Financial Sector Technology

Guest Blog: Embracing ‘Change’ in the Financial Market

By Varghese Thomas, global head of financial services at Savvis

“In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin, 1789. An obvious addition to the list in the financial market is “change”. What changes are we talking about?

1. Regulatory and Structural Change - In the U.S. we have the Dodd-Frank Wall Street Reform Act, plus the SEC’s ongoing review of potential curbs on high frequency trading, naked access and dark pools. In Europe it’s the MiFID review, UCITS and longer term Basel III, essentially resulting in a number of structural changes within the financial markets that firms must address. Liquidity fragmentation, municipal bonds and over-the-counter (OTC) instruments moving to exchanges, and multi-asset class trading are just a few examples that spring to mind. No doubt some uncertainty will lead to reviews and even further change down the track - which market participants, and the solutions providers who service them, must be in a position to respond to in a timely fashion.
2. Environmental Change - What I’m referring to are firms’ own operating environments. We regularly hear our clients say that they’re under pressure to do more with less. Couple this with a need to be able to respond rapidly to their business units’ constantly changing requirements, it’s no wonder that IT departments in a number of firms struggle to deliver quickly, when they’re already stretched just “holding down the fort.” For instance, the rapid growth in existing and emerging markets in Asia has many financial institutions redeploying or increasing resources in order to participate. Firms will need the flexibility and reach of their IT partners to manage through the various challenges to operate in new environments.
3. Technological Change - Moore’s law has shown that computing power continues to increase as associated cost and footprint decreases. Add to this the proliferation in high frequency/automated trading systems - in which proponents look to shave microseconds off the time it takes to receive and act upon a price - and it’s obvious that trading firms need to be able to leverage best-of-breed technology to remain competitive. Given the previous point, it can be difficult for many firms to allocate resources to constantly assess and implement new IT infrastructure.

In order to embrace constant change, organisations should look to a service provider which they can work closely with to tailor solutions to meet their needs, freeing resources to focus on their own core competencies and be able to respond to further changes as they arise.

Varghese Thomas is global head of financial services at Savvis

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Guest blog: Basel III – The compliance conundrum

by Linh Ho, director of product marketing at OpTier

Critics have not been kind to Basel III. Whilst few will argue that championing greater visibility and tighter regulation of liquidity controls is a bad thing.  It’s widely believed that the legislation lacks teeth and is, in truth, a fairly weak ‘knee jerk’ reaction to the economic crisis. Regardless of sideline criticism, implementation of the legislation in some form will be vital to the future of the banking system. In practice, it is potential confusion around the cross over between Basel II and III that will be the real sticking point.

The fact is, even if analysts and banks do come around to the new legislation ideals, they are likely to have trouble implementing the processes effectively within their current IT environment. As Alison Ebbage noted in her recent article for FST, one of the key challenges that banks face in their drive towards Basel III, is fragmented and siloed IT infrastructures. The article noted that this can make things cloudy in terms of generating a holistic view of events happening across trading platforms. This poses a significant operational risk to banks.

In terms of mitigating unforeseen risks, the onus is still very much with the banks to ensure that their internal processes and failures don’t let them down. In particular, The Accord specifically cites business disruption, data loss and security breaches arising from system failure as events that banks need to protect themselves against. As these processes are very much enabled by technology, IT needs to ensure its got its own back.

If banks are to enforce the latest legislation, simplifying these complicated IT landscapes will be the key to success, but it’s certainly a tricky business. For years banks have invested in sprawling systems, adding more and more layers as they were needed. In this situation, identifying how, why and where an IT problem has occurred is arduous, time consuming and expensive. With a complicated mismatch of systems and pressure to implement new regulations, I’d bet my bottom dollar that most IT managers wish they could clear out their IT cupboard and start again. In this day and age, a rip and replace strategy isn’t viable. So, with operational risk a much overlooked - yet pivotal - part of Basel III, what’s a bank to do?

Flipping IT management on its head is a good starting point. Rather than thinking about individual applications and how they’re performing, banks need to generate an end-to-end view of all business transactions in real-time. Traditionally this hasn’t been possible because IT management has been just as siloed as the systems it monitors. Because of these siloes, blind-spots have been created for IT, making it harder for IT to quickly find and fix problems. This situation has made it very difficult to avoid downtime or application slowdown. Steering clear of these potential threats is crucial in order to reduce risk, which in turn makes it easier to monitor compliance processes. If comprehensive records of IT performance are the norm, potential areas of risk can be readily identified and acted upon. By ensuring these records are in place and are constantly updated, the humble IT department will become recognised as a vital, reliable and valuable business unit.

