Back to the back

01 March 2008Features

Corporate actions processing has long been the “ugly stepchild” of the back office – no one wants to deal with it but it is essential that it keeps grinding on. Yet these highly manual and complex processes pose potentially serious risks. What is holding back automating this area?

Long neglected, corporate actions automation may finally be getting a bite at resources now that more demanding regulatory pressures are over, like the Markets in Financial Instruments Directive which came into force on 1 November last year.

Nat Sey, reference data business manager at Interactive Data (Europe), believes that this is a “sweet spot” for corporate actions technology vendors and back office managers now that “there is a bit of breathing space and we can focus on dealing with corporate actions issues once and for all”.

The Aite Group, a Boston-based analyst firm, defines corporate actions as any company-driven event that can materially change the nature of the inherent value of a security. This can range from a dividend payment to a hostile takeover in the form of a tender offer. Brussels-based messaging standards consortium Swift identifies over 65 different types of corporate actions events in its ISO 15022 messaging standard.

Corporate actions generally involve obtaining and verifying several pieces of time-critical information, so in that sense they are not single-event processes. Additionally, if a custodian is operating cross-border, there is the added complexity that the reporting rules are linked to local law and therefore different in each region.

Historically, corporate actions automation has been a difficult area to find funding for: buried deep in the back office and viewed only as a cost centre, they are complex processes with many manual interventions and a lot of proprietary processes that have built up in terms of proprietary messaging and different ways of interpreting information and different market practices.

The lack of standardisation, the complexity of the instruments and the amount of innovation that happens in the securities industry have made automation a large project costing thousands or millions of dollars to develop a process where quantifying the benefits is almost impossible – it is only when something goes wrong that the risk becomes real.

In the past the answer has been for the back office to throw more people at the problem. But manual intervention increases the risk – one misplaced piece of paper can mean that all the money made from one client in a year can disappear overnight. With the enactment of regulations like MiFID, which stresses pre- and post-trade reporting transparency and best practices, stable back office systems are now considered to be a prerequisite.

Brian Filanowski, EMEA business owner, pricing and reference data at Reuters, says that the development of algorithmic trading with an exponential growth in trade volumes and the sheer complexity and innovation in the instruments are also driving attempts to automate.

“At the end of the day all the stuff that goes on in the front office eventually ripples down to the back office and the back office starts failing,” Filanowski says. “I think that it is bursting at the seams now – all these things have happened at the same time and as they haven’t invested in the back office for years, it starts to fail. This ends up costing the client money because you can only hire so many people to clear and settle your trades manually or put Band-Aids on the problem rather than getting to the root of it and revamping it.”

The Aite Group’s research confirms a growth in expenditure in corporate actions automation. In its January report, Corporate Actions Systems Vendor Comparison, the research shows a large increase in IT spending on corporate actions management over the past three years, rising from $121 million in 2004 to $186.4 million in 2007 (see figure 1). The largest portion of this spend was allocated to integration ($107 million in 2007) and software solutions ($64 million in 2007). The Aite Group predicts that this trend will continue through 2009 with the IT spend topping $246.4 million.

Phillip Silitschanu, director of European research at the Aite Group and author of the report, believes that corporate actions have been the last “frontier” for reduction of risk and also for the increase of straight through processing. He agrees with Filanowski that the pressure is increasing as trade volumes swell and hedge funds begin to look at corporate actions as something they can arbitrage, as risk comes to the forefront and as profits margins get squeezed. “This isn’t something we can just stick in the corner and hope it goes away,” says Silitschanu.

The majority of processing errors are caused by incorrect or misinterpreted data, according to the Aite Group. The 1995 development of the ISO 15022 messages for corporate actions has gone a long way in resolving this problem.

Linda Bookheim, senior manager for markets, custody and asset services at Swift, agues that the next step is to get people to automate the process and then integrate the standards. “That has been the major challenge,” she says. “The biggest obstacles are two-fold: firstly, certain firms are so engrained in the physical process that they are almost scared to automate and think they will lose control over it; and secondly, a lot of firms are limited by the software that they currently use – if they do have automation, it has limitations and maybe isn’t ready to take automated feeds or standardised messages.”

Bookheim believes that change is happening in the way people are adopting the standards: they are starting to pay attention, attend industry conferences, talk about the issues, participate in the market practices groups, and participate in projects to improve the quality of the data. She points to the fact that Swift’s volumes have increased in those message types. “On average we have seen an increase every year of at least 20%, with this year seeing more than 21% increase over last year. Because corporate actions is a complex process, it does take time to automate the process, so some are just beginning to catch up. Hopefully we are seeing a snowball effect as more and more people automate, other people will also, in order to stay competitive, reduce cost and comply with regulations coming down the road.”

The quality of the messages is another major issue, so Swift has had to deal with how the messages are being used. “We have heard comments from users that they get the same event from multiple sources and every source has it coded a different way,” says Bookheim.

The Securities Market Practice Group, which is made up of 35 national market practice groups and facilitated by Swift, launched the Event Interpretation Grid in April 2006 to assist in the understanding and coding of different events. The EIG defines every event type and identifies a code that should be used for that event type. It then drills down to say whether this corporate action event is a mandatory or voluntary event, or a mandatory event with options. Then it further breaks that down for 22 different markets because different markets may process certain events or classify them differently.

