions of both the hedge funds and the investors. There are many other examples where the Administrator’s knowledge must be kept current as markets and products evolve (new OTCs, German tax reporting requirements, etc). Experience will always be one of the keys to excellence in fund administration, however good the technology used by the Administrator. For example, anyone who has waded through an International Swaps and Derivatives Association (ISDA) Master Agreement will quickly find that the economic rationale of the transactions underlying the Agreement is not always readily apparent. But without a complete understanding of the rationale, how is the administrator to ensure that the underlying transactions are correctly booked, and, just as importantly, correctly priced? Another example: given that there are different ways of accounting for profit equalisation, an administrator needs the experience to understand the requirements as set out in the offering documents (and they are not

Alan Tooker

Keeping Pace

52 INVESTOR SERVICES JOURNAL

Alternative Fund Services

always altogether clear when written in legalese) and to ensure that the technology is used appropriately to provide the correct solution. Technology Assuming that the administrator has both the knowledge and the experience, there is still a critical area: the technology platform. Without appropriate technology, it can be well nigh impossible to provide an effective administrative service. In this increasingly complex age, both the amount of information and the reporting deadlines required by counterparties means that the technology platform has to be up to date and comprehensive. The technology platform has to be capable of a multitude of processes, including shareholder services, trade capture (requiring interfaces with trading advisers and prime brokers), pricing, Net Asset Values (daily NAVs are rapidly becoming the norm) and fund accounting. Administrators who offer a comprehensive service fall into two camps: those who have developed and maintained their own technology platforms, and those who rely on off-the-shelf solutions for their platforms. There are advantages in each of these approaches: one advantage of off-the-shelf solutions, for example, is that suppliers who specialise in the funds industry are able to offer software that has been developed in response to the industry

industry. This necessitates building and retaining a dedicated team of technology professionals who understand the industry, as well as having the competences required for development and maintenance. However, the advantages of an in-house platform are numerous. The ability to build out an all-embracing trade capture platform in response to the growth in the OTC

“Without appropriate technology, it can be well nigh impossible to provide an effective administrative service”
market is just one example. The ability to provide and maintain links with systems used by counterparties is another example. DPM does not concentrate on providing a front-end platform for its clients, because many hedge fund managers and trading advisers prefer to choose any one of a variety of off-the-shelf packages or, as is often the case, to build their own front-end solution that suits their unique operating style. Instead, DPM offers the facility to upload files from the manager’s and adviser’s chosen front-end systems, and to download files to the manager and adviser. DPM’s in-house platform allows it to develop, in response to individual requirements, an interface between the front-end system of the manager and DPM’s own trade capture system. It’s in-house platform similarly enables DPM to export files according to the manager’s and adviser’s requirements. Daily NAV reports are standard, and for those clients that have risk and transparency requirements, DPM’s systems give it the ability to download files appropriately formatted and populated for the risk engine of the manager’s choice. Requirements DPM’s own systems also give it the ability to develop solutions to new and more complex requirements. German tax reporting has been in the headlines for some time now, and many European funds of funds managers are optimistic that the German market will grow and expand with the help of a more sympathetic regulatory regime. Because of the flexibility of its in-house technology platform, DPM is already offering a tax reporting facility to hedge fund managers. The hedge fund industry continues to enjoy a period of rapid growth. As the demand for hedge fund product continues to grow, and is accompanied by continuing innovation in hedge fund strategies and product structuring, so will the demand for administrators to extend and customise their services. Technology will continue to be a key driver in this process, and DPM’s ability to develop and maintain its in-house technology platform is one factor behind the rapid growth in its client base and in assets under administration. Alan Tooker is managing director and head of European and offshore operations at DPM.

“The advantages of an in-house platform are numerous. The ability to build out an all-embracing trade capture platform in response to the growth in the OTC market is just one example. The ability to provide and maintain links with systems used by counterparties is another example.”
demands of a number of Administrators and other endusers. An advantage of in-house solutions is that the Administrator is able to get closer to a fully integrated system providing straight through processing. Going it Alone Derivatives Portfolio Management (DPM) decided, from its infancy, to go the route of developing and maintaining its own technology platform. The potential disadvantage to the administrator of going this route is obvious: an inhouse platform comes at a cost. In this day and age, the platform must be continuously developed and maintained if it is to keep pace with developments in the hedge fund

INVESTOR SERVICES JOURNAL 53

Alternative Fund Services

As an increasing number of fund administrators fall under the ownership of global banks, the integration of these business lines into the parent company are fascinating events to behold. ISJ speaks to an administrator with first hand experience in mergers and acquisitions - Paul Smith, now of HSBC Alternative Fund Services.
Recent acquisitions in the fund administration industry suggest this trend will continue for as long as hedge funds are around. But the unique characteristic about these acquisitions is that, rather than change anything, buyers prefer to leave their new assets intact while increasing their market share. As Paul Smith discovered when The Bank of Bermuda Limited was acquired by HSBC in February 2004, the new organisation would not substantially differ from the former entity. “We were asked to lift Global Fund Services out of Bank of Bermuda and to fit it within a division of HSBC called HSBC Securities Services, and keep going as previously constituted,” explains Smith, who moved from Bank of Bermuda to head up HSBC’s new Alternative Funds Services. “From a management perspective there is no material change.” Markets Geographically, the markets added to Alternative Fund Services’ radar following the acquisition include Australia, Italy, Germany and France. “Thanks to HSBC’s bricks-and-mortar presence in 76 countries globally, it is relatively simple for us as a business to open up new operating nodes in countries that interest us,” explains Smith. “We are focused on opening businesses in Australia, Italy, Germany and France in 2005.” Other Alternative Fund Services geographies include the traditional offshore hedge fund world, the domestic hedge fund servicing business in the US and the domestic fund servicing business in Asia. “We still have the look of a

Going Going Gone...

Paul Smith

54 INVESTOR SERVICES JOURNAL

Alternative Fund Services

traditional offshore services provider following the acquisition,” says Smith. “We are very strong in Dublin, Luxembourg, New York, Bermuda, Hong Kong and Singapore. “We hope to open additional centres in response to the growth of the alternative world and the way that the alternative world is moving into the mainstream, onshore marketplace. The traditional barriers between the offshore and onshore markets are beginning to break down in certain parts of the world and our new ownership affords us the opportunity, in a low cost and timely fashion, to move into developing domestic markets.” Investment The main types of investment strategies that are serviced by Alternative Fund Services include hedge funds, fund of funds, property / real estate and private equity. “The acquisition of Bank of Bermuda by HSBC has enabled us to focus on a client segment that was previously a little distant, namely the institutional asset managers or traditional asset mangers, who are beginning to move into the alternative world and may already be clients of HSBC. These clients are now looking to develop alternative products and present a new and exciting client base as far as we are concerned. “For certain stand-alone alternative funds, which have existed for many years and have grown into mid-tier asset management groups, our ownership by HSBC enables us to approach these companies with a much more compelling pitch. In this sense we are an institutional, quality counterparty as well as an administrator. Through HSBC, we now have a much broader product offering for those larger institutional clients.” The increase in alternative assets will inevitably lead to more services being offered by the alternative funds administrator. Smith explains: “Increasingly, fund administration is perceived as an adjunct to a broader product offering of a financial institution. “Competitors like State Street, Goldman Sachs and UBS are beginning to move into this space. Fund administration is becoming part of a general service offering on top of a series of capital market activities. In the case of Goldman Sachs this service would be included within a prime broker wrapper. In the case of HSBC, we are interested in selling capital markets activity to select clients. Additionally, we provide the mid and small-ranking clients of Bank of Bermuda with more balance sheet strength, more flexible credit facilities, better foreign exchange trading and better deposit facilities. Throughout the client chain, ownership by HSBC enables us to offer a much broader product spread for our clients.” Commenting on the importance of fund administration companies in the current investment landscape, Smith says: “Anyone who is in the securities servicing industry, including American and European banking institutions, has to have the ability to service alternative investment products.

“About 20 to 30 per cent of the world’s capital markets flow through alternative assets. Therefore, if you are a securities services business, you need to have the ability to administer alternative assets. Any major financial institution that wants to operate in the securities markets has to have a firm footing in the alternative industry. Some of the American banks who have made small acquisitions in this area are going to have to add to those expertise to increase their share of the market.” Technology From a technology and systems perspective, Alternative Fund Services will continue to work with best-of-breed providers, including Advent Geneva for fund accounting, Koger NTAS for investor services, SunGard Reech for risk management and Beauchamp Financial Technologies for trade order management. “Correctnet is helping us with

“Anyone who is in the securities servicing industry, including American and European banking institutions, has to have the ability to service alternative investment products”
the web-delivery of our investor servicing,” says Smith. “We are very comfortable with this arrangement as it enables us to keep pace with the alternative world, whereas in-house IT development would be less able to do so. We work with technology vendors whose products adapt to the way we wish to work and include those products in our overall offering. “We can offer SunGard Reech as an integrated or separate model within HSBC’s core administration offering. This approach is not something we can make money out of but it enables us to offer clients a value driven approach.” Future Perfect Going forward, the first area of expansion for Alternative Fund Services is based on geography. The second focus is on closer contact with HSBC colleagues in order to leverage further products for the new client base. “We are assessing what other HSBC business units have to offer and whether these products are applicable to our client base,” says Smith. “Finally, from an internal perspective, we intend to move towards a daily processing environment. The alternative world is moving towards a daily operating environment, as opposed to the traditional monthly processes of the past. This imposes significant technology issues upon all service providers. “We need to re-engineer our process and to a certain extent build slightly more sophisticated pricing and reconciliation engines. From a technology perspective, this is a major focus for 2005. It is not an external focus from a technology perspective, it is much more about adding a capability internally so that we can support our clients as they move towards daily processing.”

INVESTOR SERVICES JOURNAL 55

Mandates

US giants win in Europe
Global custodians of the US were the majority winners of European mandates for the months of January and February 2005, as the investment community continues to appreciate the value of middle and back office outsourcing.
While mandates were few and far between at the
beginning of the year, US service providers led the pack with a handful of significant deals. One of these deals saw Abbey National in the UK entrust £30bn of assets managed by its subsidiary Abbey National Asset Management (ANAM) to the Bank of New York. In the true spirit of consolidation, Abbey decided to slim its custodial arrangement from four companies (including BNY) to one provider. The consolidation will enable Abbey to improve its investment administration across ANAM, improving economies of scale and creating a tighter operating infrastructure. James Bevan, Abbey’s Chief Investment Officer, said, “We chose to consolidate our global custody services with The Bank of New York because its team clearly demonstrated that it was capable of meeting our changing needs.” Tim Keaney, executive vice president and Head of Europe at The Bank of New York, added: “This appointment highlights the quality of the existing services we provide to Abbey, as well as our long-term commitment to helping financial institutions like Abbey move and manage their financial assets.” BNY also signed a letter of intent with ING Investment Management (Europe) BV (ING IM) to offer a middle office trade and processing outsourcing service for the Euro 67 bn asset base of ING IM’s operations in The Hague. The Bank of New York, through its proprietary outsourcing business, BNY SmartSourceSM, will assume responsibility for operational functions in the trade lifecycle, post execution through to settlement. ING IM’s transition of the services to BNY is subject to applicable regulatory approvals. The 12-month implementation schedule is expected to be completed in the fourth quarter of 2005.

Pensions State Street Corporation has been appointed to provide global custody, investment accounting, securities lending, and performance measurement services for the pension plans of ChevronTexaco Corporation in the UK, The Netherlands, Ireland, and Belgium for $2 bn in assets. State Street currently services $7 bn in assets for ChevronTexaco's pension plan in the US. ChevronTexaco ranks among the world's largest and most competitive global energy companies, with more than 47,000 employees worldwide. “We are delighted to build on our relationship with ChevronTexaco to service their European plans,” said Alasdair Reid, vice president and head of State Street's asset owner servicing group in northern Europe, Africa and the Middle East. “State Street continues to benefit from the growing trend of pension plans looking for fullyintegrated service providers, and clients such as ChevronTexaco look to us for world-class service and global support.” State Street continues to win significant new business in Europe. Through the last 12 months in the UK alone, State Street has won more than 100 new investment servicing mandates. UK First As part of its first investment services outsourcing deal in the UK, Northern Trust confirmed it is in exclusive negotiations with Insight Investment Management for back and middle office investment operations. The range of services to be outsourced by Insight under the proposed agreement are: trade matching, confirmation and settlement, investment record keeping, entitlement processing, pricing, asset set-up, reconciliation, client reporting, valuations and performance analysis. The agreement, which is subject to further due diligence and contract negotiations, is expected to be completed in the second quarter of 2005. Commenting on the decision to outsource and select Northern Trust as its business partner for these services, Insight chief operating officer Atul Manek said: “After our initial feasibility study it became clear that there was a sound and compelling case for moving to an outsource business model with clear benefits for Insight, our colleagues and our clients. Given our conviction that our investment operations team is one of the best in the industry, it was important to retain that expertise and ensure the well being of our colleagues. “Key considerations for Insight included opportunities for increased technological and service benefits and the ability for increased management focus on our core proposition of investment performance and customer service.” It is expected that between 85 and 90 Insight staff will transfer to Northern Trust. Insight was advised on the selection of Northern Trust by specialist consultancy CSTIM. Insight Investment manages funds for institutional and retail clients across the full range of asset types – equities, bonds, property, derivatives and private equity. Insight’s assets under management as at 30 September 2004 totalled £74.6bn.

