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The Obama administration’snew plan for financial regulationwill change the way Wall Street

operates. But firms will have to waitfor details to see how the proposal will

translate into compliance demands. p.24V

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Project1 7/17/2009 9:01 AM Page 1

CCXGreen

Exchange

MCeX

Under the bill, sponsored by Representatives HenryWaxman (D-CA) and Edward Markey (D-MA), firms thatproduce more greenhouse gases than they’re allowed would beable to buy credits from companies that have produced feweremissions than they’re allotted, creating a large market for carbon credits. President Obama has estimated that more thana half-trillion dollars’ worth of carbon credits will be auctionedin the first seven years after the bill is enacted.

The United States was the first country to introduce a cap-and-trade scheme. The 1990 Clean Air Act Amendments estab-lished an emissions trading system to reduce emissions of sulfurdioxide (SO2) from fossil fuel-burning power plants. Accordingto Randy Warsager, director of green products at CME Group,the SO2 market was challenged last year by an unfavorable courtdecision, but it has been rebuilding slowly.

A voluntary market currently exists for carbon credit trad-ing, primarily through regional initiatives such as the RegionalGreenhouse Gas Initiative (RGGI), which covers Maine, New

Hampshire, Vermont, Connecticut, NewYork, New Jersey, Delaware, Massachusetts,Maryland and Rhode Island. In the RGGI’s latest auction inJune, 30.8 million allowances were sold for $3.23 each, whichraised more than $104 million for the 10 Northeastern statesto invest in energy-efficiency and renewable energy programs.(Each allowance represents a ton of carbon that electric plantscan release.)

Profiting From the EnvironmentCiti is among the investment banks that have been moving forward in the environmental products space. Garth Edward, thefirm’s director of environmental markets, began trading environ-mental products with the introduction of the EPA’s NOx BudgetTrading Program, a cap-and-trade program that the EPA created in 2003 to reduce emissions of nitrogen oxides (NOx)from power plants and other large combustion sources. For thepast few years Citi has focused primarily on CO2 trading, which

The U.S. carbon credit trading businesscould take off if recent climate change legislationbecomes law. Environmental market players includingCiti, the CME, the Chicago Climate Exchange andBlueNext are poised to capitalize on the surge.

HE FLEDGLING U.S. CARBON CREDIT MARKET, currently a $100 million-plus business, is poised to skyrocket if The American Clean Energyand Security Act of 2009, which recently was passed by the House, makesit through the Senate. The bill would limit, or “cap,” the amount of carbonemissions that companies can produce each year. T

3 0 J u l y / A u g u s t 2 0 0 9 w a l l s t r e e t a n d t e c h . c o m

By Penny Crosman

TRADING FOR ACLEANERTOMORROW

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has been driven bythe European Union’semissions trading sys-tem. “This is wherethe bulk of liquidity is,most of the capital flowthat drives emissionreduction projects aroundthe world,” Edward notes.

Growth in market activity and thecapital deployed in environmental prod-ucts has been strong, primarily becauseof cap-and-trade legislation, accordingto Edward. “Where you have a step forward in legislation suchas the EU emissions trading system, the voluntary agreementsin Japan and the Waxman-Markey legislation, that’s the kind ofprocess that starts creating compliance requirements on endusers and incentivizes service and technology providers to pro-vide solutions,” he says.

Despite the projected growth in environmental markets,Credit Suisse recently cut back its New York-based carbontrading team; Carbon Finance, a newsletter dedicated to theglobal markets in greenhouse gas emissions, reported that halfthe team will depart early next year as part of a de-emphasizingof the business. According to the Carbon Finance report, goingforward Credit Suisse will focus on environmental trading onbehalf of its clients, which are mostly European. (Credit Suissedid not respond to Carbon Finance’s nor to Wall Street &Technology’s requests for an interview.)

