THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

Fund Structure; Information & Data Providers; Custody;

STP & Technology; Trading Services & Outsourcing;
Hedge Funds; Prime Brokerage; Settlement & Clearing;

INVESTOR Securities Financing / Lending; Legal & Compliance

S ERVICES
JOURNAL
V O L U M E 1 - J U LY / A U G U S T 2 0 0 4

INSECURITY LENDING?
SECURITIES FINANCING INDUSTRY REVIEW

CORPORATE ACTIONS, ROUTINE OR RISK?

A NEW EUROPEAN CENTURY? ENLARGEMENT
AGENCY LENDING - THE THIRD PARTY
OUTSOURCING - SPECIAL REPORT
TRANSFER AGENCY PANEL WWW.ISJFORUM.COM
 Outsourcing for securities operations

ADP Wilco
Reduce the cost of securities processing, and benefit
from a fast-track return on investment. Contact
ADP Wilco for international outsourcing leadership.

info@adpwilco.com
www.adpwilco.com

Untitled-2 1 15/7/04 11:12:03 am

 contents

INVESTOR 6 News Investor services news from around the world

S ERVICES
JOURNAL Securities Lending
VOLUME 1 - JULY / AUGUST 2004 Sector Review
THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

15 RMA update The Risk Management Association presents a

Fund Structure; Information & Data Providers; Custody;
STP & Technology; Trading Services & Outsourcing;
Hedge Funds; Prime Brokerage; Settleme
INVESTOR nt & Clearing; Securities Financing / Lending; Legal &
Compliance

S ERVICES
JOURNAL
VOLUME 1 - JULY / AUGUST 2004 market update for ISJ’s securities financing
review.

20 Options for Agency John Piccitto highlights a range of securities

INSECURITY LENDING? Lending lending options for beneficial owners
SECURITIES FINANCING INDUSTRY REVIEW

CORPORATE ACTIONS, ROUTINE OR RISK?

A NEW EUROPEAN CENTURY? ENLARGEMENT
AGENCY LENDING - THE THIRD PARTY
OUTSOURCING - SPECIAL REPORT
TRANSFER AGENCY PANEL WWW.ISJFORUM.COM

28 Ripe for Automation The securities financing industry is preparing to

automate in order to ensure price transparency.
Helen Yates reports

34 The Borrower’s Tale The importance of the broker / dealer in a securi-

ties lending transaction is often forgotten. ISJ
reports on developments within the borrower
industry

Regulation
35 Playing by the rules The evolution of global investment regulation is
changing the scope for the investor services
provider. ISJ highlights the impacts of regulation
on the service provider

Outsourcing
36 Turn of the Tide The tendency to outsource presents a range of
opportunities for custodians, administrators and
technology vendors

Offshore
39 The Tide is High Bermuda is attracting a range of investment
funds and major financial services companies.
ISJ speaks to administrators about what makes
WWW.ISJFORUM.COM the jurisdiction unique.

INVESTOR SERVICES JOURNAL 1

contents

INVESTOR 48 They think its all over Pierre Oger of Credit Agricole Investor Service
presents an overview of UCITS III and examines
S ERVICES the benefits of the legislation
JOURNAL
50 Strength in numbers The Investment Management Association
THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL
presents its latest initiatives in the UK market
Fund Structure; Information & Data Providers; Custody;
STP & Technology; Trading Services & Outsourcing;
Hedge Funds; Prime Brokerage; Settleme
INVESTOR nt & Clearing; Securities Financing / Lending; Legal &
Compliance

S ERVICES
JOURNAL
VOLUME 1 - JULY / AUGUST 2004
51 ECSDA The European Central Securities Depository
Association outlines the barriers to efficient cross
border settlement of securities

INSECURITY LENDING?
SECURITIES FINANCING INDUSTRY REVIEW
52 Record growth An expert panel of transfer agency
CORPORATE ACTIONS, ROUTINE OR RISK?
A NEW EUROPEAN CENTURY? ENLARGEMENT
AGENCY LENDING - THE THIRD PARTY
OUTSOURCING - SPECIAL REPORT
providers debate their challenges, strengths
TRANSFER AGENCY PANEL WWW.ISJFORUM.COM

and weaknesses
Corporate Actions
58 Time for a change? James Reed highlights the need for standards in
the corporate actions industry

65 The last stand Major barriers to the automation of corporate

against automation actions can be overcome, writes Helen Cook of
FT Interactive Data

68 Time for action In an exclusive case study, RZB highlights the

evolution of its corporate action notification tool
EU - Latvia
70 Club call ISJ focusses on new EU member Latvia in the
first of a series of Baltic reports

72 Different routes to Parex Bank reviews the strength and weaknesses

growth of the asset management industries in Latvia,
Lithuania and Estonia

74 Setting the standard Steven Goswell of ISITC examines the impor-

tance of financial services messaging standards
Conference Digest
76 Hedge funds Megan Bode presents highlights from the
Managed Funds Association conference in NY
People
80 Moving & Shaken The latest people moves in the industry
WWW.ISJFORUM.COM

2 INVESTOR SERVICES JOURNAL

the journal

INVESTOR Welcome to this, the first issue, of Investor Services Journal.

S ERVICES New beginnings greet the financial services

JOURNAL industry now that the bear market has slunk back
to its cave. After an unforgiving period of economic
downturn, companies are assessing what their
main priorities should be, prompting a host of
Janet Du Chenne questions about one central theme – growth. Key
Editor to growth is the need to increase revenue, which
Janet.DuChenne@ISJFORUM.COM explains the recent emphasis on securities lending,
hedge funds and automation.
Julia Svetlichnaja To shy away from these issues in today’s climate would be fatal. Not
News Editor only do they impact the front office, but also the direction of global
Press@ISJFORUM.COM securities services providers, who are facing increased demand for a
Laurie Mullins
host of services, which can support the quest for revenue.
Designer As core products such as custody have taken a back seat in recent
Editorial@ISJFORUM.COM years, new entities and entrants to the asset management world create
demand for new investor services.
Justin Lawson Similarly, the divisions between back, middle and front office are
Publishing Director blurred and the need for a regular review of predicted trends, contrast-
Justin.Lawson@ISJFORUM.COM ed with real actions, becomes critical to all financial institutions in the
marketplace.
Ed Buckman The securities services industry in the 21st century is highly
Executive Publisher developed and highly adaptable. By providing a forum to review the
Ed.Buckman@ISJFORUM.COM actions of practitioners and the opinions of experts, Investor Services
Ann Diep Journal enables readers to identify core trends, potential within
Associate Publisher products, cost management strategies and, most importantly, the
Ann.Diep@ISJFORUM.COM changing needs of the client investor.
Taking perspectives on global securities services, the debate is
Heidi Mumford
changing in correspondence with developing trends and evidenced
Associate Publisher
activity across the industry without the traditional blinkers applied to
Heidi.Mumford@ISJFORUM.COM
back, middle and front office. ISJ encourages specialised practitioners
Investor Services Journal
in the financial services chain to examine phases prior and post to their
11 B Fitzroy Square own in a transactions life cycle, to gain an integrated view.
London W1T 6BU ISJ and its sister ISJforum.com cover all aspects of global securities
UK services; from hedge funds to outsourcing, custodial and compliance
issues, straight through processing and technology standards.
T: +44 (0) 20 7388 9000
F: +44 (0) 20 7388 6699 We provide a bi-monthly review of the actions of practitioners and the
opinions of experts. More specifically, ISJForum.com includes a news
Published by Investor Intelligence wire service, member’s intranet and discussion bulletin boards as well as
Chairman Mark Latham a ‘people’ section on moves and shake-ups in the industry.
At the start of our journey, we aim to support readers with relevant,
© 2004 Investor Intelligence Limited
All rights reserved. No part of this publication informed and unique editorial, which engages them in the key issues and
may be reproduced, in whole or in part, with- developments in the market. That is our mission, enjoy reading...
out prior written permission from the publisher.
Printed in the UK by Pensord Press. Janet Du Chenne - Editor .

WWW.ISJFORUM.COM

4 INVESTOR SERVICES JOURNAL

 Corporate actions
- shift into automatic
With over 30 years experience of gathering, updating,
validating and delivering corporate action data,
FT Interactive Data is a leader in the field.
Information is consolidated from hundreds of sources
around the world to provide a single accurate service
covering multiple markets and instrument types. Data is
provided as soon as it’s available via daily updates.
And as the data is fully computer-readable, events
processing can be completely automated.
FT Interactive Data is also working with industry groups
on data standards such as MDDL and ISO 15022 – key
for the move to STP.
So shift your corporate actions into automatic with
FT Interactive Data by calling +44 (0)20 7825 7800,
email eu-info@ftid.com
www.FTInteractiveData.com
world news - Europe Middle East & Africa
NAB to sell UK
custody business
London - National Australia Bank has decided to
exit the UK custody market by signing an agree-
ment with the Bank of New York for UK trustee,
custody and related services. National Australia
Bank will close its National Custodian Services UK
operations and has reached an agreement to trans-
fer its clients to the Bank of New York, subject to
the approval of clients. The sale (thought to be
worth $60bn) does not involve a transfer of busi-
ness infrastructure or a legal entity. National
Custodian Services (NCS) UK provides custody,
trustee & depositary and fund administration for
institutional clients from its base in Glasgow. This
agreement represents an enhancement of a strong
relationship with The Bank of New York, which is
the National’s global custodian for offshore assets.
Commenting on the agreement, Tony O’Grady, gen-
eral manager of NCS, said: "The National is a mar-
ket leader for custody and investment administra-
tion services in Australia and New Zealand, and will
continue to offer a full range of securities services
in those markets. However within the UK, ongoing
market consolidation and increased price competi-
tion mean that we would be unable to remain prof-
itable in this business in the UK in the long term.
O’Grady said the Bank would be contacting its
UK clients to inform them of this decision and to
organise meetings to introduce them to the Bank of
New York and to outline the proposed process.
Assuming client agreement, the transfer of clients
will take place over a period of six months. He said
the decision would impact
approximately 140 roles in
NCS UK. Employees are
being informed of the
decision and meetings will
Tim Keaney be held with all staff and the
union (UNIFI) to discuss
options available to them.
The agreement with BoNY does
not affect the National’s other
European operations.
Tim Keaney (pictured), executive vice president
and head of Europe for the Bank of New York said:
"This agreement further strengthens our relation-
ship with the National, and demonstrates our lead-
ership position in the field of UK custody, trustee &
depository and fund administration. We are looking
forward to working with our new clients and are
confident of providing a seamless transition and a
high quality service."
6 INVESTOR SERVICES JOURNAL
BNP Paribas
expands into
Austria
London - BNP Paribas Securities
Services has extended its local cus-
tody services to include Austria,
bringing to twelve the number of
markets where these services are
now offered.
A direct link to OeKB (the
Austrian Central Securities
Depository) has been established on
a remote-access basis from the
bank’s Frankfurt branch, a move,
which leverages the experience and
success of a similar model in Paris
for Euronext markets.
The selection of Frankfurt as the
access point to Austria was based
on a mixture of technical platforms,
synergies with the bank’s significant
German custody operations.
In addition to the advantages of a
direct access to Austria’s market
infrastructure - such as competitive
cut-off times and local market
knowledge - benefits for clients
include a single client support team
in Frankfurt for both German and
Austrian securities, harmonised
reporting, and the range of liquidity
management products currently
offered by BNP Paribas Securities
Services in Germany.
Commenting on this new market
link, Jon Lloyd, product head for
the bank’s clearing, settlement and
custody business, said: "We have
been evaluating the Austrian market
for a while and the timing is now
right to launch this service. It is
evidence of the commitment to
extend our leading position in
Europe to new markets, and lever-
ages all the strengths of our existing
network."
The first trades in Austrian
securities were settled on July 1st.
global investor
services news
ISJFORUM.COM
 Partnership and Trust

As Ireland’s premier provider of third party custody and administration services, you can trust us
to deliver outstanding service through our partnership approach. Building on our success achieved
to date, we have extended our services to cover hedge funds (Irish and non-Irish domiciled). Should you
wish to obtain more information on our services
please contact: Liam Butler (Dublin) at +353 1 670 0300.
Email: info.boiss@boi.ie Web: www.boiss.ie
world news - Europe Middle East & Africa

Northern Trust enters

UK fund accounting market Euroclear
London - Northern Trust has formally entered the UK fund accounting business.
The move is considered to be an integral part of Northern Trust’s expansion of its growth strate-
accelerates
gy for the Global Fund Services (GFS) business in Europe and a complement to Northern Trust’s
existing fund administration capabilities. Globally, Northern Trust already values over 2,000 funds, consolidation
striking close to 40,000 Net Asset Values (NAV’s) a month. Brussels - Euroclear will accelerate its
Toby Glaysher, head of European GFS Strategy, said: "Now is the right time to add UK fund delivery of settlement platform consolidation
accounting to our range of services for investment managers. Our European GFS custody business and market practice, following months of
has witnessed spectacular growth in recent years and is the fastest growing part of our institu- intensive market dialogue and consultation.
tional business. Our entry in to the market at this time represents a progressive evolution. We will The Group will offer a harmonised settlement
look to capitalise on the synergies that naturally exist between the custody and fund accounting platform for the straight through processing
businesses." of trades from Euronext's single order book
Jeremy Hester, head of European GFS Business Development, added: "As a result of our recent for both local and remote Euronext members.
success with the investment manager community, these clients are now looking to us to provide Delivery is expected at the end of 2007, fol-
additional services. We already have a strong fund accounting pipeline from existing and prospec- lowing the launch of Euroclear's Single
tive clients. There is a real appetite for our expanded GFS offering." Settlement Engine in 2006.
To support the business, and Northern Trust’s pan-European expansion more broadly, Northern The new initiative will provide clients with a
Trust has selected INVEST ONE, the flagship accounting engine from SunGard Investment single access point of their choice to settle
trades conducted on any of the Amsterdam,
Management Systems. "We conducted a thorough search for the solution with the best global and
Brussels and Paris segments of the Euronext
alternatives investment accounting capabilities to support our UK, Irish and Luxembourg business
exchange. It will transform what are today
needs," said Brian Ovaert, head of Global Fund Accounting. "In the end, we found INVEST ONE had
cross-border transactions among these
the most comprehensive functionality to support our growing global operations. Euronext markets into harmonised domestic-
type transactions, enabling clients to settle
ABN AMRO wins CLS mandate from SA bank trades at the same cost as a domestic trade.
Clients will also benefit from an integrated
Johannesburg - FirstRand Bank has currencies, there is now an even central-bank money settlement model, where
awarded ABN AMRO a mandate for greater imperative for South they will be able to settle the cash compo-
third and fourth party CLS services African organisations to adopt this nent of their trades through any one of the
in South Africa. risk free settlement system. I am three central banks within the Euronext zone.
The mandate covers FirstRand's delighted that FirstRand has cho- As a result, clients will also have the oppor-
operations in South Africa as well sen ABN AMRO as its CLS partner tunity to rationalise their own back-office
as its African subsidiaries and will to enable FirstRand to lead the structure.
see FirstRand becoming one of the way in Africa." Pierre Francotte, chief executive officer of
first banks in Africa to go live for Louis Jordaan, chief executive offi- Euroclear Bank, said: "The Euronext settle-
third party CLS services. cer of FNB International Banking ment solution is an important intermediate
The two banks have also signed a (a division of FirstRand Bank) said: step towards the creation of a single trans-
partnership covering the provision "A key factor in our decision to action-processing platform for the Euroclear
group. Local and remote Euronext members
of private-labelled fourth party work with ABN AMRO was their
will derive tangible value in terms of reduced
CLS services for banks across ability to provide an all encompass-
cost and risk, greater pools of liquidity and
Africa. The partnership will capi- ing CLS solution and a highly flexi-
higher STP rates. This initiative is also an
talise on FirstRand's pan-African ble and supportive approach. ABN impressive example of successful collabora-
network and ABN AMRO's CLS AMRO understood our needs and tion between the users of the five CSDs in
capabilities to create a CLS team current set-up, offering us a tailor the Euroclear group to chieve harmonisation
for the continent. made solution that will allow us to of key market practices."
Sam Zavatti, senior executive vice implement as soon as possible. CIK (the Belgian central securities deposito-
president of Financial Institutions ABN AMRO's extensive experience ry),Euroclear France and Euroclear Nederland
and Public Sector at ABN AMRO in CLS and partnership approach will use a common settlement and custody
said: "With the addition of the gave us confidence that we will platform, based on harmonised market rules
Rand to the growing list of CLS exceed our CLS objectives." and practices within the three markets.

8 INVESTOR SERVICES JOURNAL

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world news - The Americas

Spina - led the biggest takeover in

history with Deutsche GSS - exits State SEC moves to
Street on the back of sound results regulate hedge
Boston - Former State Street chairman and chief executive officer David A. Spina left State Street
as the group announced second-quarter revenue of $1.29 bn. These results compare to revenue of
funds
Washington - The Securities and Exchange
$1.08 bn in the second quarter of last year. Total expenses in the second quarter of 2004 were
$953 m compared to $1.14 bn in the year-ago quarter. Commission (SEC) has proposed the adoption
Commenting on the results, Ron Logue, who succeeds Spina as chairman and chief executive of a rule under the Investment Advisers Act,
officer, said: "State Street’s strategy – focusing on being the best provider of services to institu- which will require hedge fund managers to be
tional investors around the world – continues to drive our company’s growth. Much of my energy is subject to the regulator’s authorisation, over-
going into ensuring that we execute on this strategy extremely well. By delivering consistent value sight and supervision. The Act requires hedge
to our customers, we will achieve our goals of becoming the undisputed leader in our target mar- fund managers with 15 or more investor clients
kets and delivering sustainable growth to our stockholders." in a fund and more than $25 million under
Commenting on the quarter, he added: "Favourable market conditions in the first quarter contin- management to register under the Act and to
ued into the second, helping us to achieve record operating revenue. The results of the second examine a fund and count each investor in a
quarter were solid due to strong revenue growth across all segments of our business. However, fund or fund of funds as a client.
market conditions may not be as favourable in the second half of the year. We expect to face The Alternative Investment Management
downward pressure on revenue in the short term, due to anticipated increases in interest rates, Association (AIMA), the global hedge fund and
among other things. We also expect to incur implementation expenses related to converting sever- alternative investment association, will con-
al large new customers in Europe. Continued sider the proposed rules for the registration of
improvement above initial expectations for the hedge fund managers in the USA. AIMA will
Deutsche Bank GSS business, however, is expected focus on the implications for funds and man-
to partially offset these increases." agers domiciled outside of the USA.
Global competitor Citigroup has reported net The Association will consider the detailed rule,
income for the three months ended June, 2004 of when published by the SEC, and anticipates
$1.14 bn. Results included a $4.95 bn after-tax making a submission in response to the
for the WorldCom class action settlement and Commission’s public consultation on behalf of
Spina Logue increased litigation reserves related to 2003 its members. The deadline for submissions is
regulatory settlements. 15 September this year.
The SEC estimates that about 40 to 50 percent
positions ADP Brokerage Services Group to
BANK OF AMERICA provide both retail and institutional broker
of all hedge fund advisers are currently regis-
tered with the Commission. Registration under
SELLS BROKER / clients an integrated solution encompass- the new rule would permit the Commission to
ing Brokerage Processing Services (Service collect and provide to the public basic informa-
DEALER ARM TO ADP Bureau), Operations Outsourcing and tion about hedge funds and hedge fund advis-
Clearing Services. Our BPO strategy ers, including the number of hedge funds oper-
New Jersey - Technology giant Automatic
strengthens the value proposition of our ating in the United States, the amount of
Data Processing (ADP) has entered into a
offerings to the financial services industry assets, and the identity of their advisers. It
definitive agreement to acquire the US
while it also opens the small and mid-tier would also allow the SEC to examine hedge
Clearing and BrokerDealer Services divi-
broker-dealer segment to ADP for future fund advisors to identify compliance problems
sions of Bank of America Corporation. The
growth." early and deter questionable practices. If fraud
transaction is subject to regulatory review
ADP, with over $7 bn in revenues and does occur, examinations offer a chance to dis-
and is expected to close before the end of cover it early and limit the harm to investors.
approximately 500,000 clients, is one the
the calendar year. All hedge fund advisers will be required to
largest independent computing services
Commenting on the transaction, Albert adopt basic compliance controls to prevent vio-
firms in the world.
Weinbach, said: "We are pursuing a busi- lation of the federal securities laws.
ness process outsourcing (BPO) strategy in global investor services news The new rule would also contain special provi-
response to market demand and in light of sions for advisers located outside the United
the changing dynamics of the financial States designed to limit the extraterritorial appli-
services marketplace. The acquisition,
with revenues of approximately $85 m,
ISJFORUM.COM cation of the Advisers Act to offshore advisers to
offshore funds that have US investors.

10 INVESTOR SERVICES JOURNAL

 European
Hedge Fund
Administrator of
the Year 2004

Hedge Fund
Administrator
Survey 2004
Commended Status

Best Fund Administrator

(Hedge Funds) 2003

Please contact:
In Europe: Brian Wilkinson, +(353) 1 407 2262,
brian.wilkinson@bankofbermuda.com
In the Americas: Christine Egan, +(212) 715 6344,
christine.egan@bankofbermuda.com
In Asia Pacific: Joanne Murphy, +(852) 2847 1100,
joanne.murphy@bankofbermuda.com

Visit www.gfsfunds.com
world news - Asia Pacific

Dexia wins This deal further secures Dexia’s position

in the region, where it has a 35 per cent
Frontier provides real-time decision-
supporting data. It aims to increase
Singapore of assets under trust for Singapore
domestic Funds and now services the two
the speed and accuracy of the trans-
action settlement process while
mandate of the biggest fund houses in Singapore. decreasing overhead, minimising risk
and supporting evolving customer
services.
Schroder Investment Management
Singapore has awarded its registration
CHECKFREE CheckFree supplies character-based
language-enabled electronic billing
business to Dexia Fund Services (DFS)
Singapore. This move comes after several EXPANDS IN and payment software in Taiwan, via
a pre-existing partnership with C&H
months of planning and is effective from
the April 2004. ASIA PACIFIC Technology using CheckFree i-Series
software. By broadening its use of
In total the business represents 42 the CheckFree Software product set,
local unit trusts with approximately CheckFree Software, a division of
CheckFree Corporation has expand- C&H Technology’s strategy is to pro-
40,000 investor accounts and a total of vide solutions to online banks in
ed business partner relationships
27 offshore funds. Taiwan and China that integrate
with the Singapore-based division of
The growing need for distribution sup- front-end electronic billing with
technology vendor Decillion.
port, customised reporting, automation back-office payment reconciliation
These new agreements extend
and a flexible registration platform all systems. "CheckFree delivers solu-
CheckFree’s international reach to
contributed to the need for Schroders to bring CheckFree Software’s RECON- tions that are targeted to local cul-
review its business model and move to a Plus Frontier enterprise-wide recon- tures and languages, which reflects
new service provider with the technologi- ciliation solution into banking back the company’s experience in the
cal capabilities to support their growth offices across the region from China international marketplace," said Tony
initiatives. and Taiwan to Australia. Chen, president of C&H Technology.
DFS utilises the group registrar system CheckFree RECON-Plus Frontier is "CheckFree also has the ability to
which supports over 5 million transac- a browser-based, real-time reconcili- adapt to different business segments
tions annually and 3.5 million client ation solution that provides compre- and technology requirements across
accounts. The system is an in house hensive, automated reconciliation the markets we serve."
application, which is deployed in all workflow for banks, insurance firms, Decillion has offices across the Asia-
jurisdictions where Dexia has registrar broker/dealers, government entities Pacific region including Singapore,
operations. and corporations. When automated Indonesia, Malaysia and Australia.
The system is supported and developed at the enterprise level and integrat- As an official business partner of
ed with relevant legacy systems, the SWIFT, Decillion services over 100
by First European Transfer Agent (FETA),
centralised design of RECON-Plus banks and financial institutions in
a wholly owned subsidiary of Dexia -BIL.
Southeast Asia. Commenting on the
agreement with C&H, Thomas Lee,
Bertie joins BNP managing director of Decillion, said:
Paribas Securities Services NZ "CheckFree offers one of the most
Jennifer Bertie joins BNP Paribas Securities Services from AXA (New Zealand) where she was advanced sets of software solutions
responsible for investment operations for the past three and a half years. available to the banking industry,
Bertie’s decision to join BNP Paribas as head of its New Zealand Branch was based on the and its strong commitment to
strength of the business in New Zealand and in Australia and the commitment of senior research and development ensures
management to New Zealand. "BNP Paribas Securities Services is uniquely positioned to state-of-the-art readiness and contin-
service the New Zealand market, being the only global provider to have local operations," she ued competitive advantage."
says. "This business model enables us to cater to the specific needs of the local market but
at the same time gives us access to regional and global infrastructure to promote efficien- global investor services
cies and consistency of approach."
Commenting on the appointment, Gail Burke head of BNPPSS for Australia and New news
Zealandsaid: "Jennifer’s local knowledge and understanding of the New Zealand industry and
clients’ needs will add great value to our growing New Zealand operations."
- see the movers and the shaken page 80
ISJFORUM.COM
12 INVESTOR SERVICES JOURNAL
 events

CONFERENCES ARE THE MOST IMPORTANT AND CONVENIENT WAY OF NETWORKING AND
SHARING VIEWS ON THE SHAPE OF THE INDUSTRY AND THE MARKET, HERE ISJ LISTS
COMING EVENTS FOR YOUR DIARY AND ON PAGE 76 WE BEGIN OUR REGULAR CONFERENCE
DIGEST SERIES WHICH CAPTURES AND SUMMARISES THE PROGRAMMES AND PRESENTATIONS.