Posted in Regulation | 13 Comments »

Guest Blog: Basel III must aid, not hinder global trade

By Jamuna Ravi, President and Geo-head, Banking and Capital Markets, Europe, Infosys Technologies Ltd

Basel III’s main objective is to re-establish the rules and ensure the global economy doesn’t become a victim of a financial fall out of the kind that was experienced in 2008. Regulators have been quick to exert their authority to make sure banks have sufficient capital to return deposits in the event of a crisis, are able to survive a protracted liquidity freeze, and are less dependent on the vagaries of short-term credit markets. These rules had to be implemented, especially in retail banking, where it was necessary to curb high risk mortgage and credit card lending. However, when taking a three hundred and sixty degree view of the financial market place, the new ‘rules’ appear restrictive and could even be accused of squeezing life out of a recovering economy.

Whilst the mature markets are expecting flat GDP rates in the near term and are battling with deflation, currency crisis’s and resorting to quantitative easing, the emerging markets are experiencing exponential growth. It is predicted that emerging markets’ GDP will grow at a rapid pace of 6.3 per cent in 2011 and 6.2 percent in 2012[1]. Yet, this economic growth could be seriously threatened by the Basel III regulation, thanks to the impact the rules will have on the trade finance business.

The emerging markets dependency on trade is significant and Basel III is likely to result in an increase in trade finance pricing and consequently a reduction in the volume of trade finance, due to the new capital and liquidity ratio requirements. Standard Chartered Bank estimates that trade finance pricing will increase by between 15 and 37 per cent and the impact of this could see the volume in activity reduce by six per cent, which would result in a reduction in global trade by $270 billion per annum. This equates to a 0.5 per cent reduction in the global GDP[2].

Also, a study conducted by the Chamber of Commerce found that based on the trade finance activity of nine global banks from 2005 to 2009, out of the 5.2 million transactions which took place, only 1,140 defaulted and only 445 of those defaults were during the banking crisis from 2008 to 2009[3]. Basically, the statistics prove that the existing trade finance system works, but it will become ten times more expensive to do a low-risk trade guarantee than it previously was, due to new regulations that are based on a set of rules for the mass finance industry, that don’t accommodate for the niche markets within it.

Emerging markets are breathing life into the existing economy and are an integral part of the global market moving forwards. They are recognised for their innovation, talent and creativity in enabling mature markets to establish new, more profitable business models through collaboration. Basel III regulations on leverage, liquidity ratio and treatment of off-balance-sheet items fail to distinguish between new ‘hot money’ financial instruments (like CDOs and SPVs) and the more stable and time-tested instruments (like LCs and trade-finance guarantees). Any adverse impact to International Trade Finance may lead to slow down of growth in emerging economies through a second and third level impact to infrastructure and capital goods financing.

As the governmental authorities thrash out the final detail of the Basel III regulations they need to take into consideration the potential hindrances that the new rules could have on existing financial structures that already work and aid economic growth.

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Guest blog: Finance companies lag behind in uptake of unified communications

Mark King, Senior VP, EMEA, Aspect

Consumer expectations of good service are higher than ever; and not just when they pick up the phone or enter a bank. Today’s socially networked consumers expect to be able to make contact with companies when and however it suits them – and have more outlets for voicing opinions about their experiences (and grievances) than ever before.

It’s somewhat surprising, therefore, that according to recent research, banks, insurance companies and other financial institutions are behind the game when it comes to delivering a unified experience for their customers.

Presented with a long list of communications capabilities from E-mail to Mobile Devices, Traditional Voice (PSTN/PBX), Conferencing, VoIP, Instant Messaging (IM), Document Sharing, Presence and Video, 56% of all European organisations responding to the Aspect UC-Trends 2010 survey* said they used 6 or more of them – with 55% stating that they had either integrated or ‘partially integrated’ these capabilities on a unified communications (UC) platform.

When it came to respondents from the finance industry, however, only 53% said that they had fully integrated or partially integrated communications capabilities on a UC platform.

Similarly, while 58% of European organisations said that they will have deployed (or expect to deploy) UC platforms by 2012; just 54% of organisations in the finance industry responded likewise.

