THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

Fund Structure; Fund Administration; Information & Data

Providers; Custody; STP & Technology; Trading Services &
Outsourcing; Corporate Actions; Hedge Funds; Prime

INVESTOR Brokerage; Settlement & Clearing; Securities Lending;

Reference Data; Transfer Agency; Legal & Compliance

S ERVICES WWW.ISJFORUM.COM

JOURNAL
VOLUME 3 - NOV / DEC 2004

SECURITIES LENDING ASIA – EMERGING REALITIES

PRIME BROKERAGE – HEDGE FUND SERVICING
PENSION FUND POOLING – SINK OR SWIM?
REGULATION – FACING THE RISKS
TECHNOLOGY – BUSINESS PROCESS
OUTSOURCING
plus SIBOS REVIEW
HEDGE FUND PERFORMANCE
NORDIC / BALTIC FUSE
ON- OR OFFSHORE?
PENSIONS

PURE BLISS
DOMICILE DUBLIN: THE FIRST FIFTEEN YEARS
Contents

37 Analyse This... Securities lending tackle a variety of questions about

Securities Lending their industry
INVESTOR 43 Prime Time Prime brokers face competition in hedge fund services
S ERVICES
JOURNAL 48 Dublin’s Fair City Bird’s eye view of Dublin’s financial services centre

50 Rules Rule? Can regulation put onshore jurisdictions in a more

favourable position than their offshore counterparts?
54 Sink or Swim Tax transparency of the pension fund pooling vehicle
is distinguishing the old from the new
56 Alpha Alternatives Hedge funds may be the favourite of institutional
investors, but should pension trustees be careful?
58 A Question of Trust Instinet review the main concerns of pension funds

60 Hedge Edge Hedge Fund Research third quarter performance

61 Mandates Summary of latest mandates awarded and trends

62 The real Madrid The might of the banking & investment markets in Spain

66 Unforeseen Neglect record-keeping and day-to-day functions go

Consequences wrong report Barrington Partners

66 In or Out? BPO - Is Business Process Outsourcing the latest fad?

70 Taking Risk Out Look at fund managers outsourcing risk management

74 Problem Solving European funds face high charges or fast automation

76 Infrastructure - SEB Nordic and Baltic market consolidation, SEB report

78 A Change of Heart Central Trade Matching has evolved since the collapse
of the GSTPA report Omgeo
80 Conference Digest Transparency was cited as the main cause of stagnation
at the securities lending summit in Edinburgh

82 RMA conference Agency disclosure, technology and growth.

83 Bearing Fruit Sibos 2004 encouraged providers to recognise the

fruits of their labour, ISJ reports from Atlanta

88 Events calender A selection of must attend events for the organiser

91 ISJ School The right courses for training the team

92 People moves A report on the latest moves

WWW.ISJFORUM.COM 94 Directory ISJ directory of services

2 INVESTOR SERVICES JOURNAL

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Letters to the Editor
INVESTOR
S ERVICES
JOURNAL
Janet Du Chenne
Editor
Janet.DuChenne@ISJFORUM.COM
Design Studio
NatterJack Design
Editorial@ISJFORUM.COM
Contributors
Brian Bollen, Rekha Menon,
Fionnuala Synnott, Julia
Svetlichnaja, James Wallace,
Helen Yates
Justin Lawson
Publishing Director
Justin.Lawson@ISJFORUM.COM
Jon Dunham
Executive Publisher
Jon.Dunham@ISJFORUM.COM
Heidi Mumford
Associate Publisher
Heidi.Mumford@ISJFORUM.COM
Nacire Sayeh
Directory Sales Executive
Nacire.Sayeh@ISJFORUM.COM
Investor Services Journal
11 B Fitzroy Square
London W1T 6BU, UK
T: +44 (0) 20 7388 9000
F: +44 (0) 20 7388 6699
Published by Investor Intelligence
Chairman Mark Latham
© 2004 Investor Intelligence Limited
All rights reserved. No part of this
publication may be reproduced, in
whole or in part, without prior written
permission from the publisher.
Printed in the UK by Pensord Press.
ISSN 1744-151X
4 INVESTOR SERVICES JOURNAL
Price versus Reliability
(From Gilles Reiter, global head of marketing
and client servicing, Dexia Fund Services)
The last few years have been rather
turbulent for the financial community.
Corporate frauds, insufficient transparency
in corporate reporting and financial scan-
dals have led investors to raise serious
questions about how corporations and
banks run their business.
For the mutual fund industry, regulatory
initiatives such as Basel II or UCITS III will
certainly contribute to the regeneration of
a certain level of confidence amongst
investors in Europe. But they will also con-
front financial institutions with two major
issues. The first is a huge operational
challenge due to a fragmented, complex
and fast evolving regulatory environment,
coupled with products that are becoming
more sophisticated and difficult to man-
age. The second is the increasing level of
costs, resulting from necessary software
adaptations, evolution of procedures and
staff training.
For many financial institutions, out-
sourcing becomes a serious option and
low cost solutions offered by the market
can appear rather seductive. But when it
comes to making a strategic decision,
where one's future is to be bound to a
financial services provider, more attention
should be given to services offered and
the real operational risk levels. Increasing
regulatory requirements and more com-
plex products carry a price tag. Low cost
solutions can be attractive but they often
mean lower levels of expertise, poor serv-
ice levels, insufficient staff training and
minimal control levels, leading to un-
acceptable operational risks.
The question to ask when taking steps
towards outsourcing is ‘what is the right
balance between price level and true
reliability?’
Working Group Games
(From Nat Sey, manager of delivery & infra-
structure, FT Interactive Data)
Throughout the securities industry alone,
there is a myriad of industry bodies and
working groups that exist in order to rectify
some problem or other, some omission to
current working practice. Across the entire
‘financial industry’ - however one defines
that - their numbers must increase by an
order of magnitude. In some quarters, I
have observed a sport growing in popularity.
A sport so addictive that it has all kinds of
market participants vying for position on the
field of play.
The sport goes by several names, but the
one that I choose to use is 'working group
bashing'. It's an easy game to pick up.
Simply select your chosen working group
(play is enhanced if this group is self-fund-
ed and double scores are awarded if the
group's participants give their own or their
company's time for the venture). Then pro-
ceed to take pot-shots along the lines of “It
takes THEM an eternity to decide anything”,
“How difficult can it be to resolve XYZ
(insert your chosen industry problem
here)”, or my personal favourite, “I don't
know what THEY get up to, but it can't be
worthwhile”.
Of course, the problem is if this sport
becomes too popular and the various groups'
participants all give in under the weight of
criticism. Then the rest of the industry may
need to get its hands dirty in trying to resolve
some of the industry's challenges.
Are all working groups 100 per cent effec-
tive? It's doubtful. However, I would suggest
that our industry's future would look far less
rosy without individuals willing to pitch in
and deal with some of its challenges.
Fax Off
(From Mark Austin, head of strategy for
JPMorgan Investor Services in Europe)
I read both the editor's comment and the
letter to the editor in your last edition (ISJ Vol.
2) with great interest. Both you and Dermot
make excellent points about automation and
regulation respectively. However, neither of
you do more than barely touch upon the fun-
damental importance of the ultimate client to
the continued prosperity of our industry.
“We need to focus on creating a
process that efficiently transfers
investment through the system
for the benefit of the investor,
not just for the bottom line.”
Investors should expect to get the vast pro-
portion of their hard earned contributions
back when they retire or redeem, rather than
see them consumed in inefficiency and
bureaucracy. Eventually they will question
the costs associated with investing in the
mutual fund industry and hunt out more effi-
cient methods of saving.
Isn't it time we started to champion the
end-user in these industry debates? I cer-
tainly believe so. We need to focus on creat-
ing a process that efficiently transfers invest-
ment through the system for the benefit of
the investor, not just for the bottom line.
Fund managers who use faxes should be
treated like drivers of gas guzzling cars and
encouraged by industry pressure to mend
their value destroying ways. End buyers...
letters continued page 89
WWW.ISJFORUM.COM
 DPM IS THE HEDGE FUND ADMINISTRATOR

At DPM, we offer a complete suite of services designed to solve all your adminis-
trative needs and improve your operational efficiency – no matter how challenging
it may look.
From the most basic administrative reports, to complex portfolio valuations, risk
analysis and transparency, DPM has the systems, infrastructure and experience to
handle your toughest administrative challenges.
Our shareholder services are thorough and complete. From shareholder communi-
cations, documents fulfillment and AML compliance, to secure Internet access to
your proprietary shareholder database, DPM provides the products and services
you need, in the format you prefer.
To focus on investing and investor relations all day long, at the end of the day, you
can rely on DPM.

DPM Europe Ltd

33 St. James’s Square London SW1Y 4JS Tel: +44 (0)20 7661 9464
www.dpmllc.com info@dpmllc.com
New opportunities and high stakes call for
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 rt .
po .S
Re .I.S
ns 4 B
tio 00
Ac 2
e s
at as
or p
rp om
Co ityC
C

Speaking your language

A corporate actions language fit for the global village
FT Interactive Data’s ISO 15022 global corporate actions
service went live on 2 August 2004. ISO 15022 is
considered as a positive catalyst for corporate actions
processing and can help to reduce risk and increase
operational efficiency.
FT Interactive Data is delighted to offer new and existing
customers immediate access to this new global service.
Clearly speaking, FT Interactive Data is helping to lead
the way in global corporate actions data.

FT Interactive Data has provided global corporate
actions event data for over 30 years and has a wealth
of experience in gathering, updating validating and
delivering this data. By mapping its corporate actions data
to the MT564 event types specified within ISO 15022,
Take advantage of immediate access – please call Nat Sey
on +44 20 7825 8744 or email: ISO15022@ftid.com today.
www.ftinteractivedata.com

FT Interactive Data is an Interactive Data company

News - Americas
Custody & Outsourcing
New York - Citigroup is to acquire ABN
AMRO’s direct custody, securities clear-
ing, and fund services businesses in
selected European and Asian markets.
Upon completion, these ABN AMRO
businesses will join the Global
Transaction Services unit (GTS) in
Citigroup’s Global Corporate and
Investment Banking Group. The trans-
action is expected to broaden the prod-
uct capabilities and client growth oppor-
tunities for GTS, one of Citigroup’s pub-
licly reported business units. The trans-
action includes ABN AMRO’s domestic
custody business in the Netherlands
and its network domestic custody busi-
ness in Russia, Greece, India,
Indonesia, South Korea, Poland and
Taiwan, servicing approximately 550
financial institution and corporate
accounts. The transaction should add in
the order of $240 bn of assets under
custody to GTS’s $7.3trillion custody
portfolio.
New York - GW Capital Management,
LLC, a wholly owned subsidiary of
Great-West Life & Annuity Insurance
Company, and Maxim Series Fund, Inc.
have selected the Bank of New York to
provide custody services for its Maxim
Series Equity Index Funds, which total
approximately $1.6 bn in assets under
management. Great-West Life &
Annuity Insurance Company, headquar-
tered in Denver, serves its customers
through a range of health care, life and
disability insurance, annuities, and
retirement savings plans and services.
Toronto - With the expansion of its
strategic alliance with RiskMetrics
Group, RBC Global Services now offers
BENCHMARK RiskManager, a web-
enabled risk management tool that pro-
vides estimation techniques to help
identify and measure sources of risk
within investment portfolios. Expanding
the BENCHMARK platform to include
RiskManager from RiskMetrics Group,
this new tool integrates market and
portfolio data across asset classes to
form a source of investment informa-
8 INVESTOR SERVICES JOURNAL
tion. Managers can create various
investment scenarios and stress test
market changes to see the potential
impact on their portfolio as well as gen-
erate on- demand customised reports of
their portfolios' risk exposure using
multiple VaR methodologies
Funds & Administration
Chicago - The hedge fund sector posted
a 0.9 per cent performance gain for the
third quarter 2004, largely reversing a
1.0 per cent loss in the second quarter
of this year, according to results pub-
lished by Hedge Fund Research, Inc.
(HFR), a leading source of hedge fund
information and performance data.
Based on the HFRI Fund Weighted
Composite Index, which measures
equally weighted performance across 19
distinct fund sectors, the industry also
saw $16.9 bn in net asset inflows in the
quarter, a marked improvement over the
$7.5 bn in inflows seen in the second
quarter. The increase suggests a return
to the faster rate of capital flow experi-
enced in the 12-month period ending
March 30, 2004, when net inflows aver-
aged $21.2 bn per quarter.
Technology
New Jersey - Automatic Data Processing
(ADP) reported 8 per cent revenue
growth and $.35 earnings per share for
the first quarter ended September 30,
2004. Revenues approximated $1.9 bn
compared with $1.7 bn in fiscal 2004.
Pretax and net earnings grew 6 per cent
and 7 per cent, respectively.
Pennsylvania - SunGard Data
Management Solutions, an operat-
ing group of SunGard has launched
referencePoint Managed Data Service
(rMDS), with Banc of America Securities
as a charter member of the service's
advisory panel. Slated to begin opera-
tion in the first quarter of 2005, the new
service will offer financial institutions an
outsourced solution for the loading,
cleansing, formatting, enrichment, stor-
age, management and distribution of
data to a variety of downstream sys-
DAILY NEWS AT WWW.ISJFORUM.COM
tems, backed by an expert help desk to
help ensure the highest level of cus-
tomer support. referencePoint Managed
Data Service is a service bureau solu-
tion that aggregates pricing and refer-
ence data from multiple sources includ-
ing both customer and vendor content.
SunGard Data Management Solutions
will leverage best practices and build a
scalable service infrastructure, based on
its referencePoint platform, which will
help meet the data management needs
of other SunGard business units as well
as their financial institution customers.
SunGard Trading Systems has also
launched Management & Compliance, a
reporting tool that helps customers to
proactively manage both their regulatory
obligations and their trading business.
Regulation & Infrastructure
Washington - The Securities and
Exchange Commission (SEC), chaired
by William Donaldson (pictured below),
has voted to adopt a new Rule 203 (b)
(3) –2 that will require hedge fund
William Donaldson
advisers to register with the
Commission under the Investment
Advisers Act of 1940 by February 1
2006. The rule is the culmination of an
initiative to study hedge funds and their
advisers that commenced over two
years ago. The new rule will eliminate
the ability of hedge fund advisers to rely
on an exemption from adviser registra-
tion designed for advisers providing
advice to only to a small number of
clients. The rule also contains provi-
sions for non-US advisers to limit the
extraterritorial application of the
Advisers Act to offshore advisers to off-
shore funds that have US investors.
 DPM IS THE HEDGE FUND ADMINISTRATOR

At DPM, we offer a complete suite of services designed to solve all your adminis-
trative needs and improve your operational efficiency – no matter how challenging
it may look.
From the most basic administrative reports, to complex portfolio valuations, risk
analysis and transparency, DPM has the systems, infrastructure and experience to
handle your toughest administrative challenges.
Our shareholder services are thorough and complete. From shareholder communi-
cations, documents fulfillment and AML compliance, to secure Internet access to
your proprietary shareholder database, DPM provides the products and services
you need, in the format you prefer.
To focus on investing and investor relations all day long, at the end of the day, you
can rely on DPM.

DPM Europe Ltd

33 St. James’s Square London SW1Y 4JS Tel: +44 (0)20 7661 9464
www.dpmllc.com info@dpmllc.com
News - Asia Pacific
Custody & Outsourcing
Taipei - As of August 31, 2004 State
Street provides investment services —
including fund accounting and custody
— for almost 60 percent of the SITE
funds in Taiwan. In the past six months
State Street has added 14 new man-
dates to service SITE funds, bringing
the total to 28 new mandates in the
last 18 months, most recently from
Allianz Dresdner Asian Pacific Dynamic
Strategy Fund; Fuh-Hwa Global
Balanced Fund; Polaris Global Short
Duration Diversified Bond Fund; and
Prudential Financial Global Selection
Fund. SITE funds, aimed at collecting
investment funds from the public, were
established in 1983 in order to provide
an investment channel for small
investors and to introduce more
sophisticated investment behavior to
the Taiwanese securities markets.
Beijing - SEB is to apply for a banking
licence in Shanghai to further improve
the services offered to its client base.
Lars H Thunell, president and group
chief executive said: “China is one of
the fastest growing markets for SEB's
clients. China's importance in terms of
global sales sourcing and production is
increasing day by day.” SEB has been
present in Asia for 25 years through
offices in Beijing and Singapore. SEB's
Beijing representative office will contin-
ue to operate and focus on marketing
and client services.
Singapore - DBS Group Holdings
(DBS) reported net earnings of $362
million for the three months to 30
September 30 2004, up 24 per cent
over third quarter 2003. Total earnings
for the first nine months of 2004 were
$1.70 bn, a 132 per cent increase over
the same period in 2003. Compared to
second quarter 2004, net profit was 57
per cent lower. However, if one-time
gains of $497million from the disposal
of Wing Lung Bank and DBS Thai
Danu Bank (DTDB) stakes were
excluded from the second quarter fig-
ures, net profit would be 3 per cent
higher. Net interest income for third
10 INVESTOR SERVICES JOURNAL
quarter 2004 grew 10 per cent from a
year ago to $645 million, while total
customer loans expanded at the same
rate to $67.2 bn. Net interest margin
at 1.83 per cent was the highest in six
quarters.
Funds & Administration
New South Wales - BNP Paribas
Securities Services has been appointed
by the Office of the Protective
Commissioner (OPC) to provide a full
range of core custody and investment
administration services, including
accounting, tax and statutory reporting.
The OPC is an agency established in
1985 as part of the NSW Attorney
General’s Department. Its primary
objective is to protect and administer
the financial affairs and property of
individuals unable to make financial
decisions for themselves. A wide range
of legal, technical, financial and other
services are provided by the OPC such
as liaising with financial and legal insti-
tutions, managing a business and mak-
ing investments. OPC presents BNP
Paribas with the opportunity to
strengthen its market positioning as a
leading provider of value added invest-
ment administration services to finan-
cial institutions in Australia and New
Zealand.
Technology
Beijing - SWIFT is in the process of
extending its reach to China and India
and is working with its partners in each
region. The messaging utility
announced its plan at the Annual Sibos
event, held in Atlanta, Georgia in
Jaap Kamp
DAILY NEWS AT WWW.ISJFORUM.COM
October this year. Commenting on
future goals, chairman of the Board
Jaap Kamp (pictured) said: “SWIFT is
planning to change its governance to
create more affordable access for
smaller users.” To further its commit-
ment to the Far East, SWIFT will
appoint a senior manager to work with
the local authorities and improve pay-
ment systems.
Regulation & Infrastructure
Shanghai - The Depository Trust &
Clearing Corporation (DTCC), the finan-
cial services post-trade infrastructure
organisation, has opened a new office
in Shanghai to provide further coverage
for its global corporate actions busi-
ness. The new service centre will sup-
port DTCC’s Global Corporate Action
(GCA) Validation Service, which pro-
vides brokers, banks and other finan-
cial institutions an automated, stan-
dardised source of global corporate
action announcement information for
100+ events, ranging from rights offer-
ings to elective dividends to tender
offers and stock splits. The service is
provided by Global Asset Solutions
LLC, a wholly owned subsidiary of
DTCC. DTCC selected Shanghai after a
survey of nine potential sites. Search
criteria included availability of a large
skilled and educated labour pool,
varied language availability, cost-effec-
tiveness and quality-of-life .
Tokyo - Japanese stocks and other
securities are to be dematerialised
within five years. The law concerning
book-entry transfer of corporate bonds
and stocks was promulgated on 9 June
2004 and requires dematerialisation of
stock certificates of publicly-held cor-
porations to be implemented by 9 June
2009. Infrastructures and market
participants will have five years to
prepare their systems for demateri-
alised stocks. The elimination of stock
certificates is intended to streamline
and accelerate settlements for trades
of stocks and reduce risks and costs
related to the issuance and trading of
stocks.
 Wherever you settle should feel like

home

Demands for a single European

capital market have set
harmonisation in motion.

We are convinced of the benefits

of harmonised financial markets
in Europe and are committed to
removing barriers to cross-border
securities settlement.

DELIVERING A DOMESTIC
MARKET FOR EUROPE
Profile - CEO eSecLending
Doing Your
Bidding
Susan Peters
As one of the most popular
new approaches to securities
lending, the auction model
affords lenders and borrowers
greater choice.
ISJ speaks to Susan Peters, a
pioneer in this field and CEO of
eSecLending.
12 INVESTOR SERVICES JOURNAL
T he bear market may be retreating, but institutional
investors have not abandoned their search for above
average returns. Amidst flashes of market growth, they still
exercise their right to shop around for a provider who can
deliver these returns. Securities lending is no exception to
this rule, which has fashioned the business of eSecLending,
the securities lending auction platform. After several years
in the industry, CEO Susan Peters still supports the free-
dom of choice, which lenders should have when deciding
who should borrow their assets. Peters began her career in
securities lending as an attorney for State Street’s securities
lending division. Her legal expertise extended to product
“Lenders believe they deserve
better treatment, a better service,
a better product and
better returns”
development and she was made head of the Bank’s securi-
ties lending trading desk. From State Street Peters moved
to Credit Suisse First Boston where she helped build an
agency-lending program for the company in New York.
Change
Although the daily commute from home in Boston to
work in New York proved challenging, Peters relished the
opportunity of witnessing the first securities lending auc-
tion, which eSecLending conducted on behalf of CalPERS,
the California state pension fund, while working with
CSFB. “This was a major change in the securities lending
world, which was being reshaped to
ensure lenders could get what they
deserve,” she says. “The product
enabled lenders to design their own
program and reap the economic ben-
efits of doing so.”
When eSecLending was launched,
the auction product was designed
through the joint efforts of
eSecLending’s president Ty Danco
and Dan Kiefer of CalPERS. Peters
then joined the Company to bring on
board the administrative function
required to support the securities lending process. The
team successfully designed a product that combined the
auction feature and the administrative work of the agent
lender. Today, eSecLending has a fully functioning product
that enables lenders to auction their securities and receive
the same administrative functions provided by a custodian.
Commenting on the demand for securities auction
services, Peters says: “When securities are loaned on a
daily basis through a traditional agency lender, all that is
evident to the lender is the demand from the borrowing
community on a per-security basis. Lenders do not see
the overall benefit that a borrower derives from having
exclusive access to an entire portfolio. From our model
we have seen that borrowers are willing to place mean-
ingful bids in front of the lender in order to have that
access. Access to an entire portfolio is priced differently.

The borrowers know their ability to cap-
ture a portfolio for the benefit of their
program says a lot about their ability to
deliver assets to the hedge fund commu-
nity. This is an added value.”
As market conditions improve, lenders
are beginning to question whether they
are deriving best value from their lend-
ing program, whether their risk and
return needs are being met and whether
they are receiving excellence in opera-
tional and reporting functions. “Lenders
believe they deserve better treatment,
better service, a better product and bet-
ter returns,” says Peters.
A unique approach
In keeping with eSecLending’s unique
approach to securities lending, Peters
admits the product has a strong bias
toward the lender. “We are willing to con-
cede that the auction model may not
always be the best way to go to. We
encourage clients’ use of other routes to
market because that is how they can ben-
efit from optimal use of what the market-
place has to offer.
“Loan balances are not a good indicator of success
unless the risk/return profile is optimal.”
We have a good model for different
types of assets but it is not the best
model for all types of assets. In order to
increase our offering to the lenders util-
ising multiple providers, we offer consol-
idated reporting. We can accept a data
feed from any source, including our auc-
tion platform or another agency pro-
gram. This approach enables the lender
to manage their risk and collateral more
effectively.” Peters’ value added principle
is widely applied across the securities
lending industry. For eSecLending, this
principle includes the auction platform’s
ability to obtain a commitment from the
borrower community to maintain a core
level of cash collateral on loan at any
given time. “This enables us to effectively
manage cash collateral by having a core
balance in place,” says Peters.
eSecLending can also manage different
types of collateral through an internal
risk management system.
The company will assess the risks
associated with individual securities it
holds as collateral and individual securi-
ties out on loan. “Most agent lenders
will only look at the risks associated
with the broad category of collateral
held and the broad category of securities
that are on loan,” says Peters. “The abili-
ty to monitor individual risks associated
with the securities they hold is a very
powerful tool as the risk from one secu-
rity to another can vary dramatically.”
Growth
Now that securities lending providers
have quelled lenders’ fears, on loan bal-
ances are likely to increase. “The growth
in hedge funds has exceeded all
expectations. Statistics indicate there are
about 6000 hedge funds. On loan
balances are increasing due to the
increased activity in the hedge fund
community. But from our perspective,
the amount on loan is far less important
than the amount of return the lender
receives from their on loan balances.
Loan balances are not a good indicator
of success unless the risk/return profile
is optimal. We are more interested in
loan balances that are coupled with a
high rate of return.”
Governance
In a season of mergers, acquisitions and
IPOs, corporate governance is close to
Peters’ heart. “It is entirely appropriate
that each lender thinks about his or her
internal proxy and corporate governance
issues. Major institutional investors want
to have their votes counted,” she says.
“However, it is equally important that
the lender balances voting against the
revenue to be derived from lending his or
her securities. We are in an age where the
revenue to be derived from lending secu-
rities or making their portfolio available
in an auction is significant. Each lender
should have a policy with their lending
agent to ensure they are addressing this
issue. We work closely with our lenders to
derive an appropriate policy that address-
es both their desire to lend securities and
to participate in corporate actions. This is
a very important part of our relationship
with clients.”
Technology
Peters is also an active promoter of
technological change. “Technology is rap-
idly changing in order to address issues
CEO eSecLending - Profile
such as reporting, risk management and
operational efficiency. This change bene-
fits the lenders more than ever. We are
very fortunate to be working in a time
where people are willing to make some
significant changes to what they're offer-
ing. These changes include different types
of lending platforms, co-operative efforts
such as Equilend, single stock auctions or
the ones that we offer. More routes to
market and greater technological and
operational efficiency benefits the lender
and that is a good thing.”
ISJ
Susan C. Peters, Chief Executive
Officer, eSecLending LLC
Susan Peters' primary responsibilities
within eSecLending LLC are global
business strategy and execution.
Prior to her appointment as chief
executive Officer of eSecLending,
Peters was chief operating officer in
charge of the operations and lending
strategies and was instrumental in
building eSecLending’s administrative
agency capabilities. Formerly, she
served as director of Credit Suisse
First Boston's agency lending pro-
gram in New York. She was also pre-
viously the head of trading for State
Street Global Securities Lending.
Susan is an attorney by training,
beginning her career at Skadden,
Arps, Slate, Meagher & Flom. Over
the course of her career, Susan has
become a widely recognized expert in
securities lending. Some examples of
her industry contributions include: a
leadership role in creating the
Navigator Fund while at State Street
and obtaining all of the necessary SEC
exemptions; her testimony before
both the Financial Accounting
Standards Board and the Govern-
mental Accounting Standards Board
regarding securities lending issues
and co-authorship of a white-paper
submitted to the SEC while a member
of the RMA sub-committee on securi-
ties lending and her work on the
International Organization of
Securities Commissions’ paper
regarding securities lending transac-
tions authored by the US Federal
Reserve.
INVESTOR SERVICES JOURNAL 13
Irish Funds Industry
Within a space of just 15 years,
Ireland has transformed itself
from an agrarian economy into a
financial services Mecca.
How is such a radical transi-
tion possible? ISJ examines the
secrets of the Ireland’s success
as service providers...
The Celtic Cougar
W hen Charlie McCreevy was
given the prime job of internal
market Commissioner of the European
Union, few underestimated the link
between his appointment and the eco-
nomic might of his
homeland.
McCreevy,
Ireland’s finance
minister since
1997, has presided
over the most
dynamic economy
within the EU,
supported by rela-
tively low business
taxes – a model
David Dillon emulated by many
of the new coun-
tries that joined the EU. The decision of
Jose Manual Barroso, president of the
European Commission, to hand the inter-
nal market post to McCreevy, was viewed
as an attempt to boost Europe’s sluggish
economic growth.
After all, European countries have a lot
to learn from the Emerald Isle, particular-
ly from its funds industry. Since its cre-
14 INVESTOR SERVICES JOURNAL
ation 15 years ago, the International
Financial Services Centre (IFSC) in
Dublin has devised a number of ingen-
ious methods to keep ahead of the game.
The Common Contractual Fund (CCF),
UCITS III and hedge funds are just three
areas that testify to the creativity of the
Irish regulator. The Dublin funds indus-
try works closely with the authorities to
hasten the authorisation and approval of
investment funds. “The Dublin Funds
industry works closely with the authori-
ties and the current project in hand is the
design of an authorisation procedure
which will shorten the time lines. The
procedure will involve more input from
the advisers in the form of a detailed
application form. This should enable the
regulator to rely on certification by advis-
ers in more routine aspects leaving the
regulator to focus more on the important
prudential aspects.” says David Dillon,
partner at law firm Dillon Eustace.
Common Contractual Fund
Ireland has welcomed the level of inter-
est in its CCF, a tax efficient pooling vehi-
cle for pension funds. The first company
to offer a CCF in Dublin was Deutsche
Asset Management. “The industry is also
attempting to extend the new CCF
beyond pension schemes,” says Dillon. “At
the moment, the vehicle is confined to
pension scheme investors in a UCITS
framework, we would like to extend the
structure to all categories of investors and
all types of investment strategies. Because
the tax authorities are concerned that the
domestic tax regime might be compro-
mised, there is still some way to go before
we see an extension. In the meantime,
there are a number of schemes being set
up for pension funds under the existing
regime.”
Liam Butler, director of sales and client
servicing at the Bank of Ireland Securities
McCreevy, Ireland’s
finance minister since
1997, has presided over
the most dynamic
economy within the EU.
Services agrees that the CCF has created
renewed interest in Dublin and expects
the level of business to increase over the
next few months. “Pensions are a big area
 Irish Funds Industry

in Dublin, particularly with the emer- year end. This is expensive and to a and could force promoters to look at reg-
gence of pan-European pensions,” he large extent administrators are biting istering their funds in other jurisdictions.
says. “Not many people are jumping up the bullet.” From a marketing perspective, it is good
and down about the that funds are regulated and
non-UCITS CCF at the that fiduciaries act inde-
moment, but it will “The regulatory change in the last nine to pendently on behalf of the
create an additional
interest for investment
twelve months has been phenomenal” shareholders.”
Service providers like
when it arrives.” Citigroup believe regulated
Butler’s business is an active hedge fund Multiple domiciles funds ensure greater investor protection.
services provider. “There was a point As an appointed However, Wright adds, it is important to
when these funds were the ‘in’ thing, trustee for Irish enforce regulation, which is not burden-
when markets were difficult. Now that regulated funds some and costly for the promoter or the
markets have stabilised, there is a and service management company who is setting up
demand for other products and the provider to funds the fund. “This can be achieved by
hedge fund buzz has softened but it is authorised in at liaising between local industry bodies
still a growth area.” least five regulatory and the regulator before regulation is
Apart from Dublin, Ireland boasts a jurisdictions, finalised.”
variety of cities that are top of the list for Citibank The increasing sales of regulated funds
outsourcing non-core fund activities. International plc to retail investors is testimony to the
Service providers such as State Street, Ireland Branch is creative regulatory oversight for these
Citco, Fortis and International Financial responsible for
Services have seized upon the low costs $15bn worth of Bronwyn Wright
of doing business in centres such as assets. Regulatory
Kilkenny, Cork, Galway and Naas developments such as UCITS III, the EU Irish Registered Collective Investment Schemes
respectively. Savings Directive, late trades, market tim- (No. of Funds including sub-funds)
ing and the CCF; constitute the daily t 2004 3616
Law of the land agenda of senior vice president Bronwyn 2003 3507
At a European level, Ireland is subject Wright and her team. “The regulatory 2002 3300
2001 2870
to the provisions of the European Union change in the last nine to 12 months has 2000 2392
Savings Directive, which are supposed to been phenomenal,” says Wright. 1999 1967
into effect in January next year. “Service providers have to equip 1998 1693
According to the Directive, fund adminis- themselves with market knowledge in 1997 1221
trators will be deemed the final paying order to provide promoters with value 1996 985
1995 759
agent and will be obliged to report to the added services. Its not just about cutting 1994 597
administrator’s local tax office informa- the NAV anymore. Promoters want to 1993 409
tion on interest income, as opposed to know about new legislation such as the 1992 299
capital gains earned by EU individual CCF, UCITS III ( product / management 0 500 1000 1500 2000 2500 3000 3500 4000
investors. directive), and how it affects them.”
No. of Funds (incl. Sub-funds) Source: IFSRA
“The directive is likely to be enforced According to many service providers in
next year for interest earned this year,” Ireland, regulation should combine prac-
says Dermot Butler, chairman of Custom tical laws and an intuitive marketing plan
House Fund Administration. Service for the funds industry. “You can achieve
providers are also waiting to hear how that balance if you have open communi- Irish Registered Collective Investment
Schemes in the UCITS Fund Structure
the USA Patriot Act will affect the hedge cation between the industry and the regu-
funds industry. New audit protocols, lator,” says Wright. “This balance should 350 328.6
which will affect the way in which infor- be achieved at the consultation stages of a B
mation is presented for audit, are also on particular piece of legislation.” 300 285.3
B
the horizon. Service providers in Ireland have 250 238.5
Butler is outspoken on the issue of praised UCITS III for giving promoters 215.1 B
regulation and the costs associated with and fund managers greater flexibility for 200 NAV Euro bn
B
compliance. “All such regulation means the investment instruments. “We need to 145.3
more checking, more information gath- ensure the mind, management and sub- 150 B
ering and more reporting,” he says. stance of the fund’s board of directors is 94.5
“However, there are some EUSD exemp- practically achievable and that we do not
100 B
tions. For example, if less than 40 per make it burdensome for promoters to set 50 42.9
B
11.814.720.7
0.7 2.2 6.3 8 B B B
cent of a fund’s assets are in interest up businesses in a home jurisdiction,”
earning instruments, no report needs to says Wright. “The promoter is responsible 0 B B B B
2000

2003
2002
1993

1998
1992

1995

2001

JULY 2004
1996

1999
1997
1991

1994

be made. But nobody has made it clear for the substance of a fund and for work-
whether that 40 per cent is a daily figure ing with the service provider in the home
or based on the status of the fund at jurisdiction. This practice can be costly Source: IFSRA