FORTHCOMING CONFERENCES, CONGRESS AND SEMINARS

Organiser Title Dates

Terrapinn HedgeFundsWorld Asia 2004 September 13-15, 2004 Hong Kong

HedgeFund Intelligence EuroHedge Forum 2004 September 14-15, 2004 London, UK
AIMA & ALFI ALFI/AIMA Hedge Funds Conference September 16, 2004 Luxembourg
IQPC Hedge Funds for Nordic Pension Funds September 23-24, 2004 Stockholm
ICBI Pensmart 2004 October 5-8, 2004 Munich, Germany
IRC Conferences Hedge2004 October 11-12, 2004, London, UK
SWIFT SIBOS 2004 October 11-15, 2004 Atlanta, USA
The Risk Management Association
RMA Conference on Securities Lending October 12-15, 2004 Phoenix, USA
IMN - UK & Irish Pensions & Investing October 18-19, 2004 Dublin, Ireland
Stewart Conferences Global Absolute Return Congress October 18-20, 2004 Boston, USA
HedgeFund Intelligence AsiaHedge Forum 2004 October 19-20, 2004 Hong Kong
IMN The 9th Annual European Beneficial Owners’ Securities Lending & Global Custody Summit
October 19-20, 2004 Edinburgh, Scotland
IMN Corporate Pension Funds Summit, October 25-26, 2004 Half Moon Bay, USA
Terrapinn HedgeFundsWorld Africa 2004 October 26-28, 2004 Cape Town, South Africa
IMN The 11th Annual Beneficial Owners' Summit on Domestic and
International Securities Lending & Repo February 6-9, 2005 Phoenix, USA
ICBI GAIM Invest 2004 November 16-18, 2004 Geneva, Switzerland
Terrapinn HedgeFundsWorld Japan 2004 December 1-3, 2004 Tokyo, Japan
The Bond Markets Association The 10th Annual Securities Lending and Repo Conference,
December 9, 2004 New York, USA
IMN World Cup of Investment Management February 28 - March 1, 2005 Barcelona, Spain
IRC Conferences Alternative Investment Summit 2005 April 18-19, 2005, London

INVESTOR SERVICES JOURNAL 13

securities lending
INSECURITY LENDING?
A REVIEW OF SECURITIES FINANCING
In the first issue of ISJ, we examine the
methodology of securities financing.
Over a series of articles and reports we
reveal how this one-time ‘mythical’
practice now has the potential to be
accepted by all in the value chain.
Whether you are a pension fund or a hedge fund, securities
financing has become a widely accepted practice.
Knowledge, automation and risk will determine the success of securities financing
Considering the income that could be generated by this
activity, it would seem niave of institutional investors not to
participate. Not only is the investor more savvy nowadays,
they know about, and have fully embraced the priveledge of
shareholder activism. With various tools at their disposal, it
would be a waste of assets if investors did not lend at least a
portion of their portfolio. So what is the hold up for the
rest of the financial community?
More pension funds are flirting with securities financing
programmes, but few are completely aware of the available
options. You don’t always have to rely on your custodian to
14 INVESTOR SERVICES JOURNAL
launch you into the game. Another alternative would be to
use a specialist third party lending agent (with a large
client-borrower base) or operate an inhouse securities lend-
ing desk. The latter option allows you to keep a tighter
reign on the trading of your portfolio.
Another burning issue in the securities financing industry
is that of technology. Lenders and borrowers have often
dodged the need for automation and historically, all securi-
ties lending transactions were done manually by fax or
phone. Thankfully, technology vendors have created a num-
ber of systems and platforms for securities financing trans-
actions. The creators of the most prominent securities trad-
ing platforms, eSecLending, EquiLend and SecFinex, are
encouraging the industry to automate.
To add further credibility to securities financing, the subject
of agency disclosure has kickstarted a major industry initia-
tive that promises to add a layer of transparency to each
transaction. The initiative encourages agent lenders to dis-
close the name of the underlying shareowner in a transac-
tion to enable the broker dealer (the borrower) to make the
appropriate credit decision. The ultimate aim of agency dis-
closure is to ensure risks are mitigated. Knowledge, automa-
tion and risk are the biggest impactors on the growth of
securities financing.

The RMA - celebrating its 90th anniversary this
year - produces, in association with counterparts
PASLA and ISLA, an exclusive Market Update for
Investor Services Journal
The interests of securities lending
professionals around the world are
represented by three bodies - the Risk
Management Association (RMA), the
International Securities Lending
Association (ISLA) and the Pan-Asia
Securities Lending Association
(PASLA). These three organisations,
working within their respective jurisdic-
tions and together, represent the com-
mon interests of securities lending
professionals, both borrowers and
lenders, often working with regulators
and tax authorities.
The RMA Committee on Securities
Lending, formed in 1983, is highly
active in the US securities lending
industry. The Committee is probably
best known for its Quarterly Aggregate
Data Survey. Survey data is published
for primary lending markets worldwide,
with cash-collateral reinvestment data
aggregated to reflect reinvestment
return, interest-rate sensitivity, liquidi-
ty, credit tiering, and instrument types
for both US dollar and Euro currency
collateral. Lending activity is also pro-
vided for all other currency collateral
converted to US dollar.
The RMA Committee on Securities
Lending also produces a biannual sur-
vey of securities lending activities, and
this information, unlike the quarterly
survey, is released only to those insti-
tutions participating in the survey. This
information represents the major
sources of information about lending
practices as well as market trends.
Currently, approximately 25 banks par-
securities lending - MARKET UPDATE
ticipate in the RMA survey. In addition
to its other activities, the RMA jointly
sponsors annual conferences with both
RMA and PASLA.
For the RMA, agency disclosure is a
primary area of focus this year.
Recently, the Bond Market
Association, the securities lending
division of the Securities Industry
Association, and RMA, through their
joint Industry Agent Lending Task
Force, hired New York-based consult-
ants Capco to manage the agency dis-
closure project. Commenting on the
project, Peter Adamczyk, chairman of
the RMA Committee on Securities
Lending, said: "This was in response
to concerns from the Securities and
Exchange Commission (SEC) and New
York Stock Exchange (NYSE) regarding
the level of information disclosure in
agency lending transactions and the
impact on credit and capital monitor-
ing." The SEC is concerned with the
long-standing industry practice of
recording agency securities lending
transactions at the agent level, with
the borrower having little detail
regarding the book of business open
with each of the underlying principals
in the lending program.
The Industry Agent Lending Task
Force has met several times with the
SEC, NYSE, and Federal Reserve Bank
of New York to discuss the necessary
data elements, the identification of
open issues, and the distribution of a
proposed data elements document.
Issues have been refined, and the Task
Force has sought regulatory feedback.
It is planned that Capco will work
with regulators and other constituents
such as the Federal Reserve Bank of
New York, securities lending vendors,
and other market participants to
ensure that agendas are delivered and
see that the project is well organised
and kept on schedule. The Task
Force’s objective is to implement a
solution for agent lenders to commu-
nicate the allocation of loan data to
broker/dealers in an industry wide
standard format. A firm delivery date
on the project has not been set, but
Adamczyk expects implementation to
take place sometime during the first
half of next year.
The RMA is also closely reviewing the
recently released Basel II guidelines.
This new capital adequacy framework
sets out the details for adopting more
risk-sensitive minimum capital
requirements for banking organisa-
tions and seeks to strengthen market
discipline by enhancing transparency
in banks’ financial reporting.
Adamczyk says the committee is
focused on the credit risk portion of
the document, and is now "waiting for
the Federal Reserve to make its next
move on how Basel will be implement-
ed in the US."
ISLA was established in 1989 and
has more than 50 members, compris-
ing insurance companies, pension
funds, asset managers, banks and cus-
todians, representing over 4,000
clients. ISLA works closely with regula-
tors, and in the UK has representation
on the Securities Lending and Repo
Committee, a committee of market
practitioners chaired by the Bank of
England. ISLA is working on a number
of initiatives.
On the regulatory front, the EU
Financial Services Action Plan contin-
ues to be a focus of attention, accord-
ing to Mark Hutchings, chairman of
ISLA. ISLA’s current objective is to
highlight those directives that will
have an impact on securities lending,
INVESTOR SERVICES JOURNAL 15
securities lending - MARKET UPDATE
analyse whether the industry will be
affected and take the appropriate
action. Three directives have already
received ISLA’s attention:
- The Insurers Reorganisation and
Winding Up Directive. In mid-2003,
ISLA worked with a consortium of
insurers to ensure securities lending
(with particular focus on the lending
by insurance companies) would not
be hindered by such a directive. After
months of negotiations, a satisfactory
result was achieved.
- Collateral Directive. According to
Hutchings, a report concluded that
the implementation of the
Collateral Directive in the UK
would not have significant implica-
tions for stock loans entered into
between a UK lender and a UK bor-
rower, largely because title transfer
and netting were already effective
under English law. The report added
that there would be advantages for
UK lenders when dealing with bor-
rowers in other member states, since
the implementations of the Collateral
directive should remove concerns
about the recharacterisation of stock
loans and the enforceability of netting
provisions.
- Transparency Directive. The specific
areas to focus on in this directive
are the notification requirements
around substantial shareholding and
the process of voting. Hutchings says
ISLA is working to assess the impact
of the Transparency Directive on
securities lending.
Due diligence and corporate gover-
nance are additional topics occupying
ISLA’s agenda. The "Due Diligence
Project," a proposal aiming to reduce
some of the legal, tax, and regulatory
due diligence costs, is a significant ini-
tiative for ISLA. Hutchings says the idea
is to adopt more of an "industry
approach in those areas where there is
a potential common interest and imple-
16 INVESTOR SERVICES JOURNAL
ment a financially feasible method of
using external resources to answer
many standard questions relating to a
vast number of our members."
Corporate governance and voting are
hot topics not only for the RMA but for
ISLA as well. ISLA is currently consider-
ing ways to enhance communication in
the corporate governance area to ensure
all parties are aware of their roles and
responsibilities. The impetus for a
review stems from a report published
earlier in the year by the UK Shareholder
Voting Group, which said that many
beneficial owners were not aware that a
vote was lost when stock was lent. ISLA
is working with the Bank of England’s
Securities Lending and Repo Committee
on a revision to the Code of Guidance
which will incorporate appropriate
guidelines on voting.
PASLA was founded in 1995 with the pur-
pose of creating an industry association
to represent the common interests of
institutions (both lenders and borrowers)
that participate in the securities lending
and repo businesses in the Asia/Pacific
region. PASLA works with regulators,
stock exchanges and monetary authori-
ties throughout the region to help
achieve a workable regulatory environ-
ment for securities lending.
PASLA’s energies are directed toward
several countries, but according to
David Timpany, chairman of PASLA,
Taiwan is in the forefront of PASLA’s
agenda. The securities lending market
in Taiwan has a lot of potential, but the
regulatory environment is still very strict
for foreign investors, with a bias toward
local investors, according to Timpany.
Lenders can only take Taiwanese Dollar-
denominated cash and non-cash collat-
eral, making it difficult for the large for-
eign custodians to lend in this market,
and thereby removing a huge chunk of
supply from the marketplace. PASLA is
working with the Taiwanese authorities
and lobbying for changes, and believes
the rules will change over time.
In addition, the short settlement cycle
(T+1) in Taiwan is also a concern, espe-
cially given the global client base of
most lenders. There is a very strict no-
fail regime in Taiwan, and PASLA is lob-
bying the regulators to provide some
relief, as well as to move toward allow-
ing same-day fail coverage.
On the borrow side, the narrow scope
of the specified purposes for borrowing
significantly limits the trading/arbitrag-
ing opportunities. PASLA has highlight-
ed this to the regulators and expects
that the scope of specified purposes will
broaden over time.
In Korea, Timpany says the Korean
Securities Depository (KSD) has finally
allowed partial returns, and this has
been welcomed by the market and will
provide far greater operational efficien-
cy. Even though there has been a signifi-
cant increase in the amount of discre-
tionary lending conducted in Korea, the
inability to be able to reallocate between
Investment Registration Certificates
(IRCs) is still limiting the development
of this market to its full potential.
PASLA will continue to lobby on this
point.
The Hong Kong Exchanges and
Clearing Limited (HKEx) now provides
the T+3 buy-in exemption for sales that
are awaiting recalled securities, to make
settlement on a permanent basis.
Although this exemption has not been
widely utilised to date, it provides more
of a "comfort zone" for lenders who
may need an extra day’s leeway to get
their securities back from loan to make
settlement, thus allowing lenders to run
smaller buffers. ISJ
This exclusive series for Investor Services
Journal will continue with a focus on
agency disclosure and Basel in forth-
coming issues.
securities lending RMA SECURITIES LENDING COMPOSITE - Comparison Quarter 1 2003, Quarter 1 2004
Below is a table showing a year-on-year snapshot of the industry worldwide. -Lendable assets refer to
the value of loanable securities. -On loan vs. cash collateral refers to the value of securities on loan
in return for cash. -On loan vs. non-cash collateral refers to the value of securities on loan in return
for non-cash collateral
LENDABLE ASSET ON LOAN vs. CASH ON LOAN vs. NON-CASH TOTAL ON TOTAL ON
US Dollar $ ($MM) COLLATERAL ($MM) COLLATERAL ($MM) LOAN ($MM) LOAN (%)
2004 2003 2004 2003 2004 2003 2004 2003 2004 2003
North American Treasuries/Bonds 1,202,786 1,169,481 277,781 206,696 67,878 56,581 345,659 263,277 29% 23%
U.S. Treasuries/UST Strips 298,529 274,869 161,026 117,573 57,405 44,518 218,431 162,091 73% 59%
U.S. Agencies 159,676 162,703 41,153 36,072 9,156 9,360 50,309 45,432 32% 28%
U.S. Mortgage Backed Securities 66,293 N/A 17,816 N/A 219 N/A 18,035 N/A 27% N/A
U.S. Corporate Bonds 649,790 576,233 56,159 52,505 319 303 56,478 52,808 9% 9%
Canadian Bonds (Gov't & Corporates) 28,498 155,676 1,627 546 779 2,400 2,406 2,946 8% 2%

North American Equities 2,112,256 1,577,220 156,922 97,976 9,193 6,967 166,115 104,943 8% 7%
U.S. Equities (includes ADR’s) 2,092,507 1,485,768 155,432 97,524 8,192 5,055 163,624 102,579 8% 7%
Canadian Equities 19,749 91,452 1,490 452 1,001 1,912 2,491 2,364 13% 3%

European Equities 565,185 395,730 53,238 31,390 15,605 15,767 68,843 47,157 12% 12%
French Equities 72,489 52,827 17,702 8,337 2,149 3,676 19,851 12,013 27% 23%
German Equities 48,496 29,200 9,219 5,811 2,790 2,222 12,009 8,033 25% 28%
Italian Equities 24,266 19,298 5,220 3,696 515 1,242 5,735 4,938 24% 26%
UK Equities 258,341 168,420 1,977 1,919 6,400 3,463 8,377 5,382 3% 3%
Scandinavian Equities 33,380 30,521 6,920 5,047 884 1,498 7,804 6,545 23% 21%
All Other European Equities 128,213 95,464 12,200 6,580 2,867 3,666 15,067 10,246 12% 11%

Pac-Rim Equities (Includes Australia) 239,975 159,190 18,447 12,476 8,233 7,940 26,680 20,416 11% 13%
Japanese Equities 149,725 102,960 13,238 9,711 5,722 5,480 18,960 15,191 13% 15%
Hong Kong Equities 19,743 12,242 1,711 900 649 663 2,360 1,563 12% 13%
Australia 46,567 31,180 2,438 1,414 1,048 983 3,486 2,397 7% 8%
All Other Pac-Rim Equities 23,940 12,808 1,060 451 814 814 1,874 1,265 8% 10%

All Other Equities (Not Previously Listed) 6,186 6,124 258 485 5 100 263 585 4% 10%
Total Equities (Aggregate Total) 2,923,602 2,138,264 228,865 142,327 33,036 30,774 261,901 173,101 9% 8%

EURO Denominated Sovereign Bonds 69,484 55,431 1,014 958 - 477 1,014 1,435 1% 3%
French Sovereign Bonds 14,362 12,312 12 91 - 100 12 191 0% 2%
German Sovereign Bonds 19,993 17,273 450 199 - 301 450 500 2% 3%
Italian Sovereign Bonds 9,213 7,783 277 282 - - 277 282 3% 4%
Spanish Sovereign Bonds 4,607 3,824 67 78 - - 67 78 1% 2%
All Other EURO Denominated Sovereign Bonds 21,309 14,239 208 308 - 76 208 384 1% 3%

UK Gilts 57,913 76,694 97 427 8,844 7,630 8,941 8,057 15% 11%
Emerging Market Eurobonds** 8,321 6,028 1,323 1,453 46 40 1,369 1,493 16% 25%
Eurobonds 112,342 59,737 9,265 7,354 3 172 9,268 7,526 8% 13%
All Other Sovereign Bonds † 27,359 15,500 5,496 1,900 - - 5,496 1,900 20% 12%
Total Bonds (Aggregate Total, inc. US) 1,478,205 1,382,871 294,976 218,788 76,771 64,900 371,747 283,688 25% 21%

TOTALS 4,401,807 3,521,135 523,841 361,115 109,807 95,674 633,648 456,789 14% 13%
Average Number of Lending Markets 14.78 14.55 *(Reported in Aggregate) **(Latin America & E Europe) †(Not Listed Above)

ANALYSIS - QUARTER 1 2003 AGAINST QUARTER 1 2004
From the data, it becomes clear that North American
treasuries/bonds have made the most dramatic move into securities
lending programmes over the last year. Particularly in the treasuries
sector, the amount of assets on loan increased by $56.3 bn, from
$162bn in the first quarter of 2003 to $218,4 bn in the first quarter of
this year. North American equities, on the other hand, were less enthu-
siastic about lending and despite an increase in the availability of lend-
able assets by $535bn, investors were reluctant to lend and the total on
loan increased by one per cent only. Canada showed an increase of 10
per cent in the number of equities on loan.
European equities displayed a moderate increase in the number
of securities on loan, particulary in Germany, where the amount
on loan increased from $8bn in 2003 to $12bn in 2004. Lending
activity in the Pacific Rim area increased slightly, with Hong
Kong increasing its equity loans from $1.6bn in the first quarter
of 2003 to $2.3bn in 2004.
Despite the availability of $2.9 trn worth of equities in 2004,
only nine per cent were lendable, an increase of one per cent
from last year. The global bond market also increased by almost
$100bn in the last year. However, only a quarter of $1.4 trn worth
of assets were placed on loan.

18 INVESTOR SERVICES JOURNAL

 PRIME BROKERAGE & SECURITIES LENDING

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Scotia Capital has long been dedicated to adding value to hedge fund and alternative asset managers through a
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securities lending

OPTIONS FOR AGENCY LENDING

Securities lending programmes are becoming a common practice
for institutional investors. John Pi citto presents a range of agency
lending options for shareowners
gency lending bridges the gap for themselves and for their investors.

A between the beneficial owner

who holds shares and the broker
/ dealers and (via prime brokerage units)
the hedge funds whose voracious appetite
for securities has nearly doubled in the
last two years, and is likely to continue to
increase as long as investors can make
more money from investing directly in
And since it feeds this hungry money-
spinner, and for several other reasons as
well, agency lending is necessarily a grow-
ing industry, morphing and diversifying
by the day.
For the beneficial owner, especially the
smaller beneficial owner – pension funds,
mutual funds, county councils and other

For the beneficial owner, especially the smaller beneficial owner – pension
funds, mutual funds, county councils and other professional organisations
– it is folly not to lend out at least a portion of a portfolio
hedge funds than they can by investing in professional organisations – it is folly not
the stock markets of the world. Since to lend out at least a portion of a
hedge funds by their very nature take on portfolio because of the income that
greater risk, they generate high returns would be foregone by not doing so.

20 INVESTOR SERVICES JOURNAL

Why have some of
the world's largest
Institutional Investors
embraced eSecLending?

We make them
more money.*
It's money they
can count on.*

eSecLending takes an active approach to securities borrowers pay guaranteed fees in exchange for exclusive
lending by designing, managing and administering borrowing rights. eSecLending clients achieve all this
customized programs for institutional investors while maintaining conservative risk parameters and
worldwide. Unlike the traditional "best efforts" close control over their lending programs.
approach, where many lenders' portfolios are grouped
Interested in hearing more about what we have
together and their securities wait in line to be borrowed,
done for organizations like yours?
eSecLending markets each client's portfolio individually,
combining securities into attractive groupings,
promoting them to top institutional borrowers, and
awarding lending rights to the optimal bidders. Our Europe +44 (0) 207.002.6700
clients receive more lending revenue compared to the United States +1.617.369.7100
traditional programs, because eSecLending introduces info@eseclending.com
www.eseclending.com
objective competition via the auction process. And our
clients can count on their lending revenue, because

*eSecLending provides services only to institutional investors and other persons who have professional investment experience. Neither the services
offered by eSecLending nor this advertisement are directed at persons not possessing such experience. eSecLending has proven to increase
returns for our clients over traditional custodial and agency lending programs. We arrange exclusive principal relationships via an auction process.
The exclusive principal relationships we establish offer a guaranteed fee payment over the course of the auction term. Old Mutual (US) Trust
Company, an eSecLending company, performs all regulated business activities. Past performance is no guarantee of future results. Our services
may not be suitable for all lenders.
securities lending
Pressures on these funds have increased
sharply in the past several years because
of declining markets, because of the
increase in the number of pensioners and
their increased average life span, among
other factors. Greater investor knowledge
and activism have also made fund man-
agers nervous, as have increased regulato-
ry and legal scrutiny. Sitting tight and
collecting dividends is no longer an
Since hedge funds by their very nature take on greater risk, they generate
high returns for themselves and for their investors
option, if indeed it ever was. No more
taking time off to watch the world cup.
Ironically, securities lending, once seen as
“dodgy” in some quarters, has rapidly
become an imperative for fund managers;
the problem is no longer whether to do
it, but how.
Beneficial owners who choose agency
lenders to enhance the income of their
programs tend not to have in-house facil-
ities to conduct lending by themselves.
By working with an agent lender, the
beneficial owner saves the costs of setting
up and maintaining a trading desk, out-
sourcing the work of lending in anticipa-
tion of income at month-end.
For these most risk-averse of groups,
the issue of safety is paramount. So if the
beneficial owner decides not to build an
in-house lending desk, then the next stop
must be a custodian who will add the
beneficial owner’s shares to his existing
pool (sometimes a very large existing
pool) of shares from other beneficial
owners, and lend them out to broker /
dealers or (occasionally) to hedge funds.
Such loans are made on the basis of an
algorithm; everybody in the pool gets an
opportunity to earn income, depending
on the demands of the market for the
shares in the pool. If your portfolio has
the only issues in your custodian’s pool of
the hottest stock in South Korea (unlikely
as it is that a small pension fund would
have bought these), then you have escaped
22 INVESTOR SERVICES JOURNAL
the algorithm, and you are now very much
in the profits column. But if you have a
largish portion of blue chips (as might be
expected of a prudent beneficial owner),
then you may not see too much action
from your custodian’s pool arrangement,
since your portfolio will be used to meet
borrower demand along with the portfo-
lios of all of the other wisely purchased
portfolios of the wise and conscientious
portfolio managers gathered under the
wing of your custodian.
The algorithm determines whose port-
folio gets tapped for what loans. But two
million shares of Blue Chip Issue A is still
only two hundred thousand shares per
client among a pool of, say, ten clients
who own Blue Chip Issue A. So this loan
would only yield £200 per year in income
at a lending fee of 10 basis points when
calculated on a total loan value of
£200,000 – not exactly worth an
Extraordinary Notice to your Board.
This level of lending however is an essen-
tial feature of a custodian’s agency securi-
ties lending pool programme; it’s conven-
ient, it’s safe, but it’s got a problem.
The problem is that the beneficial
owner would like to find a way to barge
the queue implicit in the algorithm, if at
all possible, in the nicest possible way, of
course. Plans and programs for getting
the most and more out of a third party
lender, as well as war stories of failures to
do so, decorate the conversations of ben-
eficial owners when they talk together
frankly.
And it is evident, listening in on the
conversations of concerned agency
lenders, that they are more than happy to
provide whatever comfort they can to
their clients, specialised technology (ABN
AMRO Mellon’s iBID auction service, for
instance), prompt payment of cash divi-
dends on payment date (whether or not
 One of the little secrets of institutional investors.