56 INVESTOR SERVICES JOURNAL

Mandates

Month January January January January January January January December December December November November November November November November November November November November November October October October October October October September September

Winner

Client

Location

Assignment Global Custody Outsourcing Fund Accounting Investor Services Outsourcing Global Custody Global Custody Investor Services Custody Custody Record Keeper Investor Services Fund administration Transfer Agency Fund acc./Reporting Custody/Fund admin Custody Fund administration Securities Lending Securities Lending Investor Services Custody Services Global Custody Global Custody Global Custody Global Custodian Global Custody Global Custody RecordKeeper

Mandate Size EUR5.8bn £325m $2 bn EUR 67bn EUR 80bn £30bn $60 bn New Fund $2,300 £10bn £32m New Facility $2bn £500m $1bn £100m $4bn $4bn New Fund $400m $11.9bn £1bn £63m $10.4bn -

BNP Paribas B. Sabadell Spain N. Trust Insight IM UK N. Trust KBL UK State St ChevronTex. UK BNY ING IM UK BNY NBP France BNY Abbey UK Fidelity Textron Inc. US CIBC MellonManulife Toronto BNY New Smith London JPMorgan Sun Micro. US State St BA London Butterfield Liontrust Guernsey IFDS Investec London State St OAC Singapore RBC Hermes Channel Is. RBC ARC Canada BFSG INVESCO Channel Is. Dresdner OPERS Ohio Key Bank OPERS Ohio BNY JO Hambro London ING-BHF BNY Germany N. Trust Michigan CC US BNP Paribas Master Sup Australia N. Trust LAFPP US N. Trust Teeside UK State St Clore Duffield UK State St Illinois State US Vanguard Teleflex, Inc. US

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Securities Services - Germany

Bearing Up

The bear market’s treatment of Germany could be likened to a sharp claw across a tender face. Dwindling investment returns in a post-9/11 environment have left investment banks no choice but to inflict severe redundancies on their workforce. Today, the unemployment rate has reached record volumes and about five million people are out of work. The German market was given some respite in the form of a strong Euro and a lenient financial regulator. In fact, Germany’s implementation of UCITS III and the subsequent provisions for hedge funds provide some hope for local financial institutions, which rearranged their structures in order to focus on the lines of business that matter the most. “An obvious example of a restructured German company is BHF-BANK, which was one of the largest privately owned banks before it changed its corporate form into a joint stock corporation in 1995 and was acquired by ING Group in 1998,” explains Cornelia Keth, head of BHF-Bank’s marketing and sales team for Custody and Derivatives Services. “This Dutch-German banking partnership was cut short when ING decided that BHF did not fit in with its strategy anymore and put the bank up for sale. Following talks with a variety of interested parties, ING sold BHF to Sal. Oppenheim, a privately-owned German bank, last year. Under the terms agreed, Sal. Oppenheim and BHF will operate independently and retain their names, while together forming the largest privately owned bank in Europe. “We have successfully re-entered the sub-custody market for German securities in 2004,” says Keth. “BHFBANK traditionally offered custody services for private, corporate and institutional clients. Now we also provide high quality sub-custody services for global custodians, foreign banks and broker dealers. BHF-BANK partly exited the custody business in 1995 by scaling down its active custody services for global custodians.”
Changes BHF is not the only example of an acquisition in the banking segment. In 2003, Deutsche Bank bought the domestic custody business of Dresdner Bank, a wellestablished provider of sub-custody services in Germany. “This year, everyone is very interested in the developments within Deutsche Bank and how they propose to take on the Dresdner Bank business,” says Keth. “The industry is also interested in Deutsche Bank's ability to satisfy the high expectations of Dresdner Bank’s clients.” According to Moritz Ostwald, sales and relationship manager for custody services at BHF-BANK, the business focus of Dresdner Bank was very similar to that of BHF-BANK, as both banks conMoritz Ostwald centrate on offering personal service with a high commitment to clients. “Deutsche Bank seems to be more transaction and volume-driven. It will be interesting to see how

In light of changes endured over the last few years, the German securities services industry cannot be accused of standing still. From mergers to hedge funds, recent events have served to focus the minds of those who are in the game
58 INVESTOR SERVICES JOURNAL

How can we help you navigate the challenges of custody business?

www.bhf-bank.com

Your expectations are high. We meet them. BHF-BANK – your sub-custodian for German securities. For further information please contact Cornelia Keth on +49 69 718-3738 or at [email protected]

Securities Services - Germany

Deutsche will meet the diverging demands and high expectations of their new clients. This will be a major story for 2005.” Deutsche Bank announced during the fourth quarter 2004 a series of programs to realign business units to improve their effectiveness, enhance product and service delivery to clients, and respond optimally to market developments. This realignment also provides the opportunity to streamline both the Bank's businesses and infrastructure. The combination of these related programs is designed to enhance revenues and reduce expenses, and thereby to contribute to Deutsche Bank's stated targets. The Bank previously communicated that it would incur costs, both in the fourth quarter 2004 and in 2005, associated with these realignments. During the fourth quarter of 2004, Deutsche Bank recognised expenses of approximately EUR 0.6 bn on a pre-tax basis for the realignment programs and other efficiency measures. As part of its realignment process, the Bank recently announced plans to shed 6,400 jobs worldwide, including 1,000 in the City of London.

“The new approach to outsourcing is a major enhancement for 2005 and will particularly affect the German asset management companies”
Funds Industry Apart from mergers and business realignment, there have been high expectations surrounding to the introduction of hedge funds in Germany. “Hedge funds are now part of the new German Investment Improvement Act, which replaced the previous legislation in 2004,” explains Keth. “Some details still need to be dealt with, but we generally see a positive reaction in the community to the new legal framework although volumes in 2004 have only been a fraction of the forecasts. Apart from hedge funds, the introduction of so-called Super Funds will also have a positive impact on the flexibility of the investment strategies, since all types of securities and investment vehicles can be included in a single Super Fund.” Outsourcing The outsourcing of middle and back-office operations by investment companies is becoming more popular in Germany. “The new approach to outsourcing will be a major topic in 2005 and will particularly affect the German asset management companies and Kapitalanlagegesellschaften (KAGs),” says Keth. “These companies are under extreme cost pressure and will use opportunities provided under the new investment law to outsource more services.” Several years ago, German banks were reluctant to outsource any processes to a third party and preferred to manage these processes internally. Explaining the recent change, Keth says: “In the last year, a large number of transaction banks have been launched to take on securi-

ties and cash processing functions. This trend will continue in the investment management industry, where a number of companies are offering services for asset managers, including accounting.” Thanks to the new approach to investment services outsourcing, German savings banks are beginning to outsource back office functions, including securities and payments processing. “Transaction banks are ready to take on this business from other banks,” says Keth. “In the last year, asset managers and master-KAGs were granted permission to outsource some of their functions to third parties. Asset managers outsourced the entire volumes of their Spezialfonds, which are specialist investment vehicles for institutional investors.” According to the German Investment and Asset Management Association (BVI Bundesverband Investment und Asset Management e.V.) the asset management of a third of asset volumes held in so-called “Spezialfonds” (special funds for institutional investors) was outsourced to third parties in 2004. This was accompanied by a decrease in the number of these funds. Concurrently, the number of these funds also decreased as investors consolidated their Spezialfonds. Investors with various Spezialfonds consolidated these funds into one Master fund and appointed different asset managers. Thanks to the implementation of new investment law, the role of the banks in Germany has changed considerably over the last year. While the universal banking system used to be the one-stop-shop for investor services, this structure now appears to be changing. “Institutional investors are now selecting the best provider for each product,” says Keth. “Their requirements have become more diversified. These investors demand consolidated reporting, performance measurement and risk measurement tools. Daily eReporting is replacing monthly paper-based reports and enables clients to download information and use it for their own data processing, for accounting for example.” Infrastructure As German banks await the outcome of Deutsche Boerse's bid for the London Stock Exchange, they are certain the result will have a significant impact on their business. Ostwald explains: “If Deutsche Boerse is successful in its bid, two of the largest exchanges in Europe will be consolidated. As part of its vertical model, Deutsche Boerse currently includes Clearstream and Eurex. From a clearing and settlement perspective, the question is whether Deutsche Boerse will keep Clearstream - as its spokesman recently confirmed - or if the political pressure could lead to a disinvestment. One should bear in mind that four years ago Deutsche Boerse was willing to sell its then 50 per cent stake in Clearstream. There are new rumours every day. We will keep an eye on this development as it will have an impact on our market.”

60 INVESTOR SERVICES JOURNAL

Technology After an 18-month systems project that was completed in the spring of 2004, BHF-BANK was able to take new clients on board, including The Bank of New York. “Getting them on board was a significant challenge,” says Keth. “The Bank of New York – known as a highly professional market participant – has confirmed that BHFBANK fully meets its requirements, which makes us very confident of winning other custodians. From a technological perspective, our custody product can be characterised by high levels of STP with information being processed in a very effective manner. Going forward, we will pay significant attention to our new internet portal.” “We continue to invest in our technology platform,” adds Ostwald. “We are currently completing the first module of our internet portal, which will offer a webbased reporting functionality. Later, our clients will also be able to enter their instructions for OTC settlements and corporate actions online.” Apart from internet enhancements, service providers in Germany are focused on the new SWIFT standards. “We will be compliant with the new SWIFT Standard Release 2005 in May this year,” says Ostwald. Foreign Perspective For Citigroup Global Transaction Services (GTS) in Germany, 2004 was a year in which to digest major initiatives such at the launch of the Central Counterparty and the introduction of the new settlement system a year previously. “Following these initiatives, we focused on gearing up our depot bank service offering,” says Gregory Rodeheaver, securities country manager. From a depot bank perspective, the developments in Germany market are extremely significant. “Global custody is only part of the client service offering of a German depot bank,” explains Jürgen Ehle, German head of project management for Global Funds Services at Citigroup. “These providers are under pressure from clients who require efficient straight through processing and high quality reporting interfaces. These requirements are prompting depot banks in Germany to review their structure and business approach. There will be an increase in activity in the retail funds sector in Germany. Not all depot banks have the structure to support these clients and consolidation among providers is inevitable. Consolidation will present an opportunity for the global custodians who are entering Germany with a broad, global business structure.” Citigroup GTS has invested in Germany in order to increase its presence and its range of services provided to the funds industry. “Owing to existing cost pressures in the market, straight through processing remains a critical issue,” explains Ehle “A lot of work by German banks is still performed on a manual basis. In order to fully serve the highly intense and complicated nature of a Germandomiciled fund, a diverse service offering is a must. Provided you have sufficient processes available in-house you will be able to offer clients attractive fee schedules.”

Securities Services - Germany

During its 10- year presence in Germany, JPMorgan has witnessed significant contraction within the transaction banking sector. “Most consolidation has come about through merger activity,” says Oliver Berger, vice president for Investor Services (Europe). “Many of the 'Landesbanks' got together to ensure that their transaction banking businesses could reach critical scale, while in the commercial transaction banking market consolidation has largely been between same-sector banks. These banks aim to consolidate their systems and run on one platform. We have not seen this consolidation among private and mid-sized banks, which prefer to outsource.” Germany's Investment Modernisation Act has looked favourably upon players like JPMorgan Investor Services. “As many transaction banks have proved, outsourcing is possible. But global players need a significant amount of

“the KAGs have been granted permission by the new investment law to outsource additional internal administrative processes, including accounting”
infrastructure on the ground in Germany in order to be part of the outsourcing game. You have to be local and make use of the global scale behind the local entity.” As one of the first global entrants into Germany, JPMorgan is an important provider within the institutional client sector. “Institutional investors look to global custodians for infrastructure, using our infrastructure in areas in which they do not want to invest themselves. The institutional investor relies upon these components and upon our infrastructure, which we make available through our Internet portal, JPMorgan Access. This portal contains applications such as risk, performance, fund accounting and core custody information, which we make available to institutional investors on an electronic basis. The institutional investor focuses on about 20 reports in the area of compliance, performance risk and fund accounting, in order to steer and monitor their funds and to glean better information for use in discussions about fee transparency, which has become a big issue in the German market. 10 years ago, fee transparency was limited. To further increase transparency, global custodians have broken down execution price, stock exchange fees, brokerage fees and any settlement fees into their constituent elements.” Technology State-of-the-art communication is a major selling point for ADP (Wilco) Germany, which provides SWIFT Service Bureau and Swift Transaction Management to about seven clients. A further three clients are in the process of moving to the Bureau. ADP’s main clients are KAGs, banks and data providers. “These clients are provided with a complete SWIFT service from assistance with the completion of membership

forms, through connectivity to the Swift network and Straight Through Processing provided by the ADP SWIFT Transaction Manager,” says David Gow, senior sales director, ADP Brokerage Services Group. “In the case of the KAGs, the combination of connectivity and message processing allows them to participate in the Securities Market Practices established by the BVI (The Association of Asset Managers in Germany).” An example of such a client is Universal, which has managed to replace 65,000 faxes with SWIFT messages in a six- month period. In addition to the banking community, ADP manages data from WM Data, the source of security information in Germany. is the source for security information in Germany. This service includes the provision of tools like OAS, an on-line visualisation of this vast data source and TeD, an event calendar, which creates a corporate action event list for a selected group of instruments. This work list is used to simplify back office processes. ADP in Germany also provides services to banks with private clients, by creating information required for tax earnings certificates. Client data received by ADP is matched to WM Data to produce the relevant tax information. The complete service includes, consultancy, annual updates for each tax year and the complete outsourced production of the relevant documents. This service is also available to banks outside of Germany (e.g Switzerland and Luxembourg), many of which have German clients. “An example of the quality of this service is apparent in relation to the recent German Tax Amnesty,” says Gow. This involved producing the relevant information retrospectively, on some occasions up to nine years in arrears. With historical WM Data available in-house and Fitas versions still available for each tax year, ADP met this demanding challenge, delivering the results through it’s data centre in Geneva, thereby meeting the stringent Swiss data laws.” Outsourcing to Foreign Companies The German laws enabling foreign securities service providers to take on some of the functions of transaction banks and asset managers have been relaxed over the last three years. Previous laws dictated that the German back office of an investment bank had to be present in Germany. But this has changed. Deutsche Bank has outsourced a lot to a company based in the UK. Within the EC, there is no law preventing the move of data from one place to another. It is implied that the German regulator looks more strenuously at data that is held outside. With a more favourable approach to investment regulation, Germany is fast becoming a land of opportunity for foreign and local securities service providers. Instances of outsourcing look set to increase and consolidation among financial services institutions will deliver all prospects to the best of the best.

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Germany Panel Debate
Tom Carey

Big in Germany
Service providers who operate in Germany agree that the country’s recent regulatory changes present significant opportunities. In an exclusive panel discussion, ISJ presents participants outlook on Europe’s largest economy.

Alan Crutchett

Tom Carey, Chief Operating Officer, ADP Wilco (part of ADP Brokerage Services Group). Carey is responsible for international strategy and operational improvement within ADP Wilco. His remit is to continue the growth of the company through both geographic and product-based expansion. Carey joined ADP in 1992 and has been extensively involved in the evolution of ADP Wilco's global trade processing and settlement platform, Gloss. Alan F. Crutchett, Managing Director, DWS Investment GmbH. Crutchett was appointed Managing Director at DWS Investment GmbH in January 2002, with responsibility for Operations and IT. Crutchett held previous roles in management, business re-engineering and new business building at Dresdner Bank and Royal Bank of Canada. Cornelia Keth, Head of Marketing & Sales CDS BHF-Bank AG. Keth began her career in 1987 at Dresdner Bank’s securities settlement department. In 1991 she became head of marketing at BHF-BANK’s Custodial Services department. At the beginning of 2004 Keth was appointed head of Marketing & Sales cds (Custody and Derivatives Settlement) at BHF-BANK, where she is now promoting bank’s re-entry into German sub-custody business. Claude Noesen, Client Relationship Manager, Alternative Fund Services, Luxembourg, HSBC. Noesen is responsible for client relationship management for HSBC’s Alternative Fund Services (formally Bank of Bermuda Global Fund Services) in Luxembourg. Claude additionally works as a project director delivering German tax transparency to funds and providing administration services to domestic German hedge funds out of Luxembourg. Prior to this, Claude held the position of Director of Sales in Luxembourg from 2002 to 2004. Achim Puetz, Chairman, German Alternative Investment Association (BAI). Puetz is founder and chairman of the German Alternative Investment Association (BAI) and is council member of the Alternative Investment Management Association (AIMA). Puetz is also a partner in the Munich office of SJ Berwin (law firm).

Cornelia Keth

Claude Noesen

Achim Puetz

Rudolf Siebel

Rudolf Siebel LL.M, Managing Director, Market & Service BVI Bundesverband Investment und Asset Management Siebel is responsible for fund industry standards, market research, as well as member education and services, at the BVI. He is a deputy member of the Board of Directors of the European investment fund trade association, FEFSI.

