ISJ005

THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL
Fund Structure; Fund Administration; Information & Data

Providers; Custody; STP & Technology; Trading Services &
Outsourcing; Corporate Actions; Hedge Funds; Prime
Brokerage; Settlement & Clearing; Securities Lending;
INVESTOR Reference Data; Transfer Agency; Legal & Compliance
WWW.ISJFORUM.COM
S ERVICES
JOURNAL
VOLUME 2 No. 5 - MAR/APR 2005
BUBBLE OR
SEACHANGE?
FUND ADMINISTRATION REVIEW
OFFSHORE CENTRES – BRAZEN BEACONS PLUS:

PRIME BROKERAGE – IN IT TO WIN IT LUXEMBOURG – CENTRE OF STRENGTH
HEDGE FUNDS – THE RIGHT INCENTIVE TRANSFER AGENCY – 21ST CENTURY SYSTEMS
INVESTMENT ANALYTICS – FAIR GAME CORPORATE ACTIONS – THE QUEST
CUSTODY – SECURITIES SERVICES IN GERMANY STP & AUTOMATION – PAPERWAIT
Perspectives:
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Editorial & Contents
INVESTOR Buy In, Bow Out?

S ERVICES Would the last independent fund administrator please stand up? This request would be met with
limited response from the financial services industry, considering the exciting opportunities
JOURNAL currently presented by the alternative investment world. As more assets flow into alternative
funds, the revenue made from servicing them has prompted banks enter the world of
VOLUME 2 No. 5 - MAR/APR 2005 administration. The latest acquisition of Derivatives Portfolio Management by Mellon proves the
administrator buy-out trend will continue until the number of independent administrators
become an extinct species.
INVESTOR
Reference Data; Transfer Agency; Legal & Compliance
Thanks to recent regulatory changes, alternative funds have earned the acceptance of many an
S ERVICES
WWW.ISJFORUM.COM
JOURNAL institutional investor. These days, investors do not have to move offshore to get a taste of the risks
in investing. Onshore regulators have clubbed together with the service providers to relax the
rules relating to alternative investment, allowing for more esoteric funds to be set up, including
SICAVs, SICARs and property funds.
Onshore centres are the current winners in the investment funds landscape, including those
who provide tax amnesty for investors whose investments were previously held offshore. This
bodes well for service providers who are already in these onshore centres, and who have the scale
BUBBLE OR and the global reach to be able to service different types of funds.
SEACHANGE?
FUND ADMINISTRATION REVIEW
Luxembourg and Dublin are still the overall winners in the race for funds domiciliation and
administration, while offshore centres in the Western Hemisphere are playing catch up. In
Europe, thanks to UCITS III the possibilities are endless, not to mention the possibility of funds
distribution from one country into the next. The only proviso is that funds submit frequent
NAVs and investment reports as frequently as possible. The investment made in fulfilling this
INCLUDING THE ISJ requirement is considerable and a further watering down of the market of providers who are able
SECURITIES LENDING REVIEW 2005 to do this is inevitable.
But traditional custodians and fund administrators should be aware. Their turf is keenly
observed by non-custodians, such as technology vendors, which have the latest tools available to
ISJ
2005 SECURITIES provide investors with timely NAVs, consolidated investment reports and tax-related information
LENDING REVIEW
for certain countries. This form of competition has a domino effect on the entire securities serv-
ices industry. These custodian banks, who feel slightly threatened, will endeavour to become all
VOLUME 2 - 5 - MAR/APR 2005
things to all people, including safekeeper, administrator, technology provider and transfer agent.
Essay Prize
TRANSPARENCY - CLEAR AS MUD?
ANALYSIS - LATEST PERFORMANCE FIGURES
DEBATE - TRANSPARENCY, REGULATION, AUTOMATION
Amidst all of this competition, another first for ISJ. It is important to give voice to future leaders
AUTOMATION - TALKING TECHNOLOGY
MARKET VIEW - NOMURA
ITALY - MEETING THE MARKET in the securities services industry and so we launched an essay competition to recognise
tomorrow’s stars. Details are on page 71, you or your team members can apply on ISJforum.com.
BENEATH THE SURFACE Janet Du Chenne - Editor

GROWTH, REGULATION AND TRANSPARANCY
WWW.ISJFORUM.COM
Contents
6 World News The latest securities services news
12 Vive La Difference The Credo of a first-class global custodian
16 Centre of Strength Service providers on why it’s good in Luxembourg
26 Analyse This… Financial professionals answer a range of questions

Luxembourg about the Luxmebourg funds industry
30 A Question of Trust Regulation - cornerstone of trust in Luxembourg
32 Brazen Beacons How are offshore centres of the Western Hemisphere

bearing up against the competition?
WWW.ISJFORUM.COM Continued
INVESTOR SERVICES JOURNAL 1

Contents
INVESTOR Continued from page 1

38 The Right Incentive An analysis of hedge fund equalisation techniques
S ERVICES
JOURNAL 40 In it to Win It Hedge funds continue to present prime brokers with a
host of opportunities

43 Transfer Agency - Barrington Partners analyses the latest transfer agency
Systems for the 21st systems
INVESTOR Reference Data; Transfer Agency; Legal & Compliance
S ERVICES
Century
WWW.ISJFORUM.COM
JOURNAL
46 Weighing in the Risk Determining risk exposure is important when entering

new markets
48 Hedge fund index up ISJ presents the latest hedge fund performance results
BUBBLE OR
SEACHANGE?
FUND ADMINISTRATION REVIEW 50 Fair Game Investment manager monitoring can ensure
benchmarks are met
52 Staying Ahead DPM’s Alan Tooker examines the complexity of hedge

funds administration
54 Setting the Scene What does the acquisition of a hedge fund

administrator entail?
56 US giants win in EU US custodians continue to dominate news in Europe
58 Race against Time Service providers in Germany are confident of a

brighter future
63 Germany Panel Financial professionals in Germany debate the latest

Debate trends and future opportunities
72 The Quest for Rekha Menon highlights recent efforts to standardise

Standards corporate actions
78 Issuers in the FT Interactive Data on a possible solution to the

Limelight? corporate actions conundrum - Intelligent Document format
80 Discarding the ISJ present presents the latest efforst intended to

Paperweight automate securities processing
82 Strengthening the Link Automation is within reach, writes Clearstream’s Bruno

Zutterling
86 Come Together Digest of the securities lending industry’s conferences
92 People Moves Movers and shakers in the global securities industry
94 ISJ Directory A-Z list of investor services companies and contact

WWW.ISJFORUM.COM information
2 INVESTOR SERVICES JOURNAL

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Letters to the Editor
INVESTOR Write to letters@ISJforum.com ply than compliance”.

Improving technology will continue to necessi-
S ERVICES Perfect Harmony tate the need for more comprehensive protocols
that might ultimately prove incompatible with
JOURNAL A possible takeover of the London Stock
Exchange by Deutsche Börse or Euronext is older operating systems. Working with multiple
more exciting, indeed, than harmonising and messaging standards should not impede an
standardising corporate actions processing improvement to trade processing efficiency.
throughout Europe. Yet, I would argue, the latter Existing data transformation / translation mid-
Janet Du Chenne is more important to achieve the goal of a sub- dleware such as that incorporated within FMC’s
Editor own post-trade FMCNet, already manages that
Janet.DuChenne@ISJFORUM.COM “The need for a quantum leap challenge. There is no need to mandate any
in efficiency gains is located messaging standard, the quick win is clearly to
Julia Svetlichnaja at the post trade part “Working with multiple
News Editor of the value chain.” messaging standards should
Press@ISJFORUM.COM stantial reduction of cost and risk, to make not impede an improvement to
meaningful progress towards an internationally
Design competitive pan-European capital market. trade processing efficiency.”
The need for a quantum leap in efficiency gains harmonise what we already have. Isn’t it time to
NatterJack Design
is located at the post trade part of the value “get tangible”?
Editorial@ISJFORUM.COM chain. The European Commission has therefore Phil Banas, managing director, Financial Models
established the Clearing and Settlement Advisory Corporation Ltd
Contributors
and Monitoring Expert Group (CESAME) to foster
Brian Bollen, Rekha Menon the process of change. Charlie McCreevy, the Missing the Boat
new EU Commissioner for Internal Market and (From Helen Stephenson)
Justin Lawson Services has named clearing and settlement a The recent proposals from the UK’s Financial
Publishing Director priority in the field of financial services in Europe. Services Authority (FSA) on the implementation of
An increasing number of private sector organisa- the Simplified Prospectus, show that the UK
Justin.Lawson@ISJFORUM.COM
tions get engaged in the work to harmonise and Regulator has once again missed a valuable
standardise the current highly fragmented and opportunity.
Jon Dunham inefficient cross border clearing and settlement. The European directive had all the promise of
Executive Publisher To be successful, a close and effective coopera- providing consumers with easy to understand
Jon.Dunham@ISJFORUM.COM tion between private and public sector institu- information about products and charges, but the
tions will be required as the complexity and the FSA’s interpretation has resulted in complex and
Heidi Mumford interdependence of barriers caused by market unwieldy proposals.
Associate Publisher practices on the one hand and by legal, fiscal Not only does the Regulator feel it necessary to
and regulatory diversities on the other, are high. run the existing key features requirements along-
Heidi.Mumford@ISJFORUM.COM
Werner Frey, CEO, European Securities Forum side the new prospectus, but it also wants to go
above and beyond the scope of the Simplified
Kenny Thomas Tangible Thinking Prospectus rules, making UK implementation
Associate Publisher A lot of authoritative ink is being used in
Kenny.Thomas@ISJFORUM.COM highlighting the need to achieve post-trade “The European directive had all
message standardisation, but little pragmatic the promise of providing cus-
Investor Services Journal advice on how to accomplish it. History shows tomers with easy to understand
that any standard will evolve with technology,
11 B Fitzroy Square
becoming redundant or superseded within five information about products and
London W1T 6BU, UK years. Unfortunately, the industry as a whole charges, but the FSA’s interpre-
T: +44 (0) 20 7388 9000 has often proven itself too measured in its tation has resulted in complex
approach when trying to keep pace with
F: +44 (0) 20 7388 6699
change. and unwieldy proposals.”
If we are to have a reasonable chance of attain- super-equivalent to the EU directive.
Published by Investor Intelligence ing a single global STP standard devoid of A particular bone of contention is how charges
Chairman Mark Latham regional or commercial vested interest, we must are displayed. The directive stipulates that invest-
first acknowledge that for a majority of organisa- ment funds should use the internationally recog-
© 2005 Investor Intelligence Limited
All rights reserved. No part of this tions, it’s their legacy systems that will continue nised and standardised method of calculating
publication may be reproduced, in to dictate their preferred communications proto- charges, the Total Expense Ratio (TER). By apply-
whole or in part, without prior written col. As Francis Remacle notes in the SWIFT ing this universal method, investors would be able
permission from the publisher. consultation paper ‘The proposal for the to accurately compare the charges of all funds
removal of Barrier 1 of the Giovannini Report’ domiciled in Europe, making comparisons simple,
Printed in the UK by Pensord Press. [i.e. elimination of paper and automated com- straightforward and accurate.
ISSN 1744-151X munication…], it’s “more a willingness to com- (Continued page 89)
WWW.ISJFORUM.COM

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News - Europe Middle East Africa
Custody & Outsourcing headed by Richard Bolton who has over Technology
14 years experience in the industry, with
London - Insight Investment and Geneva - SunGard Software and
particular expertise in the areas of pri-
Northern Trust have entered into exclu- Processing has reorganised its global
vate equity and fund of funds, gained
sive negotiations for Insight to out- structure, creating SunGard Europe, a
through his previous senior manage-
source its back and middle office invest- new operating group. The new
ment positions in leading fund adminis-
ment operation to Northern Trust. The European operating group will be led by
tration companies on the island.
range of services to be outsourced by Harold Finders, who commented that
Insight under the proposed agreement London - The Bank of New York has the reason for the reorganisation was to
are: trade matching, confirmation and acquired Continental Fund Services better adapt SunGard’s services to the
settlement, investment record keeping, (CFS), a Luxembourg PSF (Professional way its clients are structured. The
entitlement processing, pricing, asset of the Financial Sector). Financial European group will deliver four types
set-up, reconciliation, client reporting, terms were not disclosed. CFS provides of services, namely Trading, Treasury
valuations and performance analysis. retail transfer agency and registrar serv- and Risk, Insurance & Benefit
The agreement, which is subject to fur- ices to Luxembourg SICAVs run by two Administration, Wealth Management
ther due diligence and contract negotia- US fund management companies, and Institutional Asset Management &
tions, is expected to be completed in Davis Selected Advisers and Alger Securities Servicing.
the second quarter of 2005. Associates, as well as sub-transfer
agency and sub-registrar services to Market Infrastructure
London - Old Mutual Asset Managers European shareholders of Alger US
("OMAM") has appointed RBC Global Frankfurt - Banco Bilbao Vizcaya
domestic funds. CFS administers the
Services to act as its UK fund adminis- Argentaria (BBVA) has signed up to
accounts of approximately 32,000
trator, global administrator, fund implement Vestima+, Clearstream’s
shareholders in such funds.
accountant and global custodian, along- new investment service. BBVA is one of
side The Royal Bank of Scotland plc, London - Northern Trust has been Spain's biggest banks and a proponent
Trustee & Depositary Services as selected by KBL Investment Funds Ltd, of the open architecture model that is a
Trustee provider. RBC will provide all which trades under the name Solus and key element of Clearstream's new serv-
fund administration and fund is a subsidiary of private bank Brown ice. Clearstream launched the Vestima+
accounting for OMAM's UK Unit Trust Shipley, to provide fund accounting and service in January 2005.
range, and global administration for a global custody services to the Solus
further group of funds with combined funds, with funds under management London - CRESTCo, at the request of
AUA of £3.5 bn. RBC's offering will also totalling £325m. KBL has also appointed the Irish Stock Exchange, has agreed to
extend to trade order management serv- Royal Bank of Scotland to provide offer services for the clearing and settle-
ices for all funds and foreign exchange trustee and depositary services for the ment of Irish equity trades netted
facilities on selected funds. Solus funds. “We aim to continue the through a central counterparty (CCP),
growth we are currently enjoying within subject to conclusion of contractual
London - State Street has been appoint- arrangements. The Irish Stock Exchange
ed by Brandywine Asset Management, a has informed CRESTCo of its decision
wholly-owned subsidiary of Legg to use Eurex Clearing as the CCP.
Mason, Inc. to provide managed
account outsourcing services for several London - Initiated by European
Jeremy Hester Securities Forum, an Industry Working
billion dollars in assets. State Street will
provide accounting, performance meas- Group has proposed the demateriali-
urement, portfolio administration, trade sation of share certificates and the
support and investor reporting services opportunity for further enfranchisement
for Brandywine’s managed account of shareholders in the UK.
portfolios. The Working Group, led by UBS
our Global Fund Services (GFS) busi- Investment Bank and including repre-
Funds & Administration ness, which is in line with our strategy sentatives from the broker community,
to increase the breadth of service capa- the registrars, LSE, CrestCo and indus-
Isle of Man - Anglo Irish in the Isle of bilities to the UK and European makets try associations has discussed the
Man has launched Anglo Irish Fund in new areas like UK fund accounting,” issues arising from an inefficient and
Services to provide full administrative said Jeremy Hester, head of GFS paper-based process involving share
services to offshore collective invest- Business Development at Northern certificates and transfer forms.
ment schemes. This new service is Trust in London. DAILY NEWS AT WWW.ISJFORUM.COM

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News - Americas
Funds & Administration multi-year systems redesign project either TradeXpress or OASYS. This new
aimed at consolidating its separate consolidated feed and online allocation
Boston/New Jersey – The Asset underwriting, reorganisation and divi- management tool provides broker/deal-
Servicing group of Mellon Financial dend processing systems onto a single ers with an opportunity to reduce trade
Corporation has signed an agreement to processing platform. “This initiative processing costs by further eliminating
acquire Derivatives Portfolio will deliver major efficiencies to DTCC error prone manual processing.
Management, a Somerset, New Jersey- and the industry, streamlining process-
based hedge fund administrator that es, eliminating redundancies and offer- New York - The Securities Industry
oversees $30 bn in assets for 91 clients. ing greater operational flexibility,” said Association has entered into an agree-
Its services also include middle- and John Colangelo, DTCC managing direc- ment with MCI to offer Internet services
back-office outsourcing and transparency tor of Operations and Customer to its nearly 600 member firms. Under
services. Terms of the transaction, sched- Service. “It will also deliver a number terms of the agreement, MCI will deliver
uled to close by the end of the first quarter of enhancements, including new inter- a wide range of Internet related servic-
of 2005, were not disclosed. “The institu- national processing capabilities and es, including managed hosting, Internet
tional asset management industry is enhanced reporting features using ISO access, security, Private IP, video and
demanding a growing breadth of services 15022 message standards.” Net Conferencing solutions, to help SIA
from its providers, and this investment members conduct business more effec-
helps bolster our position at the forefront New York - Wachovia Corporation, has tively through better technology utilisa-
of the asset servicing industry,” said selected Asset Control, a data manage- tion. SIA and MCI will work closely to
James P. Palermo, president of Mellon ment solutions provider, to manage help SIA members better utilise Internet
Global Securities Services. price data for risk management opera- technology to conduct electronic trans-
tions within its corporate investment actions, process and share confidential
bank. The implementation is scheduled documents, research market trends,
to be in production in the first quarter host Web-based meetings, and enhance
of 2005. “The Asset Control technology communications with customers.
Robert Aaron being deployed on this project will
improve our risk management and Regulation
research capability,” said Barry Fenwick,
Washington - The Securities and
divisional information officer of
Exchange Commission has filed sepa-
Wachovia Corporate Investment Bank.
rate settled civil actions against Morgan
“The new platform will allow us to
Stanley & Co. Incorporated (Morgan
leverage our comprehensive market
“Joining Mellon’s Asset Servicing group Stanley) and Goldman, Sachs & Co.
history and provide additional analytical
will enable us to better serve the growing (Goldman Sachs) relating to the firms'
services to our clients.”
number of hedge funds that are coming allocations of stock to institutional cus-
under the umbrellas of large institutional tomers in initial public offerings (IPOs)
Boston - Thomson TradeWeb, the trad-
asset managers,” said Robert M. Aaron, underwritten by the firms during 1999
ing network for fixed income markets, is
who will remain chief executive officer of and 2000.
the latest company to join the Omgeo
the new Mellon subsidiary within Mellon’s Under the terms of the settlements, a
STP Partners Program. Under the
Asset Servicing business. judgment will be entered against each
agreement, the companies plan to fur-
“As hedge fund managers are becoming firm enjoining it from violating Rule 101
ther automate fixed income trade pro-
more institutionalised, they are turning to of the Commission's Regulation M and
cessing through the creation of elec-
administrators that are part of large, well- ordering each firm to pay a $40 million
tronic links between TradeWeb and cer-
regarded financial institutions that can civil penalty.
tain Omgeo services. Initially, Omgeo
provide the transparency they require.” The settlement terms are subject to
and Thomson TradeWeb will link
court approval. In its complaints, the
TradeXpress, TradeWeb’s online STP
Boston - The CSFB/Tremont Hedge Commission alleges that Morgan
network that enables institutions and
Fund Index is up 1.61 per cent for Stanley and Goldman Sachs violated
dealers to allocate and confirm trades,
December 2004. Major US equity Rule 101 of Regulation M under the
with OASYS, Omgeo’s US domestic
indices ended the month in positive ter- Securities Exchange Act of 1934 by
trade allocation and acceptance service.
ritory, with managers generating returns attempting to induce certain customers
This will enable investment managers
on the long side of their portfolios. who received allocations of IPOs to
and their broker/dealer counterparts to
place purchase orders for additional
electronically exchange and manage
Technology shares in the aftermarket.
allocation information regardless of
New York - DTCC has launched a whether allocations are generated on DAILY NEWS AT WWW.ISJFORUM.COM

