THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

Fund Structure; Fund Administration; Information & Data

Providers; Custody; STP & Technology; Trading Services &
Outsourcing; Corporate Actions; Hedge Funds; Prime
Brokerage; Settlement & Clearing; Securities Lending;

INVESTOR Reference Data; Transfer Agency; Legal & Compliance

S ERVICES PROXY VOTING ASIA – EASTERN PROMISE

JOURNAL
VOLUME 4 - JAN/FEB 2005
SECURITIES LENDING – TRANSPARENCY & GOVERNANCE
PRIME BROKERAGE – HEDGE FUND OPPORTUNITY
FUND SERVICING – CHANNEL ISLANDS
CUSTODY – US SECURITIES SERVICES
PLUS:
PENSIONS REGULATION
UK DEPOSITORIES
INFRASTRUCTURE
– BRIDGING THE GAP
CLEAR IN EUROPE

EXORCISING
DATA DEMONS
REFERENCE DATA REVIEW
WWW.ISJFORUM.COM
 Wherever you settle should feel like

home

Demands for a single European

capital market have set
harmonisation in motion.

We are convinced of the benefits

of harmonised financial markets
in Europe and are committed to
removing barriers to cross-border
securities settlement.

DELIVERING A DOMESTIC
MARKET FOR EUROPE
Contents

40 Industry Panel Consolidation and outsourcing are major concerns

Fund Services for fund service providers
INVESTOR
S ERVICES 48 Hedge Fund The latest hedge fund performance results from
JOURNAL Performance industry-leading benchmarks

THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

Fund Structure; Fund Administration; Information & Data
Providers; Custody; STP & Technology; Trading Services &
50 Hedging Gets Prime Brokers business gains from hedge funds
Outsourcing; Corporate Actions; Hedge Funds; Prime
Brokerage; Settlement & Clearing; Securities Lending;
INVESTOR Reference Data; Transfer Agency; Legal & Compliance

S ERVICES
55 Channeling
PROXY VOTING ASIA – EASTERN PROMISE
JOURNAL
VOLUME 4 - JAN/FEB 2005
SECURITIES LENDING – TRANSPARENCY & GOVERNANCE
PRIME BROKERAGE – HEDGE FUND OPPORTUNITY
FUND SERVICING – CHANNEL ISLANDS
CUSTODY – US SECURITIES SERVICES
What’s in store for the Channel Islands’ fund regimes?
Growth
PLUS:
PENSIONS REGULATION
UK DEPOSITORIES
INFRASTRUCTURE
– BRIDGING THE GAP
IN EUROPE

62 A Common Call? A new Directive for multinational pensions in Europe

64 To Rate, Uncovers the dark arts of custody ratings with

EXORCISING or Not to Rate Thomas Murray
DATA DEMONS
REFERENCE DATA REVIEW
WWW.ISJFORUM.COM

66 Safe Deposits Developing the depositary and trustee industry in the

UK and Europe

68 Mandates Summary of the latest mandates awarded and trends

70 Winning the West Will America welcome new service providers?

74 Driving Measuring the efficiency of US securities STP

Automation
76 Bridging the Gap European ISCDs co-operate on securities settlement

79 Cooperation is Key The next steps towards creating a unified securities

market in the Nordic region

Conference Digest
81 Learning from ISITC: How far is the European securities industry
Experience? from achieving standardisation?

83 Fixing Dated Data FIMA: Reference data specialists Conference Digest

86 Events Forthcoming events for the securities services professional

90 People Moves Movers and Shakers in the securities industry

93 Contact Directory ISJ directory of services

WWW.ISJFORUM.COM

2 INVESTOR SERVICES JOURNAL

Letters to the Editor
INVESTOR Write to letters@ISJforum.com
S ERVICES Back to the Future
JOURNAL With a collective annual systems spend of £30
bn, you’d be forgiven for thinking the financial
services retail sector, houses the latest and most
forward thinking IT infrastructures, with max-
imised straight through processing and highly
Janet Du Chenne sophisticated settlement solutions.
Editor
Janet.DuChenne@ISJFORUM.COM “A reliance on updating legacy
systems - many well over 10
years old - remains a wide-
Julia Svetlichnaja
News Editor spread business phenomenon”
Press@ISJFORUM.COM This may be true for some organisations, how-
ever, Summerson Goodacre’s latest annual
Design review of stock exchange-linked financial houses
NatterJack Design has brought to light intriguing evidence that a
reliance on updating legacy systems - many well
Editorial@ISJFORUM.COM over 10 years old - remains a widespread
business phenomenon. The Report, which asked
Contributors
high level questions about reliance on in-house
Brian Bollen, Rekha Menon, development versus outsourcing, looking at levels
Fionnuala Synnott, James of investment in technology and third party
Wallace, Helen Yates selection criteria, reveals that 36 per cent of the
100 institutions polled are working with systems
originally introduced prior to market deregulation
Justin Lawson
let alone the ubiquitous adoption of the internet.
Publishing Director Many have added components as required
Justin.Lawson@ISJFORUM.COM over the years, and continually attempted to
adapt their IT infrastructures to cope with and
manage change in regulation, compliance and
Jon Dunham
market practices.
Executive Publisher These legacy systems represent an enormous
Jon.Dunham@ISJFORUM.COM ongoing cost base - and many institutions will
find it’s an issue which needs to be addressed
Heidi Mumford urgently in light of the greater regulation and
Associate Publisher competition expected in 2005 and beyond. But
Heidi.Mumford@ISJFORUM.COM before you switch over to a fully outsourced
system are you simply moving from an in-house
legacy system to an outsourced legacy system?
Investor Services Journal The film ‘Back to the Future’ a contemporary of
11 B Fitzroy Square many of these systems - may be an appropri-
London W1T 6BU, UK ate credo here. Choosing whether a system is
administered by your own in-house personnel
T: +44 (0) 20 7388 9000 or by a third party outsourcer is only part of the
F: +44 (0) 20 7388 6699 decision, the principal question to address is
the suitability of the system being used and its
Published by Investor Intelligence relevance to today’s and tomorrow’s market.
Chairman Mark Latham Passing the maintenance headache of your
legacy system to an outsourcer is not the
© 2005 Investor Intelligence Limited recipe for any sort of future.
All rights reserved. No part of this Dr Mike Foley, managing director, Peterevans
publication may be reproduced, in
whole or in part, without prior written
permission from the publisher. Asset pooling - why all the noise?
Managers of money have for many, many
Printed in the UK by Pensord Press.
decades sought means by which to co-mingle
ISSN 1744-151X
funds in order to achieve diversification of risk,
critical mass and reduction of expense.
WWW.ISJFORUM.COM Products that are common today such as
4 INVESTOR SERVICES JOURNAL
mutual funds, pension funds and life funds, are
all examples of these.
The modern money manager has developed
investment products to meet the needs of particu-
lar constituencies of its client base. For a UK
manager, these constituencies could include UK
pension funds, UK retail investors, European retail
investors and Japanese institutional investors.
Whilst the same investment strategy may be
pursued for each constituency, their varying
requirements for taxation, regulation, legislation and
administration demand that the UK manager main-
tains multiple independent investment products.
“Regulatory and fiscal
developments are broadening
the horizons for the application
of pooling each year”
Product proliferation of this type creates
inefficiencies in investment management and
administration. These translate into costs, which
are inevitably born by the investor.
Pooling offers the possibility to co-mingle assets
for investment management and administration
purposes whilst retaining the unique fiscal and
regulatory characteristics of each participant in
the pool. Pool participants can be pension funds,
mutual funds or large institutions under a
segregated investment mandate. Regulatory and
fiscal developments are broadening the horizons
for the application of pooling each year.
Is it any wonder that 'pooling' is on the project
list for many managers in 2005 - whether at the
implementation or exploratory stage?
Bernard Hanratty, director, Global Funds Services,
Citigroup Global Transaction Services EMEA
Straight To the Point
(From Gert Raeves, CheckFree Software)
In the article ' A Change of Heart' in the
Nov/Dec 2004 issue of ISJ, you printed a diagram
showing the key 'efficiency pain points' for invest-
ment managers and custodian respectively. The
main custodian issue was labelled 'generating
“Securities processing is only a
profit generator for a small section
of the industry - for most it is a
pain and a cost”
priority, critical mass, and incentivising automa-
tion', or in plain English: getting anyone else to
care about investing in STP. Why do custodians
care? Because they are in the business of opera-
tional efficiency, and if they can shift some of the
process back out to their clients, means they
have to spend less.
Securities processing is only aprofit generator
for a small section of the industry - for most it is
a pain and a cost. (Continued page 88)
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News - Europe Middle East Africa
Custody & Outsourcing
Brussels - Belgian banking group Dexia
has confirmed it is in preliminary dis-
cussions with San Paolo IMI in Italy
about a potential partnership. In the
course of its development policy, Dexia
keeps relations, in a usual way, with
potential partners. The discussions take
place in the framework of a confidential-
ity agreement. A merger of the two
groups would create one of Europe's
largest banks.
Paris - The Securities Services business
of Société Générale, Global Securities
Services for Investors (SG GSSI), has
retained its Moody’s Aa2(MQ) rating
for its Clearing Custody and trustee
activity, the third highest Management
Quality rating possible. The rating
obtained by the department, which is
dedicated to asset managers and insti-
tutional investors, is based on the
Agency’s favourable evaluation of its
organisational structure and manage-
ment characteristics.
London - AXA Investment Managers’
(AXA IM) has completed its investment
operations outsourcing to State Street.
This partnership with State Street cov-
ers the middle office functions, fund
accounting, performance measurement
services, fund administration and
investment operation support.
London - F&C Asset Management, the
£118 bn pan-European fund manager
created in October 2004 from the merg-
er of F&C and ISIS, has reached heads
of agreement with Mellon Financial
Corporation to outsource a number of
operational functions across the
enlarged group.
Copenhagen - The Danske Bank Group
has signed an agreement with National
Australia Bank to purchase Northern
Bank in Northern Ireland and National
Irish Bank in the Republic of Ireland,
including the banks' activities in the Isle
of Man. The two banks have been part
of National Australia Bank's European
organisation since 1987.
6 INVESTOR SERVICES JOURNAL
The Danske Bank Group will pay £967m
in cash for the shares of the holding
company National Europe Holdings
(Ireland) Ltd. The purchase is subject to
the approval of the competent authori-
ties.
Funds & Administration
London - International Financial Data
Services (IFDS), the international trans-
fer agency joint venture between State
Street and DST, announced that
Investec’s UK OEIC’s new multi-curren-
cy facility has gone live on the IFDS
platform. Investec will be using just one
of the servicing models that IFDS/State
Street provides to support consolidated
Simon
Hudson-Lund
European product ranges. Simon
Hudson-Lund, managing director of
IFDS said: “Working in collaboration
with our colleagues at State Street we
have expanded our range of integrated
solutions for the European fund market,
offering a number of flexible operating
models that allow organisations such as
Investec to use a single solution to dis-
tribute across Europe, thereby gaining
economies of scale.”
London - Northern Trust is buying
Baring Asset Management's Financial
Services Group (FSG) from ING for
£260 million. FSG is the institutional
fund administration, custody, and trust
services arm of Baring Asset
Management, which ING acquired when
it bought the British merchant bank in
1997.Upon completion of the acquisi-
tion, Northern Trust will acquire a fund
services group with approximately $63
bn in funds under administration, $28
bn in custody and $32 bn in trust assets
as of September 30, 2004.
Securities Lending
London – SecFinex, the independent
online marketplace for securities
finance, has added two new clients,
namely the Bank of New York and Guild
Global), as well as fixed income and
new equity markets (USA, Belgium and
Exchange Traded Funds) to its web-
based trading platform, where lenders
and borrowers meet and execute securi-
ties loans.
Technology
London - Mondas PLC, the corporate
action software specialist, has formed
an alliance with FT Interactive Data, the
operating subsidiary of Interactive Data
Corporation and a supplier of financial
information and analytical software to
global markets. From initial data feed
through to the updating of election
outcomes in back-office systems, the
benefits of the combined services will
include greater transparency and con-
trol of the CA process with the resulting
potential to reduce operational risk.
Regulation & Infrastructure
Paris - Euronext, Deutsche Börse’s rival
bidder for the London Stock Exchange
(LSE), was reported to be involved in a
separate offer for MTS, the European
bond trading platform. As operator of
four continental exchanges and the Liffe
financial futures market, Euronext
declined to comment on reports that it
is in talks to buy the Milan-based MTS.
At the time of going to press, Werner
Seifert, CEO of the Deutsche Börse, and
Jean-François Théodore, CEO of
Euronext, were to begin a series of talks
with Clara Furse, chief executive of the
LSE. The German exchange’s offer is
530p per share, while Euronext’s offer is
expected to be about 580p.
Frankfurt - Deutsche Börse will be offer-
ing reference data under the name of
PROPRIS from the first quarter of 2005.
The new product range includes refer-
ence data such as new issues data and
corporate actions.
DAILY NEWS AT WWW.ISJFORUM.COM
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News - Americas
Custody & Outsourcing
New York - Citigroup Global Transaction
Services has launched an advanced set
of services for asset managers looking
to outsource the operations of their
separately managed accounts (SMA).
These services are part of an integrated
suite of Asset Manager Solutions
designed to meet the middle- and back-
office outsourcing requirements of an
asset manager. Using this technology
platform, Citigroup enables asset
managers to deliver customisation, tax
efficient management and investment
restrictions monitoring, while enabling
asset growth, improving controls and
lowering costs. “Through our expertise,
experience and leading integration capa-
bilities, we now have a comprehensive
servicing platform to provide a scalable,
cost-effective, end-to-end solution for
clients,” said Chandresh Iyer, director
and product manager for Fund Services
with Citigroup Global Transaction
Services.
Technology
Chicago - Aleri, a provider of innovative
aggregation and analytics software,
conducted a survey of financial services
executives attending a seminar on
financial reporting solutions. This sur-
vey revealed the increasing focus and
importance of being able to accelerate
reporting cycles while enhancing the
quality and granularity of underlying
data. According to respondents, 71 per
cent rank increasing regulatory and
compliance requirements as the key
driver for enhancing financial reporting
capabilities. 94 per cent of respondents
claim they are limited by the time,
scalability and flexibility constraints of
their current financial reporting
processes and systems. 71 per cent of
respondents felt their reporting
capabilities were limited by inflexible
reporting tools and infrastructure.
New York – The Brokerage Processing
Services (BPS) division of ADP
Brokerage Services Group has enhanced
its trade-processing platform to
interface with the Depository Trust &
8 INVESTOR SERVICES JOURNAL
Clearing Corporation (DTCC) Real Time
Trade Matching (RTTM) application for
corporate and municipal bonds and unit
investment trusts (CMU). RTTM
enables firms to match trades soon
after execution, achieving 100 per cent Joseph De Feo
matching on trade date. As of August
20, the BPS division successfully com-
pleted all mandated Fixed Income
Clearing Corporation (FICC) testing.
FICC is a DTCC subsidiary. The FICC
enhanced RTTM for CMU trades by
exchange transactions. The new
establishing a single pipeline to
currencies join the existing eleven, the
facilitate both trade comparison for
Australian Dollar, Canadian Dollar,
clearing purposes and regulatory
Danish Krone, Euro, Japanese Yen,
requirements to the MSRB in real-time.
Norwegian Krone, Singapore Dollar,
ADP's implementation includes both
Swedish Krona, Swiss Franc, UK
inter-dealer and customer transactions
Sterling, and US Dollar as CLS Bank eli-
to RTTM via real-time interactive mes-
gible currencies Joseph De Feo, Chief
saging. ADP has also added Money
Executive Officer of CLS Group and
Market Fund Tiering to its Brokerage
President and CEO of CLS Bank, said:
Processing Services (BPS) Shareholder
“The addition of four new currencies
Accounting System. Money Market
represents another major enhancement
Fund Tiering allows clients to calculate
to the service and is part of our ongoing
accruals on their customer accounts
strategy to continue to grow CLS Bank’s
using adjusted money market rates.
value proposition.”
Clients of the Shareholder Accounting
System can define their own tier rate
increments to support their business
Securities Lending
objectives. In addition to new systems Ohio - The Ohio Public Employees
functionalities, ADP is to provide Retirement System (OPERS) has
correspondent clearing services to appointed Key Bank in Cleveland and
Murphy & Durieu. Murphy & Durieu is Dresdner Bank in New York as
the first client signed by ADP Clearing securities lending agents to manage the
and Outsourcing Services (ADP lending of OPERS’ mortgage-backed
Clearing) since the acquisition of U.S. securities portfolio valued at approxi-
Clearing and BrokerDealer Services mately $4 bn. OPERS will begin lending
from Bank of America. mortgage-backed securities from its
fixed income asset portfolio as part of
Clearing & Settlement its strategy to enhance revenue it
receives from its securities lending
New York - CLS Bank International (CLS
program. The OPERS securities lending
Bank) has announced it will settle
program involves lending securities to
payment instructions in four new
large financial institutions for their use
currencies for the first time this week.
as pledge collateral for repurchase
This brings to fifteen the number of
agreements, as a hedge against market
currencies eligible to settle through CLS
volatility and similar reasons. The
Bank. Following regulatory approval, the
institutions pay a fee to OPERS for use
Hong Kong Dollar, the Korean Won, the
of the securities. Mortgage-backed
New Zealand Dollar and the South
securities are bonds consisting mostly
African Rand have been designated as
of residential real estate mortgages as
CLS Bank Settlement Eligible Currencies
the underlying collateral. They are
by the CLS Bank Board of Directors.
becoming more important as assets
The extension of the CLS Bank service
that provide liquidity in the marketplace.
to these currencies enhances systemic
stability in the settlement of foreign DAILY NEWS AT WWW.ISJFORUM.COM
 DPM IS THE HEDGE FUND ADMINISTRATOR

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trative needs and improve your operational efficiency – no matter how challenging
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From the most basic administrative reports, to complex portfolio valuations, risk
analysis and transparency, DPM has the systems, infrastructure and experience to
handle your toughest administrative challenges.
Our shareholder services are thorough and complete. From shareholder communi-
cations, documents fulfillment and AML compliance, to secure Internet access to
your proprietary shareholder database, DPM provides the products and services
you need, in the format you prefer.
To focus on investing and investor relations all day long, at the end of the day, you
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www.dpmllc.com info@dpmllc.com
News - Asia Pacific
Custody & Outsourcing
Singapore - State Street Corporation
has been appointed by the Overseas
Assurance Corporation Limited (OAC)
to provide a range of integrated
investment services including fund
accounting and enhanced insurance
reporting for US$2 bn in assets. OAC
is the sister company of Great Eastern
Life Assurance Company Limited
(Great Eastern Life) and a wholly
owned subsidiary of Great Eastern
Holdings Limited.
Funds & Administration
Hong Kong – The Alternative
Investment Management Association
(AIMA) has released the “Guide to
Sound Practices for Asian Hedge Fund
Managers”. The Guide provides an
overview of the issues that should be
considered by a hedge fund manager
when establishing a business, though
it is not intended to set out definitive
standards or an exhaustive list of
requirements that could serve as a
benchmark against which conduct
should be assessed.
Technology
Sydney – RBC Global Services, a
division of Royal Bank of Canada, has
selected DST International (DSTi), a
provider of business solutions for the
investment management and business
process management industry to
provide its HiPortfolio’s new
International Accounting Standards
(IAS) modules to RBC’s Australian
investment management operations.
The modules include the Multi-View
Accounting module, Classification of
Assets module, Interportfolio Transfers
module and the Preference Shares
module. Following the implementation
of new IAS effective 1 January 2005, the
modules will assist RBC Global
Services with the new dual accounting
and reporting requirements, as well as
further management of share portfo-
lios for its customers. The HiPortfolio
IAS modules will assist RBC Global
Services in replicating current records
10 INVESTOR SERVICES JOURNAL
Ian Mathieson
into the new Standards format and
introducing new levels of functionality
for share transfers and additional
calculations. According to Ian
Mathieson, DSTi’s Australia and New
Zealand CEO: “RBC Global Services
has continued to adopt DSTi’s
advanced HiPortfolio solutions into its
business offering as they are a strong
contributor to RBC’s technology
innovation. A benefit for implementing
the DSTi International Accounting
Standards modules is that they are
available now and can be implemented
with minimum future disruption.”
The Reserve Bank of Fiji plans to
implement DSTi’s flagship back-office
solution, HiPortfolio/3. The conversion
will see Fiji’s central bank move to
DSTi’s global platform for fund
administration and accounting in early
2005. For the Reserve Bank, they will
expect to achieve better analysis,
reporting and management to markets
data, including an improvement in
scenario-based forecasting with the
implementation of HiPortfolio/3.
Singapore – Financial software
company SimCorp has further extended
its presence in Asia Pacific with the
opening of an office in Singapore. It is
the third SimCorp office to be opened
in this region, in addition to Australia
and Hong Kong.
Securities Lending
Hong Kong - Northern Trust Global
Investments (NTGI), the investment
management arm of Northern Trust,
has strengthened its resolve in the Far
East by reorganising its securities
lending team. The new structure sees
the relocation of Sunil Daswani to lead
the Hong Kong team. Daswani, who
joined NTGI in London in 2002,
becomes regional manager for
Securities Lending in Asia. His
appointment is part of the develop-
ment of NTGI's broader Asia strategy,
which includes initiatives for NTGI’s
Commission Recapture, Transition
Management, Quantitative
Management, Manager of Managers
and Active Equity and Fixed Income
Management businesses.
Regulation & Infrastructure
Shanghai - Accenture and Deutsche
Börse have been selected to help the
Shanghai Stock Exchange build a new
electronic trading system. Under the
agreement, the Shanghai Stock
Exchange, China's largest exchange,
has licensed Deutsche Börse's Xetra
trading system, which Accenture will
adapt and implement for the Chinese
market. The system will enhance the
exchange's ability to offer additional
products and services to investors and
institutions and will enable the
exchange to more efficiently scale its
operations to meet growing market
demand in China. The Shanghai Stock
Exchange serves a broad range of con-
stituents by providing the marketplace
and facilities for securities trading,
arranging new listings, regulating
members, and disseminating market
information. The new technology plat-
form will enable the exchange to rapid-
ly introduce new services by providing
a more flexible market structure to
accommodate new market participants
and support the trading of financial
products. “The Shanghai Stock
Exchange is committed to fully leverag-
ing its assets to enhance the value it
provides to institutions and investors,”
said Robert P. Gach, managing partner
for Accenture's Financial Services in
the Asia Pacific region. “The new plat-
form will accelerate the introduction of
sophisticated instruments and services
that can generate greater returns on
investment and more control over
financial risk.”
DAILY NEWS AT WWW.ISJFORUM.COM
Profile - CEO DPM
Deriving
Growth
Robert Aaron
The business case for fund
administration services has
become stronger thanks to
hedge funds. ISJ speaks to
Robert Aaron, CEO of
Derivatives Portfolio
Management about how to
recognise an opportunity
when it knocks.
12 INVESTOR SERVICES JOURNAL
A career in accounting, when channelled intuitively,
could turn into a worthwhile and lucrative business
cause. This statement could not be closer to the truth for
Robert Aaron, who began his vocation as an accountant
and today chairs one of the most successful hedge fund
administrators. After an initial start in public accounting
with Arthur Young & Company, Aaron progressed to
Commodities Corporation USA. In the early 1980s, the
Corporation was dubbed a multi-strategy hedge fund or a
venture capital type operation, which traded heavily in the
futures and financial markets. Starting in risk manage-
ment, Aaron was placed in charge of its securities trading
operation in Bermuda.
“Instead of doing administration
for our own organisation, we
became an administrator for
any kind of outsourcing client
who was interested”
In the mid-80s, Commodities Corporation spun off its
proprietary businesses, which traded hard assets and phys-
icals, in order to focus on money management. Aaron
partnered with the president of Commodities Corp. to
take over the company’s energy trading operations and
launched a spin-off company called Tricon. Tricon evolved
into a trading company focussing on futures and physicals
and, over time, became a money management business. In
the early 1990s, Aaron and his team began to sell off
Tricon’s physicals business, comprising oil terminals and
sawmills. The company’s traders also decided to spin off
and became individual hedge fund
managers as opposed to propri-
etary traders. “We took the admin-
istration group of Tricon and
transformed it into DPM,” says
Aaron. “Instead of doing adminis-
tration for our own proprietary
organisation, we became an admin-
istrator for any kind of outsourcing
client who was interested.”
As a sign of loyalty, several of
Aaron’s colleagues at Commodities
Corp. are with him at DPM.
Taking the lead
A significant portion of DPM’s business growth is owed
to hedge funds. About 10 years ago, the role of the daily
administrator of alternative funds did not really exist.
Most of this work was performed by the hedge fund and
offshore administrators paid monthly visits to the fund to
perform reconciliations and issue net asset values. Three
companies were instrumental in changing this status quo,
namely International Fund Services (the former back
office of Moore Capital), DPM and GlobeOps (the former
back office for the ill-fated Long Term Capital
Management).
DPM grew as the daily administrative back office for any
instrument traders wished to trade. “As IFS, DPM and

GlobeOps evolved into the same area
where Fortis and Citco were the primary
suppliers of the monthly administration
piece, we also started performing admin-
istration on a daily basis,” says Aaron.
“This marked the change in the industry
from a monthly top-side review and rec-
“The independent
administrator business
clearly got a boost
from the Long Term
Capital event.”
onciliation to a true daily outsourcing
function. With the Long Term Capital
event, people became much more
focussed on transparency and what was
going on in the hedge fund. The inde-
pendent administrator business clearly
got a boost from the Long Term Capital
event.”
Regulation
With an impressive career in hedge
fund servicing, Aaron is well placed to
comment on the impact of regulation on
fund administrators. His first point of
reference is the US Patriot Act, which
required US funds to become attuned to
know-your-client rules. “This was not a
huge change for the administration busi-
ness because we were used to KYC func-
tions in place for years in the offshore
industry,” says Aaron. “The Act was more
of an adjustment for the US and in theo-
ry we don’t become solely responsible for
the hedge funds, because they can never
give away total responsibility for knowing
their client. But they can certainly make
“Increased demands
on reporting wouldn’t
be that helpful for
overall growth in the
short term.”
use of a service we were used to provid-
ing. The impact of hedge funds registra-
tion will not create a lot of work for the
administration industry, but we can
anticipate some form of reporting
requirements, which may be eventually
promulgated. Anything that restricts the
trader from being able to run his business
CEO DPM - Profile
is not good for the industry and is not
good for the investor. Reasonable rules, if
that is what we end up with, will be fine
and yes, there will be more work for the
administrators. Increased demands on
reporting and transparency that would be
forced on the industry probably wouldn’t
be that helpful for overall growth in the
short term.”
Increased regulation may spur hedge
funds to increase their offshore presence
and minimise their onshore presence. But
Aaron is confident of a favourable out-
come: “Your break starts to become the
Biography
spread between sophisticated offshore
investors and retail onshore investors. But
Robert M. Aaron
there is a stronger feeling about retailisa-
tion and whether those rules, if promul- Chairman and CEO
gated, should legally apply to the truly Derivatives Portfolio Management LLC
sophisticated institutional investors.
There is still trepidation about how the Robert Aaron has over 25 years of
rules will affect the business. I don’t think experience in trading operations and
anyone has the answer yet. But a couple risk management, asset allocation
of things could happen, including the and investment accounting, and has
choice to take more offshore money, ver- become a recognised expert in the
sus onshore money. There may be a hedge fund industry. Aaron has writ-
bump in independent administration to ten several articles on the hedge
ensure a third party is looking at the fund industry, covering both opera-
portfolios, not just on an annual basis. tional and risk transparency issues.
We work on annual audits but we may
see more administration done on a
He is a Board Member and past
monthly or quarterly basis.”
Treasurer of the Managed Funds
Bucking the trend of third party soft-
Association and previously served on
ware, DPM uses proprietary software,
the Board of the Foundation for
which is developed internally. “We offer a
Managed Derivatives Research.
customised solution for people,” says
Aaron. “It is an ever-evolving asset.” Aaron currently chairs the MFA’s
annual conferences.
Challenges
Diarising priorities for the year ahead, Prior to founding DPM, Aaron served
Aaron predicts a greater demand, espe- as President of Tricon U.S.A., Inc., a
cially from fund of funds and institution- commodities trading company and
al-type clients, for more transparency on investment manager. He previously
underlying portfolios. “Funds end up
with a lot more transactional data, which
served as Assistant Controller of
happens to be our niche,” he says. “You Commodities Corporation (U.S.A.), a
trading and investment management
have to be able to perform this function,
not just from an accounting perspective, company, and Chief Financial officer
of its Bermuda affiliate, Hamilton
to get all of the right data elements
through a risk engine, of which there are Securities Ltd.
several. You have to become very efficient Tricon was a spin-off of Commodities
at moving high volumes of data and Corporation.
cleaning that data, not only for net asset
value accounting, but also for people who Aaron began his career as a certified
use this data in their operations. Chief public accountant with Arthur Young
risk officers are increasingly demanding & Company, after earning an
of this type of data, both on the speed,
Accounting degree from Fordham
accuracy and the timing of its delivery.”
University.
ISJ
INVESTOR SERVICES JOURNAL 13
STP/Technology - Reference Data Solutions
Multiple data sources, used by
a single institution, potentially
expose the institution to
operational risk.
Reference data - one of the last
bastions of legacy infrastructure
- now needs to be dealt with if
the securities industry is to
enjoy true cost savings through
straight through processing
initiatives. ISJ investigates
Frame of Reference
W hile straight through processing and regulation have
occupied the minds of financial institutions worldwide,
reference data presents another major hurdle to overcome.
This challenge becomes clearer when considering that most
transaction lifecycle functions depend on accurate and timely
reference data. In fact, a recent report from research company
Gartner suggests that of all failed trades, about 40 per cent of
those trades are a result of incorrect reference data. This figure
presents a massive cost to the securities industry as a whole.
For example, if $50 were required to fix each failed trade, the
financial services industry would be left with a bill of $12 bn,
including $5 bn from failed data. “These costs are spread
around the trading systems and passed on to investors and
other players in the market,” says Chris Broyden, a partner in
Accenture's Capital Markets Practice. “For a number of years,
people have been looking at how they can reduce these fric-
tion costs rising from bad data and are looking to resolve
some of the root causes.”
There are three main types of reference data: reference data
for instruments such as securities and the underlying rates for
those securities; reference data for trade counterparties and
thirdly, static reference data trading holidays and tax regimes.
The first two types of reference data are the most complex
and pose the greatest challenge to the financial services indus-
try. Broyden explains: “Securities data are used by all market
participants and should therefore be consistent across the
industry. Counterparty trade data is more specific to an insti-
tution as it involves the individuals and firms, or the counter-
parties, with whom they do business. The solutions available
to resolve instrument reference data tend to have industry-wide
applicability. Those relating to counterparty or client reference
data are often very tailored to the actual institutions that want to
clean up their data.”
14 INVESTOR SERVICES JOURNAL
Solution
Over 90 per cent of all financial institu-
tions have given thought to conducting
reference data programmes to improve the
quality of their data. But there are a num-
ber of challenges these firms are facing.
“The more you delve into reference data the
more complex it becomes,” says Broyden.
“For example, there are about 350 different
elements of information for a single bond
instrument. This figure is replicated across
the total number of bond instruments,
amounting to a global figure of between
two and three million. This is a huge
amount of data, which needs to be stored,
managed and kept up to date. The reference
data programmes people are putting in
place tend to be for the long term. In the
current environment, it is harder to get the
investment for a multi-year programme
when everyone is looking for quick returns
on investment in a reference data
programme. But the benefits of doing this
are enormous.”
“If $50 were required
to fix each failed trade,
the financial services
industry would be left
with a bill of $12 bn”
Threats
Financial institutions who face the most
severe impact from having incorrect refer-
ence data are the custodians. Broyden
explains: “Because custodians are providing
securities services, their clients expect them
to get things like corporate actions right.
For custodians the issue is becoming
increasingly acute, as the services they offer
are beginning to move up the value chain.
Many firms are now outsourcing their back
office operations to the big custodians like
State Street and the Bank of New York. For
example, many of the private banks and
asset managers are turning to these custodi-
ans to for help with fund accounting. The
further up the value chain they climb, the
more important it is that the services they
are offering are premised on correct data.”
Outsourcing
Reference data outsourcing can be
divided into three broad categories. The
first type involves purchasing reference data
from traditional data vendors, including
Reuters, Bloomberg and Telekurs. These
vendors take feeds from stock exchanges
and aggregate a lot of information from
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STP/Technology - Reference Data Solutions
different financial institutions. Instead of
taking direct feeds from all the stock
exchanges for instrument or counterparty
information, a broker dealer can simply
take a feed from these vendors.
The second area of outsourcing, Broyden
explains, occurs on a one-to-one basis.
“Accenture has been involved in this type of
outsourcing for many years. A number of
our clients have asked us to take the data
management problem off their hands. The
outsourcing provider can source the data
and clean and enrich that data with specific
information for a particular client, such as a
proprietary set of models. Clients also ask
for the technical infrastructure for data
management. We believe an institution can
achieve cost savings in the range of 15-20
per cent of their total costs per annum by
outsourcing their data management to a
solutions provider.”
The third area of reference data outsourc-
ing involves shared services between two
institutions. “We are working with the
Depository Trust & Clearing Corporation
to provide a global corporate actions
(GCA) service,” says Broyden. “The GCA
service takes in a number of data feeds
from information vendors and provides a
“single right answer”. This removes the
broker dealer’s need for dozens of people
internally to validate and reconcile different
data feeds for corporate actions.” The GCA
processes corporate actions data messages
on a shared service basis and provides a
clean data feed, or a single right answer, to
the GCA client.
Regulation
As financial regulators become more
involved in the efficiency of the securities
industry, institutions are feeling the impact
of Basel II, the Patriot Act and Sarbanes
Oxley. The rules presented by these regula-
tions force banks to improve their risk
management functions, meet capital ade-
quacy requirements and ensure the accura-
cy of the data they present to shareholders.
Regulation is expected to encourage institu-
tions to fix their reference data problems in
a timely fashion. “One of the ways they can
help to fix the problem is by outsourcing,”
says Broyden. “Regulation is prompting
institutions to put a lot of resources into
data management programmes to get their
data right.”
With first hand experience in the capital
markets, Dai Bedford, partner and UK
regional head at Capco (a data management
provider), emphasises the impact of regula-
tion on these markets. "The biggest impact
16 INVESTOR SERVICES JOURNAL
of regulatory pressures is on client reference
data,” he says. “It is
difficult to explain to
a regulator that you
are trading with a
counterparty, but
you are not sure who
owns them, what
their name is or what
their physical address
Dai Bedford is. As with all indus-
tries, if you put bad
stuff in, you're going to get bad stuff out.
This is very true of reference data and there
are clear operational efficiency gains to be
made in having clean and consistent data."
Tighter margins for investment products
make operational efficiency gained through
the cost of processing per trade far more
valuable today than it was five years ago.
"The risk-weighted return expectations of a
business means that the accuracy and
cleanliness of data reported to the regula-
tors is crucial," says Bedford. "Institutions
do not want to carry additional risk capital,
which would reduce their ability to generate
revenue."
“In the current
environment, it is
harder to get the
investment for a
multi-year programme
when everyone is
looking for quick
returns on investment”
Impact
The impact of incorrect reference data on a
financial institution depends on the holder of
that data. "The buy side of the securities
industry is very keen on anything that allows
them to negotiate a reduction in fees," says
Bedford. "They have picked up on opera-
tional performance, targeting areas such as
confirmation matching efficiency and a
number of initiatives around failed trades.
Contracts with custodians are now based on
guaranteed settlement. The custodian's oper-
ational performance is going to be increas-
ingly measured by the client and will be used
to renegotiate contracts. The contracts custo-
dians enter into with their clients, particularly
those involving guaranteed settlement, place
the risk of settlement failure as a result of
poor data with the custodian."
REFERENCE DATA MANAGEMENT
CHALLENGE SURVEY
The data indicates what 100 of the most
influential reference data and IT man-
agers worldwide think of their data man-
agement challenges and how they are
tackling them.
1. Are reference data strategies in
progress?
Not Yet 17%
No 3%
Yes 80%
Source: Reference Data Now report published by A-Team
Consulting / Reuters Nov 2004
The first chart shows that reference
data is taking front stage; 80 per cent of
firms have implemented a strategic
approach to reference data, and another
17 per cent are planning one.
Change in budget expected over next three
years
70%
70%
60%
50%
40%
30%
30%
20%
10%
0%
Increase Decrease
Source: ‘Reference Data Now report published by A-Team
Consulting/Reuters Nov 2004
The second chartshows that 70 per cent
of those surveyed expect budgets to
increase over next three years. 30 per
cent have a budget of over $5 million per
annum, including 12 per cent with a
budget of over $25 million for reference
data and related services. Continued...
STP/Technology - Reference Data REFERENCE DATA MANAGEMENT CHALLENGE SURVEY - Cont.
Quality and range of reference data by asset class
Management 2% 18% 35% 15% 30%
Over the last six years, Capco has recorded a greater propen- Derivatives Exceptional
sity for managed services in the area of market data, instru-
19% 29% 11% 41% Well Served
ment data and the ability to manage multiple sources of data
Commodities
flowing into an organisation. "A lot of firms have adopted the Average
classic outsourcing review and are considering those activities, 2% 49% 20% 7% 22%
Foreign Exchange Poor
which are core to their business and those which are not,"
explains Sally Hinds, managing principal at Capco. 4% 49% 32% 11% 4% N/A
"Institutions who have large numbers of people managing data Fixed Income
quality are looking to outsource this process. Some institutions 11% 67% 7%2% 13%
have extremely large reference data teams across the globe. But Equities
when this function is outsourced, we can manage that process
from a low cost centre such as Bangalore. This provides firms