Swift validates the syntax and structure of messages on the platform – but it doesn’t validate content or placement of certain fields. “The grid gives us the basis to start to validate but our customers said that they don’t want Swift to validate market practice because of the high risk of corporate actions not being notified on time or not being notified at all. So they still want to get the notice even if it is not a good notice,” says Bookheim.

Swift has responded to that problem with a service called Stimulation Test and Qualification System (STaQS), which will test for consistent compliance with SMPG guidelines for corporate actions. A version is already being used for SEPA, and the corporate actions STaQS will be going live in May 2008 for the 2007 standards release – the one in current use. Swift will make another release in July 2008 with the standards release of 2008, which will go into effect in November, so the industry be able to test STaQS between July and November.

Interactive Data’s Sey points out that ISO 15022 is not the only standard in town. “Right now ISO 15022 is where it’s at and it is what people are concentrating on, but that is not to say that it is the be all and end all – we are seeing much more interest in ISO 20022 than ever before, for example. The whole industry – and I don’t just put this at Swift’s door or ISO – has to be very aware of the challenge involved in approaching market participants with the notion of moving to 20022 when it has so recently had to undertake a lot of integration work in order to deal with 15022. What are the technical benefits? Its all in the presentation.

“There has been a lot of investment in dealing with 15022 – to suggest that it needs to be now thrown away and we move to 20022 would be a very hard sell. There must be a happy medium we can reach where a lot of that investment can be leveraged and moved over to the 20022 environment.”

However, Aite Group’s Silitschanu, for one, thinks an absolute standard to enable STP is just around the corner. “Once that happens, it will be the big bang in corporate action. I think you will see that standards coalesce this year, probably establishing themselves early or mid 2009. By 2010 you are going to see a huge revolution in the corporate action field.”

Gert Raeves, vice president of business solutions at GoldenSource, a data management systems vendor, is more sceptical that a development in one area will clear the logjam. “There isn’t a single problem with corporate actions so that you can say if only you used ISO then you are fine, or have a superior matching and exception management environment then it will all be fine. You need to do all of it. That is where the biggest challenge is for the industry – the maturity of understanding that.”

Although standardisation helps to harmonise the corporate actions landscape and increase STP rates, the idea of reaching 100% STP misunderstands the very nature of corporate actions, believes Mathias Papenfuss, head of asset services at Clearstream. “Because the world of corporate actions is moving fast in terms of innovation, investment bankers, lawyers, etc. are always coming up with new ideas about how to structure a corporate action event. Consequently, you are lacking standardisation and harmonisation because the market is full of innovation. Innovation, to a certain extent, is a reflection of diversity and change, and it is the biggest enemy of standardisation and STP because we are always forced into exceptional processes with specific exception handling,” he says.

He thinks that the industry has moved through a learning curve. “There were people out there that said we need to achieve 100% STP and set up big projects and then simply failed due to the diversity of the corporate action event types,” he says. He promotes Clearstream’s method of re-engineering specific modules within the end-to-end process. Putting together all these modules means that the majority of the chain is STP’d but you retain the flexibility that is required to keep pace with the innovation in this business.

Clearstream plans to automate information capturing and collection by the end of this year or early in 2009 – it has already automated information distribution. Papenfuss believes that the instruction handling module of the corporate action can be put easily into STP process, which Clearstream is working on in order to get something rolled out for defined event types in the third quarter this year. “We will have quite a big IT release at that point in time in order to improve and expand those capabilities,” he says.

Desert blooms

01 February 2008Features

The Middle East financial services market is booming due to the high oil prices and emergent construction and real estate markets. Local exchanges and financial institutions are responding quickly and expanding their business in the region, as well as making advances internationally.

While the rest of the world has been rocked by the sub-prime crisis on one side and the fear of recession on the other, the majority of the Middle Eastern economies have been booming, fuelled mostly by the high oil prices that reached a record $100 a barrel at the beginning of January.Sovereign wealth funds, like the Abu Dhabi Investment Authority and the Kuwait Investment Authority, are using their billions to bail out big players like Citi and Merrill Lynch during these turbulent times.

Much of the money has stayed within the region after 9/11, when America took a harder stance towards the Arab countries. Many of the Middle East nations, especially in the Gulf, turned their investments inwards with massive expenditure in infrastructure, which in turn is fuelling a construction and real estate boom.

“What we are seeing is huge public expenditure in infrastructure, into diversification projects like tourism and into creating free trade zones. Plus there many Middle Eastern sovereign wealth funds that are investing all over the world,” says Kamran Butt, research analyst at Credit Suisse and author of an equity research paper,Gulf region: One of the most attractive investments for 2008.

“We’re seeing a strong economic basis that is driving the local markets with an influx of liquidity intra-regionally – this isn’t money that is coming from abroad but money that is generated locally within the region.” The creation of the Gulf common market on the 1 January this year has also helped to increase cross-border business opportunities between the Gulf States.

Although not all countries in the Middle East are as wealthy as the Gulf States, most are still seeing relatively strong growth, with the exception of countries bogged down in war or its aftershocks such as Iraq, Lebanon and Israel. Even Iran, in the face of US sanctions, is growing economically, benefiting from the high price of oil. And there is a trickle down effect that is being felt within the whole region.

