ISJ28 Cover FINAL 13/3/08 8:50 pm Page 1

VOLUME 4 No. 28 - 2008 ISJNEWS.COM

GBP 25 - UK, ROW
USD 45 - America
INVESTOR EUR 35 - EMEA

S ERVICES
JOURNAL

PLACE YOUR BETS

Are institutions playing a risky game?

LONDON - FUNDS CENTRE SECURITIES LENDING - PROXY

NORDIC MARKET- CUSTODY FOCUS ANALYSE THIS - SEPA
CLIENT REPORTING - TECHNOLOGY PANEL DISCUSSION - HEDGE FUNDS
DIGGER DONAHUE - CEO PROFILE PAYMENTS - UK FASTER PAYMENTS

SERVING THE GLOBAL SECURITIES SERVICES INDUSTRY

ISJ28 Cover FINAL 13/3/08 8:51 pm Page 2

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ISJ28 pp1-15 ML 12/3/08 6:16 pm Page 1

HEADS UP

INVESTOR
S ERVICES
JOURNAL
VOL 5 No. 28 - 2008 A behemoth is born
he big news this month will be technology systems not up to the job?

T the finalisation of Thomson’s

buyout of Reuters for USD18
billion in cash and stocks, when
shareholders of both companies vote on
the deal at meetings on 26 March in
London and Toronto. Thomson has now
received all required antitrust and
regulatory clearances and is expected to
close the deal on 17 April, the Canadian
data company said.
Regulatory bodies decided that the
merger between the two firms would not
represent a monopoly as the two were
instructed to put their financial databases
up for sale to rivals and potential rivals
(whoever they may be?). Thomson will
put its Worldscope database up for sale
while Reuters will offer its Estimates,
Aftermarket Research and EcoWin
databases.
However, the regulators kindly allowed
the two to keep the rights to their
fundamental data. Essentially, one giant
company will now own all the financial
data in the world and how this fails to
represent a monopoly is beyond me. Read
more on the deal in our news analysis
section, which begins on page 10.
Our lead feature this month examines
the fallout from the Soc Gen trading
fraud. We consider the implications for
the financial services community at large
– is there a corporate culture of sweeping
risk under the carpet, or are banks’
Are traders at banks wilfully dodging
those back office systems designed to
keep risk in check and are these practices
endemic among some firms?
We also have a special feature on
London as a funds centre, analysing
why the city has become the world’s
financial capital, benefiting from the
overly zealous Sarbanes-Oxley regulation
in the US and London’s own permissive
regulatory environment.
We also have a round up of offshore
fund centres around the globe on page
25, given the plethora of domiciles
that exist today. The feature details
their regulatory environments and
considers how far they can develop –
which can challenge the Caribbean
dominance of today?
Our company profile this month
features the innovations of the Bank of
Ireland Securities Services (page 66),
which has adopted new vendor
technology and new structured products
services. The bank has expanded to
service UCITSIII compliant funds as
well as opening up to Qualified
Investment Vehicles.
Finally, we’d like to thank Brown
Brothers Harriman’s managing partner,
Douglas ‘Digger’ Donahue, for taking
time to speak with us about BBH and his
career to date (page 14).
JD

INVESTOR SERVICES JOURNAL

Editors: Virginie O’Shea, Jamie Darlow (Jamie@2ipartners.com), Giles Turner (Giles@2ipartners.com)
Reporter: Joe Corcos (Joseph@2ipartners.com)
Contributors: Brian Bollen, Fabien Buliard, Nicholas Pratt
MEMBER - PERIODICAL PUBLISHERS ASSOCIATION
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Operations manager: Sue Whittle (Sue@2ipartners.com)

TOTAL NET CIRCULATION 12,133 Sales administration: Charlotte Gilbert (Charlotte@2ipartners.com)
Analysis for the Audit Issue Vol 4, No 22 distributed June 2007.
CEO: Mark Latham (Mark@isjnews.com)
Source: AUDIT BUREAU OF CIRCULATIONS, www.abc.org.uk
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ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 2

CONTENTS

VOL 5 No. 27 - 2008

23 Domiciles reports
Isle of Man and Guernsey

24 Offshore funds
Global jurisdictions wrapup

30 Offshore funds - BIBA

Bermuda insurance status

■ Custody 24
Idyllic funds
32 Nordic custody
Growth in an established market
■ Securities lending
38 Canadian custody
Not the 52nd state 48 Proxy voting
The XML era begins
Risk - the product of 40 UK Custody
Has global M&A in the UK
corporate culture? ■ Hedge funds
43 Transfer agency
1 Heads up Conference report 52 Panel discussion
Editor’s letter Hedge funds
■ Technology 60 Hedge fund statistics
4 Letters
Points of view Securities on loan
44 Fee billing
Performance above all else?
■ News ■ Payments
45 Client reporting
6 Global snapshots & mandates Growing client demands 61 UK Faster Payments
Round up of securities services
headlines from isjnews.com 62 Analyse this
SEPA
10 News analysis 38
Reading between the lines ■ Regulars
14 CEO profile 66 Company profile
Digger Donahue of BBH Bank of Ireland

■ Special report 68 People moves

16 Institutional risk 80 Hindsight/Foresight

Place your bets Christopher Cruden of Insch

■ Funds ■ ISJ Directory

20 London as a funds centre 69 The directory of securities

The road to financial dominance Services providers

2 INVESTOR SERVICES JOURNAL

ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 3

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LETTERS TO THE EDITOR
The ISJ letter prize of a Cross writing instrument
The pen is mightier than the sword...If you are affected by, or have an opinion on,
any aspect of investor services please write to jamie@2ipartners.com and enter into
the running to win an exclusive Cross pen.
Winning Letter
A bowl of credit crunch
anyone?
n much the same way that retailers
I rush to assure consumers of the
quality of their products following a
food scare, credit lenders are currently
trying to convince investors of the
quality of their assets following the
US subprime mortgage crisis. Though
the outlook may appear bleak, investor
confidence can be re-established in
part by simply providing a clearer view
of risk and the way assets are priced
by reviewing the origination process
and risk models. As with many crises,
be they food or finance, the key to a
quick resolution often lies in
transparency and audibility.
Thanks to the rise of the celebrity
chef and greater health awareness,
ignorance of the ingredients and
source of our food is no longer
palatable. Similarly, investors now
want to be provided with more
information on the ingredients of their
credit portfolio through an
independent evaluation on the risk
profile of the underlying assets they
are purchasing. This visibility applies
not only to how portfolios are built,
but also to which strategies have been
chosen to hedge risk. Arguably,
through this revised approach, when
the crisis next occurs - as it inevitably
will - it will be easy to identify and
isolate the specific instruments
affected and should therefore not
jeopardise overall market confidence.
The financial market now needs to
raise the bar by developing new
models to better understand the effect
of liquidity risk on the pricing of
otherwise low-risk instruments. It is in
this scenario where technology
arguably has a role to play. As an
advocate of flexible decision
automation, technology such as
4 INVESTOR SERVICES JOURNAL
Business Rule Management Systems
(BRMS) which assist credit
institutions and banks in many
aspects of the underwriting and
distributing credit processes, are
crucial in the drive for transparency.
BRMS facilitates portfolio managers
and credit professionals in enhancing
their operational efficiencies,
optimising processes and managing
risk and value along the entire
securitisation supply chain.
A decision-led approach allows
managers to automate portfolio
regulatory policies and guidelines
alongside best practices and their
individual and corporate intellectual
property. And in so doing, managers
can develop extensive internal and
external ratings, profiles and risk
analysis systems – not only providing
transparency for existing customers,
but also for future potential investors.
The US subprime mortgage crisis,
like a major Salmonella outbreak, has
caused a significant dip of confidence
in the product and rightly prompted
investors to question portfolios and
the specific risk of underlying assets.
Portfolio managers must now prove
that they are successfully managing
and balancing risk exposure within
their portfolios if they want to regain
some of the confidence lost.
Appropriate technology solutions
hold the key to standing up to this
level of scrutiny and providing the
visibility of underlying assets needed
to continue to operate confidently in
an uncertain market. Re-establishing
confidence in the financial
marketplace will take some effort
and change in behaviour, but if
investors are as resilient as
consumers, then it shouldn’t be too
long before trust is restored.
Geoff Round, UK director for Insurance
and Financial Services, ILOG
EPA went live on 28 January
S and VocaLink’s Euro CSM
processed its first SEPA
transactions. A small milestone for
VocaLink but the launch of SEPA is
a major milestone for the payments
industry.
Although SCT volumes will
inevitably increase, SEPA Direct
Debit (SDD) will be more attractive to
end-users. However, delay in adoption
of the Payments Service Directive
(PSD) has led to uncertainty about
the timing of its introduction.
The payments industry must
encourage the market to embrace
SEPA by introducing new customer-
oriented products. Value-added
services, such as payments capture
and direct debit mandate
management, will enable banks to
differentiate their services while
making those services more
accessible for their customers.
Martin Wilson,
chief marketing officer, VocaLink
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ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 5

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ISJ28 pp1-15 ML 12/3/08 6:07 pm
NEWS
CUSTODY, CLEARING AND
SETTLEMENT
M u m b a i - Euroclear
SA/NV and Central
Depository
Services (India)
Limited (CDSL) have
signed a Memorandum of
Understanding (MoU)
establishing a basis of
cooperation in anticipation of
developing a closer working
relationship in the future.
Euroclear and CDSL will
explore the timing and
possibility of establishing an
operational link between the
central securities
depositories. The agreement
includes: regular meetings
between senior management
to increase mutual
understanding of business
developments, operating
models and related
improvement opportunities;
exchange of staff and
training to increase
understanding and
knowledge of the respective
securities markets; joint
studies on topics related to
securities depository
operations; and joint
conferences, seminars and
workshops on topics of
mutual interest.
Hong Kong -
Euroclear Bank is to
significantly improve its
operational service levels for
clients located in the Asia-
6 INVESTOR SERVICES JOURNAL
Page 6
Pacific region, Euroclear
says. Furthermore, Euroclear
Bank will open a
representative office in
Beijing. Euroclear Bank
will increase operations
in Asian securities
transactions by
employing more than 25
new operations
professionals in Hong
Kong to work with Asia-
Pacific clients in their own
time zones and languages.
N e w Y o r k - The
Depository Trust &
Clearing
Corporation's
Wealth Management
Services unit has
announced fee reductions for
Fund/SERV and
Networking, two of its
highest-volume services for
the mutual fund industry.
The decreases, which
represent a reduction of
USD18.4 million, are part of
the largest-ever fee
reductions for services
provided by DTCC's
subsidiaries. Effective 2
January , 2008, the cost for a
Fund/SERV transaction was
reduced to 7.5 cents, a 32%
reduction from the previous
fee of 11 cents. The fee for
Networking was reduced by
33% and is now at 10 cents
for every 100 records
processed, versus 15 cents.
FUNDS AND
ADMINISTRATION
Hong Kong - Atlantis
Investment
M a n a g e m e n t has
launched an Atlantis China
Star Fund which will target
Chinese companies one to
two years away from IPO.
The Atlantis China Star
Fund differs from Atlantis’
existing China funds in that
it can invest up to a
maximum of 50% in unlisted
securities, focusing on pre-
IPOs and Convertible Bonds
in private-owned-enterprises
where Atlantis believes there
is great return potential. The
initial target size of the
Fund is USD200 million and
it will be managed by Yang
Liu, Chairman of Atlantis
Investment Management
(HK).
S y d n e y - Superannuation
and pension funds around the
world are paying on average
50% more in fees than they
were five years ago,
according to research by
consultancy firm W a t s o n
Wyatt. The research found
that fees now average around
1.1% compared with around
0.65% in 2002, with the vast
majority of these costs being
paid in fees to external
investment managers and
brokers. Graeme Miller, head
of Investment Consulting at
Watson Wyatt Australia,
says: “One of the main
reasons for this upward cost
spiral is investors’ focus on
‘alpha’ , which has increased
their appetite for alternative
assets. Investors have
naturally assumed that they
are paying these fees to
reward manager skill, but in
many cases they are wrong.”
Dublin - C a r n e is
offering a new fund
registration service, which it
claims can speed up the
UCITS III authorisation
process. Of late the UCITS
III structure is proving
increasingly appealing to
fund managers, and is
accepted everywhere from
Hong Kong to Mexico. But
the process of getting
authorisation for the fund
structure can sometimes be
convoluted and lengthy.
Carne claims that it can
shave up to three months off
the whole process.
St Helier - Jersey has
introduced two new classes
FREE NEWS DAILY AT WWW.ISJNEWS.COM
of investment fund which
can be established without
regulatory approval under
Jersey’s funds legislation
with immediate effect. The
Unregulated Funds Regime
provides fund promoters with
certainty, flexibility and
speed when establishing new
funds and adds to the range
of existing regulated fund
regimes already available
from Jersey.
LEGAL AND COMPLIANCE
London - Three quarters of
fund managers do not
publicly disclose any policies
relating to environmental
and social issues despite
many firms' transparent
corporate responsibility
policies, according to a
FairPensions survey.
The FairPensions’ Fund
Manager Transparency and
The survey covered the top
20 fund managers in the UK,
who together manage GBP7
trillion on behalf of clients
including individual
investors, occupational
pension funds and charities.
N e w Y o r k - Institutional
investors’ non-participation
in US securities class actions
between 2000 and 2007
resulted in nearly USD12
billion being left on the table,
according to a report from
G O A L G r o u p. Some
USD3.6 billion of this can be
attributed to European
investors, the report
continues. Around the
millennium, corporate
governance scandals such as
Enron were the main
instigator of class actions,
but the mantle has now
passed to the subprime
mortgage market crisis. With
average settlements sitting at
some USD54 million, and
filings again on the rise,
investors and fund managers
can no longer ignore the



 ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 7

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ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 8

NEWS

opportunity to claim damages
to which they are legally
entitled.
London - An online survey
conducted by FRSGlobal,
provider of multi-country
regulatory reporting
solutions, has found that 41%
of respondents consider their
business’ reporting process
lacking in standardisation,
with 17% of respondents
saying that a standardised
process is non-existent. Over
a quarter of respondents
(25.5%) expressed low levels
of confidence in their
organisations ability to
measure operational risk.
MARKET INFRASTRUCTURE
Atlanta -
Intercontinental
Exchange (ICE), a major
operator of global exchanges
and over-the-counter (OTC)
markets, and Natural Gas
Exchange (NGX), an energy
exchange and clearinghouse,
will offer clearing and
settlement services for
physical OTC natural gas
contracts beginning 3 March,
2008. Physical clearing on
select US trading hubs will be
available as part of the
previously announced alliance
between ICE and N G X. The
first two natural gas hubs
available for cleared physical
delivery will be PG&E
Citygate and GTN Malin,
with additional US hubs to be
announced in the near future.
NGX's clearing organisation
will serve as the central
counterparty for physical
delivery and financial
performance.
N e w Y o r k - Office
systems provider
SuperDerivatives has
announced a partnership with
Liffe, which will allow its
customers use of the Liffe
Connect electronic trading
platform. Superderivatives Technologies and
also provides risk private wealth vendor
management, revaluation and Odyssey Financial
online options trading Technologies have
solutions. announced a global
partnership to offer Redi2
SECURITIES LENDING
Revenue Manager as the fee
Dublin - State Street
billing and revenue billing
Corporation has
component of Odyssey's
expanded its relationships
wealth management platform.
with two of its clients, N e w
Odyssey began searching for
Star Asset
a more robust fee billing
M a n a g e m e n t and
solution in early 2007. Under
Muzinich &
the new licensing and reseller
Company (Ireland), to
agreements, Odyssey will
include securities lending
initially offer Redi2 Revenue
services. State Street will
Manager to its North
provide securities lending
American clients. The next
services for EUR225 million
phase of the relationship is
in assets and facilitate lending
expected to target Odyssey's
for an additional EUR1.3
European client base, which
billion in assets via an
includes more than 180
exclusive lending
financial institutions in 30
arrangement for New Star
countries and 15 of the top
Asset Management’s Irish
25 European banks.
domiciled funds.
NEWS DAILY AT
TECHNOLOGY
WWW.ISJNEWS.COM
Oakland, CA — Fee
billing vendor Redi2

Mandates round up of awards

BNY Mellon cleaned up in February, culminating in
its reappointment by ING Funds to act as global
custodian for over USD100 billion in assests. This
continues a five-year partnership between the two,
with BNY Mellon also providing fund accounting,
securities lending, risk reporting, foreign exchange
and shareholder servicing.
The Wall Street bank also scooped a mandate from
Banco Central de Uruguay in the same week, covering
investment accounting, performance and risk analytics,
and securities lending services.
BNY Mellon also picked up separate wins from Old
Mutual, First American and the OPG Group’s Dutch
pension fund. With the latter win, BNY Mellon said it
will work closely with the Blue Sky Group, the
fiduciary manager recently hired by OPG to provide
advisory and investment management services to the
fund.

Mandates awarded in January, February and March 2008

Month Winner Client Location Assignment Mandate size
March State Street Scotiabank Cayman Custody Services CAD4.54bn
February State Street Columbia Boston Custody Services USD20bn
February BNY Mellon ING Funds Amsterdam Custody Services USD117 bn
February BNY Mellon Old Mutual Denver Custody Services USD5bn
February BNY Mellon First American Santa Ana Custody Services N/A
February BNY Mellon Bank of Uruguay Montevideo Custody Services USD4.5bn
January RBC Dexia Close Wealth London Custody and FX GBP1.5bn

8 INVESTOR SERVICES JOURNAL NEWS DAILY AT WWW.ISJNEWS.COM

ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 9
ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 10
NEWS ANALYSIS
An unfair
handicap
iscussions, probably not
D particularly friendly ones, are
continuing between
LCH.Clearnet and SIS x-clear, regarding
LCH.Clearnet’s obstinate refusal to
cooperate with the Swiss-owned
company’s attempt to set itself up as a
clearinghouse for the LSE.
SIS x-clear optimistically announced in
January that it would start offering
clearing services on the LSE at the
beginning of February 2008.
That was before LCH.Clearnet, which
has been the LSE’s exclusive clearinghouse
since time began, decided to charge SIS x-
clear for business access to the exchange.
This is in spite of LCH.Clearnet
supposedly supporting the EU Code of
Conduct for clearing and settlement, which
stipulates access must be free.
LCH.Clearnet claims it made the
decision to charge the fee in order to
protest about the troubles that it has been
having gaining access to German and
Italian exchanges. Local regulations in
both countries would force the company to
open banks locally in order to access stock
exchanges. However, many see this as a
poor excuse for the clearing house
essentially locking the door in the face of
the EU Code of Conduct.
Of more import is the fact that SIS x-
clear announced last year that it intends to
drastically undercut the fees that
LCH.Clearnet charges.
A spokesman from SIS x-clear said: “To
make this issue conditional on other
countries is unacceptable as one cannot
exert any influence there. We are pursuing
a strategy of free competition and fully
support the Code of Conduct because we
are convinced that it will lead to free
competition.”
In all of this the LSE has largely been
relegated to the role of frustrated observer.
An LSE spokesman says: “What we’re
trying to do is just to facilitate discussions
and try and get it sorted out as quickly as
we can. We want to see that happen as soon
as possible, that's absolutely in line with the
EU’s position on this.”
Also of consequence may be the fact that
Turquoise, the planned equities trading
10 INVESTOR SERVICES JOURNAL
platform being designed by seven major
investment banks, could potentially be a
rival to the LSE in the distant future.
Hanging over the situation is the spectre
of intervention by the European
Commission.
The LSE spokesman adds: “If the Code
of Conduct didn’t work then the
Commission might have to act and regulate
it but they want to see the industry work it
out.”
The SIS x-clear spokesman said of this
possibility: “Of course, we would welcome
it if all participants adhered to the Code of
Conduct. On the other hand, the Code of
Conduct was launched by the EU
Commission and adherence to it would
certainly be in the Commission's interest.”
And many in the City are becoming
impatient about what they see as
LCH.Clearnet’s intransigence.
One City lawyer, a veteran of 20 years,
said: “This is a big issue for the City and for
the government and for the Treasury. I
don’t think its something that is just a
Commission issue, I think it's a UK issue.
“What they should be doing is rising to
the opportunity of competition and
excitedly going and talking to the
Germans and French and everyone else
instead of chucking boulders into the
water so that it stops the tide.” ■
Definitely
maybe
bsolute return equity funds came
A
to the fore in the early months of
2007, when market volatility was
rife in China and investors saw the
opportunity to make money off this
continuing trend. They were wrong. In
fact, they were right, but so right they
were wrong, as last summer’s subprime
disaster caused investors to become
bearish and withdraw the funding.
As a result, European absolute return
equity funds (designed to make
incremental gains even when markets
move against them) suffered net outflows
of almost EUR5 billion in the second half
of 2007. This represents around 22% of
the sector’s entire assets.
So what went wrong? It wasn’t that
these funds couldn’t perform in adverse
conditions – they are market neutral and
should have been protected from the sell
off in long only funds occurring since
last summer precisely because they are
long/short. In reality, the absolute return
equity funds were undone because
investors didn’t believe in the promises of
their investment advisors. Essentially, the
human factor crept in and people got
scared, unfortunate given that they were
designed to withstand panic market
movements.
Mutual funds, in the US and Europe,
have also taken massive hits over past
months. Stock market declines during the
first few weeks of 2007 caused investors
to withdraw USD32.9 billion from equity
funds in January. There were also
declines in France and Canada and in
Italy investors pulled USD14.3 billion
from equity funds in January.
So where has all the money been put?
Is it sitting there in cash positions? If
yes, it won’t be there for long. There is
still a massive demand for absolute
return products, including UCITS III
compliant vehicles to Qualified Investor
Funds (QIF). There are also many
institutions offering these services, such
as Bank of Ireland, or about to launch
offerings. I would not be surprised to see
a bombardment of such vehicles during
the next few months. ■
ISJ28 pp1-15 ML 12/3/08 6:07 pm Page 11

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ISJ28 pp1-15 ML 12/3/08 6:08 pm Page 12
NEWS ANALYSIS
Behemoth
is born
Thomson gobbles up
Reuters
egulatory bodies across the board
R have given permission for
Thomson to go ahead with its
purchase of Reuters, which will create a
financial news behemoth that few will be
able to rival.
The two companies will probably not
have been surprised that regulatory
bodies included the caveat that both
Reuters and Thomson will have to put
copies of their widely-used and very
lucrative financial databases up for sale to
rivals and potential rivals.
Thomson will put its Worldscope
database up for grabs, and Reuters will
make available its Estimates, Aftermarket
Research and EcoWin databases.
Sales of the databases “do not effect
affect Thomson’s and Reuters’ ongoing
business or capabilities in these areas”,
Thomson stated.
While Reuters and Thomson will both
still own the data itself, they will make
available copies of databases as well as
source data and training materials.
Neither company has to complete any
sales of the databases before the merger
goes through, the date of which has been
forecast as 13 April 2008.
Which is not to say that there will not
already be a queue forming to purchase
rights to the databases.
“I’m certain they have suitors, you’re
talking about basically a global database
of fundamental data, so anybody that
needs that access might consider it.
There really is nobody else,” says Adam
Honore, an analyst at the independent
research and advisory firm Aite Group.
He adds: “They were told to reduce
the monopoly on their fundamental
data, they still get to keep the rights to it
which is fairly generous, so other than
that they’ve managed to kind of
escape with whatever product lines they
had in tact.”
The current chief executive of
Reuters, Tom Glocer, is to head up the
12 INVESTOR SERVICES JOURNAL
new creation, predictably
dubbed Thomson Reuters. He called the
merger “an important step toward
completing the transaction and creating
what we believe will be the leading
provider of information and related
applications to businesses and
professionals around the world”.
In essence, both companies will be
happy with what turned out to be
relatively smooth run through the
gauntlet of competition bodies. Now,
barring something untoward
happening in the bringing together of
management fiefdoms, sales teams, and
other bureaucracy-related hassles,
Thomson Reuters will steamroll ahead.
Honore sums it up: “I don’t think
anything happened that Thomsons or
Reuters would be particularly
upset about.” ■
A dip
arrives
US mutual fund investors
come over all shy
n the wake of a 2007 that was
I traumatising for investors in the US,
mutual funds in the country dipped
by 2.5% in January – the equivalent of
USD302.99 billion.
This left total mutual fund assets at
USD11.717 trillion for the month,
according to the Investment Company
Institute, which compiled the data.
The ICI is an outfit made up of
investment companies, mutual funds,
closed-end funds, ETFs and UITs. For its
survey it garnered figures of
actual assets, sales and redemptions
from funds.
In December, stock, bond and hybrid
funds saw an inflow of USD3.57 billion,
compared to an outflow of USD22.01
billion during January, the ICI
figures showed.
For those funds that have investments
mainly in the US, there was an outflow of
USD7.24 billion in December,
compared to an outflow of USD35.75
billion in January.
If caution is the prevailing attitude
among US mutual fund investors so far
this year it is hardly surprising. For
months there has been talk of a coming
recession, and recently the venerable US
millionaire Warren Buffet said in a TV
interview that “from a common
sense standpoint” the country was
already in a recession.
The sage of Omaha did add that
though times were rough, they were not
as bad as the recession in the 1970s that
saw a precipitous climb in oil prices and
plummeting stocks.
In his latest letter to shareholders
in Berkshire Hathaway, Buffet scathingly
wrote: "As house prices fall, a huge
amount of financial folly is being
exposed. You only learn who has
been swimming naked when the tide goes
out - and what we are witnessing at some
of our largest financial institutions is an
ugly sight.” ■
ISJ28 pp1-15 ML 12/3/08 6:08 pm Page 13

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ISJ28 pp1-15 ML 13/3/08 1:53 pm Page 14
CEO PROFILE - DIGGER DONAHUE
Douglas ‘Digger’ Donahue, managing
partner, Brown Brothers Harriman & Co
14 INVESTOR SERVICES JOURNAL
“Digger” Donahue
has been at private
bank BBH for more
than thirty years and
takes time out to talk
with Giles Turner
egun nearly 200 years ago as an
B importer of Irish linen, Brown
Brothers Harriman has a
reputation not just as one of the last
great private banks, but also of being
something of a special fraternity. Perhaps
the history in linen has created a
comfortable atmosphere? Douglas
‘Digger’ Donahue has been at BBH since
1976, and his managing partner
predecessor, Michael McConnell, has
remained at the firm since 1968. “I
remember going to a banking professor
at Harvard Business School during the
spring of my graduation year and
enquiring of him what he thought of
BBH,” says Donahue. “He said to me:
‘You know, I don’t actually know what
they do over there, but I do know we’ve
sent lots of people there over the years
and they stick like glue.’ Why do they
stick like glue? I think it’s because it’s a
place that has got a lot of character to it.
You can have an immediate impact, and
by keeping good people at BBH they’ve
created a collegial atmosphere.”
Perhaps the major reason behind
BBH’s supportive role is that it has
consistently avoided the often
demoralising ups and downs of the
financial market place. At the time of
writing, Cambridge University
researchers warned that a global banking
crisis would kill tens of thousands of
people through heart attacks brought on
by stress and anxiety. It is hard to see
Donahue being a financial fatality after I
asked him where the nickname ‘Digger’
came from: “During high school and
college my summer job was out on the
mudflats near Cape Cod doing the
tough job of digging clams. I still do it
once a month and it’s a great antidote to
grovel around in the mud looking for
ISJ28 pp1-15 ML 12/3/08 6:08 pm Page 15
clams instead of sitting at a desk in a suit
and tie.”
With no activist interference, BBH
remains independent. However this
independence only remains through
continued success. Donahue started his
BBH career as a commercial banker at the
Boston office. “The Boston office was a
very entrepreneurial place and I could see
that if I just stayed in the office doing
spreadsheets then it was my own fault.
Others had been very successful by
getting out of the bank and attracting
good business. This was lots more fun
and was the way the best careers were
shaped.”
Perhaps the best way to continue good
business is make sure that lessons learnt
are passed onto the next generation.
General partners like McConnell work at
BBH until age of 65, after which they
give up day-to-day line management but
remain general partners until the age of
74. They can then remain limited
partners of the firm for as long as they
desire. “They are provided a desk, a lot of
them sit together, it is really a life long
kind of thing and a great source of
strength and continuity for our firm,”
Donahue says.
This longstanding style of doing
business has been channelled into a
specialised, global firm. Rather than
competing by copying others, BBH aims
to deliver value where others can’t. For
Donahue, one of the major areas of value
within BBH has been the securities
services business: “We build some of our
most important relationships around this
industry. We are very creative in the fund
accounting world with pooling
techniques, share class hedging, and
automatic rebalancing of fund of funds.
We try to be out on the early edge, for
example we are servicing many of the
more innovative ETFs. We work with
our clients’ new product areas and we
help fund groups with their distribution
strategies around the world.”
Another interesting aspect of Brown
Brothers is that the firm started in 1818
handling capital flows across borders and
now the business is doing the same with
investment flows across borders.
Somewhere around two-thirds of
BBH’s securities servicing business, their
largest business, is conducted outside the
US. It wasn’t always like this. “Cross
border investment in the US was a new
CEO PROFILE - DIGGER DONAHUE
thing in the 70s and 80s. At that time
there was hardly anyone who was any
good at it or who even wanted to try it. It
was an entrepreneurial, let’s give it a try,
approach. We had been a United States
sub-custodian for foreign financial
institutions for decades but global
investment was a new activity in the 70s
and 80s that grew very rapidly.”
At present, anybody in the global
custody services space has to be alert to
the economic and liquidity implications of
the spreading credit crisis. So far BBH
has managed to avoid any direct
problems, a fact less to do with luck, and
more to do with long term planning.
Donahue explains: “One of the things
that comes with a lot of continuity and
stability in an organisation is a long-term
perspective that includes seeing cycles
going up and down and not getting
carried away with things. There is
independent thinking and not just a ‘me
too’ herd mentality.” Donahue argues
that the sub-prime event was a Black
Swan, so called after Nassim Taleb’s The
Black Swan: The Impact of the Highly
Improbable. Until the 19th century and
the discovery of black swans in Australia,
it was assumed that all swans where
white. “Black Swan” is now a phrase for
widely unexpected events or processes,
like 9/11 for example, or unlikly winners
of the Oscars. The sub-prime summer
was a Black Swan, as everybody
thought that mortgages were great until
the whole system froze up and nobody
wanted to buy anything from anyone.
BBH managed to avoid this dark anomaly.
According to Donahue: “There is
something in our outlook, I wouldn’t call
it conservative, but we don’t get carried
away. There is scepticism that if
everyone is doing one thing, it might not
be as good as everyone thinks it is.”
General partnership puts an element
into risk management that corporate
companies often try and cover up by
heavy risk processes and technology. It
helps to manage risk when 100% of the
firm is owned by the people who’ve
worked their careers there. At
Brown Brothers there is a saying from
years ago that the firm hires a lot of
high-powered MBA’s, brings them in at
the bottom, keeps them there until
they learn the business, then makes sure
they stick like glue. Donahue proves
the point. ■
DOUGLAS A DONAHUE JR
Douglas (Digger) Donahue was
named managing partner of the
private banking firm of Brown
Brothers Harriman & Co. (BBH)
in January 2008.
He joined the Boston Office of
BBH in 1976 as a commercial
banker. Over the course of his
career he became involved
with the firm's Investor
Services business which
operates through 8 offices
located in the world's primary
financial centers.
Donahue assumed overall
responsibility for this business
in 1997 and it has grown to be
BBH's largest business activity
servicing over USD2 trillion in
assets for the world's most
sophisticated asset managers
and financial institutions.
He was named a Partner of the
firm in 1990 and in 1997 he was
named the Partner in charge of
the Boston Office and to the
BBH Steering Committee. He is
a director of numerous
BBH subsidiaries around the
globe and is Treasurer of the
Commercial Club of Boston.
Donahue is a 1969 graduate of
Phillips Academy, a 1973
graduate of Dartmouth
College and a 1976 graduate of
Harvard Business School.
Donahue resides in Boston and
New York.
INVESTOR SERVICES JOURNAL 15
ISJ28 pp16-31 ML 13/3/08 4:41 pm Page 16

