Checklist. There s a lot on the financial services agenda. Time to get organised... OCTOBER

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1 OCTOBER 2012 Checklist There s a lot on the financial services agenda. Time to get organised... Coping with complexity Cathy Bessant, global technology & operations executive, Bank of America Rise of the ASEAN Empire A new phase in the development of Asia Pacific markets has begun The Emperor s New Social Media Site? Can social media tools be used for more than just marketing? Sibos 2012 Something old, something new...

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3 Contents OctOber 2012 In this issue 4 news 7 Banking technology Awards shortlists 8 World Payment Report regulation can lead to improved services and competition 11 Heather McKenzie on payments 12 DtCC corporate actions programme moves on 13 nasdaq omx embraces the cloud with Amazon Web services 14 Frausters turn to old ways 15 Apple hasn t joined in, but nfc is on a roll 17 european Banking Union starts next year 18 otc turmoil for buy-side 19 Cloud levels playing field for firms 20 Pure and easy: IBM s stripped-down server offerings Cover Focus 22 the Industry to-do List If you have a lot on your plate, make a list. In the run up to Sibos, Banking Technology tries to pin down an agenda for the industry Markets & Investments 26 Rise of the AseAn empire connectivity linking members of the ASeAN states has created a new market. technology 30 the emperor s new social Media site can social media techniques and platforms be used for anything more than advertising and marketing? Yes, with some surprising results. 36 show Preview 32 sibos: what s new? Many of the must-see sessions and announcements this year are from Swift. Interviews 36 Coping with complexity cathy bessant, global technology & operations executive at bank of America, talks about technology in financial services 39 talking tape robert barnes, chief executive of UbS MtF, calls for a mandated from regulators for a consolidated tape of post-trade data 32 Regulars 40 Appointments 43 Diary Dates 47 Comments 52 out of office outside back cover Regtech the second edition of the Banking Technology/ JWG collaboration on the technology impact of regulatory compliance looks at reporting data and sees a big opportunity for european authorities to take a lead. 13 I 1

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5 editorial COMMeNT OctOber 2012 editor David Bannister, Senior Staff Writer Elliott Holley, Regular Contributors Dan Barnes, Sherree DeCovny, Alison Ebbage, Tom Groenfeldt, Eugene Grygo, Graham Jarvis, Heather McKenzie, Nicholas Pratt, Kristina West Production Kosh Naran Press Releases Send relevant releases to Publisher Tim Banham, Sales Manager Sadie Jones, Marketing, Circulation and Reprints Sophie Burdajewicz, Subscriptions and Renewals Subscription enquiries: Customer Service Dept, Informa UK Ltd, Sheepen Place, Colchester, CO3 3LP. Tel: +44 (0) , Fax: +44 (0) , Annual Subscription: UK 690, Europe 860, US/ rest of world $1, Banking Technology All rights reserved; no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electrical, mechanical, photocopying, recording, or otherwise without the prior written permission of the publisher. Banking Technology is published 10 times a year by Informa Business Information, a trading division of Informa UK Ltd, Mortimer Street, London, W1T 3JH, UK. Printer: Wyndeham Grange, Southwick, UK. Member of the Audit Bureau of Circulation Average net circulation for the period 1st July 2010 to 30th June ,171 Moving on We take for our text on this occasion the works of the American film actor Bill Murray. In particular, the films Groundhog Day and Lost in Translation. In the first, a tv weatherman finds himself in a time loop, constantly covering the same event, which he initially cynically manipulates for his own advantage. In the second, a celebrity travels to Japan for the filming of a commercial. the film, according to Wikipedia, explores themes of loneliness, alienation, insomnia, existential ennui and culture shock against the backdrop of a modern Japanese city. (According to the Guardian, on the other hand, it is self-pitying drivel.) Why should these two films should be in my mind as we put together the Banking Technology and Daily News at Sibos issues for this year s Sibos in Osaka? tough question, eh? For Lost in Translation, the answer is relatively easy: since it was known that Sibos was going to be in Osaka, people have asked me if I ve been to Japan, and press for information once they discover that I have. Invariably, I tell them that watching the opening scene, in which Murray observes tokyo from the back-seat of a cab, I felt that someone had stolen my memories and put them on the screen alienation, insomnia and self-pitying drivel? Few of my friends would quibble or demur. Groundhog Day is another matter. In once sense, it s obvious: covering the same things repeatedly can dull the senses and become frustrating. How do you do the same thing differently time after time? best not to try, perhaps, which is why you won t see a photo of the latest Swift boss as the main photo on the cover of this issue just because it s the Sibos issue. Inevitably, however, the past few months have been filled with interviews, interview requests, meetings and phone conversations* about Sibos, and inevitably, some I ve had some thoughts, Less inevitably, they have surprised me, because I m not quite sure how to put this I find that I am approaching this Sibos with a strange sense of optimism about the state of the financial services industry and its future. Strange, because pretty much every indicator there is suggests that the events that followed Lehman brothers collage on the first day of Sibos 2008 have yet to be resolved and the wider economy and political landscape will never be the same. Optimistic, because during all those meetings and calls with industry figures there was a recurring theme that suggests that four years on, everyone is ready to face the long-term realities of the task ahead, like developing new sustainable business models, and stop worrying about the short-term challenges like regulation and compliance. If only bill Murray had starred in a film of the book Don t Sweat the Small Stuff... BT ISSN David Bannister, editor an informa business *caller: How often does Daily News at Sibos come out? Me: Four times a year. caller: So it s a quarterly? Me: No, it s a weekly in four parts. I 3