“The infrastructure budgets in this region are among some of the highest in the world and that creates an economic driver and a feel-good factor within the whole region, whether you are looking at Bahrain, Oman, United Arab Emirates or Saudi Arabia,” adds Butt. “It is a feel-good factor led by the governments that are pumping money into the infrastructure into the non-oil sector of the economy.”

With the knowledge that the oil will not last forever, many of the Gulf States are increasingly looking to diversify their economies. Dubai, one of the emirates in the UAE which has almost no oil left, has led the region with theField of Dreams mantra: “build it and they will come”. Striving to oust Bahrain as the financial hub of the region and with hopes to play in the big league internationally, Dubai has developed a supply-led strategy through building the Dubai International Financial Centre in 2004 and enticing financial institutions to set up shop through attractive ownership structures, zero tax, etc.

Phil Knowles, partner at KPMG, explains: “The Dubai government built the DIFC and then incentivised people to come with 100% ownership and no restrictions around repatriation of profits and dividends; there is a guaranteed zero rate of tax for the next 50 years; and there are strong regulations – they brought in experienced people, from different regulators around the world who know what they are doing, to build a strong regulator to establish a reputation of trust.”

Now most of the big firms like Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers have a presence there, and a lot of the middle tier firms are moving in, with a wave of smaller boutique-type operations expected to follow. “They all have to focus now on delivering a strategy for the region, which in the past was more fragmented,” says Knowles.

Dubai has also taken the initiative in driving international expansion in order to be a recognised financial centre like London or New York. In a high profile move, Borse Dubai has entered into a relationship with Nasdaq by bolstering Nasdaq’s holdings in the Swedish exchange technology firm OMX – now Borse Dubai has a stake in Nasdaq and the American exchange has invested in its Dubai International Financial Exchange. Within the deal, Borse Dubai also gained a chunk of the London Stock Exchange.

Butt points out that beyond the integration agenda, there is a technology reason underpinning the interest in OMX. “In the Middle East there is a lack of domestic technology companies. One of their motives for buying assets is buying expertise or technologies. OMX is one of the most technology advanced exchanges within Europe – it may not be the biggest but it has one of the most advanced trading platforms. One of the reasons that Dubai looked at OMX is to buy in technology. This is why you are seeing that these wealth funds have the aim of buying technology, buying up companies that have expertise and also get exposure in the region. I think that is the primary reason for OMX deal.”

OMX is a main trading technology player in the Middle East partly through its 2006 acquisition of Computershare, which had previously acquired Canadian trading systems firm EFA Software, giving it a strong presence from the onset of exchanges in the region; and it has pushed forward its momentum with deals with the Egyptian Cairo & Alexandria Exchange and the Tadawul, the Saudi Arabian stock exchange. Atos Origin Middle East, sold off by Atos Origin in February 2006 and recently acquired by HP in November 2007, is the other large player, supplying trading platforms to Amman Stock Exchange, Muscat Securities Market and the Beirut Stock Exchange.

A strong exchange is part and parcel of the dream of becoming the logical financial centre in the Middle East, says Knowles. An exchange that includes “a good range of high quality listings of both equities and derivatives and potentially other instruments, backed up by good technology, creates a lot of opportunities, liquidity and volume to your financial market that you can exploit across the region,” he says. The listing of DP World, which debuted on the DIFX in late November, has given Dubai a centre stage position in global markets.

Dubai is facing a lot of competition, not just from Bahrain but also from Qatar, which is in the process of building its own financial centre and has a lot of cash to invest because of its gas reserves.

Plus the region’s “sleeping giant”, Saudi Arabia, is beginning to wake up. With Saudi Arabia’s economy flourishing and its Tadawul still the biggest stock exchange in the region, even after the correction in 2006 when the exchange’s value was nearly halved because of fears that the market was being manipulated by a few large investors. It will be hard for Dubai maintain the upper hand especially since Saudi Arabia has begun the process of opening up its markets to foreign investment and ownership as a result of joining the World Trade Organisation in 2005.

Krishan Soni, regional sales manager for capital markets, Tata Consultancy Services, explains: “The market crash resulted in the Capital Markets Authority waking up and implementing new regulations in Saudi Arabia. Now the brokerage divisions have to be spun off as a separate legal entity, so the commercial banks can not do investment banking anymore. This also resulted in CMA looking at options of creating licenses for new brokerage firms – these have gone from nine to 27 brokerage firms in 2007.”

The protectionism that has historically been a strong characteristic of the Middle Eastern countries is being broken down. With the advent of the Gulf common market, the walls are being torn down between the Gulf Co-operation Council nations, which include Saudi Arabia, UAE, Kuwait, Qatar, Oman and Bahrain. This change will make it more difficult for the other countries to maintain protectionist barriers.

The GCC is also talking about moving to a common currency by 2010, but with the pressure on many countries to de-peg their currencies from the dollar – which Kuwait has done already – the deadline is unlikely to be met. KPMG’s Knowles believes that there is still a long way to go before the central banks reach consensus about how to drive the common currency project forward.

