KAS BANK clearing specialist on Euronext Paris
KAS BANK is the first General Clearing Member of Euronext that is able to provide clients of the three underlying Euronext exchanges with its services from one portal instead of from three different connections. KAS BANK commenced its clearing and settlement services on Euronext Paris in November, after successfully completing a pilot phase with securities broker Eduard de Graaff. Euronext members can now trade on all three Euronext exchanges and have their positions cleared and settled using KAS BANK as their General Clearing Member. As from February 2002, KAS BANK can provide all its clients in Europe and outside Europe with this service. In the coming months, KAS BANK will conduct several pilots in order to gain further experience in the French infrastructure. Due to its highly automated services, KAS BANK can provide this service without any further increase in costs.KAS BANK now offers its clients one clearing and settlement protocol for the Euronext exchanges in Amsterdam, Brussels and Paris. In connection with this, KAS BANK introduces its new, automated collateral system; clients can now reduce costs by using their collateral surplus for other liabilities. Aside from these expansions, KAS BANK also provides one uniform reporting structure for the three Euronext markets. Expectations are that clients will have a better insight into the increased transaction volumes and turnover around the first quarter of 2002.
For Global Custodian article on KAS BANK (previously KAS Associate) see “KAS’s Custody Niche Across the North Sea”, IT 2001.
ESF Members Vow to Battle On
Despite the exposure of its threat to build a European central counter-party (CCP) as a bluff, the European Securities Forum (ESF) has decided not to implement the sunset clause in its constitution. The clause, which would have wound up the ESF in April next year unless members decided otherwise, was overruled at a meeting on 30 November at which members renewed their “commitment to a pan-European capital market.” ESF is also promising “new arrangements to enhance the strength of its membership and the role of its own executive.”This is understood to mean the recruitment of senior investment bankers to the executive committee of the ESF; the establishment of a permanent secretariat; and especially the broadening of the membership of ESF to include non-investment banking interests such as fund managers, custodian banks securities depositories and especially the smaller players in various national markets. Details will emerge from a full meeting of members, which is now unlikely to be held before the New Year.Though an ESF spokesman describes broadening the membership categories into new areas as “pure speculation,” the step does reflect the relative failure of an investment bank-led ESF to mould the European securities market infrastructure in its own image. The promise to appoint more senior figures to the executive committee of the ESF recalls the embarrassing collapse of the ESF threat to build their own single European CCP if the London Clearing House (LCH), Clearnet and Eurex Clearing did not build one for them. At the meeting of the EuroCCP Working Group of the ESF on 28 June, the members simply refused to put up the money. As the minutes of that meeting put it, “there is a risk to the reputation of the industry if it appears to lose interest in a development for which it has lobbied the authorities … [a decision by ESF] to abandon its objectives it could damage its reputation and prospects for successful lobbying in the future.”Considered in that light, the decision to override the sunset clause was more or less inevitable. The chief focus of interest in European CCP developments today, of course, is the future of Clearstream – currently the subject of competing bids from Euroclear and Deutsche Borse. The ESF announcement today says the organisation “continues to believe strongly in a horizontal structure which separates the governance of clearing and settlement from trading platforms … It is important to maintain vigorous pressure for horizontal consolidation.” This puts ESF squarely in the Euroclear camp (whence it came, critics might say) in the battle for control of Clearstream between Deutsche Borse and the Brussels-based clearer. But ESF will also continue to lobby for the removal of the barriers to efficient cross-border clearing and settlement in Europe, itemised in the recently published Giovannini Group report.See Global Custodian Pre-Sibos issue Summer 2001 (“Three’s Company”, pages 42-47).
T+1 Conference At Toronto Stock Exchange
The Canadian Capital Markets Association (CCMA) is holding a half-day conference on December 12th at the Toronto Stock Exchange on the latest T+1 developments, including three white papers.Those who are interested in attending can now register to the T+1 workshop online. Just click on the following URL
Fintuition Extends Operations to New York
For the first time since its creation in 1996, Fintuition Ltd, the London-based specialist Securities Finance training company, is to offer its courses in North America. In 2002, Fintuition will be offering its Global Collateral Management course in February and its Equity Finance & Structured Products course in April with both courses being run for a second time in September. All the courses will take place in NYC and will be limited to 16 participants each.Alison Brooks, Managing Director, said “I am pleased to be bringing our specialist training courses to my home country and we are confident that the courses will be as well-received in the US as they have been in Europe”.Alison Brooks and Fred Gander from Dewey Ballantine will be course directors for the Equity Finance course and Christian Karg from JP Morgan in London will be director of the Global Collateral Management Course.
Full details of dates and on-line booking is available from
For further details please contact Jonathan Gollow, Business Development, Fintuition Ltd +44 (0)20 7388 6363 or
Kas Associatie N.V. Wins First Mandate
KAS Associatie N.V. has been awarded its first UK custody mandate by the GBP 145m Norwest Holst Group Staff Pension Scheme following its launch into the UK market earlier this year. Norwest Holst, part of VINCI, the world’s largest company in construction and related services, have appointed KAS to provide custody services to a UK Equity mandate managed by GMO Woolley Limited.KAS launched their custody services in the UK initially focussing on the smaller and medium sized pension fund market, an area many feel is under serviced in the UK. KAS does not impose any minima criteria business or fee levels.Ian Ratoff, Head of UK Institutional Investors said:”Launching into the UK has been a very exciting time for KAS and we are delighted that the Trustees of the Norwest Holst Group Staff Pension Scheme have chosen us to provide custodial services to their pension scheme. This mandate win supports our views that there is a real demand for custodians to service smaller and medium sized pension schemes which some players may ignore.”
See “KAS’s Custody Niche Across the North Sea”, pp 16-17, Global Custodian, IT Issue 2001.
Money Market Mutual Fund Assets January 3
Total money market mutual fund assets stood at $2.306 trillion for the week ended Wednesday, January 2, 2002, the Investment Company Institute reported today. Fund assets decreased $40.84 billion from a revised $2.347 trillion for the previous week ended Wednesday, December 26, 2001. The revision is due to data adjustments and a change in the number of funds reporting. Assets of Money Market Mutual Funds (billions of dollars) Retail: Assets of retail money market funds decreased by $7.75 billion to $1.088 trillion for the week ended Wednesday, January 2, 2002. Taxable money market fund assets in the retail category decreased by $7.36 billion to $896.85 billion; the tax-exempt fund assets decreased by $392.2 million to $191.33 billion. Institutional: Assets of institutional money market funds decreased by $33.09 billion to $1.218 trillion for the week ended Wednesday, January 2, 2002. Among institutional funds, taxable money market fund assets decreased by $32.62 billion to $1.133 trillion; the tax-exempt fund assets decreased by $466.7 million to $84.33 billion. ICI reports money market fund assets to the Federal Reserve each week. The Institute also provides other statistical reports
on investment companies, including monthly reports on five broad categories of mutual funds.
The Hennessee Hedge Fund Index Increases by 1.6% in December 2001
The Hennessee Hedge Fund Index increased by 1.6% in December 2001, bringing its year-to-date return to 4% net of fees, significantly outperforming most major US and international equity indices, but lagging Lehman’s bond index, which increased by 8.98% over the year. MORE at
Hedge Funds Still Outperform Global Equity Markets
Despite posting their worst performance since 1996, hedge funds still outperformed global equity markets, according to early data from Allenbridge Hedge Info – which estimates that single-manager funds rose 4% last year, while funds of funds gained 3.6%. MORE at
Delaware Mutual Funds Go For “eDelivery”
Shareholders of Delaware Investments’ mutual funds can now elect to receive fund materials electronically, rather than hardcopy. The new Delaware eDelivery allows shareholders to receive annual and semi-annual reports, statements, prospectuses and other documents online at
Hedge Funds Rocket in 2001
Hedge funds proved a better bet for investors in 2001 – with the average US hedge fund rising by 5.6% net of fees over the year, according to data from Van Hedge Fund Advisors International. Offshore hedge funds performed even better than their domestic counterparts, averaging a 7% net gain for the year.
More at http://www.plansponsor.com/eprise/main/PlanSponsor/News/Markets/VanHedge
Kirby Quits Bolero to Re-Join Reuters
The longstanding rumour that Tony Kirby, executive director of the Global Straight Through Processing Association (GSTPA) during its fund-raising stage, was poised to leave bolero.net – the faltering trade documentation standardisation project backed by SWIFT and the Through Transport Company – look set to be confirmed this coming Tuesday. Kirby takes up a new position as head of STP Marketing Activity at Reuters on 28 January. It means Kirby re-joins the firm at which he made his debut in the securities industry, before joining SWIFT and then the GSTPA. His job will presumably be to Forge better links between the Reuters information businesses and its transactional services. There is an obvious opportunity for Reuters to provide pricing and other data to the GSTP/axion4 and Omgeo virtual matching engines. At Bolero, Kirby was director of Global B2B services, and a member of the executive committee.
Also read an article in IT Issue of Global Custodian
The Electronic Trade Enablers
Deposits to Unit Investment Trusts Increase by $1 blon
Deposits to Unit Investment Trusts increased by $1 billion in October 2001, significantly below a year before when deposits were up $2.8 billion, according to figures compiled by the Investment Company Institute (ICI). Unit investment trusts, or UITs, are investment companies that purchase fixed portfolios of selected stocks or bonds. MORE at
Shock Horror: The Biggest Bank in the World is Japanese
Figures published today by Bankersalmanac.com include the surprising revelation that the Sumitomo Mitsui Banking Corporation, the top-rated agent bank in Japan in the 2001 Global Custodian survey of major markets, is now the biggest bank in the world. The Japanese bank, enlarged by the merger of Sumitomo and Sakura banks in April last year, sports total assets of over $905 billion. Deutsche Bank, which headed the leaguer table last year, is second with assets of $883 billion. Last time the table was drawn up, Sumitomo Mitsui did not even make the top ten.Another Japanese bank, Bank of Tokyo Mistsubishi, he Japanese triumph is vitiated by the possibility that many of the assets are in fact liabilities, in the shape of unresolved bad debts, and the fact that Sumitomo Mitsui must re-pay Yen 1.5 trillion borrowed from the government as part of its re-capitalisation programme. These considerations apply across the Japanese banking sector, whose combined assets of $7.9 trillion make Japan the biggest banking sector in the world, ahead of Germany ($6.5 trillion) and the United States ($4.6 trillion). Interestingly, the top ten in the Bankersalmanac.com league table includes only one American bank: Bank of America. The other seven are all European.
Top Ten World Banks
Bank Assets (US$m)
|Sumitomo Mitsui Banking Corporation|
|Deutsche Bank AG|
|Bayerische Hypo und Vereinsbank AG|
|BNP Paribas SA|
|Bank of Tokyo Mitsubishi Ltd|
|Credit Suisse Group|
|Bank of America NA|
|ABN Amro Holding NV|
Scripless Securities Clearing and Settlement Infrastructure
SEC will allow the creation of a scripless securities clearing and settlement infrastructure for the commercial paper market if additional safety nets are created. On the condition that additional safety nets are created to ensure transparency, the Securities and Exchange Commission (SEC) said it will allow the creation of a scripless securities clearing and settlement infrastructure for the commercial paper (CP) market. Following a joint presentation made by the Investment Houses Association of the Philippines (IHAP) and the Philippine Central Depository (PCD), the corporate regulator approved in principle the proposed scripless securities settlement of CPs. SEC chairperson, Lilia R. Bautista, noted that while the commission expresses no objection to the proposed system, it will ask the proponents to submit regular and detailed reports on the issuers and the investors that go through the scripless system. IHAP and PCD said the SEC’s endorsement would encourage financial institutions and investors to use the proposed system for outstanding CP issues. Under the proposal, PCD will create the book entry system, providing participants with individual accounts constituting each participant’s CP holdings for one or more issues.
Also refer to Rick Butler’s “Squeaky Wheels”, Global Custodian, Fall 2001
on inadequate settlement infrastructure for European commercial paper market.
Financial Times Group Launches Fund Ratings Service For Investors
The Financial Times Group today launched FT Fund Ratings, a new service designed to help investors compare and understand more about funds. FT Fund Ratings is a major advance in the information available to private investors. It offers incisive information about fund risks, clear assessment of fund charges and improved comparison of fund performance. The monthly updated service provides consistent information on 25,000 funds from across Europe, allowing direct comparison of funds from different markets.A summary of the FT Fund Ratings for the main UK and offshore funds including those in ISAs, PEPs and pensions will be published in the Financial Times from February and is available now at
A full analysis of funds is being supplied by the FT to Fund Managers, IFAs and Fund Supermarkets for publication and internal analysis. Stephen Hill, chief executive of the Financial Times Group commented: “With the growing number of funds available, and the current turbulence in global stock markets, FT Fund Ratings will provide an easy to use guide to risk, charges and performance. FT Fund Ratings builds on our global reputation for impartial financial information by offering independent analysis from a source that is trusted by investors and professionalsalike. ” “This unique ratings approach from the FT Group will be the only fund analysis service to focus on three key criteria for investors in one system, examining the ISA, pension and PEP markets in a thorough yet easily comprehensible format.”FT Fund Ratings allows investors to identify the risks associated with funds and provides a transparent guide to fund charges, giving the individual investor a better understanding of their fund portfolio. Christine Farnish, Consumer Relations Director at the Financial Services Authority’s (FSA) commented: “The FSA actively encourages initiatives that seek to enhance the transparency and accessibility of financial products. We therefore welcome this initiative and shall watch developments with the greatest of interest.”FT Fund Ratings have been produced in conjunction with Fitzrovia International, Advanced Portfolio Technologies and FT Interactive Data.