INVESTOR SERVICES JOURNAL 15

Irish Funds Industry
vehicles. Service providers work with
promoters and regulators to ensure that
regulation is practical. Under the man-
agement directive of UCITS III, for
example, promoters are obliged to artic-
ulate to clients how the interpretation of
the Directive differs from one jurisdic-
tion to the next.
Launched at the beginning of the year,
the CCF has been widely accepted by
the funds industry. “A CCF’s assets are
mobile and enable pension funds to
benefit from their scale, higher regulato-
ry provisions, greater buying power and
the use of an international provider in
Dublin,” says Wright.
The CCF enables pension funds to
pool their assets into a legal structure,
which is charged one brokerage
and settlement fee. The product
was launched in competition to
“Providers who can service all
the FCP in Luxembourg and is types of funds will be the winners”
intended to compliment the
hedge fund structures, which have also
caused a rush to the market by global
financial institutions. “Institutions have
purchased hedge fund administrators
rather than build the capability in order
to provide an immediate hedge fund
service,” says Wright.
Fund servicing
Since the establishment of the IFSC,
Ireland has attracted highly qualified
graduates into the mutual funds arena.
The basic passport to enter this industry
is a certificate or diploma for mutual
funds, created by the Dublin Funds
Industry Association and the Institute
of Bankers. Wright continues “Hiring
staff is not a problem. Considering the
growth and complexity of the funds
business it allows staff to develop with
these opportunities and continually be
challenged.”
While staff availability may not be
cause for concern, the number of
providers servicing the business in
Ireland decreasing. The reason for this,
according to Wright, is down to acqui-
sition. “In the next three to five years,
there will be about 10 providers serv-
icing the Irish mutual funds business,
as opposed to about 25 at present.
This is because clients are looking for
a one-stop-shop. Fund Promoters are
seeking service providers that can
service all fund types in multiple
European jurisdictions.”
16 INVESTOR SERVICES JOURNAL
Cooperation
The Irish legislators are assessing
whether sub-funds within an umbrella
investment company should be allowed
to cross-invest. According to Brian
McDermott, partner at law firm AL
Goodbody, the regulator is already
comfortable with this possibility. “It
has always been permissible for unit
trusts and would simply require a small
company law change in order to be
permissible for umbrella investment
companies,” he says.
If non-UCITS CCFs and cross invest-
ment were not enough for the legisla-
tor’s plate, the creation of a separate
cell type legislation, which would
protect the assets of sub-funds of
umbrella investment companies from
the liabilities of other sub-funds, is also
on the cards. “Assets of a sub fund of
an investment company are in theory at
risk of being exposed to liabilities of a
highly leveraged or risky fund within
the same umbrella,” says McDermott.
“This potential risk has provoked
certain fund promoters to elect to
establish their funds as unit trusts.”
The Irish Financial Services
Regulatory Authority (IFSRA) has
responded to the Dublin funds
industry’s comments on rules regarding
the creation of retail funds-of-funds,
which can invest in hedge funds and
Assets under Management for all Funds Domiciled in Dublin (Euro Billion)
US $ billion 1999 2000
Cash/Short- 27.10 49.20
Term
Equity 37.20 79.90
Bond 23.90 27.40
Fund of 3.50 3.50
Funds
Alternative 3.80 2.20
Investment
Others 13.10 13.90
TOTAL 108.60 176.10
Note: 'Equity' and 'Bond' categories include both actively and passively managed funds
other alternative investment funds. The
original notice from the regulator has
been refined in the last few months.
“The retail fund of funds product has
provoked a lot of interest,” says
McDermott.
To the delight of the alternative
investment industry, IFSRA is chang-
ing its tune on the appointment of
prime brokers to Irish hedge funds,
following industry efforts to afford
greater flexibility to the brokerage
industry. The regulator has published a
revised version of its draft guidance
note and has sought comments from
the industry. “The changes have been
accepted in principle and the extent of
the custodian's monitoring role in this
new arrangement is the final
hurdle to be addressed,” says
McDermott.
Previously, the assets made
available to prime brokers for
rehypothecation was limited to 100 per
cent. Following regulatory interven-
tion, it is likely that this figure will
increase to 140 per cent.
“This will be very effective for prime
brokers,” says Brian Wilkinson, direc-
tor of Bank of Bermuda GFS Dublin.
The rules governing retail fund of
hedge funds have also been amended
and the minimum subscription
requirement has been removed.
IFSRA is planning to levy a fee of
about £1500 for custodians and
administrators in Dublin. This action,
according to Wilkinson, is a sign of
2001 2002 2003 2004
73.20 117.30 150.70 192.90
80.30 82.80 92.00 137.60
33.50 41.40 64.90 78.20
6.00 10.50 13.80 27.70
3.10 7.30 11.60 17.30
17.50 30.60 42.40 49.60
213.60 289.90 375.40 503.30
Source: Fitzrovia International, Dublin Fund Encyclopedia 2004/2005
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Irish Funds Industry

market maturity. “It points towards the
independence of IFSRA,” he adds.
Like other administrators in Ireland,
the Bank of Bermuda can attest to the
availability of skilled professionals to
service the local funds industry. “The
growth has been so tremendous that
professionals can attract a premium
salary by moving from one point of
the industry to another,” says
Wilkinson. “Some fund administrators
have created satellite offices in Galway
and Cork. Another administrator is
setting up a series of offices in the sub-
urbs of Dublin in order to attract peo-
ple from the west side of the City. This
initiative will probably work very
well.”
The Bank of Bermuda, now part of
the HSBC group, is a primary compo-
nent of the Irish hedge funds industry.
“While promoters can outsource some
of the basic processing functions such
as portfolio valuation and corporate
actions, the added value and the calcu-
lation of complex fees will always stay
in Dublin. The expertise, which have
been built over a number of years, is in
situ in Dublin and it will take time to
build those expertise elsewhere.”
juniors who want to travel or explore
other job opportunities. Thankfully
we have enough skilled people here in
Dublin.”
AIB / BNY administers funds that
are domiciled in Dublin and in other
centres around the world. “We have
over $120bn of funds under adminis-
tration at AIB / BNY. A significant
number of these funds are domiciled
in Dublin and we are servicing a grow-
ing number of funds that are domi-
ciled in other jurisdictions. Dublin is
becoming a centre of expertise for
The Dublin Who’s Who...
Our graphs show the professionals
serving Dublin Funds.
Clockwise from top graph page 18;
Auditors, Solicitors,
Custodians and Administrators.
Dublin auditors - number of funds served
RSM Robson Rhodes - 83
Deloitte & Touche - 184
Ernst & Young - 840
fund administration services for global
funds. An increasing number of RFPs
involve funds that are domiciled across
a range of jurisdictions, including
Dublin.” says Murphy.
While Irish funds regulation may be
strict and pragmatic, there are certain
flexibilities. “Regulation is a good price
to pay for reputation, quality and the
protection of companies and investors'
cash,” says Murphy. “From Dublin's
point of view, the main impact of reg-
ulation is cost. In addition to making
a fund more marketable, regulation
adds to the reputation and quality of
the funds.”
Dublin's service providers have
catered for interest in jurisdictions
such as Luxembourg and the Cayman
Islands. “We are present in those
jurisdictions because our customers
want us to be there,” says Murphy. “But
PricewaterhouseCoopers - 1468

Centre of excellence
According to Denis Murphy, chief
manager of AIB / BNY, the CCF has
enabled the pooling of pension
schemes and the creation of sophisti-
cated skills and technology.
“European pension schemes can now KPMG - 943
invest into assets globally through a
Dublin domiciled CCF pooling vehicle, Source: Fitzrovia International - Dublin Fund Encyclopedia 2004/2005
resulting in lower costs for fund
administration, transactions, audit and
legal services,” he says. “We are work- Dublin fund administrators - value of funds under
ing with customers who want their administration in US $ bn
CCF domiciled and administered in
GAM Fund Management - $38.7 bn
Dublin.”
Hedge funds represent about a tenth State Street International - $127.6 bn
of AIB / BNY's business. “Hedge funds PFPC International - $55.9 bn
are a major growth area and one that
we are very keen on,” says Murphy.
“Dublin has a great reputation for
administering hedge funds, which may
be domiciled here or in other jurisdic-
tions.”
Bank of Ireland (BOISS) - $67.7 bn
On the subject of staff, Murphy has
always noticed a low turnover in sen- AIB/BNY Fund Mgmt - $90.5 bn
ior management positions in Dublin.
“Turnover has always been higher for Source: Fitzrovia International - Dublin Fund Encyclopedia 2004/2005

18 INVESTOR SERVICES JOURNAL

 Irish Funds Industry

to a significant extent, most of the
fund administration work is carried
out in Dublin.”
The European choice
As a premier funds domicile, Ireland is
nimble in its acceptance of new prod-
ucts. “The CCF structure is a major
product for Ireland as a jurisdiction.
The product was initial-
ly created for UK pen-
sion funds, which need-
ed to receive dividends “Regulation is a good price to pay for reputation, quality
gross of US withhold-
ing taxes, and is now
and the protection of companies and investors’ cash”
being promoted to
other jurisdictions,” says Kerys
Gavigan, marketing director at
Investors Bank & Trust in Dublin.
As its European centre of excellence,
Investors Bank subscribes to Ireland’s
industry-wide training program and
endorses the DFIA’s certificates and
Dublin solicitors - number of funds served
William Fry - 266
Matheson Ormsby Prentice - 289
diplomas in mutual funds. “A large like to go abroad for a few years but
percentage of the Irish population is they always seem to want to come
below the age of 25 and includes a lot home. That’s another reason for the
of university graduates,” says Gavigan. high level of financial services expert-
Investors Bank recruits directly from ise in Dublin.”
the local universities and introduces According to Gavigan, there are fur-
new employees to an intensive three ther important factors behind Ireland’s
and a half week training program. success. “It is within the EU and pres-
“The availability of skilled labour in ents a timezone advantage,” she says.
Dublin is excellent,” says Gavigan. “Should an asset mananger choose
“Traditionally, many graduates with India, the timezone between the US,
three or four years of financial experi- India and Europe is substantial. The
ence have gone abroad to work in manager would be better off using
other fund centres. But increasingly, Dublin for its funds administration.
they are coming back to senior man- Traditionally, investment managers
agement positions in Ireland. People have selected the EU to domicile their
funds, while those who did not want
the added regulatory burden remained
outside. But regulation has become
attractive for companies in terms of
selling and distributing funds, since an
increasing number of financial scan-
Dillon Eustace - 761 dals have been reported.”

Arthur Cox - 363
A&L Goodbody - 532
Source: Fitzrovia International - Dublin Fund Encyclopedia 2004/2005
Dublin custodians - value of assets under custody in US $ bn
PFPC Trustee & Custodial - $42.8 bn
JP Morgan - $59.5 bn
Bank of Ireland (BOISS) - $69.2 bn
State Street Custodial Services - $117.5 bn
AIB/BNY Trust Co - $73.9 bn
Challenges
“Luxembourg is the largest offshore
market in Europe,” says Gavigan. “But
there will always be a role for both
Luxembourg and Dublin. Dublin is
about 35 per cent of the size of
Luxembourg. Having said that, Ireland
has attracted alternative investment
products like hedge funds, which
Luxembourg has fallen slightly behind
on in the last two years. Now
Luxembourg is fighting back and so
are the Channel Islands. The Channel
Islands have introduced new rules to
attract hedge funds. But they have a
restricted labour force. From Dublin’s
perspective, it is important that we do
not become complacent and think that
because we have been around for a
while that we are established enough.
The industry needs to continue to
promote Ireland.
“ This is something Investors Bank,
DFIA and IFSRA are all very good at.”

Source: Fitzrovia International - Dublin Fund Encyclopedia 2004/2005

ISJ

INVESTOR SERVICES JOURNAL 19

Irish Funds Industry
Green
Energy
Declan Cassey
The Dublin funds industry has
recorded exceptional growth
since it’s establishment in 1989.
Declan Cassey of the Dublin
Funds Industry Association
guides us through a domicile
with a difference.
20 INVESTOR SERVICES JOURNAL
I n addition to administering Irish domiciled funds,
Dublin has gained an international reputation for excel-
lence in fund servicing and consequently many promoters,
who may have their funds domiciled in a jurisdiction
other than Ireland, opt to have their funds administered in
Dublin. This is particularly true of alternative investment
funds, which would typically have a Caribbean domicile,
where more and more of these funds now take advantage
of the skills and expertise available in Ireland to service
these funds. The Irish funds industry, with a dynamic and
well educated workforce, a strong appetite for new busi-
ness and a growing reputation as a key location for both
fund administration and as a fund domicile, has been
quick to react to the increasing demand for fund adminis-
tration services for these new, complex and often intricate
fund structures. Ireland’s appetite to service this business
and its decision to take on the challenges of these complex
fund types proved to be well founded.
Strengths
One of the core strengths and key drivers of the success
of Ireland as a funds jurisdiction is the people working in
the industry. Key to this is a willingness to deliver and to
meet and exceed client’s needs and expectations. We have
always sought to embrace industry developments and
ensure the products and expertise available from Ireland is
second to none. Our willingness to deliver and to meet
our client’s needs has seen Ireland’s reputation as a key
location for money market funds, exchange traded funds
and alternative investment funds grow, and with it the
global acceptance of Ireland as a key financial services
jurisdiction. With this background it is not surprising that
from a standing start in 1989
Ireland has developed into a signif-
icant international jurisdiction for
the domicile and administration of
international investment funds and
is now recognised as one of the
leading international fund jurisdic-
tions with, at the end of July 2004 a
total of 993 Irish registered
Collective Investment Schemes
(funds), (3,619 including sub-
funds). At the end of July 2004 the Net Asset Value of Irish
Collective Investment Schemes was Euro 418 billion with a
further Euro 214 billion being administered in non-Irish
domiciled schemes.
Alternatives
Key to the recent development and growth of the business
in Ireland is the expertise and reputation as the acknowl-
edged jurisdiction of choice for the administration of
alternative investment funds. Recent publications have
estimated that the size of the global Alternative Investment
Funds (AIF’s) industry is between $600bn and $700bn and
a recent DFIA survey reported that in excess of $200bn of
alternative investments are serviced by the Irish industry,
representing approximately 30 per cent of the global
industry. At present the vast majority of AIF’s are domi-

ciled in the Caribbean and marketed to
non-retail investors, however this is like-
ly to change. With the increased demand
by retail investors for these products,
discussions at the EU for the regulation
of alternative investment funds and the
introduction in a number of countries,
including Ireland, of regulatory provi-
sions to provide for retail funds of hedge
funds, AIF’s are set to move into the
retail sector and the demands for regu-
lated AIF’s are set to increase.
Anticipating these developments, it is
important to ensure that the industry in
Ireland and the regulator, through their
knowledge and expertise in this area, has
the necessary structures in place to ben-
efit from these
developments.
With regulatory “investors are increasingly demanding more
provisions already
introduced for
frequent, weekly or even daily, ‘indicative’ net asset
retail fund of value calculations from the administrator”
hedge funds and
conclusion of the consideration by Irish
Financial Services Regulatory Authority
in relation to related issues i.e. collateral
and prime brokers, imminent, the
framework for enhancing Ireland’s repu-
tation as a domicile for regulated AIF’s is
nearing completion.
Demands
As the hedge fund industry develops
and matures the requirements of hedge
fund promoters and investors expands
and the demands on hedge fund adminis-
trators increases. Investors are also
demanding greater transparency and dis-
closure in an effort to measure and con-
trol risks and, as a result, require more
reporting from the service providers to
the fund. There is understandable reluc-
tance to rely solely on information
received from the investment manager
and as an independent third party, an
increasing degree of reporting is being
requested from the administrator. While
the majority of hedge funds have month-
ly dealing net asset value calculations,
investors are increasingly demanding
more frequent, weekly or even daily,
‘indicative’ net asset value calculations
from the administrator. Directors are also
requesting more frequent and detailed
reporting from the administrator, to
ensure that they are discharging their
responsibilities to the fund.
There has also been a trend for hedge
funds to restructure, by adding on addi-
tional classes of shares or feeder funds,
which increases the complexity of the
accounting in the fund. Thus a one-size
fits all approach to providing fund
administration services is not suitable for
hedge funds. Hedge funds require a more
tailor-made service from an administra-
tor. While technological advances are
necessary in providing the platform for
delivering a high quality, flexible fund
administration service to hedge funds, it
is the staff who actually deliver this
service. Hedge fund managers expect the
administrator’s staff to be of a very high
calibre and to have an in-depth knowl-
edge of the hedge fund industry. It is
quite normal for a fund administrator to
offer other ancillary services, e.g. custodi-
al services, banking & FX services, tax
reporting, producing financial state-
ments, etc which all help complete the
service offering, further assisting the
smooth operation of the fund. An exam-
ple of this is the importance of the role
played by the transfer agent in the admin-
istration of hedge funds. The traditional
role of the transfer agent, that of simply
processing investor transactions and issu-
ing dealing confirmations, has become
more specialised as a result of ever-
expanding compliance and reporting
roles. While in the past the hedge fund
manager was looking for an administra-
tor, nowadays expectations are far higher.
When selecting an administrator for its
funds a hedge fund manager is looking
for an experienced hedge fund adminis-
trator with; a track record of excellence in
the provision of the required services,
established links with the prime broker
community, the required cutting-edge
technological capabilities and most
importantly, knowledge and understand-
ing of the managers’ investment strate-
gies. These qualities and capabilities are
demonstrated daily in the Dublin funds
industry.
Pension pooling
Another development, which has
ensured Ireland is well positioned for the
future, was the introduction in 2003 of
legislation to facilitate the creation of a
Irish Funds Industry
tax transparent pension-pooling vehicle,
the Common Contractual Fund (CCF).
The CCF structure enables the assets held
on behalf of pension schemes to be
centralised through a single vehicle,
which is owned jointly by the trustees or
custodians of the individual pension
schemes, in proportion to the assets or
cash subscribed to the CCF structure.
This contract structure will have a partic-
ular appeal to multi-national companies,
which operate pension schemes in a
number of different jurisdictions for the
benefit of employees in those jurisdic-
tions. The industry is presently at an
advanced stage of discussion with
government agencies to extend the
existing CCF legis-
lation/regulations
to permit the
establishment of a
non-UCITS CCF
structure. In
addition,
discussions are on going to extend the
opportunities for this product beyond
pensions funds and to create a tax trans-
parent asset-pooling vehicle, which is the
identified goal of the industry.
Additional legislative refinements,
which will promote the growth and
development of the industry in Ireland
are scheduled amendments to company
law to provide for the ring fencing of
liability of sub-funds and to allow for
cross investment between sub-funds in an
umbrella structure. These developments,
which will enhance and expand the
industry product range, are at an
advanced stage of preparedness and
should be introduced in the very near
future.
Together the Irish Government and
IFSRA have shown the legislative and reg-
ulatory foresight necessary to ensure
Ireland remains a premier international
financial jurisdiction. In addition,
providers themselves have looked inter-
nally to enhance offerings and increase
efficiency to ensure they are well placed
to shoulder the increasing demands from
promoters, managers and investors. We
are confident that the expertise, skills and
reputation of Ireland as a prime location
for the administration and domicile of
investment funds will continue to grow
and develop into the future.
ISJ
Declan Casey is an executive of the DFIA
INVESTOR SERVICES JOURNAL 21
Irish Funds Industry
The Common
Contractural Fund
T he Irish government is committed
to making its country the leading
domicile for pan-European pensions. This
commitment, according to Sean Langdon,
(CCF) will ensure business development manager at the IDA,
greater returns and will give pensions’ investments the benefit
of double taxation treaties. Each multina-
better risk management tional pension fund currently invests in
individual funds. “But if they pooled their
for pensions, says the assets, they may get better fees, reduced
Irish Development administration costs and a better risk
management arrangement,” says Langdon.
Agency (IDA). What “By pooling assets, the pension funds get
will the structure do for better value, more leverage and proper
overall risk management.”
Ireland? There are a number of vehicles, which
can facilitate pension fund pooling,
including unit trusts, CCFs and limited
partnerships. Unit trusts are used by the
Nestle pension fund, which has about
$3.8bn of pension assets pooled in
Dublin. IBM has $1.2bn pooled in fixed
income assets. “If a fund is investing in
equities, they would need a CCF to limit
the withholding tax,” says Langdon.
Active A UK life insurer is at advanced stages of
setting up a CCF in Dublin. “The pensions
industry is plagued by a lack of urgency as
Agents there is currently no compelling reason to
pool pension fund assets,” says Langdon.
“However, that is all about to change.”
The CCF will receive a boost next year
with the European Union Institutions for
Occupational Retirement Provisions (EU
IORP). From September 2005, EU coun-
tries will be obliged to recognise the pen-
sions of other countries. Under the new
provisions, employees can continue to
pay into foreign schemes and still receive
the income tax relief. Ireland is set to pass
the EU IORP in April 2005. A non-
Sean Langdon UCITS CCF will also be included in the
Irish finance bill at the end of this year,
of the IDA broadening the range of pension pooling
investment vehicles.
The Irish government established a
pan-European pension taskforce at the
beginning of 2004, comprising top offi-
cials from the government, industry, the
IDA, service providers, consultants and
the director of a multinational company
(MNC) pension scheme. The taskforce
aims to identify obstacles to Ireland
becoming a major domicile.
It has issued a report to the Inter-
national Financial Services Centre (IFSC)
Clearing House Group, the Government’s
overall policy group for the international
financial services industry, making re-
22 INVESTOR SERVICES JOURNAL
commendations on how to develop
Ireland as a competitive centre for Pan-
European Pensions.
The introduction of the EUIORP will
force MNCs with a presence in two or
more EU States to address the Provisions.
The scale of investment in Pan-
European Pensions can be illustrated by
an analysis carried out by Mercer
Investment Consulting prior to the acces-
sion countries joining the EU in May
2004. Mercer estimated the total assets of
pension funds in Europe at approximate-
ly Euro 3.7trn. If industry funds were to
grow to 15,000 per capita, which is con-
sidered very conservative, assets would
grow to approximately Euro 7trn. If the
accession countries are included the fig-
ure could be in excess of Euro 10trn.
According to David Hanna, manager of
the IDA International Financial Services
Division, the funds industry is the most
successful segment of the IFSC in terms
of size. “Back in 1987, the rate of unem-
ployment was roughly 18 per cent and a
large number of young people were emi-
grating to the UK,” he says. The Irish
Government decided to launch the IFSC
to help reduce graduate unemployment.
Within the IFSC, a number of sectors
were prioritised, including funds, corpo-
rate treasury, international banking and
insurance. Funds became a very success-
ful ingredient of Dublin's make up. Fund
strucrures were introduced for retail,
qualifying and professional investors.
“The government made a priority of get-
ting the right framework for a range of
fund structures, including UCITS and
other institutional funds,” says Hanna.
“Various state agencies working in finan-
cial services put extra people into the area
to improve service to the incoming com-
panies. Regulation in Ireland is strict but
we compare it to a velvet glove on an iron
hand. IDA has actively promoted Dublin
around the world to encourage the funds
industry to bring their fund administra-
tion and IT expertise to Dublin. Dublin
currently has about 3900 funds and about
EUR 650bn funds under domicile. The
latest international asset management
company to enter the jurisdiction is
Australia's Perpetual Trustees, who
entered the jurisdiction by recruiting a
handful of fund managers from the Bank
of Ireland Asset Management to run their
global equities investment portfolio.”
ISJ

Dublin’s funds industry carries
many different guises. In an
exclusive profile for ISJ, Joan
Moran, chair of the Dublin
Custodian Group speaks about
their group’s role in the industry
T he Dublin Custodian Group (DCG) was formed in
1999 by local custodians with a common interest in
improving settlement and safekeeping in the Irish securi-
ties market. The founding members of the group came
from AIB/BNY (formerly AIB Securities Services), Bank of
Ireland Securities Services, Citibank NA and Northern
Trust (formerly Ulster Bank Custodial Services).
The group was formed to provide a forum at which the
members can review and assess developments in the Irish
securities market. We identify enhancements that can be
made to improve efficiency or reduce risk in the market
and we lobby the appropriate bodies to achieve these
objectives.
Over the past five years we have worked with CRESTCo,
Euroclear, The Revenue Commissioners, Irish Stock
Exchange, Registrars Group, Irish Business & Employers
Confederation (IBEC), British Bankers Association (BBA),
International Custody Tax Liaison Group (ICTLG) and the
Irish Market Advisory Committee (IMAC) in order to
facilitate progress on a range of issues.
Successes
We have regular meetings with CRESTCo to discuss their
plans for additional services and to ensure the unique
attributes of the Irish market are considered when changes
are proposed to the settlement of UK securities. All rights
issues in the Irish market are now processed via CREST.
Previously, settlement was paper based, with the seller
splitting and delivering Allotment Letters to the buyer,
using ‘free and free’ settlement. Moving rights issues to
CREST has been a very positive step for the market in
terms of reducing risk and streamlining settlement.
The area of dividend withholding tax (DWT) has been
simplified in recent years. In 1999, Ireland moved from a
system of imputed tax credits to a withholding tax regime.
This allows tax-exempt investors to receive gross dividends
at source, thereby eliminating time consuming and costly
tax reclaims.
Way forward
Since the DCG was formed in 1999, we have lobbied for
a change to the existing legislation that governs accounta-
Irish Funds Industry
One Voice
Joan Moran
bility for payment of stamp duty on Irish securities. This
legislation holds the transferee (receiving party) account-
able for the payment of stamp duty on a transfer of shares.
This is at variance with the market practice, whereby the
broker, as the transferor (delivering party) receives the
stamp duty as part of the settlement consideration and
pays this to the Revenue. We have worked with the Irish
Stock Exchange (ISE) and representatives from the brokers
to agree on proposed changes to legislation to recognise
the existing market practice.
Together with the ISE, we have made a joint submission
to the Revenue Commissioners requesting that legislation
be amended to recognise the broker as the accountable
party when settling market trades.
Electronic Transfer of Title is in place for UK registered
securities and we would like it applied to our local market.
With ETT, settlement and re-registration occur simultane-
ously. Currently, Irish registrars are allowed up to two
hours to reflect the change of ownership, after settlement
has taken place in CREST. In reality, our experience is that
most share holdings are re-registered within a few minutes
of settlement taking place.
We are in close contact with CRESTCo, who is working
with the local authorities to examine the legislative changes
that are necessary to extend ETT to Irish securities.
CRESTCo introduced a facility for automated dividend
and interest payments and issuance of electronic vouchers
via CREST in July this year. The DCG is actively represent-
ed on the Irish Market Advisory Committee (IMAC), which
is working with CRESTCo and the Revenue Commissioners
to move distribution from Irish companies to payment via
CREST. These moves would translate into changes to the
companies’ Articles of Association and acceptance by the tax
authorities of electronic vouchers to support DWT reclaims.
The strength of the DCG lies in its ability to work closely
together to pursue items of mutual interest. Going forward,
we will continue in our commitment to improving custody
in our market by listening to our clients’ requirements.
ISJ
Joan Moran is chair of the Dublin Custodian Group and
manager of domestic settlements at the Bank of Ireland
Securities Services.
INVESTOR SERVICES JOURNAL 23
Securities Lending - Ireland

Irish eyes are smiling since the

introduction of laws for securities
lending in the domicile.
Hans Beckmann, managing
director of Guild Global, explains
the changes that provide for a
lucrative industry

The introduction of a modern regulatory framework by

Gearing for
the Irish Financial Services Regulatory Authority (IFSRA),
the Irish Revenue and the Irish Stock Exchange in 1999
was not only an outstanding achievement, but it paved the
way for one of the most remarkable success stories in the

Growth international securities lending business.

The Irish equity securities lending market has grown
from Euro 200 million in 2000 to over Euro 1.0 bn in
aggregate securities loans per day in 2004. Trading in equi-
ties on the Irish Stock Exchange in 2003 was up 10 per
cent over 2002 to Euro 77.5 bn with exceptional turnover.
The strong performance of the Irish market was not con-
fined to turnover and the ISEQ Overall Index closed at
just under 5000 at year-end, outperforming most global
indices including the FTSE All-Share Index and the
Eurostoxx 50, with a 23 per cent increase from its end-
2002 level of 3995. Notably, in 2003, the Irish Stock
Exchange became the largest centre in the world for the
listing of investment funds with the number of funds list-
ed at over 3,400 by global asset managers.
Securities Lending has created market liquidity, which is
a precondition for the correct pricing of financial instru-
ments, risk management techniques, and monetary poli-
cies. As the demand for Irish equities surged from Irish
and UK borrowers for settlement, market-making, arbi-
trage and hedging purposes, bid offer spreads converged to
a remarkable level.
Yields on Irish equities between 1999 and 2003 averaged
about 100 to 200 basis points. Today, spreads tend to be in
the vicinity of 50 to 75 basis points with specials in the
region of 100 basis points. Advanced thinkers have recog-
nised that liquidity is the single most important compo-
nent of any successful financial market, and probably the
most misunderstood by market participants. Indeed, in
markets where securities lending does not exist or is not
encouraged, price volatility is prevalent. This suggests that
any anecdotal evidence that securities lending is exerting
downward pressure on share prices has, again, been
proven wrong as Ireland serves as an example of how
securities lending is a risk mitigation tool and not a risk
element. The naked short-selling demon continues to die a
slow death.
Most notably of all, it has not been the traditional par-

24 INVESTOR SERVICES JOURNAL


ticipants, the local banks, their asset man-
agement arms, or brokers who led the
way. Two innovative Irish Financial
Services and Insurance Companies led
the Irish securities lending market since
2000, supported by IFSRA, creating a
domestic and global securities lending
industry beyond recognition. More and
more Irish insurance companies, the
National Treasury, Superannuation
Schemes, and a growing number of
Collective Investment Schemes, UCITS
Variable Capital Companies and Unit
Trusts based in Dublin’s Irish Financial
Services Centre have joined the market.
UCITS are based in EU legislation and,
“The highly regulated securities lending product is
an integral part of the Irish capital markets”
once authorised, may be marketed
throughout the EU.
Regulation
The provisions governing securities
lending are captured by a number of reg-
ulations. The Irish Revenue Statement of
Practice Note from April 1999 for Irish
lenders recognises the substance of the
transactions involved i.e. a loan of securi-
ties notwithstanding that legally a trans-
fer of title to the loaned securities and
collateral takes place. Manufactured pay-
ments are exempt from tax in the hands
of the lender where the receipt of divi-
dends by the lender would not have been
taxable. The transfer of securities under a
securities loan is exempt from stamp
duties and the loan will not be regarded
as a disposal or acquisition for tax pur-
poses. Any profit earned as a result of the
loan and return taking place at different
prices will be treated as a fee and taxable
as income or exempt from taxation if the
recipient is not a taxable entity. The prac-
tice note applies to institutions within the
scope of Irish tax, which are companies,
building societies, pension funds, chari-
ties or collective investment undertakings
and the maximum term of a lending
transaction is six months before stamp
duty is applicable. The Investment
Intermediaries Act of 1995 exempts col-
lective investment schemes and the
depositaries and managers of such
Securities Lending - Ireland
schemes insofar as the activities of the
collective investment undertaking are
subject to regulation by IFSRA. Thus a
proposal by a collective investment
scheme to engage in securities lending
activities, on the assumption that its con-
stitutional documents permit securities
lending, does not require separate autho-
risation. The Netting of Financial
Contracts Act of 1995 provides protec-
tion on insolvency for bilateral netting,
set-off, guarantee and collateral arrange-
ments and subject to certain exceptions
provides that netting agreements in rela-
tion to financial contracts are enforceable
against a party to the netting agreement.
The EU Finality of
Settlement in
Payment &
Securities
Settlement Systems
Regulations 2000
extend the ambit of
the Act to sale and repurchase transac-
tions, and lending and borrowing trans-
actions to encompass such transactions
relating to equities. Buy and sell back
transactions in securities and equities are
now also addressed.
The securities lending framework for
collective investment schemes are cap-
tured in UCITS Notice 11 issued by
IFSRA in August 2003, dealing specifically
with techniques and instruments for the
purposes of efficient portfolio manage-
ment. Similar provisions for Non-UCITS
are contained in Notice 16.
Agreements
Essentially, repurchase agreements, repo
contracts, and securities lending agree-
ments may only be effected in accordance
with normal market practice. Collateral
obtained must be in the form of cash,
government or other public securities,
certificates of deposit, bonds/commercial
paper, letters of credit, deliveries-by-
value, or comparable Central Securities
Depositaries Systems instruments, pro-
vided that they are subject to a concen-
tration limit, the securities are a con-
stituent part of a recognised index, and
the securities are consistent with the
investment objectives of the UCITS. Until
the expiry of the transaction, collateral
obtained must equal or exceed the value
of the amount invested or securities
loaned, be transferred to the trustee, or
INVESTOR SERVICES JOURNAL 25
Securities Lending - Ireland
its agent, be held at the credit risk of the
counterparty, and be immediately avail-
able to the UCITS, without recourse to
the counterparty, in the event of a
default. Non-cash collateral cannot be
sold or pledged, must be marked-to-mar-
ket daily, be issued by an entity inde-
pendent of the counterparty, and be
diversified such that no more than 10 per
cent of the collateral may be represented
by the securities of any one issuer. This
limit will not apply to government or
other public securities as such limit is
increased to 30 per cent. The credit quali-
ty of the non-cash collateral must be con-
sistent with the investment policies of the
UCITS. Cash collateral may not be
invested other
than in deposits,
which are capable “a challenge for the industry will be to continue to
of being with-
drawn within five widen the forms of collateral used”
working days, or
such shorter time as may be dictated by
the repo contract or securities lending
agreement. The holding of cash on
deposit is subject to the provisions of
UCITS Notice 9. Cash may not be held
on deposit with the counterparty or with
a related institution. Cash collateral
may be invested in government or other
public securities, certificates of deposit,
letters of credit, repurchase agreements,
daily dealing money-market funds, which
have and maintain a rating of AAA or an
equivalent. If investment is made in a
linked fund, no subscription or redemp-
tion charge can be made by the underly-
ing money-market fund. The UCITS
instrument may enter into a securities
lending program organised by generally
recognised Central Securities
Depositaries Systems provided that the
program is subject to a guarantee from
the system operator. The counterparty
must have a minimum credit rating of
A2/P2 or equivalent, or must be deemed
by the UCITS to have an implied rating
of A2/P2. Alternatively, an un-rated
counterparty will be acceptable where the
UCITS is indemnified against losses suf-
fered as a result of a failure by the coun-
terparty, by an entity, which has and
maintains a rating of A2/P2. A UCITS
instrument must have the right to termi-
nate the agreement at any time and
demand the return of any or all of the
securities loaned. The agreement must
26 INVESTOR SERVICES JOURNAL
provide that a borrower must redeliver
the securities within five business days or
other period as market practice dictates.
The future
The highly regulated securities lending
product is an integral part of the Irish
capital markets and Ireland has joined the
ranks of the growing securities lending
markets around the globe. The dramatic
growth in onshore and offshore lending
and borrowing of Irish and foreign secu-
rities is serving the financial services
industry and will create an even more
diversified capital market. The Global
Master Securities Lending Agreement
(GMSLA) is now widely used as the mar-
ket standard legal document to include
netting, force majeure and other precau-
tionary clauses. The increase in Contracts
for Differences will result in further bor-
rowing demand for Irish equities.
Securities lending within the funds indus-
try is still in its infancy with most fund
administration companies not even real-
ising the potential fee income that can be
derived from a lending program. The
pension funds in Ireland are slowly
beginning to embrace securities lending
and the incremental fee revenues that can
be earned with such a conservative, low
risk product. Another trend in securities
lending in Ireland is a shift from a grow-
ing number of institutional lenders,
UCITS and life companies to secure
exclusive contracts with borrowers to un-
bundling their securities lending pro-
grams from their custodians by either
lending directly through in-house pro-
grams, via other custodian agents or spe-
cialist third-party securities lending
agents to capture the maximum in fee
earnings. Given the surge in securities
lending activities, a challenge for the
industry will be to continue to widen the
forms of collateral used to include
Exchange Traded Funds, introduce alter-
native forms of equity financing such as
Equity Swaps and Fixed Term Collateral
Financing Trades.
Notwithstanding these positive and
optimistic assessments, securities lending
in Ireland for Irish pension funds and
lenders who wish to enter into the busi-
ness and earn substantial fee revenue
streams on their portfolios in order to
reduce custody and asset management
costs must be demystified further.
Emphasis will shift further toward wealth
protection rather than wealth creation.
This suggests a flow toward capital guar-
anteed and downside protected funds.
There will be a continued movement into
the hedge fund sector with continued
flows into Dublin, due its relaxing regula-
tions. European countries have differing
attitudes toward hedge funds and it can-
not be denied that hedge funds have been
the victim of misunderstanding and con-
fusion among investors. Perception of
this asset class will
change over time.
We will experience
a booming
Exchange Traded
Funds Industry
after a spectacular 2002. Europe, by far
the most fragmented of the world’s mar-
kets, now has the largest number of prod-
ucts even though its assets are smaller
than those in Japan and the US. The out-
sourcing of selected business areas such
as back-offices, transfer agency and secu-
rities lending will become a growing
trend in Ireland and Europe as a means
of reducing operational costs further and
generating steady revenue streams. As
European stock markets remain frag-
mented, perspectives and strategies of
European equity analysts will shift from
an emphasis on country-specific factors
to industry and company factors in the
valuation of securities further driving
borrowing demand for securities.
It seems safe to conclude that the
growth of the securities lending industry
in Ireland is an irreversible trend. The
convergence of securities prices and the
positive impact of Securities Lending in
Ireland over the past three years suggests
a powerful on-going process of the mar-
ket’s evolution, credibility and reputation.
Whatever challenges and volatility is
ahead, one thing is for sure. Securities
lending will be a major fee revenue con-
tributor in any market condition and the
most effective shock-absorbing factor for
the Lenders and market participants with
active securities lending programs - with
virtually no risk.
ISJ
Securities Lending - Ireland
its agent, be held at the credit risk of the
counterparty, and be immediately avail-
able to the UCITS, without recourse to
the counterparty, in the event of a
default. Non-cash collateral cannot be
sold or pledged, must be marked-to-mar-
ket daily, be issued by an entity inde-
pendent of the counterparty, and be
diversified such that no more than 10 per
cent of the collateral may be represented
by the securities of any one issuer. This
limit will not apply to government or
other public securities as such limit is
increased to 30 per cent. The credit quali-
ty of the non-cash collateral must be con-
sistent with the investment policies of the
UCITS. Cash collateral may not be
invested other
than in deposits,
which are capable “a challenge for the industry will be to continue to
of being with-
drawn within five widen the forms of collateral used”
working days, or
such shorter time as may be dictated by
the repo contract or securities lending
agreement. The holding of cash on
deposit is subject to the provisions of
UCITS Notice 9. Cash may not be held
on deposit with the counterparty or with
a related institution. Cash collateral
may be invested in government or other
public securities, certificates of deposit,
letters of credit, repurchase agreements,
daily dealing money-market funds, which
have and maintain a rating of AAA or an
equivalent. If investment is made in a
linked fund, no subscription or redemp-
tion charge can be made by the underly-
ing money-market fund. The UCITS
instrument may enter into a securities
lending program organised by generally
recognised Central Securities
Depositaries Systems provided that the
program is subject to a guarantee from
the system operator. The counterparty
must have a minimum credit rating of
A2/P2 or equivalent, or must be deemed
by the UCITS to have an implied rating
of A2/P2. Alternatively, an un-rated
counterparty will be acceptable where the
UCITS is indemnified against losses suf-
fered as a result of a failure by the coun-
terparty, by an entity, which has and
maintains a rating of A2/P2. A UCITS
instrument must have the right to termi-
nate the agreement at any time and
demand the return of any or all of the
securities loaned. The agreement must
26 INVESTOR SERVICES JOURNAL
provide that a borrower must redeliver
the securities within five business days or
other period as market practice dictates.
The future
The highly regulated securities lending
product is an integral part of the Irish
capital markets and Ireland has joined the
ranks of the growing securities lending
markets around the globe. The dramatic
growth in onshore and offshore lending
and borrowing of Irish and foreign secu-
rities is serving the financial services
industry and will create an even more
diversified capital market. The Global
Master Securities Lending Agreement
(GMSLA) is now widely used as the mar-
ket standard legal document to include
netting, force majeure and other precau-
tionary clauses. The increase in Contracts
for Differences will result in further bor-
rowing demand for Irish equities.
Securities lending within the funds indus-
try is still in its infancy with most fund
administration companies not even real-
ising the potential fee income that can be
derived from a lending program. The
pension funds in Ireland are slowly
beginning to embrace securities lending
and the incremental fee revenues that can
be earned with such a conservative, low
risk product. Another trend in securities
lending in Ireland is a shift from a grow-
ing number of institutional lenders,
UCITS and life companies to secure
exclusive contracts with borrowers to un-
bundling their securities lending pro-
grams from their custodians by either
lending directly through in-house pro-
grams, via other custodian agents or spe-
cialist third-party securities lending
agents to capture the maximum in fee
earnings. Given the surge in securities
lending activities, a challenge for the
industry will be to continue to widen the
forms of collateral used to include
Exchange Traded Funds, introduce alter-
native forms of equity financing such as
Equity Swaps and Fixed Term Collateral
Financing Trades.
Notwithstanding these positive and
optimistic assessments, securities lending
in Ireland for Irish pension funds and
lenders who wish to enter into the busi-
ness and earn substantial fee revenue
streams on their portfolios in order to
reduce custody and asset management
costs must be demystified further.
Emphasis will shift further toward wealth
protection rather than wealth creation.
This suggests a flow toward capital guar-
anteed and downside protected funds.
There will be a continued movement into
the hedge fund sector with continued
flows into Dublin, due its relaxing regula-
tions. European countries have differing
attitudes toward hedge funds and it can-
not be denied that hedge funds have been
the victim of misunderstanding and con-
fusion among investors. Perception of
this asset class will
change over time.
We will experience
a booming
Exchange Traded
Funds Industry
after a spectacular 2002. Europe, by far
the most fragmented of the world’s mar-
kets, now has the largest number of prod-
ucts even though its assets are smaller
than those in Japan and the US. The out-
sourcing of selected business areas such
as back-offices, transfer agency and secu-
rities lending will become a growing
trend in Ireland and Europe as a means
of reducing operational costs further and
generating steady revenue streams. As
European stock markets remain frag-
mented, perspectives and strategies of
European equity analysts will shift from
an emphasis on country-specific factors
to industry and company factors in the
valuation of securities further driving
borrowing demand for securities.
It seems safe to conclude that the
growth of the securities lending industry
in Ireland is an irreversible trend. The
convergence of securities prices and the
positive impact of Securities Lending in
Ireland over the past three years suggests
a powerful on-going process of the mar-
ket’s evolution, credibility and reputation.
Whatever challenges and volatility is
ahead, one thing is for sure. Securities
lending will be a major fee revenue con-
tributor in any market condition and the
most effective shock-absorbing factor for
the Lenders and market participants with
active securities lending programs - with
virtually no risk.
ISJ
 Partnership and Trust

