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October 2015

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The wayforward

FX-MM, in association with SmartStream,takes an in-depth look into the future offinancial utilities and how they can helpaddress the regulatory, cost and marginpressures firms face today.

trading · treasury · technology

FINANCIAL UTILITIES

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New Levels of Flexibility and Control

Championing a unique approach to post-trade processing. SmartStream’s suite of solutions, managed services and utilities enables you to maximise your current investments and embrace the new, at a time when transparency and cost reduction matter more than ever.

Our flexible business model is built on years of industry experience and the long-term relationships we have with our customers. It’s never too late to take the leap.

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The financial crisis produced a perfect storm for banks, with fallingmargins and increased regulatory demands and cost pressures

revealing the decades of underinvestment in back and middle office operations. Now, however, with regulators

demanding increased control over and timeliness ofdata, institutions are looking at transformational ways

to change their outdated systems and meet thosedemands as well as bringing down costs.

Financial firms are increasingly realising thatthere is little or no competitive advantage inindividually repeating the same processes.Adopting utility models not only mutualises costacross the industry, but allows access to newtechnology that can break down silos withininstitutions bringing operational benefits to firms.

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FINANCIAL UTILITIES: INTRODUCTION

Gamechanger

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4 Under referenceReference data – thekey component

8 ReconciliationThe new reality

10 Liquidity & cashmanagementNext generationsolutions

11 CollateralmanagementFactual collateral

12 InvoicingOptimising trading expenses

13 CorporateactionsTake the right step forward

14 BCBS 239The regulatory tipping point


There has, according to Philippe Chambadal, CEO at Smartstream,been an underinvestment in post trade services at banks for 30 years.

“There needs to be not only a re-tooling of the back office but alsoa re-thinking of the processes,” he says. “Banks need to understandwhat processes give them a truly competitive edge, and which arebetter managed in-house, and which do not. Processes in which thereis no competitive advantage, and which cost a lot of money, are bettermanaged as a shared service.”

Banks are realising this across back and middle office functions,and the treatment of reference data is no exception.

Indeed, three of the world’s biggest investment banks – Goldman

Sachs, JP Morgan Chase and Morgan Stanley – have joinedSmartStream to create a new company, Reference Data Services LLC,an industry-led service using the SmartStream Reference Data Utility(RDU) to transform reference data management.

The collaboration has been formed to mutualise common market processes, incorporating each organisation’s best practicesand individual controls with the intention of bringing the utility, andthe resulting savings and operations improvements to all capitalmarket firms.

Reference data are essentially everything that describes thebehaviour of a financial instrument – the terms and conditions,

Financial firms are starting to recognise the benefits of the shared service model in managingreference data, a potentially transformational change for the industry in terms of cost andefficiency, writes FX-MM’s Peter Garnham.

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FINANCIAL UTILITIES: REFERENCE DATA

Under reference


maturity date, coupon data and corporateactions processes for example. According toChambadal, SmartStream examines all the dataa financial firm would need for their middle andback office functions and posts them as a single data set. It therefore manages counter -party data, issuer data, settlement instructions,ETF components, index components, corporateactions and terms and conditions in a single

data set. The firm than cross references and cleanses the data, to offerclients a real-time service.

These are data that up until now, every single trading firm has hadto deliver themselves for every instrument in their trading universe.That could include smaller trading firms on the buy-side with a tradinguniverse of 5,000 instruments to the large banks covering the completetrading universe of 20 million financial instruments, plus anything else in between.

“We are really trying to take over that function that exists in-house,and is done 50,000 times across 50,000 firms and do it once for theentire industry,” says Chambadal.

Cost savingsThe utility model has, he says, potential to offer huge cost savings tofinancial firms.

“There is a direct cost saving in terms of banks not doing the workthemselves, but the largest cost saving is downstream because baddata breaks trades,” says Chambadal.

As a trade reconciliation vendor as well as operating in thereference data space, SmartStream has a good idea of where tradesbreak, he adds. Indeed, SmartStream estimates that 30% to 40% oftrades break because of a reference data mismatch.