0%

30%

80%
20%

50%

60%

90%
70%
10%

100%
40%
with data quality at a lower price."
In terms of its profile within an investment bank, reference
The third chart shows the quality and range of reference data by asset
data is regarded as a highly back office and low-level function.
"A service, which requires specialist knowledge that is not class. Equities scored highest on data range and quality; fixed income is
valued by an organisation, is a much a better service if generally good but with specific areas identified as needing work. Less sat-
provided externally," says Bedford. isfactory were commodities and derivatives data. Only 16 per cent of firms
Despite the cautious approach to regulation across the have some method of measuring return on investment (ROI), while 71 per
securities industry generally, legal intervention could substan- cent do not. ROI was a divisive issue: 34 per cent believed measuring ROI
tially improve the data management function. Bedford is ‘extremely important’, 38 per cent ‘somewhat important’ and 28 per cent
explains: "The regulator needs to enforce data standards on the ‘not important at all’
securities market. Standards would be a key enabler of good
reference data. The regulator also needs to develop a view on Perceived benefits of co ordinated data management from front to back office
35% 29% 36%
the quality of data and how this quality is measured." Moving to lower number of securities ID schemes
42% 43% 15%
“there are clear operational Ensuring of contractual compliance
Cost savings in reduced management requirements
47% 45% 8%

efficiency gains to be made in Unifying contracts

54%
54%
32%
41%
14%
5%
having clean and consistent data” Pooling of knowledge
62% 30% 8%
Cost savings in rationalised data sources
Automation 68% 24% 8%
Reduction in operational risk
Reference data, as defined by Bob O'Brien, vice president, 70% 25% 5%
product management at Financial Technologies International, Increased accuracy & consistency of data

is any piece of information relating to a security, including

0%

30%

80%
20%

50%

60%

90%
70%
10%

client and counterparty information. "In order to achieve
straight through processing, you need to be able to normalise
data across every single application involved between a custo-
dian and a client or investment manager, for identification
purposes," he says. "Every system that processes securities for
customers effectively relies on data. Getting that normality is
important in order to fully integrate information across all
systems. Having worked with large investment management
firms, reference data was an issue we constantly needed to
address, but we never really got to the bottom of establishing a
central entity within a bank and re-doing the pipes or
infrastructure relating to the securities, customers and
counterparties for proper communication."
100%
Defined benefit 40%
Could have benefit Source: Reference Data Now report published by A-
Team Consulting / Reuters Nov 2004
No benefit
Chart 4 shows the perceived benefits of co-ordinated data
management from front to back office. Benefits respondents believed
could be realised by a coordinated data management approach across
the enterprise include: Increasing the accuracy and consistency of data
across the enterprise (73 per cent); A reduction of operational risk (70
per cent); Cost savings realised through rationalisation across data
sources (67 per cent).
Arriving at a value proposition for a custodian bank
30-40%

Custodians Reduction of interpretation risk

Reference data presents custodians with significant opportu- 5-30%

nities. "It is an opportunity for them from a leverage and rev- Reduction in data inconsistencies
enue standpoint provided they succeed with it," says O'Brien.
5-25%
"Custodians are potentially liable for the firm they are provid-
Reduction in multiple data sources
ing a back office service for. For an investment manager, the
investment decision-making is a strategic key for customer 10-30%
accounts, whereas normal processing functions are pushed out. Reduction in maintaining databases
The further the outsourcing relationship develops, the further
downstream the potential liability moves. For the custodian, Source: Reference Data User Group

there is revenue opportunity and there are risks, for which they
have to get their systems in order. Most custodians typically are
working on old legacy infrastructures."
In the US, the Securities and Exchange Commission is
encouraging information availability and risk evaluation in the
Chart 5 shows how reference data could be translated into benefits for
the custodian. The reduction of interpretation risk is the most popular
way of attaching value to clean and consistent reference data.
Continued

18 INVESTOR SERVICES JOURNAL

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STP/Technology - Reference Data Solutions
early stages of the investment process. Basel
II is also forcing banks to take a high level
approach to internal operational risk. Firms
are requested to set capital assets aside in
order to offset some of those risks and
retain levels of profitability.
Investment
The level of investment required in main-
taining correct data was previously avoided.
But attitudes are changing. "The defence of
ignorance, which firms very actively took
hold of, is no longer acceptable," explains
O'Brien.“The type of attitude where finan-
cial institutions believe they can be ignorant
of their customers and the risks associated
with individual securities and parent compa-
nies is not going to cut it any more. The SEC
and New York State Attorney General are
going after firms and are trying to identify
where controls were not in place. Firms used
to be excused of ignorance, but can now be
found guilty of it. Sarbanes Oxley itself forces
fund managers to thoroughly understand
what goes on in their business."
For technology vendor Asset Control, refer-
ence data has always been mission-critical.
“What is different about today’s environment
are the new pressures created by regulatory
initiatives and operational standards, such as
Basel II, know-your-counterparty and scruti-
ny of operations and information by
investors and prosecutors,” says Ger
Rosenkamp, CEO.“These pressures include
the need to report across a broader spectrum
of data types and business operations, the
requirement to maintain more historical
records, and the accountability of institutions
for the quality of not just their data but also
the integrity of their data-handling.”
Many of the problems that exist in refer-
ence data simply occur because of the huge
number of sources, resellers, the require-
ments of consuming users and applications,
and the many systems that have been set up
to move the data from one place to another,
says Rosenkamp.“We encourage people to
think about data management in the larger
framework of operational coherency, rather
than solving discrete problems associated
with one business area or one regulatory
imperative,” he says.“The capital markets
industry itself has invested a great of energy
in attempting to establish these common
frameworks through standards initiatives.
Regulators can ensure that the institutions
they oversee are doing business in a way that
promotes the safety of the financial market-
place as a whole. Under the Basel II initiative,
using the Advanced Measurement Approach
in operational risk implies scrutiny of the
20 INVESTOR SERVICES JOURNAL
quality of an institution’s data and the
integrity of data management, as part of eval-
uating compliance with risk management
regulations.”
According to Rosenkamp, buyside operations
are vulnerable to potentially serious losses
stemming from a mistaken or delayed trade,
a mishandled corporate event or an incorrect
assessment of a counterparty’s risk of default
– all of which could be the result of faulty ref-
erence data.
“The traditional approach (to data manage-
ment) is to obtain data from at least two
sources, then to consolidate and cleanse them
into a single “approved” version. The varia-
tions of standards and data models make this
a fairly complex process that can be automat-
ed by systems, such as Asset Control. Features
such as structured exception handling and
workflow should be standard ingredients to
any such process. Because managing the
“commodity” or vendor-sourced data that is
common all firms who participate in capital
markets, the task lends itself to outsourced
services. Our approach to the marketplace
has long been to promote “total data man-
agement,” which is the use of hybrid in-house
and outsourced systems to optimize the
cost/efficiency of handling commodity and
proprietary data.”
Standards
As part of a reference data initiative, the
London Stock Exchange conducted cus-
tomer-based research into its Securities
Masterfile Service, a database of global refer-
ence data. The LSE allocates International
Securities Identification Numbers (ISINs) to
UK securities as well as the Stock Exchange
Daily Official List (SEDOL) codes. In 2002
the old seven digit numeric SEDOL codes
began to run out, prompting the 18 month-
long customer research. "We conducted this
research to understand our customer’s
requirements for enhancing the SEDOL
Masterfile Service before starting a project to
redevelop the service,” says Mark Husler, head
of reference data at the LSE.“The feedback
we received from clients about the service
included a strong desire for us to continue to
issue SEDOL codes. Customers also request-
ed that the service be enhanced to issue codes
in real-time, cover all global instruments and
provide market level transparency”. The LSE's
system resembles a pyramid structure: ISIN
codes at the top, allocated at the issuer level,
SEDOL codes, on the next level down, allo-
cated at the listing level and Market Identifier
Codes (MICs), at the bottom, allocated at
place of trade level.
Hence, where an instrument such as HSBC
REFERENCE DATA MANAGEMENT
CHALLENGE SURVEY - Cont.
Interested parties at November 2004 (by number of firms)
Market Infrastructure / Misc. - 6%
Banks - 12%
Suppliers - 37%
Broker/Dealers - 10%
Fund managers / corporates - 35%
Source: Reference Data User Group
The sixth chart shows the level of interest in the
Reference Data User Group (RDUG), a forum
where representative members of the global securi-
ties markets can discuss and agree on solutions for
key market issues pertinent to STP. Created in June
2002, RDUG now comprises 156 industry practi-
tioners and suppliers.
Number of firms with ROI measurements
in place
80%
71%
70%
60%
50%
40%
30%
20% 16%
13%
10%
0%
Yes No Don't know
The final chart serves to highlight the benefits of
clean and correct reference data. Only 16 per cent
of firms have some method of measuring return on
investment, while 71 per cent do not.
is listed in multiple markets there are many
SEDOL codes to represent these listings and
potentially many MICs to indicate where the
instrument is traded on multiple platforms
within a country. "Rather than taking
SEDOL codes down and applying them to
the market level, our customers requested
that we continue to allocate SEDOLs at the
listed level and only one SEDOL per coun-
try,” explains Husler.
“Our new system, launched in March 2004,
addresses customer requirements for auto-
mated real-time code allocation covering all
global instruments.”
Securities and client reference data are
prone to a host of regulatory developments.
As regulatory intrusion in the financial serv-
ices industry increases, the time to act on
incorrect data is now.
Reference data, it appears, will have an
increasing impact on the bottom line and
demand more attention from brokers, custo-
dians and investment managers. ISJ
 Analyze This...Reference Data
In the spirit of enlightenment,
ISJ readers asked about the reference data industry.
We asked the professionals, namely vendors,
consultants and stock exchanges for the answers.
Neil Henderson
“Comment on the future of reference data
outsourcing in the securities industry.”
Answered by Neil Henderson, senior vice president
and securities processing and fund servicing
executive at JPMorgan Investor Services
The area of reference data is very challenging. Unless global
organisations tackle it head on, it can be full of inconsistencies in
terms of how that data is handled in one geography or in one
system versus the next.
We (JPMorgan) embarked on a global market reference data
initiative, which aims to establish consistent market data across
all of our systems we use to provide our services.
"These systems include custody, accounting,
compliance and performance measurement"
The customer receives the same, consistent data, regardless
of whether they are located in Hong Kong, Australia, Europe or
the US.
New instruments that are brought to market are rapidly estab-
lished on our system, which is populated on a worldwide basis.
We are at the forefront of establishing consistent high-quality
data.
We use numerous automated reference data and pricing serv-
ices and ‘scrub’ them until we get to our golden copy, which is
used to populate all of our systems.
Clients can see more consistent data in our reporting services
and some of them have expressed interest in buying the services
directly from us.
Reference data is another area where service providers can
add a lot of value. Traditionally kept in-house, clients are now
buying reference data services.
Therefore it has to be a candidate for outsourcing.
At this time we hold 4.5 million securities records on our refer-
ence data master file and have over one million records in a live
status on our custody and accounting systems.
The flow of new securities, including short term instru-
ments, and the complexity of many, particularly in the fixed
income area, has resulted in our increased focus on data
quality and the need to screen multiple sources of informa-
tion so that we provide more accurate and complete reference
data to our clients.
Chris Broyden
“Why can't reference data providers offer market data
that is “old” or “stale” to software companies for free,
in order to facilitate their testing and software develop-
ment?”
Answered by Chris Broyden, a partner in Accenture’s
Capital Markets Practice
In general, we have found data vendors to be pretty responsive
in providing access to their data for testing purposes.
As an example, for our global corporate actions service, the ven-
dors in question have agreed to allow us to distribute what is
effectively live data to prospective customers for free for a limit-
ed time. However, as the question suggests, vendors can be
reluctant to provide free feeds of data for testing purposes.
There may be a number of reasons for this:
- Vendors may question how they can control usage and owner-
ship of the data if it is used in test environments which lack the
same controls as production. Even a one-off feed of relatively
static data contains valuable content and cross-referencing
information.
- Vendors may agree to provide a subset of their data, but this
may not be a typical cross-section of different asset types and
geographies.
- Where you have a vendor feed with cross-referencing between
different entities (e.g. the Telekurs VDF), a subset of records from
these entities will not necessarily cross-refer correctly.
- Providing feeds of past data on demand is a complex task.
Capturing and replaying "canned" data from a specific date is
something we help to provide (for example) at the Stock
Exchange for vendors and large banks with direct Exchange
wholesale feeds. However, the overhead in maintaining these
feeds separate from the main live data infrastructure is consid-
erable - for example, vendors need to make sure that the data
are distributed in the latest version of message formats regard-
less of when the original messages were disseminated.
So those are some of the problems, but what can be done?
It should be in data vendors' interests to ensure that interfaces to
their feeds are developed and tested in a controlled manner, thereby
minimising production problems and providing the required level of
control over data usage. A solution would be to connect to vendors
through an outsourcing provider. Accenture's Data Management
Service aims to solve exactly these kinds of problems by providing
data sourced from multiple vendors in a single unified format, cus-
tomised to each client's requirements.
INVESTOR SERVICES JOURNAL 21
Analyze This...Reference Data
Ian Dunning
“What is the securities industry is planning to do about
data standards across the board and globally?”
Answered by Ian Dunning, managing director at
CB.Net
Efficiency in the securities industry is hampered by the lack of
standards, specifically worldwide unique entity identifiers (UEI)
and the equivalent unique instrument identifiers (UII).
The International Standards Organisation (ISO) has set up
Working Groups 8 (International Business Identifiers) and 11
(Unique Instrument Identifiers) to develop these standards.
However, the international approval, ratification and issuance
process will take time – at least another two to three years.
Industry requirements cannot wait for the development, approval
and issuance of these essential standards.
Standard identifiers are critical elements in both improving STP
rates and facilitating compliance controls. Therefore, in the mean-
time, the industry has adopted a variety of commercial and\or par-
tial solutions. For example, to deal with the requirement for UIIs,
there are solutions such as Crosswalk – a cross mapping of exist-
ing instrument identifiers from Dun & Bradstreet, the London Stock
Exchange, Standard & Poors and Telekurs.
Similarly, to address the requirement for a Unique Entity
Identifier, there is a currently available, pragmatic solution. SWIFT
already issues so-called Non-SWIFT BICs (Bank Identification
Codes; ISO Standard 9362) to finance companies, corporates and
securities companies as well as to banks and bank branches. In
addition, large organisations often create their own internal identi-
fiers – or other codes issued by commercial organisations (such as
Omgeo and D&B) - and cross mapping systems.
Given that the immediate driver is Compliance, therefore the
industry focus is on entity identifiers.
As the new ISO is unlikely to be available in the short to
medium term, the industry is increasingly turning to the use
of Non-SWIFT BICs.
Their advantages are that they are:
1. free
2. issued by a truly international body
3. in a useful, recognised format – acceptable to
current installed systems
4. available now
Indeed, these now exceed SWIFT BICs both in terms of absolute
numbers and growth.
22 INVESTOR SERVICES JOURNAL
Richard Newbury
“A lot of number schemes have been set up but nothing
has really worked on a global basis.” Comment
Answered by Richard Newbury, head of products at
Telekurs Financial
It should be easy to allocate an identification number to any-
thing. All books published have International Standard Book
Numbers (ISBN) and people are allocated social security num-
bers.
But what is being numbered in the securities industry? There is
a clear distinction to be made between the instrument itself and
the place where the instrument is traded or listed. An instru-
ment, no matter where it is bought, remains the same instrument
and is generally fungible with any other of its listings.
The history and the wealth of talent in the financial services
industry means national interests have been well served. The
national numbering agencies (NNAs) issued identifiers for the
listing of an instrument in their jurisdiction – generally only one
listing.
As globalisation increased, the NNAs tried to “internationalise”
their offering. Telekurs Financial, as the NNA for Switzerland and
Lichtenstein, issues Valoren numbers, which identify an instru-
ment rather than a listing. The identifier now covers non-Swiss
instruments, although (in common with other NNA’s) not the
entire universe of instruments globally. To be able to define a
global standard to identify an instrument the International
Organisation for Standardisation (ISO) brought together a num-
ber of NNAs, including Telekurs Financial, and created the
Association of National Numbering Agencies to develop and issue
International Securities Identification Numbers (ISIN) codes.
The coding system is mandated by ISO, in the same as the
ISBN for books. How can the listing of an instrument be identi-
fied? In combination with another ISO code, the Market Identifier
Code (MIC), the ISIN can represent each place of listing or trad-
ing. For example, ISIN GB0004594973 represents ICI (company)
ordinary shares.
However, ISIN GB0004594973 plus MIC XFRA represents the
Frankfurt listing of that share, fungible with the London listing,
GB0004594973XLON, but priced in different currencies and pos-
sible to arbitrage. In an industry crying out for standards,
Telekurs Financial believes that instruments themselves are
clearly identified by the ISIN. Furthermore, the combination of
ISIN with MIC represents a clear global industry standard way of
a listing or trading place of an instrument.

Laura Perdue
“What opportunities are there for the data management
function of a bank and the data acquisition, cleansing and
data derivations functions provided by the vendor to coex-
ist, without complete outsourcing taking place?”
Answered by Laura Perdue, vice president, marketing
& communications, Cicada
In the recent past, banks’ choices in reference data manage-
ment solutions were limited. Today, there are numerous opportuni-
ties for bank and vendor data management resources to not only
coexist, but to work in concert for the benefit of the bank. And
given the data quality requirements being driven by today’s regu-
latory and compliance environments, banks are taking a closer
look at improvements to be gained by outsourcing selected data
management responsibilities to vendors with particular expertise
and experience that the bank may not currently have (or want to
build) in-house. In our experience working with major institutions,
we have found a variety of expectations and needs in regard to
outsourcing, falling along a spectrum from the completely out-
sourced service approach to a software-only solution that keeps
data cleansing and exception-handling functions in-house, with
every hybrid possibility between the two ends of this spectrum. For
the data management functions of the institution and the vendor
to coexist for the long term, the vendor must have a full menu of
technology and services components, so that the bank may choose
pieces that make sense at any given time and may add to or
change them as business requirements dictate.
Some examples of these components include:
- Data management software that can be hosted and operated at
the bank, or offsite at the vendor’s data center, or both.
- The ability for either vendor or bank staff to conduct technical
operations, onsite or remotely.
- Qualified, experienced data analyst team.
- Structure that allows the bank to outsource data management by
asset class, type of data, business unit, geography or other classi-
fication, while keeping other domains for in-house work (i.e. hybrid
approach).
- Data platform and interfaces that handle third-party and
internal data sources.
- Ability for the bank to create and modify data validation rules
and/or use existing rules that have been tested by the vendor.
With a cooperative, flexible hybrid approach, banks can meet
the growing challenges of data management with an optimal mix
of in-house and outsourced resources.
Analyze This...Reference Data
Bob O’Brien
“A What is required for the successful deployment of a
reference data solution at a financial services firm?”
Answered by Bob O’Brien, vice president, product
management, Financial Technologies International
New regulations, accounting standards, corporate governance
as well as new market opportunities are forcing financial serv-
ices firms to tame their data management at an enterprise
level, and bring it out of the ‘silo’ age.
Poor quality data results in increased operational risks, costs
and missed opportunities, underscoring the importance for
nimble financial services firms to maintain solid data founda-
tions. As a daily part of processing trades, large securities
firms deal with myriad sources of reference data, both within
and outside the firm.
Most firms process feeds from several market data vendor
sources and in some instances, multiple times.
Add to this client and counterparty information spread across
many lines of business, and the process of data retrieval, nor-
malisation, and aggregation is further complicated, making
data integration challenging.
Successfully consolidating and coordinating the information
and the systems involved and applying an emerging industry
standard such as Market Data Definition Language (MDDL) can
reduce the redundancy of the feeds and associated costs while
improving distribution and access to reference data.
Enterprise data management and the implementation of the
key master files for securities, customers, counterparties and
position data is the required foundation for global financial
institutions to power financial enterprise systems.
Reference data management enables firms to leverage data
found in application-specific silos through an integration and
consolidation platform for sharing and aggregating information
across the enterprise.
Simply put, reference data management facilitates a “golden
source of the truth (security data or positions)” that supports
enterprise applications and compliance solutions.
INVESTOR SERVICES JOURNAL 23
Analyze This...Reference Data
Anthony Kirby
“What impact will regulation have on reference data func-
tions?”
Answered by Anthony Kirby, founder / secretary of the
Reference Data User Group (RDUG)
Regulation is likely to have more positive than negative effects
when it comes to standardising reference data.
The cumulative effect of the 40 or so regulatory directives under-
way between now and the end of 2008 is likely to be greater busi-
ness transparency and accountability, the critical dependency has
to be the industry’s readiness to grasp the problems of handling
business instrument and entity identifiers in particular.
Both are highly relevant to firms wishing to comply with the
Patriot Act/Know Your Customer (KYC), the Money Laundering
Directives, the Prospectus and Transparency Directives, the EU
Savings Directive (EUSD), the Markets in Financial Instruments
Directive (MiFID) and finally, the Risk-based Capital Adequacy
Directive (Basel II).
As reference data is the fundamental fuel powering the man-
agement of workflows and thereby process efficiencies, firms will
increasingly realise their dependency on accurate and timely refer-
ence data within their operational environments in order to opti-
mise efficiencies, satisfy their end clients and comply with these
regulations.
I predict that the cost argument, which dominated the debate
since 2001 will give way to a realisation that reference data is a
valuable resource, which could represent an extra income stream
for the mid- to back-office if managed wisely.
Created in June 2002, the RDUG now comprises 156 practition-
ers and suppliers.
The Group’s term of reference relates to a forum where represen-
tative members of the global securities markets can discuss and
agree on solutions for key market issues pertinent to STP.
RDUG complements other work programs underway, e.g. ISO, ISITC,
FIX and SMPG.
One of RDUG’s core principles is “that prevention earlier in the
cycle is preferable to more expensive cure later.”
24 INVESTOR SERVICES JOURNAL
Sven Grzebeta
“What is the bare minimum a financial institution can do
to ensure their data is clean and consistent?”
Answered by Sven Grzebeta, product manager for
PROPRIS, Markets & Analytics – Backoffice Services
division of Deutsche Borse
The instrument reference data we use in our operations must
be in line with the information other transaction providers work
on. This is what we mean when we talk about "clean" and "con-
sistent" data.
In order to achieve this an institution should work closely with
the right suppliers, namely the depositories and data vendors. As
for depositories, it is obvious that they must exert the greatest
possible care in the production of reference data, particularly on
corporate actions and income events.
When selecting data vendors it is vital to choose the ones that
can react flexibly on the individual back office's requirements.
Ideally a vendor of choice has access to reference data from a
transaction provider (Central Securities Depository, stock
exchange or custodian) so that the vendor can ensure the infor-
mation he provides is in line with what is communicated through
the transaction and custody chain.
A financial institution should make sure it pays enough atten-
tion to reference data management.
From our own experience, you should not rely on only one source
unless it accepts liability for its data.
And data management is not a student's job - it takes profes-
sional experts to routinely identify data conflicts and to solve
them before they become costly errors.
Going forward we expect that more and more back offices will
outsource data management to central service providers.
As partners to the industry, such initiatives need to be closely
linked to the transaction business, and their value will be meas-
ured by the expertise and the efficiency they bring to the market.
Until such offerings have established themselves, every insitu-
tion is faced with the dilemma of having to assign adequate
resources to data management and having to be cost efficient at
the same time.
*PROPRIS is the new reference data product from the Deutsche
Borse. Launched in December 2004, PROPRIS includes reference
data such as new issues data and corporate actions

Eastern
Promise
Corporate governance in the
Far East is as fashionable as
Sony and Zanussi.
Consequently, proxy voting
issues are significant in the
region. ISJ reports.
Proxy Voting - Far East
T he ability to vote is one of mankind’s most sought
after human rights, particularly for institutional share-
holders in the Far East, where shareholder activism is
becoming more commonplace. Proxy voting in this region
is a rapidly emerging industry and the means available for
voting on mergers, acquisitions and Initial Public
Offerings (IPOs) are undergoing major overhaul.
Speed of delivery is the ultimate goal, and efforts taken
to further automate the shareholder voting process are
being warmly received. Pioneering these efforts in July this
year, ADP Investor Communication Services signed a joint
venture agreement with the Tokyo Stock Exchange and the
Japan Securities Dealers Association (JSDA) to form a
joint venture company in Japan to provide an electronic
proxy voting platform, which handles both Japanese and
English languages. The Japanese proxy voting season is
highly concentrated in the last two weeks of June, with
over 2500 listed companies holding meetings in that peri-
od. Issuers routinely release paper voting materials just
days prior to their late June meeting dates, through the
Japanese postal system. This causes serious backlogs in the
delivery of materials and processing of outgoing ballots
which, coupled with shortened deadlines to allow bank
processing of returning ballots, leaves investors with little
or no time to properly analyse the materials and make
informed voting decisions. This narrow window is even
tighter for foreign investors, particularly when language
translation requirements are taken into consideration. The
new process will enable users of ADP's platform to view
meeting materials and receive ballots over the web, in
Japanese or English, within minutes of the materials being
officially released by participating issuers. The joint ven-
ture is scheduled to launch operations in the first quarter
of 2005 starting with companies holding meetings in May
2005, in time for the crucial June season the following
year. “This is a significant development for all participants
involved,” says Bruce Babcock, president for Europe and
Asia, ADP Investor
Communication Services. “Proxy
voting information will show up
sooner for global clients, resulting
in longer solicitation periods. This
speed of information is the key
benefit of our global service and
the service we provide to local
institutions in Japan.”
A fund manager, whose parent-
banking organisation participates
in ADP’s proxy voting programme,
Bruce Babcock will receive free access to the ven-
dor’s software. “Apart from the top-
tier financial institutions, we also want to get all fund
managers in Japan onto our platform,” says Babcock.
“Top tier managers are the ones who are most actively
pursuing the service; we are also targeting domestic insti-
tutions such as Japanese fund managers who vote on
Japanese securities. A large number of participants vote on
local securities, including brokers and private client fund
managers. We provide these firms with free access to our
platform if their parent bank is already a participant. We
INVESTOR SERVICES JOURNAL 25
Proxy Voting - Far East
estimate that between 75 and 100 fund managers are in
the early stages of platform participation and this figure
will increase.”
Regulation
Despite the similarities in legal frameworks of the finan-
cial services industries in the West and the Far East, the
latter region has a different interpretation of the laws.
Babcock explains: “The financial regulator in Japan said it
would tighten institutions’ disclosure requirements, based
on Section 404 of the Sarbanes Oxley requirements.
Executives will have to ensure their firms’ internal controls
are correct. Suddenly, these executives will be personally
liable for everything that happens within their institution.
The financial services laws in Japan are similar to those in
the West, but the interpretation and enforcement of these
laws is slightly different. Japan is moving towards a
Westernised legal framework. There is no law against elec-
“Owing to the cross-shareholding structure,
companies’ financial structures are undermined”
tronic voting in Japan and the regulators have accepted
that our proxy voting system's use of a digital signature is
legal, as opposed to requiring ballot signatures.’
Ownership
Apart from proxy voting, companies in the Far East have
effected major changes to their ownership structures.
About 15 years ago, the Japanese regulator amended an
ownership law, permitting banks to hold a stake of less
than five percent stake in non-affiliated companies. If their
shareholding exceeded five per cent, these companies had
to become affiliated. The banks reduced their stakes in
non-affiliated companies to 4.9 per cent. “But the big
companies would hold five, 10 or 15 per cent of shares
with each other,” says Babcock. “This was a very effective
anti-takeover mechanism, but the system has deteriorated
over the last few years. Instead of owning 40 per cent of
the market, corporations now own 25 per cent. Five per
cent of this ownership has shifted to foreigners and 10 per
cent to Japanese domestic institutional investors, who are
primarily pension funds. There has been a huge shift from
a secure 40-50 per cent shareholder structure to a friendly
shareholder ownership of 20 – 30 per cent. This makes a
huge difference to the mindset of management executives,
who realise they need foreign votes to get their proposals
approved. The bigger companies, with 40 per cent foreign
ownership, need the foreigners’ vote.”
Owing to the cross-shareholding structure in Japan,
companies’ financial structures are undermined and total
returns seem low. Companies can counter this trend by
selling off their stakes in companies. This approach is one
of the driving forces of independence among Japanese
companies. In terms of corporate governance, the shift is
moving from an internal company regulated environment
to an external shareholder regulated environment. The
Japanese pension fund market is also being liberated.
“Pension funds are focusing on corporate governance as a
26 INVESTOR SERVICES JOURNAL
way of improving their investment returns,” says Babcock.
“A new domestic client base is getting involved in
corporate governance and proxy voting and the foreigners
are coming in. These two dynamics are altering the
marketplace.”
Automation
Despite the heightened awareness of proxy voting in the
Far East, automation is still in its infancy. “Countries
throughout Asia are looking for ways to improve their
governance and proxy voting systems,” says Babcock.
“Proxy voting in the Far East is still a highly paper-based
system. The Chinese regulatory commission has informed
the Shanghai and Schenzen stock exchanges they want an
electronic proxy voting system for retail shareholders in
the market. The level of interest for electronic proxy vot-
ing in the region is very high and it will probably be easier
to introduce electronic voting systems in Asia than it is in
Europe, which operates on a lot of old sys-
tems and is very slow to change.”
ADP’s joint venture in Japan is focusing
on the institutional market place. “Most of
these institutions hold multiple accounts
with a number of custodians and banks,
resulting in a very messy structure,” explains Glen Good,
director at ADP for Europe and Asia. “There has been
progress since the joint venture. We expect our electronic
system, through its multi-custodian capabilities, will be a
dominant feature of proxy voting in the next three years.”
The next major proxy voting
conquest is Korea, whose custody
structure lends itself to easy imple-
mentation of proxy voting systems.
The country’s CSD contains
records of all registered sharehold-
ers. “Without getting 20 people to
participate in one system, we can
simply cooperate with the CSD,”
says Babcock. “Korea will take time
(to automate) as the country does
not have the legal infrastructure
Glen Good for proxy voting. They are current-
ly writing the rules and regulations
and the systems will follow. Taiwan is less straightforward.
The country’s CSD is not that heavily involved in share-
holder voting and the regulatory environment is not very
clear. Australia has a better corporate governance environ-
ment. The country has research and advisory firms to
advise institutions on corporate governance. We are put-
ting our systems in place here through some of our bank-
ing contacts.”
According to Good, the corporate governance
infrastructure in Australia lends itself to easier systems
implementation for the retail business. “Companies like
AMP have cleverly automated the proxy voting process,”
explains Good. “Amidst their de-merger with Henderson,
AMP conducted their proxy voting electronically by
mailing out CD voting ballots. As an issuer with hundreds
of thousands of shareholders, they took the lead with the
proxy voting exercise. In the UK, issuers appear unwilling
to cover the costs of proxy voting distribution to the bene-
Proxy Voting - Far East

ficial owner although, perhaps somewhat hypocritically,

they look to their beneficial owners when they need their
votes in a takeover situation. The burning question is,
“who pays for the efficiency in proxy voting?”