Meanwhile the primary U.S. exchanges involved in carbontrading are the Chicago Climate Exchange (CCX) and the

Chicago Mercantile Exchange(CME). The CCX tradesallowance and offset contracts thateach represent 100 metric tons of

CO2 equivalent. The Chicago Climate Futures Exchange, asubsidiary of the CCX, trades RGGI futures and options con-tracts. The CCFE reported record trading volume for June2009 — it traded 133,175 contracts versus its previous recordof 132,319 in April.

The CME — along with partners Evolution Markets,Morgan Stanley, Credit Suisse, Goldman Sachs, J.P. Morgan,Merrill Lynch, Tudor Investment, Constellation Energy,Vitol, RNK Capital, ICAP and TFS Energy — has appliedfor CFTC approval for a Green Exchange, on which it willtrade all the environmental products it already trades on itscommodities exchange. (For more on the CME’s carbon credittrading efforts, see page 12.)

Europe’s BlueNext, an environmental exchange that’s 60percent owned by NYSE Euronext, plans to open an office inNew York “very shortly,” according to Keiron Allen, theexchange’s marketing and communications director. It plansto start trading contracts within the RGGI market by the end

Carbon Credit Trading

European DominationThe largest carbon trading exchange in theworld is the European Climate Exchange(ECX), which handles more than 80 percentof global volume, according to the Celentreport “Trading in Carbon Emissions:Gearing Up for the Next Big Market.” Thenext largest center of activity is the LondonEnergy Brokers’ Association (LEBA), whose members traded $350 billion worth ofenergy credits in 2008. The U.S.’ ChicagoClimate Exchange (CCX) and GreenExchange are comparatively small today,but they are poised to grow as the U.S.moves to adopt cap-and-trade rules.

GLOBAL CARBON TRADING MARKETS

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Business Innovation Powered By Technology

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China’s nascent mutual funds are nowinvesting internationally, adding more

than 1 billion new investors to theglobal markets. Meanwhile

Western firms see a huge technology opportunity. p32

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COVER STORY

China is opening its notoriously closed mutual fund industry to internationalinvesting, injecting more than 1 billion potential investors into the global markets.Meanwhile Western fund managers and technology providers hope to providemuch-needed expertise to Chinese investment firms.

continues to expand and increasingly invest in mutual funds,the local market has the potential to become one of thelargest in the world and could provide a huge pool ofinvestors to the international markets.

Like other countries around the world, China’s economyhas been hard-hit by the global financial crisis — assets undermanagement at mutual fund companies in China shrank fromUS$457 billion in 2007 to US$275 billion by the end of 2008,according to Zhou Hua, president of SunGard China. (Bycomparison, in the U.S. the mutual fund industry’s assets stoodat $9.6 trillion at the end of 2008, downfrom $12.04 trillion the previous year,according to the Investment CompanyInstitute.) But due to new regulationsallowing Chinese companies to trade

internationally and the fast develop-ment of innovative investment vehi-cles such as pensions and separatelymanaged accounts, Zhou Hua says,China’s mutual fund industry couldsurpass US$1.5 trillion by 2012.

The country’s gradual transfor-mation into a global financial playeris already creating a wealth of oppor-tunity for Western financial firms

and technology providers. Since Chinese firms are relativelynew to the game, they must rely on the expertise and tech-nology of their Western counterparts to become a real forcein the international markets.

Raising the Gate to Foreign InvestingConcerns over risk exposure first led Chinese regulators tointroduce in 2006 the Qualified Domestic InstitutionalInvestor regulation, better known as QDII, and open thecountry’s notoriously tightly controlled securities markets to

international investing. At that timethe government decided — fol-lowing the “Don’t put all of youreggs in one basket” investmentmantra — to try to diversify theportfolios of Chinese investors byallowing Chinese financial institu-tions to invest in foreign markets.

By Melanie Rodier

LMOST EVERYTHING ABOUT CHINA IS BIG — its geogra-phy, its population, its manufacturing capacity. Almost

everything except its financial services sector, that is. Butthat is beginning to change.