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Comment on 2004. What does challenges does 2005 present to the German market? Carey: While the industry may not highlight 2004 as a good year, ADP Wilco has observed a significant growth in demand for its services and products in the second half of 2004. Looking forward to 2005, I envisage continued growth in the KaG (Kapitalanlaggesellschaften) market. This growth will be driven by the funds administration market and the introduction of fund of funds. In turn, this will trigger investment in new infrastructure and systems. In addition, regulatory change in Germany has continued to drive business demand. ADP Wilco's portfolio of tax products has certainly benefited from this demand. In particular, the new requirements to report profit and loss on earnings relating to security investments have been a key trigger.

emphasis on privately run schemes. Noesen: Following the adoption of the New Investment Modernisation Act in late 2003, some industry participants expected the German hedge fund and fund of hedge fund industry to experience growth of between 6 bn and 60 bn. Actual market growth to date has been around 800 million. One of the challenges impacting growth is the new tax transparency component, which makes the processing of vehicles more onerous. However, we expect a high level of commitment from regulators and industry participants in 2005 to finalise the new laws and implement an efficient process for establishing funds domestically. This will align with other initiatives to broaden distribution channels, increase hedge fund awareness and understanding as well as attracting established foreign managers to the German market. In terms of increased investment, we believe the insurance sector will utilise their five per cent allocation, which was introduced by a new law in September 2004, to invest in fund of hedge funds in an effort to diversify portfolio risk. Puetz: January 1, 2004 was a very important date for the German fund industry. A new regulatory and tax framework for investment funds was enacted on this date. The new law did not only transform the provisions of UCITS III into German law but also, for the first time, set a reliable framework for hedge funds in Germany. On the regulatory front, the new law provides for specific rules on the set-up of hedge funds (and funds of hedge funds) as regulated funds and the marketing of hedge funds to private and institutional investors, with the proviso that single hedge funds may under no circumstances be publicly offered or distributed in Germany. As the new investment law was accompanied by a revision of the investment rules for insurance companies (which made hedge funds a permissible asset class for investments of their restricted assets), many market participants had very bullish expectations with regard to potential inflows into hedge funds. However, the difficult conditions in financial markets in 2004 did not only have an adverse effect on traditional securities funds but also made it very difficult for hedge funds to attract as much attention and money as possible. Nevertheless, a growth rate comparable to the ones seen in other countries is to be expected. Siebel: In 2004, the German investment funds industry reached an all time high of EUR 1,002 bn in assets under management in retail and institutional funds. However, total net inflows in the order of EUR 17 bn, of which only

“From a regulatory framework perspective, the scene has been positively set with the new Investment Act, the Investment Tax Act and the new rules on derivatives”
Crutchett: As a business year, 2004 could be described as one of modest recovery. From a regulatory framework perspective, the scene has been positively set with the new Investment Act, the Investment Tax Act and the new rules on derivatives. Usage of these new freedoms will pick up through 2005, spurring the growth of new products and services for institutional and retail investors. The market will open for highly specialised niche providers. Keth: German banks faced growing cost pressures in 2004, leading to outsourcing activities. These activities have materialised among an increasing number of Master KAG structures on the one hand and through a number of important deals for German transaction banks on the other. From a political perspective, the introduction of the new investment law has been of great importance. For 2005, challenges will more likely be focussed on the integration of past acquisitions, such as Deutsche Bank’s purchase of Dresdner Bank’s local custody business. Hedge funds and Master KAGs will continue to be an important topic in Germany, particularly in regard to the greater outsourcing possibilities offered by the new legislation. As a consequence of this law, core business areas of KAGs, including fund administration and asset management, can enter into outsourcing arrangements. In addition, increasing volumes will be invested into pension schemes as the German pension system places more

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Germany Panel Debate

EUR 6.5 bn were in retail funds, are disappointing. Investor confidence in long-term funds, especially equity funds, is still low. The industry expects growth in 2005 and beyond as investors increasingly realise, after recent changes in the tax treatment of life insurance products, that funds hold the most advantages for long-term savings in private or occupational pensions. In the past few years a lot of companies’ books have changed ownership. Is the German market becoming more or less competitive and can we expect further consolidation going forward? Carey: The market will continue to become more competitive as the true business drivers are considered, i.e. cost of ownership and ability to address change. Further consolidation remains a possibility, especially for firms, which want to compete in the worldwide markets. Crutchett: Competition for the local subagency business has traditionally been tough, with only a handful of players actively running such a franchise. Further consolidation in this segment is unlikely. The depotbank business for German domiciled funds is provided by a large number of indigenous banks. Here we can expect consolidation, driven by increasing product complexity and technological pressure.

high margin business has markedly declined, companies will look to broaden their service offering in an attempt to attract new business and ensure ongoing profitability. Ultimately, it is about being able to provide customers with the broadest and deepest range of securities services across a range of markets, hence the acquisition of Bank of Bermuda (one of the top service providers to the hedge fund industry) by the HSBC group. Smaller domestic custodians will find it tough in such an environment and given the new investment law and the significant opportunities that it offers to both custodians and administrators, there is likely to be increased interest by global players. Puetz: While consolidation in the German market will continue, the competitiveness of this market will not decrease. All major players are well aware of the need to be active in Germany, or risk the consequences if they are not.

“Further consolidation can be expected in the co-operative and savings banks sectors”
Siebel: The German market is becoming more competitive and consolidation is increasing, thanks to mergers or acquisitions among the banking or insurance parents of domestic asset managers. At the same time foreign asset managers are making inroads on the retail and institutional front. German asset managers are focusing on specialisation, either concentrating on asset management or administration. This focus has led to the creation of the “Master-KAG”. The success of Germany’s transaction banks is based on two operational strengths: payment services and securities services. Discuss. Carey: The provision of these services exemplifies the demand for one-stop-shopping. At the core of this lies the more fundamental desire of controlling costs, in this instance through an outsourcing model. Crutchett: Activities that are beyond the client facing activity have been migrated to transaction banks. These activities are mostly discrete or linked processes that occupy a small part of the complete value chain. The main drivers of this migration include the avoidance of technology spend and unit cost reduction for commoditised activity, while being able to retain the client relationship. Keth: The outsourcing of payment and securities services as typical bulk transactions in the banking business - is the first step for German financial institutions. The demand for outsourcing solutions has led to the establishment of

Keth: Competition in the German market is indeed increasing owing to a decreasing number of custody service providers and increasing cost pressure from clients. The German custody market has already undergone fundamental changes as evident from the Deutsche-Dresdner deal. As for the independent domestic providers, Commerzbank and HVB have been subject to merger rumours for some time. Further consolidation can also be expected in the co-operative and savings banks sectors, the latter of which is to be omitted from state guarantees from the summer of 2005 onwards. These institutions may also opt for outsourcing opportunities, where DWP, ETB and TXB have established themselves as providers for securities services. On the other hand, international custody providers, such as BNP Paribas, are also delving into the German market. Noesen: Further consolidation is likely but this is not restricted to the German market. We expect consolidation to occur in the securities industry globally. The European market is still fairly fragmented and is therefore likely to lead the trend in terms of consolidation. While German custodians will be affected by multinationals seeking to create efficiencies and gain market share through mergers and acquisitions, competitiveness will remain key. Once

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Germany Panel Debate

transaction banks. At first, deals developed at a sluggish pace and some of them folded during the project stage. But recent deals have included larger volumes such as the outsourcing of payment services by Deutsche and Dresdner Bank to Postbank. The fact that these services present the major operational strengths of German transaction banks is likely to change due to major changes into the legal framework, which opens further outsourcing capabilities such as fund-administration or risk management solutions. Noesen: Consolidation in the securities world is largely attributable to the transaction banking sector. While larger institutions will be aiming to offer both services, the smaller transaction banks will need to focus on either payment services or securities services. So far two different strategies have emerged. The first is in the form of trans-

Keth: The main focus has been online reporting as a value added service. This should include easy access such as Internet or online file transfers. Emphasis also falls on handling and flexibility in generating individual reports, including aggregated reports and reports that include historic data. In addition, the possibility of downloading data into the client’s own network for further processing is of great importance to clients, as are short term updates, which reflect continuous booking. Analytical reports such as transaction cost analysis, risk management solutions and performance analysis are also requested. Further products like transition management, securities lending and repo, treasury or derivatives trading and settlement remain key value added services, presenting a one-stop solution for the client. Noesen: Institutional Investors are increasingly looking at the quality of the service providers chosen by fund managers. At the same time, transparency and risk awareness are becoming even stronger drivers. Software such as HSBC’s GFSRiskPlus application, which allows managers to extract risk measures such as VAR calculations, stress testing, Monte Carlo simulations, market risk and credit risk on-line are becoming increasingly popular. Web-based tools allow fund managers and their investors to access positions and reports 24 hours a day. In addition, it allows investors to evaluate their respective risk parameters. These are services that an investor should now be looking for from the administrator. Puetz: The severe losses, which German institutional investors have sustained as a consequence of the downturn, has prompted a focus on portfolio diversification and hence take a deeper look into alternative assets like hedge funds. But these investors are still lacking in experience with this asset class and will therefore have to avail themselves of external advisors for due diligence and research work, in order to handle the risks associated with such investments. Siebel: Institutional investors are valuing the services offered by a Master KAG, particularly the provision of consolidated reporting across all investments, from Spezialfonds to direct holdings. Reporting covers regulatory aspects such as investment fund and insurance laws, sophisticated performance and risk measurement, and the ability to provide IFRS reporting on the basis of the holdings of the fund. With the launch of a domestic KAG, Fidelity has underlined the importance of a visible presence and close contact to the German market place.

“Institutional investors are valuing the services offered by Master KAG, paticularly the provisions of consolidated reporting accross all investments”
action banks, which have been set up by large financial institutions to act as independent service providers to securities settlement and payment processes. The second approach focuses on becoming the first entity to work with T-Systems, an independent non-bank IT service provider servicing custodian and transaction banking platforms on a joint venture basis. Puetz: The banking industry is experiencing the most radical structural changes in its history. Globalisation, panEuropean deregulation and liberalisation of the financial sector, increasing deployment of high-performance information technology, changing customer requirements and the break up of the value added chain all lead to ever lower margins. In order to remain competitive, banks are compelled to react to this drop in profits with a resultant increase in cost pressure. In this respect, the production of bank services can provide immense savings potential. As markets move away from traditional investment strategies, institutional investors are increasingly looking for value added services. Which value added services are key at present? Crutchett: Cost efficient administration with daily portfolio reporting (optimally with a direct link to investor’s own accounting system). IFRS and regulatory reporting (e.g. VAG), VaR reports and performance attribution functions are also key.

66 INVESTOR SERVICES JOURNAL

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As a premier European financial institution, Commerzbank is a natural choice for quality custody services. With over half a century of experience in core and value-added asset administration, we focus on flexibility to satisfy individual client needs – integrating fresh ideas to optimize performance. For a genuinely professional working partnership, call on Commerzbank. A good idea.

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Commerzbank is regulated by FSA for the conduct of investment business in the UK

Germany Panel Debate

Now that investment laws have paved the way for UCITS III, have institutional investors become more liberal with their investment strategies and have hedge fund assets increased? Crutchett: The expectation is that many institutional investors will increase their asset allocation in hedge funds. It is still too early to highlight a definite trend. Keth: Although the industry has been quite euphoric about the introduction of hedge funds in Germany at the beginning of 2004, less than EUR 1 bn was invested in hedge funds at year-end. This figure is equal to 0,2 per cent of the total volume of investment funds. The reasons for this slow progree include unsolved regulatory details, adverse market conditions and high costs. Insurance com-

rules, the variety of permissible assets has significantly increased and the use of derivative instruments has been liberalised, including the possibility to use derivatives not only for hedging, but also for mere investment purposes. Nevertheless, hedge funds are still outside the scope of UCITS III. Thus, it is up to each EU member state to set specific rules for hedge funds. Apart from some early-stage consultations, the competent EU bodies have not yet taken any specific measures to “legalise” hedge funds. Siebel: The new Super-UCITS is eligible for investment by both insurance companies as well as pension vehicles. However, we do net yet see widespread use of the possibility under the UCITS directive to increase the market risk of the fund to 200 per cent because of the negative risk weighting this implies for insurance companies. Similarly, the investment by insurance companies and pension funds in hedge funds remains limited, as these investors need to increase their regulatory capital to be able to support large investment in such assets. As a result we expect a measured increase in assets under management in regulated hedge funds going forward. Technology is becoming an increasingly important factor for institutions when allocating mandates. To what extent does technology drive your industry and what systems changes or implementations has the industry made in the past 12 months? Carey: It is apparent that the SWIFT network and messaging are becoming common methods of communication for clients. From our own perspective the increased interest in SWIFT has been borne out by the growing number of firms committing to process SWIFT messages on an outsourced service bureau basis during the last 12 months. Seven new German clients have joined our SWIFT Service Bureau from a broad spectrum of service groups, including KAGs, a transaction bank, and the data provider WM Daten, who contracted ADP to convert their corporate action information to ISO 15022 standards for distribution via SWIFT. To that end, ADP has advanced its technology within the SWIFT Service Bureau to provide a new user interface and controls to allow clients to maximise STP rates with their SWIFT messaging. This is known as the SWIFT Transaction Manager. Interfacing and messaging in general continue to evolve. ADP has adapted to this change within its tax products by offering XML defined message interfaces to minimise the cost of integration. Crutchett: Many asset managers were traditionally sluggish to invest in new technology. This has changed.