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has been a major player in the Information Banking game
since the beginning. The management and integration
of information flows is our core business. One of our
major competences is the borrowing and lending of
securities. As a matter of fact, we are market leader in
Europe. Our aim is to create value for investors based
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on expertise, flexibility and ingenuity. Together with
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G L O B A L I N V E S T O R S E R V I C E S
securities lending
the money comes into the bank from the
paying agent), marshalling of sufficient
resources to avoid most potential fail-to-
deliver transactions (the custodian will
simply borrow the necessary issues from
other clients who hold the same issue),
client-customised reports and other tech-
niques for producing the appearance of
seamlessness.
Agency lenders act on behalf of their
clients, offering back office services,
including collateral reinvestment, corpo-
rate actions and comprehensive report-
ing. The beneficial owner foregoes a
degree of control (having done a meticu-
lous risk/reward calculation, of course)
and collects the income. The majority of
By working with an agent lender, the beneficial owner saves
the costs of setting up and maintaining a trading desk
US custodian banks act in an agency
capacity when lending securities owned
by the clients in their custody pro-
gramme. Some custodians, notably Swiss
banks, act in a principal capacity; that is,
the borrower deals directly – under con-
tract – with the bank and not the benefi-
Agency Lending - the transaction
Lenders Intermediaries
Beneficial Owners
- Insurance Companies
CUSTODIANS
- Pension Funds
- Mutual Funds
- County Councils
24 INVESTOR SERVICES JOURNAL
cial owner of the security, so in case of
beneficial owner bankruptcy, the borrow-
er has recourse against the custodian
bank. European custodians, once over-
whelmingly operated as principals, but
now they often operate in either capacity,
as required by circumstances.
Anomalous in the agency lending busi-
ness are those private Swiss banks, who in
compliance with Swiss Bank Secrecy Laws
will act in an agent capacity for an undis-
closed principal. Some of these banks
have in the past amended their contrac-
tual wording to accept principal risk with
the borrower’s collateral.
Pension funds, superannuation
schemes and county councils – among
other beneficial owners – who feel that
they are too small to achieve much
income from the ordinary operation of a
custodian’s pool lending arrangements
use third party agent lenders to improve
their strategic position. Funds and secu-
rity portfolios stay on deposit with the
Borrowers
PRIME BROKERS
&
HEDGE FUNDS
selected custodian bank, thus retaining
the safety offered by the custodian bank
in the form of counterparty indemnifica-
tion, among other things. But the benefi-
cial owner arranges with a third
party/agent lender to manage his portfo-
lio through the custodian. So the custodi-
an loses the use of those shares in its
lending programme, but still retains cus-
tody of the portfolios and gets movement
fees when the shares are loaned out and
taken back at the direction of the agency
lender. The third party agent lender has
access to a large and varied and some-
times specialised client base of borrowers
(he may focus on certain classes of secu-
rities, or on several specific industries)
and places the secu-
rities out on loan for
the beneficial owner.
The key to this new
relationship has to
do with the size of the agency lender:
small is beautiful.
The third party agent lender has a small
client base of beneficial owners; close
client relationships are a most important
aspect of his business. No more small
fish in a large pond. Lending out as
much of the portfolio as possible as often
as possible is the chief objective because
the third party agent lender has to do
better than the custodian bank did with
the portfolio, which is not only a func-
tion of scale.
So what are the future prospects for
this business relationship? Where is new
supply coming from in the next year? In
the next five years? And where is the
demand likely to come from in those
same time frames?
Between 2001 and 2004, the number of
active hedge funds has increased, from
around 4,000 in 2001 to in excess of
6,000 –the figures often mentioned in the
London financial press. Professionals in
the field anticipate the effects of this
growth. “I see new demand coming from
the broker/dealers, especially from their
prime broker units as new hedge funds
 Still using your Global Custodian
to provide Securities Lending
Agency Services to you?

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Management, Guild Global provide first-class Third-Party
Securities Lending Agency Services to Europe’s premier Life
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gateway throughout Europe and our innovative Securities
Lending techniques now give Institutional Lenders the
freedom of choice for the management of your Securities
Lending programs, delivering strong, consistent fee
performances, reducing operating costs further in an
unrivalled control and compliance environment. This allows
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Irish Financial Services Regulatory Authority. © 2004 Guild Global Securities Limited. All Rights reserved.
securities lending
come into existence and bring with them
new trading strategies which will require
a securities lending facility,” says Ciarán
McNamee, senior vice president, Brown
Brothers Harriman. “In addition,”
McNamee points out “there is an increase
in proprietary trading activity, which will
also require additional supply.”
Hans Beckmann, managing director of
Guild Global Securities, Dublin, foresees
for his third party lending agency inter-
mediary service “expansion throughout
Europe this year, beginning in the UK
and the US.” But Beckmann has also
targeted European countries Austria, Italy
and Luxembourg, as well as other EU
countries. “In terms of demand,”
Beckmann adds, “I can see a complete
shift into more exotic, high fee earning
Remembering a hard-won battle, Smith points
out that, “securities lending is now ‘ethical’”
countries and not the mainstream new
markets everybody talks about like
Taiwan, India, etc.” He said, “It would
not surprise me to see markets like
Greece, Israel, Eastern European
Countries who have just joined the EU to
start lending and borrowing activities
along the same line Guild Global has
kick-started in the Irish market.”
But besides hedge funds and expanded
or newly developed markets, there are
internal prospects for increased action in
the agency lending business. “Growth in
demand emanates from long holders of
securities,” according to Tim Smith, head
of inventory management at AXA
Investment Managers GS Ltd.
“Investment managers are setting up
their own hedge funds and long/short
vehicles.” Smith also pointed out that
“another source of different demand will
come from the push for shorter settle-
ment cycles, thus driving up the demand
for more efficient coverage.”
And supply? “Supply is coming from
26 INVESTOR SERVICES JOURNAL
the European institutions coming to
market like pension funds, insurance
companies, etc.” McNamee says. “It will
continue to grow for the foreseeable
future.”
Smith agrees; “Additional supply may
come from the growing transparent
nature of the securities lending business
which leads to a greater acceptance by
those portfolio managers that have previ-
ously looked slightly askance at the con-
cept.” Remembering a hard-won battle,
he points out that, “securities lending is
now ‘ethical’”.
Interestingly, Smith added that “the
reviewing and tread towards relaxation of
legal limits to lending by the regulators
worldwide will increase the lending pool
of assets. An example of this would be
the recent change allowing more than 15
per cent of OPCVM assets to be lent out
in France.”
Currently, a healthy competition exists
among beneficial owners, custodians and
their internal programs, and third party
agent lenders. Choosing among the
options for the beneficial owner can be a
question of selecting the most pro-active
programme within given risk parameters.
Several varied scenarios exist for the ben-
eficial owners to consider and take
advantage of and profit from. And each
scenario in turn provides a means to get
securities to market, and to provide
greater market liquidity. ISJ
John J. Piccitto has over 34 years of experi-
ence in the financial services industry. In 1982
he developed for Merrill Lynch, the equity
services group that grew into the international
stock lending and borrowing desk now
known as Equity Finance. Piccitto is a
member of the Risk Management Association
(RMA), and has been a member of the
London Court of International Arbitration.
Do-It-Yourself?
What if you – the beneficial owner – decide
to do it yourself? It can be a good idea, and
incidentally, operating your own in-house
desk does not preclude continuing to use
third party lenders as well. An in-house desk
allows the beneficial owner to keep close
control over the trading of his portfolio. But
an in-house desk can be very expensive and
time consuming to establish, and the burden
of risk assessment is one that a beneficial
owner must be very careful about undertak-
ing. And depending on the size of the port-
folio under management, an in house desk
can be costly and inefficient to operate.
Staff must be hired and trained (possibly a
minimum of three full-time people). A com-
prehensive IT system must be installed, and
one of the best of these on offer now goes
for around £250,000 to £500,000 . Other,
less expensive systems can be purchased off
the shelf from one of the industry special-
ists, or a system can be purpose built by an
in-house systems architect who might or
might not produce something as good as
might have been purchased.
An in-house program must be marketed.
Each new client must sign the standard for-
mat document (usually the UK’s Global
Master Securities Lending Agreement-
GMSLA) prior to the beginning of trading.
And most important, risk evaluations must
be calculated on all new clients, which would
cover credit, annual reports and trading his-
tories, among other things.
This last task is the sort of service an
agency program does as a matter of routine.
An agency lender has files from past busi-
ness, access to data bases, and experience in
both credit evaluation and in risk calcula-
tion.
In a recently released survey of their bene-
ficial owner members, the Inter-national
Corporate Governance Network (ICGN)
found that “a minority of respondents” lend
stock through in-house programmes.
Twenty-one out of the thirty-one who lend
stocks rely entirely on third party agent
lenders. And four more of the remaining ten
operate both in-house and third party pro-
grammes.
www.icgn/documents/share_lending_report
 Want something for nothing?
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INVESTOR
S ERVICES FROM THE BACK OFFICE TO THE BOTTOM LINE
JOURNAL
securities lending
RIPE FOR AUTOMATION
Not everyone in the securities lending industry welcomed the price
transparency of going electronic, but the inevitable has been accepted.
Helen Yates looks at some of the market’s multilateral platforms and
systems vendors that are creating new ways of doing business.
S hort selling - the selling of stocks you believe will
fall and buying them back when they are cheaper -
is a practice that is growing in acceptance. Ever since as
demand from the hedge fund industry began to mushroom
and beneficial owners became more comfortable with lending
out assets, securities lending evolved into a major industry.
But with this also came the urge to automate the industry and
make it more efficient and transparent.
Resistance to change
Securities lending is a global business, with an estimat-
ed US$2 trillion of securities on loan at any time. The
US is easily the largest lending market and US institu-
tions are the largest lenders and borrowers. There are
generally three parties involved in lending transactions.
They are: lenders (large institutional investors), borrow-
ers (usually broker dealers, prime brokerage units and
hedge funds) and market facilitators who arrange and
facilitate securities lending transactions. Increasingly,
market facilitators include electronic trading platforms.
Until recently, nearly all lending activities were done
over the phone and fax. Not only were these methods
28 INVESTOR SERVICES JOURNAL
time consuming and inefficient, they also prevented
price discovery and hence the opportunities for bench-
marking and transparency in the industry. Chris Fay,
chief operating officer of electronic trading platform
SecFinex, explains the old system where “you would have
your list of 50 stocks and you would send that list to ten
or 20 lenders, they would each check availability on all of
those 50 stocks and come back to you with the five, ten
or 20 they could do. Then you would agree prices, write
your trade tickets and key them into the system. I’m get-
ting bored just talking through it.”
For some, this opaqueness has been an advantage they are
unwilling to forego as it has often represented greater spreads
and profit opportunities. “The opaque market structure on
the securities lending side allows the sophisticated market par-
ticipants to make substantial profits because of these market
inefficiencies,” explains Felix Oegerli, chief executive officer of
IFBS and product manager of FINACE (a fully-integrated
securities finance and collateral management solution). Now
technology is making huge inroads in changing the nature of
the business and those who opt out know their resistance can
only continue for so long.
Apples and pears
One of the difficulties in trying to gain
more price transparency in securities
lending is the nature of the business.
Lending is a maturing over-the-counter
marketplace dominated by large market-
making intermediaries, and price discov-
ery is therefore subject to many different
factors. Price is given in basis points on
the value of the loan and this varies dra-
matically based on the supply and
demand for borrowing a given security.
The general rule for most players is that if
you hold the
stock, it is There is currently no real central marketplace
general collat-
eral (GC), but where counterparties can compare demand and inventory
if you are desperately seeking to borrow a
stock, it becomes a ‘special’.
While lenders need to know they are
getting the best revenue for the loan of
their stocks and borrowers need to know
they are not paying over the odds, the
tricky part is finding a point of compari-
son. There is currently no real central
marketplace where counterparties can
compare demand and inventory. Even if
there was, each lending agent has such
differing terms relating to the lending of
their stock that it becomes almost impos-
sible to make accurate comparisons.
An electronic era
Those behind the emergence of securi-
ties trading platforms over the past two
years are hoping to change the complex
nature of the securities lending industry.
Online lending is now a reality and while
electronic platforms EquiLend and
SecFinex were spawned during a down-
turn, the recovery of the global economy
over the past two years is finally bringing
the kind of volume and liquidity that
could be what the industry has been wait-
ing for.
One of the first platforms to spring up
was eSecLending, a joint venture
between the Californian pension fund
CalPERS and the financial service group
Old Mutual. To begin with it enabled
CalPERS to auction off the exclusive
rights to borrow from portfolios of
securities lending
stock, but now other institutional
investors have also come onboard.
Cutting out the middlemen, the prime
brokers and custodian banks, it aims to
generate premium returns for its clients
rather than following the pooled, stock-
by-stock agency approach.
eSecLending operates very differently
from the other trading platforms in the
market. “Our model differs from the
traditional agency lending business in
that it is not relationship driven,”
explains Susan Peters, chief executive
officer of eSecLending. “Our process is
objective and solely based upon the
value a borrower can bring to our
clients’ portfolios… borrowers compete
on price; they do not compete with
securities lending
respect to their ability to borrow general collateral.”
Rather than seeing itself as a pure trading platform, Peters
says eSecLending is a third party lending agent that manages
the loan activity through the portfolio auction process.
While the auctioning off of portfolios has been going on for
years, this is the first time anybody has successfully automat-
ed the process, and Peters believes the company is beginning
to see an impressive momentum. “Over the past few years,
we have auctioned several hundred billion US dollars worth
of global securities, and included all major borrowers as par-
ticipants in our programme,” she says. “The momentum
gained in the past two years is especially strong where we
have added significantly to our lender base, auctioned assets
and on loan balances.”
Each client on eSecLending is treated as a separate book of
business and portfolios are auctioned independently.
Therefore the platform does not need to worry about getting
volume and liquidity in the same way as trading platforms
EquiLend and SecFinex.
Borrowers compete on price; they do not compete with
respect to their ability to borrow general collateral
A bilateral trading hub
EquiLend has just passed its two-year anniversary.
Formed by a powerful consortium of ten of the industry’s
major players, including State Street, Bear Stearns and
Goldman Sachs, it supports the current business model for
securities lending and has been developed to automate
point-to-point securities lending transactions between
lenders and borrowers of stock. It is aimed at those who
deal with the general collateral market, with its high vol-
ume and need for greater processing efficiencies.
Dirk Pruis, EquiLend’s president and chief executive offi-
cer, concedes that the venture could accurately be seen as a
step by the industry to take matters into its own hands. With
the knowledge that automation would be coming, those
involved in the consortium decided to develop EquiLend
and get in there first. “I give our founders a lot of credit for
looking out for the business as a whole and not just their
individual businesses as they figured this out,” says Pruis.
The platform and the XML (Extensible Markup Language)
message standards it employs are designed to replace the
expensive proposition of maintaining point-to-point con-
nections between intermediaries.
With a sustained stock market rally and a knock-on
demand for securities lending services towards the end of
2003 and into 2004, EquiLend’s volumes have steadily gone
up. “Between $4 bn to $5 bn USD equivalent value is execut-
ed on the platform and that’s in the order of 6,000 trades
daily. We are up about 120 per cent (from the same quarter
last year), across the whole platform and our international
30 INVESTOR SERVICES JOURNAL
volumes are triple what they were last year.”
EquiLend has also continued to attract new members,
including Deutsche Bank, Nomura, Abbey (the first UK-
based bank to join) and most recently Credit Suisse First
Boston and Robeco. Pruis indicates there are more in the
pipeline, and that this coming expansion, along with market
forces, will continue to ramp up the volume. “When global
markets go up the securities lending business tends to
increase,” he explains. “There’s been a continued growth in
alternative investment vehicles, which drives the lending busi-
ness.” EquiLend has so far proved to be largely focused on the
GC market, although Pruis says it also deals in specials: “Our
focus is really both but we’re probably first and foremost the
GC market because its larger and frankly more important to
automate than the specials market.”
The European cousin
EquiLend’s main rival is UK-based SecFinex, an inde-
pendent online marketplace for securities finance. Despite
Pruis’ conviction that
specials will continue to
be relationship-based,
SecFinex is out there to
prove that not only can
it be done electronically, but that it can also be done anony-
mously - a massive step towards real price transparency. The
SecFinex system offers an order market, a private market
and an auction market. The private market operates for the
lending and borrowing of GC stock, while the auction and
order markets are focused on specials.
The order market is the first system of its kind and has
taken off since its launch last summer, explains SecFinex’s
Chris Fay: “It is a bid and offer system, which is completely
pre-trade anonymous, so you don’t know who you’re trad-
ing with. You trade based purely upon price and quantity. It
has been a huge success.’ On the order market everybody
sees every price and trade that has happened on a specific
day, and therefore the full depth of the market. It could be
the closest the industry has come to complete transparency.
Whether clients opt for the private, auction or order mar-
kets - or a combination - one of the major benefits Fay
emphasises is a vast increase in efficiency. “One of our clients
stood up at a conference a couple of years ago and said elec-
tronic trading saves a trader half of his day, and that’s not
counting the savings on the lender side as well… If you’re
saving half a day, that allows the traders to actually spend
their time more effectively, rather than going through a slow
process of locating stock and borrowing it at what are often
pre-agreed rates. It allows people to spend time adding a bit
of value rather than just filling time.”
Like Pruis, Fay has seen not just an increase in clients, but
an increase in the level of business from existing clients. “The
securities lending
difference we find now, when we’re talking
to clients, is that it’s no longer a question of
whether electronic trading is going to hap-
pen in securities lending - it very much has
and is happening - and it’s just a question
of how they are going to integrate the tech-
nology… I think the liquidity has really
been the key. As that has grown, people
have accepted that these systems are here
to stay.” Fay believes the current volume of
trading on SecFinex accounts for around
five to ten per cent of daily UK volumes.
While EquiLend carries the liquidity of
its heavyweight members, SecFinex has so
far lacked the support of these major cus-
todians and prime brokers. While it has
Signing up to online offerings will become critical
for those wanting to stay in the game
the appeal of independence and argues it
is more accessible than EquiLend - which
has been accused of unfair competition -
it has also reportedly been stricken with
funding problems.
In March this year SecFinex announced
it had sold a stake in its business to Fortis
and Société Générale Corporate &
Investment Banking. With this new fund-
ing, its improvements in liquidity and
apparent success in the anonymous trading
of specials, many in the industry hope its
success will continue. One industry insider
said: “One of the great tragedies of recent
securities lending, is that SecFinex, which
was a fantastic idea, a great product and
very easy and simple to use, should have
taken off, and so far it hasn’t.”
Although EquiLend and SecFinex are not
in direct competition, as they operate in dif-
ferent markets, the idea that eventually there
could be some kind of hook up between the
platforms - as happened with Euroclear and
Clearstream - is not being dismissed by
either party. “We would love to see a single
central counterparty because it would pro-
vide us with greater opportunities to link
through and help the straight through pro-
cessing standpoint,” says Pruis. “Whether
that happens and when that happens has
a lot more to do with
politics than economics.”
32 INVESTOR SERVICES JOURNAL
Coping with the volume
“In a world of small spreads you have to
do more business to make money” says
Pruis. With further commoditisation of
the GC market leading to higher volumes,
signing up to online offerings will
become critical for those wanting to stay
in the game. “Market participants will be
more willing to invest in technology and
interfaces which allow them to become
more volume insensitive,” says Oegerli.
“This will lead to a broader community
using electronic marketplaces.”
What is sometimes forgotten is that
with increased volumes comes the need
for those involved to have the right
software in-house in order to cope.
Investing in securities finance solutions
is set to become as important as the
automation of trading. “It’s always easi-
er to be efficient internally before you
can act externally,” says Pruis. “If you
want to do some major volumes, and
do it in a “no touch” way, it is difficult
to do if you don’t have a decent inter-
nal system to run that through. So if
you’re doing it manually or on spread-
sheets or something - you’re in trouble.
This is becoming a business of scale.”
The demand for scalability and the abil-
ity to handle greater volumes more cost
effectively, has sparked competition
between vendors to develop the best secu-
rities lending office trading systems.
SunGard, 4sight Financial Software, IFBS,
and Anvil Software are just some of the
vendors hoping to get a look-in.
“All I can say is that from our point of
view we’re ready for it,” says Malcolm
Clark, director and strategist at Anvil.
“When it gets to that point when every-
one feels they have to be trading on
EquiLend or SecFinex, then the natural
extension of that is decent in-house soft-
ware as well, which means they’ll be com-
ing to us and seeing what we’ve got.”
While competition between vendors is
becoming fiercer, as Clark explains, the
greatest competition is still with IT
departments: “The real competition is in-
house development. If we loose a sale it’s
more often going to be because of in-
house development or doing nothing.’
The real challenge, says Chris Fay, is
getting securities lending desks to spend
money on technology: “A lot of those
involved in the securities lending market
are typically not the most aggressive in
terms of taking up new technology - it’s
grown up out of the back office of
custodians, and they haven’t historically
invested lots of money in their securities
lending business. It’s very much an add-
on to their other businesses - but I think
that’s starting to change as well.”
An IT revolution
Anvil’s repro and securities lending sys-
tem, ARTS, is the ‘traders’ bible’ according
to Clark. “A securities finance trader is
sitting at his desk and he needs to know
what he has, what he needs to finance,
and what transactions he’s already done.
And he needs to manage those transac-
tions, he needs to worry about the risk,
there are global aspects he might need to
understand, positions available in sister
or subsidiary companies around the
world. It’s about managing that flood of
information. If you have ARTS you can
manage the flood of financing informa-
tion that otherwise tends to swamp
traders.”
Systems such as ARTS are complemen-
tary to EquiLend and SecFinex - which
are the markets, where people can meet
to exchange information on buying and
lending. “We’re a processor,” explains
Clark. “Once you’ve done an exchange
and been to the market you need to man-
age that transaction - that’s what ARTS
does for you.” Clark believes it will
become more and more sensible to use a
third party system for core processing as
time goes on.
Anvil is not the only vendor waiting to
 securities lending

take off when securities finance discovers

single IT platforms. IFBS says its product
FINACE is the only product supporting
an integrated securities finance and col-
lateral management business model, and
that it will lead the IT revolution. The
future’s bright, the future’s electronic.
It no longer appears that those involved
in automating the business of securities
lending are going at it alone. Oegerli is
less certain than some that the industry

automation could
eventually be forced
upon the industry
if efficiency and
transparency do not
develop
itself will drive the change. He believes it
is market demand that will ultimately
decide how successful electronic securi-
ties lending will become: “I do not believe
that until market demand changes that
we are going to see a very steep increase
in business volumes traded electronically.
Market demand changes can, for exam-
ple, be based on tax or regulatory changes
that impact the spreads in securities lend-
ing dramatically in a negative way.”
The overall conviction from those in
the industry is that as volumes grow on
EquiLend and SecFinex the industry will
slowly but surely move towards more
automation. “It’s always going to be a
slow accumulation process,” says Clark.
“I suppose there must be a tipping point
where enough people are using electron-
ic trading platforms that everyone else
feels that they have to.” But there is
some support for Oegerli’s scepticism
and the belief that automation could
eventually be forced upon the industry
if efficiency and transparency do not
develop sooner. “My belief is that if the
market doesn’t become efficient the reg-
ulators will step in and force something
on it,” predicts Fay. ISJ