RISK MANAGEMENT

Seeing more risk,

Seeing more fraud
Until risk management becomes part of corporate
culture rather than an issue of compliance, scandals
will continue. Giles Turner writes

16 INVESTOR SERVICES JOURNAL

ISJ28 pp16-31 ML 13/3/08 4:41 pm Page 17
n 21 February, a leading provider
O of risk management, internal
audit and fraud prevention
services offered a one day work-shop
entitled ‘Embedding Risk Management
into the Corporate Culture’. As the day
progressed, you were offered seminars
such as ‘Breaking Down the Barriers’,
‘Recording the Risk environment’, and to
finish off, ‘An actual risk workshop – with
your own risks.’ Unfortunately this course
was not compulsorily for all employees of
investment banks and only offered in
Dublin, not in Paris. Attendance will
undoubtedly increase however as, post-
Jerome Kerviel, more and more failures in
risk management make it to the front
pages. Recently Credit Suisse senior staff,
when reviewing the books of their
London office’s collateralised-debt
obligations (CDOs) and residential
mortgage-backed securities, realised that
the prices used were seriously out of date,
resulting in a USD2.85 billion write-
down.
At Credit Suisse, internal sources have
stated that the mispricing seems to be a
mistake rather than the result of
underhand actions, but like the majority of
investment banks, Credit Suisse stipulates
that traders value daily positions under a
management supervisor. These valuations
are then checked weekly or monthly. So
why did it take someone as senior as D
Wilson Ervin, chief risk officer at Credit
Suisse, to check the pricing of the CDO
and discover the old valuations?
These ‘mistakes’ have not been confined
to the investment banks. At the end of
February, wheat broker Evan Dooley lost
USD141 million through “unauthorised”
trades at MF Global, one of the world’s
largest commodities brokers. What is
notable from Kerviel’s misdemeanours
through to Dooley’s duff dealing is that
these men didn’t intellectually conquer
the risk management systems in place.
Kerviel simply invented hedged positions
in order that, on paper at least, balanced
out his bets. He also failed to take the
required amount of holiday and lied to his
superiors. Chrisitan Noyer, governor of
the Bank of France, described Kerviel as
a “computer genius.” This is the talk of
Hollywood, not of high finance, and
sources within Societe Generale have
described Kerviel as “not a star”.
Just like Kerviel, Dooley wasn’t a
young, beautiful-mind capable of twisting
the system at will. He was a 40 year old
trader, who used MF Global’s lax security
systems in order to “establish significant
positions in his own account”, according
to Kevin Davis, chief executive of MF
Global. MF Global’s original statement
blamed a failure in its computer systems,
however they later amended this account
by saying that a number of buying
control limits had been removed because
this cramped trading desk efficiency when
dealing with multiple clients. “Clearly
that was a mistake” said Davis later.
Dooley, like Kerviel, had abused the
system relatively easily, plus it is more
than likely that others across the industry
were, and are, doing the same.
Unfortunately for Dooley and Kerviel,
they were caught out by unexpected
market moves. On 27 February the wheat
market underwent massive volatility,
falling 11% but then jumping up 20% in
just three minutes. For Kerviel, the
discovery of his exposed positions came
at a time where the market was suffering
from an extremely nervous disposition
due to the subprime and low investor
confidence. The unwinding of his
positions hardly helped matters.
Is this spate of fraud just an example of
three buses arriving at once? Jiro Okochi
CEO & co-founder or Revel, a provider of
web-based treasury and risk management
solutions, believes it’s not just
coincidence. “The one thing you notice is
that failure in risk management becomes
more apparent in volatile times. When
performance isn’t that good overall,
people start looking more closely. When
the traders are doing really well and the
money is coming in, everyone is happy. In
such times risk problems get brushed
over.”
If risk management is brushed aside
during times of relative prosperity, the
key to successful risk management points
not towards the processes already in
place, but the people involved. If the
variable of the user made no difference to
the risk management system in place,
then times of volatility shouldn’t make
much of a difference. Okochi continues:
“Everyone talks about financial risk
management and enterprise risk
management and trading risk
management but I think it starts with
human risk management. You have got to
wonder how much time people put into
the human risk management factor,
RISK MANAGEMENT
whether it is HR department involvement
or just sitting down with these traders
once a quarter. I’m sure there is
something else going on that would result
in someone willing to risk going to jail,
especially in the case of Societe Generale
where it didn’t appear to be to any
immediate financial gain.”
The explanation as to why Kerviel
acted the way he did has resulted in many
interpretations. However, on the Saturday
afternoon, the day after SocGen stumbled
onto Kerviel’s hedged position, Kerviel
himself spent six hours talking to Jean-
Pierre Mustier, the head of SocGen’s
investment banking arm. Kerviel
allegedly tried to explain to Mustier how
he had managed to devise a new trading
strategy, and if allowed to continue with
his positions would make the bank
billions.
SocGen is a bank known for its
intellectual foundations. The bank often
believes that it was responsible for
inventing derivatives, now one of the
most popular investment instruments
around. Yet Kerviel lost the bank billions
through simply betting whether the
major European stock exchanges would
go up or down. This isn’t the rocket
science that has earned SocGen financial
plaudits. Perhaps Kerviel, more computer
technician than astrophysicist, wanted to
show that he too could invent new trading
systems and become as respected as
Mustier? Whatever the case, where was
the corporate culture that is supposed to
get the most out Kerviel’s intellectual
drive, rather than leaving him to run
amok?
Clearly something was at fault, but to
what extent? Philippe Carrel, EVP global
head of Business Development at Reuters
explains: “I think you need to reassess the
entire risk management process. I think
that everything we thought we know
about managing risk has been thrown out
the window. After 2007 you really need to
rethink the whole story. The processes are
good but they are too rigid. It is more
about implementing a culture rather than
implementing a system or a process that
is going to do the job for you. Those days
are over.”
For Carrel, risk management simply
hasn’t caught up with the changing
industry. Even though the majority of
people throughout organisations are
usually extremely risk aware, the
INVESTOR SERVICES JOURNAL 17
ISJ28 pp16-31 ML 13/3/08 4:41 pm Page 18

RISK MANAGEMENT
Vix at market close

Volatility, then scandal, not the other way around

It is often believed that financial catastrophes lead to market volatility, however recent scandals have often come to public attention
during times of market volatility. Nick Leeson’s luck ran out at Barings when the Kobe earthquake sent the Asian financial markets into
a tailspin. Leeson bet on a rapid recovery by the Nikkei Stock Average that failed to materialise. Jerome Kerviel became unstuck through
jittery markets early this year, and in 2006 Amaranth lost billions due to betting on meteorological and sociopolitical events.

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options.
Referred to by some as the fear index, it represents one measure of the market's expectation of volatility over the next 30 day period.

majority of risk management systems
were developed when the concept of a
Chinese Wall was paramount. Front,
middle and back office were designed with
full independence in mind, yet no windows
seemed to be in place in order for each
department to communicate when
appropriate. When billions of euros are
going back and forth in accounts that, like
Kerviel’s, have strict and relatively minor
trading limits, any questions the back
office might have about potential
irregularities are voided by the depth and
breadth of the Chinese wall. As Carrel
succinctly puts it: “Why doesn’t the back
office know about what’s going on?
Because he is not supposed to know, and
because he’s on the other side of the wall.
All these risk management systems were
developed five years ago and five years ago
in finance might as well be the time of the
dinosaurs.”
Times change too quickly to always
have the most up-to-date risk
management software and processes.
What can change in pace with financial
innovation is the attitude of the company
towards risk. It’s not enough to see risk as
an important factor in day-to-day
business. What needs to be done is that
each individual needs to understand his or
her own risk. Carrel recalls a personal
example: “You need to define
responsibility and accountability, and then
risk management will improve. I recall
when we were implementing operation
risk frameworks for a client in the context
for the preparation for Basel II. First we
thought we where going to define various
trading processes and other complicated
procedures, yet after a few months we
ended up score carding, with a qualitative
approach, giving speeches all across the
enterprise explaining that everyone has to
be responsible and defining this
responsibility. For example, the head of
the desk makes clear their responsibilities,
they then choose the risk factors they’re
going to be watching, explain why they
think these are most appropriate and then
you watch them, report, and fill the
scorecard. In the end this approach was
much more successful as we are giving
responsibility to the individual.”
This approach may sound very simple
in such a technological age, but giving
responsibility to the individual is a tried
and tested method. However if you are
going to increase the responsibility of the
individual, do you also have to increase the
punishment of the individual when things
go wrong? Everyone asked seemed
reluctant to answer this question and
stressed the need to make the employee
feel responsible, rather than flesh out
draconian retributions. The traders
themselves have been taking some of the
blame for the recent economic problem.
"Over the past few years, risk
management has been an oxymoron.
Banks haven't been doing it," said Larry
White, professor of economics at New

18 INVESTOR SERVICES JOURNAL

ISJ28 pp16-31 ML 13/3/08 4:41 pm Page 19
York University's Leonard N Stern
School of Business. "They thought that
all the extra return they were getting was
because they were the smartest, not
because they were taking a lot of risk and
were just being lucky." Guy Bunker, chief
scientist at Symantec, agrees: “They have
become greedy – and like a gambler on a
winning streak, they don’t believe they
can lose, so the stakes get bigger and
bigger. In this instance the subprime
debacle is something people didn’t
forecast or even really consider. In these
cases it is agility that wins the day –
recognising the ‘new’ risk and then acting
on it. Tougher internal governance is
required to ensure that the risk is fully
known and understood.”
Tougher internal governance also
means forcing traders to relax once in a
while. In 2007 Kerviel refused to take any
holiday, and by early January this year he
was placing around EUR50 billion on
three European stock indices, more than
SocGen’s entire market value. While
many quips have been traded at
conferences about Kerviel being the first
If you are going to increase the responsibility of the
individual, do you also have to increase the punishment
of the individual when things go wrong?
Frenchman not to take a holiday, the irony
is that despite social stereotypes, forcing
Kerviel to take a holiday would have
avoided, or at least scaled back, some of
the USD7 billion losses taken by SocGen.
Okochi of Reval explains: “A simple Fed
rule is that you are supposed to be off
your desk for two weeks a year. If you’re
not on your desk and you’ve got some fake
positions against real positions, all that
stuff should unravel over two weeks. I
can’t say every trader that I’ve ever
worked with took the full weeks off, but
switching people off books for a period of
time would certainly help unravel day to
day massaging of figures.”
There will always be rogue traders and
corporate fraud. When asked if traders
will always slip through the risk
management net, Carrel replied that “if
there is a net, then there will be people
slipping through the holes.”
What remains to be seen is whether
corporate culture will change in the near
future. Dan Cohen, Misys Summit
product manager, thinks not: “There is
still pressure to obtain alpha and people
are not going to change their culture any
time soon.”
How soon change will occur is up for
debate, but after the subprime and the
recent fraud events change, like an Obama
slogan, is inevitable. Perhaps the greatest
change within companies will be the rise
and rise of the risk management officer.
In the 60s the entrepreneurs held sway in
a technocratic environment, in the 70s the
marketing manager was king, in the 80s it
was the finance manager, in the 90s it was
the M&A team, the beginning of this
decade saw data managers wielding
power, and now these next years will see
the risk managers consolidating their
power. It will take some time for the risk
mangers to implement a new corporate
culture, but time is not being wasted. One
large investment bank has already put
through a GBP150 million risk report, an
expensive enough undertaking even
before any implementation, but cheap
enough compared to a USD7 billion
write-down.
It will be impossible to stop ‘rogue
traders’ getting into the system, but a
corporate culture that gives responsibility
to the individual, rather than relying on
the most up-to-date risk process, is more
likely to succeed. Carrel explains: “We
need to review the way we manage risk.
Don’t start with what is being done, start
with what needs to be done. I think the
risk manager today is somebody who
holds the truth about the real worth of a
company. An employee’s performance
should not impress the risk manager if
the same employee does not follow the
risk policy of the company. ‘Yes you have
outperformed, but you are fired’ should be
the response. What we see now is the
beginning of the era where the risk
manager is the holder of the truth, the
real value of the company. Risk
management is the shareholder value
now.”
Those willing to act on warning signs,
such as a trader refusing to take holidays,
will be of more use to a company than a
RISK MANAGEMENT
reckless but briefly profitable trader. It is
not as if the warning signs were obvious
enough. A SocGen insider stated that
“Recently he’d spend all his spare time re-
reading Adam Smith's Wealth of Nations,
which is his favourite book." Too much
faith in the invisible and not enough risk
awareness always spells disaster. ■
Tony Freeman, executive
director of Industry Relations
and Market Growth EMEA on
Risk, Communication and
Office politics.
The SocGen incident highlights not
just the efforts of one man but also the
miscommunication between various
parts of an organisation – something
that is prevalent across many firms. In
this instance it appears to be
communication between front and
back offices. The back-office did query
Kerviel’s fictitious trades to hedge
against the enormous positions he was
trading, but it was a further 10 months
before the whole incident came to
light. One senior banker sent in to clear
up the mess said that he didn’t think
SocGen’s risk-control techniques were
any different or worse from most other
banks. This is of course a concern. The
major problem is that the different
functions around risk management and
control still operating in silos. What
needs to happen is a weaving together
of risk, control, exposure etc as part of
an overall, institution-wide risk
management effort.
The back office has been given a
hard time as a cost-centre and an
impediment to faster trading in todays
volatile markets. Quotes from recent
press coverage include: “Back office
staff add cost but do not generate
revenue,” and that giving more power
to the back office would “create a
group of people who see nothing but
risk and for whom it would be easier to
say no.” In the SocGen story it appears
that the organisation didn’t know what
trades it had executed resulting in false
positions on its books. The level of risk
was therefore unknown. An efficient
back office enables productivity in
the front office, it eliminates
operational latency and, crucially, by
implementing fast and accurate trade
confirmation it provides the foundation
of operational stability.
INVESTOR SERVICES JOURNAL 19
ISJ28 pp16-31 ML 13/3/08 4:46 pm Page 20
LONDON FUNDS CENTRE
Advantage
London?
Has London become
the world’s financial
centre? Virginie
O’Shea investigates
t is undeniable that London is the
I financial centre of Europe – the city
plays host to the headquarters of
over a quarter of the world’s largest
financial companies and the London
foreign exchange market is the largest in
the world, with an average daily turnover
of USD504 billion, more than New York
and Tokyo combined. The city has also
profited from the introduction of
Sarbanes-Oxley in the US in 2002, which
put the UK’s regulatory environment into
a favourable light. Recent years have seen
the migration of a number of funds and
financial institutions from the US to the
UK as a direct result of these regulatory
restrictions. But does this mean that
London has finally reached the position of
the most important financial centre in the
world?
London definitely meets the criteria for
a global financial centre, as defined by
consultancy firm Z/Yen in its 2006 study
on financial centres throughout the
world. “A global financial centre is an
intense concentration of a wide variety of
international financial businesses and
transactions in one location,” the report
states. Given the figures, the city meets
these criteria. London is also a global
centre for the innovation of financial
instruments, for example it is the biggest
market in the world for derivatives traded
over the counter (OTC), with 36% of
20 INVESTOR SERVICES JOURNAL
global turnover. The capital is the world’s
largest fund management centre,
managing almost half of Europe’s
institutional equity capital worth
USD5,500 billion and more than half
(56%) of the global foreign equity market
and 70% of Eurobonds are traded in
London. But has it overtaken New York
as the financial centre of the world?
The recent market conditions have
certainly indicated that the US markets
are a tough place to be at the moment.
Moreover, at the beginning of the
downturn in the US mortgage markets
last year, Wall Street giant Goldman
Sachs announced that its international
revenue matched that of its US
operations for the first time in its 138
year history. “The trends in virtually all
of our businesses are to be growing faster
outside the United States than within,”
said David Viniar, the Goldman’s chief
financial officer at the time of the
announcement. A clear sign that
Goldman Sachs is taking notice of the
importance of London as a financial
centre is the fact that the investment bank
had only 50 employees located in the city
a 25 years ago but now has 6,500 there,
and the number keeps rising.
The position of London as a financial
centre for non-UK institutions has led to
the city being described as having
undergone ‘Wimbledonisation’. This
refers to the fact that the tennis
tournament was last won by a British
man in 1936 and has since been
dominated by foreign players. The city
has likewise enticed US and other foreign
institutions to bring their expertise to
London and enrich the financial services
community as a whole.
A report commissioned in 2006 by the
London Stock Exchange and carried out
by Oxera Consulting highlighted that it
is not just the institutions that have been
flocking to London – companies are
choosing to move their initial public
offerings (IPOs) across the Atlantic too.
In August of that year, New York seemed
to have lost its place as the world hub of
capital formation following the decision
of over 20 companies to pull their IPOs
from US exchanges, most of which then
relocated to London. Only one of the 24
biggest international IPOs in 2005 was
in New York. This decision to cross the
pond has largely been attributed to the
hefty compliance burden placed on these
companies by Sarbanes-Oxley.
The Sarbanes-Oxley Act of 2002, also
known as the Public Company
Accounting Reform and Investor
Protection Act of 2002, was enacted on
30 July 2002 in response to a number of
major corporate and accounting scandals,
including those affecting Enron, Tyco
International, Adelphia, Peregrine
Systems and WorldCom. These scandals,
which cost investors billions of dollars
when the share prices of the affected
companies collapsed, shook public
confidence in the nation’s securities
markets and the legislation was duly
introduced to enhance standards for all
US public company boards, management,
and public accounting firms.
An unfortunate side effect of Sarbanes-
Oxley’s introduction has been that the
compliance burden has significantly
increased on US-based public companies.
Critics such as Congressman Ron Paul
contended at its inception that the
legislation represents an unnecessary and
costly government intrusion into
corporate management that places US
corporations at a competitive
disadvantage with foreign firms.
Denise Valentine, senior analyst with
Aite Group, agrees that Sarbanes-Oxley
has driven many firms away from the
shores of the US East coast and that even
a significant relaxation in the regulatory
ISJ28 pp16-31 ML 13/3/08 4:49 pm Page 21
ISJ28 pp16-31 ML 13/3/08 1:57 pm Page 22
LONDON FUNDS CENTRE
London’s financial markets
The Bank of England, based in the
City on Threadneedle Street, is the
country’s central bank and the
government’s banker. The bank used
to regulate the financial markets
before the government launched the
Financial Services Authority (FSA) to
take control of financial regulation.
The FSA is an independent non-
governmental body that was given its
full powers in 2001 by the Financial
Services and Markets Act 2000. The
FSA is accountable to treasury
ministers and through them to
parliament. It is funded entirely by
the firms it regulates.
The London Stock Exchange (LSE),
like the Bank of England, transferred
its role as regulator to the FSA. The
LSE operates in four key areas:
equity markets, trading services,
market information and derivatives.
The exchange has two primary
markets: the Main Market and the
Alternative Investment Market (AIM).
AIM is the LSE’s market for small,
young and growing companies.
Euronext.liffe is the world’s leading
exchange for euro short term interest
rate derivatives and equity options.
The exchange, which was formerly
the London International Financial
Futures and Options Exchange, is the
international derivatives business of
Euronext, comprising the
Amsterdam, Brussels, Liffe, Lisbon
and Paris derivatives markets.
The London Metal Exchange (LME)
is the world centre for non-ferrous
(non-iron) metal trading, providing
the global forum for all those who
wish to manage the risk of future
price movements in non-ferrous
metals.
The British Bankers’ Association
(BBA), the leading trade association
in the UK banking and financial
services industry, is based in London.
Its members, as well as many
associate members, fund its not-for-
profit activities.
London is the centre of the world’s
insurance industry and Lloyd’s of
London is the world’s leading
insurance market providing specialist
insurance services to businesses in
over 189 countries.
22 INVESTOR SERVICES JOURNAL
regime may not rectify the situation. “A
relaxation for foreign firms may improve
registrations in New York; however,
businesses might be concerned about
future changes. The actions that
regulators take build up a history of
behaviour. If the US is viewed as over
prescribed regulation-wise, or constantly
needing to revisit its regulation, this
would likely cause firms to consider
alternatives,” she explains.
Furthermore, it is not just Sarbanes-
Oxley that lies at the root of the US IPO
exodus. The London Stock Exchange
commissioned report indicated that US
IPOs are simply more expensive and
more complicated for companies to do.
The costs include significantly higher
fees for US investment bankers.
According to the report, investment
banking fees for New York IPOs are
roughly twice as high as those for London
listings and that is before taking into
account the legal, accounting, marketing
and other fees that US-listed companies
typically pay. Other problems in terms of
public image include the Patriot Act, the
Department of Homeland Security, and
the perception that America doesn’t
welcome outsiders.
The UK’s cost efficiencies in terms of
compliance demands and more favourable
regulatory regime have proved great
attractions for the hedge fund community
in particular. “Hedge funds have
registration lite in London and while the
US regulatory bodies and congress
appear confused and fussing about what
to do about hedge funds, the Financial
Services Authority (FSA) has been quite
directed and clear. The lack of ambiguity
offers stability from a hedge fund
perspective,” explains Aite Group’s
Valentine. “Principles-based regulatory
regime rather than a prescribed regime
allows for interpretation and
accommodation to a growth market
which is continually developing and
changing. Prescribed regulation would
no doubt require continuous modification
which causes uncertainty and can lead to
extremes where a rule is set up which
ultimately has unintended consequences.”
In 2006 the FSA conducted an overhaul
of its rulebook, which heralded a move
towards a principles-based approach to
the way it regulated the UK financial
services market. The FSA explained at
the time that the Markets in Financial
Instruments Directive (MiFID), which
came into effect in November last year,
was a significant driver in the decision to
introduce more flexibility into its regime.
According to the regulator, the new
approach was a “radical simplification” of
the rules governing banks and
investment firms and a move away from
the excessive detail and prescription of
the previous rulebook.
“The move towards principles-based
regulation means focusing on the
outcomes that really matter rather than
on procedural box ticking,” said FSA
director of retail policy Dan Waters
when the changes were announced. “It
also gives firms the flexibility to achieve
these outcomes in the context of their
particular business models and it fits with
the emphasis we place on senior
management responsibility, a core FSA
principal of good regulation.”
This more flexible approach to
regulation is a factor that makes London
attractive to the financial services
community as a whole and hedge funds in
particular. “There is certainly a growing
hedge fund business in other parts of
Europe but it is not likely to threaten
London which is an established, stable
financial hub, a proven entity to the hedge
fund community,” adds Valentine.
Of course, it is not just the US markets
that are faced with the prospect of a
recession – there is much speculation that
the events of last summer were a
precursor to a global recession. However,
Valentine does not believe this will
prevent London from continuing to
thrive in the long term. “Currencies
always move and would only be a single
factor in business decisions.
Economic climates, recessions and booms
are again part of the landscape. Financial
centres are in effect a business which
works to draw in ‘clients’, creating a
favourable business environment. This
extends beyond registration fees, to tax
breaks, infrastructure, regulation and so
forth,” she explains.
It would appear that for now at least,
London is at the top of its game. Like
Wimbledon, it’s attracting top
international talent and seems to be
benefiting from the advantage of the
FSA’s lighter regulatory touch. But the
city cannot forget the baseline – to
remain competitive it needs to adopt an
open stance. ■
ISJ28 pp16-31 ML 13/3/08 1:58 pm Page 23
In great shape
Guernsey’s funds industry has received a
double fillip in the last few weeks with the news
that one of the Island’s administrators has
picked up a new private equity award and values
under management and administration finished
last year with a flourish led by growth in that
Guernsey asset class.
New figures show that funds in Guernsey grew
another GBP13.7bn (8.3%) in the final three
months of 2007 despite continued market
turbulence during the quarter. That took the total
value of funds under management and
administration in Guernsey to another record
high of GBP178.2bn at the end of December – up
GBP48bn (37%) during the year. The most eye-
catching results came in the private equity asset
class where values increased by GBP5.5bn (19%)
during the quarter and GBP13.6bn (66%) year on
year to reach GBP34bn at the end of 2007.
This is an excellent set of results. The figures
are particularly impressive considering the
significant market turbulence that we saw during
quarter three of last year, carried over into the
final three months of 2007 and the start of the
new year. Given these conditions, the strength of
business flows has held up very well and in all
honesty surpassed expectations. In particular,
the growth in private equity business provides
yet further evidence of the Island’s strength in
this asset class.
Fund launch
To coincide with the launch of the Isle of Man’s
new fund regime in November last year, a
number of new hedge fund operations have
established on the Isle of Man. These include the
leading fund management firm Bridge Global
Asset Management (IOM) Ltd, which was issued
Isle of Man with an investment business licence by the Isle of
Man Regulator, the FSC (Financial Supervision
Commission).
Bridge Asset Management was established by
partners Nick Corby, Gary Cressman, Aelita
Arampova and Mark Slater in August 2007. In
October 2007, the management company
decided to base its middle, back office and
trading execution in the Isle of Man, while the
fund advisor was based in the Mayfair head
office. This is in line with the model advocated by
the Island as part of its new fund regime
(formally announced in September 2007).
The management company launched its first
fund, Bridge Global Opportunities Fund (BGOF),
in October 2007 and it intends to increase the
size of its Isle of Man operations as other fund
strategies are added.
Four months on, Mark Slater, general counsel
at Bridge Asset Management has commented on
the benefits of the company’s partnership with
DOMICILES REPORT
Reinforcing this point is the fact that Guernsey-
based Schroder Private Equity Services (SPES)
has been named ‘Best Private Equity Fund
Administrator 2007’ at the European Venture
Capital Journal (EVCJ) awards.
SPES received the accolade during the EVCJ’s
annual awards dinner at the Dorchester Hotel in
London. The venture capital and private equity
publication hosts the event to recognise and
celebrate outstanding achievement in the sector
and it is attended by more than 300 of the most
senior industry professionals from around the
world.
The trophies – this year presented by the Rt
Hon William Hague MP – are awarded on the
basis of votes from EVCJ’s readership. The award
for ‘best fund administrator’ was a new category
introduced this year by EVCJ, which is recognised
as one of the leading publications in the field.
Over the last few years and particularly during
2007 Guernsey has been gaining a reputation
from leading fund promoters and sponsors as
the jurisdiction of choice for private equity. For a
Guernsey firm to receive this award so early into
2008 not only reinforces the Island’s credentials
as a centre of excellence for private equity funds,
but gives us a significant boost as we look to
continue growing our business and
developing our infrastructure throughout the
rest of the year.
Peter Niven is the chief executive of
GuernseyFinance
the Isle of Man: “The Isle of Man was the clear
choice of domicile in which to base our
operations when we formed the business last
year, and the Island’s authorities made the set-up
process very straightforward. It is now clear that
our decision has quite literally paid off, with the
Isle of Man’s low tax regime and competitive
operating costs creating the perfect environment
for our fund operations.
“The Island also offers a political and
economically stable platform on which to
conduct business, while the capacity and
appetite for growth mean we have physical room
to expand our company. Obviously the Island’s
close proximity to London and a high quality of
life complete the picture.”
We expect to see the successful Bridge Asset
Management model replicated with further fund
management and administration companies
basing operations on the Isle of Man in 2008.
Despite the challenging current market
conditions, we remain confident about
our ability to convert new business opportunities
for the Island and have a very
full programme of conferences and seminars in
the coming months to showcase the Isle of
Man’s credentials.
Brian Donegan, director, Foreign Direct
Investment, Isle of Man Finance
INVESTOR SERVICES JOURNAL 23
ISJ28 pp16-31 ML 13/3/08 2:01 pm Page 24
OFFSHORE FUNDS
Recently there has been a host of new locales setting
themselves up as fund centres. Nicholas Pratt asks are they sustainable?
he growth of the alternative
T funds industry in recent years has
inspired a host of territories to
launch ambitious plans to position
themselves as the next international
funds centre of choice.
These territories have been
encouraged by the efforts of Dublin and
Luxembourg in becoming the major two
destinations for cross-border fund
administration and also the success that
an off-shore territory such as the Cayman
Islands has had in being a leading
domicile for alternative funds.
By the end of 2007 the number of
international fund centres had risen to
42, including a new wave of on and off-
shore destinations in Canada, South
America, Eastern Europe, the Middle
East and South-East Asia. And while
there may be some short-term success
given the continued growth in the funds
and hedge funds industry, surely the
long-term survival of all of these 42
must be questioned.
In which case, what are the key factors
to longevity and sustainable success for
all of these new funds centres? And is it
possible to already see which of these are
performing well? “The new fund centres
are getting pieces of business but they
are still a long way from gaining critical
mass,” says Harley Murphy, head of
offshore at Bank of New York Mellon
Asset Servicing.
To indicate what they are up against,
24 INVESTOR SERVICES JOURNAL
Rise of the fund
centres
between Dublin and Luxembourg there
are around 120 administrators operating
there, including the five or six firms that
dominate on a global business.
Consequently the mainstream offshore
market is still centred in those two
destinations. What Murphy does
envisage for the new wave of domiciles is
a strategy of specialisation such as real
estate or private equity funds, as is being
seen in the Channel Islands, or fund of
funds such as in Malta.
Alternatively, it will be a case of
waiting for any overspill from Dublin
and Luxembourg. What is less likely to
happen is that any of the new fund
centres will be able to go head to head
with Dublin and Luxembourg and come
off better. “It will be very difficult to win
business from those domiciles especially
with the increase in UCITS funds and the
sheer size of the larger players operating
there,” says Murphy.
There are of course some regional
advantages for many of the newer
domiciles, for instance Malta has
described itself as a domicile positioned
conveniently between Europe and Asia.
However, Murphy also believes that
location is becoming less important in
today’s market due to advances in
technology and the number of global
operators that have offices in several
timezones.
The newer destinations have a fiscal
advantage in their favour but they will
need to make significant investment up-
front in both people and infrastructure to
reach a critical mass, including the
development of over-capacity to be able
to take on the larger business should it
come their way.
But the timing, at present, is not great
says Murphy. “The current market
conditions are working against them,” he
says. “Ireland was very lucky when it set
up the IFSC. It was the start of a bull
market and it gave it the possibility to
work alongside Luxembourg but now the
complexity of products is increasing and
we are in a less certain time. These
things are clearly cyclical but it is a
difficult time to be building a new
domicile and hope to attract people and
funds away from the preferred and
established fund centres.”
In terms of which domiciles are
successful in the long-term, a lot of it
will come down to how long they can
stay in the race in the short-term. “We
will continue to see growth in the market
and some domiciles will stay while others
will fade away. But then 10 years down
the road there will be the next wave of
new domiciles entering the market.”
Of the European centres Murphy
envisages that the Eastern European
ones stand the best chance of success due
to the capacity concerns that surround
the smaller destinations such as Malta,
concerns that will only increase during a
credit crunch or bear market.
ISJ28 pp16-31 ML 13/3/08 2:06 pm Page 25
ISJ28 pp16-31 ML 13/3/08 2:07 pm Page 26
OFFSHORE FUNDS
Malta: The jurisdiction’s relatively short history as an
international funds centre began in 2004 after it was
welcomed into the EU as one of nine accession states.
Between 1988 and 1994 Malta’s financial services industry
had been governed by offshore legislation and had 2,500
trading companies on the island but just a handful of banks
and financial services companies.
The offshore legislation was repealed in 1994 as Malta
embarked on a strategy that would see it adopt EU practices
and regulation, as seen by the implementation of the
Investment Services Act. The 10 year phasing out period for
offshore companies based in Malta coincided with the
island’s accession to the EU. Now, four years on, there just
over 50 UCITS funds, 150 hedge funds, 21 banks, 13 fund
administrators and over 10bn in assets under management
– a sharp increase from the 1bn of just 18 months ago.
According to Michael Xuereb, director for strategic
development at Malta’s Financial Services Authority, the
growth in Malta-based hedge funds has followed an
international trend of moving from the traditional offshore
Guernsey and Jersey: Capacity is also an issue
for the Channel Islands, such as Jersey and Guernsey,
which have a longer history in the funds industry than
Malta but are similarly looking to expand their respective
funds markets. Jersey in particular has been successful in
recent years in developing itself as one of the top European
centres for property funds and private equity funds but is
yet to establish a dominant position in the hedge funds
market, something which it is attempting to change.
“We recently introduced the Unregulated Funds Regime
which is available to high net worth investors,” says Robert
Kirkby, technical director for Jersey Finance, the body
established by the Jersey government and the finance
industry to promote the island as an international financial
centre. “It is wholly unregulated unlike other domiciles
which have a fast-track registration or partial regulation
regime. There is a minimum requirement of $1 million and
26 INVESTOR SERVICES JOURNAL
centres such as the Cayman Islands to ‘onshore’ domiciles
based in the EU or the US.
He credits a “regulatory framework that is flexible and
working well” as the most important factor in the domicile’s
current success but sees a “combination of factors rather
than a single feature” as the key to any long-term success.
The fact that it is English speaking has helped and human
resources have increased. Of the 400,000 population
roughly half are employed and just over 7,500 are working
in the financial services industry and Xuereb believes that
there is room for growth.
Nevertheless, capacity will undoubtedly be a concern for
a domicile the size of Malta and it has turned to education
as a way of swelling its numbers. “All academic institutions
in Malta are geared up for providing more training in
financial services,” says Xuereb adding that the MFSA
provides areas of training as required. There are currently
10,000 university students and despite the frequency of
emigration, it is these students that the funds industry is
targeting, says Xuereb.
it is assumed that with that much money the investors will
be able to afford the professional advice they need. It also
complements our existing regulated regime and the recent
updates we have made to company law.”
The fact that Jersey has been able to introduce such
legislative changes is indicative of a government that is
pro-finance and pro-funds, says Kirkby, an attitude that he
feels has helped Jersey to overcome a lot of its capacity
constraints. “The government recognises that it is very
lucrative work so the immigration of professionals is well
supported and I have yet to hear of any company that was
not able to attract the staff it needed.”
So what is so attractive about Jersey? “It has a low tax
regime and it is a nice place to live – there are good schools
and hospitals and a low crime rate,” says Kirkby. The
commute is rarely longer than 10 minutes and in the same
space of time you can be on the beach. And for those that
ISJ28 pp16-31 ML 13/3/08 2:07 pm Page 27