“The new provisions for hedge funds present opportunities for asset servicing providers”
panies are even further restricted as they can only invest a maximum of five per cent of their assets into hedge funds. Due to current the obstructions, neither the investments into hedge funds nor the creation of hedge funds in Germany have increased. Although Germany tends to be a conservative country, investments in hedge funds may increase over time if positive experiences are observed. But due to the difficult risk assessment of hedge funds, it is expected that assets to be invested will remain limited. Noesen: There has not been a significant increase. The German hedge fund market saw an inflow of roughly $1 bn of assets in 2004, which was below expectations. However, only time will tell. We believe that as institutional investors become more comfortable, they will allocate larger sums to hedge funds in Germany. As mentioned previously, both pension funds and insurance companies will be looking to use their five per cent allocation in an effort to diversify risk. Education and knowledge on the sector is on track and with the more liberal regulatory environment (such as the UCITS III), the long term outlook for the German hedge fund industry looks positive. The outlook will become more positive once there is clarity on the exact details and impact of the New Investment Modernisation Act. Puetz: UCITS III has brought Europe one-step closer to integrating its financial services community and facilitating asset pooling for global companies. The recent changes are paving the way for a single market for financial services in Europe and could lead to liberalised investment strategies among institutional investors. Under the new

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Germany Panel Debate

Leading firms, such as DWS, have made and are continuing to make significant technology investments throughout the value chain. The past 12 months have featured implementations in investment accounting, fund accounting, compliance, client reporting, risk management applications and distribution servicing platforms. Keth: Custody services have developed into a combination of high level of STP rates and seamless and effective information delivery, offered by highly qualified and dedicated people. Due to clients’ ever increasing cost sensitivity, technology – expressed in high STP rates - has become a key issue in the custody business. Substantial investments have been made and this will continue, in order to reduce manual input. Future threats will include the implementation of SWIFT 20022 UNIFI formats and the increasing demand for SWIFT based solutions from institutional investors like KAGs. As for BHFBANK, major investments have been made to support the implementation of the ISO 15022 standard and to prepare a flexible and customised reporting matrix. Furthermore, a risk measurement tool has been developed in co-operation with the software provider Algorithmics in order to assist clients to comply with the requirements of the derivatives ordinance (DeriV). The preparation of an Internet based reporting tool with download functionalities is also in full swing. Siebel: The German KAGs, especially those focusing on administration, have made huge efforts towards achieving internal and external STP. More than 2O KAGs are in the process of implementing automated trade confirmations and settlement instructions (MT 515/ MT541/3) on assets under administration to the tune of EUR 350 bn each. In response to this BVI-led STP initiative, more than 20 international brokers are also implementing MT515 messaging schemes. As of December 2004, all German KAGs are internationally, uniquely identified by the Bank Identifier Code (BIC), which allows for easier reporting and trading in both national and cross-border situations. Comment on opportunities within the KAG market. Do the new provisions for hedge funds present opportunities for asset servicing providers? Carey: The KAG market is regarded as one of the fastest developing areas of the German financial market. There is a great drive to improve procedures to cater for increased transaction volumes. The BVI is driving the use of SWIFT to create communication standards. Crutchett: There are about 70 KAGs in total, with the market being dominated by a small number of large

groups. Furthermore, the Master-KAG structure is very efficient for institutional investors seeking multi-manager structures. Consolidation will probably outweigh the number of new entrants who are likely to focus on niche strategies (hedge funds, structured products, quant, etc.). Given that the larger players have the scale and have already invested in new technology, the opportunities for service providers are likely to be among medium and small size KAGs as well as new entrants. Keth: From an asset allocation perspective, KAGs tend to invest more into over-the-counter, exchange traded derivative products and structured products. This investment behavior leads to an increased demand for sound risk management solutions offered by asset servicing providers. Further opportunities for asset service providers evolve

“full lift-outs will be rare wheras component based outsourcing will increase”
from the introduction of hedge funds as well as from an increased demand for outsourcing solutions. These solutions may include depot banking and fund administration services. Some asset-servicing providers have already carved out their territories in the hedge funds industry, even though this sector has not developed as expected. These providers include Citigroup, which already has established a Master-KAG to offer prime brokerage and depot banking as a one-stop solution to hedge funds. Increasing investment volumes in Germany, due to increasing privately organised pension schemes, present further opportunities within the KAG market. Noesen: Our aim is to provide tailored and flexible connectivity to our client base, ensuring that technology is an enabler both externally and internally. We recognise that technology is an important component in the hedge fund industry and, as a specialised hedge fund administrator, our technology strategy evolves as the needs of the industry changes. Working with leading technology vendors is one of its cornerstones. We have worked with US-based Advent Inc. – a software development company – and Koger NTAS to provide our core accounting and investor servicing systems. More recently, we have added to the initial offering using an open-architecture web based channel. Puetz: The implementation of UCITS III has not only increased the possibilities to use derivative instruments in portfolio management but has also facilitated the outsourcing of fund management and administration services to third parties. This should on the one hand create new

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business opportunities for structurers of derivative instruments, which could be offered to German funds. On the other hand, there should be a growing demand for fund support and administration services (like fund accounting or risk management) which, due to a comparably small local infrastructure, could create additional opportunities for well-experienced foreign service providers. Siebel: The new provisions for hedge funds present opportunities for asset servicing providers. But also on the traditional long only fund side the German market, including the Master-KAG, remains attractive for asset servicing providers, as evidenced by the ever-increasing share of Spezialfonds, which are managed or advised by third party managers. Currently one third of Spezialfonds assets are managed externally.

of lift out deals. On the other hand, international market participants doubt that the full back office lift out deals would have a brilliant future, as they are too cost-intensive due to their individualised structure. Only large market participants are able to gain sufficient experience to cope with these deals in a cost efficient manner. Furthermore, in conjunction with an increasing flexibility in other aspects such as reporting or technical infrastructure - a component based outsourcing form will become more likely, probably in a core satellite structure. Noesen: We anticipate the Master KAG route to be widely adopted in Germany by new hedge funds and funds of hedge funds. An alternative is the Investment AG, which is similar to a Luxembourg SICAV. HSBC has teamed up with INKA, the Master KAG and a wholly-owned subsidiary of HSBC Trinkaus & Burkhardt. Unlike many of the 60 KAG’s who are supporting their own business, INKA acts as the administrator to third party funds but with the additional benefit of value added services such as risk management and compliance. As with custodians, we are likely to see consolidation in KAGs, as they are pushed by their boards to decide whether to focus on investment management or look at administration only. The new Investment Modernisation Act could provide a business option for a handful of Master KAGs, i.e. those who will specialise, who will gather knowledge over time and who will not shy away from the considerable IT investment. Puetz: The new outsourcing rules should surely help to facilitate enhanced outsourcing activities in the German fund industry. There is already a certain form of process in place, which governs the current outsourcing transactions. So far, outsourcing has primarily been made on a component basis but there is a certain tendency towards full back office outsourcing. KAGs are offering their fund platforms as a tool to bundle the administrate investment activities under one “umbrella”, while using various external managers. Siebel: Outsourcing of both asset management and asset servicing has been accepted in the German market place. However, owing to the lack of dedicated outsourcing partners, most back office outsourcing tends to be with other KAGs, which take over the fund accounting. The development of more specialised service providers will lead to further component based outsourcing. BVI is supporting these trends by conducting research on the identification and description of the individual processes within an asset manager, in order to enable the provision of standardised component outsourcing to KAGs.

“The development of more specialised service providers will lead to further component based outsourcing”
Comment on the future of outsourcing in the German market. Can we expect the full back office lift out deals to increase or will component based outsourcing form the basis of client contracts? Carey: Earlier attempts at outsourcing have left some service providers with a small number of clients. In such models, the provider may find it a greater challenge to make profit and pass economies of scale to its early adopters. In addition, I believe that some clients have suffered from the need to grow their infrastructure to monitor and control the service provider. Again, this has impacted the business benefit of such arrangements. One would suspect that a more mixed model would be adopted in operational outsourcing moving forward. By this we mean that the full “lift out” option will not be taken up but selective function-by-function lift outs will be attempted. The service provider will identify the unique functions that the new prospect possesses and attempt to extract these. It will wish to leave behind the core functions for which it will already possess capabilities. Evidently, this may be affected by local labour laws. Crutchett: In my opinion full lift outs are likely to be rare whereas component based outsourcing will increase. Keth: Looking back, full back office lift-out deals have not been common in Germany. Nevertheless, the new investment law broadens the possibilities for outsourcing e.g. of fund administration for investment institutions KAGs which might mark a milestone for the future development

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SPONSORS OF

TOMORROW’S PEOPLE
Investor Services Journal has launched a competition to seek out tomorrow's stars in securities services. The competition is open to any student of an area of securities services to write 2000 words on questions set in one of the following categories to win US $2,000:
Academic Advisory Panel
Professor Eva Liljeblom Dept. of Finance and Statistics, HANKEN Swedish School of Economics and Business Administration Professor Frank Kirwan Royal Bank of Scotland Visiting Professor of Strategy The University of Edinburgh Management School Associate Professor Narayan Naik Director, Centre for Hedge Fund Research and Education London Business School Christian C.P. . Wolff, Ph.D Program Director Amsterdam Institute of Finance Dr. Sami Tamer Lecturer in Finance School of Management and Economics The Queen's University of Belfast Margaret Woods Senior Lecturer in Accounting and Finance Nottingham University Business School Christopher Cook Head of Division and Field Chair - Accounting and Finance Head of Division - Information Sciences University College Northampton Trainers - Center for Interactive Financial Training (CIFT) Robin Brown Capital Consultancy Ltd Paul Meadows Director - Chadley House Training Andrew Street Managing Director - Value Consultants Ltd
ISJ would like to thank the Academic Advisory Panel, comprising the above individuals who set the essay questions.

ISJ ESSAY COMPETITION 2005
Categories:
· Compliance / Regulation · Hedge Funds · Outsourcing · Risk Management · Technology in Financial Services

Questions in each category are available online at www.ISJforum.com The winning entrant will receive a prize of USD 2,000. The deadline for entries is 4th May 2005

Industry Judging Panel
- Essays will be judged our panel of industry experts:

Accenture - Chris Broyden, Partner, Capital Markets Practice HSBC Securities Services – Paul Stillabower, Head, Business
Development BNP Paribas Securities Services - Tony Solway, Head, UK Citigroup Global Transaction Services - Giulio Di Cerbo, Managing Director, Head of Banks and Broker Dealers JPMorgan - Mark Austin, Head of Strategy, Investor Services EMEA State Street - Jeff Conway, Managing Director, Investor Services The prizes for the winner and certificates for the runners up in each category will be presented at a reception, which will also be attended by the Industry Judging Panel, members of the Academic Advisory Panel and the ISJ team. The reception will take place in June 2005. For further information about the Competition including the questions and the rules, please visit our website www.ISJForum.com

www.ISJFORUM.com

Corporate Actions

The securities industry appears to be striking the right chords in corporate actions standardisation. Rekha Menon highlights the most notable efforts in the search for standardisation.

The case for corporate actions standardisation has been effectively established in the past few years with leading industry bodies like the Giovannini Group and the Group of Thirty (G30) highlighting the need for automation. As the January 2003 G30 study stated, “Corporate actions, across the market are the major source of financial loss attributable to operational failure.” Another report by the Depository Trust & Clearing Corporation (DTCC) further quantified the risks associated with corporate actions processing, stating that failure in handling a single, complex corporate action has the potential to result in losses running into tens of millions of euros.
Progress? While complete standardisation is still a long way off, it is almost universally acknowledged that current standardisation initiatives are working in the right direction. The key initiative that has made a significant impact is the SWIFT ISO 15022 message format. Despite a slow initial uptake, ISO 15022 is considered the defacto industry standard for corporate actions, and all the participants in the corporate action lifecycle from data vendors to the custodians are implementing the standard. However, 15022 has its own pitfalls, the main being differing interpretations of the standard by individual firms. Industry experts state that this is essentially because the standard is too open and flexible. So the way Firm A interprets and represents a particular corporate actions event might be quite different from the way Firm B does. Differences in market practices across geographies and the slow adoption of the 15022 standard has further compounded the problem. Forum To SWIFT’s credit, the standards organisation has taken cognisance of the interpretations problem, and in April last year, it initiated a corporate actions operations forum comprising top global custodians, investment managers and broker/dealers, with the objective of agreeing on the interpretation of ISO 15022 messages. In addition, SWIFT created the market data providers user group with a mandate to achieve a standard approach for the implementation of ISO 15022. There are 10 vendors already members of this user group and the group has outlined twelve key principles on how corporate actions should be implemented. “It was a real bonus that SWIFT formed this group. Without this initiative, vendors would have implemented ISO 15022 in different ways,” comments Nat Sey, manager of infrastructure and delivery at market data vendor, FT Interactive Data. Sey however adds that although all the ten vendors were active members of the group, only a handful have thus far implemented the principles or have plans to do so. Interactive Data itself launched its ISO 15022 service in August last year and is currently in the process of connecting to SWIFTNet. According to Darryl Twiggs, product manager at SmartStream Technologies, aside from the work being done by the market data providers user group with regards to 15022 interpretations, another reason why the (data

The Quest for Standards

The new hymn sheet?

72 INVESTOR SERVICES JOURNAL

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Corporate Actions

standardisation) issue will get sorted out is because all the vendors are working to meet the 15022 design deadline by 15th May 2005. “This means that their data will be in the same version,” he says. Another organisation that is working towards refining the ISO 15022 messaging format, is the DTCC. “The 15022 standard is great, however it only goes to a cerextent in solving the problem,” Brett Lancaster tain states Brett Lancaster, vice president of DTCC's Global Corporate Actions business. “Corporate actions are very complex, and 15022 does not fully address the granularity of information required for corporate actions processing. We have been working to develop best market practice guides that set usage rules for ISO 15022 corporate action message standards, seeking to create globally harmonised market practices,” says Lancaster. Validation The DTCC’s Global Corporate Actions (GCA) Validation service, which was launched in 2003 to provide good quality, clean and timely corporate actions data globally and boasts of customers like UBS, currently produces data in DTCC’s proprietary format. However, recognising market demand, DTCC is producing an ISO 15022 version as well which should be ready in the next three months. “Then customers can decide in which format they want to take in data, our proprietary format or the ISO 15022 format,” states Lancaster Source While efforts to further improve the ISO 15022 standard are commendable, industry experts contend that the most effective way to resolve the problem of inconsistent, bad quality corporate actions is to go for standardisation right at the source, when an corporate action announcement happens. The logic being that ensuring that information about a corporate action is announced in a standard, consistent and complete format by the entity most familiar with the specific details is the most effective way to address the risk associated with identifying and interpreting the information. “We are arguing that the issue should be resolved at-source so that companies report on any event in the same format,” states Lancaster. He says that DTCC supports the efforts being made by ISSA (International Securities Services Association) and SIA (Securities Industry Association) in this respect explaining that globally, an ISSA committee is working to obtain agreement on

“Corporate actions, across the market are the major source of financial loss attributable to operational failure”

74 INVESTOR SERVICES JOURNAL

C Co ityC rp om or p at as e s Ac 2 tio 00 ns 4 B Re .I.S po .S rt .

Speaking your language
A corporate actions language fit for the global village
FT Interactive Data’s ISO 15022 global corporate actions service went live on 2 August 2004. ISO 15022 is considered as a positive catalyst for corporate actions processing and can help to reduce risk and increase operational efficiency. FT Interactive Data has provided global corporate actions event data for over 30 years and has a wealth of experience in gathering, updating validating and delivering this data. By mapping its corporate actions data to the MT564 event types specified within ISO 15022, FT Interactive Data is delighted to offer new and existing customers immediate access to this new global service. Clearly speaking, FT Interactive Data is helping to lead the way in global corporate actions data. Take advantage of immediate access – please call Nat Sey on +44 20 7825 8744 or email: [email protected] today. www.ftinteractivedata.com

FT Interactive Data is an Interactive Data company

Corporate Actions

“There is a ground swell of opinion that the corporate actions issue should be resolved at the source, the issuer and agent level to avoid interpretational risk”

a standard set of announcement data elements and in the United States, the SIA’s Corporate Action Division has proposed that a template of corporate action data elements be agreed upon. In Europe too, the RDUG (Reference Data user Group) is working towards achieving at-source standardisation. “There is a ground swell of opinion that the corporate actions issue should be resolved at the source, the issuer and agent level to avoid interpretational risk,” says FT Interactive Data’s Nat Sey, a member of RDUG, describing the inefficiencies involved in corporate action processing in the current environment where the issuer via its agent announces a corporate event. That announcement takes the form of a Word document or perhaps a PDF file and the content is generally unstructured text. Any third party such as a data vendor wishing to process the event must first attempt to interpret the content, which is a complicated affair taking into consideration the endemic inefficiencies of the process, differences in regional practices and the complex nature of individual corporate events. “At Interactive Data we have literally hundreds of people dealing with data and structuring it,” says Sey. Action While currently there is minimal automation with regards to the capture of notifications from the issuer, the London Stock Exchange’s recent announcement to offer all its corporate action announcements using the ISO 15022 format is an example of an increased momentum in the adoption of standards in the marketplace. London Stock Exchange is the first stock exchange to implement this standard and industry reports suggest that other stock exchanges will follow suit. To further assist the process, the RDUG is proposing that

Existing stylised illustration of the participants in the corporate action chain (based on the UK model)

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rather than using a text-based document to make an event announcement, the issuers can instead use an intelligent document format that requires them to do no more than select from drop-down boxes and build their event on the fly. Such a formatted document could then be provided to the market. Nat Sey believes that such a document promises huge efficiency gains to the industry. In the next couple of months RDUG plans to create a pilot environment where this intelligent document format can be tested. In addition, the organisation is planning to continue and expand its dialogue with other industry bodies involved in standardising the corporate actions space such as the European Central Bank and the European Central Securities Depositories Association. It remains to be seen how RDUG’s intelligent document format suggestion will fare, but there can be no doubt that the industry has come a long way, and such initiatives and regular dialogue between industry participants will soon bear fruit.

