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Capital Markets: Top 10 Technology Initiatives for 2012 Capital
Markets February 2012 V70:09CM
TowerGroup Key Findings Firms will be challenged to maintain
margins and profitability in a low-growth business
environment due to increasing financial, regulatory, and
political uncertainty.
Spending on regulatory compliance and risk management will be
one of the few areas of budget growth, with global capital firms
expected to spend $26.7 billion cumulatively over 20112013 on new
regulations.
The top ten IT projects for 2012 can be categorized into three
broad themes: focus on risk management and compliance, spending on
infrastructure, analytics and data, and a realignment and
revitalization of IT and operations.
What little discretionary budget and innovation expense in 2012
will go toward expansion into global markets, and the adoption of
horizontal technologies, such as cloud computing and mobility.
Report Coverage
Introduction to the Top 10 Research Note The global capital
markets industry will continue to transform in 2012, impacted by
continued instability in financial markets and new regulations. How
macroeconomic conditions, market volatility, Euro Zone uncertainty,
and impending regulations impact the technology and operations
decisions of securities firms in 2012 is the subject of this
TowerGroup Top 10 Research Note. The report describes major
business drivers the capital markets industry will face in this
year and how these will manifest themselves in new technology and
operations projects and priorities. Business drivers are external
factors in the industry or the broader business environment that
are outside the control of any single firm. The strategic responses
identify the particular initiatives or actions that individual
firms undertake in response to the generic business drivers. These
then lead to the top 10 list of IT priorities and projects in the
industry most likely to take place in 2012.
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Financial institutions will find this list of issues useful in
validating their understanding of the market forces impacting the
industry, and benchmarking their IT projects and priorities with
their peers and competitors. Vendors can use this report in several
ways. They can use it to better understand the business issues
driving the industry and how to market their own solutions in the
context of these business drivers. They can gauge industry
proclivity toward particular IT priorities and make strategic
decisions to acquire that capability, or partner with firms to
provide it to clients.
Business Drivers in 2012 2011 was a tumultuous year for the
global capital markets industry. End-of-year market performance in
the United States and Europe is grossly misleading as it obfuscates
the massive volatility we experienced during the year. The S&P
500 ended the year 1.4% lower than it began on January 1, 2011, but
was down almost 14% in October 2011. In Europe, the Euro S&P
500 Stoxx index ended the year down 13.5%, but was down 34% at one
point in November. This gut wrenching volatility shook investor
confidence and money flowed out of risky assets into treasuries and
gold. Even the exchange-traded fund (ETF) market was not spared
with ETF asset growth in 2011 just 5.6%, down from a blistering 47%
in 2009 and 38% in 2010. All this impacted IT budgets and
priorities at capital markets firms with budgets flat to down 2%,
and most discretionary projects delayed to better times.
Unfortunately, prospects for 2012 do not look any better. The
biggest business driver impacting brokerage firms and investment
managers is uncertainty in the Euro Zone and the risk of the euro
collapsing. Besides the obvious global economic slowdown this would
cause, it would decimate the sovereign bond market and have serious
spill-over effects in the corporate bond market. Since 2008, major
equity indices have not fully recovered and Wall Street firms have
been depending upon the fixed-income market for revenue growth, so
a slowdown in the debt market would be catastrophic. Even outside
the extreme scenario of the euro collapsing, continued Euro Zone
uncertainty will put a damper on growth in IT budgets, especially
on the sell-side. TowerGroup expects global capital markets IT
spending to increase a modest one to two percent in 2012. Continued
Euro Zone uncertainty in 2012 will also mean that US firms will
further reduce their business exposure to Europe, on the heels of
MF Globals collapse due to its over-exposure to European debt. What
Jefferies did in 2011 reduced its Euro Zone exposure by 75% in less
than six months will be replicated by more firms in 2012.