Governance
While Japan has addressed some of its corporate owner-
ship concerns, Korea has one of the most intricate cross-
ownership structures owing to the number of State-organ-
ised corporations. “Some of these corporations span sever-
al different industries, perhaps to the detriment of some of
them,” says Cas Sydorowitz, a director at Georgeson, a
provider of proxy solicitation and a wholly owned sub-
sidiary of global registrar Computershare. “K-Corp, for
example, has many different subsidiaries and we
(Georgeson) worked on that proxy fight earlier in the year.
We worked with Sovereign Asset Management to remove
the existing slate of directors and nominated a new slate.
The vote did not go
“The burning question is, “who pays for the efficiency in through, one of our
directors was nominated,
proxy voting?” but a lot more pressure
will be brought on
Korean issuers because the value of the companies are so
great. Unlocking some of that pent-up value through bet-
ter governance will bring a lot more attention to share-
holder activism in that market.”
Sydorowitz likens Asia to Latin America, in terms of its
reaction to governance issues. “A shareholder, who is a
founder or family member, runs the firm as if it were his
private company”, he says. “This plays a significant role in
the development of a market. The only way this situation
will change is through greater transparency and inter-
ownership structures, instead of pyramid structures. As
people look for more value from lagging stock markets
around the world, they will look to developed markets
such as Korea and Taiwan to unlock some of this hidden
value by running these companies better.”
According to Sydorowitz, there are several endemic
problems with proxy voting in Asian companies. “Only the
largest companies make the information available in
English as well as the local language,” he explains. “As you
move down the issuer chain, the smaller companies won’t
have the resources to make information available in
English. They will have copy translated instead. The regu-
lators could increase the length of time for companies to
file their notice of an annual meeting. Japan is an extreme
case, where most companies do not even publish their
meeting notices until two weeks before the meeting.
Regulators will not consider a change until there is suffi-
cient pressure to do so. The greatest pressure will come
from the issuers, who are paying the taxes and funding the
economy through their own efforts.”
Company shareholders who are interested in voting pay
third party providers like Institutional Shareholder
Services and Demenor to alert them of when company
meetings are in order to execute their vote. These compa-
nies provide a level of automation, which is paid for at the
shareholder or custodial level. “The issuer needs to initiate
the automation process, not just for foreign institutional
investors but for shareholders in general, including retail

28 INVESTOR SERVICES JOURNAL

 Proxy Voting - Far East

and institutional, domestic and foreign investors,” says

Sydorowitz. “There is some automation but it is mostly
down to those institutions who consider it a vital element
of their fiduciary ownership versus the company who
wants to make it more readily available.”
Institutional Shareholder Services, founded in 1985,
helps shareholders execute their ownership rights through
proxy voting. The company provides institutional share-
holders with research and recommendations on items
arising for the shareholders' vote in a shareholder meeting.
Shareholders are also assisted with the processing of votes
back to the issuing company, via the custodian.
“Companies and shareholders are increasingly using
corporate governance as a means of mitigating risk and
improving value,” says Stanley Dubiel, (CEO) director of
International Research at ISS.
“There has been a strong desire among institutional
shareholders in Japan to simplify the voting process.” A
concentration of
votes takes place
around the end of
“Companies and shareholders are increasingly using corporate
June where 90 per governance as a means of mitigating risk and improving value”
cent of companies
have their meetings over a three-day period. There is a
push to move the dates to allow shareholders more time to
make an informed decision on the companies they own.
Dubiel explains: “One of the driving factors in making
companies hold their meetings on the same day and at the
same time was the risk of organised crime, which threat-
ened to disrupt shareholder meetings by
raising embarrassing questions about executives
governance,” says Dubiel. “The law has removed some of
the threats posed by the organised crime syndicate and
companies are spreading out their shareholder meetings.”
Thanks to an increased interest in corporate governance,
a lot more Japanese companies have begun to reach out to
their non-Japanese shareholders. “They are communicat-
ing with their shareholders in a way that facilitates the
flow of information out of Japan and the processing of
votes back into Japan,” says Dubiel.
“They are publishing information in English and this
information is more detailed than ever before.”
In addition, more domestic shareholders are starting to
vote on shares in their Japanese holdings. A number of
Japanese institutional investors are now voting in the US
and in Europe as well as in their own markets.
Many of the proxy voting channels in Japan are
electronic, but when the vote reaches the end of the
channel, a paper intensive process of filling in the proxy
cards follows. But the country is not alone, explains
Dubiel. “The UK had a slow uptake of the Crest initiative
to create an electronic proxy voting system,” he says. “But
there has been a drive to enable companies to take up the
Crest system. We imagine the same will happen in Japan.”
With Japan in the lead, the drive to automate the proxy
voting process will become a corporate governance priori-
ty over the next few years. Similarly, issuers in the Far East
will recognise the benefits of a digital signature in securing
the votes of foreign and domestic investors.

ISJ

INVESTOR SERVICES JOURNAL 29

Securities Lending - Performance Analysis

Key performance statistics at 1 December 2004

ISJ examines the performance in securities lending,

Number of Securities Value of Securities (USD Bn)
including the top 10 most lendable equities and
bonds. The analysis below includes the basis points
Securities Available for Lending 53,763 3,390
earned and fees paid over the last year.
(Data courtesy of Data Explorers) Securities On Loan 21,452 926

Securities Transactions 330,218

Securities lending group summary at 1 December 2004 (values presented in USD million)

SL Total
Revenue Return Return
Balance vs SL
Security Lendable Balance vs Total Utilisation Share to to
Non Cash SL Fee (Bp) Tenure
Type Assets (M) Cash (M) Balance (M) (%) from SL Lendable Lendable
(M) (days)
(%) Assets Assets
(Bp) (Bp)

All 3,389,848 463,901 461,636 925,537 17.75 32.12 93.25 3.1 3.74 119
Securities

All Bonds 1,891,740 272,937 265,842 538,779 23.75 11.71 74.82 2.11 3.23 127

Corporate 1,020,186 120,373 51,624 171,997 12.9 15.68 62.29 1.25 2.85 130
Bonds
Government 870,890 152,553 214,201 366,754 36.47 9.84 88.05 3.11 3.68 125
Bonds

All Equities 1,498,108 190,964 195,794 386,758 10.17 60.56 99.88 4.36 4.38 109

Americas 440,954 104,771 32,407 137,178 7.96 64.33 99.67 3.96 4.02 91
Equities
Asian 154,752 12,804 22,178 34,982 9.9 90.05 100.01 7.13 7.13 135
Equities
European 820,144 48,839 135,628 184,467 11.78 48.72 100.05 4.1 4.1 123
Equities
Depository 18,112 9,740 1,640 11,380 11.4 95.8 99.92 10.63 10.68 100
Receipts
Exchange
Traded 8,336 13,639 3,571 17,210 35.26 68.54 99.8 12.24 12.53 50
Funds

Top 10 Lendable equities Top 10 Lendable equities Top 10 Lendable Corporates Top 10 Lendable corporates
1 December 2004 1 December 2004 1 December 2004 1 December 2004
Equity by fee > 10 < 100 million Equity by fee > 100 million Corp by fee >10<100 million Corporates by fee > 100 million
Rank Stock description Rank Stock description Rank Stock description Rank Stock description
1 TRAVELZOO INC 1 DELTA AIR LINES INC 1 CALPINE CORP 1 MICRON TECHNOLOGY
2 CAL-MAINE FOODS INC TASER INTERNATIONAL LEVEL 3
2 2 2 RHODIA SA
INC COMMUNICATIONS
3 NOVASTAR FINANCIAL
KRISPY KREME
3 GENERAL MOTORS
3 FINMECCANICA
MARTHA STEWART 3
4 DOUGHNUTS INC FINANCE SA 4 LUCENT
LIVING -CL A
4 KARSTADTQUELLE AG SEVERN TRENT WATER
EUROTUNNEL SA ESA- 4 5 FORD MOTOR CREDIT
5 UTIL
UNITS 5 EACCESS LTD
NORTHWEST AIRLINES
6 GENERAL MOTORS
MAXIM 6 ALLIED CAPITAL CORP 5
6 INC
PHARMACEUTICALS INC TENET HEALTHCARE
7
7 GARMIN LTD KAISER ALUMINUM & CORP
STOCKMANN OYJ ABP-B 6
7 CHEM
SHARE 8 KMART HOLDING CORP 8 TRAINS HY-2004-1
8 BRITISH ENERGY PLC FAIRFAX FINANCIAL GOODYEAR TIRE &
9 7 UNITED MEXICAN
HLDGS LTD RUBBER 9
9 NETFLIX INC STATES
10 MICROSOFT CORP 8 CALPINE CORP
10 AROTECH CORP 10 FRANCE TELECOM
ALLEGHENY ENERGY
9
SUPPLY
TIME WARNER TELECOM
10
INC

30 INVESTOR SERVICES JOURNAL

 Securities Lending - Performance Analysis

Securiites Lending and Reinvestment Return Borrowers Balance Against Collateral at Non-Cash
to Lendable Assets 1 December 2004
6 Cash
SL Return Exchange Traded Funds
5 RI Return Depository Receipts
Other Equities
4 European Equities
Asian Equities
3
Americas Equities

2 Government Bonds
Emerging Market Bonds
1 Corporate Bonds

30%
0%

80%
20%

50%

60%

90%
70%
10%

100%
40%
0
3/24/2004

11/24/2004
9/29/2004
1/21/2004

7/21/2004
5/19/2004

10/27/2004

12/1/2004
4/21/2004

8/25/2004
11/19/2003

6/23/2004
12/10/2003

2/18/2004

Source: Data Explorers

Source: Data Explorers

Utilisation of lenders' securities at All Bonds

1 December 2004 Lenders Balance Against Collateral at Non-Cash
25 All Equities 1 December 2004
Cash
Exchange Traded Funds
20 Depository Receipts
Other Equities
15 European Equities
Asian Equities
10 Americas Equities
Government Bonds
5 Emerging Market Bonds
Corporate Bonds
0
30%
0%

80%
20%

50%

60%

90%
70%
10%

100%
40%
3/24/2004

11/24/2004
9/29/2004
7/21/2004
5/19/2004
1/21/2004

10/27/2004

12/1/2004
4/21/2004

8/25/2004
11/19/2003

6/23/2004
12/10/2003

2/18/2004

Source: Data Explorers

Source: Data Explorers

INVESTOR SERVICES JOURNAL 31

Securities Lending - Transparency/Governance/Automation
Now that securities lending
has found its place among
financial institutions globally,
the industry can focus on
improving some of the grey
areas, writes Brian Bollen
Through the looking glass
S ecurities lending faces a fascinating
year in 2005, with the triple themes of
corporate governance, increasing automa-
tion and broader transparency very much to
the fore, all buttressed by the industry’s
attempts to continue their sundry education
programmes. If all goes as expected, it
promises to be an enormously enlightening
and rewarding time as efforts continue to
spread the word about the benefits of secu-
rities lending and more investment strate-
gies emerge based on securities lending.
According to Roy Zimmerhansl, director
“We see regulators in
Taiwan and Korea
continuing to make
improvements to their
regulations that
facilitate the business”
of global securities lending at Deutsche
Bank, the era of continued regulatory
acceptance that the industry is enjoying is
set to continue. “We see regulators in
32 INVESTOR SERVICES JOURNAL
Taiwan and Korea continuing to make
improvements to their regulations that facil-
itate the business. The Indian authorities are
making positive noises, though not putting
anything in writing. Brazil is the next big
market to watch. Expect them to move
towards allowing a securities lending mar-
ket. Asian market demand continues strong-
ly.”
Other major trends and issues affecting
securities lending include rebounding hedge
fund performance in the second half of
2004. “Some fund strategies continue to
underperform and these are losing investor
money and/or closing,” says Zimmerhansl.
“Despite lacklustre performance, though,
new money continues to flow into alterna-
tive strategies.”
Governance
The debate over corporate governance is
going to not only continue, but intensify
throughout 2005, says Paul Wilson, head of
securities lending and Investment Products
for JPMorgan
Investor Services,
EMEA. “I think
this issue will be
the one dominat-
ing the headlines in
2005. At this stage
each industry par-
ticipant seems to
think it is some-
body else’s prob-
lem. The broker-
Paul Wilson dealers seem to be
pushing back on
the large custodial lenders whilst the ulti-
mate borrowers seem reluctant to declare
their borrowed position. Unless there is a
coming together and a consensus reached,
unnecessary regulation might be imposed
and/or lenders may decide to refrain from
lending because of the unwelcome addition-
al overhead involved.”
Fred Francis, vice president of securities
finance and global product at RBC Global
Services in Toronto, says that continuing
education is the way forward after what he
describes as a record year for securities lend-
ing, both in terms of volume and reward.
People who know and understand the mar-
ket have a continuing obligation to educate
potential new players on the mechanics,
dynamics and financial advantages to be
derived from securities lending. Those with
a better understanding of risk-reward opti-
misation, market forces, volatility and liq-
uidity, may be able to enhance returns by
making a slight micro-change to their risk-
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Securities Lending - Transparency/Governance/Automation
ic interest, then it may be appropriate.
Remember that the only reason that a bor-
rower is even in a theoretical position to
vote is because the beneficial owner has
chosen not to vote the shares itself. The
owner retains the right to call back shares at
any time. It is possible, but not often actual-
ly used. Those instances where it does
occur become widely known, and very
quickly.”
Once shares are borrowed, this affects a
legal transfer of ownership of those shares,
he continues. “Without this transfer, it
would not be possible to deliver the shares
into a short sale, nor would a transfer of
ownership of the lenders collateral occur.
These issues would change the fundamental
nature of the transaction that might be to
the detriment of both the beneficial owner
and the borrower. The bigger issue is how
can it become more transparent without
impacting the market liquidity of the stock,
or have a revenue impact on the beneficial
owner that is out of proportion with the
benefits. Borrowing to vote is not possible
except as a potential action presented by the
inaction of the investor.”
“From a beneficial owner's point of view,
securities lending is an activity that is sec-
ondary to the investment process. Issues of
corporate governance are an essential part
of the investment process. To the extent
that it doesn't impair the investor's ability to
make investment decisions, it is a very low-
risk, valuable return enhancer. The legal
contracts governing the lending activity are
specifically structured to allow the lender to
exercise its rights by acting in a timely man-
ner to recall shares if on loan. The investor's
method of dealing with lending of shares
should be a follow-on from its development
and implementation of a corporate gover-
nance policy.”
“Regulators such as the Securities and
Exchange Commission and Financial
Services Authority either gave their implicit
or explicit endorsements of securities lend-
ing,” adds Fred Francis. “The relaxation of
the uptake rule, which allowed shorts to
only occur when the share price was
increasing not decreasing for certain liquid
stocks, has had a significant impact on lend-
ing. The benefits of lending are clear –
increased market efficiency and better liq-
uidity. The spotlight has fallen on proxy vot-
ing due to the current preoccupation with
corporate governance. When you lend a
security, you give up, albeit temporarily,
ownership of that stock – and by extension
you give up your right to vote it. However,
the reality is you can always recall the
34 INVESTOR SERVICES JOURNAL
loaned stock. It should be remembered that
a loan by its nature is an overnight thing:
the loan is renewed afresh every day and can
be recalled at any point in time.”
“We think that using securities lending to
affect the outcome of a merger, while theo-
retically possible, is highly improbable, since
tender rights are usually vested with benefi-
cial owners,” says Guy d'Albrand. “Even if we
ignore the fact that it is contrary to industry
good market practice, the practical feasibility
and the economics of such a proposition
should make it truly exceptional.”
Transparency
Moving away from the theoretical to the
very practical and actual, transparency in a
“To the extent that
lenders understand the
dynamics it is easier for
them to make decisions”
number of different aspects of the business is
increasing, albeit slowly. Typically, trans-
parency is thought of in the context of the
price of a given transaction, in the same way
as “best execution” is judged in the equity
markets. However, securities lending has fur-
ther nuances that make a like-for-like com-
parison difficult. Factors influencing pricing
include the collateral involved, the credit
quality of the counterparty and the expected
duration of the loan. “A totally screen-based
trading business in securities lending is some
ways off still outside of the intra-dealer mar-
ket, and the possible impact on the various
market participants is by no means clear,”
says Zimmerhansl. “It is interesting to note
that as pricing became more transparent in
the equities markets, the main beneficiaries
were the buy-side firms. In the context of
securities lending, it could be argued that the
buy-side are the borrowers.”
Automation
Paul Wilson believes the transparency
issue has been overplayed recently and is
uncertain about the reasons why.
“Automation is key to the future in terms of
driving down cost and eliminating both
errors and redundant manual processes.
Those who invest wisely in new technolo-
gies have a greater chance of being an
endgame winner. What differentiates one
lender from another is, amongst other
things, being able to judge the markets cor-
rectly, develop differentiating trading strate-
gies and maximise earnings for a customer
within a given risk tolerance. Total trans-
parency seems to suggest that all trades will
be executed at the same time and at the
same price. This is not what customers are
looking for. They want to understand the
earnings potential of their assets, see where
earnings have been derived from and know
what has prevented them from reaching
maximum earnings potential. I see this
more as attribution analysis.”
There is of course something of a symbiti-
otic link between automation and trans-
parency. And if technology lies at the heart
of securities lending today, it will do even
more so in the future, says John Arnesen,
head of securities lending, Europe, at The
Bank of New York. “Trading will take place
on platforms like EquiLend, SecFinex and
BrokerTec (the latter of which already
accounts for 40 per cent of the pan-
European government bond market)”
There are signs of an acceleration in the
use of technology, argues Roy Zimmerhansl.
“We are starting to see Equilend and
SecFinex commitments increase. The con-
tinued development of automated facilities,
and the wider use of existing systems, is criti-
cal to the long-term future of the securities
lending business. As volumes increase and
spreads continue to decrease, the importance
of straight through processing will grow.”
Infrastructures
Guy d'Albrand says the growing accept-
ability of the web-based exchanges will sig-
nificantly impact the way securities lending
transactions are made, essentially in terms
of price transparency and gains in produc-
tivity. This will apply both for the front
office, which may be able to move securities
by a simple click, and for the back office
through greater processing efficiencies.
“Until recently all lending activities were
done on the phone and by fax and this was
quite time consuming, but more important-
ly these trading methods also prevented
price disclosure and hence chances for
benchmarking and increased transparency
in the industry. The opaqueness of the mar-
ket led to greater spreads and profit oppor-
tunities for insiders but now technology is
changing the business, especially for securi-
ties close to general collateral.
“If Equilend is primarily aimed at those
who deal with the general collateral market
with its high volume and need for greater
processing efficiencies, SecFinex represents a
massive step towards real price transparen-
cy. On this platform specials can be traded
electronically and anonymously and every-
body sees every price and trade that hap-
pened on a specific day, and therefore the
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Securities Lending - Transparency/Governance/Automation
full depth of the market is disclosed.”
Increased transparency will undoubtedly
help the market, suggests Brian Staunton, a
director at Citigroup Global Transaction
Services, EMEA. “This has moved on a lot
in the last five years with the development
of new independent data providers, auction
systems and benchmarking.”
Bill Cuthbert, executive director of Data
Explorers, one of the specialist data
providers in question, argues that the grow-
ing reach of the firm’s Performance
Explorer product, which captures around
half the securities lending taking place, is
steadily raising comfort levels by increasing
market transparency and that this is helping
to change attitudes, awareness and behav-
iour. “Once people see what’s going on they
take a different view. It is not securities
lending that drives a security’s price down, it
is the fundamental underlying investment
view that does that. Securities lending is
only the conduit through which an invest-
ment view is expressed.”
“Technology plays an increasing role in the
growth and development of securities lend-
ing,” adds Fred Francis.“Operational efficien-
cy, STP, continual transaction cost reduction,
and new regulatory requirements are key
drivers in the push for securities lending
improvements and we expect investment in
the business will continue to grow as a result.
The winners in lending will be the ones that
invest in the right choices rather than doing
things right. As the markets move towards
STP and inevitably T+1, the back-office inef-
ficiencies will be addressed, removing the
hurdles surrounding recalls caused by sales
and proxy voting.”
The need for increased automation will
not in itself drive further consolidation, but
it will be one of the contributing factors to
that continuing process, says Paul Wilson.
“Those who can successfully drive expense
out of their business will over time develop
a competitive advantage, which when cou-
pled with scale, a superior and robust
balance sheet and continued innovation,
will produce the endgame winners.”
Banner returns in a bear market
Institutional investors such as CalPERS
have managed to buck the market down-
turntrend through resourceful securities
lending programmes, which reinvest cash.
Dan Kiefer at CalPERS explains
“In 2000, while managing over $180 bn in
assets, including over $100 bn of lendable
assets in various asset classes, we decided
to take securities lending out of the back
36 INVESTOR SERVICES JOURNAL
office and approach it with a front office to lock up a portfolio in an exclusive
investment decision discipline. Our aim because it removes those assets from the
was to capture the benefits of our assets market and from their competitors. In
without taking on incremental risk. With exclusive arrangements such as these,
the introduction of the auction model in other borrowers cannot capitalise on the
late 2000, we experienced a banner year inherent value of these assets via tradition-
for returns in 2001. By opening our portfo- al agency programs. There is value in
lios up to competition and a broader range name recognition as well, for big blocks of
of players, we were able to shift up on the assets and stable asset pools. The auction-
risk/return frontier. We segmented the based system is transparent and opens
portfolios based on borrower needs, allow- our portfolios up to potential buyers on a
ing us to place our assets with those coun- level playing field. This would explain the
terparties who are best positioned to majority of the increase in our returns from
utilisse the securities and guarantee us the 2000 (please see graphic below). Our utili-
highest premium. Our $29.5 bn interna- sation levels have increased in our exclu-
tional equity portfolio, for example, was sive program from our previous agency
subdivided into country lots. The rationale program, because borrowers want to maxi-
was that a French or German entity might mize the value of the assets in which they
be interested in a specific market or the are paying guarantees. Therefore, our cash
hedge fund clientele within that market. balances have increased leading to
The subdivision of our portfolios placed greater opportunity for superior cash
our assets with those counterparties who reinvestment returns. Our main securi-
had a specific business model or strategy ties lending focus is on maximizing our
in the local market. For example, a hedge loan returns, with a secondary, albeit
fund that is looking for incremental value important, focus on the cash reinvest-
from a prime broker will evaluate potential ment side. We maintain a conservative
prime brokers based on who can provide reinvestment policy, wherein approxi-
the best execution, best financing as well mately 20-25 per cent of our program
as their ability to facilitate a consistent and earnings come from reinvestment. We
stable borrow. Since many prime brokers conduct multiple auctions through
offer similar financing and administrative eSecLending, who manages the auction
services, they need to seek opportunities to process and on-going operations and
differentiate themselves. One way this can administration of the program. By using
be done is through a strong asset base for an administrative agent/auction partner,
securities lending. A prime broker, who is we have disaggregated the securities
awarded the rights to borrow a $50 bn lending process. Previously, the custodi-
block from CalPERS, knows they will have a an agent used to handle all transactions
consistent and reliable ‘borrow’ to supply for securities lending and perform the
to their hedge fund clients. When the reinvestment functions. But the decou-
prime broker approaches us through bid- pling of these functions through
ding on an exclusive lot, they will take a eSecLending allows us to move out on
book or a block of assets. If the prime bro- the risk/return frontier.”
ker is targeting a certain market, it makes Dan Kiefer is a portfolio manger at CalPERS
sense to pay a certain amount to lure (US pension fund), and is a chartered finan-
future hedge fund clients. There is also cial analyst.
value created when a prime broker is able ISJ
CalPERS Net Securities Lending Earnings
120
0
Auction
100
duction of eSecLending Au
ss in January 2001
80
$ Millions
60
Process
40
Introduction
20
0
2000 2001 2002 2003 2004* (Est.)
Net Program Earnings
Intrinsic earnings represented approximately 75 per cent of total earnings during 2003 and 2004,
with the remaining portion due to cash reinvestment income.
*Estimated for 2004.

Irish Eyes are Smiling
Continuing our focus on the Irish Funds Industry, Mike
Cosgrave of Bank of Ireland Securities Services provides
fresh perspectives on the market for securities lending
Securities Lending has taken a firm foothold in the Irish
market after a sluggish start in the mid to late 1990’s.
There are a number of factors that have combined togeth-
er to fuel this growth, namely the continuing search by the
users of borrowed securities i.e. investment banks/prime
brokers and hedge funds, to source new supply, the gener-
ally favourable tax-treaty arrangements between Ireland
and other tax jurisdictions, and the Irish taxation and reg-
ulatory environment around securities lending. However,
these circumstances in themselves did not mean that the
supply of securities coming to the market would increase.
That supply was of course driven by the institutional
investor community. This community can be broken down
into two sectors, namely traditional institutional investors,
such as domestic pension funds, insurance companies and
fund managers, and the “funds” industry.
Funds Industry
Taking the funds industry first,
there has been much written about
the funds industry in Ireland.
Centered in Dublin’s International
Financial Services Centre (IFSC)
this industry has seen spectacular
growth in the past five years alone
and this growth has directly led to
the growth in securities lending
activity. Many of the world’s lead-
ing managers of mutual funds and
Mike Cosgrave collective investment schemes have
successfully established Irish-domiciled schemes in the
IFSC. The primary driver for many of the managers of
these schemes is performance, measured against a bench-
mark and/or other schemes. The managers who run these
schemes clearly understand the need to include securities
lending as part of their overall investment philosophy,
simply because they realise the potential for securities
lending income to enhance the overall performance of
their schemes. In recognising the benefits of securities
lending The Irish Financial Services Regulator (IFSRA) has
established in its UCITS and Non-UCITS Notices, 12 and
16 respectively, prudential guidelines for the operation of
securities lending.
Institutional Investors
On the other hand, the view from the traditional domes-
tic institutional investor has been a slightly different one,
given their natural aversion to risk and relative lack of
understanding of what securities lending was. In that par-
ticular market segment there are no specific
Securities Lending - Ireland
guidelines/regulation such as there is for the funds
industry, other than that which applies marketwide to the
taxation treatment of securities lending, contained in the
Revenue Commissioner’s Statement of Practice. The
process of bringing supply from this segment to the
market has therefore been a slower one. This segment has
in the past tended to adopt a more “educational” stance
looking to understand in greater detail the mechanics, the
risk factors and the rewards of securities lending. This is
not unusual when compared to other jurisdictions, for
example a very similar landscape existed in the UK in the
early to mid 1990’s, where in many cases it may be that a
group of trustees are being asked to approve participation
in a securities lending programme. But this too has
turned, to the extent that most if not all of the major
domestic pension funds, insurance companies and fund
managers are now active participants in the securities
lending market primarily through their global custodians.
However, whether it’s a pension fund or collective invest-
ment scheme by far the majority of securities are lent into
the London-based investment banking community,
although local Irish brokers do participate they are very
much on the periphery of the industry.
Pioneer
Bank of Ireland Securities Services (BOISS) has been
closely linked with the development of the securities lend-
ing industry in Ireland, setting up its operation in 1997. In
Ireland BOISS pioneered the principle of pooling different
clients’ securities in a securities lending programme,
providing all of the operational support and market inter-
action for its clients, delivering economies of scale and a
pooled, stable supply to its borrowers. BOISS has led, or
has been actively involved in many working groups set up
to discuss the Irish securities lending framework with the
regulators, such as IFSRA, the Revenue Commissioners
and the Irish Stock Exchange, helping improve that frame-
work and educate domestic institutional investors who
were otherwise unaware, or lacked the understanding as to
what securities lending was and what it could deliver. This
has been a long process but nonetheless rewarding, as
BOISS has now an enviable list of pension fund, insurance
company, fund manager and collective investment scheme
clients. Expectations for future growth are high with a
number of exciting new opportunities ahead of in 2005,
and we look forward to continuing to be a leading partici-
pant in the future growth of securities lending in Ireland.
Mike Cosgrave is head of global securities lending at the
Bank of Ireland Securities Services ISJ
INVESTOR SERVICES JOURNAL 37
RMA Securities Lending Analysis
RMA SECURITIES LENDING INDUSTRY COMPOSITE – Comparison Quarter 3 2003, Quarter 3 2004
ISJ continues its’ year-on-year analysis of the securities lending industry worldwide. – Lendable assets
refer to the value of securities available for lending. – On loan vs. cash collateral refers to the value of
securities on loan in return for non-cash collateral
Total on Loan in North America Total on Loan in Pacific-Rim Equities
US $ million (US $ million)
Q3 2003 / Q3 2004 Q3 2003 / Q3 2004
6,358
Canadian Equities 4,764 2,141 2003
All Others
208,435 3,691
U.S. Equities (includes ADR’s) 183,640 2004
2,835 3,402
Canadian Bonds (Gov't & Corporates) 5,687 Australia
4,488
63,997
U.S. Corporate Bonds 79,450
1,693
U.S. Mortgage Backed Securities 2003 2004 Hong Kong Equities
18,630 2,499
68,541
U.S. Agencies 61,172 19,211
212,731 Japanese Equities
21,053
U.S. Treasuries/UST Strips (Reported in Aggregate) 256,051
0 50,000 100,000 150,000 200,000 250,000 300,000 0 5,000 10,000 15,000 20,000 25,000

Total on Loan in Euro Denominated

Sovereign Bonds (US $ million)
Q3 2003 / Q3 2004 Analysis – Quarter 3 2003 against Quarter 3 2004
8,383
All Other Sovereign Bonds (Not Previously Listed) 5,785
Eurobonds
12,755 The securities lending industry enjoyed a buoy-
30,858
Emerging Market Eurobonds (Latin America & Eastern Europe)
1,730 ant third quarter in 2004, with the amount of
2,515
6,178 assets on loan increasing significantly from
UK Gilts 6,012
451
$688,83 bn in the third quarter of 2003 to
All Other EURO Denominated Sovereign Bonds
198
2,491 $766,47 bn in the third quarter of 2004. North
Spanish Sovereign Bonds 250 American treasuries recorded the highest value of
869
Italian Sovereign Bonds 2003 assets participating in securities lending in the
1,351
1,975
German Sovereign Bonds 2,620
2004 region, increasing from $348,104bn in the third
French Sovereign Bonds
537
1,210
quarter of 2003 to $420,99 bn in the third quar-
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 ter of 2004. But North American equities also
showed headwinds in the value of assets on loan,
Total on Loan in Europe
(US $ million) sliding from $214,79 bn in the third quarter of
Q3 2003 / Q4 2004 2003 to $188,4 bn in the third quarter of 2004. In
All Other European Equities
16,226 2003 Europe, recent regulatory enhancements to the
20,619
3,672 2004
securities lending industries of Sweden and
Scandinavian Equities
4,413 Norway, contributed to a significant increase in
8,033
UK Equities
12,452 the value of assets on loan, from about $3,672 bn
Italian Equities
6,757 in the third quarter of 2003 to about $4,413 bn in
5,299
9,361 the third quarter of 2004. Italian equities, on the
German Equities
6,302 other hand, decreased their level of involvement
21,886
French Equities
22,838 in securities lending, from $6,757 bn in the third
European Equities
65,935 quarter of 2003 to about $5,299 bn in the third
71,923
quarter of 2004. In the Pacific Rim region, the
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
value of Hong Kong equities participating in
Lendable Assets vs. Total on Loan securities lending almost doubled, from $1,69 bn
in Q3 2004 in the third quarter of 2003 to about $2,499 bn in
(US $ million)
the third quarter of 2004. French sovereign bonds
7,922 Total on Loan
EURO Denominated Sovereign Bonds more than doubled from $537 bn in the third
86,262
Lendable Assets quarter of 2003 to $1,21 bn in the third quarter
31,731
Pac-Rim Equities (Includes Australia)
278,578 of 2004. Eurobonds also showed a remarkable
European Equities
71,923 increase in the value of assets on loan, from
699,507
$12,75 bn in the third quarter of 2003 to about
188,404 $30,858 bn in the third quarter of 2004. UK gilts,
North American Equities
2,392,266
on the other hand, decreased from $6,178 bn in
420,990
North American Treasuries/Bonds
1,398,884 the third quarter of 2003 to $6,012 bn in the
0 500,000 1,000,000 1,500,000 2,000,000 2,500,000
third quarter of 2004.
Source: Risk Management Association

38 INVESTOR SERVICES JOURNAL

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Fund Servicing - Panel Debate

ALL ABOUT THE FUND

Outsourcing, regulation and
automation are fundamental concerns
for fund servicing providers. In an David Aldrich
exclusive panel discussion, providers
debate the impact each of these factors
will have on their organisation and the
industry at large.

David Aldrich joined The Bank of New York in 2003 as head

of Securities Industry Banking in London. He is responsible Kevin Milne
for relationship management and sales for the hedge fund
and broker dealer industries in Europe. Aldrich and his team
advise BNY’s clients how to best leverage the Bank's core
business of securities services in order to deliver more value
to their end clients. Prior to joining the Bank, Aldrich was a
senior manager at JP Morgan Chase London.

Kevin Milne joined SS&C Technologies in June 2004 as

Senior Vice President - International. Milne has over 20 years
of senior level experience in Global financial markets work- Ruth Murphy
ing in both Europe and Asia. Milne spent six years at the
London Stock Exchange in various positions before joining
Thomson Financial.

Ruth Murphy is currently Director of Marketing at Citco

Fund Services (London). She joined Citco’s European fund of
hedge funds operations in Amsterdam in 1998. In 2002, she
assumed the role of Marketing and Business Development
Manager for Citco's Dublin administration operation focus-
ing on the London single strategy hedge fund market. In
2004, she was promoted to Marketing Director - Citco Fund Marc Schammo
Services London.

Marc Schammo joined Dexia Bil Luxembourg in 1985. He

holds an MBA in Financial Services and spent part of his
career specialising in the fixed income markets. Schammo
joined Dexia Fund Services in 2002 and took the position of
Head of Sales in July 2004.

Rob Wright, Managing Director of RBC Global Services,

Institutional & Investor Services (IIS), International Division, Rob Wright
is responsible for the development of the global business
strategy for custody and related services. Prior to his role as
managing director, he was Vice President, Sales and
Relationship Management, RBC Global Services, responsible
for business development and strategic management.