6 NEWS OctOber 2012 Goldman Sachs to overhaul global data centres with IO Goldman Sachs has formed a strategic technology partnership with IO, a Phoenix-based provider of data centre technology and services, under which it will use the vendor s IO.Anywhere in multiple locations including the US, UK and Singapore. IO specialises in modular data centres, essentially packing the systems into units rather like shopping containers that can be rapidly deployed and reconfigured. George Slessman, chief executive of IO, said that the approach, which it calls Data centre 2.0, provides a standard data centre infrastructure. this is a tipping point in how data centres are delivered, said Slessman. typically, they have been delivered as a a construction project, which means they take too long to build and are very expensive whether you measure it by square foot, MIPS or kw/hours. More importantly, he said, data centres are typically built to have a lifespan of 15 to 20 years. that s crazy as another of our customers put it, you should be solving the problem you have today, not the problem you think you might have in 15 years time. No-one tries to buy storage 10 years out, he said. Don Duet, global co-chief operating officer of the technology division at Goldman Sachs, said: We believe [IO s] Data centre 2.0 strategy provides sustainable enhancements to our data centre operations. their innovative technology and services will allow Goldman Sachs to scale its data centre operations more efficiently, and further advance the firm s broader commitment to environmental stewardship and reduced carbon footprint. Slessman said that Goldman Sachs first approached IO 18 months ago. It has been a long process, he said. they are a rigorous and incredibly adept technology firm, and put an enormous consideration into how they want it to work in practice. BT Banking code of conduct and professional register loom in wake of Libor reforms The replacement of the discredited mechanism for setting the Libor interbank lending rate with a more technically robust mechanism based on actual transactions could be the first step towards a banking system governed along similar lines to the medical profession. As the Wheatley report set out its 10-point plan to reform Libor and other benchmarks the decision of the british bankers Association to step away from the process was being seen by some as the final nail in the coffin for self-regulation in the banking industry. Following the financial crisis we are seeing a trend towards replacing self regulation of financial infrastructure with more formal arrangements, said tony Anderson, a partner in the banking team at international law firm Pinsent Masons. the area of payments is also under review. Greg clark, Financial Secretary to the treasury, said the report showed that the self-regulation of Libor has failed and was another example of the broken regulatory system. Libor is a hugely important international benchmark and this report makes a series of comprehensive and practical recommendations designed to restore its credibility. the Government will respond, in full, once Parliament returns, clark said. Wheatley s 10-point plan for reform includes fundamental overhaul of the way Libor is run, including taking responsibility away from the bba; a requirement for banks to back up their submissions with evidence of relevant transactions; and detailed technical changes to refine the way the benchmark is put together, to make it much harder to manipulate. I have concluded that Libor can be rehabilitated through a comprehensive and far-reaching programme of reform, said Martin Wheatley, managing director of the Financial Services Authority. Although the current system is broken, it is not beyond repair, and it is up to regulators and market participants to work together towards a lasting and sustainable solution the need to move towards a better form of governance, with professional oversight was raised by none other than the villain of the Libor story, barclays, in a written submission to the Parliamentary commission on banking Standards, a joint committee of the House of commons and the House of Lords. We need to ensure that the high professional standards that the vast majority of bank employees adhere to are followed by all employees, says the submission. this could be done through the development of a more rigorously enforced code of conduct for banks backed up by a register of banking professionals. It says that a code of conduct and register could be operated in full cooperation with the Financial conduct Authority, one of the bodies that will replace the FSA next year. this could build on and broaden existing authorisation programmes run by the FSA, such as the Approved Persons regime and the Significant Influence Function process, and requirements for front line staff to be appropriately trained and monitored. Where existing authorisation focuses on a particular specialism or senior executives, we see scope for the development of a far broader framework, the submission says. the independent mechanism for setting Libor will start the ball rolling, say observers. the programme set out for reforming the regulation, oversight and setting of Libor is an important first step in re-establishing trust and confidence in the London markets, said Kevin burrowes, Pwc s UK financial services leader. there was little option but to recommend a highly regulated approach to setting and governing Libor as anything less would not have answered the depth of public concern. the new independent Libor administrator will be critical to the functioning of checks and balances in the system, and getting transparency of information right. Speed is needed to get the administrator in 4 I

7 Go to for the latest news and comment Wheatley: It is up to regulators and market participants to work together. place quickly as until this appointment is made the new processes cannot be introduced. Anderson at Pinsent Masons said: It is key that the overhaul of Libor that is proposed is accepted by the rest of the financial markets throughout the world. It has become far more influential as a global index since it was first introduced in the 1980s so any changes to Libor must be agreed universally to apply. the proposed regulation to be included in the Financial Services bill to replace oversight by the british banker s Association will be scrutinised carefully. burrowes pointed out that Libor does not exist in isolation, banks and other financial institutions that sponsor or participate in benchmarks should be closely examining their participation to identify any other areas where their governance and process improvements may be needed, he said. this area will be a major focus of the FSA in the coming months, so firms need to be prepared to explain why they believe their governance and processes for benchmark participation are sound. Other pricing mechanisms are likely to come under scrutiny in coming months. Among these will be the way in which firms contribute prices to market data vendors like thomson reuters and bloomberg. these are often calculated by traders using ad hoc spreadsheets, with an inevitable lack of transparency and audit trails. A number of large banks are understood to be reviewing this mechanism in anticipation of it coming under regulatory scrutiny. Once you move from Libor to look at other contributed pricing mechanisms, you open a can of worms, said one data manager working on a a project in London. BT It s a fair cop, but society s to blame... It is the belief of a majority of banking professionals that it is the regulators themselves that must shoulder much of the blame for the Libor scandal, as they exercised inadequate oversight of banks practices and may have even been unwilling to prevent this misconduct. According to a survey of professionals in international banks carried out by London-based consultancy Lepus, 43% of respondents cited week regulation as the primary reason for the rigging. Many 60% said that regulators were aware of the manipulation but did nothing openly because of a legitimate fear of damaging confidence in the financial markets. the survey makes clear that most of the industry thinks that the methodology for setting the rates needs to be revised and regulated more closely. A large proportion of respondents would like to see Libor rates based on actual borrowing costs, rather than the hypothetical quote system that is currently in operation, and a more prominent role played by regulators, central banks or exchanges in submitting these rates. the majority of the respondents to the survey, 57%, believe that the rigging of Libor was pervasive in the banking industry, while only 31% believe that this practice was not widespread. Of the 12% of respondents that selected other, the majority commented that rigging is too severe a term, but a few banks may have submitted incorrect borrowing costs. Some others said that Libor may have been manipulated during the crisis to alleviate perceptions of systemic instability, but the practice was not widespread and did not occur before the crisis. One respondent commented that the regulators may not have known about rate manipulation, but if they did, they probably had no desire to launch any investigations as that would have damaged the industry s reputation even further in a time of crisis. Only a quarter of all respondents thought that regulators were completely unaware of any instances of manipulation. BT Daiwa Europe settles on Torstone London-based Daiwa capital Markets europe has awarded a four-year contract to torstone technology for its Inferno posttrade securities processing and trade accounting system, which it will use across its trading operations as its sole back office system. the deal was negotiated with Daiwa Institute of research the firm s global systems integration and research arm. Inferno is already used for convertible bonds and associated equity/hedge products, and for FX/MM treasury functions. the firm s cash equity business will move to the system by the end of this year and fixed income securities will follow in Following the expansion of the Daiwa europe s operations through the acquisition of parts of Kbc Financial Products in 2010, the firm explored a number of options to replace its aging mainframe back office system. As an incumbent in parts of the business, the teal-time, event-driven Inferno system became a candidate for its replacement alongside traditional back office systems vendors. Having the ability to handle securities and derivatives trades within a single solution avoids the issues of integrating silo systems and enables operations to be streamlined. the depth of functionality which includes general ledger trade accounting and the ability to centrally reconcile cash, positions and trades was also an important factor in choosing Inferno, according to Matthew Hargreaves, chief information officer of Daiwa europe. Inferno is a one stop shop where you go for everything, Hargreaves said. No matter what the product or whether you are in finance, compliance, middle or back office, the suite of functions you need are all in one place and it is comparatively easy to add new ones. the application is well designed and the torstone team uniquely able to drill into the detail of both technology and business, which very much simplifies the working relationship. Inferno reconciliation now provides visibility across multiple asset classes and was the first stepping stone in moving the equity and fixed income business from the mainframe onto Inferno. Having all positions reconciled in one place also provides a central source of accurate data, which simplifies regulatory reporting requirements. BT I 5