India Announces NationWide Funds Transfer Network
The Indian authorities have begun work on eliminating the biggest single barrier to making a success of rolling settlement on T + 3, scheduled to start in April this year. It was announced today that eFunds Corporation will be working with Logica to create a Real Time Gross Settlement (RTGS) for the Reserve Bank of India (RBI) which will allow banks in India to make secure inter-bank payments throughout the country. At the moment, the RBI is the only institution capable of transferring same-day funds around the country electronically. In addition, Logica and eFunds will be working onm a new core banking system to cover all general transactions and central accounting at the RBI, including the bank’s general ledger. eFunds Corporation (Nasdaq: EFDS), a leading provider of electronic payment, risk management and related information technology and business process improvement services, will provide technical expertise and functional support to Logica in the implementation of the RTGS project. It will also perform work relating to the porting of Logica’s RTGS software onto a mainframe platform and help Logica develop a real-time accounting and settlement system for RBI. Logica’s Quaestor product suite will be supplied to 205 Indian financial institutions to enable their direct participation in the RTGS system.Also read on www.globalcustodian.com an article by Dominic Hobson
India Set to Adopt Rolling DvP on T +3
European Repo Market Worth Euros 2.3 Trillion Says ISMA
The value of repo contracts outstanding in Europe at the close of business on 12 December 2001 was Euros 2,298 billion, according to the second of the biannual surveys of the European repo market carried out by Richard Comotto on behalf of the International Securities Market Association (ISMA). This is 23 per cent upon the Euros 1,863 billion identified in the first survey in June last hear.However, the figure needs to be treated with caution. First, 55 banks responded to the December survey, against 48 in the June equivalent. Secondly, 11 of the banks which participated in the first survey failed to contribute data to the second, either because they were unable to provide any or because they submitted it too late. Thirdly, despite this, the authors of the report have added the value of the contracts outstanding at the eleven banks in June to the total for December. This certainly led to an under-estimate of the size of the market at the end of last year, since the value of contracts outstanding with banks which contributed data to both surveys rose by 13 per cent (or 28 per cent compound) in the second half of 2001. Fourthly, although the survey undoubtedly includes all of the major European banks active in the European repo market, and measures cross-border activity fairly accurately, it is impossible to say what proportion of the total market is covered by the 66 banks, not least because its insights into purely domestic repo are relatively limited. Fifthly, the survey measures only the value of cash and securities on the books of respondents at the close of business on one particular day, and gives no sense of the volume of business being done in the market day by day. Which means there is also an element of double-counting, with the two banks on different sides of the same deal both reporting it.In effect, the survey has done no more than put a floor on the total size of the European repo market, creating a base from which its future growth can be calculated. Indeed, the 11 missing banks are excluded from the detailed analysis of currencies and counter-parties which accompanies the December survey results. The survey also confirms anecdotal evidence about how the market works, but without spotting emergent trends. It tells the market little, for example, about the types of collateral now being financed. It shows that the bulk of collateral was issued in euro-zone countries (78.3 per cent) and that Germany (35.7 per cent), Italy (19.2 per cent) and the United Kingdom (11.2 per cent) are the three biggest sources. It also shows that 90 per cent of the collateral in outstanding transactions consisted of government bonds. But the split between government bonds, other types of fixed income and equity or baskets of collateral was not investigated. “Within individual countries it varies a lot,” explains Richard Comotto, the former Bank of England official and ISMA Centre Fellow who is the chief author of the study. “In the smaller European countries, government collateral can be quite a small proportion of the overall total. In Denmark, for example, there is a large non-government debt market, representing mainly mortgage-backed securities. In Germany, we also isolated Pfandbrief as a category. That is as far as we have gone. But of the 9 to 10 per cent of collateral which is not government bonds, I am not sure a huge proportion of that is equity.” Better understanding of equity repo in Europe awaits the conclusion of a working group of the European Repo Council, which is looking at the market. “I see more banks being interested in the product, but it will take some time before it becomes a substantial market,” says Godfried De Vidts, Associate Money Market Product Manager at Fortis Financial Markets in Brussels and chairman of the European Repo Council. “It is a difficult market because you have dividends and corporate actions. Even the custodians are struggling with those issues, so it is not easy for the repo market to advance in equity either.”Likewise, the survey shows a modest shift from fixed to floating rates on cash advanced in repo transactions. This probably reflects no more than a higher level of participation in the survey by banks from France, where floating rates are popular. Similarly, the survey confirms that French and British counter-parties favour documented deals (81.9 percent of all outstanding contracts were documented at the end of December, mainly GMRAs) while Germans and southern Europeans are still happy with spot sales and forward re-purchases (9.1 percent of outstandings were undocumented sell/buybacks). But this probably exaggerates the degree of documentation, simply because the survey sample is biased towards north rather than south Europe. So it is obvious that more research and greater participation by banks -particularly in countries such as Spain and Italy – are needed before market authorities and participants have a clear idea of the true size and inner workings of the European repo market. Clearly, the publication of a biannual survey is intended to encourage precisely that participation. Both De Vidts and Comotto say it is already having that effect. But in the meantime, there are dangers that the data will be over-interpreted. Until the data series has a record spanning years rather than months, there is certainly a risk of attaching unwarranted significance to short term fluctuations. For example, the survey picked up a significant shift since June in the maturity profile of outstanding repo contracts: seven day-one month contracts were up from 17.5 per cent to 23.5 per cent and those over six months from 10.7 per cent to 17.3 per cent. This probably reflects no more than a stronger year-end appetite at banks to lock in funding over the holiday season, though it may also reflect equally short-term bets on the future course of interest rates. Since firms always fret about tying up collateral for long periods, this shift to longer maturities is likely to have unwound itself by the time the June 2002 survey is competed. However, plans by the European Repo Council to encourage a “forward forward” market in general collateral via the electronic trading platforms by applying full rights of substitution may deepen the longer-dated repo market in Europe. This may in turn encourage the development of futures and options on repo rates.Despite its limitations, the survey has already produced data robust enough to draw some firm conclusions about how the European market is actually working.-Tri-Party Repo Has Yet to Take Off. Tri-party accounted for only 5.7 per cent of outstanding repo contracts. The volumes agreed bi-laterally or (39 per cent) and through voice brokers (40.1 per cent) were seven times as large, and even dealing through electronic trading platforms such as BrokerTec, Eurex and Euro MTS (15.2 per cent) was significantly higher. This suggests repo tri-party agents are still struggling to convince Europeans of the virtues of a product which plays a highly significant role in the repo market in the United States, despite lengthening maturities (to which tri-party is well-suited) and claims that it was the chief source of dollar liquidity in the wake of September 11. The absence of data on equity and basket repo (to which tri-party is also well-suited) also means the survey is unable to confirm the supposition that fixed income repo is unlikely ever to abandon bi-lateralism. The hopes of tri-party agents are now invested in Basle II encouraging European banks to switch from unsecured to secured lending. An as yet unpublished survey by the European Central Bank is said to bear this out. The Argentinian crisis is already encouraging the Spanish banks in particular to look harder at secured lending.-Electronic Repo Trading Is On the Increase. The volume of business passing through electronic trading platforms such as BrokerTec and Euro MTS has nearly doubled since June, rising from 8.1 per cent of outstanding contracts in June to 15.2 per cent in December. Predictably, this has come mainly at the expense of voice-brokered business – which is down by an eighth to 40.1 per cent in the last six months – rather than direct bi-lateral business. If counter-party anonymity is anything to go by, BrokerTec is winning the battle, since 8.7 per cent of the 15.2 per cent was anonymous, and out of the three platforms only BrokerTec and Eurex Repo have the central counter-party (CCP) needed to guarantee anonymity – and, by common consent, the LCH-owned RepoClear is garnering the bulk of the business. Anonymous trading is at nearly twice the level it was in June (4.6 per cent). It is a reasonable deduction that the 6.5 per cent of electronic trades settled without anonymity are passing through Euro MTS, though the lack of Italian banks participating in the survey makes it hard to judge. But is a reasonable conclusion that repo trading will grow fastest where it is anonymous, especially across borders, because it eliminates the credit constraint. -Repo Desks are Becoming Collateral Management Desks. Though the survey measured a decline in securities lending as a proportion of total business on repo desks from 17.4 per cent in June to 14.6 per cent in December, the latest results on a larger base do confirm the increasingly willingness of the banks to regard repo and securities lending and borrowing as more or less interchangeable. This broader and better integrated approach will also entrench the repo desk at Continental European banks, where it remains a relatively novel idea.But if the data is comprehensive enough to allow these conclusions to be drawn, its compilers freely admit its shortcomings. “We originally started collecting far more data than we ended up with,” admits Godfried de Vidts. “We have had to balance the need to obtain new material against the strain that would be put on banks’ back offices and IT departments in helping to get the data together. If we had asked for too much, it might have prevented banks taking part.” He adds that the survey has forced banks to prepare data series they have never considered important before, sharpening their thinking about how they can best manage their collateral.The survey series was prompted not only by the natural interest of market participants but also by calls from the Securities Settlement and Money Market Working Groups of the European Central Bank for more accurate statistics on repo transactions in Europe which fall outside the open market operations of the central banks themselves. Central bank repo figures are of course published separately by the European central banks. A proper estimate of the size of the repo market in Europe would need to add the market and central bank figures together.ISMA’s European repo market survey December 2001 is available
Custody Revenues Set to Fall Again
Figures from Combinaed Actuarial Performance (CAPS) presage another dent in the ad valorem earnings of custody banks. According to CAPS, the average balanced pension fund had a second year of falling returns in 2001, down 11.9 per cent. This is the first time there have been two negative years in a row since 1973/74. While equities, globally, produced double-digit negative returns, fixed income (3.0%) and property (5.6%) provided some solace with positive returns.
Small comfort from UK outperformance
UK Equities recovered in the fourth quarter of 2001, but this was not sufficient to reverse the losses of the earlier part of the year. However, with the UK Equity Standard median for the year at -13.1%, compared to the FTSE All-Share return of -13.3%, just over half the funds in the survey beat the index after fees. The relative results for funds in the UK Smaller Companies section were even more encouraging with a median of -14.5% compared to the index of -16.9%.Overseas Equity funds provided the biggest disappointment with a median of -16.8% compared to the index return of -14.1%. This was due to funds favouring European investment over North America, which performed relatively better.
More risk, less return
For the five years ending 31 December 2001, returns on UK and Overseas Equities were 7.3% and 9.4% pa respectively. Five years ago, the same figures were 16.1% and 12.1% pa. While equity returns have been considerably lower recently, volatility levels have nearly doubled. Tracking errors for many actively managed UK Equity and Balanced funds have increased substantially in recent five-year periods. In contrast, risk on fixed income and property has declined while their returns have improved relatively.This volatility in the markets has reduced the number of funds managing to outperform their section median in each of the last five years. In the equity and balanced sections, it is rare for more than one fund to have achieved this.
Allocation to fixed income increases
Over the year, Fixed Income weightings in Balanced funds rose from 12.5% to 13.6%. Despite this increase, allocation to fixed income still remains below its 1998 peak of 15.6%. Cash fell from 6.6% to 4.7%, while Property allocations hardly changed at 1.1% at the year end.Average equity weightings in Balanced funds increased over the year, from 79.6% to 80.3%. This is surprising, given the relatively poor performance of equity markets. Within this, average holdings in UK Equities fell, from 54.0% to 53.3%, while the allocation to Overseas Equities increased from 25.6% to 27.0%.While the allocation to Overseas, as opposed to UK Equities, is increasing, the proportion invested in Europe has declined recently. Three years ago, Europe represented 60% of Overseas Equity allocation. This has now fallen to 42%. In addition, European Equity allocation within Pan European (UK plus Continental) Equity funds has fallen over the last 18 months. CAPS Pooled Pension Fund Database covers the largest and most representative sample available to the trustees of UK pension funds. We currently cover 83 separate asset managers who manage over 199 billion in pooled funds, both balanced and specialist.
DTCC Moves Into Insurance Distribution
Following its success in transforming mutual fund distribution with Fund/SERV, the DTCC announced it is looking to work the same magic with insurance products. It has joined forces with ACCORD (The Association for Cooperative Operations Research and Development) to streamline communications between insurers and insurance distributors. The partners say they will help give the industry the tools allowing distributors to market, sell and process insurance products with the same ease and speed they do with other financial instruments such as stocks, bonds and mutual funds. This is referred to as the “mainstreaming” of insurance products.With this agreement, DTCC and ACORD will work toward the development of a set of common data standards that all sectors of the annuity and life insurance industry can use for exchanging product and sale information and for providing money settlement in the process.ACORD is the insurance industry’s leading standards organization. DTCC, through its clearing corporation subsidiary’s Insurance Processing Service (IPS), provides an automated, centralized system that electronically links insurance carriers with broker/dealers, banks, and financial planners for the exchange of information and money settlement during the sale and support of variable- and fixed-rate annuities and life insurance products.The first undertaking of ACORD and DTCC this year will be the completion of the “Product Profile” standard. “Product Profile” will allow insurance carriers, distributors and vendors to share product information, via IPS, by using a standard format.”Annuity and life insurance comprise a vital part of the financial services community, and we are glad to be working with DTCC on this important initiative,” said Gregory A. Maciag, CEO and president, ACORD. “Together ACORD and DTCC will provide the leadership needed to drive industry efforts toward standardization and automation in the annuity and life insurance fields.””At DTCC, we welcome the opportunity to work with ACORD,” said Marc Reiser, vice president, DTCC’s Insurance Services. “We have built a strong relationship with ACORD during the past three years and have seen how the organization effectively leads industry efforts towards standardization.””This standardization is an important element in mainstreaming insurance products to the broker/dealer community and will help the insurance industry establish and maintain a competitive stance in the financial services marketplace,” Reiser added.Other near-term projects include expanding ACORD’s standards in the area of licensing and appointments and life applications. DTCC plans to expand functionality in both these areas and will work with ACORD to ensure that a completed standard is ready for the enhanced products.”There are a broad array of projects that ACORD and DTCC will begin working on in the near future, and we will be calling on our carriers, distributors, other standards organizations and vendors for their input and cooperation as we move ahead toward the standardization of data formats and processing,” said Reiser. “We know that that the ACORD partnership is the best, most efficient way to serve the industry and the best way to fuel the growth of the life insurance and annuities market.”