40 INVESTOR SERVICES JOURNAL


What were the highlights for fund servicing providers in
2004?
Aldrich: The implementation of the Investment
Modernisation Act in Germany was the landmark
European event of the year. To date we have seen only a
very limited number of hedge fund vehicles incorporated
in Germany and Luxembourg with the specific aim of
utilising the Act to target the new investor pools. The
hope is that both the institutional investor and the retail
investor will become active investors in fund of hedge
funds and the most sophisticated institutions will invest
directly into single strategy funds. Of course Germany
has for long had the hedge fund “certificates”, which are
estimated to have attracted investments of over EUR 10
bn from the High Net Worth (HNW) sector to date, and
these investors have not yet seen a convincing
argument to move into direct fund vehicles
rather than structured products. The main fac- “We expect 2005 to be a very active year in the
tor that may cause such a move could be the
fact that the fund of hedge fund (FoHF) prod-
ucts have lower levels of fees compared to the
certificates. Other contributory issues include the fact
that FoHFs offer greater liquidity, a more directed invest-
ment approach, and, arguably, higher transparency of
investment performance.
Murphy: The growth of the hedge fund industry can
largely be attributed to an expansion from a traditional
hedge fund investor base of high net worth clients to
institutional investors seeking diversification into alter-
native asset classes, paired with their quest for low
volatility which many hedge funds can offer. The increas-
ing institutionalisation of the hedge fund industry has
been another notable positive development in the land-
scape of the industry in the past year, the entry into the
alternative investment arena of an increasing number of
US and European institutions has led to an increased
demand for outsourcing, creating opportunities for serv-
ice providers to develop and enhance their offerings.
Citco’s Front to Back solution powered by Aexeo
Technology provides the manager with online trading
software and analytical tools, a robust middle office
service complimented by a shared database as well as
the traditional core administration functions of fund
accounting, valuation and investor related services.
Schammo: We experienced a substantial increase in the
demand for alternative structures in 2004, particularly in
real estate investment vehicles, venture capital struc-
tures and hedge funds. In Luxembourg, the creation of a
specific legislation on venture capital vehicles (i.e. the
SICAR) triggered a lot of demand from varying parties.
While only a few of these demands have materialised
into concrete projects, we expect 2005 to be a very
active year in the alternative funds segment.
Fund Servicing - Panel Debate
Wright: There is an increased acceptance of outsourcing
as a strategic business option, particularly in the UK and
Europe. A few years ago, the (financial) market was
debating whether or not outsourcing should be consid-
ered as a strategic business option, and fund managers
were monitoring the early adopters of this principle.
Now conversations have evolved to what the definition
of those business options and models should be. For
many fund managers it’s not so much a question of if
but when, and to whom. In the outsourcing deals them-
selves, we see a more experienced approach to deal
structures that acknowledge the complexity of outsourc-
ing arrangements. The commercial structure of out-
sourcing deals, while not yet benchmarked from an
industry standard, is becoming more mature. Global
fund managers are buying services on the basis of
alternative funds segment”
global propositions (that leverage the service provider’s
operations in several jurisdictions).
Milne: When we look back on 2004, it will be viewed as
a year of realisation for all fund administrators but not
all for the same reasons. For many it was the realisation
that keeping up with the demands of the market was
just too hard and too expensive. Hedge funds, by defini-
tion are at the leading edge when it comes to complex
strategies and instrument types. When you combine
these with ever increasing demands for more frequent
reporting schedules, transparency requirements and the
systems to support them, the job has proved too diffi-
cult for many. The good news for many of these admin-
istrators was that there was no shortage of eager banks
willing to pay top dollar to provide a dignified and lucra-
tive exit for some administrators. For the others, it was a
realisation that the bets they had placed on technology,
process and scalability appeared to be paying off.
Comment on the impact of regulation on your business
and the business of your clients. The Securities and
Exchange Commission (SEC) in the US recently voted to
make hedge fund manager registration the norm. Do
you consider regulation to be a threat to your business?
Aldrich: One of the most interesting elements of the
SEC registration debate is the fact that the SEC regime
is, in practice, considered by most practitioners to be a
much “lighter touch” than the stringent requirements of
the European regulators, for example the Financial
Services Authority in the UK. Therefore the practical
impact of such regulation is not to increase investor
protection, but to add regulatory burdens for those man-
INVESTOR SERVICES JOURNAL 41
Fund Servicing - Panel Debate
agers and additional direct costs to the funds. The
result can only be a decrease in observed investment
performance, especially on the smaller funds by asset
size. The issue of SEC regulation of managers should
not be confused with the choice of domicile of the fund.
The growth of Luxembourg and Ireland as domiciles
within the European Union, and the attempt by Jersey
and Guernsey to compete with the popular fund centres
of the Caribbean, is largely founded on the premise of
ensuring relatively greater regulation and investor pro-
tection. During 2004, BNY saw an increased emphasis
on intelligent domicile selection by promoters, as they
refine their marketing efforts towards both European
institutional and retail investors. BNY has heard some
European hedge fund managers say that the SEC extra-
jurisdictional reach has further encouraged them to for-
bid US investor entry to their hedge funds, as they are
“There is an increased acceptance of
outsourcing as a strategic business option,
particularly in the UK and Europe”
uncertain where this development will lead, except into
the courts. If the costs of having US investors on board
become too onerous then the risk is that funds will
reject investment from the USA – presenting an unin-
tended opportunity cost to US investors entirely. One
prominent Swedish manager is on record as saying that
US investors are not welcome now or in the future to
either their Swedish Kroner or foreign currency share
classes due to the litigious nature of US citizens. The
move by the SEC has only strengthened their resolve in
this matter.
Murphy: The advent of regulated hedge fund managers
in the US will undoubtedly bring increased credibility to
the industry and increased investor confidence in the
asset class. Investor perception of hedge funds as
unregulated products has gradually changed to a posi-
tive perspective whereby hedge funds are viewed as reg-
ulated products providing transparency and steady
returns; further regulation can only aid this process.
Furthermore, from an investor base perspective, hedge
fund’s investor bases have traditionally been largely
comprised of high net worth individuals, increased regu-
lation has and will continue to attract a more varied
investor base; institutional investors, funds of funds,
insurance companies and pension funds. On the other
hand it will lead to greater scrutiny of the administra-
tor’s policies, procedures and controls. Also hedge
funds and their investors, in turn will benefit from
greater technological enhancements being developed by
their service providers driven by the requirement for
greater transparency.
42 INVESTOR SERVICES JOURNAL
Schammo: Regulation, or over-regulation, can be a
threat to the (funds) industry in the sense that too much
of it creates excessive costs. Cost weighs on the return
of the products, specifically in a market environment
with slowly increasing stock prices and low interest
rates. This situation can deter investors from regulated
products to unregulated products, and thus the stronger
regulation for better investor protection has a complete-
ly opposite effect. Regulation, if adequate and well bal-
anced, can be an added value in the sense that it could
create a climate of confidence among investors and con-
tribute to the positive evolution of a product / industry.
An adequate balance between regulation and cost
(impact on return) is important when it comes to
adding new laws to a product/market.
Wright: Increased regulation is an implicit consideration
when assessing the value of an outsourcing
arrangement. For our clients, the increasing reg-
ulatory burden requires that resources be allocat-
ed away from core competencies of gathering and
managing assets. This trend may lead fund man-
agers to require compliance related reporting as
well as a dashboard of analytical tools from serv-
ice providers. Accordingly, we do not see this (regula-
tion) as a threat but rather an opportunity to provide
more comprehensive services to our clients.
Milne: We have only seen the tip of the iceberg in terms
of the impact of regulation. Much of the debate sur-
rounding regulation has been confused by jurisdictional
issues and the concept that changing the domicile of
the fund can in some way make these issues go away.
From an administrator’s point of view, these issues fade
into insignificance when you step back and analyse the
potential impact of what many believe can and will be
imposed. It is not only the regulation that pertains to
the fund itself but in many cases the regulatory position
of the investor. 2004 saw a dramatic increase in tradi-
tional long only players such as mutual funds and pen-
sion funds making hedge funds part of their asset allo-
cation. Both of these fund types are subject to deep and
broad regulatory oversight. To satisfactorily cater for this
oversight alone will require a substantial overhaul of sys-
tems and processes.
How will the word 'outsourcing' evolve over the next
few of years?
Aldrich: BNY sees full outsourcing growing in 2005 and
beyond for alternative asset managers, as we have seen
in 2004 in the traditional asset management space.
Outsourcing will involve both the lift out of operational
staff from within the mature hedge fund management
businesses, plus the provision of ready-made infrastruc-
ture specifically designed for new start up managers.
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Fund Servicing - Panel Debate
Providing this infrastructure on a fully scalable basis is
the challenge and only a few providers have a realistic
opportunity to stay in the frame over the long term. BNY
sees its leading position as a global outsourcer of
investment management operations giving the Bank a
significant advantage as the hedge funds industry
grows. Tremont (hedge fund research company) recent-
ly predicted that assets under management in the hedge
fund universe will grow within four years to $ 2.35 trillion
from their current level of about $ 900 bn to $ 1 trillion.
Murphy: Outsourcing will become more and more
bespoke over time whereby service providers will have
the flexibility to provide solutions tailored to meet the
needs of the individual hedge fund firm. Irrespective of
whether they are a boutique hedge fund operation or a
large institutional asset management outfit, the offer-
“Regulation, if adequate and well balanced, can be
an added value in the sense that it could create a
climate of confidence among investors”
ings will be tailored to compliment their existing in-
house expertise, allowing them to outsource areas of
weakness to a resource-rich service provider and giving
them the opportunity to concentrate on those areas they
are strongest in. Essentially the manager will be in a
position to choose an unbundled suite of services and
pick and choose the disciplines they seek to outsource.
Similarly, administrators providing outsourced solutions
will continue to develop their business models overtime
and focus on specific areas of strength.
Schammo: We expect outsourcing to be a key subject in
the forthcoming years. There will be further consolida-
tion in the banking industry in Europe. This is also true
for the fund administration industry. Smaller players
may want to step out of business completely and thus
put their fund administration business on offer. Certain
medium to large sized players may want to concentrate
more on their core activities and consider fund adminis-
tration as non-core, or they may seek third party solu-
tions rather than investing heavily in the development of
their own administration business. We expect the out-
sourcing market to become more complex, in the sense
that outsourcers will not just seek a third party adminis-
trator capable of offering the standard custody, account-
ancy and transfer agency services. Clients will increas-
ingly seek complete back-office or even middle-office
solutions.
Wright: The word “outsourcing” will evolve to encom-
pass all activities that a fund manager considers non-
core. For some fund managers, only asset management
activities such as research and investment decision-
44 INVESTOR SERVICES JOURNAL
making will be deemed to be core. For other fund man-
agers, only manager selection and fund promotion will
be considered to be core (and investment management
will be outsourced). These long-term trends should
become more prevalent over the next five years. Lift-
outs in various jurisdictions around the world will con-
tinue at the same pace as 2004, but we expect that 2005
will be the peak in activity for three reasons: first, the
opportunity set has shrunk. Secondly, there are a num-
ber of deals currently on the table that will be digested
over the next 12 to 24 months. Thirdly, the economics
from the providers’ point of view need to make sense:
the business model needs to be sustainable, replicable
and profitable.
Milne: I am not sure that outsourcing will necessarily
evolve over the next few years. The idea of core compe-
tence concentration and outsourcing the
rest will be with us for many years to
come as some functions are just too dif-
ficult, too expensive and too much of a
management distraction for many hedge
funds to contemplate. However, the
providers themselves will clearly have to evolve and it
will certainly not be a painless evolution. If an adminis-
trator is to survive over the next few years it will need to
have several core competencies, including scalability,
sophistication, spread and a sense of urgency. Many
administrators are heavily dependent on manual pro-
cessing and the lack of suitably qualified staff is a major
hurdle to achieving scalability for many firms. As hedge
funds face increased competition from each other they
are turning to ever more complex instrument types to
achieve their desired returns. The ability to value and
process these instruments with the frequency and accu-
racy required will be a real challenge for those providers
without the ability to do so in a highly automated envi-
ronment. Geographical spread will also become a key
factor as reporting frequency increases.
Do service providers prefer to outsource their technolo-
gy to an external vendor or developing technology in-
house?
Aldrich: Technology is a key differentiator between serv-
ice providers, and the ability to provide a tailored mix of
proprietary technology and third party technology
enables the provider to stand out from the crowd. The
implementation of third party software can provide cus-
todians and administrators with quantum levels of serv-
ice differentiation. Anyone can buy a package off the
shelf but you must ask the question “as a client, how
important am I to the software vendor?” The answer
will determine, to a significant degree, your ability to
deliver promised value to clients. BNY is one of the
largest clients for SunGard’s accounting systems,

enabling us to deliver customised solutions from a third
party system. On the other hand, BNY has also imple-
mented a proprietary system called Praeeo to calculate
the myriad performance fees demanded by its hedge
fund clients. The provision of “white- labelled” systems
for areas such as risk reporting is a useful tool for
administrators and custodians who require the technical
expertise outside of their natural core competency,
which is accounting fundamentally.
Murphy: Service providers benefit from owning their
technology since it is integrated with their operations
risk modules as well as Quality Assurance designations
such as SAS70. If fund servicing technology were to be
entirely outsourced to and supported by an external
vendor, the fund management firms would need to
achieve operational excellence individually which
can become quite expensive. However one can
understand how attractive it would be for institu-
tions to white-label service provider’s technology
business completely and thus put their fund
and build their operations around it, managing
code, versions and upgrades could however then be
extremely onerous. There are some specialist disciplines
that may be best left with experts in areas such as risk
reporting.
Schammo: Some products have established themselves
in the market as more or less standard and can be
bought off the shelf by administrators. A lot depends on
the positioning of the service provider: A large scale
service provider for standardised products may want to
rely on vendor software that is readily available in the
market place. A smaller-scale, niche player would want
to maintain flexibility in serving their specific client base
and work more efficiently with in-house developed solu-
tions. Provided niche clients are prepared to pay the
price for enhanced flexibility, this solution does work.
Wright: Where possible, most providers would rather
buy than build. The increasing complexity of regulation
and constant margin pressure make it extremely chal-
lenging to develop and maintain a competitive, robust
and scalable proprietary platform. The trend, particular-
ly in Europe, has moved towards a handful of technolo-
gy vendors dominating the majority of the market. RBC
believes in a best of breed approach – especially where
there is a clear leader in terms of market dominance and
specialisation. We have partnered with RiskMetrics
Group and Charles River Development to provide value
at risk analysis and compliance monitoring services for
both our custody and fund services clients.
Milne: Historically, fund administrators have taken appli-
cations developed for similar markets and have tried to
customise them with varying degrees of success. While
many administrators will boast a core competence in
Fund Servicing - Panel Debate
technology, the reality is that few have really been suc-
cessful in integrating third party applications and even
fewer have enjoyed success in building their own. There
are very few core applications for hedge fund adminis-
tration and the majority of them were produced on low
budgets by undercapitalised vendors to meet one
client’s requirements. To be successful, administrators
will need to develop and own their technology. The catch
is that few administrators would even know where to
start in terms of doing this.
Comment on the role of fund service providers going
forward. Will they become watchdogs of investors’
assets and be held more accountable for the smooth
running of the investments industry generally?
“Smaller players may want to step out of
administration business on offer”
Aldrich: Administrators are already the most active
watchdogs for investor interests, as their desire to
ensure that the fund is run on purely ethical lines is 100
per cent aligned to the interests of the investors. Whilst
many observers refer to the Long Term Capital
Management blow-out as the defining moment of the
past decade the Manhattan/Michael Berger case was of
equal importance because of the breathtaking level of
fraud allegedly undertaken, and the ease with which high
profile “sophisticated” investors were hoodwinked,
many of whom were institutions rather than individuals,
with responsibility for investing client money. No service
provider wants to be associated with fraud and everyone
has an interest in being the cleanest monitor of anti-
money laundering procedures.
Schammo: A pure fund administrator should not be a
watchdog of the investors’ assets or a referee for the
asset managers’ investment decisions. A service
provider may provide tools for monitoring certain regu-
latory or other requirements. But the ultimate role of
deciding whether a given investment decision was good
or bad for the investors must increasingly be taken up
by fund management companies and the board of direc-
tors in place. These functions play an increasingly
important role in the supervision of the funds’ corporate
and investment life, as well as the protection of
investors’ interests. The service providers should pro-
vide the tools to detect anomalies.
Murphy: Administrators are in a unique position insofar
as they are charged with being a conduit between the
manager, prime broker and investors yet operating inde-
INVESTOR SERVICES JOURNAL 45
Fund Servicing - Panel Debate
pendently and autonomously. The administrator’s role is
ever changing and it will develop in tandem with the
evolution of the industry. There is an increasing trend
for fund managers to seek out other service providers
independently of administrators such as risk system
providers, compliance and due diligence consultants
and also independent operational consultants. Whilst it
is incumbent on the fund’s service providers to act
responsibly and in the best interests of the investors, it
is largely the duty of the regulators in the various juris-
dictions to ensure the smooth running of the industry.
Wright: We do not believe the fund service provider will
become a “watchdog”. However, investor protection is
a key focus, so fund managers will increasingly be
required by regulators to monitor their service providers
more carefully – which will lead them to require more
“Many administrators are heavily dependent on
manual processing and the lack of suitably qualified
staff is a major hurdle to achieving scalability for
many firms”
compliance related reporting and activities from their
service providers. This should lead to more accountabil-
ity on the part of both fund managers and their service
providers. Outsourcing is the way in which fund man-
agers will increasingly look to minimise operational risk.
Fund services providers are well-placed in this regard as
they contribute to the smooth and seamless running of
the fund manager’s operation particularly with the
bundling of third party administration activities with
custody.
Milne: I am not sure the administrators’ role will funda-
mentally change; it will just be harder to fulfil it well. The
speed at which hedge fund managers operate make it
very difficult for administrators to provide some of the
services that their on-shore counterparts provide in
terms of overseeing the “general well being” of the fund
and its investors. However, if an administrator dis-
charges his responsibilities efficiently and accurately it
certainly contributes to a smoother running and more
accountable industry for all involved. My greater concern
is that as the hedge fund industry emerges from its
shroud of secrecy, it is important that is does so in a
credible way. The on-shore markets are administered to
very rigorous levels and we must aim to ensure that
these levels are the starting position for the off shore
markets.
Comment on recent consolidation within the fund
administration industry. Will we see more purchases of
fund administrators over the next year?
46 INVESTOR SERVICES JOURNAL
Aldrich: BNY were in the vanguard of custodian banks
buying niche hedge fund administrators, with the pur-
chase of International Fund Administration agreed in
2002 and completed in January 2003. The recent pur-
chase of International Fund Managers (Barings) by
Northern Trust, and of Tranaut by JP Morgan, is simply a
continuation of this trend and is more than a “me too”
reaction to get into alternatives. It is actually a sensible
response to clients’ demands for a full service offering
across custody and administration regardless of asset
class. The next stage will be a consolidation of providers
within those that are already large, so as to gain addi-
tional significant scale.
Murphy: The growth of the hedge fund industry has pre-
sented significant opportunities for service providers
and has directly led to increased consolidation and a
number of acquisitions in the fund
administration industry resulting in
Citco Fund Services being the sole
remaining independent and privately
owned provider of hedge fund admin-
istration services in the space. With
many high profile acquisitions occur-
ring in 2004 alone, it appears this
trend may be set to continue as large investment houses
recognise the opportunities inherent in this burgeoning
industry.
Schammo: We anticipate further consolidation in the
industry. In the end, a few large-scale service providers
for the “mainstream” business might dominate the
industry. At the lower end, there will be a number of
small service providers delivering niche services to spe-
cific industry segments not sizeable enough for the big
ones to consider. This process may take a couple of
years, but is typical of a mature industry with pressure
on revenue margins in a global market place.
Wright: Yes, we expect to see consolidation to continue
for two reasons. First, it is becoming increasingly diffi-
cult for pure fund service providers (e.g. non custodi-
ans) to compete without being able to offer higher mar-
gin value-added products (like securities lending and
foreign exchange) to compete. Secondly, hedge fund
administrators will continue to be acquired – in order to
acquire the intellectual capital in the hedge fund area, as
much as for the functionality of their proprietary plat-
forms. To achieve the efficiency gains anticipated from
the harmonisation of EU markets, several small to medi-
um size players with a strong footprint in their local
jurisdictions have become targets for larger groups with
a clearly defined growth strategy.
Milne: As the demands on fund administrators increase,
so do the capital requirements. Happily for some, this

trend has coincided with an increased desire by the
banks to get involved, which has provided a timely and
lucrative exit route. However questionable the valuation
multiples are when compared with other sectors, the
norm has been established at a level that does not
appear to have deterred the hungry banks. The thirst
displayed by the banks for buying administrators shows
no sign of being quenched and as the economic pres-
sures increase the acquisitions will continue.
What can fund servicing providers look forward to in
2005?
Aldrich: In 2005 we expect the “Kraken” (the German
hedge fund market) to awake. There are still possibly
less than 15 funds, in “pre-production” and awaiting
BaFin (the German regulator) approval. Once these
launches are underway and assuming the global hedge
fund industry posts good returns in early 2005, we
expect big things of Germany. Increased competition in
the service provider universe is a given, but with a small-
er number of credible providers, the opportunities
remain positive.
The hedge fund industry is expected to post asset
growth of upwards of 35 per cent in 2005, as institutions
begin the process of dramatically increasing their hedge
fund weightings, as shown in the recently published
research by The Bank of New York and CQA:
“Institutional Investment in Hedge Funds: New
Opportunities and New Standards”. The days of a bou-
tique administrator servicing a boutique manager are
not over, but their days are very clearly numbered.
Murphy: We expect the trend of institutions allocating
an increasing percentage of assets into the alternatives
industry to continue in conjunction with increasing
numbers of institutions launching their own hedge
funds products. Funds of hedge fund growth looks also
set to continue with demand for good fund of hedge
fund products continuing to outstrip supply. With the
2004 drafting of German legislation to encourage hedge
funds opening up to investors in Germany we could see
this becoming a major area of growth. Initial guidance
issued in September 2004 is expected to be reinforced
by further guidance this month and the industry is hop-
ing that this will clarify many of the ambiguities that
remain following the introduction of the legislation. The
Fund Servicing - Panel Debate
outsourcing solution which has gathered pace in the last
few years should continue and grow further as managers
recognise the value of utilising cutting edge technology
and resources which have been developed specifically
for the challenges they face.
Schammo: Outsourcing and alternative investment
vehicles will certainly be among the key subjects for
2005. Economic outlook, though not enthusiastic,
seems to be positive again and the fund industry should
continue to develop. We can expect further pressure on
margins as the industry continues to consolidate.
Service providers will be asked to provide assistance to
fund promoters further up the value chain. Back-office
and middle office solutions will increasingly part of the
service requested.
Wright: I anticipate a peaking of lift-out activity, continu-
ing consolidation of fund managers and fund servicing
providers and the definition of “outsourcing” will contin-
ue its evolution up the value chain. Pricing pressures
and increasing regulatory burdens will hammer away at
the resolve of those fund managers who have not yet
considered outsourcing as a viable and attractive strate-
gic business option. Fund managers will look for a bun-
dled solution from one service provider (in order to min-
imise risk and reduce overall costs). Global fund man-
agers will continue to buy services on the basis of cross
border propositions that leverage the service provider’s
operations in various jurisdictions
Milne: At the risk being a doomsayer, I think the light at
the end of the tunnel many administrators see may in
fact be the lights of an oncoming train. Large parts of
the funds administration industry are ill equipped to
cope with many of the challenges that will face it in 2005
and beyond. When you look at all of the challenges fac-
ing administrators and then place on top of this the pre-
dicted number of new funds, the outlook is very scary
indeed, especially if you are less than supremely confi-
dent of your technology. The reassuring thing, at least
for some, is that hedge funds will start to pay much
more attention during their due diligence to systems
and processes. There will, and should be, a change of
focus from what looks good on the prospectus to what
is good in reality.
Thank you. ISJ
INVESTOR SERVICES JOURNAL 47
Hedge Fund Performance

Hedge Funds Outperform

ISJ showcases the latest hedge
funds performance results from
two reputable industry sources.
This research highlights the
hedge fund industry’s ability to
offer increasing returns in a
volatile market
From a mediocre third quarter in
2004, the CSFB/Tremont Hedge Fund
Index increased by 2.65 per cent in Nov 2004
November 2004. According to Oliver CSFB/Tremont Hedge Fund Index is up 2.65% in November 2004
Oct 2004
Schupp, president of Credit Suisse 15%
First Boston Tremont Index LLC, the YTD 04
FX market was a key performance 10%
driver in the Managed Futures sector
during November 2004, with this sec- 5%
tor reporting a positive return of 5.83
per cent. “Credit-focused managers
0%
also generally had a good month as
they reported gains on both the debt
and equity side of their portfolios,” he -5%
said
“US, European and Japanese equities -10%
Convertible Arbitrage

Dedicated Short Bias

Global Macro
Fixed Income Arbitrage

Long/Short Equity

Multi-Strategy
Emerging Markets

Equity Market Neutral

Risk Arbitrage
Event Driven

Distressed

Managed Futures
Event Driven Multi-Strategy
CSFB/Tremont Hedge Fund Index

were generally positive for the month

of November,” added Robert I.
Schulman, co-chief executive officer
of Tremont Capital Management, Inc.
“Many of the major world indices
climbed throughout the first half of
the month (November) and then
tapered off in the last week. Source: CSFB Tremont Hedge Index
Long/Short Equity hedge fund man-
agers generated returns through both
stock selection and directionality.
The Dedicated Short Bias sector con-
tinued to be hurt by this market
upturn, reporting a return of negative YTD 04
7.71 per cent.”
Performance for the CSFB/Tremont Comparison of Indicies Oct 2004
Hedge Fund Index and its ten sub Nov 2004
strategies is calculated monthly. NASDAQ Composite US $ Index
November, October and year-to-date
2004 returns for all categories are list- MSCI EAFE US $ Index*
ed in the diagram below.
The CSFB/Tremont Hedge Fund
MSCI $ World Index*
Index value is 309.58, returning
209.58 per cent for the 131-month
period since inception (January 1 Dow Jones Industrial Index*
1994 through November 30 2004).
For additional current and historical
CSFB/Tremont Hedge Fund Index
data including more comparisons
with other widely followed global
-2% 0% 2% 4% 6% 8% 10% 12% 14% 16%
indices, visit the CSFB/Tremont
Hedge Fund Index web site at Source: CSFB Tremont Hedge Index

www.hedgeindex.com.

48 INVESTOR SERVICES JOURNAL

 Hedge Fund Performance

HFRI Hedge Fund Index month track record, and audited financial state-
HFRI Indices NOV 2004 Year-to-Date 2004 ments. Index funds are selected using a formula
based on assets under management that ensures
Fund Weighted Composite 2.83 7.19
the Index represents at least 85 per cent of total
Convertible Arbitrage 0.85 0.68
assets in each of ten strategy-based sectors in the
Distressed Securities 3.15 15.47
Emerging Markets (Total) 3.10 15.00
selection universe. Once added, funds are not
Equity Hedge 3.36 5.75
excluded until they liquidate or fail to meet the
Equity Market Neutral 1.36 3.63
reporting requirements, in order to minimise sur-
Equity Market Neutral : Stat. Arbitrage 2.53 4.08 vivorship bias. The CSFB/Tremont Index is calcu-
Equity Non-Hedge 6.24 9.82 lated as a total return index on a monthly basis,
Event-Driven 3.50 11.08 adjusted for asset in- and outflow, including a res-
Fixed Income (Total) 1.25 7.36 election according to the procedure outlined above
on a quarterly basis.
Macro 2.93 4.06
Market Timing 3.35 3.49
Merger Arbitrage 1.76 3.11
Independent research
Regulation D -0.98 4.53
To further highlight the increase in hedge fund
Relative Value Arbitrage 0.80 4.59 performance, Hedge Fund Research Incorporated
Sector (Total) 4.03 9.55 (HFRI), an independent research consultancy in
Short Selling -3.00 -2.15 the US, announced upward returns of 2.83 per
HFRI Fund of Funds Index
cent in November of last year. The returns from
the HFRI Market Timing Index were favourable,
HFRI FUND OF
HEDGE FUNDS NOV 2004 YTD 2004 Rate of Return Std Deviation SHARPE RATIO with an increase of 3.35 per cent in November
INDICES
2004. Year to date performance for this index
Fund of Funds
Composite
2.62 5.38 7.01 3.70 1.53 increased 3.49 per cent. The HFRI Equity Hedge
Fund of Funds:
Index also posted improved performance, increas-
1.57 4.35 5.40 2.22 1.84
Conservative ing 3.36 per cent in November of 2004. Year to
Fund of Funds: date performance for this index was up 5.75 per
2.76 5.68 7.27 3.67 1.61
Diversified
Fund of Funds:
cent. Other hedge fund indices performing well
3.24 2.50 4.16 5.89 0.52
Market was the HFRI Event Driven Index, which increased
Fund of Funds:
Strategic
3.19 6.60 3.5 per cent in November 2004. Year to date return
Fund Weighted
for this index was 11.08 per cent.
2.83 7.19 9.19 4.37 1.76
Composite
Source: Hedge Fund Research Inc.
Fund of hedge funds
To highlight the success of fund of hedge funds,
The CSFB/Tremont Hedge Fund Index is comprised of 384 funds HFRI recorded returns of the main hedge fund
as of November 30, 2004. instruments. The HFRI Fund of Funds: Market
Defensive Index performed well, up 3.24 for
Changes November 2004. Tailing this index, the HFRI Fund
There was one strategy reclassification in November 2004; Value of Funds: Strategic Index was up 3.19 per cent.
Partners ‘A’ was moved from Long/Short Equity to Emerging Overall, fund of funds appeared to be catching up
Markets. Three funds, Barep Convertible Arbitrage, Mellon HBV to their hedge fund counterparts, increasing 2.62
Arbitrage Fund, and Sapphire Partners LLC, were dropped from in November 2004. Year to date return on these
the Index because they are no longer reporting. The Equity funds compared favourably with the HFRI Hedge
Market Neutral sub strategy was revised slightly downward to Fund Index, increasing 5.38 per cent.
account for a prior misstatement.
Comparison
Source The HFRI Fund of Hedge Funds Index outper-
The CSFB/Tremont index is constructed using the TASS and formed nearly all of the main market benchmarks
CSFB/Tremont databases of more than 3,000 hedge funds. It over the year to November 2004, including the
includes both open and closed funds located in the U.S. and off- Lehman Brothers Aggregate - US Government
shore regions, but does not include funds of funds. In order to Bond Index, which was up 2.71 per cent and the
qualify for inclusion in the index selection universe, a fund must NASDAQ Composite, which was up 4.68 per cent
have a minimum of US $10 million under management, a 12- over the year to November 2004. ISJ

INVESTOR SERVICES JOURNAL 49

Prime Brokerage - Hedge Funds
Hedging Bets
The range of services on offer
from a prime broker place
hedge funds in an ideal position
to leverage from a one-stop
shop solution. Brian Bollen
investigates
50 INVESTOR SERVICES JOURNAL
P rime brokerage firms provide a range of customised
services to hedge funds. But while in the past they
tended to focus on back office operations, today they play
a far broader role for funds. Current services include han-
dling trade execution, clearing and settlement, providing
financing and technology services, lending securities and
making introductions to sources of capital.
Changes in technology and the markets have led to
innovation and expansion of the prime brokerage services
offered not only by the top tier firms, but also by the lesser
known firms, says Kevin A. Pollack, a partner at the New
York-based hedge fund merger & acquisition / joint ven-
ture specialist Resurrection Advisors. The boom in the
number of hedge funds and in the amount of assets cur-
rently allocated to, and expected to be allocated to hedge
funds in the future, makes prime brokerage a very attrac-
tive and growing business.
Challenge
Most of the top prime brokerage firms have been grow-
ing substantially, especially internationally. As hedge fund
returns in the US have become compressed, hedge funds
are looking to emerging markets, such as Asia. With the
landscape around them changing so dramatically, the key
challenge that lies ahead for prime brokers is a simple one.
According to Stuart Bohart, managing director at Morgan
Stanley, it is to position themselves to deal with the multi-
plying complexities of the modern hedge fund, the grow-
ing numbers of which are behind the stampede into prime
brokerage. “Clients want to have relationships with very
big firms that can service their every need in the various
areas of activity,” he says. “Firms need to be able to deal
with everything the hedge funds throw at them. That
means being multi-jurisdictional, multi-asset, multi-time
zone and multi-currency. Morgan Stanley has worked hard
to develop those capabilities. The growth of aggregate
hedge fund assets is a big driver of revenues, and our
future success largely depends on our ability to capture
this growth. Key to our effort is the continued develop-
ment of cross-firm, multi-asset class capabilities - in prime
brokerage, research, and sales.”
The challenge for the hedge funds themselves, mean-
while, is altogether arguably more daunting, though it can
be expressed very simply: finding performance. “Until the
fourth quarter, performance was lacking,” says Stuart
Bohart. “Hedge funds need to understand where the
opportunities are. And if we are in a low volatility environ-
ment for an extended period of time, what does that mean
for them?”
Reluctance
Although prime brokerage firms are adding services and
are working towards becoming a one-stop shop for hedge
funds, many hedge funds remain reluctant to rely on just
one firm, says Kevin Pollack. Thus, some hedge funds
handle several prime brokerage functions in-house, have
multiple prime brokers or are using other service
providers, including providers of technology and fund

administrators, to handle some of the
services offered by their main prime bro-
ker. In addition, different hedge funds
have different needs and different prime
brokerage firms
and service
providers have
different
strengths such
that no one
prime brokerage
firm offers the
perfect solution
for every hedge
fund.
The growth in
John R. Phillips competition will
inevitably improve service levels and
reduce prices, says John R Phillips, chief
investment officer, Philadelphia Capital
Management. “My job as a fund manager
is to drive the prime brokers to the most
competitive service levels, which will ulti-
mately make the prime brokerage busi-
ness somewhat lower margin than it is
today,” he says. “I think there is a lot of
very low risk money that the banks are
making that ultimately should find its
way back into the funds held in custody
by the brokers. As more banks develop
this business, competition will force this
process.
“Prime brokers need a substantial
level of infrastructure in place to pro-
vide the integrated services that hedge
fund managers are seeking. They have
an incentive to build assets that generate
trading commissions and I believe that
stock lending offers a substantial profit
opportunity for the banks. Banks with
a strong lending programme are able to
offer a broad selection of equities to sell
short. Increasing demand for short
sales has led to the banks charging a
premium for an increasing number of
hard to borrow stocks. The resulting
benefit to the prime broker is interest
collected on the cash from the short sale
plus in some cases a premium percent-
age charged to the short seller.
Historically, the short seller has benefit-
ed substantially from the interest
income on cash from the short sale, as
interest rates dropped and short selling
gained popularity, it seems that the
banks have increasingly kept the pro-
ceeds of the short interest cash flow.
Fund managers need to use the industry
Prime Brokerage - Hedge Funds
competition as a way to recapture the
short rebate cash flow.”
“The winners will be the firms that can
develop relationships with hedge funds
that will survive for the long haul, grow
their assets and generally be profitable
customers for the brokers. Successful
fund managers will be able to attract
assets and should have strong negotiating
position with prime brokers to get com-
petitive rates on cash, margin and com-
missions. The prime brokers that are
flexible to accommodate “good” clients
will ultimately share in the success of the
industry. The quality of infrastructure
will also come in to play. Those banks
that actually have a significant propri-
etary trading element should have an
edge in providing the best services and
infrastructure since they will have first
hand experience. Global reach providing
access to all markets and financial instru-
ments is also necessary – otherwise a
diverse hedge fund will not be able to
truly consolidate its business with the
prime broker.”
“Clients want to have
relationships with
very big firms that
can service their every
need in the various
areas of activity”
Threats
By contrast, an inferior quality of
infrastructure, inability to introduce
capital and an unwillingness to provide
competitive interest rates and fees
should hurt a prime broker’s chances at
success, he continues. “Those banks
that buy into the prime broker business
risk paying too much. If competition
reduces margins they may struggle to
generate an acceptable return on their
investment. So, late comers that pay big
to get into the business run the biggest
risk of losing out. I think some of the
newcomers will be successful, because
the established firms are likely not as
service oriented as they should be and
the newcomers will use that weakness to
win business. I know I have to fight
hard with my current prime brokers to
get a satisfactory level of service. I look
forward to increased competition for
my business!”
Competition
Investment banks are growing closer
than ever to the alternative industry
because they want their share of the
lucrative commissions paid-out from the
trillion dollars of assets under manage-
ment, comments Nicolas Breteau, chief
executive officer at the UK branch of
Fimat, part of the SocGen group. “Fund
managers have a huge turnover of posi-
tions and therefore pay a large amount of
brokerage commissions. They also out-
source part or all of their non-trading
operation, creating opportunities for
more fees.”
Appetite is also growing among invest-
ment banks because they realise that
nowadays the big bulk of hedge funds
strategies involve capturing market
opportunities through market neutral
arbitrage strategies, rather than “maver-
ick” market speculation, he argues. “The
diversification of funds strategies in
recent years means that it is now required
to offer not only geographically diversi-
fied sophisticated products but also serv-
ices across all asset-classes. As a conse-
quence, the barriers to entry are now very
high as this requires intensive IT systems
and support, a strong balance sheet and
highly skilled people.
“The European lanscape, which used to
be dominated by the huge US banks, is
changing. New players are trying to break
the duopoly of Morgan Stanley and
Goldman Sachs and contesting the equi-
ty-focussed model. European prime bro-
kers tend to develop the all-in-one
approach offering the full basket of serv-
ices across all asset classes. UBS, CSFB,
Lehman, Deutsche Bank, Bear Sterns and
Fimat are competing for mandates in all
varieties of strategies, from global macro,
to fixed income, volatility or convertible
arbitrage.
“These changes have been driven by the
rise of assets managed by the alternative
industry players. The total industry net
assets in single manager hedge funds are
estimated to be approximately USD890
bn. If we add the assets that are estimated
to be in private managed accounts run by
hedge funds managers, this figure easily
rises to over one trillion dollars.”
“For the year 2004, total asset flows into
INVESTOR SERVICES JOURNAL 51
Prime Brokerage - Hedge Funds

hedge funds have surpassed the USD100 bn mark. This

represents very lucrative opportunities for investment
banks and brokers who want their share of the gold rush.
However, the concept of centralisation of settlement, clear-
ing, custody, cash or securities financing with one “prime”
counterpart tends to seduce traditional financial institu-
tions or market professionals. Looking for a better usage of
their capital and balance sheet allocations, proprietary
traders are looking for lower costs, as well as products or
services providing them with additional leverage. Some of
them are considering outsourcing support functions that
were traditionally built in-house because the brokers are
able to offer them the robust and attractive set-up that was
originally designed for hedge fund managers.