China’s mutual fund industry is currently one-tenth ofthe size of the U.S. market, but it is expected to grow drastically as Chinaopens its doors to international trading. And if the Chinese middle class

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Until 2006 the Chinese could only invest in domesticstocks and bonds or sit on their cash, according to OliverSchuurman, sales and marketing director at Z-Ben Advisorsin Shanghai. Then in 2007 retail investors were given accessto offshore investments via mutual funds. “Through inter-national investing the Chinese can have access to all kindsof alternative investments,” he says.

Under QDII firms initially were permitted to investonly in fixed income and money markets. But the plan waseventually broadened to allow firms to invest in other products too. Then, in 2008, China and the U.S. agreed toallow Chinese citizens to invest in the U.S. stockmarket through mutual fund organizations orother asset fund companies in China. For the firsttime, some 1.3 billion Chinese were allowed toinvest in the U.S. stock market.

“The time the QDII regulations were put inplace was the time of the Chinese equities bub-ble,” explains Neil Katkov, SVP, head of Asiaresearch for Celent in Tokyo. “There was a rise inequities values that was very rapid, and the governmentthought it looked like a bubble. It was a bit speculative;there was a lot of excitement from investors. So [regulators]wanted to open up the market to different types of invest-ment, to asset diversification.”

Indeed, foreshadowing what was about to occur in theglobal markets, the Chinese equities market did crash, losingnearly half of its value in 2007 and 2008. “The Chinese gov-ernment was right,” Katkov says. “Individual [Chinese]investors are very interested in exposure to other markets,and financial institutions know the products are available inthe most developed markets — the Western markets.”

A Nation of SaversOne of the reasons behind the Chinese people’s strong desireto invest is a cultural emphasis on the elderly and preparingfor the future. Like other Asian countries, China has a veryhigh savings rate. But without corporate-sponsored retire-ment plans, such as 401(k)s in the United States, or substan-

tial help from the government, the Chinese must take com-plete charge of their own savings and retirement planning.

And they do a good job of this. According to a report inChina Daily, the largest English-language newspaper inChina, economists estimate that the average Chinese citizensaves between 30 and 40 percent of his disposable income —a rate that is at least twice as high as in the U.S.

People’s Bank of China vice governor Yi Gang said on Dec.26, 2008, that Chinese individual bank savings had exceeded 20trillion yuan (nearly US$3 trillion), while loans, includingthose for cars and housing, added up to just 3.7 trillion yuan by

the end of September 2008. “This indicates the debtlevel of Chinese households is quite low and such bal-ance sheets are very healthy compared with those forU.S. and European households, making it possible tocreate room for development,” he noted.

Until recently the Chinese public put its money inlow-yielding bank investments. But as the populationbecomes increasingly affluent, the Chinese market isdemanding new investment vehicles. Further, the

Chinese government, aware that it can’t meet the demands ofits aging population on its own, is encouraging private invest-ing through pensions and mutual funds while also encouraginginvestors to seek higher potential returns, says Dayle Scher,research director, investment management, TowerGroup.

Today the Chinese mutual fund market — which emergedeight to nine years ago — remains underdeveloped, but it israpidly growing. There are currently 63 fund managementfirms in China, half of which are joint ventures with foreignfirms. These joint ventures includeMorgan Stanley Huaxin FundManagement Co., SYWG BNPParibas Asset Management Co.and ICBC Credit SuisseAsset Management Co.

“People in China

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S e p t e m b e r / O c t o b e r 2 0 0 9

As the wealth managementindustry rebuilds after thecrisis, brokerage firmssuch as Merrill Lynchare making investmentsin technology to attractand retain high-performing advisersand wealthyclients. p.30

Lyle LaMothe(l.) and Mark

Alexander,Merrill Lynch

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Despite the market down-turn, Merrill Lynch has

built a new broker work-station, according to

Lyle LaMothe (l.), head ofU.S. Advisory, and Mark

Alexander, managingdirector, head of tech-

nology, operations andBroadcort clearing for

global wealth and invest-ment management. “Wespend a lot of focus andenergy on making finan-

cial advisers more produc-tive,” Alexander says.