“We can make a call in real time in the data utility to resolve themismatch and prevent the trade from breaking in the first place,” saysChambadal. “That has an even greater impact.”

He estimates that for every $100,000 financial firms spend on data management, they spend between $300,000 and $500,000 on repairing trades that were broken by bad data.

“The ripple effect of bad data in post trade is gigantic. We arelooking at solving the problem end to end and being pre-emptive andavoiding these trade breaks,” says Chambadal. “We cross reference sothat firms’ internal systems can speak the same language, and thenwhen they come to settle a trade with a counterparty, they have

common keys and a common data model sotrades don’t break.”

Of course, financial firms can spend billionsof dollars to build the best system in the world,but are only as good as their counterparties’systems, given that it is the lowest commondenominator that can cause a costly trade

break. For a utility to gain critical mass, in other words, the more firmsthat get on board, the better.

“You might trade with 1,000 counterparties or 20, eachcounterparty’s system will be in a different state, with differentrepresentations of data, different data quality, maturity of theirsystems,” says Chambadal. “It is an end-to-end problem. The only way forward is to switch to a shared service in which everybodybenefits from a single data model, with very high quality enriched data in the centre.”

Established positionChambadal says the consortium of Goldman Sachs, JP Morgan Chase and Morgan Stanley selected SmartStream as their partner in its reference data utility after an intensive evaluation due to its established position as market leader in data management, with five years of experience, true multi-tenant architecture, fullauditing capabilities, complete market coverage and highest quality reference data.

“The Reference Data Utility is at the forefront of what really is anevolution in the industry with the achievement of processingmutualisation, the reduction in operational risk and an increase inservice quality within the reference data management domain” says Chambadal.



Philippe ChambadalSmartstream

Banks need to understand what processes give them a truly competitiveedge, and which are better managed

in-house, and which do not

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“Our three bank partners have embraced the utility model toensure that the duplication of effort is minimised when addressingcommon market issues such as inconsistent data in regulatoryreporting, costly trade breaks, and risk management.”

He says he hopes SmartStream will be theleader in the reference data utility space, but isaware that other firms are looking to build asimilar concept.

Where he believes SmartStream differs isthat unlike competitors it has not bought anexisting company active in data managementand tried to morph it into a utility – a processthat, in his opinion, does not work.

“A utility has to be from the beginning, and by design, multi-tenanted, and have the ability to scale to a huge level,” says Chambadal.

“From the get-go, you have to have a completely different design,and we think we have. There is going to be some competition but wethink we are at least three to four years ahead of the nearestcompetitor.”

A transformational opportunityFor his part, Nathan Wolaver, Broadridge’s Global Head of ReferenceData Services, says reference data is a topic that is also of immenseinterest to his firm.

“We see this as a transformational opportunity in the market place,and something that we are positioned to capturewith our managed service offering,” he says.

For many years, according to Wolaver, firmsconsidered the way they approached reference data to be a competitive advantage, or at leastsomething of enough concern that they were willingto forego the common savings of implementing orincreasing their ability to capture and control reference data in autility-type model.

He says there was an evolutionary approach to reference data andreference data management, which meant that when firms wanted toenter into a new asset class or wanted to add a new data feed: theysimply built a new database, a new feed connector and started to loaddata without regard to its effect across the enterprise.

“What has resulted is this notion of a spaghetti architecture at most firms where nobody really has the complete picture of the data, where it is, its transparency, who has touched it andultimately what the costs are,” says Wolaver. “And so you have thisevolution without the Darwinian natural selection that removessystems that are old and not necessarily relevant but might have some impact on some downstream system of which nobody is aware until it is turned off.”

While that may be the current state of play, he says that regulatorypressure, along with increased pressure on margins focus on costcontrol, has changed banks’ thinking around reference data.

“Banks are really looking outside of their own four walls forpartners that can help them manage their reference data and do it ina way that is flexible, allows them to retain control, but essentiallyturns it into a data supply chain,” says Wolaver.

Wolaver says for the most part, his firm is a proponent of the utility concept.

“Where I think we have some differentiation between what is autility and what is a managed service is the whole notion that in a utility you get one flavour for everything and we don’t believefinancial services firms are yet ready to go ahead and say that is goodenough for them,” he says.