Fund/SERV story (Three’s Company) published in Global Custodian, Summer 2001
NBG/Alpha Bank Merger Off
The merger between the two leading indigenous agent banks in Greece is off. National Bank of Greece and Alpha Bank announced that it had become clear during merger negotiations that a common understanding was impossible on such issues as the operation of the new bank based on market criteria and the equality of the two parties; these points had constituted, from the outset, the basis for the merger of equal talks.The bank statement read: “Given the trust of its shareholders, the preference of its clients, the devotion and hard work of its staff, Alpha Bank will continue its autonomous and productive course conducted by the permanent values and principles which led it to become the largest bank of the private sector in Greece.”Also see Major Market Agent Bank Review 2001 results for Greece
Verticals versus Horizontals: Who Cares Who Wins?
Clearstream knew that its decision – made by the Cedel International board on December 7th (see news item
“Clearstream For Cedel’s Negotiations with Deutsche Brse”
) – to negotiate a merger with Deutsche Borse alone risked alienating the investment banks which have campaigned for a merger between the Luxembourg-based clearer and Euroclear. London-based investment bankers have huffed and puffed repeatedly that they would switch their business to force a merger if they did not get what they wanted by more reasonable means. On 10 January JP Morgan Chase made good on that threat. The bank confirmed that it intended to shift assets worth $150 billion from Clearstream to Euroclear, and that Tom Swayne had resigned his seat on the board of the Luxembourg-based ICSD. The bank made clear that its decision was a protest at the decision by Clearstream to enter exclusive negotiations with Deutsche Borse, with a view to creating a vertically integrated business combining a trading platform, a central counter-party and a depository. “JP Morgan Chase supports a horizontal solution to the clearance and infrastructure question, while Deutsche Borse advocates a vertical solution,” read an official statement from JP Morgan Chase.On 21 January it emerged that UBS was also threatening to move its business across the Ardennes. The threat was less explicit than that issued by JP Morgan Chase, since its realisation depends on the outcome of the merger talks between Deutsche Borse and Clearstream, but the implication was obvious enough. “UBS AG supports the horizontal approach to European capital markets, including separation of ownership and control of clearing and settlement from exchanges,” it read. “We were disappointed that the Board of Clearstream decided to terminate merger discussions with Euroclear and pursue exclusive merger talks with Deutsche Borse AG. Thus, UBS has indicated to Clearstream and Deutsche Borse that it intends to move some of its assets. UBS action is dependant in part on the outcome of the Clearstream/Deutsche Borse talks. UBS had constructive talks with Clearstream management yesterday. UBS believes this strategic decision is in the best interest of our customers, of our group, and of the capital markets in Europe.” But the threat had to be taken seriously by Clearstream. If UBS did defect, it would – following the decision of DKW to move its Bund business to Euroclear last year – mean that Barclays Capital is now the only major investment banking group to keep its business at Clearstream. “We constantly review our position in the light of market developments, as one would expect,” says the British bank, tersely. But exactly how much would it matter if even Barclays Capital was lost? Clearstream wants to keep the business, and spent a day trying to persuade UBS to stay. But it would not matter that much if they lost it. JP Morgan Chase and UBS are just two out of 2,500 clients. The Euros 150 billion JP Morgan Chase is taking away may seem a lot of money, but it is only 2 per cent of the Euros 7.4 trillion Clearstream has on its books. And JP Morgan Chase is not in a position to shift its German equity business from Clearstream Frankfurt anyway, since there is no alternative to using the German CSD. Likewise, UBS accounts for about 3 per cent of total assets at Clearstream. Moreover, it is easy to think of a number of large and influential German banks, such as Deutsche, Hypo Vereinsbank and (ironically) even Dresdner Bank, who might actually shift assets from Euroclear to Clearstream. Many smaller Continental banks, whose presence in the securities trading and financing arena is increasingly significant, are already closer to Clearstream than they ever will be to Euroclear. And however angry some London-based investment bankers feel, they will all have plenty of clients who remain happy to keep assets with Clearstream. So the JP Morgan Chase decision is at least premature – since Deutsche Borse has yet to table a formal offer to the Cedel International shareholders and is not obliged to do so until its exclusivity rights expire on 31 January – and may be relatively unimportant. UBS acknowledges that defecting now would be premature, and other banks are known to be postponing a reassessment of their relationship with Clearstream until the outcome of the talks with Deutsche Borse is known. Unsurprisingly, given the closeness of relations between Euroclear and JP Morgan (until 2000 Morgan operated the Euroclear system, trousering $250 million a year for its trouble), Clearstream senses its rival in Brussels has launched a dirty tricks campaign by encouraging bankers already close to its view of the world to make the merger with Deutsche Borse look unpopular or even unviable in the run-up to 31 January with a series of well-spaced defections. Certainly these would-be defectors would be more credible if they had agitated for Euroclear to make a killer bid for Clearstream in the weeks before Christmas. The Brussels-based clearer may have raised its bid ostentatiously at the last minute, but its mix of cash for the Deutsche Borse and stock for Cedel International shareholders was scarcely designed to wow the right 50 per cent at Clearstream.Clearstream can plausibly argue that the vertical versus horizontal dichotomy is over-simplistic anyway. The Euroclear case for a merger with Clearstream (and other CSDs) rests mainly on the elimination of multiple interfaces in the back offices of the major investment banks. But the bulge bracket banks are not the only trading and investing houses which matter in Europe. Smaller domestic players want to keep the local CSDs. The elimination of multiple interfaces also depends as much on consolidation per se as it does on the direction of the consolidation. And not only has Clearstream never said it opposes further consolidation of depositories in Europe, it can also point to the Euronext grouping (to which Euroclear is linked) as not hugely different to the vertical platform Deutsche Borse wants to build. In the short run, vertical integration will almost certainly deliver cost efficiencies faster than a long drawn-out process of horizontal integration, and in the long run competition is always and everywhere the best means of securing efficiency and low prices. No wonder vertical integration is not as counter-cultural as Euroclear and its investment banking friends pretend: it is common in Asia and was recently adopted by the Helsinki stock exchange in Finland. Nor is continuing competition between ICSDs necessarily a negative outcome. The recent study by the Centre for European Policy Studies concluded that a single European CSD – akin to the Depository Trust & Clearing Corporation (DTCC) in the United States – was “not necessarily cheaper than competing organisations.” A merger of ICSDs would certainly do nothing to improve efficiency in European equity clearing and settlement, where agent banks reign supreme. Given that the ICSDs cannot centralise the settlement of equity transactions (which remain overwhelmingly domestic) without alienating that army of smaller broker-dealers and fund managers in every market in Europe whose interest in cross-border business is minimal, the ICSDs are in reality offering European equity traders and investors no more than an alternative to agent banks as a way into domestic CSDs. They will rightly be tempted to stick with agent banks, who offer a broader range of asset servicing products than the ICSDs in markets where the cultural, habitual, regulatory, fiscal and legal barriers far outweigh the infrastructural as business inhibitors. As the politics of clearing and settlement in Europe heat up, it will become increasingly obvious that Euroclear is more popular in investment banking circles than it is among the agent banks. This could be a decisive factor in the outcome.
********************************************************************************************************************Comment:The underlying technologies required for improving settlement timings are broadly similar whatever the accounting deadlines imposed. The article does not recognize that maturing technology is a key part of this equation. Orchestrating web services is an inflection point in supply and value chain integration. This will reduce the technology costs significantly by separating the business analyst from dependence on the IT developer. CSDs and CCPs are important…the market infrastructure does need to evolve…but advances in technology are equally relevant. The underlying technology change is driven by a continual move towards more application integration to reduce back office costs – the difference since Y2K is that new web-based standards allow organizations to use one infrastructure for internal integration, integrating with external business partners and also connecting with customers. Y2K only made pre-existing systems compliant and the underlying process and systems change was limited to reduce overall project risk. Many organizations still have large client-server systems (albeit Y2K compliant) which need to be broken down into their constituent functionalities and exposed to the settlement flow. The new generation of XML Web Services enables older legacy systems to expose their services so that system replacement decisions can be made separately from infrastructure decisions (and settlement deadlines).
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Industry Experts’ Comments on Clearstream Drama
Record Flows in US Mutual Funds Says Lipper
Despite a slow December, a weak equity market and the events of September 11, a record amount of new money flowed into mutual funds in the United States in 2001 – some $434.5 billion of new cash inflows, in fact, according to Lipper. MORE at
$5.1 bn AIM Weingarten Fund Lead Manager to Be Replaced
AIM Capital Management says that Jonathan Schoolar will step down as lead manager on the $5.1 billion AIM Weingarten Fund and will be replaced by AIM veteran Lanny Sachnowitz. Ronald Sloan, lead manager of the AIM Mid Cap Equity Fund, will assume Sachnowitz’s duties on the AIM Charter Fund. The moves come just a week after Doug Fabian, editor of the Maverick Adviser newsletter, targeted both funds in the latest installment of his Lemon List of chronically poor-performing funds (see AIM Funds Turn Sour at
CalPERS Names Emerging Markets Managers
The California Public Employees’ Retirement System (CalPERS) has finally selected four investment firms to actively manage up to $1 billion of emerging market assets of the $147 billion fund. MORE at
Advantus Capital To Offer Limited Partnership Interests
Advantus Capital Management has formed Advantus Capital Partners Fund I, L.P., to offer $150-$250 million of limited partnership interests to qualified institutions and high net worth individuals. The fund invests as a limited partner in a diversified portfolio of venture capital, buy-out, and other private equity funds. MORE at
Morningstar Helps Find Portfolio Risk
Investors may know that some investment decisions are risky, but few probably know how to measure that risk or its effects on their portfolios.To help get that information, investors can now use a new free risk analysis tool released by Morningstar.Risk Analyzer helps determine which investments contribute to the investor’s risk and shows how to adjust the portfolio’s risk exposure.Risk Analyzer displays data on stock and mutual fund holdings within an investor’s portfolio. It illustrates how each holding contributes to overall portfolio risk. Mark Wright, Morningstar, Director of Tools and Portfolio Content, told
that financial advisors can also use Risk Analyzer when working with clients.
ETFs Jump 5.2% in December
GC.com: 1. Is Andersen Consulting right to argue that the case for T+1 in a bear market has yet to be made?2. Is the Andersen Consulting alternative of settlement on T+2 with same day trade confirmation a viable and effective step towards settlement on T+0?
Broad-based domestic equity ETF assets jumped to $71.77 billion at the end of December, compared to the $68.52 at the end of November, while domestic sector funds were up slightly to $8.2 billion from $7.74 billion a month earlier. Global funds were up to $3 billion from $2.58 billion over the period.The ICI report includes 35 broad-based domestic equity ETFs, 33 domestic sector focused funds, and 34 global ETFs.Statistics contained in the monthly ETF report have been obtained from information provided to ICI by ETFs. Trust-issued receipts, such as Holding Company Depository Receipts (HOLDRS), are not included in the report because registered investment companies do not issue them.
Industry Experts Comment on Clearstream Drama
GlobalCustodian.com: Are the threats this week by leading banks to switch business from Clearstream to Euroclear in protest at the failure to achieve a horizontal alignment of the two ICSDs a sufficient argument against the full vertical integration of Deutsche Borse and Clearstream?
John Gubert, HSBC:
The rationale for horizontal versus vertical structures is a commercial issue and not a polemic one. Horizontal structures enable the markets to build not for profit utilities with strong user based governance. They allow economies of scale both in management, staff and technology.Vertical structures that integrate trading, clearing and settlement, best typified by the proposed Deutsche Boerse model, seek to commingle the shareholder value driven world of the listed company with a monopoly arrangement post trade. Despite all promises that this monopoly will be benign, the fear is that it will be used to promote shareholder value at the expense of user interest.Were there multiple choice- and real choice- at all levels of the vertical structure, the market would be willing to see this model operate alongside others. But, at the moment, that choice is not really there except in the international bond activities of the ICSD’s.It is questionable whether user dislike for the vertical structure will lead to new thinking by Deutsche Boerse. Much may depend on shareholder reaction. Like all listed companies, the driver for strategy will be closely linked to the valuation placed on the company by the market. It will be interesting to establish whether others will follow the proposed moves of Chase and UBS. It is also, of course, possible that some clients may move the other way. The Chase and UBS thinking will, in part at least, have been driven by commercial realities. Scale gives fee discounts and they both have strong relationships with the two ICSD’s due to mergers. UBS was the Clearstream house as was Chase. J P Morgan was the Euroclear house as was Warburg. Consolidation could thus also be economically advantageous for the two houses.The news though undoubtedly poses problems for Clearstream. Losing two of ones top clients automatically weakens a company. It also will hit morale in Luxembourg. The converse is the case for Euroclear.It is that weakening of morale that is the key issue for users. Financially, earnings may suffer a glitch. But key staff retention remains the big issue for Clearstream management. Its top management has been decimated, the users and press have been critical of its culture (and its ethics) and now it faces up to the possible loss of two key non-executives on its board.The market will be concerned if this leads to further key person loss. Clearstream Luxembourg and Frankfurt are critical components of the market infrastructure. Performance degradation, perhaps due to loss of skill sets and focus, poses the greatest threat to market stability.Logic calls for consolidation in Europe. But consolidation must mean removal of layers of management, closure of facilities and consolidation of IT platforms. To date, there is little evidence of this happening. Fees in Europe need to reduce and reduce substantially. For the major holders of assets pay an exorbitant share of the costs of the big ICSD’s through ad valorem fees and non-competitive pricing of cash accounts. Holding a simple Eurobond is totally out of line with the equivalent cost for a domestic bond (CREST, for example, charges nothing). Cash balances are unremunerated and cash management tools complex. The ICSD’s and many in the market focus on the cost of a transaction. That serves well the high volume transaction houses. But for the non-broker dealers, the ICSD’s are a costly problem. And consolidation of infrastructure and user based governance must lead to fee cuts in those areas of excess charging and not just in the often quoted transaction fee. For that fee contributes perhaps around 15% of the ICSD’s gross income. Transaction cost cuts may provide useful headlines but they do little to tackle the issue of the total cost of our relationships with the ICSD’s.