INVESTOR SERVICES JOURNAL 33

securities lending
the borrower’s tale
Never underestimate the importance of the broker /
dealer in a securities lending equation. ISJ uncovers
how counterparties can impact hedge fund borrowing
W hile a lot of emphasis is often
placed on the agent lender of a
securities lending programme, the
role of the broker/dealer is easily forgotten.
However, now that hedge funds have
increased appetites for securities lending,
the broker/dealer is likely to become a
more crucial element of the securities
lending paradigm.
Swiss American Securities Incorporated
(SASI) is one example of a broker /dealer
who participates in securities lending pro-
grammes . The company borrows securities
on behalf of clients whose strategy is to
short sell those securities in the anticipation
of a market downturn. In addition to
borrowing, they also covers the settlement
fails of their clients.
Hedge Funds
The growth of broker/dealer’s securities
lending business over the past few years is
partly due to the hedge fund industry’s
palate for lending programmes. Setting the
scene, Ed Anselmin, senior vice president at
SASI, says: “In the US, hedge funds are
responsible for a substantial portion of the
daily volumes. Hedge funds participate in a
variety of trading strategies including
American Depository Receipt (ADR) arbi-
trage, distressed bonds and convertible
bond arbitrage. Many of these hedge fund
strategies require, somewhere along their
trade cycles, a securities lending transaction,
traditionally a service supplied by prime
brokers, however, some hedge funds have
begun to seek alternative providers.”
Intermediate and larger hedge funds are
usually served by a prime broker counter-
party. But from a price perspective, these
counterparties have not always provided the
most cost-effective approach to hedge fund
servicing. The market for prime broker
services is also consolidating prompting
hedge funds to pursue alternatives.
Considering the available options, a hedge
fund could create its own broker/dealer sub-
34 INVESTOR SERVICES JOURNAL
The borrower would decide to exclude cer-
tain participants from the securities lending
programme. The borrower would contract
with the agent lender, while never knowing
who supplied the underlying security.
The industry is now working towards a
best practice approach, which will add a
layer of transparency to securities lending
transactions. Depository service bureaus
sidiary, which allows the fund to execute, want agent lending departments to continue
clear and, depending how broad its range is, to deal in the same manner they do today,
either borrow or lend for its own account. but to supply additional data to the credit
Although this strategy is not entirely new, areas of the counterparties. In an ideal
more hedge funds have embraced it. Large world, a broker dealer could borrow 100,000
US hedge funds have used inhouse broker shares of AT&T from an agent lender. This
/dealer subsidiaries for some time. activity would enter the system as a normal
Intense price scrutiny convinced some of securities lending transaction. Post-transac-
them to include prime brokerage services in tion phase, the agent lender will, via the
their subsidiary broker/dealers where it made depository service bureau, disclose who the
sense. According to Anselmin, a key driver participant lender is.
behind this strategy is cost. “Between mid- With that data, the credit departments of
2000 and mid-2001, nearly every financial the counterparties or broker/dealers would
services firm began to scrutinise expenses,” he be able to assess, per participant in the agent
says. Large hedge funds felt it would be in lender’s pool, the level of risk they would like
their interest to provide their own to take on board.
broker/dealer services and fulfil as many At the behest of the regulator, the industry
prime brokerage requirements as possible. has undertaken to foster the agency disclo-
The second option is for a hedge fund to sure initiative. However, there may not be
partner with a clearing provider like SASI. any blatant advantages for agent lenders,
With this solution, the hedge fund is able to which are reluctant to forfeit their client list
use SASI as a clearer, while executing trades for confidentiality reasons.
through their broker/dealer subsidiary. If set up correctly, information would flow
Despite the variety of options, prime bro- from the agent lender into a credit risk area
kers understand the value of their role in the within the broker/dealer, who can then set
hedge fund industry and only a portion of thresholds as they know what is outstanding
this business has moved away from them. with the agent lender and for which client of
“Even in situations where a hedge fund will the agent lender. This process ensures that
insource as many back office functions as risks are mitigated.
possible, or allot it to a partner like SASI, the
hedge fund will continue to support their Consolidation
prime brokerage relationships because of the Securities lending has consolidated on
important role they play in providing financ- both sides of the Atlantic. As the size of the
ing and reporting,” says Anselmin. market decreases, pricing inefficiencies
become less apparent. This is one of the
Agency disclosure immediate effects of consolidation on the
The subject of agency disclosure has kick- securities lending industry. In order to make
started a major securities lending industry contributions to their bottom line, diversi-
initiative and implies a change in the long- fied entities are seeking to acquire.
standing procedures of agent lenders. Agent Fleet Securities and Prudential Financial
lenders would enter into a contractual agree- are two examples of major players in the
ment with borrowers and provide general securities lending arena which sold their
data on their types of clients i.e. pension businesses to Bank of America and
funds, insurance companies and unions. It Wachovia Corporation respectively. The
would then be up to the borrower to make acquisition trail looks set to continue as
the appropriate credit decisions based on the companies attempt to strengthen their own
information provided by the lender. organisation and increase returns. ISJ
 s global investment fund regulation
A continues to evolve, the role of the
fund administrator and custodian is
rapidly changing. It is thanks to regulation that
service providers are not only responsible for
asset safety, but also for reporting to the regulator
and protecting investors. The increased scrutiny
of hedge funds obligates the administrator to
produce timely NAVs and ensure a fund is com-
pliant with the local legislation in its jurisdiction.
A handful of offshore jurisdictions go so far as
to make the administrator responsible for vetting
new funds as well as the investors into those
funds. Similarly, custodians with depot bank facil-
ities are often called upon to report on the invest-
ment activity of instruments as diverse as fund of
funds, SICARs, SICAVs and Real Estate
Investment Trusts (REITs). In offshore jurisdic-
tions such as the Bahamas, fund administrators
obtain licenses from the regulator in order to
"self-approve" funds and fund investors.
This is encouraged by the Alternative
Investment Management Association (AIMA),
which is trying to persuade the Securities and
Exchange Commission to register hedge fund
managers in the US.
Developed jurisdictions such as Dublin and
Luxembourg have catapulted Europe into the
hedge fund league by enhancing their regulation
for alternative investment vehicles. Service
providers in these jurisdictions must report the
activity of funds and present investor data regu-
larly. While some regard regulation as a good
business opportunity, others are less excited and
predict that
clients will “In the end, somebody will have to start paying for the extra work involved”
have to
foot the bill for robust new systems. Furthermore,
the European Union Savings Directive (EUSD)
presents a range of challenges for service
providers. Once effective in January 2005, the
Directive will request that the payment agent or
administrator provides within the designated EU
areas, including the European Union, Switzerland
and British dependent territories in the
Caribbean, to either withhold tax or report details
of the interest earned on investments in a fund
from January 2004 (or January 2005, depending on
the powers that be). This requirement may prove
difficult for some service providers to implement,
depending on how regulations are perceived for
funds of funds.
Despite the wide-ranging implications the
EUSD, the Directive does not signify the end of
investment fund regulation. "Inevitably, the
European Union will produce further regulation
on top of this to make life more complicated,"
says Dermot Butler, chairman of Custom House
in Dublin. "In the end, somebody will have to
start paying for the extra work involved. If we
have shares in an emerging market debt fund
Playing
by the
Rules
Witholding tax, reporting,
increased scutiny of hedge
funds. Are the regulators
taking over the system?
that are purchased by a European custodian bank,
acting for a series of Independent Financial
Advisors, the bank will have to comply with the
EUSD, which means extra work. It may be in the
paying agent's interests to be in Singapore."
To counteract the negative side of regulation,
service providers are using their risk management
and analytical tools to provide piece of mind to
first time investors.
In Germany, for example, service providers are
developing their risk management and fund
accounting capabilities now that the country has
enforced new investment fund regulation, which
allows for hedge funds to be set up in Germany.
Once various tax issues are addressed, Germany
will compete with the likes of Dublin and
Luxembourg in the hedge fund space.
On a global scale, hedge fund managers predict
that the hedge fund industry will quadruple in
size over the next six years. A US manager expects
the industry to continue growing at its present
rate of 30 per cent a year and assets under man-
agement to surpass $4 trillion by 2010.
As regulation continues to rubber stamp the
hedge funds, these estimates could become reality.
The United States is still waiting to hear how
the US Patriot Act of October 2001 will affect
hedge funds. Although in the US they are largely
unregulated, a range of transparency initiatives
are afoot in order to make hedge funds as safe as
possible. The US has consistently demonstrated
regulation round-up
its ability to reinvent itself through initiatives like
the Ten Commandments, which led to the repatri-
ation of a significant administration work from
offshore jurisdictions in the Caribbean back to the
US. These jurisdictions responded by introducing
their own regulatory quirks. The Bahamas, for
example, has gazetted its Investment Fund Act
2003, which replaces the Mutual Funds Act 1995.
The Act updates the current environment and
introduces a specific collective investment vehicle
- The Bahamas SMARTFund - also known as the
Specific Mandate Alternative Regulatory Test
Fund. Investment funds will benefit from a super-
visory environment appropriate for the limited,
specific nature of the project.
The introduction of SMARTFunds and the new
legislative regime aims to attract more business
to the Bahamas and position the jurisdiction as a
viable alternative for investment funds. Although
the Bahamas does not have a local custodian
requirement, the administrator must be local.
Curaçao has introduced the National Ordinance
for the Supervision of Investment Institutions and
Administrators (NOSIIA) 2003, an enhancement
of their investment fund regulation expected to
launch Curaçao into the same league as the
Bahamas it provides exemption for sophisticated
investors from regulatory supervision.
While
Caribbean cen-
tres continue
to promote their status as self regulated jurisdic-
tions, the Channel Islands and Malta have intro-
duced their own forms of regulation. Jersey, for
example, has launched the Expert Funds Regime
in an attempt to catch up with Ireland and
Luxembourg. This regime offers promoters and
investors a soft-touch regulatory approach and is
aimed at the private, high net worth investor. The
administrator also gains the power to approve
new funds.
Further afield, Malta is climbing the charts with
a lightly regulated, non-intrusive approach to
funds investment. While the thought of Malta as
a premiere offshore jurisdiction may be difficult
to conceive, remember the humble beginnings of
the Irish financial services centre 15 years ago.
There is no doubt that emerging jurisdictions
such as Malta will give the others a run for their
money. Service providers with interests in these
areas have much to look forward to. At the same
time, the burden on service providers as financial
watchdogs in developed jurisdictions should not
be underestimated. ISJ
INVESTOR SERVICES JOURNAL 35
outsourcing
After years of if-and-when
scenarios, outsourcing has finally
taken off. ISJ sets the scene on
one of the financial services
industry’s long awaited arrivals
T he quest to turn outsourcing
Turn of the tide
into a reality has focussed the
attention of many service
providers worldwide. Custodians and
administrators have waited years for fund
managers to become overburdened with
securities processing and fund accounting
tasks. Thankfully, the last two months have
brought good news for outsourcing
providers and the column inches look set
to increase.
Probably the most significant announce-
ment during this period came from State
Street, who was appointed by Investec Asset
Management to provide investment opera-
tions, global custody and fund accounting
services for $34 billion of Investec’s assets
under management.
As an international investment manager,
Investec Asset Management provides port-
folio management services and products to
institutional and individual investors world-
wide. It announced in November that it had
entered into exclusive negotiations with
State Street for the mandate.
Commenting on the deal, Hendrik du Toit,
CEO of Investec said: "The outsourcing
agreement with State Street allows Investec
Asset Management to focus on its core busi-
ness of managing client assets and follows a
growing trend in the fund management
industry to outsource non-core functions.
By using State Street’s experience and tech-
nology platform, we will be able to direct
more resources to developing innovative
solutions to help our clients succeed."
Although fund manager outsourcing only
began to hit the radar screen about a year
ago, the deals themselves have taken up to
several months to finalise. However, they
give the service provider a lot to be thankful
for. As Jeff Conway, senior vice president of
State Street, pointed out: "We are pleased to
have successfully concluded our negotia-
tions with Investec. As global investment
managers seek partners to help them oper-
ate more efficiently, we believe that State
Street has the required experience in han-
dling complex transitions of this nature."
Approximately 66 Investec staff members
36 INVESTOR SERVICES JOURNAL
based in Cape Town and London have become employees of
State Street. State Street has been instrumental in providing
investment servicing solutions for the Southern African mar-
ketplace. Through its alliance with Nedcor, established in 1998,
it provides a variety of investment services to pension funds,
insurance funds, asset managers and sovereign agencies.
To match Investec’s outsourcing move, Barclays Global
Investors (BGI), one of the world's largest asset managers, has
entered into exclusive discussions with JPMorgan Investor
Services regarding the consolidation of custody, administration
and fund accounting functions for the majority of its European
business. BGI Europe manages assets of over $263 billion from
its European office in London and over $1.1 trillion globally.
Subject to a successful outcome of the discussions, the transi-
tion of services is expected to commence later in 2004. The
consolidation will cover services for core processing of a range
of funds domiciled in the UK, Dublin, Jersey and Luxembourg,
most of which are already performed by third party providers.
Malcolm Smith, head of investment operations at BGI, said
the deal will enable the fund manager to focus on its core busi-
ness. "By consolidating our service providers, we can stream-
line our operating model, allowing us to take advantage of
scale across the business," he said. "We feel JPMorgan Investor
Services has the breadth and capability to service our diverse
product range for our European client base."
Tom Christofferson, senior vice president of global client
management at JPMorgan Investor Services added: "We have
appreciated the opportunity to support BGI around the world
for a number of years, and we are eager to expand the range
and scope of our partnership with BGI in Europe."
Despite their size in terms of assets under management,
Investec and BGI are mere examples of what has been ach-
ieved in the land of investment services outsourcing.
Insight Investment Management recently selected the Bank
of New York, a global leader in securities servicing, to provide
investment services for its $14 billion UK and European mutu-
al fund business. The Bank of New York will provide Insight
with a range of investment services, including depository, cus-
tody and fund accounting, and enable the firm to consolidate
the administration of its funds on a single platform.
Commenting on this mandate, David Norman, managing
director of business partnerships at Insight, said: "We chose the
Bank of New York for the quality of their service and because
they have the scaleable platform and functionality that we need
in order to become a new force in asset management."
Tim Keaney, executive vice president and head of Europe at
The Bank of New York, added: "Our dedicated focus on
Insight’s securities servicing needs will provide strategic sup-
port for the company as they continue to grow their asset man-
agement business."
Insight Investment manages funds for institutional and retail
clients across the full range of asset types - equities, bonds,
property, derivatives, and private equity. As of December 31,
2003, Insight’s assets under management totalled $126 billion.
Apart from custodians, fund administrators are waiting
patiently as fund managers face the strain of additional regula-
tion for investment funds. New regulation often translates into
a requirement for new systems, which fund managers are often
 Delivering outsourcing solutions offshore...

We appreciate that no two businesses are alike, and so we For further information on our full range of outsourcing services
tailor our services to suit your needs. At RBSI Securities please contact:
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different. Outsourcing various middle and back office functions
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will allow your company to focus on core business activities,
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RBSI Securities Services Group comprises RBSI Custody Bank Limited (“Custody Bank”) and RBSI Fund Administration Limited (“Fund Administration”), both of which have: Registered Offices at 71 Bath Street, St. Helier, Jersey JE4 8PJ and business
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of Man Financial Supervision Commission to conduct banking and investment business.
outsourcing
loathe to paying for. As costs continue to
escalate and administrators are held more
accountable for the activities of investment
funds, mid-to back office functions will
move away from the fund manager and into
the hands of the administrator. A current
deal between AEGON Asset Management
UK, part of the worldwide AEGON Group,
and Mellon European Fund Services, the
investment administration arm of Mellon
Financial Corporation in Europe, looks set
to prove this theory. The two companies are
in the process of negotiating an investor and
transfer agency services mandate for
AEGON’s retail fund business.
Following a thorough review of its current
arrangement, the selection exercise has been
undertaken and the decision to proceed fur-
ther with Mellon European Fund Services
was announced internally in May this year.
"This is an extremely important piece of
transfer agency business for Mellon, and we
are delighted to be adding this important
international dimension to AEGON's exist-
ing relationship with Mellon in the US,"
said Richard Godfrey, managing director of
Mellon European Fund Services.
Despite a limited number of administra-
tion deals, providers are confident of good
fortune as financial centres in Europe intro-
duce further regulation for investment
funds. While Dublin and Luxembourg
introduced hedge fund regulations last year,
the Channel Islands have fought back by
launching their own fund regimes, which
are fairly light when compared with the
more developed jurisdictions. These re-
emerging jurisdictions, together with the
likes of Malta, are destined to give Dublin,
Luxembourg and Cayman a run for their
money. Similarly, administrators stand to
benefit as fund managers in these centres
realise the advantage of outsourcing non-
core functions to specialist third party
providers.
A different tune
In addition to fund manager outsourcing,
service providers are extending their remits
in include the back office processes of major
financial institutions. This trend is at the
heart of ABN AMRO, which signed an
agreement with Barclays, one of the largest
financial services institutions in the UK, in
38 INVESTOR SERVICES JOURNAL
February this year. ABN AMRO undertakes
operational processing for Barclays' trade
services business, an arrangement that gives
Barclays the opportunity provide enhanced
service capability to its UK clients.
Commenting on the agreement, Sam
Zavatti, senior executive vice president of
the Financial Institutions and Public Sector
business at ABN AMRO said: "As cost pres-
sures intensify, financial institutions are
redefining the way in which they provide
trade services to their customers. This agree-
ment will provide Barclays with access to
ABN AMRO's global scale, expertise and
investments in trade technology, whilst
building upon their customer franchise."
ABN AMRO began handling processing
for Barclays in January 2004. The initial
Outsourcing provides a sense of
immediacy in terms of investment because
you pay as you go
activities being processed are export letters
of credit for UK beneficiaries. The remain-
ing trade services activities will be phased in
over 2004, including import letters of credit,
import and export documentary collections
and clean reimbursements.
Daniel Cotti, managing director of
Global Trade Advisory, part of ABN
AMRO’s Working Capital business said:
“We are convinced that it will set a prece-
dent for the way organisations around the
world will address their trade service offer-
ings to clients".
ABN AMRO's approach to the develop-
ment of trade services is one of providing
value-add to the client. It offers a range of
trade partnership and outsourcing solu-
tions, from the management of a number of
processes to full outsourcing and strategic
partnerships. Its trade portal, MaxTrad, can
be white-labelled, enabling clients to retain
their own brand and offer their own cus-
tomers online access to a full and expanding
array of trade finance products and services.
A deal for brokers
Automatic Data Processing (ADP) pro-
vides securities processing engines to bro-
kers and custodians on an application serv-
ice provider basis. The firm recently entered
into a definitive agreement to acquire the
US Clearing and BrokerDealer Services divi-
sions of Bank of America Corporation. The
transaction is subject to regulatory review
and is expected to close before the end of
the calendar year.
Commenting on the transaction, Arthur
Weinbach, chairman and chief executive
officer, stated, "We are pursuing a business
process outsourcing (BPO) strategy in
response to market demand and in light of
the changing dynamics of the financial
services marketplace.
The acquisition, with revenues of approxi-
mately $85 million, positions ADP
Brokerage Services Group to provide both
retail and institutional broker clients an
integrated solution encompassing
Brokerage Processing Services (Service
Bureau), Operations Outsourcing and
Clearing Services.
“Our BPO strategy strengthens the value
proposition of our offerings to the finan-
cial services industry while it also opens
the small and mid-tier broker-dealer seg-
ment to ADP for future growth."
According to Mike West, vice president of
international marketing for ADP Brokerage
Services Group, one of the main advantages
of outsourcing has occurred on the cost
side. "Outsourcing ensures a scaleable cost
model, which is typically orientated towards
the cost per trade" he says. "You pay what
you use, compared with the traditional
methods where a sizeable upfront payment
is required. Outsourcing provides a sense of
immediacy in terms of investment because
you pay as you go, rather than investing in
something you do not get a return on until
after you go live on it.
“Our outsourcing model is based on a pay-
as-you-go strategy i.e. there is no wastage in
terms of paying for unused capacity. This
model provides various economies of scale
too. There is also a risk reduction aspect to
mitigate the user firm’s exposure to issues
such as scalability, access to new market
functionality and IT.” ISJ
 offshore funds -Bermuda

More US fund managers are

choosing Bermuda to register
investment funds.
the tide is high Administrators present
the potential of the
jurisdiction in the context of
global offshore centres

A s the international funds industry becomes more

competitive, offshore centres are enhancing their
servicing regimes to attract more attention.
In the case of Bermuda, the amount of international inter-
est proves there is a lot more to the jurisdiction than a
thriving insurance industry.
From an service provider’s point of view, Bermuda's
move to introduce a licensing requirement for adminis-
trators will provide an extra layer of comfort for would-
be investors.
A licensing regime is also expected to increase operating
costs and put the local monetary authority in charge of
fund administration
in Bermuda.
Apart from adminis-
"Bermuda administrators
trator licensing, offer every conceivable
Bermuda is in the service to offshore and,
process of consoli-
dating legislation for
increasingly,
collective investment onshore funds"
schemes (CIS).
According to Andrew Collins, vice president and manag-
ing director of Butterfield Fund Services in Bermuda,
revised CIS legislation will enable fund managers to better
understand the Bermuda laws and demonstrate the
importance of fund administration to the regulator.
"Bermuda administrators offer every conceivable service to
offshore and, increasingly, onshore funds," he says.
Apart from a range of mutual funds, Bermuda is record-
ing a rapid increase in the number of hedge funds, fund of
funds and index-based funds.
Structured fund investment is also very popular. Various
regulatory developments have affected the Bermudan
funds industry, notably the imminent registration require-
ment for advisors in the US and the provisions of the USA
Patriot Act. "The main impact of the Patriot Act will be
increased pressure through excessive costs for start up
hedge funds," says Collins. "The impact of these changes is