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ISJ28 pp16-31 ML 13/3/08 2:07 pm Page 28
OFFSHORE FUNDS
seek a more exciting night-life, London is just a 45 minute
plane journey away.
It also helps that work is interesting, says Kirkby,
something which ahs helped attract the local work-force
along with an extensive training program – something
which Kirkby says will help sustain the Island in the long-
term. “After all, you can only have regulatory arbitrage for
so long.”
Long-term sustainability will also be helped by Jersey’s
heritage, says Kirkby, who accepts that the current number
of international funds centres is unlikely to be so high in
five to ten years time. “There is clearly no need for so
many,” he says.
Where some of the newer domiciles will struggle, he says,
is their lack of a proven track record. “The key requirement
for fund managers is service levels and that comes from
having the right people on the ground and the history.
Jersey has been an established funds centre for the last 10
to 15 years, it has the people, it has a robust court system
and a reputation which the new domiciles will struggle to
gain.”
Heritage and reputation are cited as important factors by
those involved in Guernsey’s funds industry. As Robin
Fuller, managing director of Guernsey-based Dominion
Fund Management, says, Guernsey predates Dublin, if not
Luxembourg, as an offshore fund centre, beginning
operations in the late 1960s, primarily for UK institutions.
It then assumed more of a retail focus in the 1980s before
returning back to the institutions given the success of
Dublin and Luxembourg in the retail sector.
Currently much of Guernsey’s fund industry is centred on
the more specialised side of the market – property and real
estate funds, private equity, hedge funds and fund of funds
Dubai: One new market that has emerged without any
of the heritage enjoyed by the Channel Islands yet in many
people’s eyes, it stands a better chance than many of
enjoying some long term success as an international funds
centre. For example, as BNY Mellon’s Murphy states, not
only can it cater for specialist funds, notably Sharia funds,
it is more immune to changes in market conditions given
the financial resources of the Emirates and, similarly, has
few capacity constraints in either infrastructure or people.
“We are looking at Dubai as a possible fund centre for the
future. With the current demand for Islamic finance and
Shariah funds it makes sense to have a presence there.”
The first thing Kevin Birkett, director, asset management
at the Dubai International Finance Centre, says is that
28 INVESTOR SERVICES JOURNAL
– and it is this ability to respond to changing market
conditions that Fuller says is one of Guernsey’s key
advantages.
“Guernsey has to be able to do things differently and
create an environment where this is possible,” he says.
“There has to be an interaction between the legislators in
Guernsey, the market and the regulators and Guernsey is
very good at that and has always been very responsive.”
Some of this responsiveness is down to the proximity and
accessibility of Guernsey meaning that if a fund manager
wants to see his administrator, custodian and regulator all
in one day, they will all see you, claims Fuller. Furthermore,
there is a collective will among all sides of the market in
Guernsey to grow the industry, something that tends to
exist in the smaller domiciles and which helps to cultivate
an accommodating yet robust enough regulatory
environment, something that Fuller believes will be
increasingly important for the alternatives market.
“There is more institutional money driving hedge funds
and there is more need for good corporate governance and
for compliance oversight which can be done more easily in
Guernsey than the Caribbean,” says Fuller.
Guernsey is set to introduce a new Companies Law
later this year (June), a new electronic company registry
and the investment regulations are all being upgraded in
response to industry demand, all of which is part of the
strategy for growing Guernsey as a funds centre, says
Fuller. “This is what attracts people to Guernsey –fund
managers are constantly looking to innovate in the
alternative funds sector, to do something different,
Guernsey is responsive to this. It is willing to support
managers ‘pushing the envelope’.”
Dubai is not just trying to be a Cayman Islands for funds or
a Dublin for fund administrators. “We are more trying to
create an all-embracing capital markets centre, akin to
London where there is a coming together of all kinds of
financial services firms.” Consequently, he says, the funds
industry will be subservient to the capital markets activity
that will in turn create the encouragement for asset
managers to be here.
The Dubai International Financial Centre has been in
effect since September 2004 but the collective investment
legislation was only introduced in March 2006. Funds
domiciled in Dubai only number 11 currently but this is no
great surprise says Birkett as they are still waiting for the
market to establish and the industry to arrive.
“The asset management is here in large numbers but
ISJ28 pp16-31 ML 13/3/08 2:07 pm Page 29
only really as sales outposts rather than manufacturing
centres,” he says. “Now we are beginning to see more
funds looking to manufacture products here but they are
still using the traditional Luxembourg/Cayman/BVI route at
the moment.
The plan is a long-term one, even if ‘long-term’ is a
phrase not readily associated with Dubai. What is more
readily associated with Dubai and the Middle East is the
whole area of Islamic finance and shariah funds, however
Birkett stresses that there is also a number of firms
engaged in conventional business.
Birkett also insists that Dubai is not really offering any
specific incentives for firms to set up there – so no seeding
of funds or similar tactics. “We think we have created the
infrastructure here that will make us an attractive
proposition. We have a common law jurisdiction in the
middle of a shariah law country. We have an IOSCO-
accredited regulator (the DFSA), we allow 100% ownership
of a company, which is rare in Middle Eastern countries,
and there is a guaranteed free tax rate for the next 50
years.
“These features along with the economic growth that is
happening here, should be enough to attract a lot of firms,”
says Birkett. In the three years since the DISC was set up,
the regulator has licensed 178 firms, including banks and
private equity firms, to operate there.
As would be expected in Dubai, capacity is unlikely to be
North America: In contrast to the example of
Dubai and its image as an oasis in the desert attracting
young ex-pats in search of a lucrative life, albeit that many
more are settling for longer periods, there are a number of
Canadian cities that are competing for employment,
particularly in the fund administration market.
Ron Suber, president of Spectrum Global Fund
Administration mentions the Canadian cities of Nova
Scotia, Prince Edward Island (PEI), Ottawa and Toronto as
having been particularly aggressive in soliciting hedge
funds and offering a multitude of incentives.
As many others have stated, Suber does not imagine that
all of the new territories will be able to sustain any long-
term success but what is interesting about the Canadian
cause is that in most cases it has involved attracting
Canadians back form the various off-shore domiciles, such
as the Cayman Islands, Dublin or Bermuda.
“Many of the Canadians that went to these off-shore
destinations are now at the point in their lives where they
want to come back to Canada. Many of them are older and
OFFSHORE FUNDS
an issue. The current centre is twice the size of Canary
Wharf (110 acres) and there are 65 buildings being
constructed on the site to cater for both residential and
commercial properties. “Our current problem is getting
them up quick enough to cope with demand,” says Birkett.
In terms of labour, the market is very much ex-pat,
however there is a difference in many of these ex-pats now,
says Birkett. “Historically Dubai was seen as a hardship
post where you would stay for two years maybe and then
return to the family but now people buying property here,
sending their children to school here and generally
establishing a life here.”
Overall Birkett remains confident that Dubai will prove to
be successful. “I think this is another one of those
initiatives in Dubai that just does not fail. I can’t think of
any market in this region that could have an English legal
system and an IOSCO regulator and I think that’s been the
secret of our success.”
Birkett also cites the amount of wealth in the Middle
East, something which certainly protects areas like Dubai
more than other territories when it comes to market
slowdowns. “I don’t think Dubai is ever immune to global
recessions or credit crunches but it is so far removed from
the centre of the action and in a business with so much
economic activity around us. There are ripples perhaps but
no-one is getting wet.”
want to be closer to their families or start their own,” says
Suber.
It is not just Canada that is attempting to establish itself
in the Americas. Suber also mentions South and Central
American domiciles such as Costa Rica, as well as South
East Asian countries like Singapore and the Philippines as
territories that are providing a talented accounting and
operations resource pool to fill the growing capacity for
fund administration.
“Having universities that are producing talented,
motivated students with accounting and brokerage
knowledge and training along with a pool of labour that
wants to live and remain in that area will be key,” says
Suber of the various training and education efforts
underway at these new destinations. But as much as the
desire for staff to live and raise their family there and the
ability to encourage young professionals and graduates to
develop their career there, some good old-fashioned
financial, tax or real estate incentives will always help, says
Suber. “The combination between these factors is
important – those incentives cannot be overlooked.” ■
INVESTOR SERVICES JOURNAL 29
ISJ28 pp16-31 ML 13/3/08 2:07 pm Page 30
OFFSHORE FUNDS - BIBA
ost of the Fortune 100
M companies have a Bermuda
captive insurance presence.
Recently released figures show the
capitalisation of Bermuda's reinsurance
industry rose more than 20 percent to
reach USD129 billion by the end of the
third quarter of 2007. That staggering
figure is greater than the 2006 gross
domestic product of many countries,
including Pakistan and New Zealand and
oil-producing Nigeria, according to
International Monetary Fund (IMF)
figures.
And, in the investment industry,
Bermuda also enjoys a world class
reputation. At the end of 2007, after
making the decision to leave London,
leaders of Invesco quickly arrived at the
conclusion that Bermuda was the best
place to redomicile. With more than
USD500 billion of assets under
management, the company picked the
Island because of its legal and
regulatory environment and the
similarities of those to the laws of the
US state of Delaware. A company
spokesman said that a number of the
large companies already domiciled in
Bermuda were recognised and respected
by Invesco, which presented an
additional reason in the Island's favour.
30 INVESTOR SERVICES JOURNAL
Bermuda
thriving
Bermuda enjoys a
booming investment
business and a world-
class (re)insurance
market that is quickly
closing on the leading
position for insurance
domiciles says Cheryl
Packwood of BIBA
He went on: "The third factor was we
wanted to make sure the transaction in
moving our domicile was tax neutral for
our shareholders. Moving to the US
would not have been a tax neutral
situation. When it came down to it, it
was a very short list of places that we
considered and Bermuda was at the top."
Packwood cites the ongoing
cooperative support and consultation that
thrives between government, the
business community and regulators
which ensures that appropriate yet
flexible legislation and regulation
remains a priority. The passing of the
Investment Funds Act 2006 in December
last year by Bermuda's House of
Assembly was applauded by the business
community in Bermuda.
BIBA (the Bermuda International
Business Association) gave its full
endorsement to the legislation, which
outlines more clearly the regulation of
public funds and refines the framework
for non-public, institutional funds.
Packwood stated: "As I commented at the
time the legislation was enacted, this Act
is yet another example of the positive
results of collaborative consultation
between Bermuda's private and public
sector partnership. It is the policy in
Bermuda for the Ministry of Finance and
the Bermuda Monetary Authority (BMA)
to collaborate on writing financial
legislation. On this occasion, as is
traditional in Bermuda, they also asked
for the input of the financial industry in
reviewing the Act and recommending
pertinent changes or additions to it prior
to presentation before the House of
Assembly. It is this ongoing collaborative
spirit between Government, industry and
the regulatory authorities that is one of
the primary reasons for Bermuda’s
success in introducing legislation that is
effective and works."
Finance Minister Paula Cox, who
piloted the Act through Parliament, said
that it was necessary for Bermuda to
streamline the incorporation process for
investment funds and eliminate
unnecessary administrative procedures to
augment the jurisdiction’s competitive
edge by bringing more clarity and
certainty to the authorisation process.
She explained: “There will be less time
required to set up a fund as the rules are
more clearly stated. The Act is another
example of Bermuda's continued efforts
to ensure that we maintain the right
balance as a reputable international
financial centre.”
means
Although the passing of the Act
that Bermuda's fund
administrators will be licensed for the
first time, Minister Cox has been quick to
point out that it is not the case that there
has been no regulation of service
providers.
Prior to the Act, fund administrators
were regulated entities under the
Proceeds of Crime Act 1977 and were
subject to a higher level of due diligence
when handling subscriptions and
redemptions similar to those imposed on
banks, trust companies and investment
providers. While many funds register in
other jurisdictions, Bermuda is one of the
leading choices for companies to
administer their funds, regardless of
where they choose to domicile. Bermuda
actually administers a substantial
proportion of the funds which register in
Cayman, for instance.
BIBA’s members are enthusiastic about
both the intent and content of this
legislation. Combined with Bermuda's
superior infrastructure, reputation and
intellectual capital, the island is poised to
effectively garner its share of the
booming global fund business.
ISJ28 pp16-31 ML 13/3/08 2:07 pm Page 31
Another attractive feature for those
choosing to register and list in Bermuda
is a unique vehicle whereby funds can be
simultaneously approved by the BMA
and listed on the Bermuda Stock
Exchange (BSX) in as short a time as
two weeks.
In late 2005, a New Product
Development Committee was established
as a joint initiative between BIBA
members of the private sector, engaged
in funds and trust business, the BSX and
the BMA in order to stimulate creative
thinking and devise new products that
would appeal to global investors.
The first product developed, ‘Launch ‘n
List’, leverages the fact that Bermuda has
a fully electronic stock exchange with
Designated
Investment
Exchange status,
as well as a
regulatory
authority with a
practical but
effective approach
to regulation that
Bermuda's reinsurance industry rose
more than 20% to reach USD129 billion
Cheryl Packwood by the end of the third quarter of 2007
supports development of bespoke
products for the investor. As of
December 2007, the BSX was designated
by the Board of the United Kingdom’s
HM Revenue and Customs as a
“Recognised Stock Exchange”.
The committee is chaired by Conyers
Dill & Pearman partner, Julie McLean
who explained: “Funds usually list for
two main reasons. The first is that listing
insures that the shares of the funds are
considered liquid assets, which many
institutional investors prefer since they
are frequently prohibited, for various
reasons, from investing in illiquid assets.
Secondly, hedge funds are largely
unregulated so listing provides a layer of
comfort to investors that there is an
independent, regulatory body
monitoring the funds to ensure proper
corporate governance and compliance
with stated investment strategies and
restrictions.”
The feedback the committee received
was that the larger exchanges had
increased their regulatory approach to
the extent that it was inappropriate and
impinged on fund managers’ ability to
effectively carry out their investment
strategy. Julie McLean said that
exchanges needed to have a balanced
approach whereby investor protection is
achieved while still allowing funds to
carry out effectively their investment
strategy. “This is what we feel the BSX
offers,” she added.
The ‘Designated Investment
Exchange’ recognition given to the
Bermuda Stock Exchange reflects that it
is a properly managed exchange with
sophisticated trading platforms and not
just a mere listing board. In addition to
the effective regulation of the BSX, the
exchange has the ability to be nimble
and flexible in its approach to listing
funds. “An example is funds with side
pocket investments,” said Julie McLean.
“The BSX has never had an issue with
listing such shares.”
As mentioned above, the co-operation
between the Bermuda authorities and
the BSX in the ‘Launch ‘n List’ process
means that funds can apply to
incorporate and be classified under fund
regulations at the same time that initial
application is made to the BSX for
listing.
Greg Wojciechowski, President and
CEO of the Bermuda Stock Exchange
and a member of the New Product
Development Committee commented
that: “We continually see issuers
coming from jurisdictions all over the
world seeking to incorporate in
Bermuda and list on the BSX. The
Launch ‘n List product was a logical
extension to offer our clients a one-stop
solution.”
Mr. Wojciechowski also pointed out
that the new product will not only apply
to the funds industry but will also be
important for products such as private
equity and debt transactions.
The ‘Launch ‘n List’ product is an
example of the innovative yet quality
business that Bermuda can provide
discerning global investors and is the
brainchild of a successful collaboration
between the public and private sector. ■
OFFSHORE FUNDS - BIBA
Highlights of the Investment
Funds Act
• a clearly defined distinction
between public (retail) funds and
institutional or non-public funds;
• refined powers to exclude funds
from particular requirements,
giving certainty as to the minimum
requirements expected of fund
operators;
• more clearly defined exclusions
from fund regulation, so funds of a
‘private nature’ are not captured;
• the inclusion in the legislation of
partnerships, as well as mutual
fund companies and unit trusts
(under previous legislation
partnerships were not covered);
• regulation and licensing of fund
administrators;
• the introduction of a new class
of funds, known as ‘administered
funds’. With the introduction of
licensed administrators, it is now
possible to register funds under
this class with the level of
regulation adapted on the grounds
that the administrator is based in
Bermuda and subject to codes of
conduct and fund rules that will
ensure the proper level of
governance of the fund;
• clearer definition of the rules for
the appointment of service
providers and delegation of powers;
• a new section enabling unit
trustees to hold property in
segregated accounts and defining
how these accounts will be
managed. This affords trustees the
same benefits as companies
operating with segregated
accounts;
• rules for prospectuses of funds
that are clearly set down and
distinguished from the general
rules under the Companies Act of
1981;
• enhanced powers for the BMA to
inspect funds and to require more
information;
• more clearly defined
requirements and powers for
sharing of information with other
regulators;
• the introduction of a right of
appeal to a tribunal, similar to
other financial institutions.
INVESTOR SERVICES JOURNAL 31
ISJ28 pp32-51 ML 13/3/08 4:34 pm Page 32

NORDIC CUSTODY

Breaking Out Fabien Buliard reports on how the

Nordic custody market is dealing
with the local and the global
ith rising volumes and a well- systems, not to mention CSDs. providers like ourselves to provide

W established community of
institutional investors whose
strategies are becoming increasingly
sophisticated, the growth potential of
the Nordic custody market is attracting
the attention of both local and global
institutions, in an environment that
remains fairly fragmented.
Indeed, it would be more appropriate
to talk about Nordic markets, with four
countries - Sweden, Norway, Finland and
Denmark - that have different
languages, currencies, regulators, tax
"Given the differences between
markets, the market knowledge from a
custodian is very important, to guide
investment banks and global custodians
in the market to get the best benefits and
information," says Anne-Lise
Kristiansen, head of sub-custody at
Nordea.
For established regional players fully
versed with the local nuances, such
fragmentation constitutes both a
challenge and an opportunity.
"There are challenges for regional
customers with a harmonised solution
that is as simple as possible, even though
the local environment is pretty
fragmented," says Johan Wennerberg,
vice president & head of Relationship
Management at Handelsbanken Asset
Management.
However, he admits it can also be seen
as an opportunity, "because it makes it
more difficult for new competitors to
enter the market. They need to set up in
many different places and adapt to
different systems, so it can be seen as a

32 INVESTOR SERVICES JOURNAL

ISJ28 pp32-51 ML 13/3/08 4:34 pm Page 33

www.danskebank.com

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– for the Nordic region
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Issued by Danske Bank, Copenhagen and approved by Danske Bank, London Branch, 75 King William Street, London EC4N 7DT, which is regulated by the Securities
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Financial Services Act 1986 for the protection of investors may not apply to investment business carried out from offices outside the UK.
ISJ28 pp32-51 ML 13/3/08 4:34 pm Page 34
NORDIC CUSTODY
type of barrier to entry."
This lack of harmonisation is not the
only hurdle awaiting custodians
wanting to set up shop in Scandinavia.
Banks that are not established and
regulated locally cannot act as a trustee
for local funds, forcing players willing to
take on the fund's global custody
"If you are a local player, you are competing
head-to-head with institutions that have a global client
base; and that is very difficult to compete with"
business to strike up a co-operation
agreement with a depot bank in the local
market.
Still, for all the complexities and
subtleties of the Nordic markets, the
opportunities presented by their vibrant
investment communities are enough to
motivate local and global providers
alike.
"We see huge increases in transaction
volumes," says Wennerberg. "Of course,
investment banks and international
brokers represent a big part of that
business. However, the local pension
funds and domestic client segments are
also growing quite a lot. We do see local
companies popping up and doing very
well in the market. Hedge funds are also
an area that is growing very quickly,
mainly in Sweden, but also in the other
Nordic markets."
The Nordics also present a very
sophisticated client base, according to
Maddy Senior, head of Nordic client
services at Northern Trust. "They are
clients with large pools of assets and
many of the ones we deal with are
predominantly in-house managed," she
explains. "So when you are talking about
a pension fund client, you have to be able
to treat them and understand their
needs, not just from the pension
perspective, but also as an investment
manager in their own right."
For Senior, the most notable driver in
the region last year was the performance
of some of the funds. "One of our
clients had a double-digit annualised
return for last year," she says. "When
you are looking at a volatile market, it is
a pretty impressive bottom line figure.
Really, the main driver for the clients
there is to continue to generate alpha. In
34 INVESTOR SERVICES JOURNAL
doing that, they are having to invest in
more alternatives, derivatives, and with
that come much more sophisticated
product lines like cash collateral
management."
Another potential new opportunity in
the field of securities services was
brought on by recent changes in
Finland's tax laws.
"Clients are now able to lend
securities," Senior explains. "Securities
lending is going to be a big thing this
year in Finland and in Norway. We are
seeing mutual fund lending showing
more promise in being able to expand
the percentage of assets being lent."
Another trend in demand from
domestic clients is a growing interest in
high growth foreign markets such as
Far-eastern Europe or Africa. "This is
something that keeps our global custody
network quite busy," Wennerberg says.
This international appetite also
increases the sophistication of the
clients needs, according to Senior. "You
are seeing this much more diverse
investment strategy, clients are moving
into world markets they haven't been in
before, and currency also is an important
aspect of their investment needs," she
explains. "They need to have a global
platform that can give them real time
information and very refined technology
that takes them straight to the
information they need, so that they can
manage their risks much more
effectively."
In a region that tends to lead the way
in terms of technology adoption,
particularly when it comes to financial
applications, technology can indeed act
as a differentiator. And in the innovation
race, global custodians appear to have an
edge, if only because of their deeper
pockets.
"I think the technology requirements
of the Nordic market, certainly at the
institutional investor level, may also
differentiate the Nordic market," says
Sid Newby, head of business
development for the Nordic region, BNY
Mellon. "They have strong appetite for
highly technical interfaces. As an
organisation, BNY Mellon has invested
heavily in building these interfaces and
we have had good experiences in
working with our top tier clients, which
go beyond the level of interfacing we
see in many other markets. It would
incorporate not just transactional flows,
but an array of data sets."
For Newby, the barriers of entry are
not necessarily around whether you are
international or local. "I think it is about
having the range of services and having
made the investment in the technology
that is now being demanded by the
underlying clients," he explains.
Newby considers that BNY Mellon's
win of a major mandate in the region
last year, for one of the largest Nordic
pension funds, Denmark's ATP in
Denmark, demonstrates the advantages
offered by a global house over local
banks.
"ATP moving from a local to a global
(player) is a good example of this," he
says. "In some countries, there has been
a preference towards local house banks,
but as the clients' investment strategies
have become more complex, their needs
have expanded, and we are increasingly
seeing them look toward providers who
have the global reach and range of
products that can meet their changing
needs."
"ATP was looking for a broader area
of services, with highly technical
interfaces and components of a middle
office solution, which encompassed core
custody but also traditional middle office
functions such as trade matching and
collateral management," Newby
explains.
He also contends that, despite cultural
differences across the regions, there are
strong similarities in the needs of top
tier institutional clients. "In addition to
core custody, there will be similar
demand for servicing OTC derivatives
and a range of value-added services,
such as securities lending, providing
CLS and collateral management," he
says.
Local players, however, argue that
their intimate knowledge of the markets
in which they operate gives them a
competitive advantage over larger
foreign players.
"Technology is of course a
ISJ28 pp32-51 ML 13/3/08 4:34 pm Page 35

NORDIC CUSTODY

differentiator," admits Göran Fors,
global head of custody services at SEB,
"but the local presence and our expertise
in servicing the client is equally
important. We continuously develop our
technology to accommodate our clients'
needs."
As for the tendency of pension funds
and insurance companies to invest more
globally, and increasing demand for
services in Africa, Eastern Europe, or
Asia, Fors does not think they provide
an advantage to global players. "Local
custodians are very capable of offering
those services as well," he says.
Bente Hoem, head of Global Relations
and Business Development at DnB Nor,
considers that local players have the
"unique added advantage of full scale
local operations and solid domestic
client bases. In addition, they have in-
depth product and market knowledge,
are influential and their closeness to the
local market is an obvious benefit to
Nordea Bank AB (publ)
clients. Having a large domestic client
base also ensures that the custodian is
committed to the market and will not be
tempted to withdraw in difficult times."
Peter Dahlgren, head of custody
services at Nordea, considers that what
sets his bank apart from the competition
is its pan-Nordic footprint. "The main
differentiating factor is that we are local
in each of the four markets and our
competitors are not,'" he says. "They are
usually local in Sweden, but are not full-
fledged banks in other countries. That is
of course a huge advantage for us, as it
allows us to pass back benefits to our
sub-custody clients when it comes to
corporate actions or tax services."
If competition continues to heat up
among Nordic providers, some of them
have also signed mutually beneficial
deals with global custodians to address
some of the challenges of their
competitive environment.
"If you are a local player, you are
competing head-to-head with
institutions that have a global client
base; and that is very difficult to
compete with," says Dahlgren. "We have
tried to mitigate that a couple of years
ago through our partnership with Bank
of New York, which we are constantly
looking at, to see how we are going to
develop further."
Another such alliance is the
partnership between Northern Trust
and Handelsbanken, signed five years
ago, which covers all four Nordic
markets.
"We provide local custody, local
connections, and trustee services to local
fund companies and insurance
companies," says Handelsbanken's
Wennergberg, “while Northern Trust
provide their expertise in global custody
and make their set-up and systems
available to domestic clients in the
Nordic markets."
Northern Trust's Senior considers

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email: anne-lise.kristiansen@nordea.com

Making it possible
ISJ28 pp32-51 ML 13/3/08 4:34 pm Page 36

NORDIC CUSTODY

that foreign players face the choice of
setting up shop as a full-blown local
bank or partnering with an existing
local player with immediate expertise.
"There are restrictions, but the
important thing is to be creative and to
be open-minded, to look for best-of-
breed solutions for your clients, and
focus on where you can add most value,"
she explains.
However, some Scandinavian banks,
like Denmark's Danske, Norway's DnB
NOR or Sweden's SEB, still prefer to go
it alone, at least for now.
"We have of course evaluated the
possibility of partnering with a global
institution and decided that we would
continue by ourselves," says SEB's Fors.
"We saw that the solutions that we could
offer to our clients combining custody
with other products in the bank was very
important and that our offer was
competitive."
"For the time being we do not have
any plans to partner with a global
custodian," says Hoem, "but if the right
timing, product and benefits for both
parties are present, DnB NOR will
consider the idea."
"I think that the domestic providers
offer a very good, high-quality service
domestically," says BNY Mellon's
Newby. "They have been very focused on
their domestic service and for a number
of them, on creating a pan-Nordic
solution to provide a consistent service
across all four markets."
"However," he adds, "I think that the
top tier institutional investors and asset
managers are becoming more complex
and their needs are becoming broader. So
there is a challenge for local providers to
maintain the level of investment that is
required to continually service this top
tier. That is one choice they may face:
either focus on domestic custody or
develop a global solution which has a
minimal level of investment that is not
insignificant."
But whether or not they form alliances
with global players, Wennerberg reckons
it is unlikely that local banks will exit the
custody business altogether.
"All the local banks provide a custody
product, both for the proprietary and
retail sides," he explains. "All major
players are strong in the retail sector and
also have big amounts of proprietary
trading in the markets. So there will
always be a need for the banks to
maintain a custody and settlement
product, internally. I don't think any
bank will exit the custody market,
because as long as you need to have the
product internally, you can also offer it
to external clients."
Others consider a consolidation of the
local custody market likely, with
mounting price pressure that could be
hard for smaller players to stomach in
the long run.
"We are getting a lot of new business
from the players that are not sustainable
in the sub-custody business, which
helped us double our volume last year,"
says Nordea's Dahlgren, who sees his
bank as one of the few consolidators in
that segment. "We increased our market