Given the commitments to improve accessibility and service quality delivered by European financial institutions, these findings will surprise many people. And especially when one considers that two-thirds of all financial institutions surveyed agreed that the value of UC increases when it is extended to customers.

Of those finance companies who agreed with the statement “the value of UC increases as it’s extended to customers”, 45% recognised that UC enabled ‘Cross-Channel Communications’, 21% that it will ‘Improve Response Rates by Connecting to Knowledge Agents Outside the Contact Centre’, and 24% that it will enable ‘Better Interaction with Field/Mobile Workers’.

Overall, the survey shows that benefits of UC in terms of improving service quality, enhancing employee productivity, creating a mobile office, reducing travel costs, and saving time and resources using presence are well understood and appreciated.

In economically-challenging times, investing in UC is surely not just an opportunity to enhance internal communications and business performance. It is a statement that companies are keen to engage with customers in new and exciting ways; giving them the contact choice and quality of service they so clearly demand.

Posted in Uncategorized | 10 Comments »

Guest Blog: Optimising Business Processes

Charley Rich, Nastel Technologies

Looking back to the January 2010 FST post, The coming year: 2010 predictions,there were mixed opinions on what direction financial services IT spending would take in 2010. Some industry resources forecasted tech spending would increase given that new strategic technologies would require significant investments, while other key players predicted reductions in the amount of money available for technological investments.

With 2010 capping off in mere days, Gartner has reported IT spending indeed did increase in 2010 and that a 3.5% increase in worldwide IT spending for 2011 is likely.

While this is a positive sign of an economic upturn, it’s vital in 2011 for financial services organizations to control costs by optimizing business processes. This empowers institutions to be more competitive at a lower cost and with an improved customer experience.

The key here is to integrate IT into the business. IT teams need to be able to instantly visualize technology issues as situations in the context of their business and to automatically predict – and even prevent – their business impact. The all too common alternative, simply reacting to problems, is an expensive process for problem resolution. This impacts the business in multiple ways such as escalating support costs, reduced productivity and poor customer service – all of which result in customer attrition and order fallout. Even more troublesome is that most of IT talent gets pulled into fixing problems instead of working on developing new services to attract business. As such, IT is stuck fixing the business instead of helping to grow it.

A remedy for reactive troubleshooting is Business Transaction Management (BTM). The IT departments in financial services firms can utilize BTM to monitor business processes comprised of applications, the transactions they invoke and the middleware that interconnects them for patterns that identify imminent failures. The software needs to be able to monitor complex, service oriented architecture (SOA) applications comprised of many composite services spanning the distributed, mainframe and cloud tiers. These composite applications are themselves dependent on other complex processes that are prone to failure including networks, storage, security, firewalls and even the electrical power grid – any of which could cascade into a serious business impacting problem.

BTM solutions give deep visibility into transactions from the business perspective and can discriminate between failures which are important, but not business impacting, and those that have immediate critical impact to the business. Customer satisfaction and the visibility provided by BTM are intertwined. Once middleware and related processes begin to conflict and slow down, end users experience session time-outs related to new application versions or scalability problems. In order to avoid this, IT departments need the visibility BTM brings to see these bottlenecks.

To begin the BTM process, the software first needs to clearly define normal behavioral benchmarks. BTM systems can use a combination of Complex Event Processing (CEP) with policies to determine normal or abnormal behaviors compared to the business’ expected results.

Establishing the “normal” first involves establishing a base line of user-defined samples for certain sets of key performance indicators. Computation of statistical indicators follows, which measure rate of change, momentum, exponentially moving averages and other analytics. The system then compares the newly made samples to the continuously learning base line to understand if there is a deviation from normal behavior and determine if this will have business impact.

An effective BTM solution should monitor applications, transactions and middleware to proactively find business process issues. In addition, by leveraging CEP, it can prevent the impact of a problem via the automated dynamic invocation of business rules.

So what’s the big picture result? Implementation of BTM in financial services will result in lessened mean times to resolve problems, and will greatly increase the time between system failures, thus, freeing up IT resources to help build the business.

Lowered costs through operational efficiencies will always be a priority for financial services IT management. However, saving money isn’t strategy, it’s a tactic. No financial services institution can claim saving money internally is a competitive differentiator. Saving money will remain the number one priority, but 2011 should see a focus on other initiatives including growing revenue and improved customer satisfaction as companies begin to focus on growth instead of recession-induced survival.