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Corporate Actions

Will Intelligent Document Format put Issuers in the Limelight?

Nat Sey

A strange thing is happening in the securities industry. People, often from within the same sector and from competing companies, are working with one another for the betterment of the whole industry. Since when did competitors become so friendly? Could it be since they bought into the idea of standardisation of the core components of their offerings – on which there is no gain to be had in competing with one another? Fed up with the inefficiencies and difficulties that the industry faces on a daily basis, we all yearn for a more productive, lower risk environment in which to do business. This yearning is manifesting itself in the formation of several industry groups that are taking it upon themselves to explore the causes and seek potential solutions. The Reference Data User Group (RDUG) is one such group. Founded by Dr Anthony Kirby and John Gubert of HSBC Holdings in June 2002, the group now acts as a virtual, not-for-profit forum and consists of more than 156 practitioners and suppliers. It has coupled with other market associations and industry bodies both in Europe and North America to further its goals by improving cooperation. RDUG’s terms of reference describe it as ‘a forum where representative members of the global securities markets can discuss and agree on solutions for key market issues pertinent to STP’. RDUG has at different points throughout the past two years established three separate work streams: Unique Instrument Identification, Legal Entity Identification and Corporate Actions. The latter stream deals with issues that the industry has identified as those requiring attention from the perspective of the existing use of standards. It also looks at the role that issuers play in the processing chain. And it is now the turn of the issuers to hog the limelight. Correctly Interpreting an Event Few would describe the way that global corporate actions are processed today as efficient. The issuer, perhaps via their agent, announces a corporate event, which takes the form of a Word document or perhaps a PDF file and the content is generally unstructured text. Any third party such as a data vendor wishing to process the event must first attempt to interpret the content. Given the inefficiencies, differences in regional practice, as well as the industry’s penchant for coming up with weird and wonderful asset types and event combinations, we might justifiably be surprised that the process works at all. Ironically, however, it is in the issuer’s interest that the event is correctly interpreted and therefore understood: in the case of an elective event, this will have a direct bearing on its take-up. And it is in the data vendor’s interest to interpret the event correctly as the vendor will be judged by customers, at least in part, on the basis of the accuracy of content. Clearly, it is also in the market practitioner’s – e.g. the investment bank’s – interest to reduce risk and try to avoid potentially costly errors as far as possible. Given all this, one might reasonably ask why on earth we are still making do with a less than ideal process. Removing Interpretation from the Equation As with so many other efficiency related problems, technology certainly has a part to play. ISO 15022 – and its

What if, rather than simply using a text-based document to make an event announcement, issuers instead used an intelligent document format that required them to do no more than select from drop-down boxes and build their event on the fly? Nat Sey, FT Interactive Data’s manager of infrastructure and delivery, and member of the Reference Data User Group (RDUG) and its corporate actions working group, investigates.
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Corporate Actions

comprehensive corporate actions’ dictionary – is still relatively new to the party. And today’s bandwidth availability makes verbose languages a breeze to transmit and process. Technology is only part of the solution though. The heart of the answer is of course to push the codification process further up the chain of events and to virtually remove interpretation from the equation. If issuers themselves were to make structured event data available, most observers agree that interpretational risk would be reduced to negligible figures. When this has been suggested to issuers in the past their response has been, whilst not frosty, decidedly chilled. This is due to the assumption that costly resources would have to be allocated to the implementation and maintenance of expensive automation solutions. It is now time for that idea to come in from the cold: RDUG has an ace up its sleeve. The Intelligent Document Format What if, rather than simply using a text-based document to make an event announcement, the issuers instead used an intelligent document format that required them to do no more than select from drop-down boxes and build their event on the fly? In the case of a rights issue, the first drop-down box might be for ‘event type’, and selecting this would provide three additional drop-downs – ‘number of new shares’, ‘number of old shares’, ‘issue price’, and so on. This would require no more resource than simply writing the event out in prose. Such a formatted document could then be provided to the market and, if absolutely necessary, used in the same way as present – with content aggregators having to apply their interpretation of the event before passing it on to their customers. Where such aggregators have the facilities, however, they would be able to extract the component parts from the document and process the corporate actions event in all its structured glory – perhaps transforming it into an ISO 15022 MT564 for onward dissemination to their customers. This would provide ‘backward compatibility’ with huge potential efficiency gains at the same time. Anthony Kirby does not believe that RDUG should be prescriptive about the solution: “RDUG exists to identify process deficits and the business cases for change – not invent standards nor dictate technology solutions which are the rightful remit of other industry efforts and the supplier community. We look forward to expanding the dialogue further during 2005 with the issuer communities and their agents across the European Union, by partnering with bodies such as the European Central Bank, the European Banking Federation and the European Central Securities Depositories Association, as well as engaging further with relevant bodies in the UK such as the Institute of Chartered Secretaries and Administrators, the Financial Reporting Council and the Financial Services Authority. Experience has taught us that the challenges are not insuperable if industry bodies remain focused on their core missions and couple to other industry efforts underway to avoid reinventing the wheel.”

“If issuers themselves were to make structured event data available, most observers agree that interpretational risk would be reduced to negligible figures”

FT Interactive Data, an Interactive Data company, has been a provider of corporate action event data for over 30 years and has a wealth of experience in gathering, updating, validating and delivering corporate actions data to back office environments. In August 2004, FT Interactive Data launched its ISO 15022 service – the culmination of significant development work to map global corporate actions data from its proprietary formats to the MT564 event types specified within the industry data standard. The ISO 15022 service is available as an optional module within FT Interactive Data’s FTS online desktop portfolio administration tool. FT Interactive Data has participated in open standards forums for a number of years. Initiatives such as the Market Data Provider User Group, Reference Data User Group and ISO Working Group 11 are all contributing towards making an even playing field, with fantastic transparency upon which the more dynamic data vendors can build real added value. Easier access to that added value is achieved because the more vanilla offerings are easier to process, and as a result, this frees up valuable resource to concentrate on the integration and execution of those added value components. For further information please contact Nat Sey. Tel: +44 (0) 20 7825 8744 Email: [email protected] www.interactivedata.com

INVESTOR SERVICES JOURNAL 79

STP and Automation

PaperWait
As the securities industry wrestles with a paper-based environment, the potential of STP solutions increases. Investor Services Journal looks at the concerted efforts of fund platforms to address the paperintensive processes of today
The nightmare scenario for any financial institution is a three-day backlog of unprocessed fund transactions piling up in the back office, exacerbated by the phone ringing off the hook, to the sound of angry clients and more instructions. In the meantime, trades continue to pour in. While the scenario is not as fanciful as some may think, the reality is that the potential European paper crisis will radically shake up the investment funds industry. As Thierry Logier, head of Investment Funds Product Management at Euroclear, succinctly states: “Certain parts of the fund-market infrastructure are beginning to creak as more and more investors rely on funds for their privately managed pensions, and contribute to company-based investment-fund plans.” It is a mystery why great numbers of fund distributors, transfer agents (TAs) and fund promoters do not prepare themselves for the inevitable, considering that the infrastructure and technology exist today to avoid the paper crisis of tomorrow. But, with so many solutions available, which set of criteria should be used to assess them? The Thierry Logier answer is as complex as the environment in which the fund industry operates: fragmented processing methods, complex webs of communication links between TAs, distributors and promoters, differing regulatory environments, low levels of straight-through processing (STP), increasing third-party fund distribution and, of course, heavy reliance on paper. Taking Paper out of the Mix If the European fund industry is to avoid or at least mitigate the impact of a paper crisis, then more of its participants must look to embrace solutions that automate and simplify the exchange of information. Investment fund platforms such as Euroclear’s FundSettle, have been

extremely active in this regard, integrating the elements of order routing, cash and securities settlement, and asset servicing. “The platform enables fund buyers to easily interact with more than 400 TAs,” says Logier. “Previously the buyers would have had to maintain a separate operational relationship with each TA. On the other side, fund promoters now see hundreds of fund orders routed centrally from FundSettle, instead of a barrage of orders from 100 to 150 disparate distributors. The savings in terms of network costs, technology and staffing are immense.” FundSettle’s integration of the three main fund-processing functions on a single platform is central to Euroclear's investment-fund strategy. Today, the platform covers approximately 23,000 domestic and offshore funds, having added more than 3,000 funds in 2004 and a large number of financial institutions are using the platform as their preferred STP solution. These institutions include retail banks, investment banks, private banks, global or local custodians, and fund supermarkets. Platforms such as these add value to third-party fund distributors, who distribute a wider and more operationally complex range of funds. “The distributor can rely on the efficient and automated flow of transaction information, from routing to settlement to custody, thereby guaranteeing the timely and correct payment of their trailer fees,” says Logier. “If there are chinks in that chain, then invariably these fees will be delayed and/or incorrectly calculated.” Rather than maintaining relationships with multiple suppliers for the provision of information in their respective parts of the chain, fund-market participants are increasingly using a single service provider, which offers all three elements of fund processing under one roof, in the hope that the real risk of information depreciation along the chain will then be eliminated. Pure STP between order routing, settlement and asset servicing is now an imperative, whereas manual intervention perpetuates unnecessary costs and risks. Another area where the financial services industry is drowning in paper is in fund documentation, with pile upon pile of prospectuses gathering dust in the corridors of financial institutions. Again, platforms such as Euroclear’s offer a solution: “In the near future, FundSettle users will have online access to all fund

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STP and Automation

prospectuses. Moreover, they will also be able to review all relevant operational details of the funds, from the platform’s own database,” says Logier. “All information will be easily downloadable.” A Paperless Standard Underpinning fund-processing solutions like FundSettle are the new fundtransaction messaging standards from SWIFT. SWIFT is currently promoting a new XML standard, ISO 20022, which will further advance the standardisation and efficiency of the investment funds industry. “While the market is hesitant to embrace yet another standard so soon after ISO 15022, we expect a gradual pick-up of the new XML format in the coming one to three years,” says Logier. “It will probably be adopted sooner in those markets operating without or with a limited SWIFT infrastructure, and/or small amounts of technology investment that need to be amortised. Euroclear is fully supportive of SWIFT’s efforts and our fund platform will soon become compatible with the new XML standard.” Going forward, it is expected that financial incentives will reward STP and ensure further standardisation and automation in the funds industry. In the meantime, Logier asks, “Why not correlate transaction fees with the levels of STP that a given transaction attains? After all, why should those companies that have made investments to streamline their businesses have to subsidise others that rely largely on manual processing?" A Competitive Market FundSettle is by no means the only solution to more sophisticated European fund processing. EMX and Vestima+ are two other fund solutions that are in service today. In contrasting these with his own platform, Logier says: “These are “orderrouting only” systems, de facto unbundled from settlement and asset servicing. Detaching settlement and custody from order-routing could work well in mature markets operating under the CSD model, where it is merely a question of routing the orders to the local CSD. But, as cross-border fund transactions continue to grow, an “order-routing only” solution will not provide the STP settlement or custody features that also serve to accommodate the discrepancies in market practice from one country to the next. Nor will it provide a unified reporting mechanism that centralises domestic and cross-border transac-

tion information.” Logier remains confident that full-service solutions will prevail: “This is competition and natural consolidation at work, with the market choosing the solution that best services its needs,” he says. Third-party Fund Distribution Despite advances in fund industry automation made possible by existing platforms, says Logier, the funds industry’s development of open architecture models, whereby distributors extend their products to include third party products, remains limited. “Many fund distributors note that their customers want more than just a wide range of funds. In addition to being offered choice, more fund investors are demanding tailor-made advisory services from their distributors about the funds offered. Thus, fund distributors, rather than selling scores of relatively generic funds, are instead offering a portfolio of best-of-breed funds in cooperation with strategic partners. There is a threshold to the number of funds that any one organisation can sell. Moreover, it is a selective business; a major retail bank is likely to choose a handful of trusted and capable promoters that will provide assistance in staff training, client servicing and fund promotion. Ultimately, a fund promoter assumes a certain level of responsibility for the way in which its funds are sold and serviced. So too does the distributor. It is, therefore, solid business sense for promoter and distributor to centralise their business onto a single robust and efficient processing platform, where information flows seamlessly and accu-

rately between all of the relevant parties.” High Tech or no Tech? Change is permeating most corners of Europe’s capital markets, and the funds sector is no exception. While change to date has been slow, Logier feels that momentum is on the increase for STP in fund transactions. In the coming five years, he predicts STP levels of very close to 100 per cent across the main crossborder and domestic fund markets and, as a result, far less paper in circulation. He also predicts that the number of funds on offer will stabilise, as promoters consolidate the range of funds on offer. “This trend will accelerate as the asset-management sector continues to consolidate,” he says. “To this end, we would expect to service well over 35,000 funds on FundSettle by 2010. In the future, clients will be looking for value-added services, and not merely order-routing engines that must be plugged into separate settlement and custody service providers.” Streamlining operational flows from trade inception to the reporting of a settled transaction through a centralised, single-access point is clearly one of the obvious ways to modernise the European funds industry. Greater efficiency, lower costs, reduced risks and better information quality can all be achieved through STP technology. Service providers like Euroclear are intent on bringing the industry back from the brink of a paper crisis. Logier concludes: “Platforms like ours will help to transform the growing intricacies associated with cross-border and domestic fund-processing into mounds of paper confetti.”