The mutility conceptInstead, he says Broadridge advocates the concept of a mutility, which allows clients to achieve cost savings through mutualisation ofthings such as hardware, best practices, a data model and data feed onboarding.



Nathan WolaverBroadridge

There is a direct cost saving in terms of banks not doing the work

themselves, but the largest cost saving is downstream because bad

data breaks trades

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“These are all things that can be mutualised, and therefore drive down costs across the entire customer base,” says Wolaver. “But we still want to empower our clients and give them the control and transparency into the process so that they can have their own vision and version of what the data should be, the rules, the level of data quality that is ascribed to any particular data feed or attribute, and so there has to be this utility plus concept.”

He believes a utility model for reference data, in which “one-size-fits-all”, will not work across the industry.

For instance, he says, Broadridge are cognisant and very protectiveof its data vendor partners’ intellectual property.

“To make this reference data offering work, you need to have a facility that allows each data vendor to be confident that we are not going to impune or cannibalise their business plans and prospects,” says Wolaver. “In fact we want to offer a facility that gives them additional opportunities to sell data to customers,

because the customer base will be able to consume, evaluate and distribute the data through the managed services platform.”

That said, Wolaver recognises the benefits of mutualising the costof data cleansing, which has the potential to save the financial industrymillions of dollars. Indeed, he notes, some estimates put the cost offixing data at 15% to 20% of a bank’s operating budget.

“Our internal assessment says there are$75million to $125 million dollars worth of costsat major banks which are associated withcleansing data. We think that we should be ableto save banks significant costs – between 30% to50% – because all of these processes are beingreplicated at various banks,” he says. “Thisduplication is not a competitive advantage yeteach bank has to go and do this. Cleaning a

financial instrument, setting up an instrument has to be done acrossevery single institution, but if you can set it up once, or clean it once,you have set yourself in a position to really help the industry take someof the duplicate costs out of their infrastructure.”

Widespread benefitsIt is not just in the trading world that institutions are looking at utility-type models to improve how they approach reference data.

Swift introduced its utility for payments reference data, Swift Rec,three years ago and has attracted interest not just from financial firmslooking to ensure the quality of their data and avoid exceptions in

their cross-border transactions, but also fromcorporates looking to decrease the cost of theirbroken international payments.

According to Herve Valentin, Head ofReference Data at Swift, the reason for theinterest is simple: cost.

“Data costs a lot,” he says. “We did someanalysis into the deterioration rate of reference data. It goes quite fast:around 3% of the data institutions own deteriorate one way or anotherevery month. Therefore it has a cost consequence. If your paymentcannot go through, clearly there is a repair cost associated to that.”

Keeping on top of those costs, is therefore, crucial to firms across all sectors.

Indeed, for Chambadal, reference data is the most important areain which firms can drive efficiency across their back and middle offices,increase automation and decrease the need for manual intervention intheir processes.

“For me, the root cause of most problems is reference data. If youdon’t have the definition of your counterparty, corporate actions andall the other aspects of reference data sorted out, then everythingdownstream is going to be a nightmare,” he says.

“Having a consistent data model across an institution is a verygood place to start to drive efficiency and bring down costs.”



For further information: www.fx-mm.com

Herve ValentinSwift

Our internal assessment says there are $75million to $125 million dollars worth of costs at major banks which are associated with cleansing data


Volatility is waxing with US rate rises on thehorizon and the eurozone struggling for survivalin the wake of the Greek sovereign debt crisis.

Moves by the national banks in Switzerlandand Japan, when they respectively de-peggedversus the euro and expanded quantitativeeasing (QE), also reflect a more unstable multi-asset environment, in which risk and margincalls are rising – just as the operational budget

to pay for them is waning. SmartStream technology can help delivermore efficient processing.

Regulators are demanding more data, traceability and intersystemcontrols under post-crash regulations such as the US Dodd Frank rules,European Market Infrastructure Regulation (EMIR) and the Basel IIIcapital adequacy regime.