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News - Asia Pacific
Funds & Administration cent of the turnover of Linedata capabilities. Their focus on STP from a
Services, making it the biggest operat- truly functional and industry-wide per-
Shenzen - UBS and the State ing unit in the group, with over 350 spective will no doubt pay off for them
Development Investment Corporation employees. CMS provides sell side in the long run.”
(SDIC) will form a joint venture funds solutions in Australasia and the Far
management company through the East. Established in 2003, through a Tokyo - The Bank of Tokyo-Mitsubishi
purchase by UBS of a 49 per cent stake management buy-out of the Asia has gone live with the Cognotec Market
in Shenzhen-based China Dragon Fund Pacific operations of Misys Securities Rate Manager (MRM), a solution from
Management Company Ltd (China Trading Systems, CMS now employs 90 Cognotec, provider of foreign exchange
Dragon), subject to approval by the people across five offices in the region. trading solutions to the financial com-
China Securities Regulatory The company has recently established munity. For the past four years BTM
Commission (CSRC). China Dragon an asset management arm, where have deployed Cognotec AutoDeal
will be restructured as a joint venture focus will be on the sales and market- solutions to provide automated trading
between SDIC Hongtai Trust & ing of Linedata Services’ LongView to proprietary clients on the FX@BTM
Investment Co. Ltd, a wholly-owned Trading and Linedata Compliance prod- service and also to provide automated
subsidiary of SDIC, and UBS. The ucts. pricing capability to the FXall multi-
application to the CSRC follows the bank portal. BTM is using MRM to pro-
signing of a Shareholder Agreement Sydney – DST International (DSTi), a vide a single source of bank-specific
and a Sales & Purchase Agreement by business solutions provider for the market rates to various internal bank
UBS, SDIC and its affiliates. The part- investment management industry, has systems, in addition to the FX@BTM
ners propose to use the existing China confirmed that boutique investment service and to FXall. The introduction
Dragon platform to launch new mutual manager Perennial Investment of MRM provides dealing room work-
funds and, as regulations permit, pur- Partners (Perennial) will be converting flow efficiencies as well as providing
sue discretionary investment manage- to HiPortfolio/3, an investment admin- complete dealer transparency of the
ment mandates. As market liberalisa- istration platform. Perennial’s latest rates being provided to all systems that
tion continues, the partners expect the investment in technology is designed require an FX Rate.
joint venture to capture new opportuni- to provide improved Straight Through
ties in the Chinese investment man- Processing (STP) capabilities, upgrad- Market Infrastructure
agement market. China Dragon, cur- ed client reporting functionality and
rently 100 per cent-owned by SDIC, personalised customer service for its Tokyo - JASDEC has introduced a Book-
manages RMB3.2 bn in mutual funds investment administration activities in Entry Transfer System for corporate
assets ($386 million). Subject to CSRC the future. bonds and has asked issuers to submit
approval, the joint venture will be one Perennial recently completed a strate- their prior consent on the handling of
of the first to allow the new maximum gic review of its technology-derived book-entry transfer bonds at JASDEC
49 per cent foreign partner-holding in business benefits and assessed the by the end of 2005. The system is
a Chinese fund management company. opportunity cost of implementing intended to enable right transfers of
The financial terms for the proposed HiPortfolio/3 technology immediately corporate bonds in a paperless envi-
change in ownership of China Dragon ronment, by electronically recording
will not be released. the increase and decrease in the
Transfer Account Book at Book-Entry
Technology Transfer Institution or at Account
Management Institution. Preferential
Australasia & the Far East - Linedata Ian Mathieson tax treatment to investors (e.g. tax
Services, a provider of software and exempt corporation and the “Maruyu”
services to the global financial services tax exempt savings system) will only be
marketplace, has signed an agency applied to book-entry transfer bonds.
agreement with Capital Market Outstanding issued bonds can be con-
Solutions Limited (CMS). Under the verted to book-entry transfer bonds.
terms of this agreement, CMS will be versus a three to five year timeframe. JASDEC shall obtain prior consent
marketing, selling and supporting Ian Mathieson, DSTi’s Australasian from issuers on handling newly issued
Linedata Services’ asset management CEO said: “We now consider Perennial book-entry transfer bonds and on con-
software products in the Australasian a leader in high technology adoption verting outstanding issued recorded
and the Far Eastern markets. and its conversion to HiPortfolio/3 def- and physical bonds to book-entry
Linedata Services’ Asset Management initely positions them at the head of transfer bonds.
division accounts for more than 54 per the queue for investment management DAILY NEWS AT WWW.ISJFORUM.COM

CEO - BNP Paribas Securities Services
In just five years BNP Paribas

Securities Services can claim
New Directions membership of the biggest-
providers-in-the-world club.
But its approach to expansion is
radically different to that
adopted by the big guns.
Who better to devise that
Jacques-Phillipe Marson approach than Jacques-Philippe
Marson, a man whose career
includes contracts with the
cream of American and
European service providers.
Westward ho! Component based outsourcing may be on the rise
and specialised services are fast becoming the order of the
day. But in an industry built on trust, size is a major
requirement to stay in business. Despite a developing
appreciation of outsourcing, clients still prefer to entrust
their assets and back office processes to the largest custodi-
ans in the market. This preference is largely responsible for
the transformation of securities services at Paribas Bank,
from an average French provider in the mid-1990s to one
of the largest in the world at the end of 2004. It is hardly
surprising that the man responsible for this transforma-
tion is one who began his career with the likes of global
players such as JP Morgan and State Street.
Jacques-Philippe Marson’s banking career commenced in
1976, when he joined Morgan Guaranty Trust Company
(now JP Morgan) as part of a trainee programme for MBA
students. His 12-year employment with Morgan included an
assignment with the Bank’s former subsidiary Euroclear.
“Morgan placed significant emphasis on financial analysis,
the cost of capital and the understanding of financial state-
ments,” says Marson. “However, when I entered Euroclear
my focus shifted to operations. Euroclear was initially a divi-
“This is a low margin business,

but one that incurs revenue
on a recurring basis”
sion (Euroclear Operations Centre) of Morgan’s Belgian
branch, created in 1968 to help grow the newly created
eurobond market. In 2000 Euroclear became a bank when
Morgan relinquished its operating contract with what had
become a “securities settlement system”.
With a background in engineering, Marson was
assigned to build the Euclid system in the mid-1970s, to

ensure electronic connectivity between Clearing & Settlement Paribas acquired clients such as
Euroclear and its clients. “Euroclear was Following his short-term employment Clearstream and State Street, who still use
one of the first organisations to spend the with SWIFT, Marson joined Cedel (now the organisation today. The Bank provid-
time, effort and money to ensure an STP Clearstream) as general manager. His ed local custody for global custodians as
process with its clients,” says Marson. main task was to address the ‘bridge’ or well as local clearing for investment
“The transaction flows to and from the means of securities delivery between banks. “Clearing presented the Bank with
Euroclear were mainly STP (-based), on Euroclear and Clearstream. a lot of intraday risk because the proceeds
“The agreement formed between from one sale were expected to finance
“Custody and global Morgan, the operator of Euroclear, and
Cedel when the “electronic” bridge was
the next transaction,” says Marson.
In 1997, Paribas completed the integra-
custody are also an established, appeared to be largely in tion of Morgan’s business and had devel-
favour of Morgan,” explains Marson. oped modern connectivity tools for its
evolution of the bank- “Some large financial institutions were clients. Paribas securities services, a newly
ing business, built on using the bridge to arbitrage the two util-
ities. Indeed, under the new agreement,
created business line, was to leverage the
acquisition of Morgan’s business. But
the concept of trust” Cedel had to deliver securities the night despite serving a few institutional clients,
before settlement date. the securities services business was
proprietary standards though.” “Debiting the securities from their clients’ dwarfed by Paribas’ function as invest-
Marson left Morgan in 1987 after being accounts the day before settlement date ment bank.
invited by former CEO of SWIFT, Bessel meant they had to provide the cash the Enter Marson, whose ambitious securi-
Kok to join his organisation and to create day before too. ties services project received immediate
a for-profit unit, called SWIFT Service “This technicality became a free-financ- backing from Paribas’ then chairman and
Partners (SSP). While SWIFT was solely ing opportunity for some institutions and vice chairman. “The project was to create
focused on payment messages, SSP began an important issue to address when I a major European bank, by aligning with
to explore other areas of the financial arrived.” the leaders in every major European mar-
services industry. With Marson’s previous ket.”
knowledge, securities became the first Custody The first markets to be included within
port of call. “We had to open up the Following his achievements at Cedel, Marson’s strategy were London, Frankfurt
SWIFT membership to non-banks, Marson joined State Street in 1991 at the and Paris, followed by Eastern Europe,
including broker-dealers, asset managers, invitation of then chief executive officer Scandinavia and southern Europe. “The
trustees and a number of other institu- Marsh Carter and executive vice president plan was to find another European bank
tions who needed to be “eligible” to the Albert Petersen. Before taking responsi- and I began that conquest with Royal
system, in order to create STP efficiency bility for the international business of Trust in the UK in 1998. But rather than
among industry participants.” State Street, Marson engaged the bank in pay for that business, we wished to create
While a change in SWIFT’s bylaws a major operational reengineering a partnership. If we bought the business
required 75 per cent of shareholder votes, process. “This project significantly of a UK bank, a large percentage of the
Marson succeeded in approving four cat- reduced the costs of State Street’s interna- clients would flee to another UK bank.
egories of new participants, including tional operations,” says Marson. Instead, we wanted to integrate the insti-
broker dealers, investment banks, tutional servicing business of a UK,
International Central Securities Value Creation
Depositories and trustee services Marson left State Street in 1998 and
providers. joined France’s very own Paribas Bank in “If we bought the
But despite efforts to extend SWIFT’s July of the same year. His primary objec-
reach, the organisation lacked the partici- tive was to create a major European bank business of a UK bank,
pation of the investment managers.
“Their participation was rejected by the
in the securities servicing industry. This
ambitious plan was first initiated when
a large percentage of
UK and US banks, which for protective
reasons, were unwilling to open up the
Paribas acquired the clearing business of
Morgan in 1996. “Morgan hung on to
the clients would flee
network to these organisations,” explains Euroclear and decided to sell the rest,” to another UK bank”
Marson. says Marson. “Morgan’s global custody
“But subsequent pressure from other business was sold to the Bank of New German or Italian bank in order provide
standards bodies such as the Industry York, which still operates what was then a local touch when servicing local clients.
Standardisation for Institutional Trade JP Morgan in Brussels. Paribas acquired As part of the strategy, we would ensure
Communication (ISITC) and transaction the clearing business in Belgium, Italy, equal rights of ownership and governance
flow operators such as OMGEO con- Spain and Germany. Paribas’ securities between ourselves and our partner.”
vinced SWIFT to open its membership to service business line had been in place Paribas’ hopes of a partnership with
investment managers. This was an impor- since 1992 and included securities lend- Royal Trust were dashed when the UK
tant inflexion point in SWIFT’s life. ing. The Bank leveraged the securities player received an offer from the Bank of
While it welcomed new users, it did not services tools in the investment bank and New York. Paribas then set its sights on
create any competitive advantage other private equity business to service other Dresdner Bank, but the German provider
than reduce costs for all participants”. companies.” was already strategically aligned with

Banque Nationale de Paris (BNP) and could be implemented with ease, securi- and Asia-Pacific institutional investors
could not partner with Paribas. ties systems were only adopted much such as pension funds, asset managers
At the beginning of 1999, BNP later. “The creation of infrastructures and insurance companies in their global
launched a hostile bid for Societe such as central securities depositories by investment requirements. We aim to
Generale and Paribas and by March of the banks, happened only within the past serve those who perform investment
the same year, the Bank assumed owner- 40 years and was in fact self disintermedi- activity within Europe and in Asia-Pacific
ship of Paribas. “In terms of value creation from custody - by moving securi- as well as those who have inbound invest-
ation, this was one of the most successful ment activity into European countries.”
mergers in banking history,” says Marson.
“An important differentiating factor “In a business where European Consolidation
among continental banks emerged at the
time of the merger, when I convinced
significant technology As a result of lower market valuations,
assets in portfolios have significantly
senior group management to establish a
separate securities service for the bank’s
spend is needed for decreased over the last few years, trigger-
ing consolidation in the financial services
retail network. This resulted in a joint processing functions, industry. “These events have also trig-
technical venture between BNP Paribas gered a thought process among European
and Credit Agricole Indosuez.” size, best practice and banks about partnerships,” says Marson.
The Beginning
operating discipline “Of course, all institutions want to be
equal partners, but the cost for the small-
BNP Paribas Securities Services was are important” er players to be or equal partners has
created in 2000, a day before the merger become too high. Consequently, many
of BNP and Paribas. Explaining its ori- ties from their vaults and into a central have decided to sell their business and/or
gins, Marson says: “We took a group hub,” explains Marson. “Securities servic- to outsource. The European consolida-
investment bank structure called Banexi es came about when banks realised the tion has mainly benefited the large US
(Banque pour l’ Expansion Industrielle) substantial technology investment custodian banks, which have a buying
and renamed it. We developed the bank required to sustain a viable presence and power that none of the European consol-
in France and created branches across therefore outsourced non-core functions idators could match. BP2S is an actor in
Europe. In 2002, the last building block to other banks to invest in and to focus this consolidation process. We made a
was in place and a branch was established on operating processes. This process number of small to medium large acqui-
in Luxembourg.” began in the US, which enjoys the largest sitions – the larger being Cogent - and we
In addition to its position as an ambi- domestic market in the world.” have increased our market share by win-
tious European player, Marson began to ning business from existing clients and
focus on BNP Paribas Securities Services’ Consolidation from new clients. In the context of
position on the world stage. “Today, the In light of the investment required to European consolidation, new opportuni-
bank is number one in France, number provide custody and settlement services, ties arise from those who are selling their
one in Europe and number five/six the securities services industry rapidly business. Indeed, their clients take the
(depending on the euro/dollar exchange consolidated, creating giants such as State opportunity to review their available
rate) in the world (asset under custody),” Street, the Bank of New York, JP Morgan options. This has been a significant
he says. “We are sticking to our partner- Chase and Citibank. As a subsidiary of means of winning new business. For
ship strategy while focusing on growing BNP Paribas, BP2S is emerging among example, when Dresdner sold their
our market share in all segments of our the leaders. It has created a full set of domestic custody business to Deutsche
business. Securities services is a low mar- business lines to provide clearing, settle- Bank, many of their clients came to us
gin business, but one that incurs revenue ment, custody, financing and liquidity, and found BP2S to be a reasonable alter-
on a recurring basis. Gaining market global fund services and “value added” native, which was already well established
share is important, in order to increase banking and information services. “We in Germany”.
the number of assets one has to service. are engaging in transaction banking and
Market share can be acquired by partner- liquidity banking on behalf of our clients Outsourcing
ing with other organisations, while creat- and on the basis of transaction flows In the midst of headline grabbing man-
ing value through revenues and costs syn- originating from those clients,” says dates, outsourcing is often referred to as
ergies. In a business where significant Marson. “We are uniquely positioned to an evolution of the custody business.
technology-spend is needed for process- serve both the buy side and the sell side.” Marson explains: “Custody and global
ing functions, size, best practice and By the end of 2004, BP2S totaled custody are also an evolution of the
operating discipline are important.” EUR2,475 bn in securities under custody banking business, built on the concept of
with locations in Australia, Belgium, trust. Trust carries a legal connotation
Pillars France, Germany, Greece, Ireland, Italy, and a perception that banks are institu-
According to Marson, transaction pro- Jersey, Luxembourg, Netherlands, New tions that can be trusted. Custody is a
cessing and custody are the two pillars of Zealand, Portugal, Spain, Switzerland, UK banking business and involves protecting
banking. By 2000, the multiple move- and US. “We are a global player with a the investor and their ownership of
ments of cash and securities between regional focus on Europe,” explains assets. The settlement process itself is a
banks had become a complex task, even Marson. “We service inbound investment way of “guaranteeing” the finality of
in domestic markets. While cash systems flows into Europe as well as European exchanging ownership of assets, while

custody ensures the rights protection for “Essentially, we are dealing with one raw
the owner (right of income, right to vote, material, namely data,” he says. Biography
right to exercise a change in the nature of The main challenge for securities serv-
the assets in corporate actions and the ice providers is to service the transaction Jacques-Philippe Marson is President &
right to pay or reclaim tax). The lifecycle. “If your business relies on assets CEO of BNP Paribas Securities Services,
Americans expanded their services represented by computer bytes and trans- a fully owned subsidiary of the BNP
beyond the scope of banking, starting actions represented by strings of bytes, Paribas Group, and a member of the
with accounting for collective investment you have a good case to achieve STP Group Management Board.
schemes. Indeed, fund accounting has through the use of technology,” says
prompted banks to move outside of their Marson. “The issue, though, is scale and He joined Paribas as head of Global
traditional borders of custody services. speed. The technology, therefore, needs to Securities Services and member of the
The banks then moved further into non- involve large databases and real time pro- Investment Bank Management Board in
banking by providing performance meas- cessing.” July 1998. Marson joined Paribas from
urement and risk modeling. More State Street where he was Executive Vice
recently we witnessed specialist/boutique Forward Thinking President and head of the Global
types of acquisitions. This trend is accel- Although BP2S, along with most of its
erating among hedge fund accounting competitors, has endured a period of dif-
Investors Services Group - International,
re-grouping all Financial Asset Services
business units outside the United States.
“I believe technology will dramatically change the In July, 1992 Marson joined State Street
as Senior Vice President and head of
business of securities services providers” International Operations. In July 1993,
after engaging the bank in a fundamental
specialists, who are selling their business- ficult markets, its strategy paints a hope- re-engineering program, he was appoint-
es to global custodians.” ful picture for the future. BP2S remains ed Director of International Financial
According to Marson, the securities serv- committed to its clients and to the mar- Asset Services. Marson joined State
ices industry business case is simple: trans- kets in which it operates. “Our motto,
form clients’ fixed cost base into a variable “the closer the better” means that we
Street from Cedel, one of the two
cost base. “That is what outsourcing is all want to be close to the clients in the mar- International Clearing Organisations,
about,” he says. “It saves clients from kets where they do business,” says where he was a member of the
investing in IT and running large opera- Marson. “We decided to operate a decen- Management Board and Executive Vice
tions. Outsourcing provides an opportuni- tralised strategy in order to increase effi- President in charge of Business
ty for clients to pay only for a fraction of ciency. We believe the winners are going Development, Operations and Treasury.
the cost of their initial cost base.” to be the quality service providers. The Mr. Marson was also Chairman of Cedel’s
industry has already recognised the quali- Credit Committee. Prior to that he was
Investment ty of our 3,500 people. One of the great- associated with the SWIFT group where
The common themes presiding over est temptations during the recent difficult he lead one of its subsidiaries providing
banks’ moves into non-banking services period has been to centralise. As a matter
are operations and technology. “Clients, of fact, if you want to reduce costs you
value added services to financial institu-
who are also in the business of opera- centralise processing activities. However, tions. Prior to SWIFT, he spent 12 years
tions, are complaining about rules and this is usually done at a cost of reducing with JP Morgan. During his stay in the
regulations that require continual invest- service quality and responsiveness to US, Marson was General Consul of
ment,” says Marson. “For the past 50 client requirements”. Luxembourg for Massachusetts.
years, most investment banks and asset Going forward, the key question
management firms have outsourced their Marson poses to financial organisations is
Marson is a member of the Board of
custodial activities. Indeed, clearing and “how is technology going to change your Euroclear, a member of the Board SWIFT
settlement activities require connectivity business?” SC, a member of the Board OMGEO
to central banks and to central securities “I believe technology will dramatically (UK), a member of the Board of Trustee
depositories, which involves heavy tech- change the business of securities services of the International Charter School of
nology and operations investment. providers,” he says. “The requirement for New England, and the European
Outsourcing is a natural step within the a banking license in order to provide Chairman of the International Securities
functions of processing and IT manage- securities services may also be the next Services Association. Marson is a citizen
ment. Operations and IT have become industry evolution”. of the Grand Duchy of Luxembourg.
the core business of specialist banks such With a significant global reach already
as ourselves.” in place, there are no limits to BNP
Paribas Securities Services’ plans for the
He received his BA in Finance from
STP future. And the direction of such global Hautes Etudes Commerciales (HEC). He
STP is often dubbed the impossible thinkers as Jacques-Philippe Marson holds a Master of Computer Science from
dream of most. But according to Marson, places the organisation in good stead for St. Louis Graduate School of Business,
the term becomes realistically feasible in opportunities arising from consolidation, and an MBA from University of Leuven.
an industry such as financial services. outsourcing and fund servicing.