Case study: Arab National Bank replaces treasury and risk systems

The Middle East has seen a huge growth in the banking market and a rise in the sophistication of the marketplace. Many of the traded instruments in the treasury space are more sophisticated compared to 10 years ago – now many people are trying to hedge their positions with complex structured products, credit derivatives and other instruments commonly seen in the West.

Roy Froud, Misys’ managing director in the Middle East, says that these developments are stretching the core banking systems. “Five or six years ago banks tried to solve their technology problem with a one-stop-shop by going to a vendor and buying just one core banking system which tried to address everything from the core retail banking, the wholesale banking, the trade finance, the treasury and syndicated lending, all in one piece of software. But now that concept has started to be tested.”

Due to this increase in complexity and the expansion of its treasury business, Saudi Arabia’s Arab National Bank, headquartered in Riyadh and with 117 branches including one in London, realised that it had outgrown its existing IT system. It required a modern integrated treasury and risk management system that would improve efficiency while reducing costs.

John Eldredge, general manager and head of treasury markets at the bank, says: “The system had done its job well, but it didn’t meet our developing needs, particularly the increasing range of products we wanted to introduce. For example, it didn’t support derivatives and would not enable us to comply with IAS 39. This is the new international standard relating to accounting for derivative financial instruments and hedging activities.”

ANB needed the platform to be comprehensive, meeting all existing capital market requirements and still have the inbuilt flexibility to support and enable its growth agenda. The bank also wanted to automate its back office processes.

Eldredge adds: “We decided we wanted a complete front, middle and back office system with full reconciliation and support for trading across a wide range of products and real-time risk management. The old treasury system did not interface with the bank’s main accounting system, so we definitely wanted to change that. The old system only supported ‘vanilla’ functions and we needed one that could support some of the Islamic products we were introducing, which have very specific and often complex requirements, such as foreign exchange delayed delivery features.”

ANB chose Misys Opics out of a field of 15 competitors because of its open, flexible framework for rapidly introducing new products in the future. With Opics, ANB benefits from more efficient risk management and straight through processing capability across all of its treasury businesses and product lines. Opics was implemented in phases during an 18 month period, starting with derivatives, which were the most pressing requirement due to the imminent introduction of IAS 39, and ending with foreign exchange, the largest area by volume of transactions per day.

Egypt

▪ Population: 80,335,036 (July 2007 est.)*

▪ Egyptian pound floats again the US dollar.

▪ GDP growth rate at factor cost markedly increased from 4.6% during FY 2004/2005 to 6.9% during FY 2005/2006 (source: Central Bank of Egypt Annual Report 2005/6).

▪The Central Bank of Egypt is implementing reform based on four pillars: privatisation and consolidation of the banking sector; financial and managerial restructuring of the state-owned banks; solution of the problem of non-performing loans; and upgrading of the supervision sector at the CBE.

▪The Cairo and Alexandria Stock Exchanges and Misr for Clearing, Settlement and Central Depository signed an agreement with Abu Dhabi Securities Market, allowing dual listing and trading of the securities listed in both markets in accordance with their relevant trading systems. CASE has signed MOUs with Shanghai Stock Exchange and Korea Exchange, as well as teaming up with the Swedish IT company OMX to establish a capital market IT company. CASE has launched a mid and small cap market NILEX.

Israel

▪ Population: 6,426,679 note: includes about 187,000 Israeli settlers in the West Bank, about 20,000 in the Israeli-occupied Golan Heights, and fewer than 177,000 in East Jerusalem (July 2007 est.)*

▪ Israeli shekel.

▪ Economic activity continued expanding throughout the year, extending the trend that started three years ago, following the deep recession of 2001 and 2002. The recovery persisted, even though the rate of growth slowed in the third quarter of 2006, due to the Second Lebanon War. GDP increased by 5.1%. (source: Bank of Israel)

▪Tel Aviv Stock Exchange has four international financial institutions as members of the TASE – Citibank, which joined the exchange and the clearing house during 2006, and HSBC, UBS and Deutsche Bank, which joined earlier. TASE has signed agreements with Nasdaq and with the London Stock Exchange.

Lebanon

▪ Population: 3,925,502 (July 2007 est.)*

▪ Lebanese lira pegged to US dollar.

▪ Beirut Stock Exchange successfully implemented the remote trading system in December 2006. In 2007 the BSE launched a new real time website which provides data on live trading, news digest, listed companies’ performance and maintains the flow of information to the public. In addition, the stock exchange plans to upgrade the NSC-UNIX trading system, with a new version that will add more features to the existing system.

Palestinian Territories

▪ EFA Software Services, a Canadian company, provided both the trading and settlement & clearing systems for the Palestine Securities Exchange in Nablus, which was established in 1995 as part of the Oslo Accords.

▪The Palestinian Authority is now in the process of establishing an embryonic central bank.

▪The Palestine Monetary Authority is mandated to manage a Palestinian currency once a state is established. Palestinians in the West Bank and Gaza now use Israeli shekels, US dollars and Jordanian dinars.

Saudi Arabia

▪ Population: 27,601,038 note: includes 5,576,076 non-nationals (July 2007 est.)*

▪ Saudi riyal pegged to US dollar.

▪The growth rate of GDP (at current prices) rose by 10.6% (source: Saudi Arabian Monetary Agency Annual Report 2006).