Banks and their clients are de-risking. Intra-day pricing, matchingand speedy reconciliation, plus automated updating of all risk systemsin such conditions is important. It’s the new ‘license to play’ in a moretightly regulated capital markets era and a key differentiator forsuccessful firms. The Target 2 Securities (T2S) single securitiessettlement engine is also on the horizon, soon requiring additionalconnectivity to reconciliation systems.

In this environment, where high compliance costs and lower

RoE is driving a need for more efficient IT to cut legacy operating costs,the pressure is on financial institutions (FIs) to improve performance.

One way to do so is for banks, asset managers, traders, custodiansand other capital market participants to invest in integratedtechnology and move towards a shared service utility. SmartStreamcan help you with this. You can, for instance, introduce an internalreconciliation processing utility for all forms of reconciliation coveringcash, trade, position, intersystem requirements and so on.

TLM Reconciliation Consolidating on one single solution, such as SmartStream’sTransaction Lifecycle Management (TLM) Reconciliation Premium,delivers economies-of-scale savings internally. The SmartStreamSmartRecs module can also ensure easier and faster on-boarding ofreconciliations with in-built control and auditability, feeding into acommon processing engine.

In addition, SmartRecs’ real-time data analysis capabilities and in-line self-service reconciliations, de-risk dependence on common tools,such as Excel, which are susceptible to ‘fat finger’ data entry errors.

I know of some firms that previously had 25 different reconciliationsystems, excluding ad hoc spreadsheets. These systems couldn’ttechnically ‘speak’ to each other cross-departmentally, never mind linkinto wider enterprise-wide exception management, risk management

Finance has a new reality. Return on equity (RoE) has fallen as operational costs have risen and regulations multiplied, says Darryl Twiggs, Head of Product Management & Strategy,SmartStream. The need for utilities in reconciliation, and elsewhere, has never been greater.


FINANCIAL UTILITIES: RECONCILIATION

Darryl TwiggsSmartStream

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Reconcileyourself to the new reality


or reporting systems. That type of siloed infrastructure is a recipe forduplication, over-staffing and inefficiency. SmartStream integratedtechnology ensures it never happens.

Smaller FIs, particularly on the buy-side, may want to look at using Software-as-a-Service (SaaS) reconciliation deployments toprotect scarce capital expenditure (capex), or even outsource the entire transaction processing operation. The days of FIs adopting the ‘build out’ and internal maintenance approach where they developed their own proprietary tools, connections and IT are over.

Even some Tier 1 banks are reviewing cloud solutions now, ratherthan relying solely on their own singular internal processing utility.Low-cost deployment costs, IT flexibility and on-demand subscriptionoptions make it attractive.

Whatever utility implementation method you choose – internal,SaaS or outsourced – it is bound to positively impact performance.

To be a utility is to be of useThe industry has been reliant on utilities, such as the continuous linkedsettlement (CLS) engine on the foreign exchange (FX) markets, forsome time. We are now seeing new initia -tives such as T2S and CCPs for derivatives.Utilities inherently bring lower operatingcosts and much needed clarity to standardsof data, governance and opera tions, so I welcome them.

A financial utility could mean con -solidating on a single internal solution, or acollective of FIs using the cloud or moving to a compliance platform.For instance, lots of different internal lines of business at a large Tier 1bank, which previously had standalone business, regional or assetclass reconciliation systems, could use one engine. Alternatively, acloud-enabled asset manager could sign up to a third-party processingengine, which is supported by a strong Service Level Agreement (SLA).

In an internal utility model data resides in a single point, so thewhole trade lifecycle is now available to be analysed. Fixing any breakcan be easily resolved as the many different components reside in asingle process. If the data is in different systems, or even in differentformats, then data quality, mining and efficient straight throughprocessing (STP) would suffer.

Key Performance Indicators (KPIs) and SLAs can be written into any SaaS or externalised utility contract, alongside security andresiliency standards. Common messaging protocols like ISO20022 XMLor FIX can also be mandated. Standards such as the EDM Council-supported Financial Instrument Global Identifier (FIGI) may also be adopted if appropriate.