1. It is very curious that several of the major firms who were pushing for a Clearstream / Euroclear merger on the grounds of “economies of scale” were the same firms who found it necessary to create the GSTPA o the grounds of “competition is good”.2. Vertical reintegration has really gathered pace in Asia and Australia in Hong Kong, Australia and Singapore. In those markets there is an absolute belief that the only way top achieve real economies and efficiencies is the total integration of the trading and settlement activities. This makes perfect sense and I predict that it is these markets that will leave Europe and the US embarrassingly behind by actually doing what is said cannot be done.
Paul Symons, Head of Retail and Public Affairs, CRESTCo Ltd:
“There appears to be very little support for vertical silos in Europe outside Germany. Although a vertical silo may appear to reduce costs in parts of the value chain, this will generally reflect cross-subsidisation of one activity (where there may be more competition – say in trading) by another. There is a markedly consistent view from all consumer levels that separate control of CSDs and trading platforms means that CSDs are best able to respond to consumer needs in respect of settlement. In particular, this is perceived as the best means of ensuring that access to settlement services is open and fair, and that tariffs are transparent.Of course we should not read too much into the decision by JPMorgan Chase and the public concerns of UBS. But two such high profile announcements so soon after DBAG’s intended purchase of Clearstream must demonstrate that customers do not see vertical silos as the settlement solution for an integrated European captal market.”
Another Market Infrastructure Expert:
“The clear answer, sadly, is “no”. However large and influential JP Morgan and UBS might be, their total holdings under Clearstream management are unlikely to be sufficient to cause terminal damage to Clearstream profitability. In some ways, their defection might even facilitate the absorption by Deutsche Brse on the grounds that this example of loss of confidence will dent the stated value of Clearstream, enabling a lower price to be paid by DB. I think I see two overriding issues. The first is that Clearstream will remain, unless stripped of the responsibility, the de jure CSD for German equities, which, given the enormous importance of the domestic marketplace in Germany, will ensure its survival, either independent or under DB management. The second is that those entities that have been crying out for consolidation at the settlement level have had their chance to respond to the opportunity, and have let it pass them by. Of course, the implicit right of veto enjoyed by DB did not make things any easier, but its existence was well understood in advance, and could ultimately have been overcome by a sufficiently attractive offer by Euroclear.Of itself, there is nothing wrong with vertical integration. It brings STP efficiency, it can bring lower cost, and it can enable unanimity of strategic direction. On the other hand, unless allied to horizontal segmentation of ownership, it also imposes lack of user choice, restriction of egress rights, lack of user focus, and opacity of pricing. This is clearly understood by the international participants in the European capital markets industry, but their voices have not yet been strong enough to counter the determination of the German marketplace to build and operate a vertical silo. Voices are not going to be enough; they will have to vote en-masse with their feet. The action of just two major international banks, whilst significant, is not going to achieve much. But it is a serious wake-up call.”
SWIFT Calm as Global Crossing Files for Chapter 11
Less than twelve months after SWIFT CEO Lennie Schrank inked the telecommunications out-sourcing deal, chosen partner Global Crossing has filed for protection from its creditors under Chapter 11 of the US bankruptcy code. The news caps a bad four months for the rumbustious Schrank, which began with the widely criticised last minute cancellation of the Sibos conference in Singapore. It comes only a few months after the cessation of hostilities between SWIFT and FIX Protocol Limited, with the two sides agreeing to work on a series of new messages to run on the joint network. Worse still, the Global Crossing contract was the flagship deal in the new partnership-based, Internet-driven, securities-focused strategy for SWIFT outlined by Schrank at Sibos in Sydney nearly four years ago. The decision to plump for a pure telecommunications provider such as Global Crossing surprised many at the time. In retrospect, talk of the competitive pricing of the Global Crossing bid to run both the new Internet Protocol network (SIPN) and the old SWIFT store-and-forward X.25 network suggested that it needed the traffic more than SWIFT needed the low prices. Certainly, the rejection of the obvious establishment candidate – the Equant/Reuters venture, Radianz – was one which owed more to competitive inhibitions (Reuters is in the data business) than financial considerations. Nor will Schrank be pleased to be reminded that the out-sourcing deal with Global Crossing including a cross-marketing agreement, in which SWIFT would push Global Crossing products and services to its members. “Is this risky?” asked Schrank at the time of the deal in February last year. “We don’t think so, and neither do our board or our auditors.”Today, Schrank is heading for the World Economic Forum, moved this year from Davos to New York. But SWIFT is anyway reluctant to add to the statements he posted on the SWIFT web site on 22 January and last night. These emphasise two points. The first is that that the security and continuity of the SWIFT messaging network is not at risk because the agreement with Global Crossing allows SWIFT to resume ownership and control of both the IP and the X25 network, and that SWIFT staff are still at the controls in both the Dutch and American SWIFT facilities anyway. SWIFT is also providing a back-up line for the minority of customers linked indirectly to SIPN via Global Crossing’s Frame Relay network. Secondly, SWIFT is emphasising that Global Crossing has a viable route out of its current financial crisis. Indeed, the purpose of Chapter 11 is to allow Global Crossing to continue its business while a financial restructuring is arranged. If the company can persuade holders of its $12 billion of bond and bank debt to write off some or all of their claims, Hutchison Whampoa Ltd and Singapore Technologies Telemedia Pte Ltd, the second biggest telecommunications company in Singapore, have agreed to inject $750 million of fresh equity into Global Crossing. But Global Crossing has until August to agree a financial restructuring – meaning SWIFT users could be facing months of uncertainty unless SWIFT exercises its option to resume ownership and control of its networks. Already, a number of unanswered questions have surfaced. Should SWIFT continue with the process of transferring operational responsibilities to Global Crossing? Won’t the prospective change of ownership interrupt that process? Can the chief rationale of the original deal – lower prices and a faster transition to the Internet – survive a period in Chapter 11? What do partners such as GSTP AG, CLS, CREST and EBA think? Has the news embarrassed FIX Protocol Limited, which only recently put an end to years of hostility towards SWIFT? How diligent was the due diligence carried out by the SWIFT executives who masterminded this deal? Why did SWIFT not choose a more established partner for such an important aspect of its services? Doubtless more awkward questions will emerge. In the meantime, Schrank is promising to keep SWIFT users informed of “further developments.”
– Dominic Hobson Executive Editor
Experts Comment on SWIFT-Global Crossing Affair
Radianz: We Would be Happy to Have SWIFT as a Customer
For more, read:
“SWIFT’s Technology Crossover”, Global Custodian Spring 2001
“Shooting the Messenger,” Global Custodian Fall 2001
SWIFT Sustains Its Assault on the Front Office
Experts Comment on SWIFT-Global Crossing Affair
Global Custodian: It emerged yesterday that Global Crossing, the telecommunications company to which SWIFT out-sourced its networks in February 2001, has filed for protection from its creditors under Chapter 11 of the US bankruptcy code. Do you think SWIFT took an unwarranted business risk in out-sourcing network provision (a) to this company and (b) to any company at all?
John Gubert, HSBC:
The adverse financial position of Global Crossing has been known for some time and SWIFT had a contingency plan in place well in advance of the event. They have advised of the steps they will be taking to ensure stability of the network and we have, at the current time, no reason to doubt that these will be effective.The decision to outsource its network was made for sound commercial reasons. SWIFT has, over the years, become much more than a network. In fact the network was a commodity with the value added being in the security, the messaging and, above all, the connectivity. The events around Global Crossing do highlight though the need to ensure the financial stability of one’s outsource partners. The entry into Chapter 11 of Global Crossing is symptomatic of the unprecedented malaise that has hit many telecommunications organisations.The reality is that SWIFT, as a major client of Global Crossing, will now have to consider how to work with the successor organisation. Given the critical nature of the network, it may have to examine whether it needs to consider added contingency arrangements. However, such contingency could be costly and it is unclear how effective it would be.SWIFT is required to ensure that its service offering is cost effective. It therefore is forced to look at ways of reducing the cost of the commodity component of its service.The reality is that the events around Global Crossing appear to be a problem for SWIFT but, in no way, a mission critical one. However, it does highlight the need for careful selection of partners, especially where there is no automatic alternative supplier available to replace the partners in the event of an unforeseen contingency.
It is very easy to be critical of SWIFT for a whole number of reasons not least of which was the SIBOS debacle last year referred to in the article. I could hardly be accused of being a great SWIFT fan myself. However, I find it hard to find fault with SWIFT in this instance. Its deal with Global Crossing was a surprise to many people because for the first time SWIFT were acting like a real company making real company decisions based on real company criteria. Criteria such as cost, speed to market, build or partner? The surprise was less about the decision itself and more about the organisation making it.For years SWIFT has been lambasted as slow, bureaucratic and out of touch with the real world and with good reason. There have been calls to restructure, realign, refocus and be responsive in the press, industry gatherings, even from the platform at SIBOS itself. The saying goes that you have to be careful what you ask for you might just get. SWIFT made the decision to outsource for all of the right reasons including speed to market and cost and most importantly it made a decision. Furthermore it appears to have put in place detailed contingency plans in the event of Global Crossing experiencing difficulties. It should be commended for all those reasons and not criticised. Whether SWIFT are liked or not, they are a key infrastructure player in the financial markets and at least for the time being their existence is very important.As to their choice of vendor, they are guilty of negligence. But then again only as much as Enron shareholders, BCCI depositors and tourists stranded at airports after their travel companies go bust. My hope coming out of this is that SWIFT continues to do these kinds of deals, as their reverting to their old ways would be too depressing to contemplate.
For more read
Radianz: We Would be Happy to Have SWIFT as a Customer
Deutsche Brse and Cedel Agree Acquisition Terms
Offer to value Clearstream at euro 3.2 billionDeutsche Brse will offer Cedel shareholders cash or shares
The Board of Cedel International and Deutsche Brse’s Management Board have agreed the terms of an offer to be made for the acquisition of Cedel and its 50 percent ownership in Clearstream by Deutsche Brse. The offer will be subject to an affirmative vote by a two-thirds majority of Cedel shareholders and to certain further conditions, including regulatory and Deutsche Brse’s Supervisory Board approval.Should Cedel shareholders accept the offer, Deutsche Brse will own 100 percent of Clearstream and would in due course liquidate Cedel. The offer will value Clearstream at euro 3.2 billion (2.76 billion US Dollar). Cedel shareholders will thus receive euro 1.6 billion plus an amount representing the net asset value of Cedel’s other assets, estimated at no less than euro 150 million. Shareholders of Cedel will have the choice to receive either cash or shares in Deutsche Brse, subject to an overall limit on the number of new Deutsche Brse shares to be issued. The acquisition of the remainder of Clearstream confirms Deutsche Brse’s position as the preeminent one-stop handling agent for the securities processing chain. The company will provide services and products throughout the securities industry beginning with trading and information products all the way through clearing and settlement. Increasing the level of integration will result in new product and service offerings at a faster rate thus creating value for the customers and shareholders alike.The combined entity will introduce a system of straight-through-processing and interoperability standards to European capital markets, open at each stage of the securities processing chain.The euro 3.2 billion valuation for Clearstream represents an expected multiple of approximately 20 times Clearstreams expected net earnings in 2002, before synergies and restructuring charges. The offer is expected to be initiated no later than 28 February, 2002 and will extend for six weeks. The transaction is expected to be in excess of 50 percent accretive to Deutsche Brse’s cash flow per share in the first full year of Deutsche Brse’s ownership and to be only marginally dilutive to its IAS net earnings. Deutsche Brse expects to achieve significant long term annual cost synergies in the areas of improved operational efficiency, coordination of IT project development and spending and other administrative costs. Immediate efforts to achieve synergies will focus on the reduction of external consultants and natural attrition. There are no plans for any compulsory staff reductions. In the longer term Deutsche Brse expects that the number of employees at Clearstream in Luxembourg will increase due to the anticipated growth of Clearstream.Deutsche Brse is committed to support Luxembourg as a financial center and Luxembourg will remain Clearstream’s headquarters location as well as the primary location for Clearstreams operations. The construction and relocation to Clearstreams new headquarters building will continue as planned.The management of Deutsche Brse and Clearstream will be integrated in a combined management team. Andr Roelants will remain CEO of Clearstream and will also join the Management Board of Deutsche Brse as its deputy CEO. A further member of Clearstream’s Group Executive Management will also be appointed to Deutsche Brse’s Management Board. Robert Douglass will continue as chairman of Clearstreams Board of Directors and it is anticipated that he will play a significant role in the new organisation. As soon as practicable, Deutsche Brse will recommend two new directors, to be agreed upon with Cedel and representing significant Clearstream customers, for election to Deutsche Brse’s Supervisory Board. Werner Seifert, CEO of Deutsche Brse, said: “When we announced the merger between Deutsche Brse Clearing and Cedel in 1999, we were on the threshold of creating something unique. Clearstream became the first clearinghouse of truly European scope. Today’s transaction puts us on an equally exciting threshold. By seamless cooperation between all our businesses, we can create the most efficient, lowest cost securities processing chain. Our service levels will increase and we will accelerate the introduction of new products and services across all our businesses.This is not the last step in the consolidation of European securities trading, clearing and settlement. Deutsche Brse is eager to consider cooperations, ventures, partnerships and acquisitions all along the chain: with other exchanges, CCPs, CSDs, ICSDs and even ventures with customers. From its inception, Clearstream has recognized the importance of customer input and corporate governance structures that build confidence for our market participants. As consolidation accelerates through the European securities industry, Deutsche Brse will continue to respect the importance of market participants and will operate in a manner that gives them the loudest voice in determining the future direction of the market’s development.” Robert Douglass, Chairman of Cedel, commented: “I am delighted that we have succeeded in striking a deal that is good for Cedel shareholders, for the customers of Clearstream, for its employees and for Luxembourg as a financial centre. It gives a proven management team greater opportunities to develop the business and pursue efficiency gains in what will continue to be an evolving and highly competitive European environment.” Clearstream CEO Andr Roelants added: “I have been strongly encouraged by the backing for this exciting, new stage in the development of Clearstream that has come from major users like Barclays, Citigroup and ING. This deal will enable Clearstream to extend its strong growth record and to make even bigger improvements to its highly competitive service offerings to the market. The quality and skills of our people are complementary to Deutsche Brse and will be very much needed to deliver the full benefits of this deal to our customers.”
