For each of our markets we have considered the business imperatives, business trends, and the impact that emerging technologies and solutions may have in addressing these.
Imperatives
Government-led emergency measures for the banking industry (capital injections, special liquidity facilities, and quantitative easing) together with ultra-low interest rates have led to a gradual thawing of capital and money market in the course of 2009.
There has also been a boom in investment banking margins and profitability as a result of reduced competition following the collapse of major players such as Lehman Brothers and the withdrawal from the market of T2 investment banking players.
The return to economic growth in the last quarter of 2009 in the USA and in key European economies, together with continued growth in the Far East, should see a recovery in world trade. The boom in equity markets reflects the return of risk appetites and an increase in investor confidence.
However, the economic recovery is fragile with persisting concerns about the strength of recovery. Consumers and businesses remain cautious with demand subdued by high unemployment and the deleveraging process ongoing.
Governments and regulatory bodies continue to debate the shape of more stringent regulations across the sector to achieve the necessary transparency safeguards. In addition, more robust reporting (such as liquidity risk and stress testing regimes, increased capital ratios, and some form of structural regulation) is likely to be introduced, following the ‘too big to fail’ debate. The result of this could drastically impact on industry business models, particularly the concept of universal banking, with the possible separation of investment and retail banking.
Business trends
After intense merger and acquisition activity in 2009, organisations are likely to continue to focus on integration and optimisation, although regulatory pressure may be a significant driver.
Whilst credit spreads have significantly diminished from the height of the crisis, capital remains scarce. Consequently, credit systems will be used and enhanced to enforce stricter policies for the foreseeable future.
Balance sheet control and tight day-to-day management of liquidity continue to remain in place as management seeks to build on business stability with stringent risk control, thus meeting the demands of investors, central banks, and regulators. Management and regulatory reporting on risk, finance, and operations with a single version of the truth remains the key imperative. Significantly increased information demands from new regulations are leading to a need for streamlined reporting architectures. The reputational damage arising from any failures in this area can be calamitous.
Product innovation continues with 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 by the need for greater transparency on all aspects of the product.
The volume of some traded (credit) derivatives will diminish and the investment model around hedge funds will be reduced. Again, greater transparency will be required.
Product commoditisation and continued reduction in demand in particular markets such as securitisation mean that organisations must balance their reduced revenue by driving down the cost of business operations, either through operational rationalisation or further streamlining straight-through processing. This should be exception-based and transparent, with service levels met.
Some markets have remained functional during this period and these continue to see volume growth despite the price volatility of traded products (as seen in foreign exchange and commodity). Competition is likely to intensify, driving further fragmentation of the overall market and a reduction of spreads and fees.
Infrastructures will have to cope with trading volume increases — more trade but less value per trade thanks to algorithmic trading — making performance a major concern. Organisations will also have to diversify their instrument support, introducing complex products in mature markets, funds, and plain vanilla derivatives in emerging markets. Systems need
to deal with the fragmentation of trading venues away from traditional exchanges to benefit from arbitrage opportunities and drive reduction in commission charges through increased competition. Traditional stock exchanges continue to become more and more like technology companies as trading becomes a utility.
The buy-side is becoming increasingly sophisticated and seeking more control over trade execution and demanding low commissions. To retain business, the sell-side firms need to offer increasing service, automation, and systems.
New remuneration models are now top of the agenda in most banks driven by regulators. These models will be driven top-down, with the objective of balancing long-term risk with short-term gain. As the culture changes, a new kind of employee will emerge, less focused on aggressive targets and more focused on results within calculated risk. The risk function has assumed a new authority for the approval of new business no matter
the short-term profitability. This is likely to give rise to new performance measurement rules.
The relationship with regulators has fundamentally changed. Regulators will be more hands-on 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, because of the increasing need for transparency.
There is some growth in certain IT budgets, although few companies are seeing major increases. Governmental influence on risk measurements might influence IT budgets or market-driven investment, for example, increasing market automation (straight-through processing) through
to multi-protocol support. In emerging markets, it is more about implementing international recommendations (G30, IOSCO, BIS, ISSA, or the EU) by focusing on addressing messaging harmonisation between post-trade institutions.
In such an environment, organisations are concentrating on reducing risk, ensuring global model work, and seeking partners that can deliver value add expertise — especially with Business Process Outsourcing or IT Outsourcing. Strategic investments are not taken lightly. The trick is to turn market changes, regulation, and compliance into a business driver, such as taking advantage of the fragmentation of liquidity and securing the transaction lifecycle.
ASSET MANAGEMENT
Reduction of investment funds because of market volatility and reduced investment returns have placed huge pressures on Asset Management businesses — to re-engineer business models, reduce costs, and automate business processes.
For Asset Management, organisations can increase profitability by improving the investment lifecycle management process, improve performance, manage cost, minimise 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 customised client reporting. They need to produce more with less human resources. Organisations want to manage operating costs, realise operational efficiencies, and minimise any potential risk exposure. The cost of multiple data entry, incomplete valuations, and incorrect pricing can be significant.
Organisations 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. Organisations 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 (MDM) 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 Service-Orientated Architecture (SOA) and Business Process Management (BPM) for enabling agility. SOA, and the reduction in the time-to-market it enables through the reuse 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 Virtualisation can provide agility and help to reduce costs whilst reducing energy consumption.
Customer Relationship Management (CRM) and Business Intelligence (BI) applications are helpful for understanding customers and building better relationships, with MDM providing a consistent single view of the customer across multiple systems.
Enterprise Content Management (ECM) will ensure that secure content is accessed only by those entitled, along with Identity and Access Management (IAM).
Innovation Management (IM) 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.
Social media software will enable communities to develop.
Platforms for Governance, Risk, and Compliance (GRC) can help address regulatory pressures. Cloud Computing solutions can help to address cost pressures.
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