Ironically, this means the tide toward globalization that capital
markets firms have been riding for the last six to eight years will
reverse itself, at least temporarily. In 2012, capital markets
firms will also strive for greater transparency and disclosure,
pressured by various stakeholders regulators, clients, boards of
directors, shareholders, and the press. Requiring firms to disclose
more information, and more frequently, is a very clear theme across
different regulations (Dodd-Frank Act, MiFID II, and Basel III).
New regulatory requirements include more detailed investment
performance disclosure by hedge funds and private equity funds and
detailed transaction data required of systemically important firms.
For example, Form PF is a new requirement levied on hedge funds by
the Dodd-Frank Act and is proving to be very onerous and expensive
for funds to complete. Besides pressure from regulators, clients
and shareholders are demanding greater insight into the business
workings of financial institutions, asking questions they never
asked
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before. Endowments such as Yale University are asking investment
managers which IT systems they are using and why they chose them.
High-net worth clients are demanding greater detail on past
investment performance of their hedge funds, no surprise after the
Madoff and Stanford scandals. The drive toward greater transparency
and disclosure will have major consequences for IT projects and
operational practices in 2012. New requirements for additional
data, more frequently and in specific formats (XBRL) will mean
firms will need to open up legacy systems, write interfaces to
applications, and invest in reporting infrastructure. This may even
spawn more outsourcing of reporting with several asset servicers
and software vendors hoping to offer reporting as a service.
Regulatory compliance and optimization will be the next driver.
Despite multiple regulatory delays in 2011, all major regulations
are still on the agenda and 2012 will see firms preparing to meet
preliminary deadlines related to the Dodd-Frank Act, FATCA, Basel
III, and Markets in Financial Instruments Directive II (MiFID II).
We will see new securities trading rules in the United States
including obligations for high-frequency trading (HFT) firms and
the rules governing dark pool activity. Buy-side firms will prepare
to comply with the large trade reporting rule passed in Q4 2010.
Europe will witness further progress in rulemaking on MiFID II and
a possible formal combination of MiFID II and European Market
Infrastructure Regulation (EMIR). So in 2012, capital markets firms
will continue working on IT projects that help meet new
regulations, and juggling deadlines imposed by all the different
regulations. A related business driver in 2012 will be regulatory
optimization, which refers to firms finding the right balance
between investing adequately to comply with new regulations, and
yet not overspending on it. Another dimension of regulatory
optimization is the balance that firms need to strike in committing
resources to comply with US and European regulation. For example,
firms need to comply with over-the-counter (OTC) derivatives
regulation in the United States and Europe, which entails
optimizing investments and achieving economies of scale. The next
business driver in 2012 in capital markets will be reassessing the
IT operating model. This refers to the importance for institutions
to correctly manage the IT and operations function, and to achieve
the right IT operating model that meets multiple objectives cost
effectiveness, reliability, business agility, security, and
regulatory preparedness. Because IT has become a critical element
of the capital markets business, these issues have become business
executive decisions rather than purely CIO/CTO issues. Correctly
managing the IT operating model has wide ramifications for
securities firms, from implementing their business strategy, to
achieving financial targets and staying clear of regulatory
blowups. Reassessing and amending the operating model will cause
firms to answer questions such as: what should our IT budget be, to
what extent should we use third-party vendors, what and how should
we outsource IT and operations? The final business driver in 2012
that we discuss in this top 10 note is the need for firms to better
manage their global aspirations and current foreign operations.
Theres no question that the desire to expand overseas experienced a
hiccup in 2011 due to softness in emerging markets and Euro Zone
instability. However, in the long-term, the financial industry is
definitely becoming a more global, integrated business and
financial institutions
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need to align themselves with this trend. In 2012, firms may
pull back from parts of Europe, but there will be pockets of growth
even in Europe (think Turkey and Eastern Europe). Growth rates in
China, India, and Brazil may slow down in 2012, but long-term
growth opportunities in these markets remain and US and European
firms will continue building their presence there. For large
brokers and investment managers that already operate across
borders, the challenge in 2012 will be to manage IT and operations
assets across these markets in the face of new regulatory concerns,
volatile markets, and a slowing economic environment.