Click here for
Details of the Offer
CIBC Mellon Wins Custody From TD Bank Financial Group
CIBC Mellon has acquired from TD Bank Financial Group its third party investment fund custody business and will be TD Bank’s primary supplier of internal custodial services. Terms of the transaction were not disclosed.”We see this transaction as delivering a tremendous amount of value to everyone involved,” said Thomas C. MacMillan, CIBC Mellon president and chief executive officer. “Clients currently receiving custodial services from TD Bank Financial Group will be introduced to an industry leading provider whose core business is custody services and whose operations are based on a strong client focus and best-in-class technology. In addition, clients will be able to maintain many of their relationships with TD Bank Financial Group staff members as offers of employment will be made to all TD employees associated with the institutional custody business that was sold.”This acquisition will result in CIBC Mellon increasing its custodial assets under administration by approximately C$75 billion, bringing its total assets under administration to about C$560 billion. In conjunction with CIBC Mellon’s acquisition of TD Bank Financial Group’s custody business, AGF Management Inc.’s wholly owned subsidiary, AdminSource, has acquired TD Bank Financial Group’s third party fund valuation and shareholder record keeping business. AGF is one of Canada’s premier mutual fund and wealth management companies. “CIBC Mellon clearly fit our criteria as a prospective purchaser of our custody business,” said Gerry O’Mahoney, TD Bank senior vice president, securities services. “They have a proven ability to meet our and our clients’ needs and will be providing significant opportunities for our employees who are joining their organization.”
For more on CIBC Mellon read
“Portrait of a Marriage”, Global Custodian, Summer 2001
DTCC, Pivot/Info-One Launch Automated Annuity Application System
A fully-automated annuity application processing system that represents a major advance for the insurance industry and promises to lower costs and speed the growth of the annuities market has been launched by The Depository Trust & Clearing Corporation (DTCC) and Pivot/Info-One.The system, using Pivot/Info-One’s InfoSource Solution and DTCC’s Insurance Processing Service (IPS), allows insurance representatives at various financial organizations, including broker/dealers and banks, to complete on-line annuity applications at their desks or even from a laptop in a customer’s home and pass them directly to the insurance carrier. This speeds the application, eliminates costly manual procedures and dramatically lowers processing costs. “This service brings us closer to mainstreaming insurance products by taking what was a time-consuming, paper-based, manual procedure – that could take days or even weeks to complete – and turning it into an automated process that can be completed within 24 hours,” said J. Randall Grespin, managing director for Distribution Services at DTCC.”It provides broker/dealers with the tools they need to sell and process annuities effectively and efficiently and creates an additional source of revenue for them,” said Grespin.Pivot/Info-One and IPS began processing annuity applications for First Union Securities in January, sending the completed applications to Hartford Life, Inc. More than 7,750 financial advisers at First Union will be equipped with the annuity applications technology.The InfoSource software walks a registered insurance representative through a logical series of choices, helping to ensure the accuracy of customer information throughout the sales process. It also houses all of the product and carrier-specific information needed to help make sure that the annuity contract is correct and that financial transactions are handled for all involved parties. The completed application is then sent through IPS to the carrier. Same-day money settlement is handled through the IPS money settlement system.DTCC’s IPS provides an automated, centralized system that electronically links insurance carriers with broker/dealers, banks, and financial planners for the exchange of information and money settlement during the sale and support of variable and fixed-rate annuities and life insurance products.”By utilizing our Web-based, front-end system in conjunction with IPS’ annuity processing, broker/dealers will discover how easy and fast it is to process an annuity,” said Lou Hensley, co-president, Pivot/Info-One. “This will certainly help fuel the growth of the annuity market.””At First Union, we anticipate this new system will help us transact more business with our current broker force and at the same time enable us to become efficient as we grow,” said Richard Randa, senior vice president of annuity marketing, First Union Securities. “By connecting to DTCC via InfoSource, the transaction will be totally automated and money settlement will be much easier.”In my opinion, this system will get more brokers to sell annuities because trades will be more transactional in nature, less confusing, and the system will allow broker/dealers to track all the annuity business they do,” Randa said.In addition to First Union, Pivot/Info-One will supply its front-end technology to the SunAmerica Financial Network, providing more than 13,000 registered representatives with the Web-based annuity processing system. SunAmerica is also an IPS client.
For more read
DTCC Moves Into Insurance Distribution
SEI Investments Reports Record Earnings Figures
SEI Investments, which distributes as well administers mutual funds on behalf of banks and fund managers, has defied falling equity markets to post record earnings figures. 2001 revenues are up 10 per cent to $658 million, and operating profits 24 per cent to $198 million. Assets under administration now total $257.9 billion, of which $77.5 billion are also under management.
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SEI Investments Press Release
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“SEI tries for the world”, Global Custodian, Fall 2001
Rumours That Cogent is For Sale Re-Surface
Rumours that AMP is keen to sell Cogent Investment Operations Limited have circulated ever since the Australian life company set up the separately branded fund administration subsidiary. Now they have re-surfaced, with Mellon Trust touted as the likeliest buyer. As a prospective buyer, the American bank is certainly a logical candidate. It has ambitions in fund administration, but an insufficiency of clients to achieve economies of scale, and Cogent has 140 billion of assets under administration. But are the Australians willing sellers? Cogent has been more successful than its inventors expected. It is generating revenues not far short of 100 million a year, with a portfolio of services aimed at the fund management niche from which it originally emerged way back in 1990 from the Henderson back office (as Henderson Investment Services). Obviously, two thirds of the assets in administration are in-house monies of its Australian parent. But Cogent has also picked up not only acquisitive and fast-growing UK fund managers such as Aberdeen Asset Managers but – by opening an operation in Luxembourg – also good European names such as Vontobel and Raffeissen. Its third-party business has grown faster than its internal business.The difficulty for Cogent is that it is competing for clients in a market stuffed with custodial competitors willing to give administration away in return for getting paid in other ways (such as securities lending). Against raw pricing considerations, Cogentesque arguments about custodial choice and unbundled best-of-breeds are not always as persuasive as they should be. Indeed, Cogent might well be advised to form a partnership with a particular custodian to plug this gap in its armoury, and no custodian likes partnerships better than Mellon. It is certainly known to have had conversations with custodians about working together to provide an integrated custody and fund administration service.But a healthy track record, and an obvious way out of a strategic dilemma, does not mean Cogent is not for sale. Inevitably, a decision to sell Cogent will owe more to the wider strategic ambitions and imperatives of AMP than it ever will to the senior management of Cogent.
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Consultant Report Blasts Antiquated UK Mutual Fund Industry
The sale and distribution of UK mutual fund is a festival of low-tech solutions, high overheads, data re-keying and poor customer service. Or so says a new report on the industry by consultants Cap Gemini Ernst & Young. At one level, this is a re-statement of the obvious – the director general of the Association of Unit Trusts and Investment Funds (AUTIF) admitted as long ago as 1996 that the mutual fund industry was “among the worst service providers in the world” – but the new report itemises just how bad things have remained despite this widespread realisation. It found that just one in fifty IFAs (who still dominate fund distribution in the UK) use extranets on a daily basis. Data arrives from fund managers in a jumble of formats, with different time stamps, making it impossible to provide clients with consolidated, up-t-date information. Most purchases and sales are still agreed over the telephone, and necessitate constant re-keying. A jumble of payment methods leads to days of wasted time as distributors try to reconcile their accounts with providers. The answer, predictably, is standardisation: of information exchange, transaction processing and payment methods. In short, the UK would benefit from a version of Fund/SERV, the DTCC service which has standardised communications between fund managers and fund distributors in the United States, and which Euroclear (with FundSettle) and Claerstream (with Vestima ) are looking to reproduce in Europe.
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Cap Gemini Ernst & Young Press Release
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“Three’s Company,” Global Custodian, Summer 2001
CSFB Counts Cost of Settling SEC IPO Investigations
CSFB announced today that it was putting aside US$100 million to fund the settlement reached with the Securities and Exchange Commission (SEC) and the National Association of Securities Dealers Regulation, Inc. (NASDR) over their investigation into IPO allocation practices at CSFB. It was alleged that CSFB brokers had demanded excessive commissions from hedge funds in exchange for higher allocations in hot IPOs.
(CSFB to Pay $100 million to Settle IPO Actions)
The figure is dwarfed by US$745 million CSFB is spending on restructuring costs, most of it (US$583 million) to shrink the head-count, including shedding the burden of the notorious guaranteed contracts given to hires by the previous CEO. Credit Suisse Group announced that it expects to report a net operating profit of approximately CHF 4.0 billion for 2001, and a net operating profit of approximately CHF 0.6 billion for the fourth quarter, excluding one-time charges at Credit Suisse First Boston and amortization of goodwill and acquired intangible assets after taxes. The Group expects a net profit of approximately CHF 1.6 billion for 2001, and a net loss of approximately CHF 0.8 billion for the fourth quarter. The one-time charges at Credit Suisse First Boston relate to the previously announced cost reduction initiatives and the settlement of the SEC’s and the NASDR’s investigations into certain IPO allocation practices, and aggregate approximately CHF 1.1 billion (USD 646 million) after taxes. The Group’s financial services, private banking, and asset management businesses continued to perform well and showed strong momentum in 2001.Based on preliminary results, Credit Suisse First Boston expects to report a net operating profit of approximately USD 338 million (CHF 570 million) for full year 2001, and a fourth quarter net operating loss of approximately USD 196 million (CHF 328 million), excluding the after-tax one-time charges of approximately USD 646 million (CHF 1.1 billion) and the after-tax amortization of goodwill and acquired intangible assets. Credit Suisse First Boston expects to report a net loss of approximately USD 961 million (CHF 1.6 billion) for full year 2001 and a net loss of approximately USD 1.0 billion (CHF 1.7 billion) for the fourth quarter.Excluding the after-tax one-time charges at Credit Suisse First Boston as well as the after-tax amortization of goodwill and acquired intangible assets, Credit Suisse Group expects to report a net operating profit of approximately CHF 4.0 billion for full year 2001 and a net operating profit of approximately CHF 0.6 billion for the fourth quarter. The Group expects to report a net profit of approximately CHF 1.6 billion for full year 2001, and a net loss of approximately CHF 0.8 billion for the fourth quarter.Lukas Mhlemann, Chairman and Chief Executive Officer of Credit Suisse Group, said: “Our preliminary results demonstrate the resiliency and strength of our financial services, private banking, and asset management businesses. Although some of the actions we took at Credit Suisse First Boston had a negative impact on our short-term financial results, they have allowed us to take great strides forward in enhancing the business unit’s competitiveness. Given the progress at Credit Suisse First Boston, all of our businesses are better positioned than ever to meet the challenges of a demanding market and capitalize on our many opportunities for growth.” John Mack, Chief Executive Officer of Credit Suisse First Boston, said: “While we still have much work to do, we made important progress at CSFB during 2001 bringing costs more in line with the market and our competitors, resolving outstanding regulatory matters and making our firm more competitive. Going forward, we remain intensely focused on enhancing profitability, creating a stronger, more unified culture and delivering a superior level of service to our clients worldwide. These are the critical steps necessary to achieve our ultimate goal of creating the world’s premier investment banking firm.”The pre-tax one-time charges at Credit Suisse First Boston totaling approximately USD 845 million (CHF 1.4 billion) are comprised of the following major items:- Charges of USD 745 million (CHF 1.3 billion) relating to restructuring in connection with the previously announced cost reduction initiatives. These charges increased by USD 95 million (CHF 161 million) over previously disclosed estimates due to incremental headcount reductions. Of these charges, approximately USD 583 million (CHF 985 million) relate to personnel costs (approximately 20% of which relate to guarantees and retention awards for fiscal years 2002 and 2003), approximately USD 103 million (CHF 174 million) relate to facilities, and approximately USD 59 million (CHF 100 million) primarily relate to exiting non-core businesses.- A provision of USD 100 million (CHF 169 million) for a settlement reached with the U.S. Securities and Exchange Commission (SEC) and the National Association of Securities Dealers Regulation, Inc. (NASDR) in respect of their investigations into certain IPO allocation practices. The cumulative tax benefit for these items is expected to amount to approximately USD 199 million (CHF 336 million), resulting in an after-tax impact of approximately USD 646 million (CHF 1.1 billion).Credit Suisse First Boston’s fourth quarter results were also significantly affected by weaker fixed income revenue, pre-tax losses of USD 213 million (CHF 360 million) related to Argentina, pre-tax losses of USD 126 million (CHF 213 million) related to Enron, and pre-tax private equity write-downs of USD 104 million (CHF 176 million).Credit Suisse First Boston’s results also reflect credit provisions – excluding Argentina and Enron – of USD 339 million (CHF 573 million) in the fourth quarter. The increase in provisions reflects deteriorating credit market conditions. Aggregate credit provisions for the full year 2001 total USD 718 million (CHF 1.2 billion).Credit Suisse Group’s other business units continued to perform well:- Credit Suisse Financial Services expects to report a 2001 net operating profit of approximately CHF 1.4 billion (approximately CHF 1.8 billion excluding losses stemming from the investments in its European Financial Services Initiative);- Credit Suisse Private Banking expects to report a 2001 net operating profit of approximately CHF 2.3 billion, and;- Credit Suisse Asset Management expects to report a 2001 net operating profit of approximately CHF 0.3 billion.The asset gathering businesses maintained strong growth momentum in 2001 with net new assets for the Group totaling approximately CHF 66.5 billion, of which Credit Suisse Private Banking contributed approximately CHF 33.1 billion.Thomas Wellauer, Chief Executive Officer of Credit Suisse Financial Services, said: “Credit Suisse Financial Services and Credit Suisse Private Banking performed well in the challenging environment. Thanks to the merging of the two business units, we have achieved a segmentation that is geared even more closely to the needs of our clients. This move also enables us to transfer the expertise available in Switzerland more effectively to our growth initiatives in Europe and to eliminate overlaps in support areas.”Overview of Expected Full Year 2001 Results Detailed results will be disclosed on March 12, 2002, with the Group’s 2001 year-end earnings announcement.Additional Information on Financial ReportingExcept as noted, the results referred to herein are prepared based on Swiss generally accepted accounting principles, which Credit Suisse Group uses for its quarterly and annual reporting.