The flexibility and scalability of the cloud mean contracts can bemade-to-measure. Regional data privacy laws or differingimplementations of global regulations can be accommodated into thedata requirements and framework of on-demand infrastructures.

The utility can do the back-end heavy lifting, with a bank team nowfocused on enforcing the SLA parameters on their own behalf or thoseof their clients. Merely the fact of joining a utility should also de-risk FIsas the centralised service will hold counterparties to an agreedminimum standard for members and comply with all necessaryregulations. Collective participation in the utility delivers mutualisedbenefits for all.

The reconciliation requirement The unyielding operational requirement to ensure all cash, derivativeand other trades are properly reconciled between counterparties andthat all exceptions are promptly and effectively resolved is never-ending. Potential errors, fraud or irregularities need to be highlightedduring reconciliation and resolved fast in the search for a balancedbudget and the optimum cash and hedging position. The aim mustalways be to reduce the number of irregularities that needinvestigating in the first place by cutting false positives or instanceswhere risk limits are breached.

Reconciliation is an on-going process that must occur at the pointof publication and later on down the chain as well, depending on each

FI. When the long-term net asset value(NAV) of a derivative contract changes, forinstance, the capital base of the firm mustchange too and this calculation will need tobe made again and again.

Integration Integration is fundamental in deliver-

ing STP and efficiency. This is why SmartStream offers its solutionsacross cash management; corporate actions; brokerage services;reconciliations and so forth within a single technical architecture. Byintegrating these functions into the over-arching TLM platformSmartStream delivers a holistic and efficient architecture, which issimultaneously flexible and scalable.

Introducing as much automation as possible frees up staff time todo more value-adding rewarding work, which keeps employees loyal.Operationally, it reduces duplication of effort and IT support tasks thatare automated cost much less to perform.

The multi-asset environment is also driving our pursuit for greaterintegration from the back- to the front-office. SmartStream softwaremust not only be able to link our TLM systems together, but also third-party systems and externally to global networks.

The search for yield during a period of prolonged low interest rateshas driven firms to search out new asset classes. Operationally it is astretch to ensure all the necessary data, compliance requirements andmulti-dimensional risk assessments are catered for in a multi-assetworld. The task is possible, however, with an optimal normalised datamodel and with SmartStream technology.


FINANCIAL UTILITIES: RECONCILIATION

For further information: www.smartstream-stp.com

The unyielding operational requirement to ensure all cash, derivative and othertrades are properly reconciled betweencounterparties and that all exceptions are promptly and effectively resolved

is never-ending


Next generation solutions

Focus on this topic has arisen as a result ofregulatory focus on this topic from the BaselCommittee on Banking Supervision. Two papersin particular are driving the market: ‘Principalsfor sound liquidity risk management andsupervision’, published in 2008, and ‘Monitoringtools for intraday liquidity management’,published in 2013.

For investment and retail banks, an explicitrequirements arising from these papers relate to monitoring toolswhich have to be produced on a monthly or quarterly basis. Gatheringthe necessary information can be a significant challenge for banks, dueto the decentralised nature of the data. In order to build up a profile ofintraday liquidity, banks need to have a time stamp for every debit andcredit across every account held by the bank. As well as gatheringinformation produced in-house, banks also have to obtain thenecessary information from correspondent and agency banks. This canbe particularly challenging for multinational banks which may beworking with over 1,000 other banks around the world.

Rather than simply ticking a regulatory box, banks are looking toobtain greater value from this focus on intraday liquidity. In particular,banks are increasingly looking for solutionswhich will provide full real-time insight overtransactional activity throughout theorganisation.

Real-time managementIn the past, banks tended to focus on managing their cash positions onan end of day basis. Today, banks are also seeking to understand howliquidity is consumed and offered by their organisations throughoutthe day – taking into account relationships with correspondent banksand central banks, as well as the credit lines and intraday liquidityoffered to customers. They are also working to identify stresses in themarket and undertake scenario testing, in order to check that cash andliquidity management processes are sufficiently stable to withstandparticular scenarios.