▪Tadawul, the Saudi Arabia stock exchange, is the eleventh largest exchange in the world and is supervised by the Capital Market Authority. In 2006 the Tadawul signed a contract with OMX for the design, supply and implementation of trading, information dissemination, surveillance and depository and settlement systems. The new infrastructure will support Tadawul’s plans for expanding its business and product offerings.

Syria

▪Population: 19,314,747 note: in addition, about 40,000 people live in the Israeli-occupied Golan Heights – 20,000 Arabs and about 20,000 Israeli settlers (July 2007 est.)*

▪Damascus Stock Exchange to open early in 2008 and Sweden’s OMX will provide the technology.

Jordan

▪ Population: 6,053,193 (July 2007 est.)*

▪ Jordanian dinar pegged to the US dollar.

▪ GDP, at constant market prices, increased by 6.4% in comparison with 7.2% in 2005 (source: Central Bank of Jordan Annual Report 2006).

▪Amman Stock Exchange, like other regional markets, witnessed a broad correction movement during 2006 that led to a significant decline in stock prices in contrast to the marked increase recorded in 2005.

Oman

▪ Population: Pop 3,204,897 note: includes 577,293 non-nationals (July 2007 est.)*

▪ Oman rial is pegged to the US dollar.

▪ GDP grew by 15.6%, in 2006, representing the third consecutive year of strong economic growth (source:Central Bank of Oman Annual Report 2006).

▪The Omani banking system has gone through several rounds of mergers since the 1990s and as at the end of 2006, the number of commercial banks stood at 14, of which 5 are locally incorporated and 9 are branches of foreign banks.

▪ Muscat Securities Market implemented an advanced electronic trading system, as well as a financial settlement system for trading among brokerage companies. Internet-based trading was launched in the first quarter of 2007. The second milestone in the Payment System Strategy Roadmap was reached on 6 September 2006 with the launch of an automated clearing house.

Iraq

▪ Population: 27,499,638 (July 2007 est.) *

▪ Iraqi dinar.

▪Iraq Stock Exchange was established 18 April 2004 and began trading on 24 June 2004. It operates under the oversight of the Iraq Securities Commission, an independent commission modelled after the US Securities and Exchange Commission. The ISX opened to foreign investors on 2 August 2007.

Yemen

▪ Population: 22,230,531 (July 2007 est.)*

▪ GDP growth accelerated from 3.9% in 2004 to 4.6% in 2005 (source: Central Bank of Yemen Annual Report 2005).

▪ No stock exchange.

Iran

▪ Population: 65,397,521 (July 2007 est.)*

▪ Iranian rial.

▪Despite regional and international tensions during 1384 (2005/06) GDP registered a growth rate of 5.4%.

▪The Tehran Stock Exchange experienced a dramatic fall in the second half of 1383. The slump continued in 1384 and bottomed out by the end of the year against the backdrop of bubble market.

▪ TSE established seven new stock exchanges in various regions. (source: Central Bank of the Islamic Republic of Iran Annual Report 2005/6)

Bahrain

▪ Population: 742,561 note: includes 283,549 non-nationals

▪ Bahrain dinar is pegged to US dollar.

▪ GDP grew by 19.7% at current prices and 7.8% at constant prices in 2005 (source: Central Bank of Bahrain Annual Report 2006).

▪ Central Bank of Bahrain has implemented an RTGS system from Singaporean firm BCSIS, which also developed a securities settlement system to handle government securities. The CBB has recently moved to new premises in the Bahrain Financial Harbour.

▪ Bahrain Stock Exchange has recently approved a project to replace its existing trading, clearing, settlement and central depository servers. In May last year it signed an MOU with Abu Dhabi Securities Market and followed that in June with a cooperation agreement with LSE.

Kuwait

▪ Population: 2,505,559 note: includes 1,291,354 non-nationals (July 2007 est.)*

▪ Kuwaiti dinar unpegged from US dollar.

▪ GDP at current prices continued to grow during 2006 up 20.8% on 2005 (source: Central Bank of Kuwait Economic Report 2006).

▪The main trading indices of the Kuwait Stock Exchange followed a downtrend during 2006. The OECD reports that a new capital market regulatory authority is being established in Kuwait.

▪ On 28 January 2003 the Kuwaiti Ladies Trading Hall was opened with the aim of creating an adequate environment for business women to trade their investment.

Qatar

▪ Population: 907,229 (July 2007 est.)*

▪ Qatari riyal fixed rate against the US dollar.

▪ GDP continued its vigour in 2005, albeit at slower pace than that of 2004, reaching 33.8% in 2005 compared to 34.8% in 2004 (source: Qatar Central Bank Annual Report 2005).

▪ In February 2005, QCB instructed the commercial banks to provide the new Islamic financing services through a unit (or a division) inside the bank or through an independent branch. In the second half of March 2005, QCB allowed banks to open accounts for foreign companies which do not operate in Qatar.

▪ Doha Securities Market

▪ Qatar Holding, part of the state-owned Qatar Investment Authority, withdrew its bid for Nordic Exchange OMX to focus instead on a potential deal to become the biggest shareholder in the London Stock Exchange.

▪ Qatar has plans for free trade zones and is building a large financial centre.