Top 10 Technology Priorities and Projects This section describes
each of the ten technology priorities and projects in detail. We
relate each IT priority/project to the business drivers motivating
it, followed by a discussion of each objective, and then examples
of projects within each IT issue.
2011 The Tower Group, Inc. 12
Top 10 Technology Initiatives in Capital Markets for 2012
Top 10 Technology Initiatives for Capital Markets
Bolster Risk Management
Capability
Learn to Live with Radical Transparency
and DisclosureImplement Agile Data
Management Align IT Investment with
New Growth MarketsChallenge Vendors
on Big Data and Analytics
Upgrade Trading IT for Market Reform
Connect to Market Infrastructures Across
Trade LifecycleConsolidate Vendors;
Right Source OperationsLeverage Existing
Investments for OTC Derivatives
Selectively Implement New Technology (Cloud, Tablets)
Business Drivers
Risk of Euro Zone Meltdown
Pressure for Greater Transparency & Disclosure
Regulatory Compliance
Regulatory Optimization
Reassessment of IT Operating Model
Manage Globalization
Strategic Responses
Refocus Firm on Core Business Activities
Enhance Operational and IT Efficiency
Realignment of Incentive
Re-evaluate Product Offerings to Match Customer Requirements
Enhance Risk Management Capability
Source: TowerGroup
Exhibit 1 Capital Markets Top 10 Trends of 2012 Source:
TowerGroup TowerGroup has organized the top 10 technology
initiatives into three themes as outlined in Exhibit 2. They are 1)
continued focus on risk and regulation, 2) invest in
infrastructure, analytics and data, and 3) realign and revitalize
IT and operations. Each of the top 10 technology projects aligns
with a particular theme, while some map across different
themes.
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Three Technology Themes for 2012
Top 10 Technology Initiatives for Capital Markets
Bolster Risk Management
Capability
Learn to Live with Radical Transparency and
DisclosureImplement Agile Data
Management Align IT Investment with
Growth MarketsChallenge Vendors
on Big Data Analytics
Upgrade Trading IT for Market
Reform
Connect to Market Infrastructures Across
Trade LifecycleConsolidate Vendors;
Right Source OperationsLeverage Existing
Investments for OTC Derivatives
Selectively Implement New Technology
Continued Focus on Risk and Regulation
Invest in Infrastructure, Analytics, and Data
Realign and Revitalize IT and Operations
Source: TowerGroupExhibit #: 70:09-E2
Exhibit 2 Three Themes in the Capital Markets Industry for 2012
Source: TowerGroup Theme 1: Continued Focus on Risk and Regulation
Upgrade Trading IT for Market Reform The role IT plays in
securities trading is perhaps one of the most crucial of any parts
of the trade lifecycle and so trading has attracted the highest
proportion of IT budget overall. This trend will continue in 2012
driven by new regulatory changes, continued change in market
structure, exchange consolidation, and changing market conditions.
The impact of new regulations on securities trading IT is evident
by the sheer amount of money we expect capital markets firms to
spend to comply with new rules. TowerGroup estimates that global
capital markets firms will spend a cumulative $1.78 billion (USD)
on changes to trading IT from 2011 through 2013 in direct response
to new regulations. About 40% or $710 million of this will be
incurred in 2012 in response to capital markets regulation.
Examples of US trading related changes are OTC derivatives, large
trade reporting, limit up/limit down rule, changes to sponsored
access, and employee trade surveillance. European laws impacting
trading include MiFID II, EMIR, Undertakings for Collective
Investments in Transferable Securities IV (UCITS IV), and the
creation of a consolidated tape. Typical IT projects in this area
include amending order management systems to support new best
execution requirements, improvements to risk management
applications, new smart-order routing applications, and
implementing sell-side measures to monitor buy-side sponsored order
flow. All types of vendors will play a role here including firms
such as Charles River Development and Advent Software, as well as
SunGard and IPC.
