journal of applied it & investment management - vol.2,no.1

MITIGATE RISK REDUCE COST ENABLE GROWTH

#JOURNALVolume 2 · No. 1 ·April 2010of Applied IT and Investment Management

Alexander Poppe Managing DirectorHSBC INKA

GEARING UP INVESTMENT MANAGEMENT SYSTEM FOR UCITS IV

Cornel Bender Managing Partner Capco

POST-CRISIS FINANCIAL ORDER SETS NEW IT SYSTEM CRITERIA

IN THE PURSUIT OF GROWTH: A BEST-PRACTICE IT PLATFORM CASE

Roman G. TrageiserSpokesman of the Board of the Managing DirectorsDealis

2 April2010 JOURNALOFAPPLIEDITANDINVESTMENTMANAGEMENT SimCorp

Read the journal online at www.simcorp.com/journal

CONTENTS# INTHEPURSUITOFGROWTH:

ABEST-PRACTICEITPLATFORMCASE 3

# GEARINGUPINVESTMENTMANAGEMENTSYSTEMFORUCITSIV:ONEGERMANVIEWPOINT 10

# THOUGHTLEADERSHIPININVESTMENTMANAGEMENT:SIMCORPSTRATEGYLABRESEARCHPROGRAMME2010–11 16

# POST-CRISISFINANCIALORDERSETSNEWITSYSTEMCRITERIA 18

# ASSETMANAGERS:NEWREQUIREMENTSINLIGHTOFTHEFINANCIALCRISIS 22

# OPERATIONALPLATFORM:ASTRATEGICASSETTHATSUPPORTSBUSINESSGOALS 27

# COUNTDOWNTOSOLVENCYII:ACHECK-LISTOFITCHALLENGESFACINGINVEST-MENTMANAGERS 32

# REGULATORYUPDATE 36

# BOOKREVIEWS 37

# RECENTRESEARCHANDWHITEPAPERS 38

CEO COMMENT:

Welcome to the ‘new normal’

by CEO Peter L. Ravn

Given the vulnerable state of thefinancialmarketsin2009andtheharshconditionsinwhichmanyofourclientshad to operate, SimCorp producedresults for the year thatwere goodonthe whole considering the morechallengingandvolatileclimate.Asoneinvestmentanalystobservedatarecentpresentation of our annual accounts,SimCorp’s business model has beenstress-tested throughout the past yearandresultshaveliveduptoexpectations.

Viewed historically the investmentmanagement industry has performed

wellandactedasadriverforgrowth.Butthefinancialcrisisof2007-09wasawake-up call for the industry, challenging existing norms and codes of behaviour. Ifanythingthecrisisbroughthomethefactthatfromacorporateperspective,whatisnowneededisanorganisationthatisflexibleandquicktorespondtoanacceleratedpaceofchange.‘Businessunusual’isthenewnorm–not‘businessasusual’.

In this rapidly changing and more hostile environment we have observed aslight shift in thedecision-makingprocess in termsof somewhatprolongedbuyingprocessesandincreasedinvolvementoftop-tiermanagement.Weseethesetendenciesasapositivesignthattheindustryismaturing;investmentsinIThaveneverbeenofmorestrategicrelevancethannow.

AnalystsagreethatmakingtherightITdecisionsisparamountandwilleventuallysortthewinnersfromthelosersinthestruggleforcapturingaprofitableshareoffuturegrowth,andforcreatingthekindofvalueforinvestorstheyarestrivingforinthe‘newnormal’.Inthislight,thecrisishasincreasedtheproportionoffinancialinstitutionsthatrequestsolutionsonastrategiclevel.AtSimCorpwearegeareduptomeettheseinstitutionswithawholerangeofinitiatives.

Among these initiatives and in addition to constantly enhancing SimCorp’senterprise solution for investment managers, SimCorp Dimension, we arecontinuinglyinvestinginindustrybest-practiceresearchthroughfundingSimCorpStrategyLab,SimCorp’sindependentresearchinstitution.Onthatnote,Iamlookingforward in 2010 to presenting the results of the work of 12 international best-practiceresearchcommittees,consistingofacademicsandindustryrepresentatives.

Supplementary to our research activities, we also provide a series of serviceofferingsthroughSimCorpServices,thatindividuallyorinanycombination,enable institutions to further streamline their business operations or theircompleteoperatingmodel,resultinginsometimesquitesignificantlyincreasedcompetitiveness. As one example, within the area of operational services, bydeploying SimCorp’s certified SimCorp Dimension specialists, we are nowcapable of taking on the responsibility of managing system problems andincidentsfromtheclient’ssideaspartoftheclient’steam.

Peter L. Ravn, Ph.D., is CEO at SimCorp A/S.

EDITOR-IN-CHIEFLars Bjørn Falkenberg, Vice President, SimCorp A/[email protected]

EDITORIALASSISTANTMette Trier, SimCorp A/[email protected]

PUBLISHERSimCorp A/S, Weidekampsgade 16, 2300 Copenhagen S, Denmark, Phone: +45 35 44 88 00.

Journal of Applied IT and Investment Management is a quarterly publication, published and distributed globally by SimCorp A/S. Print run: 11,000.

SUBMISSIONGUIDELINESArticles, book reviews, new reports and information on recent research can be submitted for review to Editorial Assistant Mette Trier, [email protected]. For submission guidelines, please visit www.simcorp.com/journal.

LEGALNOTICEThe contents of this publication are for general information and illustrative purposes only and are used at the reader’s own risk. SimCorp uses all reasonable endeavours to ensure the accuracy of the information. However, SimCorp does not guarantee or warrant the accuracy or completeness, factual correctness or reliability of any information in this publication and does not accept liability for errors, omissions, inaccuracies or typographical errors. The views and opinions expressed in this publication are not necessarily those of SimCorp.© 2010 SimCorp A/S. All rights reserved. Without limiting rights under copyright, no part of this document may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form, by any means (electronic, mechanical, photocopying, recording or otherwise) or for any purpose without the express written permission of SimCorp A/S.SimCorp, the SimCorp logo, SimCorp Dimension and SimCorp Services are either registered trademarks or trademarks of SimCorp A/S in Denmark and/or other countries. Refer to www.simcorp.com/trademarks for a full list of SimCorp A/S trademarks. Other trademarks referred to in this document are the property of their respective owners.

ISSN 1903-6914

SUBSCRIPTIONSubscription to the journal is free of charge for members of the industry, associated institutions and academics. To subscribe, please visit www.simcorp.com/journal. Change of address should be e-mailed to [email protected].

SimCorp JOURNALOFAPPLIEDITANDINVESTMENTMANAGEMENT April2010 3

# In the pursuit of growth: a best-practice IT platform case

I nvestment management in Ger-manyisbasedonatriangularre-lationshipofinvestor,investmentcompany and custodian (more

commonlyreferredtoinGermanyasDe-potbank) that isunique in its scope.In-vestmentcompaniesserveassuppliersofinvestmentfundsandmanagefundassetsprovidedbytheinvestors.ItisthetaskoftheDepotbanktotakecareofthecusto-dianship of fund assets, calculate thesharepriceeachtradingday,aswellastomonitor compliance with investmentguidelines. In theadditional interestsofinvestors,thecountry’sfinancialsupervi-sory authority – the Bundesanstalt fürFinanzdienstleistungsaufsicht (BaFin) –servesasthesupremeregulatingauthor-ity,supervisingallthepartiesinvolved.

The investment company in turn re-flectsavaluechainwithlinkscomposedofselection,purchaseandsaleofshares,interest-bearingsecuritiesorrealestateand extending to regular reporting onactivitiesandfunddevelopments.ItisacurrenttrendinGermanythatpartsofthis value chain are increasinglybeingoutsourced to competent, specialisedservice providers. One prominent ex-ampleofthisisDealisFundOperationsGmbH,whichwitharound€325bninassets under management (AUM) inaround2,500 funds is the largestpro-viderof fundaccountingandfundad-ministrationservicesinGermany.

Dealis is the joint venture of two ofGermany’s foremost investment man-

As the dust settles in the wake of the financial crisis, growth has reemerged at the top of the agenda for investment management companies. We spoke to Roman G. Trageiser, Spokesman of the Board of the Managing Directors, Dealis, about the strategic goals the company has set and how a successfully integrated and scalable IT platform is instrumental in enabling growth.

agementcompanies,AllianzGlobalIn-vestorsandDekaBank.AllianzGlobalInvestorsGermanyisGermany’slargestinvestment management company, ex-panding its market leading positionwith theacquisitionof fellowGermaninvestment management companycominvest early in 2009. DekaBankserves as the central investment man-agementcompanyfortheGermansav-ingsbanks,federalstatebanks(Landes-banken)andothernetworks.

ANAGENDAGEAREDTOGROWTHIn the relatively short time since thetwo investment management compa-niesagreedtopoolresourcesandfoundGermany’s largest fund administratorin January2009,Dealishaspursuedabusyagendagearedtogrowth.Impor-tant milestones along the way for thejoint venture, according to Roman G.Trageiser,include:

• migration of the first of DekaBankand cominvest funds to a commonITplatform;

• integration of new employees tobring the current total to around400;

• creationofaLuxembourg-basedsub-sidiary;

• relocation to a new head office inFrankfurt.

Of these moves, the successful migra-tionofthefirstDekaBankfundstotheintegrated SimCorp Dimension plat-

forminJuly2009wasoneofthemostimportantbuildingblocksforensuringthegrowthof the young company.AsMr.Trageiserexplains:“Successfuluseoftheuniformsystemplatformengen-deredinSimCorpDimensionaffordedmaximum flexibility so that processescan be systematically adjusted to suitour individual client requirements. Toensureoperational stability in thebestinterestsofclients,thefirstdaysofpro-ductionusingthenewsystemwereini-tially run in parallel with the old sys-tem.Fundvaluations for themigratedfundsarenowrunonlyonthenewplat-form. It is foreseen thatallDekaBankfunds will have been migrated by theendof2010.”

Moreover, and in parallel, the firstcominvest funds were successfully mi-gratedtotheSimCorpDimensionplat-formbymid-2009.Thiswasinthecon-text of Allianz Global Investors’integration of cominvest, which en-tailed administration of the Germancominvest funds being outsourced toDealis.AsMr.Trageiseradds:“Tomi-grate the funds of three major invest-mentmanagementcompaniestoacom-mon IT platform was a real ordeal byfire.Butweaccomplished it thanks tothe excellent cooperation of the entireDealis team. All cominvest funds arescheduledtobemigratedbymid-2010.”

Another important landmark was thecreation of a Luxembourg-based sub-sidiaryintheformofDealisFundOp-

Michael Metcalfe is a German-based f inancial journalist who has worked in the Luxembourg f inancial sector for more than 15 years.

April2010 JOURNALOFAPPLIEDITANDINVESTMENTMANAGEMENT SimCorp4

erationsS.A.,whichcommencedoper-ations in June2009.Headquartered inLuxembourgCity,atotalof47employ-ees manage the funds of the Luxem-bourg DekaBank Group in Luxem-bourg.Themigrationofthesefundshasjuststarted.

Asofmid-July2009,staffdrawnfromvariouspremisesinFrankfurtwerere-located under the single roof of theHerriot’s office complex in the Frank-furtsuburbofNiederrad.InadditiontotheFrankfurtandLuxembourgoffices,Dealis has a presence in Leipzig andMunich.Overall, the jointcompanyisstaffed by around 400 employees re-cruitedfromthebackofficeunitsofAl-lianzGlobal InvestorsandDekaBank.For Mr. Trageiser, this marks anothermilestone: “With the support of ourparent companies we have in additionto the daily operations at project levelaccomplishedagreatdealinaveryshorttime.Withtheseinitialmoves,wehavelaidthefoundationsforourfuturede-velopment and growth. We must nowbuildon thismomentum for the tasksandchallengesthatlieahead.”

CREATINGTHERIGHTGROWTHFRAMEWORKSinceitwascreated,Dealishas,asstatedbefore indetail,primarilyusedthepastfewmonthstobuildthenewcompanyinterms of its infrastructure and workprocesses.With thehelpofmarketandcompetitive analyses, as well as a cost-based price/performance survey cur-rentlybeingundertaken,thebasicframe-workisnowbeingcreatedwithwhichtoacquirenewbusiness.InMr.Trageiser’swords:“Theincreasedvolatilityobservedinfinancialmarketsmakesusveryopti-mistic about the successful exploitationofnewbusiness.Preciselybecauseofthisvolatility, investment managers will beled to increasingly focus on their corecompetencies and seek out high-per-formancepartners inordertooutsourcewhat they regard as non-core activities,such as fund accounting and fund ad-ministration.”

As Mr. Trageiser goes on to explain:“Already today Dealis has successfullypositioned itself as such a specialisedservicepartnerguidedbytwostrategicgoals:firstly,tobeastableandreliablepartnerforourclients;andsecondly,tohelp our clients to be even more suc-cessful. We will achieve the first goalthrough our unique ownership struc-ture:withover50yearsoffinancialex-perienceandtheindustryknow-howoftwo of Germany’s largest investmentmanagersasshareholders,ourbusinessmodel is safeguarded and sustainable.Thereforethefoundationsarelaidtoof-fer our clients particularly stable andindustrialisedproductionprocessesthatarestateoftheart.”

Thesecondand relatedgoalDealisas-pirestoachieveistoallowitsclientstooffload specific working tasks. By out-sourcingpartsofthevaluechainthatdonotbelongtocorebusiness,suchasfundaccounting and fund administration,Dealisenables itsclientstofocusmore

on their core competencies and excel-lence in daily business operations. InMr.Trageiser’swords:“Withthehelpofour high-performance SimCorp Di-mensionplatformwecanalwaysensurethatwetailorourservicestoservingtheneedsofourclientsandatthesametimereflect the latest legal requirements aswellasfinancialinstruments.”

An essential part of the customisedserviceDealisprovidesistheclosedia-logueandcoordinationitpursueswithits clients. As Mr. Trageiser explains:“To this end, there are service reviewmeetingsheldregularlywitheachindi-vidualclient,aswellasadvisorymeet-ingsscheduledwithallclients.Forin-stance,thefurtherdevelopmentofourplatform, i.e. in the form of softwarepatches,isjointlycoordinated,plannedandbudgeted.Thiscoupledwithannualreleasechangesputsusinapositiontobookandadministerallthedesiredfi-nancial instruments, e.g.ofoneof theworld’slargestbondmanagers.”

CHALLENGESFACINGTHEINDUSTRYTODAYNevertheless,anddespitethefast-trackgrowth Dealis is intent on pursuing,Mr. Trageiser is quick to admit thatthereareanumberofchallengesfacingthe investment management industrytoday.Theseincludehowbesttoachievegrowthandvalue-creationinthepost-crisis environment, whether it bethrougheconomiesofscaleandalow-costleadershipstrategy,productdiffer-entiationorgrowthacceleration.How-ever,someofthechallenges,includingan increasing flow of regulatory re-quirements and the greater need forflexibilityandscalabilitywithregardtooperational platforms, were already inevidencebeforethecrisisbroke.

As Mr. Trageiser observes: “Even be-fore the financial crisis erupted theGerman investment management in-

“In view of the sharp drop in fund volumes as a result of the financial crisis, many investment managers are now confronted with the ques-tion of what direction their future

business strategy should take.”



dustrywasfacedwiththechallengeofimplementing as quickly as possibleregulatory frameworks that were con-stantlychanging,quiteapartfromhav-ing to deal with product innovation.And this in an environment that foryearshadbeencharacterisedbyasteadyerosionofmarginsontheonehand,and

on the other, by a labour market thatwas short on specialist skills (particu-larly with respect to tax and IFRSknow-how).”

Inviewofthesharpdropinfundvol-umesasa resultof thefinancial crisis,many investment managers are now

confronted with the question of whatdirectiontheir futurebusinessstrategyshould take. Should they positionthemselves as anicheplayerwith spe-cialisedproductknowledgeorasafullservices provider, capable of plausiblycateringforallassetclassesandinvest-mentstyles?

As a trained banker and certif ied EFFAS financial analyst, Roman G. Trageiser has more than 17 years of experience in asset management.

“… we have laid the foundations for our future development and growth. We must now build on this momentum for the tasks and challenges that lie ahead.” Roman G. Trageiser

6 April2010 JOURNALOFAPPLIEDITANDINVESTMENTMANAGEMENT SimCorp

Irrespectiveoftheanswertothatques-tion, Mr. Trageiser stresses that: “Fo-cusingonthecorecompetencyof‘fundmanagement’ isanessentialelementintheargument–andhenceapreoccupa-tion with the subject of ‘outsourcing’.Onlyinsuchacasewillmostfundman-agersbeinapositiontomasterboththeregulatory and legal requirements aswell as striving for innovation.For theinsourcer,however,thisdemandsaflex-ibleandmoreor less infinitely scalableplatform,aswellastheabilitytoprovideclients with resources that are alwaysdedicatedtoinnovation.”

PRECONDITIONSFORCREATINGDEALISIn the specific case of Allianz GlobalInvestors andDekaBank,bothcompa-nies had recognised independently ofoneanother that theybarelyhad roomfor further efficiency improvements intheiralreadyhighlyefficientbackofficeunits.FollowingsuccessfulintroductionoftheSimCorpDimensionplatformin2005, Allianz Global Investors was inthepositionthatonlyamassiveincrease

in processing volumes, e.g. through ajoint venture, would create significantsynergies–circumstancesthatSimCorp

Dimension can accommodate if andwhentheneedarises.