United Arab Emirates

(Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Qaiwain, Ras Al Khaimah, Fujairah)

▪ Population: 4,444,011 (July 2007 est.)*

▪ UAE diram fixed peg to the US dollar.

▪ GDP grew 23.4% in 2006, compared to 2005 (source: Central Bank of the United Arab Emirates Annual Report 2006).

▪ Dubai International Financial Centre is a “financial free zone,” a separate legal, geographic and judicial jurisdiction established in 2004.

▪ Dubai International Financial Exchange, Abu Dhabi Securities Market, and Dubai Gold & Commodities Exchange. The Dubai Mercantile Exchange will soon be launched, following a joint venture with the New York Mercantile Exchange.

▪ Borse Dubai, the holding company for DIFX and Dubai Financial Market, has entered a complex deal to buy shares in OMX and then transfer these stocks to Nasdaq. At the same time, Borse Dubai will make a minority investment in Nasdaq which in turn will take a minority holding in DIFX.

Tech spend rising due to regulatory change

The Middle East countries have created a more favourable financial services regulatory environment, which in turn is driving technology spend, according to the Tower Group research note Bright Spots in the Desert: Governance Takes Center Stage in Financial Services in the Gulf Region (see graph). Changes in the region include the opening up of the markets to foreign investment, the implementation of Basel II and the rise of Islamic products.

The central banks across the Middle East decided to implement Basel II in the agreed international timeframe of the 1 January 2008. But for many banks looking to compete on an international level, the technology expenditure has been driven more through the desire to implement best practices across their business.

Andreas Hug, solution leader for risk management, SunGard, says: “We see a lot of banks in the region investing in risk management solutions. One of the key drivers, besides the fact that right now they have a lot of money, is that they want to be prepared and credible in the international banking market – and to basically have international banking activities you have to prove that you have your risks under control. The other driver is a straight regulatory driver because the banks in the Middle East are also implementing Basel II.”

Waleed Abdullah Rashdan, executive manager at Kuwait Finance House (Bahrain), agrees that Basel II was a secondary reason – primarily the bank wanted a good risk management system for better risk practices. In 2006 it began by implementing SunGard’s asset liability management technology and then Basel II to meet the Central Bank of Bahrain’s deadline of 2008.

“We knew that it is difficult to generate the capital adequacy report required for Basel II using manual calculations – we had to automate the process. The problem was to map the Islamic banking products with Basel II products. This was the challenge and it took time for us and SunGard to sit together and map all these products to Basel II,” says Rashdan.

Islamic banking is an increasingly important part of the Middle East financial terrain and is growing by close to 15% each year – this growth rate is expected to continue at least until 2010. Nick Brewer, group strategy manager, Temenos, says: “Rather than being a specialised function, Islamic banking has moved into the mainstream. I would be now surprised if you came across a new bank or a bank expanding that didn’t have plans to offer some type of Islamic window. Four or five years ago it wasn’t the case; it was a growing sector but it tended to be more specialised banks or experiments.”

Andrew Jackson, chief executive of the KPMG Saudi Arabia practice, agrees: “Islamic banking is becoming increasingly important – a lot of the banks have refocused their Islamic banking strategy. If you look at National Commercial Bank, over the last 24 months it has gone through the process of converting all its banks to Islamic banks. All major players in Saudi are increasingly reliant on their Islamic banking strategy.

“Plus they are looking at expanding regionally and further afield – like the Al Raji Bank which has set of operations in Malaysia and is expanding those operations. There are all sorts of things that spring up from that, like efficiency of operations and consistency of systems and platforms. When these national banks become regional and international, they have got to face all sorts of governance issues as well.”

Turning green

01 December 2007Features

Climate change is making the entire world sit up and take notice of the potential challenges it poses. What technology can financial institutions employ to reduce their carbon footprint and promote sustainability?

After years of environmentalists banging on about climate change, it took an economist to make the business world sit up and take notice – basically because he presented the crisis in market terms. In his November 2006 report, Sir Nicholas Stern, head of the UK Government Economic Service, said that the world was facing not only a potential economic disaster but also the greatest market failure ever seen due to the effects of climate change.

The UK government, following the recommendations of the Stern Review, has become the first to propose binding legal limits on carbon dioxide emissions – aiming for a 60% cut from 1990 levels by 2050. The government is in the process of pushing these regulations, embedded in the Climate Change Bill, through parliament, which will impact every industry, including the financial services industry where IT is a major component of its carbon footprint.

The Stern Review was also the catalyst for the Confederation of British Industry to establish a task force on climate change. In its recently released report Climate Change: Everyone’s Business, the CBI Task Force, made up of 18 chairmen and chief executives from UK firms including Barclays and the London Stock Exchange, committed themselves to adapting their businesses for the new low carbon world. These include: a promise to develop new products and services that will help households to halve their emissions by 2020; and a commitment to encouraging their employees to achieve major cuts in emissions both at work and at home. The initial aim is to identify and promote action that will save an extra one million tonnes of ^CO2 ^emissions within three years.