The leading provider of Custody and Clearing Services in Norway

DnB NOR your Nordic Partner

Offering: Commitment, Knowledge, Experience and Excellent Service

For further information please contact:
Head of Securities Services - Jan B. Penne: jan.penne@dnbnor.no
Global Relations and Support - Bente Hoem: bente.hoem@dnbnor.no
e-mail:CUSTODY DNBNORNOsWWWDNBNORNOCUSTODY
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 37
share considerably with investment
banks in 2007," he adds.
But as Newby points out, the question
there is more generally whether or not
there will be more banking consolidation
in the region. "The Nordic market has
already gone through a series of bank
consolidations over the last five years,"
he says. "Banks that do not have a pan
Nordic footprint would probably like to
"I think that the domestic providers offer a very good, high-quality service
domestically," says BNY Mellon's Newby. "They have been very focused on their
domestic service and for a number of them, on creating a pan-Nordic solution to
provide a consistent service across all four markets."
explore opportunities to create a pan
Nordic institution, but the number of
opportunities are diminishing."
Beyond the competitive landscape and
potential M&A activity in months to
come, questions remain around the
Nordic financial industry's desire to push
for more harmonisation and integration,
and if so, whether it will be driven by
purely Scandinavian initiatives or a
result of larger changes affecting the
European landscape.
While progress has been made on the
exchange front, with regional exchange
OMX now covering Sweden, Denmark,
Finland, as well as Iceland, Latvia, and
Lithuania, the CSD environment
remains fragmented.
NORDIC CUSTODY
Indeed, while Sweden and Finland stage," says Newby. "Obviously, that
have merged their CSDs, at least on a hasn't been totally successful. Norway
corporate level, with Norway and still has its vertical integration model of
Denmark generally seen as dragging CSD and exchange. I don't see that
their feet. In fact, Norway continues to changing in the short term, but there is
operate its own exchange, vertically seems to be the will from the local banks
integrated with the country's depository. to make that happen."
Therefore, plans to consolidate On top of their pan-Nordic ambitions,
regional depositories into one Nordic local players are also looking beyond the
CSD, while they are supported by the borders of Scandinavia to high growth
banking community, have never really neighbouring markets on the
taken off. What's more, they could Eastern front, with Baltic countries like
eventually be rendered irrelevant by the Estonia, Latvia and Lithuania, now EU
advent of a pan-European clearing and members, but also to the West, with
settlement facility, as proposed by the Iceland.
ECB's Target 2 Securities project. One of the Baltic's region largest
"I think we are going to see more banks, Hansabank, sees SEB as its main
harmonisation, but probably as part of a competitors in the Baltic market "while
European harmonisation effort that will Sampo, Nordea and Svenska
include the Nordic countries," says Fors. Handelsbanken have minor market
"If all Nordic CSDs commit to Target 2 shares as well."
Securities, it will of course have a big Nordic custody players therefore have
impact on the region, but it is too early plenty of opportunities to tackle both at
to say whether that will be the case." home and in nearby emerging markets,
"A lot of the local banks have spent but with growing appetite from global
considerable efforts working with the competitors and a changing European
local CSDs and exchanges, trying to environment, they have just as many
encourage a move to a consolidated challenges lying ahead. ■
Flexibility on a solid ground
Handelsbanken Nordic Custody Services is locally
present in all the Nordic markets, and offers a wide product
spectra to a diverse client base. Handelsbanken is one bank
throughout the region and we pride ourselves on being the
PRVWÀH[LEOHSURYLGHURIFXVWRG\DQGFOHDULQJVHUYLFHVLQWKH
region. We are also one of the highest rated private banks in
Europe.
Nordic Custody Services
www.handelsbanken.com/nordic_custody_services
Tel: +46-8-701 2988
custodyservices@handelsbanken.se
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 38
CANADIAN CUSTODY
Jamie Darlow reports on how Canada is
surviving the credit crunch
t seems a shame to begin another
I feature bemoaning the fallout from
the US credit crunch, but when
considering the Canadian custody market
it’s hard to avoid. Pension funds north of
the border were hit hard by the turbulent
markets of 2007, loosing 0.5% in the
quarter ending 31 December, and
returning only 1.5% for the year,
according to a recent survey from RBC
Dexia.
“Overall, 2007 was a tumultuous year
for Canadian pension funds,” agrees
Annie Blouin, head, North America,
Corporate & Institutional Services at
RBC Dexia Investor Services. “They were
hurt not only by the high Canadian
dollar’s impact on foreign investments,
but also the tightening global credit and
recessionary pressures in the United
States.”
More on the Canadian dollar strength
in a minute, but the tightening of global
credit and recessionary pressures from
38 INVESTOR SERVICES JOURNAL
the US are generally accepted to have had
a significant affect on the Canadian
custody market.
“The impact of the credit crunch on
equity markets — financial sector stocks
have been the hardest hit and are having a
significant impact on Canadian returns
since they represent almost 30% of the
S&P/TSX 60 index,” says Thomas C
MacMillan of CIBC Mellon, which is
jointly owned by CIBC and The Bank of
New York Mellon Corporation.
State Street’s Canadian Universe
performance was broadly consistent with
RBC Dexia’s report. “Our data reveals a
flat (0%) median fourth quarter return for
Canadian pension funds and a full year
return of 3.1%,” says Stephen Smit,
president of State Street Trust Company,
Canada, and head of investment servicing
and investment research and trading in
Canada.
Yet with the exception of a few funds
with exposure to asset-backed
commercial papers (ABCP), and the
broader impact on equity market
valuations, Canadian custodians and
pension plans came through the credit
crunch largely unscathed, Smit continues.
Generally, Canadians did not have to
wake up each morning to hear of the
next set of billion dollar losses from their
unfortunate retirement fund, as many
Americans did.
Northern Trust, the other of the big
four players in Canada, tells of a similar
story played out over 2007: lots of
volatility, sparked by the subprime
mortgage debacle in the US. Rob Baillie,
president and CEO at Northern Trust’s
Toronto office, takes up the story:
“Returns in Canada through July show
that equities were very strong. The
second half of the year they were
relatively flat and very volatile. Fixed
income posted some positive results.”
Yet Baillie continues from Smit’s theme
that Canada in fact came away largely
unscathed by the US subprime disaster.
“The interesting comparison is between
Canada and the US – Canada performed
quite well,” he explains. “In Canadian
dollars, the S&P/TSX produced a
composite return of 10% last year, where
in the US the S&P500 returned only
about 5% in local dollars and lost 10% in
Canadian dollars.”
Other figures are in accord: the
financial services sector was down 1.5%
approximately – admittedly not good by
any stretch of the imagination - but the
US was much lower, around 30% down.
Baillie explains: “The Canadian market
has been strong and the credit system is
in much better state than the US. We
have no subprime lending market here,
which is a key strength of the Canadian
banking system.”
The year ahead looks like being a more
positive year for Canadian custodians. In
2007 the Canadian dollar reached parity
with the US dollar in 2007, climbing
dramatically during the course of the
year and virtually eliminating gains on
non-Canadian holdings, particularly
those in the US.
John Hardy, strategist at Saxo Bank,
explains that in 2002, the USD bought
1.60 CAD, but in late 2007 it bought as
little at 0.91, far and away the lowest level
recorded since the end of the Bretton
Woods system in 1971. “The latter
phases of CAD strength were closely
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 39
linked to Canada’s enormous wealth of
natural resources as commodities prices
rocketed – especially in energy and
metals,” he explains. “These industries
were pivotal in strengthening the CAD
on all fronts: in terms of capital flows due
to foreign investment, in terms of a
strong trade surplus, and due to their
effect on the domestic economy and the
governments ability to maintain a strong
budget surplus.”
And since the US is where the majority
of non-domestic investment from
Canada ends up, the affect of the strong
Canadian dollar was increased. What is
more, the US market continues to be the
major source of geographic
diversification for Canadian investors,
according MacMillan.
But 2008 is predicted to see the CAD
weakening against the USD, according to
Saxo, with the CAD moving from being
underpriced to severely overpriced
between 2002 and 2007. “While in the
short-term we could see a bit more CAD
strength on strong commodity prices, the
longer term outlook is more likely to
favour CAD much weaker versus the
USD. First, the Canadian economy
cannot move independently or in the
opposite direction as the US forever due
to the degree with which the two
economies are integrated,” Hardy says.
“Second, the strong CAD is damaging to
other sectors of the Canadian economy
in terms of export competitiveness, and
the weak USD is doing the opposite.
Canada recently recorded it’s lowest
merchandise trade surplus in years, while
the US non-energy trade deficit is fast
shrinking. Finally, any strong sell-off in
commodities markets related to a global
growth slowdown would likely mean a
weaker CAD.”
Whether or not the US economy will
recover from its downturn or slide
further into depression isn’t really a
matter for debate here, but the link
between the two largest North American
economies should not be ignored. But it
is generally accepted by the big
custodians that time is on the side of the
long-term investments – the long-term
returns are there for the taking.
Unfortunately, that’s not nearly good
enough in 2008. Pension funds are
expected to make returns in both good
years and bad as investors become
increasingly savvy. In many countries
there are also deficits to make up and
almost all developed countries are facing
an aging population with fewer
contributors to pay the bills.
Many funds have got around this by
changing their investment strategies:
some have embraces a policy of absolute
returns, some have invested in hedge
funds and fund of funds and commodities
while some have expanded their
securities lending operations. The list
goes on and on, but the buck stops with
the custodians who must service these
requirements.
Providing for these alternative
investments is one of the biggest, if not
the biggest, potential area for growth for
the asset servicing industry in Canada,
says Smit. “Allocations above 20% of
total plan assets are not uncommon
among the larger plans and some have
been very public about their intentions to
increase their allocations even further,”
he explains.
RBC Dexia’s Blouin agrees that one of
the major trends is the dramatic increase
in the number of traditional, long-only
funds making use of alternative
investment vehicles. “This growing trend
has added a new level of complexity to
our clients’ businesses and accordingly,
they are becoming increasingly reliant on
us to help them administer these
products. An excellent example of this is
the emerging popularity of 130/30
investment strategies, she says. “We
identified this as an opportunity for us to
grow with our clients and developed the
Products and services for funds, provided by custodian
banks, will continue to develop as those banks look to
corner the fund administration market and push brokers
out of the space
required product functionality to support
them.”
MacMillan says that five to 10 years
ago only the largest funds were investing
in alternative investment strategies.
“Now most clients above the USD1
billion threshold are allocating to these
investments. Some of our clients have
even set a goal of up to 20% of their
assets in alternative investments in the
coming years.”
Alternative investments require
servicing, just as vanilla investments do,
CANADIAN CUSTODY
but the complexity and originality of
these services can lead to increased risks.
“With greater complexity comes cost,
risk and manual processing,” says Blouin.
“Just as the industry spent many years
implementing straight-through
processing solutions for cross-border
equities clearing and settlement, it now
needs to make similar improvements
across the entire alternative investment
space. Clients and their administrators
need to work in partnership to build
solutions that are flexible enough to
handle the growing number of asset
classes and instrument types flooding the
market. Strategies are needed that help
raise service standards, create capacity,
reduce processing risk and improve
operational efficiencies.”
The big custodians in Canada are
either launching products to meet this
increased demand, or are buying existing
firms that do so. The Bank of New York
Mellon has made in-roads through the
acquisition and integration of the
operations of DPM and International
Fund Administration (IFA), says
MacMillan.
Northern Trust, on the other hand, has
recently launched a service that handles
the collateral management of OTC
derivatives, something that’s typically not
a core service for investment managers
who are focused on delivering returns.
Products and services for funds,
provided by custodian banks, will
continue to develop as those banks look
to corner the fund administration market
and push brokers out of the space. But
the overall relationship between client
and bank will also change, with an
increased burden on banks to help clients
understand all the aspects of their
instruments (for example if it’s highly
liquid, or non-transparent like a private
equity structure, or even something
vanilla like using a systematic trading
strategy through exchange traded
derivatives). The onus will be on
custodians to identify and help mitigate
the risk around these instruments. ■
INVESTOR SERVICES JOURNAL 39
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 40

UK CUSTODY

t is not just London that has been
Come together
The global custody market has
experienced a high level of M&A
activity over the last few years, but
how does the UK market compare?
Virginie O’Shea investigates
Chris Rowland, JPMorgan’s global The last decade has seen a significant

I experiencing the Wimbledon effect –

the UK custody market has long been
dominated by foreign rather than
domestic institutions. The current
competitive landscape goes back to the
end of the last decade, explains Nadine
Chakar, head of EMEA for Bank of New
York (BNY) Mellon Asset Servicing. In
the wake of mergers at the main bank
level or other strategic reappraisals, the
indigenous UK providers – Lloyds,
NatWest, Midland and Barclays – decided
that custody was not a core activity for
them and hence not a priority, resulting in
a staggered series of high profile exits
from the market. The last decade saw
indigenous custody providers such as
Barclays and Royal Bank of Scotland exit
the custody business by selling to their
larger US counterparts.
“Ultimately, those actions were driven
by a recognition on the part of those
organisations that going forward they
would be unable or unwilling to commit
the necessary resources to developing
new technology or intellectual capital
required for them to achieve long term
growth and success in this sector. In that
respect, as in so many other areas of
financial services, the UK established a
blueprint for the evolution of the business
that was soon followed by other European
markets,” says Chakar.
It was a natural choice for JPMorgan
and the other US global custodians to
locate their European operations in
London, the largest regional market, says
custody product executive for EMEA.
The UK was a physical market at the time
so it was desirable to have a local
presence, and following dematerialisation
given the in-house expertise it was a
natural to continue to service a market
the size of the UK. “Overseas custodians
dominate the UK market because as one
of the most international financial
centres in the world, it has complex
requirements for cross border services
and value added services, not just local
custody,” Rowland explains.
Joanna Meager, managing director in
the UK for RBC Dexia Investor Services,
feels that the UK market has witnessed
the survival of the fittest. “The UK is a
particularly demanding market, and only
a handful of seriously committed global
players have been able to adapt to the pace
of change, the technological
commitments and spend to support the
many ongoing and challenging industry
initiatives.”
Meager feels that technology is a key
differentiator between custodians because
investment in and the deployment of
technology is instrumental in helping
clients to capitalise on their growth
aspirations. As the globalisation of
investment activity accelerates, market
structures change, and financial
instruments grow in complexity, the
ability to harness and deliver technology
platforms that keep clients at the forefront
of change in an easy to use way will be a
highly competitive, she explains.
amount of M&A activity within the
European financial services market as a
whole, not least of which was the
protracted battle for ABN AMRO last
year. But it seems that at this point in
time, the UK market is unlikely to see
much further M&A activity. “In Europe as
a whole, there is still scope for further
consolidation, given there are still a good
number of local providers, the majority of
whom in the longer term lack the
resources or commitment to stay the
course. In the UK, however, I’m not sure
how much further the number of
providers can contract. There are no
longer any indigenous players, small or
large, and the niche players that are active
have well regarded offerings that have
been tailored to very specific client bases,”
explains Chakar.
If we look at the global custody market
as a whole, perhaps the BNY-Mellon
merger is itself indicative of the future
shape of the business. It certainly
reinforces the fact that global custody has
become a business of scale. The
transatlantic merger of NYSE-Euronext
highlights the globalisation of the
financial services industry as a whole. In
this environment, it is the banks that have
scale in terms of higher transaction
volumes and revenue streams that are
able to make the higher level of
investment required to stay in the
business. Accordingly, in the UK custody
market a handful of providers dominate –
BNY Mellon Asset Servicing holds a 30%

40 INVESTOR SERVICES JOURNAL

ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 41
share of the UK pensions business, for
instance, and it is also the biggest
provider of transfer agency and fund
accounting solutions in the UK.
Despite the bias towards the bigger
players, scale is not the be all and end all,
says Chakar: “Your ability as a provider
to handle complexity is the real key, but
there is no question that today clients are
Both the asset managers and the custodian community
may have also been attracted to the UK market as a
result of its favourable regulatory and tax environment
increasingly looking to work with one
trusted partner who can support them
across all their needs, both global and
local. Volatile capital markets, clients’
desire to embrace new portfolio
strategies and instruments and the ability
to come quickly to market are all
challenges that play to the strengths of
large providers like BNY Mellon that
have a strong track record both in respect
of innovation and cross border service
delivery.”
“If there is to be further consolidation,
it will almost certainly result from main
bank level M&A activity – as was the case
with the BNY-Mellon Financial merger –
rather than being driven by the needs of
the custody business,” adds Chakar.
You could argue that the concentration
of players in the UK market has resulted
in less choice, but equally you have to ask
whether that is necessarily a bad thing,
continues Chakar. There are still enough
providers to ensure fees remain
competitive and to encourage innovation
– but at the same time, those remaining
custodians possess the scale that is today
mandatory if you are to finance the
massive investments in technology R&D
and intellectual capital that are required
if you are to meet the needs of an ever
more sophisticated and globalised client
base. “Plus those of us who have stayed
the distance are very demonstrably
committed to this business, and that level
of commitment is very important to our
clients, who are looking to establish long
term partnerships,” she elaborates.
M&A activity doesn’t just affect the
banks, however. There is the potential
that clients could be seriously
disadvantaged by a changeover in
provider and that is exacerbated further
is they are subjected to more than one
change in the course of a year. “Clearly,
history has shown that mergers can be
disruptive to clients if they are not
properly managed,” admits Chakar.
“Signing the deal is the simple part, it is
merely the end of the beginning of the
merger process – successfully integrating
the companies is where the real challenge
lies. Having watched and learnt from the
often painful mergers or acquisitions
other custodians have gone through, we
are determined to take our time in
making that a reality, and to do it right.
Client retention is one of our foremost
priorities post-merger, and in keeping
with that we are committed to a very
measured and considered integration
process to ensure minimal disruption to
our clients and staff.”
JPMorgan’s Rowland agrees that
custodians are very conscious of the need
to make transitions as ‘seamless’ as
possible to clients, given that the driver of
the consolidation and M&A activity is to
retain and grow client revenues.
However, he admits there is always going
to be client disruption with the need to
From a custodian’s perspective, the current regulatory
environment seems to be rather favourable
make certain changes to settlement
standing instructions, as well as the need
for clients to understand a new custodian
structure. “Clearly any change in
relationship is likely to prompt clients to
re-evaluate the current and potential
service offering. Therefore, in addition to
scale and ability to invest in services,
clients need to know that the people
servicing their accounts are experts in
custody,” Rowland explains.
But what exactly is the attraction of
the UK custody market? The draw of the
market for custodians could have
something to do with the fact that the UK
is the largest centre for asset
UK CUSTODY
management in Europe. According to a
study by consultancy Oxera in 2005, the
UK fund management industry had
assets under management of at least
£2.8 trillion.
Both the asset managers and the
custodian community may have also been
attracted to the UK market as a result of
its favourable regulatory and tax
environment. “The legal and tax
environment is regarded as clear and
efficient and the Financial Services
Authority (FSA) is viewed highly as a
regulator,” explains Jerome de Lavenere
Lussan, managing partner at investment
management consultancy firm Laven
Partners.
The philosophy of principles-based
regulation instituted by the FSA has
given the UK the reputation of having a
constructive and business friendly
environment relative to other
jurisdictions, agrees Tom Brown,
European head of Investment
Management and Funds at KPMG in the
UK. “There is an atmosphere of more
consultation and working towards
building solid relationships with business
relative to other regions,” he adds.
However, this favourable environment
may not be the norm for much longer as
regulations change frequently. The
Inland Revenue, for example, has adopted
a more tenacious and investigative role
towards hedge funds which is likely to
put an end to the current flexible and
advantageous business model. “The
recent tax rules relating to non-doms are
evidence of a potential lack of thought
from the government, as the economics
apparently were not properly evaluated
before the changes were reported. There
was a lot of noise about raising revenue
when most experts believe the resulting
exodus would lead to an actual loss of
tax collected,” says de Lavenere Lussan.
It only takes a few regulatory changes to
make all the difference – just look at
Sarbanes-Oxley in the US.
From a custodian’s perspective, the
current regulatory environment seems to
be rather favourable. Custody has been a
regulated activity for many years in the
INVESTOR SERVICES JOURNAL 41
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 42
UK CUSTODY
UK and the FSA has developed a high
level of understanding and comfort with
regard to market participants, says
Meager. Last year, the Markets in
Financial Instruments Directive (MiFID)
was the centre of regulatory attention in
custody banks and this year there will be
increased attention around money
laundering and know your client (KYC)
procedures, as well as fraud risk
management.
Very little has changed from a pure
custody perspective, agrees Chakar,
although MiFID has placed some
additional requirements upon custodians
in certain specific areas of their
businesses. “The recent changes to SORP
require us to carry out additional work in
the accounting space, and further
changes may be forthcoming in 2008
from a more international perspective. In
the UK, from a trustee’s perspective, we
can add value in a number of ways:
helping to ensure that they are carrying
out their regulatory responsibilities;
assisting them in making informed
decisions and making their operational
processes more efficient; and assisting
them with training,” she explains.
The UK Treasury is also likely to
permit the electronic transfer and
renunciation of title to authorised funds
in 2008, which will allow for automation
to be introduced to the UK unit trust
market, adds Rowland This will allow
custodians to standardise and rationalise
their operations resulting in an improved
service to clients – cost savings and
better client service equals a win-win
situation.
The general economic environment
that resulted from the credit crisis last
summer has also had some impact on the
custody market. Tough market
conditions typically lead to retrenchment,
with fund managers looking to refocus on
their core activities and explore ways to
reduce their operational costs, Chakar
elaborates. “We are ideally placed to work
with them in a consultative capacity as
their trusted partner, handling their non-
core activities on their behalf via our
flexible modular outsourcing solutions.”
However, these more complex products
do present somewhat of a challenge to
the custodian community. Custody
technology platforms were never created
to handle short positions and over the
counter (OTC) derivative instruments
42 INVESTOR SERVICES JOURNAL
and thus can struggle to adapt quickly
enough to properly service these
requirements. But in order to retain their
clients custodians have been forced to
react faster as traditional long only
managers and institutional clients have
expanded their investment capabilities to
include alpha generation strategies and
instruments.
“In almost all cases custodians have had
to rely on complementary technology
platforms, supported by technically
proficient staff and even the creation of
in-house quant teams, to support the
increase in alternative instruments. Many
have leveraged the expertise in their third
party hedge fund administration
operations, which for several providers
has come as a result of external
acquisition versus organic growth. The
industry is also seeing a parallel trend
whereby many managers are also looking
to outsource and bundle the middle office
components of alternative investment
processing with custody. This in itself
possesses additional operational
challenges for those custodians
struggling to make the initial leap just
supporting shorts and derivatives,”
explains RBC Dexia’s Meager.
The integration of alternatives into
traditional asset servicing model is being
felt in a number of ways, adds Chakar.
Transparency is one area – an investment
into a private equity fund, for example,
will appear on an accounting system as a
The integration of alternatives into traditional asset
servicing models is being felt in a number of ways
line item (for example, 100 units of fund
ABC valued at X). Clients want to know
what their full exposure is in terms of
counterparty risk or number of shares in
a particular company or segment. The
private equity investment needs to be
broken down into its constituent parts to
consolidate with a client’s more
traditional positions, she explains. “Hence
providing transparency or ‘drill down’
reporting is a key component of our
overall service offering, and to that end
we have partnered with The Burgiss
Group, LLC, an industry leading
provider of solutions for investors in
private equity and other alternative
assets,” says Chakar.
Performance and reporting is another
area. Many clients would like to calculate
returns on their private investments on a
non-lagged basis – for example, they
require valuation and corresponding
rates of return reflective of the true time
periods (private equity valuations are not
produced in a timely fashion, hence miss
the month end accounting deadlines). By
importing the detailed breakdown or
transparency of an alternative fund
investment into the traditional custody
database, consolidated reporting and
performance reporting and accounting
services can be provided.
“Alternatives servicing can also be an
administrative burden to our clients. For
example, a UK pension plan typically
may invest 5% in alternatives – hence
they would only need a small special team
to support this (say three or four people),
which can be difficult to sustain.
Accordingly, we offer ‘hosted private
investment services’ to clients to help
ease this burden and remove various
forms of administrative overhead,
including data and document
management, from the client,” Chakar
continues.
JPMorgan has similar ambitions
explains Rowland: “Instruments types
are always evolving and custodians need
to constantly enhance their platforms to
service these. Because JPMorgan’s
Investment Bank is a leading derivatives
house, JPMorgan Worldwide Securities
Services is particularly well positioned to
develop our alternative investment
technology offerings. We are jointly
developing service platforms that can be
leveraged by both businesses. Our status
as a leading global firm also means we
can attract and retain the brightest and
most experienced team of professionals
to provide the best intellectual capital to
service these highly complex
instruments.”
These complex instruments are
likely to pose a significant challenge to
the UK custodians in the future and
given the level of competition in
the market, it will be an interesting next
few year. ■
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 43
ITAS
Virginie O’Shea reports
from the International
Transfer Agency
Summit at the Abbaye
de Neumeunster,
Luxembourg
he most controversial issue at this
T year’s International Transfer
Agency Summit (ITAS) was
certainly the proposed introduction of the
UCITS IV management company
passport. Niall Bohan, head of Unit 4,
Asset Management at the European
Commission’s Internal Market and
Services Directorate General, discussed
the details of the latest incarnation of
UCITS during his keynote speech to the
delegation on the first day of the
conference.
Bohan described UCITS IV as a “work
in progress” and stressed that the details
have not been decided upon by the
Commission; these will only be available
after the directive is released for
consultation in April. However, if the focus
of UCITS III was product innovation,
then the current focus of UCITS IV is
volume, he explained, which is largely
centred on cost and efficiency
rationalisation. The directive is a reaction
to the difficult macro environment of
the retail fund market in which
competition is growing from non-
European jurisdictions, such as the growth
of UCITS vehicles in the US.
UCITS IV will not involve any
significant changes to the investment rules
but will deal with issues such as the
consolidation of oversight mechanisms and
tackling “efficiency bottlenecks” in the
administration space, said Bohan. The
UCITS “fund passport” is part of this drive
for consolidation and efficiency – it will
permit the registration of a fund in one
state and it to be marketed in a cross border
way, thus creating a single European
market. This will also allow cross border
fund mergers and assets to be pooled cross
border via a master-feeder structure.
“The management company passport
has been the most divisive issue in the
creation of UCITS IV,” said Bohan. This
part of the legislation would allow a
management company to be registered in a
domicile other than that of the fund. The
decision over whether this should be
extended to a full management company
passport or whether it should be a
restricted passport has been something of
a “conundrum” for the Commission.
National supervisory bodies are concerned
that it will be difficult to provide adequate
risk controls cross border and that it may
not be clear what each regulator is
responsible for.
ITAS CONFERENCE REPORT
The passport would have a significant
impact on the transfer agency community
as it would be possible to have a transfer
agent from any state in Europe, thus
opening up the field for greater
competition. The increased competition
combined with the greater complexity of
cross border products would therefore
change the definition of transfer agency in
Europe. Bohan urged the delegates to
consider these impacts and provide the
necessary industry feedback during the
consultation period later this year.
Jim Clark, head of Transfer Agency
Products at JPMorgan, also discussed the
transformation of the transfer agency
business in a retrospective look back over
the last six years. He pointed to the state of
the business during the first ITAS, which
took place in 2002, and discussed the
developments surrounding automation,
third party distribution, outsourcing,
rising competition and product innovation.
Clark praised the work of Swift in
tackling the area of automation but
stressed that the need for greater straight
through processing (STP) has not gone
away. Mike Boardman, director of Retail
Operations EMEA at Blackrock Merrill
Lynch Investment Managers, seconded
this notion: “Automation rates are going
down due to Asian trades, which are fax
heavy and involve more work to process.
The fact that there are two versions of
ISO [15022 and 20022] is also confusing.
We are not getting value for money from
our transfer agents.” ■
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 44
FEE BILLING
Performance critical
Are performance based fees the logical step,
by Jamie Darlow
t seems a strange model to keep
I market forces out of the fee billing
process. In a world where corporates,
funds and individual investors either
prosper or perish according to how well
they perform in the open market, why are
so many fund managers paid a fee
unrelated to their performance?
At first glance this question flies in the
nature of what funds, mutual, pension or
otherwise, are trying to achieve. It would
seem like the logical step to provide those
who manage the money with direct
incentives to perform to the highest
possible standards all the time. Indeed,
there are may funds that have gone down
just such a route.
However, there is an inherent danger
here. When a fund establishes a structure
other than a simple bips based flat fee, and
instead chooses a fee billing system linked
to performance risk can creep in. Many
funds managers are now getting paid
either according to how they compare to
their peers at other firms, how they rate
versus an index, how they actually
perform in terms of market returns, or a
mixture of all three. Some hedge funds
are rumoured to be hauling down fees of
around 50% of the returns on the monies
invested, a staggering figure.
Mark Lester, consultant at Morse,
explains that funds must have the
appropriate structures in place to manage
any risk. “Performance fee based charges
must be carefully structured in order to
ensure that the fund manager is not
tempted to take excessive risk in
managing the portfolio so as to gain
additional fee income,” he says. “The
absolute return culture has become
increasing popular as a measure of
success for new funds; this makes the
structure of any performance fee
particularly important. Performance fees
can be a significant incentive to the
manager, especially if the manager takes
little or no fee if the client loses money.”
Seth Johnson, CEO of Redi2
Technologies, which has just gone into
partnership offering its fee billing and
44 INVESTOR SERVICES JOURNAL
revenue billing component through
Odyssey's wealth management platform,
says that most funds with performance-
based fees also have an associated base
management fee. “In the event of poor
fund performance, the performance-based
fees may be zero or may result in a
negative adjustment to the management
fee,” he explains. “With such fee
structures in place, fund managers have
every incentive to live up to their
fiduciary responsibilities to maximize
returns without assuming excess risk.”
Johnson continues: “We’ve only seen a
handful of relationships that are strictly
performance-based. If, in the future,
investment management agreements
trend toward pure
“In the event of poor fund performance,
the performance-based fees may be
zero or may result in a negative
adjustment to the management fee.”
performance-based fees that are not based
on benchmarks, this kind of absolute
returns culture may risk becoming
endemic.”
It would seem like the obvious answer
is for funds to pay their fund managers
both a performance fee and a flat fee – a
hybrid system. But this brings with it an
incredible level of complication to the
process and may in some cases have the
effect of obscuring the client from
calculating how much he will be billed –
bad practice.
“The methodology behind the
calculation of performance fees is not
standard throughout the industry and
therefore needs to be relatively simple to
understand, especially if the fund has any
retail investors,” says Lester. “It is
unlikely that the FSA would consider the
fund manager was treating the customer
fairly if the fee calculation was overly
complex.”
Johnson says most users maintain a
series of Excel spreadsheets to calculate
performance-based fees and migration to
an enterprise fee billing system requires
appropriate training.
And he is aware of the complexity of
the task: “Performance-based fee
calculations can be exceedingly difficult
to explain. In these cases, clear examples
of the billing algorithm should be
incorporated into the investment
management billing agreement, complete
with what-if scenarios and sensitivity
tests of the primary variables,” he says.
“Efficient training coupled with
intelligent design/engineering make
Seth Johnson
automated performance-based fee billing
processing accessible to a much broader
base of potential users. And billing
systems should provide a means to
calculate what-if scenarios so that all
parties can agree upon the appropriate
procedures.”
In this case, technology is probably the
easiest way to keep track of the process,
but not the only way. “Any billing process
must be transparent to the client in order
that they can reasonably check what they
are being charged by the fund manager.
A full audit trail detailing the calculation
of the performance fee should be easily
obtainable, especially where modern fee
billing systems are being used,”
concludes Lester. “A good audit trail
enables the fund manager to perform a
simple reasonableness check of the fee
and the client to verify the calculation.” ■
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 45
What do
they want
from me?
Jamie Darlow looks
at how client
reporting is changing
lients of custody banks are always
C wanting more (except when it
comes to fees payable, that is).
Pension funds want more return on their
investments – nothing wrong with that,
they have a fiduciary responsibility to
their investors – with many now
expecting growth even when traditional
markets are performing badly. Now it
seems those clients are wanting more
frequent, in-depth and easier to manage
reports detailing precisely where there
funds are allocated – who wouldn’t, given
the sticky times of late?
RBC Dexia’s head of Client Service in
the UK, Kate Homewood, explains the
situation from the providers’ point of
view: “Clients are looking for greater
transparency in their custodial reports to
include details of not only their
traditional investments but of their
alternative investments as well,” she
says. “They are also looking for more
timely and user friendly information to
use for internal analysis and making
better informed decisions.”
From a global custody perspective
clients want data they can feed into their
MIS,” she continues. “Similarly, as fund
managers outsource more of their
operations they are increasingly
dependent on outsource providers for
timely data that they can manipulate to
suit their needs; in order to meet the
reporting demands of their underlying
clients.”
Reporting will always be a major
‘touch point’ for financial institutions and
their clients, according to data
warehousing technology firm Netik. “As
their customers become more
sophisticated, these institutions
recognise the need for providing
meaningful reports that represent the
investment strategies in place,” explains
president Colin Close. “This is true in all
market conditions. However, when
markets are doing poorly, there tends to
be an extra level of scrutiny that takes
place; it becomes one more item for the
client to worry about.”
And the demands from the high net
worth individuals show a similar pattern.
In quieter times, clients have really only
CLIENT REPORTING
demanded periodic statements of wealth
from their managers, detailing activity in
summary. “More sophisticated clients
now demand information from their
portfolio manager about the relative
growth of their assets,” explains Brent
Randall, managing director for the
Wealth Management Division at
Financial Objects.
“At the same time, as the market for
providing discretionary portfolio
management services becomes more
competitive, clients will demand more
advanced value-added service offerings,
which actively manage the fundamentals of
their portfolio - risk and return. It follows
that clients will demand a demonstration
of that value-add in any communication
with their portfolio manager,” he
continues. “In addition, there is now
growing recognition that a demonstration
of relative performance is a major
marketing tool for portfolio managers.
With an increase in the sophistication of
products and services comes a
corresponding increase in the complexities
involved in demonstrating results.”
INVESTOR SERVICES JOURNAL 45
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 46
CLIENT REPORTING
Regulation is also playing its part in
increasing reporting demands, according
to Mark Deakin, business development
consultant at Rhyme Systems. “In
certain parts of the market, regulation
has meant that clients are getting more
regular reports than was previously the
case, he says. “There has definitely been
an increased move to giving access to
client’s information over the web on
demand and inviting clients to interact
with their data in a way not previously
required or possible.”
But it’s important to note there are
exceptions to increasing demand. It
depends on the individual client, says
Giles Drury, senior manager, Alternative
Investments Group, KPMG in the UK.
“Over the last few years, many pension
funds have made their first investments
into more complex products such as
hedge funds. If anything, they are
probably looking for simple reporting for
these complex products, he explains.
“More specifically, simple reporting
which includes additional explanation
and education from managers and is
delivered in a format that allows for
integration with data from other
investment portfolios so they can view
overall exposures and interrogate this
information more proactively. Very
sophisticated investors have always
demanded a high standard of reporting.
Perhaps what has changed is the ability
of technology to meet those high
standards.”
The technology is certainly there now
for clients to adopt, if they are prepared
to put up the cash to do so. More of them
will need to, however, as the
sophistication of funds increases. The
Bank of New York Mellon’s clients are
turning towards alternatives, derivatives
and new types of instruments, says Steve
Boor, global director of Information
Delivery at the bank. “Our average client
at BNY Mellon Asset Servicing has over
11% in alternative investments. It’s been
growing gradually. Across our client
base, some have been in alternatives for a
longer period of time, but it is becoming
more the norm now and you get to the
point where the average is above 10%,”
he continues.
In the end, it all comes down to risk –
if you can’t see your positions you are
unable to manage risk and the trend is
for funds and money managers to want
46 INVESTOR SERVICES JOURNAL
to see their positions daily or in real the client, so the client doesn’t have to
time. Alternative investments are new to log into multiple systems or run several
many funds, so of course they want to be reports and piece them together, he
in control of their positions. Pension continues – “Integration is the main
funds want comprehensive reporting focus around technology growth.”
that lets them see both the accounting In particular, demand is coming from
value and the notional exposure of their the over the counter (OTC) space, Boor
funds in their monthly financial says: “We are seeing the greatest demand
statements. Som in alternatives from limited partnerships,
“Ultimately this translates into OTC swaps and OTC options. One of
constant pressure to evolve and keep in the big projects we are working on right
step with investments we need to track,” now is counterparty exposure and being
says Boor. “The initial challenges often able to consolidate that across all the
relate to integrating pricing and OTC positions a client has.”
reference data and the special processes Clients will always want a monthly
around the unique instruments they are cycle report detailing their complete
buying. This puts us in a position where valuation, but if the diversification into
we can consolidate all the traditional commodities by funds continues, there
instruments with the newer, more exotic will be an increase in clients
ones, and put it into one picture of the wanting more complex services. “In
entire investment strategy.” volume terms we are not seeing an
Boor says that most of the challenge increase in the amount of information
consists of integrating customised clients are looking for – if anything, it’s
investments information and the decreasing,” concludes BNY
technology the technology that requires Mellon’s Boor “What they are asking us
into the bank’s processes. This lets BNY for is more complex and more
Mellon put together the total picture for sophisticated information.” ■
Which services are most highly prized by clients:
“Clients want reports and information analysis that tells them how close they are to retirement, a
second home purchase, or a child or grandchild’s education fund. You can’t get this information
from the Financial Times, but your investment partner can provide it to extend value to you”
Todd Paoletti, Director, Customer Self Service Solutions, Actuate.
“The ability to rapidly produce customised reports which conform to the corporate “look and feel”
and are accurate remains a key problem area for many Asset Managers. Even where they manage
to achieve, many organisations then struggle to automate the regular production of these new
reports and so the volume of manual reporting keeps increasing”
Peter Bambrough, Management Consultant at Citisoft, specialising in Client Reporting
“One view on this is that some clients are after brevity and more frequent reports. To offset that, a
great deal of wealth is in the hands of generally quite conservative people working within strict
boundaries as to what is acceptable, from an investment perspective”
Mark Deakin, Business Development Consultant, Rhyme Systems
“An absolute basic requirement is to have a consolidated view across a client’s entire portfolio.
Additional elements such as attribution, risk and performance analysis are highly desirable”
Jonathan Hammond, Consultant, Morse
“Meaningful information, compliance reporting, exception reporting, graphical presentation of the
information, and then drill down analysis”
Steve Boor, global director of Information Delivery at BNY Mellon Asset Servicing
“Customized reporting of the alternative asset holdings complete with independent valuation”
Kate Homewood, RBC Dexia’s head of Client Service in the UK”
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 47