Mr. Trageiser goes on to explain: “Si-multaneously DekaBank found itself inthesituationofhavingcreatedwithDekaFundMasteraspecialisedandlegallyin-dependent back office unit as insourcerfortheinvestmentmanagementactivitiesof the Deka Group; also within theframework of outsourcing internal con-trolling, all processing aspects were onthepointofbeingmademoretranspar-ent and where necessary improved. Asthetimeapproachedforthemaintenancecontractwiththeexistingbackofficesys-temtoexpireandthedecisionwasmadeto use SimCorp Dimension as the tar-getedplatform,itbecameanobviousstepforDekaBanktocarryouttheforthcom-ingmigrationwithapartnerwhoalreadyhadextensiveexperiencewithSimCorpDimension.”

For both companies – Allianz GlobalInvestorsandDekaBank–theresultingpartnership as reflected in Dealis pro-ducedprecisely theoptimisationpossi-

bilities that were soughtafter: higher processingvolumeswiththesameop-portunity of being able toshare future IT costs, aswellastoenhanceintellec-tualpropertysynergies.

CHOOSINGTHERIGHTGROWTHALTERNATIVEAccording to Mr.Trageiser:“Sincethemainobligation here was thatthe existing service main-tained the same degree ofexcellence as before, thesecondcourseofactionwaschosen. No external pro-

viderswouldhavebeenabletoensureinsuchacertainwaythat,tocitejustoneexample, the highly complex require-

ments of the IFRS accounting proce-duresoftheAllianzGroupasthelarg-est institutional investor in Germanyweremetintheshortterm,aswellasinthemediumandlongterms.”

DekaBank meanwhile was faced withthe prospect of replacing its existingback office platform. Not only did itwishtomigratewithSimCorpDimen-sionasthemostpowerfulsystem,italsowantedtopreservethemostappropriateparametric setups for its own require-ments. And it was precisely these re-quirements that Allianz Global Inves-torsasitslaterjointventurepartnerwasable to fulfil in its already establishedSimCorpDimensionplatform.

Furthermore the creation of Dealisplacedbothjointventurepartnersintheposition of leaving their own mark onthemoreorlessinconclusivediscussionsconcerning the outsourcing trend thathavebeenrumblingoninGermanyforyears. Adds Mr Trageiser: “Both ourshareholders and my fellow manage-ment board members and I are firmlyconvinced that some other German orLuxembourg investment managementfirmswill followthisexampleandthatwewillbeabletowelcomefurthercli-entsinthenearfuture.And,unlikebe-foreourcreation,therenowexistsinthemarketaserviceproviderintheformofDealisthatcansatisfyeventhecomplexneedsoflargeclients.”

ACLEARLYDELINEATEDVALUECHAINIn its relatively short existence DealishasalreadytakenanumberofITmeas-urestoensurethat itsoperationalplat-form can support and enable its fast-paced growth strategy. The standardSimCorp Dimension system platformDealisusesallowsittomakeprocessesevenmoreclient-orientedandsuitedtoitsspecialisedneeds.ThusSimCorpso-lutionsplay an integral role inDealis’s

“For both companies – Allianz Global Investors and

DekaBank – the resulting partnership as reflected in

Dealis produced precisely the optimisation possibilities that

were sought after ...”



overallbusinessmodel in termsofcor-rectly aligning IT systems to combinethebestfeaturesfromtheperspectiveofefficienciesandsynergies.

InMr.Trageiser’swords:“WeatDealisareahighlyspecialisedserviceprovider,whichverydeliberatelybusiesitselfwithonly a single clearly delineated part ofthevaluechain in investmentmanage-ment: providing services in the areaoffund accounting and fund administra-tionathomeandabroad.This also in-cludesthemaintenanceoffinancialas-sets and other services related to theabove activities, with the exception ofsuch transactions that requirea licenceundertheGermanBankingActortheInvestmentAct.”

He continues: “Our work begins pre-cisely at that point when a transactionthat isbrokermatchedandcompliancecheckedisrecordedbythemiddleofficeof our clients via a data interface withourSimCorpDimensioninfrastructure.Ourworkendswiththetransmissionoffund-relevantdataviaaninterfacefromSimCorpDimensionintothereportingsystemsofourclients.Thesefund-rele-vantdataincludetheshareprice,securi-tiesholdingsandcashbalances,aswellasthetransactionsbooked.”

The process is best described with ananalogy as used by Mr. Trageiser: “Ifonecomparesourworktothatofafac-tory,SimCorpDimensionwouldbeourassembly line. And precisely this pro-ductionlinewasselectedbecause,ontheonehand,noothersystemisasscalableand,ontheother,asindividuallyadjust-able. Another important aspect is sus-tainability.Inourmissionstatementwestressthatwewanttobeastableandre-liable partner for our clients. Conse-quently,wearealsodependentonasys-tems supplier that provides us withsufficientcertaintytoworksuccessfullywithitoverthelongterm.Herewefeel

that with SimCorp we are in verygoodhands.”

Compared with other investmentmanagementsystems,Dealisalsore-gards SimCorp Dimension as themostattractivesolutionofferedonthemarket because it offers comprehen-sive,guaranteedup-to-datefunction-ality and fully meets its specific de-mands for flexibility, scalability,usability, customisation,performanceand reliability – all in an extremelyconfigurable and fully integrated,modular operational platform. Mr.Trageiser adds: “Dealis is confidentthatSimCorpDimensionisuniquelycapableofsupportingourcurrentandfuturestrategicandtacticalinitiativesand will continuously enable ourgrowth strategies in the years tocome.”

ITASAPLATFORMFORENABLINGGROWTHIn describing the results Dealis hasachieved fromusing the ITplatformwith regard to enablinggrowth,Mr.Trageiserlistsasfollows:

• flexibilityandscalabilityinseizinggrowthopportunities;

• integratedservicesofferedtointer-nalandexternalclients;

• consistentlyhighandreliableserv-icelevels;

• measurable productivity gains andcostreductions.

Explains Mr. Trageiser: “When weoriginally planned theproject tomi-grateDekaBankinvestmentfunds,weworkedon thepremise that the totalnumber of migrant funds would bemore limited than in fact turnedouttobe the case.However, launchesofnew funds meant that the figureclimbedonceagain.TheintegrationofcominvestintoAllianzGlobalInves-torsinturnaddedtheGermanfunds

ofcominvest.Allinall,wearemigrat-ing a total of approximately twice asmany funds on our platform than waspreviouslythought.Thisisaprojectthathasnoequalinitsscope–bothintermsof the number of funds as well as theclassesofrecordedsecurities.”

At thesametimeDealisalsohas toat-tend to its day-to-day business in the

framework of which it administers thefundsofAllianzGlobalInvestorswithaconsistently high degree of service andquality.Takenaltogether,Mr.TrageiserestimatesthatDealiswilladministerap-proximately2,500fundsonasingleSim-CorpDimensionplatformbyyear-end.

Migrationprojectsanddailyoperationsareonething–respondingtochangingneeds is another. Explains Mr.Trageiser:“Almostonaweeklybasiswereceivefromourclientschangerequestsfor newly administered instruments,primarilyintheareaofover-the-counter(OTC) derivatives, as well as newlybooked IFRS-holding categories, andthelike.Andalsoprevalenthereistheexpectation that the ‘time-to-market’forsuccessfullyrespondingtothesere-quirementsisinnowayworsethanbe-

“ ... we are migrating a total of approximately twice as many funds on our platform than was previously thought. This is a project that has no equal in its scope ...” Roman G. Trageiser


Dealis Fund Operations GmbH

Dealis Fund Operations GmbHisajointventurecompanysetupby Allianz Global Investors andDekaBank. Administrating ap-proximately€325bninassetsun-dermanagementinaround2,500mutualandspecialfunds(asat31December 2009), Dealis groupstogetherallthecentralbackofficetasksoftheleadingGermanassetmanagers.Thismakesitthelarg-est provider of fund accountingand fundadministration servicesinGermany.Dealisusestheinte-grated investment managementsystemSimCorpDimension.Thisuniform system platform offersmaximumflexibilitysothatproc-esses can be systematically ad-justedtosuitindividualclientre-quirements.

forethejointventurewascreated.Andsofarwehavenotrunintoanysystemicbottlenecks. I think that speaksclearlyfortheperformanceofoursoftwarepro-vider SimCorp, as well as our internalprojectmanagementexpertise.”

In Mr. Trageiser’s view, this profoundknowledgeisalsooneofDealis’suniquefeatures.“Nootherserviceproviderhassuchresources intheformofdedicatedspecialistsforfinancialinstruments,ac-countingaccordingtoHGB,IFRSandUSGAAPrules,investmenttaxissues,as well as outsourcing-controlling, IT

security–thelistcouldgoonandon.Ithinkwecanrightlysaythatouruniqueexpertise makes us the single point of

contactforallquestionsconcerningtheoutsourcingprocess,”addsMr.Trageiser.

PLANNINGFORFUTURECONTINGENCIESLooking to the future, Mr. Trageiserstates that different growth strategiesarecurrentlyunderconsideration.

“Inalloureffortstoattractnewclientsitis alwaysvery important forus thatwedonotcompetewiththemandthattheycan maintain their special unique fea-tures.Thisisanotherreasonwhywespe-cialise in a particular part of the valuechain.Forboththeinstitutionalandtheretail end-investors of our clients, it istotally irrelevant who calculates thesharepricesoftheirfunds.Thatthepriceforthisserviceshouldtendtobecheaperiffarmorethan2,500fundsareavaila-ble–asisthecasewithusatDealis–isobvious,”arguesMr.Trageiser.

Inhis view,evenat thepre-andpost-tradereviewofassetlimitsthingslooksquitedifferent.“Herethereareverysig-nificant differences for any investmentmanagertoexamine,andthatispossiblyaunique feature.Exactly the sameap-plies in the execution of commercialtransactionsinbuy-sidetrading.Theex-ecuted trade isaunique feature.Equalto the ensuing downstream process isthemonitoringofcorrectbusinessprac-tices.Alsoforpurelyorganisationalrea-sons, the responsible unit should be incloseproximitywiththetradingunit,asexperience shows that too many ques-tions can arise in this area.Also thesearegoodreasonswhywedonotwanttochange our business model in that di-rection,”statesMr.Trageiser.

Briefly expressed, Mr. Trageiser con-cludes that Dealis’s strategy looks likethis:“Wedonotwishtoberecognisedbytheend-investorsofourclients.Butatthesametimewewouldliketorelieveour clients from an activity for which

theycanobtainnopriceincreasesfromtheircustomersandalsoearnnolaurels.With this strategy,we feelweareverywellpositionedforgrowthinthecom-ingyears.”

Roman G. Trageiser was appointed Spokesman of the Board of the Managing Directors of Dealis Fund Operations GmbH 1 January 2009. Mr. Trageiser is also the chairman of the administrative board of Dealis’s Luxembourg-based subsidiary Dealis Fund Operations S.A.

“We do not wish to be recognised by the end-

investors of our clients. But at the same time we would like to relieve our

clients from an activity for which they

can obtain no price increases from their

customers and also earn no laurels.”

Roman G. Trageiser


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# Gearing up investment management system for UCITS IV: one German viewpoint

The countdown to legal implementation of Undertakings for Collective Invest-ment in Transferable Securities (UCITS) IV in July 2011 is compelling the investment management industry to shift into higher gear the tasks of aligning business models and making operational structures more efficient. In this con-text, it is worth examining the challenges and opportunities presented by the latest evolution of the UCITS framework and exploring the significance for the German asset management industry.

W ithUCITSIVsettobe written into thenational legislationofall27EUmember

statesby1July2011,anassessmentofthe likely impact of the directive andthe strategies that fund companiesshould adopt has become more press-ing.Thepotentialcapability foreasingaccessacrossEuropeanbordersengen-dered in theUCITSIVdirectivepro-vides opportunities to achieve greaterefficienciesacrossawiderhorizon.Butthere are also challenges to be takenintoconsideration.

The aim of UCITS IV is clear: to in-crease economies of scale and reducecostsforUCITSinvestorsbyintroduc-ing an improved regulatory environ-mentthatwillincreasecross-borderef-ficiencies while enhancing choice,transparency and investor protection.Inaddition,therangeofUCITSfunds

managersthroughamorescalablefundrange.Changesunderthedirectivewillimprove distribution opportunities,bringing speedier entry intonewmar-kets and that should be the leadingdriver for managers distributing prod-uctsacrossborders.

Although the implementationdeadlineforUCITSIV is July2011, the surveyshowedthatwithlessthan18monthstogo,afifthoffundshadnotstartedworkin this area. Less than a third had al-ready started work on implementation,eitherbyappointingasteeringcommit-teeorconductinghigh-levelanalysis.

THEKEYFEATURESOFUCITSIVOneof themainobjectivesofUCITSIV is to address what have been per-ceivedasthestructuralinefficienciesofthe UCITS framework. UCITS IVcontainssixprovisionsthatareintendedtoincreasetheefficiencyofthecurrentlegislative framework by allowingUCITSmanagers tomore easily tradecross-border and drive down the costsofmanagement,whileimprovinginves-torprotection.Thesekeyelementsare:

• introduction of the managementcompany passport (MCP), enablingfunds tobemanagedby a companylocatedinanyEUmemberstate;

• simplifying and speeding up theUCITSnotificationprocedure;

will widen to include some alternativefund products. However, what is lessclear is theway inwhich implementa-tionwillpanoutintheoperationalandadministrativespheres.IntheseareasitwillbecrucialtohavetherightITplat-form.

ALIGNINGBUSINESSMODELSISKEYAccording to a report published byErnst & Young in January, businessmodelalignmentwithUCITSIVwillcompelcompaniestoimprovetheirop-eratingmodels.Inasurveyof98Euro-pean investment funds, 49% indicatedthat business model alignment withUCITS IV was the biggest driver forimprovingtheiroperatingmodels.Thiscomparedwith37%thatidentifiedcostefficiencyasthebiggestdriver.

However,thesurveyalsorevealedthatUCITS IV is not bringing the opera-tional cost reductions many Europeaninvestmentmanagersassumed.Accord-ingtoErnst&YoungUCITSIVleaderCrispin Rolt, the focus has turned tousingUCITSIVtooptimisetheoper-atingmodel and fund ranges, to alignbetterwiththebusinessstrategyoftheorganisation.

The report indicated that operationalefficiencywasakey featureofUCITSIV and that itwouldbringbenefits to

“Changes under the directive will improve distribution

opportunities, bringing speedier entry into new markets ...”

Alexander Poppe,Managing Director,Internationale Kapital-anlagegesellschaft mbH –HSBC INKA, Germany.


• clarifying the rules for cross-bordermergersbetweenUCITSfunds;

• introducing rules to create UCITSmaster-feeder(pooling)structures;

• replacing the simplified prospectuswith a ‘Key Investor Information’(KII)factsheet;

• reinforcing existing regulatory re-quirements, such as organisationalrequirements and rules of conductformanagementcompanies.

THEMAINIMPLICATIONSOFUCITSIVThrough UCITS IV, the EuropeanCommission aims to increase econo-mies of scale and to reduce costs forEurope’sUCITS investorsby improv-ing cross-border efficiency. Improvedefficiency should in turn result in im-provedinvestorreturns.Themainim-plications of the directive’s six provi-sionsasoutlinedaboveareforeseenasthefollowing:

• Implementingthemanagementcom-panypassportwillhave to take intoconsideration the tax implications.Theprofitsofthemanagementcom-panywillbetaxedinthetaxdomicileof themanagementcompany.Giventhe differing corporation tax ratesacrosstheEU,certaindomicilesmaybe favoured over others. Also theregulatory framework may differfromonelocationtoanother.

• The new notification procedure is adefiniteimprovement,butitdoesnotapply to marketing material, whichmanyfundgroupschoosetopublishinordertodefinehowtheyaddvalue,nor to changes to an existing pro-spectus.Theelectronic transmissionof documents will considerably re-duce the administrative burden ofthenotificationprocess,aswouldtheestablishmentofacentralelectronicdatabasetowarehouseallfunddocu-mentation – a proposal that is cur-rentlyunderconsideration.

• In clarifying the rules for UCITSmergersinvestmentmergershavethegreatest potential scope for deliver-ing efficiencies. Full mergers elimi-natemore costs than entitypoolingstructuresbecausetheresultisasin-glefundvehicle,withoneprospectusand one interface with one primaryregulator.However,giventhediffer-encesinEurope’snationaltaxframe-works,includingthetaxtreatmentofmergers, it will prove difficult forUCITSmanagerstomergefundsonthescaleoriginallyenvisaged.

• Master-feeder (pooling) structuresprovide very important flexibility.ThereareavarietyofwaysinwhichUCITS managers could in practiceuse master-feeder structures, whichcanbeintroducedforeitherumbrellaor sub-funds. Most obviously, aUCITS manager could decide tohaveaEuropeanhubinoneparticu-lar centre and to run all of its EUfeederfundsintothatmaster.

• Like the simplified prospectus, theKIIdocumentrequiresupdatingan-nually, or more frequently in theevent of a material change to thecontents,withupdatessenttohomeandhost regulator. Itwill alsohavetobetranslatedintothelanguageofeverycountry(orintoEnglishifap-proved) in which the fund is mar-keted and made available on themanagement company’s website, soincurringextracosts.

• Strengtheningcurrentregulatoryre-quirementsshouldmakeiteasierforUCITS managers to consolidatetheircross-borderactivities, therebycreating savings and significantlyimprovingtheabilityofafundpro-moter based in one country to dis-tribute and market funds in othermemberstates.

CHALLENGESANDOPPORTUNITIESBynowit isclearthatUCITSIVwill

pose a number of administrative chal-lenges and opportunities, not least intheITarea.ThiscouldtriggerarethinkofcurrentbusinessandITmodelsifin-vestmentmanagerschoosetocentralisetheir UCITS management companiesor establish a master-feeder structure,allowing cost efficiencies to be gainedbyhavingthesameserviceprovider indifferentjurisdictions.Overall,therealchallenge facing the investment man-agementindustrywillbetoidentifytheoptimaloperatingmodelaffordedto itby thenewpossibilities underUCITSIV, while at the same time refocusingonmeetingtheneedsofinvestors.