INVESTOR SERVICES JOURNAL 39

offshore funds -Bermuda
likely to include consolidation within the
industry, an increasing use of private cap-
ital to better finance hedge fund groups
and possibly a
reduced perform-
ance of the funds
themselves."
Despite the burden
Andrew Collins
of regulation,
Bermuda is able to
compete with other
fund centres, which
have enhanced their
regulatory regimes, in the Caribbean.
"One of the main attractions of Bermuda
is the centre's reputation as a jurisdiction
which appeals to certain types of
investors and the availability of a wide
range of service providers," says Collins.
"The close proximity to New York is also
an advantage."
As the impacts of
consolidation effect
"The close proximity the Bermudan funds
to New York is also industry, the key
challenge for
an advantage" Butterfield Fund
Services is to contin-
ue to provide high quality personal serv-
ice in a jurisdiction with limited availabil-
ity of human resources.
"While the need to constantly improve
technology is important, the cost of
doing so has decreased considerably," says
Collins.
Ede Conyers Despite the challenges, Bermuda contin-
ues to support a significant fund admin-
istration industry, as evident in the acqui-
sitions of hedge fund service providers by
large global banks. Apart from the acqui-
sition of the Bank of Bermuda by HSBC
last year, Citigroup expressed an interest
in Bermuda when it acquired Forum
Financial Group, a provider of fund
administration services with over 18 years
of service history. The acquisition has
provided sustained value and growth
opportunities for Citigroup's Global
Transaction Services (GTS).
40 INVESTOR SERVICES JOURNAL
"This acquisition demonstrates our
strategic focus on meeting the fund
administration service needs of leading
fund managers worldwide," said Frank J.
Bisignano, chief executive of Citigroup
GTS. "Forum has built its
business over 18 years through continued
customer excellence, as
demonstrated by its top ranking in exter-
nal customer satisfaction surveys.
We look forward to growing the value
and profitability of this business by
applying our global operating experience
together with introductions to
our extensive, premier client base."
"In addition to establishing a strong
presence in fund accounting in the US,
the acquisition enhances our transfer
agency capabilities and continues the
development of our ability to service
hedge fund clients. Citigroup is commit-
ted to integrating this new operation into
a world class, scaleable business and
enhancing our service offering to new
and existing Citigroup clients," said
Bisignano.
According to Ede Conyers, general man-
ager of Forum Financial, the Citigroup
acquisition has created a lot of opportu-
nities for both firms. "We complement
eachother as far as our products are con-
cerned," she says.
Citigroup’s acquisi-
tion of Forum
speaks to the suc-
cess of Bermuda as
an offshore juris-
diction.
"International firms
feel comfortable
with centres like
ours," says Conyers. "Bermuda is regulat-
ed, but with a flexible standard. It is a
jurisdiction of substance as opposed to
many other jurisdictions out there." To a
large extent, the Bermudan funds indus-
try has developed around a substantive
insurance industry. "All of the ancillary
services that the insurance and funds
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offshore funds -Bermuda
Tony Riker
42 INVESTOR SERVICES JOURNAL
industry would require are here in
Bermuda," says Conyers.
Despite the level of international interest
in Bermuda, the jurisdiction sets high
standards for foreign companies.
"Bermuda has always maintained itself as
a ‘separate’ jurisdiction and it doesn’t take
business just for the sake of it," says
Conyers. "Bermuda has a
strong reputation as a
quality jurisdiction and "We continue to see the
will not merely accept biggest growth in
anything that walks
through the door."
fund of funds, followed
Bermuda recent success closely by single manager
in the hedge funds area is hedge funds"
thanks to its range of
competent administrators.
Despite the growth of hedge funds and
the apparent 'retailisation' of the indus-
try, the demands of US based hedge
funds present numerous challenges for
Bermudan administrators.
The challenge remains to provide high
quality personal services and to use tech-
nology effectively.
Fund administrator Dundee Leeds has
observed significant funds growth from
its offices in Bermuda. "Many billions of
dollars have flowed into the industry,"
says Robin Bedford, president of Dundee
Leeds. "The fall in the stock market may
have prompted investors to diversify into
esoteric instruments to reduce their expo-
sure to equities. Also, the mutual funds
timing scandal may have added further
doubt about the value of investing in tradi-
tional mutual fund products." As a provider
of hedge fund administration services,
Dundee Leeds has recorded increasing
interest for alternative investments from the
institutional client segment.
Despite the challenges presented by the
Patriot Act, Bedford is confident that it
will have little impact on the method of
business in Bermuda. "Legislation has
been in place in Bermuda and Cayman
for many years and is at least comparable
to that proposed by the Patriot Act." says
Bedford.
Dundee Leeds uses its niche position within
the industry to provide value- added servic-
es to its client portfolio. "Our internal sys-
tems and organisational structure gives us
the upper hand over the traditional players
in the market," says Bedford. "We are struc-
tured to ensure quick response times to our
client and shareholder enquiries."
As a consequence of improved CIS legisla-
tion, all administrators in Bermuda will be
subject to a licensing process. The licence
carries certain requirements, including
confirmation that controllers, directors
and senior executives of a company are
diligent individuals and that their funds
business is conducted with an appropriate
degree of integrity and professionalism.
As a monolith of the Bermudan finan-
cial community, the Bank of Bermuda
has welcomed the licensing requirement
for administrators and the proposed
changes to existing legislation. The Bank’s
fund servicing busi-
ness, Global Fund
Services (GFS), is
largely responsible
for putting
Bermuda on the
hedge funds map
and is heavily
involved in the
alternative invest-
ment arena. "We continue to see the
biggest growth in fund of funds, followed
closely by single manager hedge funds,"
explains Tony Riker, managing director of
Bank of Bermuda GFS in Bermuda.
GFS provides full administration, bank-
ing, registrar and transfer agent, corpo-
rate secretarial and credit facilities.
offshore funds -Bermuda
The company takes a global view to
fund servicing and is able to offer tailored
multijurisdictional servicing solutions to
fund managers. As a global provider of
services to hedge funds, GFS is fully
aware of the latest regulatory develop-
ments to affect the entire funds industry.
"We continue to monitor the actions of
the UK Financial Services Authority and
the Securities and Exchange Commission
[SEC] in the US," says Riker. "It is still
unclear whether both regulatory bodies
will impose increased regulation for
hedge funds or whether they are likely to
keep the status quo for longer."
the Patriot Act will obligate fund managers to follow anti-
money laundering and know-your-customer procedures by
collecting specific information about investors
The SEC has yet to reach a decision on
whether to introduce mandatory registra-
tion for hedge fund managers and the
question of whether
to open hedge
funds to retail
investors is still
being evaluated.
David Aldrich
In the meantime,
the USA Patriot Act
will obligate fund
managers to follow
anti-money laun-
dering and know-your-customer proce-
dures by collecting specific information
about investors. "To some extent, the
Patriot Act codifies practices that were
already being carried out by some
administrators and legal firms in
Bermuda," says Riker. "The impact for
Bank of Bermuda is minimal because
our existing anti-money laundering pro-
cedures exceed those currently set out in
the USA Patriot Act."
Despite fierce competition from other
fund centres in the Caribbean, Bermuda’s
'blue chip' reputation enables the juris-
44 INVESTOR SERVICES JOURNAL
diction to attract fund managers from
around the world. The Island is home to
major financial institutions, which favour
a highly progressive regulatory regime.
Like other administrators, Riker agrees
that the key challenges facing fund
administrators going forward will contin-
ue to be technology and resources.
"Investment in technology will continue
to be a differentiating factor, with the
larger institutional players able to provide
sophisticated solutions to clients with
complex needs," he says.
As a global provider, the Bank of New
York (BNY) takes a domicile neutral
approach to serving hedge funds and
regards expertise to service the specific
technical requirements of the fund as
most important. "Increasingly, funds are
choosing global fund administrators such
as the Bank of New York, which is able to
provide solutions for both established
domiciles such as Cayman and Bermuda
as well as the new emerging domiciles
such as Germany, Luxembourg and the
Channel Islands," says David Aldrich,
head of securities industry banking
(Europe) at the Bank of New York.
According to Aldrich, the growth in
hedge funds stems from conventional
long/short equity funds and a diversifica-
tion towards fixed income and credit
arbitrage funds. "This diversification puts
the emphasis on the administrator to
provide industrial strength systems and
processes to the new funds, particularly
in areas such as independent pricing of
complex derivatives such as credit default
swaps," he says.
Despite the complexity of investment
funds, Bermuda can offer a "full
service" offshore fund administration
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offshore funds -Bermuda
solution. For certain providers,
this includes services such as online
real time compliance testing, fully
redundant document imaging, per-
formance attribution, independent
"As a service centre Bermuda is a significant player, but as
a domicile it serves a valued niche market at present"
derivatives pricing and risk analytics.
Like most service providers, BNY has
given its blessing to the CIS legislation,
Whether funds fly
offshore depends on tax
and legal advice
which is expected to uphold the credi-
bility of industry in Bermuda. BNY has
implemented best practice for both
AML and servicing standards. "For the
smaller, boutique players who are
already struggling to win business in an
increasingly competitive environment,
this institutionalisation of the market-
place will create further pressures that
are likely to result in consolidation of
service providers," says Aldrich.
Geography is key to the success of
46 INVESTOR SERVICES JOURNAL
Bermuda, and its proximity to the US
hedge fund community is of para-
mount importance. However, the cen-
tre has to work around Cayman as the
dominant domicile for US and
European managers. Managers' advi-
sors use the Cayman model as the stan-
dard boilerplate.
"As a service centre Bermuda is a sig-
nificant player, but as a domicile it
serves a valued niche market at pres-
ent," says Aldrich.
The challenges facing Bermuda fund
administrators are largely the same as
those presented to the industry globally
as hedge funds continue to attract an
ever-increasing asset allocation. To
meet the challenges, BNY is investing
heavily in both proprietary software for
fund of fund servicing, and in vendor
software, for areas such as derivatives
pricing models and risk analytics. For
example, BNY has developed systems to
provide German tax reporting under
the new German Investment
Modernisation Act (December 2003) -
this satisfies the technical needs of the
fund wherever it is domiciled. The
decision on where to domicile the
fund, to best attract German investors,
is down to the fund and its advisors.
According to Aldrich, the ability to
provide industrial strength solutions
on a genuine global platform will
enable fund administrators to attract
business in every funds centre, includ-
ing Bermuda. "Fundamentally, funds
will select their domicile according to
the advice they receive from their legal
and tax advisors, with a view to satisfy-
ing the requirements of their target
investors," he concludes. ISJ
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UCITS III
They think
it’s all over...
Tax - the single biggest
threat to the success of
UCITS III. How is the
Directive coping with
fiscal disparities in Europe
and what has it actually
achieved?
hen European countries
W were first presented with the
UCITS III Directive, few imag-
ined it would take so many months (even
years) to implement.
Only a handful of fund centres have
grasped the full meaning of the Directive
and their service providers regard it as a
good move. Particularly in Luxembourg,
where new instruments such as SICARs
and pooled pension vehicles have been cre-
ated, administrators predict a range of
opportunities going forward.
ISJ spoke to Pierre Oger, senior product
manager (Europe) at CA-IS about what
UCITS III implies.
ISJ: Now that European fund centres have
more or less implemented UCITS III leg-
islation, what impact has the Directive
had on the industry so far?
PO: It is worth noting that unlike the US
market, the European market for mutual
funds is still characterised by important
cultural, structural, regulatory and fiscal
disparities and fund distribution is domi-
nated by local products. The UCITS III
Directive aims to reduce these hurdles in
three ways. Firstly, the "product directive"
extends the range and structure of prod-
ucts that are sold under the EU passport
e.g. money market funds, fund of funds
and derivative funds. Secondly, the intro-
duction of the simplified prospectus allows
48 INVESTOR SERVICES JOURNAL
for a rationalisation of the marketing
approach by offering a standard and more
comprehensive set of information to
investors. Lastly, the "profession directive",
which no longer allows "letter-box entities",
will prompt fund managers to reflect on
the domiciliation of their products.
ISJ: UCITS III is expected to favour the
distribution of mutual funds across Europe.
Luxembourg, in particular, is regarded as a
hub for European distribution platforms.
On average, a Luxembourg-domiciled prod-
uct is being sold in six different countries.
However, the pure administration of a
mutual fund brings with it certain complex-
ities. Although the distribution of mutual
funds has increased, there are a number of
important differences from one European
country to the next in terms of taxation.
Is UCITS III a move in the right direction?
PO: Absolutely. We believe UCITS III is a
move in the right direction. It will enhance
the cross-border distribution of mutual
funds, particularly those domiciled in
Luxembourg and Ireland, which are the
major pan-European distribution centres.
ISJ: UCITS III has enabled an extension
of the products being supported and dis-
tributed and access for the retail investor
has become a lot easier. Where do SICARs
and pooled pension vehicles fit in?
PO: The introduction of the SICAR
enables an extension of the distribution of
venture capital vehicles to qualified high
net worth individuals.
ISJ: Can we expect further legislation for
investment funds?
PO: Recent months have been quite
intensive as regards the legislation for
investment funds:
- Luxembourg has introduced UCITS III,
the EUSD and SICARs
- at a European level, there have been
fundamental changes in local regulation
e.g. Germany and France. We are expected
to accommodate all of these regulatory
changes and come up with standards and
better harmonised practices.
As for further legislation, we are follow-
ing the UK evolution on the distribution of
foreign funds, as well as the possible open-
ing of the US market to European funds.
Does Germany present any threat to
Luxembourg in a UCITS III environment?
No, Germany does not represent any
threat to Luxembourg. However, it is
worth mentioning that recent regulatory
changes in Germany favour the
distribution of Luxembourg domiciled
products (including hedge funds) in the
German market. ISJ
Pierre Oger
Pierre Oger joined Crédit Agricole in 1989 and
is in charge of analysis, implementation and
development of new products in relation to
globalisation tools and the modification of the
regulatory framework for investment funds.
GLOSSARY
UCITS III
- A European directive, proposed in 2002, to reg-
ulate investment funds and companies
EUSD
- European Union Savings Directive. Effective in
January 2005, the Directive will request that the
payment agent (fund administrator) provides
within the designated EU areas, including the
European Union, Switzerland and British
Dependent Territories, to either withhold tax or or
report details of the interest earned on invest-
ments in a fund.
SICAR
- Société d’investissement en capital risque
(SICAR), a new investment vehicle for European
private equity and venture capital investors.
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uk pensions
Strength in
Numbers
Riposting the regulator is vital,
ISJ invite the UK’s Investment
Management Association to
explain their work.
T
he investment management industry in
the UK is one of the most developed in the
world and is estimated to add some 0.5 per
cent a year to GDP. Formed in 2002, the
Investment Management Association (IMA) is the
trade body for this industry. Our 180+ members
provide investment management services to insti-
tutions and private investors, and between them
they manage over £2 trillion worth of assets in the
UK.
The Association’s core activity is dealing with
the regulatory issues that affect fund management
products, investment management companies
and the markets in which our members operate.
FSA Consultation Paper (CP176)
One of the “hot topics” of recent months has
been the question of soft commissions. The FSA
issued a consultation paper (CP176) addressing
the practice of “softing” where brokers agree, in
advance, to pay for services from a third party on
behalf of a fund manager in return for putting a
certain amount of business their way at an agreed
commission rate. The FSA felt that this either
needed to be abolished or made more transparent
and regulated.
In our response to CP176, we recommended
that this practice did indeed need to be made
more transparent but that a market based solution
was preferable to regulation which becomes out-
dated very quickly and could constrain the natural
evolution of the market. The FSA agreed with this
approach and placed the ball in our court to fur-
ther develop proposals as to how this might work.
In order to enable fund managers to be fully
accountable to their clients for the decisions they
make about trade execution and the purchase of
additional services, we are developing, in conjunc-
tion with the NAPF, an improved version of our
2002 Pension Fund Disclosure Code.
Pension Fund Disclosure
The existing code aims to help trustees to
understand the costs and charges to a fund. The
code outlines how both softed and non-softed
commissions should be disclosed but now needs
to go a stage further in order to meet the FSA’s
requirements. The main focus therefore is on
enhancing the information provided about broker
selection, conflicts of interest, the evaluation of
research and further transparency with regard to
50 INVESTOR SERVICES JOURNAL
commissions paid for execution and additional
trading services. Feasibility studies will be carried
out over the coming months to see if these pro-
posals work in practice. The FSA will assess
progress towards the end of the year and it is
hoped that this improved disclosure will go far
enough to meet its needs.
Confidence
More than two thirds of funds managed by
IMA’s members represent the savings of UK citi-
zens. The question of improving investor confi-
dence in long-term savings products is therefore
another topic very high on our agenda.
The Government’s rather disjointed and often
contradictory approach to long-term savings, such
as its failure to retain some of the benefits of its
“flagship” savings product, ISAs, only adds to this
confusion and uncertainty.
In our submissions to the Treasury Select
Committee’s inquiry into “Restoring confidence in
long-term savings” we outlined areas which we
feel need to be addressed in order to create a sta-
ble foundation for the financial services industry
and improve investor confidence. Of particular
note is the need for the Government to implement
a single regulatory framework for all long-term
savings products in order to remove complexity
and enable the industry to develop straightforward
products which are easy to understand.
Stakeholder Products
The recently announced proposals for the stake-
holder suite of products, has wrapped a further
layer of complexity around, what was originally a
straightforward product, the investment fund.
Thus confirming that, on its own, the Government
is ill equipped to design financial products.
What is needed is a commercially viable, inte-
grated model, which would have the flexibility to
respond to investors’ evolving needs. In its current
form the stakeholder suite of products will not be
a panacea to the long-term savings gap. Advice
and education is the key to creating a well-bal-
anced portfolio which meets the risk profile of the
individual investor and their investment objec-
tives. Until this has been addressed, confidence
will not be restored in the long-term savings
industry and Government policy will continue to
contradict this aim... the lobbying continues.
Europe
IMA’s lobbying activity however, is not just con-
fined to the UK. Increasingly we are supporting
members who operate or wish to operate across
Europe and we have to take into account legisla-
tion emanating from Brussels.
Apart from the day-to-day work on European pol-
icy issues, IMA has made great strides in identify-
ing where the case for the UK investment manage-
ment industry needs to be strengthened. In 2003,
the Association commissioned a survey from the
Centre for European Economic Research in
Mannheim (ZEW) under the direction of Doctor
Friedrich Heinemann, to examine the obstacles to
greater competition in the provision of savings
products by asset managers.
The survey identified key action points for the
industry and policymakers which included new leg-
islation to facilitate cross-border mergers of funds,
the removal of unnecessary and expensive regula-
tory processes and more use by the Commission
of its enforcement powers, including to end tax
discrimination against non-domestic funds. The
“Heinemann Report” as it came to be known, out-
lined the constraints facing the industry and the
Association recently followed this up with a survey
entitled “Moving up a gear? A survey of the devel-
opments in the single market for asset manage-
ment during 2003/04.” The new survey assesses
the progress made by the industry since the publi-
cation of the Heinemann report and outlines our
priorities for the coming months.
In particular, our European team will be look-
ing at the requirement for funds to be registered
in each state in which the fund is sold, adding to
costs and introducing delays. We are calling for
this process to be simplified or abolished and
will be publishing a paper outlining the costs of
the existing regime and benefits of reform later
this year.
Mergers
Next on the agenda is the issue of mergers.
Investment managers wishing to rationalise their
portfolios are subjected to regulatory barriers and
discriminatory tax treatment when merging funds,
particularly cross-border. IMA has convened a
group of experts in order to consider these barri-
ers and identify a way forward.
Cross-Border ‘pooling’
Finally we are looking into developing a cross-
border framework for the “pooling” of funds.
Pooling will help managers to achieve economies
of scale and will benefit investors in both invest-
ment funds and cross-border pension funds. We
have been studying the various techniques in use
at the moment and the regulatory barriers which
have been encountered, with a view to making
detailed recommendations later in the year.
This is just the tip of the iceberg. There are
many other pressing issues but the list would go
on for pages. Our aim always, is to be the repre-
sentative voice of the industry and influence the
debate both here and internationally. The list of
work may be long but our proven track record
speaks for itself.
Helen Stephenson is the Communications Officer of
the Investment Management Association in the UK

ECSDA report on Barriers 4 and 7
BREAKING The European Central Securities Depositories
Association (ECSDA) was formed in 1997 to pro-
vide a forum for national and international CSDs
THE ROUND to exchange views and carry out projects of
mutual interest in the field of securities clearing
and settlement.
BARRIER Recently, the ECSDA has enhanced its role from
the mainly technical implementation of links
between CSDs. ECSDA’s general objective now is
Co-operation to offer solutions and to provide advice at inter-
national level on technical, economic, financial,
between CSD’s legal and regulatory matters in order to reduce
underpins open and risk and increase efficiency in custody, pre-settle-
efficient markets, ment and settlement arrangements for securities
and related payments across Europe for the ben-
here ISJ invite the efit of issuers, investors and market participants.
European Central This is achieved by promoting:
• processing flows which ensure the
Securities highest efficiency with a low risk profile;
Depositories • a level playing field with the highest
Association (ECSDA) standards for entities providing custody,
pre-settlement and settlement services;
to report on their • common standards to reduce or
response to the EU’s remove barriers to cross border
settlement;
Giovanni Group and • the exchange of information on legal,
the barriers to tax, regulatory frameworks and market
efficient settlement practices to foster the process of
harmonisation across Europe, and
across the new • international co-operation.
Europe Four ECSDA working groups (viz, Public Policy,
Harmonisation, Settlement links, Audit and
Compliance) are dedicated to projects designed
to deliver this ambitious role.
The ECSDA currently has 19 members, includ-
ing CSDs and ICSDs, and maintains close and
active links with other international associations
of CSDs around the world.
Giovannini Group - Barriers
The first concrete steps in removing the barriers
for efficient clearing and settlement arrange-
ments in the EU were identified by the
Giovannini Group.
In April 2003, the Giovannini Group asked the
European Central Securities Depositories
Association (ECSDA) to take the lead in remov-
ing three of the fifteen market barriers they
identified to low-cost, cross-border settlement.
To this end, a dedicated ECSDA working group,
chaired by Michael Kempe of CRESTCo, was set
up to address the issues.
ecsda report
Ten Standards
The ECSDA have agreed and published ten
standards for implementation at various times
between now and April 2005 to enable intraday
finality (by removing Barrier 4) and to harmonise
operating hours and settlement deadlines (by
removing Barrier 7).
While there is a high degree of compliance by
ECSDA members with some of the standards,
others are met by only 50% of CSDs. This means
that there will be considerable change over the
next 12 months and this short time scale is an
indication of the importance that all ECSDA
members place on the standards.
The third, Barrier 3, concerning corporate action
harmonisation, will be addressed later this year.
ECSDA Chairman, Giovanni Sabatini, said,
“The agreement and public disclosure of the ten
standards is an important milestone in the har-
monisation of Europe’s capital market. The
ECSDA initiative is the first market response to
the Giovannini report and demonstrates the
commitment by our members to the creation of
an efficient securities processing infrastructure
in Europe.
Implementation of the standards (which has
already begun) will create a foundation that will
benefit Europe as a whole. ECSDA will continue
to build on this foundation with other market sec-
tors in relation to these standards, as well as tak-
ing the lead to address Barrier 3.”
It is important to note that full compliance by
all CSDs or other Security Settlement Systems
with the standards will not, by itself, remove the
two Giovannini-identified barriers. This is due to
the fact that other market sectors will also have to
adapt their practices. Where this is the case, the
report identifies which sectors of the market will
have to act and how.
To progress these issues, the ECSDA plans to
work closely with Europe’s central banks and the
Central and Eastern European Central Securities
Depositories Association (CEECSDA). It is impor-
tant that agreement is reached both with the cen-
tral banks and the CEECSDA before these stan-
dards can be considered as final.
To download ECSDA’s complete report, please con-
sult the section of working group 5 on the website
of ECSDA: www.ecsda.com.
INVESTOR SERVICES JOURNAL 51
transfer agency panel
RECORD
GROWTH
s cross border investment
A increases and alternative
investment instruments
become more favoured by
institutional and retail
investors, the scope of services
and systems offered by transfer
agents (TAs) has shifted con-
siderably. ISJ spoke to the top
TA providers to learn more
Meet the panel...
52 INVESTOR SERVICES JOURNAL
Gavin Davies, head of product development, Mellon European
Fund Services. Davies has worked within the retail financial
services industry for 16 years. He joined Mellon European Fund
Services in 1999 within its product development function and
is primarily responsible for working with existing and prospec-
tive clients in helping to launch new products and services.
Prior to joining Mellon Davies worked for 12 years in operational
and operations management roles within an asset management
company, during which time he was responsible for the invest-
ment trust savings scheme and PEP administration areas.
George McKay, business development director, Mellon
European Fund Services. McKay joined Mellon Financial
Corporation in May 2002 from JP Morgan Fleming Asset man-
agement where he was managing director for the group’s Pan
Asian Mutual Fund Business from 1994-2002.
Based in Hong Kong, in addition to his responsibility for
growing funds under management, McKay established back
office operations supporting the group’s offshore business,
introducing Image, Workflow STP and Web based dealing into
the Asia Market. He also set up operations in Japan, India,
Korea, Taiwan and China.
Claude Michaux, senior product manager, Crédit Agricole
Investor Services (CA-IS). Michaux is responsible for the product
development of CA-IS’s transfer agency services and third party
distribution platform. Prior to joining CA-IS, Michaux was in
charge of Fastnet Luxembourg Transfer Agency, and held similar
positions at Crédit Agricole Indosuez and Banque Indosuez.
CA-IS’s Fastnet network of fund administration centres oper-
ates in Belgium, Luxembourg, France, the Nether-lands and
Ireland.
Sandra Reiser, managing director, First European Transfer
Agent (FETA). Reiser is a member of the executive committee
of Dexia Fund Services and is in charge of shareholder services
such as transfer agency and cash support in eleven countries.
She has worked in the funds industry for the past 16 years.
Reiser began her career at Dexia BIL and moved to its wholly
owned subsidiary FETA in 1994.
Paul Roberts, managing director, International Financial Data
Services (IFDS). Roberts is in charge of business development
in the UK and Europe, which encompasses sales, marketing
business and product development.
He joined IFDS in 1998 from Fleming Fund Management in
Luxembourg, where he was responsible for the European trans-
fer agency and fund administration operations, as well as vari-
ous IT functions. Roberts is a graduate from Bristol University
and is a chartered accountant.
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transfer agency
Investor Services Journal
TRANSFER AGENCY PANEL 2004
George McKay
WHAT ARE THE LATEST DEVELOMENTS TO AFFECT TRANSFER
AGENCY INDUSTRY?
PR: Open architecture is being embraced across
Europe. In Germany, the banks (who dominate
retail investment product distribution) are starting
to sell non-proprietary funds. This trend is repli-
cated in France, Spain and Italy. In the UK, we
see more retail products being transferred to fund
supermarkets/consolidators such as Cofunds.
There has been a sea change in Europe and we
are starting to see asset groups focus on pure
asset management and the rise of pure distribu-
tion, be it through retail banks or consolidation
platforms. Transfer agents choose whether they
want to service the fund distributors as well as
managers.
The retail sector has a confidence issue, while
the institutional sector is fairing well
The fund distributor is king in Europe. The vast
bulk of retail investment products are sold with
advice, be it via banks in Germany, France, Italy
and Spain, or via an Independent Financial
Advisors (IFA's) in the UK.
Compared to five years ago, the range of
added value services being provided to the dis-
tribution channels has grown infinitely. The TA
must track that.
Europe tends to inherit trends from the US.
This is evident in the rise of open architecture
and products distributed by companies such as
Schwab, Merrill Lynch and other broker-dealer
networks. Distribution channels in the UK are
dominated by the IFAs. In Europe, these chan-
nels are driven by banks and are also embracing
open architecture.
The retail investor in the UK is not flooding back
into investment products and the level of retail
redemptions remains higher than the actual sales.
The retail sector has a confidence issue, while
the institutional sector is fairing well. Costs are
54 INVESTOR SERVICES JOURNAL
Sandra Reiser Claude Michaux Paul Roberts Gavin Davies
becoming more transparent. This cost pressure
passes on to the TA. After many years of effort,
volumes are growing.
However, there is a proliferation of STP
methods which increases complexity for the TA.
SR: We are being forced to meet compliance
requirements as a result of UCITS III and Basle II.
There is a growing need for strict compliance
measures linked to know-your-customer rules, late
trading and market timing. These are continual
challenges for promoters and service providers.
Other major challenges for TAs and the entire
fund industry are automation and standardisation.
We have made significant investments over the past
few years in order to offer the widest possible range
of trade automation solutions to the distributors of
our fund promoter
clients. In 2003, we
processed 5.3 million
trades globally at an
average STP rate of
84 per cent.
These trades are received from millions of
shareholders and/or distributors via file
exchange, a workstation, or our transactional
Internet Site linked to the promoter and/or via
SWIFT.
As a market leader in Luxembourg and Asia, we
believe that we have a responsibility to assist all
industry participants in sharing our experience
and knowledge. We actively participate in indus-
try groups such as the Dublin Funds Industry
Association, the Luxembourg Funds Industry
Association (ALFI), the Federation Europeenne
Des Fonds Et Societes D'Investissment
(FEFSI), SWIFT and other industry modelling
groups.
CM: It all comes back to distribution. If the fund
manager wants to have effective European distri-
bution, it has to have effective TA. The general
consensus across the fund administration world
is that the distributor is now king. The distributor
has needs, which the TA must cater for. All dis-
 transfer agency

tributors need appropriate interfaces and client
relationship management strategies.
Furthermore, as demand for cross-border dis-
tribution into multiple markets increases, the
challenges facing TAs (managing the diversity of
tax regulations, legal and operational processes)
are accentuated. Fund managers are seeking the
assistance of third-party transfer agents to help
them manage this complexity.
Fund managers want us to help their local dis-
tributors meet local registration, reporting, com-
pliance, regulatory and tax requirements.
GD: The development of open architecture has
led to more opportunities to provide back office
services to fund distribution platforms. As these
platforms grow, we will see a corresponding
decline in the registers of traditional TA services.
have to apply one or several methods i.e.
withholding tax, exchange of information and /
or exemption certificate.
Systems must be adapted in order to:
- Capture additional shareholder information such
as fiscal residence
- Record the fiscal status of mutual funds and
other collective investment vehicles
- Calculate the tax and combine the information
relating to the fiscal status of investors, the funds
and the income type (dividends, capitalisation
shares, switches and redemptions)
- Report to shareholders and tax authorities

Systems investment is spread across a relatively

low number of participants
- Exchange files with NAV calculation agents and
WHAT IMPACT DO THE EUROPEAN UNION SAVINGS external price feeds/central funds databases
DIRECTIVE (EUSD) AND EU ENLARGEMENT HAVE ON
TRANSFER AGENCY PROVIDERS ? The impact on cross-border distribution
remains to be seen. Nominee distributors, fund
supermarkets and transfer agents who qualify as
PR: The EUSD does not have a major impact as paying agents in a cross-border environment will
most TA is performed within a domestic context. have to report to their regulator in order to
It is an additional regulatory cost at a time remain competitive. Systems investment is an
when governments are leading the move to issue of scale, given that investment is spread
reduce charges. across a relatively low number of participants.
The EU enlargement will accelerate the drive Transfer agents which have traditionally operat-
for the creation of single domiciled investment ed in a multi-jurisdictional and cross-border dis-
vehicles for sale across all of Europe. This devel- tribution environment, have been exposed to vari-
opment will increase the demand for TA solutions ous methods of fiscal reporting, including
that can support these activities. German income equalisation, which has been
In terms of the accountability of the adminis- replaced by equity tax. Providers who are famil-
trator to report to the regulator, there is a change iar with these methods are best placed to under-
thanks to the EUSD. There is very little change if stand requirements of the EU Savings Directive.
you are dealing domestically. The biggest
changes are in Luxembourg and Dublin where we CM: The EUSD will have an impact on our sys-
are dealing with multinationals and people from tems as we have to meet new requirements as
many markets, which requires a greater level of set out by the Directive. We will have to identify
legal reporting of monies. the benefical owner of shares and combine client
registers with information such as tax identifica-
SR: The implementation of the EUSD raises a tion number, country of residence, country of tax-
number of technical issues, which a TA needs to ation etc. As a paying agent, the TA needs to col-
work on in a cross-border environment. lect and report the appropriate information to the
In the situation where the TA qualifies as a tax authorities.
paying agent within the definition of the Commercial and organisational aspects also
Directive and there is a cross-border payment have to be taken into consideration.
for private individuals, the transfer agent will GD: The EUSD has a limited impact on the major-