rhymeSIGHT Reporting to Clients is an automated, scalable, www.rhymesystems.com

standalone solution encompassing the entire investment
reporting process.

REPORTING TO CLIENTS

Reporting: Take control

ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 48
PROXY VOTING
The Crossroads
Brian Bollen reports on XML message
standards and the new era of proxy voting
roxy voting stands on the brink of
P a new era. At least, that is the
gospel according to SWIFT
(Society for Worldwide Interbank
Financial Telecommunications), which
sees 2008 as a year in which it will place
great emphasis on educating the market
in the use of its new XML-based proxy
messages. “We piloted this in 2007 and
the new messages have been available on
the SWIFT network since 15 December
2007, says Linda Bookheim, senior
manager, custody and asset servicing, at
SWIFT in New York. “SWIFTNet Proxy
Voting enables the issuers, investors, and
all intermediaries in the proxy voting
chain to communicate with each other in
48 INVESTOR SERVICES JOURNAL
a fully standardised way. This facilitates
straight-through processing in an area
that, to a large extent, is still manual.”
The eight new XML message
standards were developed according to
the procedure as defined by UNIFI (ISO
20022). They were designed to fully
support the communication needs for core
proxy voting activities. This is in
contrast to ISO 15022 Corporate Action
messages that neither fully accommodate
today’s proxy voting complexity nor the
full life cycle of messaging that is
required to provide a defensible audit
trail. The delivery of ISO 20022
messages is also part of the
recommended solution resulting from the
Giovannini Barrier 1 gap analysis.
This is much, much more than a
technical issue with implications and
ramifications beyond the industry’s IT
help desks. Proxy voting and securities
lending are inextricably linked, comments
Richard Thompson, Securities lending,
product manager EMEA and APAC,
Northern Trust Global Investments
(Northern Trust’s Asset Management
arm). Clearly the fact that votes cannot be
manufactured during the life of a loan
presents lenders with a trade-off, and this
defines the relationship. The Myners
Report, he reminds us, states “a balance
needs to be struck between the
importance of voting and the benefits
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 49
derived from stock lending”.
“Voting versus lending is an
investment decision, and as with any
other investment decision, it is important
for clients to be informed,” he continues,
adding that Northern Trust has a
consultative approach and works with
clients to determine their requirements
and offer advice, in a lending context.
This is much, much more than a technical issue
with implications and ramifications beyond the industry’s
IT help desks
“Securities lending provides an additional
revenue stream in a low risk
environment, and so for this reason it is
attractive, however, some clients may
place higher value on representation.
Northern Trust has particularly
observed this relationship in the Nordic
region, where representation has a fair
deal of significance, and has developed a
track record of working with clients to
reconcile their voting and revenue
requirements. Ultimately, clients
shouldn’t consider any aspect of this
topic in isolation, but rather view their
decision in an overall investment
context.”
“There has been a lot of heat and light,
particularly in the media, around
speculation of an industry trend of
market participants borrowing stock to
obtain cheaply the right to vote on
contentious issues. (eg: Fortis and ABN).
In terms of “borrowing to vote” as an
industry trend, there is a growing
recognition that there is no empirical
evidence to suggest this is happening.
Nevertheless, the perceived lack of
transparency around borrowed versus
purchased positions can cause disquiet,
and so it is helpful if the industry makes
some firm statements in this area – such
as the International Securities Lending
Association’s recent statement which
states that “shares should not be
borrowed knowingly for the principal
purposes of acquiring voting rights”. So
one can certainly say, the industry is
making strides towards consistency and
clarity in terms of the relationship
between lending and proxy voting.”
Paul Wilson, the literary-minded
global head of client management and
sales for securities lending at JPMorgan,
argues that while he understands the
theoretical issues, in reality the topic of
proxy voting/securities lending has
become something of a non-event in the
recent past. “As Shakespeare might have
said had he been writing about it, it is
Much Ado About Nothing,” he quips. “It
is clear to me that there is a well-
developed best practice that if all those
involved in lending adhere to (beneficial
owners, agents, prime brokers, etc) then
any issues can be easily avoided. At the
heart of the matter is the balance that
each beneficial owner needs to strike
between enhancing their overall revenue
by lending securities and running the
potential risk of incurring an economic
loss arising from any failure to vote.”
Every situation is different, he adds,
and the decision to recall or not to recall
a stock will depend on the significance or
not of the subject being voted upon. He
does specifically say, however, that short-
term temporary holders of stock
acquired via borrowing who do not have
a long-term economic interest in that
stock should not be allowed to vote. “As
“The problem: regulatory and reputational risk.
The solution: standardise and automate the proxy
voting process” Linda Bookheim, SWIFT
an agent lender, we do not allow our
clients to vote on stock they have lent
unless it is returned prior to the record
date. Indeed many prime brokers won't
allow their hedge fund clients to vote on
shares they have borrowed."
Building up the usage of its new
messages quickly will be a challenge for
SWIFT, if only because of the cyclical,
seasonal nature of proxy voting, Linda
Bookheim believes. “Everyone is involved
in getting through the season; with
around 80% of proxy voting taking place
in the period from March to June, there is
PROXY VOTING
no room for development around time.
We want to make sure the industry has
budgets available to develop the
necessary capability with the aim of
being ready with a solution by
2009/2010.” With this in mind, she adds,
SWIFT is developing testing tools and
aids to help developers drive the work
forward. “A lot of money needs to be
spent by the industry, but cost savings
and greater efficiencies will outweigh
that spending.”
The driving forces behind attempts to
automate proxy voting are well
documented, if only by SWIFT itself, but
are worth revisiting nevertheless. As
Linda Bookheim observes in a paper she
published on the subject, the pressure to
improve participatory corporate
governance continues to increase, and
international investment across all
markets is expanding. “When combined
with increasing attention from
regulatory bodies, proxy voting
standardisation and automation has now
become a critical industry need,” she
observes. “The current landscape makes
compliance with growing regulatory
requirements costly with its non-
standard processes, frequent manual
requirements, and multiple proprietary
solutions. Until now, industry processes
have failed to provide a standardised end-
to-end audit trail that could prove that a
vote was lodged with every intermediary
in the process. Success has been isolated
and limited in the several attempts to
automate and standardise Proxy Voting.
Proprietary methods, inadequate
standardisation, and manual
requirements create a laborious and
costly exercise for investors and
intermediaries.”
The history books show that in June
2005, the SWIFT Board of Directors
endorsed the community request for
SWIFT to develop new ISO 20022 Proxy
Voting messages and to deliver a
SWIFTNet-based solution using these
messages. In concert with a group of
INVESTOR SERVICES JOURNAL 49
ISJ28 pp32-51 ML 13/3/08 4:35 pm Page 50
PROXY VOTING
industry practitioners, SWIFT worked
hard to finalise the message standards
and ISO-registering the business
elements of the proxy voting process.
“The SWIFT Proxy Voting Solution
went through a pilot in early 2007 to
address the use of the new messages and
the process flow, from initiator to
investor, through all intermediaries,” says
Linda Bookheim. “It then went through a
subsequent maintenance. This is valuable
because it means that the first version of
the solution is already refined; there are
no plans for any update of the messages
before 2009.”
How does it work? And what will it
actually do?, we can almost hear the
readership demanding to know. As
SWIFT itself tells the story, the
SWIFTNet Proxy Voting Solution
implements end-to-end standardised
messaging on a service that validates and
delivers those messages with security and
reliability for the benefit of all
participants involved in proxy voting.
The use of this solution will enable the
industry to address a whole host of
issues. It will: minimise risk associated
with errors; reduce costs and errors by
reducing the volume of manual
intervention; streamline and standardise
deadlines; help eliminate ‘under’/‘over’
voting with increased precision in vote
execution; accommodate funds voting;
maintain audit trails; provide
transparency; increase voting levels;
comply with regulatory requirements,
and integrate new customers/agents
rapidly.
The benefits do not end there. SWIFT
adds that global custodians and proxy
voting agencies will be able to: provide a
better service to their clients;
manage reputational and financial risk,
and give more reasonable deadlines. For
their part, issuers will be able to: better
comply with corporate governance
requirements; have better access to
shareholders, and enhance shareholder
value. Investors, meanwhile, will be in a
position to: have more time to monitor
positions and recall shares in time to vote
confidently; comply with fiduciary
responsibility; increase their participation
in cross-border voting; make better and
more thoroughly informed decisions;
increase confidence in voting for
their clients, and, finally, reduce financial
and reputational risk. ■
50 INVESTOR SERVICES JOURNAL
EXPRESS BRIEFING with Lyell Dampeer, president, Investor Communication
Solutions, US, Broadridge Financial Solutions
ISJ: How would you narrate the history of the development of the
relationship between securities lending and proxy voting? Is it a long-
standing relationship? Is it entirely imaginary? Or is it real?
Lyell Dampeer: Share lending is an integral part of US capital market
structure and is widely practiced. For voting purposes, the holder of shares
on Record Date has the right to vote those shares. Generally, voting rights
go with the shares, meaning that the borrower may vote the shares. Share
lending requires custodian banks and/or broker-dealers (together,
“nominees”) to reduce the votable position of the account lending the
shares and increase the votable position of the borrowing account.
Banks and brokers are responsible for not reporting votes for more shares
than their “of record” positions. Tabulators, acting as agents of the issuers,
have traditionally ensured that banks and brokers holding beneficial
positions do not vote more shares than they hold. Several years ago,
Broadridge and nominees, with guidance from SIFMA, developed
technologies and processes to automate this function. We provide a free
service to subscribing banks and brokers, called the Over Reporting
Prevention Service, that helps banks and brokers manage the process and
thereby prevent possible over voting of shares to a tabulator. Currently, over
300 nominees utilise the service and together, they encompass over 95%
of all street accounts. Tabulators can request that nominees provide an
accurate home for votes.
Some observers have suggested that there should be changes in how votes
are processed; others have suggested that rules on short selling, stock
lending, and disclosure should be changed.
ISJ: Has automation led to an increased willingness to vote? Are people
more likely to vote if it’s easier for them to do so?
Lyell Dampeer: Generally, voting participation has increased year over year
and automation, while not necessarily a driving force directly in increasing
participation, does allow investors to participate using the media they want
to, be it electronic or hard copy. During the 2007 proxy season, 89% of
shares voted through Broadridge were voted electronically using the
Internet, telephone or our proprietary ProxyEdge voting platform widely
used by institutional investors.
ISJ: Does development continue? Has it stalled, or peaked?
Lyell Dampeer: Development most certainly continues. Our Investor
Mailbox offering allows clients of participating brokers to access
shareholder communications – proxy events, corporate actions,
prospectuses, etc. – directly through their broker’s own website, providing
yet another way for the investor to participate in the process in the way they
want to.
ISJ: Has it made a positive contribution towards increasing transparency?
Lyell Dampeer: Transparency is not an issue, but facilitating shareholder
communications is an important goal of the SEC.
ISJ: Is the obligation to vote made stronger by the increased ease of voting?
Lyell Dampeer: We provide technologies and processing services.
These have made it easier for investors to vote, and reduced solicitation
costs to issuers.
ISJ28 pp32-51 ML 13/3/08 4:36 pm Page 51

PRIVATE

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alternative investment products such as single and multi-strategy
hedge funds, private equity vehicles and real estate.
With one of the largest alternative investment teams in Ireland,
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For more information, contact:
David Dillon, Andrew Bates, Donnacha O'Connor,
Etain deValera, Stephen Carty or Peter Stapleton at:
33 Sir John Rogerson’s Quay, Dublin 2, Ireland.
Tel:+353 1 667 0022, Fax:+353 1 667 0042,
e-mail: info@dilloneustace.ie
or Brian Dillon or Gregory Noone at:
Dillon Eustace, Tokyo.
Tel: +813 5219 2042 Fax: +813 5219 2021
e-mail: brian.dillon@dilloneustace.ie
gregory.noone@dilloneustace.ie

or Andrew Lawless at:

Dillon Eustace, Boston.
Tel: +1 617 217 2866 Fax: +1 617 217 2566
e-mail: andrew.lawless @dilloneustace.ie
www.dilloneustace.ie

DUBLIN CORK BOSTON TOKYO

In alliance with Arendt & Medernach

ISJ28 pp52-67 ML 13/3/08 6:15 pm Page 52
PANEL DEBATE - HEDGE FUNDS
Evolution
Our panel of experts
debates servicing
the hedge funds
industry...
IIt has been a rough time for hedge funds in
the public eye over the last few months – how
has the increased public and regulatory scrutiny
affected the hedge fund community?
Butler: The first point I would make would be to
repeat the endorsement that Mr. Charlie
McCreevey gave in a recent speech. Mr.
McCreevey, the EU Commissioner, slated
SocGen for their lack of controls and then went
on to say that, under the circumstances, it was
ironic that Sovereign Wealth Funds and Hedge
Funds had been demonised, when it was clear
that Hedge Funds have provided liquidity to the
market when it most needed it and Sovereign
Wealth Funds had provided capital to the banks
when they most needed it.
His is, of course, one lone voice in the
wilderness and you are quite right that Hedge
Funds have had a rough time in the public eye,
as a result of ill thought out or biased media
reports which have resulted in more regulatory
scrutiny, again, a lot of it ill thought out and, in
my opinion, based on ignorance.
I think it is fair to say that the Hedge Fund
Working Group (HFWG) came about as a direct
response to the German led attack on Hedge
Funds. HFWG has, I think, been a successful
project, led by 12 major UK Hedge Fund Groups,
together with one Swedish and one US Hedge
Fund Group. HFWG introduced their Best
Practices Report for Hedge Fund Managers.
This report followed on from two Guides to
Sound Practices, published by AIMA and by MFA
and, it is fair to say that, not only did the HFWG
carry many of the same recommendations that
the AIMA Guide carried, but that a very high
proportion, if not the vast majority, of Hedge
Fund Managers already follow most of the Best
Practices outlined in the HFWG.
In addition to the above, it is likely that, by the
time this Panel is published, we may have the US
President’s Working Group Report, which will be
a two-pronged affair, sub-divided into Investors
52 INVESTOR SERVICES JOURNAL
ISJ
PANEL DEBATE
HEDGE
FUNDS
Dermot S L Butler is chairman of Dublin
based Custom House Administration &
Corporate Services, which specialises in
advising and assisting clients on the
structure and the incorporation of offshore funds and, once established,
providing a full administrative service through globally integrated offices
in Dublin, Chicago and Singapore. Dermot is also Deputy Chairman of AIMA
(the Alternative Investment Management Association).
Donnacha O’Connor is a partner in Dillon Eustace, which he joined in
2001, where he works principally in the area of investment fund and
investment services regulation and derivatives. He is a law graduate of
University College Dublin, and a member of the Law Society of Ireland
and the New York State Bar.
Ross Munro, partner - Investment
Funds & Regulatory. Ross Munro is
involved in advising upon all
aspects of the establishment and
restructuring of investment funds under British Virgin Islands law, with
particular emphasis on funds set up as Segregated Portfolio Companies.
Before joining Harneys in January 2005, Ross Munro practised in the
corporate finance department at Hammonds in Manchester, England.
and Managers input. regulated lenders, structured product providers,
It can be seen, therefore, that the Hedge Fund rating agencies, etc.
Community is endeavouring to demonstrate that
it is well regulated, albeit, to a certain extent, self Munro: Given the success of the industry over
regulated. Nevertheless, it is likely that more the last few years it is no great surprise that it is
regulation will appear, particularly as a result of coming under greater scrutiny from regulators,
the Sub-Prime and Credit Crunch crises and that the tax man as well as the general public. Almost
Hedge Funds will have to live with it. daily it seems, newspapers and news websites
post stories of hedge funds being held
O’Connor: I think that hedge funds are learning responsible for the latest crisis in the financial
to communicate more effectively with the media sector. In part, this is a reflection of just how
– It seems to me like the lack of information on wide spread the influence of hedge funds is. The
hedge funds is partly causing inaccurate media industry is certainly maturing as well as growing.
speculation about them, for example, at the start Investors are becoming more sophisticated and
of the subprime crisis, hedge funds were being have larger amounts invested in hedge funds –
demonised, whereas the problem, lay with as a result, they demand and are getting higher
ISJ28 pp52-67 ML 13/3/08 6:15 pm Page 53
ISJ28 pp52-67 ML 13/3/08 6:15 pm Page 54
PANEL DEBATE - HEDGE FUNDS
levels of corporate governance.
Despite the troubles, global asset growth in
the hedge fund industry was estimated to be
more than 50% over 2007, is this likely to
continue this year and what will be driving this
growth? What impact has the volatility had on
the market?
O’Connor: Anecdotally the volatility has caused
some hedge fund strategies to significantly
reduce their exposure to the market to keep
within their mandates. Obviously hedge funds
have shipped heavy losses and some investors
are loathe to put new money into what they
perceive as risk strategies. The in-flows to hedge
funds, particularly funds of hedge funds from
the final quarter of 2007 look very respectable so
hopefully growth will continue this year.
Munro: Most commentators believe that the
increased flow from institutions into hedge
funds will continue as they look to further
increase exposure to the sector. Against that,
one might expect funds from high net worth
individuals to tighten particularly if concerns
about the US economy prove to be accurate.
The volatility in the markets, however, is an
opportunity for top managers to demonstrate
that they are worth the fees they charge. Clearly,
some investment strategies, such as those
investing in distressed debt or residential
property, are likely to find it harder than others
to attract new money.
Butler: The growth of Hedge Funds in 2007 was
a result of organic growth as well as the
increased institutionalisation of the Hedge Fund
Market. In volatile times such as we have seen
over the past six months or so, institutions are
keen, not just to achieve respectable returns, but
to preserve capital and many Hedge Fund
There is little justification for materially greater
regulation of hedge funds
strategies achieve both of these objectives. I,
therefore, think it is likely that we will see
continued growth throughout 2008 and that
growth will be primarily reflect the continued
interest from institutions who remain nervous of
the equity markets. It is also likely that investors
who might previously have invested in fixed
income, credit and loan portfolios, will now look
towards other strategies which provide hedged
opportunities in the current markets, such as the
Long-Short Equity Fund, which is where the
whole hedge market started.
54 INVESTOR SERVICES JOURNAL
That is one of the impacts that volatility may
have on the market. The other is that Hedge
Funds which provide a truly hedged portfolio,
i.e. some kind of arbitrage or long-short strategy,
thrive on volatility.One final point with regard to
growth – I was interested to read a report by
Camden Media and Merrill Lynch that found that
European Family Offices are planning to shift
investments from traditionals into alternatives,
such as Hedge Funds and Commodities and
that, in three years, these could make up more
than 50% of a typical Family Office Portfolio in
Europe.
Regulation of hedge funds has also been much
discussed by regulators such as the SEC and
the UK FSA – is there a need for greater
Significant changes to the existing laws and regulations
to target hedge funds specifically is unworkable
regulation of the sector and what impact would
this have?
Munro: There is little justification for materially
greater regulation of hedge funds. Some
additional regulation is inevitable but for so long
as hedge funds source the bulk of their funding
from institutions, high net worth individuals and
other sophisticated investors increased
regulation will provide few, if any, tangible
benefits.
Butler: Hedge Funds continue to be affected by
“blanket” regulations, such as the EU Savings
Directive and MIFID and it is likely that this will
continue. I should make it clear that I have
nothing against regulation, per se, but I do
resent bad regulation, of which there are many
examples, not the least the ultimate failure of
the SEC to impose it’s requirement that Hedge
Fund Managers in the United States should be
registered. Personally, I don’t see much need for
greater regulation in the Hedge Fund Markets,
providing the Hedge Fund Managers and other
participants in the Market follow the Sound or
Best Practices, as outlined by AIMA and HFWG.
I must also say that, although I am against
“blanket” regulations, as opposed to targeted
regulation, which is when a regulation targeted
at one particular sector, has, under the Law of
Unintended Consequences, a dramatic effect on
another sector. I do believe that, internationally,
regulations with regard to retailisation of hedge
funds is an area of concern. In this regard, I
believe that regulations specifically targeted at
the sales process – the marketing of hedge
funds (or any other financial product for that
matter) to the retail clients needs to be
tightened up considerably and a perfect example
of this is the Sub-Prime Mortgage Market, where
all our current troubles started. If the Sub-Prime
mortgages had been sold to people who could
support them, then I think it is unlikely that we
would have the current problems that we have
with the Credit Crunch and monoline insurers,
both of which appear to be derivatives of the
Sub-Prime fiasco.
O’Connor: I think that regulation of hedge funds
really means regulation of the operators of
hedge funds and the managers and
administrators and custodians of hedge funds,
at least in Europe, are fully regulated, and
increasingly so in the U.S. There seems now to
be an acknowledgement in Europe and in the US
that significant changes to the existing laws and
regulations to target hedge funds specifically is
unworkable (either for reasons identified in the
US through Goldstein judgement or in Europe
through a lack of support from the European
Commission, the UK etc). The approach that
now has appeared to gained traction on both
sides of the Atlantic is that of a voluntary code of
conduct for the managers of hedge funds and
continued indirect supervision of the way in
which financial institutions leverage hedge
funds. The one are which still appears to be
unsettled in some quarters is the political
pressure for increased levels of disclosure of
hedge funds engaged in shareholder activism in
continental Europe.
What impact are strategies such as hedge fund
replication, indexation and investment in
130/30 funds having on the hedge fund market?
O’Connor: We are seeing a lot of interest from
promoters in these strategies, but the volume of
finds actually setting up and trading this strategy
do not seem to be making a significant dent on
traditional hedge fund in-flows. Many traditional
hedge fund managers who we speak to hold the
ISJ28 pp52-67 ML 13/3/08 6:30 pm Page 56
PANEL DEBATE - HEDGE FUNDS
view that the 130/30 strategy will turn out in
performance terms not to be as adept at
generating alpha as traditional hedge fund
strategies. 130/30 strategies orientated in the
US and were partly driven by specific tax
efficiencies which they offered under US federal
tax rules and the same considerations do not
apply in Europe so it remains to be seen whether
they will really thrive in Europe..
If these strategies proliferate in the retail
investor market as alternatives to traditional
hedge fund investment, this would seem likely to
result in a reduction in investment opportunities
for traditional hedge funds, pressure to reduce
fees, reduction in the investment management
talent available to traditional hedge funds.
Butler: I am not sure that any of these strategies
are having a huge effect on the market,
although, obviously, there is some demand,
otherwise they wouldn’t still be about. I am not
familiar with Hedge Fund Replication, although
I have heard a number of presentations on the
subject. Indexation is another matter and still
remains problematic, because of the very nature
of Hedge Funds and the fact that so many Hedge
Funds close, either totally withdraw from the
market, or just close to new investors, with the
result that they no longer remain valid
components of the index. Thus, in my opinion,
notwithstanding the fact that there are several
tradable Hedge Fund Indices, I still think that it
is dangerous to rely on them as a true indication
of the Hedge Fund Market’s performance.
As regards 130/30 funds, which, as far as I can
see, include 120/20 and 140/40 funds, appear to
me to be variations on the Long-Short theme,
which are, as far as I can see it, unnecessarily
restrictive in the context of the ratios 130/30. It
seems to me that it is an unnecessary and
dangerous restriction to prohibit a Manager
from changing the ratio from 130/30 to, say,
100/90, if the Manager believes that is the best
way to attack the market, but maybe I am
missing the point.
Be that as it may, Hedge Funds Markets and
the numerous different strategies that are
currently employed are thriving and will
continue to thrive, despite Hedge Fund
Replication, Indexation or 130/30 funds.
Munro: It is in part a sign of the growing
maturity of the market. Exactly what impact it is
having right now is difficult to gauge but in time
replication and indexation is likely to make life
more difficult for those managers who have not
consistently generated alpha returns. The lower
fees offered by replicated and synthetic funds
are attracting a following and are likely to
56 INVESTOR SERVICES JOURNAL
continue to do so for so long as they deliver
impressive performance at the cost of the less
successful managers. On the other hand, those
managers who have successful track records will
be concerned about being replicated or forming
part of an index and the impact that has on
There is a risk that a reduction in liquidity and lending
power in the Prime Broker market could adversely affect
the ability of Hedge Funds to go short
comparable performance. A further factor is
that the scope for conflict of interests within
service providers grows with the introduction of
such products.
How has increased M&A activity and IPOs in
the hedge fund market affected the community?
What impact does this have for clients,
counterparties, competitors and the fund
services market?
O’Connor: I think the resources and
infrastructure that institutional buyers of hedge
fund service providers bring should be positive
for the market. It may be that hedge fund
manage IPOs will disincentivise the traders and
the traditional alignment of their interests with
those of the investors might not be as strong.
Butler: Depending upon which area of the
Hedge Fund Market you are talking about, it
seems to me that the big get bigger and the
small carry on. It all seems an inevitable
consequence of the Hedge Fund Market
maturing and those who have been in it for the
longest seeking an exit, on the one hand. On the
other hand, there is no doubt that some Hedge
Funds and Managers that have set up Publicly
Traded Vehicles have an agenda to create an
Investment Bank in the relatively near future.
If we are talking about Managers being listed,
then this should not have a major difference for
their clients (investors) or the counterparties
(Prime Brokers) except that, as a Manager gets
bigger, whether listed or not, so that Manager
will be able to negotiate better terms from their
Prime Brokers. I am not sure that there is any
great effect on competitors, because the Market
is getting bigger and there is enough cake for
everybody.
If it is the fund that is being listed, then
clients/investors will have the opportunity of
greater liquidity, although the prices for the
shares of their funds may not correspond with
the NAV and could run at a premium or discount
to NAV. I am not sure that counterparties or
competitors would be greatly effected.
In the context of M&A activity, I can see this
having a greater effect on Hedge Fund
Administrators, as demonstrated by the
“consolidation” or “acquisition” trail over the
past several years. This has affected the clients
(the Hedge Funds and Hedge Fund Managers)
in instances where the Hedge Fund
Administrator has been consumed by a larger
traditional Fund Administrator and where the
“Big Bank” culture relating to minimum client
size has prevailed. We have seen several funds
moving from some of the big banks, because
they were deemed too small. I think it is fair to
say that the majority of the big Hedge Fund
Administrators around Dublin and the world will
now not look at funds of less than
USD200million or will price themselves out of
the market, by introducing high minimums,
notwithstanding the fact that something like
70% of all hedge funds in the world have a total
Net Asset Value of less than US$200million. As
a result, smaller competitors of the big
administrators are thriving.
The hedge fund services market has become
increasingly competitive – how are players in
the market adapting to the needs of the hedge
funds?
Munro: As fund managers grow, they will
inevitably become more demanding. This is an
opportunity as well as a threat. As ever, getting
the basics right will be key for any service
provider but as the demands on compliance
officers and in-house counsel grow there will be
opportunities for those that services providers
who understand the industry.
O’Connor: I think there is more focus on
service levels now. Increasingly the larger hedge
fund managers are taking are more institutional
approach to service provider appointments and
looking for tighter, and legally binding, service
levels. And with increased competition, there is
some downward pressure on prices.
Promoter loyalty to a particular service provider
seems to be a thing of the past with more
promoters willing to move from one service
provider to another.
ISJ28 pp52-67 ML 13/3/08 6:30 pm Page 57