Ahead of the pack, last year Barclays signed a contract with EdF Energy for the supply of electricity from a portfolio of different sources including wind, small-scale hydro, biogas, tidal and waste. The three-year deal will cut Barclay’s carbon footprint by up to 125,000 tonnes of CO₂ a year, equivalent to the annual emissions from 19,000 homes in the UK. In March this year Barclays went “carbon neutral”, focusing on improving energy efficiency and using increased amounts of renewable energy before offsetting the remaining carbon emissions. Barclays has a target of reducing its UK CO₂ emissions per £million of income from 16.8 tonnes in 2005 to 12.9 tonnes by 2010.

But “carbon counting” is quite difficult because it is hard to accurately map emissions across an enterprise. In order to help firms calculate their carbon footprint, telecommunications giant BT, whose chief executive Ben Verwaayen chairs the CBI Task Force, has recently launched a carbon impact assessment service. The model looks at: pattern and infrastructure (e.g. office-based, home worker, mobile worker, and so on), which includes the transportation individuals use during work and their commute, plus emissions from any equipment used; shared services – where only a proportion of the contribution needs to be attributed to the business or department being assessed (e.g. WANs, LANs, office communications systems, and communal display screens); and also buildings – the relevant real estate infrastructure and its carbon contribution through, for example, heating and lighting.

Janet Blake, head of corporate and social responsibility, BT Global Services, makes the point that the model offers an assessment together with a set of recommendations, which she thinks is vital. “Once you have the data, the discussions begin over which should be the significant areas that you want to focus on first; and then you do more detailed analysis into those areas to work through the recommendations. For instance, if you highlight the data centre as one of the key focus areas – and in the financial environment that is definitely the case – then you might want to drill down into that area first and get more detailed recommendations for that area because it may account for a more significant proportion of the carbon footprint. We promote a holistic approach,” she says.

Data centres are indeed topping the list of priorities for many financial institutions when they look to tackle carbon emissions – not least because it is estimated that in the US data centres account for 1.5% of all the power consumed in that county, and power requirements are predicted to double within the next four years. As energy and oil prices rise, as well as the potential for brown or black outs, data centres are increasingly targeted to reduce energy consumption and also carbon footprints.

But, as Trewin Restorick, director of the environmental charity Global Action Plan, points out, there is a contradiction between the government’s drive to cut carbon emissions and its regulatory drive to retain more and more data. “One big cry for help from the financial sector is that government policy on data should be compatible with its policy on carbon emission reductions,” he says. “There is also a big concern about energy supply and security – lots of companies are feeling that they are going to run out of server space fairly soon and they are having a hard time finding that added server space, especially in places like Canary Wharf and inner London. There is not enough energy coming into the city, so they have to look at storage options outside of the UK and that is a major constraint for business growth.”

Whether or not national governments take this contradiction into consideration, global financial institution Citi has targeted data centres as part of a global $50 billion (£24 billion) plan to address climate change. Citi has invested €170 million (£120 million) in one of the “greenest” data centres worldwide. The data centre is being built in Frankfurt and the year long construction is expected to be completed in March 2008.

Dirk Schubert, head of Citi Realty Services Germany, Austria and Switzerland, says: “Computer power consumption is the primary user of energy in the data centre. This requires efficient cooling technologies to maintain the required operating environment. With the new data centre, we are employing the latest cooling technology, including a free cooling system. We only use our cooling towers during the summer months and the rest of the year we can do without. Our design will enable savings in energy consumption of up to 25% annually. And 99% of the electrical energy used will be ‘green’.” This is the equivalent of powering 3,000 family homes.

The data centre will provide IT services for Citi’s operations in Europe, the Middle East and Africa. It is being built by the Gold-standards of LEED (Leadership in Energy and Environmental Design). LEED is the benchmark for sustainable building in the US.

Morgan Stanley has also targeted the data centre. Through a global programme, codenamed Firebird, the bank is evolving 12 data centres to be cost and energy efficient. The New York data centre should be complete in 2010 or 2011. This is part of a larger plan to reduce CO₂ emissions by 7% by 2012 and become carbon neutral.

Speaking at BT’s Green Bank Event in October, Jonathan Saxe, international chief information officer at Morgan Stanley, laid out the methodology, which has board level endorsement: “First level of awareness is the business imperative; the second is low hanging fruit and the development of a work plan; the third is integrating real goals into projects; and the fourth is an operating model shift in terms of technology.”

Saxe says that the data centre is just the “tip of the iceberg”. Morgan Stanley also looks at the amount of paper wastage and has created document warehouses so its employees don’t have to print a hardcopy. It employs collaborative technologies, recycling and thin client technology on desktops.

HSBC, which declared itself the first carbon neutral bank in October 2005 through planting trees, reducing energy use and buying “green” power at an extra cost to the bank of £3.4 million a year, is involved in a number of projects in order to offset its global footprint. According to Jon Williams, head of group sustainable development, the bank’s 150 megawatts wind farm in Wales has been approved; it has launched the “coolest building” in India; its UK training centre in Bricket Wood has embarked on a wind and solar trial; it has launch a zero carbon branch in New York; and it is also using BT technology for video conferencing. Finally it purchased 813,000 carbon credits to offset its 2006 emissions. So there is a myriad of ways to become more environmentally friendly. UK information and communications technology firm Bailey Teswaine, which recently launched a product called EcoPod, a naturally ventilated data environment, also looks at all aspects of the building environment, using “intelligent building” methodology.