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Gordon is speaking of the era of the dot-com boom,when new online brokerage firms seemingly were poppingup every day and E-Trade was running ads about firingyour broker. “The commercials would show a beautifuloffice and a broker who would say, ‘Let’s talk about retire-ment.’ But it was his retirement, not the client’s,” Gordonrecalls. “They were mocking financial profes-sionals and the value of their advice. Over thecourse of the tech boom and bust and over thecourse of the last year and a half, there’s beenno other time when the value and need of soundfinancial advice from professionals was moreimportant. It’s a good time to be a professionalfinancial adviser, challenging as it is.”

The largest U.S. demographic segment,baby boomers, is approaching retirement, Gordonnotes, and in dire need of financial advice during theseturbulent times. And although Generations X and Y are more accustomed to serving themselves online, hebelieves these groups eventually will realize the need forfinancial advice as well. “It will evolve, just as it has in thelast 20 years,” Gordon says. “The advice may come in a

different fashion — it may get streamed on Twitter orsomething. But I wouldn’t count out the value of profes-sional financial advisers for many decades.”

To keep up with investors’ changing needs and toretain experienced financial advisers, many Wall Streetfirms — including RBC, Merrill Lynch and Fiduciary

Trust — have been pumping money and pro-gramming talent into wealth managementtechnology. “In this current marketplace a lotof financial advisers are going from one place toanother,” comments Sanjay Bery, director,asset and wealth management, at EMCConsulting. “To retain them you need to givethem a bigger bonus as well as the tools that

other firms say they provide.”Three areas in which Wall Street firms are direct-

ing their wealth management IT resources, accordingto Bery, are “shadow browsing,” which allows the finan-cial adviser to see what a client is seeing online (to helpguide the client through the Web site); “client vaulting,”which provides secure online sites to which customersand financial advisers can upload documents and view,

By Penny Crosman

ECAUSE OF ALL THE CHALLENGES and unknowns [in the marketsand the economy], there’s never been a better time for clients to needadvice from a professional,” asserts Craig Gordon, director of RBCCorrespondent Services and RBC Advisor Services. “When I thinkback to 1999, the exact opposite seemed to be true: People werewondering if advice was dead.”

Brokerage firms such as Merrill Lynch, RBC and Fiduciary Trustare confidently investing in technology and tools to attract and

retain high-performing advisers and wealthy clients.

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This year’s honorees, including BlackRock’sTom Fortin (l.) and Rob Goldstein, havefound ways to drive technology innovationsthat are improving business results during anincredibly tough year for the industry. p.12

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N THE WAKE OF THE FINANCIALcrisis, BlackRock has emerged as one of themost valued and influential advisers to theU.S. government. Not only is it the world’slargest money manager, with $2.7 trillion inassets under management stemming from

its acquisition of Barclays Global Investors (due toclose in the fourth quarter), BlackRock also hasbecome a key contractor to the U.S. Treasury depart-ment because of the quantitative asset manager’sexpertise in valuing complex debt instruments.

At the heart of BlackRock’s rise to prominence hasbeen its analytics, which are housed in the firm’sBlackRock Solutions technology division. The tech-nology organization develops BlackRock’s analyticsand maintains extensive databases. “Fundamentally,these products are incredibly complicated,” says RobGoldstein, managing director and head of BlackRockSolutions. “We fortunately have the modeling capabil-ities to look at them from the bottom up.”

Even before Bear Stearns’ hedge funds implodedin spring 2007 and the credit crisis crippled the indus-try, BlackRock was called on for its risk analyticsexpertise. “We started to get inquiries to look at port-folios and to provide a risk assessment,” relatesGoldstein, who declines to name clients but acknowl-edges that the firm became involved with some of the“headline” names following the market implosion.

Known for its expertise in fixed income,BlackRock reportedly was hired by the federal gov-ernment to help value and unwind the complex hold-ings of Bear Stearns, American International Groupand Citigroup. In addition the government engagedBlackRock to evaluate Fannie Mae and Freddie Mac,

the mortgage finance giants, and to perform riskassessments of banks and insurance companies both inthe U.S. and internationally. “It all goes back to thecore modeling capabilities,” emphasizes Goldstein,who compares the ability of the firm’s analytics to pro-vide transparency into complicated instruments to thecapabilities of an MRI machine.