Fund Centres - Luxembourg
Luxembourg
- Centre of Strength
As a pioneer of investment fund regulation in Europe,
Luxembourg remains well ahead of its competitors. Service
providers attest to the key selling points of their domicile and pin
high hopes on the year ahead.
Hubba hubba

In January this year, Europe’s leaders assembled in more accurately attributed to the available expertise,”
Toulouse, France to marvel at Europe’s latest collaborative says Ries. “80 per cent of funds, which are sold in three
project, the A380 Airbus plane. If this form of collabora- countries or more in Europe, are domiciled in
tion is anything to go by, then anything is possible in other Luxembourg. This is down to our geographical location
areas of business, including financial services. To a certain and the skills available here,” says Ries.
extent, investment fund regulation could be referred to as
the Airbus of financial services, responsible for unifying Opportunities
the cross border market place. The Architect, Luxembourg, Luxembourg was one of the first countries to transpose
was one of the first European countries to benefit from the UCITS III into national law in December 2002. The
implementation of UCITS III and the subsequent provi- Directive contained certain product features, which were
sions for hedge funds. The Grand Duchy was also the first
country to transpose the UCITS directive of 1985 into
national law. As if this agility were not enough, “80 per cent of funds, which are sold
Luxembourg is also known for its convenient geographical
location and highly qualified work force, which comprises
in more than three countries in Europe,
nationals from Belgium, France and Germany. “The for- are domiciled in Luxembourg”
eign languages spoken in Luxembourg is an important fac-
tor when applying the UCITS directive, which specifies
that funds registered in one EU country can be sold and welcomed by fund promoters. “Compared to UCITS I, the
marketed to any country in the European Union, provided latest directive allows for the launch of money market
they stick to some rules,” explains Stephane Ries, head of funds, which can benefit from the European passport. This
relationship management at the Investment Fund & was not the case before. Nowadays, if a fund of fund,
Global Custody Department of Kredietbank S.A. which was previously categorised as a non-UCITS fund,
Luxembourgeoise. “As Luxembourg was the first jurisdic- invests 70 per cent of its assets in UCITS funds, it can
tion to permit the cross border distribution of funds, a lot qualify as a UCITS fund. Index-tracking funds, which
of fund promoters came to the Grand Duchy to register specify in their prospectus that they will track an index,
their funds. The funds of these promoters are sold all over can also qualify as UCITS funds. Today, a fund tracking
Europe, while Luxembourg is regarded as the distribution the Finnish Index may hold NOKIA shares for over 35 per
hub. For example, a German fund promoter could choose cent of the net assets provided this holding is stated in the
Luxembourg in order to sell funds into Germany, Austria funds prospectus. UCITS III funds can of course benefit
and Switzerland.” from the European passport. Luxembourg welcomes
Apart from UCITS III, Luxembourg's banking secrecy umbrella fund structures, including sub-funds with differ-
laws and tax efficient investment structures have also ent investment policies such as funds of funds, money
attracted a lot of interest from fund promoters. market funds and index tracking funds Therefore, a lot of
“Although these factors helped Luxembourg to become a fund promoters register their fund family in Luxembourg
financial centre for investment funds, our success can be so that they can add sub-funds.”
Fund Promoters with fund assets domiciled Trends in total net assets for largest asset classes of Luxembourg-domiciled funds
in Luxembourg - in US$ bn
Fund Promoter Dec 2003 Dec 2002 US$ billion Dec 1998 Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003
UBS 119.2 93.2

Equity 154.50 287.50 339.00 291.00 242.80 370.70
JPMorgan Fleming 73.1 55.7 Funds
Pioneer Investments 52.1 33.9 Bond Funds 194.10 194.30 186.80 189.30 242.60 324.20
Credit Suisse 51.4 46.5

Cash Funds 131.00 133.50 123.60 175.90 219.60 274.10
DGZ-DekaBank 48.6 34.7
Funds of 7.70 21.80 45.10 51.80 58.30 78.70
Deutsche Bank/DWS 42.2 34 Funds
Fortis Inv Mgmt 40.8 27.2 Protected 22.10 24.00 24.00 21.90 23.60 31.10
Capital
Fidelity Investments 40.5 24.2
Others 65.00 85.90 98.80 92.90 96.30 120.90
Fideuram Group 38.6 26.9
Union Investment 31.6 22.9 TOTAL 574.40 747.00 817.30 822.80 883.20 1199.70
Source: Fitzrovia, Luxembourg Fund Encyclopaedia Fitzrovia, Luxembourg Fund Encyclopaedia

Hedge Funds agement. Luxembourg has just introduced an exemption

An investment circular, published by the Commission from the taxe d'abonnement for these funds, which are
de Surveillance du Secteur Financier (CSSF) in 2002, con- also called pension-pooling vehicles.”
tributed to the transformation of Luxembourg into a As of last year, foreign funds and hedge funds can also
hedge fund centre. “We are administering about EUR 46 be quoted on the Luxembourg Stock Exchange. “This is a
bn of fund of hedge fund assets and EUR 10 bn of direct good selling point, which may appeal to institutional
hedge fund assets,” says Ries. “For the time being, we are investors who are only allowed to invest in listed compa-
specialising in the fund of hedge funds business. Direct nies or in listed hedge funds. This is a good piece of mar-
hedge fund administration and custody is increasing, but keting for promoters who have funds listed in
the circular for Luxembourg domiciled hedge funds is less Luxembourg,” says Ries.
than satisfactory for some promoters as they cannot do To further enhance the credibility of Luxembourg as an
what they would like to do. As a consequence, these pro- investment centre, the CSSF introduced the Long Form
moters keep their funds in domiciles such as the BVI, Report in addition to the annual report on an investment
while we perform the central administration for those fund. “The analysis in the Long Form Report gives the
regulator a good idea of what has been going on in the
fund for a certain year,” says Ries. “The CSSF also issued a
“Our success can be more accurately circular on late trading and market timing. While these
attributed to the available expertise” rules may not be very cost efficient, we have to use them as
marketing tools, in order to show the world we are well
organised and properly supervised.”
funds here in Luxembourg. A substantial amount of fund Distribution
of hedge funds are domiciled and administered in By virtue of its geography and regulatory approach,
Luxembourg. The business is growing, assets are increas- Luxembourg is ideally positioned to support pan-
ing and new funds are being launched. The CSSF circular European distribution. “Our people are experienced in
was not a huge success at first, but more fund of hedge cross-border distribution, we know how to accommodate
funds business is coming to Luxembourg. We are adminis- the local distribution laws in the different countries and
tering funds that are domiciled outside of Luxembourg.” can work around any complications that may arise from
The circulars from the CSSF have added to cross-border distribution,” says Christophe Lentschat, head
Luxembourg's appeal as a centre for investment funds. of product development and marketing at European Fund
Similarly, standards for market practice remain extremely Administration (EFA). “We have multilingual staff, who
high. “At the beginning of the year, we abolished the sub- are able to deal with funds that are distributed in different
scription tax (“taxe d'abonnement”) for AAA-rated cash countries and who can provide multilingual investment
funds that are exclusively for institutional investors,” says reports. We also have systems with multilingual and multi-
Ries. “This change implies that an industrial company, currency capacity, and the ability to handle the high vol-
which would like to efficiently manage its cash investment, umes presented by the retail investor. Several providers in
could create a Luxembourg fund. If this fund invests only Luxembourg have had these systems in place for quite a
in cash or money market instruments with a weighted while.”
residual portfolio maturity of less than 90 days and with
the highest possible ranking, it would not have to pay any
taxe d'abonnement on its assets. In this instance, Net Assets under Management in
Luxembourg abolished the taxe d'abonnement to attract Luxembourg in Euro bn
more institutional money.” 2002
Pensions
Others 3.263
In 1999, Luxembourg introduced a law to enable the 3.321 2003
launch of pension funds. However, only 11 pension funds
were launched since the creation of this law. It appears the
main obstacle to the launch of pension funds in Europe is 405.475
taxation. “Taxation hinders the creation of cross-border SICAV
pension funds,” says Ries. “Luxembourg acknowledged it 483.759
could not attract many multinational pension funds and
began to focus on getting the assets of those funds into the
435.77
domicile. Nowadays, if a multinational company is run- FCP
ning several pension funds for the benefit of its employees, 466.222
it can create a single investment fund in Luxembourg in
order to leverage off economies of scale in pensions man- 0 50 100 150 200 250 300 350 400 450 500
Source: ALFI

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Institutional Banking and Funds
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E-mail: mario.feierstein@bgl.lu www.bgl.lu
Solid partners, flexible solutions

Service providers such as EFA have welcomed the launch For most service providers in Luxembourg, UCITS III
of new investment funds, which take advantage of the presents a range of opportunities. “We now have the possi-
‘product’ provisions of the UCITS III directive. EFA has bility of launching new products, but there are certain
recorded an increase in the number of hedge funds requirements to be met in the areas of corporate gover-
administered in Luxembourg. “I wouldn't say the growth nance and investor protection,” says Lentschat. “We want
is wholly down to the CSSF circular for hedge funds,” says our clients to comply with the new requirements in the
Lentschat. “We would have experienced this growth any- easiest possible way and do not want the regulations for
way. The circular is simply a regulatory change aimed at the investment funds industry to appear too burdensome.
defining the rules of the game. Most of our fund sponsor We also have to be ready for the possibilities created by
clients have said they would launch funds here regardless UCITS III. We cannot afford a situation where funds are
of regulation.” barred from distribution in other countries in Europe
Investments because we weren't ready. It is a huge challenge for our
One of EFA’s clients, a major pension and investment company and a priority for the entire industry.”
company, has based its pension-pooling vehicle in The retail distribution opportunities for fund managers
as a result of UCITS III was significantly
highlighted with the launch of the first
“The CSSF circular was not a huge success at first, UCITS III compliant mutual fund by
but more fund of hedge funds business is coming European Credit Management (ECM),
an independent fund management com-
to Luxembourg” pany. The Luxembourg-based European
Credit Fund (ECF), a self-managed
Luxembourg. “We expect to have more of these vehicles in SICAV, can be sold to retail, as well as institutional,
the future,” says Lentschat. “The exemption from the taxe investors across the European Union because the
d'abonnement for funds is one of the main advantages for Luxembourg regulator has registered the fund as UCITS
promoters establishing their pension funds in III compliant. The fund was approved by the CSSF, the
Luxembourg.” Luxembourg securities regulator, as UCITS III compliant
Apart from pension fund pooling vehicles, EFA has in January 2005 through the “grandfathering” provisions,
recording a high demand for the SICAR. The demand for having been originally established in 2003. ECF has about
this vehicle, according to Lentschat, is directly linked to the EUR 1 bn of assets and invests in fixed income securities
interest in private equity and venture capital as asset class- and derivatives. Its assets will be managed and distributed
es. “The demand is also due to the administrative simplifi- by ECM, while mutual fund service provider The
cation and flexibility offered by these products. Promoters Directors' Office, which was launched by Patrick
who want to run SICAVs face strict qualification require- Zurstrassen (formerly of Indosuez and Credit Agricole),
ments, but the requirements for SICARs are a lot lighter, will handle the negotiations with the CSSF, and ensure the
this is counterbalanced by requirements on the investor’s fund meets the latest mutual fund corporate governance
eligibility.” standards.
The Luxembourg Investment Fund Industry in 2004 - number of funds

2000
1963
1800
1600 1955
1944
1400
1936
1200
1924
1000
1909
800
1910
600 1904
400 1898
1892
200
1869
0
June
July
February
May
November
March
April
October
January
August
September
Source: ALFI

Agility
Compared to other European countries, Luxembourg is
nimble in its implementation of regulatory directives.
According to David Claus, head of business development
at the Bank of New York, the speed
“the increasingly global nature of the of implementation in Luxembourg
funds industry is prompting continual is particularly true for UCITS III.
“The business Luxembourg got
investment in this business” from implementing the first UCITS
directive probably triggered a
speedy implementation of the third directive,” he says.
“The funds industry seems to recognise that UCITS still
leaves some freedom for implementation, as evident in
certain countries. Many countries have interpreted the
directive in different ways. More co-ordination and effort
is therefore required on a pan-European basis to ensure we
get closer to a single market. The single market can only
The Luxembourg Investment Fund Industry by achieved on a pan-European basis and a number of
in 2004 - net assets in EUR bn decisions have to be made so that countries can imple-
1,200 ment UCITS III more consistently. More co-ordination is
needed to enable the directive to accomplish that which it
1,000 1,090.8 was intended for. At the end of the day, we are all working
1,072 for the end investor, who can also benefit by increasing the
1,058.9 size of their fund across borders.”
800
1,053 For most service providers in Luxembourg, the 'new'
1,039.1 hedge fund law made explicit what was already implicit in
600 Luxembourg before. Previously, a large number of hedge
1,046.8 funds were unwelcome in Luxembourg, but there was no
400 1,026.6 specific law defining what was possible and what was not
1,037.3 possible. “Promoters who were active in the hedge funds
1,032.7 area knew they could employ the criteria used by the
200 1,006.1 CSSF,” explains Claus. “Owing to the implicit nature of the
987.6 hedge funds industry prior to regulation, promoters did
0 not think Luxembourg was in this business at all. Fund
June
July
February
May
April
November
March
October
August
January
September
sponsors would therefore recommend Dublin for hedge

funds and money market funds. But Luxembourg is trying
Source: ALFI
to fight back by abolishing the taxe d'abonnement so that
countries can implement UCITS III more consistently for
institutional money market funds.”
,UXEMBOURG 'LOBAL #USTODY

&RANCE &UND !DMINISTRATION
)RELAND 4RANSFER !GENCY
3PAIN
)TALY
.ETHERLANDS
(ONG+ONG
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3INGAPORE
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"ELGIUM
#AYMAN)SLANDS WWWDEXIAFUNDSERVICESCOM
Regulation
Despite their location and experience
Key Advisor Analysis
in financial services, Luxembourg service Luxembourg administrators at December 2003 - value of assets under
providers have endured their fair share of administration in US $bn
Fastnet - $73.6 bn
challenges. “The last year has been inter- UBS Fund Services - $120.9 bn
esting in terms of financial market condi- Dexia BIL - $84.7 bn
tions,” says Claus. “In addition to UCITS,
we also faced the European Union
Savings Directive, the International
Accounting Standards and the new
German tax legislation. Adhering to these
European Fund Admin. (EFA) - $86.1 bn
laws means continual investment in the
business. As soon as the bar is raised, the
number of providers who are willing to JP Morgan Bank - $117.8 bn
stay in this business decreases. There are Source: Fitzrovia, Luxembourg Fund Encyclopaedia
over 70 fund service providers in

Luxembourg. The EUR 15 bn adminis- Luxembourg auditors at December 2003 - number of funds served
BDO Cie Fiduciaire - 197
tered by the average provider is a fairly
small figure and there are a number of KPMG - 1,146
providers who will struggle. Funds PricewaterhouseCoopers - 3,255
administration is global business. An

increasing number of European sponsors
are running Luxembourg SICARs, but
Deloitte - 1,302
these assets are managed out of Asia and
Europe. This arrangement places addi-
tional strain on the service provider to be
able to service asset managers and dis- Ernst & Young/Cie de Revision - 1,507
Source: Fitzrovia, Luxembourg Fund Encyclopaedia
tributors in multiple time zones. Service
providers have to be more local in terms
of client servicing, adding to the cost of Luxembourg custodians at December 2003 - value of assets
being in the business. Apart from regula- under custody in US$ bn
Citibank - $82.9 bn
tion, the increasingly global nature of the
JP Morgan Bank - $142 bn
funds industry is prompting continual Dexia BIL - $90.1 bn
investment in this business.”
To further commit to the funds servic-
ing business, BNY recently acquired
Luxembourg-based Continental Fund
Services (CFS). CFS provides retail trans- BBH - $114.3 bn
fer agency and registrar services to

Luxembourg SICAVs run by two US fund
management companies, Davis Selected UBS - $120.9 bn
Fitzrovia, Luxembourg Fund Encyclopaedia
Advisers and Alger Associates, as well as
sub-transfer agency and sub-registrar
services to European shareholders of
Alger U.S. domestic funds. CFS adminis- Luxembourg legal advisers at December 2003 - number of funds served
Kremer Associés & Clifford Chance - 323
ters the accounts of approximately 32,000
shareholders in such funds. Bonn Schmitt Steichen - 492
Commenting on the acquisition, Claus Elvinger Hoss & Prussen - 1,744
says: “In an operational business such as
this, accounting, custody and transfer
agency are operational issues. People
Linklaters Loesch - 578
don't really consider operations to be an
issue, as long as it all works. If the rules of
the game were to change thanks to regu-
lation, financial institutions will be faced Arendt & Medernach - 1,475
Source: Fitzrovia, Luxembourg Fund Encyclopaedia

with the question of whether to buy a new system or to

invest in an old one. These are interesting times when
tough decisions are made.”
Value Added
From a legal perspective, Luxembourg introduced its
new hedge fund regulation after realising it could achieve a
lot more than simply providing a platform for UCITS
funds. “We were confident that our expertise could also be
applied to alternative funds,” says Claude Kremer, partner
at Arendt & Medernach, a Luxembourg-based law firm.
“We developed hedge funds and SICARs and have done
quite well so far. We significantly increased assets and
numbers in the hedge funds and fund of funds arena in
2004. The overall message we project is that Luxembourg
can be used for non-UCITS funds too. This message has
been well received by the market.”
Together with Ireland, Luxembourg has taken the lead
on competitive hedge fund regulation in Europe. Kremer
explains: “The Germans have developed legislation but
their taxes imposed on hedge funds to become compliant
are huge. We are not sure whether Germans can launch
hedge funds in Germany or whether they can use the
Luxembourg funds. The French have not really devised
any competing regulation for hedge funds. Although
Ireland was the first to introduce hedge fund regulation,
we have become a competing jurisdiction to the classical
Irish hedge funds.”
SICARs and property funds have also given Luxembourg
service providers a lot to be thankful for. “Property is an
extremely well developing segment and Luxembourg has a
flexible regulatory environment to support these funds,”
says Kremer. “The structuring of these funds through
Luxembourg vehicles has proved to be extremely tax effi-
cient for the investor. Luxembourg service providers have
to become more specialised in order to service these types
of funds because there are a lot of opportunities.”
Number of investment funds in Luxembourg

2002
28
Others
25 2003
896
SICAV
888
1017
FCP
957
0 200 400 600 800 1000 1200

Source: ALFI

The changes to Luxembourg’s investment fund regula- NEWS

tion have prompted service providers to specialise in Luxembourg, February 2005 – FUNDsoft and Protracs have signed a
their service offerings. “This specialisation will make it strategic agreement, covering FUNDsoft’s complete solution range
possible for providers to service new funds,” says which includes the COBAS Bureau Service for outsourced IT of funds
Kremer. “Alternative funds, in particular, behave differ- administration as a range of components for workflow and document
ently to ordinary funds. The service provider has to management. Commenting on the agreement, Mark Culham,
monitor the underlying value of the assets in hedge FUNDsoft’s client and partners manager, said, “Both our companies are
funds. Reporting for fund of hedge funds requires the perfect complements to each other; Protracs is a niche services provider
value of the target funds from the relevant service in the Luxembourg and Pan European market and FUNDsoft is a
providers of these funds. Service providers face the dynamic provider of solutions for the fund administration and financial
challenge of achieving a degree of specialisation to meet marketplace.
Both companies have a wealth of experience in operating in this sector
the high expectations of promoters. They have to invest
and their combination provides unique opportunities for existing and
in the business, declare their areas of specialisation and
new clients to access the latest technology and services for areas such as
offer their services in a cost competitive manner.” a range of Bureau solutions, fund supermarkets, transfer agency, pooled
pensions, and a range of other investment vehicles”
Under the terms of the agreement, FUNDsoft’s range of solutions,
based on the COBAS platform, will be delivered into the European mar-
ketplace by a number of partners, such as Protracs, through application
management, licensing, or fully outsourced services, including
Net Assets under Management - Luxembourg in Euro bn
FUNDsoft’s recently launched Bureau service. The agreement marks the
2002 beginning of a long-term strategy between the two businesses.
Institutional funds “We are committed to providing our users with a complete solution for
2003
all aspects of fund administration. The barriers for distributing funds on
a pan-European basis are coming down but technology has not delivered
Part II Law 2002 the cost savings that most fund administrators require. We intend to sig-
nificantly change that,” stated Culham.
“Protracs is a rapidly expanding professional services organisation and
the employees have years experience between them in the European
Part I Law 1988
funds industry. FUNDsoft offers best-of-breed solutions which will have
a significant impact on this market,” said Robert de Yong, managing
0 100 200 300 400 500 600 700 800 director of Protracs. “Protracs is delighted to have been chosen as the
Source: ALFI first strategic partner of Fundsoft in Luxembourg; our combined expert-
ise offers a unique range of services and solutions for the funds industry
throughout Europe”.
2004
Net Assets under Management - Luxembourg in Euro bn
1200 2003
1000
800
600
400
200
0
January February March April May June July August SeptemberOctober November
Source: ALFI

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Fund Services
Analyse This...Luxembourg
After several years of regulatory change, Luxembourg and its service providers
seem well prepared to attract new business. ISJ readers put them to test with a
host of questions about their existing fund regime
Nicole Pauquet Johnny Yip
Comment on the outlook for investor services Is the existing funds regime intrusive or fair and will the
outsourcing in Luxembourg. existing rules lead to further back office outsourcing?
Answered by Nicole Pauquet, managing director of UNICO Answered by Johnny Yip, partner, Deloitte Luxembourg
Financial Services S.A. Over the last few years the entire financial services industry
Increasing pressure on the profit margins of asset managers has faced an increasing number of new prudential regulations.
is the driving force behind outsourcing in the investment This trend is likely to continue as regulators try to improve
fund industry. As a consequence of this pressure, asset corporate governance. Luxembourg’s appeal may be explained
managers tend to focus on their core business, seeking ways by its regulated environment and investor confidence in the
to cut their operational costs by transforming fixed costs “Luxembourg Brand”. The qualitative aspect of the industry’s
into variable costs. The range of outsourcing extends from track record is not the result of a “bullying” style by the
single IT-platform outsourcing to the entire back- and omnipresent CSSF (Commission de Surveillance du Secteur
middle office value chain. However, the demand for com- Financier). Instead, Luxembourg singles itself out from other
ponent-based outsourcing is, in my opinion, an indication jurisdictions by the close working relationship between the
that some asset managers have not yet taken a final deci- regulator and the industry, grouped under the Luxembourg
sion about the definition of their core business. In such a Association of Investment Funds (ALFI). Every draft law or
situation, the following criteria appear as barriers to a com- regulation is debated and discussed via working groups and
plete outsourcing decision: existing in-house service cen- committees by representatives of the lawmakers and the
tres, concern about the effectiveness of cost reduction, con- industry. The main concern is the impact of implementing the
cern about the quality of services and limited supply of new prudential regulations. There is no single player in
credible service providers operating in a global European Luxembourg who is not aware that the CSSF recruited 15
market. However, partial or component-based outsourcing additional staff in 2004 as a result of increased workload. It is
does not deliver a taste of the key outsourcing benefits, very difficult to convince the most optimistic fund adminis-
which include: the replacement of fixed costs by a higher trator of the positive aspects of the introduction of Long
grade of variable costs; the reduction of capital tied up in Form audit reporting. Increased operating costs and profes-
administration operations; the fact that investment costs sional indemnity cover will surely make the players rethink
are borne by the outsourcer; economies of scale by using their business model. Currently there are about 70 fund
scalable IT-platforms; sharing of product development administrators that provide back-office functions and most of
costs for industry-wide changes across a wide customer them also provide custody services. There have been some
basis and the flexibility of personnel deployment, avoiding major outsourcing deals amongst some big players in the
redundancies especially for high qualified personnel. In industry, driven mainly by strategic positioning. So far,
conclusion, there will be some component-based outsourc- increasing prudential regulations has not been a compelling
ing deals, but I would see them as a transitory phenome- reason to outsource further back office functions. As of
non, paving the way for more lift out deals. This trend will January 1, 2005 the CSSF reported a total of 25 authorised
accelerate as the European market expands. Local differ- UCITS III management companies and most of them are a
ences will remain, but we can expect an increasing grade of spin off of existing fund administrators. Clearly, the industry
regulatory harmonisation, as well as product harmonisa- could end up with as many management companies as fund
tion. The Luxembourg fund administration outsourcing administrators. We expect increased outsourcing activities in
market can profitably grow with the acceleration of cross this segment of the market, largely driven by the regulations
border outsourcing, when these decisions are taken on for minimum substance and the ease of transferring labour-
board by the head offices of big the European asset man- intensive functions to exotic outsourcing havens. The smaller
agers. This will be the main challenge for the Luxembourg players will no doubt face serious difficulties to keep pace with
fund industry within the coming years. increasing operating costs and remain competitive. We could
witness an accelerated flight to the “niche market”.