Paperless Platform

INVESTOR SERVICES JOURNAL 81

STP and Automation

Strengthening the Weekest Link

Bruno Zutterling

control teams. From a financial point of view, evaluating the payback of an investment in this area should normally take into account the savings in every department and should not be considered as a standalone process. Fortunately for the entire securities industry, the business case of such automation is self-sustainable, with direct savings. One could also consider other financial benefits such as bonuses. Before entering the process of benefit evaluation, we have to keep in mind that both distributors and fund providers are facing a similar but reversed situation: distributors will of course benefit from the automation of order processing towards several fund providers, while fund promoters will benefit from similar improvements by automating orders coming from several distributors. Before proceeding with this analysis in the context of full STP order management in the fund distribution process, one can easily think that, by using faxes to send orders to a fund, a distributor is, directly and indirectly, penalising not only itself but the fund performance and the other shareholders too. Hence it could be understandable that fund promoters would want to link a trailer fees policy to the efficiency of systems implemented by the distributor for order and settlement processing. Debates Coming back to theme of this article, if it is now widely accepted that an automated process ensures greater efficiency, there are still debates concerning the solutions to be used in respect of expected benefits versus costs. For distributors, it is clear that they have to choose one of several solutions, from automated faxes to total externalisation. However, for fund promoters or their agent, the situation is slightly different, as they have to accommodate and sometimes suffer their customer’s choice. As there is no reason why several distribution networks in different countries apply the same means of automation, the promoter’s agent will have to cope with several systems and formats, increasing the global complexity of the problem. As the choice of automation mechanism is mainly in the distributor’s hands, it is important to identify which level of automation would best suit their requirements and, given the fact that several possibilities could be considered, it could be useful to isolate the advantages and costs of each possible solution for each player. By clarifying the advantages of each level of automation, we are then able to identify the best solution for each player. However, for a given level of automation, constraints and efficiencies will not be the same for distributors and providers and we have to take into account that an optimal solution for one side is not necessarily the best solution for the other side. The fax could be a partial solution for very small distributors such as independent financial advisers. However, this tool cannot be considered as an industry solution as it lacks important functionalities such as audit trails, volume management and non-repudiations. Furthermore, it is hard to imagine an industry that adopts the same fax template and operates in a fax-only environment. The means, which really enable market players to man-

While full automation in the securities industry may seem a long way off, service providers continue to build machines to make this goal possible. Bruno Zuttlerling of Clearstream explains how automation is within reach
When discussing the subject of automation in the securities industry, one should first consider the various processes involved across the full length of the value chain. Indeed, a partially automated system is like a chain with the strength equivalent of its weakest link. Today, owing to the intensive use of faxes for order processing, any fund distribution organisation has a weak link, which triggers inefficiency in every other area of the business. In fact, by streamlining operations from the front office to the middle and back offices, automated order processing not only brings direct savings generated from automating a manual process and reducing error rates, but also triggers further savings in downstream processes like the commercial management of distributors and fund providers, trailer fee reconciliation and settlement efficiency. Benefits Hence, from a company point of view, the decision to automate an order process should involve many departments within the distributor or the asset management company, from the commercial teams to the audit and

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STP and Automation

age volume and ensures basic traceability functionalities, is file transfer. But even this cannot be considered as an industry-wide solution because there is no real common standard or communication procedure. SWIFT Significant steps towards automation are made possible by SWIFT. This network is bringing real efficiency to the market by promoting standards and formats, enabling non-repudiation, compliance and audit functionalities and setting a certain common standard of communications. However, if this solution could be considered as an industry-wide solution for the most important financial institutions, it is obviously concentrated on very large players who are able to leverage the investment with functionalities in other areas, such as payments. These players are able to cope with regular improvements and are able to manage their own referential data. The use of a ‘hub’ provides a unique solution for every type of distributor and fund agent, enabling them to enjoy SWIFT functionalities with a level of flexibility and added services like referential data access. By providing easy access through webbased solutions, a hub enables access to the SWIFT network, as well as very sophisticated functionalities for every type of market participant. By providing these functionalities, a hub is able to improve the entire securities industry and is one of the most efficient solutions in respect of cost of implementation/benefits. Vestima+ To highlight the level of service that a hub can provide, consider the example of Vestima+, launched by Clearstream in January 2005. This new generation of funds platform is an “open hub”, enabling distributors to automate their order processing and to choose how they wish to settle and to safe keep shares. The range of possibilities in settlement and custody is significant and can cover everything from shares kept in the fund register i.e. without custody fees, to shares kept with the global custodian, and of course safekeeping with Clearstream or Euroclear Bank. This open hub is accessible through the SWIFT network, but could also be accessed from a public Internet web station for uploading orders and download the answers. Aside from the above functionalities, the hub provides access to referential data and commercially useful, daily reports. Last but not least, the platform provides minor functionalities such as the automated

enrichment of orders and the ability to restrict access to a specific range of funds. These functionalities help in the day-to-day running of an industry to which the Vestima+ open hub is dedicated. Through this service, STP and automation can finally begin to materialise across the industry.

Events

Events for securities industry professionals’ fact-finding and networking endeavours
March 1 2005, 1 day Spitalfields Advisors Securities Lending Forum London, UK Tel: +44 (0) 20 7392 4008 Web: www.securitieslendingforum.com March 7 2005, 2 days The Institute of Economic Affairs Retail Banking in Europe The Okura, Amsterdam Tel: +44 (0) 207 608 0541 Web: www.marketforce.eu.com March 9 2005, 1 day Securities Finance International Securities Finance & Hedge Fund Symposium Royal Banqueting House, London, UK Web: www.securitieslfinance.co.uk March 14-16 2005, 3 days PASLA/RMA Conference on Asian Securities Lending Seoul, South Korea Tel: +1 215 446 4035 Web: www.rmahq.org March 21 2005, one day ISITC ISITC 11th Annual Industry Forum and Vendor Show Boston, MA Tel: +1 703.823.1600 Web: www.isitc.org April 18 2005, 2 days IRC Conferences Alternative Investment Summit 2005 London, UK Tel: +44(0) 870 777 4144 Web: www.irc-conferences.com May 10-13 2005, 4 days ISLA/RMA Conference on International Securities Lending Athens, Greece Tel: +1 215 446 4035 Web: www.rmahq.org

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Events

May 11 2005, 3 days Marcus Evans Summits Pensions and Investments Summit in Switzerland, EPI 2005 Montreux, Switzerland Tel: +357 22 849302 Web: http://www.epi-summit.com/ June 8-9 2005, 2 days IMN Conferences Scandinavian Institutional Investors Summit Stockholm, Sweden Tel: +1-212-768-2800 Web: www.imn.org June 26-27 2005, 2 days IMN Conferences New Mexico Pension Fund Congress Santa Ana Pueblo, New Mexico Tel: +1-212-768-2800 Web: www.imn.org July 5 2005, 3 days ICBI

15th Annual Fund Forum International Venue TBA Tel: +44(0)1202 201182 Web: www.irc-conferences.com September 5 2005, 5 days SWIFT Sibos 2005 Copenhagen, Denmark Tel: +32 2 655 4228 Web: www.swift.com October 10 2005, 2 days IRC Hedge 2005 London, UK Tel: +44(0) 870 777 4144 Web: www.irc-conferences.com October 18-21 2005 RMA Conference on Securities Lending Boca Raton, Florida Tel: +1 215 446 4035 Web: www.rmahq.org

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Conference Digest - Securities Lending

Come Together

About 400 people attended the IMN Eleventh Annual Beneficial Owners’ Summit on Domestic and International Securities Lending & Repo in Phoenix, Arizona. The program included a special focus on fixed-income lending, the Securities and Exchange Commission and the Securities Lending Transparency Initiative, cash collateral reinvestment and risk management, and indemnification. According to Peter Adamczyk of AIG, the programme was of a very high quality. “The audience raised some interesting questions and there was a tremendous amount of interaction. There were several presentations, which I felt were particularly useful. One of them took place during the first session, the 'Agents and Principals' roundtable. During this session, the large custodial bank lenders spoke about the differences between their various securities lending Peter Adamczyk programmes. “I found this very illuminating, as I initially would have said there are very few differences among these programmes. But in fact, different firms highlighted those areas in which they felt they excelled. State Street, for example, emphasised their technology and their ability to quantify risk-adjusted performance. “Barclays Global Investors spoke about securities lending as an investment management discipline as opposed to the traditional view of it being an operational business, and so on. This last point was a recurring theme throughout the conference.”
Asset Owners A significant number of people in the audience at the Arizona conference represented the asset owner community. “This contrasts with industry conferences such as the Risk Management Association (RMA) conference in the US in October 2004, the RMA / International Securities Lending Association (ISLA) joint conference in Europe in May 2005 and the RMA / Pan-Asia Securities Lending Association (PASLA) conference in March 2005,” says Adamczyk. “These conferences are mostly attended by market practitioners, whereas the recent IMN conference had a large percentage of people who are customers of the practitioners, presenting a platform for a host of different questions.”

The securities lending industry faced a heat wave this February as participants assembled in Arizona.
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Conference Digest - Securities Lending

Competition The business cases for custody lending and third party lenders was hotly contested by both types of providers at the summit. Adamczyk explains: “One custodian mentioned that one third of their total lending programme globally involved assets for which they were not the custodian. “I think this is remarkable, as it highlights the fact that the lines between the various market participants are becoming thinner and thinner. “This makes it difficult to label lenders nowadays.”

aspects of the market with a group of people you would like to do business with.” Q&A Conference delegates were suitably impressed by the diversity of questions raised. McIntire participated in a roundtable discussion at the event and had the following to say: “The panel was moderated by Mark Faulkner (from Data Explorers), who is good at drawing up good questions and getting a lively discussion going. He was able to draw questions from the audience. “Usually, when asked if there are any questions from the audience nobody wants to raise their hand. But someone submitted a quesTred McIntire tion on a piece of paper, and this format seemed to encourage greater audience participation. “There were discussions about cash reinvestment as most of the business in the US is done versus cash. There were questions about the periods for which participants analysed their reinvestment returns. “Owing to the Fed-Rate hikes of this year there have been times when some of the cash reinvestment pools have under-performed and loans would be negative. “There were discussions about whether to analyse lending performance on a day-by-day, week-by-week, monthby-month or quarter-by-quarter basis. “One of the panelists said reinvestment should be considered over a longer period of time and not on individual days. There are always a lot of questions about risk and do the agent lenders share in the risk with the beneficial owners? Clearly that is the case because many lenders in the US offer indemnification against borrower default or they may share in losses of individual loans on a day-by-day basis. “There was a question about benchmarking where people spoke about various services that provide performance information. A panelist from Brown Brothers Harriman explained that one way to benchmark would be through multiple providers, that is, if the beneficial owner is large enough, by splitting portfolios among different lenders or by splitting an individual portfolio.” If the Arizona summit was anything to go by, the securities lending industry should entertain a host of key debates over the next year.

“One custodian mentioned that one third of their total lending programme globally involved assets for which they were not the custodian”
Attendees According to Adamczyk, about one-third of the Arizona conference attendees were market practitioners. “These practitioners included those who are lending or borrowing and who are actively supporting the trade. “Another 25 per cent are people from those firms, whose job it is to provide client and marketing support. The rest of the attendees were largely beneficial owners. This represents a growing trend among the asset owners in attendance at these conferences. “I would say that people are much more involved nowadays. One of the speakers commented that he had been in the industry for about 20 years and 15 years ago, he would sign a contract with an asset owner and never talk to them again. “Nowadays there is regular contact between client and service provider, including monthly and daily reporting. The process is much more hands on. It is fair to say that people who attend these conferences tend to be the larger firms, such as the New York State Teachers Retirement System, which has about $80 bn in lendable assets. Entities such as these clearly have the resources and the scale to be very hands on. I would think there are a lot more assetowners who follow securities lending much more closely than before.” Tred McIntire from Boston Global Advisors added that the participation of the beneficial owners was significantly high. “This conference is designed for beneficial owners. What made it good is that a lot of pension plans and mutual funds were in attendance. They make an effort to to attend the sessions. “There was also good participation from vendors, who saw the summit as an opportunity to promote their firms. It is an opportunity to share your knowledge of certain

INVESTOR SERVICES JOURNAL 87

14th ANNUAL CONFERENCE ON INTERNATIONAL SECURITIES LENDING
May 10-13, 2005 Athenaeum InterContinental Hotel Athens, Greece

x The joint U.S./European Securities Lending Conference sponsored the recognized industry associations. x Issues that influence lending markets in Europe and around the world Market Developments/Updates Regulatory and Technology Changes European Clearing and Settlement Issues Developing/Emerging Markets Keynote Addresses by: Spyros Capralos, Chairman, Athens Stock Exchange S.A. David Taylor, Author & European Business Speaker of the Year 2004 x This is the conference that identifies best market practices and sets global standards in international securities lending. Come and join your colleagues for these important updates and discussions!
For more information or to register visit RMA's website: http://www.rmahq.org/RMA/SecuritiesLending/ or contact Kim Gordon (215) 446-4021 E-mail: [email protected]

Conference Chairs Philip Reichardt Director Euroclear Timothy Douglas Managing Director Citigroup

Investment Management - Outsourcing

In, Out, Turn it all About?
Which factors will prompt further outsourcing among investment managers? Nii Tetteh of Barrington Partners investigates.
There has been significant publicity over the last couple of years about the next major trend to sweep investment managers. Nii Tetteh of Barrington Partners explains which factors prompt these managers to outsource. The outsourcing of broad areas of the middle and back office promises many benefits that allow investment managers to concentrate on their core competencies. In the US there have been a few sizeable ‘early adopters’ but no broad acceptance as of yet. However, Barrington Partners, a Boston based firm specialising in middle and back office consulting for fund and asset management companies, has recently seen an increased interest in reviewing technology and outsourcing options. Has anything changed?

range of tasks such as pricing, security master and corporate actions performed in the middle office and back office that are a duplication of effort, and liability outsourcing. Additionally, by shifting operational risks to the service provider, the investment manager can focus on core competencies and apply the technology budget to the front and back office. While maintaining or improving the quality of service to the investor, investment managers will also be able to provide access to global markets, support new products and higher volumes. Yet despite this, the investment community has been slow to embrace outsourcing. Reluctance Several factors have contributed to the reluctance of investment managers to outsource. First among these is a perceived or a real loss of control over service to clients and the front office, both in quality and customisation requirements. Additionally, outsourcing would remove many or most of the staff from the advisors office. The community has also not been comfortable with the relative inexperience of vendors, primarily custodians, within the middle office arena. Given the long-term implications of outsourcing, investment firms need greater assurances that the service provider they select will be a ‘survivor’.

“Given the long-term implications of outsourcing, investment firms need greater assurances that the service provider they select will be a ‘survivor’”
Many investment managers are not yet convinced that vendors have demonstrated they have a sustainable business model to support the long-term reinvestment needed to keep ahead of the technology curve. Technology What does interest most investment managers is upgrades in the level of technology supporting their business, and in some cases having another party take responsibility for making the necessary changes. Banks are aware of these technology issues and understanding the business. A number of banks have entered outsourcing deals in order to gain the staff, who understand the operational environment. Many of these banks have worked on their platform by either developing capabilities, partnering with outside software firms, or a combination of both. The successful implementation of several clients will validate the effectiveness of the vendor’s operating model and the viability of the underlying technology platform. Not only does this reflect the potential scalability and cost efficiency of the provider but it also demonstrates that the platform can support the investment management differentiators; accurate and comprehensive data for analytics/decision support, and flexible reporting to clients. Current activity would suggest that outsourcing of front and middle office functions in the US will be a slow process. However, based on the number of firms considering issues relating to technology and efficiencies outsourcing, this market will begin to grow more quickly.