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

Cash
Borrowers Balance Against Collateral at 13 Oct 2004
Non-Cash
100%
90%
80%
7. The table showing the borrowers 70%
balance against collateral ranks the 60%
percentage of borrowers’ securities
50%
lending balance against the collateral
paid at 13 October 2004. Bonds and 40%
depository receipts were the most 30%
borrowed stock 20%
10%
0%

Other Equities

Exchange Traded Funds

European Equities
Corporate Bonds

Government Bonds

Asian Equities

Depository Receipts
Emerging Market Bonds

Americas Equities

Source: Data Explorers

8. The Securities Lending Group Summary provides a snapshot of how stocks

were performing at 13 October 2004. Exchange traded funds were the top per-
formers with revenue share from securities lending of 99.94 per cent.

Securities lending group summary at 13 Oct 2004

SL
Return
return
Balance vs Revenue to SL
Security Lendable Balance vs Total Utilisation to
non-cash SL Fee (Bp) from lendable Tenure
Type Assets (M) cash (M) balance (M) (%) lendable
(M) SL (%) assets (days)
assets
(Bp)
(%)

All 3,081,184 390,703 389,481 780,184 17.15 22.14 88.8 2.26 2.97 120
Securities
All Bonds 1,770,458 229,286 238,166 467,452 23.1 9.47 67.74 1.62 2.81 128

Corporate 971,832 110,681 46,869 157,550 13.17 14.73 60.73 1.09 2.64 132
Bonds
Government 798,173 118,605 191,282 309,887 35.19 6.8 77.61 2.25 3.02 126
Bonds
All Equities 1,310,726 161,417 151,316 312,733 9.12 41.09 99.45 3.13 3.18 109

Americas 375,405 88,723 22,708 111,431 7.46 34.08 98.65 2.17 2.3 96
Equities
Asian 135,445 15,131 18,121 33,252 10.5 81.15 99.68 7.23 7.3 130
Equities
European 721,632 38,999 106,554 145,553 10.14 33.84 99.84 2.86 2.87 118
Equities
Depository 13,660 8,491 1,091 9,582 12.78 69.6 99.68 11.88 12.04 99
Receipts
Exchange
Traded 14,377 9,217 2,563 11,780 14.16 54.98 99.94 4.84 4.87 51
Funds
Source: Data Explorers

INVESTOR SERVICES JOURNAL 29

Securities Lending - Asia

As a relatively new industry, group never lend securities, for a number

of reasons,” he says. “One, by lending we
securities lending in Asia has feed the short market which could have
an impact on the price of the securities
enormous potential for growth. we hold - driving those prices down. Two,
Do providers have what it takes we insist on voting all our shares and will
not surrender that right. Three, if there is
to carry the industry forward? a fundamental reason not to hold the
stock we prefer to simply sell. Four, the
Brian Bollen reports. returns on securities lending are seldom
attractive. There is a counterparty risk -
if a bank or other counterparty gets into
financial difficulty our lent stocks
(regardless of all the legal contracts and
assurances) could be in jeopardy. We
thus abandon our fiduciary obligations
to our clients.”

"In terms of pure

revenue, Asia is where
Emerging lenders should be
focussing”
Realities In favour
Be that as it may, for every anti-cam-
paigner, there are several vigourous pro-
lending lobbyists and apologists, and all
argue convincingly in favour. “In terms of
“It’s like sex in the sixth pure revenue, Asia is where lenders
form at school. There are should be focussing,” says Roy
Zimmerhansl, head of European securi-
a lot of people talking ties lending at Deutsche Bank, with global
about it, but nobody’s responsibility for sales and marketing.
“Spreads are higher now than they will be
actually doing it.” in three years time. There has been a big
This is one view of securities lending in turnaround in respect of securities lend-
Asia, but is it fair? ing. Countries which were formerly very
Is it even accurate? suspicious - like Japan, Hong Kong,
Not according to Thailand, Taiwan and Korea are now
those market prac- broadly in favour. And India knows it has
titioners who are to accept it. In recent weeks, both
prepared to go on
Paul Wilson the record with
Indonesia and the Philippines have both
proposed a framework for domestic secu-
their comments. rities lending activity. Securities lending is
And not everyone a generally accepted and required practice
is singing from the across the region.” Indeed, against this
same hymn sheet. background, Malaysia sticks out like a
Mark Mobius, for sore thumb in a time when it is a neces-
instance, a manag- sary part of a developed stock market.
ing director of “I am enthusiastic about the future, but
Templeton that enthusiasm is tempered by the
Investments and a knowledge that Asia can be a peculiarly
long-time special- volatile region,” continues Zimmerhansl.
Roy Zimmerhansl ist in emerging “The opening up of Korea and Taiwan,
markets, has very with the potential for India and China
strong views further tells me that there will be more
against the prac- demand for the region as a whole. The
tice. “We in the key to that is regulatory acceptance. The
emerging markets product needs to be accepted onshore.

30 INVESTOR SERVICES JOURNAL

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Securities Lending- Asia
The business seems to be receiving that support.”
According to Tony Venditti, managing director of
Nomura's equity finance business, the Japanese market has
become more interesting due to large corporate bond
issuance and new borrowing demand for hedging require-
ments. “Most global asset managers have been under-
weight in Japan but with recent strong performance of the
NIKKEI they have started to allocate more capital to
Japenese equities,” he says. “M&A activity has picked up
and I expect this trend to continue, especially in the finan-
cial sector. The Japanese market has plenty of liquidity so
it is easier to invest large amounts of capital.”
Expansion
“As has been the case for some time, Asia is witnessing
an expansion in the securities lending industry, across
numerous fronts,” says Simon Lee, vice president,
Securities Lending product manager, JPMorgan Investor
Services, Asia
Pacific. “Hedge
fund activity is on“As the industry moves further into
the increase,
which in turn is
the mainstream, regulators look to
driving borrower
demand which
move in a similar direction”
provides industry wide benefits. As the industry moves
further into the mainstream, regulators look to move in a
similar direction, and individual markets open up, as we
have seen in South Korea and Taiwan, and lastly, we see
more beneficial owners in the region entering the industry,
and making their securities available to lend.”
“These themes have been relevant for some time, though
the last year could be characterised by growth, expansion,
and acceleration, across all fronts,” adds colleague Paul
Wilson, senior vice president, securities lending and
investment products executive for JPMorgan Investor
Services in Europe. “The diversity of the industry in terms
of market participants (hedge funds, prime brokers,
lenders, beneficial owners) is mirrored in the diversity of
market expansion, be it new lenders coming to market, or
expansion of lending into 'emerging' markets. This is all
related to the general theme of industry growth in Asia;
without labouring the point, as the business moves to the
mainstream, it expands.”
“Expansion of the lending industry throughout the Asia
Pacific region follows the same evolutionary pattern as it
does elsewhere, though again, given the diversity in the
region, the pace of this expansion varies, and the markets
develop accordingly,” says Simon Lee. “The story is the
same with beneficial owners; certain investor types in
certain domiciles move at relatively differing speeds in
embracing the lending of their assets. One thing however
that can be said with certainty -the trustees and responsi-
ble entities of these institutional investors have an obliga-
tion to their shareholders and stakeholders to at least
explore the possibility of securities lending.”
Future perfect?
The future’s bright, the future’s rosy, according to the
securities lending team at the Korea Securities Depository
in Seoul. “Securities borrowing and lending (SBL) is
32 INVESTOR SERVICES JOURNAL
increasing a lot, especially in Korea, where it launched in
1996,” they say.
Illustrating the general by reference to the particular, the
team reports that market activity in Korea has increased
nearly six times since 2000, and doubled from the end of
the third quarter of 2003 to the end of the third quarter
2004. “The government and the marketplace want trade to
grow. Portfolio strategy has advanced enormously since
the Asian problems of 1997. SBL increases market
liquidity, and if there is good liquidity in the securities
market, the market is more stable and harmonious. SBL
also plays an important role in balancing the market.”
The KSD’s internet-based matching system attracts
players from other markets, and means Korea has more
experience than other markets in the region, says the team.
The system is a ‘blind’ system matching counterparties
instantly, reducing time, reducing risk, making risk-free
transactions available. While the KSD is currently set up
principally for local-to-local business,
it also handles local-to-foreign
demand, and aims to cater for for-
eign-to-foreign transactions if possi-
ble. “This would require only relative-
ly simple system enhancements.”
Interest
Asia presents a good combination of large asset holders
looking to participate in securities lending, says Francesco
M. Squillacioti, vice president, regional business executive,
securities finance, State Street. “Increasing levels of global
investing among the larger, and also among some of the
growing institutions, are increasing the volume of assets
that will be enrolled in lending; and securities markets that
have a healthy sense of competition amongst each other in
terms of trying to attract participants are looking at the
introduction of domestic securities lending models. To be
balanced, it is certain that this will require time and
patience to develop, but it seems pretty clear that Asia
should keep us busy for some time to come!”
New methods
Changes are also taking place in the way lending is car-
ried out, with many providers trying to lend assets on a
third party basis, observes Paul Wilson. “JPMorgan is also
active in this particular space and successfully lends securi-
ties for customers where it does not hold the assets under
custody. And of course, bespoke lenders such as eSec-
Lending have entered the market in recent years. On the
borrowing side, brokers are looking for more cheaper forms
of collateralisation (including equities) as well as pressing
more for tri-party collateral management services.”
Francesco Squillacioti agrees: “As the marketplace
becomes increasingly more competitive, plan sponsors
and/or other institutions are also looking at using a third-
party lending provider in order to optimise lending
opportunities. We have been involved in a number of
such mandates this year. Another trend we have seen
become more prevalent relates to non-traditional types
of lending structures. Although trading opportunities may
exist the local market may not support conventional
securities lending activities.”

Governance
Mergers and acquisitions activity between banks and
financial institutions has meant that the number of bor-
rowers has decreased over the last five years, although a
number of new borrowers have also come to the market
during the same time. On the lender side there have been
more and more new customers making their assets avail-
able for lending. During the last year, JPMorgan says it has
seen the ratio of lenders to borrowers rise from approxi-
mately 1.7 to two.
Corporate governance is of increasing importance in the
great securities lending debate, partly because of the argu-
ment about whether every single institution should vote
on every single issue on every single share in every single
investment, and partly because of the theoretical potential
for securities lending to be used (or abused) to affect the
outcome of an M&A transaction. On the M&A question at
least, there is broad consensus within the industry that the
potential will remain purely theoretical and that there is
no evidence to suggest it has happened to date in Asia.
But lending around corporate activity is genuinely one of
the hot topics of the day.
“As such we are seeing more and more investment man-
agers actively voting or delaying decisions to the final
deadline which makes lending very difficult,” says Simon
Securities Lending - Asia
Lee. “Unless a process can be developed where lenders can
be assured that their votes on lent securities have been cast
in the manner they wish (and this is going to be difficult
and even more problematic to prove given lent securities
are re-registered in the name of the borrower) then they
will restrict lending over such periods, thus giving them
the security and comfort they require. As this theme devel-
“Proxy voting can be supported
in a lending programme in a
number of ways, such as
recalling shares prior to a vote”
ops, we expect all parties to work together, so as to achieve
a mutually beneficial resolution, which is often a feature of
the industry as a whole.”
“The focus on corporate governance and institutional
investors’ role in that process is something that is starting
to be seen more and more in Asia, perhaps most so in
Japan at this stage, though primarily focused on domestic
equities,” says Francesco Squillacioti. “The large public
funds in the US seem to be models for this activity here in
the region. Participants in lending all have roles in the
Securities Lending
process. The plan sponsor or asset owner
ultimately is responsible for the decisions
made with regard to each vote on securi-
ties that they own. They are also respon-
sible for making the best choice as a fidu-
ciary for the beneficiaries of those assets.
This is a choice that involves securities
lending. While participating in the gover-
nance of the companies in which they own
stakes provides benefits, so too does partic-
ipation in a securities lending programme.
So, they need to determine where the most
benefit is to be obtained given their
responsibilities, and strike a balance.
The Weighted Average Fee to Borrow
Asian Equities Sept 03 to Oct 04
90
81 81
80 76 74 B B
B B 72 72
B B 68
70 B 65
B B
62
60
50
Fees in
40
basis points
30
20
10
0 ing as far as the development and use of
Feb 2004
Oct 2004
Nov 2003
Aug 2004
June 2004
Sept 2004
Oct 2003
July 2004
Mar 2004
Sept 2003
May 2004
Jan 2004
April 2004
Dec 2003
“What is the lending agent’s role in the
process? Our role is to make sure that we
support our clients in all that they need to
do. First of all, we explain to our clients
just what can and cannot be done in a
lending programme. I have read about
studies where participants were not aware
that ownership of the securities passes on
to the borrower, and so too does the vote.
We make sure that our clients know this
up front; it’s clarified in the contracts we
sign. Clients also need to know that par-
ticipation in a lending programme does
not mean that they cannot vote. Proxy
voting can be supported in a lending pro-
gramme in a number of ways, such as
recalling shares prior to a vote. Of course,
lending agents need sufficient notice to do
this, but it is supported. We often keep
buffer positions – that is, a certain percent-
age of a total holding that will not be lent – 6 SOJITZ HOLDINGS CORP
for our clients. Those ‘buffer’ shares can be 7 MORINAGA & CO LTD
voted at any time.
“So there are ways for lending and corpo- 8
rate governance responsibilities to coexist.
A lot of it comes down to the plan sponsor 9
having clear goals and policies in mind; for
the lending agent to have explained what
34 INVESTOR SERVICES JOURNAL
lending entails as well as what their specific time, there are commonalities in some of
programmes will support; and for the the issues that institutions face. One of the
sponsor to make the best decision for their main ones is the desire to maximise
beneficiaries based on this.” returns, or find some way to offset the cost
“As this cognisance of corporate gover- of the administration of their funds. We
nance grows and spreads in the region, we are speaking to increasing numbers of
hope that the various institutions involved institutions of all kinds that feel that lend-
will implement governance policies in a ing their global assets is one of the best and
thoughtful manner, and allow us to work most appropriate ways to do this. We are
in partnership with them where appropri- also seeing that the provision of securities
ate to address any concerns and map out lending is almost a prerequisite to being
programme parameters that will help them able to provide other types of services.
meet their many responsibilities.” These new participants are generally quite
sophisticated in how they approach securi-
“The markets have been ties lending, in terms of focusing on per-
formance and risk-adjusted returns. While
thoughtful in how they some of them have never participated
85 86
B B
90
B
82
approach lending” directly in a lending programme, they are
B making an effort to learn as much as they
73
B Outlook can in order to make the most informed
In the meantime, Francesco Squillacioti decisions.”
sums up the current and future major “Another important factor, though, is
trends and issues affecting the securities that we are talking about a number of dif-
lending industry in Asia in a single word: ferent countries, with different regulatory
expansion. “Of course, this is a large and regimes, market practices, etc. This has
diverse region, and – as you would imagine implications on the operations side as well
– different areas are subject to varying – while performance is important, the abil-
trends and are in differing stages of evolv- ity to be able to handle lending within the
context of how it needs to work in a partic-
securities lending goes, but in general, we ular market, for a particular kind of partic-
see a lot of potential in Asia. ipant, is very important, too. For example,
“There are two aspects to this: one being you have to know how something like sub-
Source: Data Explorers the various institutions in the markets that stitute dividends will work in a market for
wish to become participants in lending a certain kind of participant, and you need
programmes, i.e., lending clients; the other to ensure that the lending programme you
is in terms of those markets where the structure for that client is viable. This
lending of domestic securities is opening requires knowledgeable product develop-
up. The countries in the region are of ment, legal, and account management
course unique and distinct, but at the same teams, sophisticated due diligence process-
es, and robust operations capabilities.”
Top 10 most expensive equities to borrow “While this is happening on the lending
13 Oct 2004
side, we also see various markets looking to
Japanese Equities Chinese Equities expand participation, or to increase liquid-
MITSUBISHI MOTORS TIANJIN CAPITAL ity, and they have seen that a vibrant lend-
1
CORP ENVIRON-H ing market is a crucial component of an
2
ALL NIPPON AIRWAYS QIAO XING UNIVERSAL increasingly sophisticated capital market.
CO LTD TELE INC The markets have been thoughtful in how
3 KANEBO LTD
JILIN CHEMICAL INDUS they approach the introduction of lending,
CO-H
and we would characterise the progress as
4
MAZDA MOTOR ZIJIN MINING GROUP good. The regulators appear to be open to
CORPORATION CO LTD
the thoughts of the market participants,
HITACHI ZOSEN TINGYI (CAYMAN ISLN) and are looking to introduce changes to
5 CORPORATION HLDG CO
increase viability and efficiency – on a
TOM ONLINE INC
timetable that suits their needs. Examples
QINGLING MOTORS of markets currently developing would be
COMPANY-H
Korea and Taiwan, and other markets will
TSINGTAO BREWERY CO surely follow. That is one of the exciting
OKUMA CORP
LTD-H
things about the region: that there is still a
DATANG INTL POWER
TOHO ZINC CO LTD
GEN CO-H
relatively long list of markets to go the
route of developing lending markets.”
10 KOYO SEIKO TRAVELSKY
ISJ
Source: Data Explorers
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For More Information, Please Visit:

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Securities Lending - data analysis Risk Management Association (RMA) data on the
securities lending industry at the second quarter of 2004.
Total on Loan in North America
1 (US $ million)
Q2 2003 / Q2 2004
2
Total on Loan in Pacific-Rim equities
1,013
(US $ million)
Canadian Equities
1,819 Q2 2003 / Q2 2004
115,922 1,309 2003
U.S. Equities (includes ADR’s) All Others
177,985
2,244
2004
906
Canadian Bonds (Gov't & Corporates) 2,839
1,650 Australia
4,022
57,321
U.S. Corporate Bonds
68,434 2003 1,492
Hong Kong
2,433
U.S. Mortgage Backed Securities 2004
29,724
14,003
Japanese
47,306 22,589
U.S. Agencies
63,558
0 5,000 10,000 15,000 20,000 25,000
167,822
U.S. Treasuries/UST Strips
259,405

0 50,000 100,000 150,000 200,000 250,000 300,00 4 Source: Risk Management Association
Total on loan in Euro
Bonds (US $ million)
Denominated Sovereign

Source: Risk Management Association

Q2 2003 / Q2 2004

3 Total on Loan in Europe (US $ million) All Other Sovereign Bonds

3,735
6,367
Q2 2003 / Q2 2004
8,593
Eurobonds
15,226
11,605
All Other European Equities
31,015 Emerging Market Eurobonds
1,724
1,988
6,692 8,102
Scandinavian Equities UK Gilts
10,351 7,995

5,974 537
UK Equities All Other EURO Denominated Sovereign Bonds
2,168
10,657
2003 86
Spanish Sovereign Bonds
12,053 294
Italian Equities 2004
12,002
233
Italian Sovereign Bonds
1,222 2003
14,727
German Equities
16,804 German Sovereign Bonds
704 2004
2,449
24,311 40
French Equities French Sovereign Bonds
31,982 1,324

0 5,000 10,000 15,000 20,000 25,000 30,000 35,00 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000
Source: Risk Management Association
Source: Risk Management Association

Featured items include the total balances on loan in different parts of the world Total on loan as a percentage of lendable assets
as well as the amounts on loan as percentage of lendable assets. Pac-Rim equities at Q2 2004 6
Analysis by Investor intelligence. All Other Pac-Rim Equities 10%
Japanese Equities 12%

1 - Stocks (including equities and bonds) on loan in North America, contrasting the sec-
ond quarter of 2003 with the second quarter of 2004. The amount of US equities on
loan increased from $115.9 bn in Q2, 2003 to $177.9 bn in Q2, 2004. 2 - Equities on
loan in the Pacific-Rim region, contrasting the second quarter of 2003 with the second
Australia 9%
quarter of 2004. Japanese stocks on loan increased significantly, from $14 bn in Q2,
2003 to $22.5 bn in Q2, 2004. 3 - Equities on loan in Europe, contrasting the second Hong Kong Equities 13%
quarter of 2003 with the second quarter of 2004. French equities were most active,
increasing their activity from $24.3 bn in Q2, 2003 to $31.9 bn in Q2, 2004. 4 - Euro
denominated sovereign bonds on loan, contrasting the second quarter of 2003 with the Total on loan as a percentage of lendable assets European
second quarter of 2004. The most notable utilisation was for Eurobonds, which Equities at Q2 2004 7
All Other European Equities 16%
increased from $8.5bn in Q2, 2003 to $15.2 bn in Q2, 2004. 5 - North American bonds
on loan as a percentage of lendable assets. Lenders made the most of US treasuries / French Equities 40%

strips, using 78 per cent of the assets available for lending. 6 - Equities on loan in the Scandinavian Equities 27%
Pacific-Rim region as a percentage of lendable assets. Lenders used 13 per cent of avail-
able Hong Kong equities . 7 - Equities on loan in Europe as a percentage of lendable
UK Equities 4%
assets. Lenders used 42 per cent of the available Italian equities. 8 - Bonds on loan in
Europe as a percentage of lendable assets. Lenders used 9 per cent of the available German Equities 29%
Italian and French sovereign bonds.
Italian Equities 42%
Source: Risk Management Association

Total on loan as a percentage of lendable assets - North American

Treasuries/Bonds at Q2 2004 5 Total on loan as a percentage of lendable assets
Euro Denominated Sovereign Bonds at Q2 2004 8
Canadian Bonds (Gov't & Corporates) 11%
U.S. Corporate Bonds 10% All Other EURO Denominated Sovereign Bonds 8%
French Sovereign Bonds 9%

U.S. Mortgage Backed Securities 19%

U.S. Treasuries/UST Strips 78%

Spanish Sovereign Bonds 6%
German Sovereign Bonds 7%

U.S. Agencies 39%

Source: Risk Management Association

Italian Sovereign Bonds 9% Source: Risk Management Association

36 INVESTOR SERVICES JOURNAL


Continuing our series of analyses from participants rather than
observers; ISJ readers asked about the securities lending industry.
We asked the professionals for the answers.
Pauline Parker
“Comment on the provision of securities lending technology
to the front office. Are pension funds and lenders becoming
more automated or is there still a long way to go?”
Answered by Pauline Parker, a director of Global One
at SunGard Securities Finance
The agent lenders we have spoken to would say they are definitely
becoming more automated, but would agree that they have a long
way to go to catch up with the broker community.
The drive towards electronic trading and straight through process-
ing (STP) is clearly strong in some quarters and the systems are
tantalisingly close. However, one lender confided that a primary
reason for the general lack of trading efficiency within the lender
community is lack of investment in technology developments.
Multiple funds and portfolios, managed via multiple custodi-
ans and settlement systems, are challenges faced by the lender.
This complexity, together with increasing trading volumes at low
margins means that the option of moving towards automation is
gaining focus.
Sophisticated securities lending systems have the ability to
seamlessly integrate diverse systems and automate the composite
trade flows. This has particular resonance, notably for the
automation of general collateral reinvestments, for example,
interfaces to escrow agency collateral management service
providers result in providing a fully automated booking and set-
tlement facility for receipts and returns.
There are many existing areas of automation that help achieve
trading efficiency. These include the automation of settlements
through interfaces to industry standard electronic settlement
systems and the access to interfaces that allow a lender to take
feeds from brokers, counterparts, clients and custodians.
General collateral trading through automated borrowing systems
as well as electronic trading systems relieve pressure on low
value volume trading.
A high profile client driven demand for the lender is the delivery
of personalised reporting; the ability to automate reports and
deliver them by email is now considered to be the norm.
These, plus many other initiatives, allow the trader to concen-
trate on profitable quality business, for example tax trading or
exploiting market quirks.
There is a fear that the highly developed broker will favour the
lender who can link to their systems electronically. This market
force will clearly drive the lenders to seek more automation – and
why shouldn’t they take the challenge to increase their margins?
Analyse This... Securities Lending
Malcolm Clark
“How soon do technology vendors believe that full
automation of the securities lending transaction process
will be achieved, given that the European marketplace
is not as 'homogenous' as the US?”
Answered by Malcolm Clark, director at Anvil Software
To deal with the end of the question first: the range of European
securities lending platforms is a strength, not a weakness.
Competition encourages better systems to evolve over time. The
use of different systems by securities lending participants is not
a barrier to efficient and effective trading. All you need is a pro-
tocol for communication between them. FIX protocol and XML
messaging can solve the inter-system communication problems
that have been a constraint in times past. Let’s look at the
process securities lending players need to go through to initiate
a trade: - they need to understand their positions, current trans-
actions and collateral, and identify borrowing and lending
requirements and opportunities; - they need to locate matching
requirements and opportunities with their bilateral counterparts;
- they need to agree a fee or rate with the counterpart per stock;
- they need clean and efficient execution
Our trader’s securities lending system should handle the first
step. Using Anvil ARTS will help the trader maximise trading
and efficient collateral usage. The second step is often tediously
manual in today’s European market, involving communication
via e-mails, faxes and phone calls between bi-lateral counter-
parts. Fees are agreed, again via phone, e-mail or fax, and
each participant books a trade – with luck, they will match.
This second step, sourcing a counterpart with whom you can
execute a trade, is where modern technology can provide the
greatest assistance. Secfinex offers a centralised solution: par-
ticipants send their requirements in and see matches and other
players’ orders on Secfinex’s centralised “market”. But with
modern internet communications and an open messaging stan-
dard, market players can simply communicate their orders
directly with each other in an automated fashion. In addition to
the systems for securities finance trading, vendors offer order
matching engines.
This eliminates much of the manual effort involved in the last
three steps of trade initiation described above. Securities lend-
ing is fundamentally a bi-lateral trading environment; all the
more important for an open-source communication protocol to
be established. The technology is available now: we simply need
the securities lending community to embrace it!
INVESTOR SERVICES JOURNAL 37
Analyse This... Securities Lending
David Boyle
“Do existing system patches and upgrades hinder the
business objective and the technology solutions, which
brokers operate on today?”
Answered by David Boyle, operations director at
4sight Financial Software
The necessary patching and upgrading of technology solutions is
driven largely by the business itself. For many firms a strong IT
capability has long been a competitive necessity. As the business
has evolved, IT has helped create revenue opportunities, improved
efficiency and reduced costs by automating many processes that
were once manual. The advances in STP and the associated cost
savings have been especially important to us all in recent years.
The pace of change can be daunting, but I have to agree with a
leading firms’ spokesperson, who said that “only those who are
committed to technology improvements will remain at the forefront
of the industry”.
The goal that we, and your firms’ IT department, are faced with
is ensuring you (the broker) do not undertake an upgrade need-
lessly and for little or no benefit. We take the view that clients
should upgrade the system at least once per year and the upgrade
should have a clear value to the business. We understand that
your goal is to grow your business, and not to waste time manag-
ing changes to your IT systems.
One of the key responsibilities of any successful software solu-
tion is to ensure that upgrades keep pace with the changes in the
market and are in line with client’s expectations and requirements.
We ensure that functionality of our system, 4Sight Securities
Finance, is of value to our client’s businesses by maintaining a
roadmap of the functionality that we will be delivering to them and
when. This roadmap not only tells you what you are getting but
when you will get it, and allows you to plan your upgrade strategy
and minimise the disruption to your business.
As I mentioned, we have to ensure our upgrades match the
client’s expectations and requirements. Our User Group plays a key
role in achieving this. The Group provides a forum for the clients to
discuss new functionalities and agree amongst themselves the
relative priorities of these functionalities. We then work with the
clients to define the functional requirements and to ensure the
software delivered does indeed meet their needs.
The securities finance business will continue to evolve, systems
will change accordingly; firms’ ability to gain or maintain competi-
tive edge technology solutions will continue to play a pivotal role.
38 INVESTOR SERVICES JOURNAL
Mike Cosgrave
“Is there enough transparency among securities lending
auction platforms?”
Answered by Mike Cosgrave, senior manager of
securities lending and product development at the
Bank of Ireland Securities Services
There is no doubt that for certain participants in the securities
lending market the preferred mechanism for lending and
borrowing is via an auctioning process. The auctioning process
is very “deal oriented”, suiting those lenders who wish to extract
maximum value out of their loan portfolios, perhaps secure a
guaranteed fee, or possibly a combination of both; it suits those
borrowers who for the most part will gain exclusive access to
portfolios and therefore secure guaranteed supply.
At present there is no one centralised auctioning platform for
the market as a whole, but a collection of platforms that market
participants can choose from. These platforms co-exist with and
compliment the traditional telephone, e-mail, screen-based
process that has served the market well for many years and
continues to do so.
There are pros and cons to auction platforms. On the one
hand they offer efficiency and aid price discovery, but on the
other they do not necessarily offer the best basis on which to
build a long-term mutually beneficial relationship between
counterparties.
While there is an element of transparency provided by the
many auctioning platforms that exist, the level of that trans-
parency is naturally subjective given the proprietorial nature of
the platforms and the fact that they are not owned by the
market collectively, or another market “neutral” body. Until such
time as there is a centralised auctioning platform available to
all market participants (something akin to the foreign
exchange market perhaps) full and complete transparency will
remain a goal.
How far away is the market from achieving that goal? Maybe
not as far away as one might think. There have been significant
technology developments within the market even within the past
five years alone and it would be wrong to think that the market
will not continue to develop through technology.
At the end of the day it's people that drive the business and
human nature being what it is demands order, efficiency and
control - full transparency will come, it's just a matter of time.