INVESTOR SERVICES JOURNAL 55

transfer agency
ity of our UK based clients, as they tend to sell
their funds almost exclusively to UK investors.
However, we do have a number of clients where
this is not the case, so clearly we have to develop
the necessary data capture and reporting capa-
bilities. We predict further regulation within an
EU environment and market differences present
the TA with numerous challenges. There is a will
for more standardisation in the industry but we
do not believe this is likely to happen in the near
future.
IS TRANSFER AGENCY CONSIDERED A CORE OR VALUE
ADDED SERVICE ?
PR: Transfer agency tends to be the first function
a fund manager or distributor sees as non-core.
They react by outsourcing their retail business to
a TA platform. Companies like IFDS seek to pro-
vide a range of investor record keeping functions
whilst growing additional added value services on
top of the traditional pure 'record –keeping’.
Nowadays we serve multi-national promoters, which have
multi-jurisdictional funds
Transfer agency is becoming an area where
providers want to add value. We have a mixture
of clients, who prefer to contract our services on
an individual/component basis or may request a
one-stop shop. Clients with a retail outlook tend
to contract our services on an individual product-
by-product and service-by-service basis. The
manufacturer organisation is likely to request a
one-stop-shop.
SR: Transfer agency varies from a commodity to a
value added service, depending on the distribu-
tion strategy of the fund promoter.
Traditionally, the TA would hold a couple of
omnibus positions in the fund register without
any challenges.
Nowadays we serve multi-national promoters,
which have multi-jurisdictional funds and multi-
currency share classes. We also provide share-
holder reporting in seven different languages.
Owing to increasing cross border distribution, we
are facing both institutional and retail investors,
who have different currencies and settlement
requirements as well as sophisticated commis-
sion handling and reporting requirements.
Additional services like dynamic savings plans
56 INVESTOR SERVICES JOURNAL
with direct debit features, redemption or switch
plans, phone dealing or asset allocation are only
a few samples of what a TA has to offer.
CM: Transfer Agency is a value-added service. At
the recent Fund Forum event in Monaco, a fund
manager suggested that most of his added value
is provided by the TA. TA has become a key
product. Transfer agents are carving out a grow-
ing role in the financial services industry. Their
role is evolving in line with distribution trends
and is changing to that of a startegic partner,
which links up with fund managers and fund dis-
tributors. Current market trends have made TA
services an increasingly important element of
fund product offering.
GM: Transfer agency can be seen as a core or
value added service depending on the provider.
There is a shift towards added value services,
which we can provide through our TA platform, in
areas such as client relationship management
strategies and call enhanced call centre services.
GD: While custody and fund accounting are core,
TA reaches the end client. When performed well
it can potentially create more business, making it
a value added service.
WHO ARE THE MAIN PURCHASERS OF TRANSFER AGENCY
SERVICES ?
PR: Historically, the main purchasers were the
asset managers. As a consequence of open
architecture and the distribution of non-propri-
etary funds, product distributors need TA servic-
es, and are thus leveraging the skills and tech-
nologies of retail transfer agents.
SR: Our main clients are international asset man-
agers, insurance companies and banks in the
US, UK, Italy, Asia, France, Switzerland and
Germany. These clients have traditional invest-
ment funds, which we service out of 11 jurisdic-
tions (Luxembourg, Dublin, Brussels, Hong Kong,
Singapore, Zurich, Milan, Paris, Cayman, Madrid
and Amsterdam).
Over the coming years, we believe the client
base will diversify beyond traditional mutual
 transfer agency

funds and include pension funds, insurance
funds, institutional accounts and alterna-
tive managers.
CM: The main purchasers of TA services are both
the fund management companies and the fund
distributors which outsource their retail business
to a third-party TA in order to get an efficient
position. CA-IS can serve
both retail and institutional client groups.
GD: Our clients are both distributors and manu-
facturers (i.e. fund managers).
GD: Although the industry uses various fund trad-
ing and settlement platforms, there is no single
platform servicing all client types and all jurisdic-
tions. The lack of a dominant or consistent plat-
form is a problem.
Technology is directly linked
to the evolution of our
product offering

COMMENT ON THE CHANGES IN TECHNOLOGY AND
SYSTEMS , WHICH PERFORM TRANSFER AGENCY
FUNCTION ? H OW ARE THESE CHANGES IMPACTINGTHE
ABILITY OF FUND MANAGERS AND DISTRIBUTORS TO
PERFORM THEIR OWN TA FUNCTIONS ?
PR: Historically, organisations used legacy sys-
tems. But the growth in outsourcing over the last
two years has made them realise that the levels
of technology investment required in order to
remain in the business are extremely high.
Evolving regulations have prompted us to make
continual investments technology. The ability to
share this investment and development across
many companies is a major source of attraction
for our clients.
WHAT CHALLENGES DO HEDGE FUNDS AND OTHER ESO -
TERIC INVESTMENT INSTRUMENTS PRESENT ?
PR: Hedge funds are still a 'specialised' product.
Retail and volume TA providers have not moved
into this field, but organisations such as State
Street have their own specialised providers who
offer a range of services to hedge funds. If hedge
funds do become a retail product, we would
expect the proposition to become similar to exist-
ing funds.

SR: The expanding networks that serve clients in

multiple jurisdictions and the constantly growing
volume and complexity of the transactions are
further challenges TA providers have to
tackle. We currently employ over 50 IT experts to
maintain and constantly improve and upgrade
our IT system. It becomes increasingly difficult
for smaller to medium players to continue such
investments for a limited number of clients
and/or funds. As a consequence, the outsourcing
trend becomes a more valid alternative to an his-
toric inhouse approach.

CM: Technology is directly linked to the evolution

of our product offering. We need the appropriate
technology to support client needs and require-
ments such as complex commission and fee
structures, sophisticated distribution
networks and new distribution vehicles such as
savings plans and asset allocation modules etc.
We believe the system should evolve with the Is technology the key to Transfer Agency
product offering and stay abreast of evolving reg- or a closed door?
ulation for investment funds in Europe.

INVESTOR SERVICES JOURNAL 57

transfer agency
Despite the proliferation of new investment funds
such as SICARs and fund of funds, there is not a
great deal of change. While transfer agency involves
the record keeping of the investment holdings for
the individual, the biggest change has occurred in
the middle office functions such as accounting and
the valuation. The change at the individual record
keeping level is minimal.
SR: Concentration in the mutual funds industry has
prompted mainstream transfer agents to move into
the alternative funds segment, partly in response to
There has not been a significant shift away from
fax and paper-based transaction processing
the needs of fund promoters who are expanding into
all investment classes. The former separation
between mainstream and alternative asset managers
is gradually diminishing. Over the last two years, a
number of jurisdictions e.g. Germany, France and
Luxembourg have issued new regulations with a
view to regulate alternative funds.
Whilst providers have been able to achieve a rela-
tively high degree of automation in processing and
reporting for mainstream funds, the sheer
number of variations in methods used for sharehold-
er income equalisation represents a true challenge.
Traditional TA platforms do not necessarily cater for
hedge fund equalisation. Funds of hedge funds also
require the ability to process partial subscriptions
and redemptions, and to record "simulated" as well
as "final" NAVs.
CM: The proliferation of investment funds has had
little impact on the way we operate and the TA func-
tion as such has not changed. The service remains
the same, whether you subscribe to a SICAV or
hedge fund. The major change however is at the
investor level, who tends to be much more qualified,
and such as more demanding.
GM: It takes a lot of investment in technology and a
high degree of flexibility to provide transfer agency
services to hedge funds. This can make it difficult
for smaller providers to keep pace and to generate
sufficient scale.
WHAT CHALLENGES DO TA PROVIDERS FACE?
PR: Any organisation focusing on TA as a core busi-
ness, rather than as a service to gain custody or
58 INVESTOR SERVICES JOURNAL
investment operations business, needs to separate
fund distribution from fund manufacturing.
Distributors demand a holistic picture of their
clients' business and are seeking major efficiencies
in their back office operations. The revolution of the
pensions industry is also a key issue in Europe and
will influence the demands on the TA. Historically, a
fund manager performed its record-keeping func-
tions inhouse. Today, sub-accounting is an extensive
feature in the US where providers hold a sub-regis-
ter on behalf of a distribution channel. This is the
biggest change in the industry. Providers who serve
distribution channels may require different services
and different tools.
Equally, asset managers are turning into manufac-
turers and have come to rely on the tools provided
by the TA.
SR: While the main challenges include increasing
sophistication of distributors, automation and stan-
dardisation are key to sustaining higher volumes.
Cross border distribution will increase volumes and
the pressures on margins will translate into pressure
on costs
CM: There has not been a significant shift away from
fax and paper-based transaction processing across
the European fund industry. A higher degree of
automation in fund transaction processing will
enable TAs to support cross-border and third-party
distribution t a reasonable cost.
TAs should support initiatives aimed at standardising
the processing and settlement of mutual fund trades
in Europe, including the SWIFT initiative.
GM: Aside from aggregation through platforms, the
differing local requirements throughout Europe pres-
ent a considerable challenge.
GD: The amount of new regulation is always a chal-
lenge. In the UK, the regulators are moving towards
a less prescriptive stance. Whilst this is good for
innovation, it presents TA providers with a challenge
as each client will want to do things differently.
ISJ

CORPORATE ACTIONS PROCESSING
TIME FOR A CHANGE?
Corporate actions lose shareowners’ money if information is lost.
James Reed highlights the importance of messaging standards in
a crucial but overlooked area
orporate actions processing
C is one of those areas the securi-
ties industry has been busy fil-
ing in the ‘to do’ pile for years. A lot of
talk, a lot of conferences, a lot of vendors
pushing their wares, but no widespread
action. It is strange really, because there
are countless real-world examples of how
failures in processing takeovers, rights
issues, tender offers and dividends can
really hit a firm’s bottom line.
Losing money
In December 1999, UK mobile phone
giant Vodafone launched the largest hos-
tile takeover in corporate history. Its bid
for German rival Mannesmann was an
all-share offer valuing the company at
over €129 bn.
corporate actions
CEO Christopher Gent offered share-
holders nearly 60 new Vodafone shares
for each Mannesmann share they owned.
But Vodafone’s stock price climbed
sharply in the days after the bid closed.
On 17 February 2000, Vodafone was
trading at 322.25 pence in London. A
month later it had climbed sharply, clos-
ing at 368.5 pence. Why does this matter?
Well, imagine you are a custodian hold-
ing just 1,000 Mannesmann shares for a
relatively small-scale client. The fund
manager in question wants to accept
Vodafone’s offer and swap all those shares
for stock in the merged company. On
February 17 those 1,000 Mannesmann
shares should be swapped into 60,000
Vodafone shares with a value (at that
day’s closing price) of some £193,350.
INVESTOR SERVICES JOURNAL 59
corporate actions
But something went wrong with the
corporate action. Instead of taking the
offer, you somehow managed to do the
opposite and instruct the broker to sell
There is a growing realisation that what happens behind the scenes
has a direct impact on trading strategies in the front office
and ultimately the bottom line
the stock into the market. A month later
the furious client is on the phone asking
where his Vodafone shares are and why
he has an extra £193,350 in spare cash
floating around in his account. Under
your service level agreement you are
forced to buy back the 60,000 Vodafone
shares at the current market price. But
Vodafone’s stock price has jumped
sharply in the days after the deal closed.
Buying back those 60,000 shares is going
to cost you £221,100. Your firm is
£28,100 out of pocket.
Suddenly corporate actions processing
doesn’t seem like such an obscure, dull,
back office process. There is a growing
realisation that what happens behind the
scenes has a direct impact on trading
strategies in the front office and ultimate-
ly the bottom line.
But the risk to an intermediary of
missing a deadline or making a pro-
cessing error can be measured in more
than simple financial terms. The custo-
dian or broker that makes a mistake
risks its reputation and can pay with
lost business or revised contract terms
further down the line.
Corporate actions processing can also
have a huge effect on the issuing firm as
well, just look back a year to May 2003
for a good example. Shares in Glaxo-
SmithKline had lost over a third of their
value in the three and a half years since
chief executive Jean Pierre Garnier took
over the top job at Europe’s largest drug
maker. Investors were furious at a pay
deal that would leave the Frenchman
with a £22 m payoff if he was sacked.
The wage package went to a vote at the
firm’s annual general meeting. The deci-
sion was historic. By a tiny majority of
just 50.72 per cent investors rejected the
motion, marking the first time ever that a
60 INVESTOR SERVICES JOURNAL
FTSE 100 company’s pay policy had been
thrown out by its owners.
In such a close vote, the security and
reliability of corporate actions processing
is critical. Just a few hundred lost or mis-
calculated votes could have swung the
decision either way, leaving the firm open
to accusations of manipulation or even a
costly lawsuit.
Both examples are cited in a recent
report commissioned by the US
Depository Trust & Clearing Corporation
(DTCC) and written by UK consultants
Oxera. Oxera’s director, Dr. Louis Correia
da Silva, strongly believes corporate
actions should not be thought of as a
simple back-office issue. “Given the
industry’s increased focus on operational
risk management, our research has
brought into focus the importance of
raising awareness that corporate actions
represents very significant risks and
costs,” he says.
TECHNOLOGY VENDORS: CORPORATE ACTIONS SOFTWARE INSTALLATIONS - CLIENTBASE
50
40
30
20
10
0
A B C D
Swept under the carpet
Nearly a million corporate actions events
take place every year worldwide. Every
single event involves a large number of
market participants, ultimately feeding
down to thousands of individual
investors at the bottom of the chain.
The amount of messaging activity has
increased substantially since the equity
markets bottomed out, according to
Brendan Farrell, managing partner at
XcitekSolutionsPlus, a technology com-
pany that develops a corporate action
processing system. “As stocks rise so that
leads to a lot of M&A activity and creates
more corporate actions messages,” he
says. “It’s an area that really can’t be
ignored and firms are being forced to do
something.”
This is a real challenge for those com-
panies that cut head count in the months
after the dotcom bubble burst. Corporate
actions processing is a complicated busi-
key
A Xcitek
B Vermeg
C Tata
D Info Mosaic
E Smartstream
F Mondas
G FTI
H Heliograph
I ADP Wilko
E F G H I
source: Celent
 CORPORATE ACTIONS AND ONLY
CORPORATE ACTIONS.
Vis
Sib it us at
Sta os 2
0
#: A 04
nd
013

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automating corporate actions processing. With an
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unparalleled client base of the world’s leading
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Contact us today and start improving
implementations, XSP™ is the definitive ISO-15022
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 exchange and derivatives based on corpo- benefit the whole market.
corporate actions rate action information. Some desks in SIS SegaInterSettle, the Swiss central
brokerage and fund management firms securities depository, has launched a web-
employ specialised traders who make based service to automate many of the
money from arbitrage based just on cor- processes involved in corporate actions and
porate action information. Those very link with clients’ own back office systems.
trading strategies can therefore be The product supports any client using
ness. The firm’s department needs to be
impacted by errors in corporate actions Swift, according to Marco Strimer, head
highly skilled and that means that indi-
data. The Oxera-DTCC report estimates of the marketing division and network at
viduals are extremely hard to replace. “As
the risk to firms’ front offices from sub- SIS. “The crucial point is that users
the market recovered, firms either had to
optimal trading decisions related to cor- receive more information. The system
find highly trained staff or put in corpo-
porate actions could be worth up to 78 can easily link to a company’s website or
rate actions systems,” adds Farrell. “JP
bn a year globally. Actual losses are lower to Adobe PDF files containing a more
Morgan in London added 204 per cent in
than that because firms generally spend detailed breakdown of the corporate
volume but less than one per cent in
very large sums on failure prevention. action itself,” he says.
headcount over that time. When you
The best guess is that European fund Details of a corporate actions event are
automate the process, it allows the appli-
managers lose something of the region added to a central diary. That information
cation to take care of all the grunt work.”
of 765 m to 7140 m a year through is then sent out to clients as an email or
Corporate actions affect the entire
investment decisions linked to bad available over a secure web connection.
industry from the issuing company, to
corporate action data. A second phase of the system, intro-
intermediaries such as custodians, fund
For mandatory corporate actions, one duced earlier this year, allows clients to
managers, brokers and depositories, to
firm’s loss can be another firm’s gain. For send voluntary and special corporate
the final investor. Generally speaking, the
process is very manual. There are pre-
cious few standards available to actually For mandatory corporate actions,
communicate corporate actions data
both downstream, from the issuer, and
one firm’s loss can be another firm’s gain
upstream, back from the end investor.
example, if there is a delay in paying a action responses back to the issuing firm.
Information is generally delivered via
dividend, the end investor loses interest SIS provides legally guaranteed ‘letter
phone, fax, telex or unformatted email
on the money. But an intermediary some- templates’ to send to clients in English,
and processed manually. That can result
where along the chain gains this interest. French, German and Italian.
in a domino effect where one small,
So-called zero-sum errors are not a huge More than that, clients will not need to
mistyped entry has repercussions further
deal in developed markets like Europe buy data to double or triple check the
down the line.
and North American were any delay in corporate actions information they send
To make matters worse, the process is
payment is likely to be measured in days down the chain. “Every firm out there is
typically very deadline driven. The more
at the most. In some emerging markets, verifying data two or three times and that
steps in the chain, the tighter the time-
however, that delay could be anything up is a waste,” says Strimer. “We take respon-
frame since each intermediary sets its
to three months long. In that situation, a sibility for the information so clients
own deadline to give enough time to
fund manager could, in theory, claim don’t need to go through that process.”
meet its own targets. Since every party
back interest from its custodian, and in SIS is now working to build links
in the corporate action chain is respon-
turn from the emerging market sub-cus- through to firms’ own back offices so that
sible for passing on correct information,
todian. In practice, this simply doesn’t clients can pass ISO 15022-formatted
a lot of time and money is spent on
happen unless a significant amount of information down the corporate actions
external data sources and internal data
money is involved. These inefficiencies chain. Another key advantage is the abili-
scrubbing efforts.
weaken the global financial system and ty firms now have to easily send corpo-
When information is passed back
deter much-needed investment in some rate actions data to the front office,
upstream from the investor to the issuing
developing economies. according to Strimer. Traders can then
company, life is just as complicated. Fund
use that information to make investment
managers typically change their minds as
The way forward decisions.
the terms of the rights issue, takeover or
Very worthy organisations from the Other financial market participants
other corporate action are revised.
G30 and the Giovannini group to the are also starting to take the problem
Because of this, decisions can often be
European Central Bank itself have seriously. A joint study commissioned
taken just before the final deadline, mak-
commissioned studies on the efficiency by Swift, consultants CityIQ and tech-
ing processing even more difficult. In
of corporate actions processing. The nology company SmartStream found a
most cases, there is still no standard elec-
conclusions are pretty comprehensive. widespread shift from patchy to sub-
tronic way of sending the final decision
All advocate bringing greater efficiency stantial automation across the industry
or vote back to the issuing company.
and standardisation to the corporate within all corporate actions areas. 75
Often a custodian will have to post or fax
actions process. per cent of the firms questioned in the
back a physical paper form, correctly
Some market utilities, particularly depos- survey anticipated substantial automa-
completed and officially stamped.
itories, have begun to implement innova- tion in the sector with only 5 per cent
It’s also important to remember that
tive corporate actions systems that can expecting to maintain the status quo.
fund managers trade securities, foreign

62 INVESTOR SERVICES JOURNAL

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corporate actions
But with no clear mandatory reason to
automate corporate actions, organisa-
tions are still moving at their own speed.
Standards are also a major stumbling
block. “Every corporate action is the
dreamchild of an investment banker and
even today, there’s no accepted way of formatting a
corporate actions message, making automated
processing that much more complicated
that means every single message can be
different,” says Farrell. “The events them-
selves are very fluid and can be created in
numerous different ways. The way the
message is delivered to the market can
also be very different every time.”
In today’s world, there’s no accepted way
of formatting a corporate actions mes-
sage, making automated processing that
much more complicated. With the devel-
opment of Swift’s ISO 15022 standard,
there is some hope this will change. In
the Swift-commissioned study mentioned
above, nearly half the respondents identi-
fied its introduction as a key motivator
for automation. A majority of firms
anticipate either introducing or moving
to using the new messages on a bi-direc-
tional basis.
Within an actual firm itself, corporate
actions systems have gained limited
acceptance over the last two years.
Manual processing is still the norm across
most enterprises but the more forward-
looking firms have started to move to
automated systems. Market participants
say that, in today’s environment, it is dif-
ficult to justify the investment needed at
board level. Losses from corporate
actions errors and failures are hard to
quantify and are often hidden away as
trading or operational losses. “We haven’t
incurred a significant loss from corporate
actions… the manual processes we
already have in place are too efficient,”
seems to be a typical comment.
At the height of the dot com boom,
more than 20 vendors were fighting for a
piece of a pretty thin market but that has
changed. Now there are only nine real
players in the sector with two firms dom-
inating in terms of implementation (refer
to graphic on pg 64).
“There has been a lot of talk about con-
solidation. Most of those [original] ven-
dors are still there but they have moved
out of the corporate actions space,” adds
Farrell. “Firms are being very specific
about their requirements and the days of
taking a chance with a vendor are over. A
lot of companies have seen their rivals get
burnt in the past and are not prepared to
take the risk.”
But Farrell takes issue with the accepted
notion that corporate actions has been
slow to take off in the marketplace.
“That’s an invalid point made by firms
who are failing,” he adds. “We have 45
global clients and are the dominant play-
er in the space. We’ve been releasing soft-
ware since the end of 1997 and I would
say there is a lot of action in the market.”
Farrell is seeing what he describes as a
an “unbelievable” amount of business
activity at the moment, equally split
between Europe and the United States.
“Firms are now really looking for a global
solution across multiple locations,” he
adds. “It’s not just the large global custo-
dians that are interested in automation,
we are starting to see a lot of activity
from the smaller buy-side houses and
especially hedge funds who trade on cor-
porate actions information.”
A note of caution
But corporate actions, despite all the
talk, is still a relatively immature area and
consultants voice a note of caution before
spending cash. “Though third-party ven-
dor solutions are gaining acceptance,
financial institutions should keep in mind
that a number of the solutions do not
have extensive track records,” says Pamela
Brewster, a senior analyst at Celent who
recently wrote a study on the market.
“There are a number of risks involved
with the solutions from whether the
product can deliver on its promise, to
whether the vendor will be around for
the long haul, to how long the implemen-
tation will take.”
But that’s not to say that throwing
money at the problem is a cure-all solu-
tion. “In the final analysis, it‘s
important to remember that
automating the corporate actions
process does not just happen when
the technology gets deployed,” adds
Brewster. “In many cases, automa-
tion also entails total process reengineer-
ing, dictating a change in staff behaviour.
As such, involving members of the corpo-
rate actions team in major steps of the
project is critical for ultimate success.”
At SIBOS in Singapore last year, Swift kicked
off a market data pilot allowing commercial
providers of corporate action announce-
ments to deliver data in the ISO 15022 format
over its SwiftNet network. Four data vendors
have already signed up to the pilot; FT
Interactive Data, Reuters, Telekurs and WM
Datenservice. The London Stock Exchange
also agreed to offer its customers the oppor-
tunity to receive corporate action notifica-
tions of UK-listed securities over the network
in ISO15022 format.
This service is very much focused on the
downstream, issuer to participant, leg of the
corporate actions lifecycle. But any initiative
that promotes a standard offers the potential
for increased STP and risk reduction.
Creating a solid standard in this area is likely
to filter through to the rest of the industry.
But ISO15022 is not so much a solid stan-
dard as a data format, or a way to describe
information in a standardised way. Many
firms are still printing out their ISO15022
messages and manually typing the data into
internal systems. But over the last year or so,
Brendan Farrell at Xcitek has seen a much
more active switch to managing ISO15022
messaging electronically. “The majority of
messages are sent by major custodians. If
you can get these firms on track then the
industry follows suit,” he says. “The more for-
ward-looking fund managers are also getting
heavy with custodians and forcing them to
send information in ISO5022. It benefits the
custodians in the end as it’s far easier if all
their clients can take this information.”
 CORPORATE ACTIONS

THE
LAST
STAND
AGAINST
AUTOMATION
Recent industry developments
appear to indicate that major
barriers to the auto-mation of
corporate actions can be over-
come, writes Helen Cook of
FT Interactive Data

H
istorically, corporate actions have
been one of the least automated
areas in data processing within
financial institutions, and therefore the
most-labour intensive, error and risk-
prone. Despite the fast pace and elec-
tronic methods of today’s financial
world, corporate actions processing con-
tinues to be heavily reliant on paper and
mainframe systems. But with several
major developments in the industry, it
appears that there is finally a real desire
to move towards automating corporate
actions.
To date, the corporate actions desks
have been largely ignored and under-
funded in favour of the more dynamic,
moneymaking front office businesses.
In the heady markets of the past, firms
could afford to overlook the billions of
dollars that the regular breakdown in
the processing of vital corporate actions
information cost the industry. But with
today’s tough economic climate, costs
are being scrutinised and regulations
tightened, and this comes against the
backdrop of the drive towards STP.
Automating corporate actions process-
ing is a complex business. This is due to
the number of players involved in the
corporate actions processing cycle, the
multitude of data formats, and the dif-
ferent descriptions that are used
depending on the source for the same
data elements. This information general-
ly has to be manually compared and re-
keyed into multiple spreadsheets.
With no clear mandatory reason to
automate, no agreed standards, and a
general lack of confidence generated by
failures of high profile initiatives such as
T+1, it has so far been impossible to
overcome such barriers and achieve the
critical mass required to automate cor-
porate actions.
But the tide is turning.
Moving forwards
After years of stagnation, there are
many signs that the industry is finally
moving forwards. The range of figures
available suggests that corporate
actions automation is now one of the
top five IT projects on the list at many
financial organisations, and that pro-
cessing time can be reduced by up to
40 per cent by automating corporate
actions.
A report published in April 2003 by
Celent Communications, ‘Corporate
Actions Automation: Getting Closer to
Reality?’ cited: “Spending on corporate
actions projects is projected to total
almost $830 m between 2003-2007
as the securities and investment indus-
try looks to automate one of the last
remaining manual areas within the
securities processing chain.”
The ‘Corporate Actions Automation

