what challenges lie ahead? a review of emerging industry trends
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What Challenges Lie Ahead? A Review of Emerging Industry Trends. Lee Cutrone BDUG Annual Conference October, 2005. What Challenges Lie Ahead? Predicting the Future is Hard!!!. “Nothing endures but change”. Heraclitus. “ To improve is to change; to be perfect is to change often ”. - PowerPoint PPT PresentationTRANSCRIPT
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What Challenges Lie Ahead?A Review of Emerging Industry Trends
Lee Cutrone
BDUG Annual Conference
October, 2005
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What Challenges Lie Ahead?Predicting the Future is Hard!!!
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“Nothing endures but change”
“To improve is to change; to be perfect is to change often”
“Change in all things is sweet”
“I put a dollar in one of those change machines. Nothing happened.”
Heraclitus
Winston Churchill
Aristotle
George Carlin
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Only Three Things Can Drive Fundamental Change in Our Industry:
Crisis
Economics
Regulation
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Will the Regulators Drive Change?
Conflicting Trends:• Declining Investor confidence• Corporate Malfeasance (Enron, Tyco, WorldCom),
Mutual Fund scandals • Increased Regulatory oversight
– Federal vs. State Regulators -“Regulatory Leapfrog”– Hedge Funds, Mutual Funds, Soft Dollars, Reg NMS
• Change in SEC leadership• Conservative appointment
– ”Laissez Faire” climate?• Spitzer goes for Governor
Which way will the pendulum swing?
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Shorter Trade Affirmation
• The quest for shorter settlement cycles is dead – for now!• Central Matching will not be mandated
• Focus on the goal and not the means to get there– Goal: Affirm trades faster to Improve processing efficiency – Central Matching is the most effective means to that end
• Same Day Affirmation is where we (& the Regulators) want to be• Could be driven by both regulation and economics• Best Practices alone won’t get it done!• SDA will be mandated – but when???
– Canada in 2007– U.S. ???– Europe???
Get Ready for SDA …NOW!
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Will Economics Drive Change?????
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YES, Economics Will Drive Change!
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Emerging Trends Driven by Economics
• Single point of access for IMs
• Investment Manager Outsourcing (IMO)
• Electronic trading
• FIX – executions and post-trade processing
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Seeking a Single Point of Access -Introducing Omgeo Connect…
What is Omgeo Connect?“A single point of access for investment managers to interact with Omgeo services and, ultimately, other third-party post-trade solutions, enabling the trade and settlement management of multiple asset classes via an ASP environment.”
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Traditional Workflow Models & Omgeo Connect
OASYS
SWIFT
Fax/E-mail
ALERT
Omgeo CTM
Trading
Back Office
OASYS
SWIFT
Fax/E-mail
ALERT
Omgeo CTM
OASYS
SWIFT
Fax/E-mail
ALERT
Omgeo CTM
OASYS
SWIFT
Fax/E-mail
ALERT
Omgeo CTM
Trading
Back Office
3rd Party3rd Party
Traditional Model Omgeo Connect
*Omgeo Connect currently offers access to Omgeo Central Trade Manager (Omgeo CTM).
All other connectivity references listed above are planned future enhancements.
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Omgeo Connect Value Proposition
• Enable reliable trade and settlement management
• Manage operational risk and costs through a single connection
• Maintain control over business processes
• Consolidate access to best of breed post-trade offerings
• Access multiple communities of trade counterparties through a common interface
• Mitigate capital cost of continually reconciling systems
Now Live!
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The Move to IM Outsourcing
Top Services Investment Managers Would Consider Outsourcing:
• SSI Database Management – 65%• Trade Confirmations – 59%• Transition Management – 53%• Performance Measurement and Attribution – 47%• Reconciliations – 44%• Fails Management – 44%
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•What’s moving IMs forward?• Cost of technology• Focus on investment performance
•What’s causing IMs to hesitate?• Loss of control• Lack of confidence in providers
Why Outsource?
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Choosing a Provider
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The Relationship
Fund ManagersCustodians
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Sustainability
• Wide gap between consumers and providers on value for price
• Mutual belief that this model is not sustainable
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The Move to IM Outsourcing
• Summary of findings: • IM Outsourcing is here to stay• Outsourcing will promote a greater use of STP & standards• IMO “Flexibility” was most important determinant to Outsource
by an IM• IMOs believe “cost” was most important determinant• Executing an “exit strategy” is risky & expensive• Nearly half of the survey respondents view the current
price/value model as “unsustainable” and in need of change.
What does this mean for IM Outsourcing?
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Is the Current IMO Business Model Flawed?
Consider the following:
• Virtually every GC has an IMO business today• Competition for new business is fierce• Usually based on “cost” & “flexibility”
– “Lift-outs” abound – good for IMs; bad for IMOs
• Result: Squeezed Margins• Result: Delays in consolidating IMs to a single platform• Absent these “economies of scale”, the IMO business
model begins to breakdown
• Likely outcome: IMO “shake-out” and/or increased cost to IMs
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The Growth in Electronic Trading
• Electronic trading (Programs, Algorithmic, DMA) is a growth sector
• 60% of US IM’s are doing with algorithmic trading
• Hedge Fund growth a factor
• Brokers running faster just to stay even!• Volumes AND Commissions
• Theory 1: Tighter margins force firms to be more efficient• The IT “Trickle-down effect” to Operations
• Good news for STP automation
• Theory 2: Tighter margins reduce available IT resources
• Post-trade IT resources decline• Bad news for STP automation
• A catalyst for change – e.g., differential pricing?
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Expanding the Use of FIX
• The Final Information Exchange (FIX) has become the de-facto standard in Trade order IOI and execution in the US• Initially equities focused• Fixed Income is rapidly growing• FIX Europe on the rise
• FIX U.S. (equities and Fixed Income) now looking to expand use of FIX protocol to U.S. allocations and confirms.
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25%
15%
20%
9%
0%
2%
1%
3%
38%
29%
34%
27%
37%
48%
22%
52%
ForeignFixed
Income
ForeignEquities
DomesticFixed
Income
DomesticEquities
OmgeoManual
FIX
Other
Percent of Allocations Processed by Channel
How are allocations processed today?
Source: The Tabb Group
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Implications/Contingencies
• Legal:• 10(b)10 “No-Action” required – Plausible• NYSE Rule 387 approval – Questionable
– Is it needed for Bi-lateral links?– Who is filing entity?
• Compliance “legends” on FIX not accommodated
• Operational:• Custodian Banks would have to accommodate FIX messages• Promotes Local Vs Central matching• Necessitates multiple “PDQ-Like” links to DTC• May promote greater use of Delivery Orders
– Is this contrary to STP goals?
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