Jean-Jacques Picard Thomas F. Langer
What does 2005 hold for the Luxembourg Funds What impact has the implementation of UCITS III had
Industry and what factors will act in its favour? on asset managers in Luxembourg so far?
Answered by Jean-Jacques Picard, public relations director, Answered by Thomas F. Langer, Dresdner Bank Luxembourg
Association of the Luxembourg Fund Industry (ALFI) S.A., Chief Investment Officer
The Luxembourg funds industry accelerated its growth in With the introduction of the new EU directive, investors
2004. During the first eleven months of the year, can look forward to a broader range of more sophisticated
Luxembourg saw the net creation of no less than 320 new products coming out of Luxembourg, including funds
fund units, bringing the total number of portfolios offered structured around a total return approach. UCITS III
to private and institutional investors around the world to allows providers to offer funds out of Luxembourg with an
more than 7,800. During the same period, net assets under enlarged range of underlying securities and the possibility
management in Luxembourg-based investment funds of short selling. This helps firms to meet the demand for
increased by Euro 130.5 bn or 14.4 per cent. The more refined products that will provide better returns in
Association of the Luxembourg Fund Industry (ALFI) the current, uncertain economic environment. The fund
believes that this positive development will continue in manager now has new opportunities to make funds more
2005. Many of its members have new investment fund attractive for investors. In general, EU-countries have
products in the pipeline. Furthermore, fund promoters enacted their UCITS III legislation, but each country has
that are not yet present in Luxembourg are increasingly read the new directive from its own point of view.
interested in setting up funds in the Grand Duchy. This is Luxembourg had a lot to lose, but less to win. The compe-
particularly true for hedge funds, where a clear trend to tition with Dublin led to a good, but not optimal, result.
domicile this type of fund in a more regulated jurisdiction From now on, a fund manager can use currency deriva-
is observed. Since the Luxembourg regulator issued specif- tives for purposes other than hedging. This means that a
ic hedge fund regulation at the close of 2002, both the fund could be invested in long/ short currencies to profit
number of hedge funds and the assets under management from movements in the currency market only. Leveraging
in these funds have shown steady growth. Private equity is permitted to a certain extent, to improve performance.
and venture capital funds are another growth area since By selling uncovered derivatives, the fund manager can
the Grand Duchy offers a legal and fiscal environment that shorten underlying markets without having the long posi-
takes into account the specific needs of this category of tion to take advantage of decreasing market prices.
investment vehicle. Whereas real estate funds used to be Different types of underlying securities can be combined.
set up by specialised promoters for a specific type of A so-called super fund can be composed of stocks, bonds,
investment clientele, large retail fund promoters are now mutual funds, futures and options. The fund manager can
starting to turn towards these products. By reducing to nil decide which product gives them the right exposure at the
the annual subscription tax on pension pooling vehicles, a best price. Depending on the clients’ demand, the fund
highly attractive scheme for a tax efficient and cost-effec- manager has to identify the investment products that offer
tive grouping of pension funds was created in May 2004. them the expected return. Former stock pickers have to
One of ALFI’s working groups is currently investigating explore whether the direct investment or an investment
the extent to which the March 2004 Law on Securitisation via a discount certificate offers the best opportunities. To
can lead to the creation of new types of investment funds. profit from UCITS III, both the managers and the
The Association is also thinking about measures that could investors have to be aware of their aims. Fund managers
be taken to render Luxembourg an attractive centre for will better meet the expectations of their clients, who will
socially responsible investment (SRI) funds in general and receive better products at lower costs. While this is the the-
microfinance funds in particular. ory, only reality will prove it.

Sheenagh Gordon-Hart Patrick Zurstrassen
Can service providers in Luxembourg expect any What opportunities does the UCITS III law for Sicavs
opportunities from the creation of pension fund pool- and open ended investment companies present to
ing vehicles and the abolition of the tax d'abonment? fund promoters and to fund service providers?
Answered by Sheenagh Gordon-Hart, vice president, head of Answered by Patrick Zurstrassen, chairman and founder of
Strategy & Reseach, EMEA at JP Morgan Investor Services The Directors’ Office
Pension fund pooling – it’s the ‘Holy Grail’ for service The UCITS III law for Sicavs and open-ended investment
providers. For years, legal and tax experts, consultants and companies presents a change in the investment funds
practitioners have worked on finding a solution to the dis- regime. Within a few months, fund promoters and fund
economies of scale that arise from having a hugely frag- managers will not have a choice between UCITS I and
mented pensions picture in Europe and across the world. UCITS III. The Committee of European Securities
Just when one problem appears to be capable of solution, Regulators (CESR) has just published its final recommen-
so yet another obstacle seems to emerge. However, the dations on how to manage the transition from UCITS I to
pressure is now on to transform this situation: the unstop- UCITS III. For many funds, the Committee has shortened
pable inversion of the population pyramid demands radi- the grandfathering period of UCITS funds to one year,
cal action. In Europe, attempts are being made to address rather than close to three years. Most of them will have to
this in terms of growth, market efficiencies, and in a myri- comply at the latest in March of next year. This transfor-
ad of other ways. For those that provide services and to mation would impact the entire European market, be it
end investors alike, the benefits that pension fund pooling cross-border or for all practical purposes domestic, broad-
can offer will be significant. Already, but to a very limited ening the range of possible investments and fostering fund
extent, pooling is available; the big prize will be efficient governance. About 30,000 funds in Europe will thus have
cross-border pooling. In Luxembourg, all the signs are that to convert to UCITS III in the coming months. The spirit
the Flexible Corporate Pension (FCP) structure will thrive of the Directive is to provide managers with a much
as a pooling vehicle. That is not to say there will be no broader range of investment possibilities than those avail-
challenges; there are still many unknowns and the industry able in 1985 when the first UCITS directive was drafted.
will have to move forward with a degree of uncertainty The first UCITS directive is very much long-only equity
around, for example the domestic tax/stamp duty treat- driven. Those securities, including bonds or equities, had
ment of assets transferred in specie. Additionally, a cross- to be listed on the stock exchange.
border pooled vehicle will look fairly complex with a We are now moving into a more open field and over-
range of share classes representing the potential need to the-counter instruments are allowed under certain condi-
observe a range of asset allocation rules and/or tax profiles tions of law. There is also the the possibility to invest in
of investors. However, service providers in Luxembourg other funds, the possibility to invest in money market
are used to dealing with such complexity. The tax chal- instruments, collateralised securities and the possibility to
lenge will remain as pioneers seek the multiple jurisdic- buy and sell derivates, not only for hedging an exposure
tional rulings recognising the FCP as tax transparent and but also for picking an exposure, thereby achieving greater
thus eligible for favourable treatment. Over time, however, leverage. But nothing is perfect - some might say UCITS
such vehicles are likely to prove themselves as efficient III should have included possibilities for master-feeder
vehicles for the management of pension assets and that is funds or real estate funds. One of the first firms to have
a market whose growth is assured. The abolition of the completed the transition from UCITS I to UCITS III for
taxe d’abonnement for institutional investors is welcome; their Luxembourg Sicav is European Credit Management.
but should be the beginning of the end for this tax: its This achievement has been completed thanks to the local
continued existence is a distraction. support of The Directors' Office.

Robert de Jong Marc Schammo
What opportunities exist for fund managers, promot- What challenges do open architecture models
ers and distributors to outsource their administration? present, considering that Luxembourg's laws do not
allow for certain functions to be carried out in other
Answered by Robert de Jong, managing director of fund centres?
Protracs
Outsourcing is definitively a trend to monitor in the Answered by Marc Schammo, head of sales at Dexia Fund
Luxembourg market. The new provisions for hedge funds Services
have increased the competitiveness of the Luxembourg The Luxembourg authorities may have no problem with
market, but current systems and workflows are not always functions being performed elsewhere under certain cir-
adapted to handle the complexity of these financial instru- cumstances. Major functions have to be performed here
ments. This also applies to the regulatory requirements and there is no getting around that. We do not have it in
and risk management measures required for UCITS III writing that which can be outsourced and that which can-
compliance. As most transfer agency and fund administra- not. From my point of view, it would be risky to state
tion application providers still focus their efforts on the which functions could be performed outside Luxembourg.
implementation of an EU Savings Directive, compliant Dexia Fund Services performs a number of activities out
release for July 2005, financial institutions are looking to of Luxembourg for our subsidiaries in 11 jurisdictions.
fill the gap by outsourcing or by integrating specialised FETA (First European Transfer Agent) is doing the same
packages, to offer additional products such as hedge funds for certain transfer agency activities. We try to centralise
and funds of hedge funds. But changing regulations are all functions in Luxembourg as far as possible. It is diffi-
not the only outsourcing drivers. Financial institutions cult to say whether more funds have been set up in
have since the beginning of this century been looking for Luxembourg as a result of recent regulatory changes, we
ways to reduce overall operating costs, and outsourcing, do see new business come to Luxembourg on a regular
although sometimes thought as controversial in the long basis. Whether new business is due to UCITS III is difficult
term, is seen by many as cost reducing measure. Increasing to assess. Luxembourg can attribute its success to a strin-
competition and client awareness of financial markets and gent, yet flexible regulatory environment and to the
products are pressuring profit margins to a minimum and expertise of the Luxembourg service providers. How much
obliges market players to offer a wide range of services to new business comes to Luxembourg because of these qual-
avoid dependency on one single product or service. As ities and how much due to UCITS III is difficult to say.
such, market consolidation will probably continue in 2005 But generally speaking, UCITS III is not necessarily gener-
and 2006 and the smaller niche players may have difficul- ating new business across the board. It certainly adds costs
ties to survive under these circumstances, unless perhaps to the funds administration function, thus to the fund
they consider outsourcing specific activities to profit from promoters and ultimately to the investors. Whether this
economies of scale. In order to offer a full range of diversi- may compel fund managers and promoters to go offshore,
fied products and services, investment in best of breed to a totally unregulated environment, is an interesting
solutions becomes almost inevitable, but these solutions debate. Investors tend to buy products that are in safe
are not cheap. Not only should purchase and maintenance havens. There is a trend towards unregulated structured
fees be considered, but integration costs and middleware products, which have, for some time, been offered to pri-
requirements need to be carefully analysed before opting vate banking clients. These don’t compare to investment
for a best of breed solution scenario. Companies like funds but at the end of the day, could provide investors the
Fundsoft have recognised the potential of the Luxembourg same outcome. These products are often private place-
market and are establishing local presence here today. ments, they undergo no regulatory control and are often
totally illiquid. Investors increasingly buy such unregulated
products from their local banker but not necessarily exotic
investment funds from a source they know less.

Luxembourg Funds Industry
Luxembourg is often said to be the Luxembourg FCP (Fonds Commun

de Placement).
over-regulated, but regulation is In terms of flexibility, the Luxembourg
solution offers more possibilities, both for
the cornerstone of trust that investors and investment policies. Indeed,
promoters and the investor while only pension funds can invest in a
Dublin CCF, the Luxembourg law has
community have built up over adopted a wider definition of who quali-
fies as a pension pool investor, for exam-
the years. ple, balance sheet assets held for pension
purposes could also qualify. Similarly, in
terms of investment policies, the CCF can
Stephanie Grisius at UBS Fund only take the form of a UCITS fund,
Services explains the importance whereas the Luxembourg solution also
allows non-UCITS structures, which
of regulation could be used for master-feeder set-ups.
By abolishing the subscription tax on
corporate pension pooling vehicles,
Luxembourg has further shifted the bal-
ance from the CCF to the FCP.
The crux of pension pooling vehicles
remains the issue of tax transparency.
While discussions with different foreign
tax authorities are still in progress, the
FCP has the advantage of being an estab-
A Question of Trust lished and well-known product. The

investment management community is
certainly well aware of its potential:
“Within UBS, we have received a number
of enquiries regarding the possibilities of
the Luxembourg vehicle for cross-border
Regulation provides a sound basis pension needs. We are confident that the
for product innovation and professional Luxembourg platform offers a key build-
fund servicing. Luxembourg has posi- ing block for developing these vehicles on
tioned itself successfully as the hub for a pan-European basis. There are a num-
international fund distribution. With ber of challenges we will need to address,
more than 500 fund promoters, but this is certainly an area that will fur-
Luxembourg has attracted fund sponsors ther develop in the future,” argues Jean-
from all over the world. Paul Gennari, head of UBS Fund Services
While standard UCITS funds represent a in Luxembourg. “Even though the FCP
significant part of the Luxembourg may not have been given as much media
investment fund market, more and more attention as its
effort is being devoted to increasingly Dublin counterpart, it stands the test in
innovative solutions and the regulatory every respect. The possibilities of the FCP
Stephanie Grisius and Jean-Paul Gennari framework for complex products. are wide and its tax transparency is, to a
“We have received a number of enquiries

regarding the possibilities of the Luxembourg
vehicle for cross-border pension needs”
Pension Pooling large extent, better tested than that of the
While Dublin has been good at CCF. In addition, a cross-border pension
marketing the CCF (Common solution would complement
Contractual Fund) as a pension-pooling Luxembourg’s existing international fund
vehicle, it is little more than a copy of distribution offering”.

Luxembourg Funds Industry
Regulated Centres investment required for servicing these says Jean-Paul Gennari. In addition, it is
While plain vanilla funds are success- products is also increasing. becoming increasingly important to be
fully used as the building blocks in cus- able to offer a unified, streamlined service
tomer-oriented solutions, more complex, Make or Buy? across different locations. “We are partic-
structured funds are also making Outsourcing is already a reality in ularly pleased with the successful intro-
progress in Luxembourg. Gilbert Luxembourg. More than half of the top duction of a single, state-of-the-art
Schintgen, head of Compliance and Risk 100 promoters - controlling 95 per cent administration platform for our centres
Management at UBS Fund Services in of total assets in Luxembourg domiciled in Luxembourg, Switzerland and the UK,
Luxembourg says: “Luxembourg sees a lot funds - outsource some or all their fund allowing us to offer the same high-quali-
of hedge fund managers who are looking administration requirements to a third ty, consistent standard of processing
to onshore their hedge fund ranges from party. In terms of assets, these promoters regardless of where a fund is domiciled.
unregulated or less regulated offshore represent more than a third of the total Our clients will benefit from increased
places to Luxembourg. The trust of their Luxembourg investment fund market. speed, accuracy and functionality in all
client base is an invaluable asset that out- “Luxembourg has a very professional areas of administration. The flexibility
weighs regulatory constraints or slight fund servicing industry. The choice and and connectivity of this new platform
add-on costs for doing business.” quality of specialists have facilitated the allows us to take on new mandates and
decision to outsource, particularly in the respond to requests from existing clients
SICAR: in regula- more effectively,”
tion we trust says Gerhard
Three SICARs “The SICAR represents a very attractive vehicle for Fusenig, head of
(Société
d'Investissement
investments in private equity and venture capital” Investment Fund
Services.
en Capital à
Risque) have been set up under the law of areas of fund administration and custody. A New Service Dimension
15 June 2004. The purpose of the SICAR Regulation, if anything, is going to fur- Successful fund administration goes
is to invest in “risk capital”, including ther intensify this trend,” notes Jean-Paul well beyond accurate and timely NAV cal-
venture capital and different forms of Gennari. culation. Increasingly, fund administra-
private equity, like convertible debt and Promoters who only perform the fund tors are expected to assist and guide their
mezzanine financing, offering a flexible administration of their in-house fund clients in the changing regulatory envi-
wrapper for a large array of investments. range are likely to either outsource or to ronment. While increased regulation is
Its legal and operational flexibility and start offering fund administration servic- often regarded as a burden, it also offers
different tax possibilities have sparked the es to third-party clients. But the fund many opportunities that fund promoters
interest of the financial community in administration market is already very are keen to seize as soon as they arise.
Luxembourg. “The SICAR represents a crowded and also very concentrated: Regular discussions and close interaction
very attractive vehicle for investments in “There are already more than 70 fund with the client allows faster time to mar-
private equity and venture capital. The administrators in Luxembourg and the ket. “Having a state-of-the-art IT archi-
financial community welcomes this new top 20 control more than 60 per cent of tecture is the cornerstone of a successful
regulated product, which offers an attrac- total assets. Competition is fierce and fund administration business, but we
tive alternative to what would have for- building up a third-party client base is have taken our service offering one step
merly been set up as an unregulated lim- tough under these conditions,” argues further,” says Jean-Paul Gennari. “As a
ited partnership,” says Gilbert Schintgen. Jean-Paul Gennari, “Building up a fund leading fund provider, we have in-depth
administration operation from scratch is product and market knowledge which we
Securitisation also challenging: in addition to prohibi- share with our clients. We assist our
Luxembourg offers a legally secure, yet tively high set-up costs, it is difficult to international client base from the early
flexible environment for the securitisa- build up and maintain the required local product development stages to the full
tion of a wide range of assets. The law of product, regulations and market expert- administrative servicing, including tax
22 March 2004 introduces securitisation ise.” and regulatory reporting in more than 25
vehicles in the corporate form as well as target countries. Through regular discus-
in the form of a securitisation fund. It The Right Infrastructure sions and proactive information provi-
offers maximum investors’ and creditors’ A state-of-the-art fund administration sion, we help our clients in their strategic
protection by securing their rights, allow- architecture needs to accommodate the decision process. This regular exchange is
ing the use of separate asset classes and servicing requirements of innovative new key to our service offering and turns us
enhancing bankruptcy remoteness. investment products. “At UBS Fund from just a service provider to our clients’
Services, we have continuously invested in partner.”
Successful Servicing our people, processes and systems to offer
Innovative products also call for state- high-quality fund administration services Stephanie Grisius is responsible for business
of-the-art servicing. While products are to be able to respond to the growing development initiatives at UBS Fund
getting more and more complex, the complexities of the investment products,” Services in Luxembourg.

Offshore Centres
The offshore centres of As homes to the world’s largest concentration of hedge

funds, it is hard to imagine the offshore centres of the
Bermuda, Cayman, Curaçao Caribbean and Bermuda going
through a bad spell. But the events
and Bahamas have endured of the last year inflicted consider-
testing times over the last year. able havoc on their infrastructures.
The impact of Hurricanes Ivan and
Frances certainly put inhabitants in
ISJ finds out how service these centres through their paces.
The scale of the disaster was also
providers in these centres severe for organisations with busi-
nesses in these offshore centres.
have overcome internal The Bank of New York, whose
problems and competition Sean Flynn acquisition of International Fund
Administration in Bermuda added
from onshore centres. to its fund servicing status in North America, operates a
trust company in Cayman and had to mobilise its contin-
gency plan after the Hurricanes struck. “We temporarily
took our representatives out of the Cayman Islands and
put them into other offices where they carried out their
Blazing
business as usual,” explains David Aldrich, head of
Securities Industry Banking at the Bank of New York.
Regulation
Beacons Apart from having to overcome the impact of the

Hurricanes, the offshore centres in the Western hemi-
sphere faced brutal regulatory arbitraging from the off-
shore centres located within Europe. Aldrich explains:
“Everybody is trying to modify their own regulations to
appear more attractive. Apart from Bermuda, Bahamas,
Curaçao and Cayman, centres such as Jersey, Guernsey and
the Isle of Man are also trying to attract the same business
and are making their own regulatory changes in order to
compete against each other.”
Perhaps the most important weapon in the offshore
centres' arsenal is reputation. “Bermuda, Cayman and
the Bahamas all have a credible structure and a credible
regulatory regime,” says Aldrich. “The offshore centres
are increasingly competing against the onshore, more
highly regulated centres such as Ireland and
Luxembourg. At the same time, managers with a
Cayman fund, a Bahamas fund and a Bermuda fund are
considering whether they should 'redomicile' to one sin-
gle centre and as a result, we are seeing a redomicilation
of funds for administrative convenience. To a large
extent, the recent regulatory changes are enabling those
centres to remain in the game and protect their existing
market share. The net result of this regulatory arbitrag-
ing is that none of these centres are able to move ahead
of the pack, other than the Cayman Islands, which
already stands proud. There is a lot of 'me-too' activity
as far as launching funds in Cayman is concerned.”
Regulation
The offshore centres of Bermuda, Bahamas, Cayman and
Curaçao have strengthened their regulatory regimes to
attract more funds business. Fund service providers in
these centres are responsible for the daily checking of all