The Birth of AladdinThese capabilities are delivered through Aladdin,BlackRock’s enterprise investment management,operations and risk management system. “The rootsof Aladdin started with the founding members of thefirm,” relates Tom Fortin, CIO at BlackRock’s head-quarters in New York. He explains that with the fastrun-up in complex mortgage assets, BlackRockfounder and CEO Larry Fink, who previously washead of the mortgage department at First Boston,realized the lack of capabilities on the buy side tounderstand these products.

“The sell side was leveraging technology in the mort-gage space, and the buy side didn’t have comparableproducts to understand these things,” adds Goldstein.

So in 1988 BlackRock cofounders Charlie Hallec,currently co-COO, and Ben Golub, the firm’s chief riskofficer, began building collateralized mortgage obliga-tion (CMO) valuation models, relates Fortin. “Thathas been one of the guiding principles of the firm — tounderstand the risks you are taking, to know where youare, to be able to manage them, and to know the limi-tations of the products and the models,” he says.

“Complete portfolio transparency was and is thetheme,” observes Goldstein, who says that BlackRockbegan to get inquiries from other institutional asset

Nonstop Analytics

BlackRock’s analytics and pricing modelsare so well respected that the firm made

a business of them. Now the federal government is one of its top customers.

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ANALYTICS

managers regarding its analytic capabilities when the U.S.mortgage market went through an earlier implosion in 1994:“Can you take a look at our portfolio?” he recalls being asked.

Over time BlackRock started to make the analytics avail-able to its institutional clients as a risk and analytics platform,expanding it to include various advisory services and eventu-ally the entire Aladdin platform. The company officiallylaunched BlackRock Solutions in 2000.

Today BlackRock Solutions employs 1,000 people and hasevolved into a global business with clients that span theAmericas, Europe, the Middle East, Asia and Australia. Itmaintains local client service sites in major cities overseas andacross the United States. With about $7 trillion in clientassets, BlackRock Solutions is the largest securities and port-folio analytics company in the world, according to Goldstein.

“BlackRock recognized very quickly that the problems itsclients were facing were exactly the problems we are facing,”explains Fortin. “It was a natural position to create these mod-els, use them ourselves and use the models to help others.”

Although it’s the largest user of the Aladdin platform,BlackRock collaborates with more than 100 large organiza-tions that use the analytics and risk tools, which ensures thatthe platform stays best in class, according to Goldstein.

Adds Fortin, “We offer Aladdin as a service, so we managethe hardware, the database, the communication services and

the data centers.” While the compute farm is a sharedresource, he notes, each client has its own unique database andtechnology to ensure confidentiality of client information.

BlackRock Solutions generated $116 million in revenue inthe second quarter of 2009 (compared to $100 million in Q22008). In turn, the money manager can plow those profitsinto maintaining the models. “The commercialization ofthose tools allowed us to continue to invest and build out thetools that our clients and BlackRock needed,” says Fortin,adding, “It’s the combination of the technology and thehuman capital investment in people who understand the dataand the models that has made us unique.”

As Fortin suggests, one of BlackRock’s strengths is its ana-lytics group, which includes more than 200 risk analysts. WooKwong and Jody Kochansky run the analytics group, whichperforms the modeling and quality control and helps explainto clients how the models’ analytics work — both thestrengths and weaknesses, according to Goldstein, who start-ed in the analyst program in 1994. In addition BlackRockhires a quantitative modeling group to analyze how the secu-rities will perform in volatile markets.

Recognizing their value, BlackRock works hard to recruit,train and retain top analysts. “BlackRock has a strong recruitingphilosophy,” says Goldstein. “We hire an analyst class with thegoal of [putting them through a] training program.” Analysts in

“BlackRock recognizedvery quickly that the prob-lems its clients were facingwere exactly the problemswe are facing,” says CIOTom Fortin (l.). Adds RobGoldstein, managing direc-tor and head of BlackRockSolutions, “Complete portfolio transparency wasand is the theme.”

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