8 The Banking Technology Awards December 2012 Grand Connaught Rooms, Great Queen Street, London, WC2B 5DA BOOK YOUR TABLE AT THE INDUSTRY S PREMIER NETWORKING EVENT 2011 ROLL OF HONOUR Best Green IT Initiative by a Financial Institution Outstanding Contribution by a Female in Financial Technology Best Internet Banking Service Provider Best Industry Infrastructure Initiative Now in its 13 year, the incredibly successful Banking Technology Awards have become established as the premier event in the industry which recognises excellence in the use of IT in financial services. Make sure your company doesn t miss out on the prestigious Banking Technology Awards night and the opportunity to meet and greet a number of high-profi le industry professionals by booking your table at the fi nancial services IT social event of the year. Tables of 10 are available for the gala dinner. Why should you book a table for the event? Identify new business: You will be able to meet potential clients face-to-face and make new and invaluable relationships Develop your business strategy: Industry professionals from across the world attend this event, it is the perfect opportunity to see what your competitors are up to Building client and employee relationships: This glitzy event is also the perfect way to entertain your clients and reward your teams Best Investment Banking Initiative Best Payments System Initiative Payments System Best Trading Platform Best use of IT in Investment Banking Best Use of IT in Retail Banking Best use of IT inwholesale/transaction Banking IT Team of the Year Best Use of Mobile Technology in Financial Services CIO of the Year CONTACT US To book your table please contact: Sadie Jones T: , E: Follow us on Twitter: Join us on LinkedIn: Go to and click on the button on our home page

9 Go to for the latest news and comment News OctOber 2012 Banking Technology Awards 2012 Short-lists The votes are in, the counting is finished and the arguments resolved. Here are the short-listed entries for the Banking Technology Awards and readers choice Awards. Winners will be announced at a Gala Dinner on 5 December at the Grand connaught rooms in London. Judging of the awards for institutions was eased this year by modifications to the online entry systems introduced last year, but our judges still had to plough through details for slightly over 100 project entries from around the globe. Voting in the readers choice Awards also showed a wider geographical spread than in previous years, which is reflected in the arrival of some new names on the list. So congratulations to all those on the short-list, and good luck on the night. Banking Technology Awards 2012 Readers Choice Awards 2012 Best Green IT Initiative by a Financial Institution bank Hapoalim HSbc technology and Services Best Industry Infrastructure Initiative bank of America Merrill Lynch bt Global banking & Financial Markets european Data Warehouse Best enterprise Infrastructure Initiative bank of America Merrill Lynch Deutsche bank Lloyds banking Group Best Internet Banking services Provider Alior bank e-la caixa Best Payment systems Initiative barclaycard citi SIX Payment Services Best security Initiative bankinter Metro bank Santander Best Trading Platform or Venue bats chi-x europe DcX/SuperDerivatives HSbc technology and Services Best Transaction/wholesale Banking Initiative Deutsche bank HSbc technology and Services JP Morgan Best Use of IT in Retail Banking HSbc technology and Services Standard chartered bank Best Use of IT in Investment Banking bnp Paribas citi Deutsche bank HSbc technology and Services Best Use of IT in Asset/Fund Management To be announced Best Use of IT in wholesale/ Transaction Banking citi the royal bank of Scotland. JP Morgan Best Use of IT for the purposes of regulatory change Deutsche bank Deutsche bank Lloyds bank Best Use of Mobile Technology in Financial services citi Handlowy barclays citi IT Team of the year bank of America Merrill Lynch bankinter Lloyds banking Group Outstanding Contribution by a Female in Financial Technology bank of America Merrill Lynch (Sheenagh Meghan) barclays (Kate Wignall) Piraeus bank cyprus (Natasha Kyprianides) Best Core Banking Product/service Infosys Oracle temenos t24 Best Corporate Actions Automation Product/service Information Mosaic SmartStream XSP Best enterprise Data Management Product/service Asset control GoldenSource XSP Best Financial Crime Prevention Product/service Fircosoft Nice Actimize Fiserv Best Governance Risk & Compliance Product/service Lombard risk thomson reuters Grc Wolters Kluwer Best Payments Product/service Dovetail Logica Senteniel Best Post-trade Processing Product/ service DSt Multifonds Polaris Quantum FX Best Trading system calypso Misys SunGard Best Risk Management Product/service Algorithmics Misys SunGard I 7

10 NEWS ANAlySIS OCTOBER 2012 World Payments Report 2012 The eagerly-anticipated World Payments Report is a treasure trove of information on trends in the payments industry. The 2012 edition is no exception, writes David Bannister Confirmation that the world of payments is changing rapidly comes in the latest World Payments Report 2012 from Capgemini, RBS, and the European Financial Marketing Association. While the predictable conclusion is that debit cards continue to gain market share from credit cards, the growth in the use of electronic and mobile payments is exponential, there are plenty of other surprises not least of which is the way that regulation can drive innovation in a number of areas, though in others it has a stifling effect. The report also reveals shifting geographical dominances, demonstrating that the BRIC Brazil, Russia, India, China concept is no longer valid; at least in payments. Brazil is now the second-highest ranking country by payment volumes after the US. There were 20 billion non-cash transactions in Brazil in 2010, compared with 13.1 billion in Russia, India and China combined. Overall, the resilience of payment volumes is confirmed, as global non-cash payments volumes grew by 7.1% in 2010, reaching 283 billion, although early 2011 indications show only an additional 0.8% growth. Payment volumes in developing markets grew at a much faster rate (16.9%), boosted by a greater than 30% increase in both Russia and China. Innovation While much of the report shows how regulatory compliance is squeezing budgets and cramping the ability to innovate, there are some areas that show how it is reshaping the industry in more subtle ways, said Simon Newstead, head of FI market and business strategy at RBS (pictured). One piece of regulation that isn t an obvious driver of innovation is intraday liquidity, which has caused the market to look at how we do things, and come up with new ways of doing them, he said. The regulation is there for systemic risk reduction, but the new intraday liquidity market certainly has focussed minds on the cost, management, and make-up of the client base. The downside remains that regulation can challenge banks capacity to undertake customer-centric innovation because of its drain on resources. Partly as a result of the Eurozone debt crisis, European banks are complying faster than originally expected with the Basel III objectives, but as a result they have less capacity to focus on innovation. The report concludes that regulation can have direct or indirect beneficial The regulation is there for systemic risk reduction, but the new intraday liquidity market certainly has focussed minds on the cost, management, and make-up of the client base. consequences for payments innovation but not for all cases. Regulation must not be created in regional isolation. Its central goal needs to drive innovation forward, and deliver customer benefits that push industry boundaries, said Jean Lassignardie, corporate vice president, head of sales and marketing, Capgemini Global Financial Services. Asked what is driving innovation, more than two-thirds of respondents cited customer retention and acquisition as the two most critical areas for innovation. But in customer service, banks face tougher challenges than their non-bank counterparts, which in some cases have been able to focus on being customercentric, without the same regulatory pressures. The report also shows that the real payment innovators are organisations with a granular understanding of the needs of their target customer segments, as well as their own capability to innovate. The WPR cites Japanese telecommunications organisation NTT Docomo, which has succeeded in quickly growing to create a critical mass of both users and merchants totalling 35 million or half of the market with its Mobile Wallet. Mobile Wallet, or Osaifu-Keitai in Japanese, is a proximity payments instrument enabled through compliant mobile phones, with services going beyond just NFC payments and including: electronic money, identity card, loyalty card, public transport ticketing (includes railways, buses, and airplanes), and credit card. By using open standards, building on existing payment instruments (such as credit cards) and considering loyalty programs and CRM services for merchants, the programme has proven successful over the past eight years. Going forward, some innovations have great potential to result in substantive change, the report says. NFC initiatives offer a prime example. An increasing number of smart phones are being equipped with NFC technology, suggesting the market is becoming ready to drive usage of NFC technology in the payments industry. The bank and non-bank players piloting NFC innovations include major names like Google, PayPal, MasterCard, Visa, and Apple. The combination of industry initiatives, core bank infrastructure and non-bank players has and will be a powerful force of transformation in payments, it concludes. Good news for supporters of standardisation is that the report identifies regulation with this as its objective as being one of the most positive sorts of regulation when it comes to promoting innovation it scores a medium, which is the highest score on the credit side of the ledger, along with regulation intended to increase competition. The good thing about standards is that they set clear terms and boundaries while establishing a common platform, but the down side is that they can increase the wait-and-see tendency as people wait for others to make the first move and the standards to be finalised. The Canadian Task Force on Payments is offered as an example of good practice in this area. The consultative process is seeking to define the roles of all players to ensure a level playing field, but the report warns regulators not to put all scope for innovation into the collaborative space. That can lead to certain impediments apparently. The worst form of regulation is that which seeks to limit entry to a market. PayPal s plans to enter the Indian market were stymied by demands from the central bank for details of merchant transactions, which made the company an unattractive option for merchants. 8 I