WhilethefullimpactofUCITSIVim-plementation on the fund administra-tionmarketremainsunclear,thisareaisalreadyan important focusofattentionfor investment managers. In parallel,thereisagrowingtrendtowardscreatingmore efficient administrative modelswith institutionsstreamliningandcon-solidatingoperationalprocessesandITplatforms. Other factors driving this

“The aim of UCITS IV is clear: to increase economies of scale and reduce costs for UCITS investors by introducing an improved regulatory environment ...”


trend include cost pressures, increasedcompetition, increased product com-plexityandgrowingregulatoryanddis-closure requirements. Investment man-agement companies are increasinglyseekingtooutsourcenon-coreactivities(suchasback-officeservices)andsharpentheirfocusoninvestmentmanagement.

Investmentmanagersfaceawiderangeofadministrativeoptions.Whilesomemay choose to handle this functioncompletely in-house, others will use asingleexternalserviceproviderormul-tipleproviders.Thereisalsoanappetiteforpartiallyoutsourcingtransferagencyactivitiestoexperiencedtransferagents

thatcouldhelpassetmanagersdistrib-uteproductsinnewmarketsandextendtheirfunddistributionchannels.Anin-creaseincross-bordermarketstargetedbyUCITSmanagersislikelytoacceler-ate the trend to transfer agency out-sourcinggiventhecomplexityofcross-borderdistribution.

Managing Director Alexander Poppe at the headquarters of HSBC INKA in Düsseldorf, Germany.



Ongoingconsolidationofthefundad-ministration business should lead togreaterlevelsofstandardisationandau-tomationintheindustry.AsUCITSIVapproaches there is someevidence thatassetmanagersareconsideringtheirad-ministrationoptions.Besidetheclients,thewinnersofthenewUCITSIVregu-lations will be those custodians andfundadministratorsthathavesufficientsizeandeitheractonaEuropeanscaleorareleadingspecialistsfortheirhomemarket.

CAPITALISINGONAUNIQUESYSTEMThe asset management value chain inGermany is modular, with most fundscontracting a number of services exter-nally.Aminorityofspecialfunds,mutualfunds and free assets use the samepro-viderforassetmanagementandadminis-tration services. This modularisation ofthevaluechainisfacilitatedbyGermaninvestmentlaw,whichallowsinvestmentcompanies (knownasKapitalanlageges-ellschaftorKAG)tooutsourcealmostallof their non-core services, provided su-pervision by the country’s financial su-pervisory authority – the BundesanstaltfürFinanzdienstleistungsaufsicht(BaFin)–remainsunaffected.

Core services, which must not be out-sourced, include the supervisionof theinvestmentprocessandthepreparationof annual reports. A unique elementcommon to the German market is theMasterInvestmentCompany,knownas‘Master-KAG’.Thisformofinvestmentmanagement company was establishedto consolidate reporting across variousportfoliosunderdifferentassetmanag-ers,standardisingthereportsthatinves-torsreceive.

Thisvehicleisincreasinglypopular.To-day,halfofall investment fundsregis-teredwiththeGermaninvestmentfund

industry association – the Bundesver-band Investment und Asset Manage-ment eV (BVI) – are administeredthrough a Master-KAG, and the pro-portion of such funds has increasedsteadilyinrecentyears.

ItremainstobeseenpreciselyhowMas-ter-KAGswillfareunderUCITSIV.Ithas been suggested that these compa-nies, which are unique to the Germanmarket,willfindthemselvesexposedtothe new regulations, as Master-KAGshavebeenspecificallycreatedtocaterfortheGermanmarket.However,theirde-gree of specialisation suggests that nodirect repercussionsare tobeexpected.Itisevenpredictedinsomecirclesthatthe idea of the Master-KAG will spread acrossEurope,asthisistheidealformatforassetspooledin-ternationally that requireconsolidatedreporting.

As far as the administra-tionof special funds fromnational institutional in-vestors are concerned, nodirect changes are ex-pected through UCITSIV. Special funds are atypical German product.By contrast, UCITS IV regulates themutualfundsembodiedinundertakingsforcollectiveinvestmentintransferablesecurities (UCITS), particularly theirrelatedcross-borderactivities.

Indirectly UCITS IV could drive thetrendtowardslargespecialisedMaster-KAGs even further to encompass across-border component for institu-tionalclients:Master-KAGs,whichdueto their involvement in a Europeangroup have the appropriate expertiseandreflectasystemsupportingthevari-ousinternationallegalnorms,mightinfuturealsoofferinstitutionalinvestors

withsubsidiariesabroadaholistic–notjustnational–formofadministration.

InthisregardthoseMaster-KAGsthathaveboththetechnicalandhumanre-sourcestoprovideaninfrastructurefora complete range of administrativeservicesi.e.fromGermanyandLuxem-bourg,andinadditionformpartofaninternationalnetwork,areverywellpo-sitioned for all developments encom-passingUCITSIV.

FUTUREOFTHEGERMANDEPOTBANKSimilarly divided is the opinion con-cerningthefutureoftheGerman-spe-cific Depotbank. Under German law,

investors must designate a Depotbankto do the settlement, monitor the in-vestmentlimits,reconcilethenetassetvalue and control the activities of theinvestment company. Rising costs,tightermarginsandgreaterdemandforadditional servicescouldseea sizeablechunkofthemarketvolumeopeningupforcompetitorswhensmallerprovidersaresqueezedoutofthemarket.

UCITS IV throws up another chal-lengeforDepotbanks:althoughUCITSIVrequiresacustodianineachcountrywhereafundoperates,custodiansoper-atingexclusivelyinGermanymayfind

“Importantly, scale will help investment servicing companies make the substantial IT invest-ments needed to keep abreast of change ...”


themselves less attractive than thosewhichcanofferservicesthroughouttheEU. Reporting obligations might re-quirecross-borderknowledge,andcli-entsmightprefer tocentralise servicesproviders rather than to deal with abunchofdifferentcustodians.

Onesolutionforlocalcustodianscouldbe to specialise in their home marketand to become the leading providerwithin the national boundaries. Thesesmallernicheplayerswillbeabletopro-

videservicesinaformlargecompaniesarenotabletodo.Theseaspectsincludepersonalservice,moreflexibilityandin-dividualsolutions.

Anothersolutionmightbetoformcross-borderalliances toprovide the interna-tionalservicerequiredunderUCITSIV.Despite the increasing internationalisa-tionoftheEuropeanfundindustryun-derUCITSIV,adeepunderstandingofthelocalmarketswillalwaysbecrucial.As the European investment manage-mentenvironmentbecomesincreasinglycomplex,theneedforspecialistswithathoroughunderstandingof local affairswillonlygrow.Thiswillleaveroomfor

providerswithastrongpositionintheirnationalmarkets.

CHOOSINGTHERIGHTPARTNEROneofthemainaimsofUCITSIVistoincrease theefficiencyofEurope’s fundindustry by reducing the number offunds, as we have seen, either throughfund mergers or master-feeder struc-tures.Asfundrangesarerationalised,soUCITSmanagers are likely to consoli-datetheirserviceproviderrelationships.

Needlesstosay,UCITSin-vestment managers willprefer those investmentservicing providers offeringthebestqualityofserviceatthe lowest cost. They willwantintelligencefromallofthe countries where theyhavefundstokeepthemuptodatewithlocalregulatorychanges. They will alsowant access to the greatestavailableeconomiesofscale.Importantly,scalewillhelpinvestment servicing com-paniesmakethesubstantialIT investments needed tokeep abreast of change, in-cludingforthcomingamend-

mentstotaxlegislationinsomecountries.

For large pan-European UCITS man-agers, selecting the right provider willbeessentialiftheyaretorealisethefullpotentialcostefficiency.Asthesegroupsdecidehowbesttostructuretheirfundranges and management companies,they will need providers that can offerthemasmuchflexibilityaspossible.

In general, the large fund groups willgravitate toward providers with pan-European infrastructures. So invest-ment servicing companieswillneed tobe able to provide local services at theindividual country level where the

UCITSfundisdomiciled,aswellasthewider range of servicing solutions,wherever they make most sense to thefund company. Additionally, they mayneedtobeabletoprovidelabour-inten-siveprocesses,suchasfundaccounting,fromcost-efficientcentres.

ABLUEPRINTFORACTIONBymaking it easier for the investmentmanagementindustrytolaunchandop-erate fund products across a range ofproduct types and countries, includingcertain types of alternative investmentstrategies,theUCITSIVdirectivewillfurtherenrichinvestorchoice.Inaddi-tion,UCITSIVwillenableinvestmentmanagement companies to streamlinetheir operating models, with conse-quentbenefitsforprofitability.

Assetmanagersshouldundertakeholis-tic cost-benefit analyses, looking notonlyathowtheycanoptimisetheirfundranges but also at how they might ra-tionalisethestructuresoftheirmanage-ment companies. When making theseassessments, they should take into ac-count tax and regulatory implications,where their valuable intellectual talentis based and what the cost of makingfar-reachingchangesislikelytobe.

Investment managers should also con-sidertheroleoftheirserviceprovidersinensuringthattheyobtainthefullbenefitfrom the opportunities on offer. Whattypeofassetadministratorsandauditorsdotheyneedinpractice?WhatITinfra-structureswillprovebestsuitedtotacklethe demands of UCITS IV? As noted,pan-Europeaninvestmentmanagerswillbelikelytoconsolidatetheirservicepro-viderrelationships, selectingcompaniesthat can provide flexible, cost-efficientand forward-thinking services and ITinfrastructuresacrossEurope.

Giventhecomplexityoftheissuessur-rounding UCITS IV, and the strong

“Asset managers should undertake holistic cost-benefit analyses,

looking not only at how they can optimise their fund ranges but

also at how they might rationalise the structures of their

management companies.”



INKA Internationale Kapitalanlage gesell schaft mbH

Internationale Kapitalanlagegesellschaft mbH – HSBC INKA is one ofGermany’sforemostcapitalinvestmentcompanies(Master-KAGs),admin-istratingapproximately€64bninassetsundermanagementinmutualandspecialfunds(asat31January2010).BasedinDüsseldorf,Germany,andspecialisinginfundadministrationsinceitscreationin1968,HSBCINKAaggregatesallbackandmiddleofficeservicesrequiredinthefundmanage-mentbusiness.HSBCINKAiswhollyownedbyHSBCTrinkaus&Bur-khardtAG,partoftheHSBCGroup.

desireoftheCommissiontomakeEu-rope’sinvestmentmanagementindustrymore efficient, UCITS IV marks onlyonestepfurtherdowntheroadtocon-solidationandharmonisation.Fornow,implementingUCITSIVisthetaskathand.Inviewofthemanycriticalfac-tors,whetherfiscal,regulatoryoroper-ational,whichhave to taken intocon-sideration when implementing thedirective,andwiththeclocktickingin-exorablytowardsJuly2011,thetimetoactissoonerratherthanlater.

Managing Director Alexander Poppe has been with HSBC INKA since 2002, from 2007 as a management member. Mr. Poppe, who holds a Master in Finance and Accounting, is a German Certified Tax Advisor and has previously worked for five years in KPMG’s Financial Services department.

IUCM is by invitation only

SimCorp is pleased to announce its annual summit industry conference:

SimCorp Dimension International User Community Meeting 2010. The

gathering of clients to share knowledge and best practices is the most

efficient way of learning from the experiences, mistakes and successes

of others and is a key to any organisation’s success in achieving long-

term strategic goals for growth, while on the short term facing changing

priorities and new challenges in the market.

SimCorp offers its valued clients an exclusive opportunity to:

• participate in workshops focusing on major challenges and best practices in the global investment management industry;

• share experiences, discuss subjects of mutual interest and network during breakout streams and a spectacular social event;

• discuss recently released functionality and to gain unique insight into SimCorp Dimension development plans.

www.simcorp.com


SIMCORP DIMENSION INTERNATIONAL USER COMMUNITY MEETING 2010, 9–10 SEPTEMBER BERLIN


# Thought leadership in investment management: SimCorp StrategyLab research programme 2010–11

In direct response to a new agenda in the investment management industry, with increased focus on risk management, cost control and growth opportunities, SimCorp established its independent research institution, SimCorp StrategyLab, in December 2008. Through its extensive research and know-how, the insti-tution’s aim is to provide insight into some of the many challenges facing professional asset managers throughout the world. Going forward SimCorp StrategyLab will continue to seek to suggest ways to meet the challenges and to share best practices.

Tofindappropriate solutionsand to gather relevant bestpractices for the top strate-gicinstitutionallevelsofthe

investmentmanagementindustry,Sim-Corp StrategyLab carries out its ownresearchandanalysisoftrendsandchal-lenges in the financial sector. The re-searchprogrammeiscarriedoutinclosecollaborationwithinternationallyrecog-nisedacademicsandestablishedindustryexperts.Asaresult,SimCorpStrategy-Labisabletocontributecompetentsug-gestionsforbestpractices,whicharein-tendedtominimiserisk,tofindwaystoachieve sustainable cost savings and toenable growth. Figure 1 outlines themission and the vision of SimCorpStrategyLab.

ORGANISATIONSimCorp StrategyLab is formally or-ganised under the management of aboard of directors. The chairman ofSimCorp StrategyLab’s board is theCEO of SimCorp, Peter L. Ravn(Ph.D.). SimCorp StrategyLab isheaded by the renowned Ingo Walter,SeymourMilsteinProfessorattheSternSchool ofBusiness,NewYorkUniver-sity,whoisinchargeoftheresearchin-stitution’s academic affiliations andoverseesthequalityofitsresearchworkand related activities. Along with Sim-CorpStrategyLab’spartners,andbuild-ingbridgesbetweentheoryandpractice,are leading academics, industry expertsandexecutiveswhocontribute to its re-searchprogrammeandotheractivities.

Lars Falkenberg, Assistant Director of SimCorp StrategyLab.

Ingo Walter, Director of SimCorp StrategyLab, is Vice Dean of Faculty and Seymour Milstein Professor at the Stern School of Business, NYU. Professor Walter has had visiting professorial appointments worldwide and remains a Visiting Professor at INSEAD in Fontainebleau, France. Professor Walter's principal areas of academic activity include international trade policy, international banking, environmental economics and economics of multinational corporate operations.

Figure 1. SimCorp StrategyLab: mission and vision

MISSION

The mission of SimCorp StrategyLab is to contribute to identifying ways of mitigating risk, reducing cost and enabling growth in the global investment management industry.

VISION

The vision of SimCorp StrategyLab is to become a renowned and trusted thought leader in the investment management industry through the contribution of applicable research and knowledge within matters of strategic importance for IT and investment management.


Professor Ingo Walter, Director of SimCorp StrategyLab (third from left), presents MEAG representatives (from left) Claudio-Peter Prutz, Head of IT and Organisation, Dr. Peter Schenk, Head of Investment Controlling, and Günter Manuel Giehr, Managing Director with the Risk Management Excellence Award 2009.

Four-sector research programme 2010-11

Among the designated sector-leaders from Stern School of Business, NYU, who will team-up with distinguished European academics conducting research in the area as well as industry specialists in charge of examining the four industry sectors, are:

Investment fundsProfessor Martin M. Gruber (Stern School of Business, NYU); Massimo Massa (INSEAD)

Asset management (notably discretionary asset pools)Professor Stephen J. Brown (Stern School of Business, NYU); Tarun Ramadorai (Oxford University)

Pension funds Professor Ingo Walter (Stern School of Business, NYU); Anthony Neuberger (Warwick University, UK)

Insurance funds Executive-in-Residence and Adjunct Professor of Finance John Biggs (Stern School of Business, NYU); Sylvio Borner (University of Basel, Switzerland)

In its first year of existence, SimCorpStrategyLab’s research focused, in linewith the institution’s mission, on thethreefundamentaldriversoftheinsti-tutional asset management industry:risk,costandgrowth.

Asinfluentialoutcomesofthisresearch,SimCorp StrategyLab published twooutstanding survey reports: ‘Report onGlobal Investment Management RiskSurvey2009’and‘ReportonGlobalIn-vestment Management Cost Survey2009’.AthirdreportbasedonasurveyaboutenablinggrowthwillbepublishedinApril2010,entitled‘ReportonGlo-bal Investment Management GrowthSurvey2010’.Correspondinglyandwiththe top strategic institutional levels of

ThesecondperiodofSimCorpStrate-gyLab’sresearchactivitieswillfocusonthefourmajorsectorsoftheglobalassetmanagementindustry:

• investmentfunds• assetmanagement (notablydiscretionaryassetpools)• pensionfunds• insurancefunds.

The guiding perception is that thesesectors,whichallfaceasetofstrategicand tactical challenges, along withwrenchingchangesintheeconomic,fi-nancial and regulatory environment,can benefit from useful insightsachieved from SimCorp StrategyLab’swork on risk, cost and growth issueswithineachoftheseindividualsectors.

theinvestmentmanagementindustryinmind,theinstitutionalsopublishedtwobooks;oneonrisk–‘Understandingthefinancial crisis: investment, risk andgovernance’–andoneoncosts–‘Opera-tional control in asset management:processesandcosts’.Athirdbookinthesameseries,dealingwiththesubjectofgrowth,initiatedin2009andtobepub-lished in the early summer of 2010, isentitled ‘Growth and value creation inasset management’. The valuable find-ings of the surveys and research workhavecreatedmediaheadlinesandcoverstories in leading publications like theFinancialTimes’sFTfmsection.

AmongSimCorpStrategyLab’sotherac-tivities, an executive master class on

Rather than taking a descriptive ap-proach,effortswillfocusonamorepre-scriptiveangleinordertodefineindus-try best-practice. The work will bebased on primary and secondary re-search and industry practices. Withtheseeffortsinmind,anumberofsmallteamsofleadingthinkersfromtheaca-demicworldandthefinancialindustrywill examine the sector/issue intersec-tions(Figure2).