Recognising these evolving needs, SmartStream has recentlylaunched a new intraday liquidity management module as part of itssuite of cash and liquidity management products. The module gives

banks real-time visibility over key indicators,metrics and intraday liquidity profiles. As well assupplying the information needed for regulatorycompliance, the module also provides fullvisibility over everything that’s happening on areal-time basis in conjunction with tools inorder to proactively managed intraday liquidity

Greater understandingAlongside the focus on intraday liquidity, banks are also looking forcash and liquidity management solutions which will serve a wider usercommunity across the organisation. Historically, cash managementsystems have been used by back and middle office teams – but today,software providers are accommodating increasing demand from thefront office for real-time visibility over cash by building in access forfront office users. By doing so, technology companies are supporting agreater understanding across the organisation of the impact ofdifferent teams’ decisions and actions, while also providing fulltraceability and accountability between the different departments.

At the same time, providers are also focusing on helping usersaccess data in a more concise and meaningful way. Having a huge

database of transactions is all very well, but in order to benefit fully from thisinformation, users need to be able toaccess data with the right user interfaceand a strong analytics engine.

In conclusion, the market for cash andliquidity management solutions is undergoing a significant shift.Ticking regulatory boxes, although important, isn’t necessarily theprimary goal of implementing a strategic cash and liquiditymanagement system: banks are also looking for more accurateprojections on bank account activity, clearer understanding of marketstresses as well as insight of counterparty and customer behaviour. As intraday liquidity becomes more of a commodity, banks which lackreal-time visibility will find themselves behind the curve – resulting ina clear and growing need for tools which can support the effectivemanagement of this area.

For banks around the world, intraday liquidity has become a key concern, write Nick Noble, Product Manager, Liquidity Risk Management, and Darryl Twiggs, Head of Product Management, Smartstream.


FINANCIAL UTILITIES: LIQUIDITY & CASH MANAGEMENT


Darryl TwiggsSmartstream

Nick NobleSmartstream

Banks are increasingly looking forsolutions which will provide full real-time

insight over transactional activitythroughout the organisation


Factual collateral The post-crisis reform agenda has created acritical need for collateral as part of the drive tocut credit and liquidity risk – and prove it bydemonstrating assets quickly. New utilities,shared service options and data technologyfrom providers such as SmartStream arenecessary to handle the extra margin calls, costsand obligations on financial institutions (FIs).

Parallel implementation of the Basel IIIcapital adequacy regime and over-the-counter (OTC) derivativereforms, under the US Dodd Frank Act and European MarketInfrastructure Regulation (EMIR), mean that FIs need to meet tougherstress tests and track valuation changes more frequently. The need touse Central Counterparty (CCP) clearing houses in the OTC market isalso causing problems.

In this environment, liquidity needs matching collateral to provefirms’ capital bases are strong and exposures covered. But it costsmoney to report and high quality liquidassets, such as repos, are scarce – theyattract a premium. The laws of supply anddemand apply, so those with optimisedcollateral management can benefit.

With solutions such as SmartStream’sTLM Collateral software you can turn aregulatory obligation into a benefit. Forinstance, some bank clients will berewarded for providing intraday liquidity when it is needed, others maybe penalised for giving a bank too much unplanned liquidity – and toomuch of a matching collateral requirement. That is why identifyinggood quality assets, and releasing them at the right time, at the rightprice, is vital.

Execution services will also be essential in the reformed andevolving capital markets, alongside better management of changingportfolio values, more complex margin calls, and so forth. It is not forus, however, to guess what the final ‘best practice’ or ratio andliquidities of particular financial instruments should be in the future.The market will decide this and our flexible on-demand systems willsupport the market.

Collateral optimisation SmartStream is concentrating on developing the connectivity andoptimisation capabilities of its collateral and margin management TLMCollateral software in order that firms can quickly make the mostprudent and/or beneficial choices of assets from their availableinventory. This is especially important within the context of theirprimary business activities (eg. securities versus cash, which obviouslydiffers significantly between the buy- and sell-side).

Institutions are also weighing the cost of maintaining and securingin-house collateral systems and staff versus Software-as-a-Service(SaaS) solutions. SmartStream’s purchase of IBM Algo Collateraladvances the concept of collateral management as a service because itlinks to our existing cash management, reconciliation, fees andreference data platforms in a holistic offering.