Offshore Centres
shareholders against the Office of Foreign Assets Control tions, including the USA Patriot Act. “As many offshore
(OFAC) list. “Our job is to make sure we are fully compli- administrators adhere to these rules I do not anticipate a
ant, and BNY has uniquely automated the difficult task of mass exodus of fund services to the US once the Patriot
anti-money laundering and OFAC checking into a systems Act is fully implemented for hedge funds,” says Agemian.
process run on a daily basis,” says Aldrich. Agemian adopts a similar stance on competing juris-
Fund service providers are also adamant that onshore dictions such as the Channel Islands as well as
regulation such as the USA Patriot Act of 2001 did not European centres like Luxembourg and Dublin. “Our
inflict a move of administration services to the US. “The laws are in place, we have the reputation, our regulation
main reason we service clients out of our US offices is is not onerous and the costs of setting up funds here
because certain managers there prefer a local service for would not be higher than any other jurisdiction,” he
their US investors,” says Aldrich. says. “Overall we have a good product, which other
Overall, it is believed that increasing regulation has a jurisdictions would like to emulate. Many (fund) pro-
mixed impact on offshore and onshore centres. Aldrich moters are happy and comfortable with the Cayman
explains: “Promoters are seeking the regulated environ- structure. Until that changes, we will keep our market
ment for their investors, who require the controls and pro- share as an offshore funds jurisdiction.”
cedures to be in place. The impact of regulation is not a
negative thing. The regulatory overhead for an onshore
fund is likely to remain higher than the overhead for an “Bermuda, Cayman and
offshore fund. If you can avoid going to the onshore cen-
tres, you will.”
the Bahamas have a credible
structure and a credible
Cayman Islands
In comparing the offshore centres of the Western regulatory regime”
Hemisphere, the perception is that Cayman will remain
the strongest player for some time. BNY is currently in
talks with a fund manager who intends to launch six new Consolidation
Cayman funds in March 2005. “Cayman will remain the While offshore service providers remain confident about
domicile of choice for about 80 per cent of hedge funds,” competition from other fund centres, increasing consoli-
says Aldrich. dation within the fund servicing industry presents a differ-
As the heart of Cayman, Georgetown received minimal ent concern. “The disappearance of niche players is
Hurricane damage in comparison to the rest of the Island. inevitable,” says Agemian. “I don’t think consolidation is a
Citco, which has an office on Seven Mile Beach, was bad thing. There are a lot of hedge fund administrators
severely impacted but had a business continuity plan to out there. There is room for some of the smaller players.
get its services up and running after the Hurricane struck. The bigger banks are seeing the potential out there and
“For the next two months, most of our accountants were they are trying to get into the game. The most efficient
sent to our Fort Lauderdale office and our investor rela- way of getting into hedge funds administration is by going
tions staff were sent to offices in Curaçao,” says Patrick after someone who is already in the industry and who has
Agemian, managing director at Citco. the infrastructure. Mellon’s recent acquisition of
Inspite of the damage caused, the Hurricane did little to Derivatives Portfolio Management provided the bank with
thwart Cayman’s ability to compete head-on with other
fund centres. To maintain Cayman’s status as a premiere
offshore domicile, the government accepts a lot of advice
from the private sector. Considering this form of co-oper-
ation, is little wonder that the number of hedge funds in
Cayman has increased exponentially over the last year. Number of Mutual Funds in the Cayman
“Almost 6000 hedge funds are registered in Cayman and Islands at the end of 2004
6000 5894
this figure shows now sign of slowing down in terms of
the number of hedge funds that are being set up and regis- 5000 4808
tered here,” says Agemian. “The laws are in place here to 4285
give promoters and managers piece of mind. The law and 4000
audit firms in the US are comfortable with Cayman struc- 2989
tures and they will most likely recommend promoters to 3000
use Cayman. With of host of quality law firms, auditors 2000
and administrators present, everything is in place to make
Cayman successful.” 1000
Citco provides fund administration from about several
different centres. Consequently, its Cayman office adheres 0
2004 2003 2002 2001
to many of the rules emanating from onshore jurisdic- Source: CIMA

Offshore Centres
easy access to the hedge fund market.” ment funds,” says Chin. “These investors, including the
The hedge fund product has largely appealed to both the retail investors, are now more attracted to these types of
high net worth and institutional investors. “I suspect over funds. Enhanced legislation and supervision is a positive
the next few years the regulatory framework for establish- development. Curaçao is in line with global moves to
ing hedge funds will come into play in most European introduce good pieces of legislation to ensure the smaller
countries,” says Sean Flynn, managing director of UBS investors' interests are being protected.”
Hedge Fund Services “However, there will always be strong As a member of the Dutch Kingdom, Curaçao's legisla-
demand for products domiciled in the offshore centres tion bears a strong resemblance to the law of the mother-
because of the ease of set up and lack of investment land. In fact, Dutch legislation was used as a platform for
restrictions. Asset management start-ups often need a the implementation of NOSIIA in Curaçao. “It is still too
track record in managing funds before they can get early to say whether this piece of legislation has benefited
approval for sponsoring funds onshore. These managers Curaçao as a domicile, but it is a positive development for
will continue to domicile their hedge funds in offshore the service providers,” says Chin. “The receipt of a license
centres like Cayman.” from the Central Bank reassures investors and fund man-
According to Flynn, the increase in onshore hedge funds agers that they are dealing with a service provider who is
will not have a significant impact on the number of funds regulated by the Central Bank of the Netherlands Antilles.”
domiciled in offshore centres for a long period of time. “As Despite its favourable position in the offshore funds
industry, Curaçao does not compete
“The regulatory overhead for an onshore fund is with fellow jurisdictions on the basis of
domiciliation. Chin explains: “Curaçao's
likely to remain higher than the overhead for an off- strengths lie in the area of experienced
shore fund” fund administrators who have operated
in this business for a long time and who
the hedge fund becomes more of a mainstream product, have seen a wide variety of alternative investment prod-
more investors, including retail investors, will want access ucts, both in terms of structure as well as investment strat-
to it, thus giving rise to an increasing number of onshore egy. Additionally, the low costs of living here, in compari-
products,” he says. son to other jurisdictions in the Western Hemisphere, have
As further testimony to its reputation, the Cayman enabled Curaçao-based administrators to compete on
Islands’ stock exchange received formal recognition by the price.”
UK Inland Revenue in March 2004. The Revenue granted Onshore regulation, such as the USA Patriot Act, is also
the Cayman Islands Stock Exchange (CSX) status as a recognised by service providers in Curaçao. “I find it diffi-
“recognised stock exchange” under Section 841 of the cult to predict whether regulation will be beneficial or
Income and Corporation Taxes Act 1988. Commenting on detrimental,” says Chin. “As the alternative investment
this landmark announcement, Valia Theodoraki, CEO fund industry matures and becomes more widely accepted
said: “This recognition of the CSX places the Exchange on by various types of investors, regulation will increase.
the same footing with exchanges in other financial centres, Ultimately, all of the centres where fund administration is
such as the Irish, London and Luxembourg stock performed will have similar rules and regulations in place
exchanges.” to compete with each other. What will prevail is the quali-
The recognition granted to the CSX also prompted three ty of the service provider in combination with the cost of
more entities to become listing agents on the CSX, which providing these services. Additionally, the popularity of
in turn brought more listings. By the end of 2004, listings alternative investment funds has led to the acquisitions of
on the CSX exceeded 850, compared to 735 listings at the the traditional hedge fund administrators. But the market
beginning of 2004. Market capitalisation at the end of is big enough and there are still enough opportunities for
2004 was $53.5 million, compared to $43.94 million at the the smaller administrators, who can provide a lot of guid-
beginning of 2004. “Much of the Exchange’s considerable ance in the pre-inception phase of the fund.”
growth can be attributed to the hedge funds that have list-
ed on the Exchange since 2002,” says Theodoraki. Bermuda
As a pre-eminent offshore financial centre, Bermuda
Curaçao remains at the forefront of its competitors and drives
To compete with its offshore neighbours, Curaçao developments occurring in the offshore financial services
launched the National Ordinance on the Supervision of and insurance industries. “The mind, management and
Investment Institutions and Administrators (NOSIIA) to deep level of experience of professionals in this jurisdic-
regulate and supervise investment funds and administration continues to keep Bermuda at the cutting edge of
tors. The introduction of this legislation, according to global industry and regulatory developments while estab-
Robert Chin, managing director of ATC Fund Services, lishing a solid sophisticated commercial environment from
results, among other things, from the move of investment which to conduct business,” explains Greg Wojciechowski,
funds into the retail marketplace. “Not too long ago, many chief executive officer of the Bermuda Stock Exchange.
investors did not think of investing in alternative invest- The Bermuda Stock Exchange provides a state of the art

Offshore Centres
securities market environment for the Island. “It is used and Institutional – reflecting the characteristics of the
by brokers, both domestic and international, securities and funds and the profile of the underlying investors.
funds,” explains Wojciechowski. “The BSX, like its corpo- However, it became evident to the Bermuda Monetary
rate colleagues in mature financial centres, provides elec- Authority (BMA) that the existing legal provisions were
tronic trading, clearing, settlement and depository services not wholly satisfactory. In particular, they lacked certain
for its clients. The infrastructure that is in place ensures powers necessary to ensure the Authority’s ability to
integrity and security while providing essential risk miti- obtain information and to intervene promptly and effec-
gation elements. The BSX created a regula-
tory and operational platform which sup- The development of the mutual fund sector in
ports the domestic economy and welcomes
international brokers, issuers and investors.” Bermuda has given rise to the growth of a major
Net assets in Bermuda collective invest-
ment schemes increased to some $133 bn as
local fund administration industry
at end-June 2004, almost three times the level at the end of tively in the very small number of cases in which funds
2000. may encounter compliance or other serious problems.
In parallel, the development of the mutual fund sector in The BMA concluded that new primary legislation was
Bermuda has given rise to the growth of a major local required, in the form of a new Collective Investment
fund administration industry, with a significant number of Schemes Act. Mutual fund companies and unit trust com-
administration firms established locally. panies will continue to be captured; but for the first time,
Bermuda determined in the 1990s that mutual funds the definitions in the Act will also seek to ensure that other
should be subject to appropriate regulation. The result was entities, which provide for the pooling of investors’ funds
the development of the Collective Investment Scheme for collective management purposes will similarly come
Classification Regulations of 1998, which provided for a within the scope of the provisions. A major new develop-
three-tier classification of funds – Recognised, Standard ment is that the Act will, for the first time, require fund
Offshore Centres
Bermuda Collective Investment Schemes Statistics in place in many of the premier offshore jurisdictions.
2003-Q1 2003-Q2 2003-Q3 2003-Q4 2004-Q1
2004- Offshore centres are not looking to provide ‘regulation-
Q2 free’ services to compete against onshore jurisdictions.
Mutual Funds 758 763 759 817 849 834 However any advantage or disadvantage, should onshore
regulators seek to impose overly onerous requirements,
Umbrella-Funds 52 53 56 57 62 69
would likely depend on the impact to the manager or his
Sub-Funds 459 436 407 395 422 441 client base, including the cost and or time of meeting those
Segregated Account 3 6 9 9 13 20
requirements, versus being able to provide a similar prod-
Companies uct more efficiently to the same investors from an offshore
Segregated Accounts 7 21 35 43 46 87 base.”
Total 1279 1279 1266 1321 1392 1451
Bahamas
Source: BMA
In its own right, the Bahamas has for long had the ability
to overcome those events which threaten the wellbeing of
Bermuda Collective Investment Schemes Statistics its funds industry. When Hurricane Frances hit the juris-
diction last year, Standard & Poor’s Credit Analyst Olga
2003-Q1 2003-Q2 2003-Q3 2003-Q4 2004-Q1 2004-Q2 Kalinina said that the Hurricane should have no impact on
either the attractiveness or financial health of the Bahamas'
Unit Trusts 70 65 63 72 93 65 international financial sector.
The Bahamas continues to take steps in enhancing its
Umbrella Trusts 31 64 65 67 67 72 funds environment. In January 2005 for example, The
Securities Commission of The Bahamas (SCB) published
Sub Trusts 33 32 50 82 115 195
Guidelines providing direction for the fast tracking process
of applications for investment funds that target accredited
Total Unit Trusts 134 161 178 221 275 332
or high net worth investors. Under this process, the SCB
Source: BMA guarantees approval of these categories of investment
administrators in Bermuda to be licensed. The Act will funds within 72 hours of receipt of a complete application.
specify a set of minimum licensing criteria to be met by “This fast tracking process complements the ability of
fund administrators, similar to those already detailed in unrestricted fund administrators to immediately license
other recent financial services legislation in Bermuda. funds targeting sophisticated clients, once the necessary
The Act will also provide for the Authority to issue a due diligence and documentary requirements are met,”
explains Wendy Warren, chief executive of the Bahamas
Financial Services Board.
“Net assets in Bermuda collective The new fast tracking process uses a declaration, signed
by either the lawyer or the administrator to the fund, certi-
investment schemes increased to fying that the application and all supporting documenta-
tion are in compliance with the Investment Funds Act and
some $133 bn as at end-June 2004, Regulations of 2003. “The quick turnaround in establish-
almost three times the level ing the fast track process and Guidelines reflects SCB’s
continued preparedness to address the evolving require-
at the end of 2000” ments of the industry and the need for regulation that is
relevant to the risk of each of the services offered by the
Bahamian industry,” says Warren. “The Investment Funds
Statement of Principles on its interpretation and Act 2003 updated the definitions and classes of funds
approach under the Act, as well as Codes of Conduct for recognised locally, and created a new style of fund, known
fund administrators. “The licensing of fund administra- as a SMART Fund.”
tors on the island will hopefully further improve While the Bahamas has gained credibility and recogni-
Bermuda’s profile as a premier domicile for funds and or tion as a properly regulated environment for the establish-
administration activities,” says Paul Kneen, general man- ment and operation of funds, the new Investment Funds
ager of Bermuda Commercial Bank. Act was structured in light of the need to develop a risk-
When asked what impact the onshore regulations such based system of regulation, and to deal with certain weak-
as the Patriot Act have on offshore centres, the reply nesses in oversight.
from service providers in Bermuda is perfectly candid: The introduction of the Segregated Accounts Company
“Despite the initial concerns, the Patriot Act has had very (SAC) Act in 2004 also strengthens the Bahamas compara-
little impact on the offshore centres,” says Kneen. “The tive advantage in the securities and capital markets areas.
majority of requirements being imposed by the Patriot An SAC allows the compartmentalisation of risks within a
Act with regards to anti-money laundering were already single corporate structure. As a result, the financial per-
formance of an individual account does not affect any

Offshore Centres
other accounts of the SAC itself.

“Most companies in the Bahamas are pleased with the
new regulation and have received positive feedback about
the Investment Funds Act,” says Terah Rahming, president
of Oceanic Fund Services. “We haven't been able to test the
market's appetite for the new structure under the
Investment Funds Act as yet. Our only form of participa-
tion with the new Act is to ensure that the funds we
presently administer are compliant.”
The Investment Funds Act enables The Bahamas to com-
pete with the likes of Luxembourg and Dublin. “The Act is
a step in the right direction,” says Rahming. “The industry
and the regulator in the Bahamas considered the regula-
tion that was in place in the Channel Islands and Dublin Bermuda Collective Investment Schemes Statistics
and tried to create a law that would give us a competitive
2003-Q1 2003-Q2 2003-Q3 2003-Q4 2004-Q1 2004-Q2
edge. The new Act will put us in direct competition with
other jurisdictions.”
With further regulation for onshore jurisdictions on the Unit Trusts 70 65 63 72 93 65
cards, offshore centres of the Western Hemisphere are con-
Umbrella Trusts 31 64 65 67 67 72
fident this trend will lead to further opportunities. “We
expect the proposed registration for hedge funds managers Sub Trusts 33 32 50 82 115 195
in the US may become too onerous and these managers
may move some of their business to the Bahamas,” Total Unit Trusts 134 161 178 221 275 332
concludes Rahming.
Source: BMA
Hedge Funds – Performance Fees
During the penultimate

decades of the second millenni-
um, when markets were mainly
bullish, the asset managers were
compensated with management
Christophe Bodart fees, usually expressed in basis
points of assets under manage-
ment. During that time, most of
the asset managers of undertak-
ings for collective investment
schemes tried to beat a target
benchmark, usually a single index,
sometimes a compounded index, trading with long posi-
The Right tions only. With falling markets, preceding an unexpected

recession between 2000 and 2003, some independent asset
managers have developed more complex asset manage-
Incentive
ment techniques, aimed at providing investors with posi-
tive returns during those periods of economic recessions.
Even if hedge funds already existed at the time, these tech-
niques really boosted the alternative investments sphere.
We know those alternative investment management tech-
niques make intensive use of leverage through borrowings,
short sales, derivative instruments (regulated and/or over
the counter instruments), etc. Competition amongst asset
managers is such that the best ones must obviously be
rewarded, according to their performance. The concept of
performance fee (or “incentive fee”) now plays a crucial
As an investor, one of your role in this area.
major concerns is getting the Performance Fees
highest return on investment. The performance fee is paid to the asset manager on a
pre-agreed basis, as a percentage of the assets that per-
formed (the rate usually fluctuates between 20 and 30 per
cent of the performance of those assets). The asset manag-
As an asset manager, your main er also receives a management fee, independently of the
concern is to offer the highest performance. The performance fee is only due when the
assets exceed a high-water-mark (HWM). Sometimes, a
return to those investors who ‘hurdle rate’ is added to the HWM before accruing per-
formance fees. This rate is premised on the payment of a
entrusted you with part of their performance fee only if an equivalent performance to a
savings, and consequently be risk-free investment has been achieved.
When informing fund shareholders of the amount of the
rewarded for the achieved performance fee paid to assets managers, we cannot com-
pute the performance fee at the fund’s level. Indeed, this
performance. may result in discrimination in shareholder treatment, or
Christophe Bodart of Dexia even a lack of performance fee owed to the asset manager.
To give an example, let us assume a shareholder sub-
Fund Services Luxembourg scribes to a fund at a net asset value below the HWM.
They would benefit from a free ride until the NAV reaches
explains how both parties can the HWM of the fund. Accordingly, the asset manager
be satisfied through would not receive the performance fee due on this free
ride and lose revenues as a result. On the other hand, a
equalisation methods. shareholder who subscribes to a fund at a NAV above the

Hedge Funds – Performance Fees
HWM, would benefit from an unfair at least a subscription, a new share class is Depreciation Deposit
claw-back when the NAV comes back to a issued. In this respect, the equalization is The depreciation deposit applies to any
lower level. Indeed, the shareholder performed at the share class level. taxlot purchased when the fund GAV per
would benefit from a partial reversal of Previously issued share classes that share is below the fund’s HWM. This
the accrued performance fee, even accrued performance fees will be convert- deposit looks like a performance fee pre-
though he did not contribute to those ed into one single share class, in order to payment, since it relates to the amount of
accruals. ‘crystallise’ the performance fee. It is performance fee that would be payable
important to note that share classes that on the taxlot if, and when, the fund GAV
Solution did not perform will not be converted. per share rose again to the prior fund’s
The performance fees equalisation Suffice it to say that daily NAVs could HWM. The depreciation deposit is
technique is well placed to address the result in a large number of share classes deducted from the subscription amount
attribution issue, by computing the per- being issued. As fund administrators, we paid by the investor, and is separated
formance fee at the share class level, or at could maintain a high number of differ- from the remaining amount booked
the shareholder level. ent share classes, impacting on the under- within the Capital account of the fund.
lying fees as supported by the fund (i.e. If the value of the fund exceeds the taxlot
There are currently three generic equal- transfer agency fees, accounting fees, pub- purchase price, either at redemption or at
ization methods available to enable the lication fees, etc.). For this reason, the crystallization, the performance fee paid to
right attribution of performance fees. ‘series of shares’ equalization method the fund manager will first be paid out of
could be used for funds distributed to the depreciation deposit, then from the
They are: institutional investors only, and with a subsequent accruals, if any. If the taxlot is
quarterly or even monthly NAV calcula- redeemed at a price above the purchase
1. Series of shares tion. This method should not be used for price, but below the current fund HWM,
2. Equalization credit – retail funds and/or daily NAVs. then part of the depreciation deposit is
Depreciation deposit Contingent liquidation should also be paid to the fund manager while the
3. Equalization credit –
Contingent liquidation “The performance fees equalisation technique is
Depending on various considerations, well placed to address the attribution issue”
one might opt for one of these three
methods. avoided for retail funds, due to forced remaining amount is refunded to the
From a commercial point of view, it redemptions that might frighten retail investor as an additional cash payment.
should be noted that performance fees shareholders away. These redemptions Finally, if the taxlot is redeemed at a price
equalization was historically developed will occur at crystallisation and impact below the taxlot purchase price, then the
for hedge funds, which were exclusively negatively on retail shareholders who entire depreciation deposit is refunded to
sold to institutional investors and high subscribed at a NAV below the HWM of the investor as an additional cash payment.
net worth investors. These two categories the fund.
of investors were sufficiently aware of From a conceptual point of view, as
these techniques and were keen to get Equalisation Credit described above, equalization techniques
more accurate performance reading. Should the fund promoter choose to ensure a fair treatment of the perform-
In the case of retail fund distribution, avoid the issuance of (too) many share ance fees attribution. Needless to say that
these equalization techniques, to be dis- classes, he will probably opt for the automated treatments are required to
closed within the fund prospectus, may Equalization credit – Depreciation guarantee a proper equalization process,
have a negative impact on the marketing deposit method. When using this with no risk! Indeed, at subscription, one
of the fund, thereby raising a host of method, the shareholder pays at subscrip- must determine the right amount of
questions from “non-professional” tion level the NAV plus either an equal- equalization credit or depreciation
investors. For example, if the ization credit or a depreciation deposit, deposit to be paid. Any subsequent
Equalization credit – Contingent liquida- depending on the subscription price, redemption requires browsing historical
tion method were used, retail investors which is above, respectively the HWM. transactions of the shareholder in order
may not understand why they are forced Equalization credit applies to any taxlot to determine the right amount of per-
into a partial redemption, the proceeds of purchased when the fund’s GAV (Gross formance fee, if any. At crystallization, a
which are intended to pay a performance Asset Value, i.e. the NAV before accruing similar review of historical transactions
fee to the asset manager. the performance fee) per share is higher must be performed. Manual treatments
than the fund’s HWM. for addressing equalization could lead to
Series of Shares Put simply, equalization credit is a pre- unprecedented mistakes, swindling either
On closer inspection of the three equal- payment of the performance fee owed to the shareholder or the fund manager!
ization methods, the ‘series of shares’ the fund manager, based on the positive
method appears to be the easiest one to difference between the present GAV and Christophe Bodart is Head of Product
understand and to implement. Any time the HWM, should the performance fee be Development at Dexia Fund Services
the NAV is calculated, assuming there is crystallized at that time. Luxembourg

Prime Brokerage
Prime broking, it seems, is the Growth

David Aldrich, head of Securities Industry Banking for
new black, and everyone wants The Bank of New York in Europe, predicts that the hedge
fund industry will experience continued massive growth
a piece of the action. and the significant technology investments being made by
the larger service providers in both the prime broking and
administration worlds will provide substantial returns for
The game continues to change the banks involved. It is active investment management
that will be the main loser from the continued growth of
as the industry grows, writes hedge funds, he says, pointing to the forecast made by
Tremont Capital Management at the GAIM Invest confer-
Brian Bollen. ence in Geneva in November 2004, which says the size of
the hedge fund industry will grow from $950 bn in 2004
to $2,350 bn by 2008.
Is it purely the rise of the hedge fund that is driving this
growth or are there significant other factors? The answer, it
In it to Win It seems, is yes, and we have a classic “chicken and egg” sce-
nario, according to Jim Conklin, FX portfolio manager,
Southfield Corporation, and formerly assistant professor of
economics at the University of Texas, Austin. “The eco-
nomics driving the exodus of sophisticated speculative
activities away from brokers (market makers) and asset
managers (marketing and fund accounting organisations)
centre upon the falling cost of establishing infrastructure.
This is technology-related, but once it got started, prime
brokers lowered the barriers to entry even further, enabling
smaller and smaller players to become hedge funds.”
Talent Pull
The growth of the hedge fund sector is drawing talent
away from the sell side (investment banks and brokers) and
the most lucrative activity away from the traditional buy-
side: actively-managed investment vehicles, suggests Jim
Conklin. He argues that the new model of investing for insti-
The rapid growth in the number of tutions will be, more or less, to park large amounts of assets
in index funds; then overlay with hedge funds to beat the
hedge funds and the diverse suite of standard market benchmarks. “The old buy-side model is to
services they require has placed a high blend exposure to large liquid indices with active manage-
ment. When you blend the two, pricing gets blurred and
level of demand on the infrastructure your ability to monitor the performance of the active man-
that prime brokers provide. Differing ager becomes more difficult. Financial conglomerates see
this, and they don't want to miss the boat on this latest re-
views between hedge funds and prime distribution of specialisation in the asset management busi-
brokers have created a lucrative ness. A prime broker is a financial institution that offers a
hedge fund to essentially “draft” off of all their investment
situation for prime brokers, but there infrastructure and the associated benefits of credit quality
are always caveats to be issued when- that go along with it. That is, in the old days if a hedge fund
wanted to trade it had to hammer out legal documentation
ever a niche in the financial services with each of its trading counterparties, build a back office to
world becomes the new must-have. As calculate profit and loss and conduct payments, build and
use risk management software, etc. Investment banks have
the landscape, rules and practices all all of this in place. A prime broker basically allows you to
change, one is on pretty safe ground in “rent” all of this infrastructure, outsource it, for a fee. So if
Citibank is my prime broker, I do one agreement with them.
predicting that whatever else happens From there on, I trade under Citibank's name and use all of
there will inevitably be tears by their infrastructure to clear my trades. So now, UBS has no
issue trading with me: I am a Citi-level credit. In the old
bedtime, for some at least. Pitfalls and days, I would have had to negotiate credit and trading agree-
elephant traps lie in wait not only for ments with every single counterparty. In the past three
years, it has become possible to sign an agreement with just
the unwary, but also for the wary. one financial institution and you're now up and running.