11 Given that regulation can help to drive innovation even when not specifically designed to do so, it may be beneficial for the industry if regulators could find a way to optimise the innovative effects of their initiatives when thinking through the entirety of the potential impact, says the report. Even though regulators try to assess the broad effects of their actions, some examples exist of cases in which the net effect of various regulations with different objectives may not have transpired as anticipated. Not another BRIC in the wall Globally, the volume of non-cash payments remains concentrated in developed markets, with North America, Europe and Mature Asia-Pacific together accounting for 79.5%. However, the BRIC block is diverging, with Russia and China boosting payment volume increases of more than 30%, while Brazil has become the third-largest payment market in the world, after the US and the Eurozone. India s payment volume grew at 10% and has great potential for future growth, but is still the BRIC payment laggard. The BRIC acronym no longer works in payments, said Patrick Desmarès, Secretary General, EFMA. Given significant differences in each market s stage of development, the four countries should be viewed very differently. This is particularly important for Brazil, where volumes now surpass all the individual European markets. As more consumers embrace electronic, mobile and debit card payments, industry innovation will continue to focus heavily on these payment methods. According to industry analysts, there were an estimated 28.3 billion electronic and mobile payment transactions globally in 2011, and in 2010 more than one in three non-cash payments globally was made using a debit card, up 15.2%, according to the report. What stands out in this, says Newstead, is that with only 2.1% of all mobile users making m-payments, the potential for additional growth is still huge, with mobile payments set to reach 17 billion by 2013 and e-payments 31.4 billion by Debit card transactions continue to take market share from other types of payment methods because they easily allow people to bypass the use of cash, said Kevin Brown, global head, transaction services product, International Banking, RBS. As more and more consumers move to mobile and other electronic payments, we ll continue to see the exponential growth of innovative payment solutions. The huge growth in e-payments will not be without challenges, however. Many forms of contactless and m-payments are beginning to go mainstream, creating alternatives to existing forms of e-payments. The industry is now developing hybrid instruments that combine various payment channels, and e-merchants are looking to capture this trend by mixing online payments with other channels so consumers can, for example, pay using online banking capabilities rather than cards (e.g. ideal, and the MyBank initiative from EBA Clearing). A cornerstone of long-term success for online payment services is safety and security for end-users. Industry estimates show the number of m-payments growing even faster than e-payments; by 52.7% a year in to reach 17 billion in These latest industry growth estimates are even higher than the robust growth projections reported in WPR 2011, and are being led by the sharp rise in the number of mobile subscribers globally. The number of m-payments users worldwide is likely to have surpassed 141 million in 2011, a 38.2% increase from 2010, but that number would still represent a mere 2.1%10 of all mobile users, showing the vast potential for additional growth. Surging m-payments usage also reflects the rapid rise in the number of smart phones. The emergence of application stores, such as Apple s App Store and Google s Android Marketplace, has also proven to be a game-changer for the mobile ecosystem by making mobile apps far more visible and accessible to consumers. This is especially the case in developed markets, where volumes are currently low, but are expected to surge once NFC-enabled e-wallets are launched. In developing economies, the growth in m-payments is being largely driven by the huge population of unbanked consumers, which can get access to payment services options through mobile devices. Recent industry projections are even starting to envisage an all or nothing adoption of m-payments, with the upper-end ranges of usage seeming to be achievable given the widespread innovation in m-payments solutions. Several stakeholders are also pursuing a number of e-wallet initiatives, which fuse e- and m-payments into joint value propositions that are expected to boost usage, the report says. The emergence of these hybrid instruments, which settle as card, credit transfer or direct debit transactions according to the customer s preference, are promising for the market, and retail PSPs should see this change as an opportunity, and provide their customers with multiple payment options. It may be difficult to judge the real usage levels of such instruments, however, because there is no official data from central banks on these payment flows. In a recent report on innovation, the Bank for International Settlements urged central banks to improve the way these e-and m-transactions are reported by market participants, and provide an accurate accounting of this activity. BT The report is available for download at I 9