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ISJ28 pp52-67 ML 13/3/08 6:30 pm Page 58
PANEL DEBATE - HEDGE FUNDS
Butler: There is no doubt that the Prime
Brokerage Market has become increasingly
competitive, although I am not really qualified
to discuss it in any depth. What will be
interesting is to see what effect the
Subprime/Credit Crunch debacle will have on
some of the Prime Brokers, which are divisions
of major banking institutions who have suffered
substantial losses in this area. As already
stated, there is a risk that, a reduction in
liquidity and lending power in the Prime Broker
market could adversely affect the ability of
Hedge Funds to go short and that could have a
knock-on effect, as discussed above.
With regard to the increasingly competitive
nature of the Hedge Fund Administration
As fund managers grow, they will inevitably become
more demanding - an opportunity as well as a threat
Service, this is true, but in a rather stratified
manner. The consolidation at the larger end of
the market is introducing competition, but the
market is certainly big enough for all parties at
the moment and there doesn’t appear to be any
sign that the large traditional administrators are
suffering in the hedge fund area.
At the smaller – under USD200million – end
of the market has become increasingly
competitive because several new smaller hedge
fund administration companies have been set
up in order to capture part of the very large
group of small hedge funds.
As to hedge fund administrators adapting to
the needs of hedge funds – this has always been
the case, whether it be with regard to providing
systems to enable compliance with new
regulations (EU Savings Directive), or
facilitating risk monitoring and specialist
pricing services. Other areas in which hedge
fund administrators are meeting the needs of
hedge funds is, in our case, the provision of an
automated German Tax Reporting module,
which we hope to have in place very soon.
One of the things that clients have got to
appreciate is that, regardless of the competitive
nature of the market, margins are finite and
costs aren’t. Therefore, as clients seek more
and more, so they will have to be prepared to
pay more. It was, I think, Nicola Horlick, who
recently berated the value of outsourced
services generally, but explained the poor quality
that she, and many of the mutual fund industry,
suffered because the clients’ weren’t prepared
to pay. The old joke about peanuts and monkeys
58 INVESTOR SERVICES JOURNAL
applies here.
Is there likely to be further consolidation in the
hedge fund services market and will it be the
larger players that win out?
Butler: By further consolidation in the hedge
fund services market, I presume you mean fund
administration. It is, I think, a case of swings
and roundabouts. As I have already said, the
larger players restrict themselves to larger
accounts and there are thousands of smaller
accounts. Therefore, the smaller players will
still be able to make a very healthy living, subject
only to the possibility that too many people will
try to get into that market and there will be some
natural culling, over time. What the larger
players should also be aware of is the reluctance
of some larger managers to go with the larger
administrators, for a variety of reasons,
including the belief by many that Chinese Walls
are made of Gruyere cheese and the fact that a
small to medium sized firm is likely to provide a
better and more personal service than the larger
firms. We have clients who have indicated that
they would not join us or would leave us if we
were to sell out to one of the major banks and I
don’t think it was an idle threat.
Munro: I expect there to be some consolidation
but not perhaps at the same rate of recent years.
The credit crunch is likely to impact on the
willingness of the banks to make acquisitions at
least in the short term. In addition, the industry
is still receptive to new entrants who can offer
good service at reasonable prices. The barriers
to entry are not huge in an industry that still
counts on recommendations and personal
relationships. The reality or perception of
conflicts of interest when a single organisation
provides multiple services will also act as a
brake on consolidation.
O’Connor: Perhaps with the cost of money and
the turbulence in the financial sector at the
moment, the first half of this year might see
reduced activity in this area, but we feel that
there is still appetite there and that increased
competition will inevitably lead to further
consolidation over the medium term.
What are likely to be the main challenges and
opportunities for the hedge fund market over
the next year?
Butler: The main challenges for the hedge
fund market is going to be the survival in a low
liquidity environment and this will depend upon
how soon the market recovers from the Sub-
Prime/Credit Crunch problems. Against this,
there is still a huge pool of cash, around and
ironically some lending requirements are now
being met by hedge funds that have become the
lender of last resort, as the banks have pulled in
their horns.
So this, in itself, becomes one of the
opportunities for certain hedge funds. Other
opportunities include the development of totally
new markets. We have seen in the last few years
the development of Carbon related funds, Green
funds, Africa funds and the growth in
commodity funds. The Emerging Markets will
always be emerging, whether it is China and
India or Vietnam and Uganda. Obviously, China
and India are the greater opportunities, purely
on a volume related basis.
Perhaps the main challenge for hedge funds
is to ensure that their strategies maintain
capital and that they can take advantage of any
volatile situations to generate real returns,
whilst the rest of the market is either in decline
or, probably by mid-year, just out of favour.
O’Connor: I would image that performance will
be the main challenge this year, as it is every
year, due to the difficult few months funds have
experienced. On the legal side, the work that the
EU Commission is undertaking on the removal
of obstacles within Europe to the private
placement of non-UCITS funds will hopefully
result in some positive opportunities for hedge
fund distribution.
Munro: There can be little doubt that the
volatility and, in some cases, lack of liquidity in
the markets will help investors to distinguish
those managers who are capable of generating
alpha returns and those that who have merely
successfully ridden the bull market of recent
years. For those with a track record of
generating alpha returns, there is an enormous
opportunity to attract new money. For those
who can not, life is likely to get harder. A
number of funds are facing liquidity issues and
will be reviewing the fine print of their offering
for suspension of redemption rights, gates, side
pockets and other mechanisms for controlling
the outflow of funds. ■
ISJ28 pp52-67 ML 13/3/08 6:31 pm Page 59

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ISJ28 pp52-67 ML 13/3/08 6:31 pm Page 60
HEDGE FUND STATISTICS
Static
Analysis of the key indicators on securities
borrowing by hedge funds from Data Explorers.
The graphs below represent some actual activity at the end of
February in 2007 and 2008. the graph to the left shows the considerable
increase in revenue from securities lending and reinvestment activity,
scaled by the lendable assets, in basis points. American equities have
more than doubled in return to lendable, demonstrating the increasing
demand for high-quality equities borrowing by funds during the
subprime crisis. Fewer owners were prepared to lend out their equities
over the summer while fund were increasingly keen to borrow them.
60 INVESTOR SERVICES JOURNAL
Securities lending is a major global
activity and an integral part of the efficient
operation of the global capital markets. The
vast majority of beneficial owners, asset
managers, banks and investment banks
play some active role in the securities
lending industry. This is a vibrant and
growing business. Spitalfields Advisors
estimates the annual gross revenues paid to
borrow securities exceeds USD20 billion.
Building upon years of experience in the
more developed markets, and in recognition
of its broader role in the capital markets,
securities lending activity is increasingly
gaining support from regulators in the
developing markets. To refer to it as
disreputable or to call for it to be curtailed
shows a lack of understanding of this
practice and its importance to the efficient
functioning of markets.
The graph (left) estimates the scale of the
equity activity on a global basis as at 31
December 2007. Lendable Assets represents
the total value of holdings for securities
lending, while the Total Balance represents
the total value of assets on loan. The graph
shows that, while sec lending and
borrowing, predominantly by funds,
represents over USD2 trillion, this is only a
small percentage of those securities
available for loan. There is massive
potential for growth therefore.
ISJ28 pp52-67 FINAL 3/4/08 2:55 pm Page 61
Payments
revolution
The UK payments
market is set to get a
revolutionary revamp
in May this year with
the launch of the
Faster Payments
initiative.
Virginie O’Shea reports
espite the delays, it seems that the
D UK is finally on track for the
launch of Faster Payments, which
will bring the speed of business to business
and person to person payments into near
real time. The service will focus on low
value payments and is set to launch in May,
at which point banks will begin to roll the
services out to their customers. The
scheme will run alongside the UK’s
c u rrent payment systems and has been
developed by the UK trade association for
payments APACS.
There are curr e n t ly 13 banks and
building societies, which account for over
97% of the UK’s existing payments traffic,
committed to the new service, although it
will be open to other financial institutions
from May. These institutions will have the
option of either joining as members or to
accessing the system through ag e n c y
arrangements with a member. Faster
Payments is being developed by APACS
but once it is up and running, it will be
operated and managed by CHAPS
Clearing Company, a member-based
company that operates the CHAPS
sterling high value same day payment
system.
The Faster Payments scheme was
conceived fo l l owing discussions about how
to improve the UK’s payments system by
the Office of Fair Trading’s (OFT)
Payment System Task Force in 2005. An
agreement was reached between the OFT
group and the banking industry to reduce
PAYMENTS REVOLUTION
With a reduced risk in payments, the costs
to business of making payments will fall
and as a result UK companies will be able
to become more competitive
internationally.
Faster Payments will also have a
dramatic effect on the banking industry. At
a business level, banks will no longer have
the financial benefit of the current cash
fl o at that results from today’s longer
payments process. “The result will be a loss
in revenue for banks, which will therefore
be looking to other business opportunities
to generate additional, replacement
revenues. These include initiatives such as
in financing the supply chain. It is expected
that this will increase competition betwe e n
banks in order to obtain this new business,
and that this competition will ultimately be
to the benefit of their clients,” says
Nicolson.
At a technology level, banks have had to
change their business processes and adapt
their IT accordingly in order to allow for
clearing times on phone, internet and
standing order payments. These payments
would on ave rage require approximately
three working days from the initiation of
much faster processing rates. Batch
processes that work only on the basis of a
multi-day payments cycle have had to be
added to in order for same day processing
payment to the beneficiary receiving the
to be possibl e.
funds – a length of time that the OFT
“This is a fundamental change to the UK
deemed as unaccep t ably long. Following
payments system. The industry has
the agreement, in October 2005, the
decided to do more than the minimum by
c o n t ract to provide the centra l
implementing payer to payee funds
infra s t ructure for the new service was
availability in approximately two hours
awarded by APACS to Immediate
rather than purely same day. Wh e n ever a
Payments Limited, a joint venture
new payments system is launched banks
company set up by Voca and LINK who
must ensure that it is absolutely robust in
have since merged to form VocaLink.
order to gain user confidence. A very
“The main driver behind the
significant amount of i nvestment,
introduction of the faster payments
including systems build and industry
scheme is that with day to day transactions
testing, has been incurred by the banking
cash is currently tied up in the payments
community to enable this solution,”
process, during which time businesses are
explains Alan Koenigsberg, EMEA Core
not able to make any use of it. The
Cash product exe c u t i ve for JPMorgan
consequence of this is that businesses have
Treasury Serv i c e s.
to obtain ex t ra cash in order to keep them
It will be interesting to see how Faster
solvent and operational until their cash
Payments and BACS develop in light of
that is locked up in the payments system is
the Payment Services Directive’s ultimate
released for use,” explains Andy Nicolson,
requirement for D+1 clearing, he adds.
managing director, UK Finance Industry
“The rest of the world is watching the
Sector, BT Global Serv i c e s.
Single Euro Payments Area and a
There will be a number of benefits
successful payments area will act as a
stemming from the reduction in time that
catalyst for other ‘cross country’ schemes.
it takes to process payments and the
Likewise, the rest of Europe and the world
freeing up of cash across the UK economy,
are watching Faster Payments. A
particularly for the corp o rate community.
successful intra d ay system for mass market
For example, the risk of a payment failing
payments will drive other regions and
is reduced due to the shorter processing
countries to do the same, ” concludes
time – any obstacles to the payment
Koenigsberg.

clearing will be apparent more quickly.
INVESTOR SERVICES JOURNAL 6 1
ISJ28 pp52-67 ML 13/3/08 6:31 pm Page 62
SEPA REVIEW
The Legal Lowdown
What is the Irish Financial
Regulator doing to help
fund promoters?
Jeremy Light senior executive in Accenture’s Banking
Practice
Threat or opportunity, compliance or innovation? Many
banks are still grappling with these questions as they make
sense of the changing payments landscape and their
position within it. Even though SEPA became a reality in
January this year, banks are often unclear on their payments
strategies and on how to respond to multiple forces of
regulation, competition, customer demand and
technological change.
However, it is becoming clear to many CEOs and COOs
that revenues from their payments operations are under
pressure, investments requests are escalating and
operational costs and outages are rising. Peering further
into their organisations, they see duplications,
inconsistencies, and even incoherence between retail,
commercial and other business units.
Meanwhile, other banks and payments processors are
making noises in the market about the opportunities of
SEPA and announcing grand strategies to expand in
Europe; the Payments Services Directive is being
transposed into national laws, and non-bank Payments
Institutions, including telcos and utilities are being held up
as predators bent on eating into the banks’ already
diminishing payments revenues.
So, what is a bank to do? And how should it respond to
these pressures?
For those banks who have not yet set themselves a single,
bank or group-wide, payments strategy, there is a still a
window to do so this year. Our view is that they should seize
this opportunity now – without one, they will not have a
roadmap to navigate the next 2 - 5 years as SEPA catalyses
a pace of change in payments that has not been seen for
decades.
There are compelling reasons why the window on setting
a payments strategy is tight. This year will be the year
when many banks finally make outsourcing decisions –
their hands will be forced by the size of the alternative,
62 INVESTOR SERVICES JOURNAL
SEPA in-house investment, and by the SEPA migration
timetable. Yet the supply of outsourcers – major transaction
banks, processors and others, is likely to be tight. Their
ability and appetite to service large numbers of banks are
also likely to be constrained; demand may exceed supply and
those late to a decision may be stranded.
Anecdotal evidence suggests banks are successfully
targeting new corporate customers for SEPA payments. No
big deal, volumes were non-existent before January 2008,
and are still very low. However, as migration gathers pace,
it is quite possible that banks with substantial corporate
direct debit and cash management business will see it erode
as the early marketers are rewarded for their foresight and
stealth.
In our experience, a bank can develop a single payments
strategy and roadmap for the whole bank in around 3
months. Threat, opportunity, compliance, innovation? All
four apply – a single, robust payments strategy shows how,
and drives the roadmap to navigate them.
Cash has always been
king, especially at times of
financial uncertainty. Is
this even truer today than
it has been in the past?
how can challenges best
be met and opportunities
maximised?
Chris Furness, global head of cash management at
Standard Chartered Bank in Singapore
The credit crunch that hit the international markets last
summer is arguably the biggest event to impact upon those
markets since the events of September 11 2001. In some
ways, though, the response to September 11 was clearer cut
and more straightforward than the credit crunch. In the
former, the objective was to restore the confidence of the
system. In the latter, what is needed is to restore confidence
in the system, and the banks that populate it. This is not
proving easy. A bank’s greatest asset is its reputation, and
once that reputation is damaged, it can be difficult to recover.
The same is true of the broader system.
Demonstrating the central importance of credibility in
the banking world (remember, the word derives from credo,
the Latin word for ‘I believe’), the fallout from the credit
crunch is proving difficult to deal with. Confidence in
markets has been badly shaken, and as yet shows little signs
of recovery.
ISJ28 pp52-67 ML 13/3/08 6:31 pm Page 63
Attempts to replicate the aggressive monetary easing that
helped alleviate the adverse economic effects of the terrorist
attacks in the USA are not so far having a similar outcome
today. This has focused new and widespread attention on the
importance of efficient and effective cash management in
corporates, financial institutions, central banks and
households across the developed world and the emerging
markets.
In an era of relatively scarce credit, cash is not just king;
cash has become a master of the universe, and all indications
are that it will remain so for the foreseeable future.
Corporates and financial institutions who make the best use
of their cash resources will surely gain a new competitive
advantage.
In such an environment, a holistic approach to making the
most of working capital will almost literally deliver more
bangs per buck than the traditional piecemeal approach to
handling cash, trade finance and foreign exchange
requirements. For those who know where to look,
opportunities exist for corporates to cement, or even enhance,
their market position.
In practical terms, for example, as credit remains hard to
come by, and expensive for those who find it, a company’s
ability to offer access to supply chain financing could spell the
difference between success and failure. Where a supplier
might be experiencing difficulty in obtaining its own finance,
an injection of liquidity at the right link in the chain could
lubricate business. This could enable corporates to grow their
own sales and improve their profit and loss account without
incurring significant additional risks.
The devil, as always, is in the detail, and the advice and
support of those who know and understand the detail
intimately could well prove crucial in the difficult months that
still lie ahead. There are many institutions that can provide a
single solution to a single problem. But fewer can engineer
customer-specific solutions across the entire working capital
cycle, freeing up cash for deployment elsewhere. Fewer still
can boast a strong balance sheet, strong liquidity and
therefore a strong position from which to lend.
SEPA – What Next?
Andrew Foulds, Director, Directory Services, cb.net
The launch of the first SEPA scheme in January 2008
was heralded as a great achievement in the banking
SEPA REVIEW
industry. Something of great significance was created and
the protagonists are merited in feeling a sense of
achievement. Around 4000 banks have signed the
adherence agreements and have declared themselves
compliant to the SEPA standards.
But what happens now? It is a question that is being
asked inside and outside the industry. There is a sense in
some circles of SEPA being somewhat of an
anti-climax, that the rush and initial euphoria of meeting
the starting deadline has not led to anything concrete.
There have been many been pronouncements from
various industry players on the introduction of SEPA
payments and the volume passing through their systems.
This all very well but on close examination the volumes
are not high. In fact, one ACH admitted privately that the
volume of SEPA payments being made through their
system has not been anywhere near expectations. Some
major banks have made only token transfers in order to say
that they have processed SEPA payments. The
number of SEPA payments so far has been only a very
small percentage of the overall payment volumes.
So the take up has been low after the launch but there are
some encouraging signs that SEPA is not being ignored.
Some smaller banks have started to introduce SEPA
payments in online banking services. They are offering
their retail clients the option of choosing a SEPA Credit
Transfer as opposed to the traditional credit transfer.
Debate is moving into how to leverage SEPA to achieve
the intended benefits. A straw poll shows that some of the
larger banks are not publicising SEPA products and the
fear is that, after the initial fanfare, the introduction of new
services will be quietly forgotten.
A key factor in this debate has to be education. It is
apparent that there still needs to be a greater effort to
sell the concept of SEPA to the wider community.
Public education campaigns have been low-key to say the
least. Even now, some corporates are still mystified as to
what SEPA is and what it will mean. It has to be of
great concern that stakeholders are not fully informed
nor really aware of the benefits that SEPA is designed
to bring.
Instead of focusing on the deadline for the introduction
of SEPA, the deadline for the migration of
domestic payment systems to SEPA schemes should be the
focus. Public education has to continue and, it can be
argued, increased following the poor efforts that have been
attempted previously.
To be fair, the real volume for SEPA payments
will be delivered by the migration of the current domestic
systems. Considering that domestic payments account for
between 92 and 98 per cent of payments, this is the critical
mass.
We can hope that there will be an increase in
education and publicity activities leading up to this
deadline at the end of 2009. Will it be then that we see the
real benefits that SEPA promises?
INVESTOR SERVICES JOURNAL 63
ISJ28 pp52-67 ML 13/3/08 6:32 pm Page 64
SEPA REVIEW
The Legal Lowdown
Is this a period of
unprecedented change?
Richard Spong, Financial Services Industry marketing
manager at Sterling Commerce.
In Europe, when it comes to successive waves of what
some industry commentators perceive to be poorly
conceived regulatory change, ‘unprecedented’ is a pretty
reasonable word to use. For the Eurozone finance sector,
SEPA is now past the point of no return as, with effect from
28 January, the implementation timeframe is ticking away.
It’s also past the point of very little return in the revenue
context, with many banks still uncertain of the real impact
that SEPA will have on their payments revenue profile.
According to the European Central Bank, by October 2007,
a significant number of banks and infrastructures had
committed themselves to be ready for SEPA credit transfers
by the January 2008 start date. Being ready is not
necessarily the same as doing, and many are still keeping
their implementation and compliance options open. The
SEPA change program therefore will continue to roll
through 2008 and 2009, with an understandable tendency
by some participant organisations to defer the associated
revenue risk for as long as they reasonably can.
Even when SEPA credit transfers are established across
the Eurozone community, the legal and mandate issues
surrounding SEPA direct debits remain to be finally
resolved, with direct debit implementation now unlikely
until late 2009 at the earliest. SEPA direct debits will result
in further change in the revenue profile for banks and
payment processors, and consequent changes to the shape
of the Eurozone payments business are likely through 2008
and 2009. In addition to systems adaptation by those
organisations that can continue to sustain a profitable
payments business, other organisations will be outsourcing
some or all payments processing to third party banks or to
shared service centres, and others again will be scaling up
their existing infrastructures so that they can host
payments processing for larger numbers of banks, so
becoming major payments ‘hubs’.
64 INVESTOR SERVICES JOURNAL
What is the state of the
SEPA project one month
after implementation?
Karoline von Richthofen, head of Corporate Payments,
Cash Management, at Deutsche Bank
With over a month since the SEPA Credit Transfer (SCT)
went live, most banks should be fully able to accommodate the
new payments instrument. And while most are now able to
send and accept SEPA payment instructions from clients, the
strategic approach – or lack of – taken by some banks is still
showing some shortcomings.
The failure to realise that SEPA will be a key enabler of the
next generation of treasury best-practice lies behind some of
this neglect. While the technical changes are certainly a
primary concern in the time before and immediately after
implementation, the harmonization of payments procedures
across the eurozone will give corporates the opportunity to
eliminate duplicate processes across national subsidiaries.
This will enable greater centralization and automation of
treasury functions – measures that will create considerable
cost savings and efficiencies.
It is these considerations that have been the driver behind
Deutsche Bank’s SEPA strategy – a strategy designed to yield
immediate benefits to clients while also dealing with concerns
regarding the SEPA migration. The key components of this
approach are the decisions to treat all transnational payments
with SEPA criteria identically (including in terms of pricing)
from day one of implementation – which exceeds the
statutory requirements by some margin – and the decision to
enhance the payments formats currently in use to
accommodate XML, the standard SEPA format. This second
measure is specifically designed to insulate clients from some
of the technical difficulties during the migration process. And
Deutsche Bank has taken several further measures such as
deciding to use the new XML format globally, and not just in
the SEPA area.
Above all, the strategy has been designed to ensure that the
SEPA initiative is as successful as possible for Deutsche Bank
clients. A similar approach industry wide would doubtlessly
multiply the benefits available to all parties and provide
incentives to Corporates for a fast SEPA migration.
ISJ28 pp52-67 ML 13/3/08 6:32 pm Page 65