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Investing in trading applications and infrastructure will also
be driven by the continued race toward zero latency. Top vendors
that will benefit from this trend include Progress Software
(Apama), Informatica (29 West), Sybase, and Corvil. For all the
negative publicity levied on high-frequency traders and investor
mistrust of high-speed execution, the need to spot liquidity and
execute trades fast is still paramount. And the trend is spreading
to new asset classes (e.g., futures, options) and new geographies
(e.g., emerging markets like Brazil and India). But the rush toward
low latency is also driving related processes like risk management
and pricing and analytics toward ever faster speed, which requires
amending a lot more applications that trading systems. Investments
in low latency will be also made by exchanges, execution venues,
clearing corporations, and other entities that are an integral part
of the trading ecosystem. Bolster Risk Management Capability The
scope and urgency required of risk management practices continues
to increase. In a risk-averse environment with huge downsides in
sovereign and counterparty risk, boundaries between market, credit,
counterparty, liquidity, and operational risk are blurring.
TowerGroup estimates that spending on risk management technology
across the globe will vary among the three large geographic
segments, averaging CAGR of 6.8%. In the Americas, higher economic
capital standards, a compliance-driven focus on risk management,
changing demographics, and the increase in Latin American
counterparties will result in elevated levels of spending compared
to Europe and Asia. From a technology and operations perspective,
the need to monitor and act upon changes in exposure as a result of
changing market conditions has put renewed focus on the two
challenges of risk management. First is the need to collect ALL the
data that is required with the right level of quality and
timeliness, and second is the analytical capacity to translate raw
data into actionable insights. Collecting and organizing large
amounts of data and acting upon event triggers is the bread and
butter business of many horizontal technology providers, which
offer buyers an acronym soup with everything from ETL, BI, CEP, to
MDM and many more. In 2012, there will be a backlash against the
idea that all you need for better risk management are tools to
collect, group, and visualize raw data. Risk-specific analytics
capability, as well as integration with line-of-business
applications for problem resolution is the new hot topic. This
creates opportunities for traditional risk application providers
like Algorithmics (now part of the IBM stable), Sophis (now part of
Misys), SunGard, Razor, QuIC (now part of MarkIT) to extend their
footprint, but also for accounting and portfolio management
solutions from firms like Murex, Calypso, DST, SimCorp, and SunGard
to increase their appeal to firms looking to consolidate vendor
relationships and maximize their use of existing investments. 2012
will be the third year in a row when global capital markets firms
increase their IT/operations spending on risk management by double
digits. TowerGroup estimates risk management spending to rise by
11% in 2012 after a similar increase in 2010 and 2011. Learn to
Live with Radical Transparency and Disclosure A milestone for
transparency will be the introduction of the European Central Bank
asset-backed security (ECB ABS) Data Warehouse in Europe by the end
of 2012, allowing loan-
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level data to be shared for European asset-backed bonds, and
increasing the level of standardization and liquidity. As risk
aversion has morphed into institutionalized distrust, TowerGroup is
seeing a similar focus on radical transparency at all levels of the
industry. Financial instruments, software products, and services
are all now subject to a level of due diligence and scrutiny that
allow buyers to see inside the envelope. Not only do they want to
see the finished product, but they also want to see the sources,
components, and methods that are used to produce it. If financial
technology buyers were shopping for bread they would demand to see
the finished loaf, the key ingredients flour, yeast, salt, and
water the recipe, as well as the food hygiene inspection reports.
Higher levels of transparency and disclosure mean more spending on
customer education, maintaining books and records, greater storage,
and investing in visualization tools. Although such investments may
help firms boost productivity and better manage its business, it is
often a distraction to management and an enormous addition to cost.