“The push back we had a few years ago when we suggested some of this stuff was ‘well we do all our patching of servers overnight so they need to be on 24x7 so they can get the latest version of Microsoft’s bug fix’”, says Rajesh Sinha, technical director of Bailey Teswaine, “but there is new software out there that allows much more dynamic upgrades so you don’t have to have servers on 24x7. There is software which effectively hibernates your PC.

“The other gripe from traders is ‘I don’t want to lose all my windows and spend the first half hour of the day moving my trading application to exactly where it was yesterday’. Things have moved on since the 1980s and you can get software that automatically re-positions everything. It is technologies like that which we are trialling with customers and getting good results.”

Sinha says that Bailey Teswaine promotes Wi-Fi instead of structured cabling, but in financial climes that is “not necessarily the thing we are pushing just because of the volumes of data and the data speed and the reliability that people need, but it is an option for things like guest areas and hot desking”.

Bailey Teswaine also encourages video conferencing which can see return on investment within the first year on “people flying all over the world or getting on trains to spend three hours of dead time when they could wake up in the morning and get presented with a video conferencing unit, see the whole team, decide on the day’s activity or work on a project together – which costs virtually nothing compared to all that transportation,” says Sinha.

As part of the Barclays Group, Barclaycard has been pulling its weight environment-wise – nine years ago its headquarters in Northampton was built to very high environmental standards with a building management system so that the building is not heated and cooled at the same time, and there are motion sensors and light-level monitors on the lighting so that the building is not overlit. After a successful trial at its headquarters, these ideas were then rolled out to the regional offices and call centres.

Barclaycard is presently trialling three major projects targeting: 1) energy use – using eco-friendly lamps; 2) water use – re-using lake and rain water; and 3) resource use – by using 80% recycled paper from Xerox and Canon duplex printing machines.

Because of its environmental activities, Barclays has obtained an ISO 14001, a standard which specifies the actual requirements for an environmental management system. But with that accreditation comes responsibility. Ben Brakes, environment manager, Barclaycard UK, explains the vicious/virtuous circle. “We have an improvement programme that we must adhere to. Once [the standard] is put in place, it makes you act on it because the bad publicity that comes with losing ISO is too great. You are stuck in a cycle of having to do environmental projects. That is the good thing about ISO – the business must take notice or it will lose it. To get ISO you have to be environmentally aware; so to lose it will look worse than if you hadn’t got it in the first place.”

Best Contribution to Reducing the Carbon Footprint, European Banking Technology Awards 2007

Global financial institution Credit Suisse is focused on serving its clients in three business lines: investment banking, private banking and asset management. The bank found that its applications were becoming increasingly resource-intensive; legacy proprietary technologies were being employed to run server grids and the cost of maintaining these proprietary investments was becoming prohibitive and limiting.

Credit Suisse wanted break down the traditional IT application silos that were tied to specific computers while reducing dependency on and maintenance of expensive proprietary software. It looked for a common solution that would address a wide range of applications while building cross-project architecture that was scalable and flexible enough to satisfy the unpredictable and growing demand for computing power across the organisation.

In 2004, after a review of existing in-house grid solutions and available off-the-shelf products, the bank decided to implement GridServer, DataSynapse’s grid management technology which provides an application virtualisation solution by abstracting underlying hardware from business applications. GridServer maintains a real time inventory of the available compute nodes and client applications submit a request to the middleware; then GridServer dynamically allocates resources (compute nodes) based on application requirements and runtime priorities.

The group began work in early 2005 to develop production pilots with a number of applications and in Q4 2005 decided to concentrate on moving an application measuring collateralised debt obligations risk onto the grid, driven by a significant increase in the volume of CDOs and complexity of risk calculations.

“The complexity of the instruments traded in the market has been increasing rapidly,” said Alexander Pastron, IT director, head of grid programme, Credit Suisse. “If the CDO risk application was deployed on our usual dedicated server farm, it would not calculate risk quickly enough for the amount of trading that the business wanted to achieve. We needed to find a way to run the calculations faster without investing lots of money and effort into building new dedicated server farms. We were also constrained by limited data centre capacity.”

A proof of concept was completed in early 2006 using GridServer and a small grid of servers. A benchmark test showed a CDO pricing calculation took 3.5 hours to complete on 12 servers; after the implementation of the workstation grid, the same pricing calculation was completed in one hour using 100 workstations. “We are now running the application on 4,000 desktop workstations in London and New York,” said Pastron, “achieving more timely results with more complex risk models and greatly increased trade volumes than we achieved in the original server grid benchmark.”

In the second half of 2006 Credit Suisse also moved an equity research application from blades to the workstation grid. Credit Suisse has improved the performance of its existing operations with a recent survey citing a reduction from 206 hours to 18 hours for an equity research production job.

Today Credit Suisse’s enterprise grid footprint stands at around 5,000 workstations and server blades in London, Zurich and the US on heterogeneous hardware including HP PCs and IBM blades running Linux and Windows operating systems. The bank has seen tremendous cost savings, including reduced operating costs, lower capital costs and ongoing cost avoidance. With 30-40,000 desktop workstations being at least 60% available during business hours globally, Credit Suisse sees ever more enormous potential for further grid expansion.