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ISJ28 pp52-67 ML 13/3/08 6:32 pm Page 66
COMPANY PROFILE - BOISS
Pluck of the Irish
ISJ speaks to Paul Heffernan of Bank of
Ireland Security Service about the hard work
and triumphs of the year gone by
he last year has been one of
T growth, change and adaptation
for the Bank of Ireland Securities
Services (BoISS). As well as coping with
the mammoth task of integrating new
accounting technology, the outfit has
coped with the advent of new
regulation spanning Europe, the
burgeoning of structured
products, putting together fund
vehicles and a significant
growth of fund of hedge funds.
According to Paul Heffernan,
the outfit’s business
development manager, for much
of 2007 BoISS was busy
upgrading its accounting
technology to SunGard
InvestOne Enterprise.
Heffernan calls the migration
the bank’s “single biggest
project over the past 18
months”.
He says, "We have
approximately 400 fund
structures with multiple sub
funds under each structure and
we had to take a dated approach
to migration. To combat that,
we had a project team in place
for the last number of months in
charge of implementation and
migration onto the new
platform. There was an
education and training process
to get existing staff used to the
technology and its capabilities."
The migration has resulted in
enhanced automation in
reporting capabilities and has
provided more flexibility, however Mr
Heffernan said that so far BoISS’ use of
system is still in its infancy.
In the last year Europe has seen a wave
of new regulation, which has affected
BoISS, as it has most other financial
institutions on the continent. BoISS has
66 INVESTOR SERVICES JOURNAL
concentrated on creating and
implementing systems to deal with what
sometimes seems a vast array of
regulatory and tax requirements. BoISS’
efforts were rewarded when the bank
was independently reviewed as the
Paul Heffernan
paramount reporting system for German
tax. Heffernan calls the recognition a
“huge endorsement for the work we put
in developing the system.”
He added, "It's a SunGard system, but
it's very flexible which has allowed us to
rebuild around the core accounting
technology and deliver an enhanced
German tax capability."
Last year’s new regulation for
overnight filing for Qualified Investor
Funds (QIF) forced BoISS to change its
infrastructure to make the time to
market swifter. This is because the new
filing process allows approved asset
managers to have the QIF authorised
within a day, as opposed to the six weeks
it previously took.
Of this development, Heffernan says,
"We always work within the guidelines
for six to eight weeks for conception and
structure, but what we had to do was
change our internal infrastructure to
make the time to market speedier. We
have launched products in a three to four
week process in some instances.
"Before any client goes live with
a product we look to try and
understand our clients' business as
much as possible. At the take-on of
every new client we appoint a
dedicated project manager who act
as a conduit across all areas; the
client, our business and third
parties, and manage the entire
take-on of new business."
According to Heffernan, BoISS
now occasionally sends teams to
clients’ offices in order to
understand their clients’ needs in
a more in-depth fashion. This
allows the bank to better “tailor
solutions”.
The outfit has set up a team
specifically to deal with clients’
concerns. Dubbed client
relationship teams, they can
answer questions on a variety of
subjects, from custody to fund
administration.
Heffernan says, "Testing on the
model reveals 80% of questions
coming to that relationship team
can be answered there and then,
but there are some that need to go
to the business to get the answer,
which the client services team
takes responsibility for delivering
back to the client. This means the
client doesn't have an extensive list of
people they need to contact, instead they
have a core team."
One area in which BoISS has seen
substantial growth recently is in
structured products, especially UCITS
III. Under UCITS III, companies in
ISJ28 pp52-67 ML 13/3/08 6:32 pm Page 67
effect have a passport to operate across
Europe, and funds can invest in a greater
variety of financial instruments, thus
clearing barriers to cross-border market
of units of collective investment funds.
Lately mangers have been putting
fund vehicles together, with structured
vehicles in these products – effectively
using UCITS III as a “wrapper”,
Heffernan says.
He continues, "Typically the
structured product is done on a
proprietary index of the asset manager
or as a capital protected product.
Structured products have been around
for a number of years, but putting them
into fund wrappers is relatively new – 18
months to two years."
Now UCITS III is starting to expand
out of Europe to other regions. In Asia,
UCITS are now recognised in the
financial hubs of Hong Kong, Japan,
Singapore and Taiwan. Heffernan says,
"They [UCITS] are also recognised in
parts of Central and South America. So
the UCITS brand is expanding beyond
Europe and, because of the well-
regulated structure they have, are
recognised by other jurisdictions."
He added that with the progress of
UCITS III there is an opportunity for
“different types of strategies and
instruments”.
As UCITS III products become more
popular, the FSA has recently issued a
warning to managers using UCITS III
that there is a lack of trained staff, which
could lead to what the regulatory body
calls “incorrect trades, mandate breaches
or valuation errors”.
Another area of high activity for
BoISS recently has been fund of hedge
funds, Heffernan says.
“We don’t operate a production line
approach or a Ford T model approach
where we tell our clients how things
work and tell them to sit on one platform
– we offer something different, tailored
and bespoke”, the business development
manager claims.
Clients are offered a “turnkey
solution” where BoISS puts in place a
structure to deliver their needs. Later
BoISS uses this structure to deliver in
other relationships.
The recent global growth of ETFs
(Exchange Traded Fund) has also
benefited BOI in the past year, according
to Heffernan. After the pool fund became
available in Europe in 1999, BoISS was
one of the first administrators in the
region to launch an ETF.
“We’ve seen our assets under
management grow to over USD30
billion this year, making us the largest
third-party administrator of ETFs in
Europe. From an Irish perspective, we
have the majority of ETFs in terms of
assets – 80-90% perhaps,” Mr Heffernan
says.
Most ETFs in the EU are traded cross
border as UCITS III.
Heffernan added that the credit crunch
resulted in a “large demand” for fixed
income securities lending, which include
US treasure bills.
The bank’s securities lending trading
desk has also seen growth, Heffernan
says, with the bank now being able to
indemnify clients against those risks
traditionally associated with securities
lending. Of this, he says: “This gives
BoISS performance in ETFs and AUA from 2005 to 2007
COMPANY PROFILE - BOISS
uplift, sometimes 20 or 30 basis points,
to our clients’ fund performance. This
uplift is no additional cost to our client
but a revenue sharing agreement is in
place.”
BoISS took what Heffernan described
as “a big step” in 2007 by opening a unit
solely dedicated to hedge fund servicing
in Belfast. The new unit will deal with
all new offshore funds business.
Last year also saw BoISS’ Sterling
Liquidity Fund voted the best
performing liquidity fund in the world
by Moody’s Investors service.
And BIAM, the highly successful
investment management arm of the
Bank of Irleand Group reached a
landmark in February when it
announced that it now manages more
than EUR ten billion for institutional
investors in Ireland. ■
The number of BoISS’
exchange traded funds
(ETFs) climbed
significantly from 2005 to
2007. This growth has
been mirrored across
Europe and the world as
ETFs gain in popularity
with investors. These days
there are ETFs for almost
any area of the market,
allowing investors to more
specifically target their
investments.
The last three years has
seen the assets under
administration by the
BoISS steadily increase. In
2005 there was USD133.6
billion under management
by the outfit, a figure that
rose to USD 180 billion by
the end of 2007. This
represents a rise of
approximately 36% over
three years – a positive
result by anyone’s
standards.
INVESTOR SERVICES JOURNAL 67
ISJ28 pp68-80 FINAL 13/3/08 7:53 pm
PEOPLE MOVES
MOVING & SHA KING
Pittsburgh - Stephen M Wynne has been
elected chief executive officer of PNC
Financial Services Group (PFPC), PNC's
provider of global investment services.
Timothy G Shack will remain chair-
man of the PFPC board, working
closely with management on strategic
business initiatives, technology
advances and client relations. Shack
will also continue to serve as PNC chief
information officer. A 31-year PFPC
veteran, Wynne has been president of
PFPC since 2005. As CEO, he will be
responsible for leading PFPC's delivery
of information- and transaction-based
services to an international client base.
Boston - Global custodian Brown
Brothers Harriman (BBH) has appointed
Douglas ‘Digger’ Donahue, Jr, 56, as its
new managing partner, effective from
January 1, 2008. Donahue will
succeed Michael W. McConnell, the
current managing partner, who has
served in the role since 2002.
McConnell, who
will be turning
65 in January,
joined BBH in
1968 and will
remain a
partner of the
firm. BBH
currently has 40
partners.
Donahue joined
DOUGLAS DONAHUE
Brown Brothers
Harriman in 1976 as a commercial
banker in the firm's Boston office. He
was named a partner in 1990. In 1997
he was made a member of the firm's
Steering Committee and asked to run
the firm's worldwide Investor Services
business. See CEO Profile this issue.
London - StreamBase Systems is to
expand its sales team with the addition
of Mark Bannon as vice president of
Americas sales and Paul Grossman as
vice president of EMEA sales. The hir-
ing of both was driven by increased
demand for StreamBase’s CEP technol-
ogy and the accompanying need for
additional sales-management resources,
the vendor says.
68 INVESTOR SERVICES JOURNAL
Page 68
Zurich - The board of directors of UBS
will propose to the Annual General
Meeting that the terms of office of
board members be reduced to one year.
Marcel Ospel, Peter Voser and Larry
Weinbach will be proposed for re-election
for a one-year term. Sergio Marchionne
is appointed non-executive vice chair-
man of the board of directors. Peter
Voser will take
over as chairman
of the audit com-
mittee from Larry
Weinbach. The
board of directors
of UBS will pro-
pose to the Annual
General Meeting
(AGM) that the
MARCEL OSPEL terms of office of
board members be
reduced from three years to one year.
The proposal will require that the
Articles of Association be amended at
the AGM on 23 April 2008 such that
new or re-elected members of the board
are appointed for a one-year term only.
Copenhagen - Saxo Bank has appointed
Steven Bellamy and Matt Strang to support
new hire Steven Braithwaite, director and
global head of foreign exchange and
fixed income in Copenhagen. The new
hires further strengthen the FX team in
Copenhagen and reflect the bank’s
increased focus on enhancing profession-
alism and integration, the bank says.
Steven Bellamy will be part of the mar-
ket makers of major currencies, while
Matt Strang will work within the exotic
currencies team. Both will report to
Steven Braithwaite. Steven joins Saxo
Bank from JP Morgan where he worked
as an analyst on the FX Spot Trading
Desk. Matt previously worked at Bank
of America in base/precious Metals
Operations, where he assisted with the
planning and build-out of the newly set-
up Metals Department.
London - Northern Trust has made five
senior level appointments to manage
new clients and regional business
growth in Asia Pacific (APAC).
Northern Trust has made five senior
level appointments to manage new
clients and regional business growth
in Asia Pacific (APAC). “We are deep-
ening our regional management team
in response to recent growth and
expected future growth,” says Gregg
Behrens, who was appointed as
Northern Trust’s regional head for
APAC, in 2007. “We continue to lay a
foundation of strong oversight and
governance and a robust risk manage-
ment infrastructure, and have an
experienced team to lead our future
growth trajectory in the region,” he
adds.
Washington DC - The Carlyle Group has
promoted 30 executives to senior
positions in the company, eight to
managing director – the most senior
role below those of senior adviser,
founder and chairman – and 22 to
director. The individuals work in
Carlyle’s offices around the globe con-
ducting buyout, venture and growth
capital, real estate and leveraged
finance transactions, as well as
accounting, administration and
investor relations activities. A full list
can be seen on the firm’s website.
London —
Northern Trust
has appointed
David Curtin as
general coun-
sel-internation-
al, and assistant
general counsel
for the
DAVID CURTAI
Corporation. In
this role, Curtin
is responsible for the in-house legal
team in London, which supports
Northern Trust’s Europe, Middle
East, Africa (“EMEA”) business oper-
ations, and for international legal
matters. “Northern Trust’s EMEA
business is one of the fastest growing
segments in the Corporation, and
David will manage the London-based
legal team in line with this expan-
sion,” said Kelly Welsh, Northern
Trust General Counsel
ISJ28 pp68-80 FINAL 13/3/08
ISJ Directory of Services
T: +44 (0) 844 499 6388
C: Saghar Bigwood or Stephen
Everard
A: 7th Floor, 69 Park Lane,
Croydon, CR9 1BG
E: sbigwood@goalgroup.com or
severard@goalgroup.com or
info@goalgroup.com
C: Cornelia Keth
T: +49 69 718 3738
F: +49 69 718 6050
E: cornelia.keth@bhf-bank.com
C: Moritz Ostwald
T: +49 69 718 6838
E: moritz.ostwald@bhf-bank.com
A: Strahlenbergerstraße 45,
63067 Offenbach a.Main
Germany
W: www.bhf-bank.com
International: Olivier Storme
T: +352 4767 2847
E: olivier.storme@caceis.com
France: Patrick Lemuet
T: +33 (0)1 57 78 03 34
E: patrick.lemuet@caceis.com
W: www.caceis.com
T: +47 22 94 92 95
F: +47 22 48 28 46
Contact: Bente I. Hoem
E: bente.hoem@dnbnor.no
W: www.dnbnor.com
W: www.handelsbanken.com
/nordic_custody_services
T: +46 8 701 2988
F: +46 8 701 2990
C: Johan Wennerberg
E:custodyservices@handelsbanken.se
A: Blasieholmstorg 12,
SE - 106 70,
Stockholm, Sweden
7:54 pm Page 69
Asset Servicing
GOAL is the widely-acknowledged industry leader in providing creative products,
services and solutions to automate and optimise the global reclamation of withhold-
ing tax and class action compensation. Our research has shown that in excess of
US$6 billion of withholding tax remains unclaimed each year by the rightful owners
and beneficiaries and the amounts for class actions is even larger.
To establish your potential ability to reclaim over-withheld taxes and/or class action
compensation GOAL provides a free proof of concept analysis. We simply require details
of the income entitlement(s) and/or trade details together with the type and domicile of
the underlying beneficiaries. We do not need the name(s) of the beneficiaries.
Our Products include GTRS, Class Actions, GQI, e-Reclaim, GOAL TaxBack, DMS
and Bespoke Software Development.
Custody & Clearing
BHF-BANK is one of Germany's most prestigious private banks. Its roots date back to the
year 1854. As an advisory, service and sales & trading bank, we offer our discerning clientele
a comprehensive array of customised solutions. BHF-BANK combines the strengths of a
private bank with a long track record of capital market competence.
Trust, an individual approach and impartiality - these qualities are at the very heart of the
long-term guidance and advice we provide for our clients. Our bank's activities are grouped
within the divisions Asset Management & Financial Services, Financial Markets & Corporates
and Private Banking.
The bank's longstanding experience in the German securities services market goes hand
in hand with a corporate culture that values prompt acknowledgements and short
decision-making channels.
BHF-Bank offers tailor-made custody services to meet its clients' particular requirements.
It's reporting services include a comprehensive SWIFT reporting matrix as well as its
Internet-based reporting tool cds@web. Assets under Custody: EUR309 bn No of funds: 409
CACEIS is an Investor Services company with six offices across Europe. Owned in
equal parts by Crédit Agricole and Natixis, CACEIS provides Custody, Fund
Administration and Corporate Trust services to demanding Corporate and
Institutional clients. We have considerable expertise in Cross-Border Fund
Distribution Support as well as Alternative Investment and Private Equity servic-
ing.
Our staff have the language skills and industry knowledge to develop business
relationships into strong partnerships and our powerful IT systems are constantly
updated to ensure high levels of process automation.
CACEIS is responsible for over EUR1.75 trillion held under custody, and over
EUR850 billion under administration.
Designing custody solutions
– for the Nordic region
One region • One custodian • One point of entry
DnB NOR is the largest and leading provider of Custody, Clearing and
Remote Member Service in Norway. In addition, DnB NOR provides a wide
range of value added services to both Foreign and Domestic clients.
Through an Alliance solution with banks in Sweden, Finland and Denmark,
DnB NOR can offer seamless regional products, which can be customized to
our client's needs.
The cornerstone of Handelsbanken’s philosophy is to put the client and the
client’s needs in focus. Nordic Custody Services are locally present in all the
Nordic markets and offer a wide product spectre to a diverse client base.
Each client is allocated an account manager in each market, fully
responsible for the day-to-day activities, as well as a regional relationship
manager. Handelsbanken provides specialised and tailor-made custody services
including complete corporate action services, securities borrowing and lending
for all Nordic countries, as well as settlement and clearing services to clients
that are remote members of the Nordic stock exchanges.
INVESTOR SERVICES JOURNAL 69
ISJ28 pp68-80 FINAL 13/3/08 7:54 pm Page 70

ING Wholesale Banking Securities Services provides award winning local and region-
al custody services for investment professionals. We are proud to be the largest cus-
todian provider in terms of assets and number of foreign clients in Central & Eastern For further information please
Europe. ING has been providing Securities Services in CEE since 1994 and we will contact
continue our ongoing pursuit of excellence through new technology. Innovation and Lilla Juranyi, Global Head
client focus are the key drivers to service our clients the best way. Custody
at + 31 20 7979 435
Other activities of ING Wholesale Banking Securities Services are Paying Agency or contact her by email:
Services and web-based management of employee stock option & share plans. Lilla.Juranyi@mail.ing.nl
ING is your local partner in: Belgium, Bulgaria, Czech Republic, Hungary, Poland,
Romania, Russia, Slovak Republic and Ukraine.

Business Development –
Investment Fund & Global
KBL, leading service provider in the Luxembourg fund industry, offers one-stop shop Custody Services
facilities to international fund promoters. 43, boulevard Royal
Product structuring (of SICAV, FCP, SIF, SICAR, SEPCAV, …), global custody L-2955 Luxembourg
services as well as an efficient fund administration and transfer agency infrastructure Stéphane Ries e-mail :
are some of our fields of expertise that will bring added value to the management of stephane.ries@kbl-bank.com
your assets. Sandra Cortese e-mail :
For all kinds of Undertakings for Collective Investment going from plain vanilla sandra.cortese@kbl-bank.com
cash, money-market, equity and bond funds to sophisticated alternative, venture Stéphane Pesch e-mail :
capital/private equity, pension pooling and funds of hedge funds, KBL offers expert stephane.pesch@kbl-bank.com
legal, fiscal and technical advice as well as access to the global markets. Tel. : (352)4797 3512
Fax : (352)4797 73910
www.kbl.lu

Nordea is the leading financial services group in the Nordic and Baltic Sea region
and operates through three business areas: Nordic Banking, Banking & Capital
Market Products and Savings & Life Products.
Nordea is the leading custody services provider in the region. Nordea provides high T: +47 2248 6238
quality, tailor-made custody services for local and foreign investors dealing with Contact: Anne-Lise Kristiansen
Nordic, Baltic or global securities. Head of Sub-custody and
- The leading financial services group in the Nordic and Baltis Sea region Clearing
- A world-leading Internet banking and e-commerce operation E: anne-lise.kristiansen@nordea.com
- The largest customer base of any financial services group in the region
- A leading asset manager in the Nordic financial market
- The most comprehensive distribution network in the region

RBC Dexia Investor Services offers a complete range of investor services to

T: +44 (0) 20 7653 4096
institutions worldwide. Established in January 2006, we are equally owned by Royal F: +44 (0) 20 7248 3946
Bank of Canada (RBC) and Dexia. We rank among the world's top 10 global Contact: Tony Johnson
custodians, with approximately USD 2.0 trillion in client assets under custody, Head, Sales & Relationship
including in-house assets of RBC and Dexia. Our innovative products and services Management
help clients maximise operational efficiency, minimise risk and enhance portfolio E: antony.johnson@rbcdexia-is.com
Address: 71 Queen Victoria Street,
returns. And our 3,800 professionals in 15 markets offer proven expertise to
London, EC4V 4DE, UK
enhance clients’ business performance.

Santander is Spain’s leading financial institution and the largest bank in the euro zone
by market capitalization. Our commitment and contribution to the securities industry is
well established after more than a century of providing services in this field. T: Europe: (34) 91 2893932 / 28
T: USA: (1212) 350 39 02
Santander’s cutting edge technology enables it to offer a comprehensive array of inno- W: santanderglobal.com
E: globalsecurities@
vative services in a broad range of markets. Santander currently has full local capabili- gruposantander.com
ties in Iberian and Latin American markets along with a franchised presence in many
others. Santander`s experience and product range ensures that every aspect of the
securities business is fully contemplated.

SEB is the leading provider of securities services in the Nordic and Baltic area. We
are committed to custody and clearing processes for the wholesale market. We hold
securities worth over 560 bn EUR and provide services in more that 75 markets, 10 T: +46 8 763 5770
of them under the SEB name (Sweden, Norway, Finland, Denmark, Luxembourg,
F: +46 8 763 6930
Germany, Estonia, Latvia, Lithuania and Ukraine).
C: Goran Fors, Global Head of
We offer a full range of securities services including corporate action and informa- Custody Services
tion services, securities lending and services to remote members of the Nordic and
Baltic stock exchanges. We continuously develop new products in connection with E: goran.fors@seb.se
clients and partners to ensure we deliver the high-quality products our clients W: www.seb.se
demand. We always strive to make the processes more efficient. With a history of
over 150 years in the securities industry; we know the market and our clients well.

70 INVESTOR SERVICES JOURNAL

ISJ28 pp68-80 FINAL 13/3/08 7:54 pm Page 71

Sébastien Danloy
Global Head of Sales,Investor
Services
Société Générale Securities
Services
T: +33 (0)1 41 42 98 65
E: sebastien.danloy@socgen.com
W: www.sg-securities-services.com
Société Générale Securities Services offers institutional investors, asset man-
agers and financial intermediaries a comprehensive range of financial securities
services: custody, clearing & trustee services, fund administration, asset servic-
ing and transfer agency. SGSS currently ranks 3rd European custodian and 9th
worldwide custodian (Source: Globalcustody.net) with EUR 2,580* billion in
assets held and valuates 4,354* funds representing assets of EUR 405* billion
(as of June 2007).

Financial Asset Services is the custody and investments-servicing division of

A:Standard Bank Standard Bank, providing a unique suite of services to sophisticated investors in
Financial Asset Services South Africa and eight sub-Saharan markets.
3rd Floor
25 Sauer Street Standard Bank has assets under custody to the value of ZAR1.56 trillion and an
Johannesburg 2107 overall market share of approximately 40%.
T: +2711 636 6615
E: adam.bateman@standard- Standard Bank's unique selling point lies in its consultative approach to
bank.co.za relationships combined with the bank's commitment to custody and investment
W: www.standardbank.co.za administration services.

C: Neil Daswani,
Global Head, Securities Services
T: +65 6517 0022
E: Neil.Daswani@sg.standard-
chartered.com
W: www.standardchartered.com
Standard Chartered leading the way in Asia, Africa and the Middle East.
Standard Chartered has a history of over 150 years in banking and is in many of the
world's fastest-growing markets with an extensive global network of over 1,200
branches (including subsidiaries, associates and joint ventures) in over 50 countries
in the Asia Pacific Region, South Asia, the Middle East, Africa, the United Kingdom
and the Americas.
As one of Asia's leading custodians, Standard Chartered has an impressive track
record across the 16 Asian markets in which it provides securities services. It serves
global, regional and local custodians and broker-dealers, as well as local and regional
fund managers. The Bank plays a key role in promoting the development of these
markets and keeping the international investor community informed of industry
developments across the region.

Swedbank provides client-focused custody services to domestic and international secu-

rities lending (including auto-borrow facilities), derivative clearing services, proxy vot-
ing, full corporate actions and income service. Flexibility is an important aspect of
T: +46 8 5859 1800 Swedbanks products and services. Our dedicated Client Relations Managers and
F: +46 8 7237 147 Account Managers are focused on personalized processing and reporting solutions.
C: Neal Meacham, Head of Other Features:
Custody - ISO9001:2000 quality certification.
E: neal.meacham@swedbank.com - Swedbank Markets Online (SMO) internet information and reporting toolfor
A: Stockholm SE 105 34 Custody and Securities Lending.
Sweden - Nordic Custody alliance with DnB NOR (Norway), OKO Bank (Finland) and
Amagerbanken (Denmark) to offer regional custody product.
Institutional Assets under Custody: USD 70 billion
No. of Institutional Clients: 110

T: +43 50505-58510
F: +43 50505-58579
C: Andreas Petzl , Head of Sales
and Relationship Management
E: Andreas.petzl@ba-ca.com
W: www.hvb-custody.com/
Unicredit Markets & Investment Banking (MIB) serves as UniCredit Group's global
product and competence center for global financial markets and investment banking
services, including Custody throughout Central and Eastern Europe, including Austria.
Brand diversitiy under which the group operates (Bank Austria Creditanstalt, HVB,
Bank BPH, Bank Pekao, Zagrebacka Banka and International Moscow Bank), has its
roots in local market presence and knowledge, contributing into a single unified
product across the region. In 2006 the group was recognised by no less than 3
independent surveys as being the best region custodian
The group's ability to deliver service excellence across 13 markets is the cornerstone
of our success. From participation in local market associations to our inter group
training sessions, to a client consultative approach, the group continues to work
towards making a single impression - excellence.

Data Services .
Avox
Redwither Tower Market Data & Analytics provides high-value real-time market data, indices and back
Redwither Business Park office services. Information from diverse sources are provided to its customers,
tailored to their specific information needs. Accuracy and reliability are ensured by
Wrexham, LL13 9XT
collecting the data from the Group’s own trading platforms, such as Xetra® and
United Kingdom Eurex® and cooperation partners like STOXX Ltd. and the Irish Stock Exchange.
Avox®, a majority-owned subsidiary, validates, corrects, enriches and maintains
T: +44 (1978) 661 813 business entity data. With an operational model, unique in the industry, Avox®
F: +44 (1978) 661 668 enables clients to comply with regulatory requirements and to achieve a holistic view
W: www.avox.info of the risk exposure towards a client.

71 INVESTOR SERVICES JOURNAL

ISJ28 pp68-80 FINAL 13/3/08 7:54 pm Page 72

Interactive Data Corporation (NYSE: IDC - News) is a leading global provider of

financial market data, analytics and related services to financial institutions, active
www.interactivedata.com
traders and individual investors. The Company's businesses supply time-sensitive
pricing, evaluations and reference data for more than 3.5 million securities traded T: 020 7825 7800
around the world, including hard-to-value instruments. Many of the world's best- F: 020 76083514
known financial service and software companies subscribe to the Company's services Brendan Beith - Europen Sales
in support of their trading, analysis, portfolio management and valuation activities.
Director
Through its businesses, Interactive Data Pricing and Reference Data, Interactive
Data Real-Time Services, Interactive Data Fixed Income Analytics, and eSignal, the eu-info@interactivedata.com
Company has approximately 2,200 employees in offices located throughout North Fitzroy House
America, Europe, Asia and Australia. The Company is headquartered in Bedford, 13-17 Epworth Street
Mass. Pearson plc (NYSE: PSO - News; LSE: PSON - News), an international media
London EC2A 4DL UK
company, whose businesses include the Financial Times Group, Pearson Education,
and the Penguin Group, is Interactive Data Corporation's majority stockholder.

SmartCo is a leading provider of data management solutions for the financial industry.
SmartCo’s software, Smart Financial Data Hub, covers all the data area, including SmartCo
financial instruments, market data, third parties, funds, transactions, and provides 37 rue de Liège
full connectivity, a powerful and user friendly front-end, traceability, quality control, 75008 Paris
data enrichment and customisable workflow. France
Our solutions are based on SmartPlanet, an innovative technology focused on data
management, and able to meet evolving business requirements. T: + 33 1 58 22 29 60
SmartCo offers to its customers the ability to respond in the fastest way to regulatory E: info@smartco.fr
and business changes. W: www.smartco.fr
For further information: www.smartco.fr or info@smartco.fr

Telekurs (UK) Ltd

Telekurs Financial specialises in the procurement, processing and distribution 15 Appold Street
of international financial information. Financial market specialists at Telekurs London
Financial gather information from all the world’s major trading venues – directly EC2A 2NE
and in real time. The Telekurs Financial database with its structured, coded
securities management data is unique in terms of its depth of information and T: +44 (0) 20 7550 5000
data coverage. With offices in 22 countries, Telekurs Financial combines the F: +44 (0) 20 7550 5001
advantages of global presence and local know-how. E: info@telekurs.co.uk
W: www.telekurs.co.uk

Fund Administration
Apex Fund Services Ltd is a global hedge fund administration solution for hedge C: Peter Hughes
funds and private equity clients located in 9 separate jurisdictions across the globe. Group Managing Director
The company uses the software solution, PFS PAXUS, which is a fully integrated T: +1 441-292-2739
hedge fund accounting system combined with web-based reporting to allow clients F:+1 441-292-1884
and investors to access their information 24/7 securely online. We will tailor all
E: info@apex.bm
solutions to meet your needs and our continuing focus on the quality of service and
the relationship with each and individual client ensures that we retain our ethos of A: 31 Reid Street,
providing a personalized service rather than a generic solution. Hamilton,HM11
Highly qualified and experienced staff, mirrored with top tier technology and Bermuda
competitive fee structures make Apex Fund Services Ltd the clear choice for your
fund administration needs. WWW.APEX.BM

CACEIS is an Investor Services company with six offices across Europe. Owned in International: Olivier Storme
equal parts by Crédit Agricole and Natixis, CACEIS provides Custody, Fund T: +352 4767 2847
Administration and Corporate Trust services to demanding Corporate and E: olivier.storme@caceis.com
Institutional clients. We have considerable expertise in Cross-Border Fund
Distribution Support as well as Alternative Investment and Private Equity servic-
ing. France: Patrick Lemuet
Our staff have the language skills and industry knowledge to develop business T: +33 (0)1 57 78 03 34
relationships into strong partnerships and our powerful IT systems are constantly
updated to ensure high levels of process automation. E: patrick.lemuet@caceis.com
CACEIS is responsible for over EUR1.75 trillion held under custody, and over W: www.caceis.com
EUR850 billion under administration.

Daniel Cann, Director

Folio Administrators Limited, part of the Folio Group of Companies supplying Daniel@folioadmin.com
fund administration, company management, director services and insurance
William Harris, Director
management, is the leading fund administration company in the British Virgin
William@folioadmin.com
Islands.
We specialize in servicing the needs of start-up to medium sized hedge funds, Folio Administrators Limited
covering all aspects of fund formation, structuring and on-going operations. Folio House, Road Town
We work closely with an extensive number of banks, brokers, custodians, British Virgin Islands
auditors and lawyers to ensure that our clients receive the best independent www.folioadmin.com
advice and structures. T: 284 494 7065
F: 284 494 8356

72 INVESTOR SERVICES JOURNAL

ISJ28 pp68-80 FINAL 13/3/08
www.imfcfundservices.com
t +31.20.644.4558
f +31.20.644.2735
Mrs. Consuelo Nardon
e: consuelo.nardon@imfc.nl
Rivierstaete Building,
Amsteldijk 166, 1079 LH
Amsterdam, Netherlands
C: Fred W. Jacobs, III
A: PFPC, 301 Bellevue Pkwy
Wilmington, DE 19809 USA
T: 302-791-2000
F: 302-791-1570
E: Information@pfpc.com
C: Fergus McKeon
A: PFPC Riverside Two
Sir John Rogerson’s Quay
Dublin 2, Ireland
T: +353-1-790-3500
E: Information@pfpc.com
C: Stuart Mauger
T: +44 (0) 1481 744479
F: +44 (0) 1481 744529
E: stuart.mauger@rbc.com
A: PO Box 48 Canada Court
St Peter Port Guernsey GY1 3BQ
C: Deanna Bidwell (Cayman)
T: +1 345 949 9107
F: +1 345 946 1288
E: deanna.bidwell@rbc.com
W: www.rbcprivatebanking.com
Sébastien Danloy
Global Head of Sales,Investor
Services
Société Générale Securities
Services
T: +33 (0)1 41 42 98 65
E: sebastien.danloy@socgen.com
W: www.sg-securities-services.com
Swiss Financial Services
(Ireland) Ltd.
Block 4B,Cleaboy Business Park, Drawing upon an extensive track record of proficiency, dependability and
Old Kilmeaden Road,
Waterford, Ireland
T: +353 51 351180
F: +353 51 871595
Adrian Maher
E: amaher@swiss-financial.ie
W: www.ubs.com/fundservices
C: Mr Gerhard Fusenig
T: +41 44 235 4992
E: gerhard.fusenig@ubs.com
A: UBS Global Asset
Management, Fund Services,
Stauffacherstrasse 41, PO Box,
CH-8098, Zurich, Switzerland
7:54 pm Page 73
Established in 2002, IMFC Fund Services B.V. is a boutique hedge fund
administrator and a trustee with its offices in Amsterdam and Sydney. IMFC
offers third parties administration and related services to all type of onshore and
offshore funds combining high quality, independency, technology, timely
calculation with flexibility, experience, custom-made solutions and competitive
rates. Our services include: fund set-up and corporate services, NAV calculation
and other accounting services, R&T agent and other investors and compliance
services. For more information visit our website: www.imfcfundservices.com
PFPC is a premier provider of processing, technology and business solutions to the
global investment industry. Our core offering includes accounting, administration,
investor services, middle-office services and regulatory administration services. Whether
your products are U.S. or non-U.S. domiciled funds, trust vehicles, limited partnerships
or commingled investment products, PFPC’s multi-jurisdictional, multi-fund capability
allows us to process your complex fund structures - from hedge funds, fund of funds
and private equity funds to master/feeder and multi-managed funds.
PFPC offers personalized alternative investment solutions tailored to your unique
needs. With more than 30 years in the fund servicing industry, our seasoned and
responsive professionals bring you the know-how, focus and dedication to deliver the
services you need, when and where you need them, any way you want them.
Our clients have access to a broad range of value added services and tailored solu-
tions including global custody and fund administration services for funds domiciled
in the Caribbean and Channel Islands.
Our services include Trustee, banking and credit facilities, treasury and foreign
exchange, trade execution, financial accounting, corporate services, derivative sup-
port services and online access, leveraging a custody network that covers 80 plus
markets worldwide. Our service combines leading edge technology with professional
expertise and a truly integrated service delivering creative, customised solutions.
Société Générale Securities Services offers institutional investors, asset man-
agers and financial intermediaries a comprehensive range of financial securities
services: custody, clearing & trustee services, fund administration, asset servic-
ing and transfer agency. SGSS currently ranks 3rd European custodian and 9th
worldwide custodian (Source: Globalcustody.net) with EUR 2,580* billion in
assets held and valuates 4,354* funds representing assets of EUR 405* billion
(as of June 2007).
responsiveness, Swiss Financial Services acts as administrator as well as registrar
and transfer agent of funds investing in a broad range of financial instruments.
These include futures, foreign exchange, equities, options, bonds and other funds.
We perform accounting and administration services for diverse fund types
domiciled in, but not limited to, the United States, Bahamas, Cayman Islands, B.V.I.
and Ireland.
Fund Services offers comprehensive fund administration services including fund
set-up, registration and support around the world (currently 28 countries), fund
accounting, NAV calculation, compliance management, risk control and reporting.
We provide a flexible offering from the full range of services, including Private
Labelling, to selected functions. Services are based on leading fund administration
architecture, multi-source pricing and powerful compliance tools.
Capabilities also extend to services for hedge funds through our teams in Cayman,
Ireland and Canada.
In times when management attention is increasingly focused on value creation, it
may be rewarding to re-evaluate whether asset administration remains a strategic
core business to you.
Luxembourg: Jean-Paul Gennari, tel. +352-44-1010 1
Switzerland: Markus Steiner, tel. +41-61-288 4910
UK: Mark Porter, tel. +44-20-7901 5000
INVESTOR SERVICES JOURNAL 73
ISJ28 pp68-80 FINAL 13/3/08 7:54 pm Page 74

Hedge Fund Administration

Custom House is one of the world’s largest independent alternative investment Custom House Administration &
and hedge fund administrators and the first and only one to be awarded a Corporate Services Limited
Moody’s Management Quality Rating. A: 25 Eden Quay, Dublin 1,
Ireland
Custom House offers a round-the-world, round-the-clock service from its T: +(353) 1 878 0807
office in Dublin and representative offices in Chicago and Singapore, enabling
F: +(353) 1 878 0827
it to provide, not only complete global administration services, but also the
C: dermot.butler@
ability to produce daily dealing NAVs.
customhousegroup.com
Custom House is authorised by the Irish Financial Regulator under Section 10 of C: david.blair@
the Investment Intermediaries Act, 1995, which authorisation does not extend to the customhousegroup.com
Chicago and Singapore representative offices. ww.customhousegroup.com

For further information,

Quintillion is a full service hedge fund administration specialist which supports all
please contact:
portfolio investment strategies and fund structures from its head office in Dublin's
Joan Kehoe
International Financial Services Center (IFSC). The company has made a considerable
Chief Executive Officer
investment in technology and operations expertise, to give clients the opportunity to
E: joan.kehoe@quintillion.ie
manage a range of funds with the support of a single administration partner. Key
T: + 353 1 523 8001
technologies are Advent Geneva, Koger NTAS and Paladyne.
Ken Somerville
Typical strategies supported include Convertible Arbitrage, Multi Strategy, Distressed
Head of Business Development
Securities, Global Macro, Fund of Hedge Funds, Market Neutral and Managed Futures
E: ken.somerville@quintillion.ie
funds. A comprehensive range of fund structures, currency classes and performance fee
T: + 353 1 523 8003
mechanisms are also accommodated.
W: www.quintillion.ie

Hedge Fund Services, based in the Cayman Islands, Ireland and Canada holds a
leading position in the area of hedge fund administration, offering a complete range
of services including accounting, NAV computation, share holder services, banking W: www.ubs.com/fundservices
and credit facilities. With the dedication and experience of a professional team of C: Mr Gerhard Fusenig
200 and our state-of-the-art web reporting, accounting and shareholder systems, we T: +41 44 235 4992
are well positioned to provide clients with a first class service. E: gerhard.fusenig@ubs.com
With specialist expertise in both single manager and fund of hedge fund adminis-
tration, we provide facilities for both onshore and offshore funds. A: UBS Global Asset
Capabilities also extend to services for investment funds through our teams in Management, Fund Services,
Luxembourg, Switzerland and the UK. Stauffacherstrasse 41, PO Box,
Cayman Islands: Darren Stainrod, tel. +1-345-914 1076 CH-8098, Zurich, Switzerland
Ireland: Don McClean, tel. +353-1-436 3636
Canada: Pearse Griffith, tel. +1-416-971 4702

International Finance Centres

The British Virgin Islands has created a progressive and transparent environment for
the establishment and regulation of mutual/hedge funds and their functionaries. By
the end of Q3 2006 the BVI had recognised or registered more than 4,000 funds, British Virgin Islands
and licensed some 700 managers and administrators, making the BVI a leading International Finance Centre
domicile of choice for investment business. Haycraft Building
Benefits of conducting investment business in the BVI include: 1 Pasea Estate
-Fast-track registration and licensing system - funds can be registered in a few days. Road Town
-Presence of qualified, experienced legal, accounting & administration practitioners. Tortola
-A well-developed corporate professional infrastructure. British Virgin Islands
-Modern, robust and cost-effective regulatory and corporate regimes. T: +1 284 494 1509
-BVI private and professional funds fall outside the scope of the EU Savings F: +1 284 494 1260
taxation Directive. W: www.bviifc.gov.vg
-Segregated Portfolio Companies - also known as Protected Cell Companies - can now
be formed as mutual funds under the BVI Business Companies Act 2004.