Based on TowerGroups research, we estimate that securities firms
are spending between 12% of their overall IT budget on such
attempts at enhancing transparency and disclosure. Firms that will
benefit run the range of database infrastructure, analytics, and
visualization and include Teradata, SAS, Panopticon, TIBCO, as well
as horizontal master data management providers. At the level of
financial instruments and asset-backed securities, European loan
level data will become more widely available with the introduction
of the ECB ABS data warehouse this summer. Disclosure and
transparency are also at the heart of the increased reporting
requirements for hedge funds and other private funds (Form PF in
Dodd Frank and Review of the Markets in Financial Instruments
Directive). There is an ongoing lack of academic and practical
consensus on how to price assets and value portfolios for risk
management, performance, or compliance reasons. When mark-to-market
and mark-to-model are still compromised or unusable, the only thing
that can restore trust is a return to first principles where all
component parts of any type of risk need to be explicitly reported.
This is a challenge to the basic risk-reward principle that
underlies trading and supplier relationships in our industry and
2012 might be the year when many market participants decide the
costs of radical transparency outweigh risk-adjusted prices.
Leverage Existing Investments for OTC Derivatives The delays in
implementing regulation to change how OTC derivatives are traded
and settled are creating the impression that it is safe to adopt a
wait and see attitude. An uncertain economic, political, and
regulatory environment is not helping firms are focusing on what
they do not know yet, instead of planning for changes that they
know will be inevitable. But make no mistake. OTC derivatives
reform will take place, both in the United States and Europe. By
2014, TowerGroup expects that over 40% of OTC contracts will be
centrally cleared, and securities firms are evaluating their
options to get ready for this growth. We estimate that capital
markets firms will spend $2.02 billion on OTC derivatives reforms
in 20112013, with more than 35% of that to be incurred in 2012.
Forward-looking firms are looking to leverage existing
capabilities, and past investments in straight-through-processing
(STP) technology for equity and vanilla fixed income processing are
obvious candidates. The post-reform derivatives landscape will have
increased volume, standardized contracts, new connectivity
requirements, centralized matching, new identifiers
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for products and counterparties, and updated message formats
(FpML and FIX). This is the sweet spot for industrialization of
this transaction lifecycle, and TowerGroup expects that incumbent
providers such as SunGard, Advent, Broadridge, DST, and other
providers of scale will position themselves as safe pair of hands
with technology, services, and business process outsourcing (BPO)
solutions that deemphasize the perceived uniqueness of derivatives
contracts. As OTC contracts are slowly becoming just another flow
product, the competition between niche specialists and processing
factories will increase choice for firms that need to decide how
they can still make a profit on lower margin commoditized products.
Theme 2: Invest in Infrastructure, Analytics, and Data Challenge
Vendors on Big Data Analytics 2012 will also be the year when big
data becomes more popular in the capital markets industry and firms
begin to employ big-data techniques to address problems in risk
management, regulatory compliance, and portfolio analytics. Big
data is defined as the use of sophisticated technology and massive
computing power to handle massive data sets that are difficult to
handle using traditional database tools. The difficulty is how to
capture, store, search, share, and visualize data. Capital markets
firms are usually years ahead in the use of new technology than
other financial sectors. However, when it comes to big data, they
are learning from retail banks that already employ big data in
areas such as campaign marketing, credit card management, and
retail payments. For example, Bank of America has been successful
in employing big data technology to manage huge quantities of data
using the open source framework Hadoop. Big data will remain a huge
opportunity for vendors in 2012 and attract interest from all types
of vendors, both large and small. All the large diversified IT
vendors are active in the big data space including IBM, Sybase/SAP,
Microsoft, Oracle, and Teradata. Then there are smaller vendors
such as Acxiom, Vertex and Attivio. Vendors will approach big data
either from a data acquisition, data management, or data
visualization of data analytics perspective offering solutions in
each of those areas. Implement Agile Data Management TowerGroup
research shows that close to 60% of operations executives score
their internal data management maturity as low, cementing the