Is Deutsche GSS Safe in The Hands of the Investment Bankers?
The first results announced by Deutsche Bank since it started reporting to GAAP standards were not flattering. Pre-tax income fell by Euros 5.1 billion to Euros 1.8 billion. EPS plunged from Euros 22 in 2000 to just Euros 0.27 last year. Return on capital was close to zero, after falling just short of 40 percent in 2000. A fall in gains from the sale of industrial holdings, some duff real estate and private equity investments, plus bad debts (Euros 500 million) and restructuring costs (Euros 200 million), account for most of the damage. But competitors in the securities services industry are wondering just how large a contribution the custody and fund administration divisions made to a truly dreadful year. Needless to say, the figures cannot be found in the official announcements. As part of the Global Transaction Bank (GTB), itself part of the Corporate and Investment Bank Group (CIB) – one of the two main divisions of Deutsche Bank – the results of the Global Securities Services division (GSS) are lost in the net revenues reported by CIB of Euros 17.4 billion.But if the equity trading desks and asset management arms took a hammering from falling market values- and they did – GSS must have suffered a double whammy, since its own earnings are based on a mixture of transaction-based and ad valorem fees. Indeed, GSS probably suffered a triple whammy if the haemorrhaging of accounts from the former Bankers Trust custody business in the United States and its WM fund administration arm in Edinburgh is taken into account. These losses are likely to have been offset by higher earnings from securities lending and cash management. The current best guess in the marketplace is that the custody and fund administration businesses made a net loss of Euros 250 million in 2001, partially offset by a good year in securities financing and cash management. Apparently, GSS is unaffected by the management reorganisation which accompanied the Deutsche Bank results. The reorganisation as a whole is generally being interpreted as giving the largely American investment bankers who run Global Markets (Anshu Jain), Global Equities (Kevin Parker), Corporate Finance (Michael Cohrs) and Asset Management (Michael Philipp) greater control over the strategy of the bank as a whole. Their views of GSS are unknown, if they have any. Although a German, Juergen Fitschen, remains in charge of the Global Transaction Bank, he is no longer a member of the slimmed-down Vorstand.
Tremont Advisers to Focuse On Hedge Fund Products
Alternative investment firm Tremont Advisers has hired John J. Hock as an SVP and Director of Institutional Sales, as the firm ramps up its focus on the delivery of hedge fund products to institutional customers, including pension funds, endowments, foundations – and the consultants who work with them. Hock joins Tremont from Alpha Investment Management.
First Republic Bank Acquires Remainder of LA Bond Firm
First Republic Bank on Friday decided to acquire the 82% of LA-based convertible bond manager Froley, Revy Investment Company it does not already own. Froley, Revy manages in excess of $2 billion in assets for public and corporate pension funds, insurance companies, endowments and foundations, high net worth individuals and broker/dealer managed account programs.
ING Pilgrim Securities New Value Funds
ING Pilgrim Securities has launched two new value funds, the ING MidCap Value Fund and ING SmallCap Value Fund, both of which are sub-advised by Brandes Investment Partners, L.P.
Global Crossing Accounting under SEC Investigation
Global Crossing, the telecommunications firm that recently filed for bankruptcy, now says that the SEC wants to investigate its accounting practices. At issue are 20-year contracts for telecommunications capacity, so-called indefeasible rights of use, or IRUs, which carriers frequently swap with one another. And yes, its auditor is Arthur Andersen.
For more on Global Crossing bancruptcy read
“SWIFT Calm as Global Crossing Files for Chapter 11”
“Experts Comment on SWIFT-Global Crossing Affair”
Global Crossing Clarifies Allegations of Unusual Accounting Practices
Global Crossing issued more details on previously reported allegations by a former employee regarding the company’s accounting practices.In August 2001, Global Crossing received a letter from Roy Olofson, who was at that time a vice president-finance of the company, raising concerns about certain accounting and financial reporting matters of Global Crossing and its subsidiary Asia Global Crossing. Mr. Olofson claimed that it was improper for the company to have reported pro forma values for cash revenue and adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) because the numbers are not measures of cash receipts or earnings and because the amounts were allegedly inflated by including amounts for which cash was not received or where there had been non-monetary exchanges of capacity.After a review of the letter and consultation with outside counsel, the company determined that the financial and reporting topics raised in the letter had been reviewed by its internal finance and accounting personnel and by Arthur Andersen in connection with the audit of the company’s annual financial statements and its review of the company’s interim financial statements. The company also determined that there had been appropriate disclosure in the company’s press releases and filings with the U.S.Securities and Exchange Commission (SEC) describing how the pro forma numbers were prepared and making it clear that this information should not be considered as an alternative to any measure of performance defined under GAAP (generally accepted accounting principles). The company also determined that there were reasons to question the motives of Mr. Olofson. Accordingly, no further action was taken in response to Mr. Olofson’s allegations.As disclosed in the company’s filings with the SEC, the company’s management has used recurring adjusted EBITDA to monitor compliance with the financial covenants contained in its debt instruments and to measure the performance and liquidity of its business segments. The company’s press releases and filings with the SEC have also disclosed the fact that the company has purchased significant amounts of assets from carriers who were also customers of the company. The disclosures have presented the amounts of cash received by the company and included in cash revenue and adjusted EBITDA, as well as the amounts of the cash commitments to those customers.Shortly after Mr. Olofson wrote to the company, and notwithstanding the fact that he was still an employee, the company received a letter from an attorney alleging that Mr. Olofson had been “constructively terminated” from his employment and therefore would no longer be reporting to work. Furthermore, the employee and his counsel demanded, as a condition to dropping his wrongful termination claim, an up-front multi-million dollar payment and a minimum seven figure annual cash compensation package for a five year period. After a review of this claim and consultation with outside counsel, the company concluded that this claim was without merit and refused to agree to this demand.Subsequently, Mr. Olofson’s attorney provided the company with a draft complaint which elaborated on the allegations expressed in the employee’s August 2001 letter and added an allegation that the company had delayed the announcement of a downward revision of its guidance for 2001 earnings because of recent stock transactions entered into by senior executives of the company. After a review of these additional allegations and consultation with outside counsel, the company concluded that the allegations were without merit.The company continued to refuse to agree to the employee’s multi-million dollar demand and, over the following months, the employee’s attorney gradually reduced his settlement demand to an amount representing less than one-tenth of the original demand. The company terminated the employee’s employment on November 30, 2001 in connection with a substantial reduction in its workforce.On January 18, 2002, the company received a letter from a different attorney for Mr. Olofson, attaching a revised draft of the initial complaint and containing renewed threats to commence an action for wrongful termination against the company and certain of its officers and directors unless a multi-million dollar payment was made by February 1, 2002. The company again refused to agree to this demand.Although the company had determined that the allegations made by Mr. Olofson were without merit and that the issues raised in his letter had been properly addressed in the company’s news releases and its filings with the SEC, the company’s January 28, 2002 bankruptcy filing and recent events not involving the company have created a heightened sensitivity to any alleged accounting improprieties. Accordingly, on January 28, 2002, the company first disclosed to Arthur Andersen the existence of Mr. Olofson’s letter and on January 29, 2002 provided a copy of the letter to Arthur Andersen. On January 29, 2002, the company also first disclosed the letter’s existence to the current members of the company’s audit committee and on January 30, 2002 provided copies to these individuals.The company has provided a copy of Mr. Olofson’s letter to the SEC and has received an inquiry from the SEC for the voluntary production of certain additional information regarding the issues raised in Mr. Olofson’s letter. The company is cooperating with the SEC in providing this information. Although the company continues to believe that Mr. Olofson’s motivations are questionable and continues to believe that its accounting and reporting are entirely appropriate, at the request of the company’s audit committee and Arthur Andersen, it has decided to form a special committee of independent directors, including members of its audit committee, to conduct a further review of the allegations made in the August 2001 letter and related draft complaints. The special committee will retain independent counsel and a firm of independent accountants other than Arthur Andersen to review the matter.
For more on Global Crossing bancruptcy read
“SWIFT Calm as Global Crossing Files for Chapter 11”
“Experts Comment on SWIFT-Global Crossing”
Ariel Capital Management Launches Premier Growth Fund
Ariel Capital Management has launched a new large cap growth offering, Ariel Premier Growth Fund. This fund, sub-advised by Lincoln Capital Management, will invest in the stocks of companies with market capitalizations that generally exceed $10 billion at the time of purchase.
Calvert Launches Short Duration Income Fund
Calvert has launched the Calvert Short Duration Income Fund, an actively managed short-term corporate bond fund that employs a relative value strategy to produce incremental income. Calvert Asset Management Company manages the Fund.
Mazama Offers Small-Mid Cap Growth Product
Mazama Capital Management has opened its Small-Mid Cap Growth separate account product to new institutional investors. The Small-Mid Cap Growth product is Mazama’s second product offering.
JP Morgan Chase Buys Investia Out of FundsHub
JP Morgan Chase has rescued the client-hungry FundsHub mutual fund distribution technology out-sourcing platform from failure by buying out its founders and injecting fresh capital. With just three clients, FundsHub was beginning to look like a hangover from the Dot Com bubble, but Morgan clearly believes that on-line fund supermarkets will become important enough to feed the bank’s European fund administration business with new clients for some years ahead. “This additional commitment to FundsHub is evidence of our continuing belief in the increasingly important role that funds supermarkets will play in Europe as open architecture becomes the norm”, says Mark Tennant. He adds, “Estimates from leading industry research companies suggest that funds supermarkets will be a very important method of fund distribution. One such survey, suggests that as much as 25% of net European inflow to funds will be via funds supermarkets by 2004″.”This buyout shows the commitment of JPMorgan and FundsHub’s management to the outsourcing route for fund supermarkets,” said Jonathan Meggs, Senior Partner at JPMorgan Partners. “Our investment reflects our strong belief that more and more financial services organisations will deploy FundsHub’s product to enable their customers to research and purchase investment funds via both existing and new sales distribution channels.” He adds, “The new funding arrangements will put FundsHub in a prime position to take advantage of the upturn in activity.”Mark Collier, Chairman and CEO of Investia, said: “With the creation of FundsHub and its subsequent acquisition by JPMorgan, we have achieved validation of the Investia technology in multiple territories, languages and regulatory environments. We anticipate further success going forward and we are delighted to be continuing as technology partner to FundsHub and JPMorgan.” But Mark Lund, CEO of FundsHub, sounds more relieved than upbeat: “This is a positive step forward for our business and will give a new focus and sense of independence for FundsHub after a remarkable year for the company. FundsHub’s recent milestones are proof that our concept of being an outsourced fund supermarket solutions provider works and we have been a strong survivor among the technology ventures. This new ownership structure will secure our future and ensure our success.”
Also read the following stories on FundsHub:
“Chase GIS dot-coms its future”, Global Custodian, Summer 2000
“A man for all seasons” Q& A with Mark Tennant, Global Custodian, Fall 2000
“An online hedge fund supermarket”, Global Custodian, Spring 2001
Montrusco Launches New Multi-Manager Hedge Fund
Montrusco Bolton Investments has launched the Montrusco Bolton Focus Global Fund Ltd., a new multi-manager hedge fund. According to the firm, the fund can qualify as a Canadian asset for investment purposes, and is expected to raise $100 million this year.