Financial services IT departments can meet the challenge of optimizing business processes and maintaining (or lowering) operational costs through forward thinking strategies including Business Transaction Management. Additionally, the proactive identification and preventive action can be a direct driver of customer retention, acquisition and business growth.

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Guest Blog: There must be a better way…

Craig Wilson, MD of Ciklum UK

Battered by cutbacks, organisations are under more pressure than ever to demonstrate value for money from their IT projects. Yet the tide has turned on traditional off-shore services as a means of deriving substantial cost savings from IT development, because the results simply are not standing up to scrutiny.

Prescriptive, sequential development processes – favoured by traditional IT outsourcing destinations – are regularly failing to produce results as if there are problems with the steps in the specification, they are typically not flagged to the customer, but instead the process is continued with blindly and an entire project is quickly derailed.

And so it is unsurprising that over the last few years, analysts such as IAG Consulting and Gartner have signalled a growing trend towards ‘backsourcing’.

Here, the ends of corporate tethers are reached and projects are repatriated back to the native shores, where the project costs more to complete.

But why?

Why aren’t the traditional destinations learning from their mistakes? Complacency? Inflexibility? Ignorance?

And what alternatives are there? The reason outsourcing was pursued in the first place was the high domestic wage bill, so what alternative are clients left with? Pay low at first and run the risk of failing to complete and ending up with a potentially higher bill, or pay higher and stand an increased chance of success, but with no guarantee?

It is unsurprising then that the ends of corporate tethers are reached and more projects are brought back to native shores. While these projects stand a greater chance of successful, timely completion when brought home, as greater control and flexibility can be exerted, the costs remain high.

Eastern European nearshoring destinations are therefore, seeing this reluctant return to in-house activity as a huge opportunity. The low cost and sheer amount of IT-literate talent combined with the Europhile culture is making the proposition highly attractive. Eastern Europe delivers where offshore services have fallen short, offers the ability to regain control, and is a lifeline for organisations that simply cannot afford to reabsorb projects internally.

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Guest Blog: The Psychology of cloud computing

Colin Rowland, VP, EMEA, OpTier, looks at the psychology behind cloud computing…

Whilst much of the business world is gripped by the possibilities of cloud computing, financial services is the one industry has been decidedly quiet on the topic. That’s not to say that financial service companies have their heads in the sand – far from it – but there is a lot at stake when thinking about moving to the cloud.

There are two big challenges in relation to the cloud. Firstly, a bank’s IT assets represent the beating heart of their organisation and no one wants to move confidential data into the cloud without being 100 per cent confident that information isn’t compromised by doing so. Secondly, there is a concern about a lack of visibility by application owners – losing control over performance is a big concern.

Arguably the second point is a psychological one. In recent years banks in particular have moved to a shared services environment. In this model applications are hosted, provisioned and supported centrally. There was much resistance around this model, but it was more related to culture than it was technology. The reason for this was that people who own the business services didn’t want to lose control. Yet, what we’ve seen is that generating transparency into this environment completely changes the picture and accelerates adoption. With the right kind of visibility focused on their business services, people get that much needed comfort factor back.

In many ways the success of shared services models means that the second point has already been negated. Or has it? People still remain reticent about the cloud and not from a security perspective. In an industry experiencing its biggest flux in history, performance is king. But we’re in a position where performance can be guaranteed using current models then why is everyone getting their knickers in a twist?

Ultimately, it’s the business that’s driving this forward. Decision makers hear about the cloud and the fact that services can be provisioned in days, not months and they want that level of flexibility for their organisation. They know that to compete – especially with the new kids on the block like Metro Bank – there is a need to be more innovative and dynamic. IT underpins the CEO’s future vision of the bank and if the IT department can’t deliver, then there is a real danger that business people will start to view themselves as ‘IT experts’ and go off on a whim and start doing things themselves. And for IT, that represents the ultimate loss of control.

So, what can be done? Whilst it would be unwise to move everything straight from shared services to an external cloud, it is important to map out a path on what your goals are and how cloud strategies can help. Most likely we’ll see people move from shared services, which centralises IT and resources to optimise costs, to internal clouds which take that optimisation one step further to include self service access and insight into cost. Only then will banks begin migrating information to private external clouds to accommodate busy workloads, like end of the quarter reporting, or to reduce capital expenses. I’m not convinced that the public cloud and banks will ever be comfortable bed fellows, but private clouds, whether on or off premise, can still deliver all the much hyped benefits of this technology.

