Top Five IT Spends for 2012: Readers Poll
It's that time of year again. Financial firms are closing out their books for 2011 and figuring out just what they will be spending and for what, in 2012. That is if they haven't done so already.
Budgets may be tight, but that doesn't mean firms are oblivious to the need to comply with regulators and savvier investors who want to know a lot more about their transactions, counterparties and risk exposures.
Here are the top five categories where financial firms on both sides of the Atlantic say they will spend their dollars, British pounds or euros in 2012. The categories are based on a telephone survey of 100 senior-ranking operations, IT, and consulting executives representing a cross section of fund management, broker-dealers, banks, financial software providers and research firms who read ISS' online edition.
Swaps trading and central clearing: The Dodd-Frank Wall Street Reform Act and its European counterpart EMIR will require that transactions in standardized swap contracts be executed on electronic trading platforms and cleared through central clearinghouses before they are reported to trade repositories. "Some firms might likely sit on the sidelines waiting for final regulations to be implemented while others are quickly gearing up," says Gert Raeves, director of research for TowerGroup in London. The greatest technology spend will likely be on either building or licensing software packages to connect to clearing brokers, clearinghouses and trade repositories. Next in line: automated collateral management and third-party valuation services. Firms will need to keep tabs on where their collateral is located; how much they will need and when. To do so they will need to accurately value their contracts and will no longer be able to rely solely on their own trading desks as regulators seek to ensure "independent" pricing.
Data Management: After decades of thinking of data as a four-letter word, the financial services industry is finally waking up to the fact it needs to keep accurate information about the securities or contracts they trade, with whom and when if they want to get a grasp on their enterprisewide risk and make better investment decisions. Large fund managers and broker-dealers who responded to ISS' telephone survey say they are most concerned about how they will manage "big data" -- large unstructured datasets which include real-time prices, market news and just about anything which appears on the Internet. "Firms executing quantitative strategies need to analyze large amounts of both historical and real time data quickly," explains Louis Louvas, director of solutions at OneMarketData, a New York-based provider of tick data management and analytics. The firm says that its integrated complex event processing engine and database allow firms to write a single code that will crunch and analyze the necessary data to provide real-time buy and sell signals. Other well-known database providers such as IBM, Oracle, Sybase and Teradata also providing data analytic capabilities.
Risk Management: Topping the list of concerns for broker-dealers is complying with regulatory bans on naked access, financial firms are now quick to revamp their electronic trading platforms to ensure they can perform pre-trade checks on orders without adding to latency. Bank of America Merrill Lynch, Morgan Stanley, Deutsche Bank and Lime Brokerage say they have implemented ultra-low latency market access and risk-control platforms which will reduce the time it takes for them to microseconds. Research firm Aite Group estimates that U.S. spending on pre-trade risk management software will reach $109 million by 2013 from an estimated $83 million in 2011. Fund managers interviewed by ISS say they will also be investing in complex event processing engines to understanding on-demand the ramifications of making a trade and how market conditions have affected their portfolios so changes can quickly be made.
Cloud Computing: Financial firms have been talking about "the cloud" as a way of reducing costs for quite some time, but most of their initiatives have rested with using "private clouds" inside of their own data centers. IT executives at some of the world's largest banks interviewed by ISS say they have seen major cost savings from moving some mission critical applications such as trading, portfolio and risk management to the private cloud but remain skeptical of "public clouds" such as those offered by Amazon, Google and Microsoft. As concerns over security with public clouds reduces firms will likely move their administrative, human resource and non-critical applications to public clouds.
Corporate Actions: U.S. fund managers and custodian banks contacted by ISS cited automating the corporate actions workflow process as the top initiative for 2012. Rather than communicating entirely through either faxes or emails, custodian banks have quickly embraced using standard message types endorsed by the International Organization for Standardization to communicate to fund managers information on dividends, income payments and corporate reorganizations while fund managers are relying on those same message types to confirm their understanding of the information and make any necessary decisions. Those same fund managers tell ISS that they are also investing in the necessary software from firms such as Smartstream, Simcorp and XSP to not only ensure the information is accurate but also distribute it to front, middle and back offices concurrently and keep track of any required decisions. The Society for Worldwide Interbank Financial Telecommunications, whose network transports ISO-accredited messages has teamed up with XBRL US, the US arm of XBRL International and the U.S. Depository Trust and Clearing Corp., to push U.S. corporations to tag their notifications of corporate actions in XBRL formats so financial firms don't accidentally misinterpret the information when they translate it into ISO-compliant messages. DTCC, the umbrella organization for clearing and settling U.S. transactions, has created its own version of the ISO-compliant messages to send out corporate action notifications to its member firms and will eliminate using proprietary message formats by 2015.
For financial firms concerned about how they will come up with the necessary IT budgets during a financial crisis, Raeves does offer one piece of advise: rationalize. "Firms need to evaluate whether they need multiple front middle and back office systems for each product line, business unit or region or can leverage a handful of such platforms," he says. "They should also consider whether handling their own financial messaging, settlements or reference data work is necessary. For some firms the value of doing so is debatable and outsourcing completely or relying on a hosted platform are feasible alternatives."
Raeves says that the rationalization process should also apply to managing data required to comply with regulatory iinitiatives. "Firms shouldn't think in terms of how they will deploy their staff and technology to meet one set of rules but multiple rules. Regulations such as the Dodd-Frank Wall Street Reform Act, EMIR, UCITS IV, Solvency II and Basel III all have a common theme. They will require firms to aggregate large sets of data from internal front-middle and back office applications as well as external sources to correctly measure and report risk." It would be a lot simpler if they figured out common data elements and implemented common platforms to capture, cleanse and store that data with the necessary audit trails.
Written by Chris Kentouris, Editor-in-chief (Chris can be reached at Chris.Kentouris@hotmail.com)