Theexaminationoftheintersectionsbythe teamswill result in fourwhitepa-pers,whichwillseektoconveythecur-rentstateofknowledgewithinthefoursectorsandpointthewayforwardfromamanagement-strategyandpublic-pol-icyperspective.Thewhitepapersdebat-ingthekey industry issues for the im-

growthintheinvestmentmanagementin-dustrywasperformedbySimCorpStrate-gyLabDirectorIngoWalterinconnectionwith SimCorp’s annual industry summitconference: SimCorp Dimension Interna-tional User Community Meeting 2009.ThiseventalsohostedtheannouncementofMEAG as the winner of the SimCorpStrategyLabRiskManagementExcellenceAward2009ataceremonyinLuxembourgon17September2009,withanaudienceof200 senior delegates of the internationalinvestment management industry. Thisawardhasbeenestablishedforthepurposeof rewarding andpromotingbest practicewithin riskmanagement in theglobal in-vestmentmanagementindustry.

mediate and medium-term future,options and recommendations will bepublishedatregularintervalsthrough-out2010andearly2011.

Among SimCorp StrategyLab’s otheractivities for the 2010-11 period andfollowingupontheSimCorpStrategy-Lab Risk Mangement Award 2009,SimCorpStrategyLabisseekingappli-cants fortheSimCorpStrategyExcel-lence Awards 2010, which will awardoutstanding and innovative leaders intheabilitytomitigaterisk,reducecostand enable growth. The three winnerswillbeannouncedat a ceremonyon9September 2010 at the SimCorpDimension International User Com-munityMeeting2010inBerlin.

Figure 2. Sector/issue intersections to be examined by teams of leading thinkers from the academic world and the f inancial industry as part of SimCorp StrategyLab activities 2010-11

2008-09 activities

2010-11 activities

Mutual funds Asset management(notably discretionary asset pools)

Pension funds Insurance-related asset pools

BEST PRACTICES RELATED TO

MITIGATING RISK, REDUCING COST AND ENABLING GROWTH

SimCorp StrategyLab reports and books 2008– 09

To learn more about and order the publications, go to www.simcorpstrategylab.com.

Due

June

201

0

Due

Apr

il20

10


# Post-crisis financial order sets new IT systems criteria

Intent on rebuilding profitability after a turbulent 2008 and tough 2009, in-vestment management firms must consider restructuring their cost base in their choice of IT platform to become more flexible and profitable. Amid tightening regulations, the ‘new normal’ raises the bar in distribution, and investment managers must adapt to a more challenging environment.

T he investment manage-ment industry is currentlyunder attack on severalfronts. Although the

threatswerealreadydiscerniblepriortothe financial crisis, it intensified theshortcomingsandtheneedtoact.Facedwithalossininvestortrust,investmentmanagershavehadtohandleanenor-mous reduction in assets under man-agement(AUM).

Insteadoftryingtodoandofferevery-thing,investmentmanagersneedtofo-cusoncorecompetenciesand toauto-mateworkflows.Additionallytheyhaveto create transparency to meet regula-tory requirementsand to regain inves-tors’ trust.What is required is a strictindustrialisationofallprocessesinclud-ing an improvement in risk manage-ment and reporting, supported by anagile IT platform. Establishing theright platform will also help to copewith future regulatory requirementsasyetunknownbutcertaintocome.

DEALINGWITHTHECRISISThecapitalmarketshavebeendealingwiththefinancialcrisisforwelloverayearnow.Thegoodnewsisthattheim-pact on investment managers has notbeenasdramaticasonmanyinvestmentbankers.Thebadnewsisthatitremainsamajorthreat.

Neverthelessthecrisiscanalsobeseenasanopportunity.Itclearlypointsoutthe shortcomings in the investment

managementindustry–alreadyknownfor almost a decade – and thereforeservesasacatalysttospurpressingac-tiontobetakeninspecificareassuchasfocusingoncorecompetencies,improv-ingprocesses andworkflows, reducingcosts,andcreatingmoretransparency.

Buthowspecificallyhas the crisis im-pacted investment managers? The firstandalsobiggestisthevastreductioninAUM.Thisowestodifferentfactors:

• Investors’lossofconfidenceandfaithin the markets (private investors aswellasinstitutional).

• Various market crashes sparkingweak fund performance and result-ingwithdrawalofinvestorcapital.

• Investors’mistrust inderivatives al-located in funds.Thebelief that in-vestmentmanagerswereabletoun-derstand and handle the risks wastarnished.

ThetableinFigure1givesanindicationofthereductioninAUMfortheGer-manmarket.

Although the number of funds (apartfrominstitutional funds) increasedbe-tween2007and2008byroughly640,total AUM decreased by around€205bn. Of course the reduction inavailable investment capital increasedcompetition among market partici-pants.Butalsothecompetitionamongdifferentproductsonofferhasbecomemoreintense.Thestrugglebetweentra-

ditional funds, certificates and ex-change-tradedfunds(ETFs),whichal-readybeganbeforethecrisis,grewmoreintenseduring thecrisis as investmentcapitaldriedup.

Whathastheinvestmentmanagementindustrydonesofar?Themainresponsehasbeentoreducecosts.Thishasvariedfromcurbing internal services to initi-atinghugeoutsourcingprojects.Inad-ditiontothis,somebankshavesoldofftheirassetmanagementbusinesses.Butfor any one party selling, there is alsoonewhobuys.Andtheseareclearlyus-ingthecrisistostrengthentheirmarketposition.

SPECIALISATIONWILLCONTINUEInthepost-crisisenvironmentitwillbemissioncriticaltoidentifycorecompe-tencies.Basedonthisstrategicdecision,specialisation and outsourcing of non-corecompetencieshavetoberealisedinordertoreduceinternalcosts.Certainlythis trend will continue. We see themostcrucialspecialisationcategoriesasfollows:

• Boutiques focusing on portfoliomanagement. These companies areknowntohaveahighcompetencyinresearch and portfolio managementand an excellent market reputation.Nevertheless they will have issuesachieving critical AUM mass andfacehighprocessingcostsduetolackofscale.

Cornel Bender,Managing Partner,Capco, Germany


• Specialistsfocusingonsalesanddis-tribution. Additional specialisationcouldeithertaketheformofproductofferings (i.e. retail funds, hedgefunds, fund administration), inves-tors(agentpools,onlinebanks,insti-tutional investors), or even just oneserviceprovider.Forthesespecialistsitwillbecrucialtofindasuitablese-lection of products and back officeserviceproviders.

• Bigplayersinthemarket.Theindus-try agrees that the biggest invest-mentmanagementplayerswillhaveAUMofover$1.5trninthenearfu-ture.Thiswillbetheresultofongo-ingmergersandacquisitionsaswellasorganicgrowth.Bigplayershavethe advantage of critical mass ineveryareainordertoachieveecono-mies of scale and cost advantages.However, thedownsides are lackofspecialisationandoftenhighlycom-plexportfoliomanagement.

• Back office insourcers. Of the fourcategories, thesehave themostneedtobuildaprocessingfactory.Astheyareatthelowerendofthevaluechain,theyhavetobehighlyclientorientedandfacelowmargins.

What will be the impact of this spe-cialisationprocessonIT?FirstofallitisimportanttonotethatanITplatformalways has a history. Built often overdecades the platform is usually verycomplex.Replacementiscostlyanddif-ficult and thereforeoften avoided.Butredefiningthebusinessmodelcanalso

beseenasachance foroptimising theIT architecture. And it is vital for re-ducing costs as the business is mainlydrivenbyITprocesses.OftenenoughaselectedITapplicationdefinesthebusi-nessprocesses.But theurgentneed toadapttomarketsmeansthatinvestmentmanagementrequiressystemsthatsup-port futureprocessingneeds.Thenewsystem’sflexibilityandeaseof integra-tionwillbekeytotheindustrialisationofinvestmentmanagement.

INDUSTRIALISATIONOFINVESTMENTMANAGEMENTThe industrialisation of investmentmanagementwillgohandinhandwithspecialisationanditwillbevitalforbackofficeinsourcerstobuildupaprocessingfactory. According to the‘ReportonGlobalInvest-ment Management CostSurvey2009’publishedbySimCorp StrategyLab,41%of industrydecision-makers think that auto-mationofprocessesisthemost important cost-cut-ting strategy over thecomingthree-yearperiod.Severalhigh-volumelow-marginindustrieslikethefoodindustrywentthesameroute:afewyearsagotheyindustrialisedtheirprocessesinordertocopewithsqueezedmargins.

Through automation of processes, in-vestment management will be able toboost productivity, thereby leading to

rising profitability and freeing up re-sources for core investment manage-mentwork.Weseethebiggestpotentialfor automation for the big players andbackofficeinsourcers.Astheirmainfo-cusistorealiseeconomiesofscale,theyaredependentonaconsistentandinte-grated backbone implementation. Inthe back office area securities settle-mentandprocessingarealreadyhighlystandardised.However,agreatdealofmanualprocessing is still evident.Theprocesses for less complex over-the-counter (OTC) products have a highstraight-through-processing(STP)rateand also external service providers areinplace.Thehighestpotentialandneedfor automation are for complex OTCderivatives.Theprocessesherearevery

often complex and manually driven.Someserviceprovidershavesetthefirststandards for matching, settling andhandlingofdocumentation.

Automation requires an open, flexibleandintegratedstate-of-the-artITplat-form.Abackofficeinsourcerwillcom-

“Through automation of processes, invest-ment management will be able to boost productivity, thereby leading to rising profitability and freeing up resources for core investment management work.”

Luxembourg and otherforeign retail funds sold in Germany

German retail funds All retail funds German and foreign institutional fundssold in Germany

All funds in total

Number

2,8203,5134,137

AUM in €m

335,236380,877306,148

Number

1,4731,8062,059

Year

200620072008

AUM in €m

348,187350,251269,679

Number

4,2935,3196,196

AUM in €m

683,423731,128575,827

Number

4,3724,2233,993

AUM in €m

669,512691,618641,651

Number

8,6659,54210,189

AUM in €m

1,352,9351,422,7461,217,478

Figure 1. Funds and AUM in Germany from 2006-2009. Source: Zeitreihe Fondsvermögen/Mittelaufkommen 1950 – April 2009 (http://www.bvi.de/de/statistikwelt/Investmentstatistik/download/zrfvma_dt_invbr_1950-Apr2009.pdf )


municatewithseveralexternalparties.Therefore interfaces and protocols areunavoidableandtheuseofstandardsisself-evident.AhighSTPrateisvitalasmanualprocessesarealwayscostinten-siveanderrorproneandespeciallytheirbusinesswillbehighvolume.Itwouldbeaclearadvantageiftheinvolvedpar-tiesuse the same standard software asthedatamodelwouldbe identicalandcomplexmappingcouldbeavoided.

Itisalsoimportanttonotethatfromareporting perspective a well-organiseddatawarehouseisessentialtomeetex-istingandupcomingrequirements.Dueto the fact thatmost ITplatforms areratherheterogeneous,itisusuallyquitechallenging to identify and gather thenecessary data from the right sourcewiththepropertiming.Oftenthegath-ering process and respective interfacesincludeagreatdealofbusinesslogictoprovide the required data (i.e. regula-

tory reporting, IFRS, Basel II,factsheets, individual client and inter-nalreports).Asthebasicdataisneededfor several purposes it makes sense toorganisethedatawarehouseindifferenttiers.Thefirstoneshouldbea ‘simple’gathering tier, where the data is cap-turedfromthesourceapplicationsasitis.Onasecondlevelitcanbeclustered(i.e. P&L figures, accounting figures,static data), and on a third level the

business logic can be integrated. Nowthedifferent reportscaneitherbuildafourth tier or take thedatadirectly asrequired.

RETURNOFTHEINVESTORWe know it will be a hard job to winbackinvestortrust.Inadditiontobasicprerequisites, such as excellent deci-sions inportfoliomanagementandal-location, investment management willhavetofocusontwoareastoregainandprovetheircredibility:

• riskmanagement• reporting

Riskmanagementiswellestablishedinthe investment management industry.Neverthelessitwillbevitaltoimprovemethodology and to convince clientsthat the industry is able tohandle therisks. A state-of-the-art application isas mandatory as adequate and under-

standablereporting.Inad-dition the new productprocess will come to thefore. New products fre-quently imply new struc-tures, new componentsand require complete im-plementation in all rele-vant areas. Impacted arevery often front office,middle office, back office,riskandcompliance.

It will be vital to processproductsinacoherentwayso that the components

and respective figures are distributedproperly.Inanidealworlditwouldbepossible toenter thecomponents indi-viduallyaspartofasuperordinateprod-uct. For the processing, each down-stream department can decide if itrequiresthedataandfiguresatcompo-nentlevel(i.e.riskmanagement,IFRSreporting)oraggregatedforthesuper-ordinate product. Again we see howimportant a flexible and integrated IT

platform is to provide the necessarySTP support. Also collateral manage-ment and other risk-mitigating meas-urements (i.e. break clauses, netting)willbeimportantstepstoreducemar-ketriskaswellascounterpartyrisk.

Reportingwillbeanimportantinstru-ment to re-establish investor trust asthisisoneoftheveryfewwaystobeindirecttouchwiththeinvestor.Henceaglossymarketingflyerisnotenough;de-livering the facts and demonstratingtransparencyareessential.Explanationsoftheproductstrategyhavetobemadeunderstandableaswellastheriskstrat-egyandtherespectivefigures.WiththeInternet ineverydayuse, it isveryeasynowadaystocomparedataandtoobtainadditionalinformation,soovertlydress-ingupfigureswillbequicklyseenandpenalisedbythemarket.

Transparency and ease of fund choiceare also important. Simply too manyfundshavebeenproduced in thepast.DuetothecrisisandresultingdropinAUM many funds have already beenmerged or even closed. Neverthelessfundofferingsremainexcessiveandthiscomplicatestheselectionforinvestors.

CHOOSINGTHERIGHTITPLATFORMWehaveseeninthepastthatstandardsoftware applications have becomemore and more powerful. This appliestoITapplications,whichwerepartofabest-of-breedsolution,aswellasall-in-one solutions, which embrace severalbusiness areas such as order manage-ment,portfoliomanagement,matchingandsettling,riskmanagement,compli-ance, collateral management, fund ac-counting,etc.

The strategic choice of a particular ITplatform depends on the positioning ofthe investment management company.Thebusinessfunctionalitiescompriseonemajorcriterionfordeterminingifabest-

“The strategic choice of a particular IT platform

depends on the positioning of the investment

management company.”

# Post-crisis financial order sets new IT systems criteria


of-breed or all-in-one solution is pre-ferred.Fromatechnicalpointofviewad-ditional criteria are the in-houseintegration (this is relevant for the STPrate; in general a best-of-breed solutionalsorequiresgoodmiddleware),aswellascommunicationwiththirdparties(exter-nalinterfaces).Thismighttipthescalesinfavourofasystemthatisalreadyusedbyseveralexternalparties.Alsoifasystemisverycommoninthemarketplacethereisagreater chance of finding trained staffthanforasystemthatislesscommon.

Thediscussionaboutbest-of-breedandall-in-one solutions ishardlynew, andeachsolutionhasadvantagesaswellasdisadvantages.Butwithrespecttowhatwehavestatedbefore,theall-in-oneso-lution has one major advantage in theformof an integrateddatawarehouse/pool. This provides a good consistentbasisforriskmanagementorreportingandalsoleadstoareductionininternalinterfaces and complex reconciliationprocesses. It is important that the ap-plications are integrated in the wholeITlandscapewithahighSTPrateandthat they are sufficiently flexible toquicklyadoptnewproducts.

FINANCIALMARKETSINTHEPOST-CRISISERAUSPresidentBarackObama’sproposalto limit the size and complexity ofbanks,asunveiledinJanuary,barscom-mercialbanksfromowningorinvestinginhedgefundsandprivateequitycom-panies,orrunningaproprietarytradingdesk. It also foresees a market sharelimitforbankssothattherewillbeno‘toobig to fail’ anymore.Although itremainsuncleariftheproposalwillbe-comelaw,italreadyshowsthedirectionthingsaregoing.TheFinancialStabil-ity Board (FSB) is singing the samesongandit indicatesthatthefinancialmarketsareinforchange.

Certainlyitremainstobeseenhowthefinancial markets will look in the fu-

ture, precisely whom the participantswill be and therefore how liquid themarketswillbe.Politiciansarestilldis-cussing different scenarios for regulat-ingthemarketsanditsparticipants.Butinvestment management and asset al-locationarecertaintobeimpacted.

MAINAREASFORACTIONThepastwasagoldenerafortheinvest-mentmanagement industry.Already afewyearsbefore thecrisis thiserawasbeginning to fade. New products likecertificatesandETFsforcedtheindus-trytotakeacloserlookatcostsandspe-cialised providers offered services atlower prices. The crisis has increasedthesecostpressuresand forced the in-dustrytoact.Weseethreemainareaswheretheindustryhastoact:

• specialisation• industrialisation• rebuildinginvestorconfidence

Itwillbevitaltoidentifycorecompe-tencies and to automate processes andworkflows. This requires flexible andintegrated IT platforms, not only tocoverexistingneedsbutalsotobeableto accommodate future andas yetun-known requirements. These may comefromnewproductsaswellasfromregu-latory authorities, for example, in theform of European harmonisation andstandardisation.

Winning back investors will be toughandalsomissioncritical.Thekeywordhere is transparency. Investors have tofeelconfidentthattheindustryiscapa-bleofhandlingtherisks.Thishastobecommunicated in a clear and under-standable way. In addition, reportingrequirements forprivate investorshavetobeenhanced.Asimplefactsheetwillnotsufficeanylonger.