Winners
“The winners will be those able to anticipate the consoli-
dation of this industry. The prime brokerage service will
become commoditised, margins will
“New players are trying to break the duopoly of decrease and the competition will become
fierce, a far cry from the comfortable
Morgan Stanley and Goldman Sachs and ambience which marked the early days.
This looks very like what is happening in
contesting the equity-focused model” the futures industry, where the pressure on
margins is pushing the players to consoli-
date, reduce production costs and diversify.”
“It is against this background that Lehman has bought
GLG, JP Morgan acquired Highbridge and a chunk of
Bluecrest. This move is logical as institutions want to keep
the fees in-house or are trying to find capacity to invest in
attractive products for their private banking divisions.
This is perfectly legitimate but might introduce conflicts of
interest so the jury is still out on this.”
“When the current industry boom has passed, correc-
tions will be made and the industry will end up safer and
stronger as investors will benefit from more transparency.
Prime brokers should keep in mind that most of the
money was made by people selling the shovels during the
gold rush and not by the prospectors,” he cautions.

New entrants
David Aldrich, head of Securities Industry Banking for
The Bank of New York in Europe, says that a key driver
behind the push from the big European banks into prime
brokerage has been on the supply side of the equation
rather than the demand side, based upon the perception
that much bigger margins are available from hedge funds
on their financing requirements than the banks can
achieve from their traditional borrowers.
In this context, banks such as UBS and Deutsche Bank
enjoy a huge advantage thanks to their very low internal
cost of funds and their access to massive supplies of securi-
ties from their own networks, he argues. “The US invest-
ment banks have to source both cash and securities exter-
nally and at a higher cost than the big European banks.
Whilst these factors will not necessarily determine the win-
ners and losers when the music stops, it does mean that
competition will be fierce for the medium to long term.”

52 INVESTOR SERVICES JOURNAL

INVESTOR FROM THE BACK OFFICE
S ERVICES TO THE BOTTOM LINE
JOURNAL

THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

Fund Structure; Information & Data Providers; Custody;
STP & Technology; Trading Services & Outsourcing;
Hedge Funds; Prime Brokerage; Settlement & Clearing;

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 Prime Brokerage - Hedge Funds
Administration
One related activity into which some of the major
prime brokers have expanded is hedge fund administra-
tion. Examples include Goldman Sachs who have a very
successful hedge fund administration business in Ireland,
and Morgan Stanley, who recently announced plans to
launch an administration business out of New York. This
activity is characterised by being headcount -intensive
and relatively low margin compared to traditional prime
brokerage revenue streams.
“It is however comparatively “sticky” business, as man-
agers do not change administrators lightly, and it is this
aspect which attracts prime brokers, who are seeing an
increasing fragmentation of relationships,” resumes
David Aldrich. “Most players see the consolidation
occurring within hedge fund administration being driven
by the need for managers for an increasingly sophisticat-
“The prime brokerage service
will become commoditised,
margins will decrease
and the competition will become fierce”
ed, technology-dependent service model built around the
central accounting requirements of the fund. The key
players in the administration game are increasingly the
big securities servicing banks, i.e. explicitly those players
not engaged in prime broking, such as The Bank of New
York and State Street.”
Despite concern in some quarters about the rapid
Volumes vs Margins
Institutional Share of Total Hedge Fund Capital Flows
The future 60%
battleground?
50%
40%
30%
20%
10%
B B
0%
2000 2001
Source: 'Institutional Demand for Hedge Funds: New Opportunities and New Standards' -
Casey, Quirk & Acito and the Bank of New York
54 INVESTOR SERVICES JOURNAL
growth that has taken place in hedge funds in recent
times, no let-up is yet in sight, he believes. “Capital allo-
cations to hedge funds are increasingly coming from
institutional investors, such as pension funds and insur-
ance companies. Research published by The Bank of New
York in October 2004 (Institutional Demand for Hedge
Funds: New Opportunities and New Standards) showed
that US institutional investors are dramatically increasing
their hedge fund allocations, and the statistics show that
there will be a fivefold increase in institutional invest-
ments over the next five years, from $ 66 bn to $ 300 bn.
Trends
In Europe, he continues, recent announcements from
Hermes, that the pension fund it manages for the BT
Pension Scheme began hedge fund investing in
November 2004 to the tune of approximately £ 540 mil-
lion, and from the Heineken pension fund that it may be
increasing its hedge fund allocation from 5 to 10 per cent
in its EUR 1.5 bn scheme, show that the institutional
“wall of money” into alternatives is a truly global phe-
nomenon.
The BNY research shows that the losers will be tradi-
tional active managers, from the so-called “alpha-beta
squeeze”. Investors will look to inexpensive index prod-
ucts to gain their “beta” or market exposure while they
will turn to hedge funds, and other alternative invest-
ments, for their “alpha” or absolute return.
Whether this represents a modern form of Greek
tragedy, as traditional managers fall from a great height,
or a healthy and long-overdue rationalisation of the asset
management industry, depends, of course, upon one’s
perspective, and one’s prospects for future gainful
employment. ISJ
B
B
B
B
B
B
B
2002 2003 2004E 2005E 2006E 2007E 2008E
 Fund Servicing - Channel Islands
With a 40-year head start on
most European fund centres,
Jersey and Guernsey remain
leaders in the international
financial landscape thanks to a
range of initiatives aimed at
capturing investor attention for
alternative investment.
ISJ reports.
CHANNELING GROWTH
I t is often said that regulation for fund
centres is too intrusive and drives
investors away, but this is definitely not
the case for the Channel Islands. Since the
launch of their new fund regimes at the
beginning of 2004, the Islands of Jersey
and Guernsey have cleverly lured business
away from onshore jurisdictions in the
UK and mainland Europe on a number
of fronts, including fund domiciliation
and distribution. A wide-range of invest-
ment styles, from traditional investment
vehicles for retail and institutional
investors through to alternative invest-
ments, including venture capital private
equity, property, hedge funds and fund of
hedge funds, are reflected across Jersey
and Guernsey.
In broad terms, the regulatory changes
being introduced by the Islands place
greater emphasis on providing more flex-
ibility in recognising investors’ differing
knowledge, sophis-
tication and their
risk awareness. “The regulatory environment
“The specific
needs of various
is now particularly attractive
asset classes within
the framework of
to institutions and high net
meaningful worth investors”
investor protection
are recognised,”
explains Mark Huntley, business develop-
ment director at Barings Financial
Services Group (BFSG), which is being
acquired by Northern Trust Corporation.
Guernsey has developed the ability to
service more innovative vehicles along-
side its conventional fund expertise which
is still an important part of its fund
industry.
“Guernsey continues to show an ability to
adapt, innovate and evolve to meet the
expectations of fund promoters, as illus-
trated by its new proposal for a fast-track
authorisation process for funds aimed at
professional, experienced and knowledge-
able investors,” says Huntley.
Under the Qualifying Investor Funds
(QIF) proposal being considered by the
Guernsey Financial Services Commission
(GFSC) fund approval would be granted
within three working days provided that
an appropriately licensed Guernsey appli-
cant has certified to the Guernsey
Financial Services Commission (GFSC)
that it has conducted due diligence on the
fund promoter and associated parties,
and finds them to be “fit and proper”. The
fund will be restricted to professional,
experienced and knowledgeable investors.
Hedge Funds
Guernsey introduced a more flexible
framework for open-ended hedge funds
and fund of hedge funds in February
2004. The framework recognises particu-
lar and developing characteristics of cer-
tain hedge funds, and the alternative
investment sector generally. The value of
hedge funds and fund of hedge funds in
Guernsey grew by 65 per cent during the
first half of 2004 to comprise £17. 5 bn of
the Island’s £28.4 bn open-ended funds
industry (as at 30 June 2004). Of
Guernsey’s 203 authorised open-ended
funds, 71 are either hedge funds or fund
of hedge funds.
The most significant change of the new
funds industry relates to custody arrange-
ments. Huntley explains: “For open-
ended hedge funds targeted at institu-
tional and expert investors, a Guernsey
domiciled
and licensed
custodian is
now not nec-
essary in all
circum-
stances.
Instead the
fund may be
permitted to
appoint a prime broker regulated in an
acceptable jurisdiction with substantial
net worth to be the fund’s custodian.”
To keep pace with its neighbour, Jersey
INVESTOR SERVICES JOURNAL 55
Fund Servicing - Channel Islands
introduced a new streamlined regulatory
regime for Expert Funds in February
2004. Expert Funds are particularly suit-
able for funds with alternative invest-
ment strategies where innovative prod-
ucts are targeted towards sophisticated
investors. The funds for qualifying pro-
fessional, institutional and high net
worth investors can be approved by the
Jersey Financial Services Commission
(JFSC) within a matter of days on the
basis of self-certification by Jersey-based
administrators. The Expert Fund is a
shift by the JFSC towards devolving
greater regulatory oversight
responsibilities to
the regulated “I don’t think the hedge funds industry would turn
service provider.
Expert Funds are retail focussed because the investment managers
particularly suit-
ed to hedge
do not really want to play that game”
funds. For hedge funds established
under the Expert Fund Guide the
requirement for a
custodian is being waived, provided a
prime broker that is part of a group with
a minimum credit rating of A1/P1 is
appointed. Hedge funds comprised £22
bn of Jersey’s £98.2 bn fund industry as
at 30 June 2004. Jersey is also planning to
introduce legislation for protected cell
companies (PCC) early next year. In
Guernsey, which pioneered the PCC
structure, these structures are
increasingly being used for open and
closed ended Guernsey funds. The
Expert Fund Guide provides a further
streamlining of regulations to support
the growth of Jersey as a fund adminis-
tration centre for funds domiciled in
other jurisdictions. Guernsey is also
expecting to continue to attract more
business from non-domiciled funds
through its Non-Guernsey Schemes leg-
islation. Over the year to 30 June 2004,
the value of Non-Guernsey Schemes
increased by £4.9 bn to £15.3 bn.
Regulation
The regulatory changes in Jersey and
Guernsey are aimed at putting oversight
at appropriate levels to meet a changing
investment profile. “The regulatory envi-
ronment is now particularly attractive to
institutions and high net worth investors
with a level of regulation that is appro-
priate and not bound by rules and regu-
lations established within the EU which
can be restrictive for the new direction
asset management is taking,” says
Huntley. “Guernsey and Jersey are also
56 INVESTOR SERVICES JOURNAL
recognising contemporary industry
trends and putting regulatory oversight at
appropriate levels to meet a changing
investment profile.”
The ability of hedge funds to appoint a
prime broker, as opposed to a local custo-
dian, has been a significant change for
Guernsey, according to Patrick Firth,
managing director of Butterfield Fund
Services (Guernsey) Limited. “The second
major development, which is under con-
sultation, is the introduction of qualified
investor funds, which are designed to
streamline the funds authorisation
process,” he explains.
The prime broker option for a hedge
fund demonstrates the Guernsey regula-
tor's flexible approach to non-traditional
funds. “This would enable Guernsey to be
seen to be on a level footing with other
jurisdictions, and thus further enable the
Island to be perceived as a preferred juris-
diction for sponsors, promoters and
lawyers to place alternative funds,” says
Martin Tolcher, director of Butterfield
Fund Services (Guernsey) Limited.
As host to a range of financial services
firms, Guernsey can offer administration,
custody, banking and foreign exchange
facilities. “We also have the expertise to be
able to service alternative funds, not only
those domiciled in Guernsey, but also
those in other jurisdictions, including
Cayman,” says Tolcher.
Trends in total net assets for largest asset classes of all funds domiciled in Jersey
US$ billion June 1999 June 2000
Property/Real
1.20 1.70
Estate
Private
Equity/Vent. 2.90 6.40
Cap.
Mixed
Equities/Bonds
4.70 8.50
Equities 9.10 17.00
Bonds 7.00 5.10
Funds
Prior to the launch of the new Expert
Fund regime in Jersey, the principle clas-
sification for funds sat within the
Collective Investment Funds law (CIF’s)
and Control of Borrowing Order
Schemes (COBO’s). Recognised funds
were modelled on UK legislation and
were designed to ensure investor protec-
tion that is at least equivalent to that
afforded to investors in the UK under the
Financial Services Act 2000. As a result,
the UK authorities declared Jersey a
‘Designated Territory’. Furthermore, any
fund designated a ‘Recognised Fund’
could seek authori-
sation under sec-
tion 270 of the
Financial Services
Market Act to mar-
ket directly to the
general public in the UK. This
provided a tremendous distribution
channel for promoting funds.
In Guernsey, similar structures are
available under their Collective
Investment Scheme legislation, which
classifies schemes into A, B or Q schemes.
The A schemes are the most highly regu-
lated and can be promoted under the
same designated territory rules to the UK
general public. B schemes could range
from retail to strictly private funds with
slightly less regulation, and Q schemes
tended to focus on disclosure of risk
rather than prescription.
Guernsey is planning to launch a
Professional Investor Fund (PIF) on simi-
lar terms to the Expert fund.
June 2001 June 2002 June 2003 June 2004
2.20 7.20 10.50 22.70
8.00 10.00 14.00 14.30
7.40 7.70 7.90 8.90
13.30 8.40 6.60 8.40
5.10 5.60 6.20 7.40
Source: Fitzrovia, Jersey Fund Encyclopaedia
 Global standards... local service

At RBSI Securities Services Group, our focus is clearly centred on Our range of specialist services in Jersey, Guernsey and
customers. We work together to achieve business success, no matter the Isle of Man include:
how simple or complex our customers’ needs. A combination of size,
• Global Custody • Cash Management
financial strength and wide ranging capability means we can provide
customers with the right solution whatever or wherever their business • Fund Administration • Corporate Trustee

may be. • Treasury Services • Outsourcing

For further information please contact:

Ian Henderson +44 (0)1534 286056 - email: ianhenderson@rbsint.com

Alternatively visit www.rbsint.com

RBSI Securities Services Group comprises RBSI Custody Bank Limited (“Custody Bank”) and RBSI Fund Administration Limited (“Fund Administration”), both of which have: Registered Offices at 71 Bath Street, St. Helier, Jersey JE4 8PJ and business
addresses at Liberté House, La Motte Street, St Helier, Jersey, JE4 5RL. Custody Bank: Regulated by the Jersey Financial Services Commission for carrying on banking and investment business. Business address in Guernsey: St. Andrews House, Le
Bordage, St. Peter Port, Guernsey GY1 1BR. Licensed under the Banking Supervision (Bailiwick of Guernsey) Law, 1994. Business address in Isle of Man: Royal Bank House, 2 Victoria Street, Douglas, Isle of Man IM99 1NJ. Licensed by the Isle of
Man Financial Supervision Commission to conduct banking and investment business. Deposits made with the offices of Custody Bank, all of which are outside the UK, are not covered by the Financial Services Compensation Scheme under the UK
Financial Services and Markets Act 2000. Deposits made with the offices of Custody Bank in the Isle of Man are covered by the Depositors' Compensation Scheme contained in the Banking Business (Compensation of Deposits) Regulations 1991, as
amended. Copies of Custody Bank's latest audited accounts are available for inspection on request. Custody Bank's paid up capital and reserves for the year ended 31st December 2003 exceeded £31.8 million.
Fund Servicing - Channel Islands

Oversight regime, the JFSC has introduced the were not domiciled in the Island, given
Commenting on the advance in fund ‘Non-Domicile Guidelines’, which state their experience in the operation of funds
types taking place across the Channel that practitioners who are licensed in the business and their access to large pools of
Islands with lighter regulatory touch, Channel Islands can administer funds corporate and professional capability
Brett Allen, senior manager for The Royal and provide services to funds that may be across all disciplines.”
Bank of Scotland International says: ‘It is registered in a different jurisdiction. “If a In addition, the JFSC's Outsourcing
hoped that this Policy Guidelines
long awaited de- provide for func-
regulation will “The ability of hedge funds to appoint a tionaries to be
facilitate the
speedy establish-
prime broker, as opposed to a local custodian, has delegated under
five core princi-
ment of a wide of been a significant change for Guernsey” ples: the delegate
range of alterna- is ‘fit and proper’,
tive investment fund products. The fund registered in Cayman looks like an there is a written agreement, sufficient
approach has been to move the focus and expert fund in terms of its qualification, capacity is retained to assess whether the
degree of regulation down from the level there is a 24 hour approval process where outsourced activity is performed ade-
of the vehicle itself to the underlying duties are outlined and a licensed issued,” quately, termination of the agreement is
fund administrator located in Jersey with explains Allen. “Jersey was looking for feasible and the JFSC must be informed
much more emphasis on oversight of the more flexibility to operate funds that of any outsourced duties.
fund, its operators, controls, balances and
checks.’
With previous regulatory emphasis on
the credibility of the fund promoter, The Jersey Who’s Who...
track record of previous funds and bal-
ance sheet strength of the fund sponsor, Graphs showing the professionals serving Jersey funds
there was limited scope for an asset man-
ager who was not attached to a house-
hold name to launch funds at reasonable
Jersey administrators at June 2004 - value of assets under administration in US $bn
cost and within short timescales.
Similarly, institutional investors with an Royal Bank of Scotland (RBSI) - $ 4.4 bn
experienced investor base wanted lighter Bedell Cristin Trust Company - $ 6.1 bn
regulation and speedier launch times and
a flexible approach to derogations.
As Brett Allen states: “The (new) legis- Royal Bank of Canada (RBC) - $ 8.0 bn
Mourant Intl. Finance Admin. - $ 30.9 bn
lation will hopefully attract business and
fill the void left by the migration of retail
funds to Dublin following the introduc-
tion of the UCITS directive and the
State Street - $ 14.0 bn
desire of many fund sponsors to have Source: Fitzrovia - Jersey Fund Encyclopedia
passporting rights into Europe.”
Jersey’s new fund regime has been very
well received thanks to road shows and
presentations to asset managers and Jersey custodians - value of assets under custody in US$ bn
lawyers. The minimum requirement from
Deutsche Bank International - $5.6bn
investors is that they sign a risk warning,
saying they understand the scheme par- State Street - $13bn
ticulars and have a minimum of $100,000 BNP Paribas - $5.9bn
available for investment into the scheme.
“This provides potential investors with
relatively easy entry, the promoter with
greater access to the clients on signature
of a risk warning, and recognition by the Royal Bank of Canada (RBC) - $11.1bn
investor of the risks concerned,” says Royal Bank of Scotland (RBSI) - $12.8bn
Allen
In conjunction with the new funds Source: Fitzrovia - Jersey Fund Encyclopedia

58 INVESTOR SERVICES JOURNAL

 Fund Servicing - Channel Islands

Property from these vehicles can be distributed their part in facilitating sector require-
About £15bn worth of property funds ‘gross’ to offshore and UK onshore ments. “Europe is the new focus for the
have migrated offshore, thanks largely to investors under Baker Trust rules. The institutional fund houses as yields have
a stamp duty land tax applied to the dis- Property Unit Trust ‘wrapper’, which cre- flattened slightly and demand for stock
posal of partnership interests in a UK ates a tax-transparent tradable property leaves short supply in the UK,” says Allen.
Limited Partnership, which is the stan- security, has further glorified the property “Cross-border tax and legislative issues
dard vehicle for holding make the European
property funds for insti- property market
tutions and high net
The growth of property funds is likely to more challenging
worth individuals. “The continue with the Channel Islands playing their in creating a fund.
UK Government under- Once again the
estimated the impact of part in facilitating sector requirements Channel Islands are
the levy and did not well placed to sup-
anticipate the level of migration that fund market offshore. Zero Capital Gains port these objectives.
would take place as investors moved off- tax, VAT or Stamp Duty Reserve Tax sub-
shore,” says Allen. stantially reduces a fund’s carrying costs United Front
In contrast to onshore funds in the UK, and enhances yields for the investor. The In just 10 months since the launch of
offshore structures can be established as a growth of property funds is likely to con- the Expert Funds Regime, the Jersey
tax neutral vehicle. Income generated tinue with the Channel Islands playing Funds Association has already noticed a
significant increase in the number of
funds registered on the Island. “This is
reflected in the efforts of the JFSC, which
has done a lot to improve the level confi-
dence in Jersey,” says Gary Clark, chair-
man of the JFA. “Increased confidence is
also reflected in the acceleration of new
funds. Over 200 funds have entered the
Island over the last year. The take up of
Jersey auditors - number of funds served non-Jersey funds serviced out of Jersey
KPMG - 66 Grant Thornton - 3 has also increased.”
In June 2004 the JFSC launched the
Deloitte & Touche - 86
Non-Domiciled Fund Guide. Essentially,
if a fund is materially equivalent to a
Jersey Expert Fund, a Jersey Recognised
Fund or is compliant with the latest EU
Ernst & Young - 154
PricewaterhouseCoopers - 503
UCITS directive then promoters can
select Jersey based administrators or cus-
todians and tap into the expertise on the
Source: Fitzrovia - Jersey Fund Encyclopedia
island even if the fund is not domiciled
here. “Jersey has moved to a more func-
tionary focussed regulatory regime,” says
Clark. "The regulator now relies on serv-
ice providers to have a good knowledge of
Jersey legal advisers - number of funds served
Crills - 37 the funds they serve. The new funds
Carey Olsen - 224 regime has ushered in a range of special-
ist fund types, including hedge funds, pri-
vate equity funds and property funds.
Mourant du Feu & Jeune - 640
“From June 2003 to June 2004, property
assets in Jersey have increased from $10
Ogier & Le Masurier - 330
bn to $22.7 bn,” says Graeme McArthur,
managing director of International Fund
Managers (Jersey) Limited. “UBS, for
example has recently launched a $4bn
Source: Fitzrovia - Jersey Fund Encyclopedia
Bedell Cristin - 364
property structure on the Island.”
The new funds regime is based on an

INVESTOR SERVICES JOURNAL 59

Fund Servicing - Channel Islands
understanding that investors are expert
and recognise the risks associated with
investing in these expert funds. “The
issue of appropriateness is key”, says
McArthur.
In addition to fund promoters, the JFA
is currently trying to persuade fund man-
agers and hedge fund managers to set up
businesses on the Island. “Our people are
talking to hedge fund managers about
setting up shop here,” says Clark.
The Channel Islands Stock Exchange is
also playing a part in attracting hedge
funds business. “We are trying to trans-
late a small part of the market into some-
thing that is quite substantial,” says
McArthur. “We have the infrastructure
and the people who are experienced in
looking after these funds.”
With the infrastructure in place, one of
the biggest challenges for Jersey remains
to increase brand awareness. “We have to
work as a team in order to create further
awareness of the Island,” says Clark. “The
“We have the
infrastructure and
the people who are
experienced in looking
after these funds”
attraction of fund managers and
investors will underpin that. We must
encourage people to bring their systems
and their infrastructures to the Island. We
have the product focussed expertise to
help drive our brand.”
Perfect Balance
The Expert Funds Regime and the
Non-domiciled Fund Guide have
increased Jersey’s accessibility to a wider
range of fund promoters. “The Jersey reg-
ulators have responded extremely well to
the changing face of the international
funds industry ensuring that a robust
regulatory environment continues to
evolve to provide comfort to promoters
and investors whilst providing flexibility
where it is appropriate, for example for
expert fund promoters,” says Russell
Turner, managing director of State Street
60 INVESTOR SERVICES JOURNAL
(Jersey). “It is a balancing act and its an
important balancing act to get right so
that institutional promoters and investors
can have both confidence and sufficient
convenience. Jersey’s outsourcing policies
mean clients not only get this “front end”
“Our people are
talking to hedge fund
managers about
setting up shop here”
expertise but can also access the facilities
provided in larger fund servicing jurisdic-
tions, especially where there is a need to
deal with high volumes or to take advan-
The Guernsey Who’s Who...
Graphs showing the professionals serving Guernsey funds
Guernsey administrators - value of assets under administration in US$ bn
Mourant - $11.6bn
Credit Suisse - $11.6bn
Intl Private Equity Services $14bn
Guernsey auditors - number of funds served
PKF - 40
Deloitte & Touche - 128
Ernst & Young - 140
PricewaterhouseCoopers - 292
Source: Fitzrovia - Guernsey Fund Encyclopedia
tage of advanced technologies. This
domicile and servicing equation is a pow-
erful message in the market place.” The
challenge for Jersey is to continue to attract
quality names and to be one of the serious
choices available to fund promoters.
Speaking on behalf of both Jersey and
Guernsey, José Santamaria, head of
Institutional Sales for Royal Bank of
Canada in the Channel Islands says:
“The new Expert Funds Regime (EFR)
has positioned the Channel Islands as a
jurisdiction that is very pro funds indus-
try. Over the last couple of years, it has
become clear that the alternative invest-
ments segment, primarily through hedge
funds and fund of hedge funds, has been
fuelling much of the new money inflows
into the funds sector. Most industry
Guernsey Intl Fund Mngrs - $25.2bn
Royal Bank of Canada $15.6bn
Source: Fitzrovia - Guernsey Fund Encyclopedia
KPMG - 310
 Fund Servicing - Channel Islands

participants concur that the alternative clients, including pension funds, insur- funds initiative, specifically in the area of
investments sector will grow from the ance companies, central banks and insti- alternative investments and hedge funds,”
current value of US$1 trillion to US$2 tutional clients. “This client base is very says Santamaria. “But Guernsey has
trillion by 2006. The Channel Islands are explicit about their need to domicile always had these vehicles through B and
already proudly reporting participation funds in a jurisdiction and to partner Q schemes.”
in growth. Alternative funds are still
catering for professional investors such “The existence of the CISX rounds up
as family offices, trust companies, high
net worth investors and corporate insti- the full suite of services and products that can be
tutional participants. Corporates are
allocating up to two per cent of their
sourced directly from the Channel Islands”
assets under management to alternative with a service provider that takes regula- Those promoters wishing to enter
funds. However, I don't think the hedge tory, compliance and corporate gover- Guernsey presently have to go through a
funds industry would turn retail focused nance very seriously,” says Santamaria. formal GFSC regulatory application
because of the nature of the investments The launch of regulation for expert process but Guernsey hopes to change
and lack of fund net asset value daily funds and the self-certification of funds this by implementing a complementary
liquidity.” and promoters in Guernsey is imminent. self-certification process as newly enacted
The Channel Islands have seen a large “There have been comments that Jersey by Jersey.
increase in the number of corporate has been the first to seize on the expert As one of the Channel Island's top
rated service providers, RBC attests to the
importance of Guernsey and Jersey with-
in their global marketing plan. “More and
more clients are looking for service
providers who can provide a truly global
multi-jurisdictional and integrated cus-
tody, administration, banking, relation-
ship management and value-added serv-
Guernsey legal advisers - number of funds served ice proposition,” says Santamaria. “In par-
Collas Day - 35 Haskins, F. & Co - 3 allel, service providers have also seen sig-
Ogier & Le Masurier - 62 nificant price compression taking place
across the global fund centres. Fund pro-
moters want to ally themselves with a
strategic, innovative and responsive part-
ner in order to better service the ever
Carey Olsen - 508
evolving needs of their front line investor
Ozannes - 384 client base.”
The CISX remains a complimentary
offering for Channel Islands service
providers to be able to embrace closed
Source: Fitzrovia - Guernsey Funds Encyclopedia and open-ended funds and debt-based
securities. “Historically many locally
domiciled structures seeking a stock
Guernsey legal advisers - number of funds served exchange listing would automatically
Collas Day - 35 Haskins, F. & Co - 3 default for a listing on the Cayman or
Ogier & Le Masurier - 62 Ireland stock exchanges,” says Santamaria.
“The existence of CISX rounds up the full
suite of services and products that can be
sourced directly from the Channel Islands
financial services community.”
Carey Olsen - 508 With a fresh new approach to funds
Ozannes - 384 regulation, Jersey and Guernsey look set
to give European centres a run for their
money. Promoters and service providers
will also seek to grab a slice of the action
Source: Fitzrovia - Guernsey Funds Encyclopedia by entering the jurisdiction within a few
years time. ISJ