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13 PaymentS: Commentary OCTOBER 2012 Break out the party hats... A lot has happened in the 20 years since Daily News at Sibos was launched. That might be just one of several reasons to celebrate this year, writes Heather McKenzie. In 1992, when Banking Technology s sister title, Daily News at Sibos was launched, fund managers had just been allowed onto the Swift network. Twenty years later, Swift is close to reaching a milestone with its most recent target user group. It is possible that by the time Sibos gets under way, Swift will have signed up the 1000th corporate entity as a direct participant on its network. Expect the party hats to be handed out during the Corporate Forum. While the early days of corporate participation on Swift may have been a bit of a bumpy journey, Luc Meurant, head of banking, supply chain and corporate markets at Swift, says the fact the co-operative is heading towards its 1000th corporate is a major milestone. Corporates are increasingly part of the core Swift franchise and our bank members tell us that Swift connectivity is almost always a requirement within RFPs from corporates, he said. There are a number of drivers behind the growing corporate participation on the Swift network: connecting to it has been made easier through initiatives such as Swift Lite; corporates want to lower their costs of connectivity to the banking world; and there are many more banks offering the Swift option to their corporates. Corporate connectivity to Swift is usually done as part of a broader project, such as the redesign of a treasury centre or the building of a payment factory, says Meurant. The Swift network is now seen as a normal way for corporates to connect to their banks. During Sibos, Meurant expects liquidity and risk management to be key areas of discussion for corporate delegates. Liquidity was extremely important during the financial crisis and remains so for corporates that need to understand where their cash is. Corporates need to know they can move cash quickly, if necessary moving from one bank to another in case of any problems. Another area of interest should be the Bank Payment Obligation last year Daily News at Sibos reported that Swift and the Banking Commission of the International Chamber of Commerce signed a cooperation agreement that will enable industry-wide adoption of the BPO, which is an irrevocable conditional undertaking to pay given from one bank to another. The BPO is an alternative means of settlement in international trade and provides the benefits of a letter of credit in an automated environment. It enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers. The BPO has been a learning experience for Swift. We started out looking at it from a matching perspective but soon realised that matching alone was not enough. It didn t make sense for us to own the instrument, which is why we looked to co-operate with the ICC, particularly on the legal issues, he says. Away from the corporate forum, other payments issues to be discussed at Sibos will include compliance an issue that has become increasingly important for Swift s members, says Meurant. The imposition of large fines on banks in recent months has highlighted the importance of adhering to know your customer and anti-money laundering regulations. For this reason, Swift has introduced a compliance forum at Sibos. The two-day dedicated programme will feature panel discussions, outline case studies and detail product offerings that address economic sanctions. Swift will be promoting two of its compliance products during Sibos Swift Sanctions Cleaning, which was launched in April, and Swift Sanctions Testing. The cleaning product enables users to alert Swift of the transactions it wishes to filter and against which list. Swift does not make the decision about which transactions to block, but simply intercepts suspect transactions and sends details back to the user who decides whether to let the payment transaction take place. The testing product is targeted at larger Swift users and is intended to help them test the effectiveness and efficiency of their sanctions filters and therefore increase efficiency. The appetite among our members for compliance offerings from Swift is huge. There is no real competitive advantage for banks to be had in compliance and therefore it is a key area in which Swift can offer a solution, says Meurant. A new aspect of the payments stream at this year s Sibos is the collaboration between Swift and Boston Consulting Group on four conference sessions. Swift invited consulting groups to submit ideas for thought-provoking sessions that would trigger debate and ideas. The US-based global management consulting firm came up with the most creative ideas and will lead four sessions. These include a session on emerging payments opportunities in rapidly developing economies, which will cover the leap from cash-based systems to digital and mobile payments. Speakers from BCG, The Economist and Mumbai-based Axis Bank will debate financial inclusion and the reconstruction of traditional value chains as telcos, non-banks, processors and social networks increasingly compete with banks and payments associations. Another session covers the transformation of global trade flows and supply chain fragmentation. Speakers from HSBC, Commerzbank and Bank of China will debate how commercial banks must upgrade their offerings and business models for trade related finance. Operating models in wholesale transaction banking will be examined, with speakers from BCG, Banco Santander, DBS, Citi and BNY Mellon discussing how the financial crisis has changed the way payments and transactions are managed. No payments sessions would be complete without a look at mobile payments, which will be covered in a session that will consider how banks can compete in the mobile payments world. Speakers from Commonwealth Bank of Australia, PayPal and Docomo will tackle this topic. BT I 11

14 SECURITIES: CORPORATE ACTIONS OCTOBEr 2012 Standards in corporate actions processing move forward The DTCC s corporate actions initiatives over the past year are reaping rewards for firms and vendors. David Bannister looks at how the multi-year effort is progressing. Testing of ISO messages for corporate actions processing has moved to a new phase with the launch by the Depository Trust & Clearing Corporation of a new corporate actions pilot programme that covers the entire lifecycle for distribution events, beginning with entitlements and payments and later moving on to instructions. The pilot is part of DTCC s multi-year corporate actions reengineering initiative that will replace its proprietary files with ISO messages as part of an effort to provide the financial services industry with a platform for the development of standardised corporate actions messages. Four corporate actions users have been participating in DTCC s reengineering effort: BNY Mellon, Brown Brothers Harriman, JPMorgan, and National Financial Services. For the first 12 weeks of the pilot, DTCC will send out sample ISO messages to the pilot participants. This will help them validate their development as well as the message formats. In the first quarter of 2013, DTCC will move into production and begin sending the ISO messages systemically, alerting the test participants to distributions entitlements and payments related information and allowing them to conduct further testing. Also in 2013, DTCC will be ready to test inbound ISO messages for election processing for Elective Dividend Services events with pilot firms. EDS enables DTCC clients to view and send a variety of election instructions to DTCC for processing. Another major undertaking of the initiative will be to begin the mandatory migration of all DTCC participants to the new browser-based user interface for distribution events in The new browser interface, which will replace DTCC s Participant Terminal System and Participant Browser Service, will provide a single unified corporate actions platform that will incorporate all event types. DTCC will provide customers with a series of training sessions and webinars on the new interface prior to implementation. This pilot represents phase three of our reengineering initiative and is yet another milestone in reengineering corporate actions processing in the United States, said Daniel Thieke, DTCC managing director, asset services. This represents the first time DTCC is able to take inbound customer ISO messages We ve been conducting webinars and testing the new browser-based user interface for the past year and client feedback has been extremely positive. Daniel Thieke, DTCC in distribution events, further reducing risk and cost in corporate action processing and moving us closer to straight-through processing. We ve been conducting webinars and testing the new browser-based user interface for the past year and client feedback has been extremely positive. We will now have all the necessary elements for corporate actions processing on one platform, making corporate actions processing easier and much more efficient, Thieke said. In the first two phases of the initiative, DTCC upgraded its new user interface platform to support additional data, and worked with Swift to develop and publish a suite of corporate action messages in ISO format. The effort included the launch of the first pilot program testing ISO corporate action announcements in April 2011 and implementation of the messages in November One of the four pilot firms, JP Morgan, became the first to go live with the global ISO income announcement messages, during July this year, and was moving to implement the remaining corporate action messages during August. Mark Trivedi, product head for global custody Americas at JP Morgan Worldwide Securities Services, said: ISO brings major new efficiencies to corporate actions processing, helping to reduce risk, foster transparency and streamline the delivery of corporate actions information. The launch of ISO processing is an integral part of DTCC s overall reengineering initiative. The multi-year initiative will replace multiple legacy systems with a single new platform that allows users to manage their entire corporate actions process from announcements through instructions to payments. As well as its own efforts and partnerships with the likes of Swift, the DTCC has also been lining up vendors under the Certified Software Partner Agreement that it introduced a year ago through DTCC Solutions combines its corporate actions data feed, Global Corporate Actions Validation Service, with the corporate actions processing functionalities of vendor systems. Information Mosaic, Asset Control and XSP were among the first to sign up. Doug Jeffrey, president, Americas for Information Mosaic, said of the deal: The goals of each of our respective firms are very much aligned. The focus for Information Mosaic has always been to automate post-trade processes, whether it is trade capture, settlement, or, as in this case, corporate actions. DTCC Solutions has developed its services with the industry in mind, and the GCA VS Service is a good example. By providing a cleansed, global corporate actions feed, they are directly addressing the operational risk inherent with manual announcement handling. In addition, both firms are committed to using industry standards and the most current, open, and scalable technologies. Brendan Farrell, chief executive of XSP said that the DTCC initiatives were moving the industry towards straightthrough processing and allowing clients to focus on downstream processing, such as notifications to clients and instructions to prime brokers and custodians. BT 12 I