Allied Irish Custody Clients Reach for the Smelling Salts
Custodial clients of Allied Irish Bank, a commended provider in the Irish market in the Global Custodian agent bank review for several years, will be concerned about news today of the $750 million of losses racked up by a rogue trader. The sum is large enough to have brought the continuing independence of the bank into question, with a possible merger with Bank of Ireland now being mooted. Though – unlike Barings – the bank will survive, there will naturally be questions over the quality of management and controls at a bank which allowed an individual at an unexciting subsidiary such as Allfirst to run up exposures of this size in the foreign exchange market.Allied Irish Banks Plc said it lost $750 million after a trader in its Baltimore unit used bogus transactions to hide bad bets in the currency market. The Federal Bureau of Investigation is investigating reports of fraudulent trades at the bank’s Allfirst Financial Inc. unit, FBI officials in Baltimore said today. The company identified the trader as John Rusnak and said he couldn’t be located. Rusnak’s lawyer said his client is in Baltimore and no criminal charges have been filed.Shares of Ireland’s biggest bank plunged 17 percent, the steepest drop in more than 12 years. Allied Irish’s losses are the largest blamed on unauthorized trading since Sumitomo Corp.’s $2.6 billion in the copper market in 1996. That followed Nick Leeson’s $1.4 billion loss in derivatives trades during 1995 at Barings Plc, which his superiors failed to stop.
AIB catastrophe won’t be the last” Says Financial Compliance Specialist
STB Systems, specialists in financial compliance software, warns rogue traders will continue to damage banks around the world until investment is made in an inexpensive new technology. The company, which has advanced software systems that automate audit of data integrity, says systems are available today that could pick up reconciliation irregularities inherent in rogue trading before it gets out of hand.According to James Phillips, Business Development Director at UK-based STB, many banks must still be as exposed as AIB clearly were. “There is a way to detect non-compliant activity long before it’s a major problem,” said Phillips. “Since the Leeson case there has been huge investment in risk management technology and in regulatory pressure, yet many financial organisations clearly remain exposed to fraud or misstatement of financial condition.”STB’s software can interrogate any number of trading and accounting systems, reconcile positions, or other data that ought to match, and automatically alert management if they do not. Whilst in the AIB case it is too early to say what went wrong it is believed that fictitious option trades were used by the trader to offset failed foreign exchange transactions. If this is the case, then the software would be able to automatically check and immediately highlight anomalies between fictitious options data and non-existent balancing entries elsewhere – a process known as “continuous business audit”.”These software tools constantly sniff around inside a Bank’s systems and ring alarms if abnormal activity of is occurring,” added Phillips. “If trends change, profit centres are suddenly not profitable, or more fundamentally data in one system does not reconcile to another, systematic errors whether fraudulent or inadvertent are immediately flagged. This process could prevent a build up of rogue trading and protect financial institutions from the consequences of it.”The alternative to automated tools is hugely expensive manual auditing, says STB. “But often the manual audit comes far too late,” concluded Phillips.STB Systems Limited has provided automated financial compliance software for nine years. The company now holds a major share of the UK market for compliance and regulatory reporting solutions and has expanded into the rest of the world, quickly gaining leading positions from its operations in both New York and Hong Kong.STB software provides automated reporting for FSA-supervised firms, and is one of few to be recognised by the Bank of England for electronic reporting.
CalSTRS Issues Two Consultant RFPs
The $100 billion California State Teachers’ Retirement System (CalSTRS) fund is looking for consultants for a new governance structure in its alternative investment portfolio – which could total $12 billion by 2006, according to CalSTRS CIO Christopher Ailman. Two requests for proposals were issued February 8, with final filing dates of April 5. The RFPs are available on the CalSTRS Web site at
Hedge Funds Off to Good Start in 2002
The Average US Hedge Fund managed a 0.3% net gain in January, according to preliminary figures received by hedge fund advisory firm Van Hedge Fund Advisors International.Based on that return, January would be the fourth straight month of gains for hedge funds. And, if those estimates hold up, it would be the eighteenth month in the last two years that hedge funds have outperformed the S&P 500, according to Van Hedge.Over half of the hedge funds reporting so far were profitable last month, and over three-quarters beat the S&P 500, according to the report. Short Selling hedge funds were among the most successful in January as the ongoing Enron scandal spooked investors. Final January results for the Van Hedge Fund Indices, detailing the average performance for U.S., Offshore and Global hedge funds, by strategy, should be released later this month.
DTCC Attacks CEPS Report as “Misleading”
The ICSDs and would-be ICSD the Depository Trust and Clearing Corporation (DTCC) were never going to like The Securities Settlement Industry in the EU, the report published in December by the Centre for European Policy Studies (CEPS). After all, it attacks the very foundation of their strategy in western Europe: that settlement costs are extortionately expensive and can be redressed only by consolidation of ICSDS and CSDs. The CEPS report estimated that the post-netting costs of cross-border transaction settlement within the European Union are just 1.86 times those of the United States; that the domestic CSDs are as cost-efficient as the DTCC; and that the ICSDs are easily the most expensive part of the European securities clearing and settlement infrastructure. “A centralised agency,” concluded the report, “is thus not necessarily cheaper than competing organisations.”An internal analysis of the CEPS report by DTCC officials does not spare its authors any invective. It is variously described as “a conclusion in search of a rationale,” “flawed,” “skewed,” “inconsistent,” and “erroneous.” DTCC rightly points out that a narrow emphasis on transaction costs excludes other benefits of centralisation – such as more efficient collateral management – but the nub of its own criticism of the CEPS study is equally narrowly based. Indeed, the litany of complaint from the DTCC depends entirely on the assertion that the methodology of the CEPS report was mistaken in being based (crudely speaking) on total operating income divided by the number of transactions settled after netting. According to DTCC this results in the following distortions:-Too much of DTCC’s income is included in the numerator. DTCC says only 32 percent of its total operating income came from clearing and settling securities transactions.–Too few transactions are included in the denominator. DTCC says CEPS under-estimates the number of transactions processed by using post-netting figures only, because on the best days at DTCC netting reduces the number of trades proceeding to settlement by as much as 97 per cent.In fact, the CEPS analysts were alive to these problems. But they were forced to compare settlement costs rather than settlement fees in this way because the fee structures charged by the CSDs and ICSDs vary hugely both on paper and in practice, since fees are adjusted for transaction types and the volume of business transacted by particular clients. At the ICSDs in particular, fees are also distorted by cross-subsidisation, complicating the choice of users buying a package of services at a single price. In short, the data to make fee comparisons does not exist, and cannot be derived from what is published. The DTCC itself admits as much, griping that “unfortunately CEPS does not use this opportunity to encourage a move towards price transparency and more simple fee structures in Europe.” This seems a particularly unkind way of reading a study which highlights the opacity of CSD and ICSD fee structures in the most comprehensive way possible.Secondly, far from insisting that the pre-netting calculation is the only fair way of looking at the problem, CEPS presents figures on both a pre- and post-netting basis. It concedes that relative clearing and settlement costs in Europe are considerably higher (at 7.75 times US levels) on a pre-netting rather than a post-netting (1.86 times) basis. The CEPS study also points out that the pre-netting multiple fall significantly (to 4.35 times US levels) if the high-cost ICSDs are excluded from the calculation. On a post-netting basis, operating income per transaction is almost one-to-one with the DTCC (1.08 times US levels.) It is hard to avoid the conclusion that DTCC has over-reacted, and that it has over-reacted because it finds the CEPS report unhelpful to its own commercial ambitions in Europe. But, like its mimesis Euroclear, DTCC is a past master at cloaking those ambitions in the language of the disinterested public servant.
An Industry Expert Comments on CEPS Report
OECD Bullies Barbados Into Tax Deal
The attack on tax competition from offshore financial centres – orchestrated by the OECD on the absurd premise that competition in taxation, unlike competition in other spheres, is “harmful” – continues. It emerged today that Barbados, the most outspoken of the 35 financial centres on the OECD “black list” in its opposition to being pushed around by the tax-hungry governments of the developed world, had struck a deal in which it will disappear from the “black list.” A joint press release published today read as follows: “Following detailed discussions since the release of the 2001 Progress Report, Barbados and the OECD are pleased to announce that, for the reasons specified below, Barbados will not appear on the forthcoming list of uncooperative tax havens. These discussions have shown that Barbados has transparent tax and regulatory systems and has in place a mechanism that enables it to engage in effective exchange of information.”Barbados has long-standing information exchange arrangements with other countries, which are found by its treaty partners to operate in an effective manner. Barbados is also willing to enter into tax information exchange arrangements with those OECD Member countries with which it currently does not have such arrangements. Barbados has in place established procedures with respect to transparency. Moreover, recent legislative changes made by Barbados have enhanced the transparency of its tax and regulatory rules.”Both Barbados and the OECD acknowledge the importance of dialogue in addressing international tax issues. Barbados has played an important role in fostering such dialogue. Both parties look forward to a continuing and constructive dialogue on issues of mutual interest.”
DTCC Expands Its Service to the Mutual Fund Industry
National Securities Clearing Corporation, a subsidiary of The Depository Trust & Clearing Corporation, has launched a new Web-based service, Fund/SPEED, which has the capability to allow mutual fund companies to provide – in real time – customer account information to their distributors, including the growing financial planner and financial representative industry.Fund/SPEED is a dynamic, standardized electronic platform that acts as an information gateway through which fund companies can send and receive information from a nationally based network of reps and planners. Up until now, the only way financial representatives and planners could obtain information on their clients’ mutual fund transactions and portfolios was through manual methods – phone and fax – or through multiple fund or transfer agent systems. “It’s a slow and expensive process,” said Ann Bergin, managing director for Mutual Fund Services at NSCC. “What Fund/SPEED does is provide a ‘missing link,’ using automation and the Web to bring the mutual fund manufacturer and distributor closer together. The service will strategically help funds grow their business partnerships because it’s so much easier to reach more distributors.”Fund/SPEED is being launched in two phases. In the first, and current, phase, account inquiry information is being transmitted through this link. This information includes:customers’ financial history, such as purchases, redemptions, distributions, adjustments and other financial activity information;fund position summaries and details, such as the accounts owned by a shareholder, number of shares and market value, and registration information;money transfer instructions;contingent deferred sales charge information, for example, free shares, CDSC shares, percentages and hypothetical calculations;Rights of Accumulation/Letter of Intent information, including ROA total values and LOI contribution amounts and effective/expiration dates;pending transactions – transactions that a fund has not posted into an account, and information identifying these transactions. With Fund/SPEED, which uses Extensible Markup Language (XML) as its Web-based interface, financial reps and planners can request information on multiple funds in a customer’s portfolio through their distributor, such as a broker/dealer firm, or through a service provider which, in either case, must be an NSCC member. That firm forwards the request to Fund/SPEED, and Fund/SPEED then distributes the request to all the funds automatically. The information is then channeled back from the funds through Fund/SPEED, to the service provider or broker/dealer and, ultimately, to the reps and planners. Currently, more than 50 fund companies are participating in Fund/SPEED. The first service provider to develop a link to Fund/SPEED is AdvisorCentral, LLC, a joint venture among Putnam Investments, Franklin Templeton, Fidelity, and PFPC Inc. “Along with other fund companies, we have jointly planned for an industry standard service like Fund/SPEED,” explained Kenneth Rathgeber, executive vice president and chief operating officer at Fidelity Investments Institutional Services (FIIS). “We now have the important capability to tie financial planners and the funds together directly in a more automated way. This is an opportunity to standardize the process for requesting and supplying account level information between FIIS and our distribution partners, while reducing costs and increasing operating efficiencies at the same time.”In the second stage of the service’s rollout, scheduled for later this year, Fund/SPEED will allow for further automated information exchange between funds and reps and planners. Using the Fund/SPEED link, reps and planners will be able to send fund purchase, redemption and exchange orders to NSCC’s members for routing – through Fund/SPEED – into NSCC’s Fund/SERV system, where the orders will be processed. (Fund/SERV is the industry standard for centralized, automated mutual fund order entry and settlement.) Actual settlement, however, will be completed outside the clearing corporation process, by the distributors and funds directly. This may be done through the Automated Clearinghouse (ACH), or through any other means they may agree upon.Membership RequirementsFinancial reps and planners can link to Fund/SPEED’s inquiry functionality through their distributors that are settling members of NSCC. For those distributors that are not NSCC members, NSCC has developed a new Data Services Only (DSO) Member category that does not carry the same capital requirements that a settling member must meet. DSO members are eligible to access only certain data and information services of NSCC and are not permitted to settle any transactions through NSCC’s facilities.
For more on DTCC read:
“Three’s Company”, Global Custodian, Summer 2001,
DTCC Moves Into Insurance Distribution
Daniel V. Szemis Leaves the Firm for Hedge Fund
Daniel V. Szemis, who ran Merrill Lynch’s $2.8 billion Small Cap Value Fund since 1996, has left the firm to work at a hedge fund, according to Reuters. Elise Baum, who joined Merrill Lynch Investment Managers in 1993 – and is already a portfolio manager of the Merrill Lynch Mid-Cap Value Fund and Merrill Lynch Global Technology Fund, will replace him. Baum took over the latter in mid-December after fund manager Paul Meeks left Merrill Lynch.