The investment management industryfacesmanychallenges,but it isourviewthattheyaremanageable.Oldstructures

havetobediscarded.ITplatformshavetobeadjustedaccordinglyand–wecannotstressitoftenenough–thesolutionhastobeagile.Thisisahealthyprocess.Itwillhelp the industry to position itself andbuildastress-testedbusinessmodel.Thecrisis presents a unique opportunity forinvestmentmanagerstoreviewwhattheydo, adjust theirbusinessmodels anden-sure theviabilityof their institutions forthefuture.

Cornel Bender is Managing Partner for Capco in Germany. In addition to heading the CEE region of the Package Integration business unit, his responsibilities cover the capital markets industry, including asset management, exchanges/infrastructure and investment banking. One of his major con-sulting areas is the asset management/in-vestment fund segment with its high de-mand for strategic business and IT deci-sions that are reflected in process redesign, blueprints and systems-implementation. Cornel Bender joined Capco from KPMG Consulting/BearingPoint where he was head of Capital Markets EMEA.

Capco

Capco is a leading global pro-vider of integrated consulting,technology, and transformationservices dedicated solely to thefinancialservicesindustry.

Ourprofessionalscombine inno-vative thinking with our unri-valledfirst-handindustryknowl-edgetoofferourclientsconsultingexpertise, complex technologyand package integration, andmanaged services to move theirorganisationsforward.

Through our collaborative andefficient approach, we help ourclients successfully increase rev-enue,manageriskandregulatorychange, reduce costs and en-hancecontrol.

“The investment management industry faces many challenges, but it is our view that they are manageable. Old structures have to be discarded. IT platforms have to be adjusted accordingly and (...) the solution has to be agile.”


# Asset managers: new requirements in light of the financial crisis

While the unprecedented crisis of late 2008 revealed clear flaws in the banking system, the more robust asset management sector was also affected considerably. Assets under management (AUM) did shrink and there were individual cases of malpractice damaging investor confidence. The consequences of the crisis for the sector are likely to be felt at a profound level and for a long time. Changes in regulations, investor preferences and within the industry itself will provide a range of opportunities and challenges that no asset management firm can afford to ignore. Asset managers need to adapt to these changes that will put different demands on IT platform functionalities.

I nvestors have great cause forgrievance in the wake of thecredit crisis, as many sufferedsharp losses from banking

products that were poorly understoodby buyers and sellers. Investors willtherefore expect more evidence of en-hanced management of risk, in itsbroadest sense. Institutional investorswillincreasetheirduediligenceeffortsandretailinvestorswillrequiresuitableinvestmentsreflectingtheirriskprofile.Particular attention will be paid tocounterpartyandliquidityrisk.Ensur-ing that assets are segregated on thebalancesheetofthecounterpartwillbecritical and asset managers should beawareofthesensitivities.

At the same time, investors have suf-feredfromlimitedliquidityinsomeoftheirinvestments.Thiswillmakethemthink twice about which asset classesandwhichassetmanagerstoselect.Theability toexplainhowrisk ismanagedandcontrolled, includingliquidityriskandhowtheirassetsareheld,isnowasimportant to sceptical investors as in-formation about specific risk measuresrelating to asset classes and portfolioconstruction.

RETURNTOOPPORTUNISTICINVESTMENTSWhileinvestorsmayremainsuspiciousofmarkets–particularlyequitymarkets–forsometimetocome,allocationstoequityinvestmentsarelikelytoincreaseasinvestorsseektorebalancetheirport-foliosafteraperiodofdecliningvaluesintheirequityallocations.

Lowinterestratesarealsofuellingthistrend,withinstitutionalinvestorslook-ing for and rewardinghigh alphaper-formance.Goingforward,assetmanag-ersarelikelytoseeinvestors(especiallyinstitutional)making a strongdistinc-tion between those delivering alphaperformance and dumping those whoare not able to generate true alpha forcertain products like exchange tradedfunds(ETFs),forexample.

Thefinancialcrisishasalsobeenarudeawakeningforretailinvestors,whohavenow turned ultra-conservative with ahigherfocusonassetpreservationthanongrowthandamove towards simpleand understandable products. This hasresulted in a high inflow of capital toprotected and guaranteed products(Figure1).

This trend is set to remain for the fu-ture,notonlyduetothefearofanothercrisis but also the ageing Europeanpopulation,whichwillpushassetcon-sumption rather than asset accumula-tiontocentrestage.

PRESSURETOREDUCECOSTSThefinancial crisis has ledmany assetmanagers to operate in survival modeandtoexaminewaysofreducingcostsintheshorttermtomaintainprofitabil-ityorcontainlosses.However,thepres-sureonreducingcostsgoesbeyondthefinancial crisis. Proposals for strongerregulation, transparency and reportingrequirements for the industrywill im-pactthecostbase.

The mounting pressure on fees beingdriven by investments in low marginproducts,suchasETFsontheonehandandentranceoflowfeeassetmanagerson the other, will also put additionalpressure on margins in the long term.ThistrendcanalreadybeseenintheUSwhereinvestorstendtoputtheircapitalin funds with lower than average ex-penseratios(Figure2).Assetmanagerswillhavetoadapttothesepressuresandassess exactly what sustainable costmanagementmeansforthem.

François Génaux Partner, Financial ServicesConsulting Leader

Dariush Yazdani Director

PricewaterhouseCoopers,Luxembourg© PricewaterhouseCoopers S.à.r.l – Photographer: Luc Deflorenne


TRANSPARENCYANDREPORTINGNEEDSInthewakeofthecrisis, liquidityandperformancechallengeshaveledtoin-vestorsdemandinggreatertransparencyandimprovedreporting.Inordertosatisfytheseneedsandretaininstitutionalin-vestors, asset managers will need toofferdeeperinsightintheirinvestmentprocess, valuation methodology andholdings, as well as deliver a sophisti-catedandreal-timereporting.

On the retail side ‘easy-to-understand’products and reporting will be key toattracting investor capital. The intro-ductionofmoreandmorehedgefund-likeUCITSvehicles(Figure3)demon-strates themove towards sophisticatedvehicleswithgreater transparency andinvestoracceptance.

DISTRIBUTIONCHALLENGESTheshiftininvestordemand(especiallyretail)isalsoposingnewchallengesfordistributionofassetmanagementprod-ucts.Distributors see themselves facedwith the challenge of giving good ad-vice rather than focusing on ‘pushing’productsofferinghighretrocessionfees.Thisdemandforcesdistributorstohaveamore thoroughunderstandingof theproducts,whichcouldleadtodistribu-tors preferring in-house over third-party products where extensive know-how and training offerings lie withinthegroup.

Hencetheevolutiontowardsastrongeropenarchitecturemodelwithintheas-set management industry in Europeseemstohavefallenbackamultipleofyears.Third-partyproviders,whostrivetobesuccessfulinsuchanenvironment,will need to offer comprehensive salessupporttodistributorsincludingprod-uct trainings, information and helphotlines,timelyandeasytounderstandreporting, marketing and sales docu-ments.JPMorgan,forexample,hases-

tablished the JPMorgan Academy,aimedateducatingfinancialadviserstoachieve a better understanding of in-vestmentproducts,freeofcharge.

MOUNTINGREGULATIONThespectacular failuresofglobalenti-tiesandfraudcasesoverthelastcoupleofyearshavestirredworldleaderstoacttoreformfinancialmarketsand increase regulatoryscrutiny. But even beforethe crisis, regulators wereworking on increasing in-vestorprotection,transpar-encyandreporting.

Whilethisshouldhavein-creased investor confi-dence, so far it has essen-tially only increased theadministrative burden ofassetmanagersanddistrib-utors. These changes andburdens could even forcethemtochangetheirbusi-ness models. Hence thegrowing regulatory scru-tinyalsoentailsthethreatofassetman-agers moving out of the EU to avoidsuchburdensontheirbusiness.

UCITSIVDIRECTIVEFor UCITS funds, the new legislativeframeworkofUCITSIVwillimpactallEuropean UCITS management com-panies,allowingthemtooperatemorecentrally.UnderUCITSIV,CESRrec-ommendsanassessmentofallrisksandtheirmaterialitywithintheoverallriskprofile of the UCITS. Liquidity andoperational risks are explicitly desig-nated to be material. VaR calculationmethods will also be reviewed andCESR is set to issue guidance beforeJuly2010.UCITSIVwillalsoallowforcross-border master-feeder structureswhere one or more feeder funds canpool their assets into a single masterfund, which would mean pooling

buckets of assets rather than productsforassetmanagers.

Alsounderthedirective,theassetman-agerwillhavetoprovideaKeyInvestorInformation (KII) fact sheet, whichwill replace the simplified prospectus.Thisdocumenttargetingretailinvestorswillexplaintheproductanditsrisksin

anon-technicallanguagelimitedtotwoA4 pages with frequent updates. Thismeansassetmanagerswillhavetoadapttheirproceduresand systems todevel-opingthenewdocumentinthefuture.

ALTERNATIVEINVESTMENTFUNDMANAGERSDIRECTIVEUnderpoliticalpressure,regulatorswilltarget investment firms directly, pre-dominantly those in the alternativesspace. Many mainstream financial in-stitutions may find that connectionswith‘light-touch’financialcentreswillno longer be commercially viable. TheEU has already taken steps to imposeregulation on alternative investmentfunds and managers, and this may bereplicatedelsewhere.

On29April2009,theEUCommissionpublishedthedraftAlternativeInvest-

“While the AIFM directive is still being heavily debated, the alternative investment fund industry is set to be more strongly regulated one way or the other ...”


ment Fund Managers (AIFM) direc-tivewiththedeclaredgoalofcreatingacohesiveframeworkforhigh-riskactiv-ities in the financial markets. UnderAIFM, alternative investment fundswill be required to disclose details ofthe principal markets and investmentsin which they trade (including, on anaggregatedbasis,detailsoftheirprinci-pal exposures and concentrations) anddetails of their leverage throughquar-terly reporting to their regulators.WhiletheAIFMdirectiveisstillbeingheavilydebated, thealternative invest-ment fund industry is set to be morestronglyregulatedonewayortheother,forcingtheplayerstoadapttheirprocessestothenewrules.

REGULATINGTHEDERIVATIVESMARKETThe value of outstanding over-the-counter (OTC) derivatives equals manytimestotalglobalGDP(Figure4),givingrise to concerns that theunravellingofsome of these contracts could tip thefragilefinancialsectorovertheedge.

Recognising this potential danger, theUSproposedanewregulation inMay2009 to force all ‘standardised’ OTCderivativestobeclearedthroughcentralclearinghouses, inorder toreduce theriskofinvestorsbeingexposedtoasin-glecounterparty.Thesetypesofderiva-tives would also have to be traded onregulatedexchangesviaelectronicsys-tems. Firms that use derivatives mayfind that the sands shift beneath theirfeetwhile regulators around theworldgrapplewiththisissue.

TAXATIONISSUESTaxes in theUS,muchofEuropeandtheUKwillhavetorisetorepairtheirfiscal deficits. Asset managers, in linewiththeentirefinancialservicessector,will be expected to contribute signifi-cantly to these efforts. They can alsoexpectamorerigorousenforcementof

Guaranteed/Protected

34%

Bond

19%

Equity

16%

Mixedassets

14%

Moneymarket

5%

Targetmaturity

4%

Other

4%

Absolutereturn*

4%

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

700 45,000

30,000

15,000

0

100

200

300

400

500

600

0

2006200720082009

Percentage of net �ows to funds with below (simple) average expense ratiosPercentage of net �ows to funds with above (simple) average expense ratios

Number of hedge funds-like UCITSNumber of UCITS funds

–2

All funds–3

Actively managed funds–1

Index funds

102

30,06033,151

35,210

36,322

2005

357

267

2006

450

2007

560

2008

646

2009*

33,664

103 102 101

*) Absolute return includes hedge funds and fund of hedge funds.

*) Q3, 2009


Figure 1. Breakdown of AUM of new funds launched at the end of each year of launch (UCITS and non-UCITS). Source: Lipper IM.

Figure 2. Comparison of net new cash in stock funds to the average expense ratio percentage 1999–2008. Source: ICI Fact book.

Figure 3. Number of hedge funds-like UCITS compared to the whole UCITS market. Source: Lipper IM and EFAMA.


tax rules, swifter closure of loopholesand a generally more adversarial envi-ronmentincludingastringentreviewoftransferpricingrules.Therewillbere-newed focus on privacy laws and taxevasion,mainlyrelatingtoindividuals.Onlyafewassetmanagerswillbeunaf-fected by this; either because of in-creased compliance requirements orchangesinclientpreferencesasaresultofthesedevelopments.

NewUSregulationssettobepassedinthecomingmonthshavethesamegoalastheEuropeanUnionSavingsDirec-tiveinEurope:toidentifytheultimatebeneficialownersofthefund,theirna-tionalityandtaxresidency.Theseregu-lations will demand additional report-ingandchangesinwithholdingtaxforassetmanagerswhowillhavetoadapttheirITsystemsaccordingly.

RETAILDISTRIBUTIONREVIEWPROPOSALRegulators consider that inducementsareoneofthemainsourcesofconflictsof interests in the context of portfoliomanagementandmeritspecificregula-tion. The UK Retail Distribution Re-view (RDR) proposal aims to tacklethisissuebysimplyprohibitingthepay-mentofanyretrocessionortrailer feesby a product provider to advisors/dis-tributors.InthisrespecttheRDRissettochangethedistributionandsalesoffunds and investment products in theUK. In order to operate successfullywithin such an environment, assetmanagerswillneedtocollaboratewithadvisors/distributors by ensuring theyreceive the required relevant informa-tion(rather thanavastamountofun-systematic information) and reportingattherighttime.

Those asset managers who are able toinvestinkeyareassuchascompliance,risk management and reporting infra-structuretocopewithchangesininves-

torpreferencesandnewregulationwillderiveadirectbenefit.Financialinter-mediaries and other third-party dis-tributors,especiallybanks,willhavetorestore trust and demonstrate theirvalueadded.Significantly,higherlevelsofprofessionalandtechnicalqualifica-tions, as well as an adapted IT infra-structure,wouldbenecessarytooperatesuccessfullyinsuchanenvironment.

DEMANDSONITPLATFORMSWhiletheabove-describedtrendshavehighlighted clear requirements for theevolutionofT systemsand infrastruc-tures, we would like to elaborate onsome specific aspects affecting assetmanagers.Evidenceofenhancedman-agement of risk and its transparentcommunicationtoinvestorswillbekeydeterminants inthefuture.Theabilityofassetmanagerstosatisfythesemar-ket requirements will decide over suc-cessorfailure.

Apreconditionforaneffectivemanage-mentandtransparentreportingofrisksistheaccesstoandtheconsolidationofrisk-relevantdata.Intoday’sfundmar-ketsthisdataiscollectedbyanumberoflegally independent entities, each ofthem providing a special contributionto the fund product. Data is collectedand stored in a number of technicallymoreor less sophisticated IT tools in-

cluding specialised packaged systems,in-house developments, data ware-housesandExcelsheets.

The effective management of risks re-quiresanefficientupstreamtransferofdatafromdistributionentities,transferagents and fund administrators to theassetmanagers.Themaincriteriaareasfollows:

• Systems should enable the assetmanager to have quick access to allinvestor data with the appropriatelevelofdetailinordertobeinaposi-tiontohaveatimelycommunicationwiththerightrecipient.Thiswillre-quiretransferagentsanddistributorstocloselyobserveandreportonthe

“The effective management of risks requires an efficient upstream transfer of data from distribution entities, transfer agents and fund administrators to the asset managers.”

1998199819981998199819981998199819981998

600US$trn

500

400

300

200

Total globalGDP = $55trn

100

0

Interest rate contrastsForeign exchange contractsCredit default swapsEquity-linked contractsCommodity contractsUnallocated

Figure 4.Outstanding notional amounts of derivatives.Source: BIS.


investment behaviour. Through theprovision of dashboards consolidat-ing qualitative and quantitative in-vestment data, transfer agents cansupportassetmanagersintheantici-pation of investor demands andclaimsincaseofcrisis.

• Centralisation of all data within onesingle platform to efficiently analyseanydatarelevanttotheassetmanager.

• Ability to compute/analyse/reportthelevelofrisktakenbytheassetmanager and to disseminate thisinformation in a consistent andprecisemannerindifferentreport-ingfactsheetsandmarketingmate-rials. The implementation ofUCITSIVwill require informinginvestors about the ‘essential ele-ments’ of the product. These ele-mentswillhavetobeconsolidatedin the ‘KII’, enabling the investor

to easily make comparisons be-tweendifferentofferings.Thecrea-tionofa‘KII’,whichwillbecomeastandardmarketingtool,willhaveto address investor desire for in-creased risk transparency and fre-quentupdates.

• A complete and accurate securitiesmasterfile,enablingdetailedanalysisandcreatingresultswithahighde-

gree of precision allowing soundmanagementdecisionsincrisissitua-tions. This should include accuratedatasuchasgeographicareasof in-vestment, industry sectors, issuers,underlyingassets,locationofdepos-its,valuationprinciples,etc.

• Improvedmiddleofficesystem,ena-blingtheclearidentificationandnec-essaryanalysisofcounterpartyrisks.

Neithertheintegrationofsystemsnorthedevelopment of effective reporting toolsarenewconcepts:thequestisasoldastheIT-supportedfundproductionitself.Butithasneverbeenthoughtthroughinanindustryenvironment,whichwascharac-terisedbysufficientliquidity,growthandfocus on sophistication of products andservices.Weexpect that increasedfocuson risk, liquidity squeezes, transparencyand reactivity will lead to significantly

higher cost pressures wherethese old concepts will be-comemorefashionablethaneverbefore.