15 Nasdaq OMX launches financial services cloud with Amazon The idea that financial services systems don t belong in the cloud is rapidly losing credibility as more and more applications appear. Elliott Holley looks at Nasdaq OMX s move into the cloud. SECURITIES: ClOUD OCTOBEr 2012 Major cost savings are the major benefit being held out to potential customers by Nasdaq OMX Group. No big surprise in that, except that one of the reasons that its new FinQloud platform will produce savings for broker-dealers is that it is as the name makes clear based on cloud computing. FinQloud is hosted on the Amazon Web Services platform and will allow users to store their financial data cheaply and securely, in order to meet pressing regulatory requirements more easily. The solution consists of two parts: regulatory records retention, also known as r3, and Self Service reporting. r3 is a storage and retrieval tool designed to help brokerdealers meet US Securities and Exchange Commission rule 17A-4, which requires broker dealers to preserve electronic records in a non-erasable format for a minimum period, between eight months and six years depending on the record. SSr is built to help broker-dealers to carry out analysis and reporting on their stored trade data. The cloud solution includes infrastructure data management, virtualisation and hosting, and accepts data from Nasdaq OMX as well as other sources. There s a dramatic difference in cost to store data in a cloud-based solution such as r3 versus a non-cloud based solution, said Gary Lefever, chief corporate development officer, FTEN at Nasdaq OMX. That difference can be 50-80% cost savings. But that s only the beginning. As FinQloud allows firms to make more effective use of the data, through better access to information, data-mining and feeding algorithms, for example, it introduces alpha, helping them to increase revenues and profits directly. regulators in both the US and Europe are currently pushing reforms such as Dodd-Frank, EMIr and MiFID II, all of which aim to improve transparency in financial markets by mandating tougher reporting standards, greater regulatory oversight and stricter compliance. While many financial firms have invested in technology to help meet these needs, the increasing sophistication of securities markets technology is leading to dramatic growth in the quantities of data that financial firms need to process. Adding to the difficulty of keeping pace is the fact that many broker-dealers have suffered declining commission revenues, in part due to an overall decline in equities trading volume in the last three years. According to Nasdaq OMX, traditional storage costs may increase exponentially due to the difficulty of adding and maintaining more and more data, eventually making older methods of handling data virtually untenable. To help counter the problem, r3 includes the ability to set an expiry date on data, so that it is erased once it is no longer needed. In addition, costs incurred to maintain backup copies of data at many financial institutions should in theory become unnecessary, once the data has been migrated to a cloud system that can be easily accessed. The financial industry is at breaking point in terms of operational cost, said Ted Myerson, global head of access services in Nasdaq OMX s transaction services unit. Costs come from the need to process and store more data; the need to ensure compliance with new regulation; and the need to ensure adequate reporting procedures. This platform is all about reducing those costs. reducing costs may be one priority for many market participants, but concerns over the security of a cloudbased platform have often made larger financial institutions somewhat cautious in their approach to the technology. To ensure that the new platform is secure, all connections to FinQloud are required to pass through an encryption key management system, housed in private Nasdaq OMX data centres, before connecting to AWS. Based on its existing user-base, AWS already handles sensitive financial data, including credit card data, social security numbers and government information. It s not a question of where the data is stored but how it s stored, said Andy Jassy, senior vice president at AWS. We ve been working with financial services firms around the world for years. This system is as secure, or even more secure, than what many customers used previously. On top of that, Nasdaq OMX has added additional security measures, including sophisticated encryption managed by the Nasdaq OMX data centres. At the moment, r3 covers equities and options in the US, but Nasdaq OMX plans to expand it to other asset classes such as commodities and futures in the US first, and then to other jurisdictions later. The ideas is for the platform to eventually provide global financial institutions with larger economies of scale by providing a common approach to data storage, reporting and compliance around the world. r3 is due to be released later this quarter. Cloud computing encompasses many different services, including Software as a Service, Infrastructure as a Service, Platform as a Service, Storage as a Service, Data as a Service and many others. The main principle consists of users renting software, infrastructure and or hardware from a dedicated provider, who will run and manage the service remotely. Amazon Web Services started offering IT infrastructure services to businesses in The company says that one of the key advantages of cloud computing is the ability to replace up-front capital infrastructure expenses with low variable costs that scale with business. Instead of planning for servers and other IT infrastructure in advance, firms are theoretically able to use cloud services to massively ramp up their usage of servers in minutes. AWS is active in 190 countries and has data centre locations in the US, Europe, Brazil, Singapore and Japan. BT I 13

16 RETAIL: FRAUD OCTObEr 2012 Back to basic approach from criminals pushes fraud figures up The latest figures show that technology is working to deter fraudsters, so they are going back to basic old-fashioned methods of separating you from your money... New figures show that old-fashioned frauds, such as distraction thefts and people being tricked into giving their cards, PINs and financial passwords to criminals, have contributed to a small overall increase in card fraud and online banking fraud losses in the UK. Cheque fraud losses have also increased, but phone banking losses have fallen by 20%. Even a 28% increase in online banking fraud losses, which totalled 21.6 million in the first half of the year, is in part caused by an increase in deception methods such as tricking people to divulge details over the phone. Detective Chief Inspector David Carter, head of the Dedicated Cheque and Plastic Crime Unit, a special police department sponsored by the banking industry that has an ongoing brief to help stamp out organised payment fraud across the UK, said the increase is is due to organised criminal gangs committing straightforward frauds, and our focus remains on targeting those responsible and bringing them to justice. And given this rise in old fashioned crimes criminals using distraction techniques and duping people into disclosing their passwords and online banking details we are urging everyone to be on their guard and work with us to help stop this criminal activity. According to The UK Cards Association, total fraud losses on UK cards totalled 185 million between January and June This is a 9% increase on losses in the first half of last year, but a fall of 39% from the total of million in the first half of 2008 when fraud was at its peak. Card fraud losses as a proportion of the amount spent on cards has actually decreased from 0.066% during January to June 2011 to 0.063% during the first half of this year. With technology such as Chip and PIN helping to deter fraud, criminals have turned their attention to more straightforward ways of getting hold of people s cards and PINs. This includes distracting people in shops or at cash machines and then simply stealing their cards without them noticing, as well as simply tricking them into handing over their cards and PINs on their own doorstep. For example, elderly customers are called by someone claiming to be from their bank and then being told that their debit or credit card needs collecting. From there, they are asked to key in their PIN, following which a courier is sent by the fraudster to collect the card. 80% of consumers surveyed earlier in 2012 felt anyone could be a potential victim to this fraud, which police warn is on the increase. The industry launched two public awareness campaigns earlier this year. These advised cardholders to follow simple steps to protect their cards and card details, urging them to be on their guard if they receive phone calls or s out of the blue from someone claiming to be from their bank or the police. A customer checklist of ways in which consumers can protect themselves from these forms of deception is provided following the detailed break-down of fraud figures. Online banking fraud losses totalled 21.6 million during January to June 2012 a 28% increase on the 2011 halfyear figure. This has been driven by a huge increase in the number of phishing websites set up by criminals as part of a scam to trick customers into visiting these fake websites and disclosing their online banking login details. Losses in this area also reflect the trend in card fraud, with deception scams resulting in increases. Online banking customers are being tricked into divulging their online login details and passwords over the phone to someone they believe is from their bank but is actually a fraudster. Phone banking fraud losses fell to 6.7 million (a 21% decrease) during January to June This reduction is partly down to the fact that criminals are focusing their efforts on fraudulently accessing accounts online rather than over the phone. Cheque fraud losses increased from 16.4 million in the first half of 2011 to 17.9 million during the same period in Although this is a nine% increase, the overwhelming majority of this type of fraud is stopped before the cheque is paid. In fact, million of attempted cheque fraud was spotted and stopped during the clearing process in the first half of this year. Fraud figures released by the National Fraud Authority earlier in the year put these industry payment fraud losses into perspective. The NFA estimates that fraud in all its guises cost the UK more than 73 billion a year card and banking fraud only accounts for just over 0.5% of this figure. Furthermore, in the UK unlike many other countries outside Europe innocent victims of any type of payment fraud on their debit or credit card or account are legally protected from financial loss. BT Half-yearly remote (online and phone) banking fraud losses January to June 2008 to January to June 2012 Jan-June Jan-June Jan-June Jan-June Jan-June +/- 11/ Online banking fraud losses 25.2m 39.0m 24.9m 16.9m 21.6m +28% Phone banking fraud losses 5.3m 5.8m 8.6m 6.7m -22% Remote banking fraud losses 44.3m 30.7m 25.5m 28.3m +11% Online banking fraud: No. of phishing websites 20,682 26,045 31,448 37, ,396 +/- +199% * Due to rounding, the sum of separate items may differ from the totals shown. 14 I