SmartStream offers an integrated, automated way to bring newagreements into the system; use rules-based engines to process margincalls; and asset optimisation algorithms to initiate the pledging,

recalling and rebalancing of collateral. Oursystems can automatically reconcile andhighlight dispute issues and users caninterface with downstream settlement andnostro reconciliation systems to confirmsettlement. You can take advantage of theremoval of manual tasks to focus instead onresolving and managing the risks high -lighted by exception alerts.

Custodian banks, central securities depositories (CSDs), buy and sell-side traders and others in the capital markets chain all have to changetheir mode of operation. Many are grouping together in utilities in orderto control operational costs and comply with reporting obligations.

There is a distinction to be made, however, between a commonutility, providing a shared service to report and get economies-of-scalesavings, and competitive differentiators like ours. SmartStream’ssolutions offer operational savings but are also designed to providedata quickly to ensure optimised collateral management andcompetitive advantage.

Accurate assessment, reporting and optimisation of assets in real-time is a vital function oncapital markets, says Jason Ang, Senior Product Manager, SmartStream. Collateralmanagement is now de rigueur, driven on by regulations and the market. It requires advancedsupporting technology.


FINANCIAL UTILITIES: COLLATERAL MANAGEMENT


Jason AngSmartStream

SmartStream is concentrating ondeveloping the connectivity andoptimisation capabilities of its

collateral and margin management TLM Collateral software in order that firms

can quickly make the most prudent and/or beneficial choices of assets

from their available inventory


Optimisingtrading expenses

Stimulation of profitability through expenseoptimisation is the objective of many firmsbecause of the significant cost savings available.Tuning the business in this way will exploit thefull benefit of fee schedules including their tierstructures, pricing specials and incentivepackages.

Acutely important is the creation of a bestexecution policy to identification, quantification

and validation of targeted, data-driven savings strategies based uponanalysis of service utilisation and volumes. This redirection of thetransaction flow will exploit the advantages present in currentagreements and support the negotiation of future rate structures.

Other considerations for enacting changes to achieving a prudentfees and expense management process are focused upon operationalcontrol. It is an emerging trend that firms are required to demonstrateadequate business controls to internal compliance departments andregulators associated with the monitoring of how expenses are incurred,identifying abnormal activity, applying fees correctly against approvedrate agreements and billing precisely.

Avoidance of collusion is always critical,but now there is an emergence of fines for lack of due process and invoice back-logs, the adequacy of these processes isgetting attention.

Many firms recognise transaction fees astheir third largest expense and realise that their legacy invoicingprocesses and accounting controls inhibit their ability to investigatethe optimisation of this expense.

Manually intensive invoicing processes, which are prone to humanerror and limited to validating invoiced amounts against a historicalpresidency or randomly spot checking fees, inhibit a firm’s ability tocompute their actual service consumption. The depth of informationcaptured to feed these legacy processes does not provide adequateinsight to perform meaningful utilisation analytics and all too often the

mechanism for accounting such expense isinaccurate and untimely.

Agile architectureRealising a prudent expense control processneeds to be based upon agile technology tobring together all of the information structuresassociated with the nature of a fee; inclusive ofall referential and static information, a globalrate repository and, where necessary, enriched information to support the drivers of a fee and capture the idiosyncrasies of specific arrangements.

It is only by capturing this information in its entirety can adequatecontrols be enforced. These controls need to enforce independ-ent calculation of fees based upon transactional information. This corecalculation will feed a timely accruals process and an independentverification of the fees being charged by service providers. By implementing this approach individual firms will overcome thepitfalls associated with relying on incomplete or summarised

information which can make it difficult toverify the premise of a fee and reconcileinvoices with third parties.

For the majority of banks, under -standing trading expenses such asbrokerage, clearing and execution feeswill remain a significant challenge until

the foundation of the process is robust enough to control both thecontext of a charge, why it was incurred and how it is accounted for.