DIFC
The DIFC is the world's newest international financial centre. It aims to develop the Dubai International
same stature as New York, London and Hong Kong. It primarily serves the vast Financial Centre
region between Western Europe and East Asia. Level 14, The Gate
P.O. Box 74777, Dubai, UAE
Since it opened in September 2004, the DIFC has attracted high calibre firms from
E: info@difc.ae
around the globe as well as its region. Firms operating in the DIFC are eligible for
benefits such as a zero tax rate on profits, 100 per cent foreign ownership, no T: +971 4 362 2450
restrictions on foreign exchange or repatriation of capital, operational support and M: +971 50 4958902
business continuity facilities. F: +971 4 362 2333
W: www.difc.ae

Prime Brokerage
Newedge Global Prime Brokerage Group is a global, multi-disciplinary, solution-
providing team dedicated to delivering superior services to alternative investment Philippe Teilhard de Chardin
industry participants including hedge funds, commodity trading advisors (CTAs), fund T: + 44 20 7676 85 36
of hedge funds, family offices, and institutional investors (insurance philippe.teilhard@
companies, banks and pension funds). newedgegroup.com
The Newedge prime brokerage team offers a global range of brokerage services Vincent Tournant
covering a wide range of asset classes including equities, bonds, currencies, T: +44 (0)20 7676 8171
commodities, and their related listed and OTC derivative products. We also offer an vincent.tournant@
innovative portfolio-based cross-margining solution, a dedicated account management newedgegroup.com
desk, hedge fund start up services, quantitative information on the hedge fund Duncan Crawford
industry, capital introductions services, and recently prime brokerage services to T: +44 (0)20 7676 85 04
Sharia compliant hedge funds. duncan.crawford@
Newedge is a major new force in finance, resulting from the merger of the two broker-
newedgegroup.com
age firms - Calyon Financial and Fimat - on January 2nd, 2008. Newedge is wholly W: www.newedgegroup.com
owned by Calyon and Société Générale, with both companies having 50% ownership.

74 INVESTOR SERVICES JOURNAL

ISJ28 pp68-80 FINAL 13/3/08
A: Europe/Asia/Africa
42 New Broad Street
London EC2M 1SB
United Kingdom
T: +44-207-588-1100
F: +44-207-588-1155
A: Americas
30 Montgomery Street Suite 501 ing in countries outside the U.S. that have established Real Time Gross Settlement
Jersey City, NJ 07302
T: +1-201-946-1100
F: +1-201-946-1313
VocaLink
Drake House
Three Rivers Court
Homestead Road
Rickmansworth
Hertfordshire
WD3 1FX
T: +44(0)870 1650019
F: info@vocalink.com
W: www.vocalink.com
W: www.dataexplorers.com
T: +44 (20) 7392 4000
F: +44 (20) 7392 4004
A: 155 Commercial Street,
London E1 6BJ United Kingdom
London: Julian Pittam
T: +44 (20) 7392 5018
E: jp@dataexplorers.com
Boston: Tim Smith
T: + 1 (617) 973 5099
E: tim.smith@dataexplorers.com
T: +1 212 901 2224
C: Michelle Lindenberger
E: Michelle.lindenberger@equi-
lend.com/info@equilend.com
A: 17 State Street, 9th Floor
New York NY 10004
T: +44 20 7743 9510
A: 54 Lombard Street
London EC3V 9EX
W: www.equilend.com
T: US- +1 617 204 4500
T: UK- +44 (0)20 7469 6000
C: Christopher Jaynes
E: info@eseclending.com
W: www.eseclending.com
A: 175 Federal Street, 11th FL,
Boston, MA 02110, US
A: 1st Floor, 10 King William
Street, London EC4N 7TW, UK
W: www.eurexseclend.com
T: +41 58 854 2066
F: +41 58 854 2455
E: info@eurexseclend.com
Eurex Zurich Ltd., Selnaustrasse
30, 8021 Zurich, Switzerland
7:55 pm Page 75
Payments & Settlements .
Fundtech's payments solutions automate all aspects of the funds transfer and cus-
tomer notification process, enabling straight-through-processing (STP) of payments.
Fundtech also offers payments solutions for continuous linked settlement (CLS), nos-
tro account management and enterprise-wide payments management.
Global PAYplus - The enterprise-wide payments management solution for global
financial institutions.
PAYplus RTGS - A fully integrated, multi-currency payment system for banks resid-
(RTGS) standards.
PAYplus USA - The leading payments solution for financial institutions in the US.
VocaLink is the transaction specialist. We pioneered electronic payments four
decades ago and many of the world’s top banks have been relying on our services
ever since. Our automated payment system processes over 80 million transactions
per day and has the capacity to handle all of Europe's automated payments. Our
switching platform powers the world’s busiest ATM network.
The VocaLink CSM delivers reach for our clients throughout the SEPA and beyond
with a range of value-added services that leverage our know-how and technical capa-
bilities.
VocaLink is the partner of choice in the transactions business. Find out why at
www.vocalink.com
Securities Lending .
Data Explorers Limited, a specialist and independent company, offers impartial
quantitative measurement of securities lending performance services to the global
securities financing industry. We help our clients monitor and understand the
relative performance of their lending activity and risk, and turn raw lending, borrow-
ing and collateral data into useful, actionable information. We also provide proxies
for short selling information.
Working with the industry we ensure information flows are appropriate and peer
groups relevant. We are not involved in transactions.
All of our services: Performance Explorer, Transaction Explorer, Risk Explorer,
Index Explorer and Report Explorer are web based and available to clients
over the internet.
EquiLend Holdings LLC was formed by a group of leading financial institutions to
develop a global platform for the automation of securities finance transactions.
The EquiLend platform is designed to increase efficiency by standardizing, cen-
tralizing and automating front and back office processes, while delivering global
access to liquidity, reduced risk and scalability. The EquiLend platform is
designed to process equity and fixed income securities finance transactions on a
global basis.
Investors include: Barclays Global Investors; Bear, Stearns & Co. Inc.; Credit
Suisse; The Goldman Sachs Group, Inc.; J.P. Morgan Chase & Co.; Lehman
Brothers; Merrill Lynch; Morgan Stanley; Northern Trust Corporation; State Street
Corporation; and UBS.
eSecLending is a leading global provider and administrator of customized securities
lending programs and they have grown to become one of the largest lending agents
in the marketplace. Their program has been adopted by some of the world’s largest
and most sophisticated asset gatherers including pension funds, mutual funds,
investment mangers and insurance companies. eSecLending’s approach has
introduced investment management practices to the securities lending industry,
offering beneficial owners an alternative to the custodial lending model. Through
eSecLending, beneficial owners have achieved optimal returns, greater transparency
and increased control over their program as compared to traditional lending models.
eSecLending maintains offices in Boston, London and Burlington, Vermont.
Securities Finance Trust Company, an eSecLending company, performs all regulated
business activities. Additional information about eSecLending is available on the
company’s website, www.eseclending.com.
Eurex is one of the largest derivatives exchanges and the leading clearing house in
Europe. Wherever you are located, we provide you with access to the benchmark
futures and options market for European derivatives. Eurex also offers short term fund-
ing products, such as Eurex Repo. Eurex Repo is among the forerunners in providing
integrated trading and clearing for repo transactions. Eurex’s latest innovative market-
place is called Eurex SecLend.
Eurex SecLend. Europe’s leading investment banks participate as borrowers in the
Eurex SecLend marketplace, acting as principal brokers, dealers and intermediaries.
They all benefit from Eurex’s leading state-of-the-art trading and processing services.
For Eurex, service and technology innovation is not just a buzzword. New trends are
being transformed into inventions through the adoption of advanced trading practices.
Find out more on www.eurexseclend.com.
INVESTOR SERVICES JOURNAL 75
ISJ28 pp68-80 FINAL 13/3/08 7:55 pm Page 76

Securities Lending .
FINACE® is the only fully integrated solution today which supports the future busi- T: +41 (0)44 218 14 14
ness model within the area of Securities Finance and Collateral Management. The F: +41 (0)44 218 14 18
architecture of FINACE® is based on a stable, leading edge technology platform,
E: info@finace.ch
which was developed with performance and robustness as the focus of design. With
A: COMIT AG, Buckhauserstrasse
flexibility at its core, customer-driven extensions and modifications can be quickly
and easily applied to the standard component set. 11, CH-8048 Zurich, Switzerland
W: www.finacesolution.com

New York: William Smith

JPMorgan's Securities Lending program is unparalleled due in no small part to the T: 212-623-5664
Firm's breadth of capability, financial strength, professional expertise and seamless E: william.z.smith@jpmorgan.com
operations.
London: Michael Fox
Our program enables investors to access a broad spectrum of lending markets, with T: 44 207 742 0256
a diverse borrower base, offering a broad indemnification against borrower default, E: michael.uk.fox@jpmorgan.com
while achieving very competitive bids for their securities - all of this in an
environment designed not to compromise the activities of their fund managers. As Sydney: David Brown
one of the founding members of EquiLend, a global automated platform for T: (61-2)92504606
borrowers and lenders, JPMorgan is at the forefront of technology and is ideally E: david.ldn.brown@jpmorgan.com
placed given its integrated lending, custody and accounting platforms.
W: www.jpmorgan.com/wss

Pirum provides a full suite of automated reconciliation and straight through process-
ing (STP) services supporting Operations within the global securities finance T: +44 20 7220 0961
industry. The company's on-line SBLREX service encompasses daily contract F: +44 20 7220 0977
compare, monthly billing comparison, mark-to-market & exposure processing, C: Rupert Perry
pending trade comparison, income claims processing and custody reconciliation.
E: rupert.perry@pirum.com
Subscribers to Pirum’s services significantly increase their operational efficiency
A: Pirum Systems Limited
and reduce their risk by using Pirum’s solutions, as staff are able to focus on fixing
the exceptions instead of using their time to check and process routine business. 37-39 Lime Street
These automated processes are more scalable and risk controlled too, allowing London, EC3M 7AY
significantly higher volumes to be managed without corresponding increases in W: www.pirum.com
operations headcount.

Santander is the only Spanish financial institution with a team exclusively dedicated
to securities finance & with the purchase of Abbey in 2004 has expanded its
capacity on a Global basis with trading teams in London (UK) & Connecticut (USA). W: www.gruposantander.com
T: (3491) 289 39 42/54
Santander's leading local capabilities in Spain, Portugal, UK, USA & Latin America,
E: securitieslending@
along with its solid balance sheet & combined with the state-of-the-art technology,
provides its clients with the broadest range of solutions in securities lending & gruposantander.com
financing, including availability across all assets classes, as well as access to
uncommon emerging markets.

Email: securities.finance@sun-
gard.com
Around the world, USD9 trillion in securities financing is managed on SunGard’s
proven solutions for international and U.S. domestic securities lending and repo for Contact: Switch board: +44 (0)
over 250 clients. Through our Loanet, Global One, Martini and Astec Analytics prod- 208 081 2000 Marketing: +44
ucts and services, we provide comprehensive business solutions and information with (0)208 081 2853
worldwide reach for equities or fixed income securities financing. These solutions –
all in an integrated, exception-based processing architecture – includes order rout- Visit: www.sungard.com/loanet
ing, pre-trade analytics, trading, position management, operations, accounting, set- www.sungard.com/globalone
tlement and reconciliation. www.sungard.com/martini
www.astecgroup.com

Technology .
Advent Software EMEA, established in 1998, provides trusted solutions for the front
through to back office operations, based on a true real-time fund/portfolio
accounting platform, to the investment management community throughout Europe, T: +44 (0)20 7631 9240
Middle East and Africa. Advent has an established network of offices across the F: +44 (0)20 7631 9256
region serving a growing client base of asset managers, hedge fund managers, prime E: emea@advent.com
brokers, fund administrators, wealth managers, private banks and family offices who A: One Bedford Avenue,
continue to improve their businesses using Advent’s suite of integrated investment London WC1B 3AU, UK
management solutions. Advent Software EMEA is part of Advent Software Inc. W: www.advent.com
(Nasdaq: ADVS), a global organisation that has been providing solutions to the
world's leading financial professionals since 1983. Firms in more than 50 countries
using Advent technology manage investments totaling more than US $8 trillion.

76 INVESTOR SERVICES JOURNAL

ISJ28 pp68-80 FINAL 13/3/08
Annette Lindinger
press@aquin.com
T: +49 69 21 93 66 600
F: +49 69 21 93 66 650
Mainzer Landstr. 199
60326
Frankfurt am Main
Germany
W: www.aquin.com
Broadridge Financial Solutions
The ISIS Building
193 Marsh Wall
London E14 9SG UK
T: +44 (0) 20 7551 3000
E: info@broadridge.com
W: www.broadridge.com
T: UK +44 (0)20 8390 5000
Boston +1 617 482 8800
Hong Kong +85 225 812 880
F: +44 (0)20 8390 7000
E: info@dstintl.com
A: DST House, St Mark’s Hill,
Surbiton, Surrey, KT6 4QD
W: www.dstinternational.com
W: www.eagleinvsys.com
T: +44 (0) 20 7163 5700
F: +44 (0) 20 7163 5701
A: Mellon Financial Centre
160 Queen Victoria Street
London, EC4V 4LA
W: www.f-tradeware.com
T: +44 (0)20 7493 2773
F: +44 (0)20 7495 4858
C: GrahamBright
E: info@f-tradeware.com
A: 31 Dover Street
London W1S 4ND UK
Fingertip Developments Ltd
Curtain Court
7 Curtain Road
London EC2A 3LT
UK
T: +44 (0)20 7100 9280 Unrivalled extensibility allows you to develop your own functionality with your in-
enquiries@fingertip- house development team.
developments.com
7:55 pm Page 77
Aquin are the market leader in investment compliance software with MIG21® pow-
ered by Aquin LawCards® for global compliance including UCITS III and SEC 1940.
The company has built its reputation on solid compliance and IT experience in long
term relationships with its clients.
Aquin services a blue-chip client base of the world’s leading investment
management companies, hedge funds, fund administrators and custodians. These
include Citi, State Street, BNP Paribas, Credit Suisse, CACEIS Investor Services,
Allianz Global Investors, Pioneer Investments and Commerzbank. The company has
its headquarters in Frankfurt, Germany with subsidiaries in Boston, London, Paris,
Dublin, Luxembourg and Zurich.
Broadridge Financial Solutions, formerly ADP Brokerage Services Group, with nearly
$2.0 billion in revenues and more than 40 years of experience, is a leading global
provider of technology-based outsourcing solutions to the financial services industry. Our
integrated systems and services include international securities processing, investor
communication and outsourcing solutions. We offer advanced, integrated systems and
services that are dependable, scalable and cost-efficient. Our systems help reduce the
need for clients to make significant capital investments in operations infrastructure,
thereby allowing them to increase their focus on core business activities.
Proxy Edge – comprehensive solution for institutional global proxy voting management.
Gloss – leading international STP system which automates the trade processing lifecycle from
trade capture through confirmation, clearing agency reporting and settlement.
Tarot - a UK retail and private client stockbroking, custody and fund management solution.
Securities Data Management – outsourced data services for securities operations.
DST International is the world’s premier vendor of technology solutions to the global
investment management community with over 700 clients in 55 countries, and
1500 employees in 19 of the world’s leading financial centres. Our wide range of
asset management solutions meet the needs of fund managers, dealers, settlement
staff, custodians and record keepers operating as international asset managers; from
front office simulation, opinion management and modelling functions, through data
management, dealing and settlement to custody and corporate actions. The suite of
products can be used either as stand-alone applications or brought together in flexi-
ble combinations according to specific needs.
Eagle Investment Systems LLC is a global provider of financial services technology,
serving the world's leading financial institutions. Eagle's Web-based systems support
the complex requirements of firms of any size including institutional investment
managers, mutual funds, hedge funds, brokers, public funds, plan sponsors, and
insurance companies. Eagle is committed to providing enterprise-wide, leading-edge
technology and professional services for investment accounting, data management,
and performance measurement. Eagle’s product suite is offered as an installed
application or can be hosted via Eagle ACCESS, Eagle’s application service provider.
Eagle Investment Systems LLC is a division of The Bank of New York Mellon
Corporation. To learn more about Eagle's solutions, contact sales@eagleinvsys.com
or visit www.eagleinvsys.com.
Financial Tradeware provides integrated solutions for medium to small sized
Investment Management firms, Fund Managers and Hedge Funds, covering the full
trade life cycle. It is part of the Dharma Group of companies and benefits from the
joint contributions and experiences within the group of market traders, business ana-
lysts, financial services professionals and skilled Microsoft Certified programmers.
The company has developed a suite of applications that integrate and Straight
Through Process (STP) real-time trading, back office administration, accounting and
compliance. Ultra.net®, S-Messenger® and H-Fund® are the company's flagship
products all based on Microsoft.NET infrastructure. The company also offers a
Member Concentrator for hosted SWIFT connectivity and Member Administered
Closed User Group (MA-CUG) services for Corporates and Hedge funds. For more
information see: www.f-tradeware.com
Elemes NM is your partner in global agent bank custodian network management pro-
viding a global view of your relationship network in a powerful and easy to use pack-
age. It includes diary, invoice verification, document management, multi-entity
views, reporting, account information incorporating fee and rate structures, contacts,
notes and supports eFee – electronic fee invoicing technology.
Flexibility does not stop with the software, our commercial terms offer adaptable
pricing to suit present and future requirements for all sizes of organisation.
INVESTOR SERVICES JOURNAL 77
ISJ28 pp68-80 FINAL 13/3/08 7:55 pm Page 78

IGEFI is the foremost provider of software solutions for international fund

promoters, third-party service providers and fund managers. Its prestigious A:IGEFI Group Sàrl - 7, Rue des
client-base is testimony to our commitment, service and quality with over 170 Primeurs, L-2361 Strassen
expert staff supporting clients from six offices worldwide including Bangalore, T: +352 26 44 211
Boston, Frankfurt, Geneva, Luxembourg and Paris. MultiFonds is operational in F: +352 26 44 21 44
more than 20 countries worldwide and support investment funds assets in excess E: marketing@igefi.com
of US$ 2 trillion. W: www.igefi.com

MultiFonds Fund Accounting and MultiFonds Transfer Agency are developed on C: Mr. Jesper Steiness - Director,
a “one system-one database” philosophy and provide significant advantages Business Development
including reduced overhead and IT support costs and single look and feel reporting E: jesper.steiness@igefi.com
for global clients.

For more than a decade, administrators, managers, and advisors have relied
on KOGER for dependable software tools backed by extensive industry T: 001-201-291-7747
experience and expertise. Now, for those who want to reduce costs and F: 001-201-291-7808
streamline business processes, Koger offers Fully Integrated Fund C: Mr Ras Sipko
Administrator, a vertically integrated suite serving the back-office E: ras@kogerusa.com
software needs of the fund industry. KOGER USA
Fully Integrated Fund Administrator consists of three core programs: 12 Route 17 North
~ NTAS, the New Transfer-agency System Suite 111
~ E*TAS, Electronic Transfer Agency System Paramus
~ GRID, Global Reach Interface Daemon New Jersey, NJ 07652, USA
Other programs, such as PTAS, KIT, and KORS available separately, complement W: www.kogerusa.com
the core competency of Fully Integrated Fund Administrator.

Lombard Risk is an innovative and established provider of financial trading systems,

risk management software, regulatory software and independent valuation services. Lombard Risk
Our software solutions include Colline, a market leader in collateral management, 21st Floor
and STB-Reporter, a market leader for regulatory reporting. We also provide enter- Empress State Building
prise-wide trading and risk management solutions that allow you to value and man- Lillie Road
age risk proactively across a broad range of financial instruments. Other solutions London SW6 1TR
include sophisticated anti-money laundering and financial crime detection software. UK
Lombard Risk is a global company with offices in London, New York, Shanghai, T: +44 (0)20 7384 5000
Hong Kong, Singapore and Johannesburg. F: +44 (0)20 7384 5140
For more information, please visit www.lombardrisk.com www.lombardrisk.com

Building on over twenty years of experience in capital markets and cross-asset

software solutions, Murex introduces Mx Asset Manager - a unique cross currency,
cross asset fund management solution capable of handling the full range of
products, from plain vanilla to the most complex derivative products.
C: Hélène Desbiez
Coupled with a high degree of flexibility and customization, Mx Asset Manager
Business Development Manager
features a multifaceted design catering to the needs of both service providers
T: +33 1 44 05 32 00
(prime brokers, administrators, asset servicing providers) and direct clients (portfolio
E: helene.desbiez@murex.com
managers for mutual, pension or hedge funds, insurance companies).
W: www.murex.com
With so many new challenges presented to buy-side managers when integrating
increasingly-complex derivatives into their portfolios and funds, Mx Asset Manager
represents a strong and reliable ally for dynamic position keeping and multi-dimen-
sional risk management in a thriving market.

Odyssey Financial Technologies is an industry leader in the global provision of wealth

and asset management solutions and services to the Private Banking, Mass Affluent London Office:
and Retail Banks as well as Institutional and Fund Managers. More than 180 Martin House
financial institutions in 30 countries have chosen Odyssey solutions.
Odyssey focuses on providing a comprehensive range of components for portfolio 5 Martin Lane
management (PMS), advisory process, customer relationship (CRM), compliance, London EC4R 0DP U.K.
risk, analytics and Enterprise Data Management (EDM). The components are
deployed on a single scalable wealth and asset management platform, facilitating T: +44 (0)20 7621 5800
the enterprise-wide implementation of solutions and data management. Founded in
Luxembourg in 1995, Odyssey today has offices in the key financial centers, F: +44 (0)20 7621 5899
including London, New York, Singapore, Zurich, Frankfurt, Brussels, Geneva, Madrid,
Toronto and Tokyo. Odyssey’s operational head office and main development centre E: info@odyssey-group.com
is located in Lausanne, Switzerland. Throughout this knowledgeable network W: www.odyssey-group.com
Odyssey employs over 600 professionals.
peterevans is a leading provider of front to back office solutions for the financial services
sector. With 23 years experience peterevans takes a sophisticated and dynamic
approach to assist customers in reducing costs and witnessing an increase in margins by
seamlessly replacing costly and restricting legacy platforms. peterevans works in a col- peterevans
laborative manner and sees clients as partners to help meet all the demands in today’s New Broad Street House
marketplace. The xanite product suite offers a highly configurable, flexible and fully 35 New Broad Street
integrated, browser based, comprehensive front to back solution that complies with mes- London EC2M 1NH
sage standardization and settlement harmonization. Deployed as a single application or T: +44 (0) 29 20 402200
integrated as components into your existing platform. Each of the xanite modules can be E: info@peterevans.com
delivered via an ASP or self-hosted. Covering: wealth management, custody corporate W: www.peterevans.com
actions clearing and settlement private client and on-line stock broking Clients contin-
ue to retain all control with their portfolio, fund and relationship managers, brokers,
middle and back office operation – on line anywhere in the world.

78 INVESTOR SERVICES JOURNAL

ISJ28 pp68-80 FINAL 13/3/08
T: +1 609-987-2400
F: +1 609-514-4794
C: Lorne Whitmore, Vice
President, Global Sales &
Product Management
E: lwhitmore@pfs.com
A: 600 College Road East,
Princeton, NJ 08540, USA
W: www.pfs.com
Redi2 Technologies, Inc.
1771 Broadway St.
Oakland, CA 94612
T: +1 (510) 834-7334
E: info@redi2.com
W: www.redi2.com
T: +44 (0)20 7260 1900
F: +44 (0)20 7260 1911
C: Elizabeth Gee, Sales Director
of SimCorp Dimension
E: elizabeth.gee@simcorp.co.uk
SimCorp, 100 Wood Street,
London EC2V 7AN UK
W: www.simcorpdimension.com
T: +44 (0)20 7826 4470
F: +44 (0)20 7826 4480
C: Nick Stevens
E: sales@singularity.co.uk
A: Cable House, 4th Floor
54-62 New Broad Street
London EC2M 1ST UK
Further Contacts:
US T: +1 212 946 2685
Singapore T: +65 9616 7732
Visit SunGard at
www.sungard.com
T UK: +44 (0) 8452 303 065
T US: 1-888-650-1831
F: +44 (0) 8452 303 064
E: info@fintuition.com
A: FinTuition Ltd
1 Berkeley Street
London W1J 8DJ
United Kingdom
W: http://www.fintuition.com
7:55 pm Page 79
Princeton Financial® Systems, a wholly owned subsidiary of State Street
Corporation, is a leading provider of investment management and accounting
systems and ASP services for global institutional investors.
Its flagship PAM® investment management systems provide comprehensive STP-
ready functionality that can be licensed for in-house use or accessed via the
Internet. PAM® systems are currently used worldwide by over 275 leading invest-
ment managers, insurance companies, mutual funds and unit trusts, pension funds,
hedge funds, endowments, banks and corporation, which manage combined total
assets over US $3 trillion.
Princeton Financial has offices located throughout the United States, United
Kingdom, Belgium, Australia, Singapore, Amsterdam and Canada. Form more
information, visit Princeton Financial’s website.
Founded in 2002, Redi2 Technologies is a leading provider of fee billing solutions to
the global financial services industry. Redi2 offers flexible, feature-rich solutions
that help firms streamline operations, improve cash flow, reduce costs, enhance
client service and meet compliance obligations.
Redi2’s flagship fee billing and revenue management solution Redi2 Revenue
Manager helps financial professionals more easily manage the fee billing process,
including client setup, multi-currency fee and accrual calculations, invoice and
advice generation, accrual reconciliation, adjustments and reversals.
Our open APIs and support for industry-standard relational databases ease integra-
tion with third-party solutions, including accounting, performance measurement and
CRM systems.
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INVESTOR SERVICES JOURNAL 79
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FORESIGHT

Christopher Cruden, CEO of

Swiss-based specialist forex
investment firm INSCH Capital,
pulls no punches as he talks
with ISJ about the future of the
global funds market

FORESIGHT
Analysts are suggesting alternative managers are learning
from traditional managers, with the adoption of strategies such
as 130/30. Can alternative managers learn from
traditional managers?
This is a poor question. It really depends on who you regard as
being an “alternative” manager and whether you regard their
stategies as being genuinely alternative. In my view, many
managers are not truly alternative and the strategies they employ
are merely a nod in the direction of alternative. - Just enough to
get them the classification and access to the alternative industry.
They are, in some cases, merely re-branded “traditional”
managers and they started to arrive very shortly after their own
bath water drained away. - Curiously, this was around 2001.
A guy called Richard Bernstein, who is the chief investment
stategist at Merrill, just produced a paper that says
"Whereas hedge funds were an effective diversifying tool in the
late 1990s, there is a very limited diversifying effect today. The
efficient frontier for hedge funds and stocks is now virtually a
straight line." Any guesses why that may be?
“They” have become “us” and, therefore, we have become them.
So, the question should be: “Can we learn from us?” Looking at
some of the 130/30 stategies, the answer has to be no.
Negative press from the Japanese hedge fund space has
abounded recently - will the market continue to decline?
Yes. Or no. Definitely.
How will the emerging markets and particularly China affect the
hedge fund space?
As trend followers, we take “price” as being the sum total of the
worlds information and knowlege. Quaintly old-fashioned, but
we do. We don’t have any fundamental “views” that would influ-
ence our trading.
That was the disclaimer: This is the personal opinion.
China is not going to replace the US, Europe or any other major
financial center. They are totally unsuited to do so in a global,
free-market ecconomic system. China is a communist, totalitaian
state with an enormous disparity between rich and poor, it’s des-
Christopher Cruden
perately short of commodities and has a relatively recent history
of violent revolution. Now, should there come about something
other than a global, free-market system... That’s another scenario
altogether.
The above implies that there are fabulous trading opportunities
(such as commodities) for hedge funds resulting from the rise
(and fall?) of China, in particular, and in other emerging markets.
And, no, I don’t believe that China is, in itself, a bubble, but the
game will end and probably in spectacular fashion. It may be a
replay of the Asian Crisis... but more painful.
I just can’t help but feel that like the story for other so-called
“emerging” markets, we have heard it all before. Tigers. BRIC’s,
whatever...
My mother-in-law was a stalwart of the Womens Institute.
Even she couldn’t tell me why people will flock to a “BRIC-a-brac
Sale” but there is no such thing as a “BRIC-a-brac Buy.”
Don’t cross my mother-in-law and don’t argue with the WI.
To extend the housewife theme, if you do want to enter into this
kind of market, put liquidity at the very top of your
shopping list. Shop ’til you drop but make make sure you parked
your car near the exit, pointing in the right direction and leave
the engine running. You just never know.
Have you seen risk growing over the past 12 months and what is
the biggest risk you face?
Yes, risk is growing at every level. Complexity, leverage,
volatility, transparency, you name it.
The biggest risks we face are exactly the same as all investors
face: The risk that our own emotions and egos become an
impediment to successful trading.
Its tough being human and we fight against it every day. ■

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