The cloud has changed the game. Traditional management approaches in this new, dynamic environment don’t cut the mustard. Applications and services must still perform when they are in the cloud, so extending visibility and understanding how IT transactions flow and behave across shared services to a cloud model is key to success. Certainly adoption of cloud services will only be accelerated and become a viable IT model for the industry if there is more integration between the two. It’s a journey that needs to be made safely, but quickly. The bottom line is that if you’re in IT and the cloud isn’t on your mind, then you’re behind the business. And no one wants to be in that position.

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Pressing times

It’s 4.25pm on Friday 1^st October 2010, and I have just gone to press with my first issue of FST.

It’s strange actually – I’ve stressed out for the past four weeks about being on time, and now it’s actually there, it’s a bit of an anti-climax. I was nervous: “Is this going to work out?” I asked myself. “How will people react to my new offering?” I stressed.

I guess this must be how the FSA feels when it offers out a new consultation paper. Will the proposals that they’ve put their hearts and souls (well, you’d hope so anyway) into actually come to fruition? Will people hate what they’ve got to offer?

This issue’s FST – which will be on desks in mid-October – looks at the FSA’s proposals on removing the exception to the voice recording rule on communications. It looks like from 2011 all financial institutions with employees who carry out trading via mobile phones MUST have in place the ability to record said conversations and to archive them. The reason? To reduce market abuse.

The general response, industry insiders tell me, is one of stubbornness. I’m told that the banks will comply, but only by refusing to supply employees with mobile phones, thereby removing the need for them to invest in recording equipment in the first place.

So will the regulations, assuming they will come to be, turn out to be more of a damp squib than a hot potato? I just hope my first issue is better received…

Sophie Baker

Editor

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And so begins a new chapter…

So the ash cloud had a huge effect on payments made on cards in April and May 2010, according to stats from the UK Payments Council. And to add insult to injury, the sky’s no-go status was worsened by BA’s decision to strike. Card spending on airline tickets dropped by 13 per cent in the period, compared to the same time in 2009.

Meanwhile cheque usage continued to plummet, although is this really newsworthy anymore? Even in my limited experience in the Financial Sector Technology realm, I recognise that this is inevitable, with the move to scrap cheques by 2018.

As the financial markets continue to recover, we will surely see an increase in payments overall – Q2 2010 saw a drop of 0.6 per cent. However, maybe HMRC’s tax rebates, which were set to hit doormats earlier this week, will encourage a bit of spending…

Anyhow, welcome to the new chapter in FST’s blog – I look forward to meeting you, and hope you will enjoy the lighter side of the magazine…

Sophie Baker

Editor

FST

sophie.baker@fstech.co.uk

Posted in Uncategorized | 4 Comments »

Farewell, parting is such sweet sorrow…

Well this is farewell then, as I am departing Financial Sector Technology (FST) after five and a half years in charge as editor. It’s been a rollercoaster journey since joining in January 2005 as the sector has gone from boom to bust, but I’ve thoroughly enjoyed the ride! Many things have changed in that time, of course, not least the demise of Northern Rock, Bear Stearns and Lehman Brothers in the credit crunch. I shall never forget being at the Sibos 2008 show in Vienna, Austria, and seeing the panic as many of the show’s attendees turned back around and returned home to try and save their various positions on the international financial markets as the meltdown began in earnest. My first interview at the show was, ironically enough, with HSBC’s then group COO David Hodgkinson, to discuss risk. Kudos to the man for keeping for the appointment!

In terms of technological innovation many things have changed over the last five and a half years, with the rise of mobile phones and attendant applications such as mobile payments and banking, mobile remittances in the third world, and other end uses particularly prevalent, alongside other developments such as virtualisation, cloud computing and so forth. The technology world never stands still and it is this fact that has made it such fun to report on it during my time at FST. I leave it to my successor at FST, Sophie Baker, to keep you up to date with all the latest innovations. She can be reached on sophie.baker@fstech.co.uk, Tel: 0207 562 2415 from September onwards. Please join me in wishing her well and give her every assistance in her new role; over to you Sophie…

Best wishes,
Neil Ainger
Ex-editor of FST Magazine - Financial Sector Technology
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Tags: General

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