INVESTOR SERVICES JOURNAL 61

European Pensions Directive
A Common Call?
The new European pensions
directive will give employees
who move across borders the
same rights they enjoyed in
their country of origin. But how
will the directive be interpreted
in complying states? James
Wallace investigates.
62 INVESTOR SERVICES JOURNAL
Changes in the European pension fund market are
notoriously slow. There is no better example of this than
the European Union’s uptake of central principles of the
Treaty of Rome. Dating back to 1957, the Treaty states that
the European Union is based upon the harmonisation and
free movement of all goods and services. That principle
has not applied to European cross-border occupational
pension schemes until now. The subject of pensions, final-
ly, has caught up with the Treaty of Rome.
The European Union Institutions for Occupational
Retirement Provisions (EUIORP) directive aims to plug
this outdated anomaly. The directive will be laid out by an
umbrella organisation regulating pensions where they
operate on a multi-country basis.
Essentially, there is going to be a Europe-wide regulator
that will pool together all these provisions. EUIORP is the
body of regulations pooled together by the regulator.
The trail of this directive takes us back to September
2003 where agreement was reached by the then 15
member states. It was agreed that the directive would allow
pension fund arrangements across Europe to be
harmonised. There is now a period between then and
September 2005 of “interpretation”. EU member states
have until September 23, 2005 to ensure that national leg-
islation complies with the directive.
Change
Until now it has not been possible to establish a pan-
European pension scheme. This is despite the European
Court of Justice (ECJ) having concluded that restrictions
on cross-border pension contributions or payments are
contrary to several of the fundamental principles of the
EU as outlined in the Treaty of Rome. The barriers are
inconsistent social security systems in the member states
and differences in the tax treatment of pensions.
The purpose of the directive is to achieve security and
affordability of pensions, and to encourage the provision
of occupational pensions, by:
- providing a prudential framework to protect
members and beneficiaries of IORPs;
- ensuring that IORPs have flexibility within the
prudential framework to develop an effective
investment strategy; and
- expressly permitting an IORP located in one
member state to provide benefits for employees
in another member state.
The landscape, though, is still clouded. Over the two
year interpretation period all manner of experts will be
interpreting and analysing the directive’s implications.
And with implementation not for another nine months,
the lay of the land will, no doubt, appear differently
between now and then.
The Bank of New York managing director, head of sales
Benjie Fraser says: “It is not clear yet what the directive is
going to look like. The implementation stage is some way
off. But it is long overdue. The Treaty of Rome was in 1957
and now we are in 2005.
“Employees have pension rights in their country of
origin and, from September 2005, if they go and work in
another country they will enjoy the same rights.
Harmonising pension rights across European Union

member states increases transparency and
ensures employees are not penalised.
Employees will be true European Union
citizens.”
Hasko van Dalen, head of International
Projects and Advisory services, Global
Pensions Division at ING says the direc-
tive means that
member states
now accept a sys-
tem of mutual
recognition of
each other’s pru-
dential supervi-
sion. “As a result,
an EIORP need
only report to
one supervisor
and, in essence,
Hasko van Dalen comply with one
set of prudential
rules no matter where it operates in the
EU. This is a major advance.”
Balance
Up until September 2003 member states
have not been able to agree common
stance to pan-European pensions. Under
the new provisions a balance has been
struck.
The European Union says the adoption
of the directive “moves decisively in the
direction of creating an internal market
for occupational retirement provision”.
The directive ensures a high level of
protection for members and beneficiaries
of pension funds as well as offering
security and efficiency.
It says: “The directive allows the host
member state (where the company
paying the premiums is based) to request
the home member state (where the
retirement provision institution is locat-
ed) to apply on a reciprocal basis certain
rules governing cross-border pension
schemes.”
Hurdles
Under the new provisions, employees
can continue to pay into foreign schemes
and still get income tax relief. But this
does not tell the whole story.
Resistance could come from local tax
regimes that lose out in the process of
employees taking their existing pension
rights to another country. But we cannot
be certain yet because the implementa-
tion is not predictable.
Opportunity
Global custodians are working very
European Pensions Directive
actively on providing multi-national
pension pooling arrangements to create a
single pension fund that is pan-European
with all of the custody and record keep-
ing for the underlying investments. So
rather than going from 15 member state
pension funds the custodian can go to
one pooled pension fund.
The IORP will be a single pool of assets
and liabilities, would achieve economies
of scale, allow reduced running costs by
centralising the fund administration and,
at the same time, respect all relevant
national rules for each member state.
Van Dalen adds: “We as an insurer
think this is only profitable for multi-
nationals. It will not have any effect on
the numerous small and medium-sized
“Harmonising pension
rights across European
Union member states
increases transparency
and ensures employees
are not penalised”
companies across Europe, who do not
have their own pension fund.
“We think the IORP can be a catalyst for
change. A first step, but more is to be
done to get pan-European pension
schemes. That is why the EFR produced a
proposal for steps towards pan-European
pension plans.”
Benefits
For employees, mobility within the
European Union can increase as they take
advantage of a single and consistent
benefit structure. The directive also
means they will have clearly defined rules
in the future, including clarity about the
financial situation of their scheme and
their rights as a member or beneficiary.
Fraser adds: “The directive simplifies
things from an investment administration
point of view which is where we come in.
We like it because it creates scale and
makes things more efficient. It is also
good from a business perspective.”
BNY says it has been contacted by big
pension funds requesting a global custo-
dian with the infrastructure and expertise
to create these types of pools.
State Street head of asset owner group
Alasdair Reid says the directive is benefi-
cial to both employees and employers. He
says: “From an employer’s point of view,
the primary benefit from a pan-European
pension scheme is financial. Corporations
would be able to consolidate multiple
service providers from asset managers to
custodian banks.
“Consolidation needn't stop there, either
– gone would be the need for separate
actuaries, lawyers, auditors, administra-
tors, etc. All of this would represent a
significant reduction in operating expens-
es for multinational organisations.
“This is the first step along the road
towards a single market for occupational
retirement provision across Europe,
although its introduction remains
dependent upon the member states intro-
ducing it into their own domestic legal
structures.”
The rules
The directive does not oblige member
states to recognise each others’ pension
schemes. It is important to note that the
IORP as a legal structure located in one
member state, its home state, remains
liable to tax in that state and must be able
to benefit under bilateral tax treaties
arrangements. Van Dalen explains that
the directive “only creates a framework
for a pan-European pension Fund, not
for pan-European pensions”.
The principle negative is that the
requirement to be fully funded at all
times introduces a more stringent fund-
ing regime for defined benefit schemes.
For some DB funds already looking down
the barrel of a major deficit, this may be
the final nail in the coffin – ultimately we
may see more final salary scheme closures
as a result of its introduction.
In addition, suppliers offering pan-
European services will face an increased
burden in one sense, as they will have to
be able to support these organisations in
multiple locations. This makes having a
local presence and specific market knowl-
edge more important than ever before.
Ultimately the directive will help
employers offer consistent pensions
across the European Union, while at the
same time making the internal labour
market more fluid. Overall the directive
will promote more investment in pen-
sions, thereby helping the European pen-
sions pot to grow yet further.
The lay of the land for some is still
misty. However, one thing remains cer-
tain: this directive will open up a new and
larger playing field for global custodians.
ISJ
INVESTOR SERVICES JOURNAL 63
Pensions - Custody Ratings
The custodian review process
can be as painstaking as looking
for the right fund manager.
But, as with any function,
someone has to do it. Simon
Thomas of Thomas Murray looks
at the importance of the custody
ratings process and provides
some helpful hints for pension
funds and their managers.
To Rate or Not to Rate
Custodian’s under the microscope - what should you look for
64 INVESTOR SERVICES JOURNAL
A s one of the UK’s largest pension
funds, with assets totalling £10 bn,
the British Airways Pension Scheme is no
stranger to thorough investment deci-
sion-making and ensuring the safety of
its assets. Cautious of world financial
markets, the Fund decided to test the
robustness of its existing custody
provider by reviewing the market for
these services. In doing so, the Fund com-
missioned the help of specialist ratings
agency Thomas Murray and took the
decision to stay with State Street.
Thomas Murray rates global custodi-
ans, domestic custodians, capital market
“The structured
questionnaire helps to
identify the contractual
terms and service level
offered by a custodian
as standard to clients.”
infrastructures and central securities
depositories from the perspective of insti-
tutional exposure to these entities/mar-
kets.
Thomas Murray’s global custody rat-
ings aim to bring transparency to the
process of selecting and monitoring cus-
todians and to facilitate the comparison
of their services by users and potential
users. Custody ratings aim to provide
independent assessments on a uniform
and fully comparable basis. The ratings
provide clear indicators of service quality
across the various services provided and
information on the level of risk interme-
diation provided by the custodians. The
ratings are intended to help buyers of
global custodial services differentiate
between custodians on a standardised
basis.
Public / Private
There are public and private custody
ratings. Public global custody ratings
involve a custodian bank who commis-
sions a full global custody rating, on the
ground of operational due diligence by
Thomas Murray. The rating is an indica-
tor of a bank’s ability to deliver core (and
added value, where appropriate) custody
services to clients. The benchmark is rep-

resented by the terms and service levels offered to an
“average client” by the bank. This is in effect the standard
custody terms and services offered by a bank to its cus-
tomers generally. A public rating can be kept private by a
bank until it decides do otherwise.
Private custody ratings are commissioned by a particular
institutional client and are specific to the individual client.
The private rating reflects the particular terms and service
standards offered by a custodian to a particular client. A
private rating remains private between the client, the cus-
todian and Thomas Murray.
Overall Rating
The overall rating and the rating of each service is pro-
vided on the familiar ratings scale, which runs from AAA
(extremely strong), through BBB (adequate) to C (unable
to deliver at even a minimally acceptable level. Each cus-
tody rating also contains an “Outlook” indicator,
which indicates the custodian’s ability to deliver core
custody services going forward. This “Outlook” view “Many clients choose to keep
is determined by feedback from the custodian, pub-
licly available information, due diligence visits and
a rating private for a period of time.”
monitoring feedback.
The overall public rating is a business rating, resulting
from the application of Thomas Murray’s in-depth knowl-
edge of the custody business, processes developed to assist
groups to select and monitor global custodians, and
knowledge of market best practice. There are a number of
different data sources, which feed into a rating, including
publicly available information such as credit ratings and
annual reports, Thomas Murray information and feedback
on custodians to Thomas Murray from clients. In addi-
tion, a custodian completes a detailed structured question-
naire. The structured questionnaire helps to identify the
contractual terms and service level offered by a custodian
as standard to clients.
The overall Public rating process begins with a custodian
requesting a rating, entering into a dialogue with Thomas
Murray, and signing a formal ratings agreement. Then the
custodian provides Thomas Murray with detailed infor-
mation on all aspects of its custody business, which is
combined with the other information available to help
Thomas Murray form a provisional view of the business
being appraised. This view is cemented by an extensive
on-site operational review, which can take up to four
weeks, dependent on the custodian. Following the on-site
review a draft rating and report is developed and feedback
is obtained from the custodian. The “first cut” of the rat-
ings themselves are derived using a proprietary scoring
model, which evaluates each area against best market prac-
tice or best possible outcome as applicable. The scores are
weighted, both at individual factor level (for example the
number of markets in which contractual settlement is
offered) and at overall level (settlements versus securities
lending for example). The weighted scores are then
summed to produce positions for each rating component
and an overall rating. These “first cut” ratings are then
subject to in depth analytical judgement and internal
Pensions - Custody Ratings
review, both informally and formally through the Thomas
Murray Ratings Policy Board before being finalised. The
Public rating and report are only made public with the
explicit approval of a custodian. Otherwise the Public rat-
ing and report remain private between the custodian and
Thomas Murray.
Preference
Many clients choose to keep a rating private for a period
of time prior to going public. The main driver behind this
results from Thomas Murray’s findings throughout the
ratings process. The ratings process itself identifies the
strong areas of the bank together with areas where
improvements could be made. The findings provide the
client with a level of transparency of their business
amongst the pool of their competitors, as after all, the rat-
ings scale is global and absolute in nature. Ratings find-
ings are typically used by banks to make improvements to
certain areas of their business prior to making a rating
public. We feel this part of the rating process is extremely
valuable to banks in helping them refine their service
offerings.
Surveillance
Once a rating is issued, it is automatically put under sur-
veillance, and will be reviewed at any time if relevant
changes occur to the bank or its custody business. The
sources of information for surveillance include feedback
from the custodian, publicly available information, follow
up due diligence visits and monitoring feedback generated
either by Thomas Murray clients or on their behalf by
Thomas Murray directly. The status of the rating at any
time is reflected in the “Outlook” indicator. In the absence
of any changes, a rating is formally reviewed on an annual
basis. This involves an analysis of any changes or develop-
ments to the custodian’s business during the year, and
whether this impacts the rating. This is confirmed by an
annual operational review on site. If any new information
changes the overall rating or rating of any component, a
new rating report is produced and feedback is sought
before it is finalised. For institutional funds seeking to
actively manage their respective custodians a qualitative
private global custody rating produced by Thomas Murray
can provide a useful benchmark to help focus on matters
of concern before they become major problems. We fully
expect the combination of public and private global cus-
tody ratings to be adopted as the norm for custodians on
the one hand and pension funds and asset managers on
the other as they seek to assess custody risks and service
levels on an ongoing basis.
Simon Thomas is chief rating officer at Thomas Murray
ISJ
INVESTOR SERVICES JOURNAL 65
UK Depositories Association
Formed in 1999, the Depositary
and Trustee Association (DATA)
is the trade body which repre-
sents trustees and depositaries
of UK domiciled investment
funds. The Association’s
Ros Clark explains the impact of
corporate governance on the
investment funds industry
Safe Deposit
T he UK investment funds industry began in 1931 and
since then has matured and developed into a industry
with £260 bn of assets. Collective investment funds in the
UK can be of one of two structures, either unit trusts
(which must have a trustee) or open-ended investment
companies (OEICS, also known as ICVCs, which must have
a depositary). Unit trusts are constituted under trust law
and are akin to continental contractual funds. OEICS are
constituted under company law and have been in existence
since 1997.
Objective
The Depositary and Trustee Association’s (DATA) prime
objective is to promote and support the development of
the depositary and trustee industry in the UK and across
Europe including supporting initiatives for the future
growth of the industry. The Association’s core activity is
dealing with domestic, European and international
regulatory issues that affect the investment funds industry,
with specific focus on the implications for the trustee’s or
depositary’s role as overseer and safe keeper of the fund’s
assets.
One of the “hot topics” that has been hitting the desks of
many UK fund managers, depositaries and trustees is that
of the corporate governance of investment funds, which
has involved a review of the responsibilities of all the par-
ties involved in authorised funds and of the checks and
balances that are in place to protect investors. Corporate
governance is on the agenda for a number of reasons, one
which has been the well publicised events in the USA,
which were highlighted by Elliot Spitzer, specifically with
66 INVESTOR SERVICES JOURNAL
regard to late trading and market timing in US mutual
funds.
Governance
The International Organisation of Securities Commissions
is to look again at investment fund corporate governance
globally with the aim of achieving a minimum standard
for its 135 member agencies. The Committee of European
Securities Regulators, whose members are the EU financial
services regulators, is also considering the corporate gover-
nance of funds and is specifically reviewing the role of the
depositary across Europe, with a view to harmonising the
differing requirements. It is unlikely that either IOSCO or
Committee of European Securities Regulators (CESR) will
achieve full harmonisation of a single corporate gover-
nance model, mainly due to the many different models
throughout the world, all of which have their merits and
fit within their jurisdictions legal frameworks.
For example in the USA, mutual funds authorised under
the 1940 Investment Company Act are governed by a
board of directors, whose responsibility is to ensure that
the manager acts in the best interests of investors. The aim
of the role of the board of directors under the US model
appears to be essentially similar to that of the depositary,
except that depositaries have day-to-day contact and
“UK’s model has a number of
additional benefits to those of
other jurisdictions. The main
benefit is that the assets of the
fund are held by a completely
separate company.”
undertake rolling checks on the manager and investment
fund, rather than just periodic board meetings.
Under Austrailia’s Management Investment Act, a man-
ager may be appointed as the “Single Responsible Entity”
which has total responsibility for all aspects of the fund. It
is the responsibility of the compliance department of the
manager to act as overseer. There is no requirement for a
board of directors or a depositary.
In Europe, the majority of investment funds comply
with the Undertakings for Collective Investment in
Transferable Securities (UCITS) Directive. This Directive
places certain obligations and requirements upon invest-
ment funds, managers and depositaries. The Directive is,
except for certain provisions, a minimum harmonisation
directive setting basic standards that all EU Member
States’ funds must meet to qualify as UCITS, and to be
passportable cross-border, thus creating a single European
market for investment funds.
The UCITS Directive requires that the depositary be
responsible for the safe keeping of a fund’s assets and for
ensuring that sales, redemptions, cancellations and issues
of units, and the calculation of the value of units, are car-
ried out in accordance with the regulations and rules of

the fund. So far as the relationship
between the manager and depositary is
concerned, it is a Directive requirement
that no single company may act in both
capacities and that each must act inde-
pendently of the other. However, the
Directive does not prevent two compa-
nies within the same group acting as
manager and depositary, provided that
they act independently. In many
European jurisdictions the depositary
and the manager are affiliates within the
same group. However the UK has a
unique model and is super-equivalent to
the UCITS Directive in that the trustee
must be completely independent of the
manager and cannot be affiliated and also
has additional responsibilities, for exam-
ple, ensuring compliance
with the investment limits Corporate governance is on the agenda for a
and objectives of the fund.
UK Model
DATA believes that the UK’s model has
a number of additional benefits to those
of other jurisdictions. The main benefit
is that the assets of the fund are held by a
completely separate company. It was for
this very reason that after the Barings
scandal in the mid 1990’s, there would
not have been a negative impact to the
authorised funds they managed if Barings
had gone into liquidation. The second
benefit is that the depositary is a com-
pletely independent firm and DATA
believes that this separation brings inter-
national credibility and enhances investor
confidence. The Financial Services
Authority (FSA), the UK regulator, when
carrying out a review of late trading in
units in UK investment funds, arising
from Elliot Spitzer’s review, found little
evidence of such activities were taking
place. DATA considers that the trustee’s
independent oversight of the manager’s
activities ensures that the manager has
adequate systems and controls to min-
imise the likelihood of such breaches of
the regulations.
Thinking Ahead
Although DATA believes that the UK
corporate governance model is robust,
there is no room for complacency. The
FSA is considering the practice of “soft-
ing” and the bundling of brokerage com-
mission costs across the fund manager’s
whole client base including investment
funds. The FSA believes that commis-
sions and commission arrangements
should be disclosed, and that commission
UK Depositories Association
costs should be split between the cost of
execution of deals and the cost of value
added services, mainly research. The
FSA has outlined the need for an
“Investors’ Champion” in interpretating
data under the proposed new disclosure
regime. Retail investors are not necessari-
ly in a position to understand and to
evaluate this information. DATA consid-
er that trustees can extend their role to
fulfil the FSA’s call for an “Investors’
Champion” for retail investors.
The Investment Management Association
(IMA), the UK trade body for the invest-
ment management industry, including
the managers of authorised funds, set up
a working party in January 2004 to con-
sider whether there should be changes in
number of reasons
the way that UK investment funds are
governed, with a view to making recom-
mendations to the FSA and the industry.
DATA, as a member of this working
party, reviewed the corporate governance
of such funds, including the role of the
trustee. A consultative paper was issued
in November, which included a number
of recommendations for managers,
trustees and the FSA. The working party
found that on the whole the role of the
trustee was robust, but there were certain
areas where the trustee’s role could be
extended to enhance investor protection
Unit Trust /Open-ended Investment
Company Funds under Management
300,000
250,000
200,000
150,000
100,000
50,000
0
1993
1992
1995
1996
1994
and for them to act as the “investor’s
champion”.
It is proposed in this paper that trustees
should extend their role to include over-
sight of specific elements of the invest-
ment management activities to ensure the
economic interests of holders are protect-
ed. This will not extend to reviewing the
managers investment performance but
will include reviewing a portfolio transac-
tion report which will split the cost of
brokerage between execution and
research which will be disclosed in the
fund’s report and accounts. Also the
trustee will review the manager’s process-
es, controls and reviews of their invest-
ment management activities. DATA
believes that the extension of the trustee’s
and depositary’s
role will enhance
investor protection
and increase
investor confidence
in investment funds.
The FSA is also looking to strengthen and
enhance investor protection and widen it
across other UK retail financial products.
DATA commends the UK investment
fund model and the trustee’s role as an
example of how independent oversight
can work successfully. DATA is keen to
work with the FSA and the industry to
assist and explore the wider use of this
model or relevant forms of it.
Ros Clark is the deputy company secretary
of DATA
ISJ
2003
2000
2002
1998
OCT 2004
2001
1999
1997
Source: DATA
INVESTOR SERVICES JOURNAL 67
New Mandates
PRIME TIME FOR
INVESTOR SERVICES
Mandates announced over the
last two months have typically
involved core services such as
custody and investment fund
administration. Whether the
frequency of these announce-
ments continues over the next
year remains to be seen, but
the outlook is positive.
T he penultimate months of 2004 proved extremely
frenetic for the world’s top service providers. Custody
and fund administration mandates were aplenty, as fund
managers realised they were better off without these non-
core functions. Amidst uncertainty over the UK govern-
ment’s approach to pension provisions in the run up to
the national election in May 2005, the British Airways
Pension Scheme decided to prioritise return over back
office functions, and entrusted £10 bn worth of assets to
State Street’s custody. Upon reviewing its outsourcing
arrangements after the State Street’s takeover of Deutsche
Bank’s Global Securities Services (GSS), the airways pen-
sion scheme decided to stay with the global custodian for
custody, fund accounting and securities lending services.
In addition, State Street will provide performance meas-
urement services through The WM Company, its
Edinburgh-based performance analytics and evaluation
business. Following State Street’s acquisition of the GSS
business in 2003, the British Airways mandate was put out
for competitive bid in the first half of 2004. British
Airways was advised in the selection process by Thomas
Murray, the specialist custody and ratings consultancy.
“We conducted a thorough review of investment service
providers,” said John Birch, managing director of British
Airways Pensions. “State Street’s proven commitment to
the investment servicing business and its ability to provide
premier core services and innovative solutions were
important factors in our decision.”
Apart from pension funds, fund managers are launching
a range of esoteric investment instruments and entrusting
the assets generated by these instruments to global service
providers. The Bank of New York has extended its global
custody, transfer agency, fund accounting and depository
services to JO Hambro Capital Management, which has
launched its first UK onshore Open-ended Investment
Company (OEIC). The fund is expected to grow to £750
million within the next two years.
Helen Vaughan, chief operating officer of JO Hambro
Capital Management, said: “In today’s increasingly com-
68 INVESTOR SERVICES JOURNAL
petitive marketplace, it’s crucial to look to a provider
which can set us aside from the rest of the fund manage-
ment community. We’ve found this with The Bank of
New York, which has continuously demonstrated its com-
mitment to and understanding of our business.”
Thanks to a range of tax incentives, a host of non-tradi-
tional investment schemes are finding their main climes to
be offshore centres such as the Channel Islands of
Guernsey and Jersey. Hermes Pensions Management has
launched a new offshore fund of hedge fund domiciled in
Guernsey. The Company has chosen one of the biggest off-
shore service providers, Royal Bank of Canada (RBC), to
provide custody and fund administration services for the
new offshore fund of hedge funds. This agreement repre-
sents approximately £500 million in assets under adminis-
tration. Through this new agreement the RBC subsidiaries
in the Channel Islands will provide custody, corporate
trustee, fund accounting, recordkeeping and banking
services for Hermes' new offshore fund of hedge funds,
launched in November 2004.
UK fund manager INVESCO also set up the new
INVESCO Property Income Trust, which raised £100 mil-
lion in October 2004. INVESCO appointed Baring
Financial Services Group’s International Fund Managers
(Jersey) Limited as the fund administrator of the new
fund, which has been incorporated as a limited liability
company in Jersey, with shares listed on both the Channel
Islands and London Stock Exchanges. Managed by
INVESCO Real Estate Limited, on launch, the property
portfolio consisted of 31 UK properties with an average
capital value of £4.82 million. The Fund aims to provide
attractive income returns whilst providing the opportunity
for income and capital growth. Income yield on the prop-
erty portfolio is estimated at 7.69 per cent, with a quarter-
ly dividend anticipated at 6.75 pence in the pound in the
first year.
Commenting on Channel Island property investment
fund trends, Baring Financial Services Group Head of
Fund Administration, Vic Holmes, said:
“As a long established fund administrator in Guernsey and
as a new entrant to the Jersey market place, we have seen a
great deal of interest in the setting up of property struc-
tures for both direct and indirect investment. This has
been driven in part by changes in the UK environment but
is also recognition of the lower volatility of this asset class
in times of uncertainty in the global markets, aided by a
strong move to holding property through funds rather
than direct investment.”
Elsewhere in the world, multi-billion dollar pension
schemes are realising the the benefits of lending assets
within their portfolios. The Ohio Public Employees
Retirement System (OPERS) plans to lend mortgage-
backed securities from its fixed income asset portfolio as
part of its strategy to enhance revenue it receives from its
securities lending program. “We believe the market
demand for mortgage-backed securities has developed to
the point that OPERS can earn incremental revenue with
the addition of this asset class to its lending program,” said
Neil Toth, director of investments. “Advances in technolo-
gy also allow much better tracking and management of
this lending class than existed several years ago.” ISJ
 N e w Mandates

Month Winner Client Location Assignment Size

December JPMorgan Cazenove London Investor Services £7bn
December CIBC Mellon Manulife Toronto Custody $60 bn
December BNY New Smith London Custody New Fund
November JPMorgan Sun Micro. US Record Keeper $2,300
November State Street BA London Investor Services £10bn
November Butterfield Liontrust Guernsey Fund administration £32m
November IFDS Investec London Transfer Agency New Facility
November State Street OAC Singapore Fund acc./Reporting $2bn
November RBC Hermes Channel Is. Custody/Fund admin £500m
November RBC ARC Canada Custody $1bn
November BFSG INVESCO Channel Is. Fund administration £100m
November Dresdner OPERS Ohio Securities Lending $4bn
November Key Bank OPERS Ohio Securities Lending $4bn
November BNY JO Hambro London Investor Services New Fund
October ING-BHF BNY Germany Custody Services -
October N. Trust Michigan CC US Global Custody -
October BNP Paribas Master Sup, Australia Global Custody $400m
October N. Trust LAFPP US Global Custody $11.9bn
October N. Trust Teeside UK Global Custodian £1bn
October State Street Clore Duffield UK Global Custody £63m
September State Street Illinois State US Global Custody $10.4bn
September Vanguard Teleflex, Inc. US Record Keeper -
September ING-BHF ING London Germany Custody -
September ING-BHF ING Milan Germany Custody -
August Nationwide City of LA US RecordKeeper $30m
August Front Capital City of JHB SA Software Technology
August DSTi MOSERS US Software ASP $5.2bn
August State Street MPS UK Investor Services £460m
August State Street TIAA-CREF US Investor Services £110bn
August BNY Threadneedle UK Lift-out deal -
August Watson Wytt NEXT UK Consulting -
August Capita Hrts. NEXT UK Record Keeper -
August BNP Paribas MBF Australia Investor Services -
August Fidelity Univ. of Calif US Record Keeper $8.4bn
August TKP Pension SPUW Global Record Keeper -
August Citistreet OregonPERF US Record Keeper £582.3m
July ANZ Trust Co. Australia Investor Services -
July Kas Bank Norcos Global Investor Services £320m
July Aus. Admin. Christian Sup.Global Record Keeper £155m

INVESTOR SERVICES JOURNAL 69

US Securities Services

Service providers in the US enables clients to better understand

where performance is coming from, as
are facing a host of challenges, well as the risk parameters taken to reach
a certain performance level.”
ranging from regulation to
consolidation. But whatever Outsourcing
Service providers in the US have
the infrastructure, providers focussed heavily on outsourcing, which is
available in many different forms. Some
are delivering STP. securities clients seek to outsource dis-
crete services as opposed to their entire
ISJ reports. middle and back office operation.
“Discrete services can include products
such as compliance and performance
measurement and accounting,” says
Henderson.
JPMorgan recently launched Message
Express to take on the management of
clients’ messaging functions. The types of
clients who would outsource these func-

Winning the West tions are primarily those who are not
members of SWIFT, the industry-wide
messaging standards utility. Service
providers have also assisted clients with
more broad-based outsourcing targets.
“These clients look to outsource a full
range of services upon the conclusion of
a trade,” says Henderson. “Services
include trade matching, messaging to and
reconciliation of positions and other data
with third party custodians, accounting,

W hen JPMorgan’s Heidi Miller

ascended the podium at the latest
Sibos event in Atlanta, Georgia, the con-
compliance and performance measure-
ment.” There are two approaches to out-
sourcing: one involves the outsourcing of
cerns of the US securities industry individual services; the other involves
weighed heavy on her shoulders. From individual clients who take a broader
regulation to a STP, service providers look at outsourcing their entire mid to
have taken stock of their pain points and back office functions, post-trade. There is
remain prepared for the challenges ahead. interest in both of these approaches. Full
One of the biggest challenges is the outsourcing is much more involved and
increased regulatory scrutiny of the secu- requires heavy due diligence from all par-
rities industry by US attorney general ties involved.
Elliot Spitzer and the Securities and “The risk of buying a discrete service is
Exchange Commission (SEC). Their much lower than the risk with the large
recent enquiries by these regulators have outsourcing deals, which involve a large
spawned requirements for mutual funds number of people and an expense plat-
to establish a chief compliance officer, form,” says Henderson.
keeping securities services
providers extremely busy.
JPMorgan, for example, has
“Achieving best execution through
launched a chief compli-
ance officer (CCO) initia-
unique trading strategies is having
tive to enable company tremendous impact on some
CCOs to vet JPMorgan pro-
cedures. “Our clients want of our clients’ returns”
to confirm that internal and
external managers are adhering to STP
approved investment guidelines,” says The level of STP for US securities is
Neil Henderson, senior vice president and very high, thanks largely to the
securities processing and fund services Depository Trust & Clearing
executive. A performance analytics tool Corporation’s (DTCC) trade matching

70 INVESTOR SERVICES JOURNAL


service. Trade matching on US securities
has an efficiency level of about 90 per
cent. “We have more of a challenge with
over-the-counter derivatives where many
clients have not automated their trade
movements,” says Henderson. “There is
an efficiency gap in the areas of global
custody, OTC derivatives and alternative
investments. The large fund managers
are, to a great extent, automated. Service
providers have interfaces with these man-
agers to collect all of their trade data, or
they could use SWIFT to transmit their
custody and settlement information to
us. “The non-US based and the derivates
business of medium and smaller-sized
managers have not been automated and
still involve a lot of faxing. JPMorgan’s
Browser Trade Initiation
tool enables the medium- “Much of the advancement in STP in the
sized manager to provide
trade information in an industry over the past year can be attributed to
automated way.” the maturity of ISO15022 messages”
Consolidation
Despite the level of integration in the
US securities industry, service providers
expect further consolidation. Henderson
explains: “The level of investment neces-
sary to stay in this business and provide
the full range of services to the customer
is huge. Unless you have a very large cus-
tomer base, it’s very difficult to amortise
the cost of that investment over a limited
number of customers. We see further
consolidation occurring. The US com-
prises six or seven substantial securities
services providers, but there will always
be an opportunity for niched players,
who have a niched service that appeals to
the investment community.”
Regulation
Financial services investigations by the
SEC and Spitzer have resulted in various
practices designed to combat irregulari-
ties, at a cost to the end investor. Some of
the settlements reached, as a result of the
investigations, resulted in changes to the
fund manager’s pricing policies. “Beyond
these specific settlements we have seen a
drive towards increasing transparency,”
says Henderson. “Everybody in the secu-
rities industry is required to be more
transparent about what the charges are,
what they relate to and what are the driv-
ers of those charges. This can only be a
good thing because at the end of the day,
everybody along the value chain will have
a clearer understanding of what is driving
costs and will be in a better position to
control and reduce those costs.”
Regulation has significantly impacted
on the asset servicing business of
Investors Bank &Trust. Commenting on
this impact, Rob Mancuso, senior vice
president says: “The increased regulatory
oversight in the US over the last year will
continue and move into the UK and
Europe. The objective of these additional
regulations is to make sure the end
investor is protected.” Investors Bank has
assisted clients with regulation in two
ways: one, by consulting with clients to
help them build their own enhanced reg-
ulatory infrastructure; or two, by con-
tracting with clients to fulfil the regulato-
ry requirements for them. The latter
option not only includes a consulting
service but also the running of the client’s
infrastructure on a day-to-day basis.
The year 2004 was characterised by
measured outsourcing successes.
Mancuso explains: “North America has
not seen a lot of deals in the last couple
of years. But in Europe and the UK, we
have seen a lot of outsourcing partner-
ships and deals. We will continue to see
that in Europe and a rejuvenation of that
effort in the US, now that markets are
getting better and there is less turmoil in
the securities markets here.”
Like a lot of securities services
providers, Investors Bank expects client-
specific, tailored solutions in outsourcing
to outlive the lift-out deals. “This does
not mean there aren’t any opportunities
to do some of the large lift-outs we have
already seen in the industry,” says
Mancuso. “But one of the major out-
sourcing mandates we are working on in
Europe is not a lift-out. It is client-specif-
ic and a tailored arrangement.”
Standards
Investors Bank has invested heavily in
making securities settlement and trade
communication more efficient. “Much of
the advancement in STP in the industry
over the past year can be attributed to the
maturity of ISO15022 messages,” says
Mike D’Ambrisi, senior director of
Information Technology. “Now that the
message standards have been in place for
a while, and most industry participants
have migrated to the new standards, a
US Securities Services
great deal of work has been done on
making the messages “rich enough” to
avoid processing exceptions. The
Securities Market Practice Group and the
Industry Standardization for Institutional
Trade Communication (ISITC) groups
are clarifying usage and market practice
and expanding messages to account for
new instruments.”
In terms of improvement areas, the
area of reference data is attracting a lot of
discussion and motion, but not much
movement. “There are so many service
providers with a profit/loss stake in the
issue, that concerted action is very diffi-
cult,” says D’Ambrisi. “Suffice it to say,
though, that we expend a tremendous
amount of effort applying multiple
sources to cleanse
reference data and
unfortunately, we
don't see that
changing in the
near term.”
While a substantial portion of invest-
ment managers traditionally lagged in
their STP efforts, the situation has
improved. “As asset managers continue to
outsource their back offices, the custodi-
an and fund accountant are in a great
position to leverage the STP already in
traditional custodial processes and inte-
grate those capabilities to the middle
office,” says D’Ambrisi.
New Entrants
The likelihood of new entrants in the
US securities services industry may be
strong, but this is of little threat to
providers who can cater for a wide audi-
ence. “Our clients and prospects are
looking for full solutions, rather than seg-
mented solutions,” says Mancuso.
“Vendors may do an excellent job in cer-
tain areas of service, but investment man-
agers are looking to be more competitive
by outsourcing the middle and the back
office as completely as possible. Their
general objective is more of a full service
solution than a segmented solution. A
segmented solution requires more man-
agement time, more internal interfaces
and more risk. It does not fit with the
overall trend of lowering risk, increasing
efficiency and enabling the investment
manager to focus on their business.”
Existing service providers will continue
to assist clients with the often-harsh reali-
ties presented by new regulation. “It
seems that many of the new regulations
will be welcomed in the long term,” says
INVESTOR SERVICES JOURNAL 71
US Securities Services
Mancuso. “Now that asset managers are
in the process of implementing some of
those regulations, it is hard to look at the
long term view, as opposed to the short
term work required to comply with the
new regulations. With some of the regula-
tory probes, people are spending a lot of
time and legal resources defending them-
“Our clients and prospects are looking for full
solutions, rather than segmented solutions”
selves. Looking at each specific case, the
benefit to the end investor is not as clear.
But when looking at the overall trend, the
benefit to the end investor will be posi-
tive.”
Apart from its home territory, Investors
Bank is finding new opportunities in
Europe. “Our new business wins include
an agreement to provide middle office
outsourcing services for approximately
$60 bn in assets for a large European
company. We have also recently signed a
letter of intent with the same prestigious
client to provide another $100 bn in mid-
dle office outsourcing.” The other major
area of opportunity is in the hedge funds
industry. “Our strategy is to offer premi-
um service solutions,” says Mancuso.
“The hedge fund industry is looking for
that type of solution and is not finding it
easily right now.”
Vendor Perspective
As a technology vendor to the securi-
ties industry, Tibco branched off from
Reuters in October 2003. Before the
departure, Reuters was Tibco’s exclusive
channel for the financial services indus-
try. “Now that we have direct access to
this industry, we are more motivated, our
margins are higher and the move has
been good for our business and our cus-
tomers,” says Peter Tebbenhoff, director of
product marketing at Tibco.
Tebbenhoff ’s primary occupation has
been the increase of trading in an auto-
mated fashion. “There is an increasing
acceptance of electronic exchanges in
Europe and North America. The larger
broker dealers need highly automated
systems to take advantage of the market
and not to be taken advantage of by the
market. The equities market has per-
formed better and the fixed income mar-
ket is doing fine. With the improvement
of these markets, there has been an
increasing amount of spending on infor-
72 INVESTOR SERVICES JOURNAL
mation technology in the securities
industry.”
From a vendor’s perspective, the US
securities industry is experiencing an
increasing trend towards the outsourcing
of non-strategic areas of the securities
business. “The back office is the most
likely place where business process out-
sourcing will take place,” says
Tebbenhoff. “Generally speaking, I
don’t think any significant bank
would consider clearing and settling
trades as a major competitive
advantage. The cost savings oppor-
tunity in this area will be reasonable and
banks will move cautiously in this space.
The trend has been fairly positive over
the last few years. As the banks get better
at outsourcing non-core activities, more
will follow. Enough people have out-
sourced to reach an understanding of
what are the critical success factors.”
Vendors in the US can testify to the
progress of STP in the region. “With a
good market in 2004 the buy side is now
showing a willingness to invest in various
initiatives that could be covered by STP,”
says Tebbenhoff. “They are looking to
ensure these STP projects provide value
in a reasonable time frame. STP is proba-
bly most prevalent
in the area of
order confirma-
tion. The adop-
tion of FIX for
financial messag-
ing between the
buy side and other
members of the
value chain is
increasing. FIX is
moving into the
Alan Greene fixed income
space where there
is a reasonable acceptance.”
The securities services markets in North
America and Canada are probably likely
to see more new entrants than in Europe,
according to Tebbenhoff. “There are a
handful of relatively large firms in the US
market and a few large securities firms
believe they can service the industry bet-
ter than anyone else, prompting them to
go after a slice of the action. I read an
article stating that Citigroup has
announced its intention to offer fully-
fledged securities services, including cus-
todial operations by the end of 2005.
Europe, on the other hand, is ripe for
consolidation as opposed to new
entrants.”