Holy Grail? First, investment management outsourcing has rapidly become the ‘Holy Grail’ of custodial banks. They see the potential in outsourcing of the middle office functions for over 500 firms who manage $25 trillion in assets. If this market expands, it will provide long-term growth and profitability to the custodial bank community. About 10 custodial banks have committed the resources and capital required to support this market. The challenge for banks has been three-fold: First, any successful offering will have to be functionally relevant to the investment manager. Secondly, the technology platform of choice will need to demonstrate significant scalability and processing efficiencies that allow a service provider to pass along cost savings. Finally, custodians will have demonstrated that they have both the systems and personnel that understand the front and middle office environment, and not just the back office skills that they are known to possess. The increase in interest also suggests that investment firms are recognising the new business climate, in which they work; that many aspects of middle and back office operations are commodities and the key to success is focusing on distribution and performance. Attraction There are several aspects of outsourcing of the middle office that should attract advisors: volume efficiencies, a

INVESTOR SERVICES JOURNAL 89

Letters (continued)

letters continued from page 4 Missing the Boat (continued)
...But the Regulator proposes to go one step further and include reduction in yield (RIY) calculations alongside TERs in each prospectus. Not only are RIY calculations potentially misleading for investment funds due to their use of an assumed 6 per cent yield, but the method is only recognised in the UK and is predominantly used for life insurance products. Providing investors with two methods for calculating charges, which will result in different figures, can surely only add further confusion not simplicity. The intention of the Simplified Prospectus was to supply investors with a clear explanation of products and their costs, but the proposals coming out of the Regulator do nothing more than goldplate the EU directive and in doing so are moving the UK away from a European integrated financial market. Helen Stephenson, communications officer, Investment Management Association

a low cost, easy to implement, web based STP solution aimed at this manual market. It will automate investment managers’ trade allocations – an area which the brokers cite as their key pain point. With such solutions in the marketplace, STP will be more accessible to all fund managers, regardless of their size, and reduce risk and cost for the whole industry. Tony Freeman, director of Industry Relations, Omgeo EMEA

Outsourcing data aggregation and reporting functions to third party service providers would allow fund managers to focus on the business of investing while satisfying the transparency and risk control requirements of their institutional clients. Joan Kehoe, executive vice president & managing director, PFPC International

Perfect Price
Clearing and settlement for crossborder fund operations is still a fragmented market in the EU, resulting in inefficient and costly operations as well as increased operational risk. FEFSI, the European association of fund and asset managers, is acting as a catalyst for change in the area of fund processing in Europe. In November 2003, FEFSI instituted the Fund Processing Standardisation Group (FPSG) which is made up of representatives from major fund groups, distributors, fund order messaging firms, fund platforms, transfer agents and clearing and settlement operators. At its recent meeting on in December 2004, the FPSG completed the first phase of its current work program with the adoption of two papers: - A paper entitled “Standardization of Funds Processing in Europe”, which develops a number of recommendations. After being embraced by the industry, these recommendations will serve to increase efficiency in the area of fund order processing and settlement.

Fund Manager Solution
Institutional investors increasingly turn to hedge funds to generate absolute returns in an uncertain market. Most institutional assets are invested in funds of hedge funds (FOHFs),

Making Progress
I read the Reference Data Management Challenge Survey with interest (ISJ, Volume 4, Jan/Feb 2005) and was reassured to see that 80 per cent of firms interviewed have implemented a strategic approach to reference data. Statistics like this would lead one to believe that the securities industry is focussing strongly on improving operational efficiency and risk management.. But the reality is a world apart. There is still a large number of investment managers (mainly small to medium sized firms) who continue to process all of their trades by fax. They themselves do not always feel the pain of their manual processing, but for their brokers it can cause

“Increased disclosure need not create new layers of administration or distract hedge fund managers from their primary mission: generating alpha.”
which now account for about 40 per cent of hedge fund assets. Because of their due diligence responsibilities, pensions and other institutional investors require more transparency and risk control than most FOHFs have the capacity to provide. In order to satisfy those requirements, FOHFs may turn to third party service providers with the technology and expertise to quickly and accurately process high volumes of complex hedge fund information. Technology requirements would include the ability to capture position data and valuations from multiple sources and present it in a single, integrated format. While hedge fund managers are notoriously close-mouthed about their methods, a third-party service provider can help to establish relationships that protect the funds’ proprietary information while facilitating the process of data aggregation for reports to institutional investors. Increased disclosure need not create new layers of administration or distract hedge fund managers from their primary mission: generating alpha.

“There is still a large number of investment managers who continue to process all of their trades by fax”
serious headaches, with some receiving up to 43,000 faxes per month, any of which are easily lost, late or simply illegible. To remedy this, six leading brokers have collaborated with Omgeo to produce

“...one of the most fundamental problems facing the markets in all asset classes is the fact that electronic price feeds are not providing all the information necessary to perform a trade.”
- A paper entitled “A Pan-European Fund Processing Passport”, which proposes that fund management companies summarise, at class level, the essential information on their open-end investment funds in order to facilitating funds processing. The content of the passport has been drawn up from the viewpoint of all relevant professional players involved in the operational

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Letters (continued)

aspects of investment funds distribution: investor intermediaries, distributors, distribution platforms, fund management companies and their service providers (transfer agents/registrars, fund accounting agents, trustees, cus-

“the year 2005 will be remembered as the starting point for cross border fund processing in Europe.”
todians, portfolio managers). To contribute to a Europe-wide adoption of the proposed recommendations and, thus, a more efficient funds processing procedures in Europe, FEFSI member organisations were asked to endorse the two FPSG papers and to encourage the members of their association to implement the recommendations in due course. Thanks to the usage of ISO 20022 XML fund templates by major fund complexes, distributors and transfer agents and the implementation of the FEFSI FPSG recommendations, the year 2005 will be remembered as the starting point for common market practices for cross border fund processing in Europe. Rudolf Siebel, head of Market and Service, BVI

underpins Basle II. However, America has already indicated that only those banks, which are active internationally and which have a balance sheet of more than $ 250 bn will be required to comply. The fact that there will, as things stand, be a raft of major OECD banks that are not obliged to adopt the new rules, and another group (notably, the Europeans) who must comply, appears to contradict one of the two critical reasons for introducing common capital adequacy standards in the first place - the creation of an "even playing field". The opportunity for "regulatory arbitrage" for those who have a choice between complying with Basle II or sticking with the old methodology must surely be a competitive advantage bestowed, ironically, by a process designed to eliminate unfair competition. So, too, must be the ability to avoid sizable implementation costs. The obvious antidote would be for European Financial Regulators to take the same pragmatic approach adopted on the other side of the Atlantic, restoring equivalence and ensuring an even playing field. Patrick Butler, member of the Managing Board, Raiffeisen Zentralbank (RZB)

ity. Custodian banks and investment banks also have to accept their portion of the blame too, especially when it comes to time and money wasting industry initiatives. It is impossible to really get significant costs off the table when all concerned want to be made whole. The harsh truth lies in the mathematics. To return a higher proportion of people’s savings to them intact, you have to spend less money administering them and that means that there is a smaller pie to share between the organisations involved. Kevin Milne, senior vice president, SS&C Technologies

Revolution Now
We are fortunate enough to be part of the most exciting financial revolution of the last 20 years. The alternative investment has surpassed traditional Capital markets innovation by bringing new creativity. One may argue that alternative investment is a new asset class; others may argue it is a new philosophy on investment. But the net result is that the growth rate of this new industry as well as the pace of innovation is unique in recent financial history. But do investors understand where they are investing? Regulators are trying, aggressively, to impose some control procedures but investors do not seem to care. But should they? The actual issue is not coming from a choice of performance or even a risk adjusted performance as most investors are sophisticated and capable to measure their appetite for risk. The actual issue is coming from a very basic starting point which is about the valuation of their investment. Most of the alternative investment vehicles are now using complex financial instruments to manage their portfolios. None of these are valued on an intuitive basis and very few investors have an absolute certainty of the valuation of their investment. The expertise required to actually value these instruments is mathematically challenging and market data are rare and complex, most often requiring row data reengineering. The most amazing challenge in this rapidly growing industry is coming from the most basic concept of investment: value. It is a challenge that this revolution will have to handle quickly. Christophe Reech, president, SunGard Reech

Sharing Blame
I read the letter from Mark Austin from JP Morgan in the Jan/Feb 2005 edition of ISJ with great interest. I can only applaud and echo his sentiments. Too often over the last few years, well meaning industry

Counterproductive?
Standardised capital adequacy rules were first introduced in the late 1980s (Basle I) for two reasons: to strengthen the financial system and to create an even playing field between competing banks. To quote the introduction to the July 1988 text of the Basle capital accord: "Two fundamental objectives lie at the heart of the Committee's work on regulatory convergence. These are, firstly, that the new framework should serve to strengthen the soundness and stability of the international banking system; and, secondly, that the framework should be fair and have a high degree of consistency in its application to banks in different countries with a view to diminishing an existing source of competitive inequality among international banks." The same rationale, presumably,

“It is impossible to really get significant costs off the table when all concerned want to be made whole.”
initiatives have been turned into exercises of self-preservation, with Taurus and the GSTPA being most notable and ultimately expensive. The ultimate end user of the investment industry is, by definition, the investor and in a significant proportion of cases it is the individual pension fund holder or savings plan participant who pays the price for the inefficiencies we all know exist. However, it is also fair to point out that the fund managers, while being far from blameless, cannot take all the responsibil-

INVESTOR SERVICES JOURNAL 91

People Moves

Moving & Shaking
A selection of the appointments updated daily at
WWW.ISJFORUM.COM
Steve Bernstein, managing director and global head of securities services at Citigroup Global Transaction Services has decided to leave Citigroup to focus more time on his many charitable interests, his music magazine, Relix, and other media properties. Bernstein first arrived at Salomon Brothers in 1980 as a summer intern, and secured an offer to join Salomon post-graduation. For the past two years, he has been the global head of Securities Services and was instrumental in leading Securities Services to record revenue levels. Prior to joining Global Transaction Services, Bernstein was the global head of Business Continuity for Citigroup and also served as Chief of Staff to Michael Carpenter when he was chairman and chief executive officer of Salomon Smith Barney. Paul Bodart, executive vice president of The Bank of New York, has been appointed to the board of Euroclear plc and Euroclear SA/NV. Chris Tupker, Euroclear’s chairman, said: “We welcome Paul Paul Bodart Bodart to our Board and look forward to benefiting

from his broad experience as we execute our major projects of consolidating our technology platforms and harmonising market rules and practices. The Bank of New York is a very important client of Euroclear, and its continued representation on our Board is a demonstration of user governance at work.” Paul Bodart is responsible for The Bank of New York’s Brussels Operations Centre, the Bank’s global custody hub in Europe. Before joining the Bank in 1996 as part of the Bank’s acquisition of JP Morgan’s custody business, Bodart had worked for JP Morgan for ten years, first in Brussels and then in New York. Tom Swayne, currently executive vice president and head of the JPMorgan Investor Services business, has decided to retire after nearly three decades of service at the firm. As the senior executive for JPMorgan Investor Services since 1999, Tom Swayne has grown the business into one of the largest global providers of custody and investor solutions with strong client and product leadership positions. Mike Clark, head of JPMorgan’s Institutional Trust Services business, will assume leadership of the Investor Services business, in addition to maintaining his current role. Tom Swayne and Mike Clark will work closely together to ensure a smooth transition. In his expanded role, Mike Clark will continue to report to Heidi Miller, Chief Executive Officer. Euroclear Nederland has appointed Guy Schuermans as Chief Executive Officer and General Manager of Euroclear Nederland, and Chairman of its management team. Peter Sneyers, who is currently fulfilling these roles, will transfer to Euroclear Bank in Brussels to head up the firm’s Corporate Actions and Tax service area. Schuermans began his Euroclear career in 1986 and has held progressively senior positions in financial, marketing, client service and human resources. In 1996 he became a member of the

Euroclear management team and in 2001 was appointed Managing Director. Joe Barra has joined ADP Clearing & Outsourcing Services, as president and will be directly responsible for all clearing operations and service delivery. Barra brings more than 20 years of experience working in the brokerage industry, serving in various capaciJoe Barra ties. Prior to joining ADP, Barra was instrumental in establishing National Investor Services Corp (NISC) as TD Waterhouse's affiliate clearing broker/dealer, and served as its President and Chief Executive Officer. He also continued to take on increasing responsibilities within TD Waterhouse that included building its Capital Markets group and overseeing its nationwide Call Centers and Investment Centers. Stewart Adams has been appointed by ABN AMRO Mellon to bolster its sales force in the UK and Ireland. Adams joins ABN AMRO Mellon from State Street, where he was head of Scotland, UK Sales and Marketing. Reporting to Peter Adams, Head of Sales, Adams will split his time between offices in Edinburgh and London. His appointment will strengthen ABN AMRO Mellon’s sales approach and will enhance their exposure to asset managers, trustees and pension funds across the UK and Ireland. Adams will leverage more than a decade of experience in the financial sector to carry out his new role. SimCorp has appointed Ian Crompton as managing director of SimCorp Limited in the UK. He replaces Kjell Nordgard, who has returned to SimCorp’s head office in Denmark after five years in the UK office. Crompton

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People Moves

joined SimCorp in April 2003 as sales director. Previous positions held include regional sales director at Eagle Investment Systems and sales manager at Primark Investment Management Services, now part of Linedata. He also has support and client relations experience in over 15 years in the UK investment management software industry. Elizabeth Gee has been promoted to sales director. Gee joined SimCorp in May 2004 after a sales career at DST International. Stephen M. Wynne has been given the role of directing strategic and operational development for PFPC's global organisation. He will report to Timothy G. Shack, chairman and chief executive officer of PFPC. Wynne has been with PFPC for over 25 years, serving in a number of capacities, most recently as executive vice presiStephen Wynne dent and chief operating officer of PFPC Worldwide Inc. In that role, he oversaw the management of the client advocacy office and directed securities services provided by PFPC including fund accounting and administration, custody and global alternative investment services. Additionally, Wynne was responsible for the sales division. Current Vienna Stock Exchange board member Erich Obersteiner has been appointed director of the newly established "Equity Capital Markets CEE" departErich Obersteiner ment at Raiffeisen Centrobank AG effective as

of April 1, 2005. Obersteiner will be reporting directly to the Board of Management. "We perceive significant potential for IPOs and capital increases in the CEE region", explains Gerhard Grund, Board member of Raiffeisen Centrobank with responsibility for equity finance, "and in Erich Obersteiner, we are pleased to have found an expert with many years' experience in the capital markets and excellent contacts in central and eastern Europe for our newly established department."

within North America. Thoma has 10 years experience in securities and corporate actions processing. Previously, Thoma was the Corporate Action Reorganization Manager at Fifth Third Bank, where he was responsible for all aspects of corporate actions processing. Prior to Fifth Third Bank, Thoma was a Corporate Action Specialist at Bank One Trust with various responsibilities for both mandatory and voluntary corporate actions.