Dan Kiefer
“Comment on the value of lending your portfolios, the
potential risks involved and how the industry has evolved to
the extent that some of those risks have diminished.”
Answered by Dan Kiefer, portfolio manager at
CalPERS (US pension fund)
Since February 2000, when the CalPERS Investment Board
approved a new strategy for our securities lending program,
CalPERS has benefited from a more efficient risk-return profile.
Through the success of the auction process that CalPERS
co-developed with eSecLending, we have consistently delivered
premium returns to our beneficiaries and efficiently matched
our assets with multiple providers.
The auction process enables us to move out on the efficient
frontier. It increases market efficiency by presenting our assets
directly to the borrowers, enabling CalPERS and its members to
retain a larger share of the revenues associated with the
lending process. We have consistently experienced excellent,
dependable returns via the auction model even in down markets
without extending CalPERS’ conservative risk profile.
In the most recent fiscal year (July 2003 – June 2004),
CalPERS earned approximately $103 million in securities
lending revenues net of fees, which is more than a 9 basis
points return on lendable assets.
The intrinsic value or loan fees contributed to approximately a
quarter of the earnings, while the remaining portion came from
reinvestment income. We achieved these returns by dealing
with only the highest rated counterparties and by managing the
cash collateral.
reinvestment program with a conservative strategy that
remains consistent with industry best practice.
Securities lending serves as a low-risk investment strategy
when properly managed under conservative guidelines. We
maintain a very close watch over all aspects of our multiple
provider programs to ensure that CalPERS appropriately
addresses and mitigates all realised and potential risks.
CalPERS embraces industry best practice and remains highly
influential within the industry to ensure our program continues
to successfully operate, while maximising total potential return
and minimising our risk profile.
Analyse This... Securities Lending
Olivier Grimonpont
“Comment on the future of triparty securities lending
and its use in collateral management?”
Answered by Olivier Grimonpont, director and head of
collateral services at Euroclear Bank
Triparty collateral management is still fairly new and growing in
Europe. Market professionals often use triparty service providers for
repo transactions. But over the past two years, we have seen our
business double in triparty securities lending (TSL).
There is a distinct trend in the market for more systematic usage of
collateral particularly as volumes continue to increase. Broker-deal-
ers and certain banks are heavily involved in proprietary trading or
prime brokerage, resulting in the need to collateralise more expo-
sures. This trend has and will continue to put pressure on borrowers
to find ways of optimising their entire inventory as collateral for those
transactions. At the same time, lenders are looking for extra revenues
from their portfolios to compensate for low market yields and/or
spread reductions. We also see much larger diversification in the
types of securities being used as collateral. Consequently, many new
lenders and borrowers are using triparty services.
The predominant use of securities over cash in Europe is likely to
continue, as it provides both lenders and borrowers with greater effi-
ciencies and lower reinvestment risks.
The current environment of high volumes, low margins and diversi-
fication (in term of lenders/borrowers and security types) supports a
compelling business case to outsource collateral management to a
triparty agent. This can maximise the use of small or low-rated
assets in the lender’s portfolio, while borrowers are able to control
their collateral exposures by stipulating concentration limits and eli-
gibility criteria.
Over the past few years, lenders and borrowers have been willing to
move beyond highly rated government bonds towards lower rated
securities, corporate bonds and equities as acceptable collateral,
which has created even more demand for expert collateral manage-
ment agents. The potential is huge, we estimate that only a small
portion of lending activity goes through a triparty agent today.
We also believe that the TSL market will be favourably influenced
by the continued growth in triparty repos. As more triparty repo
clients outsource their securities lending transactions to third-party
agents, they will increase efficiency and collateral optimisation by
using a single pool of collateral to cover exposures arising in both
types of transactions. Accordingly, we are convinced that the securi-
ties lending market will continue to grow, and that TSL will surpass
bilateral securities lending volumes within the next five years.
INVESTOR SERVICES JOURNAL 39
Analyse This... Securities Lending
Felix Oegerli
“Should securities lending clients outsource their
technology or implement vendor technology inhouse?”
Answered by Felix Oegerli, CEO of International
Financial Business Solutions
The question is rather open and could either refer to the
decision to “make” or “buy” technology, outsourcing processes
to a distribution partner or a transaction bank or outsourcing all
of the IT to a typical IT-service provider. Because the second and
third options involve are corporate IT issues, we will focus on
the issue of whether it is more beneficial to buy a software
package or to build an in-house application.
In the past the answer was typically dependent on the
flexibility of the business model, processes of the financial
institution and the flexibility of the vendor to provide partially
tailor made software to a client. A software package is always
less expensive and there is less project risk involved than
building an application from scratch. However, vendors can sel-
dom offer the full flexibility to build client specific versions due
to the costly maintenance of the solution. This is also because
the securities finance business is slowly moving away from a
product centric view to a global position view.
The reality is that smaller and medium sized industry players
are happy with standard software components. Large players
may use costly in-house solutions or a standard package for the
books and records. In-house functional add-ons or additional
data collections for consolidated position viewings and transac-
tions are often developed to at least partially fulfil the business
requirements. Consequently, a large number of heterogeneous
systems and interfaces must be supported and reconciled, lead-
ing to enormous maintenance costs and the risk of poor data
quality. Another knock-on effect is that, due to the complexity
and the high testing effort required, functional enhancements
are delivered at a slow pace.
As the IT-structure typically mirrors the business structure,
multiple departments have to be coordinated, which again is a
slow and costly process. So the answer is to buy a software
package and have it modified to meet specific requirements at a
relatively moderate additional cost. The precondition of such an
ideal situation is that a solution must have a modern and
flexible IT architecture.
40 INVESTOR SERVICES JOURNAL
Reza Lilipaly
“How will the securities lending market be structured in
five years time?”
Answered by Reza Lilipaly, director of securities
lending at ING
The securities lending industry is facing a period of turbulence.
Although the consequences of Basel II-regulation are not yet clear,
we are already seeing some interesting changes in the market.
These changes will certainly have a clear impact on our business.
The market is witnessing a change in the way lenders position
themselves towards borrowers. The role of the custodian-lending
agent is under the stress of change, for good and bad.
Beneficial owners, the participants of custodian-lending pro-
grams, are reconsidering the methods of their lending activities.
Beneficial owners with relatively smaller portfolios, who were once
active lenders themselves, have given their mandates back to the
custodian agent. To counter this trend, a big investor is currently
approaching the market directly via an auction platform.
Depending on the return on investment, beneficial owners will
decide on whether they should outsource (to a third party for
example) or not. Basel II may have a large impact on this
approach. It is possible that the role of the custodian agent lender
will be re-established after Basel II because of the costs involved.
Over the years, lenders who manage portfolios containing equities,
government debt paper or corporate bonds have seen a shift of
their outstanding balances from equities towards fixed-income
papers, leading to more involvement in money market and cash
management related activities. This shift in activities has been
stimulated by European tax-harmonisation (decrease in dividend
related trading). Furthermore, fixed income related lending has
become a more stable source of income. It can be said that the
use of the securities lending product as a cash generating and
funding instrument has assumed a more prominent role.
Perhaps it is now time to ask the following question: should the
traditional securities lending product be incorporated with other
activities such as fixed income repo or STIR-activities and in com-
bination with derivatives trading? Combining these functionalities
will benefit all parties involved, in terms of demand and supply.
It is difficult to predict where the securities lending market will
be in five years from now. Are more interesting cash-generating
products going to be developed in five years time? One thing is for
sure, these are certainly interesting times for the industry!
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Gone are the days when all a
hedge fund needed from its
prime broker was the satisfaction
of basic back office functions. As
the hedge fund industry comes
of age, prime brokers need to
keep up with increasingly
sophisticated demands from
their clients. So how are they
faring? Helen Yates investigates.
Prime Time
for Hedge Fund Servicing
The relationship a prime broker
develops with its clients varies a
great deal, from that of a passive service
provider, to that of a more active busi-
ness partner. Whatever form the rela-
tionship takes, the prime broker has to
understand and deliver what its client
wants. Until the hedge fund industry
took off at the end of the 1990s this was-
n’t too much of a concern, but with
industry growth came more competition
and prime brokers found they were sud-
denly under pressure to beef up their
services.
According to Eurohedge, total assets
managed by European single-manager
hedge funds now exceed $200bn. Its mid-
year survey (showing figures as at 30
June, 2004) showed an increase of over 70
per cent from the end of June 2003, and
of more than 25 per cent from the start of
this year. Globally, hedge funds manage
around $1 trillion of assets and this is
estimated to grow to between $2 and $6
trillion by 2010. Analysts estimate that
hedge funds currently account for 30 to
40 percent of equity market volume and
Prime Brokerage
up to 20 percent of bond and foreign
exchange markets.
Superior sophistication
The traditional offerings of a prime
broker include custody, settlement,
reporting, securities lending, cash lend-
ing, execution, leverage and pricing. Now
though, hedge funds are being wooed
with more sophisticated products and
services. Technology has become a key
element in the competition for clients,
while hedge funds increasingly choose
their prime broker based on value-adds
such as capital introduction, leverage
solutions, start-up services, STP and
sophisticated risk management.
The fact that prime brokers only really
earn their revenue from cash lending (to
support leverage) and stock lending (to
facilitate short selling) is no longer the
primary concern. Prime brokers now
need to offer a more sophisticated pack-
age to win and retain clients’ business. As
Brian Bisesi, co-head of equity finance
sales at Lehman Brothers understands it,
the whole concept of prime brokerage has
expanded “from a group of core operat-
ing services - clearing, custody, securities
lending - to becoming the relationship
management hub of the hedge fund busi-
ness within an investment bank. The
industry is getting more sophisticated,
and because of that prime brokers have
gotten very sophisticated.”
The majority of hedge funds use more
than one prime broker. This means prime
brokers need to be clear on their
strengths in order to effectively gear
themselves towards the particular service
that induces clients to select them. Pascal
Lambert, senior managing director and
head of global clearing services, Bear
Stearns International Ltd says “from a
“The fact that prime
brokers only earn their
revenue from cash
lending and stock
lending is no longer
the primary concern”
hedge fund standpoint, the need to use
multiple prime brokers depends on the
strategies it uses. It could be the need to
diversify stock lending sources or the
INVESTOR SERVICES JOURNAL 43
Prime Brokerage
need to ensure competitive terms from
prime brokers. Multi-strategy funds use
prime brokers based on their specific
strengths; and some would choose prime
brokers to benefit from different capital
introduction teams.”
Competition
In Europe, with the rapid growth of
the prime brokerage industry, the compe-
tition to service European hedge funds is
fierce. Those US-based firms with a small
or non-existent international prime bro-
kerage platform have been quick to catch
up. For old timers like Morgan Stanley,
the first to set up a prime brokerage plat-
form in London back in 1989, it is reap-
ing the benefits. Although it still ranks
within the top tier of league tables as
favoured prime broker, Goldman Sachs is
now hot on its tail. Stuart Bohart, manag-
ing director and head of international
prime brokerage, Morgan Stanley says
although there is a big difference between
the top tier, full service prime brokers
and those trying to get to that level, it
hasn’t made competition any less aggres-
sive. “Has competition increased? Yes
absolutely, it’s increased,” he says. “It’s not
just a Morgan Stanley show anymore.
Goldman has come after our business
and come hard, UBS comes after our
business, but that’s what we expect as the
industry grows. It makes us work even
harder.”
Keeping up with the competition
means keeping up with the alternative
investment industry. Hedge funds are no
longer the investment vehicles they were
four years ago when fund managers tend-
ed to adopt just one strategy and were a
lot smaller in size than the quasi-institu-
tional funds of today. Multi-strategy
funds require a multi-strategy prime bro-
kerage solution. “Hedge funds don’t like
silos,” explains Bisesi. “The big funds
trade multi asset class and get very frus-
trated when they have to deal with a
firm’s fixed income division for the fixed
portfolios and the equity division for the
equity component. They want a better
model. So what’s happening - certainly at
Lehman Brothers - is that prime brokers
are working hard at bringing all of these
services under one roof. This means one
set of reports, multiple financing mecha-
nisms (eg. stock loan, swaps, repo), cross
margining, listed and OTC derives, one
service team, etc - a true holistic service
44 INVESTOR SERVICES JOURNAL
all centred around benefiting the client.’
Get efficient
Prime brokers have understood and
managed the risk of the hedge fund
industry for years and an effective prime
broker understands the risk of its client’s
strategy and knows how to manage its
own exposure. Risk management however
generally means the management of eco-
nomic risks, such as market or credit risk,
and many hedge funds have remained
concerned that not enough due diligence
“The ultimate worry is
that a lack of
operational control and
repeated manual errors
could damage a fund’s
reputation irreparably”
has been paid to operational risk. This is
where technology and STP has an impor-
tant role for the future of the business, as
the only way to manage operational risk
is to improve operational efficiency. The
key attribute of both operational risk and
operational efficiency is the number of
times a trade is manually input into a sys-
tem - which ideally should only be once.
Despite the huge investment from many
prime brokers in technology, operational
efficiency is still quoted as a key concern
for the hedge fund industry. A recent
roundtable debate, hosted by Omgeo, the
post-trade, pre-settlement services
provider, and including leading partici-
pants from the hedge fund industry,
found that operational efficiency and risk
control are hampering a funds’ ability to
attract institutional investment. If prime
brokers cannot satisfy their clients’
demands for accurate reporting they will
fail to maximise the commercial opportu-
nities. Of course the ultimate worry is
that a lack of operational control and
repeated manual errors could damage a
fund’s reputation irreparably.
Automate or asphyxiate?
Despite industry concerns, most
prime brokers have invested in technol-
ogy with the intention of providing a
more efficient service. Barclays Capital,
Lehman Brothers and Dresdner have all
developed online systems. According to
Bisesi, Lehman’s electronic securities
lending platform eBorrow was an
important investment in ramping up its
business in Europe by providing opera-
tional efficiency.
For Bohart, technology spend is only a
key concern for those prime brokers
intent on offering a full-service product
across asset-classes. But in the short run,
he does not see smaller players losing
out on business because they are not
STP compliant. “If you want to be sec-
ond or third prime broker to a major
fund and provide some financing on
selected positions then you can do that
without the technology spend that say
Goldman or Morgan Stanley would have
to pursue in order to be the lead prime
broker and deal with the more complex
positions,” he says.
One worry for prime brokers surely
must be competition from technology
vendors. Any move to remove the role of
the prime broker as intermediary will be
cause for concern, as it will have a clear
impact upon revenue. Electronic securi-
ties lending systems is an area of huge
growth and platforms such as EquiLend,
SecFinex and eSecLending are designed
to cut out the middlemen by connecting
all parties and increasing price visibility.
And its not just securities lending.
Hedge funds that formerly relied on their
prime broker for complete technology
packages are increasingly requesting to
use only their prime broker’s core tech-
nology infrastructure. Instead, they are
acquiring technology from third-party
vendors or developing more sophisticated
internal financing desks. Lambert views
this as a natural step when funds evolve
in growth and size. “Some hedge funds
Brian Bisesi & Matthew Pinnock
of Lehman Brothers
Success is seldom an individual accomplishment
Since 1981, Morgan Stanley Prime Brokerage has been supporting many of the world’s largest
and most successful hedge funds. We strive to exceed our clients’ expectations.
We have built a complete range of services—from the most basic to the most customized—
to fit your needs, including enhanced securities lending products, capital introductions,
start-up services, detailed performance measurement, in-depth accounting systems and
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Prime Brokerage

have indeed reached such a size that they
try to ‘unbundle’ the service of the
prime broker,” he explains. “We are not
worried as such about it, as we retain a
very strong relationship with all those
groups, and we think it is a trend that
can only be developed by the very large
hedge fund ground which can afford to
develop the infrastructure to support it.”
unregulated, opaque investment
Global Prime Brokers
vehicles and the memories of Value of Assets Served
Long Term Capital
Management are beginning to Morgan Stanley 300
evaporate as alternative invest-
ments become mainstream. It’s
not happening yet, but one day Merrill Lynch 100
soon institutional investors
could feel comfortable without
an intermediary, investing Lehman Brothers 50

“The European directly into hedge funds,

believes Bohart. “Continued
environment is more flow from institutional money,
Barclays Capital 80

probably still going through the

regulated and that fund-of-funds route but also
0 50 100 150 200 250 300

regulation is for the looking at direct investment

into hedge funds, is going to be
Assets Served in US $ bn Source: ISJ

most part embraced”
If technology is an important success
factor for prime brokers, the positioning
of prime brokerage within an institution
is also crucial. While Morgan Stanley’s
prime brokerage business remains
behind the Chinese wall of custody and
separate from proprietary and trading
flows to ensure confidentiality, Lehman’s
sits between the equities and fixed
income to ensure a more multi-strategy
approach. As Bohart explains: “The loca-
tion of the prime brokerage business
within a financial firm is important and
Morgan Stanley is at the extreme end of
protecting client confidentiality. Some
other players take a less stringent view
the trend. The bigger hedge in the mid-1990s and while it became independent
in 2000, Lehman retained a 20 per cent share. “It is
funds will grow the fastest
because they can absorb that clear to us that the bigger guys are becoming more
and can develop the infrastruc- institutional,” says Matthew Pinnock, Bisesi’s col-
ture that creates credibility. The league and co-head of equity finance sales. “For
other thing I think will happen example, the top 25 managers in Europe manage
is that traditional asset man- almost half of the industry’s assets. This is where we
agers will start adopting some focus and will continue to focus.”
hedge fund styles and hedge
funds will begin offering tradi- What services can the typical prime broker offer?
tional long-only products with
an incentive fee structure.”
Skandinaviski
Largely ignoring start-ups Services Barclays Lehman Morgan
Fimat
a Enskilda
Merrill Lynch (Société
Lehman’s focus is on the more Offered Capital Brothers Stanley
Générale)
Banken AB
(SEB)
established funds. Bisesi
explains: ‘Whereas some other
prime brokers focus on market
share, Lehman has always Custody Y Y Y Y Y Y

and are more likely to mix the prime focused on the world’s largest Clearing and
Y Y Y Y Y Y
brokerage business with their sales and and most sophisticated hedge Settlement

trading staff.” funds that happen to pay the Global Trade

Y Y Y Y Y Y
Execution
lion’s share of the industry fee
Online
Hedge funds pool. We are totally consumed Research
Y Y Y Y Y Y

As with all financial sectors, regulators with plugging a customer into Derivatives
Y Y Y Y Y Y
have kept a keen eye on the hedge fund as many areas of the firm as Support

industry, but reform has arguably been possible. These funds then Collateral
Y Y Y Y Y Y
Margin Loans
more tenacious in the US than Europe. In become very meaningful to
the US, the Patriot Act and its require- Lehman and by the nature of Swaps Y Y Y Y Y Y
ments for greater disclosure has impacted this relationship allow Lehman Structured
Y Y Y Y Y Y
upon hedge funds and those who service to become more meaningful to Products
them. In Europe however, Bohart believes them.” Futures Y Y Y Y Y Y
regulators have achieved a healthy bal- The idea of hedge funds as
ance between “creating a stable environ- institutions in their own right is Foreign
Y Y Y Y Y Y
ment without hindering the ability of not so far fetched. At the time Exchange

hedge funds to innovate and find new of writing Lehman Brothers was Cash
sources of performance in the market. Y Y Y Y Y Y
still in talks to buy one of Management
The European environment is more regu- Europe’s largest hedge funds, Structured
Y Y Y Y Y Y
lated and that regulation is for the most London-based GLG Partners - Notes

part embraced.” which has a whopping Commodities Y Y Y Y Y Y

The hope is that regulation will contin- US$12.5bn of assets under Global Risk
ue to engender confidence in institutional management. Three Lehman Management
N Y Y Y Y Y

investors. The distrust of these formerly bankers originally set up GLG Source: ISJ

46 INVESTOR SERVICES JOURNAL

 PRIME BROKERAGE & SECURITIES LENDING

• Extensive stock loan supply

• Attractive financing options
• Timely market and account information

Prime
Capabilities

Scotia Capital has long been dedicated to adding value to hedge fund and alternative asset managers through a
full-service equity finance operation encompassing prime brokerage, securities lending, and synthetic financing solutions.
Our experienced and dedicated professionals are committed to providing comprehensive transaction expertise, timely
research and innovative ideas. Most of all, we are committed to building long-lasting client relationships.

Because great relationships deliver great results.

To find out more about our capabilities, contact:

Patrick Blessing
Associate Director – Equity Finance, Sales
Scotia Capital Inc.
+1 (416) 945-5356
patrick_blessing@scotiacapital.com

* Products. Industry Knowledge. Relationships.

www.scotiaprimebrokerage.com

*
Trademark of The Bank of Nova Scotia. The Scotia Capital trademark represents the corporate and investment banking businesses of The Bank of Nova Scotia,
Scotiabank Europe plc, Scotia Capital Inc. and Scotia Capital (USA) Inc. – all members of the Scotiabank Group and authorized users of the mark. Scotia Capital
Inc. is a member of CIPF. The Bank of Nova Scotia is incorporated in Canada with limited liability. Scotia Capital (USA) Inc. is a U.S.-registered broker-dealer, an
indirect wholly owned subsidiary of The Bank of Nova Scotia (BNS), acting as agent for BNS for various financial products in the U.S. The Bank of Nova Scotia,
Scotiabank Europe plc and Scotia Capital Inc. are each authorized and regulated by the Financial Services Authority (FSA).
Dublin - International Financial Services Centre

DUBLIN 1, REST OF THE WORLD - NIL

The International
Financial Services
Centre in Dublin 1
has guided the
Irish economy
from call centres
and hi-tech assem-
bly to Europe’s
fastest growing
financial service
sector.
Here is our guide
to those ahead of
the pack and up
for the craic.

48 INVESTOR SERVICES JOURNAL

 Dublin - International Financial Services Centre

Dublin's International Financial Services Centre (pictured along-

side), which was set up by the Irish Government with EU
approval in 1987, is globally recognised as a leading location
for a range of internationally traded financial services.

Did you know? # Barings (Ireland) Limited

# IIU Asset Strategies
# Reuters Limited

# International Fund Managers (Ireland) Limited 22. Exchange Place

- The Irish Exchequer collected more than 700 # Intuition Publishing # IFMS Ltd - Integrated Facility Management Services
million in corporation tax from IFSC companies # London Life and General Reinsurance Company Limited # IFSC Medical Centre
in 2002. # Scotiabank (Ireland) Ltd./ Scotia Capital # Metzler Ireland Ltd
# WestLB Covered Bond Bank plc # Porsche International Financing plc
- An estimated 10,700 employees work in the 3. La Touche House 23 Dublin Exchange Facility
IFSC, and this figure is expected to grow by # Bank of Ireland IFSC Branch # Baxter Financial Services Limited
1,000 this year. # Cariverona Ireland plc # Caradas Currency Brokers Ltd
# Diamond Airfinance(Ireland) Ltd # Celtex Futures
# Hibernian Investment Managers Ltd # Finex Europe
- More than 430 international operations are # IBM International Treasury Services Company # MKW Futures
approved to trade in the IFSC, while a further # Merchants Financial plc
700 managed entities are approved to carry on # Pfizer International Bank Europe 24 Multistory car park
business under the IFSC programme. # UniCredito Italiano Bank (Ireland) p.l.c.
# Zurich Bank 25 Jury’s Inn
# Jurys Inn Custom House
- According to the Central Bank, the net asset 4. KBC House 1 Harbourmaster place
value for collective investment schemes for 26 Authority offices
IFSC regulated funds was just under 300 bn 5. 2 Harbourmaster place
27 New Century House
at the end of March 2003. 6. International House 3 Harbourmaster place) # Bank Of Ireland Securities Services Ltd
# ANP International Finance # ICS Building Society
- The Irish Finance Act, 1986, introduced finan- # DEPFA BANK plc
cial incentives to encourage urban renewal and # Hypo Real Estate Bank International 28 Citigroup
# National Irish Bank # BBVA Ireland p.l.c
investment by the private sector. The Finance # Citigroup
Act 1987 established a special 10 percent cor- 7. Harbourmaster place # Transamerica International Reinsurance Ireland Limited
poration tax rate for certified companies set-
ting up in the IFSC. 8. Connolly Station Enterprise Building 29 Residential

9. Custom House Plaza 30 Shopping centre

- The initial designated site of the IFSC was 11 # Citco Fund Services Ltd
hectares of land in the Custom House Docks 31 Excise Inn
area of the Dublin's City Centre. 10. Custom House Harbour Apts+
32 Clarion Hotel
11 & 12 Harbour Master Bar and Restaurant / Shop
- In May 1997, the Custom House Docks 33 A&L Goodbody Solicitors
Development was dissolved. At this stage, the 13. Stack B
IFSC had 114,000 sq m of office accommoda- 34 National College of Ireland
14. Stack A 35 AIG Building
tion, as well as 333 apartments, a hotel, multi- # AIG Global Investment Corp. (Ireland)
storey car park and retail space, including a 15 Georges Dock 1 # AIG Global IFM
pub, restaurants and the Dublin Exchange # Cologne Reinsurance Company Ltd # AIG GITS
Facility. This area is now known as IFSC I. # JP Morgan # AIG GSL
# AIG Life (Ireland) Ltd
16 Georges Dock 2 # Caterpillar International Finance Plc
- A further 4.8 hectares of land has been rede- # Rabobank Ireland Plc
veloped to provide IFSC II, which includes # State Street International (Ireland) Limited 36 Commerzbank House
70,000 sq m of new office space. # CICM Fund Management Ltd
17 Georges Dock 3 # Commerzbank Europe (Ire)
# NCB Stockbrokers # Commerzbank International (Ire)

18 KBC House 37 Guild House

# KBC Finance Ireland # ACE European Market Insurance Ltd
# KBL Bank Ireland # AIB/BNY Securities Services (Ireland) Limited
# Captive Executive Services
Key 19 Georges Dock 5 # Captive Executive Services
# Bankgesellschaft Berlin (Ireland) plc # Demica (Ireland) Limited
1. AIB International Centres # DZ BANK Ireland plc
# AIB Capital Markets 20 Georges Dock 6 # FBD ICM
# Bankinter SA Dublin Branch # Airbus Financial Sevices # FBD IFS
# Bipop Finance Ltd # BNP Paribas Fund Services Dublin Limited # GMAC CMBE
# EMRO Finance Ireland Limited # BNP Paribas Securities Services 38-41 Chesterbridge Developments
# Generali Investment Management # BW Bank Ireland plc
# Intesa Bank Ireland plc 42 Community Training Workshop
# WGZ Bank Ireland Plc 21 Exchange Place
# Yapi Kredi Financial Services Ltd 43 Customs House Square
# MFXchange (Ireland) Limited
2. IFSC House # nSpire Re Limited 44 Campshires

INVESTOR SERVICES JOURNAL 49

Hedge Fund Administration
Offshore centres have always
been the favourite of esoteric
funds. But does increased
regulation have the ability to tip
the scales in favour of onshore
jurisdictions?
Game On or Off
50 INVESTOR SERVICES JOURNAL
The battle between offshore and onshore fund
domiciles is one that has intensified ever since hedge
funds entered the investment scene. On the one hand, reg-
ulation for onshore centres has provided investors with a
sense of security. On the other hand, the challenge of
keeping up with regulation has proved very costly for pro-
moters and fund managers. Lucky for some, the impact of
regulation on certain administrators is negligible. Ken
Somerville, director of fund accounting at PFPC
International, stresses that fund administrators should be
immune to where a fund is domiciled. “Because of the
nature of our business as fund administrator, we should be
able to provide investor services, NAV production and cus-
tody to a fund regardless of its domicile. The legislation
itself gives promoters more incentives to sell onshore
domiciles. We should be well placed to service those funds.
We seek to have operations in a number of locations, with
a large base in the US and in Europe. In order to get the
most out of emerging and existing domiciles, we have
elected to develop lines of business, which are serviced by
best-of-breed technology. Rather than restrict ourselves to
proprietary technology or more old-fashioned solutions to
service hedge funds, we have licensed best-of-breed soft-
ware from a range of vendors to service each of those
business lines, including investor services, middle-office
and trade support, NAV production and custody. That is
how promoters are better placed to create, sell and pro-
mote funds in either offshore or onshore domiciles. In
contrast to the manager, promoter or investor, we are not
as sensitive to the tax or regulatory implications of the
domicile. Our policy is to take advantage of best-of-breed
software.”
The primary consideration for the promoter, according
to Sommerville, is self-defining. “It boils down to how
much they can promote a fund based on where it is domi-
ciled. Anything that opens up a particular market to a
greater number of investors is an advantage. We expect
promoters to encourage managers to domicile funds in a
location that is most investor-friendly.”
Tax
The tax treatment of a domicile has a significant bearing
on promoters because it facilitates the attraction of capital
in a location, which is a good match for the investors’
needs. “As an administrator, we will be geared up to serve
all investors and enable promoters to devise a strategy for
the registration of a particular product,” says Somerville.
Offshore funds researcher Fitzrovia publishes six-
monthly figures on the worldwide funds industry, includ-
ing information on about 44 fund service providers in
Dublin. Its latest research values the Dublin funds industry
at $503.3bn. This figure, according to Somerville, says a lot
about the health of the fund industry and the financial
services market in Dublin. “On the one hand it says that
the market is buoyant and is growing,” he says. “Based on
the tax advantages of the domicile, there are a large number
of firms who are developing or who have the expertise to
take advantage of the market. The promoter is at a distinct

advantage, having access to a number of companies who
have provided fund services for a number of years. Service
distinction is also made easier in that providers have a
demonstrable track record. A revised tax law also carries
benefits for the manager, the promoter, the fund and the
investor. All of those areas are positively affected by legisla-
tion, which promotes growth in the funds industry. There
is a distinction between the larger funds who service insti-
tutional clients and the administrators who serve the bou-
tique businesses. The service offering is tailored differently
in order to match the needs of those funds.”
Location, location, location
Taking perspectives on the funds industry, where a large
number of funds were traditionally domiciled in the
Cayman Islands, Luxembourg, Dublin and Bermuda, a
handful of emerging domiciles have appeared on the
radar. Malta is currently promoting itself and the market
for fund administration looks promising. The Maltese
authorities are encouraging promoters to domicile their
funds in Malta and house their support services other
jurisdictions. “That can be a good selling point,” says
Somerville. “Malta is promoting itself very strongly at
present and the jurisdiction is one to watch.”
Hedge Fund Administration
For multinational fund manager Schroders, the most
important consideration for hedge fund domiciliation is
tax, rather than regulation.
“Investment management is usually carried out onshore,
but hedge funds may be based offshore (e.g. Bermuda ),”
says Jason Gardiner, director of compliance at Schroders.
“We expect promoters to encourage
managers to domicile funds in a
location that is most investor-friendly”
“We are happy to fall under the regulation of the Financial
Services Authority in the UK and we are also regulated by
the Securities and Exchange Commission in the US.”
Gardiner points out that increased regulation may be a
more complex issue for the smaller fund managers to deal
with. But he adds that the SEC's efforts to regulate hedge
fund managers should not be a show-stopper for estab-
lished managers. “Any extra costs are obviously unpopu-
lar, but we generally welcome regulation and we are happy
to operate in a regulated jurisdiction,” he says. Schroders
currently operates in about 12 jurisdictions. “If someone
wanted to go offshore to avoid regulation one would
Hedge Fund Administration
immediately have to ask why,” says Gardiner. “Thankfully
we have got to a significant size where we can cope with
regulatory requirements. We don't see the SEC as too great
a burden, but the smaller fund managers might.”
Burden
SW1 fund manager Dawnay Day, Olympia, takes a
slightly different approach to regulation. Despite a
favourable approach towards the regulation of commodity
trading advisors (CTAS) by the Commodity Futures
Trading Commission (CFTC), managing director Ian
Morley says that the subsequent intervention by the SEC,
which is proposing the registration of hedge fund man-
agers, may be to the disadvantage of the hedge fund
industry. “Rather than learn from the experience of the
CFTC, the SEC appears to be reinventing the wheel by
proposing the registration of fund managers,” says Morley.
“If regulation is forced by the SEC the drive
to bring funds onshore will not work”
“The SEC tends to be reactive, rather than proactive. The
main threat facing the hedge fund industry is that regula-
tion could become too bureaucratic for institutions and
high net worth individuals, who want to avoid overly
intrusive regulation as they rightly feel they can take care
of themselves. If regulation is forced by the SEC the drive
to bring funds onshore will not work. The FSA has taken
a more pragmatic approach but as of yet without the full
support of the Treasury.”
At this rate, it is unlikely that offshore jurisdictions are
losing sleep over the threat posed by onshore jurisdictions,
according to Morley. “Onshore managers are subject to the
rules of the regulator, whereas the funds are based offshore
and are not subject to the same rules,” he says. “The costs
of complying with the FSA's regulations have definitely
increased, particularly in the area of indemnification.”
Dual approach
Regulation has become a lot stricter, says Robert Schultz,
head of Bank of Bermuda GFS. “The SEC is making a lot
of noise about regulating the so-called unregulated hedge
fund industry,” he adds. “The off-
shore jurisdictions of Luxembourg,
Dublin, Cayman Islands and
Bermuda have always regulated
their fund industries through vari-
ous bodies. As an offshore admin-
istrator, our processes are based
upon the highest standards. We
have always implemented the nec-
essary anti-money laundering
requirements and KYC documen-
Robert Schultz tation. When the US Patriot Act was
enforced, some of the smaller
administrators were trying to figure out what it meant, but
it was not new to us.”
About 70 per cent of the funds that Schultz and his team
deal with in North America are domiciled in the Cayman
52 INVESTOR SERVICES JOURNAL
Islands and Bermuda. “Promoters want to take advantage
of the US investor base and are setting up master feeder
structures or parallel funds,” says Schultz. “An onshore US
fund normally has a Delaware partnership. This forces
administrators to be present in the US and offshore. It’s
not about a shift of funds from offshore to onshore, it's
about a shift towards properly consolidated services. Our
offshore investor services are carried out in Bermuda and
in the US while the accounting and valuation work is done
in New York. We work closely with our offices in Bermuda
and Dublin in order to serve the client properly.”
According to Schultz, smaller fund promoters and man-
agers might be struggling to comply with evolving regula-
tion for hedge funds. “In the US, and probably in Europe
over time, a fully fledged compliance department to deal
with KYC and AML requirements will be a necessity,” he
says. “Some managers may want to outsource those func-
tions to an administrator. The smaller administrators
need to beef up their compliance capabilities. It will
become very difficult for them to stay in the business.
To comply with the AML requirements you have to
ensure that the money going into a fund comes from a
proper source. The smaller administrators have a problem
with this because they are not big enough to put these infra-
structures in place. After all, having a compliance depart-
ment does not really add to your bottom line! It is more of a
cost than an added benefit, unless you outsource that func-
tion. The manager is responsible for compliance. He can
outsource certain compliance-related functions but it is still
his responsibility. He may rely on the administrator to a
certain extent but the liability still resides with the manager.”
Impact on fees
Like many administrators, the Bank of Bermuda believes
that increased regulation will impact on fee structures.
“The fees in the alternative business have declined over the
last couple of years,” says Schultz. “As people become more
efficient, the systems are working better and they can cope
with complex strategies. But fees will start to creep up
again because there is an added layer of responsibility,
which administrators can provide. We wont be able to
provide single fees for each client and will have to charge a
premium for our services. Fees will go up over the next
couple of years because of the added responsibility and the
manager's willingness to outsource more functions. We are
moving into a world of true outsourcing of front middle
and back office through administrators. More of the fund
servicing is being done in locations where administrators
can attract the proper talent. Servicing functions are being
moved from the Caribbean to the US or Dublin because
they can attract a higher calibre of staff. The Caribbean
can only hire up to a certain extent before they experience
visa complications. Most of the accounting valuation for
our new funds is done through New York while Bermuda
conducts most of the investor services.” As regulation
intensifies, so too does the rift between promoters who are
great and those who are small. The same can be said for
administrators and only those with the critical mass will
be able to keep up. ISJ
 Hedge Fund Administration

SEC votes on Hedge Funds
The Securities and Exchange Commission (SEC) has
voted to adopt new Rule 203(b)(3)-2 that will require
hedge fund advisers to register with the Commission
under the Investment Advisers Act of 1940 by February 1
2006. The rule is the culmination of an initiative to
study hedge funds and their advisers that commenced
over two years ago. Registration under the new rule will
permit the Commission to -
* collect important information about the operations
of hedge fund advisers, which represent a significant
and growing component of the US financial system.
* conduct examinations of hedge fund advisers.
* require all hedge fund advisers to adopt basic com
pliance controls to prevent violation of the federal
securities laws.
* improve disclosures made to prospective and
current hedge fund investors.
* prevent felons or individuals with other serious
disciplinary records from managing hedge funds.
The new rule will eliminate the ability of hedge fund
advisers to rely on an exemption from adviser registra-
tion designed for advisers providing advice only to a
small number of clients. The rule also contains special
provisions for advisers located outside the United States
designed to limit the extraterritorial application of the
Advisers Act to offshore advisers to offshore funds that
have U.S. investors.
The Alternative Investment Management Association
(AIMA) filed a submission in September on behalf of its
non-US members with regard to the SEC’s proposed
new rule. In response to the Commission’s most recent
decision, AIMA said it understood the new rules "will be
in substantially the same form as the draft rules pub-
lished in July, however, the final text of the rules will be
published within the next two weeks." AIMA will review
the text of these rules and advise its members of the
implications.
The Association will continue to work with the newly
established SEC task force to ensure that the status of
non-US managers already registered in their own juris-
dictions is taken into account. AIMA said it would strive
to avoid the difficulties inherent in separate and possibly
duplicative regulatory examination and enforcement
regimes and requirements.
ISJ

“THE SPECIALIST FUND SPECIALIST”

which is the only Hedge Fund Administrator in the world to be awarded a Moody’s Baa1 (MQ) Rating,
is the creator of
“The Custom House Fund Formation Service”
Custom House Administration & Corporate Services Limited (“Custom House”), which is the prime operating company of the Dublin based Custom
House Group, provides advice and assistance in the design, incorporation and establishment of offshore funds, as a turn-key package.