In addition to its current service offer-
ing, Tibco will seek to broaden its brand
name and offer additional products and
services to the securities industry. “We are
very strong on the buy side and among
the exchanges and on the securities serv-
ices side, we have about five customers,”
says Tebbenhoff. “There is an opportunity
for us to broaden our service
offering to the sell side and “the buy side is now showing a willingness
exchanges and expand into new
markets such as securities serv-
ices. The challenge is to execute
well. The securities industry is
a very cliquish community to the extent
that news of an error at a custodian or an
exchange spreads very quickly. Therefore
our foremost challenge is to make sure
we can execute properly within our cus-
tomer accounts.”
Market Share
Critical mass is important in the US
and who would know better than State
Street, which has picked up a number of
significant outsourcing mandates over
the last year. “This is definitely influenced
by the regulatory environment and addi-
tional pressure on fund managers,” says
Alan Greene, executive vice president of
State Street Corporation. “Outsourcing
administration functions such as fund
accounting and recordkeeping becomes
an attractive proposition particularly to a
pioneer service provider.”
The main driver for any firm consider-
ing outsourcing has to do with reducing
the rate of spend in the middle office in
the future and enhancing risk controls.
“In the U.S. in particular, there is a regu-
latory overhang on the fund and pen-
sions industry and it’s been a huge chal-
lenge in dealing with compliance and
regulation,” says Greene, “In the short
term, fund companies have had to focus
their attention on addressing and
responding to this regulation. Even with
the current pressure on costs, there is a
greater need for efficiency and we expect
to see an increase in firms looking to out-
source. The service provider who has the
true competitive advantage is the one
who can successfully integrate best of
breed solutions.”
With first hand access to buy side firms,
some service providers believe their path
to STP will only be achieved by substan-
tial investment in technology. “This is not
a small task,” says Greene. “Especially
since buy–side firms are focused on run-
ning money and servicing their clients as
their core competency. Accordingly, most
of their investment in technology will be
focused in these areas and on regulatory
mandates such as Sarbanes-Oxley. STP
usually does not get the amount of fund-
ing and attention to provide the level of
automation required to be successful.”
to invest in various initiatives that
could be covered by STP”
Transparency
As the largest custodian in the world,
State Street upholds transparency as an
increasingly important market force.
“Transparency is always a positive devel-
opment for us, our customers and our
industry as a whole”, says Greene. “Clients
want to know that their service providers
can act as their “eyes and ears” on chang-
ing regulations and how these will impact
their business. The more complex it
becomes to do business from an opera-
tional, regulatory and reporting stand-
point, the more those benefits will assert
themselves. As I noted before, reputation
is everything.”
Regulation has
had the most sig-
nificant impact on
alternative invest-
ments.
Citigroup has
worked with
clients to support
various structures
and processing
flows for fund of
hedge funds.
Michael Goering “Related to con-
trol and trans-
parency, we are seeing a renewed interest
in consolidated reporting, STP and con-
sistency in provider capabilities and con-
trols,” says Michael Goering, director,
Citigroup Global Transaction Services.
As an employee of one of the biggest
banks in the US, Goering says the securi-
ties industry’s palate for outsourcing is
becoming more refined. “Investment
companies want to migrate their expense
base to a variable structure and focus
their attention on investment and distri-
bution activities” he says. “The motiva-
tion to make a structural change is still
strongest when firms either want to
expand their capabilities or avoid invest-
ment in new processing technology. Basel
US Securities Services
II will have a significant impact on the
securities industry as the specific risks
associated with investment activity are
priced for their operational risk. How this
translates into modular outsourcing and
global pricing structures is going to be
very interesting.”
A host of financial regulations compel
financial institu-
tions to maintain
control of all func-
tions, even those
that have been out-
sourced.
“Therefore, outsourcing will continue,
the focus on investment managers is
changing,” says Goering. “Client interest
in messaging bureau services seems to be
the most popular outsourcing function
currently. I expect to see continued out-
sourcing of all post-execution activities
in the middle and back office with
increasing focus on discrete elements
such as corporate actions, which would
signal a fundamental change in the
custody business.”
The US investment community is mak-
ing great strides towards STP in the exe-
cution function. Goering explains:
“Automation is a primary objective of the
buy side – this will probably continue for
the next few years. Achieving best execu-
tion through unique trading strategies is
having tremendous impact on some of
our clients’ returns. Connectivity with
the middle office and treasury is also sup-
porting tremendous cost saving and simi-
lar return improvements.”
While the US market for securities serv-
ices presents opportunities for new
entrants, providers like Citigroup contin-
ue to strengthen their resolve. “I think
we’ll see more local and regional banks
drop out of the sub-custody or local cus-
tody business in several markets around
the globe, but I don’t anticipate any
major change in the line-up of the six
largest global custodians. New entrants
are likely to come from technology-relat-
ed companies. ADP, for example, just
purchased US Clearing and can leverage
some of its existing relationships. It is
reasonable that other technology
providers will enter the smaller markets.”
Despite being one of the most devel-
oped markets for securities services in the
world, the US has a lot of potential for
further development. Providers will seize
on this possibility and begin to increase
their stake in an evolving market.
ISJ
INVESTOR SERVICES JOURNAL 73
US Securities STP
Driving Automation
Formidable automation purveyor,
The Depository Trust & Clearing
Corporation (DTCC) and its
subsidiary, National Securities
Clearing Corporation (NSCC),
are instrumental in leading the
securities industry to T+1.
ISJ asks Thomas McCarthy,
DTCC's managing director, prod-
uct marketing and development,
about the development of STP in
the US and the road to T+1.
Thomas McCarthy
Q: To what extent has STP has progressed over the last year?
A: From our perspective, we have a lengthy program to
focus on STP-related initiatives. Many of those initiatives
include a real-time relationship with marketplaces for
gathering trade data. Currently about 50 per cent of trades
received from major markets are real-time. We wish to
expand this real time interface with other marketplaces in
the US. In another STP initiative, we implemented a new
Continuous Net Settlement system in August of 2004.
Within this system, we act as the counterparty to transac-
tions once we have netted them. The system is real-time
and database driven, enabling us to take in trades through
our netting process and settle them in a quicker manner.
The system gives us the ability to go to T+1, when and if
the industry decides to make that move.
Q: Comment on attempts to automate the buy-side of the
securities industry
A: There are a number of initiatives that are underway.
74 INVESTOR SERVICES JOURNAL
These initiatives are driven by the SIA to encourage trade
affirmation and confirmation on T+1. I believe the
Association has set benchmarks for progress. The first
benchmark is to achieve 95 per cent affirmation by noon
on T+1. I am sure the SIA will set further benchmarks to
improve the affirmation process. This would move the
industry to a point where shortening the securities settle-
ment cycle would be more achievable. The SIA is develop-
ing a program to shorten the settlement cycle over a peri-
od of time.
Q: What are the goals for securities STP in 2005?
A: The DTCC is working with various industry commit-
tees to identify areas within the securities industry where
extensive manual processing and paper-intensive process-
ing prevail and we are committed to finding solutions to
those problems. For example, we are introducing a corpo-
rate actions liability notification process, which we are
currently piloting with 20 firms. The process allows them
to send their messages over a web-based application tool.
It will completely automate and eliminate the paper and
the faxing involved in corporate action liability notifica-
tions. It will also provide an opportunity to input a liabili-
ty requirement and automatically populate the terms of
corporate actions with information from our corporate
actions database. The system sends the corporate actions
message over the web and tracks all open corporate action
liability notices by firm, event type and expiration date.
This is a significant step forward in automating corporate
actions. It also leads to accuracy and surety in the notifica-
tion process.
Q: How will the basic functions of the STP service
provider evolve over the next year?
A: The DTCC does not perceive STP as a one, two or five
year event. STP is an ongoing event. We began looking at
STP in 1999, even before Y2K came along. We were always
trying to anticipate expanding volumes and stay ahead of
these volumes. We don't have the luxury waiting for events
to happen, we have to anticipate them. We are always try-
ing to find new and better ways of either enhancing or
improving our services. Our Automated Customer
Account Transfer Service (ACATS) is an example. ACATS
automates the transfer of brokerage accounts from one
firm to another. Unfortunately, the cost-basis information
– so important for tax reporting purposes – up until now
was not included with the account movement. So we’ve
introduced a new Cost-Basis Reporting Service as a com-
panion product. The cost-basis service supports ACATS
and provides our clients with a new solution to a problem
that had been of increasing concern. The response to
Cost-Basis has exceeded our initial expectations dramati-
cally and more and more clients have begun using the new
product.
ISJ
 The Securities Lending Forum
The British Museum, London
Tuesday 1st March 2005

A new event for the industry…

Mark Faulkner and Bill Cuthbert have been hosting, attending and
participating in securities lending events for over a decade. Like you,
we understand what works and what doesn’t, what’s appropriate
and what isn’t. We have a track record of delivering innovative and
creative programs. Our goal is to deliver an informative event that
will have lasting relevance.

For further information and a full agenda, log on to

www.securitieslendingforum.com

To register please fill in the form below and fax it to

The Organiser on: +44 (0)20 7392 4004

The Securities Lending Forum Registration Form

Forename:
Surname:
Organisation:
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Address (line 1):
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Payment Details:
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www.securitieslendingforum.com
Market Infrastructure - Securities Settlement
To add further efficiency to the
settlement of securities
transactions, Clearstream
Banking Luxembourg and
Euroclear Bank have rolled out
the second phase of their
Automated Daytime Bridge
service. A significant
development as ISJ reports.
Bridging the Gap
T he Automated Daytime Bridge was
introduced in 2004 as a mechanism
for automating the settlement of securi-
ties transactions between counterparties
in Clearstream and Euroclear. The latest
phase of the development provides an
additional improvement in interoperabil-
ity between the two international central
securities depositories (ICSDs).
One of the notable facts about the
Bridge is the limited amount of media
interest in it. Despite regular press releas-
es from the involved ICSDs, finding a
clear explanation of the importance of
The complexity of the daytime Bridge between
the ICSD’s resulted in lengthy
negotiations between
experts of both competitors
the Daytime Bridge has proved difficult.
Perhaps this is because it appears com-
plex to understand or because this subject
hides in the darkest corner of securities
76 INVESTOR SERVICES JOURNAL
back office processing. In the spirit of
enlightenment, ISJ decided to step up to
the task and cast some light on this dark
corner.
Firstly, who is involved? Essentially, the
bridge is a technical two-way communi-
cations link between Euroclear and
Clearstream. This link enables the effi-
cient settlement of securities transactions
between counterparties in both ICSDs.
All of the ICSDs’ customers are affected
by the Bridge. To give an idea of the size
of the development, approximately EUR
60 bn flows between the two organisa-
tions each night.
Origin
Many years ago, in the days of physical
securities transfer, securities vans moved
bonds from one ICSD to another across a
physical bridge in the heart of
Luxembourg. Hence the term ‘bridge’ has
stuck. In the 1980s, the need to de-mate-
rialise this physical process emerged and
by the early 1990s Clearstream and
Euroclear finally completed an electronic
link-up that enabled the processing of the
securities positions through the night.
The basic shortcoming of this link-up
was that is was limited to the nighttime.
This limitation imposed stringent dead-
lines on customers and a limited number
of stock exchanges hindered the possibili-
ty of back-to-back transactions and inter-
action with domestic markets. The link-
up also did not allow for same day settle-
ment of securities transactions.
Owing to the limited number of
sequential delivery processes,
Clearstream was last to receive securities
and as such not able to deliver back to
Euroclear during the night. In effect this
meant a disruption of liquidity in the
financial market as the delivery instruc-
tions made possible thanks to the last
delivery received from Euroclear could
not be delivered back to Euroclear
counterparts as no additional exchanges
existed.
So for several years, the market argued
High quality services
with tangible
customer benefits
Independently rated as best ICSD*,
Clearstream provides the highest
quality securities services across
40 markets worldwide.
Clearstream remains committed to creating competitive
and innovative solutions that increase efficiency,
improve liquidity and manage risk for its customers.
* 2004 Global Custodian Magazine industry survey

Visit www.clearstream.com
or call +352-243-0
Market Infrastructure - Securities Settlement
that a change was needed. Ultimately, this market pressure
increased as banks came to recognise that structural effi-
ciency gains would reflect in their own efficiency gains and
thus increased cost savings that lead to the implantation of
the automated Daytime Bridge.
Given this background, against
the complexity of adjusting the
process into a live environment
under the watchful eyes of a num-
ber of regulators, it is understand-
able that the joint project team took
a cautious long-term project
approach to implementing the solu-
tion. The complexity of the daytime
Bridge between the ICSD’s resulted
in lengthy negotiations between
experts of both organisations in
order to document all functional Pierre Francotte
and operational procedures. This Euroclear
agreement foresaw a two-phase
technical implementation, the second of which was
successfully implemented in November 2004.
“The environment created by the
new Bridge provides the market
with a more balanced interaction.”
Status
Both phases of implementing the new Daytime Bridge
were completed exactly as planned, proving the healthy
blend of co-operation and competition between the two
ICSDs. Let’s not forget these two organisations have been
archrivals for over 30 years and compete aggressively
against each other on a daily basis. However, it is clear that
in order to deliver the project to the market, Euroclear and
Clearstream had to co-operate. Neither could afford to be
seen as the cause of project delay.
As a result, both ICSDs have begun marketing the bene-
fits to the market in their bid to use the opportunity to re-
balance certain business flows now that most of the struc-
tural disadvantage is removed.
According to Clearstream, the benefits of the Automated
Daytime Bridge include:
- Increased efficiency through extended
settlement periods and greater exception
management possibilities;
- Improved interaction between the cross-border
and domestic markets;
- Opportunities to settle with a wider range of
counterparties on a same day basis;
- Improved financing opportunities through
same day bi-lateral and tri-partite repo between
counterparties in different systems;
- Lower costs through reduced fail rates and less
borrowing needs.
78 INVESTOR SERVICES JOURNAL
Interoperability
As a direct result, the securities settlement infrastructure
now has a new and better level of interoperability between
the two ICSD’s. The automated daytime service now
allows settlement between ICSDs during the night and
into the business day. Any cus-
tomer can, on any given business
day and from the settlement loca-
tion of their choice, optimise set-
tlement activity not only via
improved repair possibilities but
also via bilateral activities with
counterparts located on both sides
of the Bridge.
In addition, increased settlement
interaction possibilities with
domestic markets provide further
Jeff Tessler benefit in increasing the liquidity
Clearstream provision for the market as a
whole. Furthermore, total costs for
the financial market have also been reduced due to the
implementation of new risk management rules by both
institutions in order to manage and control systemic risk,
by ensuring a harmonisation of cash and securities flows.
The environment created by the new Bridge provides the
market with a more balanced interaction between the two
ICSD’s while providing customers on both sides with the
benefits of improved bridge-transaction settlement effi-
ciency and greater flexibility to repair unmatched instruc-
tions. It has also enabled automatic recycling of failed
trades and extended input deadlines and opens the possi-
bility of same-day trading and settlement in eurobonds.
“the ultimate goal should, for
both operators, remain the
offering of a settlement process
between the ICSD’s as efficient
and with the same deadlines as
settlement within each system””
Refinement
Does the Bridge end here? No. It is understood that fur-
ther revision is inevitable due to other technical issues.
Karl Van Gestel, head of settlement custody design at
Clearstream explains: “Phase two of the Automated
Daytime Bridge has achieved a greater level of interoper-
ability than ever before. But the ultimate goal should, for
both operators, remain the offering of a settlement process
between the ICSD’s as efficient and with the same dead-
lines as settlement within each system”.
What is undoubtedly clear from the Daytime Bridge
development is that there is now a truer level of competi-
tion between the two ICSDs than ever before and it will be
intriguing to watch the respective CEO’s of each organisa-
tion, Pierre Francotte of Euroclear and newly appointed
Jeff Tessler of Clearstream take matters forward.
ISJ
 Market Infrastructure - Nordic Baltic consolidation

T he evolving Nordic Baltic financial landscape provides

valuable lessons for exchanges in other parts of the
world. This model proves that small exchanges in the same
geographic area can improve efficiency and pursue a
growth strategy through partnerships. A company that is
central to the integration of the Nordic Baltic market is
the exchange operator and technology provider OMX.

The Beginning
Just a short time ago, the Nordic Baltic market consisted
of eight separate exchanges in Copenhagen, Reykjavik,
Helsinki, Oslo, Riga, Stockholm, Tallinn and Vilnius.
Today, these exchanges are unified in that they are either:
members of the NOREX Alliance of stock exchanges;
owned by the exchange operator and technology provider
OMX; or both.
The idea of Nordic integration is not new. For some
time the Nordic Baltic markets have been aware that each
exchange would be too small to compete in its own right
in an increasingly global market. A basic set of fundamen-
tals inhibited their growth. Disparate, non-integrated sys-
tems made it difficult to distribute information in a stan-
dardised, timely fashion. As a result, investors lacked suffi-
cient data to make informed choices, discouraging them
from venturing beyond their domestic markets.

Improvement
Improving market infrastructure efficiency is the key to
the Nordic Baltic region’s growth and prosperity. A study
Co-operation
conducted by McKinsey & Company for OMX shows that
trade volumes and market liquidity are higher in more
efficient markets. There is a clear correlation between the
Culture
size of the transactions, the unit cost and velocity of the
market.
Larger and more efficient securities markets – both in
equities and derivatives – provide more financing alterna-
tives for companies and investment alternatives for
investors. Companies financed through the securities
markets are constantly supervised through a transparent
process. Well-functioning securities markets increase the
profitability of capital and hence economic growth, by
facilitating the restructuring of existing companies and
making sure that capital is allocated to the best new invest-
An integrated Nordic Baltic
ment projects. marketplace is being created,
Change based on regional expertise
In response to technological developments in the 1990s, and a common technological
as well as internationalisation and increased focus on
shareholder value, the pressure was on in the Nordic infrastructure that makes it a
region for structural change. The first step toward making
this change was the creation of the NOREX Alliance in the
showcase of efficiency and
1997 by an agreement between the Copenhagen and increased liquidity,
Stockholm Exchanges. Today, the NOREX Alliance
includes all the stock exchanges in the Nordic and Baltic
writes Anders Reveman of the
countries – Copenhagen, Reykjavik, Helsinki, Oslo, Riga, OMX Group.

INVESTOR SERVICES JOURNAL 79

Market Infrastructure - Nordic Baltic consolidation

Stockholm, Tallinn and Vilnius.

The NOREX Alliance members are required to stan-
dardise on the same technology platforms and synchro-
nise their rules, processes and procedures. Alliance
members benefit from reduced overhead, because they
can share the cost of systems, research and development,
as well as maintenance of the IT infrastructure. At the
same time, the partnership increases the pool of poten-
tial investors and improves liquidity since they have con-
nectivity to several exchanges through one system. And,
with greater reach, member exchanges can extend their
market offerings.
We are all small countries and we realise there is a lot to
gain from working together. Cooperation is in our culture.

Vision
Taking integration a step further and into a higher gear,
OMX has a vision of integrating the Nordic Baltic markets
into one single market through both mergers and
“We are small countries and we realise alliances. Today, OMX exchanges consist of the stock
exchanges of Helsinki, Riga, Stockholm, Tallinn, and
there is a lot to gain from working together.” Vilnius. OMX has also signed a letter of intent to
combine with the Copenhagen Stock Exchange.
Recently, the exchanges in Helsinki, Riga, and Tallinn
were migrated to the same trading and clearing technology
platform as the Stockholm exchange in record-breaking
time. Copenhagen already shares the same technology
through its membership in the NOREX Alliance and the
Vilnius migration is set for 2005.
But it is not essential for exchanges to merge in order to
take advantage of integration. The Oslo Börs, for example,
is a strong NOREX Alliance partner that has retained its
independence while still benefiting from co-operation
with other exchanges in the region.
The goal, according to OMX, is to enhance the attrac-
tiveness of the region by creating more efficient transac-
tion solutions, integrating markets on a common technol-
ogy platform and developing more compelling service
offerings.

Method
We are ‘bundling’ markets to achieve greater breadth in
their offering. And taking advantage of a common tech-
nology platform, while not losing sight of the fact that a
large part of the business is still local.
As the markets become more integrated, there will be
more opportunity to introduce stronger sector offerings.
For instance, the Nordic Baltic Information Technology
sector is the largest in Europe, representing 50 per cent of
the market capitalisation.
There are lessons to be learned by exchanges in other
parts of the world. This model proves that small
exchanges in the same geographic area can improve
external and internal efficiency and pursue a growth
strategy through partnerships.
ISJ

80 INVESTOR SERVICES JOURNAL


LEARNING FROM
EXPERIENCE?
Is the European securities
industry learning from
experience or making the same
mistakes? ISJ investigates
S ince the demise of the Global Straight Through
Processing Association (GSTPA) over two years ago, the
securities industry in Europe appears to be lacking a forum
with enough clout to ensure standardisation. In fact, almost
half of the professionals present at the ISITC Europe 2004
Annual Conference & Exhibition expressed that the available
securities standards makers, namely the Industry
Standardization for Institutional Trade Communication
(ISITC), the Financial Information eXchange and the
Financial products Markup Language (FPML), should be
merged. High on the industry’s agenda at the Conference was
standardisation.
According to Deirdre O’Grady, head of cash services at
Merrill Lynch, the direction for securities industry standardi-
sation has been set. “Now is the time to roll up our sleeves
and work towards a harmonised marketed,” she said.
Lindsay Tomlinson, Europe vice chair at Barclays Global
Investors attributed the lack of standards in the securities
industry to structural divisions. “The fund managers want to
focus on the front office and want the custodians to look after
the back office,” he says. “I would vote for a new body on
standardisation, rather than merge our existing securities
industry bodies.”
As a custodian, Richard Beaven, managing director at the
Bank of New York clarified that he would not vote for a
merger of industry bodies. “We just need to ensure the people
who attend the existing forums are representative of the
(securities) industry,” he said. “We should work with what
we’ve got.”
Technology vendors who were present at ISITC Europe
2004 believed the status quo of securities industry talking
shops would change and be brought under a single leader-
ship. Chris Church, executive vice president, strategic client
development and industry relations at Radianz said:
“Merging ISITC Europe with other bodies may prove diffi-
cult, as other bodies don’t have the securities focus that ISITC
Europe has. However, the securities industry in Europe would
benefit from a true “securities industry association” that
brings the industry participants together. As an example, FIX
Protocol Ltd goes beyond equities and fixed income and is
now covering derivatives, foreign exchange and market data.
There's FESE for exchanges, CESR for regulators, ECSDA for
CSDs, but there is nothing at a European level that is a forum
for the whole industry. ISITC's members have to decide if
they are prepared to put in the effort and money to meet the
needs of a pan-European role. ISITC is very good value for
money today, but it will need more money to expand.”
Conference Digest - Securities STP
Stuart McKinlay, vice president at State Street and ISITC
Europe chair, suggested the European securities industry
needs an umbrella organisation that embraces existing talking
shops. “I like the idea of merging ISITC but we have to agree
on how to do that,” he said.
Unity
The call for unity bellowed loudly at ISITC Europe 2004 as
the securities industry beckoned for standardisation. “There
is no group in Europe which adequately represents the secu-
rities industry,” said Tony Freeman, director of industry rela-
tions at OMGEO EMEA.
Lindsay Tomlinson added: “We should be presenting a united
face in the securities industry but we are too competitive
among eachother. This form of competition has placed us
under considerable pressure from the regulator.”
Put to a Vote
In an interactive questions and answers session, about 100
ISITC conference delegates, comprising investment man-
agers, custodians, vendors and broker dealers, grappled with
the key pain points facing their respective industries: The first
question, “has asset management outsourcing of the back
office become a key feature of the financial markets ecosys-
tem?” received an interesting response.
“We need to see outsourcing
deals that have worked.”
87 per cent of respondents, including Tomlinson, answered
yes . “Fund managers are fixed on managing their fund man-
agement components,” said Tomlinson. “We will go down the
route of outsourcing but it is still early days. We need to see
outsourcing deals that have worked. As that happens, you will
see a standard being set and the small to medium sized man-
agers will follow.”
Some respondents believed the securities industry was still
in the early stages of outsourcing. “In the beginning, a few
deals will hit the dust before they take off,” said Deirdre
O’Grady. “Those providers offering solutions should learn
how to unbundle their services and should understand what
a core competency is.”
Bob Craddock, director of operations at Bank of Ireland
Securities Services, said: “An outsourcers package from FIX
trading support to performance reporting that brings effi-
ciencies to medium-sized managers, what works for us and is
an area where we can add most value,” he said.
Outsourcing providers face a dilemma of plenty of upfront
costs for a long-term payback. “Custodians will never be able
to say they made a profit on outsourcing,” said Craddock.
“Once they say that it is profitable their fees will be squeezed
outsourcing is a very costly model to build.”
Has asset management outsourcing of
the back office become a key feature of
the financial markets ecosystem?
No 13%
Yes 87%
Source: ISJ
INVESTOR SERVICES JOURNAL 81
Conference Digest - Securities STP

ISITC Europe delegates were then asked: mercial side and an industry standards side, and it can be hard to see where one starts and
“When will financial markets have cross- the other finishes. People ask, “If SWIFT didn’t do its standards work, how else would the
asset exchange, confirmation and settle- industry fund standards”.
ment venues?” Delegates were asked what ISTIC Europe’s priorities should be for the next three years?
69.2 per cent of respondents, including O’Grady, said it should become a pressure group
Almost half of the audience believed for its members. “ISITC is a good forum for brokers, custodians and fund managers to
these venues would exist within the next implement change,” she said.
five to 10 years (please refer to illustration In certain sections of the audience, it was felt that the wider implication was one of costs.
above). “We should look at how technology It comes back to money, if you want a wider role, you have to pay for it,” said Church. “The
can help us to achieve where we are trying funding has to be considered. This affects the vendors and not just their members.”
to get to,” said Beaven.
Is the convergence of global industry standards necessary to promote efficiency and
“In certain niches, automation? 61.8 per cent of the audience voted “yes”.
According to O’Grady, standards are important. “We pay too much for connectivity. It is
some sectors will be important we have a commercial reality and to consider how clearing and settlement could
co-exist.”
able to consolidate very “Industry standards could be blended together through technology,” added Tomlinson.
well. A collection of Lastly, delegates were asked how much impact hedge funds are making on the global pro-
hubs will be the likely cessing efficiency model? 74.1 per cent of the audience believed hedge funds had an
increasing impact due to growth in the number of funds (refer to illustration below).
result.” “Hedge funds are forcing prime brokers to move from product silos to clients needs for
single views, operational functions and reporting,” explained O’Grady. “The prime broker
Speaking as a central trade-matching should add efficiencies to add scale.”
service provider, Tony Freeman explained it The majority of delegates agreed that hedge funds are here to stay. “The industry will
was not possible to consolidate the venues become more retail focussed,” said Beaven. “Automation and systems go hand in hand with
into one unit, because of the politics the accounting treatment of these funds”. But while prospectuses set out the functionality
involved. “In certain niches, some sectors for the hedge fund, a number of investors still do not understand the ris
will be able to consolidate very well,” he ISJ
said. “A collection of hubs will be the likely
result.”
So far, the securities industry has devel- Delegates Responses
oped with a delineation of the responsibili- Should SWIFT separate its
When will financial markets have standards development group
ties of CSDs, stock exchanges and CCPs. cross-asset exchange, confirmation
“But now we are seeing consolidation from its functions as network
and settlement venues? provider?
beyond delineation,” said O’Grady.
1 - 5 years 3.2
The conference delegates were also asked if No 31.5
SWIFT should separate its standards devel-
Already in place 15.1
opment group from its functions as net-
work provider, to which 68.5 per cent of
respondents answered “yes”. Never 34.4
O’Grady replied no. “SWIFT revenue Yes 68.5
comes from the traffic and goes towards 5 - 10 years 47.3
standards development,” she said. “But
SWIFT does not have a separate revenue 0 5 10 15 20 25 30 35 40 45 50 0 10 20 30 40 50 60 70
stream to fund standardisation, which Percent Source: ISJ
Percent Source: ISJ

makes things difficult. We look to SWIFT

What should ITIC Europe’s priorities be
for direction and this structure should for the next three years?
remain the same.”
Disband 3.3
“Transparency is key,
and people providing Merge with other organisations 8.8

standards should be Become a pressure grp for members 69.2

transparent on costs.”
Continue as is 18.7
Church added: “Transparency is key, and
people providing standards should be 0 10 20 30 40 50 60 70
transparent on costs. SWIFT has a com- Percent Source: ISJ

82 INVESTOR SERVICES JOURNAL

 Conference Digest - Reference Data
The damage caused by failed
trades has prompted reference
data vendors and consultants to
strengthen their resolve in
convincing executives to ensure
their data is correct.
ISJ reports from Financial
Information Management
Network’s Second European
Senior-Level Reference Data
Conference in London.
Fixing Dated Data
R eference data, if managed incorrectly,
could expose a firm to operational
risk. But one of the greatest challenges
protagonists of consistent data face is
reaching those who are personally liable
for reference data problems. At the
recent Financial Information
Management Network’s Second
European Senior-Level Reference Data
Conference in London, experts dis-
cussed how to get the message across to
the decision-makers.
As a starting point for the conference,
data specialists received tips on how to
“Changes made to reference data functions
would translate into more efficiency.”
demonstrate a return on the investment
in reference data. According to Simon
Leighton-Porter, vice president of equity
business management at Citigroup, the
reference data function is often poorly
understood in large organisations.
“Return on investment is king,” he said.
“Changes to the reference data function
would translate into more efficiency.,
but we have to show a well-argued and
quantifiable return on investment or no
one will provide the money to get the
reference data project going. If you
don't sell it right, your project will not
get funded.”
Perception
The steps towards a greater apprecia-
tion of the problems caused by reference
data include addressing the perception
problems and the symptoms, rather
than the causes. One of the biggest per-
ception problems facing reference data
is that it is regarded as boring plumb-
ing,” rather than something that affects
every aspect of the trade cycle, and it is
therefore unlikely to catch the eye of
those decision-makers who are not inti-
mately familiar with its true impor-
tance. But according to Leighton-Porter,
the symptoms of incorrect data often
pop up far from the root cause: in the
front office or in the settlement process.
“Unfortunately, the person making the
project funding decision is frequently
the furthest removed from the underly-
ing problem,” he said. “The problem is
aggravated by a lack of governance – an
approach based on tactical fixes does
not provide the strategic planning and
oversight that this vital area needs.”
Action
So how does reference data receive the
attention it deserves? According to
Leighton-Porter, the question prompt-
ing action among executives is “how
does it affect my job?”
According to Leighton-Porter, all too
often, data quality is allowed slowly to
deteriorate to the point where it pro-
vokes a crisis. At
this stage, pres-
sure from senior
management and
the risk to job or bonus are likely to be
the factors, which weigh most heavily in
the minds of decision-makers, who then
resort to tactical quick fixes.
“All too often, good projects fail to make
the cut in the funding stakes because the
business case is not clearly articulated,”
INVESTOR SERVICES JOURNAL 83
Conference Digest - Reference Data
said Leighton-Porter. “We have found
that a standardised
methodology, based on activity-based
marginal cost analysis is an extremely
effective tool for measuring ROI. We
have built our own modelling tool that
allows the impact of process change to
be measured with a high degree of accu-
racy. We then make sure we present the
analysis in a way that will grab the
interest of the decision-maker” and that
we can justify every single cost or bene-
fit attribution.
Timing
In preparing a business case to senior
management for refer-
ence data change, profes- “Service providers need to find someone in the
sionals are often hard
pressed in their search front office, who can best articulate the value of
for a holy-grail solution.
“There are too few data
data to an organisation in monetary terms”
standards and too few industry utilities
for partner data,” said Alan Connolly,
global head of reference data at UBS
Investment Bank. “Yet partner data is
key to delivering client satisfaction as
well as meeting regulatory demands.
Operational efficiency is impacted and
reduced by poor data quality and
integrity. In a world where service is
paramount, it is increasingly recognised
that data can add service value to the
client.”
When considering a reference data
solution, executives should have a thor-
ough understanding of their organisa-
tion and its culture. “Executives should
know how to spend money on some-
thing that is commonly described as
'boring ' and ' nebulous ',” said
Connolly. “The ability to talk business,
as well as data, is what ultimately wins
the day. Some organisations apply strict
quantitative analysis (ROI) others will
look to include broader nonfinancial
impacts - you must recognise what
pushes the right buttons. (Executives)
must find a sponsor for the reference
data change and ensure that the sponsor
is senior enough to drive through the
bureaucracy and reach into all parts of
the organisation e.g. someone like the
chief operating officer of an organisa-
tion. To gain the confidence of a spon-
sor, reference data specialists need to
84 INVESTOR SERVICES JOURNAL
prepare a vision, explain the problems
and document the direct impact to the
client and business. Providers need to
establish a credible program of seniority
and understand how it enables other
efforts to deliver services that clients are
asking for. Data service providers need
to find people in the organisation who
can best articulate the value of data in
monetary and service provision terms.
And qualitative benefits have a signifi-
cant place in defining the business case
so ensure you capture those. Find your
friends in an organisation and engage in
regular dialogue. Providers should find
their sponsors, keep them hooked, prove
the need for change and don't be afraid
to use regulation as a leveragable point.
Establish senior contracts and internal
collaboration across the organisation
and ensure that you manage expecta-
tions - you won't deliver everything to
everyone so keep the core deliverables
tied to business benefits.”
Regulation
In regulatory terms, the consequences
of incorrect data can be severe. The
Anti-Money Laundering (AML) rules,
the Proceeds of Crime Act and Basel II
suggest that financial institutions should
not be over-exposed to a counterparty
in case that counterparty were to
default. “In the current regulatory and
governance environment, financial
institutions need to know that; they are
not doing business with terrorists or
money launderers; they can confidently
certify their financial statements because
they have monitored business relation-
ships for material events and they are
not over-exposed to losses should one of
their customers, vendors or counterpar-
ties fail,” said Keith Webster, vice
president of business development at
D&B. “Even after they have completed
their own manual linkages, financial
Institutions often miss relationships
between securities and loans. In order to
accurately assess global risk exposure,
financial institutions must determine
their risk exposure across their loans,
securities, and counterparties”.
Standards
Tom Davin, acting director of the
Financial Information Services Division
(FISD) of the Software & Information
Industry Association, highlighted the
importance of standards for securities
processing. “There is an increased need
for automated securities transactions,”
he said. “We should embrace standards
in order to realise the benefits of
automation. When automation is
important,
standards are
important too.”
The FISD is the
originator of the
Market Data
Definition
Language (MDDL) and the Secretariat
of the Reference Data Coalition
(REDAC).
The Division estimates that about 30
per cent of all fail trades are a result of
incorrect data. “Automation should
embed more standards for processing
and reference data,” said Davin. “We
should establish market data vocabulary.”
As cross border trading increases, so
too does the need for a securities
identification method that is unique
and unambiguous. “The business rules
governing data should also be flexible,”
said Davin. "Cross referencing is also
becoming a major problem and
investors need a common identifier. The
ideal standards for the content of the
trade lifecycle are MDDL and the
Financial Information Exchange. XML
standards are six times more volumi-
nous than normal standards. ISO20022
messages have yet to be developed but
they will address many needs. They are
not, however, bandwidth friendly.”
While the return on investment for
clean reference data may not be imme-
diately obvious, data standardisation
will make the challenge seem worth-
while. “Inertia is a problem but the sit-
uation is changing,” says Davin. “The
key priority is securities processing
automation.”
ISJ
 Del 31 C Ove
iver ase
ed T
r
Stud
o Yo
Org u ies
B
aniz y Thes
atio e
ns: Leadin
g
Bank of
New York
Barclays Capital
Barclay’s Global
February 7-9, 2005 | The Waldorf Astoria Hotel, New York Investors
Strengthening Reference Data To Reduce Citigroup
Risk And Drive Processing Efficiency CSFB
Depository Trust
John Bottega & Clearing Corp
Director & Global Here’s a few of the Reference
Head of Product & Data strategies you’ll take home from Deutsche Asset
Price Management
CSFB FIMA 2005: Management
• Data Centralization - Return to your office Deutsche Bank
with new ideas and establish competitive
Colin Hall
Global Head of advantage through effective data centralization Fidelity
Data Management Investments
UBS • Corporate Actions - Tighten your grip on
FISD
Margret Hibschman corporate actions processing and overcome
Principal, Global the challenges presented by complex global Goldman Sachs
Head of Market Data
transactions
Barclay’s Global Guardian Group
Investors
• Legal Entity Data - Find out how to clearly Of Funds
John White assess credit exposure through effective
Principal, Investment legal entity hierarchies
JP Morgan
Management Data
Services Mellon Financial
State Street
• Data Standardization – Leverage your col-
Global Advisors laborative capabilities to drive industry-wide Merrill Lynch
standards
Rakesh Nigam
Morgan Stanley
Head of North • Outsourcing – Learn new techniques to
American Trading leverage vendor performance and support
State Street
Technology
your data management strategy Global Advisors
JP Morgan