Theinterconnectivity,mean-ingthatthesystemscommu-nicate with each other,straight-through-process-ing(STP),ortheseamless,electronictransferofinfor-mation to all parties in-volved utilising standard-ised information flows,technologies, and infra-structures, accuracy andflexibility of the varioussystemsandtools:alltheseshould be the key features

oftheITinfrastructuremadeavailabletoassetmanagersinordertoallowthemto cope with upcoming challenges.However,thisisnotaneasyfix.Itwillrequiresometime,startingfromablanksheetofpaperandrethinkingtheidealinteractions and functionalities of thedifferentsystemstoachieveanefficientandflexibleinfrastructure.

François Génaux is partner at Pricewater-houseCoopers (PwC) in Luxembourg, lead-ing the Financial Services Consulting Practice. He holds a masters degree in Fi-nance and Economy from Louis Pasteur University of Strasbourg, France, and an MBA from Warwick University in the UK.

Dariush Yazdani leads the Financial Services Research Unit at PwC Luxem-bourg with more than 14 years of experi-ence in the financial services industry. He has led and contributed to various research and thought leadership studies for external clients and in support of other PwC Units. He holds an MBA from the University of Chicago GSB.

“We expect that increased focus on risk, liquidity

squeezes, transparency and reactivity will lead to

significantly higher cost pressures ...”

PricewaterhouseCoopers

PricewaterhouseCoopers Luxem-bourg employs more than 2,000professionals from 53 differentcountries.PricewaterhouseCoop-ers (www.pwc.com) provides in-dustry-focusedassurance,taxandadvisory services to build publictrust and enhance value for ourclients and their stakeholders.Morethan163,000peoplein151countries across our networkshare their thinking, experienceand solutions to develop freshperspectivesandpracticaladvice.

‘PricewaterhouseCoopers’ referstothegroupofindependentfirmsthat aremembers ofPricewater-houseCoopers International net-work,eachofwhichisaseparateandindependentlegalentity.



Operational platforms in the asset management industry are treated very differ-ently, but one fact is known by all asset managers: operational platforms are ex-tremely costly. Many asset managers wrongly think that making two to three main statements that express general guidelines for their platforms is performing strate-gic management of their IT installation. In this article it is argued that this kind of management does not constitute strategic management of an operational platform. This management approach might be sufficient for simple and small asset manag-ers, but for more complex businesses a more analytical approach is appropriate.

T hekeygoalof thisarticleistodemonstratewhyfor-mulating and implement-ing an operational plat-

formstrategyisavaluableandnecessarytool for an asset manager’s strategicmanagement,andtoillustratewhichel-ements strategicmanagementcancon-sistof.The lengthof thisarticle leavesnoroomforlongdiscussionsoranalyti-cal models or for explaining strategicdrivers,soitonlydiscussesahigh-levelapproachtostrategicmanagement.

This article’s main postulate is that anappropriate and well-defined strategicapproach to an operational platform iseconomically beneficial and turns ITexpensesfromcosts intoastrategic in-vestment.

The definition of an operational plat-form(Elsborg,2008)appliedinthisar-ticleis:An operational platform in the asset man-agement industry is where the management of an organisation’s data and information takes place, together with the execution of decisions.

THEOPERATIONALPLATFORMASASTRATEGICMANAGEMENTTOOLThechoiceanddesignofanoperationalplatformisnotanisolatedtechnicalde-

cision.Theplatformisastrategicman-agement tool that either supports thedevelopment of the business or createsobstacles.Theoperationalplatformcanbeseenasawaytogaincompetitivead-vantage through cost-efficient design,reliability,flexibilityandscalability.Themaingoal for strategicmanagementofthe operational platform is to createalignmentbetweentheoperationalde-velopmentoftheplatformanddevelop-mentofthebusiness.

This article outlines a simple, straight-forward approach to strategicmanage-mentofanoperationalplatform.Firstly,abasicdefinitionoftheoperationalplat-form is required. This definition formsthebasisofthestrategy.Thereafter,thedirectionanddriversoftheoperationalstrategyaredefined,whichleadstotheactualdefinitionofanoperationalplat-formstrategy.Agapanalysismustthenbeconductedtodefinetheneedforde-velopmentoftheoperationalplatform.

Theapproach,however,canbemoreorless sophisticated, e.g. the basic modelcan be developed further according totheresultsoftheanalysis;theanalyticalapproach is extendable; and the strate-gies and drivers of the platform areequallyextendable.Itisallaquestionofhowcomplexabusinesstheoperationalplatformmustsupport.

# Operational platform: a strategic asset that supports business goals

A general problem in the industry isthatmanyassetmanagersdonotdistin-guish between IT strategy and opera-tionalplatformstrategy.Fartoooften,making no differentiation betweenthese strategies causes the operationalset-upandthedevelopmentofthisset-up to be based upon technical consid-erationsstatedintheITstrategy(ifonesuch exists). By contrast, the opera-tionalplatformstrategy–asdefinedinthisarticle–isformulatedbythebusi-nessunitusingtheplatform,whichen-suresthatthemanagementofanopera-tional platform becomes an integratedpart of the business. The underlyingtechnology processes such as network,communicationandhardwareareman-aged within the framework of the ITstrategy, which of course must bealigned with the operational strategy.TheauthorofthisarticleacknowledgesthatthemanagementofanITstrategyisofequalstrategicimportance(andof-tenmorecomplex).

MODELFRAMEWORKOFOPERATIONALPLATFORMTo implement a strategic approach tomanaging an operational platform, afunctionalmodelmustbedefinedandinplace.Thismodelisthemainoutsetforconductinganalysesandforsettingupastrategyfortheoperationalplatform.

Jacob Elsborg, MBA, M.Sc.,Head of Technology,ATP Investment Area


Definingtheactivitiesofanassetman-agerwithintheconceptofavaluechain(Sondhi,1999)isanequallysimplepre-requisite. The value chain consists ofthreeprimaryactivities,whichare theinvestmentprocesses:

1.decisionmaking2.transactionprocessing3. informationdelivery

Using this definition of the activities ofanassetmanagerwithrespecttoanop-erationalplatform,amodelinitssimplestform can be defined as where the man-agementofanorganisation’sdataandin-formationtakesplace, togetherwiththeexecutionofdecisions(Figure1).Todefineastrategicapproachtoman-aginganoperationalplatform,thepri-maryactivities inthevaluechainhavetobedefinedseparately.

Thenextpartofthisarticleisdedicatedtotheanalysisoftheprimaryactivitiesofanoperatingplatform.Figure2givesa brief presentation of a functionalmodel framework (Heyes, 2007;Elsborg,2008)forthedefinedactivitiesofanoperationalplatform.

IntheframeworkinFigure2,adiffer-entiationbaseduponthecharacteristicsoftheinstrumentsissuggested.Theas-setclassesare:

1. Cash Cashinstrumentsareequities,fixedin-comeandFXcashinstruments.

2. Exchange-traded derivatives (ETD)ETDinstrumentsarelistedfuturesandoptionsonallunderlyinginstruments.

3. OTC (named ‘Vanilla’ OTC)OTCproductsareinstrumentswithstandardisedprocedures.

4. Illiquid and private assetsIlliquidandprivateassetsarecomplexOTCderivativesandprivateorphysicalassets.

Theassetsineachgrouphavethesamecharacteristicswithregardtotheirde-finedmainfunctions,andtheyarethususeful when analysing the operationalplatform.Itisnottheintentofthisarti-cletodiscuss indetail thecharacteris-ticsofeachassetclassorhowtousethevariousinstrumentsintermsofportfo-liomanagement;however,onemustbeawareofthedifferentiationwhendefin-ingastrategicmodelfortheoperationalplatform.

THEBASICSOFANOPERATIONALPLATFORMSTRATEGYAsstatedabove,thestrategyofanop-erationalplatformhasitsoriginsintheoverallbusinessstrategy.Figure3illus-tratesthealignmentoftheoperationalstrategy.Itisoutsidethescopeofthisarticletodefineabusinessorinvestmentstrategy,whichmeansitisimpossibletodefineaspecific operational platform strategy.However, it is possible to define basicoperationaldriverswithouthaving theprecise strategic scope of thebusiness,theinvestmentortheoperationalplat-formstrategy.

Thedefinitionofabusinessstrategyde-rives fromtheusual steps:analysis fol-lowed by definition of vision/mission,objectives, strategy and tactics(VMOST;Sondhi,1999),whichagainleadstothedefinitionofaninvestmentstrategy(ithasbeenseenthatthestrat-egy and tactics definitions of the busi-ness strategy are the definition of theinvestmentstrategy).Itisuponthisbasisthatthestrategyoftheoperationalplat-formisdefined.Theimplementationofthe operational platform strategy thusbecomesanintegratedpartoftheimple-mentationofthebusinessstrategy.

“A general problem in the industry is that many

asset managers do not distinguish between IT

strategy and operational platform strategy.”


Operational platform

Data managementProcess management

Information managementSystem management

Decisionmaking

Pre-trade analyticsOrder execution

Informationdelivery

CompliancePerformance analysis

Transaction processing

Transaction processing Asset servicing

Accounting

Figure 1. Operational platform


The strategic direction of the platformhastobedefinedbydevelopinganopera-tionalplatformstrategy.Ausefulframe-workfordefiningthestrategicdirectionof the operational platform is MichaelPorter’s competitive strategies (Porter,1985)(Figure4).Thealignmentbetweenthestrategicdi-rection of an operational platform and

the business strategy is crucial becausethisdirectionhasadirect impactonalllevelsofanoperationalplatformstrategy.

Several drivers are reflected within anoperational platform strategy depend-ingonthebusinessstrategyonwhichitisbased.Threemaindriversthatshouldbeconsideredwhendevelopinganop-erationalplatformstrategyare:

• flexibility• scalability• technology

These drivers are highly dependent onthe strategic direction defined for anoperationalplatform.

As identified within the competitivescopeabove,costscanbeconsideredas

ETD(listed futures and options on all underlyings)

Vanilla OTC(OTC instruments with standardised procedures)

Illiquid and private assets(complex OTC derivatives and private or physical assets)

Cash(Equity, �xed income and FX cash instruments)

Transactionprocessing

Decisionmaking

Informationdelivery

Performance and risk measurement

Settlement and custody

Order and executionmanagement

Order management:splitting and amalgamation1

Order routing andpools of liquidity

Execution: voice andelectronic

Algorithmic trading

Stock loan coverage forshort sales

Fees and commissions

Execution management:amalgamating and splitting

Allocation

Pre-tradeanalytics

Pre-trade decision support analysis

Market data

Research management

Real-time position visibility

Trade cost data

What-if analysis

Quote maintenance and pricing

Pre-trade compliance

Order generation

Transactionprocessing

Trade capture position update

Trade veri�cation

Trade enrichment

Trade data con�rmation: manual and electronic

Break investigation and resolution

Stock loan trade processing

Trade reporting to custodians

Pre-settlement matching

Auto-FX management

Clearing and settlement

Break and fail management

Custodian reporting

Reconciliation of stock and cash

Cash management

Margining

Assetservicing

Corporate events noti�- cation and processing

Dividend noti�cation and processing

Coupon processing

Derivative events pro-cessing proxy votingmanagement

Independent price and sourcing management

Reconciliation

Portfolio accounting and valuation

Performance reporting and attribution

Benchmarking

Portfolio risk measurement

Informationpresentation

Information grouping

Performance reportingand attribution

Portfolio risk monitoringand management

Figure 2. Functional model framework for an operational platform


aseparatedriverorsimplyasafunctionofthedriversdefinedabove.

Havingdefinedafunctionalmodelandstrategic direction/drivers for a plat-form,astrategyforanoperationalplat-formcantheneasilybedefined.After-wards, a strategic fit between theexisting operational platform and thestrategyshouldbedeterminedinordertodecideonthefuturedevelopmentoftheoperationalplatform.

THEANALYSISAsstatedinthesectionabove,themainpurposeoftheanalysisistodeterminethe fit between the business demandsdefinedinthebusinessstrategyandtheexistingoperationalplatform.Theout-comeoftheanalysisdecidesthedirec-tionfordevelopmentoftheoperationalplatform,insteadofaday-to-day-drivenmethod. This approach demands thatthestrategyoftheoperationalplatformisalignedwiththebusinessstrategy.

Theanalysisoftheoperationalstrategyisbasedontheobjectivesandstrategicdirection of an operational platform,which is again based on the overallbusiness strategy. The critical successfactors (CSFs)andthemaindriversofthe platform can be determined fromthis process, along with the key per-formance indicators (KPIs; HenleyManagementCollege,2002).Figure5illustratestheflowoftheanalysis.

HavingderivedtheKPIsfromtheop-erationalstrategy,ananalysisofthefitwith the existing setup can be per-formed.Itisobviousthatthisanalysisismeaningfulwhenthebusinessstrategyis changed, and as a consequence theoperationalstrategyisaligned.Itcanbeexpected that changes will result ingaps between future demands and ex-istingset-upandthuschangestoanop-erationalplatform.

The analytical frameworkA basic analysis can be performed onthe basis of the KPIs derived as men-tioned above. The analysis comprisestwostepsbasedontwoquestions:

• What information is required atwhatlevel(Kanter,1987)?

• Istheoperationalplatformcapableofperformingthetask(Wild,2002)?

Basic analytical framework: informa-tion analysisThe main purpose of the informationanalysisistodefinewhatinformationisrequired at what level (Kanter, 1987).Thisprocessmustbeperformedforeachof the main functions defined in thefunctionalmodel (Figure2).Also, thesecondtargetistoconductagapanaly-sis to define the informational need(HenleyManagementCollege,2002).

The analysis is based on the KPIs de-fined in the strategy analysis outlined

above. The structure of the analysis isdescribedinFigure6.TheKPIsderivefromthestrategicanal-ysismentionedabove,andtheyareusedtodecidetheinformationrequirements.These requirements are expressed ascriticalinformationsets(CISs)basedontheKPIs.(Amodelforanalysis isAn-thony’sTriangle[Kanter,1987].)

TheinformationgapisdefinedaswhatislackingbetweentheCISs,whicharethe information sets that the users oftheoperationalplatformrequireandthe available information sets that areprovided by the operational platform(HenleyManagementCollege,2002).Itisthenaquestionofdefiningtheaddedvalueofinformationtofillinthegaps.

Basic analytical framework: process analysisThe basic process analysis of an opera-tionalplatformhasthesamebasisastheinformation analysis. The analysis de-finedbelowisasimpleprocessanalysis,and it would only determine the basicoperational parameters. Bringing theanalysistoahigherlevelwilldependonan actual operational platform, whichthusdeterminestheselectionofanalysis.

The main approach is to perform ananalysis of the gap between the KPIsandtheexistingprocesses.Figure7il-lustratestheflowofthisanalysis.

Competitivescope

Low cost

Broad low cost

Focused low cost

Broad

Narrow

Di erentiation

Broad di erentiation

Focused di erentiation

Advantage

Investmentstrategy

Businessstrategy

Operational platformstrategy

Figure 3. Strategic alignmentFigure 4. Michael Porter’s competitivestrategy (Porter, 1985)



Theprocessanalysisdependsontheac-tualsetupofanoperationalplatformanditsfunctions.Aprocessanalysishastwoobviouslayers(Wild,2002):

1. processmapping2.capacityanalysis

Theprocessmappingdefineseachproc-essonanoperationalplatforminorderto secure that all processes framedwithin the business strategy are han-dled in an acceptable manner, and inorder to analyse how capacity againstfluctuationindemandishandled.

Thecapacityanalysisandmanagementisabouthandlingtheflowof informa-tion, orders, transactions and analysis.Wild (2002) defines the process thus:“Thedeterminationofcapacityrequiresnotonly theestimationof steady-stateoraveragedemandlevelsbutalsodeci-sionsonhowbesttodealwithdemandlevelfluctuations.”

Thescopeofthecapacityanalysisistodefine where the capacity has bottle-necksandhowtheyaremanaged.CONCLUSIONDefiningandimplementingastrategicapproach is not an easy task, which iswhy many asset managers choose theapproachofusingatechnicalITstrat-egy or some general statements asguidelinesinstead.

Takingastrategicapproachtomanag-ingthecompany’soperationalplatformisfairlytime-consuming,notonlywithregardtodefiningthefirststrategy,butalso with regard to aligning the busi-ness strategy and operational strategywith thegapanalysis andmaintainingthefunctionalmodelofanoperationalplatform.

Thevalueof defining and strategicallymanaging the company’s operational

platform, however, exceeds the cost,withthefollowingmainbenefits:

• managementbuys into thedevelop-ment of the operational platformthroughworkingwithalignmentbe-tween the operational strategy andthebusinessstrategy;

• developmentoftheoperationalplat-form is not driven by a day-to-dayapproach, but by defined long-termbusinessgoals;

• the platform development processesbecomemorepreciseandtimelyduetotheintegrationonastrategiclevelwith the business strategy, whichleadstoadecreaseincost;

• a more stable platform results fromthe long-term perspective develop-mentanditisthuslessofa‘putting-out-the-fire’platform;

• abetterunderstandingdevelopsbe-tweentheusersanddevelopersoftheoperationalplatformduetothestra-tegicalignment;

• on a strategic level, IT and opera-tional management are separated,leavingthepurelytechnicalstrategyand decisions to the technical staffandtheoperationalstrategyandde-cisionstothebusinessunit.

Dependingonthesizeofthebusiness,astrategic approach to management oftheoperationalplatformisbeneficialinterms of development, stability andcost.

Jacob Elsborg is Head of Technology for ATP’s investment department, a position he has held since 2000. He holds a master’s degree in economics and mathematics from the Copenhagen Business School and an MBA from the Henley Management Col-lege in the UK. Jacob Elsborg previously worked as an IT economist for Danmarks Nationalbank, the central bank of Den-mark, from 1995 until 2000.