Custom House, who prides itself on its personal service, will create a tailor-made specialist fund, designed to suit a client’s particular specific objective,
taking care of all the documentation, legal and statutory matters. Custom House will also liase with the payment and custodian banks, brokers and
other service providers, including the auditor, to ensure that the creation and ongoing operation of the fund is carried out smoothly and efficiently
and
“The Custom House Fund Administration Service”

Once organised, Custom House will then provide a full administration service and oversee all aspects of the day to day operations, except for
the actual investment of the fund’s assets.

Custom House will maintain all of the fund’s books and records, carry out the valuations, calculate the NAV and handle all subscriptions and
redemptions, as well as overseeing payment of the fund’s expenses. Custom House will also be responsible for all investor (and potential investor) com-
munications and for the publication of the fund’s share price and performance data to investors, as well as the media services, directly, or on the Web,
through its CHARIOT (“Custom House Accessible Reporting In Open Technology”) secure web reporting platform for managers and investors.
_______________________________________________________
For further detailed information on Custom House and the services we provide, please visit our Website:

http://www.customhousegroup.com or please contact

Dermot Butler or David Blair

(dermot.butler@customhousegroup.com) (david.blair@customhousegroup.com)

Custom House Administration & Corporate Services Ltd.

25 Eden Quay, Dublin 1, Ireland; Tel: (353)-1-878 0807; Fax: (353) 1-878-0827
_______________________________________________________

Custom House Administration & Corporate Services Limited is authorised by the IFSRA under the Investment Intermediaries Act, 1995
Pension Fund Pooling
Pension fund pooling is evolving.
A divide is emerging between the
tax transparency of different
pooled structures and this sepa-
ration marks the old market from
the new. James Wallace reports.
Sink or Swim
Pension fund pooling structures
can be divided into two categories: on
the one hand are the traditional ‘look at’
vehicles including Irish Unit Trusts and
worldwide quoted and non-quoted
investment funds. On the other hand are
the relatively recent ‘look through’ vehi-
cles, comprising the Ireland-based
Common Contractual Fund (CCF) and
the Luxembourg-based Fondscommun
De Placement (FCP).
But, first, we need to take a look at the
basics. Pooled pension fund structures
have historically been part of pension
fund investment strategies. In essence,
pooling is where investment houses
group together assets from domestic or
global institutional investors into a single
pension fund vehicle.
The benefits of these structures are
clear: worldwide spread on the equity
markets which in turn reduces invest-
ment risk, lowers custody and manage-
ment fees and provides easier entrance to
more exclusive markets such emerging
market debt and high yield structures.
The latter is particularly true for smaller
funds.
54 INVESTOR SERVICES JOURNAL
Pension funds increasingly want to
invest through tax transparent pooled
structures, such as the CCF and the FCP,
to ensure they receive the same tax treat-
ment that investors would be subject to
through direct investment in equity mar-
kets. In particular, the problem posed by
non-transparency is rooted in the US
equity component of global equity port-
folios.
Regulations set by the United States
Internal Revenue Services impose a 15
basis points withholding tax on US equity
portfolios. And with the US equity com-
ponent of European pension funds’ glob-
al equity briefs at around 40 per cent, this
15 basis points tax drag is considerable.
This underlines the value placed in the
newer look through vehicles.
“Look through vehicles
are the future”
A closer look
So what are look through and look at
vehicles? Look through vehicles are where
regulators do not see the pooled struc-
ture, instead they directly see the institu-
tional investors and their regional origin.
In these structures there is no withhold-
ing tax. In look at vehicles regulators see
the pooled structure and not the
investors; as a result there is a withhold-
ing tax. In effect look through vehicles are
more tax efficient.
KAS Bank head of sales and acquisi-
tions Ben Kramer says: “Look through
vehicles are the future. You can pinpoint
to each of the tax authorities what your
holding in different stock is, thus
enabling you to efficiently reclaim tax as
an institutional investor. You cannot do
that in look at vehicles.”
Northern Trust vice president, product
manager Kathy Dugan says we are on the
brink of the CCF and the FCP starting to
compete for business. She adds:
“Northern Trust is implementing two
multinational clients in look through
pension fund pooling; one in the CCF,
the other through the FCP. And I think
we are the only company that currently
can support both.” The custodians’ role in
this is core. They must be able to support,
in an automated and integrated manner,
the granularity of reporting required by
the underlying pension fund investors. In
addition, there is the challenge of dealing
with technical tax and accounting issues

that result from multiple withholding tax
rates. State Street vice president Gavin
Nangle says: “Both of these tasks require
significant commitment from the custo-
dian, and an effective partnership with
their client, to ensure they collectively
stay responsive to changes in any jurisdic-
tional environment.”
Northern Trust's Dugan agrees and says
the fundamental tax work is complex. She
says: “The custodian needs to have systems
in place that will recognise how much
income each investor is receiving; what is
the appropriate tax rate on that dividend
income and capital gains tax each investor
has to pay. Those two things require new
systems if you are going to track that in a
pooled fund.” Northern Trust has devel-
oped such a system.
ABN AMRO Mellon head of multina-
tional product development Kerry Ann
White says: “Tax withholding and recla-
mation is certainly not a glamorous busi-
ness, but it is most definitely important
to ensuring that pension schemes receive
every euro that they have earned.”
Taxing tasks
Importantly, the goal for pension funds
is not tax avoidance but rather to receive
the same tax treatment that would be
realised through direct equity investment.
This complexity requires custodians to
have fairly advanced and robust systems
in place. Both Northern Trust and State
Street are currently developing systems.
The workload, then, for custodians is
increasing. In addition to tax reclamation
and other core custodial functions – such
as fund accounting, proxy voting, corpo-
rate actions and net asset value calcula-
tions – custodians are required to offer
performance measurement, risk analysis,
defined contribution administration,
transition management, commission
recapture and securities lending.
In Germany BNP Paribas Securities
Services says this master custody style
brief is starting to become the norm.
Business manager, global fund services
Dietmar Roessler says: “Our pension fund
clients increasingly ask us for daily per-
formance measurement data. They like to
know what impact market moves have on
their portfolio and we are able to provide
this to our clients on a daily ad hoc basis
via internet web-based platforms.”
Performance measurement is an essen-
tial part of custodians’ suite of services.
And, according to KAS Bank, they are the
best placed to offer the service. Kramer
Pension Fund Pooling
says: “We have bought the best software Added value
available for performance measurement But performance measurement is not
and we extract all the data from our cus- the only service that global custodians are
tody mainframe well placed to provide. They are also,
and provide some say, uniquely placed and qualified
reports to the to consolidate multinational pension
underlying clients. fund assets.
It is the best selling White adds: “One of the most impor-
tool for custodi- tant objectives is to be able to deliver
ans.” access to specialist mandates and global
ABN AMRO asset class allocation that otherwise is
Mellon’s White unavailable to smaller funds. Smaller cus-
agrees. She says: todians simply do not have the global
“To calculate the reach to support this unless they partner
most accurate with a global custodian for the foreign
Ben Kramer GIPS and AIMR assets held by the pool.
compliant returns, one really must track “In terms of providing a full suite of
each and every transaction and cash flow products to the multinational plan spon-
sor, I do think the smaller custodians will
“One of the most be somewhat marginalised. In terms of
the future for smaller custodians, this is
important objectives is just another nail in the coffin.”
to be able to deliver BNP Paribas Securities Services’
Biermann adds: “It is tough for the small-
access to specialist er custodians; they can only provide serv-
ices to local pension funds with local
mandates and global needs.” Those providers, though, will not
asset class allocation” necessarily be limited to small pension
funds, small custodians will still be able
that occurs in the pension fund. to compete for larger pension funds but
Custodians are already recording these increasingly only those, which operate in
transactions on a daily basis, so in domestic markets.
certain instances plan sponsors may find State Street’s Nangle says that while
themselves paying a third party vendor scale will inevitably assist in the more
excessive fees in order to replicate these complex pooling arrangements, that is
transactions.” not to say there is no place for the smaller
And BNP or niche player. He says: “The customised
Paribas Securities services of a smaller custodian, when
Services says that appropriately matched with the require-
its performance ments of their client, can prove to be a
measurement tool successful combination. The challenge
is an integral will be for those structures, once estab-
ingredient to its lished, to deal with any growth require-
success in the ments beyond their comfort zones, which
German market. may again bring this business back within
Performance the sights of the larger players.”
measurement KAS Bank agrees. Kramer says: “We are
company seen as a smaller custodian. But if you
Bella Jasani Russell/Mellon look at the bigger custodians and deduct
agrees. Marketing US assets you will see a different playing
manager Bella Jasani says: “Global custo- field. We are number one in the
dians have access to all the data to pro- Netherlands, the fourth largest institu-
vide performance measurement services tional market. We also compete in the
to their clients, both at an individual UK, where we have landed 14 new clients
portfolio level as well as the total fund. in the last two years.”
They already have the technology or The market, then, is indeed on the
resources to build the necessary platforms brink of change. One thing that is certain
but performance measurement is more is that global custodians are well
than simply numbers; presentation, inter- equipped to respond to that change and
pretation and reconciliation with asset adapt to an evolving market.
managers are as important.” ISJ
INVESTOR SERVICES JOURNAL 55
Pension / Hedge Funds
Ready for
Alternatives
Simon Thomas
In recent financial market
history no other asset class has
been as popular as hedge funds.
Simon Thomas of Thomas
Murray provides insight into
how institutions should
approach this form of
investment
56 INVESTOR SERVICES JOURNAL
The performance of alternative investments has
attracted many asset managers keen to launch funds,
professional investors and, more recently, institutional
investors excited by the mouth-watering performance
through exposure to absolute return vehicles. However,
recent performance has tailed off and arguably too much
money is now chasing too few decent hedge fund man-
agers. Consequently, significant institutional cash allo-
cated to alternative funds remains uninvested and expect-
ed future returns will inevitably be poorer than the mas-
sive returns experienced over the last five years.
Many investors coming into hedge funds for the first
time prefer to invest via a fund of hedge funds (FOHF)
structure, rather than directly into individual hedge
funds. Investing in hedge funds (HF) requires an in-
depth knowledge and understanding of various HF
strategies and a well structured due diligence process.
The perceived advantages of investing through vehicles
offered by FOHF managers are risk diversification, the
ability to outsource hedge fund manager selection and
monitoring and, the portfolio construction process.
Relationships
For a fund to function properly it needs to establish
various relationships e.g. with an investment manager,
prime broker, fund administrator(s) and custodian(s),
each of which will have clearly defined operational pro-
cedures. A fund’s infrastructure can be one of the criti-
cal factors in its success or significantly contribute to its
failure.
With the pressure on and too few decent hedge fund
managers around there is an increased risk that shortcuts
will be taken by investors as they accelerate their
appointment of managers and/or FOHF managers to get
their investment strategies in place. Historically most
investors have barely thought about the quality of under-
lying FOHF custodians or fund accounting, transfer or
valuation agents (suppliers). This is now changing. In the
European arena large institutional investors coming into
the alternative investments for the first time want, and
should, conduct extensive evaluations and due diligence
on suppliers.
However, it does not follow that because you are a good
traditional custodian bank that you are automatically a
good supplier to the alternatives investment industry.
Many custodians in the traditional world realised that
offering their services to the hedge fund community went
beyond their expertise. Consequently, they began their
support for the industry by entering into arrangements
with third party suppliers and some have more recently
been acquiring these specialist suppliers.
Suppliers
Having assessed many of these suppliers for major
FOHF managers and large institutional clients Thomas
Murray would rate most suppliers as less than satisfacto-
ry and lacking the operational knowledge to adequately
control most forms of alternative investment. Thomas
Murray has been staggered by the weaknesses in controls
and procedures within some suppliers to the alternative

investment industry. Equally worrying is
the huge skills gap between the specialist
expertise within operational staff of
some major FOHF managers and their
counterparts within some suppliers.
Since institutional clients do not gener-
ally have the available operational skills
necessary to evaluate and monitor hedge
funds, FOHF managers or their respec-
tive suppliers, it is a concern where they
look to their suppliers to monitor
arrangements as this skills gap potential-
ly exposes them. However, quite apart
from the skills gaps and weaknesses
referred to above, there is at times a lack
of adequate independence and separa-
tion of responsibilities between man-
agers, custody, fund accounting, transfer
agency and valuations.
We would argue that the construction
of many hedge fund contracts, service
level agreements and FOHF arrange-
ments, blending offshore and onshore
entities, is so obscure to most investors
that they will more than likely not prop-
erly understand what they are getting
involved in. Necessarily the alternatives
industry managers have sought to keep
their multi-layered reward system pretty
opaque. For instance, try understanding
the different levels of performance fee to
which managers are entitled to via their
mixers and offshore entities - add an
FOHF manager and you have a double
layer of fees, which maybe justified, but
needs to be understood and monitored.
The evaluation, appointment and
monitoring of suppliers to the alterna-
tive investment industry is, outside a few
groups, at best poorly done or is “in the
too difficult to deal with” box. The con-
trols and procedures necessary to secure
best terms and monitor performance are
often poorly understood and expose an
institutional investor to significant risk.
Much of the processing is manual in the
alternatives industry as every arrange-
ment is different. The ability to offload
responsibility to custodians is limited as
they generally act as agents and hence do
not take much responsibility for what,
for example, administrators of hedge
funds tell them. Monitoring invest-
ments, tracking trading, compliance,
equalisation, pricing and NAV, transfers,
corporate actions (including collapsing
series) and reconciliations are all areas,
which may be poorly controlled. Often
pending trades are not recorded on the
main securities movement and control
systems on the grounds that these can-
Pension / Hedge Funds
not cope when the price of a security
and the number of units traded is
unknown.
The choice of a service provider is
often not considered to be as important
as the right investment strategy. While
most investment advisers would spend
weeks or months conducting extensive
due diligence on managers they wish to
place their money with, in an extreme
situation they might select a supplier
within an hour conducting only basic
checks or just taking up client references.
The choice of service
provider is often not
considered to be as
important as the right
investment strategy
Progress?
Considering the pace at which the
hedge fund industry has become popular
it is no wonder that neither the financial
authorities nor participants have been
able to put in place adequate regulations,
procedures and controls in order to cre-
ate a sufficiently safe environment for
the investors. However, bit by bit
progress is being made and one such
area which is seeing significant change is
in the evaluation, selection and monitor-
ing of service providers where service
providers are having to staff up to cope
with the increasing number (and
variety) of RFPs being issued. The
industry is witnessing a move to more
structured approaches being applied to
the selection service providers.
The old approaches of either leave it to
your prime broker and investment advis-
er, or talking to one or two service
providers you know is fast disappearing. Thomas Murray Alternative Investment Services
Now-a-days many investors conduct
comprehensive due diligence on the TMAIS offers investors / investment managers free
service providers recommended to them access to its e-RFP platform and alternative invest-
in the investment process in order to ment evaluation and selection questionnaires to sup-
ensure that they work together with port the evaluation of custodians, fund accountants
reputable and creditable organisations and transfer agents, with a supporting supplier serv-
which can satisfy their service require- ice matrix to assist groups in considering how to
ments. Due diligence can be conducted include in a RFP mandate.
either by the interested party directly or For further details of the e-RFP Tool or if you wish
through a specialised consulting practice to learn more about TMAIS services please contact
which provides independent assessment Simon Thomas on +44 (0)207 830 8300 or by email
of the service providers based on the on sthomas@thomasmurray.com or Roger Fishwick
in-depth knowledge of the industry and on +44 (0)207 830 8300 or by email on
experience. ISJ rfishwick@thomasmurray.com
INVESTOR SERVICES JOURNAL 57
Pension Fund Stewardship

A Question of Trust Institional brokerage experts Instinet examine

the challenges facing pension fund trustees.
Investor services are finally ascending the
priority scale.

The Myners Report on institutional investment has

given Instinet many reasons to be excited, particularly
as the drive towards transparency in the trading process
increases. As a consequence, the broker commissioned
Richard Davies Investor Relations (RD:IR) to uncover the
challenges facing pension funds in the area of transparency.
“Thankfully, the understanding of
transaction costs has increased
beyond fees and commissions”
“The research aims to uncover the degree to which the UK
pension fund industry has adopted Myners’ recommenda-
tions and the extent to which fund managers report their
broker selection and the commissions paid for execution
and non-execution services,” explains Julia Streets, head of
marketing and communications, Europe at Instinet.
“There has been an increase in the number of investment
committees in the pensions sector. Professional trustees
are lending their expertise to the average trustee in order
to help them understand various trading issues.”
Instinet was created in 1969 to offer agency only broker-
age services, without a proprietary trading desk. The com-
pany positions itself as a neutral partner for clients who
wish to trade in multiple domiciles. Instinet derives its
income from trade execution and pledges to never reveal
the identity of its client to the market.
“Trustees have a wide range of issues they need to grapple
with, namely making the right investment decisions,
employing the right allocation strategies and fund admin-
istration. Thankfully, the understanding of transaction
costs has increased beyond fees and commissions.
“The hidden costs of execution strategies have also come
under the spotlight. Hidden costs include market impact –
what happens when traders start to execute trades and the
market moves away from them. There is also a greater
understanding of implementation shortfall i.e. when a
fund manager makes a decision based on research and
instructs his trading desk, the shortfall is the difference
between what is presented on paper and the reality of
what happens when you actually enter the market. Clients
trade with us anonymously. This enables them to better
manage their implementation shortfall.”
According to Streets, the next main area of trustee
understanding with regard to transaction costs will
include settlement and trading costs, particularly on the
European Exchanges.

On Trust? - the choices available and time spent by trustees. Breakdown of services obtained under
soft commission arrangements
Others (including proxy voting services) 0%
Investment-related seminar fees/publications 1%
Advice on dealing in, or on the value of, any designated investment 1%
Custodian services 2%
Computer hardware & software, dedicated phone lines 3%
Valuation % performance measurement services 11%
Research, analysis and advisory services 25%
Market price services, electronic trade, confirmation services 57%

0% 10% 20% 30% 40% 50% 60%

Source: Oxera

What are the most important tasks trustees perform for the pension fund? (2004 findings)

Other 1%
Trustees’ compliance with Myners 6%
Administration of scheme and/or supervising administrators 9%
Deciding Scheme Allocation strategy 30%

Ensuring compliance with statutory regulation 14%

Ensuring appropriate funding level 17%

Reviewing a scheme portfolio performance 23%
Source: Instinet

58 INVESTOR SERVICES JOURNAL

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Hedge Fund Performance

Hedge funds gain momentum in third

quarter, reaching $890bn in assets.
The hedge fund sector posted a 0.9 per cent The $264 bn Equity Hedge sector, which remains by far
performance gain for the third quarter 2004, the largest single-strategy fund category, stemmed its 1.2
largely reversing a 1.0 per cent loss in the second per cent negative performance in Q2 with flat perform-
quarter of this year, according to results published ance in Q3.
by Hedge Fund Research, Inc. (HFR), a hedge fund
information and performance data. The $102.3 bn Macro category, which makes leveraged
bets on anticipated price movements of stock markets,
Based on the HFRI Fund Weighted Composite Index, interest rates, foreign exchange and physical commodi-
which measures equally weighted performance across 19 ties, returned 0.3 per cent in Q3 versus a loss of 3.3 per
distinct fund sectors, the industry also saw $16.9 bn in cent in Q2. Despite the swing into positive territory, the
net asset inflows in the quarter, a marked improvement sector has retuned only 0.6 per cent year to date.
over the $7.5 bn in inflows seen in the second quarter.
Strategy-specific arbitrage fund categories ($44.6 bn
AUM increases Convertible Arbitrage and the $14.2 bn Merger
As a result of stronger inflows and performance gains, Arbitrage) languished with performance slightly down to
total hedge fund assets under management rose to $889.8 flat in both categories during the quarter. Fund flows
bn, up 2.7 per cent from the $865.9 bn tallied at the end slowed considerably in Convertible Arbitrage and Merger
of the second quarter. Year-to-date, hedge funds have Arbitrage posted a $342 million outflow of funds in Q3
returned an overall 3.57 per cent and have seen $46.6 bn (2.4 per cent of total assets in the category).
of inflows.
Given the rise in crude prices, the $4.1 bn Energy sector
Highlights - multi-strategy category experienced a robust quarter, returning 8.8 per
One overriding sector trend that emerges from the Q3 cent to investors.
2004 data is the rising popularity of multi-strategy funds
such as the $116.7 bn Event Driven category (inflows of The $24.2 bn Technology sector category experienced
$3.1 bn in Q3) and the $110.2 bn Relative Value significant turbulence in the quarter, posting a negative
Arbitrage category ($2.2 bn in Q3 inflows). 4.8 per cent return while seeing asset outflows of more
than $1 bn.
These funds, which are designed to offer a heightened ISJ
level of diversification to single fund investors, have
recently enjoyed significant
inflows. HFR data shows that Hedge Fund Research Inc. Performance Summary in percentage points
year-to-date, Event Driven and HFRI HFRI HFRI HFRI HFRI HFRI HFRI
Relative Value categories have
Index Q1 2003 Q2 2003 Q3 2003 Q4 2003 Q1 2004 Q2 2004 Q3 2004
returned 5.4 per cent and 3.4
per cent, respectively. HFRI Convertible Arbitrage 4,58 1,93 0,01 3,12 1,88 -1,93 -0,04
HFRI Distressed Securities 4,62 10,48 5,29 6,47 4,86 3,21 1,88
The $26 bn Emerging Markets HFRI Emerging Markets (Total) 1,2 13,61 10,33 9,87 9,65 -4,96 5,22
sector, which invests in foreign
securities or the sovereign debt HFRI Equity Hedge -0,85 8,23 5,67 6,3 3,45 -1,23 0,02
of developing countries, saw a HFRI Event-Driven 2,17 10,07 4,75 6,39 4,1 0,92 0,35
sharp 5.2 per cent performance HFRI Fixed Income: Arbitrage 2,11 2,74 1,48 2,71 1,65 1,26 1,38
return in Q3 reversing a 5.0 per
HFRI Fixed Income: 1,41 7,87 1,42 5,93 3,06 -1,47 0,23
cent drop in Q2. HFR attributes Convertible Bonds
the turn-around to the resiliency
of the Chinese economy, which HFRI Fixed Income: Diversified 2,38 4,65 1,35 3,06 1,73 -0,78 1,14
quickly shrugged off the pes- HFRI Macro 2,15 7,53 4,91 5,37 3,81 -3,34 0,29
simism that had predominated
HFRI Market Timing -1,19 7,93 2,52 5,51 1,49 -1,23 -1,73
in Q2.
HFRI Merger Arbitrage 0,03 3,51 2,05 1,71 1,69 -0,67 0,24

The $41.7 bn Distressed HFRI Regulation D 5,2 6,6 5,37 2,01 4,98 1,16 -2,69
Securities category notched HFRI Relative Value Arbitrage 2,45 2,87 1,27 2,8 2,21 -0,41 1,56
another strong performance
with a 1.9 per cent return in HFRI Sector (Total) 0,85 13,18 5,21 6,52 4,74 -1,61 0,06
Q3. Year-to-date, the category is HFRI Short Selling 2,71 -12,38 -5,08 -8,43 -2,55 2,44 3,04
up 10.3 per cent, leading all HFRI Fund Weighted 0,82 7,74 4,36 5,47 3,71 -1,01 0,88
other non-sector categories. Composite

60 INVESTOR SERVICES JOURNAL

 Mandates

Winning at the Teeside fund. “As an internally-managed fund, we under-

Formula
Global custody providers had a lot to
smile about during the month of
October. With giant pension plans
seeking more than just core services,
providers who can add value look set
to win more business.
While mandate victories may be few and far between, the quest
for a provider who can offer a suite of services, including securities
lending and commission recapturing should not be underestimat-
ed. Pension fund trustees are becoming increasingly savvy and
transaction costs have appeared on the top of their agendas.
Custodians who can deliver services that help monitor costs are
emerging as pension fund favourites and are able to hold on to
their mandates in a brutally competitive environment. Northern
Trust, for example, was reappointed as global custodian of
Middlesbrough Council's £1 billion Teesside Pension Fund. The
appointment was made on the basis of competitive pricing and
quality of service. Northern Trust's approach to service delivery was
a major factor in the decision of Fred Green, head of investments
Month Winner Client Location Assignment
stand that the smooth-running of the custodian relationship is of
particular importance,” he said.
BNP Paribas continues to make significant inroads into the Asia
Pacific region and was recently appointed as custodian by the
Office of the Protective Commissioner in New South Wales.
Commenting on the mandate, Chris Briant, head of business devel-
opment at BNP Paribas Securities Services said: “This is the OPC’s
first full outsource and as such, it was crucial to them that their
chosen provider understands their requirements and has the
resources to ensure that their unique needs are met. At a time
when our major competitors are downsizing, we continue to grow,
through a number of recent investment manager outsource and
master custody wins.
BNP Paribas is not the only provider tallying successes in the
Asia Pacific region. State Street currently provides investment serv-
ices for almost 60 percent of the SITE investment funds in Taiwan.
In the past six months State Street has added 14 new mandates to
service SITE funds, bringing the total to 28 new mandates in the
last 18 months, most recently from Allianz Dresdner Asian Pacific
Dynamic Strategy Fund; Fuh-Hwa Global Balanced Fund; Polaris
Global Short Duration Diversified Bond Fund; and Prudential
Financial Global Selection Fund. SITE funds, aimed at collecting
investment funds from the public, were established in 1983 in order
to provide an investment channel for small investors and to intro-
duce more sophisticated investment behaviour to the Taiwanese
securities markets.
Mandate Size

October Northern Trust Michigan CC US Global Custodyy -

October BNP Paribas Master Super. Australia Global Custody $400m
October BNP Paribas OPC NSW Core Cusstody -
October Plan Admin. MWA US RecordKeeper -
October Northern Trust LAFPP US Global Custody $11.9bn
October Northern Trust Teeside Fund UK Global Custodian £1bn
October State Street Clore Duffielld UK Global Custody £63m
September State Street Illinois State BofI US Global Custody $10.4bn
Seeptember Vanguard Teleflex, Inc. US RecordKeeper -
August Nationwide RS City of LA US RecordKeeper $30m
August Front Capital City of JHB SA Software -
August DSTi MOSERS US Software ASP $5.2bn
August State Sttreet MPS UK Investor Services £460m
August State Street TIAA-CREF US Investor Services £110bn
August BNY Threaddneedle UK Lift-out deal -
August Watson Wyatt NEXT UK Consulting -
August Capita Hearts. NEXT UK RecordKeeper -
August BNP Paribas MBF Australia Australia Investor Services -
August Fidelity Univ. of Calif. US RecordKeeeper $8.4bn
August TKP Pension SPUW Global RecordKeeper -
August Citistreet Oregon PERF US RecordKeeper £582.3m
July ANZ Trust Co. Aus Australia Investor Services -
July Kas Bank Norcos Global Investor Servicess £320m
July Aus. Admin. Christian Sup. Global RecordKeeper £155m

INVESTOR SERVICES JOURNAL 61

Spanish Custody
The Real Madrid
The imminent takeover of Abbey
National by Banco Santander
Central Hispano shows the rest
of the world the Spaniards
mean business. ISJ reveals the
might of the banking and
investment markets in Spain.
62 INVESTOR SERVICES JOURNAL
A change of government in Spain from Popular to
Socialist rule may have placed the financial sector on
the back burner, but service providers are determined not
to let politics get the better of their burning ambition, to
be as big as possible. Bearing this in mind, mergers and
acquisitions come as little surprise in the Spanish securi-
ties market.
But with not much left to acquire, players like Banco
Santander Central Hispano looked and appear to have
found opportunities abroad. BSCH itself is the product of
a merger between two Spanish banks. The bank's securities
services division is one of the largest holders of institu-
tional assets for domestic, foreign and self-issuers. The
division has spent the last few months fine-tuning its sys-
tems to adapt to a new matching system for over the
counter trades, introduced by the CSD Iberclear. “The
existing matching system is not efficient enough for OTC
trade settlement,” says Antonio Alarcon of BSCH. The
dates for Iberclear participants to begin testing the new
matching system have been established for November 15,
2004. The Iberclear Technical Committee has proposed a
preliminary date of February 7, 2005 for the implementa-
tion of the system, called Sistema Unico de Case (S.U.C.).
“During the second phase of implementation, planned for
late 2005 and 2006, the new matching system will focus
on debt transactions,” says Alarcon.
The Spanish CSD is set to change the way it communi-
cates with members through SWIFT, by using SWIFT for-
mats to help standardise the market.
The Spanish regulator is concerned about the exaggerat-
ed number of open bank loans within the CSD and its
members’ books. “The number of stock loans is increasing
and the regulator will force them to clean their books,”
says Alarcon. For foreign investors, Spain's beneficial own-
ership requirement has provided another source of confu-
sion. “There is a misunderstanding among foreign
investors who may seek to abuse the beneficial ownership
requirement through the use of the facility available at
Iberclear to handle stock loans. The regulator is demand-
ing that banks and brokers clean and cancel their open
loans. As soon as the system is cleaner, it will follow a basis
point tariff on the remaining stock loans open in the
books of both Iberclear and its members, but not neces-
sarily in the books of customers.”
Now that the Spanish banking market comprises only a
handful of players, further consolidation seems unlikely.
“We don't see any more consolidation in the field of secu-
rities services, which is only a component of the different
business lines of Spanish banks,” says Alarcon.
As the product of a partnership between the securities
businesses of CDC IXIS and Banco Urquijo, CDC Urquijo
was created four years ago and has a foot in the institu-
tional market for the provision of custody and settlement
services for mutual funds, pension funds, insurance com-
panies and foreign financial institutions, which invest in
Spanish equities. CDC Urquijo also offers securities servic-
 Spanish Custody

es, including IT, for other Spanish banks.

Daniel MacPherson, operations manager at CDC Urquijo,
describes the key market drivers for his bank: “The
Spanish mutual funds industry has increased, not only in
terms of mutual funds investing in the Spanish market but
also in foreign securities and other mutual funds.”

Investment funds
Spain has adopted the UCITS directive in order to boost
its share of the mutual funds industry. According to the
Directive, foreign and locally registered mutual funds can
now operate in Spain. Spanish funds can also be commer-
cialised outside of the country. The text of the UCITS
directive has been reviewed and the law itself will be
passed by the end of the year.
The structure of the Spanish SICAV will be very similar
to the structures in France, Luxembourg and other
European countries. The UCITS directive will
allow for the creation of hedge funds, with cer- “With the new law, the asset management
tain limitations, in Spain. Individuals will be
able to access hedge funds by investing in a
companies could create specific hedge funds in
mutual fund, which invests in hedge funds. Spain, which was not possible in the past”
Provisions for this activity will be ratified into
law at the end of this year. The new law for mutual funds
and SICAVs allows these institutions to participate in
securities lending programs, and in the creation of hedge
funds. “With the new law, the asset management compa-
nies could create specific hedge funds in Spain, which was
not possible in the past,” says Macpherson. “There could
be investment limitations to this development, where only
institutional investors would be allowed to invest in
Spanish or foreign hedge funds.”

Hedge funds
With the implementation of the UCITS directive pend-
ing, the Spanish market has embraced the idea of hedge
funds investment. “The most active asset managers are
waiting for this possibility,” says Macpherson. “They have
reported a demand for hedge funds among their clients. In
markets that are very flat, alternative investments or hedge
funds generate incentives for the investors.”
CDC Urquijo is a depository for more than 350 mutual
General index of the Madrid Stock Exchange
funds and SICAVs. This figure constitutes 20 asset man-
900
agement companies. “Some of these companies could Index
800
eventually create hedge funds and we could provide
depository, custody and settlement services for these 700
funds,” says Macpherson. “Asset managers will probably 600
create the facility for hedge funds in Spain. But they are 500
awaiting more precise regulation for mutual funds. It is 400
unlikely that asset managers will become interested if the 300
investment limitation is too restrictive. But the final text of 200
the legislation is still unclear. From our point of view, we
100
are unsure of the limitations, but it is expected that asset
0
managers will definitely contemplate hedge funds activity.
10-10-03

10-12-03

10-03-04

10-08-04

11-10-04
10-02-04

08-04-04

10-05-04

09-07-04
10-11-03

09-01-04

10-06-04

10-09-04

Through a set of circulars from the regulator, the govern-

ment will be more precise on the investment restrictions
for hedge funds. Once the legislation has been passed, the Source: Bolsa de Madrid

INVESTOR SERVICES JOURNAL 63

Spanish Custody

regulator will send a set of rules and recommendations to

asset managers and depositories for hedge funds activity.”

Consolidated infrastructure
Spain has streamlined its securities settlement infra-
structure by merging the central securities depositories
(CSDs) for fixed income and for equities. The final prod-
uct will have links with the relevant CSDs in Europe. In
the last year, the Bank of Spain, which operated the CADE
platform for the settlement of fixed income instruments,
was integrated with Iberclear, the platform for all other
securities. Commenting on the change, MacPherson says:
“The consolidation of the CSDs is a positive step.
Nowadays, investors can trade on major stock exchanges
with very few limitations. The real barrier to consolidation
in Europe is the clearing and settlement infrastructure.
The infrastructure is plagued by the lack of a common for-

“The creation of a unique CSD is a long way off,

but it is something that should be achieved
through co-operation”
mat for securities registration, different taxation aspects
and different settlement rules. It will be many months
before we reach a common European legislation, which
will impact clearly on clearing and settlement. Iberclear is
open to consolidation proposals arising in Europe. The
creation of a unique CSD is a long way off, but it is some-
thing that should be achieved through co-operation.”
For all its glory, Spain’s new matching system has failed
to provide a solution to the country’s age-old share regis-
tration problem. “At the moment, trade matching is facili-
tated at the custodian level i.e. when one of the counter-
parties places an instruction with Iberclear, the other
counterparty receives all the information from Iberclear
Values of cash traded on the Spanish stock exchanges
(registration, cash amount, value date etc.),” explains Jose (Thousands of Euros)
Morante, assistant client relationship manager at BBVA.
Sept 2004
“From February 7 2005, the matching will be facilitated
Aug 2004
by Iberclear. Counterparties will place instructions in the July 2004
Iberclear system. Iberclear will match these instructions June 2004
and send trade confirmation to counterparties. May 2004
In the case of a mismatch, the information provided by April 2004
the new system will include the details sent by the coun- March 2004
terparty. Iberclear will inform the counterparty of the reg- Feb 2004
istration discrepancy but not the full name of the other Jan 2004
Dec 2003
counterparty's instruction. As a result, investors and bro- Nov 2003
kers have to contact to their counterparty in order to solve Oct 2003
the problem. Spanish players who are specialist in the Sept 2003
clearing business will have to explain this new situation to
30,000,000
20,000,000
0

50,000,000

60,000,000
10,000,000

40,000,000

70,000,000

foreign brokers, who must provide the correct and full

name of the trades to their Spanish agents.”
Despite the level of expansion achieved by Spanish banks,
full development of the clearing and settlement infrastruc- Source: Sociedad De Bolsas
ture has to be affected before market growth can continue.