hard-won reputation of data projects as worthy but too hard. But
risk awareness is challenging that status quo data silos are
identified by 72% of respondents in that same survey as the number
one or number two causes of poor risk management practice. The link
between risk and data is neither new nor surprising: scratch the
surface of any risk or regulatory project and you will find it
bleeds data and the past years have seen an increase in the number
of data management projects that are driven by risk and compliance
more than by operational benefits. Having a consolidated data
repository of golden copy data for all your financial instruments,
trading relationships, positions, and transactions has obvious and
increased relevance in todays environment. Although this same
aversion to risk extends to ambitious projects to consolidate and
improve firm-wide data. Therefore, while data management is
rightly
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targeted for improvement, firms are wary of embarking on
multi-everything IT projects that will not contribute to
line-of-business profitability in the current budget year. The lens
through which firms evaluate data projects has become more
short-term. Time-to-market, usability, and access management are
the differentiators in a market that agrees with the long-term
benefits of firm-wide data improvement, but needs to become more
agile to maintain the support of business sponsors. This will
benefit segment specialists and technology innovators including
Cadis, PolarLake and First Derivatives, as well as more horizontal
offerings from Informatica, IBM, and Information Builders. The
supply chain for market and reference data is also set for
fundamental change the reporting requirements embedded in
Dodd-Frank and EMIR will create an as-good-as-free channel of
pricing data, which challenges the commercial model of incumbent
data vendors even further. Technology innovation in standardization
is for once moving at the right pace standards for legal entity and
contract identifiers are in the works and minor updates to
Financial Products Markup Language (FpML) and Financial Information
Exchange (FIX) will allow market participants to use existing
export-transfer-load (ETL) and messaging infrastructure. Connect to
Market Infrastructure Across Trade Lifecycle The changes to the
unholy trinity of trading, clearing, and reporting of OTC contracts
is at the forefront of infrastructure changes, but it is telling
that operations executives are prioritizing reporting to swaps data
repositories (SDRs). Fifty-eight percent of surveyed executives
ranked it higher than clearing or trading when assessing their
priorities. Across these three areas of focus, connectivity is once
again an operational priority. Managing how firms connect to
trading venues, clearing and settlement providers is an example of
efficiency and specialization when it comes to equity and fixed
income instruments. However, the impact of risk mitigation and
regulation is breaking up trading and processing silos, and forcing
all market participants to plan and execute a lifecycle
connectivity strategy across all asset classes. For all derivatives
transactions subject to the provisions of Dodd-Frank or EMIR,
buy-side firms will need to manage connectivity to multiple trading
venues (swap execution facilities and organized trading
facilities), as well as a panoply of confirmation matching,
clearing/settlement and trade reporting venues. Buy-side firms need
to evaluate the increased cost of direct connectivity and
processing complexity. Existing intermediaries (brokers, clearers,
and custodians) are facing a quality of service and revenue
trade-off: they cannot afford to offer complete coverage of all
options without increasing costs. The search for growth in global
markets will also trigger opportunities for providers of settlement
and clearing services as well as software solutions adding new
exchanges, clearing providers, and depositories to their existing
capabilities. This trend toward sharing of infrastructure costs
bodes well for community-based franchises such as Omgeo, MarkIT,
SWIFT, DTCC, as well as ICAP-owned Triana and TriOptima. This is
not just the usual drive toward more efficient and cost-effective
back-office infrastructure; the changed requirements for trading,
clearing, and reporting are creating an interconnected trade
execution and processing environment. The mechanics of transaction
cost analysis (TCA) will need to take into account margin and
collateral requirements, and the costs of membership and processing
fees across the entire investment lifecycle. This
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complexity is best illustrated by the concept of matrix
execution, clearing and settlement, where an individual trade needs
to negotiate a decision tree of SEF/non-SEF, cleared/non-cleared,
SDR/non SDR reported transactions. Firms will be evaluating best of
breed as well as one-stop-shop providers of connectivity, matching,
and message transformation in order to meet these requirements.