REFERENCESElsborg,J.(2008),‘TheOperational

Platform–AWaytoGainCompeti-tive Advantage’, dissertation, HenleyManagementCollege.

HenleyManagementCollege(2001),‘ManagingPerformance’(brochure).

HenleyManagementCollege(2002),‘ManagingInformation’(brochure).

Heyes,Richard(2007),‘Exampleoperatingprinciple’,UBSPrimeBro-kerageServices.

Kanter,J.andJ.Miserendino(Nov1987),‘Systems architectures link businessgoalsandISstrategies’,DataManage-mentMagazine.

Porter,MichaelE.(1985),‘CompetitiveAdvantage: Creating and SustainingSuperiorPerformance’,FreePress.

Slack,N.D.C.(2002),‘OperationsStrategy’, London: Financial Times/PrenticeHall.

Sondhi,Rakesh(1999),‘TotalStrategy’,Airworthy Publications InternationalLimited.

Wild,Ray(2002),‘OperationsManagement’,Continuum.

ATP

ATPisastatutorypensionfundcovering4.6mmembers–virtu-allytheentireadultpopulationinDenmark. Together with thetax-financedbasicpension,ATPprovidesbasicincomesecurityinold age for the Danish popula-tion.

ATPwasestablishedasaninde-pendent entity in 1964 and hassincegrowntobecomethelarg-estpensionfundinDenmark.

ATPpensionsarelife-long,withprofitannuities.Membersaccruepensionrightsbasedonacollec-tive insurance-based defined-contribution model. Pensionrightsareguaranteedpromises.ATP Group assets amounted toapproximatelyDKK417bnatyear-end2009.ATPinvestsinawidevariety of assets. Generally, in-vestment categories are equities,interest, credit, inflation andcommodities. The ATP Groupinvestsbothindomesticandfor-eignassets.

In its investment practice, ATPdemonstrates a long-standingcommitmenttocodesoncorpo-rategovernanceaswellascorpo-rate social responsibility. ATPstrives to increase awareness inbothfinancialinvestorsandcom-panies of the financial and eco-nomicriskandopportunitiesas-sociatedwithclimatechange.

Information requirement/critical information sets (CIS)Derived from Anthony’s Triangle

Information gap and the added value of extra information

Key performance indicators(KPIs)

Key performance indicators (KPIs) Available information sets

Main drivers

Critical success factors

Operational platform strategy– objectives and direction

Process gap

Process analysis

Key performance indicators

Figure 5. Operational platform strategy analysisFigure 6. Basic information analysisFigure 7. Process gap analysis


# Countdown to Solvency II: a checklist of IT challenges facing investment managers

While the European Commission’s Solvency II directive, which is scheduled to go into effect in October 2012, is primarily aimed at European insurers, the investment management industry will feel its impact too. Key to successful Solvency II implementation will be quality data and IT processing systems.

S olvency regulation for insur-ancecompaniesintheEUisintheprocessofbeingfunda-mentally reformed. The Eu-

ropean Commission’s Solvency II di-rective will introduce a new solvencyregime,basedonanintegratedriskap-proach,withprovisionfortheserisksintheformofsolvencycapital.SolvencyIIisanevolutionfromSolvencyI,adoptedin2003.ImplementationofSolvencyIIis currently planned for October 2012(Figure1).

The objectives behind Solvency II areconsumerprotection forpolicy-holdersandassessingoverallsolvencyofinsur-ancecompaniesusingmeasuresofsol-vencywhich,itisargued,betterreflecttherisksan insurer isexposedto.It isforeseenasleadingtogreaterharmoni-

sationacrossfinancialsectorsandhar-monisation of supervisory methodsacrossEurope. It isbasedona similarapproach encapsulated in Basel II,whichwas introduced for thebankingandsecuritiesindustryintheEUfromthe beginning of 2008 through theCapitalRequirementsDirective.

In the view of analysts and senior in-dustryexecutives,SolvencyIIsignalsafundamental shift towards a compre-hensive enterprise risk management(ERM) culture. It requires risk man-agement to be integrated into day-to-day business decisions, supported byqualitydataprocessingsystemsanden-hanced IT infrastructures. “Preparingfor Solvency II may seem a dauntingprospect. An effective and integratedsolution will encompass all aspects ofbusiness and demands a systematic,structuredandpracticalapproach.Suc-cessful delivery of a Solvency II pro-gramme needs the right partner,” saysFrankSommerfeld,ManagingDirectorof the German operations of non-lifeactuarialsoftwareproviderEMB.

CHALLENGESANDOPPORTUNITIESSolvency II representsboth challengesand opportunities alike for the Euro-peaninvestmentmanagementindustry,notleastintermsofreviewingITinfra-structurestoensuretheyarecapableofdealingwiththehostofadditionalre-porting and regulatory requirementsarisingfromSolvencyII.“Inthiscon-

text,theimplementationofSolvencyIIshouldnotbeseenpurelyasacompli-anceexercise,butasatremendousop-portunitytoimprovebusinessperform-ance. The greatest competitiveadvantage will be achieved by thosecompanies that position themselvesearly to take advantage of the comingregulatorychanges,” saysDavidHush,TechnologyInfrastructure,Pricewater-houseCoopers.

Theonuswillbeoninvestmentmanag-erstomapoutapolicyondataqualitythat meets their information needs.Many companies have some form ofdataqualitypolicyandassociatedmon-itoring procedures in place. However,theformalmappingofsources,owner-shipandotherkeyaspectsofdatagov-ernance may be lacking. Among thesupplies of and users of informationthere is also varying understanding ofwhatismeantbydataquality,thetoolsinplacetomeasureitandwhatshouldbedonewhendeficienciesaredetected.

“Those investment management com-panieswillingtotakeadvantageofthechallengesposedbySolvencyIIshouldfocusonaligningtheirITarchitecture,treatingdataasastrategicassetofpo-tentially high quality, enabling ad-vancedITriskmanagementtools,andpromoting frictionless communica-tion,” recommends NicolasMichellod,senioranalystat researchandadvisoryfirmCelent.

“Preparing for Solvency II may seem a daunting prospect.

An effective and integrated solution will encompass all

aspects of business and demands a systematic, structured and

practical approach.”Frank Sommerfeld, Managing Director of German operations, EMB

Michael Metcalfe is a German-based f inancial journalist who has worked in the Luxembourg f inancial sector for more than 15 years


TheSolvencyIIprojectwasinitiatedbytheEuropeanCommission in2000 toimplementafundamentalchangetothecurrentcapitaladequacyregimeforEu-ropeaninsurers.ItisintendedthatSol-vency II will produce a more harmo-nised, risk-orientated solvency regimeacrossinsurersandacrosstheEuropeanregion whilst also resulting in capitalrequirementsthatmorereflecttherisksbeingrunbyinsurers.

After intense negotiations, the Euro-pean Parliament and Council finallyreached agreement, with the SolvencyII Framework Directive officiallyadoptedinApril2009.Thereisnownoreason to expect any delay in the tar-geted implementation date of October2012.TheCommitteeofEuropeanIn-suranceandOccupationalPensionsSu-pervisors(CEIOPS)iscurrentlyintheprocessofpublishingthreewavesofad-viceonvarioustopics,includingcalcu-lation of technical provisions, calibra-tion of the standard formula for theSolvency Capital Requirement (SCR),andfurtherdetailsontherequirementsforinternalmodelapproval.

SETTINGOUTAROADMAPSolvency II aims to establish a frame-workofcapitaladequacy,valuationtech-niques and risk management standardsfor European insurers and reinsurers.The proposed risk-based approach willtransformthewayinsurancecompaniesdobusinessandrevolutionisetheindus-trybyreplacingmultipleexistingdirec-tiveswithonesingleglobalstandard.

IninitiatingSolvencyIIprojects,insur-ersmaywanttodevelopdetailedplansforeachworkstreamandrecognisethattheir investment will deliver not onlyregulatorycompliancebutalsotheben-efits of a common framework for risk,capital,valueandcorporategovernance.The directive was approved in April2009, so companies must begin plan-

ningimmediatelyiftheyaretomeettheOctober2012implementationdate.

“Companies need to understand thescope of changes that will accompanySolvency II so that they can look be-yond capital adequacy and focus ongovernance and broaderbusiness implications,”stresses Martin Bradley,whoisresponsibleforSol-vency II-related issues atadvisory group Ernst &Young. For him, compa-nies need to address thefollowingcriticalpoints:

• preparation–developaclear understanding ofthe necessary work-flows and resourcesneeded todevelopSol-vency II and align itwithstrategicvision;

• governance – establishresponsibility for thedeliveryandexecutivesponsorshipofSolvencyII;

• impact studies–understand the re-quirements to put in place the sys-temsandprocessestoreporttheSol-vency Capital Requirement (SCR)annuallyand theMinimumCapitalRequirement (MCR) quarterly, anduseprojections toassesscomplianceprospectivelyinrealtime;

• internalmodels–decidewhethertouseaninternalmodeltoassessregu-latory capital requirements and no-tify the regulator of internal modelintentions;

• business case – determine granularplans, resource requirements, time-lineandbudget.

“Solvency II places as much stress ontheevolutionofacompany’sriskman-agementandgovernanceframeworkasitdoesonthequantitativecalculationofthe capital,” argues Mr. Michellod.

Companies need to establish a riskmanagement function, an actuarialfunction,acompliancefunctionandaninternalauditfunction.Theymustalsodemonstratethattheyhaveanadequateand transparent organisational struc-turewithclearallocationandsegrega-

tionofresponsibilities,aneffectivesys-tem for ensuring the transmission ofinformation,anddocumentedrolesandresponsibilities.

Inadditiontotheannualreportsstipu-latedbytheregulations,thereisalsoaneedtoconsidermanagementinforma-tion requirements across the companyaspartoftheriskmanagementframe-work. Typically, risk information isspread widely across the organisationand is not always held electronically.Data integrity is crucial, and yet, notonlyintegratingbutalsoidentifyingtherequireddatainthefirstplacecanbeachallengingandcomplicatedprocess.

LIKELYCONSTRAINTSOFSOLVENCYIIInvestmentmanagerswillhavetoofferalternatives to equities if they are toguarantee the best possible return fortheir investors under the likely con-

“Companies need to understand the scope of changes that will accompany Solvency II so that they can look beyond capital adequacy and focus on governance and broader business implications.” Martin Bradley, responsible for Solvency II-related issues, Ernst & Young


straintsofSolvencyII, theauthorofarecentsurveyofFrenchinstitutionalin-vestorsclaims.RichardBruyere,presi-dent of assetmanagement consultancyImage & Finance, warned French in-vestorswouldnot increaseequityallo-cations despite strong 2009 perform-ance because of the possibleramificationsofSolvencyII.

Thiscouldleadinvestmentmanagerstosearchforothermeansofreturn,awayfromequities,heargued.“Itisuptoin-vestment managers to regain the trustofclientsandtobeabletoprovideandpropose innovative solutions,” notesMr. Bruyere. He lists liquid alterna-tives,absolutereturnproductsandmoreflexibleinvestmentproductsaspossiblesourcesofnewopportunities.

Reflecting many companies' doubtsover how Solvency II will be imple-mented,Germany’sAllianzchiefexec-utive Michael Diekmann, while wel-comingtheframeworkinprinciple,haswarnedtheproposalsbeingconsidered

risk burdening insurers with an exag-gerated level of capital. Many of theleadingplayers in the insurance sectorhopetoavoidtheextracapitalrequire-ments by using more sophisticated in-

ternalmodelstomanagerisksandcapi-tal. The Solvency II rules for insurersare similar to the Basel II rules forbanksinthatcompaniesthatcandem-onstratesophisticatedriskmanagementaretreateddifferentlytothosethatrelyonastandardformula.

CREATINGTHERIGHTFOUNDATIONSThekeyfoundationsofimproveddeci-sion-making and more efficient use ofcapital are reliable valuation systems,clear processes and sound controls.With Solvency II’s valuation basesmovinginthesamedirectionasthelat-estfiscaldevelopments in IFRSPhaseII for insurance contracts, companiesare facing a fundamental and poten-tiallycostlyoverhauloftheirreportingsystems,whichwillinevitablycompetefor resourceswithother equallypress-ingdemands.

Ifapproachedholistically,however,theparallelsbetweenSolvencyIIandIFRSPhaseIIshouldenablecompaniestore-

alisevaluablesynergiesindata, modelling and in-formation systems. Thiswould improve the con-sistency of both internaland external reporting,while avoiding needlesscosts and disruptions.While synergies exist,companiesneedtoantici-pateandexplainthenewnumbers, alongwith anydifferences between theIFRSandSolvencyIIas-sumptionsandresults, topossibly unfamiliar oreven sceptical analystsandinvestors.

SolvencyIIwillalsocastthespotlighton riskier and capital-intensive prod-ucts.Thismayrequiresignificantmodi-fications in prices and make-up of the

productportfolio, aswell asmodifica-tions to existing IT platforms. How-ever, itmayalsoprovideopportunitiesforportfoliooptimisation,keenerpric-ingandenhancedproductprofitabilityamongcompanieswithsuperiorITsys-tems and well-embedded ERM capa-bilities.

Addressing these issues will require ashiftinthecultureandmindsetoftheinvestment management business withimportant implications for strategicplanning, management skills, incen-tives and organisational behaviour.Running what could be a much moreelaborateinfrastructureofrisk,govern-anceandcapitalmanagementwillleadtoheightenedcompetitionforqualifiedpersonnel, leading to further pressureontheavailabilityofalreadyscarcetal-entasthedeadlineforimplementationdrawsnearer.

According to Mark Batten, Partner,PricewaterhouseCoopers, the timelineto achieve full compliance by 2012 istight. “Companies would be wise topressaheadwithinitiativesdesignedtoensurerobustplansareinplacetomeetthedeadlineasthenewrulesbringsig-nificant change. A well-planned ap-proach could provide optimal capital,organisationalandstructuralsolutions,”headded.Iftheframeworkdirectiveisadoptedasplanned,heanticipatesthattimeisrunningoutforidentifyingandimplementing themeasurescompaniesneedtohaveinplacebyOctober2012.

“Solvency II will also cast the spotlight on riskier and capital-

intensive products. This may require significant modifications in prices and make-up of the product portfolio, as well as modifications

to existing IT platforms.”


ThedevelopmentofSolvencyIIisbasedonathree-pillarapproachsimilartotheworldwideBaselIIapproachapplicabletothebankingandsecuritiesindustry:

Pillar 1Quantitativerequirements(Solvency)

– financialdata– internalmodels– expectedlosses

Pillar 2Qualitativerequirements(Supervisoryreview)

– riskmanagementfunction– assessandmaintaincapital

Pillar 3Marketdiscipline(Disclosureandtransparency)

SolvencyIIisaimedatimprovingriskmanagementacrosstheinsuranceindustrywithintheEUbasedonanintegratedorenterpriseriskmanagement(ERM)approach.SolvencyIIisaboutprinciples,ratherthanbeingrulesbased.Insurerswillneedtobeabletoexplicitlyidentifyriskinterdependencies,whichwillcreateincentivesforinsurerstodeveloptheirowninternalriskmodels.

Solvencycalculationswillbebasedonmarket-consistentvaluationofassetsandliabilities.Risk-basedportfolioanalysisisachievedbyapplyinganintegratedapproach,takingintoaccountdependenciesbetweenriskcategories:

– MinimumCapitalRequirement(MCR),whichisthelevelbelowwhichcapitalresourcesmustnotfallwithoutposinganunacceptablerisktopolicy-holders;

– SolvencyCapitalRequirement(SCR),sufficientcapitaltoabsorbsignificantunforeseenlossesandassurepolicy-holdersthatpaymentswillbemadeastheybecomedue.SCRcanbeestablishedbyusing:

– standardformula – internalmodel – partialapproach,i.e.amixofinternal

modelorstandardformulaaccordingtotheriskcategorieschosenbyafirm.

ThedevelopmentofSolvencyIIisfollowingaLamfalussy-typeconsultativeprocess,similartotheCRDandMiFID,namely:

– Level1–Directive=framework,agreedbyCouncil,EuropeanCommissionandEuropeanParliament;

– Level2–implementation,agreedbyCEIOPS;

– Level3–detailedimplementationbynationalregulators.

Thekeymilestonesanddatesare:

– 2008–QuantitativeImpactStudy4(QIS4)undertakenandevaluated;

– November2008–DraftSolvencyIIDirectivepublished;

– 2009–Implementationarrangementsmadebynationalregulatorsandinsurers;

– June-November2010–Modeldry-runforthoseacceptedforthe‘internalmodels’approach;

– 2011–Formalsubmissionsforthoseacceptedfor‘internalmodels’approach;

– October2012–FullimplementationofSolvencyII.

Althoughfinalimplementationiscurrentlyplannedfor2012,companiesthatwishtobeacceptedforthemodels-basedapproachmustundertakeadry-runoftheirmodelinthesecondhalfof2010,sotimeisrunningout.PlanningforSolvencyIIshouldnowbeunderway.

Solvency II – Three-pillar approach Solvency II – Key features Solvency II – Timetable

Figure 1. Solvency II at a glance: three-pillar approach, key features and timetable

§Regulatory update This quarterly regulatory update covers major new regulatory requirements and substantial developments that affect the investment management industry.

SOLVENCYIIIMPLEMENTATIONMEASURESDuring themembersmeetingheldon26 and27 January,CEIOPS, theCommitteeofEuropeanInsuranceandOccupationalPensionsSupervisors,adoptedthethirdandfinaladvicesonSolvencyIILevel2implementingmeasures. The advices are based on 6,856 comments on the individualpapersfrom126stakeholdersfromnationalandEuropeanassociationsandinsurance undertakings (for example insurance companies, mutuals, lawfirms and investment banks).To view the advices go to: www.ceiops.eu/content/view/706/330/.