64 INVESTOR SERVICES JOURNAL


Food for Thought
by Bolsa de Madrid (the Spanish stock exchange)
The process of “internationalisation” undertaken
by Spanish companies in the past few years has
reached unprecedented momentum in our eco-
nomic history. Spanish investments abroad
account for more than 60 per cent of GDP and
over the last five years, Spain has ranked within
the 5th and the 10th of investor classification and
9th in terms of investment inflows.
During the second half of the 1990s, when
globalisation of the world economy was at full
throttle, the major Spanish companies saw the
Latin American region as the natural scenario for
their expansion. According to CEPAL data, Spanish
direct foreign investment in the region exceeded $
70 bn between 1996 and 2003. Spain became
the largest investor in Argentina and Colombia, the
second largest in Brazil, Chile and Venezuela and
the third largest in Mexico.
Spanish banks such as BBVA and BSCH chan-
nelled their investments towards Latin America,
where they leveraged themselves as the leading
companies in their respective markets.
Other sectors included power and telecommunica-
tions, which represented few expansion opportuni-
ties in Spain for companies such as Endesa,
Repsol and Telefónica. These companies identified
major growth opportunities in Latin America.
The Latin American economic crises may have
inhibited the flow of Spanish investments into the
region, but prospects for the next few years are
again positive and a resurgence of Spanish invest-
ment in the region is expected.
Spanish companies are well positioned in the
banking sector and it is expected that they will
carry out important cross border operations with-
in the EU.
Bolsas y Mercados Españoles, BME, is one of
Europe's four leading operators of financial mar-
kets and systems. The Group encompasses the
companies that direct and manage the securities
markets and systems in Spain and comprises the
Barcelona, Bilbao, Madrid and Valencia stock
exchanges, MF Mercados Financieros (Derivatives
and Fixed Income markets), Iberclear and BME
Consulting.
BME’s services cover the entire securities value
chain, including trading on the Spanish equity,
fixed-income and derivatives markets as well as
clearing and settlement in a one stop-shop. The
Group also provides its customers with a range of
financial and IT consulting services. The company
advises other market operators on the implementa-
tion of IT systems and offers advisory services to
companies who wish to list on the Spanish market.
Spanish Markets
The creation of Iberclear in April 2003 resulted
from a merger between the SCLV (“Servicio de
Compensación y Liquidación de Valores, S.A.”)
settlement platform for the equities and the CADE
(“Central de Anotaciones del Mercado de Deuda
Pública”) fixed income platform, which was man-
aged, until April 1, 2003, by the Bank of Spain.
Iberclear is the Spanish Central Securities
Depository, in charge of both the register of securi-
ties held in book entry form, and the clearing and
settlement of all trades from the Spanish Stock
Exchanges, the Public Debt Market, the AIAF
Fixed Income Market, and Latibex (the Latin
American stock exchange denominated in Euros).
In January of this year, the Spanish market
began to offer the 20 best bid/ask prices for each
security listed on the Stock Exchange
Interconnection System. The objective was to
improve and adapt the Information Distribution
The Latin American economic
crises may have inhibited the
flow of Spanish investments
into the region, but prospects
for the next few years are
again positive and a resur-
gence of Spanish investment
in the region is expected.
Service to the international financial community.
Overall, 2004 has been positive for the Spanish
economy, with healthy business volumes, bright
prospects for earnings and dividends and a solid
base of economic fundamentals.
A new era is dawning and it is important for
Bolsas y Mercados Españoles to take advantage of
a bright future. The Spanish markets are assuming
their role as economic drivers, aware of their social
and economic importance and their obligation to
ensure balance and symmetry.
M&A activity has contributed to growth in the
Spanish market’s capitalisation and trading vol-
umes thanks to an increase in the number of
shares in circulation and foreign investors who own
shares in Spanish companies. Between 1995 and
2003 the market capitalisation of the Spanish
stock exchange has increased four-fold and trading
volumes thirteen-fold.
BME will continue to increase its product and
service range and stay attentive to new develop-
ments in the European stock exchange scenario.
Iberclear will continue to contribute to the
development of the European securities settlement
landscape, while proactively representing the views
of its participants in the international arena.
INVESTOR SERVICES JOURNAL 65
Case Study - Transfer Agency
There is a saying that goes ‘if the
incentives are right, everything
else will fall in line’.
In an exclusive case study for
ISJ, Hubbard Garber, partner at
Barrington Partners, presents
the tale of a US-based mutual
fund complex that made some
grave record-keeping mistakes
and the steps taken to resolve
the problem
Unforeseen Consequences
Paying a sub-recordkeeper by basis
points or by account seems like a
simple decision, but it is an incentive
nonetheless. Basis points provide incen-
tives for growing
assets, and
account based
payments
incentivise the
growth of
Hubbard Garber
accounts. In the
case of our client,
they developed
new retirement
products around
the incentive of
how they produced revenue, through
account fees. These products were
introduced in the mid to late 1990’s and
were highly successful. They appealed to
mid to smaller companies, which were
launching retirement programs. The
administration costs for these plans were
reduced as a large number of accounts
were opened. However, the accounts
were generally opened with little or no
66 INVESTOR SERVICES JOURNAL
assets, and were only funded by payroll
deduction. By the time the company
realised the problem they had created,
about 2000 company retirement pro-
grams were already in existence.
The consequences, although gradual at
first, were compounded in no time.
The number of accounts within the
transfer agency system was significant.
By 2004, over 200,000 accounts each had
less than $500. As a result, the average
account balance for the fund complex
fell dramatically. Transfer agency system
costs increased, making the funds less
profitable and less competitive in the
marketplace. The mutual fund board
became concerned and began to ask for
explanations.
“Basis points provide
incentives for
growing assets”
Events like these raise a fundamental
question: what are the inter-relation-
ships within a fund company complex
that are normally left alone?
Issues to be addressed
There are a number of key issues, which
the mutual fund complex should
address. These include:
- The allocation of expenses between
large and small funds can either
put too much expense-related
pressure on the large or small
funds, thereby impacting their
competitiveness.
- As transfer agency operations
efficiency is improved, who is
impacted? The funds or the margin
of the transfer agency provider?
- Cost drivers within the transfer
agency operation, in the case of the
mutual fund complex, exceeded two
thirds of technology/systems and
workflow and printing/postage, and
less than a third of staff.
- How do funds pay the fund
company for transfer expenses?
- Does this payment allow a margin,
does it provide the right incentives?
When the mutual fund complex
engaged our services, their expenses

were considerable. All aspects of the
transfer agency operation were up for
consideration. Over 14 projects
reviewed all aspects of operations. Over
half of these projects were inward facing
and the other half involved comparing
methods against the industry or
considering new operational configura-
tions. Due to the size of the issue, our
focus had to concentrate on issues that
had considerable impact on the cost of
operations.
“one staff member
takesan average of 70
calls per day, and the
ability to significantly
reduce the costs of
the operation will be
impossible through
staff reduction alone”
This pushed our focus to the following
areas:
-Alternatives for technology (retire-
ment system, transfer agency system,
workflow and imaging system)
-Alternatives for staffing; outsourcing
part or all of the operation
-Printing and mail bids
However, reducing costs in these areas
will not solve the problem. Problem
solving requires a review of the internal
payment methods:
-Payment for sub-accounting
-Allocation of expenses between
funds
-Method that the funds (and fund
board) use to pay the management
company
Consultant’s role
-Any consulting firm, who is sum-
moned to advise on the operations
of the mutual fund complex, has the
following to think about:
-Reconsider baseline operational
methods
-Compare the fund complex with
competitors
-Research on service centre efficiency
-Consider making changes that
would not otherwise be considered
Case Study - Transfer Agency
and enacted
-Address the difficult allocation
issues with management & the board
Baseline operations
In conjunction with the client, we
developed 14 projects, intended to
address the issue of smaller accounts
and overall costs. These projects ranged
from efficiency processes to changing
the transfer agent’s technology.
Half of the projects were internally
managed, while others involved a com-
bination of resources.
Outward facing research
One of the key strengths we are able
to bring to a project such as this is our
outward facing research capability. In
this instance, we are in the process of
contacting 10 mutual fund groups who
are competitors on a fund to fund com-
parison or have similarities in the type
of distribution or comparable complex
type. Some of the firms we have
approached have similar problems, and
we are interested in determining what
they are doing to react to the problem.
It will also help us avoid mistakes by
observing what other firms have
learned from their efforts.
The other outward facing research is a
survey of proprietary agents/brokers
who distribute the fund product.
We are working on a list, consisting of
a range of individuals, labelled:
-Low producer, frequent caller to the
service centre
-High producer, frequent caller to the
service centre
-High producer, not a frequent call to
the service centre
This research is intended to tell us
about systems that can make the service
centre more efficient and automated in
order to cut down on staff levels.
However, we are aware that one staff
member takes an average of 70 calls per
day, and the ability to significantly
reduce the costs of the operation will be
impossible through staff reduction
alone.
Another benefit of these calls is an
understanding of how brokers see the
proprietary fund family and how to
encourage them to open larger accounts
instead of smaller accounts.
“The fund group under
observation needs
to remain competitive
by fixing their small
account problem,
or they will lose the
ability to grow and
retain assets”
The small account issue
Solutions to the small account issue
are not easy to come by. Operations can
focus on minimums, account fees and
other solutions, but distribution execu-
tives will be involved. While the issue is
being addressed and significant progress
has been made to reduce the addition of
new accounts, it will take a considerable
length of time to significantly change the
average account size on the books.
Large impact items
Large impact items focus the cost effi-
ciency effort on addressing key items
that drive costs. The cost drivers of this
fund group are technology and out-of-
pocket expenses. An RFP, which is in
progress, will consider a range of solu-
tions for technology, outsourcing per-
sonnel and changing printers, for exam-
ple. This firm has already considered
most of the ‘standard’ items that address
costs. Our task now is to consider the
possibilities beyond those that are stan-
dard practice today, to consider the risks
involved and the approaches to limit
those risks.
Innovation
There are times when the spark for
innovation is inspired by forward think-
ing. But at other times, the cause is a
messy clean-up of some past mistakes
and this requires doing things in new
ways that would not be required if the
situation were status quo. In this case,
the fund group under observation needs
to remain competitive by fixing their
small account problem, or they will lose
the ability to grow and retain assets.
Without new sales, the future of this
fund group is certainly in jeopardy. ISJ
INVESTOR SERVICES JOURNAL 67
Technology Outsourcing
The past few years have seen a
rapid rise in the number of
business process outsourcing
(BPO) deals among investment
management firms. Rekha
Menon reports.
BPO
– getting with
the programme
Choosing to focus on their core competency of
making investment decisions on behalf of their
clients, investment managers have been outsourcing their
back office operations. The main beneficiaries of this trend
have been the large custodian banks such as State Street,
Bank of New York, BNP Paribas, JP Morgan and Mellon.
According to Daniel Lessner, research analyst at
Datamonitor and author of a recent report on asset man-
agement technology in Europe, the outsourcing phenome-
non has predominantly been driven by custodians pushing
their services aggressively to customers. “Asset management
firms started recognising their back office as an efficiency
burden and were very happy to hand over the back office
operations to custodians who were pushing their case for
the same. Custody is becoming a commoditised business.
To increase their margins, custodians have been looking at
new services to offer,” says Lessner. He adds, “While BPO is
still a low margin business, the attraction of these kinds of
relationships is that they provide an opportunity to push
68 INVESTOR SERVICES JOURNAL
other high margin services like securities lending.”
As outsourcing picks up speed and custodians look to
increase their market share, one segment of the market
that seems to be getting adversely affected is technology
vendors of asset management solutions. “There are two
key trends, the consolidation of back office technology
systems by asset managers themselves and back office
outsourcing to custodians,” states Lessner, explaining that
both these trends were shrinking the market for
technology vendors.
For those asset management firms that have outsourced
thus far in the hope to gain greater efficiency and cost
advantages, there are no official figures yet about the bene-
fits that they have achieved. Calling asset management
outsourcing in Europe a very
young industry, Datamonitor’s
Lessner says: “Right now only one
or two custodians are actually into
developing IT infrastructure plans,
others aren’t doing much. Till date
most custodians have primarily
focused on aggressively setting up
their presence and gaining market
share and only later will they look
at improving margins.” To improve
their efficiency and offer better cost
Daniel Lessner savings to their customers, it is
essential for custodians to invest in scalable and sophisti-
cated technology solutions and it is here that there is a
new business opportunity for vendors of asset manage-
ment technology. “As custodians plan to ramp up their
BPO operations, they are looking at the technology sys-
tems they have in place and thinking of replacing it with
best of breed solutions,” states Lessner.
“As custodians plan to ramp up
their BPO operations, they are
looking at the technology
systems they have in place and
thinking of replacing it with
best of breed solutions”
Changes
Well aware of this trend, technology vendors are equip-
ping themselves to the needs of the changing market. “For
us it opens up a new market and new opportunity. We are
experienced in corporate treasury outsourcing and hope to
transfer those experiences here,” says Arnaud Leconte,
product manager for asset management at Trema. Trema
provides integrated solutions for the front-middle-and-
back-office for asset management firms.
“We recognised this (outsourcing) trend a couple of
years ago and we’ve created our strategy accordingly,” says
Kim Holloway, global sales director at DST International
Limited, a vendor offering a vast range of solutions for the
investment management industry. “On the back office
process side, we have targeted custodians. Custodians like

StateStreet, Mellon, BNP and JP Morgan, all use our fund
accounting software. For our existing clients, it means that
it is easy to move to a custodian who is using our solution
for they both would be using the same software,” explains
Holloway. In addition, DSTi is focusing very strongly on
front office products in the areas of decision support and
compliance where the demand is very high. “For those
vendors that are focused only on the back office, the future
looks scary,” says Holloway.
For or against?
Holloway however adds that not all asset managers are
outsourcing saying that some of DSTi’s clients have evalu-
ated outsourcing but decided against it. Lessner says,
“Some large asset managers
might think that it gives them a
greater competitive edge to man-
age their back office operations
internally because they then get
the benefits of efficiency much
quicker than earlier. Also, in
some instances, outsourcing is a
culturally sensitive issue such as
in Italy because such deals usual-
ly include a people element.”
Notwithstanding such examples,
Kim Holloway Lessner believes that outsourcing
will continue. “The growth rate is very high. Every deal
will increase the market and custodians are very aggres-
sive,” he says.
It is surprising that in a market that offers such high
growth potential, thus far only custodians have made a
mark, while traditional non-bank BPO players such as
IBM, EDS and Accenture have remained rather quiet.
Industry experts suggest that the primary reason is the
tremendous equity that custodians have built over the
years with the asset management community. In addition,
some of them like State Street also have an experience of
handling their own asset management business. The key
ingredient missing in the traditional vendors is credibility
in the investment management operations space. DSTi’s
Holloway states that in this market, it is important for the
service provider to offer more than merely manage the
back office operations and custodians fulfil this criterion
by offering custody, BPO and several other services. “My
personal view is that you need to be adding significant
value than just fund accounting,” she says.
“Traditional BPO players are not as desperate as the cus-
todians. They have stood and watched this market devel-
op. In addition, custodians have deep pockets. They are
currently looking for market share and will later focus on
profitability and efficiency, which is not a route adopted
by the traditional BPO players, who focus on low cost and
efficiency from the very beginning,” states Lessner.
Despite their inaction in this arena, traditional BPO
players are keeping a close watch and are beginning to get
their act together. “Not only custodians, but consulting
companies like IBM and exchanges too are looking at this
outsourcing space and we are working with them,” states
Trema’s Leconte, refusing to divulge the name of the player
they are working with.
Technology Outsourcing
Lessner believes that while it is questionable whether tra-
ditional BPO providers can catch up with the develop-
ments of the past one to three years and enter the market
with stand-alone offerings, there is a viable case to be
made for partnerships between these traditional BPO
providers and custodians or banks. Citing the example of
IFDS, which is a partnership between State Street and DST
Systems to offer transfer agency services, Lessner says that
in the long term, such relationships could potentially be
very successful..
FUNDsoft -launches funds administration
IT on demand
Since its inception in 2004, FUNDsoft has fought
against the trend of outsourcing to keep its inherited
client base. “In our experience most companies want to
outsource a degree of their fund administration,”
explains Mark Culham, client and partner manager at
FUNDsoft. “Some of them may not want to fully out-
source, but would rather find a halfway house. The new
COBAS Bureau service from Fundsoft is that halfway
house.”
As an extension of COBAS, FUNDsoft's fund adminis-
tration platform, the Bureau service was conceived after
dealing with a particular client who needed more flexibil-
ity in their back office. By using the COBAS Bureau serv-
ice, the client can administer their own funds as well as
control compliance and regulatory functions without any
IT burden.
“With COBAS Bureau, clients don't have any imple-
mentation costs and neither do they have to buy hard-
ware or software,” says Culham. “They simply pay a sin-
gle annual fee based upon their level of business that
incorporates everything they need to run their funds
administration. This effectively gives them the Bureau
service 'on demand', while retaining as many in-house
people as they want in order to access COBAS over the
web. Every function they ever had with an in house prod-
uct can remain the same with the Bureau service.”
FUNDsoft is in the process of launching its first client
onto the Bureau service in order to quickly achieve
economies of scale. Culham explains: “In partnership
with ITEX in the Channel Islands we are placing a signif-
icant investment into infrastructure and we are guaran-
teeing the service will be accessible 24 hours a day.
Getting that first client is always the biggest hurdle to
overcome but even this has now been solved with the
first scheduled to go live in Q1 2005.”
Traditionally targeted towards the large corporate,
COBAS is now pitched at the SME market through the
creation of the Bureau service. “We wanted to start off
by going after boutique fund managers who are used to
common IT platforms such as Microsoft or IBM,” says
Culham. By the end of the first quarter of 2005
FUNDsoft hopes to expand the Bureau service to
include other solutions such as workflow, analysis tools
and document management and imaging. “We will still
look to offer our traditional solutions on a licence pur-
chase basis but the way forward for FUNDsoft is giving
clients the most cost effective solutions within a model
that suits them and us,” says Culham.
INVESTOR SERVICES JOURNAL 69
Regulation - Risk
Regulators are determined to
leave no stone unturned in their
quest to protect investors, but
increasing regulation may have
wider implications for the asset
management community.
Fionnuala Synnott examines the
hidden costs behind the paper-
work.
Regulatory
Challenges
World-changing events like 9/11
and financial scandals such as
Enron and Worldcom have led to a flurry
of regulatory activity within the asset
management industry. As the market
economy matures, regulators across a
number of jurisdictions have begun to
recognize the need to monitor the activi-
ties of investment management firms, in
a bid to ensure that clients are receiving
adequate protection for their investments.
Many of the most significant regula-
tory changes, including the Patriot Act
and Sarbanes-Oxley, have been US-led
“We have had to devote an increasing degree
of resource to making sure that we comply
with regulators’ demands”
but their implementation has far-reach-
ing consequences for today’s global
companies. European regulators have
been far from idle with the Financial
Services Authority in the UK and the EU
actively responding to regulatory issues
affecting the financial community.
70 INVESTOR SERVICES JOURNAL
The cost of compliance
Regulatory zeal has impacted everyone
in the financial services industry, from
hedge funds to pension funds. Although,
historically, asset managers have been
used to operating in a regulated environ-
ment, the regulators’ renewed interest in
their activities has seen them place a new
importance on compliance. Simon
Pilkington, vice president of State Street
Investment Manager Solutions, says: “As a
result of these regulatory changes, clients
have to invest more in control and
reporting systems and are looking for
ways to invest effectively”. This, in turn,
has made asset managers more demand-
ing of their service providers, including
custodian banks.
Increasing reg-
ulatory activity
has led to soaring
compliance costs.
Robin Saunders,
risk management
executive for JP
Morgan Treasury
and Securities
Services in
Europe, Middle
East, Africa and
Simon Pilkington Asia, says: “We
have had to
devote an increasing degree of resource to
making sure that we comply with regula-
tors’ demands”. As well as high compli-
ance costs, custodians and fund managers
face high legal costs as they seek the
advice of external counsel to interpret the
new regulation.
In order to meet the expectations of the
regulators, a significant amount of
resource is also being invested in IT solu-
tions. Of late, even the least technology-
minded fund manager seems to have real-
ized the importance of investing in
automation and good technology systems.
Not investing enough in the appropri-
ate IT solutions can result in false econo-
my. A recent study by consultancy firm
Ernst & Young claimed that one of the
greatest barriers to compliance with the
Sarbanes-Oxley Act is weak IT systems.
Indeed, if IT systems are not designed
 Regulation - Risk

effectively the quality of reporting may fail to meet the
appropriate reporting standards. Quality data is also cru-
cial to the reporting process.
Pilkington says: “Good technology provides the client
with a controlled environment in which to operate in”. In
this new, technology-aware environment, the onus is on
the service provider to provide the client with proven tech-
nology solutions that minimise and mitigate risks.
Pilkington adds: “The challenge for us is to create a con-
trolled environment in which clients can carry out their
responsibilities”.
The global challenge
For the majority of custodians, keeping up with the
sheer volume of new regulation is a challenge in itself. One
custodian, who wished to remain anonymous, said: “We
are drowning in EU directives and FSA consultation
papers and are suffering from indigestion”.
But, in an increasingly global market where firms seek a
single mantra by which to run their business, the major
difficulty lies in the implementation of regulation, both on
a local and cross-border level. Saunders comments: “The
real challenge lies not in coping with the volume of regula-
tion but in implementing the regulation throughout a
number of different jurisdictions”. He adds, “For global
companies such as ours it is critical to develop local com-
pliance systems to protect clients in the individual juris-
dictions”.
Interpreting regulation
Increasing regulation is not likely, per se, to drive further
outsourcing deals as an avalanche of issues come into play
when an asset manager considers doing something as
momentous as outsourcing part of its operations.
Pilkington adds: “We are seeing a trend towards out-
sourcing, which will continue. The regulatory aspect just
adds to the list of decision criteria and adds another ele-
ment to the mix”. Although asset managers and pension
funds are outsourcing compliance to custodians, an FSA
regulated company cannot outsource its underlying regu-
latory responsibility. Meanwhile, although custodians
sometimes invest in compliance systems such as those pro-
vided by the likes of Latent Zero, they are less likely to out-
source compliance to third parties.
The wider implications
Recent regulatory activity has led to concern among
asset managers that the industry is becoming over regulat-
ed and that, in the long-run, it could prove to be anti-
competitive by limiting the creation of new industry play-
ers and products. It is felt that some of the recent regula-
tion is too broad for such a niche market and that, by try-
ing to be everything to everyone, the regulator is being
counter-productive.
“Good technology provides
the client with a controlled
environment in within
which to operate.”
Legislation such as the European Savings Directive seeks
to protect both the average retail investor and large-scale
sophisticated institutional investors. But many custodians
question whether this kind of legislation is necessary in
the UK where the institutional investor market is well
developed and relatively sophisticated compared with its
European counterpart.

Talking Technology
It is not only the service providers who
are feeling the heat of regulation.
Technology vendors have offered their
services to institutions, which have fretted
over the costs of complying with evolving
regulation. According to Mike Foley, man-
aging director of Peter Evans, compliance
has become a major concern. “The
financial services sector has been exposed
to a host of new laws,” he says. “Our cus-
tomers are approaching us, concerned
that there are about 43 pieces of legisla-
tion which they have to implement by the
end of this year! But it is not just our sec-
tor that is affected, the regulators are also
addressing the laws for the insurance and
mortgage industries.”
According to Foley, new European regu-
lations have proved difficult to understand
and to absorb. “They are very complicat-
ed,” says Foley. “The Investment Services
Directive, in particular, forces anyone sell-
ing financial products to create a robust
audit trail. This impacts directly on IT sys-
tems. “Europe is moving towards a UK
and US style of regulation whereby it feels
that transparency can enable investors to
make proper decisions on how to invest.
They want to ensure that regulation is in
place to ensure that investors are advised
correctly. This corresponds with best prac-
tice guidelines in the UK and the US.”
While outsourcing remains a key discus-
sion point, Foley argues that institutions
have different opinions on why they
should outsource. “It depends on market
conditions,” he says. “When volumes are
down, the financial institution is more
likely to outsource. When markets are up
the institution will look to bring some
operational functions back inhouse. But
institutions will hold on to standardised
functions, which they need to support
themselves. Vendors can bring various
ingredients to this equation and imple-
ment best of breed technology. Customers
no longer want vanilla products because
this will not help them to remain competi-
tive. We work with the customer in a part-
nership and can implement solutions at
various levels, from the front, middle to
back office.”
While custodians continue to create a
stir by announcing a host of lift out deals
with prominent financial institutions, ven-
dors believe there will always be a demand
for best of breed solutions. “The days
when core services were enough to sell are
gone,” says Foley. “Custodians don’t have
all the answers to all the questions. Best
of breed is the better approach and we
intend to tailor our approach to the cus-
tomer’s needs, whether this means keep-
ing the IT inhouse or integrating elements
of our software.”

INVESTOR SERVICES JOURNAL 71

Regulation - Risk
Custodians’ relationship with the regu-
lator can be tense at times. The FSA’s
recent withdrawal of its proposed capital
adequacy rules has led some custodians
to question the competence and indeed
the motives of the regulator in a market
that is dominated by (what one custodi-
an referred to as) the FSA’s “cottage
industry” of consultation papers.
However, not everyone shares this
opinion. Pilkington is more philosophical
in his appraisal of regulators’ contribu-
tion. He says: “There is a level of consis-
tency that will be beneficial and a level of
inconsistency that will be challenging”.
“There is a significant time, and more
critically, cost to market for new
providers. These solutions are
complex and require an investment in
people, project management expertise
and IT systems -none of which can be
acquired overnight.”
Capitalising on compliance
Increasing regulation need not be a
wholly negative development and may
have some commercial advantages for
canny custodians. Compliance, at its
best, could represent a significant source
of revenue for custodians acting in their
fund administration role with reporting
and data compilation representing rich
pickings.
One consultant, who preferred not to
be named, said: “Basel II requires banks
and financial services firms to have three
years’ operational risk data by event
type. This is something that custodians
could provide as an outsource service
for their clients but have been slow to
do. In general, custodians have been
slow to capitalize on the commercial
business potential of compliance”.
The hidden costs of regulation
No one disputes the need to protect
investors from illegitimate practices but
there is concern among the asset man-
agement community that regulators may
sometimes lose sight of their main
72 INVESTOR SERVICES JOURNAL
objective and exert an anti-competitive
stranglehold on the industry.
New service providers, in particular,
will find the current regulatory environ-
ment challenging. Saunders comments:
“There is a significant time and more
critically cost to market for new
providers. These solutions are complex
and require an investment in people,
project management expertise and IT
systems-none of which can be acquired
overnight”. Sheenagh Gordon-Hart, head
of Strategy and Research at JPMorgan
Investor Services, added: “This need for
proper professional reporting will play
to the strengths of major global
players and make it difficult for
the peripheral players in tomor-
row’s world”.
There is no doubt that,
increasing regulatory activity is
causing costs to soar.
The cost of complying with
regulation, the legal costs paid
to external counsel to interpret
the legislation and investment
in IT solutions are just some of
the most obvious costs to hit
fund managers and custodians
alike. But the new regulation
may have wider
implications for the asset
management business.
In a recent analysis conducted by
consultancy firm Oxera, the cost of
regulating the market in the UK was
significantly higher than in other
European countries. Although this
discrepancy can partly be explained by
the maturity of the UK market and the
high overheads paid for a location in the
City of London, it is seen by some as
proof of the FSA’s overbearing nature.
It is feared by some market
participants that, in a worst case
scenario, this heavy-handed and costly
approach to regulation will lead some
asset managers to relocate outside the
UK, perhaps even outside the EU.
Whether or not this comes to pass
remains to be seen but what is clear is
that the burden of regulatory change will
fall on the end client. As it seems
unlikely that shareholders will be willing
to foot the bill for these added regulato-
ry costs, they will filter down to the end
investor, who will pay for them either via
funds, added performance fees or
diminished dividends. ISJ
 The Securities Lending Forum
The British Museum, London
Tuesday 1st March 2005

A new event for the industry…

Mark Faulkner and Bill Cuthbert have been hosting, attending and
participating in securities lending events for over a decade. Like you,
we understand what works and what doesn’t, what’s appropriate
and what isn’t. We have a track record of delivering innovative and
creative programs. Our goal is to deliver an informative event that
will have lasting relevance.

For further information and a full agenda, log on to

www.securitieslendingforum.com

To register please fill in the form below and fax it to

The Organiser on: +44 (0)20 7392 4004

The Securities Lending Forum Registration Form

Forename:
Surname:
Organisation:
Email Address:
Telephone:
Address (line 1):
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City:
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Payment Details:
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Studio 5, The Courtyard, 155 Commercial Street
London E1 6BJ-
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www.securitieslendingforum.com
Infrastructure - Fund Automation
Problem-Solving
for the funds industry
The European funds industry is
being overcharged.
The sheer variety of individual
funds means that excessive
administrative charges are
levied. ISJ reveals some of these
charges and solutions.
74 INVESTOR SERVICES JOURNAL
The European funds industry has grown
substantially in the last few years and specific types of
funds exist for every type of investor. While this may
sound good in theory, the reality is quite different. The
settlement and processing costs for funds and their dis-
tributors are enormous. With over 40,000 investment
funds available in Europe and an average size of around
Euro 250 million per fund, processing costs can soon add
up. Compared to 2001, cross border settlement costs today
are about 30 percent higher for wholesale trades and 150
per cent higher for retail trades. Vestima+, the innovate
investment fund processing service by Clearstream, has
devoted its energy to reducing some of these costs.
Lifeline
By combining the cost efficiencies through Vestima+ and
with currently available domestic services, Clearstream
claims that a French bank with an investment fund portfo-
lio of Euro 1 bn within an overall asset portfolio of Euro
10 bn would currently face an average price for custody of
the funds of 0.70 of a basis point. By using Vestima+, the
French bank would benefit from a reduction to an average
price of 0.27 of a basis point, a decrease of over 60 per
cent. As an open platform, Vestima+ facilitates the delivery
versus payment process for both onshore and offshore
markets by meeting the specific needs of each market. The
original Vestima was focused on the offshore market but
has been significantly enhanced to accommodate the needs
of the major domestic markets.
Consolidation
Despite the variety of funds in Europe, increased pro-
cessing and settlement charges will force the consolidation
of assets within those funds. “The effect of regulation such
as UCITS III has presented many challenges for the funds
industry,” says Thomas Zeeb, Clearstream's director of
relationship management for UK, Scandinavia and the US.
“There is a need to delivery efficiency into both the off-
shore and onshore markets in different parts of Europe.”
For several years, securities service providers have sup-
ported the funds industry by enabling players to concen-
trate on their core business of managing assets. Vestima+
is no different in this respect. The product's creators sup-
port the consolidation of assets in order to cope with the
increase of retail funds. They have also found that fund
managers prefer to use a common settlement and process-
ing platform but one that meets their differing needs in
differing markets.
Challenges
One of the driving forces behind Vestima+ is the need to
deliver STP processing efficiency and the anticipation of
further consolidation in the European funds industry.
“Collective investment fund pooling ultimately requires a
European domicile of choice,” says Zeeb.
Vestima+ expects new customers to go live in the com-
ing months, while it continues to promote greater efficien-
cies in the cross border funds industry. “Gathering cross
border assets is a difficult task, especially for pension