• Compliance & Regulations - Walk away

SWIFT
Simon Leighton-
Porter
with strategic, cost conscience compliance TowerGroup
VP, Equity Business and regulatory initiatives
Management UBS
Citigroup

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86 INVESTOR SERVICES JOURNAL

 GLOBAL ORGANIZERS OF INSTITUTIONAL FINANCE & INVESTMENT CONFERENCES

The Eleventh Annual

Beneficial Owners' Summit On Domestic And
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letters continued from page 4
Change of Heart? (continued)
The remarkable success of custodians
in signing up investment managers to a
wide range of 'outsourced' services is an
illustration of the fundamental lack of
appetite in the buy-side community.
What neither custodians nor vendors
have done so far is articulate a specific
benefit that STP contributes to that core
competency of 'managing money'. The
mechanical and humble nature of much
of the integration and status manage-
ment that needs to be implemented has
obscured the fact that locked into all
these transactions and processing
systems there is valuable information
about availability of assets intra-day. On
page 38 of that same issue, CalPERs are
pointing out the amazing returns that are
generated by their stock lending pro-
gram - and stock lending is a prime
example of that grey area between front
and back office. It makes money, but it
relies on the ability to move assets about
very quickly and efficiently - surely a
candidate for some STP TLC?
Gert Raeves, director of business devel-
opment, CheckFree Software
Side Letters
It seems that more and more fund
managers are using side letters to
amend terms to certain investors.
Normally these terms are related to
fees, “lock up” periods, redemption
notices and “most favored nation”
clauses.
Side letters are something that
should be scrutinised and managers
and directors of funds should be very
careful before entering into these “con-
tracts” with investors. Items that man-
agers and directors should consider
before signing these letters are:
Is a new share class or new series
being established to accommodate the
side letter? Shares of funds have rights
attached; these rights are the same for
each class or series. These rights are
normally set out in the memorandum
and/or articles of association for the
fund.
Are any terms of the side letter dif-
ferent than the terms set forth in the
Articles and/or Memorandum of the
fund? Any part of a side letter that is
contradictory to the rights as set forth
in the articles would probably not be
enforceable in a court of law.
Are the rights being offered in the side
letter going to be given at the detriment
of other shareholders? Often times
side letters require the manager to pro-
vide information to an investor and
then allow them to redeem based on
this information. This could leave the
remaining investors in a detrimental
position by not being provided such
information.
Before entering into a side letter,
managers and directors must carefully
consider the terms and how it will
impact the operations of the fund, the
treatment of the shareholders as well
“Before entering into a
side letter, managers and
directors must carefully
consider the terms and how
it will impact the operations
of the fund.”
as the liability that it may cause. It is
in their best interests to consult with
the legal counsel for the fund before
entering into these agreements to
ensure they are sound
Chris Meader, head of fund services,
Caledonian Fund Services Limited
In Search of Best Execution
Achieving quality trade execution, all
institutional traders will tell you, is criti-
cal to their business. But what is ‘best
execution’? Servicing this community,
we have heard different concerns.
Speed or ensuring against loss of
opportunity is central, but so are cost,
depth of liquidity, and minimisation of
market impact through anonymity.
How these are achieved together,
however, requires asking other ques-
tions, among them: If the broker-dealer
offers direct market access, is the
order routed directly to the exchange or
are there delaying stops along the way?
Is the technology outside of the control
of the broker-dealer, and if so how does
that affect the speed and anonymity of
filling the trade order? Are there any
potential conflicts at the broker-dealer
Letters (continued)
with the best interest of the institutional
client from proprietary trading or other
activities?
Honestly answering these questions
will help determine whether an invest-
ment operation is effectively managing
its trade executions instead of risking
having them managed for them.
We have seen, both in the US and
Europe, an increasing concern among
investment houses and regulators with
global transparency of trading costs
and relationships, and this trend is
healthy for the industry as a whole.
Happily, this trend toward better man-
aged trading also impacts perform-
ance, which is everyone’s eventual
concern.
Peter Kearns, president, NeoNet
Securities, Inc.
Perfect Price
Undoubtedly one of the most
fundamental problems facing the
markets in all asset classes is the fact
that electronic price feeds are not
providing all of the information
necessary to perform a trade. This
situation has been brought about by
the success of electronic trading
systems in providing sophisticated and
up to date pricing to the market place
but in the final analysis if an institution
is providing pricing in marketable
amounts on very thin spreads the last
price traded is no longer an adequate
basis on which to trade.
Pricing in spot FX particularly is vulner-
“...one of the most funda-
mental problems facing the
markets in all asset classes
is the fact that electronic
price feeds are not providing
all the information necessary
to perform a trade.”
able to emotional and economic
aspects to the price that an institution
is prepared to quote. It is undoubtedly
the hardest part of the equation to get
right as the spot price tends to drive
every other price in the derivative
space so it’s absolutely crucial to get
this right. Whereas pure electronic
INVESTOR SERVICES JOURNAL 89
IRC CONFERENCES
2005 Events
THE MOST SIGNIFICANT INVESTMENT CONFERENCES OF 2005

ALTERNATIVE INVESTMENT SUMMIT

The Leading Event for European Investors in Hedge
Funds & Private Equity
18-19 April 2005, London - Dorchester Hotel
The Alternative Investment Summit is designed to demystify the Private Equity
and Hedge Fund industries and to tackle the key issues that investors face
when considering investment in these areas. Our 2004 conference in March
attracted over 400 delegates to the Royal Lancaster Hotel, making it the
premier event of its kind in the UK.

ASSET ALLOCATION SUMMIT

The BIG Event for the BIG Picture
27-28 June 2005, London - Dorchester Hotel
The Asset Allocation Summit comes at a critical juncture in the development
of the world’s equity and bond markets, and will be examining strategic and
tactical asset allocation, current strategy and alternative investing. The Asset
Allocation Summit features a list of speakers at the very heart of recent
developments in these fields. Over 300 delegates enjoyed the event in 2004.

HEDGE2005
The Premier UK Hedge Fund Conference
10-11 October 2005, London - Dorchester Hotel
HEDGE2005 is an educational forum designed to provide investors with the
essential information they need when considering investment in Hedge Funds.
Last year's event attracted over 400 delegates, with a high ratio of investors
in attendance.

For further information, please contact Ellie Nalon-Santana on +44 (0) 870 777 4144, or by email to
Ellie@irc-conferences.com Alternatively, please visit our website at www.irc-conferences.com/61

S P O N S O R S H I P & E X H I B I T I O N O P P O R T U N I T I E S
If you are interested in speaking, sponsoring or exhibiting at any of our 2005 conferences,
contact Andrew Perrins, Conference Director on +44(0)870 777 4142
or e-mail andrewperrins@irc-conferences.com
For further details regarding IRC Conferences in 2005 visit our website www.irc-conferences.com/61

feeds might well have worked in the
past when they were used to price only
retail transactions the same parameters
do not apply when these feed are
being used as a base for huge whole-
“The ‘human touch’ is
still needed to control
the vagaries of these
information flows.”
sale deals. The “human touch” is still
needed to control the vagaries of these
information flows and the challenge to
the technology industry is to provide
the people applying this touch with
tools which allow them to do their job
more efficiently.
Until the time comes when all emotion-
al and economic considerations can be
quantified and programmed logically
into pricing considerations then we are
going to be in this situation and I have
a feeling that it is someway off just yet.
Howard M Tolman, managing director,
Cognotec
Gather Assets at your Peril!
Hedge Funds are finally starting to be
included in institutional portfolios, with
capital inflows from corporate and
public pension funds, endowments
and foundations and insurance compa-
nies projected to continue to gain
momentum through the next decade.
The hedge fund market is forecast to
reach $2.5 to 3 trillion by 2010.
Allocations from pension funds are
increasing at the greatest rate, as they
search for alpha returns independent
of beta coupled with their need to
avoid downside risk.
To meet this demand more products
will be created and launched, including
investible indices, basic capital protec-
tion, enhanced participation capital
protection and certificates. Yet it is
questionable whether supply will meet
demand. The industry could be faced
with too much money chasing too few
opportunities. This poses a problem of
over capacity and the consequential
dilution of returns. Institutions could
destroy the alpha that they seek.
Yet the trend that is starting to emerge,
with the issuance of more hedge fund
strategies and structures, is that the
hedge fund market is starting to frag-
ment into three different propositions.
Firstly, products that offer long-biased
modest beta returns characterised by
high capacity; secondly, established
hedge fund strategies with low beta
returns characterised with moderate
capacity and lastly, the most attractive
proposition, new strategies delivering
alpha returns at a cost. These will have
limited capacity. Institutions, fixated
with fees, will have to accept that there
is no such thing as alpha at a discount.
Quality and talent costs money.
Providing returns are sustained over a
reasonable period, the cost of these
payments is relatively small when
measured against the added value.
Hedge funds and funds of hedge funds
need to realise that they do not need
large institutional investors’ money at
any price. Those that do not will under-
mine their alpha producing ability.
Hedge fund managers must do exactly
that, manage assets and protect alpha.
Those that become asset gatherers do
so at their own risk.
Rachel Greenway, sales and marketing
executive at Dawnay, Day Olympia Limited
Looking after No. 1
We live and toil in a commercial and com-
petitive world. Such an environment is not
conducive to cooperation as that required
within Working Groups of analogous
organisations. Many readers of this journal
owe their livelihood and future prospects
to helping their employer evolve new serv-
ices whose success will almost certainly
have an equal and opposite detrimental
effect on a competitor. If a male peacock
can raise three foot feathers at whim there
is likely to be comparatively little attention
shown by the female audience to his
neighbour who struggles to achieve two
foot six.
On the other hand individual birds may
sacrifice themselves to the hawk because
there is a high probability that there are at
least as many of their own genes in the
remaining flock.
Unfortunately altruism, unlike in nature,
is out of place in financial
markets. There is no Lemming Bank.
Conversely, Gorilla Investments are reluc-
tant to forfeit their own existing proprietary
services for a totally open regime.
This is the real reason why significant
industry-wide progress by working
Letters (continued)
groups on ‘standards’ for example, is
slow. The cost of implementing change
in reality is less of an obstacle.
If the benefits were large enough then
feathers could be extended and
funding would be found.
Existing limitations faced as a result of
a lack of standards such as extra oper-
ational costs is something faced by the
competition alike.
“The Egyptian Plover bird,
for example, is safe inside
the crocodile’s jaws because
it is the best available
cleaner for teeth, tools that
are pretty vital for the
predator’s own survival!”
Acceptance of this fact would facilitate
renewed focus on areas where there is
more chance of success.
Tantalising parallels do exist in the
natural world.
The Egyptian Plover bird, for exam-
ple, is safe inside the crocodile’s jaws
because it is the best available cleaner
for teeth, tools that are pretty vital for
the predator’s own survival!
Unfortunately such bilateral relation-
ships tend to have a clearly dominant
partner.
Rapid steps to longer-term improve-
ments in financial markets infrastruc-
ture will occur when organisations are
more prepared to swallow their pride
rather than just their next meal.
Robert Harris, securities business
manager, CityNetworks
ISJ welcomes your letters on any
aspect of the global securities
services industry. For inclusion
within the next edition, letters
should be sent to:-
letters@ISJforum.com
Thank you.
CAPTION COMPETITION - PUREST THOUGHTS
The Christmas caption competition received a
host of imaginative entries. The Winner:
“Why did I choose custody over
football?” The winner chose to remain
anonymous and requested the prize of £100 be
donated to the DEC Tsunami Earthquake
Appeal. For further information or to donate to
the appeal please visit www.dec.org.uk.
INVESTOR SERVICES JOURNAL 91
People Moves
Moving
& and sales into asset managers, govern-
Shaking
A selection of the
appointments
updated daily at
WWW.ISJFORUM.COM
Clearstream International, the settle-
ment and custody division of Deutsche
Börse Group, has changed the composi-
tion of its board. André Roelants has
become Chairman, replacing Robert R.
Douglass, who has served as Chairman
of Clearstream International and its
predecessor company, Cedel
International since May 1994; Douglass
has been appointed Honorary Chairman
and Senior Advisor. Succeeding André
Roelants as CEO of Clearstream
International is Jeffrey Tessler, who was
already appointed to the Executive
Management Board of Clearstream's
parent company Deutsche Börse AG in
October 2004.
Russell/Mellon appointed Euan
MacLaren as
client relation-
ship manager,
Financial
Institutions.
Based in the
Edinburgh office,
MacLaren will
look after 35 of
Russell Mellon's
asset manager
Euan MacLaren and custodial
bank clients locat-
ed in Scotland, mainland Europe and
London. He will report to Anthony
Stevens, manager, Financial Institutions
Client Relationship Team. MacLaren
joins Russell/Mellon from State Street
Bank & Trust, where he was a client
92 INVESTOR SERVICES JOURNAL
relationship manager for the WM
Company, responsible for WM's US and
Far East business. This involved devel-
oping relationships, business retention
ment organisations and pension funds.
Joseph Marchal has been appointed as
CEO and head of Japanese Equities at
Instinet Japan Limited, the institutional
broker. Marchal joins Instinet with over
19 years experience in the Japanese
equity business. Most recently he held
the position of
managing direc-
tor for Deutsche
Securities Limited
(D.S.L.), a divi-
sion of Deutsche
Bank where he
was responsible
for managing the
Japanese Equity
Sales Trading
operation in
Joseph Marchal
Tokyo, London
and New York. Marchal will report to
Tony Mackay, head of International
Equities, Instinet Europe.
Refco Alternative Investments, LLC
(RAI), the alternative asset management
division of REFCO Group, has appoint-
ed Jan de Smedt as vice president,
Senior European Sales. De Smedt is
based in London and will oversee the
distribution of alternative investment
products both directly, with European
institutional investors, and through the
continued development and expansion
of strategic alliances with selected distri-
bution partners in Europe.
Jukka Ruuska, president of the OMX
Exchanges division and as of January 1,
2005, also president of the Stockholm
Stock Exchange, has decided to tem-
porarily leave his position as Executive
Vice President and deputy CEO of OMX.
No new deputy CEO will be appointed.
“We are currently carrying out an
overview of our company to see how we
could organize ourselves in a way that
supports our aim to increase confidence
in the securities market in the best way.
Pending the results of this overview, I
have decided to step down from my
position as deputy CEO of OMX in
order to avoid any risk of conflict of
interests that my triple role as head of
OMX Exchanges, head of Stockholm
Stock Exchange and deputy CEO of
OMX potentially entails,” said Ruuska.
Peter Sami has been named the new
CEO of SIS Swiss Financial Services
Group AG. Sami replaces Heinz
Haeberli, who announced his intention
to retire as of the general meeting in
May 2005. Sami will assume his new
position on 1
January 2005. To
ensure a smooth
transition,
Haeberli will
assist him in his
duties until the
SIS general meet-
ing of May 2005.
Haeberli ends a
twenty-year
Peter Sami tenure at the
helm of SIS
Group. Sami’s credentials include bank-
ing, risk management and the set-up
and implementation of SIS x-clear.
The Bank of New York appointed Mark
Snowdon to the role of Head of Custody
Sales within the European Investor
Services division. In this role he is
responsible for developing the global
and domestic custody sales business
for clients based in Europe, Africa and
the Middle East. He reports to Richard
Beaven, Managing Director of European
Investor Services. Snowdon joins from
Clearstream Banking where he worked
for six years. His final role was as
Relationship Director and Senior Sales
Manager responsible for Global
Custodians and Universal Banks. Prior
to his time at Clearstream Snowdon
spent ten years at Barclays, in Global
Securities Services, Corporate Banking
and Risk Management.
The Bank of New York has also appoint-
ed Paul Traynor as managing director

and client executive for UK investment
managers from IBM Consulting. He will
be based in London, and will report to
Ian Hards, head of UK fund managers.
Traynor joins from IBM Consulting
where he had responsibility for UK
investment management consulting fol-
lowing the merger of the consulting
businesses of PriceWaterhouseCoopers
(PwC) and IBM.
Interactive Technologies Europe Ltd, a
wholly owned subsidiary of Interactive
Technologies Inc. and creator of special-
ist fee billing software, has appointed
Terry McCaughey as senior advisor.
McCaughey will advise Interactive
Technologies on matters of strategy and
business development concentrating
initially on the European market. He is
best known as the former Head of
Global Investor Services at HSBC,
where he oversaw the development of
the global custody and fund administra-
tion business. Since then he has held a
number of senior roles and currently
advises a number of major groups.
These include Citisoft, Omgeo, Invest
Northern Ireland and COR-FS Limited.
He is also a director of the Securities
and Investment Institute.
Northern Trust has appointed Kevin
Hogan and Martin Travers to its Dublin
Operations team. Hogan joins as Head
of Fund Accounting Operations and
Travers becomes Head of Shareholder
Services Operations. Hogan, who joins
from State Street
International
Ireland, is prima-
rily responsible
for the net asset
value production
process and for
fund financial
reporting.
Travers, who
comes from Tasc
Kevin Hogan Administration,
the fund adminis-
tration arm of Sanlam, will oversee all
aspects of Northern Trust’s transfer
agency capabilities in Ireland. Both
People Moves
report to Meliosa O’Caoimh, Head of Prior to that, Duffain was Head of Client
Operations in Dublin. Service Europe at JP Morgan
Northern Trust Global Investments Investment Management. She will
(NTGI), the investment management report to Nigel Meir, Head of
arm of Northern Trust, has reorganised Institutional Sales and Distribution, UK
its securities lending team with the and Scandinavia, and will be based in
appointment of Sunil Daswani, who is the company’s London office. Duffain’s
re-locating from London, to lead the role will see her take responsibility for
Hong Kong team. investment consultant relationships and
Daswani, who joined NTGI in London in represent the group’s activities and
2002, becomes regional manager for product offering to investment consult-
Securities ants throughout Europe.
Lending in Asia.
His appointment JPMorgan Investor Services announces
is part of the today it is expanding its full-service out-
development of sourcing for managed account adminis-
NTGI's broader tration team with the appointment of
Asia strategy, Steve Boyle as Director of Managed
which includes Account Operations and Brett Rainey as
initiatives for Vice President of Managed Account
NTGI’s Operations. Based in Brooklyn, New York,
Commission Boyle is responsible for developing and
Ed Oliver Recapture, directing the operational infrastructure
Transition supporting JPMorgan's managed account
Management, Quantitative servicing platform. With more than 20
Management, Manager of Managers years of financial services experience,
and Active Equity and Fixed Income Boyle spent the previous seven years as
Management businesses. Following Director of Operations for Bear Stearns'
Daswani's move, Ed Oliver has been managed account program. Prior to that,
promoted to Senior Product Manager, he served for three years as Director of
Securities Lending, in London. In a fur- Operations at an asset management firm.
ther move, NTGI has appointed Kate Brett Rainey is located in Boston,
Lander as Massachusetts. In his new role, Rainey is
Product Manager, responsible for the operations that sup-
Securities port the firm's managed account busi-
Lending in ness and will work closely with Steve
London. Lander Boyle. He brings considerable knowledge
comes to NTGI to JPMorgan, including his tenure at MFS
from 7City Investment Management, where he
Learning Limited helped establish the operations depart-
where she was ment for their new managed account
Director of CFA servicing team.
Programs. Both
Kate Lander Oliver and Helge Forfang has been appointed chief
Lander report to risk officer and head of the new risk man-
Richard Bartholomew, Head of Product agement unit at DnBNOR in Norway. Up
Management in London. till now, deputy CEO Tom Grøndahl has
held overall responsibility for risk man-
Kerry Duffain has joined Pioneer agement. Grøndahl will now take on the
Investments as Head of Investment group strategy, group development,
Consultant Relations in Europe. Duffain investment division, legal department
joins from Citigroup Asset Management and the group secretartiat functions of
where she was Head of Consultant deputy CEO Karl-Olav Hovden, who has
Relations EMEA for almost three years. retired after 31 years of employment.
INVESTOR SERVICES JOURNAL 93
ISJ Directory of Services Custody, Clearing & Settlement
BHF-BANK is one of the leading German commercial banks which operates as an
advisory, service and commercial bank on the areas of Asset Management &
Financial Services, Financial Markets & Corporates and Private Banking. Financial T: +49 69 718 3738
Services comprises the bank’s custody services, investment company (depotbank) F: +49 69 718 6050
services and its securities and derivatives clearing business.
Through the combination of its local market know-how with an in-depth product Contact: Cornelia Keth
expertise it aims to serve its clients in an individual and flexible way. The bank’s E: cornelia.keth@bhf-bank.com
longstanding experience in the German securities services market goes hand Address: Strahlenbergerstraße
in hand with a corporate culture that values prompt acknowledgements and short 45; 63067 Offenbach a.Main
decision-making channels. W: www.bhf-bank.com
Assets under Custody: EUR 160 bn
No of funds: 244

Crédit Agricole Investor Services is the Securities and Financial Services arm of
the Crédit Agricole Group, providing a whole range of products and services to
institutional clients including Depositary/Custody/Trustee, Fund Administration,
and Corporate Trust. Innovation, technology, local expertise and strong T: + 33 1 43 23 84 68
commitment to clients enable our European network to be a leading player in the Contact: Patrick Lemuet (Paris)
European industry and to excel in servicing Institutional Investors, Banks and T: + 352 47 67 24 13
Corporate clients. Our position in the market place is reinforced by a strong local
presence, particularly demonstrated by the specialised subsidiaries, set up in Contact: José-Benjamin
Paris, Luxembourg and Dublin. The Group also operates a European network of Longrée (Luxembourg)
fund administration centres, the Fastnet network, with local operations in
Luxembourg, France, Ireland, the Netherlands and Belgium. The Fastnet network
is a joint venture with the Fortis Group.
Assets under Custody: EUR 616 bn

DnB NOR is the largest and leading provider of Custody, Clearing and
T: +47 22 94 92 95
Remote Member Service in Norway In addition, DnB NOR provides a wide
F: +47 22 48 28 46
range of value added services to both Foreign and Domestic clients.
Contact: Bente I. Hoem
Through an Alliance solution with banks in Sweden, Finland and Denmark,
E: bente.hoem@dnbnor.no
DnB NOR can offer seamless regional products, which can be customized to
our indiviual client's needs.
W: www.dnbnor.com

Nordea is one of the leading financial services group in the Nordic and Baltic Sea
T: +47 22 48 4544
region and operates through three business areas: Retail Banking, Corporate and
Contact: Ms. Oda M. Myklebust
Institutional Banking and Asset Management & Life. The largest financial services
Head of Client Relations
group in the region with approximately EUR 262 billion in total assets. A world-lead-
E: oda.m.myklebust@nordea.com
ing Internet banking and e-commerce operation with 3.8 million customers.
W: www.nordea.com
Assets under Custody: EUR 360 bn

RBC Global Services is the corporate and institutional custody arm of RBC Financial T: +44 (0) 20 7653 4095
Group. We are the largest global custodian in Canada and among the 10 largest in
F: +44 (0) 20 7248 3946
the world. We have been serving institutional investors for more than 100 years,
Contact: Tony Johnson
including 22 years in the global custody business.
Global Head, Sales &
RBC Global Services, along with RBC Global Private Banking, provides a broad range of
Relationship Management
value-added services and tailored solutions to institutional investors internationally.
E: antony.johnson@rbc.com
RBC provides the full range of fund administration and global custody services.
Assets under Administration: US$1.3 trillion Address: 71 Queen Victoria
Number of sub-custodians: 78 Street, London, EC4V 4DE, UK

As a leading supplier of custody services in the Nordic region, SEB Securities

Services expertise in dealing with securities, complex information flows, transactions
T: +46 8 763 5770
and payments efficiently and accurately is crucial to your own business methods -
F: +46 8 763 6930
and to your ability to make wise investment decisions.
Contact: Goran Fors
A blend of personal service, advanced communication solutions and IT systems
E: goran.fors@seb.se
means that SEB can provide you with the assistance you need in order to deal with
your securities in the most logical manner.
W: www.seb.se
Assets under Custody: US$ 200 bn

94 INVESTOR SERVICES JOURNAL

ISJ Directory of Services Securities Lending
eSecLending is a global securities lending manager servicing large institutional
T: US- +1 617 204 4500
lenders, including pension funds, mutual funds, insurance companies and T: UK- +44 (0)207 002 7600
investment managers. eSecLending's model is based on the premise that Contact: Dan Ahern
exclusive principal relationships generally offer greater value and significantly E: info@eseclending.com
higher returns to a lender than traditional custodial or third-party agency lending W: www.eseclending.com
programs. The firm, which has auctioned over $450 billion since inception, Addresses: 175 Federal Street,
awards principal business through an auction process to ensure greater 11th FL, Boston, MA 02110, US
competition and price transparency. eSecLending is majority-owned by Old Old Mutual Place, 2 Lambeth
Mutual plc and maintains offices in Boston, London and Burlington, Vermont.
Hill, London EC4V 4GG, UK

T: +41 (0)44 218 14 14

IFBS offers the financial industry a wide range of consulting services as well as F: +41 (0)44 218 14 18
individual and standard software solutions. The firm supports clients along the entire E: info@ifbs.com
security value chain - from business modelling to change management processes. Address: IFBS AG,
IFBS’s IT solutions range from FINACE®, a Securities Finance and Collateral Buckhauserstrasse 11,
Management Platform, to the development of tailor-made IT applications.
CH-8048 Zurich, Switzerland
W: www.ifbs.com

Technology
ADP Brokerage Services Group is an industry leading outsourcing vendor for global
transaction processing systems, desktop productivity applications and investor
communication services to banks and brokerages worldwide. T: +44 (0) 207 551 3000
-Proxy Edge – comprehensive solution for institutional global proxy voting management. E: info@bsg.adp.com
W: www.bsg.adp.com
-Gloss – leading international STP system which automates the trade processing
Address: The ISIS Building,
lifecycle from trade capture through confirmation, clearing agency 193 Marsh Wall, London,
reporting and settlement. E14 9SG, UK
-Tarot - a UK retail and private client stockbroking, custody and fund management solution.
-Securities Data Management – outsourced data services for securities operations.

FUNDsoft: With offices in London, Glasgow, Jersey and Luxembourg; FUNDsoft For more information visit
provides one of the most technically advanced Fund Administration platforms www.fundsoft.co.uk or call
available. The COBAS range of solutions are designed exclusively for Fund and T: 08702000443
Investment Managers, BPO providers and TPA’s. Various acquisition models are F: 020 7959 3030
offered covering the following areas; Mob: 07980912649
Contacts: Mark Culham,
Address: 288 Bishopsgate,
European Unit Trusts; Offshore Funds; PEP, ISA, OEIC & SIPP's; Pooled London, EC2M 4QP
Pensions; Property Funds; Fund of Funds; Multi Manager Funds; Wrappers; E: mark@fundsoft.co.uk
Fiduciary portal; Funds Automation; Funds Supermarkets; Reporting ; Hedge W: www.fundsoft.co.uk
Funds; Investment Trusts.

SimCorp Dimension is a powerful, comprehensive and truly seamless investment

management system. It can handle NAV and other calculations, with complete T: +44 (0) 20 7651 8800
related accounting, for a huge variety of fund structures and product types, includingF: +44 (0) 20 7651 8811
regional specialities. Support for broader functions, such as performance attribution Contact: Ian Crompton, sales
and risk management, are particular strengths of the system. director, SimCorp Dimension
E: ian.crompton@simcorp.co.uk
Address: SimCorp, 10 Walbrook,
SimCorp Dimension has been designed from scratch as a total straight through pro- London EC4N 8DQ
cessing system, handling all aspects of the investment management process, consis- W: www.simcorp.com
tently. Data is recorded into a single database so that reporting is made easy, there
is no reconciliation of data and no duplication of procedures.

Stock Exchanges
The Cayman Islands Stock Exchange has completed seven years of operation since T: 1.345.945.6060
its launch in 1997. It is now established as the offshore leader in hedge fund F: 1.345.945.6061
listings with substantial growth in this area over the past two years. The Exchange is Contacts: Valia Theodoraki, CEO,
a “recognised stock exchange” under the UK Inland Revenue Income and Richard Crawshaw, head of listings,
Corporation Taxes Act 1988. The CSX is an affiliate member of IOSCO and the Monique Melis, head of business
development
Intermarket Surveillance Group. The Exchange operates a true offshore market. The Address: Cayman Islands Stock
listing and membership rules have been designed to meet international standards as Exchange, 4th Floor Elizabethan
well as the needs of our specialist products. To date more than 800 securities have Square, PO Box 2408GT, Grand
listed on the Exchange, primarily mutual and hedge funds as well as specialist debt Cayman, Cayman Islands
securities and derivative warrants. W: www.csx.com.ky

96 INVESTOR SERVICES JOURNAL

Who can create a clear path to liquidity
in today’s fragmented market?

Nomura’s Global Equity Finance Group:

New York London Hong Kong Tokyo
+1 212 667 9586 +44 (0)20 7521 5672 +852 2536 1221 +813 3213 9601

Nomura International plc is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange.
 GLOBAL ORGANISERS OF INSTITUTIONAL FINANCE & INVESTMENT CONFERENCES

THE EIGHTH A NNUAL

WORLD CUP
OF INVESTMENT
M ANAGEMENT
28 February - 1 March 2005
Hotel Arts • Barcelona, Spain

IMN is pleased to announce the World Cup of Investment Management, which is In Association With
now in it’s eighth year, is once again producing a program addressing the most
critical issues relating to the institutional investor and pension fund industry.
This year, in conjunction with the Spanish Association of Employment Pension
Scheme (ACPEM), join more than 300 delegates for 2 days of networking and an Asociación Española de Comisiones de Control de
in-depth look at the most innovative approaches to both active and passive invest- Planes de Pensiones de Empleo The Spanish
Association of Employment Pension Scheme
ment management.
Hear from the most influential and insightful leaders from the largest funds in Europe. Co-lead Sponsors

Snapshot of Plans that joined us last year include:

Ahorra Corporation Gestion Comision De Control Fondo Inarcassa

Pensiones Empleados Platinum Sponsors
AP3 KBC Pension Fund
APK Versicherung Compagnia Di San Paolo La Caixa
ATP Endesa S.A Nestle Espana
Banesto Banca Privada Fachverband der Pension Danmark Gold Sponsors
Gestion Osterreichischen
PME (Pension Fund for the
BankPension Pensionskassen
Metal Industry)
BBVA Privanza Portugal Fonditel Railways Pension Fund Exhibitors
CAIFOR Fondo Pensione IBM Stichting Pensioenfonds HAL
Caixa Penedes Pensions French Pension Reserve Fund West Midlands Authorities
Central Bank of Norway IAPF Pension Fund

For More Information, Please Visit: E m a i l : mail@imn.org

Call: +1-212-768-2800 Ext. 1
www.imn.org/etm717/isjm/ F ax: +1-212-768-2484