WORKPLACEPENSIONREFORM–UKThe final batch of regulations to deliver the ground breaking workplacepensionreformswereunveiled12January2010,reflectingthefactthattheUKGovernmenthasworkedcloselywith stakeholdersandemployers tomaintaintheconsensusandensuretheregulationsareresponsivetotheirneeds and concerns. Learn more about the reform at www.dwp.gov.uk/policy/pensions-reform/.

ENHANCECOMPENSATIONANDCORPORATEGOVERNANCEDISCLOSURE–USTheSEChasadoptedrules toenhance thecompensationandcorporategovernance disclosures of public companies, including investmentcompanies,inproxystatementsandregistrationstatements.Thenewrulesinclude twocategoriesof amendments specifically relating to investmentcompanydisclosures:(1)enhanceddirectorandnomineedisclosures;and(2)newdisclosuresconcerningboardleadershipstructureandtheboard'srole in risk oversight. The new rules amend disclosures in fund proxystatements and information statements where action is to be taken withrespect to the election of directors. Funds are also required to includeexpandeddisclosuresintheirSAI.

SECFinalRule,ReleaseNos.33-9089,34-61175andIC-29092(available16December2009).ComplianceDate:Generally,28February2010.Thecompliance date varies for new and existing funds – see http://sec.gov/rules/.

USHOUSEOFREPRESENTATIVESPASSESFINANCIALSERVICESREFORMLEGISLATIONOn11December2009,theUSHouseofRepresentativesapprovedH.R.4173,the‘WallStreetReformandConsumerProtectionActof2009.’Thelegislation is designed to enhance federal regulation of the US financialsysteminresponsetotherecentfinancialcrisis.ThelegislationwouldcreatetheFinancialServicesOversightCouncil(OversightCouncil),chairedbytheSecretaryoftheTreasury,toadviseCongressonfinancial,domesticandinternationalregulatorydevelopments,andtoidentify,monitorandaddresspotentialthreatstothestabilityoftheUSfinancialsystem.

TheWallStreetReformandConsumerProtectionActof2009,H.R.4173,111th Cong. (2009); Beagan Wilcox Volz, ICI to Congress: Beware ofReform Bill's 'Adverse Consequences,' Ignites, 16 December 2009; ICIMemorandumNo.24036(21December2009)(availableatwww.ici.org).

SECADOPTSAMENDMENTSTOINVESTMENTADVISERCUSTODYRULE–USTheSEChasadoptedamendmentstotheinvestmentadvisercustodyrule,Rule 206(4)-2under the InvestmentAdvisersAct, to provide additionalsafeguards when a registered adviser has custody of client assets and toencouragetheuseofindependentcustodians.

‘CustodyofFundsorSecuritiesofClientsbyInvestmentAdvisers’,SECReleaseNo.IA-2968(30December2009)isavailableontheSEC’swebsiteathttp://sec.gov/rules/final/ia-2968.pdf.

UPDATETOGIPSSTANDARDS2010Basedontheprinciplesoffairrepresentationandfulldisclosure,theGlobalInvestmentPerformanceStandards(GIPS®)provideanethicalframeworkfor the calculation and presentation of investment performance forinvestment management firms. Firms that comply with the Standardsprovideinvestorswithconsistentandtransparentpresentationsofthefirm’sperformance.The2010editionimprovestheconsistencyandprecisionoftheStandardsandintroducestheconceptoffairvalueandspecificprovisionsrelatedtorisk.

Therevisedversionreflectsthejointcooperationof32countrysponsorsofGIPS across Europe, the Middle East, North America, Africa and theAsia-Pacificregion.Learnmoreatwww.cfapubs.org/doi/abs/10.2469/ccb.v2010.n5.1.

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37SimCorp JOURNALOFAPPLIEDITANDINVESTMENTMANAGEMENT April2010

§ C risis:Cause,Containmentand Cure’ explains howthe global financial crisisof 2007-09 came about,

howitisbeingcontainedandwhatstepsshouldbetakentopreventsuchacrisisfromhappeningagain.Writtenby theDirector of the Banking Sector at theFinancial Services Authority of theUK,itgivesafirst-handviewofpolicy-making combined with rigorous eco-nomic analysis presented in an easilyreadablestyle.Itisanalytical–notan-ecdotal–basedonup-to-dateeconomictheory and recent policy pronounce-ments, including both macroeconomic

‘

W hy have financialcrises been increas-ingly frequent andsevereinthelast30

years?Howcanfinancialcrisesbepre-vented?

Whatroledogovernmentsandinterna-tionalinstitutionsplayintheirpreven-tion?Howdoesthelatestcrisisfitinthelong-termpoliticaleconomycycleoffi-nance?

Thisbookanswersthesequestions,us-ing three complementary parts: Part Iprovides the reader with the ‘toolkit’necessary for understanding financialcrises – explaining the essential ele-ments of economic theory. In Part IIthe authors put these key theories incontext, using them to illustrate thechief international crises since the

and financial sector aspects. There arenumerous books on the crisis but fewthat have the breadth, analytical rigorand first-hand experience of policy-makingofferedherebyDr.Huertas.

Enhanced with diagrams to illustratekeyconcepts,thisbookwillbeavalua-ble resource for banks, central banks,public policy-makers, banking regula-tors, law firms, securities associations,financeministries,studentsofbanking,finance and monetary economics andindeed anyone who seeks a balanced,comprehensive, global authoritativeviewofthecrisis.

Great Depression of the 1930s andeventsthat,sincethe1980s,havetrig-geredahighlevelofinstability.When-everappropriate,similaritiesanddiffer-encesbetweenthesehistoriccrisesandthe recent crisis are highlighted. PartIIIfocusesontheglobalfinancialcrisisof2007-09,triggeredbytheturmoilinthe subprime mortgage market of theUSA.

By offering a comprehensive explana-tion of the long-term dynamics of fi-nancial systems and by depicting theprototypeofafinancialcrisis,thebookenables an in-depth understanding ofanyspecificcrisisandgivesmodelsforidentifyingthecrisis’strueoriginsandamplification channels.Thebook con-cludeswithadiscussionofwaystose-cureastable,sustainablefutureforglo-balisedfinance.

THOMAS F. HUERTAS is Director, Banking Sector for the Financial Services Authority, UK. Previously, he worked for Citigroup for nearly 30 years in various roles, including senior policy and business positions. He has written extensively on the current crisis, credit derivatives, insur-ance and retail banking.

VINCENZO D’APICE is Economist in the Research Department of the Italian Banking Association. His research interests include international finance, banking and regulation. He is currently undertak-ing economic research at the Instituto Ein-audi, Italy.

GIOVANNI FERRI is Chair of the De-partment of Economics, University of Bari, Italy. He previously worked for the World Bank and the Banca d ’Italia. He has published extensively on money and credit economics.

# Crisis: Cause, Containment and CureThomas F. Huertas, Palgrave Macmillan, 2010

BOOK REVIEW:

BOOK REVIEW:

# Financial Instability: Toolkit for Interpreting Boom and Bust Cycles

Vincenzo D’Apice and Giovanni Ferri, Palgrave Macmillan, 2010

38 # MAKINGSENSEOFTHENUMBERS:ANALYSTS’PERSPECTIVESONCURRENTANDFUTUREREPORTINGINTHEINSURANCEINDUSTRYInterviews with more than 40 investment professionals revealed widespreaddissatisfaction with the current state of financial reporting. Many participants,especially life insuranceanalystsusingIFRS,wouldliketheIASBtomovetoarevised reporting framework as quickly as possible. While recognising thedifficultiesofdevelopingsolutionsforsuchadiverseandcomplexindustry,manywouldencouragestandardsetterstoputpragmatismbeforetheoreticalprecision.

‘Makingsenseofthenumbers:Analysts’perspectivesoncurrentandfuturereportingintheinsuranceindustry’,PwC2009www.pwc.com/gx/en/insurance/IFRS/publications/analyst-reporting-perspectives.jhtmlPricewaterhouseCoopers,16pages,November2009

THEFUTUREOFOTCDERIVATIVES:FIGHTINGTHROUGHFIVEKEYCHALLENGESFirmsthatwanttoplayinOTCderivativeswillhavetofundprojectstoimplementtheautomationandprocesscontrolsdemandedbyregulatorsandinvestors.Inthisreport,TowerGroupencouragesOTCderivatives technology teams to focusonfront-to-backautomationsoastoreducerisk,improveoperationalefficiencyandgenerate better valuations. To thrive in tomorrow’s new paradigm, institutionsmustaddresselectronictradingofOTCderivatives,cross-asset-classtradingandthereal-timeneedsofcounterpartiesandregulators.

‘TheFutureofOTCDerivatives:FightingThroughFiveKeyChallenges’www.towergroup.comTowerGroup,9pages,June2009

IFRSFUNDSURVEY2010In thecurrent economy, the importanceof financial reportinghasbeen thrownintothespotlight.Therehasbeenaprofoundimpactontheassetmanagementindustryand,inparticular,hedgefundsreceivedconsiderablecriticism.Thissurveyexplores the current applicationof InternationalFinancialReportingStandards(IFRS)byinvestmentfundsacrossEurope.

‘IFRSfundsurvey2010’www.ey.com/GL/en/Industries/Asset-Management/IFRS-fund-survey-2010-introductionErnst&Young,52pages,January2010

DELOITTEREVIEW–MONEYANDBORDERS:CROSS-BORDERINVESTMENTSINACHANGINGGLOBALMARKETPLACEAsconditionsimproveaftertherecession,it’swidelyexpectedthatgovernment’sroleineconomiesaroundtheworldwilldiminish.Firmsthatreceivedgovernmentaidwillbuybacksharesandpayoffloans,stimulusspendingwillwinddown,andprotectionistimpulseswillrecede.Butisthatthefuture?

‘MoneyandBorders:Cross-BorderInvestmentsInAChangingGlobalMarketplace’,DeloitteReviewwww.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/Deloitte%20Review/US_deloittereview_Money_and_Borders_Jan10.pdfDeloitte,15pages,January2010

FUTUREOFINVESTMENT:THENEXTMOVE?Twoofthefourworstbearmarketsofthelast100yearsravagedtheglobalassetmanagementindustryoveraspanofsevenyearsinthisdecade.Indiscriminately,likeatsunami,thelatesthaswipedoutsome$15trninassetvalues,causinghavocineveryassetclass,everymarket,everygeographyandeveryclientsegment:15yearsofcapitalgainswerewipedoutin15months.Withtheworstofthiscollateraldamagenowseeminglyover,itistimeforastock-takeandsomescenariowork.Thisstudyexploreshowthemarketdynamicsofthefundbusinesswillchangeandhowitsbusinessmodelswillreshape.

‘FutureofInvestment:thenextmove?’,CREATE-Research2009www.create-research.co.uk/pubRes/prTxt.html#futureofinvCREATE-Research,43pages,June2009

OPPORTUNITIESINADVERSITY:ASSETMANAGEMENTSURVEYSNAPSHOTTheassetmanagementindustryisfacingunprecedentedchallengesinthewakeofthedeepandprolongedglobalfinancialcrisisandtheaccompanyingcreditcrunch.Investmentlosses,widespreadredemptionsanddamagetotheindustry’sreputationhave combined with the looming threat of significant regulatory changes topressure almost all industry participants. Asset management firms are nowchallengedtoreassesstheirriskmanagementstrategiesandtomanagecostsinnewandinnovativeways.

‘Opportunitiesinadversity:Assetmanagementsurveysnapshot’,Ernst&Young2009www.ey.com/Publication/vwLUAssets/Opportunities_in_adversity:_Asset_management_survey_snapshot/$FILE/OIA_Asset%20mgmt%20survey%20snapshot.pdfErnst&Young,8pages,July2009

TRANSVERSINGTHEROCKYROADOUTOFTHEGLOBALFINANCIALRECESSION:STOPWAITINGFORTHETIP!Traversing the rocky road to a sustainable economic recovery will requirecollaboration between governments, regulators, technology vendors, and mostimportantly, financial services institutions (FSIs) on a few bold steps. ThisTowerGroup Research Note analyses the strategic business framework andproposes steps that each of these stakeholders must take in helping the globalfinancial services industry recover from its longandobscurenightof crisis andrecession.

‘TransversingtheRockyRoadOutoftheGlobalFinancialRecession:StopWaitingfortheTip!’,TowerGroup2009www.towergroup.comTowerGroup,10pages,October2009

RENEWINGTHEPROMISE:TIMETOMENDRELATIONSHIPSININVESTMENTMANAGEMENT‘Renewingthepromise:Timetomendrelationshipsininvestmentmanagement’wasproducedbyKPMGwithresearchandsupportfromDatamonitor.Thisreportdraws on the findings of a global survey of 288 respondents representing theinvestmentmanagementindustryandinvestorsaswellasin-depthinterviewswithseniorexecutivesworkingacrosstheindustry.

‘Renewingthepromise:Timetomendrelationshipsininvestmentmanagement’,KPMG2009www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Pages/Renewing-the-promise.aspxKPMG,40pages,June2009

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RETHINKINGBUSINESSOPERATINGMODELSININSURANCE:THERIGHTCOMBINATIONOverthepast twoyears,manyfinancial services institutionshavebeenworkingtowards one goal – survival. Like many others, insurers have come under greatpressurethefinancialcrisis.Comparedtotheirbankingcounterparts,mostinsurershave come through in good shape. But ‘business as usual’ is unlikely in theforeseeablefuture.

‘Rethinkingbusinessoperatingmodelsininsurance:Therightcombination’,Deloittewww.deloitte.com/view/en_GX/global/industries/financial-services/ec90a3ef7be16210VgnVCM100000ba42f00aRCRD.htmDeloitte,January2010

EUROPEANINSURANCEOUTLOOK2010Insurershavefaredbetterthanthebanksduringtherecentfinancialcrisisbuthavestill seen premiums drop by 6% for 2008 with no improvement in 2009.Theauthorsofthisarticlehaveidentifiedsevenpost-crisisrisksandopportunitiesforinsurers in 2010. Among the risks and opportunities there are challenges likeRebuildingcapital,developingaholisticapproachtoriskmanagement,preparingfor Solvency II implementation and handling an increasing complexity in achangingregulatoryenvironment.

‘Europeaninsuranceoutlook2010’,Ernst&Youngwww.ey.com/GL/en/Industries/InsuranceErnst&Young,8pages,January2010

New reports published and information which could be relevant for listing can be submitted for review to: Editorial Assistant Mette Trier, [email protected].

FRONTIERSINFINANCE–ANEWPICTUREAs the financial services industry moves into recovery, it is still facing manychallengesandopportunitiesresultingfromtheeconomiccrisis.Clarityonwhatthetruepicturewillbeisimportanttounderstandinghowtheindustrywillmoveforward.Witharenewedfocusonefficientcapitalallocation,riskmanagement,transforming business models and cost optimisation, the industry is workingtowardsreachinga‘newnormal’.

‘FrontiersinFinance–anewpicture’,KPMGwww.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Frontiers-in-Finance/Pages/FiF-a-new-picture.aspxKPMG,48pages,December2009

TOP10CHALLENGESFORINVESTMENTBANKS2010Theglobalassetmanagementbusinesshashadawildridein2008and2009withmutual fund assets andhedge fund assetsdecliningprecipitously.AlthoughassetlevelshavereboundedsmartlyfromtheirlowsofMarch2009andtheprofitforecastsfor2010lookencouraging,investmentfirmswillnotforgettheexperienceofthelasttwoyears.If2009wasanalogoustothedarkagesforinvestmentmanagementfirms,then2010willbetherenaissance.ThisTowerGroupResearchNotediscussesthe10most important business drivers and the strategic responses, and technologyprioritiesspurredbythemthatassetmanagerswillfocusonin2010.

‘2010TopTenBusinessDrivers,StrategicResponsesandITinitiativesinInvestmentManagement’,TowerGroupwww.towergroup.comTowerGroup,10pages,December2009

2010TRENDSTOWATCH:FINANCIALMARKETSTECHNOLOGY–OPPORTUNITIESINTHERECOVERYOneyearonfromthefinancialcrisis,thephoenixofthefinancialmarketssectorhasemergedfromtheflames.Withthesectorrenewedincapitalstrengthandriskdiscipline,2010lookssettoseeafocusonopportunitiesratherthanfire-fightingandsurvival.However,thecrisishasnotonlychangedtheinstitutionsthemselves;ithasalsochangedthelandscapeinwhichtheyoperateand2010issettobeaperiod of uncharted territory for the industry. This brief maps out the likelyevolutionof the sector, following thekey forces thatwill shape themarketanddrivebusinessstrategy.

‘2010TrendstoWatch:FinancialMarketsTechnology–OpportunitiesintheRecovery’,Datamonitorwww.datamonitor.comDatamonitor,18pages,December2009

TOP10TRENDSINCAPITALMARKETSFOR2010A new report from Aite Group, LLC provides insight into 2010's top 10 keyindustry trends for asset managers, retail brokerage firms, exchanges, regulatorsandtechnologistsinthecapitalmarkets.AiteGroupseestheyearaheadasoneinwhichon-holdadvancescanfinallymoveforward,whileregulatorychangesbeginto reshape the financial services industry. The report is based largely on AiteGroup'sassessmentofthepastyear'sindustryachievementsandfailures,aswellasfeedbackfromvendorsandfinancialinstitutions

‘Top10TrendsinCapitalMarketsfor2010’,AiteGroupreportwww.aitegroup.com/reports/201001191.phpAiteGroup,23pages,19January2010

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SimCorp is a leading provider of highly specialised software and financial know-how for the financial sector. Established

in 1971, with approximately 1,100 employees, SimCorp is listed on the NASDAQ OMX Copenhagen A/S stock exchange.

The SimCorp investment management system, SimCorp Dimension, is developed, sold, implemented and supported by

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