schemes,” admits
Bruno Zutterling,
director of invest-
ment funds serv-
ices at
Clearstream
Banking. “There
are several differ-
ent countries and
each of them has
their own form of
regulation. The
Bruno Zutterling political issues are
compounded by
the fact that regulators do not like the
idea of moving assets to other countries.”
Regulators in individual European mar-
kets may not like the idea of fund pool-
ing, but Vestima+ can help overcome the
different regulatory approaches and
encourages promoters to move their
funds onto a common platform.
The creation of Vestima+ was spurred
by the evolution of the fund industry's
clients. “The funds industry was asking
for help to deliver greater efficiency,” says
Zutterling. “This industry constitutes
about 50 per cent of Europe's financial
savings so efficiency is a must.”
Pricing
Clearstream recently announced a new
modular pricing policy for Vestima+,
aimed at bringing costs reductions to
market participants. Customers can com-
bine domestic services from local central
securities depositories (CSDs) with inter-
Flowchart showing Clearstream’s approach to fund automation:
Infrastructure - Fund Automation
national services offered by Clearstream
and other international central securities
depositories (ICSDs) or even global cus-
todians. Customers can select wherever
they wish to settle and whether to use or
not Clearstream's settlement and custody
services. In addition to its traditional cus-
tomer base of banking institutions,
Clearstream is offering this service to
insurance companies and asset manage-
ment firms.
Testing
The testing phase of the new service
will start on 22 November 2004 with cur-
rent customers. The new pricing concept
will be implemented with the launch of
“The European fund
industry is desperately
lacking automation for
fund transactions”
the new Vestima+ service on 22 January
2005. Commenting on the possibility of
cost reduction with Vestima, Zutterling
says: “When this cost efficiency benefit is
coupled with STP efficiency improve-
ments close to 100 per cent and the wider
possibility of accessing more markets, the
business logic for adopting Vestima+
becomes compelling.”
Mandates
With three months to go before launch
date, Vestima+ has already signed a num-
ber of new clients. IXIS, a subsidiary of
Caisse d'Epargne Group, has committed
to the service, which will be implemented
to receive fund orders coming from
Clearstream's customers that wish to gain
access to French domestic funds. IXIS is
part of the AA-rated Caisse d'Epargne
Group, a major French universal bank
with a leading position in the French
retail market. IXIS Asset Management,
the third-party asset management entity
of Caisse d'Epargne Group's investment
banking arm, manages Euro 339.5 bn in
assets. Through the Vestima+ service, any
distributor using a Clearstream account
will be able to settle through a delivery-
versus-payment (DVP) process in a fully
automated way with French funds cen-
tralised by IXIS in Paris. Vestima+ will
communicate with IXIS using SWIFT
messages and utilise the specific template
issued by the French Fund Market
Practice Group (FFPMG).
Jean-Marc Eyssautier, head of opera-
tions for custody and banking services at
IXIS in Paris stated: “The European Fund
Industry is desperately lacking automa-
tion for fund transactions in the areas of
both order processing and secured settle-
ment. By combining the Vestima+ service
with SWIFT communication standards
and a true DVP process, IXIS will provide
our customers with a very secure way of
distributing their funds outside of France.
Clearstream's new initiative to deliver a
fully automated process for cross-border
distribution is combining security of the
French domestic infrastructure with high
flexibility of the new Vestima+ service.”
Bruno Zutterling added, “This agree-
ment from another major player in the
French market recognises the efforts done
by IXIS to enhance automation rates in
the fund industry. By complying with
French market practices, Clearstream
enables fund distributors to access
domestic markets as transparently as
international ones. This highlights the
value added by Vestima+ as an order pro-
cessing hub adopting a multi-domestic
approach.”
Vestima+ will also connect to BNP
Paribas Securities Services as centralising
agent for their mandated French funds
for the delivery of processing efficiency
and higher levels of straight-through
processing (STP). ISJ
INVESTOR SERVICES JOURNAL 75
Infrastructure - Nordic / Baltic Consolidation
SEB focuses on the five Nordic
and the three Baltic States and
the possibility of a consolidated
Nordic/Baltic Market.
How soon will this market be
realised? Goran Fors and Ulf
Noren of SEB present some of
the changes which point towards
consolidation in the market.
Nordic Markets
- A Case of Consolidation
The Nordic Region and the EMU
Finland is the only Nordic country
to have joined the European Monetary
Union (EMU) and it is not yet clear
Goran Fors
Ulf Noren
76 INVESTOR SERVICES JOURNAL
the possibility of further infrastructure
changes in the region, it presents certain
difficulties. The three Baltic States will join
the EMU at a time that is yet to be defined.
The Baltic countries will fulfil their conver-
gence criteria before the new EU countries
do so.
Stock exchanges in the Nordic markets
Trading volumes have grown enormous-
ly, thanks largely to trading in Ericsson and
Nokia. A large number of remote members
have contributed to Nordic trading vol-
umes. This is particularly true of Sweden,
where the number of remote members
currently stands at 43. In other Nordic
markets, the number of remote members is
continuously growing, a trend that is
expected to continue.
In comparison with the exchanges in
Europe, the Nordic exchanges are still
small. The combined market capitalisation
is around Euro 600 bn. However, a merger
of the eight exchanges would establish a
stock exchange of reasonable size, compa-
rable with Milan, Madrid and Zurich.
A significant step towards a consolidated
exchange is the merger between OM and
HEX, completed in 2003. OMX, together
with the other exchanges in the NOREX
alliance, is now establishing itself as a true
Nordic marketplace. The vision for the
Nordic markets also includes the Baltic
exchanges, which are owned by OMX.
OMX is also bidding for ownership of the
Polish exchange.
The NOREX alliance has achieved sys-
whether Denmark tems co-operation, making it easier for
and Sweden will members to connect to the exchanges in
follow. This means each market. Sweden, Denmark, Iceland
that the Nordic and Norway have used the same trading
region will have dif- platform, called SAXESS, at length and
ferent currencies Finland, Estonia and Latvia implemented
for quite some time the system in September 2004. Lithuania is
and even if the scheduled to implement SAXESS in April
Euro is introduced 2005. A consolidated regional exchange,
in Denmark and building on OMX, will translate into fur-
Sweden within the ther success.
next five years, Liquidity enhancement of blue chip
Norway will still be companies on the Nordic Stock Exchanges
outside of the is a critical issue at present. A few securities
EMU. The current currently dominate trading in the Nordic
environment of dif- region. These securities are also heavily
ferent currencies in traded on other exchanges and foreign
the region is one investors are most prominent in this
that we will have to respect. Foreign exchanges will continue
live with for some- in their efforts to attract trading in these
time. While this sit- securities and a consolidated exchange for
uation does not the Nordic markets stands a good chance
necessarily rule out of furthering blue chip liquidity.
The NOREX strategy is to support all
Infrastructure - Nordic / Baltic Consolidation
SEB focuses on the five Nordic
and the three Baltic States and
the possibility of a consolidated
Nordic/Baltic Market.
How soon will this market be
realised? Goran Fors and Ulf
Noren of SEB present some of
the changes which point towards
consolidation in the market.
Nordic Markets
- A Case of Consolidation
The Nordic Region and the EMU
Finland is the only Nordic country
to have joined the European Monetary
Union (EMU) and it is not yet clear
Goran Fors
Ulf Noren
76 INVESTOR SERVICES JOURNAL
the possibility of further infrastructure
changes in the region, it presents certain
difficulties. The three Baltic States will join
the EMU at a time that is yet to be defined.
The Baltic countries will fulfil their conver-
gence criteria before the new EU countries
do so.
Stock exchanges in the Nordic markets
Trading volumes have grown enormous-
ly, thanks largely to trading in Ericsson and
Nokia. A large number of remote members
have contributed to Nordic trading vol-
umes. This is particularly true of Sweden,
where the number of remote members
currently stands at 43. In other Nordic
markets, the number of remote members is
continuously growing, a trend that is
expected to continue.
In comparison with the exchanges in
Europe, the Nordic exchanges are still
small. The combined market capitalisation
is around Euro 600 bn. However, a merger
of the eight exchanges would establish a
stock exchange of reasonable size, compa-
rable with Milan, Madrid and Zurich.
A significant step towards a consolidated
exchange is the merger between OM and
HEX, completed in 2003. OMX, together
with the other exchanges in the NOREX
alliance, is now establishing itself as a true
Nordic marketplace. The vision for the
Nordic markets also includes the Baltic
exchanges, which are owned by OMX.
OMX is also bidding for ownership of the
Polish exchange.
The NOREX alliance has achieved sys-
whether Denmark tems co-operation, making it easier for
and Sweden will members to connect to the exchanges in
follow. This means each market. Sweden, Denmark, Iceland
that the Nordic and Norway have used the same trading
region will have dif- platform, called SAXESS, at length and
ferent currencies Finland, Estonia and Latvia implemented
for quite some time the system in September 2004. Lithuania is
and even if the scheduled to implement SAXESS in April
Euro is introduced 2005. A consolidated regional exchange,
in Denmark and building on OMX, will translate into fur-
Sweden within the ther success.
next five years, Liquidity enhancement of blue chip
Norway will still be companies on the Nordic Stock Exchanges
outside of the is a critical issue at present. A few securities
EMU. The current currently dominate trading in the Nordic
environment of dif- region. These securities are also heavily
ferent currencies in traded on other exchanges and foreign
the region is one investors are most prominent in this
that we will have to respect. Foreign exchanges will continue
live with for some- in their efforts to attract trading in these
time. While this sit- securities and a consolidated exchange for
uation does not the Nordic markets stands a good chance
necessarily rule out of furthering blue chip liquidity.
The NOREX strategy is to support all

participating markets with technology solu-
tions. However, there are no components in
the NOREX set-up to encourage local blue
chips to change primary listings to any of
the larger participating exchanges.
Therefore, liquidity is not “stolen”’ from
smaller participating exchanges. This is a
unique situation for Europe’s consolidated
stock exchanges.
CSDs
Another important part of the financial
market infrastructure is the Central
Securities Depositories (CSDs). A consoli-
dated CSD would be a step forward in cre-
ating further efficiency in the Nordic
region.
A giant step towards consolidation has been
affected, with plans to merge the VPC CSD
in Sweden with the APK CSD in Finland. A
consolidated CSD would be of great advan-
tage to market participants as a large num-
ber of banks and broker dealers are active
in all Nordic markets. Connections to four
different CSDs adds extra costs and makes
the Nordic marketplace less efficient.
Denmark has reacted positively towards the
creation of a Nordic CSD while the
Norwegian infrastructure and its political
and commercial voices are either outspo-
kenly negative or at best silent on the issue.
No decision has been taken on the intro-
duction of a central counterparty in the
Nordics/Baltics region. The issue of the
CCP is a very complicated one and the pros
and cons can be derived from the areas of
risk, cost, timing versus consolidation and
international versus local agendas.
The regulatory picture
Like all other markets in Europe, the
Nordics will be heavily impacted by the
implementation of the ESCB/CESR
Standards. SEB has placed strong emphasis
on a balanced regulatory practice that sup-
ports the need for European financial mar-
ket consolidation and a credit risk free
infrastructure serving a fiercely competing
intermediary section. The current status of
the Standards is not encouraging and some
very serious effects will be evident if the
Standards are implemented ‘as is’. In
essence, our concerns arise from the fact
that there are not many distinctions made
between infrastructures and intermediaries
and that the implementation of the
Standards would increase the financial and
systemic risk in a currently risk free CSD-
environment. In addition, the competitive
picture might become blurred, additional
costs will be introduced, liquidity will suffer
Infrastructure - Nordic / Baltic Consolidation
due to increased collateralisation require-
ments and conformity is not encouraged as
many issues are left to national discretion.
Similar effects can be expected from other
regulatory initiatives like the pending clear-
ing and settlement Framework Directive
and the Hague Convention.
In the meantime, work continues to
change this approach and it is at least assur-
ing to see the Nordics and Baltics develop
into a model that is completely in line with
our ideal model. Hopefully it can work as a
model for Europe!
“the Nordics are
characterised by fierce
competition and a
number of players.”
Custody and clearing services
For the moment, the Nordics are charac-
terised by fierce competition and a number
of players compete for business. Regional
players such as SEB and Nordea, and to
some extent SHB, compete across the
Nordics. Local players are active in all four
Nordic markets. Some local players such as
Danske Bank, Hansa Bank and DnB NOR
have a fairly strong hold in their markets
while a few smaller players play a relatively
insignificant role in the sub-custody field.
The international client base perceives the
Nordic market as “one”. The markets them-
selves are consolidating. Increased demands
from regulators will increase complexity
and investment needs. The international tax
and legal situation is becoming increasingly
more complex. Consolidation offers cross
border clients the possibility of’ a “one con-
tract, one balance sheet = one risk’’ scenario
with one regional provider, thereby easing
the administrative and compliance burden.
There are threats of disintermediation,
which in combination with the new regula-
tory roadmap for Europe poses a true
threat to the agent bank community.
Margins will continue to thin out, following
increased service demands and price re-
negotiations. The possibility to charge for
value added services becomes smaller as
traditional value added services become
commodities. The ability to find differen-
tiators will be the key.
- True regional players will continue to win
business and local players will meet inc-
reasing difficulties in defending positions.
- The decision to continuing with massive
investments to cope with client and regu
latory demands or not will be a difficult
one to make.
- In order to exist in the context of thin-
ning margins and still be able to invest,
implies that leverage on volumes is key.
Those volumes cannot emanate from only
one market.
- To run a regional operation successfully,
one regional system is necessary. If this is
not in place, the phasing out of old sys
tems and the implementation of new
ones will be prove very costly.
- Full connectivity to all local infrastruc-
tures is key, as is the necessity to have
local competence in all centres to address
local risks and local exposure.
- To address risk and exposure, it is impor-
tant to know your counterpart.
Contractual arrangements will become
increasingly important.
Regionalisation is happening now, which
means that efforts to build a regional prod-
uct have probably started too late. The flow
of business from local to regional compa-
nies has already begun. Investment banks
lead the way in this development, followed
by universal banks and global custodians.
The surviving regional providers will be
challenged by two-types of animals: one is
the infrastructure itself that will compete
for the low-complexity clearing business. It
will still take time before the CSDs can
compete for the top business but it will
happen. The other animal is the European
regional provider. This institution needs to
build a Nordic competence and assimilate
their organisations to present short-term
threats to the regional providers. This is
where competition becomes fiercer.
Competition will continue to prevail in the
far northern corner of Europe.
Conclusion
Consolidation is inevitable in the long term
and a single Nordic market place is a strong
possibility. One European market is still
many years away. One Nordic market place
is worth working for and would place the
whole region in front of further consolida-
tion in Europe.
There are great opportunities for the
Nordic region in creating a consolidated
market place. It is important that each
market and individual participants in each
country look into the future with the inter-
est of the Nordic markets in focus or face
the risk of losing business and becoming
marginalised. The question really is one of
survival.
Goran Fors is head of investor services, global
clients at SEB and colleague Ulf Noren is head of
client relations.
INVESTOR SERVICES JOURNAL 77
Post-trade Technology - STP
A Change of Heart
From massive industry initia-
tives to customer-specific solu-
tions, Omgeo has learned a lot
from the failure of GSTPA and
the decibel shift of T+1 from a
roar to a murmur
78 INVESTOR SERVICES JOURNAL
T he STP timeline from 2002 to present day has
enabled considerable growth among solutions
providers. In less than two years, the securities indus-
try's obsession with communal monoliths such as the
Global Straight Through Processing Association has
flipped 180 degrees to embrace industry-wide solutions
that take account of individual clients' needs. By taking
the time to listen to the top 50 financial services firms,
post-trade, pre-settlement provider Omgeo has learned
that a lack of industry-wide incentives for automation is
slowing the march toward greater efficiency in the glob-
al securities industry. This lesson, made possible by The
Tabb Group research and advisory firm, revealed that
the provision of incentives for industry-wide automa-
tion is becoming vital, as firms are increasingly
focussing on enhancing their internal technologies,
leaving external gaps as the greatest hurdle to overcome.
The overall efficiency levels firms can achieve are limit-
ed by their less automated customers.
Change
The Omgeo / The Tabb Group research recorded a
change of heart and mind among top financial firms.
“They have abandoned big external initiatives and are
looking internally,” says Larry Tabb, CEO and founder
of the The Tabb Group. “The financial industry endured
a period of frustration when the large industry-wide
projects become difficult and the focus turned to one of
'how do I better manage my internal processes and keep
fail rates in check. They have realised there is no longer
a panacea for STP.” Omgeo is
working with all parties to a trade
to help these firms become more
efficient in the post-trade cycle.
Costs
Despite the level of progress
affected by financial institutions,
unit costs are increasing. “As
trades become smaller, costs
increase,” says Tony Freeman,
director of industry relations at
Tony Freeman Omgeo EMEA.
For Omgeo, the biggest STP
challenge lies within manually oriented firms. Central
to this challenge is the shift away from large-scale out-
sourcing. Freeman explains: “Investment managers and
custodians thought that fund manager outsourcing was
a good thing for the industry. They felt that outsourcers
had the budget to invest in technology and to become
more automated. But there are different approaches to
technology outsourcing, depending on the type of
client.”
Reading the signs, Freeman predicts a tidal wave of
indirect outsourcing. “Thanks to the Spitzer report in the
US, the regulator does not fully trust the investment
industry,” he says. “Global custodians have therefore
 Post-trade Technology - STP

become our biggest clients. These outsourcers are challenged with Key challenges for financial institutions:
consolidation in that their operations have to merge into unified
platforms. They also have to make a margin and secure their costs.” By and large there was widespread agreement on
the key challenges facing the industry in terms of
increasing efficiency, as revealed by The Tabb
“People are still scarred by the failure Group / Omgeo research.
of GSTPA and don't want another · Firms from all segments of the industry
believe that the greatest industry-wide efficiency
big industry initiative” challenges lie in the areas of reference data and
connectivity.
Central trade matching
Omgeo continues to attract more clients to its Omgeo Central · Brokers and custodians see the need to
Trade Manager (Omgeo CTM) product. About 37 clients are live, generate industry-wide priority and critical mass
around automation as the single greatest point
with more than 100 signed up. "People often say 'if you build it of pain in their drive to improve efficiency.
(a solution), they will come," says Tabb. "This is not always true.
People are still scarred by the failure of GSTPA and don't wont · Owing to the lack of incentives to join indus-
another big industry initiative. Adding new functionalities to try-wide initiatives, investment managers saw
existing trade matching models makes more sense." managing their own external STP and
Omgeo and Tabb noted the enormous potential for same day connectivity as the greatest challenge.
trade affirmation in the US. Highlighting the reasons for Omgeo
CTM adoption, Kim Davies, marketing manager says that many · In the realm of custodial communications,
custodians, brokers, and investment managers
financial institutions are responding to increased regulation. "The unanimously agreed that the biggest problem
European Union Framework Directive is due for implementation was custodians being last on the information
in 2005," she says. "We will support our clients through this piece chain. Firms in both the US and Europe agreed
of legislation." that this was the major barrier to efficient
custodial communications.
Major Pain Points: The diagrams show investment managers’ and
custodians’ main efficiency pain points. Managing external straight
through processing and connectivity were the main problems for the Key findings of The Tabb Group / Omgeo research
bulk of investment managers. Generating industry priority, critical mass
and incenting automation were the main pain points for the custodian. · Despite firms' implementation of exception
management, there are still a significant
Investment Manager number of failed trades, particularly in fixed
income, where 7.2 per cent of cross-border
Other 13% trades and 6.4 per cent of domestic trades fail
to settle on time.
Data Management / Standards / Corporate Actions 18%
· With the SEC considering mandatory same-day
affirmation, industry SDA rates require further
Managing Technology Upgrades and Infrastructure 21%
improvement. Surveyed firms indicated that
only 44 per cent of their trades are affirmed on
Managing Fixed Income / Derivatives & Product Complexity 21% trade date.

Managing External STP & Connectivity 26% · FIX allocation and confirmation adoption has
been slow to develop; only 3 per cent firms
0% 5% 10% 15% 20% 25% surveyed of domestic equity allocations and
confirmations were sent using FIX and only 21
Custodian per cent of US firms and 37 per cent of
European have adopted the standard.
Internet 8%

F. Income 8%
· In lieu of costly, industry-wide initiatives, firms
now prefer to focus on internal efficiency
Reporting and Customisation 15% challenges, and look to larger industry vendors
to solve external efficiency initiatives.
Managing Tech Upgrades & Infrastructure 15%
· While progress has been sporadic to date,
Data Management / Corporate Actions 23% central matching is being considered for
adoption by 50 per cent of European firms and
Generating Priority, Critcal Mass, Autom. 31% 27 per cent of U.S. firms surveyed.
0% 5% 10% 15% 20% 25% 30%

INVESTOR SERVICES JOURNAL 79

Conference Digest - Securities Lending
Opacity is causing stagnation in
the securities lending industry.
At the IMN 9th Annual European
Beneficial Owners’ Securities
Lending & Global Custody
Summit, professionals heard
how a lack of clarity is holding
the industry back. ISJ reports
from Edinburgh, Scotland.
Transparency is the Key
From a risky business to a legally-
approved bread-winner, securities lend-
ing has come a long way over the last five
years. Thorough regulatory cross-checking
has elevated the business to the level of best
practice that is common among core secu-
rities services. Particularly in the UK, a
stock borrowing and lending code ensures
the legitimacy of the industry and a stock
loan data service, launched by Crest in
September 2003, ensures that more infor-
mation is made available to industry par-
ticipants. The UK has also introduced a tax
exemption for stock loan transactions on
recognised stock exchanges and UK securi-
ties lending providers are exempt from
stamp duty.
The hold up
So why is securities lending not a trillion
dollar industry? The general consensus at
the recent IMN conference was that securi-
ties lending is not transparent enough. To
be fair, various initiatives have tried to
increase transparency in the industry. The
Financial Services Authority (FSA) in the
UK, for example, urged the London Stock
Exchange to shorten the timeframe for
buying illiquid stock. Crest delivered a
80 INVESTOR SERVICES JOURNAL
boost to the industry by presenting daily
securities information on the UK’s top 350
companies. The International Corporate
Governance Network (ICGN) issued a
report on share lending and voting in May
2004 and the UK has also closed the loop-
hole on the reduction of corporate tax
through manufactured payments.
But during a highly charged roundtable
at the IMN forum, Alan Line, head of deal-
ing at F&C Management, suggested the
industry was backward, citing technology
as a driver of transparency: “The industry
should embrace technology or else the cur-
rent level of opacity will make the regulator
wonder what is going on,” he said.
The roundtable heard that Equilend built
a securities lending protocol, which opened
the door to further transparency. “We are
poised for technological change,” said
Kevin McNulty, head of securities lending
Europe & Japan at Barclays Global
Investors.
Roy Zimmerhansl, director of global
securities lending at Deutsche Bank, said
one of the biggest threats to the securities
lending industry is the lack of an effective
delivery mechanism. “It is becoming harder
to make money,” he said. Spread compres-
sion is having a financial impact on all
market participants – hedge funds, prime
brokers, lenders and beneficial owners.
Thus, it is harder for all firms to achieve the
revenues obtained in previous years. It
takes a higher volume of business for
lenders and borrowers to make the same
money.”
To lift the spirits of roundtable, Mark
Faulkener, director of Data Exlporers, sug-
gested the industry is moving forward and
change is occuring slowly. “The financing
industry is extraordinarily profitable in
parts and could support, but many organi-
sations like it just the way it is,” he said.
“There is a leading group of prime brokers
who want to challenge the status quo and
will do so as capital strength becomes an
increasingly important determinant of suc-
cess. Certain lenders would also love to
challenge the established order but this will
take time.”
Zimmerhansl said that an increase in
transparency provides opportunities for
greater return. “Borrowers are more likely
to benefit from an increase in transparen-
cy,” he said. “Greater visibility on GC pric-
ing has a greater value to borrowers rather
than lenders.”
Hedge funds
As a major driver of the securities lending

industry, the state of hedge funds received a lot of attention
at the IMN conference. There are currently about 8000 hedge
funds, which collectively are worth about $1 trillion of assets
under management. But the industry is not growing, given
the impact of poor performance of these funds.
Zimmerhansl predicted a move of money from hedge funds
to better performing funds. “Hedge fund strategies are hav-
ing an impact on how investment banks are structured,” he
said. “There is an increasing demand for integration of equi-
ty and fixed income product offerings.”
Ed O’Brien, divisional head of securities finance at State
Street, has noted significant growth of hedge funds globally,
with fixed income playing a major part. “Fixed income arbi-
trage is a key growth area,” he said.
The panel concluded the roundtable by commenting on
the outlook for securities lending in the UK and Europe.
Global custody agents
Securities lending is available in many different forms,
including agency lending and third party lending. But how
integral is the product to the overall custody package? This
was one of the questions asked during a panel discussion on
global custody agents and securities lending. As a custody
agent, Paul Wilson, senior vice president at JPMorgan, insist-
ed that the product is just one of the criteria of a keenly con-
tested custody mandate. “I have yet to see a mandate being
awarded to a custodian just because he is good at securities
lending,” he said. In contrast to this statement, BBH's Patricia
Fallon argued that securities lending is an indication of excel-
lence from the investor services provider. “Excellence in the
securities lending product is an indication of how committed
a custodian is to the investor services business line, as it takes
significant investment in technology and risk management to
offer an industry leading program,” she said.
For a growth industry, the size of securities lending is diffi-
cult to quantify to would-be clients. “I would hope that any
RFP has parameters on which to base calculations,” says
Richard Thompson, head of agency securities lending at
BNP Paribas Securities Services.
According to Paul Cutts, senior vice president at
Northern Trust, securities lending is an important part of
the overall custody package. “The vast majority of ques-
tionnaires we receive include questions about securities
lending. But we don’t see it as our right to participate in
securities lending just because we’re custodians. Each serv-
ice should be considered on its own merit.”
Like other elements of securities services, securities lend-
ing is about trust and relationship building. “Your lending
agent should be looking out for your long term best inter-
ests,” says Fallon. “This means lending within your specific
objectives and risk/return profile.”
The role of securities lending consultants came under
the spotlight at the IMN conference. “It should be incum-
bent on consultants to set out what they want from us as
custodians in the RFP process,” says Wilson. “Although we
use a benchmark portfolio for securities lending, we have
made it difficult for beneficial owners as they do not know
what to ask for.”
In defence of consultants, Ross Whitehill, chief operating
officer at Thomas Murray and chair of the panel, said there is
no way of working out the price of securities lending on a
Conference Digest - Securities Lending
day-to-day basis. “How can institutional investors be sure
they are getting a good price?” he asked. Thompson volun-
teered a response, saying providers should present risks and
rewards and address the inefficiencies of the industry. “There
is no holy grail for measuring returns,” he said “You have to
put them in the context of the value proposition.”
Third parties
The existence of third party agent lenders was met with
mixed response from custodians who were present at custody
agents panel discussion. “Third parties expect custodians to
take on incremental risk,” said Wilson. “The third party
makes a good offer but he wants the custodian to look after
the corporate actions and other grind work. Third parties
should also provide the same service as the custodian and
take on some of the risks.”
Paul Cutts, on the other hand, said custodians should seek
to develop agreements with third party lenders. “Best prac-
tice and benchmarking is an important consideration when
working with a third party,” he said.
“Your lending agent should
look out for your long-term
best interests”
Benchmarking
Considering the array of clients, securities lending
providers said benchmarking is difficult to achieve. “All pen-
sion funds have a different philosophy to risk,” said Wilson.
“I am not convinced that an industry benchmark is the best
approach. Fail trades, income collection and proxy voting
should be included in the service level agreement because
each custodian and each client is different.”
Client support
To further support his comments made at the panel discus-
sion, Cutts emphasised the importance of a support mecha-
nism between the lender and the client. “From an opera-
tional perspective, appropriate service level agreements
should be in place,” he said.
Ed Oliver, director of securities lending product manage-
ment at Northern Trust, added that corporate governance
should be considered in conjunction with the benefits of
securities lending. “It’s difficult to quantify the financial ben-
efits of corporate governance,” he said. “The balance between
corporate governance and securities lending is an industry-
wide concern.”
ISLA will continue to work with the industry on this issue
and key discussions will take place over the next 6 to12
months.” According to Cutts, lending agreements should bal-
ance returns with the ability to recall stocks on contentious
governance issues.
Oliver concluded that proxy voting vendors could work
with the beneficial owner and offer advice on which meet-
ings they should be voting at. “Vendors can help the benefi-
cial owner work out an appropriate voting policy that com-
plements their securities lending activity,” he said
ISJ
INVESTOR SERVICES JOURNAL 81
Conference Digest - Risk Management
In the heat of the
Arizona desert, securities
lending providers tackled
the many thorny issues
facing their industry.
Carol McGinn reports
for the RMA Committee
on Securities Lending.
Taking the
Sting Out
A business program reflecting the
current issues affecting the securities
lending industry was in focus at 21st RMA
Conference on Securities Lending, held
from October 12-14 in Phoenix, Arizona,
USA. More than 450 industry participants
attended this event, which featured a legal
and regulatory update of the agent-lender
disclosure project, the evolving technologi-
cal demands of the securities lending
industry, the growth and development of
the hedge fund industry, and the emerging
trends toward off-balance sheet financing
structures. Participants also enjoyed two
colourful keynote speakers: Jim Rogers, co-
founder of the Quantum Fund and author
of Adventure Capitalist and Investment
Biker, and Roger Lowenstein, author of
When Genius Failed: The Rise and Fall of
Long-Term Capital Management.
Comment
“From my perspective, this year’s meeting
was a complete success,” said David
82 INVESTOR SERVICES JOURNAL
Giroux, conference co-chair and vice presi-
dent, JP Morgan Chase & Co., New York.
“There is a great deal of effort that goes
into planning this event, and all the panels
were excellent, covering a broad range of
topics. There was much audience participa-
tion that kept the momentum going and
the energy high. Our guest speakers were
key in our success, as both Jim Rogers and
Roger Lowenstein held the audiences cap-
tive with their unique styles and points of
view.”
The conference opened on Wednesday,
October 13 with welcoming remarks by
Eugene Picone, chair, RMA Committee on
Securities Lending, and senior vice presi-
dent, JP Morgan Chase & Co., followed by
a panel discussion on the current status of
the Agency Lending Disclosure Project and
its impact on the industry.
“People were most
interested in
determining how these
instruments fit into
their securities lending
programs.”
“It was apparent that participants were
aware of this issue and of the specific deliv-
erables of the Agency Lending Disclosure
Taskforce,” said moderator Leslie S. Nelson,
managing director, Goldman, Sachs & Co.,
New York. “Broker-dealers and agent
lenders understand there is a schedule and
project plan for the taskforce, and it was
apparent that they are also addressing tech-
nology and other issues in their individual
firms that need attention.” Nelson added
that the deliverables are on schedule, and
the taskforce continues to have a full
schedule of working group-related meet-
ings and is moving along its projected
timetable. Among its key project accom-
plishments so far, the Taskforce has devel-
oped an infrastructure “schematic” of cred-
it and capital process flows, conducted a
survey to determine the size and scope of
the daily data transfer requirement, run
“blind tests” of daily regulatory capital file
to ensure feasibility, developed use cases for
daily open loan file, finalized business
requirements for regulatory capital compu-
tation and concentration monitoring, and
confirmed assumptions with regulators
(ongoing). At this stage, Nelson says the
Taskforce is developing function and tech-
nical specifications with vendors.
A panel entitled “Comparative
Analyses—Beyond Benchmarking” focused
on the trend in the industry toward more
sophisticated informational demands by
agents and their lending clients. Moderator
Angie B. Meyers, senior vice president,
Northern Trust Company, and her panel of
vendors discussed how technology is evolv-
ing to satisfy current and future require-
ments. The vendors offered their perspec-
tive on the direction the industry is headed
as it relates to benchmarking.
Growth
Day two of the conference led off with a
well-attended panel on the “Development
and Growth of the Hedge Fund Industry.”
This panel of experts discussed a variety of
topics that elicited a discussion from par-
ticipants, including several issues lenders
should consider in response to a clustering
of hedge fund strategies as well as the rela-
tionship between lenders and hedge funds.
One panel member said that collateral
management has always been an important
factor in a lending program, and each ben-
eficial owner must create investment
guidelines that are commiserate with the
level of risk he or she is willing to under-
take.
Following this panel, conference partici-
pants heard another panel of experts dis-
cuss emerging trends toward off-balance
sheet financing structures. The panel dis-
cussed and shared their views on the appli-
cability of synthetic instruments in a cash
collateral program. They also explored
approaches to the use of swaps and other
tools and why they are beneficial to bor-
rowers and lenders. Moderator Michael
Morin, CFA, vice president, JP Morgan
Chase & Co., New York, said the panel dis-
cussed various asset-backed structures,
including extendable notes, callable agen-
cies, and structured repos. “People were
most interested in determining the
appropriateness of how these instruments
fit into their securities lending programs,”
he said. “Everybody is looking for that
extra yield.”
He added that the majority of the prod-
ucts are beneficial from the buy side,
assuming you have the resources to
employ analysts to review the creditwor-
thiness of the issue.
“The sessions focused on topics that were
on everyone’s minds, issues we are all fac-
ing in securities lending,” added Giroux.
ISJ

Let the Benefits Begin
Reflections
As I look back on Sibos 2004, I am impressed not only by the breadth of
discussions and business that took place, but also by the high levels at
which the SWIFT community interacted.
All of us were challenged at Sibos. We had serious discussions about
how, now that the migration to SWIFTNet is drawing to a close, financial
institutions will leverage the investments they have made in SWIFTNet.
We showed how the range of SWIFTSolutions across payments, securities,
treasury and trade are being implemented by institutions and how the MTs
will continue to support FIN and members’ legacy applications, while new
XML-based SWIFTSolutions (MXs) are being developed to meet today’s
business needs.
We agreed that now is the time to simplify cross-border payments. STP
is not dead – we heard the call to bring it to the securities industry. And
the debate over corporates intensified, as we looked at how to welcome
corporates into our community.
These are significant challenges, and we saw many responses from all
constituents in Atlanta. We certainly agreed that in working together as a
global financial community, we can address and solve these challenges
together.
SWIFT is already working on ensuring that next year’s Sibos in Copenhagen
from 5-9 September, will again provide a forum for thoughtful leadership
in the global financial community. If you have any ideas or suggestions,
don’t hesitate to contact me at patrik.neutjens@swift.com.
Patrik Neutjens - Director of Sibos, SWIFT
Conference Review
For the first time in four years,
this year's Sibos event
encouraged securities industry
providers to recognise the fruits
of their labour. ISJ reports from
Atlanta, Georgia.
From Realities to Rewards, SWIFT took the time to
recognise the achievements of the securities industry at
this year's Sibos event. While determined to drive home
the importance of standardisation and automation, the
global messaging authority was ready to pat its members
on the back for their commitment over the last few years.
To mark the start of the benefits, SWIFT opened its 26th
conference by announcing a 10 per cent rebate on 2004
FIN messaging, a financial messaging standard, and con-
firmed the community is on track for a successful
SWIFTNet migration. To date, 95 per cent of all customers
have completed migration. Fiscally, the rebate on 2004 FIN
traffic translates into EUR33 million. In total, SWIFT has
announced EUR 73 m in rebates for the 2002-2004 period.
SWIFT said it is well on track to meet its 2006 challenge to
cut prices by 50 per cent over the 2002-2006 period. The
organisation reported a decrease in prices of 33 per from
2001 to 2004 for FIN, InterAct and FileAct services com-
bined.
Migration
SWIFT is closing the final lap of the SWIFTNet migra-
tion. To date, 95 per cent of all customers and 85 per cent
of all FIN traffic has migrated to SWIFT's new IP-based
messaging platform, SWIFTNet.
The focus on successful migration was a key feature at this
year's Sibos event and service providers were extremely
vocal in their concerns about STP and standardisation. In
fact, the SWIFT standards forum was oversubscribed with
delegates who assembled to discuss options for the conver-
gence of financial messaging standards. A fund managers’
forum was also held to convey the benefits of SWIFTNet
migration.
Landmarks
According to Leonard H. Schrank, CEO of SWIFT, 2004
has been a good year for his organisation. The number of
payments increased by 13 per cent from last year. Financial
trade messaging increased by 8 per cent from last year and
overall growth increased by 12.7 per cent. Since 2001,
SWIFT has managed to cut its costs by 26 per cent. Costs
for SWIFT messages have decreased by 35 per cent.
Commenting on the reductions, Schrank said that SWIFT
is committed to price reduction and investing for the
future.
Jaap Kamp, Chairman of the SWIFT board, admitted it
has been a struggle to get the buy side to adopt SWIFTNet.
“In the meantime, we continue to support the success of
INVESTOR SERVICES JOURNAL 83
Conference Review
corporate institutions and the intermedi-
ary role of banks in setting up a corporate
structure.” he said. “We have to work out
how to standardise the arrangements
between corporates and banks. The mar-
ket has to develop for the benefit of every-
one, but it takes time.”
Challenges
Kamp's sentiments can be widely
applied across the securities lending
industry. “We have survived 30 years of
success and complacency,” says Schrank.
“Our biggest competition is our members.
If they are not satisfied, they could leave
and set up their own groups. The telecom-
munications companies could pose a
threat in this area but we can compete. We
believe that only the paranoid survive - we
are paranoid!”
Going global
SWIFT is in the process of extending its
reach to China and India and is working
with its partners in each region. “SWIFT is
planning to change its governance to cre-
ate more affordable access for smaller
users,” says Kamp. To further its commit-
ment to the Far East, SWIFT will appoint
a senior manager to work with the local
authorities and improve payment systems.
Out front?
Compared to previous years, SWIFT has
managed to attract more fund managers
to Sibos. “We have structural issues to
address and have to convince fund man-
agers of the benefits of migration,” says
Schrank. SWIFTNet FIN, which is the core
product, constitutes about 10 to 15 per-
cent of revenue. The company expects the
volumes to multiply in the next five years.
One voice
Speaking on behalf of the securities
industry at Sibos 2004, Heidi Miller, chief
executive officer of JPMorgan Chase &
Co's Treasury & Securities Services deliv-
ered a no-holds-barred interpretation of
the theme's event, a “Time for Growth”.
Originating from they buy side of the
securities industry, Miller revealed her
amazement at the complexity of the IT
and operational aspects of transactions
processing. But more importantly, she
vented her bewilderment at the lack of
standardisation across countries and
across market infrastructures. “Despite
efforts to digitise transactions and auto-
mate processes, these businesses are highly
people- and paper-intensive,” she said.
“As an industry, we are a very long way
from “STP”. Miller delivered four “existen-
84 INVESTOR SERVICES JOURNAL
tial questions”, based on banks' position at
the core of the transaction services indus-
try. The first, “Why do we make things so
complicated for our clients?”, criticised the
length of time (days or even a week)
required to execute a cross-border pay-
ment. “If we cannot figure out how to
make these problems go away - to make
life easier, faster and more transparent for
our clients - we are not properly serving
them, and that is not good business,” says
Miller. The second question, “How can we
help our customers become more efficient
and productive, when our own back
offices are so expensive, fragmented, out-
dated and 'non-interoperable?”, cited the
inefficiencies and complication of banking
infrastructures. “As an industry, we sup-
port far too many redundant infrastruc-
“We believe that only
the paranoid survive
- we are paranoid!"
tures and networks, too many proprietary
standards, too many middle-ware plat-
forms, too many legacy systems and too
many products that should probably have
been swept into the dustbin two years
ago,” said Miller. Her third question, “If we
truly aspire to be leaders in the payments
and securities industry, why is it that so
many innovations in this business are pio-
neered by non-banks?”, suggests that banks
allow themselves to be disintermediated by
people who build a payment solution bet-
ter than those offered by the banks.
While praising SWIFT for its ability to
provide value around messaging, Miller
presented her fourth and final question to
the messaging organisation: “If we can
send a secure message to any company
over the internet, why should we pay
SWIFT to do it for us? “What is the real
value SWIFT will provide the payments
and securities business?,” she asked. “How
can you help our slow-moving industry to
move faster to take full advantage of all
the new possibilities? That's the challenge.”
In some ways, Miller said the problem
might be that the payments and securities
services industry is too customer-centric
and unwilling to enforce more standardis-
ation around business rules, formats and
processes. She called on the securities
industry to set its individual differences
aside figure, to figure out how it can work
together, to deliver more value to cus-
tomers, to make the back offices more effi-
cient and to get into the market place with
innovations.
Is STP dead?
In addition to Miller’s memorable plenary,
delegates assembled on day two of the con-
ference to question the existence of STP.
According to Mary Fenoglio of Citigroup, a
lot of work is still required in order to
achieve STP efficiencies for cross-border
transactions. “We should be thinking about
collective solutions,” she said. According to
Mark Alexander of Merrill Lynch, STP is
about efficiency and reducing industry costs.
“The biggest opportunity for STP lies in
Europe, where cost competition could
impact market growth,” he said. “The securi-
ties industry in Europe would be best served
by one CCP and one CSD.”
Alexander estimated that total CSD and
CCP revenues in Europe amount to about
$2.5bn per year. “Total revenues in the US
are only about $700m.
On behalf of fund managers, Alan
Crutchett of DWS admitted that his com-
munity was lagging behind in STP invest-
ment. “T+1 got a lot of hype but the airplay
was brief,’ he said. “Fund managers are try-
ing to find common practices and are look-
ing for best of breed solutions. They are
making significant investments.”
Fenoglio agreed that fund managers had
tactical issues to address. “Selective out-
sourcing helps the fund manager to move
back office functions elsewhere in order to
leverage the capabilities of a provider with
scale,” she said. “We have seen a handful of
outsourcing successes but they depend on
bank’s ability to create replicable solutions.”
At a US securities session, Taylor
Bodman, partner at BBH suggested custo-
dians are experiencing further commoditi-
sation, consolidation and convergence.
“Some players will succeed with market
changes, but they must realise that out-
sourcing has become a boring term. The
way asset managers do things is different
and does not fit perfectly with our indus-
try. The sector will begin to invite non-
custodians such as TATA and TIBco. Now
is the time to put a premium on (SWIFT)
connectivity and standardisation. SWIFT
will enable an era of unprecedented com-
munication.”
Donald Kittel of the SIA called on the
securities industry to re-examine the con-
flicts of interest in the business, adding
that the case for investing in IT infrastruc-
ture is strong. “Industry CEOs have to be
comfortable that regulatory reform has
stabilised,” he said. “We need to learn how
to better implement technological change
and free market business networks.
Markets are recovering and public trust
and confidence is improving.”
ISJ
High quality services
with tangible
customer benefits
Independently rated as best ICSD*,
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Clearstream remains committed to creating competitive
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Sibos 2004 - Bonding at the Bash