INVESTOR SERVICES JOURNAL 65

CORPORATE ACTIONS
Survey 2003’ published in May 2003
by CityIQ, and jointly commissioned by
SmartStream and SWIFT, found that
75 per cent of respondent firms antici-
pated substantial automation of corpo-
rate actions, with the remaining firms
split between 20 per cent expecting
partial automation, and only five per
cent seeing no future automation
occurring. Citing the main motivators
for automating, nearly half the respon-
dents identified ISO 15022 as key.
The CityIQ survey also states that “in
the current economic climate most
projects have to be ‘cost saving’ ones,
reflected in the fact that 59 per cent of
respondents cited the reduction of
operating costs also as a major driver.
In addition, 41 per cent named corpo-
rate actions related losses as another
area where savings can be made, with
several large custodian banks admitting
to having budgeted approximately $4
million per annum for such losses.”
Drive for efficiency and risk management
Cost cutting is not the only considera-
tion. Putting the spotlight on the
need for corporate actions automation
is the proposed regulatory require-
ment Basel II, which primarily affects
the level of capital adequacy and dis-
closure an institution must provide,
and addresses the measurement of
operational risk for the first time.
Data quality plays an important role
here.
Other developments included the
publishing of the ‘Second Report on
EU Clearing and Settlement
Arrangements’ from the Giovannini
Group in April 2003. This set out a
clear strategy and a timetable for the
removal of the 15 technical, market
practice, legal and fiscal barriers to
efficient, low-cost cross border settle-
ment. Of particular interest is ‘Barrier
3’ (corporate actions), a recommen-
dation that relates directly to the har-
monisation of national rules relating
66 INVESTOR SERVICES JOURNAL
to corporate actions processing across
Europe, with an albeit ambitious
deadline for implementation in 2005.
And of course, the drive towards
STP is prompting firms to evaluate
the efficiency of their systems. The
majority of trade failures are due to
inaccurate or inconsistent securities
administration data, which obviously
needs to be addressed before true
STP can occur.
Vendor solutions
Finally, 20 per cent of those inter-
viewed by CityIQ also placed the avail-
ability of vendor solutions now on the
market as a motivator. Indeed, there is
now a vast array of vendors offering
corporate actions solutions, giving firms
the ability to streamline corporate
actions processes by providing automa-
tion and eliminating risk.
FT Interactive Data
Companies such as FT Interactive
Data have formed strategic alliances
with software providers over many years
to help provide the information and
tools for end-to-end added value solu-
tions to securities data consistency and
quality across organisations worldwide.
The company now interfaces with over
100 international software vendors.
Not all financial institutions use
third party packages – around half of
FT Interactive Data’s clients take cor-
porate actions data into in-house
built solutions
rather than third
party packages in
order to maintain
control of their own
database.
An initiative by
FT Interactive Data
has produced
process flow docu-
mentation that pro-
vides unambiguous
processing advice
covering the essen- Flow from data vendor to client of different corporate actions
tial logic required to assist users in
creating a high quality automated
solution. Provided as part of FT
Interactive Data’s overall service, the
documentation covers income data,
takeovers / mergers / reconstructions,
capital events, issued capital, earn-
ings and security cross-reference.
The standards
With the rise in interest in automating
corporate actions due to drivers such as
cost scrutinisation, regulatory pressure
and the ongoing move towards STP,
there has been a significant increase in
the level of industry cooperation to
address the issues that have to date
held us back.
Historically, the lack of standardisation
has been problematic in automating cor-
porate actions. Different ‘ex’ dates can
be attached to income payments for the
same securities held in various coun-
tries. And certain events can be inter-
preted differently from country to coun-
try; e.g. what is reported as a stock split
in one location can be interpreted as a
subdivision or a bonus issue in another.
Clearly, this needs to be addressed
before automation can be achieved.
A standard requires four basic build-
ing blocks to enable automation: an
electronically understood format; suffi-
cient coverage; high quality content;
and a method of dealing with excep-
tions. In addition to this, the standard
consists of three core elements: a data
dictionary containing a common and
ISO15022

shared vocabulary; a data structure con-
taining a hierarchy that adds depth and
meaning to the content; and perhaps
most essential, industry acceptance –
without which the end result would fall
far short of the aspirations of a standard.
The Message
ISO 15022 is a standard maintained
by SWIFT for message types including a
structured set of message types (MT564
to MT568) for corporate actions. It has
already made a huge impact in standar-
dising corporate actions messages and
continues to do so. Since its introduc-
tion in January 2003, usage of ISO
15022 for sending and receiving corpo-
rate actions messages has grown global-
ly by 23 per cent up to September
2003 (from a presentation by SWIFT at
STP Information Services event
‘Delivering Corporate Actions Solutions’,
27 November 2003).
The CityIQ survey mentioned above
seems to echo this in concluding:
‘Many within the industry cited that
they considered ISO 15022 a positive
catalyst and a liberating force for corpo-
rate actions processing’. 53 per cent of
respondents felt that ISO 15022 mes-
sages would have a significant effect on
industry and business respectively.
Easing the flow
The task of writing an interface to the
ISO 15022 standard has been further
eased by the release of event templates
by the SMPG (Securities Market
Practice Group). These templates, rep-
resenting industry consensus from
SMPG members, provide guidance on
how messages should be constructed.
Vendors such as FT Interactive Data
have paid close attention to these tem-
plates and are now able to offer ISO
15022 test files based on the most fre-
quently occurring event types. The map-
ping of content to the standard is an
ongoing process.
Net gains
SWIFT has conducted a Market Data
Vendor pilot, which has allowed select-
ed vendors to make their ISO 15022-
based content available over the
SWIFTNet network to other SWIFT
members. This initiative has led to the
birth of the MDPUG (Market Data
Provider User Group) in order for data
vendors to establish principles of agree-
ment on the implementation of an ISO
15022 based service.
Proper language
The Market Data Definition Language
is an XML-based language that describes
market data elements, focused on refer-
ence and pricing data. Discussions
between ISO and MDDL have focused
on inter-operability between their respec-
tive areas of coverage.
Working group
Not all content, however, is covered
by the existing standards. To address
this issue, an ISO working group
(WG11) has been established to create
a market data model against which
existing standards can be compared.
WG11 has excellent industry represen-
tation and is a very worthwhile endeav-
our, the output of which will provide the
standards’ bearers with a clear view of
their standard’s development path.
There are, of course, examples of
events that cannot be automated and
some would argue that we should not
seek to automate the more esoteric –
and therefore risky – events. The end
result of such standards initiatives, how-
ever, is that the majority of events
should now be capable of efficient
automation and what remains can be
dealt with separately, and with greater
and deserved scrutiny.
Benefits
What does all this mean for the market
players? The obvious potential benefits
are reducing costs, enhancing STP and
enabling firms to meet regulatory require-
ments. But there are many additional
benefits that a financial organisation can
reap through automating the process.
CORPORATE ACTIONS
For custodians, they should be able to
provide data in a much more timely
manner. More time for the fund man-
agers means that they can perform
more value-added analysis required to
make the right investment decision,
rather than spending time on data
sourcing and validation.
For broker/dealers, there is an increas-
ing awareness of how corporate actions
can actually help in front office func-
tions such as portfolio management.
With an automated process, getting the
relevant data through to the front office
becomes a more simple process.
Overall, the increased transparency of
each player’s market position through
central management of corporate
actions should help them to increase
efficiencies in the management of prior-
ities and client interfacing.
Where there’s a will…
The market need and desire for
automation appears to be gaining
strength. In response to several market
drivers, the rise in cooperation between
industry practitioners to develop stan-
dards will help us overcome the major
barriers to corporate actions automation.
Helen Cook is European business manager at FT
Interactive Data, a leading provider of financial
information and analytical software to global
markets. FT Interactive Data provides corporate
action event data and has a wealth of experience
in gathering, updating, validating and delivering
corporate action data to back office environments.
www.FTInteractiveData.com
References:
‘Corporate Actions Automation Survey 2003’, pub-
lished on 16 May 2003 by CityIQ, and jointly commis-
sioned by SmartStream and SWIFT
‘Corporate Actions Automation: Getting Closer to
Reality?’, published in April 2003 by Celent
Communications
‘Software Providers: Working with Reference Data’,
published in February 2004 by A-Team Consulting.
INVESTOR SERVICES JOURNAL 67
 corporate action notification - case study

Information is one of the most important assets in

A Time for Action today’s world. Apart from adhering to core business
functions, one has to stay informed. Over the last
decade, new technologies (internet, e-mail, etc.)
– the professional way have increased the speed at which information
flows.
by RZB Custody The challenge
The speed of information is particularly relevant for
custody providers. While the ability of a custodian to
settle and safekeep securities is a given, more impor-
tant are additional services as tax reclamation.
However, if one were to consider the RFPs that are sent
out by global custodians, a number of communication
issues remain. Notification of settled deals and state-
ment of holdings are also standard. However, profes-
sional information about corporate actions is probably
the most difficult area and requires a lot of interaction
with the custody department.

RZB – one of the major custodians in Austria and 16

CEE markets – faced this very problem. “It was impor-
tant for us to develop a tool which allows us to be as
flexible and as fast as possible", says Martin Hofer,
head of the custody department.
"The tool had to correspond with our existing GEOS
system, our securities system and e.Custody, our inter-
net reporting tool", adds Johannes Riepl, custody prod-
uct manager. RZB’s Corporate Action Notification
(CAN) project began in 2002. Many possibilities were
considered, including internal solutions and external
software. The Bank realised that CAN would meet its
needs in the best possible way.

Martin Hofer Riepl explains: "Our main objectives were that:

Head of Custody at RZB
1. CAN should be flexible enough to handle all
different types of corporate actions (existing and
future ones)
2. CAN should enable us to notify our clients
with in minutes after we received the information
Harald Riedler
3. CAN should enable us to send client
Marketing & Sales for Custody notifications via various reporting channels
4. CAN should ensure a high STP rate in order to
minimise the need for human resources."

"Not only should CAN help us to meet the market’s

Johannes Riepl needs, it should enable a new, state-of-the-art corporate
Product manager - Custody actions solution,” says Hofer.

“We wanted to provide our clients with a new added

value service and therefore created an additional USP
for our sales activities", says Harald Riedler, head of

68 INVESTOR SERVICES JOURNAL


sales and marketing for RZB’s custody
products.
RZB’s solution
The timeframe between the concep-
tion and the implementation of CAN
was very strict. The go-ahead for the
project was given in March 2003 and
implementation took effect in
October 2003.
The above chart shows RZB’s proce-
dure upon receipt of corporate action
information. This information is
processed directly to RZB’s clients.
The corporate action department
edits the information and an auto-
mated query is sent to RZB’s main
system (GEOS) in order to identify
the affected clients.
Immediately afterwards, the client
receives the information via different
information channels. The transmis-
sion of the corporate action data into
GEOS is fulfiled on ex-date after all
the relevant information has been
collected.
Also the instructions received from
the clients (whether they are sent via
SWIFT or by other means) are
processed via CAN and confirmation
from the sub-custodian or respective
CSD is handled in the same way.
RZB has focussed on client communi-
cation, which occurs before the Bank’s
internal data transmission.
Via CAN, RZB transmits every bit of
information (even if it is incomplete). In
the case of several corporate action
announcements, RZB sends pre-advice
each time after new information is pub-
corporate action notification - case study
lished. On ex-date the final piece of
advice is sent. In the case of a voluntary
corporate action, the client receives a
reminder for all non-instructed posi-
tions one day prior to the deadline. The
reminder is sent automatically by the
GEOS system.
The instructions are then sent to the
relevant sub-custodian and confirma-
tion is immediately sent to the respec-
tive clients. Voluntary corporate actions
imply a default action, which applies to
all positions where no instructions have
been given.
What CAN can do
"The fact that we send our clients sev-
eral pieces of pre-advice, final advice, a
reminder and a confirmation does not
make the difference," explains Riedler.
“The difference is the way we do it, the
timeframe and the range of commu-
nication channels."
RZB’s aims to send confirmation
messages within 15 minutes of
information receipt.
"Experience has shown that we are
better or at least in line with a
benchmark in 95 per cent of all cor-
porate actions" says Hofer.
By implementing CAN, RZB’s clients
can receive their notifications via SWIFT,
letter, fax and e.Custody.
"The information is sent via all of these
channels at the same time i.e. the
moment a client receives a SWIFT noti-
fication he can also monitor this real
time information in e.Custody," says
Riepl.
"Thanks to our e-mail notifyer imple-
mented in e.Custody in March this year,
clients can also receive this information
via e-mail."
Advantages for RZB’s clients
"It is our strategy to invest our
resources in developments which pro-
vide our clients with valuable advan-
tages,” says Hofer. The main advantage
of CAN for RZB’s custody clients is that
they receive information in a higher
quality and much faster.
Clients include corporates and financial
institutions all over the world. The infor-
mation received from RZB has to be
sent to third parties i.e. the beneficial
owners.
CAN is a flexible tool that provides
RZB with the ability to react immediate-
ly on all market demands relating to
areas of corporate action notification. "If
you monitor RZB’s SWIFT traffic, you
can clearly see that RZB invested money
in order to increase the STP rate in the
corporate action area," says Klaus
Schritt of SWIFT.
Further enhancements have been
made since the implementation of
CAN: since March 2004, not only are
normal corporate actions handled via
CAN, but the information about default-
ed bonds has also been included.
"In the current economic climate, we
have to send client information about
default bonds,” says Hofer. “It was easy
to adapt CAN in a way that enables us
to provide our clients with this informa-
tion at the same level of quality."
Riedler, who is in direct contact with the
clients, says: "In December 2003 and
January 2004, we undertook a client sur-
vey and asked our clients to rate our
corporate actions services before and
after the implementation of CAN.
Although we received a good rating
before CAN, we saw a significant
increase after implementation. The
implementation of CAN was a real
success story."
Last word
CAN ensures flexible, fast and highly
automated processing for all corporate
action related issues. Upon implemen-
tation, clients noticed the difference as
the product is able to provide them with
an added value.
Hofer concludes: "We implemented
e.Custody - our internet reporting tool -
in 2001. In 2003 we implemented CAN.
We are now in a position to offer our
clients a unique reporting standard.
Beside our strong involvement in the
CEE region, these e.Custody and CAN
are our strongest USP’s, which distin-
guishes us from our competitors."
INVESTOR SERVICES JOURNAL 69
eu enlargement - latvia

Banking overview
The Latvian two-tier banking system started to develop
in 1988, when the first two commercial banks were
founded.
The central bank of Latvia (Bank of Latvia) was
founded in 1990, and was obligated to issue national
currency, supervise commercial banks and other credit
institutions, organize fulfilment of the state budget
treasury position and control the economy by the means
of monetary policy. The Bank of Latvia also represents
the Republic of Latvia in international banking institu-
tions.
The commercial banking sector started to expand rap-

Club Call
idly in the early 90s, the number of commercial banks
amounting to over 50 at its peak. However, the entire
banking sector ran into a deep crisis in 1995, and less
competitive banks were forced to end their activities,
among them the biggest bank of the country, Banka
With ten new states and 350 Baltija. Following the crisis, the Latvian banking sector
million citizens, is the new underwent a significant transformation as the number
of banks was reduced and the Bank of Latvia embarked
EU a recipe for growth or a on a series of reforms and actions to develop superviso-
talking shop for bureaucrats ry and regulatory systems. The Bank of Latvia has grad-
and regulators? ually developed regulations also to fulfil the principles
and directives of the EU. (EBRD's Investment Profile
ISJ focusses on Latvia in the 2001)
first of a series aiming to In 1998, the Latvian banking system was hit again by
profile the new Europeans the Russian financial crisis. The country's third largest
bank at that time - Rigas Komercbanka - was declared
LATVIA - GENERAL PROFILE insolvent and closed in March 1999. Following the sec-
ond crisis, the strengthening of the banking sector has
Territory: 64 689 sq km. Latvia' s border countries in the
North-East are Estonia and Russia, in the South Belarus and
occurred in the form of mergers, acquisitions, increased
Lithuania. From the North and North-West Latvia is surround- statutory capital and further increased regulations from
ed by the Baltic Sea. the Bank of Latvia.
Population: 2,385,231 (July 2001 est.)
Insurance sector
Ethnic group as a Percentage of the population The Latvian insurance sector comprised of 15 risk insur-
Latvian 56.5%, ance companies and 6 life insurance companies. Balta is
Russian 30.4%,
Byelorussian 4.3%, the market leader in the risk insurance sector, with BTA
Ukrainian 2.8%, and Ergo Latvija on the second and third place.
Polish 2.6%, Consolidation is expected to continue due to acquisi-
Other 3.4%
tions by the German and the Nordic (Denmark in the
Capital: Riga forefront) insurers.

Independence Day: 18 November Financial Regulation round-up

Official Language: Latvian Financial Instruments Market Law - the new law, re-
placed the Law on Securities from 1996, on January 1,
Constitution: Adopted in 1991, which supplements the 1922 2004.
constitution.
Latvia is a parliamentary republic. The previous Law on Securities has been extended to all

70 INVESTOR SERVICES JOURNAL


financial market instruments and harmo-
nizes Latvian legislation with the relevant
European Union regulations.
Impact on foreign investors:
* Supervision by and reporting
requirements to market infrastruc-
tures, and mandatory takeover and
disclosure requirements apply only to
listed securities.
* Change in substantial shareholding
disclosure reporting deadline from 7
days to 5 days, obligation to disclose to
the Stock Exchange and issuer instead of
FCMC.
* All significant shareholders have to
disclose their holding at the latest at the
annual meeting confirming the results
of 2003.
* Potential obligation for shareholders
to make a buy out offer in case they
vote against listing the company on the
the Stock Exchange as explained below.
* Final buy-out possibility introduced
for majority shareholders with a 95%
holding.
The Latvian Central Depository of
Securities (LCDS) has been admitted
as a client to the Euroclear interna-
tional securities settlement and depos-
itory system. LCDS president Martins
Riksis counts the main benefits of
membership as:
* Transactions with Euroclear-system
securities becoming more convenient
for Latvian investors as they will be able
to keep their holdings in the accounts in
Latvia.
* Possibility to provide depository and
settlement services in respect of securi-
ties kept with other European deposito-
ries of securities, Clearstream and
Clearstream France, for example, within
the LCDS system.
* The use of lat-denominated debt
eu enlargement - latvia
securities registered in Euroclear or
Clearstream system within Bank of
Latvian re-financing system.
Securities Lending
* At the end of 2003 bond market the
total volume of bonds outstanding was
LVL510 million, LVL375 million of
these being government bonds and
LVL135 million corporate bonds.
* Maturities have increased to an aver-
age duration of five years, with some
bonds being 10-years but yields saw an
average decline from almost 8% at the
turn of the century to circa 4% now due
to convergence of interest rates with the
Eurozone.
Our profile of Latvia continues with a
Baltic overview on pages 72-73.
baltic asset management
Different Routes to Growth
Key in the new Europe are the Baltic
Republics, which are positioned for
access to global markets, and sport
an ambitious and youthful population
of new Europeans
Parex Bank, a
leading regional
player based in
Latvia, reviews
for ISJ the rela-
tive strengths
and weaknesses
of asset man-
agement in the
Baltic Republics
The recent history of the Baltic financial markets is relatively short
and depicts the new-found independence of the region. Within 10
years, Estonia, Latvia and Lithuania have managed to build a finan-
cial industry in accordance with Western standards. Their maturity
can be judged by examining the development of such value-added
services as professional asset management.
Compared to North America, Europe and Japan, the scale of the
local industry is still negligible. But the most developed Baltic
country Estonia has investment fund assets amounting to six per
cent of GDP. This figure supports the undoubtedly bright growth
potential of the Baltic asset management sector, from the perspec-
tive of both financial intermediaries and consumers.
This article examines the mutual funds segment of the asset man-
agement industry and all funds registered under local supervisory
authorities and managed by local intermediaries: open-ended
mutual funds, voluntary third pillar pension funds and second pil-
lar semi-voluntary pension funds.
Lessons learnt
In a short space of time, the Baltics have endured a series of
volatile stages that are typical of emerging markets. These include
mass privatisation of state property and the creation of a local
banking system and financial markets. The bumpy road has pre-
sented a set of crises, which meant losses for the local consumer
and tampered with his faith in the financial services sector.
The first substantial shock came in the mid-1990s in the form of
a banking crisis, which resulted in hundreds of thousands of peo-
ple losing their savings. In the aftermath of this crisis banking
assets dwindled and the shoebox took over as the most popular
savings vehicle.
While the banking crisis raged through the Baltics, local secondary
72 INVESTOR SERVICES JOURNAL
stock markets began to develop. Between 1995 and 1997, equity
ownership became fashionable and equity indexes in Latvia,
Lithuania and Estonia literally surged. Like most other markets,
however, the Baltic equity bubble began to burst in the middle of
1997, coinciding with the global crisis in emerging markets. In less
than a year, Baltic stock indices tumbled by about 60 per cent. But
there was more – the Russian economic crisis and the subsequent
default of Russian government local debt resulted in another bank-
ing crisis. Needless to say, the investor’s mood was not too good in
those days.
It should come as little surprise that local attitudes towards the
financial services industry remain rather cautious, but the asset
base of Baltic banks has grown steadily over the last few years.
Similarly, demand for alternative forms of investment and profes-
sional asset management services are growing.
Only several years ago, potential investors thought professional
asset management was exclusively for the rich, who could afford to
operate with tens of thousands of Euros. To some extent this was
the truth—the choice of locally registered funds was very limited,
but the minimum lump-sum requirement for funds registered
abroad started from about ¤2,000. Nowadays, the minimum
investment for local funds is just several lats, euro or dollars,
which presents competition for the more traditional bank deposits.
These funds have become less attractive in the last couple of years
as rates have decreased.
Another important milestone for the Baltic investment fund
industry was the pension reform, which motivated local financial
intermediaries to enter the asset management business. More
importantly, the reform led to the introduction of asset manage-
ment services to the public as a whole.
Estonia—leading the way
The investment funds industry in each of the Baltic countries has
developed at different speeds. Out of the three countries, Estonia
can be proud of a long and successful history.
The development of mutual funds in Estonia can be traced back
to 1996, when a number of contractual investment funds were reg-
istered. The Asian and Russian financial crises hampered the early
growth of funds (in 1998 assets of Estonian funds fell from ¤97 m
to ¤25 m), but by the end of the decade, when the first voluntary, or
third pillar pension funds were created, investor interest began to
recover. The fund management industry in Estonia took off in 2002
thanks to the introduction of the second pillar pension system.
Total assets within the Estonian investment fund sector currently
amount to approximately ¤530 m.
When the Estonian fund industry was created in the mid-1990’s,
Baltic stock markets began to rise and about 75 per cent of the
investment funds were equity funds. However, the stock market
collapse of 1997-98 shifted the investor preference towards money
market funds, which were considered safer. While Estonia remains
cautious, the share of money market funds has declined in recent
years, to approximately 55 per cent of total investment assets com-
pared to 80 per cent at the end of 1998. In terms of popularity,
bond funds occupy second place with nearly 20 per cent and equi-
ties occupy come in third place with 15 per cent.