The success of these projects will be based on affecting this business process redesign in a cost effective way through the application of robust industrialised processes to gather theinformation necessary to effectively change the way business istransacted and improve its yield.

Financial institutions are looking to stimulate profitability by ensuring their businesses are streamlined and run as efficiently as possible. There is a new appreciation for tuningexpenditure on third party transaction fees incurred against brokerage, execution and clearingfees. This will realise efficiency in the way business is transacted, ensure correct billing,promote customer service and achieve regulatory compliance, write Adam Cottingham, VP,Data Management Services and Darryl Twiggs, Head of Product Management, SmartStream.


FINANCIAL UTILITIES: INVOICING


Adam CottinghamSmartStream

Avoidance of collusion is always critical, but now there is an emergence

of fines for lack of due process and invoice backlogs, the adequacy of these

processes is getting attention

Darryl TwiggsSmartStream


Taking the right step forward

The risk associated with dropping the ball – frommissing a coupon payment, to failing to elect ontime – is that a considerable cost will be inflictedon a firm. This reaches across the board, from abuy-side firm holding a large position withinmultiple funds and running event strategies; toa custodian bank servicing the same asset formany different clients; to an investment bankprocessing high volumes against a book’s P&L,

and to the back office managing the outturn against the full stockrecord. All firms need to prudently mitigate the risk of processingcorporate actions.

The manual effort required to administer corporate actions inopen Universal Data Access tools (UDAs) is both cumbersome andinefficient. Vendor options have not always been adopted by theindustry due to their inability to process allevent types and assets along with theirexpensive technology footprint and limitedautomation capabilities.

SmartStream believes corporateactions initiatives can standardise the nextstep in platform evolution and accommo -date market practices in a systematic way across the complete eventlifecycle. These include standardising event definitions fromannouncement to entitlement, managing the communication across involved parties and diminishing proprietary discrepanciesupon processes.

Automating corporate action processing using industry standardsand market practices can cut out the heavy lifting, so operators canapportion effort using an events diary towards higher risk events,decision-making activities and managing processing exceptions. The success of each firm’s corporate actions initiatives will be dictated by their capacity to keep abreast of these standards, achieved both by sharing in a positive network effect through their

application, but also by reaping the efficiencygains of selecting compliant solutions to handletheir process.

The real returnsHigh levels of automation have becomeaccessible in the corporate actions spacecreating smarter ways to mitigate risk process.The creation of the golden record, on-the-fly,through a trusted source hierarchy enriched with market informa-tion and client options, will initiate a firm’s ability to automate. Using a diary view provides transparency into event details andschedules which position holders must have in order to choosewhether to take cash or stay invested in a security, and furthermoresupports analysis to find arbitrage opportunities. Timely management

of positions for determining eligibility,processing elections and calculationentitlements gains significant efficiencythrough its auto mation. Proactive recon -ciliation of positions, elections andconfirmations in the event lifecycle addsintegrity into the process of managing both

interparty and intersystem communications. For market participants,the key decision when determining which the best model fortechnology provision, has become the ability to apply industrystandards to gain efficiency without risk.

Certainty of process and its application is what will determine if afirm’s next step in corporate actions processing is the right one.SmartStream’s service is highly accessible, offering an industry-standard systematic process to offset operational risk. Firms mustdecide the extent to which they can risk the uncertainty that isinherent within their legacy processes.

Certainty is critical when processing corporate actions. This principle instils a cautious approachto changing incumbent manual processes, even as the volume and complexity of corporateactions increases. Financial services firms are weighing up how advances in technology,maturing industry standards and proactive control of the event lifecycle can facilitate effectivegovernance of all event types. Today firms view corporate action business process redesign as astep forward, not only to mitigate the risk of a missed event, but to step ahead of the market byadding business insight into the investment ecosystem that these events can impact, write Alan Jones, Product Manager, and Darryl Twiggs, Head of Product Management, Smartstream.


FINANCIAL UTILITIES: CORPORATE ACTIONS


Alan JonesSmartstream

Corporate actions initiatives canstandardise the next step in platformevolution and accommodate marketpractices in a systematic way across

the complete event lifecycle

Darryl TwiggsSmartstream


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