Prime Brokerage
“For many it has been a business for some time and they proverb about not putting all one’s eggs in a single basket
are expanding or defending market share. Major global applies in prime broking as it does elsewhere. Although
brokerages who did not participate are now playing catch- prime brokerage firms are adding services and are working
up. It is a very good way to become a hedge fund's “main towards becoming a one-stop shop for hedge funds, many
bank” or preferred trading partner.” hedge funds remain reluctant to sole-source their prime
“Investors, speculators and index funds will in due brokerage needs, says Kevin A. Pollack, a partner at
course emerge as the winners. The increased specialisation Resurrection Advisors in New
in investment activity due to the hedge fund boom allows York, a hedge fund advisory firm.
the most talented speculators to focus on what they do “Thus, some hedge funds handle
best, at a lower cost. It used to be the case that a pension several prime brokerage functions
fund or endowment had to go to JPMorgan-Fleming to in-house, have multiple prime bro-
get active stock management expertise. Now, that pen- kers or are using other service
sions can invest the bulk of their portfolio in an S&P index providers, including providers of
funds at no fee, and make smaller investments in hedge technology and fund administra-
funds whose performance, expressed in “absolute return tors, to handle some of the services
space”, are easy to monitor. Index funds will win since offered by their main prime bro-
investors will migrate from actively managed “all-long” ker. In addition, different hedge
funds into index funds that complement hedge funds.” funds have different needs, which
Traditional asset managers, by contrast, will be the losers, Kevin Pollack are best served by several prime
he predicts again. “Their talented portfolio managers will brokerage firms. In other words,
leave and set up their own hedge funds. The remaining, no one single prime brokerage firm is best in servicing all
non-talented portfolio managers will be quickly out as of the needs of every hedge fund.
clients discover they are paying fees for poor performance.” “Some prime brokerage firms and other service
providers run “hedge fund hotels” whereby they provide
Sole-Sourcing low cost space and other services to small hedge funds that
Comments from elsewhere suggest that the traditional they hope will grow to become large clients. However,
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 commit-
ments 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
Prime Brokerage
Bank of America recently announced its decision to exit to gain market share against traditional asset managers.”
this space given the high costs involved.”
Revenue
Costs Nicolas Breteau, chief executive officer at the UK branch
Prime brokerage firms should expect to have increased of Fimat, part of the SocGen group, comments that prime
costs as they expand their services, notes Pollack. “As the brokerage is already one of the major revenue contributors
growth of new hedge funds slows and larger funds domi- of some investment banking divisions. Investment banks
nate the marketplace, prime brokerage firms should expect are getting closer than ever to the alternative industry
to see revenues contract as a natural progression of intense because they want their share of the lucrative commissions
competition similar to what is seen on the retail side of the paid-out from the trillion dollars of assets under manage-
business. As a result, there is a race among firms to offer as ment, he attests. “The fund managers have a huge turnover
comprehensive a suite of services as possible now to grow of positions and therefore pay a large amount of brokerage
their infrastructure, market share and reputation. However, commissions. They also outsource part or all of their non-
certain prime brokerage firms are targeting certain types of trading operation creating opportunities for more fees.
hedge funds. Other prime brokerage firms have a particular Appetite is growing among investment banks because they
niche (one leading prime brokerage firm tends to have realise that nowadays the big bulk of hedge funds strate-
long-short hedge fund clients whereas another firm tends to gies involve capturing market opportunities through mar-
ket neutral arbitrage strategies, rather than “mav-
Prime brokerage firms should expect to have erick” market speculation.”
increaseed costs as they expand their services Future

Prime brokerage as a service was conceived in
focus on futures and FX) and are sticking to what they the USA in the late 1980s to service hedge funds managers
know best. Regardless of the size of a prime brokerage firm, who had separated from large financial institutions and
if it fails to customise solutions to the needs of its hedge therefore did not have access to in-house clearing, settle-
fund clientele, it can expect to lose clients to a firm that can ment and custodial facilities. These funds developed rela-
provide the value-add services sought.” tionships with broker-dealers, which were able to provide
them with a services package providing all of these facili-
Challenges ties. These funds managers were trading listed and unlisted
In this rapidly evolving world, which often feels as if the products through numerous brokers so it made sense to
Star Trek Genesis device has been detonated on it, bringing appoint a “prime broker” whose mandate was to centralise
accelerated change and development, can investment banks the settlement, clearing and custody of these trades in a
win all around with prime brokers, in-house hedge funds, single account.
and purchased hedge funds? John R Phillips, managing Since these early days, services offered by prime brokers
director and chief investment officer of Philadelphia have evolved to encompass a whole range of financial and
Capital Management LLC, is one man who believes they technical services: execution, clearing and settlement, cus-
can. “The name of the game is edge and capacity. Finding tody, margin and leverage financing, reporting to the man-
funds that have a real edge in the market and having an agers and administrators, customer services, and corporate
ability to allocate large sums of capital are the two key driv- actions processing. In addition, some prime brokers offer
ers for the banks’ ultimate profitability. Investment banks IT or risk in-sourcing, legal structuring or sometimes even
can profit from direct ownership of hedge funds, and the premises for start-up funds. Last but not least, prime bro-
prime broking business simply complements the package. kers are helping managers in their fund raising efforts by
The bank generates a profit by increasing its commissions introducing them to potential investors.
and I think the biggest benefit is leveraging the equity lend- A prime broker needs to offer strong execution, clearing
ing business. For example, Bear Stearns provides the equity and custodial facilities coupled with additional ancillary
lending for 25-30 per cent of the NYSE short interest. This services such as securities lending, leverage financing and
is a huge sum over which they capture a handsome spread, risk reporting. Diversification of funds strategies in recent
worth 300-400 basis points. There will be a tendency for years means that it is now required to offer not only geo-
prime brokers to provide more favourable terms to in- graphically diversified sophisticated products but also
house clients – so hedge fund managers will have to do services across all asset classes. As a consequence, the bar-
their homework and be prepared to drive a fair market riers to entry are now very high, as this requires intensive
agreement to keep and even footing with the investment IT systems and support, a strong balance sheet and highly
bank-owned hedge funds. skilled people.
Jim Conklin also says ‘Yes. “They were already running But will it all end in tears? “I think there will be an
asset management firms and brokerages at the same time. eventual consolidation in the number of hedge funds,” says
Now, some portions of the investment banks' asset man- John R Phillips.
agement businesses will migrate into their “alternative “So weak little guys will go away. Prime brokers may not
investment” divisions, as will some of their prop trading get hurt, because the size of assets allocated to hedge funds
activity. If they do it right, the hedge fund “revolution” is likely to grow, independent of the number of hedge
will really be just a rationalising reorganisation for the funds. The tears will be those of investors and fund
investment banks that, if done successfully, will allow them managers, not of prime brokers!”

Transfer Agency Review
The European fund market has The acceptance of collective investment products as
the investment vehicle of choice has grown substantially.
changed rapidly since the This growth is met with a wave of demand for enhanced
creation of the EU. Accelerated product features and services.
Increasingly, transfer agency systems have been pushed
by a series of UCITS directives, to provide more advanced functionality such as workflow
the European market is management, online information and the capability to
accept subscriptions and redemptions over the internet.
becoming increasingly unified This push has given rise to a new generation of transfer
and open, in a way that no other agency systems that are designed to allow investment man-
agers to grow their business in multiple markets using one
financial services market has platform.
ever been. Nii Tetteh of The survivors in this market will be multi-domain,
multi-lingual, multi-currency, and highly flexible with
Barrington Partners analyses real-time processing capability.
the impact of changes on These transfer agency systems are being sponsored by
software firms from several different regions, from North
transfer agency systems. America to Europe to South Africa.
Most notably, the development effort is utilising pro-
grammers from India, Russia and South Africa, further
reducing development and support costs.
A number of these growing, profitable software firms are
not only supporting major multinational financial service
firms, they are also starting to compete in markets other
Transfer Agency than their base market.
In 2004, Barrington Partners, a firm specialising in the
Systems for the global financial services market, released the ‘Next
Generation’ Transfer Agency Review, a focused, in-depth
feedback-driven report to objectively assess the functional
21st Century capabilities of these licensable, cross border transfer

agency systems; systems that can handle around the clock
trading, and support any range of commission structures,
real time sorting/filtering of data, and provide greater
automation, greater flexibility, faster development, higher
operational efficiency and lower costs. The following are
excerpts from the report:
The Bank of New York

In 1993 BONY originally developed the RUFUS system in
London to support the in-house servicing of a UK client.
RUFUS has since expanded its outsourcing service to the
UK, Ireland and Luxembourg. The system is physically a
set of 700 modules linked together, which users may con-
figure and parameterise to tailor the application to their
operations. Overall RUFUS has been built as an object-ori-
ented, three tier application, using the C# programming
language. The database is Microsoft SQL Server version
2000.
Overall Strengths: Clients overall commented that

RUFUS is a ‘great system’ offering ‘comprehensive func-
tionality’ in a ‘user-friendly’ manner. Clients also noted
that support is very good and proactive.

Envision Financial Systems, Inc.

Envision Financial Systems, Inc., a privately held firm headquartered in Tustin, California, sponsors the PowerAgent
transfer agency system, which has been in commercial production since early 1997 and has focused on the US market.
PowerAgent is a client/server application, developed with a Power Builder front-end and either MS SQL Server version 2000
on the Windows operating system, or Sybase for Unix platforms as the underlying relational database.
Overall Strengths: Clients liked the overall flexibility and user-friendliness of the system, commenting that Envision’s
strategic initiative of partnering with experts to gain additional functionality and a ‘best of breed’ approach is the right
direction to be focused on.
Global Investment Systems

Global Investment Systems, Ltd. (‘GIS’), a privately held firm, is headquartered in Hackensack, New Jersey, and also main-
tains offices in Chicago and Dublin. MSHARE, the firm's transfer agency system, was released in 1999 and is designed as
an enterprise-wide solution operating in a standard Microsoft Windows environment. It is written in Delphi v.4.0, and is
an open-architecture, client/server-based system. The database is either the Oracle 9i SQL database or the Interbase 7.0
SQL database. MSHARE supports equalisation for the offshore market. MSHARE has clients in the US, European and off-
shore markets
Overall Strengths: Overall, GIS clients interviewed cited vendor flexibility as an asset. Clients commented that GIS staff
were responsive and diligent. Clients were also pleased with the strength and effectiveness of their relationships with the
vendor.
IFDS Canada
Jointly owned by DST Systems Inc. and State Street Bank, International Financial Data Services, LP (‘IFDS’) is headquar-
tered in Quincy, Massachusetts. IFDS Canada provides its iFAST transfer agency system for use globally.
iFAST supports language and processing functionality for the Japanese marketplace, although this is not currently in pro-
duction with any clients there.
The system was developed as a Unix-based system written in Progress Software (now in version 10), and utilises an inte-
grated Progress 9.1 Database. The GUI front-end was developed using Progress 9.1, C++ and Java.
Although iFAST does not meet Barrington Partners’ strict definition of ‘Next Generation’ technology, it has been included
because of its similarity to other ‘Next Generation’ competitors.
The core iFAST system is not written as an object-oriented application although the GUI and e-Commerce surround
functionality utilise common business objects as an underlying architecture. iFAST does not operate in an SQL data file
structure.
Overall Strengths: Clients generally observed that vendor viability and credibility were key strengths. Processing reliabil-
ity and scalability, in combination with IFDS staff knowledge and performance were also noted strong points.
IGEFI, LTD
IGEFI, a privately held company with headquarters in Luxembourg, offers both transfer agency and fund accounting soft-
ware for the financial services industry. The firm’s original product was MultiFonds, a fund accounting software, developed
in an Oracle environment. Introduced in 1997, the MultiFonds Transfer Agent (‘MultiFonds TA’) supports the entire fund
distribution infrastructure, including Sales Outlets, Fund Supermarkets, Fund Register, Fund Promoters and Correspondent
Banking. MultiFonds TA uses Oracle development and database tools to ensure portability across hardware platforms, wide
scalability, support for virtually unlimited transaction and database volumes. The firm maintains offices in Luxembourg,
Geneva, Frankfurt, Paris, and Boston (USA).
Overall Strengths: Clients generally commented that Multifonds was a “very powerful tool”. They believed the modern
and flexible technology/architecture behind the system to be sound and scalable. Clients praised the system’s flexibility.
Overall, IGEFI staff was commended for ‘strong relationships, responsive support and consultancy, with appropriate esca-
lation as necessary’.

KOGER Inc.
KOGER Inc, (‘KOGER’) was formed as a privately held US corporation in 1991 and introduced its NTAS transfer agency
system in 1994. NTAS was designed in a proprietary CASE tool that recognises objects at the database level and automatical-
ly generates the required source code in T-SQL language to maintain the objects (Select, Update, Insert and Delete), and can
recognise database objects within Sybase, Microsoft SQL Server, or Sybase SQL Anywhere. The system was designed using
Transact SQL for a multi-server environment. NTAS can support equalisation for the offshore market. KOGER is headquar-
tered in Paramus, NJ, and also maintains offices in Dublin. NTAS was designed to specifically support the transfer agency
functions required by offshore funds and supports equalisation. NTAS began supporting US-based hedge funds in 2001.
Overall Strengths: Clients generally considered NTAS ‘extremely open and flexible, user-friendly, with a highly evolved
equalisation capability and transfer agency functionality’. Some clients expressed the opinion that the system has more
functional points than any other licensable system.
Mutual Fund Technologies Limited (MFT)

Mutual Fund Technologies (‘MFT’), a software and systems company, is a wholly owned subsidiary of Fidelity
International. Fidelity originally developed the GFAS system in the mid 1990s. Now a multi-currency, multi-product trans-
fer agency system, the existing GFAS Core module is AS/400 based using the interactive RISC based range. It is written in
RPG400 with the data held in a DB2/400 database.
Overall Strengths: Several clients commented that the system is highly scalable and commended its processing through-
put capabilities. A number of clients also noted that from a scalability standpoint, the system is ‘substantially above all of
the others that are available in the marketplace’. One client commented that MFT as an organisation provides very good
support and has always responded when needed.
Riva Financial Systems Limited

Riva Financial Systems Limited, (‘Riva’), was incorporated in October 2002 in the Isle of Man, and maintains a branch office
in Luxembourg. The firm announced its pan-European TA system, ‘Riva TA’ in August 2003. Riva TA is an object-based, tiered
client/server solution provided on the scaleable IBM iSeries mid-range server. The business logic and GUI have been developed
using IBM’s’ Websphere development environment. The vendor reports that the system has been well received by the market
and has attracted much interest from a wide range of users. The firm currently has one European client.
Overall Strengths: As the system is not yet in production at the time of review Barrington Partners was unable to conduct
client interviews, which form the basis of a system’s overall strengths and weaknesses.
Silica Fund Administration Systems (Proprietary) Limited

Silica Fund Administration Systems (Proprietary) Limited, (‘Silica’), a privately held firm, was founded in 1998 as a spinoff
of Investec’s alternative unit trust share administration operations in South Africa. The transfer agency system, Fiscus, was
delivered to Investec in March 2001, and is used to support Investec’s UK offshore business in Guernsey and Dublin.
The Fiscus system has a thin front-end developed in VB (Visual Basic 6.0) and operates on Windows. The logic or middle
layer has been developed in C++ and can operate on UNIX (IBM IBX or Sun Solaris), NT on Windows 2000.
Overall Strengths: Clients commented that Silica is flexible and helpful to their clients. It was observed that the system is
very stable. The first user reports almost no downtime and a new client who is finalising their contract to use Fiscus
reports that the firm was well organised, very professional and methodical throughout the selection process.
Transfer Solutions, Inc

Headquartered in Virginia, Transfer Solutions, Inc. (‘Transfer Solutions’ or ‘TSI’), offers the Visual FAST system. The origi-
nal system, entitled FAST, was developed in 1972 as a proprietary product to support money market processing for the
Reserve Funds. A rewrite in 1998 took the system from an Informix database environment utilising the programming lan-
guage JAM, to a Visual Basic, SQL server and C++ environment.
Overall Strengths: Clients consistently used the word ‘flexible’ to describe functions such as establishing a fund, a fund
family, shareholder, dealer and representative requirements for fees, reporting and access. Overall system users found the
system itself stable and problem-free in operation and upgrades.