17 RETAIL: MOBILE PAYMENTS OCTOBeR 2012 Banks face challenge as Generation-Y goes mobile Despite the launch of the Apple iphone 5 without support for contactless NFC technology, rising consumer demand for mobile banking threatens firms that lag in the provision of mobile services, writes Elliott Holley. One-third of UK consumers expect to be using smartphones to do all their banking by 2020, while two-thirds of banks expect everyone to be using mobile banking in some capacity by 2017, according to statistics gathered by business technology provider Avanade As consumers increasingly come to expect mobile banking services, the pressure on financial institutions to provide workable solutions is rising. Interacting with clients effectively through digital channels will be a minimum requirement that is non-negotiable in the near future, if such predictions are correct. Generation Y consumers those born after about 1980 are digitally savvy, and will not make allowances for banks offering inferior digital experiences, according to a report by business technology consultancy Capco published last this month. Simply porting existing techniques across will not do. Instead, financial institutions will have to re-engineer their business models around a client-centric approach, rather than simply pushing products and hoping that consumers will use them. Digitally savvy recipients of inherited wealth will bring a new level of consumer demand for around-the-clock, real-time mobile, tablet and online banking, said Peter Lewis, partner at Capco. Delivering effective and attractive digital solutions to this new demographic of customer will be essential for financial institutions. Without a comprehensive digital offering, they risk losing customers and significant revenue to competitors. The Capco research implies that financial institutions risk disintermediation by newer, more vigorous online and mobile banking platforms if they do not keep pace with technologically proficient customers. However, the news is not all bad. Based on a survey of 30 customer service managers from UK banks and 2,000 UK consumers carried out in spring 2012, Avanade s findings suggest that big opportunities await banks that embrace mobile payment technology. A quarter of those surveyed said that they want their primary retail bank to manage all of their financial services, even those that were lodged with other financial institutions. One in six consumers said they would pay their bank to manage all of their utility bill payments, according to the report, The Clock is Ticking: Why banks need to act now to avoid running out of credit with mobile customers. The way banks provide financial services is changing, said Nic Merriman, UK chief technology officer at Avanade. Customers are looking for personal financial management on their mobile devices. Multichannel banking is coming, and the mobile will be the dominant form. Banks that can provide a customer-centric model that links their services together effectively will be the ones to come out on top. Tools already available or in development include voice payment, in which authentication and payment instructions are spoken into the phone, and self-pay, in which mobile NFC technology combined with 4G connectivity would end the need for tills and queuing for retail transactions. While many banks are already well aware of the trend for clients to reevaluate their existing wealth services in favour of online and mobile platforms, the operational challenge of adapting to shifting expectations is not to be underestimated. Removing siloes at organisations that have traditionally specialised to a high degree can be a difficult task, sometimes requiring painful decisions and the will to tackle entrenched ways of thinking and vested interests. However, Capco believes that by refocusing energies on providing for customers that are time poor but economically rich, financial institutions stand to gain by delivering new products and services. For example, social networking technology can be used to influence peer groups by highlighting success stories. Realtime services are also cited by Capco as a key component of future wealth management. Conversely, the lack of access to real-time information and inconsistent performance are identified as serious limitations of current offerings. The future success of wealth managers will partly be governed by their ability to meet consumer s digital requirements, said Nick Levy, managing principal at Capco. Banks must reposition themselves in line with customer expectations, define their digital strategies and put in place roadmaps to prepare for the generational shift ahead. Regulatory change is also helping to drive a more competitive market. The UK Payments Council, at the behest of the UK Government, is driving banks to implement account switching services in 2013, increasing the pressure to provide more sophisticated services to retain customers. Merriman at Avanade likens the push towards mobile banking to the rise of internet banking within the last ten years. Pointing out that providers such as Tesco Bank and Metro Bank had seen an opportunity to use technology to move into the sector, he suggested that mobile banking services would also likely see new providers enter the market in the near future. Mobile will continue to grow, he said. The mobile wallet is developing already firms such as Barclays are developing tags that help customers to track their spending on mobile devices. Voice technology is increasing the opportunities for customers to interact with the services they use. Customers will demand mobile services and banks need to be ready for that. BT I 15

