Imperatives

In these turbulent times, firms have turned their thoughts to survival, seeking preservation of capital, liquidity, and reputation. They are bracing themselves for further fast-paced regulation and are restricting spend to the necessary evils and consolidation activity.

As capital becomes scarce, focus will be on optimizing its use and maximising its return.

There will inevitably be further regulation of the financial sector, and as we saw with the temporary definition of short-selling as market abuse, this can be implemented at very short notice.

Investment Banking is challenged in itself as an independent sector, with key players either disappearing or dramatically changing their business models, either by acquiring strong retail business units to evolve into more universal banking groups, or being acquired to strengthen lines of business within an existing universal banking group.

Business trends

There is, and will continue to be, increased merger and acquisition activity as firms join forces through commercial or regulatory pressure, though bad inter-company processes could result in hostile takeovers. Similarly, organizations will react quickly to acquire and integrate financial infrastructure and people assets as they cherry pick from the carcasses of the firms that fail.

Wider credit spreads persist as firms seek to protect their capital. Consequently, credit systems will be used and enhanced to enforce stricter policies for the foreseeable future.

Given the tightening in the credit markets, balance sheet control and tight day-to-day management of liquidity will be key in the short term to avoid expensive borrowing and minimize the level of support from the central banks and regulators. They are making risk, finance, and operations figures reconcile in a way that creates one version of the truth. The reputational damage arising from any failures in this area can be calamitous.

No asset is completely risk-free and there will always be customer demand for differing mixes of protection and yield. Firms will continue to develop tailored and structured products to satisfy these needs but will be driven to provide greater transparency on all aspects of the product. The volume of some of the traded (credit) derivatives will diminish and the investment model around hedge funds will be reduced. Again, greater transparency will be required.

As some markets stall or close, organizations must balance the reduced revenue by driving down the cost of business operations either through operational rationalization or further streamlining straight-through processing. Processing should be exception-based and transparent, with service levels met.

There are markets that remain functional and these continue to see growth in volume despite the price volatility of the traded products. The competition for this volume will intensify, driving further fragmentation of the overall market and reduction of spreads and fees.

Infrastructures will have to cope with trading volume increase—more trade but less value per trade thanks to algorithmic trading. That makes performances a major concern. They will also have to diversify their instrument support, introducing complex products in mature markets, funds and plain vanilla derivatives in emerging markets. In time, stock exchanges will become more and more like technology companies as trading will become a utility. As the culture changes, a new kind of employee will emerge, less focused on aggressive targets and more focused on results within calculated risk. New remuneration models right from the very top will drive out the culture change and attract the new personality.

With an undercurrent of unwillingness to trust, the relationship with regulators will change. Regulators will be less restrained than they have been in the past and more prescriptive of their expectations. Expect a more rigid relationship. There will also be a substantial increase in financial information supply chain traffic volumes and quality, due to the increased regulation and need for transparency.

With the scarcity of capital there will be a greater reliance on capital flows from the Middle East and China as they look for new investment opportunities. We can expect to see demands for a better deal on their investments. Mature markets automation (straight-through processing) is about multi-protocol support. In emerging markets, it is more about replacing faxes and calls. All international recommendations (G30, IOSCO, BIS, ISSA, or the EU) are focusing on the lack of messaging harmonization between post-trade institutions. There is some growth in certain IT budgets, although few companies are seeing major increases. Governmental influence on risk measurements might influence IT budgets as well.

Securities
Securities firms have to deal with similar challenges:

• A very uncertain forecast for financial markets in 2009.
• Volatile global markets.
• Increased volumes.
• Fragmentation of execution venues.
• Increased competition.
• Increased pressure from compliance.
• Increased complexity for clearing and settlement.

In such an environment, they are concentrating on reducing risk and cost.
Strategic investments are not taken lightly. The trick is to turn regulation
and compliance into a business driver, deal with the fragmentation of
liquidity, and secure the transaction lifecycle.

Asset Management
For asset management, firms can increase profitability by improving the investment lifecycle management process. Asset management firms are also looking to improve performance, manage cost, minimize risk, and anticipate future challenges. To do this they need a clear view on how to focus on overall fund strategy, manage a diverse portfolio, identify investment opportunities, and make decisions around stock selection.

Managers want to automate repetitive processes and make quick operational decisions, freeing them to focus on alpha generation. This includes their front-, middle- and back-office STP processes.

With current market conditions, managers need to deliver clear, transparent, and customized client reporting. They need to produce more, with less human resources. Firms want to manage operating costs, realize operational efficiencies, and minimize any potential risk exposure of the assets and the firm. The cost of multiple data entry, incomplete valuations, and incorrect pricing can be significant.

Firms want to invest in the best infrastructure to accommodate growth without compromising performance. Many firms have implemented different systems to handle different asset types. Each system may operate in isolation and firms are challenged by the need for integration. Organizations also need to understand how to accommodate an outsourced service provider’s custody, clearing and fund administration systems and requirements.

Impact technologies

Master Data Management can help to provide a consistent single view of the customer across multiple systems. Legacy Management will move from costly, monolithic systems to loosely coupled, more agile systems with SOA and BPM for enabling agility. SOA, and the reduction in the time-tomarket it enables through the re-use of services, is a major opportunity for both mature and emerging markets.

Extensible Business Reporting Language (XBRL) will save costs and improve efficiency in handling business and financial information crucial to the new regulatory environments to come, especially in the area of solvency and capital adequacy.

Grid Computing and virtualization can provide agility and help to reduce costs whilst reducing energy consumption.
CRM and Business Intelligence applications are helpful for understanding customers and building better relationships, with Master Data Management providing a consistent single view of the customer across multiple systems.
Enterprise Content Management will ensure that secure content is accessed only by those entitled, along with Identity and Access Management.
Innovation Management can go a long way to ensuring the best innovative ideas are brought to maturity swiftly.
Mobile applications enable access to real-time information from anywhere for individuals working outside of the office.
Platforms for governance, risk, and compliance can help address regulatory pressures. Software-as-a-Service (SaaS) solutions can help to address cost pressures.