Market Risk Ratings
Every year, thousands of investors pour their money

into emerging markets in the hope that this investment
will prove to be a gold mine in later years. The purpose of
this article is to highlight the risk exposures affecting insti-
tutional investors and funds investing overseas and to
explain the relevance of custodian risk ratings and capital
market infrastructure risk ratings in helping investors bet-
ter understand their risk exposures.
Asset owners or institutional investors and
“Determining the extent of this risk exposure funds (collectively referred to in this article as
“Funds”) suffer direct exposure to specific
requires careful analysis of the custodian and the risks associated with their use of custodians
and local capital market infrastructures when
contract under which services are provided” they invest in overseas stocks and shares.
Exposure
Risk exposures to global and sub-custodians can, to
some degree, be negotiated away by a Fund with a proper
understanding of competitive terms and a first class
lawyer. This is essential if a Fund is to minimise, say, the
risk of asset servicing losses associated with corporate
action events being missed. Conversely, risk exposures to
What About the local capital market infrastructures, including central secu-
rities depositories, which occur when investing in local
markets, cannot be reduced. It follows that regulators in
Risk? many countries (for example the Securities and Exchange

Commission’s 40’s Act rule 17f-7) require Funds to be
aware of their capital market risk exposures.
Contracts between institutions and their respective glob-
al custodians often leave considerable risk exposure with
Funds. Determining the extent of this risk exposure
requires careful analysis of the custodian and the contract
under which services are provided. Minimising custodian
risk exposure is best achieved by appointing a well-run
custodian following effective contract and service level
negotiations when competitive fees are agreed.
Surveillance
In response to the above, Thomas Murray has developed
public and private custody risk ratings and surveillance
tools, which examine four risks (i.e. Financial,
Operational, Asset Servicing and Asset Safety) investors are
A host of markets have, in the exposed to when using a custodian. Funds receive these
last three years, appeared on private ratings either monthly or quarterly. Monthly per-
formance analysis on key functional indicators, including
the investment radar, presenting foreign exchange execution performance (where required),
is tracked against Thomas Murray’s Funds universe of over
opportunities for savvy EUR 300 bn of invested assets to identify areas of concern.
institutional investors. Reports
Funds, Central banks and Exchanges around the world
use Capital Market Infrastructure Risk Ratings (CMIRR)
But risk exposure is probably reports to assess and monitor their risk exposure to local
the most crucial spot check to capital market infrastructures through which the settle-
ment, safekeeping and ongoing servicing of assets take
be conducted before investing, place. These are risks that are generally not intermediated
by global custodians and fall on a Fund to bear alone.
writes Simon Thomas of A CMIRR report assesses a Fund’s exposure, firstly at the
Thomas Murray. country level and secondly, in more detail, at the individ-
ual risk exposure level where typically, but not always, the

Market Risk Ratings
majority of risks reside. The ratings examine each local

capital market infrastructure including the central securi- Thomas Murray's Capital Market Infrastructure Risk
ties depositories with a view to determining the degree of Ratings are an opinion of the post trade risk exposures to
risk exposure suffered by investors across six Risk which an asset owner (normally a fund) is exposed when
Exposure Assessments (REAs) – Asset Commitment, buying or selling securities in local capital markets. The
Liquidity, Counterparty, Asset Servicing, Financial and Risk Ratings have been developed in response to
Operational. investors' demand for ratings on these risks, which are
CMIRRs are based on an absolute and hence comparable not mitigated by their global custodians.
ratings scale (standard AAA- C symbology is used). The Capital Market Infrastructure Risk Ratings provide
ratings measure the capital market infrastructure risk subscribers with a risk rating of local market settlement
exposure a Fund suffers irrespective of which infrastruc- and custody infrastructures throughout the world. The
ture organisation is present in the country or the particu- Risk Ratings and associated Risk Exposure Assessments
lar method adopted to settle and safe-keep securities. It is use the standard AAA through C rating symbology and
possible to compare the risk exposures which investors in are maintained daily. Notification of risk changes and
the USA and Brazil are exposed to when buying, selling or how they impact an investor's risk exposures are e-mailed
holding securities in those markets. to clients daily.
Market Structure
Every market is structured differently, with each local
capital market having different practices and arrange- News
ments, such as operating models, procedures, controls and LONDON – Thomas Murray Alternative Investment
inter-dependencies, which cannot easily be compared. It is Services (TMAIS) has launched a Service Providers
worth bearing in mind, that a Fund which turns over its Request For Proposal e-Tool (e-RFP Tool) to support
portfolio once a year is exposed to various settlement risks industry participants in the evaluation and selection of
for, say, three days (or however long the settlement cycle service providers in the hedge fund and fund of hedge
is), but is exposed to various safekeeping and asset servic- fund arena. It is hoped that its launch will bring addi-
ing risks for the remaining 362 days of the year. tional controls, rigour and transparency to the industry
Settlement and safekeeping usually reside in the CSD, which is beginning to see a proliferation of RFPs as insti-
whose responsibilities may also include matching. The tutional investors increasingly invest in hedge funds.
procedures for settlement and safekeeping can be highly TMAIS has been working in close co-operation with
automated through these organisations or they may be major institutional funds, such as Railpen Investments
manual processes outside of these organisations (for and other groups including Man Investments, to develop
example where over-the-counter trades settle between bro- and implement alternative investments specific evalua-
kers). tion and selection questionnaires, due diligence processes
Thomas Murray’s custody and CMIRR risk ratings pro- and rating methodologies. “To date over 75 service
vide a solution to the CalPERs (US pension fund) issue of providers in the hedge funds industry have been reviewed
whether or not local capital market infrastructures, using the TMAIS e-RFP Tool,” said Roger Fishwick,
amongst other factors, are sufficiently well developed to Director of Ratings, Thomas Murray. TMAIS’ service
justify direct investment. You will be aware that CalPERs’ provider questionnaires currently cover custodial, fund
approved emerging market list has for many years exclud- accounting and transfer agency services. These question-
ed markets including Argentina, Turkey, Morocco, Sri naires (which may be supplemented by user specific
Lanka, Thailand, Colombia, China, Egypt, Pakistan, questions), together with the e-RFP Tool to issue ques-
Russia, Venezuela and Indonesia plus many others. tionnaires and hold the responses, are available to
industry participants via http://ais.thomasmurray.com.
Simon Thomas is chief rating officer at Thomas Murray

Hedge Fund Performance
The CSFB/Tremont Hedge Fund Index rose 1.61

Hedge Fund Index per cent for December 2004. “Major US equity indices
ended the month in positive territory, with managers
up 1.61% in month generating returns on the long side of their portfolios,”

said Oliver Schupp, president of Credit Suisse First
Boston Tremont Index LLC.
“European and Asian equities were generally positive
for the month as well, despite declining markets in
ISJ presents the latest hedge China, contributing to the return of the Long/Short
Equity sector. The CSFB/Tremont Hedge Fund Index
fund performance results from was up 9.64 per cent for the year 2004.”
CSGFB Tremont. “The Dedicated Short Bias sub strategy was hurt once
again this month by the continuing bull market in equi-
ties, reporting a return of –4.87 per cent, and ended the
Hedge funds continue to year as the only negative sub strategy in 2004,” said
Robert I. Schulman, co-chief executive officer of
provide returns, despite Tremont Capital Management, Inc. “Event Driven man-
fluctuating markets. agers generally profited from long credit positions and
distressed trades.” Performance for the CSFB/Tremont
Hedge Fund Index and its ten sub strategies is calculat-
ed monthly.
Composition
The CSFB/Tremont Hedge Fund Index value is
314.55, returning 214.55 per cent for the 132-month
period since inception (January 1, 1994 through
Dec 2004
CSFB/Tremont Hedge Fund Index up 1.61% in December 2004 December 31, 2004). The Index is comprised of 382
20% Nov 2004
funds as of December 31, 2004.
15% YTD 04
The Index is constructed using the TASS and
10% CSFB/Tremont databases of more than 3,000 hedge
5%
funds. It includes both open and closed funds located
in the U.S. and offshore, but does not include funds of
0%
funds. In order to qualify for inclusion in the index
-5% selection universe, a fund must have a minimum of $10
-10%
million under management, a 12-month track record,
and audited financial statements. Index funds are
Convertible Arbitrage
Dedicated Short Bias
Global Macro
Fixed Income Arbitrage
Long/Short Equity
Multi-Strategy
Emerging Markets
Equity Market Neutral

CSFB/Tremont Index
Event Driven
Risk Arbitrage
Distressed
Managed Futures
Event Driven Multi-Strategy
selected using a formula based on assets under manage-

ment that ensures the Index represents at least 85 per
cent of total assets in each of ten strategy-based sectors
in the selection universe. Once added, funds are not
Source: CSFB Tremont Hedge Fund Index excluded until they liquidate or fail to meet the report-
ing requirements, in order to minimize survivorship
bias. The Index is calculated as a total return index on
a monthly basis, adjusted for asset in- and outflow,
Comparison of Indices including a reselection according to the procedure out-
YTD 04
CSFB/Tremont Hedge Fund Index lined above on a quarterly basis.
Nov 2004
Dec 2004
NASDAQ Composite US $ Index Investable Index
The CSFB/Tremont Investable Hedge Fund Index is
MSCI EAFE US $ Index*
up an estimated 0.99 per cent for the month of
MSCI $ World Index*
December 2004. The confirmed performance for
November is up 1.74 per cent net.
Dow Jones Industrial Index* Performance for the CSFB/Tremont Investable Hedge
Fund Index and its ten sub strategies is calculated
0% 5% 10% 15% 20% 25%
Source: CSFB/ Tremont Hedge Index
monthly. The returns shown are net of a 0.07 per cent

Hedge Fund Performance
calculation fee.
The CSFB/Tremont Investable Hedge Fund Index was
launched with 60 funds across 10 style-based sectors.
The Investable Index was set at 100 on August 1, 2003.
As of December 31, 2004, the aggregate assets under
management of the index constituents were over $95
bn.
designed to give investors broad exposure to hedge
funds as an asset class. It fulfills investor demand for
index-linked products created to reduce dependency on
fund manager selection and fund concentration risk.
based on the broad CSFB/Tremont Hedge Fund Index,
with $311 bn in assets managed by 382 funds as of
December 31, 2004.
The funds in the CSFB/Tremont Investable Index,
selected from the funds included in the broad index,
generally comprise the six largest funds that are open to Returns for the CSFB/Tremont Investable Hedge Fund Index
investment and meet certain liquidity conditions in 20% Dec 2004
each of the 10 style-based sectors 15% Nov 2004
10% YTD 04
Sector Invest
5%
Performance for the CSFB/Tremont Sector Invest
Indices is calculated monthly. The CSFB/Tremont Sector 0%
Invest Indices were launched with 114 funds across 10 -5%

style-based sectors. Each Sector Invest Index was set at -10%
100 on October 1, 2004. As of December 31, 2004, the -15%
aggregate assets under management of the index con-
Investable Managed Futures
CSFB/Tremont Investable HFI
Investable Convertible Arbitrage
Investable Dedicated Short Bias
Investable Global Macro
Investable Long/Short Equity
Investable Multi-Strategy
Investable Emerging Markets
Investable Equity Market Neutral
Investable Event Driven
Investable Fixed Income Arb.
stituents were over $134 bn. These new indices are con-
structed to provide objective benchmarks of the style-
based investment strategies in the hedge fund universe.
They fulfill investor demand for index-linked products
created to reduce dependency on fund manager selec-
tion and fund concentration risk while allowing Source: CSFB Tremont Hedge Index
investors to play an active role in their tactical asset

allocation. The funds in the CSFB/Tremont Sector
Invest Indices, selected from the funds included in the
broad CSFB/Tremont Hedge Fund index, generally Returns for the CSFB/Tremont Sector Invest Indices
15%
comprise the largest funds that are open to investment 10%
and meet certain liquidity conditions in each of the 10
5%
style-based sectors. The fund selection rules can be
found on www.hedgeindex.com and include the follow- 0%
ing criteria: -5% Dec 2004
• Funds are selected from the CSFB/Tremont Hedge Nov 2004
-10%
Fund Index by an asset-based formula
YTD 2004
• The funds generally represent the largest eligible -15%
Sector Invest Global Macro
Sector Invest Convertible Arbitrage
Sector Invest Long/Short Equity
Sector Invest Multi-Strategy

Sector Invest Emerging Markets
Sector Invest Fixed Income Arb.

Sector Invest Dedic. Short Bias
Sector Invest Equity Market Neut.
Sector Invest Event Driven
Sector Invest Managed Futures
“open” funds in each of the ten sectors

• The funds are determined by application of the con-
struction rules
• Member funds must provide timely performance
reporting, audited financials and offering memorandum
review for inclusion. The CSFB/Tremont Sector Invest
Indices are calculated monthly and will be re-balanced
Source: CSFB Tremont Hedge Index
semi-annually.

Investment Analytics
As investment returns continue in their path When it comes to servicing assets, the
investment manager is there to manufac-
of mediocrity, continual monitoring of the ture performance and/or distribute prod-
ucts to the marketplace, and therefore tends
investment manager can ensure benchmarks to need more sophisticated and detailed
are being met. Blair McPherson of RBC reporting and a lot more quantitative
analysis to allow them communicate their
examines the value of investment analytics value to the end client and/or to better
manage their business internally.
Given that it has a vital role to play in
terms of revenue generation, asset retention Benefiting the Fund Manager
and growth, it is no great surprise that There are two key areas where investment
investment analytics is one of a number of analytics deliver value to a fund manager’s
key operational areas now being reassessed business. First, it has the critical role of sup-
by fund managers. Encompassing perform- porting the portfolio management process
ance measurement, risk analysis and com- via the manufacturing of superior risk
pliance monitoring, investment analytics adjusted performance through stress testing
offers significant benefits both in terms of scenarios, risk budgeting, attribution and
the service fund managers provide to their style analysis. Second, it allows the fund
clients and how they enhance their own manager to build a relationship with the
internal processes and capabilities. investor and instil confidence in the services
being provided to that investor – for
Benefiting the Investor instance, in the case of pension fund clients,
Investors, be they an institution or a retail by providing transparency in their quarterly
client, are essentially looking to satisfy a and annual reviews. In addition, it allows
specific risk/return profile. For a number of managers to differentiate themselves from
Fair Game years now capital markets have not per-

formed well, and consequently investor
confidence has become an issue. Factor in
various scandals, regulatory issues and a
the competition for sales and distribution
purposes by addressing a number of differ-
ent value propositions, such as trust, per-
formance or risk management capabilities.
confusing proliferation of products along-
side return volatility within the marketplace Cost and Scale
and it is little surprise that investors are The breadth of infrastructure required to
somewhat edgy. capture, collate and exploit the vast reser-
The investor, therefore, wants more than voirs of market data that underpin any
ever to understand exactly what is going on investment analytics offering is massive. In
with their investment. It is not just about addition to the need for trained staff, there
returns, but how those returns have been is the technology itself – the servers, data-
achieved, the nature of the risks involved, bases, market feeds, calculating and report-
whether their designated manager is adhering engines – required to combine the mar-
ing to the terms of the mandate, and as a ket and account data to provide the infor-
result whether changes need to be made. mation that will enable the story of the
Transparency and clarity are paramount. portfolio to be told.
Simply put, it is less about information and A robust data warehouse structure that
more about being informed. Investment can integrate with different analytical mod-
analytics is not merely about churning out ules is a key component. Such a structure
numbers – while data is a vital ingredient, will encompass the management of account
investment analytics is more about telling a data, including securities identification,
story. market accruals, market values and cash
For all the heat and light around the issue flows, all of which are core to fund account-
of returns and a manager’s ability to ‘hit the ing. However, the larger component of data
benchmark’, at the end of the day these warehousing is a whole slew of market
measures of success are less than clear-cut. data-related management tasks: collating
When we talk about performance, the real data on indices, financial ratios, credit rat-
focus should be on whether the investor ings, pricing, yield curves and so forth,
can derive the income to support their before passing that information through to
lifestyle or, from a pensions perspective, some sort of engine which in turn effects
match their liabilities. After all, income that the analytical process.
will be required in a year’s time is a very Needless to say, the development,
Blair McPherson different matter from income required 20 implementation and maintenance of such
years hence. projects can draw away focus at a time that

Investment Analytics
the investment manager should be concen- strong service model and flexible technolo- disciplines as part of a seamless reporting
trating on manufacturing value for the end gy should allow for a degree of customisa- structure generates a powerful suite of ana-
investor. Consequently, while it is clear tion, most often a large fund manager will lytical tools which will help clients optimise
there is much work to be done around also need some in-house capabilities. This is the value of their assets, a particularly
investment analytics, it is less clear which down both to their needs for analytical important consideration given the less than
business model is best placed to meet that capabilities in the front office to support the ideal market conditions witnessed in recent
obligation. One option is to outsource the investment decision-making process, and years.
investment analytics function. also for demanding and unique ‘after the Custodians have unparalleled access to
fact’ reporting driven by management or three critical resources – intellectual capital;
Outsourcing and ASP end clients. These cannot be efficiently pro- advanced technologies; and the vast reser-
Outsourcing the investment analytics vided through a full outsource offering. voirs of data accreted as part of the day-to-
function can offer benefits with respect to At this juncture, the fund manager can day business of transaction processing.
costs, functional capability, and brand opt for one of a range of business models: Investment in technologies such as data
enhancement. Cost areas include data man- insourcing using desktop solutions or Excel; warehousing and reference data manage-
agement, people, systems and technology, full outsourcing; an insource/outsource ment – the wellspring of straight-through
reporting and the future development of combination; a pure ASP approach; or an processing – has further strengthened their
new analytical tools. However, the provider ASP/outsource combination. The ASP skill set. They have also hired staff that pos-
must also possess a sound business model, approach obviates the need for the client to sess strong middle and front office compe-
with sufficient capital for continued invest- invest in a local install of software, servers, tencies and can liaise with the chief invest-
ment in the future capabilities required to and databases – all those components of ment officer as opposed to merely the back
meet the needs of their clients. the technology are ‘outsourced’ in the ASP office.
An outsourcing provider, able to leverage model, and the user simply utilises the As a result, there are a number of
a broad client base, will be in a position to Internet to access the system. providers capable of leveraging ‘best of
deliver an equally broad range of functional
capabilities and hence accommodate flexi-
ble product and service offerings. In addi- “Outsourcing the investment analytics function
tion to possessing the flexibility to meet the
diverse needs of the varied users of invest-
can offer benefits with respect to costs, functional
ment analytics, the provider must also have capability, and brand enhancement.”
the scalability to grow with the fund man-
ager’s business, including the ability to
accommodate the integration of new ana- The market is moving toward a combined breed’ solutions while delivering a ‘total
lytical tools/products in a straightforward offering both of reporting services, and ASP solution’ – global custody, cash manage-
manner. technology – which is itself a technology ment, forex – in line with clients’
Finally, the provider should both main- outsource – to carry out front office func- aspirations in respect of efficiency, cost
tain and enhance a fund manager’s ‘brand’. tions ad hoc reporting. A provider who can savings, global reach and breadth of
To this end, it will provide independent offer a data warehouse solution that sup- product offering.
third party verification, Global Investment ports both the standard outsourcing report- Investment analytics has a vital role to
Performance Standards (GIPS) and the ing functions and an ASP capability auto- play in enhancing service levels and trans-
Association for Investment Management matically connected to the data warehouse parency, but it also poses a number of chal-
and Research (AIMR) compliant method- is an ideal offering for a fund manager lenges to fund managers – for example the
ologies and reporting, as well as advanced organisation with a breadth of analytical current cost dynamics, operational issues
calculation and reporting capabilities. needs. RBC Global Services’ own and risks in this area.
A critical area to the outsource model is Benchmark Riskmanager product, through Managers need to recognise the impor-
the servicing component. The outsource our partnership with Riskmetrics, is an tance of data warehousing and analytical
provider must also be able to offer a flexible example of such a solution. capabilities, and how those analytics are
client servicing model, with clear processes required to support the portfolio manage-
around communication with the fund Custodian as ideal outsource/ASP provider ment process on the one hand and the sales
manager. No two clients are the same, but a Given that they are sitting on the and marketing effort on the other.
provider with a diverse client base should investor’s assets, custodians are ideally Accordingly, they must choose which of a
be able to leverage this capability and placed to monitor portfolio flows and cap- number of approaches – insource, out-
knowledge and pass on those benefits to ture those within a data warehouse struc- source, ASP – is optimal for their business.
each individual client. A structured service ture on behalf of a manager or pension Whichever model they choose, there are
model with clear service levels standards fund. Custodians have invested significant clear benefits associated with working in
should be a primary focus. resources in an effort to meet the needs of partnership with a third-party provider that
However, full outsourcing is best suited to managers with respect to investment ana- can offer a scaleable and flexible solution.
more standardised functions such as stan- lytics outsourcing solutions. Increasingly,
dard management reporting or end client they are taking a ‘big picture’ approach, Blair McPherson is head of RBC BENCH-
reporting. For some fund manager seg- drawing together a formerly disparate jum- MARK, U.K., Europe & Middle East, for
ments in the market, the full outsource ble of analytical products and combining RBC Global Services, Institutional and
model makes sense. However, while a them under one umbrella. This melding of Investor Services (IIS).