Theme 3: Realign and Revitalize IT and Operations Consolidate
Vendors, Right Source Operations The capital markets industry is
undergoing change and challenges of such magnitude that firms are
taking a serious look at their long-term IT and operations
strategy. In 2012, firms will be asking: how do we economize on our
massive IT budgets in the face of prolonged revenue pressure? How
do we scale down the massive IT infrastructure we have built over
the last 1015 years that is not covering its cost of capital? What
is the right balance between spending internally, and using
external vendors (both software vendors and outsourcing firms)?
These may seem to be questions that firms have always asked
themselves, but whats different is that they are actually willing
to make radical decisions now that they once would never have
contemplated. In 2012, capital markets firms will look to
consolidate vendor relationships further, driven by a desire to
simplify IT, better manage external vendor relationships, and
reduce vendor risk. For example, brokerage firms are looking to
rationalize the three-to-five order management systems they use and
standardize on one or two vendors. Further, they are extending
their relationship with those order management vendors and using
other products they have including compliance, post-trade
connectivity and portfolio management. In response in 2012, we
expect vendors to further expand their product functionality both
up and down the trade lifecycle. So order management vendors will
expand further into the front office offering portfolio
construction and even investment research management functionality,
as well as extending into the back office offering portfolio
accounting and similar functionality. This will dramatically affect
vendor competitiveness with firms that have a broader, integrated
set of functionality (one-stop shops) gaining over firms that
support only one type of service (one-trick ponies). Another trend
will be institutions seeking greater flexibility and multiple
service delivery options from their vendors. That means asking an
application vendor to make its product available as an installed
application, as an application service provision (ASP), on an
outsourced service bureau basis, and as fully outsourced solution.
Our research indicates a major uptick in the adoption of ASP-based
service delivery, even in areas like order management and portfolio
accounting, which firms were hitherto loathe to access via an ASP.
This will lead into service provision via cloud-based solutions,
which adds a new dimension to accessing IT services in capital
markets. Expect more progress on this front in 2012. Finally, BPO
will gain further ground after an uptick in BPO services in the
last few years. Vendors that long offered just software
applications and required clients to implement and process
transactions using them, are now responding to client demand and
building BPO services around their application. Such firms include
Broadridge, Advent Software, and SunGard Data Systems. At the same
time, a slew of outsourcing vendors (e.g., Cognizant,
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HCL, Accenture, and TCS) are further bolstering their ASP
capability and expanding into areas like collateral management,
client reporting and valuation services. Align IT Investment with
Growth Markets The drivers behind this IT priority are well
documented and understood. Simply put, western markets are maturing
and giving way to greater opportunity in emerging and frontier
markets, and what CEB calls the sweet 16 set of countries. As
securities firms extend their footprint into new markets (Brazil,
Russia, India, and China CEBs sweet 16 countries), they will look
to address challenges related to global expansion: adequate
personnel and infrastructure, addressing legal and compliance
issues, and safeguarding intellectual property. On the IT side,
specific issues will be supporting new security types, training
operations staff on various country processes, and ensuring
business continuity planning and disaster recovery measures. In the
last few years, US securities firms that have aggressively pursued
international expansion (T. Rowe Price in China, Fidelity
Investments in India) have learned important lessons about the
technology investments required to support such operations. In
2012, firms will take these lessons as they extend their franchise
further into the sweet 16 countries. Typical IT projects involved
will be: extending central IT capability to regional offices,
integrating with local providers (e.g., asset managers interfacing
with local sub-custodians), amending order management systems to
accommodate local compliance rules, and extending processing
systems to support new products (e.g., Sharia-compliant
investments). An important element of aligning a firms IT to its