Today Estonia has 15 registered contractual
open-ended investment funds with ¤423 m
under management. The largest and one of the
oldest funds is the Uhispank Money Market
Fund, which has a value of ¤124 m. The second
largest is the Hansa Money Market Fund, valued
at ¤80 m. Most contractual open-ended invest-
ment funds in Estonia are listed and traded on
the Tallinn Stock Exchange, the exchange for the
Baltic region.
The second pillar pension system was
launched in Estonia in 2002 and is based on
preliminary financing scheme. Working people
save for their pension by paying two per cent of
their gross salary into a pension fund. In addi-
tion, the state adds four per cent. Subscription
to the funded pension scheme is mandatory for
those who enter the labour market. The funded
pension is optional for those born before 1983.
As of today, 373,000 people have entered the
second pillar pension system, which comprises
15 funds with ¤99 m in assets. So-called
mandatory pension funds are divided into three
main groups: conservative - those investing in
fixed income securities, balanced - those that
may invest up to 25 per cent in stocks, and pro-
gressive, those who invest up to 50 per cent in
both equities and fixed income. The latter
group which comprises 64 per cent of total sec-
ond pillar assets. The share of balanced funds
is 22 per cent and the conservative segment is
14 per cent.
In addition to open-ended investment and
mandatory pension funds, Estonia has six vol-
untary or third pillar pension funds with
approximately ¤8 m under management.
Estonia currently hosts seven major fund man-
agement companies, which are part of the
country’s largest banks. Together, Hansapank,
Ühispank, and Sampo Pank control about 90
per cent of the market. Local securities firm
Trigon is also very active and approximately
eight per cent of total assets under manage-
ment. The remaining share of the market is
divided between locally domiciled LHV
(Lohmus, Haavel & Viisemann) and the fund
management subsidiaries of insurers Seesam
and ERGO, which operate exclusively in the sec-
ond pillar of the pension system.
Latvia—a close second
Latvia occupies the second place in the devel-
opment of the Baltic funds industry. The coun-
try’s first mutual fund was created in 1999. The
fund was created as a money market fund,
reflecting the risk-averse sentiment prevailing in
the market. The launch of the mutual fund coin-
cided with the birth of the third pillar pension
system in 2001. Latvia was the first Baltic coun-
try to introduce the second pillar pension sys-
tem. Total investment fund assets in Latvia have
reached ¤98 m.
The country has 11 mutual funds, which make
up ¤36 m of total assets under management.
The largest and oldest of these is the Hansa
Money Market Fund with ¤19 m, followed by
Parex Eastern Europe Bond Fund with ¤ 5.5 m.
Money market funds have attracted 60 per cent
of total open-ended fund assets, pure equity
funds have approximately eight per cent, while
the remainder part is divided between bond and
so-called balanced funds. At the same time,
about 95 per cent of assets were invested in
money market and fixed income papers and
only four per cent in stocks. This difference
indicates that fund managers are conservative
in their strategies. Eight open-ended funds are
listed and three of them are traded on the Riga
Stock Exchange.
On July 1, 2001 Latvia introduced a second
pillar pension system, mandatory for everyone
born after 1971 and voluntary for those born
between 1951 and 1971. In contrast to Estonia,
there are no additional payments for entering
the second pillar in Latvia and two per cent of
gross salary is allocated by the government
from social security contributions.
Historically, all of the second pillar assets fell
under management of the state treasury, but in
the beginning of 2003 private companies also
took over management of some funds. Today
there are 17 second pillar funds with ¤52 m
under management.
Latvian pension funds are divided into three
groups: conservative (no equity investments
allowed; six funds with ¤25 m), balanced (up to
15 per cent may be invested in equities; three
funds with ¤2 m), and active (share of stocks
up to 30 per cent; eight funds with ¤25 m). The
large share of conservative funds can be attrib-
uted to the State Treasury fund (¤21 m) in this
group. The most popular types of private
Latvian funds are those with relatively aggres-
sive strategies. Parex funds are one of the best
performers in this segment so far.
Within the next few years, management of the
second pillar will become one of the most impor-
tant strategic priorities for financial intermediaries
baltic asset management
in Latvia. Estimates show that by 2012 the system
will accumulate assets worth nearly ¤1.5 bn.
The third pillar pension system in Latvia con-
sists of four open funds with assets of about ¤9.7
m. The country has one closed pension fund for
employees of Lattelekom and Latvenergo with
assets of ¤20 m. The Parex Open Pension Fund
has ¤4.5 m under management.
There are nine private management compa-
nies which have the right to issue investment
certificates in Latvia. Six of them are eligible for
the management of second pillar pension
assets. Like Estonia, approximately 80 per cent
of the investment fund market is controlled by
the three largest banks, namely Parex Bank,
Hansabank and Unibank. This 97 per cent share
excludes the second pillar conservative. In the
latter case, the market share of Hansabank sub-
sidiary Hansa Funds is 50 per cent. Parex
Investment Company controls 28 per cent of
the market and Unibank’s Optimus Funds holds
19 per cent.
Lithuania—still catching up
In financial market development terms,
Lithuania still lags behind its Baltic neighbours.
Until last year, Lithuania only had one open-
ended investment fund, which is invested in equi-
ties and listed on the National Stock Exchange.
However, the number of funds has increased to
six. Information on the Lithuanian fund industry
is very fragmented, but according to estimates
the asset base of contractual or mutual funds is
around ¤8-10 m. Lithuanian funds are neither list-
ed nor traded on the exchange.
The country’s third pillar pension system is still
non-existent, whereas subscription for the sec-
ond pillar was launched only last year. In contrast
to the rest of the Baltics, participation in the
Lithuanian second pillar is voluntary regardless
of age. Participation in the scheme does not cost
anything as all payments (currently 2.5 per cent
of the salary that will grow to 5.5 per cent by
2007) are made by the government. The first
wave of subscription took place at the end of
2003 and first payment transfers are expected to
take place in the near future. At present there are
505,000 people enrolled in 30 second pillar
plans, 80 per cent of which have balanced or
active mandates. The largest market share
belongs to Hansa Asset Management (33 per
cent), followed by Vilniaus Bank Asset
Management (29 per cent) and Commercial
Union Lietuva Life Insurance (15 per cent).
INVESTOR SERVICES JOURNAL 73
ISITC
Money makes the
world go around. But
the ability of banks
and other institutions
to talk to each other
is what really holds
our orbit in check,
writes Steven Goswell
of ISITC
A casual search on Google for "financial
services messaging standards" returns a
staggering 1,120,000 hits. Small wonder
then that this overwhelming volume of
information can lead to confusion among
even the most seasoned of industry prac-
titioners. What is a financial institution to
do? This article to the rescue! The
Industry Standardization for
Institutional Trade Communication
(ISITC) suggests ways to make sense of it
all, and ways in which to tap into the vast
amount of intellectual capital available
on messaging standards and related mat-
ters.
First, some fundamentals. In the busi-
ness of communication, whatever it may
be that is being communicated, it is gen-
erally accepted that standards are desir-
able. Standards minimise the overall costs
at the same time maximising the main-
tainability and scalability of the systems
and technologies employed.
Communication in the financial servic-
es industry is no different. Ours is a com-
plex business; there are thousands of
financial institutions that must exchange
data with each other as part of their nor-
mal day-to-day operations. The commu-
nications infrastructure required to sup-
port the business of trading an ever
growing array of financial instruments,
and the subsequent cash, foreign
exchange, settlement, and back office
activity represents an enormous challenge
74 INVESTOR SERVICES JOURNAL
SETTING THE STANDARD
to the industry.
A typical financial institution has
dozens of counterparties with whom it
must communicate a wide variety of
instruments. For example, investment
managers trade with brokers and pass set-
tlement information to custodians and
accounting agents; banks and brokers
connect to depositories, settlement and
clearance houses, and a global network of
partner firms.
Standards allow a firm to enter new
relationships and to extend existing rela-
tionships with the minimum of changes
to existing infrastructure. Clearly stan-
It is important for institutions to develop a
strategy around external connectivity
dards are a good thing. There are people
within the industry who firmly believe
that a single unified standard covering all
markets and all instruments is achievable.
It's OK to dream but the reality is that
there are many standards covering the
financial sector that are in use today and
this will continue to be the case for many
years to come. It is important for institu-
tions to develop a strategy around exter-
nal connectivity. Once developed, the
strategy needs to be maintained as the
business changes, as existing standards
change, and as new standards emerge.
One way to do this is for a firm to man-
age the standards it uses as an active port-
folio, each with a rating of buy, sell, or
hold. For example, an investment manag-
er might consider FIX 4.3 to be the most
desirable version for transmission of
equities trade information to the broker
community, the majority of their brokers
accept this standard, and as such FIX 4.3
would have a buy rating. There may be a
number of brokers using FIX 4.2 and this
may be acceptable as long as there is com-
mitment to upgrade to FIX 4.3, and in
this case FIX 4.2 would have a hold rating.
There may be one or two brokers who
remain on the FIX 4.1 release. This may
be irritating, duplicative, or expensive.
FIX 4.1 would have a sell rating in this
case. In this way it is easy for Management
to easily see how the firm communicates
with the outside world across the entire
business and for all instruments. There
are several advantages to maintaining
such a tool as part of the connectivity
strategy. Where discretion is allowed the
tool could play a role in the selection of
partners for new business.
It is one thing to know how data enters
from the outside world. It is equally
important to know how to process this
data once it lands on the doorstep. A
good internal set of standards is impor-
tant. This could be a combination of a
data model that is representative of the
business, a set of messages based upon
that model, and a messaging bus to move
the messages around between the internal
systems. In a model such as this it would
be relatively straightforward to build a
gateway that would translate the external
message into the internal format fit for
consumption by the relevant systems.
Steven Goswell is a member of the ISITC executive
committee and is the executive sponsor of the
organisation's Technology & Standards Working
Group. Goswell is also a principal at Barclays
Global Investors in San Francisco.
 education & training
Professional training courses
a round-up of the professional courses from leading providers, further details available at
ISJforum.com. Courses may be listed and feedback and reviews from participants is welcome.
Organiser Course Date Duration Details

Securities Institute Understanding Regulation & Compliance 13 Sept 2004 2 Day www.securities-institute.org.uk
FinTuition International Securities Lending 15 Sept 2004 2 Day www.fintuition.com
Investment Education Swaps Overview 29 Sept 2004 1 Day www.investmenteducation.net
FT Knowledge Securities Analysis 30 Sept 2004 10 Evs www.ftknowledge.com/fall2004
FT Knowledge Compliance for the Securities Industry 30 Sept 2004 10 Egs www.ftknowledge.com/fall2004
Investment Education Hedge Funds Overview 04 Oct 2004 1 Day www.investmenteducation.net
Investment Education Hedge Fund Styles & Strategies 05 Oct 2004 1 Day www.investmenteducation.net
Securities Institute Introduction to Fund Management 11 Oct 2004 2 Day www.securities-institute.org.uk
Investment Education Structured Products 13 Oct 2004 1 Day www.investmenteducation.net
FT Knowledge Best Execution 26 Oct 2004 2 Day www.ftknowledge.com/fall2004
FinTuition Bond Financing (Repo) 18 October 2 Day www.fintuition.com
FT Knowledge Alternative Investments 28 Oct 2004 2 Day www.ftknowledge.com/fall2004
FinTuition Hedge Fund Strategies 10 Nov 2004 2 Day www.fintuition.com
FT Knowledge Brokerage Operations 16 Nov 2004 2 Day www.ftknowledge.com/fall2004
Securities Institute Understanding Regulation & Compliance 24 Nov 2004 2 Day www.securities-institute.org.uk
FinTuition Prime Brokerage 24 Nov 2004 2 Day www.fintuition.com
FT Knowledge Debt Instrument Transaction Processing 07 Dec 2004 2 Day www.ftknowledge.com/fall2004
Securities Institute Introduction to Fund Management 07 Feb 2005 2 Day www.securities-institute.org.uk
Securities Institute Understanding Regulation & Compliance 21 Feb 2005 2 Day www.securities-institute.org.uk
conference digest
Hedge funds
take centre
stage
In the first of a series of
conference digests to cover all
aspects of investor services,
Megan Bode reviews the
Managed Fund’s Association’s
11th annual hedge fund
conference - Forum 2004
Music, photography and videos - all
sectors whose distribution channels
are undergoing radical change
76 INVESTOR SERVICES JOURNAL
The hedge fund industry is in demand and becoming
increasingly more valuable, is probably the strongest
theme that emerged at the Managed Fund’s Association’s
(MFA’s) 11th annual hedge fund conference, Forum 2004,
in June this year. MFA is the US-based association of
alternative investment managers and service providers to
the industry.
New York’s famed Waldorf Astoria was abuzz with activ-
ity from 14-16 June as more than 600 delegates kept pace
with a fulsome agenda of keynote speeches, panel presen-
tations, workshops, meetings and networking affairs.
The official kick-off luncheon featured James Chanos,
president of Kynikos Associates, who delivered a rousing
speech that set the tone for an intellectually stimulating
conference. As an outspoken short-seller, Chanos applied
his own brand of scepticism to provide a fascinating view
of the bull and bear persona of the hedge fund industry
itself. "The hedge fund industry is in a sweet spot," he told
the standing room only crowd. Believe it or not, he added,
the industry is currently the size of the mutual fund indus-
try in 1990 and poised for continued growth. While he
exuded a generally bullish view of the industry, his train-
ing compelled him to identify a few potholes, including
the fee structures (too high) and the importance of shap-
ing the regulatory debate in Washington.
The room fell silent when Chanos began to provide his
view of the hedge fund bear landscape and described a few
industry-driven short-selling opportunities. Delegates lis-
tened intently as he shared thoughts on "disruptive tech-
nologies" like music, photography and video rentals, all
sectors whose distribution channels are undergoing radical
change. He also pointed to airlines, auto, cable and satel-
lite as "doomed legacy" industries that provide opportuni-
ty for short-sellers. Following his address he was literally
swarmed by the crowd, including some 45 journalists who
registered for the conference.
The Chanos "sweet spot" was further sweetened by
Donald Putnam, chief executive officer of investment
banker Putnam Lovell, who heaped praise on the industry
and predicted enormous growth in his Keynote Address,
"The Allure of the Absolute." How enormous might this
growth be? Up to $3 trn in assets under management by
2010, he claimed. With a slide show that included illustra-
 conference digest

tive charts and rich data, Putnam told the audience that for growth. The hedge fund "bubble" is not there because
private wealth will continue to fuel the growth but, while the pension problems need to be solved first.
high net worth investors account for 74 per cent of hedge After building a stellar career at Morgan Stanley as chief
funds’ core business today, that percentage will downsize investment officer and chief US investment strategist, he
to 68 per cent by 2010. Pension funds, with $40 trn in recently said good-bye the world of relative returns to join
investable assets will significantly increase allocations to a hedge fund. Watching him grin as he spoke, I can attest
absolute return strategies and add considerably to the to the fact that he is sporting an absolute alpha smile.
industry’s overall expansion.
While we all are aware of the "There is a hole to be filled and hedge funds can fill it"
institutionalisation of the indus-
try, the numbers Putnam provided were awesome indeed. Throughout the three-day event MFA hosted myriad
Also on the horizon, said Putnam, is a trend for older panel presentations on topics such as asset allocation, dis-
money management firms to "come to dinner" as the hedge tribution opportunities for managed futures, the direction
funds industry continues to mainstream. These firms will of technology, institutional trends in the use of alterna-
buy, not incubate, hedge fund capabilities, according to tives, the future of prime brokerage, hedge fund classifica-
Putnam, who foresees increased acquisition of good man- tion systems, the hedge fund regulatory outlook, tax issues,
agers – especially multi-strategy managers. There will be a adding value in FX execution, and strategists’ perspectives.
premium placed upon having a brand identity, he said, and Each presentation was designed to provide best practice
large money managers with established brands, such as solutions to existing and potential challenges faced by
AIG, UBS and Goldman Sachs, are well positioned to pro- industry participants and service providers.
vide their high net worth and institutional clients with On the final day of the conference, the MFA and Calyon
hedge fund choices. The future for distribution, he added, Financial hosted the eighth annual "Star Search" to a
capacity crowd. This ever-popular presentation provides a
is very bright and very profitable. "In marketing, trust beats
explanation every time," Putnam said as he underscored the 20-minute platform for new and emerging fund managers
importance of brand identity. to preview their strategies and business models. Every
The branding theme took centre stage again when Steven year, "Star Search" attracts a stellar potpourri of new man-
Galbraith, principal of Maverick Capital, took the podium agers and provides valuable insights into their business
for his keynote address, "In Search of Alpha Males (and formations to a standing-room-only crowd. This year was
Females)." Galbraith said: "There is a premium on ethics no exception, as the grand ballroom was filled to capacity
and integrity in a firm without hard assets. In money man- for yet another brightly shining "Star Search."
agement, it’s branding and image that provide value." The MFA ‘s "Special Program for Emerging Fund
Managers: Best Practices for Success" is another popular
"In marketing, trust beats feature at the Forum conference each year. The program
was divided into three sessions this year: "Business Issues
explanation every time" Facing Emerging Hedge Fund Managers; Caribbean
Offshore Administration; and Successful Marketing and
Companies that do not make tangibles (like cars or com- Effective Client Relations. Many conference delegates,
puters) need a strong brand identity, emphasised including seasoned managers who are launching new
Galbraith, who suggested that hedge funds should build products or planning expansion, attended this conference
brand identities. finale to gain insight from industry professionals on grow-
Galbraith also said investors are increasingly searching ing their business operations.
for alternatives to bonds and equities because those tradi-
tional investments are no longer delivering. "There is a MFA ‘s educational programs and seminars represent a
hole to be filled," he said, "and hedge funds can fill it." vital deliverable to the membership, the industry, investors
According to Galbraith, the equity bubble is over and and the media. The Association is proud to attract invalu-
investors are going for absolute returns. What does this able speakers, sponsors and exhibitors for their participa-
mean for hedge funds? Galbraith believes there will be tion and generous support. The next major conference,
many more hedge funds to choose from and that more Network 2005 is slated for 6-8 February 2004 at The Ritz-
money will flow to hedge funds than to mutual funds. He Carlton Key Biscayne. Mark your calendar and stay tuned
believes this as a good thing and said there is more room for more details. ISJ

INVESTOR SERVICES JOURNAL 77

mandates

On the move, in with the new or staying put?

Clients are looking for relation- Month 2004 Investor Services Provider
ships not upheaval but technology July BT Funds Management Ltd.
and service can prise them away – July Goldman Sachs Intl
or make them stay. July ING/BNY Securities Svcs
Noteable examples of increased July Jardine Lloyd Thompson
business were JPMorgan’s award to July ABN AMRO Mellon Global Securities Services
Merrill Lynch, and Norther Trust’s July JPMorgan Investor Services
(£16.2bn) selection by M&G.
July ABN AMRO
"M&G undertook this strategic review
July J.P. Morgan Retirement Plan Services
at the end of 2003 with the objective
of streamlining our investment opera- July Northern Trust
tions," said John Wright, Director, June Bank of New York (The)
Investment Operations at M&G. "We June State Street Bank & Trust Company
selected Northern Trust on the basis of June Dexia Fund Services
their excellent service quality and June Northern Trust
track record of delivering on their June Northern Trust
commitments." June ABN AMRO Mellon GSS
It was the history that counted, "We June Bank of New York (The)
are especially pleased when an existing June Mellon Global Securities Services
client awards us additional business - May State Street Corp.
there really is no better endorsement
May Brown Brothers Harriman
of the service you are providing them,"
May ABN AMRO Mellon Global Securities Services
said Toby Glaysher, Senior Vice
President, Global Fund Services at April Northern Trust Global Inv.
Northern Trust. April Bank of New York (The)
Newly formed US outfit TIAA-CREF April JPMorgan Investor Services
Asset Management targeting universi- April BISYS
ties, where the TIAA-CREF brand is April BISYS
well known, appointed Mellon Global March ABN AMRO Mellon Global Securities Services
Securities Services, emphasising the March Northern Trust
double whammy of service and tech- March Northern Trust
nology, "Mellon have received numer- February BNP Paribas
ous accolades throughout the industry February Northern Trust
for its high levels of service and tech-
February JPMorgan Investor Services
nology," said Nancy Heller, head of
February JPMorgan Investor Services
TIAA-CREF Asset Management.
"By leveraging Mellon's long-standing February Bank of New York (The)
experience with administrative func- February Bank of New York (The)
tions and delivering it through our February Northern Trust
advanced technology, we are enabling January State Street
TIAA-CREF to focus its resources on January Brown Brothers Harriman
asset management and other critical January Bank of New York (The)
areas of expertise." said James P. January Dexia Fund Services
Palermo, Mellon vice chairman and January HSBC
president of Mellon GSS. ISJ January Mellon GSS

78 INVESTOR SERVICES JOURNAL

 mandates

Client Location Assignment Mandate Size

Sims Group Superannuation Plan Australia Custody Services -
Fonds de Reserve pour les Retraites Global Transition Management -
Hamburg Mannheimer Global Custody Services -
The Big Food Group Pension Scheme Global RecordKeeper -
Warwickshire Co. Council Pension Fnd Global Custody Services -
Merrill Lynch Insurance Group Global Custody Services -
First Rand Bank SA CLS n/a
Summit Medical Group, P.A. US RecordKeeper -
LSV Asset Management US Fund Admin USD $180m
Ohio State Teachers Retirement Sys Global Custody Services -
Weir Group Pension & Life Ins. Global Custody Services -
CMI Asset Management Luxembourg Fund Admin EUR 7bn
M&G Collective Investment Schemes UK Custody Services GBP £16.2bn
London Borough of Lewisham UK Custody Services GBP £505m
Lancashire County Council UK Custody Services GBP £2.4bn
Occidental Petroleum Corporation US Custody Services USD $1.6 bn
Texas Permanent School Fund US Custody Services USD $19.5bn
ABN AMRO Asset Management Europe RecordKeeper EUR 75bn
Pension Fund of Commerce Iceland Custody Services USD $1.8 bn
Banco Desio Italy Custody Services EUR 1bn
Halifax Financial Services UK Custody Services GBP £8.6bn
Insight Investment Man. UK Custody Services -
John Hancock Financial Services US Custody Services USD $30bn
Delaware Investments US Record Keeper USD $2bn
Trusco Capital Management US Fund Admin USD $26bn
Kvaerner UK Custody Services EUR 1.8bn
Lincoln Financial US Custody Services USD $3.3bn
MMA Praxis Mutual Funds US Custody Services USD $415 m
Mariner Financial Australia Custody Services Not specified
Jarislowsky, Fraser Limited Canada Custody Services CAN $43bn
PFA Pension Denmark Custody Services USD $25bn
Lincoln County Council Fnd UK Custody Services GBP £650m
Britannia Building Society UK Custody Services USD $6bn
Manek UK Fund Admin -
Founders Trust US Custody Services USD $93m
Aventis Pension Trust France Custody Services USD $2.3bn
The France Growth Fund France Fund Admin USD $100m
ING BHF-Bank Global Custody Services EUR 34bn
Novara Aquilone Sicav Luxembourg Fund Admin -
Royal County of Berks Fnd UK Custody Services GBP £800m
Daughters of Charity US Custody Services USD $1bn

INVESTOR SERVICES JOURNAL 79

the moving and the shaken

a selection of organisation to successfully deliver on these

opportunities and grow SmartStream's solution
Markets. State Street Global Markets (SSGM) is
the investment research and trading arm of
appointments and services team." State Street Corporation.
Goold will facilitate new business develop-
promotions updated BNP Paribas strengthens New Zealand team ment for the UK asset owner group including
transition management, currency overlay and
daily at ISJFORUM.COM commission recapture. As transition manager,
McGee will advance State Street’s business to
current and potential clients.
Northern Trust hires for UK fund accounting
DSTi Appoints Global Marketing Director
Northern Trust has added Sarah Noone to its
UK fund accounting team. Noone brings with
Business solutions provider DST International
her over 13 years experience in the collective
BNP Paribas Securities Services has appoint- (DSTi) has appointed Paul Stallard as global
investment schemes industry. Prior to joining
ed Jennifer Bertie as head of its New Zealand marketing director. Stallard will assume respon-
Northern Trust, she had been a manager at
Branch, based in Wellington. Bertie will assume sibility for DSTi's global branding, product posi-
Smith and Williamson where her responsibili-
her role in October this year and will report to tioning and for managing and coordinating
ties included the day to day management of the
Gail Burke, head of BNP Paribas Securities DSTi’s global marketing activities.
fund accounting function for a range of 40
Services for Australia and New Zealand. Mike Winn, chief executive officer of DSTi, said,
schemes, and the management of new fund set-
Bertie joins BNP Paribas Securities Services "This is an exciting time for Paul to be joining
ups and scheme reconstruction’s.
from AXA (New Zealand) where she was DSTi, as we are expanding our global presence
responsible for investment operations for the and we have a number of new product launches."
Eichen joins SmartStream
past three and a half years. Previously, Bertie Complementing Dr Ian Hunt’s arrival as head
held senior investment operations and systems of global product strategy, Stallard’s appoint-
SmartStream has appointed Richard Eichen
management roles in major financial services ment highlights DSTi’s commitment to the
as general manager of US Solution Services
companies, including Royal and Sun Alliance asset management market. "DSTi has experi-
based in New York reporting to Lou Longhi, US
Asset Management, State Street (New Zealand) enced such phenomenal growth that we now
managing Director. Eichen's appointment is a key
and the National Provident Fund. need to reassess our messages to ensure they
services component in the roll out of the compa-
Bertie’s decision to join BNP Paribas was based emphasise our specialist knowledge and indus-
ny's STP Control Architecture (STPCA) vision that
on the strength of the business in New Zealand try leadership for each of our best of breed
is transforming SmartStream from an application
and in Australia and the commitment of senior products, plus the fact that they are integrated
provider to a strategic partner, providing a broad
management to New Zealand. "BNP Paribas together," said Winn.
range of STP solutions and services to its world
wide clients. Securities Services is uniquely positioned to serv-
ice the New Zealand market, being the only global De Boer moves to Fortis
This appointment is a strengthening of the
company's capability to partner with its cus- provider to have local operations," she says. "This
business model enables us to cater to the specific Fortis has appointed Jan Bart de Boer as glob-
tomers to agree strategy, design and deploy-
needs of the local market but at the same time al director of commerce within the Information
ment of its STP solutions. Prior to joining
gives us access to regional and global infrastruc- Banking group at Fortis.
SmartStream, Eichen was managing director of
ture to promote efficiencies and consistency of De Boer moves to Fortis from ING where he
Financial Services Consulting for Vitria
approach." was senior manager of the securities lending
Technologies, where he focussed on operations
Nicolas Faust, the current head of BNP and repo bank desk and director of custody and
and STP business and relationship develop-
Paribas Securities Services in New Zealand will clearing.
ment. He has held leadership positions at a
continue to be responsible for the New Zealand In his new role De Boer assumes responsibili-
range of prestigious firms including Tandem,
Branch until Bertie’s commencement in ty for account management and sales within the
Citibank, Oxford Associates and IBM.
October. Faust was seconded from Europe to custody and clearing units within Information
Eichen will be responsible for the onward
assist with the integration of the Australasia Banking, reporting to Marcel Jongmans and
development of SmartStream's solution servic-
businesses when BNP Paribas acquired Cogent Clayton Heijman, the chief commercial officer.
es in the Americas. Commenting on his
from AMP in September 2002. His appointment includes membership of the
appointment, Longhi said: "Our clients’ expec-
commercial management team, Information
tations are rapidly changing from asking us to
State Street hires for transition management Banking, which is headed by Clayton Heijman.
assist in their implementations to focusing on a
services "We are delighted that Jan Bart de Boer has
longer-term, trusted relationship, where we are
joined Fortis Bank Information Banking," said
involved in charting the way forward, solution
State Street has extended its services to Heijman. "His long track record in this industry
design and technology deployment as well, ulti-
European funds with the appointments of Toby and his professional experience will be benefi-
mately, knowledge transfer to the client.
Goold and Paul McGee to State Street Global cial for our expansion plans. ISJ
Richard has the right experience to enable our

80 INVESTOR SERVICES JOURNAL

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