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19 REGULATION: EUROPEAN BANKING UNION OCTOBER 2012 EC proposals must keep London in the loop UK reactions to the European Banking Union proposals inevitably centred on the short timescales and how the proposals would affect London, reports David Bannister. The European Commission has unveiled a proposal to create a single supervisory mechanism for banks in the euro area and called for them to be adopted for implementation by 1 January The EC proposes that the European Central Bank will have ultimate responsibility for specific supervisory tasks related to the financial stability of all euro area banks, though it says national regulators will continue to play an important role in dayto-day supervision as well as in preparing and implementing ECB decisions. From day one, the ECB will be empowered to take over the supervision of any bank in the euro area if it so decides, in particular if the bank is receiving public support. For all other banks, ECB supervision will be phased in automatically: on 1 July 2013 for the most significant European systemically important banks, and on 1 January 2014 for all other banks in the euro area. Anthony Browne, incoming chief executive at the British Banking Association said: We welcome the European Commission s proposals to establish banking union to tackle the euro crisis, and its recognition that the UK s financial centre is good for Europe. It is essential to protect the single market, and the UK s role in setting financial services legislation. The single market is Europe s biggest asset and any splintering into a two-tier financial services market would threaten the ability of businesses across Europe to raise money for investment and would hamper economic recovery. The UK is host to the EU s main financial centre, and it is essential that it is not sidelined in the making of regulations that affect it more than other countries. We therefore welcome the Commission s statements regarding the importance of ensuring balanced and adequate representation of all member states in its decision making processes. This was echoed by others. It is very important for London as Europe s global finance centre that the EC s Banking Supervision proposals don t cut across the Banking Reforms currently being undertaken in the UK, said Tony Anderson at international law firm Pinsent Mason. For example, any EU wide bank ring fencing proposals... will be detrimental to UK banks if they are significantly different to those proposed by the Vickers Report. Everyone will also be interested to see how voluntary the proposals will be for non-euro countries. Thomas Huertas, partner at Ernst & Young financial services, and former board member of the UK FSA and the EBA, said implementation will be challenging, both with respect to the intended start date and working out the details of how the ECB will interact with the European Banking Authority as well as national authorities inside and outside the eurozone. Finalising those details will play a large role in determining whether the proposal receives unanimous approval that is required from Member States. The lack of details in legislation that is supposed to come into force at the end of this year is a worry for some observers. The proposals set out a high-level blueprint for how supervision will be carried out, but some important details and elements are missing. These include how the European Central Bank will carry out supervision in practice and how crisis management will really work. Progress here is essential, said David Strachan, co-head of the Deloitte Centre for Regulatory Strategy. The Commission s proposals are a major stride towards full banking union. They involve a wholesale transfer of responsibilities for banking supervision in the Euro area to the ECB. National banking supervisors will continue to play a significant role, albeit under the direction of the ECB. Achieving a common supervisory approach and culture across the banking union will be key. Strachan said that there is also a danger of regulatory sprawl, with different authorities in different jurisdictions tripping over each other and the EU supervisors. Jorg Hackemann / Shutterstock.com How many other new institutions will there eventually be? he said. The EBA seems set to continue as the rule-making authority, including for the banking union, and exercising a critical role as guardian of the single rulebook and Single Market. But there is also a case for a resolution authority for the banking union and a deposit insurance authority. On the one hand, the more institutions there are, the greater the scope for confusion. On the other, the more power is concentrated in a single body such as the ECB, the greater the concerns about governance and accountability. This leads to the biggest question: Who s in charge in a crisis? In the UK the Government has proposed giving the Chancellor the authority to direct the Bank of England when, in a resolution, taxpayers funds are put at risk. Would a similar, last resort political power over the ECB, if it were also to be the resolution authority, be acceptable and who would wield that power? The Commission is also proposing that the ECB develop a Single Supervisory Handbook that would cover all 27 European Union countries, bringing banks in non-euro member states in line with the eurozone banks. The proposals were presented by EC officials as a way of safeguarding taxpayers from having to bail out failing banks in the future. We want to break the vicious link between sovereigns and their banks. In the future, bankers losses should no longer become the people s debt, putting into doubt the financial stability of whole countries, said José-Manuel Barroso, president of the EC. BT I 17

20 News ANAlysis: OTC DerivATives OCTOBER 2012 Buy-side faces turmoil from OTC derivatives, and $6.8 billion bill Changes to the way OTC derivatives are cleared are going to have a profound impact on buy-side firms as new risk measurements and process are put in place, says a report from SimCorp StrategyLab. The move to mandate derivatives central clearing has direct implications on investment management companies back-office services, putting them in a precarious position, not only because they are unfamiliar with having to post margin for OTC trades, but also because this requirement will alter their decision making process. That s the thrust of Dealing with the regulatory tsunami in capital markets: a spotlight on changes in OTC derivatives, a report published SimCorp StrategyLab, a research institution sponsored by SimCorp The report examines the impact new regulations will have on the global capital markets industry, affecting competitive positioning of firms, market structure, revenue growth, profitability and IT budgets. Co-authored by Gert Raeves, research director, and Dushyant Shahrawat, senior research director of CEB TowerGroup, the paper explains that market entities and participants are emerging and new risk management measures are being imposed on buy-side firms. The paper determines that firms must rework internal procedures as these market structure changes will impact pre-trade, trade and post-trade processes. The paper recommends that buy-side firms look at post-trade OTC processing through the lens of optimising working capital and collateral. The industry s working hypothesis seems to be that there is no pressing need to invest in infrastructure when so much is still uncertain, the authors say. However, delaying the investment in connectivity or misjudging the trade-off between convenient connectivity and flexibility will delay institutions abilities to optimise their collateral management practices, not to mention eventually meet new requirements in the OTC derivatives market. Additionally, the paper argues that posttrade silos of the OTC derivatives market are not being adequately addressed by the industry s current STP infrastructure. The paper points towards the following key elements needed to satisfy current and newly emerging needs: Connectivity Buy-side firms will have new venues to connect to across trading, clearing and reporting Data extraction Creating the right quality, comprehensiveness and timeliness of data needs flexible and scalable tools Message transformation and standards Adoption of new or updated message standards are a central part of the move to increased transparency Matching and reconciliation The prerequisite to central clearing will be that Integrated solutions can address not only OTC derivatives reform, but also requirements for MiFID II, Basel III and Solvency II. Ingo Walter, SimCorp all trade details are agreed and matched prior to clearing and settlement In examining the range of available vendor options, the paper notes several advantages of an integrated solution over a best-of-breed or centralised hubs approach. These include having a single system that houses all positions and transactions across different asset classes in a consolidated database. According to professor Ingo Walter, director of SimCorp StrategyLab: Siloed systems make it nearly impossible for investment managers to access consistent data firm-wide. An enterprise solution greatly alleviates data inconsistency which can cause delayed or inaccurate decision making. Additionally, integrated solutions can address not only OTC derivatives reform, but also requirements around MiFID II, Basel III and Solvency II. According to the paper, firms will spend, cumulatively over , $6.8 billion on IT and operations related to eight buy-side regulations. An estimated 40% will be incurred by sell-side firms, while 27% will be incurred by investment firms including mutual funds, hedge funds and other institutional fund organisations. In examining the range of available vendor options, the paper notes several advantages of an integrated solution over a best-of-breed or centralised hubs approach. These include having a single system that houses all positions and transactions across different asset classes in a consolidated database. The best-of-breed approach in OTC derivatives offers the advantage of specialised functionality from vendors that fully understand this space, and have custom-built functions and features that exactly match the market s complex needs. For example, there are niche message transformation specialists that have created the perfect FpML formats for OTC derivatives. The challenge with implementing a best-of-breed approach is that firms won t have a single data source that can give them a holistic view of their business and comes in the way of performing crucial risk management and performance measurement tasks. In addition, there are obvious issues around the high cost and risk of implementation and delays in time to market. Vertically integrated solutions offer the advantage of a single system that houses all positions and transactions across different asset classes in a consolidated database. Being able to access consistent data across the firm greatly alleviates the problem of siloed systems that create poor data quality and can result in delayed or inaccurate decisions. The downside of selecting such a solution is that a client may not get best-in-class functionality in a particular area, like collateral management. However, the convenience and TCO advantage of vertically integrated solutions seem to outweigh the advantages of the best-of-breed approach. Changes to the derivatives market will be the second biggest category of IT spend, both on the US and European side. Most of this will be focused on complying with the Dodd-Frank Act in the US and the EMIR regulation in Europe. The Dodd-Frank Act and EMIR together represent the biggest sweeping change for the OTC derivatives market ever, driven by the regulatory objectives of enhancing transparency, ensuring greater accountability, and reducing counterparty risk. Moving OTC derivatives to a central clearing model may take a bit longer, but it will happen, the paper says. Clearing firms, connectivity providers and trade management vendors have built out their capabilities, but trade activity levels so far are minimal. That will change when regulatory uncertainty ends, BT The full paper can be downloaded at 18 I

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