WORK

86 INVESTOR SERVICES JOURNAL

 Sibos 2004
WORK
Opposite Page from top right...
- Rudolf Seibel (BVI) and Justin Lawson (ISJ Publishing Director)
- Neal Meacham (Swedbank)
- Investor Services Journal Stands Out
- Robert Binney (Citigroup) and Michael Martin (HSBC) Janet Du Chenne (ISJ Editor)
- Graham Cope (Clearstream)
- Janet Du Chenne (ISJ), Arianna Arzeni (Credit Agricole Investor Services), Olivier
PLAY Storme (Credit Agricole Investor Services)
- Smartstreams’ Stand

PLAY
This page...
- Top left: Frankly Scarlett…Rhett and his love, together again
- Centre: Team BNP Paribas – Vive la Difference!
- Right: Two vendors walk into a bar…Dan Barnes (The Banker) and Karen Shrubb
(ADP)
- Lower Centre: Winding down after a hard days’ work…
- Lower Left: Xciting times for Brendan Fraser
- Centre Left: Oh, what a night! Sibos sing-a-long

INVESTOR SERVICES JOURNAL 87

Events Calender

March 1 2005, 1 day

Whether to meet and greet, Spitalfields Advisors
Securities Lending Forum
bone up on a technical topic, London, UK
guauge the competition - Tel: +44 (0) 20 7392 4008
Web: www.securitieslendingforum.com
you have to get out there.
March 14-16 2005, 3 days
Here are the key events. PASLA/RMA
Conference on Asian Securities Lending
Seoul, South Korea
2004 Tel: +1 215 446 4035
Web: www.rmahq.org
November 16 2004, 3 days April 18 2005, 2 days
ICBI IRC Conferences
GAIM Invest 2004 Alternative Investment Summit 2005
Geneva, Switzerland London, UK
Tel: +44 (0)20 7915 5103 Tel: +44(0)1202 201182
Web: www.icbi-uk.com Web: www.irc-conferences.com

November 28 2004, 3 days May 10-13 2005, 4 days

Strategic Research Institute ISLA/RMA
Blue Ribbon Hedge Fund Symposium Europe Conference on International Securities
Marbella, Spain Lending
Tel: +1 646 336 7030 Athens, Greece
Web: www.srinstitute.com/cx530 Tel: +1 215 446 4035
Web: www.rmahq.org
December 9, 1 day
The Bond Markets Association June 8-9 2005, 2 days
The 10th Annual Securities Lending and Repo IMN Conferences
Conference Scandinavian Institutional Investors Summit
New York, USA Stockholm, Sweden
Tel: +1 646.637.9200 Tel: +1-212-768-2800
Web: www.bondmarkets.com Web: www.imn.org

June 26-27 2005, 2 days

2005 IMN Conferences
New Mexico Pension Fund Congress
February 6 2005, 4 days Santa Ana Pueblo, New Mexico
Information Management Network Tel: +1-212-768-2800
The 11th Annual Beneficial Owners' Summit Web: "http://www.imn.org" www.imn.org
on Domestic and International Securities
Lending & Repo July 20-22 2005, 3 days
Phoenix, USA IMN Conferences
Tel: +1 212.768.2800 ext. 1 New England Public Employee Retirement
Web "http://www.imn.org/a677/isjw" Summit (NEPERS)
www.imn.org/a677/isjw Newport, Richmond (US)
Tel: +1-212-768-2800
February 28 2005, 2 days Web: "http://www.imn.org" www.imn.org
Information Management Network
World Cup of Investment Management October 18-21 2005
Barcelona, Spain RMA Conference on Securities Lending
Tel: +1 212.768.2800 ext. 1 Boca Raton, Florida
Tel: +1 215 446 4035
Web "http://www.imn.org/a677/isjw"
Web: www.rmahq.org
www.imn.org/a677/isjw.

88 INVESTOR SERVICES JOURNAL


letters continued from page 4
Fax Off (continued)
(From Mark Austin, head of strategy for
JPMorgan Investor Services in Europe)
End buyers.. should know what
they're paying for and be told the cost
of implementing regulation, particularly,
as Dermot points out, that regulation not
written for their benefit.
“We are not immune as
an industry from the
type of competitive
pressure that has
carpeted inefficient and
expensive airlines.”
We are not immune as an industry
from the type of competitive pressure
that has carpeted inefficient and
expensive airlines. We need to deal
with this issue or the ultimate buyers
will deal with it for us by voting with
their feet.
Mark Austin, head of strategy for
JPMorgan Investor Services in Europe
An Enterprise Perspective
Regulatory pressures, customer sat-
isfaction and profitability are driving
financial services firms to reassess the
way data is managed and used across
the enterprise as the first step in the
process of automation. The need to
measure return on investments is mak-
ing firms conscious that poor quality
data directly impacts profitability
“Tactical solutions that
only deal with single
business functions or
processes are being
replaced with an enter-
prise-wide strategy.”
through missed opportunities, cus-
tomer attrition and higher costs. In
tackling these challenges, firms are
adopting Enterprise Data Management
(EDM), the process of standardising
and sharing data across the enterprise
and making it available when needed.
Tactical solutions that only deal with
single business functions or processes
are being replaced with an enterprise-
wide strategy that ensures data is treat-
ed as a corporate asset and the root to
improved efficiencies.
Companies implementing EDM begin
by consolidating their enterprise data
into a repository representing the
"Single Source of Truth." This Golden
Source provides companies with key
advantages and business intelligence
including the ability to effectively
understand customer behaviour and
buying trends with the corresponding
ability to match pertinent products and
services. Other operational benefits are
gained from sharing consistent data
across all business units and from
improved decision support tools.
Adding real-time intelligence across an
enterprise reduces process cycle times,
helps automate costly information flows
between organisations and supports
the re-allocation of IT staff to higher
value priorities.
Bob Wolfert, EVP Corporate Strategy,
Financial Technologies International (FTI)
South African Corporate Actions
The introduction of a dematerialised
equities market through the South
African CSD STRATE in September
1999 has brought about major
improvements within the South African
securities industry. As such, most of
the international rating agencies rate
the South African market settlement
risk as one of the lowest in the world,
mostly due to the efficiencies brought
on by STRATE. However, corporate
actions processing has not seen the full
extent of these benefits as yet.
The first enhancement to the
STRATE Corporate Actions module is
under discussion and will incorporate
the new SWIFT qualifiers, which have
evaded the market since 1999. This
initiative will further enhance automa-
tion between STRATE, its members
and members’ underlying clients. The
use of additional qualifiers in SWIFT
messaging will further improve the
quality of the messaging to the central
securities depository participant, allow-
ing for a greater rate of STP on our
clients’ side.
Letters (continued)
As a custody provider, Standard
Bank is committed to this process and
has been a driving force in ensuring
that the client needs are taken into
account. The recommended changes
will further enable the South African
corporate actions market to move
towards Global Best Practice. These
are exciting times in an exciting market
– watch this space!
David Price, Director of Financial Asset
Services, Corporate and Investment
Banking Division, The Standard Bank of
South Africa
Passing Trade
No two transition managers are
created equal. In the past few years,
the market has witnessed a surge in
the number of investment managers,
global custodians and broker/dealers
offering to act as transition manager.
More providers means more innovation
but may also lead to more confusion
on the part of pension schemes when
evaluating different methodologies.
Different approaches to portfolio
restructurings may have vastly different
implications with respect to portfolio
trading and portfolio risk management.
In the wake of several recent
episodes, an important issue surround-
“Pre-hedging ... to
trade in advance of an
order from a client.”
ing trading practices has emerged-
pre-hedging. In some cases, a broker
has the ability (presumably with explicit
disclosure to, and consent from, the
client), to trade in advance of an order
from a client, in such a manner as to
hedge its trading book when the broker
is acting as principal in the execution
of the client’s portfolio. In doing so, the
provider is effectively taking a position
in the opposite side of the trade for that
client’s portfolio. The provider has
become a counterparty, and in the zero
sum game of principal trading, is now
an adversary rather than an advocate.
The broker can only win when the pen-
sion scheme loses. If the market
declines when the client is selling
stock, the broker benefits.
INVESTOR SERVICES JOURNAL 89
Letters (continued)
Similarly, if the market is increas-
ing when the client is purchasing
stock for a target portfolio, again, the
broker benefits.
The pricing mechanism by which these
providers quantify the cost of a transi-
tion only takes into consideration the
risk carried by the broker – not the
scheme. The gains and/or losses
occurring in this strategy are not esti-
mated before, nor are they measured
after, the trade. This results in a lack of
transparency when it comes to the full
cost of the transition, and, especially,
the manner by which the provider is
motivated – and compensated – for the
quality of execution on the trade.
Pension schemes and their consultants
should investigate the manner by
which a transition manager is being
remunerated in a transition, and
demand a full cost report and hold the
provider accountable for performance.
Avoiding to do so could result in poten-
tial costs or losses to the plan that may
ultimately be carried by the Scheme
and not quantified by the provider –
who was hired in the first place to
manage exactly that risk.
Julie Dickson, Director, Transition
Management Services Europe, Mellon
Global Investments
Competitiveness through
Institutional Trade Matching
At an October 28, 2004 industry
information session, the Canadian
Capital Markets Association (CCMA)
Board presented its unanimous
decision to realign the CCMA's priority
to focus on phasing-in the matching
(agreeing to trade details) of
institutional trades on trade date.
Recent research, commissioned by
the CCMA and conducted by the
Capital Markets Company, found that
while Canada's preparedness to
implement straight-through processing
(STP) is ahead of the U.S. in areas
such as payments and dematerialisa-
tion, it potentially lags the U.S. in the
area of institutional trade.
Until recently, the CCMA has worked
to create STP awareness among the
industry; however, the Board's decision
will direct efforts and resources to the
area thinstitutional trade matching by
90 INVESTOR SERVICES JOURNAL
the end of this year. We are excited
and confident about the opportunity
before us to significantly advance the
processing of institutional trades within
Canadian capital markets.
Gerry O'Mahoney, chair, Canadian
Capital Markets Association
Visualising More
The financial asset management
community has not seen a lot of
change in information interfaces since
the arrival of computers. Columns of
data on a black background are still
“In many cases,
the information value
of data increases
with time.”
widely seen. Simultaneously, data vol-
umes are growing.
Data is not information, and informa-
tion is not knowledge. Data means
nothing if taken out of context.
However, by presenting data in the right
context it becomes intelligible informa-
tion that can become knowledge. We
often say we "act upon information",
while in fact we act when we have
gained knowledge - from information.
In many cases, the information value
of data increases with time. That is,
with more time to consider the data,
more information can be created from
it. However, in situations where time is
fixed, as is often the case in the finan-
cial markets, greater importance is
placed on context or structure.
Improving how data is presented is
the only way we can speed up the leap
from data to information to information
to knowledge. Academic scholars have
lead the way in the research and devel-
opment of information visualisation
technology. This change is exactly what
is going on right now in the world's
financial markets. It is a major shift,
where more data will increasingly also
mean more knowledge.
Willem De Geer, CEO of Panopticon
Software
The Nordic Alliance
Despite the fact that steps have
recently been taken to consolidate the
Nordic market, infrastructure, legal
matters, market rules and regulations
as well as currencies in the Nordic
countries are still and will continue to
be very different and fragmented for a
number of years. There is still a con-
siderable amount of ground to cover
before true harmonisation can be
realised.
In order to meet the challenge to
offer a Nordic product in advance of
such harmonisation, DnB NOR in
Norway, Swedbank in Sweden,
OKOBank in Finland and
Amagerbanken in Denmark have
entered into a product alliance cover-
ing all aspects of Nordic sub-custody,
exchange and OTC clearing with relat-
ed products. The service spectrum will
encompass international financial insti-
“There is still a
considerable amount
of ground to cover
before true
harmonisation can be
realised.”
tutions as well as the domestic client
segment in each of the four countries.
The Nordic Alliance has been creat-
ed in order to provifit from a long time
relationship with other participants in
the market and thus have the neces-
sary contacts and influence with impor-
tant local organizations.
The clients will benefit from timely
market access, quality products, cost
reductions and credibility.
Bente Hoem, First Vice President,
head of global relations and business
development, DnBNOR
ISJ welcomes your letters on any
aspect of the global securities
services industry. For inclusion
within the next edition, letters
should be sent to:-
Janet.DuChenne@ISJForum.com
by Friday 17 December.
Thank you.

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INVESTOR SERVICES JOURNAL 91
 People Moves
Moving
& enhancement initiatives and fostering
Shaking
A selection of the
appointments
updated daily at
WWW.ISJFORUM.COM
Alison Hume has been appointed as
client executive for Bank of New York in
Scotland. Based in Edinburgh and
reporting to Ian
Hards, manag-
ing director, UK
fund managers,
Hume’s remit is
to develop and
manage BNY’s
relationships
with fund man-
agers in
Scotland. She
joins from
Alison Hume Linedata Services
Limited where
she had worked for 17 years, most
recently as country manager for
Scotland.
Harry W. Short (57), executive vice pres-
ident and controller of Northern Trust
Corporation and The Northern Trust
Company, is set to retire in the first half
of 2005. Short joined Northern Trust as
a senior vice president in January 1990.
He was named controller in 1994 and
an executive vice president in 1999. He
was previously a partner in the interna-
tional accounting firm of KPMG Peat
Marwick Short is succeeded by Aileen
B. Blake, who joins Northern Trust as
executive vice president, controller-des-
ignate. Blake most recently served as
vice president of financial planning and
analysis at PepsiCo Beverages and
Foods (formerly The Quaker Oats
Company, Chicago, Illinois). Northern
92 INVESTOR SERVICES JOURNAL
Trust Global Investments has appointed
Grant Johnsey as strategist for transi-
tion management in Chicago. He will be
responsible for developing product
stronger client relationships. Johnsey
will report to Kevin Hardy, global direc-
tor of transition management. He joins
NTGI from Capital Institutional Services
where he held several positions of
increasing responsibility including direc-
tor of global systems integration before
being appointed director of business
operations and most recently was head
of portfolio trading.
Instinet LLC has appointed George
Thomas, Jr as head of International
Equities, North
America. Thomas
joins Instinet
from Citigroup
Global
Investments
(CGI) where he
held the position
of Head of
Strategy and
Business
Development.
George Thomas, Jr
CGI is a division
of Citigroup that manages $90 bn in
non-traditional assets and Thomas was
actively involved in creating and imple-
menting a multi-billion dollar plan to
expand Citigroup’s hedge fund pres-
ence. Prior to CGI, George was chair-
man and CEO of JapanCross Securities,
the first off-exchange equity crossing
system in Japan. He led the business
development of JapanCross from incep-
tion to a fully operational broker dealer.
Thomas’ experience also includes work-
ing as an active international portfolio
manager for State Street Global
Advisers in Boston managing institu-
tional assets, and as part of the global
portfolio trading desk with Nomura
International in New York. Thomas will
report to Tony Mackay with regards to
international equities and to Mike
Plunkett, president of Instinet, North
America with regards to North
American clients.
Jean-Paul Votron has been appointed
executive director of Fortis. Votron hails
from Citigroup and succeeds Anton van
Rossum, who became CEO in
September 2000. Votron has gained
years of experience in the international
financial sector.
His executive committee have appoint-
ed Herman Verwilst, deputy CEO of
Fortis, as chief operating officer (COO),
a newly created position.
Verwilst will play a key role in the reali-
sation of these ambitions by closely col-
laborating with the CEO and CFO in the
day-to-day management of the group.
He was instrumental in steering Fortis
Bank through the first-ever European
cross-border integration. Verwilst will
combine his new function with his
responsibilities as chairman of Fortis
Bank's Management Committee.
As COO, he will be responsible Fortis-
wide and cross-businesses for human
resources, information technology, facil-
ity, operations, risk and legal and com-
pliance.
Fortis Bank Information Banking has
appointed Joost Beckers as managing
director of global clearing and custody
from January 1, 2005.
At the same time Barry Parker will suc-
ceed Joost Beckers as managing direc-
tor of Fortis’ clearing business in
Sydney, while he is also appointed as
regional manager of Fortis Clearing
AsiaPacific.
Both Beckers and Parker will report to
Marcel Jongmans, chief operations offi-
cer of Information Banking and CEO of
global clearing and custody.
Sylvain Ngassa was named sales direc-
tor for GL TRADE London Northern
Europe. Ngassa
joined GL TRADE
London in 1999
following the
acquisition of FL
SOFTWARE, the
provider of listed
derivatives clear-
ing software. In
2003, Sylvain was
named GL
Sylvain Ngassa TRADE’s London
deputy sales
director, responsible for spearheading
the promotion of GL STREAM™ Order
Management System (OMS) integrated
trading solutions. In his new role,
Ngassa will be supported by Simon

Bennett, who is appointed deputy sales
director. Bennet joined GL TRADE
London in November 2003, following
the acquisition of MSTS by GL TRADE.
The Bank of New York has also appoint-
ed Jim McAuliffe as managing director
with responsibility for European sales of
foreign exchange and derivatives.
McAuliffe, who will manage a European
team of 16 foreign exchange and deriva-
tives salesmen, has worked at BNY
since 1987, most recently for 10 years as
vice president, corporate derivatives
sales manager. Based in London,
McAuliffe will report to Stephen Lawler,
senior vice president, derivative sales
and Jorge Rodriguez, senior vice presi-
dent, foreign exchange sales, both of
whom are based in New York. Angus
Cameron has been appointed as chief
financial officer for the Bank of New
York’s operations in Europe.
Reporting to Tom Mastro, the Bank of
New York Comptroller, and Tim Keaney,
head of Europe, he will be responsible
for the management of all European
Finance Department functions.
Cameron has had significant experience
in both the private and public account-
ing industries, having worked as global
CFO for property/casualty underwriters
CNA, deputy finance director at Scottish
Widows, and finance director of
Barclays Stockbrokers Ltd.
BNP Paribas Securities Services has
appointed Scott Dickinson as a senior
global relation-
ship manager for
institutional
investor clients.
Dickinson is
based in London
and reports to
Margaret
Harwood-Jones,
head of global
sales and rela-
Scott Dickinson tionship manage-
ment,
Institutional Investors. He joins BNP
Paribas Securities Services from
Rabobank, where he was responsible for
sales and marketing of the bank’s
Group Treasury Products since 2000.
Prior to that he was managing director
of Global Institutional Services at
Deutsche Bank / Bankers Trust.
Richard Godfrey is joining HSBC
Securities Services in December 2004.
Godfrey will report to Mike Martin, co-
Head of HSBC Securities Services,
Europe and have responsibility for new
major asset manager/insurance out-
sourcing deals and will be a key mem-
ber of the European management team.
Godfrey has extensive experience in the
outsourcing field and in implementing
and managing large operational
processes. He joins HSBC after five
years with Mellon Financial Corporation.
Since 2001 Godfrey was managing
director of Mellon European Fund
Services, the investment administration
arm of Mellon in Europe. In this role, he
was responsible for leading Mellon into
the European outsourcing market, from
solution to implementation, as well as
for growing its traditional fund account-
ing and transfer agency businesses.
Prior to that, Godfrey spent 12 years
with Fleming Asset Management,
including managing large operations
teams supporting the insurance and
investment businesses.
DST International (DSTi) – business
solutions provider for the investment
management industry has further
expanded its Asian team with the
appointments of Ian Baldwyn and Fran
Thompson. Ian Baldwyn joins DSTi as
general manager for South Asia.
Though based in
Singapore, his
responsibilities
will also include
Malaysia,
Indonesia, India,
Sri Lanka and
Brunei. He
comes from
Bloomberg,
where he was the
Ian Baldwyn regional sales
manger based in
Singapore. Before that Baldwyn was the
project director for Odyssey Asset
Management Systems. Fran Thompson
joins DSTi as business development
manager for Asia. Thompson comes
from Thomson Asia, where she was the
product director for the Investment
Management group. Prior to that she
was the general manager of Thomson
Financial First Call Asia and before that
People Moves
she was the regional sales manager for
First Call.
Deutsche Börse AG has appointed
Jeffrey Tessler, an executive vice presi-
dent at the Bank of New York, to its
executive board. From October 6,
Tessler will be responsible for the
Banking and Custody Area within
Customers/Markets at the Borse. On
December 10 he
will also become
chief executive
officer of
Clearstream
International S.A.
Tessler (50) joins
Deutsche Börse
Group following
a 25-year career
with BNY, where
Jeffrey Tessler he held a number
of key manage-
ment positions. Most recently, he
served as EVP of BNY Securities Group,
the company's global agency brokerage,
clearing and financial services outsourc-
ing business. The current CEO of
Clearstream International André
Roelants will become the company's
chairman as of December 10. In an
expanded role, he will focus on client
development, strategic marketing, and
financial industry relationships and
developments. Robert Douglass, who has
served as chairman of Clearstream
International and its predecessor compa-
ny, Cedel International, since May 1994
will become Chairman Emeritus and sen-
ior advisor to Clearstream International.
The Bank of New York has made two
additions to its global transition manage-
ment team in London. The company has
appointed Clare Few as vice president,
product manager and Jane Burnell as
vice president, transition manager. Few
will be responsible for client relationship
management and sales and joins from
JPMorgan Chase where she worked as
transition management product manag-
er. Burnell is responsible for client com-
munications and strategic implementa-
tion of transitions and joins from G-Port,
the global equity portfolio trading divi-
sion of BNY, where she was head of sales
trading. Few and Burnell will report to
Alex Johnstone, European product head.
INVESTOR SERVICES JOURNAL 93
ISJ Directory of Services Custody, Clearing & Settlement

Credit Agricole Investor Services specializes in fund administration, T: +352 4 767 2306
custody/depositary/trustee as well as corporate trust activities. The Group aims to Contact: Olivier Storme
expand its service offering through local synergies in the areas of commercial E: info@
growth and IT infrastructure. eu.ca-investorservices.com
Assets under Custody: EURO434 bn
No of funds: 4,228

Tel: +44 (0) 207 260 8083

HSBC is one of the largest banking and financial services organisations in the world. Fax: +44 (0) 207 260 6144
HSBC's international network comprises about 10,000 offices in 76 countries and Contact: Paul Stillabower
territories in Europe, the Asia-Pacific region, the Americas, the Middle East and Email:
Africa. paulstillabower@hsbc.com
Assets under Custody :$1.483 trillion
Website: www.gis.hsbc.co.uk
No of funds: 8,370
Address: Mariner House, Pepys
Street, London EC3N 4DA

ING Securities Services in The Netherlands, Belgium, Germany, France and Central & T: +31 20 797 9436
Eastern Europe are working successfully under the single name and a single market- Contact: Ingrid Reichmann
ing strategy. ING Securities Services offers an extensive range of securities-related E: ingrid.reichmann-
services to its wholesale clients. ING offers custody services, integrated derivatives kops@mail.ing.nl
and cash-clearing in the various domestic markets in Europe. W:
www.ingsecuritiesservices.com

T: +49 (069) 718-3738

The ING BHF bank is one of the prominent German business banks. Their activities F: +49 (069) 718-3778
are in the divisions of Management & Financial services, Corporate Banking, Contact: Cornelia Keth
Financial Markets and private Banking in summary. Address: Strahlenbergerstraße
Assets under Custody:EURO 140 billion 45, 63067 Offenbach am
Main, Germany

Nordea is one of the leading financial services group in the Nordic and Baltic Sea T: +47 22 48 4544
region and operates through three business areas: Retail Banking, Corporate and Contact: Ms. Oda M. Myklebust
Institutional Banking and Asset Management & Life. The largest financial services Head of Client Relations
group in the region with approximately EUR 262 billion in total assets. A world-lead-
ing Internet banking and e-commerce operation with 3.8 million customers. oda.m.myklebust@nordea.com
Assets under Custody:EURO 360 billion W: www.nordea.com

As a leading supplier of custody services in the Nordic region, SEB Securities

Services expertise in dealing with securities, complex information flows, transactions T: +46 8 763 5770
and payments efficiently and accurately is crucial to your own business methods - F: +46 8 763 6930
and to your ability to make wise investment decisions. Contact: Goran Fors
A blend of personal service, advanced communication solutions and IT systems E: goran.fors@seb.se
means that SEB can provide you with the assistance you need in order to deal with
W: www.seb.se
your securities in the most logical manner.
Assets under Custody: $200 bn

94 INVESTOR SERVICES JOURNAL

T: +41-1-288-4811
F: +41-1-288-4512
Contact: Marco Strimer
E: marco.strimer@sec.
Sisclear.com
W: www.sisclear.com
Address: Brandschenkestrasse
47, P.O. Box, CH-8022 Zurich
T: +33 1 53 05 45 09
Contact: Mathieu Maurier,
Vincent Ginet
E:Mathieu.maurier@socgen.com,
vincent.ginet@socgen.com
W: www.sggssi.com
T: +353 1 6700 300
F: +353 1 8290 144
Contact: Liam Manahan /
Liam Butler
E: liam.butler@boiss.boi.ie
W: http://www.boiss.ie/
Address: New Century House,
Mayor Street Lower, IFSC,
Dublin 1
T: +1 (441) 295-1111
Contact: Andrew Collins
E: contact@bntb.com
W: www.bntb.bm
T: +1 732.563.0030
F: +1 732.563.1193
Contact: Lisa Cohen
W: www.dpmllc.com
Address: Two Worlds Fair Drive, has a world-wide staff of 200 employees. DPM’s HQ is in Somerset, New Jersey with
Somerset, New Jersey,
NJ08873, USA
T: +33 1 53 05 45 09
Contact: Mathieu Maurier,
Vincent Ginet
E:
Mathieu.maurier@socgen.com,
vincent.ginet@socgen.com
W: www.sggssi.com
The SIS Group (SIS Swiss Financial Services Group AG) is, together with its four
subsidiaries SIS SegaInterSettle AG, SIS x-clear AG, S A G SIS Aktienregister AG
and SIS Systems AG, an innovative full service provider for international securities
trading, clearing, settlement and custody.
Assets under Custody: CHF1,817 bn
SG GSSI offers a complete range of value added securities services for all institutional
investors: clearing, custody and trustee, fund administration, transfer agent and registrar
services. Societe Generale ranks 4th securities custodian in Europe and 10th worldwide
with USD 1,350 billion in assets held. SG GSSI provides custody & trustee services to
2,300 funds and its subsidiary Euro-VL provides valuations for over 3,300 funds repre-
senting assets of USD 300 bn. The quality of these services is acclaimed by the world’s
leading agencies: - Trustee and custody – Paris: Aa2 (MQ) (Moody’s) - Global custody –
Paris: aa (Fitch Ratings), Trustee Paris: aa+ (Fitch Ratings)
Fund Administration
Bank of Ireland Securities Services (BoISS) is a provider of administration, custody,
transfer agency/ shareholder services and trustee services.
Assets under Custody:USD$160.8 billion
No. of funds: 155 funds (July 2004) including assurance linked funds, exchange
traded funds, umbrella funds, unit trusts, variable capital companies, etc.
Butterfield Fund Services (Bahamas) Limited boasts a team of experienced profes-
sionals dedicated exclusively to serving investment managers. Fund administration is
Butterfield Fund Services’ sole business, allowing us to demonstrate our commit-
ment to fund administration.
Derivatives Portfolio Management provides onshore and offshore alternative asset fund
administration, back and middle office outsourcing, portfolio valuation, daily NAVs, risk
administration and portfolio transparency solutions for fund managers, asset allocators,
institutional investors and proprietary traders. DPM’s services are designed to solve com-
plex administrative needs and improve operational efficiency. DPM has the systems,
infrastructure and experience to handle your toughest administrative challenges. DPM
offices in London, the Bahamas, and the Cayman Islands.
SG GSSI offers a complete range of value added securities services for all institutional
investors: clearing, custody and trustee, fund administration, transfer agent and registrar
services. Societe Generale ranks 4th securities custodian in Europe and 10th worldwide
with USD 1,350 billion in assets held. SG GSSI provides custody & trustee services to
2,300 funds and its subsidiary Euro-VL provides valuations for over 3,300 funds repre-
senting assets of USD 300 bn. The quality of these services is acclaimed by the world’s
leading agencies: - Trustee and custody – Paris: Aa2 (MQ) (Moody’s) - Global custody –
Paris: aa (Fitch Ratings), Trustee Paris: aa+ (Fitch Ratings)
95 INVESTOR SERVICES JOURNAL
ISJ Directory of Services Securities Lending

eSecLending is a global securities lending manager designing, implementing and T: +44 (0)207 002 6700
administering customized securities lending programs for major institutional F: +44 (0)207 002 6700
investors worldwide. The firm provides comprehensive securities lending manage- E: ukinfo@eseclending.com
ment services. From developing the program, to setting up and conducting the Website: www.eseclending.com
auction, to handling all daily administration, eSecLending supports clients at Address: Old Mutual Place, 2
every point in their securities lending activities. eSecLending is an Old Mutual
Lambeth Hill, London EC4V
plc group company.
4GG, UK

Tel: +353 (1) 674 5520

Fax: +353 (1) 829 1055
Pioneering the dedicated Third-Party Securities Lending Agency Intermediary in Contact: Hans Beckmann
Europe since 2001, Guild Global manage Equities and Fixed Income loan balances Website: www.guildglobal.com
of 9.0 billion in twenty-four countries for some of Europe's premier institutional Address: Guild Global
Asset Managers, Pension Funds, Mutual Funds and Life Assurance Companies. Securities Limited, Guild
House, Guild Street, IFSC,
Dublin 1, Republic of Ireland

Technology
T: +41 (0)44 218 14 14
F: +41 (0)44 218 14 18
IFBS offers the financial industry a wide range of consulting services as well as
E: info@ifbs.com
individual and standard software solutions. The firm supports clients along the entire Website: www.ifbs.com
security value chain - from business modelling to change management processes. Address: IFBS AG,
IFBS’s IT solutions range from FINACE®, a Securities Finance and Collateral Buckhauserstrasse 11,
Management Platform, to the development of tailor-made IT applications. CH-8048 Zurich, Switzerland

T: +44 (0) 20 7643 2242

4sight Financial Software is a world leader in the provision of innovative software F: +44 (0) 20 7643 2201
solutions to the Securities Finance and Settlement markets around the globe. As the Contact: Judith McKelvey
technology partner of choice for many leading European, North American and Asian W: www.4sightsoftware.com
financial organizations our successes speak for themselves. Address:: No.1 Poultry, London
EC2R 8JR, UK

FUNDsoft: With offices in London, Glasgow, Jersey and Luxembourg; FUNDsoft For more information visit
provides one of the most technically advanced Fund Administration platforms www.fundsoft.co.uk or call
available. The COBAS range of solutions are designed exclusively for Fund and 08702000443
F: 020 7959 3030
Investment Managers, BPO providers and TPA’s. Various acquisition models are
Mob: 07980912649
offered covering the following areas; Contacts: Mark Culham,
Address: 288 Bishopsgate,
European Unit Trusts; Offshore Funds; PEP, ISA, OEIC & SIPP's; Pooled Pensions; London, EC2M 4QP
Property Funds; Fund of Funds; Multi Manager Funds; Wrappers; Fiduciary portal;
Funds Automation; Funds Supermarkets; Reporting ; Hedge Funds; Investment E: mark@fundsoft.co.uk
Trusts. Web: www.fundsoft.co.uk

Stock Exchanges
T. 1.345.945.6060
The Cayman Islands Stock Exchange has completed seven years of operation since
F. 1.345.945.6061
its launch in 1997. It is now established as the offshore leader in hedge fund list- Contacts: Valia Theodoraki –
ings with substantial growth in this area over the past two years. The Exchange is a CEO, Richard Crawshaw – Head
“recognised stock exchange” under the UK Inland Revenue Income and Corporation of Listings, Monique Melis –
Taxes Act 1988. The CSX is an affiliate member of IOSCO and the Intermarket Head of Business Development.
Surveillance Group. The Exchange operates a true offshore market. The listing and W: www.csx.com.ky
membership rules have been designed to meet international standards as well as the Address: Cayman Islands Stock
needs of our specialist products. To date more than 800 securities have listed on Exchange, 4th Floor Elizabethan
Square, PO Box 2408GT, Grand
the Exchange, primarily mutual and hedge funds as well as specialist debt securities
Cayman, Cayman Islands
and derivative warrants.

96 INVESTOR SERVICES JOURNAL

 Nordic Excellence

Securities Services is the leading provider of custody and clearing services

in the Nordic region.
Business is built on long standing partnerships with our clients.
Our commitments are efficiency, reliability and providing the highest
service quality.

For further information please contact: Head of Securities Services: Mikael Björknert,
mikael.bjorknert@seb.se. Investor Services Global Clients: Göran Fors, goran.fors@seb.se.
Global Client Relations: Ulf Norén, ulf.noren@seb.se. Global Securities Lending: Kristian
Stångberg, kristian.stangberg@seb.se

C2_seb_nordic-exc_203x267_isj.indd 1 2004-08-27 13:33:30

Who can create a clear path to liquidity
in today’s fragmented market?

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+1 212 667 9586 +44 (0)20 7521 5672 +852 2536 1220 +813 3213 9601

Nomura International plc is authorised and regulated by the Financial Services Authority and is a member of the London Stock Exchange.