growth plans is putting the right IT governance structure in place,
which balances regional autonomy with the need to control budgets,
prevent duplication of effort, and ensure compliance with internal
IT standards. TowerGroup believes this is an area where securities
firms must utilize the help of service providers that have
experience with managing global IT, implementing projects across
borders and have mastered the global delivery model. Some good
examples include Indian offshore outsourcing firms like Infosys,
TCS and Wipro, that have extensive experience managing IT teams
across multiple countries, both for themselves and on behalf of
clients. Other examples are Accenture, Sapient, and CapGemini
Consulting. Selectively Implement New Technology Adoption of
technology and innovation has frankly taken a back seat in the
securities industry since the financial crisis. In 2007, securities
firms were spending about 3% on new innovative technology projects,
but by 2011, that amount was reduced to half a percent, and zero
for many firms. Ironically, it is this combination of a tough
economic environment and massive regulatory change that will spur
institutions to adopt new IT approaches and innovate in 2012. The
collective challenges facing the industry are too numerous to be
addressed by marginal improvements in IT, and require more radical
approaches and adoption of innovative IT. New innovations being
considered are cloud computing, social media, mobility, tablets,
and low-latency infrastructure. Cloud computing will be biggest
innovation attracting attention in 2012. Firms will build upon the
progress made by the Frankfurt Cloud (sponsored by Deutsche Bank),
Bank of America
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2012 The Tower Group, Inc. May not be reproduced by any means
without express permission. All rights reserved.
12
and T.Rowe Price, among other prominent financial institutions.
The long-term appeal of cloud computing is too compelling to
ignore: scalability, cost effectiveness, ease of deployment, ease
of service provision, and consistency of software code. Vendors
like Microsoft, Amazon, and VMWare are leading the charge toward
offering a cloud computing infrastructure on which other
applications can be built. Business application vendors in the
capital markets space like SimCorp, Advent Software, and SunGard
Data Systems will build their software-as-a-service solutions on
this Cloud infrastructure. But Wall Street firms will exercise
caution while implementing cloud projects. In 2012, they will still
not put mission-critical applications in shared clouds, but use
private cloud infrastructures for such applications. For those
frustrated with Wall Streets slow adoption of cloud services,
consider the difference between Amazons Elastic Compute Cloud
service getting disrupted and a resulting loss of a shopping order,
with your brokers cloud service being down and your inability to
place a trade on a volatile trading day.
Conclusion 2012 will be the year that firms cannot afford to
sweat the small stuff. All market participants will have to assume
new responsibilities, costs, and liabilities, and will have to do
so without the rewards they might expect from taking on additional
risk. Regulators and governments want to see transparency and
market reform realized. Clients want full disclosure, reliability,
and service innovation. Shareholders want to preserve growth
through diversification, specialization, and once again
globalization. Operations, risk, and finance executives are being
asked to challenge long held orthodoxies about core competencies
and optimal operating models. The financial services industry is
still working through the fallout from the last crisis, even while
the Euro Zone struggles and other sovereign debt challenges are
threatening to make us think the unthinkable all over again. With
margins, volumes, and GDP growth under pressure, firms have no
choice but to be smarter, more focused, and agile enough to
capitalize on the new opportunities this market environment brings.
Across these top ten business and IT priorities for 2012,
TowerGroups ongoing dialogue with institutions and providers shows
a very solid catalog of innovation in technology and service
provision. More than ever, firms and providers are aligned around
partnership in adverse conditions: making the most of mutual
investments not just in smart technology, but of relationships that
were forged over many years of solving big challenges one step at a
time.
Report CoverageIntroduction to the Top 10 Research NoteBusiness
Drivers in 2012Top 10 Technology Priorities and ProjectsSource:
TowerGroupTheme 1: Continued Focus on Risk and RegulationTheme 2:
Invest in Infrastructure, Analytics, and DataTheme 3: Realign and
Revitalize IT and Operations
Conclusion