Real Assets Unveils Fund for Social Leaders
Real Assets Investment Management Inc. unveiled its Social Leaders Fund, which invests in companies committed to environmental and social improvements.According to Real Assets, the targeted companies demonstrate the financial benefits of strong social leadership through their progressive policies, practices, products and services. To date, the Social Leaders Fund has invested in 25 companies from Canada, the US and abroad. It will eventually hold up to 50 companies. Some of the names held by the fund include:Cisco Systems, which offered its laid off employees the option of working for a non-profit organization for one year with Cisco paying a third of the worker’s salary and the workers’ health benefits and stock options, Fannie Mae, which was named in 1999 by Working Mother magazine as among the ten best workplaces for working mothers, and Whole Foods, which was chosen as one of the 100 Best Corporate Citizen by Business Ethics magazine in 2001.
McM Funds Renamed McMorgan Funds
From now on, McM Funds will be known as McMorgan Funds.The funds in the family include: McMorgan Equity Investment Fund, McMorgan Balanced Fund, McMorgan Fixed Income Fund, McMorgan Intermediate Fixed Income Fund, and McMorgan Principal Preservation FundThe name change was made to reflect the fact that McMorgan & Company portfolio managers have been investing the fund family’s assets since 1969, according to the company.
Cerulli Report Details Italian Mutual Funds Opportunity
Italy, one of the hottest markets in mutual fund investment and administration in Europe today, is the subject of a new study by Boston-based fund analysts Cerulli Associates. According to the report, Italy now accounts for one sixth of the European mutual fund marketplace by value. ” It’s also one of Europe’s fastest-changing marketplaces, as new trends in distribution begin to redefine the landscape for both domestic and foreign fund management firms,” says Cerulli.Trends in the Italian Asset Management Marketplace analyzes how these trends are creating new opportunities for fund management firms. The report examines how sales networks have positioned themselves to reclaim lost distribution power, offering more opportunities for fund managers to gain access to Italian customers. A survey of Italian fund distributors measures their growing influence over access to the Italian market by foreign fund managers. Cerulli also examine Italy’s gestioni patrimoniali in fondi (GPF) marketplace, which it says could eventually represent a mutual fund wrap-fee marketplace larger than that of the United States, and become a sizeable force in mutual fund distribution throughout the southern European region.The report also contains growth projections for Italian mutual funds and the country’s new supplementary pension system, and rehearses arguments as to why the Italian marketplace, while now growing at a more sedate rate, still represents a valuable opportunity for fund managers throughout the world. A full table of the contents of the report, which sells for $12,000, is available in
Adobe PDF format here
Now LSE Lays Into CEPS and Giovannini Reports
The case for the consolidation of the European clearing and settlement infrastructure used to rest on a lie: that settlement in Europe costs ten times what it does in the United States. Now it rests on statistics. Any hope that that cost comparisons published by Centre for European Policy Studies (CEPS) in its December report – The Securities Settlement Industry in the EU: Structure, Costs and the Way Forward – would settle the argument we sadly misplaced. Now people can argue about whether the figures are right. The London Stock Exchange (LSE) has weighed into the dispute over the CEPS calculations in the guise of a response to Cross Border Clearing and Settlement Arrangements in The European Union, the first report of a group of experts chaired by the Italian economist Alberto Giovannini, who is engaged in a semi-permanent consultancy to the Competition Directorate of the European Commission, which is in turn engaged in identifying the barriers to the emergence of a single European capital market. What matters here is that Giovannini relied on the CEPS data, and the LSE does not believe the think tank got its calculations right.The LSE document is a curious confection. Its chief complaint is that Giovannini not only uses the wrong numbers but compares the wrong things. First, Giovannini and CEPS compare the costs of European CSDs with ICSDs, when it should be comparing the costs of CSDs plus ICSDs with the DTCC, so that the total costs of operating a fragmented European capital market can be compared with the total costs of operating an integrated American capital market. Secondly, Giovannini and CEPS compare intra-system costs in European CSDs with the DTCC, which the LSE judges irrelevant to understanding the main problem: the costs to market participants of the fragmented infrastructure. Thirdly, Giovannini and CEPS compare transaction costs post- rather than pre-netting, when US netting performance is so far ahead of any market in Europe (save Italy) that the costs of netting transactions distort cost comparisons to the point that they are highly misleading unless netting costs are stripped out of the calculation. Fourthly, says the LSE, post-netting transaction costs yield plenty of (misleading) information about the relative efficiency of providers but nothing about the costs paid by the end-users of the European capital market – institutional investors and issuers – to whom netting is irrelevant. But which are of course the customers of the LSE. By comparing the Euroclear estimate of the direct costs of cross-border settlement through an ICSD (4 per cent of the total) with its own estimate of the direct cost savings of a single European CSD (Euros 1.6 billion) the LSE even speculates that end-users investing across borders in Europe might easily be paying Euros 40 billion a year more than they should in transaction costs.Dividing one highly contentious estimate by one as obviously self-serving as that of Euroclear is perhaps the point at which the LSE makes the purpose of its response to Giovannini plain, for it soon becomes obvious that the submission as a whole is a piece of advocacy rather than an investigation. The CEPS report does make comparisons with the United States, for example, whether or not the LSE things its methodology was sound. The CEPS report also concedes that European pre-netting transaction costs are 7.75 times higher than in the United States, against only 1.86 times post-netting, irrespective of the distortions LSE says are occasioned by a failure to take account of the costs of netting. But then fairness is not what the LSE is after. In this debate, it is a far from disinterested party in the debate about the future structure of clearing and settlement in Europe. This sense of searching for the evidence to support a case crops up constantly in the all of the main arguments of the LSE document:-No Valid Comparison with the DTCC. The Exchange gripes that the Giovannini approach of comparing the costs of CSDs and ICSDs in Europe is insufficient, and that only comparing the costs of CSDs plus ICSDs with the DTCC will yield a proper comparison the operational transaction costs of an integrated capital market (the US) and a fragmented one (Europe). Which is a fair point – but one addressed in detail by both the LSE itself (in conjunction with consultants OXERA) nine months ago and more recently in the report from the Centre for European Policy Studies (CEPS). The LSE seems to resent Giovannini’s preference for the CEPS data over its own on grounds of wider coverage. It says its own submission to the European Commission in June 2001 remains “the only serious attempt” to measure the direct costs of a fragmented clearing and settlement infrastructure in Europe and compare them with the DTCC (it put the potential savings to European market participants at Euros 1.6 billion on 2000 figures). This work is ostentatiously expanded and updated in this latest submission, but in ways which make it seem parti pris. LSE admits CEPS used the same methodology as its own effort, and concedes that the data collection problems mentioned by CEPS are insurmountable, but then lards its revised work with extra costs not only by insisting on measuring transaction costs pre-netting but by including additional sums spent in non-transactional areas (such as custody). So it is hard to know quite what to make of the LSE re-working of its DTCC and European cost comparisons. Inevitably, they discover that operating income in Europe is 5.2 times (“nearly six times,” thunders the LSE) that of the DTCC and operating expenditure per transaction 3.7 times that of the DTCC. So it is hard to avoid the conclusion that these figures, pre-ordained by the assumptions made, ultimately rest on the strong interest of the London Stock Exchange in disrupting vertically integrated competitors such as Deutsche Borse.-Interoperability a Chimera. The Exchange reckons Giovannani is naive to rely on removing technical, legal/regulatory and tax barriers (the Giovannini report lists 15 such obstacles) to interoperability as a quick and dirty solution to the high cost of cross-border securities trading and investment in Europe. End-users would have to pay for all the bi-lateral links between CSDs, cutting the savings. But they would certainly still be cheaper than the alternative of CSDs and ICSDs buying each other at inflated prices or the risks as well as the costs of embarking on the construction of single securities management and control system for the single European CSD the LSE favours. Secondly, grumbles the Exchange, rights of ownership such as electronic share and bond certificates cannot be moved between CSDs like telephone calls or e-mails are moved between separately owned and managed telecommunications companies. This is a curious argument, and somewhat hard to follow, but the LSE appears to hold that rights of ownership can only be exchanged within a closed system or the number of entitlements is bound to exceed the number of shares or bonds in issue as rights of ownership are transferred to account-holders in another CSD unless an equivalent number of shares or bonds are destroyed in the old system. This reads like nonsense of the kind lawyers rejoice in spinning, but even if it is true it is hard to believe that transferring rights of ownership electronically between systems while maintaining a constant volume of assets will defeat human ingenuity. And citing a 1975 study by the SEC which rejected inter-operability in the United States as being somewhere between a seventh and half as effective as building the DTCC smacks of desperation. Much has changed, especially in computer and telecommunications costs and technology, in the last twenty-seven years. All of which makes it hard to believe that the LSE has any motive to argue against interoperability and in favour of consolidation beyond a deep anxiety that vertical integration will make it easy for the likes of Deutsche Borse and Euronext to grab liquidity from London by cross-subsidising trading costs with clearing and settlement revenues. The question is: would LSE be making this complaint if they had not made such a mess of the TAURUS settlement platform that it had to be taken over by the Bank of England? -CSDs Will Never Compete. The Exchange says Giovannini is wrong to believe even a barrier-free market serviced by fully inter-operating CSDs and ICSDs would ever see them competing to settle trades. “Clearing and settlement has the characteristic of a natural monopoly, and integration of European capital markets would be better served by having a single clearing and settlement system, on top of which trading platforms can compete with each other on an equal basis.” This is the piece de resistance of the LSE resoponse: it manages to be both self-serving and intellectually lax at the same time. The LSE – having fluffed a succession of opportunities over the last fifteen years to lead the integration of European capital markets, culminating in its failure to strike a deal with Deutsche Borse or find a way of acquiring Liffe – must be feeling vulnerable to a takeover. So no wonder it believes in competing trading platforms. But why does it think clearing and settlement is a natural monopoly? Because the LSE cannot conceive of a world in which a CSD can settle a transaction in a security held in another CSD without settling it in that CSD, except by creating – that lawyer at work again? – “shadow” securities called “Depository Instruments”. The passage in which this is explained is priceless:The creation of direct links between CSDs opens up new possibilities. In particular, through the link, ‘shadow’ securities can be created in the form of Depository Instruments (DIs). In the above transaction, if the non-local broker uses its CSD B as intermediary, then a DI of security XA is created (XDIB). This XDIB security is now held in CSD B (in the account of the broker involved). One XDIB security represents one specific XA security, and this specific XA security can no longer be settled in CSD A (ie, it has been virtually moved into CSD B by being frozen in CSD A). This arises because, for every XDIB, there must be a specific XA held in CSD B’s account in CSD A, and XA is not available for settlement within CSD A for as long as the XDIB exists in CSD B. If a sufficient number of XDIBs were created and held in CSD B, then there may come a point where CSD B would indeed be able to offer settlement and custody services for XDIB securities without having to settle with CSD A each time through the link. The link would have to be used only the first time a XDIB security is created. After that, the XDIB share can move (be settled) between CSD B accountholders directly, without CSD A being involved.-This is a bad case of what a lawyer with a sense of humour might call per rectum obscuration. Indeed, it is hard not to feel that this passage is an ingenious hoax, based on something the LSE chairman remembers from his days as a utility regulator. That sense is only reinforced when the LSE argument concludes with the observation that even if competition on this basis is possible, “tippy markets” will ensure that it all ends in a monopoly anyway. The reasons why market participants cannot maintain accounts with different suppliers of settlement services, or net movements cannot be made through CCPs or across the books of custodian banks, or processing liquidity cannot shift between CSDs, are not seriously explored. Worse still, the LSE seems genuinely to believe that clearing and settlement is a natural monopoly – in other words, one in which the costs of duplication raise too high a barrier for new entrants to compete for business. But that is not true. The rising power and falling costs of information technology mean it is perfectly possible to build an all-singing, all-dancing clearing and settlement engine for $40 million or less. After all, CREST did exactly that in London. But the LSE, of course, probably has clearer memories of the 300 million it squandered on the failed TAURUS project.The LSE concludes its submission by recommending “regulatory intervention” to create a single European CCP and a single European CSD. It will probably get them, and by its chosen means too, because the European politicians and bureaucrats are already involved and will soon be horse-trading over whether the single European CSD should be headquartered on the banks of the Main or the Seine. “Regulatory intervention” is of course exactly what European politicians and bureaucrats (like politicians and bureaucrats everywhere) love to do. But it would be a pity not to notice that the real public policy issue in European clearing and settlement is not consolidation but competition. Why are so many senior figures in the European securities industry in favour of competition in theory rather than practice? At bottom, of course, because a monopoly is a terrible thing until you have one. Because no businessman can ever view any subject except through the distorting lens of his own business interests. The fallacy to which he succumbs is the belief that he can establish where that interest lies. For example, the LSE chairman himself promised recently to get tough with the UK government over the persistence of Stamp Duty, a turnover tax on securities transactions in London which he regards as a serious competitive disadvantage [LINK TO SPEECH] because it raises the costs of trading shares in London. But how badly does the LSE really want to see it go? After all, Stamp Duty does have the advantage of preventing the likes of Deutsche Borse from trading shares of UK companies.And Stamp Duty is only one of dozens of costs and distortions imposed on European securities markets by governments and regulators (and issuers and investors for that matter). Ultimately, the only force which can eliminate them completely is the unfettered competition, which alone is interested in ever more efficient solutions to the problem of efficiency. Everything else is lies, vested interest, and ignorance. Unfortunately, competitive commercial solutions have yet to be tried in European clearing and settlement, and probably never will be. Perhaps the most poignant data in the LSE submission is the figures the Exchange got from CREST. They illustrate the rising cost of settling a purely domestic transaction (0. 50), a cross-border transaction via a direct link such as those with SIS Sega Intersettle and DTCC (2.50) and a cross-border transaction without a direct link (up to 17.50 in France). They are more telling than any other figures in the submission. The LSE thinks they are powerful evidence of the need for a single European CSD. But surely these prices reflect the lack of competition rather than the lack of consolidation?
An Industry Expert Comments on CEPS Report