MFS International has appointed Anne Healy as director of Relationship Management and Marketing. Her The Alternative Investment appointment reinforces MFS’s commitManagement Association (AIMA), the ment to the role of client relationship global hedge fund and alternative management. investment industry association, has MFS opened for announced the election of its Council institutional busifor the term to September 2006. The ness five years Council has unanimously re-elected its ago. Healy joins chairman and deputy chairman for the MFS with over 17 next two years: Chairman Christopher years experience Fawcett (second term as Chairman); in the City and Deputy Chairman Dermot Butler (third has performed a term as Deputy Chairman); Clayton variety of roles in Heijman, Fortis Prime Fund Solutions asset manageand Paul Smith of HSBC Institutional Anne Healy Trust Services continue to act as global ment. Most recently she was at Schroders where, for advisors to the Council; Florence Lombard, Executive Director of AIMA, is the last eight years, she had a lead role in business development and client relaa Permanent Member of the Council. tionship management, specifically tarGeneral Counsel is Iain Cullen of geting UK pension funds in both the Simmons & Simmons. Company Secretary is Mary Richardson, Associate corporate and public sectors. Director – Regulatory and Legal. DST International (DSTi), the busiXcitekSolutionsPlus, the global provider ness solutions provider for the investment management industry, is of corporate actions automation, has appointed Steve Thoma as senior client expanding its North American sales team. Alex Britnell joins DSTi as administrator director of sales, where he will focus within the client on global enterprise sales. Britnell services team in the Birmingham, comes from SS&C Technologies Inc, where he was a senior sales executive. Alabama office. Pamela Pecs Cytron, DSTi’s executive Thoma will have responsibility for vice president of North American, providing produc- said: “We continue to experience tion support and tremendous success in North America and the ability to enhance our implementation of the XSP™ soft- client’s experience with additional Steve Thoma components is high.” ware application

INVESTOR SERVICES JOURNAL 93

ISJ Directory of Services Custody, Clearing & Settlement
BHF-BANK is one of the leading German commercial banks which operates as an advisory, service and commercial bank on the areas of Asset Management & Financial Services, Financial Markets & Corporates and Private Banking. Financial Services comprises the bank’s custody services, investment company (depotbank) services and its securities and derivatives clearing business. Through the combination of its local market know-how with an in-depth product expertise it aims to serve its clients in an individual and flexible way. The bank’s longstanding experience in the German securities services market goes hand in hand with a corporate culture that values prompt acknowledgements and short decision-making channels. Assets under Custody: EUR 160 bn No of funds: 244 Crédit Agricole Investor Services is the Securities and Financial Services arm of the Crédit Agricole Group, providing a whole range of products and services to institutional clients including Depositary/Custody/Trustee, Fund Administration, and Corporate Trust. Innovation, technology, local expertise and strong commitment to clients enable our European network to be a leading player in the European industry and to excel in servicing Institutional Investors, Banks and Corporate clients. Our position in the market place is reinforced by a strong local presence, particularly demonstrated by the specialised subsidiaries, set up in Paris, Luxembourg and Dublin. The Group also operates a European network of fund administration centres, the Fastnet network, with local operations in Luxembourg, France, Ireland, the Netherlands and Belgium. The Fastnet network is a joint venture with the Fortis Group. Assets under Custody: EUR 616 bn

T: +49 69 718 3738 F: +49 69 718 6050 Contact: Cornelia Keth E: [email protected] Address: Strahlenbergerstraße 45; 63067 Offenbach a.Main W: www.bhf-bank.com

T: + 33 1 43 23 84 68 Contact: Patrick Lemuet (Paris) T: + 352 47 67 24 13 Contact: José-Benjamin Longrée (Luxembourg)

DnB NOR is the largest and leading provider of Custody, Clearing and Remote Member Service in Norway In addition, DnB NOR provides a wide range of value added services to both Foreign and Domestic clients. Through an Alliance solution with banks in Sweden, Finland and Denmark, DnB NOR can offer seamless regional products, which can be customized to our indiviual client's needs.

T: +47 22 94 92 95 F: +47 22 48 28 46 Contact: Bente I. Hoem E: [email protected] W: www.dnbnor.com

Nordea is one of the leading financial services group in the Nordic and Baltic Sea region and operates through three business areas: Retail Banking, Corporate and Institutional Banking and Asset Management & Life. The largest financial services group in the region with approximately EUR 262 billion in total assets. A worldleading Internet banking and e-commerce operation with 3.8 million customers. Assets under Custody: EUR 360 bn

T: +47 22 48 4544 Contact: Ms. Oda M. Myklebust Head of Client Relations E: [email protected] W: www.nordea.com

RBC Global Services is the corporate and institutional custody arm of RBC Financial Group. We are the largest global custodian in Canada and among the 10 largest in the world. We have been serving institutional investors for more than 100 years, including 22 years in the global custody business. RBC Global Services, along with RBC Global Private Banking, provides a broad range of value-added services and tailored solutions to institutional investors internationally. RBC provides the full range of fund administration and global custody services. Assets under Administration: US$1.3 trillion Number of sub-custodians: 78

T: +44 (0) 20 7653 4095 F: +44 (0) 20 7248 3946 Contact: Tony Johnson Global Head, Sales & Relationship Management E: [email protected] Address: 71 Queen Victoria Street, London, EC4V 4DE, UK

As a leading supplier of custody services in the Nordic region, SEB Securities Services expertise in dealing with securities, complex information flows, transactions and payments efficiently and accurately is crucial to your own business methods and to your ability to make wise investment decisions. A blend of personal service, advanced communication solutions and IT systems means that SEB can provide you with the assistance you need in order to deal with your securities in the most logical manner. Assets under Custody: US$ 200 bn

T: +46 8 763 5770 F: +46 8 763 6930 Contact: Goran Fors E: [email protected] W: www.seb.se

94 INVESTOR SERVICES JOURNAL

T: +33 1 53 05 45 09 Contact: Mathieu Maurier, Vincent Ginet E:[email protected], [email protected] W: www.sggssi.com

SG GSSI offers a complete range of value added securities services for all institutional investors: clearing, custody and trustee, fund administration, transfer agent and registrar services. Societe Generale ranks 4th securities custodian in Europe and 10th worldwide with USD 1,350 billion in assets held. SG GSSI provides custody & trustee services to 2,300 funds and its subsidiary Euro-VL provides valuations for over 3,300 funds representing assets of USD 300 bn. The quality of these services is acclaimed by the world’s leading agencies: - Trustee and custody – Paris: Aa2 (MQ) (Moody’s) - Global custody – Paris: aa (Fitch Ratings), Trustee Paris: aa+ (Fitch Ratings).

Fund Administration
Crédit Agricole Investor Services is the Securities Services arm of the Crédit Agricole Group, servicing Institutional Investors and Corporate Clients. CAIS provides a full range of services including Product Structuring, Accounting, Portfolio Valuation, NAV Calculation, Third Party Distribution Platform and Shareholders T: + 33 1 43 23 84 68 Services, Corporate Trust and Employee Saving Schemes, Capital Markets Contact: Patrick Lemuet (Paris) Services, Private Equity, as well as Communication and On-Line Transaction Tools. Specialising in the provision of the above services, CAIS is well known for T: + 352 47 67 24 13 its expertise in asset and liability allocation and globalisation techniques such as Contact: José-Benjamin multi-manager and multi-class structures, Funds of Funds, Pooling, Master Longrée (Luxembourg) Feeder and Cloning. Some of the above services are outsourced to the Fastnet network, a partnership with the Fortis group. The Fastnet network, operated by Crédit Agricole Investor Services, is present in France, Luxembourg, Ireland, Belgium and The Netherlands. Assets under Administration: EUR 446 bn

T: +1 (441) 295-1111 Contact: Andrew Collins E: [email protected] W: www.bntb.bm

Butterfield Fund Services (Bahamas) Limited boasts a team of experienced professionals dedicated exclusively to serving investment managers. Fund administration is Butterfield Fund Services’ sole business, allowing us to demonstrate our commitment to fund administration.

T: +1 732.563.0030 Derivatives Portfolio Management provides onshore and offshore alternative asset fund administration, back and middle office outsourcing, portfolio valuation, daily NAVs, risk F: +1 732.563.1193 administration and portfolio transparency solutions for fund managers, asset allocators, Contact: Lisa Cohen Address: Two Worlds Fair Drive, institutional investors and proprietary traders. DPM’s services are designed to solve complex administrative needs and improve operational efficiency. DPM has the systems, Somerset, New Jersey, infrastructure and experience to handle your toughest administrative challenges. DPM NJ08873, USA has a world-wide staff of 200 employees. DPM’s HQ is in Somerset, New Jersey with W: www.dpmllc.com
offices in London, the Bahamas, and the Cayman Islands.

T: +33 1 53 05 45 09 Contact: Mathieu Maurier, Vincent Ginet E: [email protected] [email protected] W: www.sggssi.com

SG GSSI offers a complete range of value added securities services for all institutional investors: clearing, custody and trustee, fund administration, transfer agent and registrar services. Societe Generale ranks 4th securities custodian in Europe and 10th worldwide with USD 1,350 billion in assets held. SG GSSI provides custody & trustee services to 2,300 funds and its subsidiary Euro-VL provides valuations for over 3,300 funds representing assets of USD 300 bn. The quality of these services is acclaimed by the world’s leading agencies: - Trustee and custody – Paris: Aa2 (MQ) (Moody’s) - Global custody – Paris: aa (Fitch Ratings), Trustee Paris: aa+ (Fitch Ratings).

Jean-Paul Gennari,Luxembourg T: +352-44-1010 6503 Markus Steiner, Switzerland T: +41-61-289 04 92 Mike Marsh, UK T: +44-20-7901 5229 W: www.ubs.com/fundservices

UBS Fund Services offers comprehensive fund administration services including fund set-up, registration and support around the world (currently 28 countries), fund accounting, NAV calculation, compliance management, risk control and reporting. We provide a flexible offering from the full range of services, including Private Labelling, to selected functions. Services are based on leading fund administration architecture, multi-source pricing and powerful compliance tools. Our capabilities also extend to services for hedge funds through our teams in Cayman and Ireland. In times when management attention is increasingly focused on value creation, it may be rewarding to re-evaluate whether asset administration remains a strategic core business to you.

INVESTOR SERVICES JOURNAL 95

ISJ Directory of Services Securities Lending
eSecLending is a global securities lending manager servicing large institutional lenders, including pension funds, mutual funds, insurance companies and investment managers. eSecLending's model is based on the premise that exclusive principal relationships generally offer greater value and significantly higher returns to a lender than traditional custodial or third-party agency lending programs. The firm, which has auctioned over $450 billion since inception, awards principal business through an auction process to ensure greater competition and price transparency. eSecLending is majority-owned by Old Mutual plc and maintains offices in Boston, London and Burlington, Vermont.

T: US- +1 617 204 4500 T: UK- +44 (0)207 002 7600 Contact: Dan Ahern E: [email protected] W: www.eseclending.com Addresses: 175 Federal Street, 11th FL, Boston, MA 02110, US Old Mutual Place, 2 Lambeth Hill, London EC4V 4GG, UK

IFBS offers the financial industry a wide range of consulting services as well as individual and standard software solutions. The firm supports clients along the entire security value chain - from business modelling to change management processes. IFBS’s IT solutions range from FINACE®, a Securities Finance and Collateral Management Platform, to the development of tailor-made IT applications.

T: +41 (0)44 218 14 14 F: +41 (0)44 218 14 18 E: [email protected] Address: IFBS AG, Buckhauserstrasse 11, CH-8048 Zurich, Switzerland W: www.ifbs.com

Technology
ADP Brokerage Services Group is an industry leading outsourcing vendor for global transaction processing systems, desktop productivity applications and investor communication services to banks and brokerages worldwide. -Proxy Edge – comprehensive solution for institutional global proxy voting management. -Gloss – leading international STP system which automates the trade processing lifecycle from trade capture through confirmation, clearing agency reporting and settlement. -Tarot - a UK retail and private client stockbroking, custody and fund management solution. -Securities Data Management – outsourced data services for securities operations. Data Solutions You Can Bank On Asset Control's Total Data Management offers seamlessly compatible in-house software and out-sourced services. Asset Control solutions manage prices, reference data, risk factors, credit risk data, corporate actions and research data. The solutions support market risk, Basel II, portfolio management, trading and enterprise-wide operational coherency. Asset Control is the only firm in its class offering turnkey solutions with guaranteed delivery dates. These ready-to-work solutions eliminate development time and risk. As a future-proof technology investment, Asset Control has been certified by a unique track record of long-standing customer implementations in leading financial firms around the world.

T: +44 (0) 207 551 3000 E: [email protected] W: www.bsg.adp.com Address: The ISIS Building, 193 Marsh Wall, London, E14 9SG, UK

T: +44 (0)20 7464 8407 / +1 212 445 1076 F: +44 (0)20 7464 8746 / +1 212 265 6402 Contacts: Pascal Guignabaudet (EU), Belinda Hamer (US) Address: 60 Lombard Street, London, EC3V 9EA, UK E: [email protected] [email protected] W: www.asset-control.com

FUNDsoft: With offices in London, Glasgow, Jersey and Luxembourg; FUNDsoft provides one of the most technically advanced Fund Administration platforms available. The COBAS range of solutions are designed exclusively for Fund and Investment Managers, BPO providers and TPA’s. Various acquisition models are offered covering the following areas; European Unit Trusts; Offshore Funds; PEP, ISA, OEIC & SIPP's; Pooled Pensions; Property Funds; Fund of Funds; Multi Manager Funds; Wrappers; Fiduciary portal; Funds Automation; Funds Supermarkets; Reporting ; Hedge Funds; Investment Trusts.

For more information visit www.fundsoft.co.uk or call T: 08702000443 F: 020 7959 3030 Mob: 07980912649 Contacts: Mark Culham, Address: 288 Bishopsgate, London, EC2M 4QP E: [email protected] W: www.fundsoft.co.uk

SimCorp Dimension is a powerful, comprehensive and truly seamless investment management system. It can handle NAV and other calculations, with complete related accounting, for a huge variety of fund structures and product types, including regional specialities. Support for broader functions, such as performance attribution and risk management, are particular strengths of the system.

T: +44 (0) 20 7651 8800 F: +44 (0) 20 7651 8811 Contact: Ian Crompton, sales director, SimCorp Dimension E: [email protected] Address: SimCorp, 10 Walbrook, SimCorp Dimension has been designed from scratch as a total straight through pro- London EC4N 8DQ cessing system, handling all aspects of the investment management process, consis- W: www.simcorp.com tently. Data is recorded into a single database so that reporting is made easy, there is no reconciliation of data and no duplication of procedures.

96 INVESTOR SERVICES JOURNAL

GLOBAL ORGANISERS OF INSTITUTIONAL FINANCE & INVESTMENT CONFERENCES

THE FIFTH ANNUAL

SCANDINAVIAN INSTITUTIONAL INVESTOR'S SUMMIT
LAST YEARS SPONSORS
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JUNE 8-9 2005 THE GRAND HOTEL • STOCKHOLM
An excellent educational and networking opportunity, this event has grown to become the largest of its kind, tailored specifically for the Nordic region's institutional investor. The programme aims to offer its delegates the opportunity to learn from experts in the financial management industry, including fellow investors, advisory groups and many of the world's most innovative fund management professionals. Details of last years event can be found on the following link:

DTZ A.G. BISSET CITIGROUP DANSKE CAPITAL DIMENSIONAL FUND ADVISORS INC. FTSE GROUP GABELLI ASSET MANAGEMENT JPMORGAN KEMPEN CAPITAL MANAGEMENT MORGAN STANLEY PUTNAM INVESTMENTS SAM GROUP SEI INVESTMENTS STANDARD & POOR'S STOXX LIMITED

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