Alternative Fund Services
In light of various opportunities As the hedge fund industry grows and matures, so the
administration of hedge funds becomes more complex.
created by hedge funds, the The complexity comes from a variety of sources. To men-
tion just a handful: regulators in offshore domiciles have
skills required to service these always provided a close oversight of the offshore part of
funds should not be the industry, and now regulators in major jurisdictions
such as the USA and the UK are, rightly, following suit;
underestimated. institutional investors such as pension funds are demand-
ing high standards of risk management and transparency;
multi-manager hedge fund platforms have continued to
Alan Tooker of Derivatives grow; weekly and daily dealing for investors wishing to
invest in or redeem from hedge funds is now offered by a
Portfolio Management explains number of managers; profit equalisation is pretty much de
rigueur for both offshore and European hedge funds;
just how crucial knowledge, more complex over-the-counter (OTC) transactions
experience and technology are ensure that pricing continues to be a challenging topic; the
development of multi-cell investment vehicles in some off-
in the world of administration. shore jurisdictions maintains the requirement to ensure
adequacy of segregation; and so the list goes on.
Keeping Pace
How do hedge fund administrators continue to keep
pace with the rapidly evolving developments in the hedge
fund universe? Three key areas, critical to their ability to
offer operational excellence, are knowledge, experience
and technology.
First and foremost, administrators must ensure they
keep their knowledge current. This is no mean feat, given,
for example, the wide range of jurisdictions that hedge
funds embrace, from the domiciles of the hedge fund and
hedge fund manager to that of the investors in the fund.
There are legal and regulatory
issues that must be considered for
all the jurisdictions, ranging from
the segregation issues arising in the
domiciles of the hedge fund vehi-
cles to the anti-money laundering
Alan Tooker
requirements in the jurisdictions
of both the hedge funds and the
investors. There are many other
examples where the
Keeping
Administrator’s knowledge must
be kept current as markets and
products evolve (new OTCs, German tax reporting
requirements, etc).
Pace Experience will always be one of the keys to excellence in

fund administration, however good the technology used
by the Administrator. For example, anyone who has waded
through an International Swaps and Derivatives
Association (ISDA) Master Agreement will quickly find
that the economic rationale of the transactions underlying
the Agreement is not always readily apparent. But without
a complete understanding of the rationale, how is the
administrator to ensure that the underlying transactions
are correctly booked, and, just as importantly, correctly
priced? Another example: given that there are different
ways of accounting for profit equalisation, an administra-
tor needs the experience to understand the requirements
as set out in the offering documents (and they are not

always altogether clear when written in legalese) and to industry. This necessitates building and retaining a dedi-
ensure that the technology is used appropriately to provide cated team of technology professionals who understand
the correct solution. the industry, as well as having the competences required
for development and maintenance.
Technology However, the advantages of an in-house platform are
Assuming that the administrator has both the knowledge numerous. The ability to build out an all-embracing trade
and the experience, there is still a critical area: the technol- capture platform in response to the growth in the OTC
ogy platform. Without appropriate technol-
ogy, it can be well nigh impossible to pro-
vide an effective administrative service. In “Without appropriate technology, it can be
this increasingly complex age, both the
amount of information and the reporting well nigh impossible to provide an effective
deadlines required by counterparties means
that the technology platform has to be up to
administrative service”
date and comprehensive. The technology
platform has to be capable of a multitude of processes, market is just one example. The ability to provide and
including shareholder services, trade capture (requiring maintain links with systems used by counterparties is
interfaces with trading advisers and prime brokers), pric- another example. DPM does not concentrate on providing
ing, Net Asset Values (daily NAVs are rapidly becoming the a front-end platform for its clients, because many hedge
norm) and fund accounting. fund managers and trading advisers prefer to choose any
Administrators who offer a comprehensive service fall one of a variety of off-the-shelf packages or, as is often the
into two camps: those who have developed and main- case, to build their own front-end solution that suits their
tained their own technology platforms, and those who rely unique operating style. Instead, DPM offers the facility to
on off-the-shelf solutions for their platforms. There are upload files from the manager’s and adviser’s chosen
advantages in each of these approaches: one advantage of front-end systems, and to download files to the manager
off-the-shelf solutions, for example, is that suppliers who and adviser. DPM’s in-house platform allows it to develop,
specialise in the funds industry are able to offer software in response to individual requirements, an interface
that has been developed in response to the industry between the front-end system of the manager and DPM’s
own trade capture system. It’s in-house platform similarly
enables DPM to export files according to the manager’s
“The advantages of an in-house and adviser’s requirements. Daily NAV reports are stan-
platform are numerous. dard, and for those clients that have risk and transparency
requirements, DPM’s systems give it the ability to down-
The ability to build out an load files appropriately formatted and populated for the
risk engine of the manager’s choice.
all-embracing trade capture
platform in response to the Requirements
DPM’s own systems also give it the ability to develop
growth in the OTC market is solutions to new and more complex requirements.
German tax reporting has been in the headlines for some
just one example. The ability to time now, and many European funds of funds managers
provide and maintain links with are optimistic that the German market will grow and
expand with the help of a more sympathetic regulatory
systems used by counterparties regime. Because of the flexibility of its in-house technolo-
gy platform, DPM is already offering a tax reporting facili-
is another example.” ty to hedge fund managers.
The hedge fund industry continues to enjoy a period of
demands of a number of Administrators and other end- rapid growth. As the demand for hedge fund product con-
users. An advantage of in-house solutions is that the tinues to grow, and is accompanied by continuing innova-
Administrator is able to get closer to a fully integrated sys- tion in hedge fund strategies and product structuring, so
tem providing straight through processing. will the demand for administrators to extend and cus-
Going it Alone tomise their services. Technology will continue to be a key
Derivatives Portfolio Management (DPM) decided, from driver in this process, and DPM’s ability to develop and
its infancy, to go the route of developing and maintaining maintain its in-house technology platform is one factor
its own technology platform. The potential disadvantage behind the rapid growth in its client base and in assets
to the administrator of going this route is obvious: an in- under administration.
house platform comes at a cost. In this day and age, the
platform must be continuously developed and maintained Alan Tooker is managing director and head of European and
if it is to keep pace with developments in the hedge fund offshore operations at DPM.

As an increasing number of
fund administrators fall under
the ownership of global banks,
the integration of these
business lines into the parent
company are fascinating events
to behold.
ISJ speaks to an administrator
with first hand experience in
mergers and acquisitions - Paul
Smith, now of HSBC
Going Going Gone... Alternative Fund Services.
Recent acquisitions in the fund administration industry

suggest this trend will continue for as long as hedge funds
are around. But the unique characteristic about these
acquisitions is that, rather than change anything, buyers
prefer to leave their new assets intact while increasing their
market share.
As Paul Smith discovered when
The Bank of Bermuda Limited was
acquired by HSBC in February
2004, the new organisation would
not substantially differ from the
Paul Smith former entity. “We were asked to
lift Global Fund Services out of
Bank of Bermuda and to fit it
within a division of HSBC called
HSBC Securities Services, and keep
going as previously constituted,”
explains Smith, who moved from
Bank of Bermuda to head up HSBC’s new Alternative
Funds Services. “From a management perspective there is
no material change.”
Markets
Geographically, the markets added to Alternative Fund
Services’ radar following the acquisition include Australia,
Italy, Germany and France.
“Thanks to HSBC’s bricks-and-mortar presence in 76
countries globally, it is relatively simple for us as a business
to open up new operating nodes in countries that interest
us,” explains Smith. “We are focused on opening business-
es in Australia, Italy, Germany and France in 2005.”
Other Alternative Fund Services geographies include the
traditional offshore hedge fund world, the domestic hedge
fund servicing business in the US and the domestic fund
servicing business in Asia. “We still have the look of a

traditional offshore services provider following the acqui- “About 20 to 30 per cent of the world’s capital markets
sition,” says Smith. “We are very strong in Dublin, flow through alternative assets. Therefore, if you are a
Luxembourg, New York, Bermuda, Hong Kong and securities services business, you need to have the ability to
Singapore. administer alternative assets. Any major financial institu-
“We hope to open additional centres in response to the tion that wants to operate in the securities markets has to
growth of the alternative world and the way that the alter- have a firm footing in the alternative industry. Some of the
native world is moving into the mainstream, onshore mar- American banks who have made small acquisitions in this
ketplace. The traditional barriers between the offshore and area are going to have to add to those expertise to increase
onshore markets are beginning to break down in certain their share of the market.”
parts of the world and our new ownership affords us the
opportunity, in a low cost and timely fashion, to move into Technology
developing domestic markets.” From a technology and systems perspective, Alternative
Fund Services will continue to work with best-of-breed
Investment providers, including Advent Geneva for fund accounting,
The main types of investment strategies that are serviced Koger NTAS for investor services, SunGard Reech for risk
by Alternative Fund Services include hedge funds, fund of management and Beauchamp Financial Technologies for
funds, property / real estate and private equity. trade order management. “Correctnet is helping us with
“The acquisition of Bank of Bermuda by
HSBC has enabled us to focus on a client
segment that was previously a little distant, “Anyone who is in the securities servicing industry,
namely the institutional asset managers or
traditional asset mangers, who are begin-
including American and European banking
ning to move into the alternative world and institutions, has to have the ability to service
may already be clients of HSBC. These
clients are now looking to develop alterna- alternative investment products”
tive products and present a new and excit-
ing client base as far as we are concerned. the web-delivery of our investor servicing,” says Smith.
“For certain stand-alone alternative funds, which have “We are very comfortable with this arrangement as it
existed for many years and have grown into mid-tier asset enables us to keep pace with the alternative world, whereas
management groups, our ownership by HSBC enables us in-house IT development would be less able to do so. We
to approach these companies with a much more com- work with technology vendors whose products adapt to
pelling pitch. In this sense we are an institutional, quality the way we wish to work and include those products in
counterparty as well as an administrator. Through HSBC, our overall offering.
we now have a much broader product offering for those “We can offer SunGard Reech as an integrated or sepa-
larger institutional clients.” rate model within HSBC’s core administration offering.
The increase in alternative assets will inevitably lead to This approach is not something we can make money out
more services being offered by the alternative funds of but it enables us to offer clients a value driven
administrator. Smith explains: “Increasingly, fund admin- approach.”
istration is perceived as an adjunct to a broader product
offering of a financial institution. Future Perfect
“Competitors like State Street, Goldman Sachs and UBS Going forward, the first area of expansion for Alternative
are beginning to move into this space. Fund administra- Fund Services is based on geography. The second focus is
tion is becoming part of a general service offering on top on closer contact with HSBC colleagues in order to lever-
of a series of capital market activities. In the case of age further products for the new client base. “We are
Goldman Sachs this service would be included within a assessing what other HSBC business units have to offer
prime broker wrapper. In the case of HSBC, we are inter- and whether these products are applicable to our client
ested in selling capital markets activity to select clients. base,” says Smith. “Finally, from an internal perspective, we
Additionally, we provide the mid and small-ranking clients intend to move towards a daily processing environment.
of Bank of Bermuda with more balance sheet strength, The alternative world is moving towards a daily operating
more flexible credit facilities, better foreign exchange trad- environment, as opposed to the traditional monthly
ing and better deposit facilities. Throughout the client processes of the past. This imposes significant technology
chain, ownership by HSBC enables us to offer a much issues upon all service providers.
broader product spread for our clients.” “We need to re-engineer our process and to a certain
Commenting on the importance of fund administra- extent build slightly more sophisticated pricing and recon-
tion companies in the current investment landscape, ciliation engines. From a technology perspective, this is a
Smith says: “Anyone who is in the securities servicing major focus for 2005. It is not an external focus from a
industry, including American and European banking technology perspective, it is much more about adding a
institutions, has to have the ability to service alternative capability internally so that we can support our clients as
investment products. they move towards daily processing.”

Mandates
Pensions
State Street Corporation has been appointed to provide
US giants win global custody, investment accounting, securities lending,

and performance measurement services for the pension
plans of ChevronTexaco Corporation in the UK, The
Netherlands, Ireland, and Belgium for $2 bn in assets.
in Europe State Street currently services $7 bn in assets for

ChevronTexaco's pension plan in the US. ChevronTexaco
ranks among the world's largest and most competitive
global energy companies, with more than 47,000 employ-
ees worldwide.
Global custodians of the US “We are delighted to build on our relationship with
ChevronTexaco to service their European plans,” said
were the majority winners of Alasdair Reid, vice president and head of State Street's
asset owner servicing group in northern Europe, Africa
European mandates for the and the Middle East. “State Street continues to benefit
months of January and February from the growing trend of pension plans looking for fully-
integrated service providers, and clients such as
2005, as the investment ChevronTexaco look to us for world-class service and
community continues to global support.”
State Street continues to win significant new business in
appreciate the value of middle Europe. Through the last 12 months in the UK alone, State
Street has won more than 100 new investment servicing
and back office outsourcing. mandates.
While mandates were few and far between at the UK First

beginning of the year, US service providers led the pack As part of its first investment services outsourcing deal in
with a handful of significant deals. the UK, Northern Trust confirmed it is in exclusive negotia-
One of these deals saw Abbey National in the UK entrust tions with Insight Investment Management for back and
£30bn of assets managed by its subsidiary Abbey National middle office investment operations.
Asset Management (ANAM) to the Bank of New York. In The range of services to be outsourced by Insight under the
the true spirit of consolidation, Abbey decided to slim its proposed agreement are: trade matching, confirmation and
custodial arrangement from four companies (including settlement, investment record keeping, entitlement process-
BNY) to one provider. The consolidation will enable ing, pricing, asset set-up, reconciliation, client reporting, val-
Abbey to improve its investment administration across uations and performance analysis.
ANAM, improving economies of scale and creating a The agreement, which is subject to further due diligence
tighter operating infrastructure. and contract negotiations, is expected to be completed in the
James Bevan, Abbey’s Chief Investment Officer, said, “We second quarter of 2005. Commenting on the decision to
chose to consolidate our global custody services with The outsource and select Northern Trust as its business partner
Bank of New York because its team clearly demonstrated for these services, Insight chief operating officer Atul Manek
that it was capable of meeting our changing needs.” said: “After our initial feasibility study it became clear that
Tim Keaney, executive vice president and Head of there was a sound and compelling case for moving to an
Europe at The Bank of New York, added: “This appoint- outsource business model with clear benefits for Insight, our
ment highlights the quality of the existing services we pro- colleagues and our clients. Given our conviction that our
vide to Abbey, as well as our long-term commitment to investment operations team is one of the best in the indus-
helping financial institutions like Abbey move and manage try, it was important to retain that expertise and ensure the
their financial assets.” well being of our colleagues. “Key considerations for Insight
BNY also signed a letter of intent with ING Investment included opportunities for increased technological and serv-
Management (Europe) BV (ING IM) to offer a middle ice benefits and the ability for increased management focus
office trade and processing outsourcing service for the on our core proposition of investment performance and cus-
Euro 67 bn asset base of ING IM’s operations in The tomer service.” It is expected that between 85 and 90 Insight
Hague. The Bank of New York, through its proprietary staff will transfer to Northern Trust. Insight was advised on
outsourcing business, BNY SmartSourceSM, will assume the selection of Northern Trust by specialist consultancy
responsibility for operational functions in the trade lifecy- CSTIM.
cle, post execution through to settlement. ING IM’s tran- Insight Investment manages funds for institutional and retail
sition of the services to BNY is subject to applicable regu- clients across the full range of asset types – equities, bonds,
latory approvals. The 12-month implementation schedule property, derivatives and private equity. Insight’s assets under
is expected to be completed in the fourth quarter of 2005. management as at 30 September 2004 totalled £74.6bn.

Mandates
Month Winner Client Location Assignment Mandate Size

January BNP Paribas B. Sabadell Spain Global Custody EUR5.8bn
January N. Trust Insight IM UK Outsourcing -
January N. Trust KBL UK Fund Accounting £325m
January State St ChevronTex. UK Investor Services $2 bn
January BNY ING IM UK Outsourcing EUR 67bn
January BNY NBP France Global Custody EUR 80bn
January BNY Abbey UK Global Custody £30bn
December Fidelity Textron Inc. US Investor Services -
December CIBC MellonManulife Toronto Custody $60 bn
December BNY New Smith London Custody New Fund
November JPMorgan Sun Micro. US Record Keeper $2,300
November State St BA London Investor Services £10bn
November Butterfield Liontrust Guernsey Fund administration £32m
November IFDS Investec London Transfer Agency New Facility
November State St OAC Singapore Fund acc./Reporting $2bn
November RBC Hermes Channel Is. Custody/Fund admin £500m
November RBC ARC Canada Custody $1bn
November BFSG INVESCO Channel Is. Fund administration £100m
November Dresdner OPERS Ohio Securities Lending $4bn
November Key Bank OPERS Ohio Securities Lending $4bn
November BNY JO Hambro London Investor Services New Fund
October ING-BHF BNY Germany Custody Services -
October N. Trust Michigan CC US Global Custody -
October BNP Paribas Master Sup Australia Global Custody $400m
October N. Trust LAFPP US Global Custody $11.9bn
October N. Trust Teeside UK Global Custodian £1bn
October State St Clore Duffield UK Global Custody £63m
September State St Illinois State US Global Custody $10.4bn
September Vanguard Teleflex, Inc. US RecordKeeper -
YO U ’ L L E N J OY M A N Y A DVA N TA G ES WO R K I N G W I T H U S .
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Securities Services - Germany
The bear market’s treatment of Germany could be

likened to a sharp claw across a tender face. Dwindling
investment returns in a post-9/11 environment have left
investment banks no choice but to inflict severe redun-
dancies on their workforce. Today, the unemployment
rate has reached record volumes and about five million
people are out of work. The German market was given
some respite in the form of a strong Euro and a lenient
financial regulator. In fact, Germany’s implementation of
UCITS III and the subsequent provisions for hedge funds
provide some hope for local financial institutions, which
rearranged their structures in order to focus on the lines
of business that matter the most. “An obvious example
of a restructured German company is BHF-BANK, which
was one of the largest privately owned banks before it
changed its corporate form into a joint stock corporation
in 1995 and was acquired by ING Group in 1998,”
explains Cornelia Keth, head of BHF-Bank’s marketing
and sales team for Custody and Derivatives Services.
“This Dutch-German banking partnership was cut short
Bearing Up when ING decided that BHF did not fit in with its strate-
gy anymore and put the bank up for sale. Following talks
with a variety of interested parties, ING sold BHF to Sal.
Oppenheim, a privately-owned German bank, last year.
Under the terms agreed, Sal. Oppenheim and BHF will
operate independently and retain their names, while
together forming the largest privately owned bank in
Europe. “We have successfully re-entered the sub-custody
market for German securities in 2004,” says Keth. “BHF-
BANK traditionally offered custody services for private,
corporate and institutional clients. Now we also provide
high quality sub-custody services for global custodians,
foreign banks and broker dealers. BHF-BANK partly exit-
ed the custody business in 1995 by scaling down its active
custody services for global custodians.”
Changes
BHF is not the only example of an acquisition in the
banking segment. In 2003, Deutsche Bank bought the
domestic custody business of Dresdner Bank, a well-
established provider of sub-custody services in Germany.
“This year, everyone is very interested in the develop-
In light of changes endured ments within Deutsche Bank and how they propose to
take on the Dresdner Bank busi-
over the last few years, the ness,” says Keth. “The industry is
also interested in Deutsche Bank's
German securities services ability to satisfy the high expecta-
industry cannot be accused of tions of Dresdner Bank’s clients.”
According to Moritz Ostwald,
standing still. sales and relationship manager for
custody services at BHF-BANK,
the business focus of Dresdner
From mergers to hedge funds, Bank was very similar to that of
BHF-BANK, as both banks con-
recent events have served to Moritz Ostwald centrate on offering personal serv-
focus the minds of those who ice with a high commitment to
clients. “Deutsche Bank seems to be more transaction
are in the game and volume-driven. It will be interesting to see how

How can we help you navigate
the challenges of custody business?
www.bhf-bank.com
Your expectations are high. We meet them.

BHF-BANK – your sub-custodian for German securities.
For further information please contact Cornelia Keth on

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Deutsche will meet the diverging demands and high ties and cash processing functions. This trend will con-
expectations of their new clients. This will be a major tinue in the investment management industry, where a
story for 2005.” number of companies are offering services for asset man-
Deutsche Bank announced during the fourth quarter agers, including accounting.”
2004 a series of programs to realign business units to Thanks to the new approach to investment services
improve their effectiveness, enhance product and service outsourcing, German savings banks are beginning to out-
delivery to clients, and respond optimally to market source back office functions, including securities and
developments. This realignment also provides the oppor- payments processing. “Transaction banks are ready to
tunity to streamline both the Bank's businesses and take on this business from other banks,” says Keth. “In
infrastructure. The combination of these related pro- the last year, asset managers and master-KAGs were
grams is designed to enhance revenues and reduce granted permission to outsource some of their functions
expenses, and thereby to contribute to Deutsche Bank's to third parties. Asset managers outsourced the entire
stated targets. The Bank previously communicated that it volumes of their Spezialfonds, which are specialist invest-
would incur costs, both in the fourth quarter 2004 and in ment vehicles for institutional investors.”
2005, associated with these realignments. During the According to the German Investment and Asset
fourth quarter of 2004, Deutsche Bank recognised Management Association (BVI Bundesverband
expenses of approximately EUR 0.6 bn on a pre-tax basis Investment und Asset Management e.V.) the asset man-
for the realignment programs and other efficiency meas- agement of a third of asset volumes held in so-called
ures. As part of its realignment process, the Bank recently “Spezialfonds” (special funds for institutional investors)
announced plans to shed 6,400 jobs worldwide, including was outsourced to third parties in 2004. This was accom-
1,000 in the City of London. panied by a decrease in the number of these funds.
Concurrently, the number of these
“The new approach to outsourcing is a major funds also decreased as investors con-
solidated their Spezialfonds. Investors
enhancement for 2005 and will particularly affect with various Spezialfonds consolidated
the German asset management companies” these funds into one Master fund and
appointed different asset managers.
Thanks to the implementation of new
Funds Industry investment law, the role of the banks in Germany has
Apart from mergers and business realignment, there changed considerably over the last year. While the uni-
have been high expectations surrounding to the introduc- versal banking system used to be the one-stop-shop for
tion of hedge funds in Germany. “Hedge funds are now investor services, this structure now appears to be chang-
part of the new German Investment Improvement Act, ing. “Institutional investors are now selecting the best
which replaced the previous legislation in 2004,” explains provider for each product,” says Keth. “Their require-
Keth. “Some details still need to be dealt with, but we gen- ments have become more diversified. These investors
erally see a positive reaction in the community to the new demand consolidated reporting, performance measure-
legal framework although volumes in 2004 have only been ment and risk measurement tools. Daily eReporting is
a fraction of the forecasts. Apart from hedge funds, the replacing monthly paper-based reports and enables
introduction of so-called Super Funds will also have a pos- clients to download information and use it for their own
itive impact on the flexibility of the investment strategies, data processing, for accounting for example.”
since all types of securities and investment vehicles can be
included in a single Super Fund.” Infrastructure
As German banks await the outcome of Deutsche
Outsourcing Boerse's bid for the London Stock Exchange, they are cer-
The outsourcing of middle and back-office operations tain the result will have a significant impact on their
by investment companies is becoming more popular in business. Ostwald explains: “If Deutsche Boerse is suc-
Germany. “The new approach to outsourcing will be a cessful in its bid, two of the largest exchanges in Europe
major topic in 2005 and will particularly affect the will be consolidated. As part of its vertical model,
German asset management companies and Deutsche Boerse currently includes Clearstream and
Kapitalanlagegesellschaften (KAGs),” says Keth. “These Eurex. From a clearing and settlement perspective, the
companies are under extreme cost pressure and will use question is whether Deutsche Boerse will keep
opportunities provided under the new investment law to Clearstream - as its spokesman recently confirmed - or if
outsource more services.” the political pressure could lead to a disinvestment. One
Several years ago, German banks were reluctant to out- should bear in mind that four years ago Deutsche Boerse
source any processes to a third party and preferred to was willing to sell its then 50 per cent stake in
manage these processes internally. Explaining the recent Clearstream. There are new rumours every day. We will
change, Keth says: “In the last year, a large number of keep an eye on this development as it will have an impact
transaction banks have been launched to take on securi- on our market.”

Technology
After an 18-month systems project that was completed
in the spring of 2004, BHF-BANK was able to take new
clients on board, including The Bank of New York.
“Getting them on board was a significant challenge,” says
Keth. “The Bank of New York – known as a highly pro-
fessional market participant – has confirmed that BHF-
BANK fully meets its requirements, which makes us very
confident of winning other custodians. From a techno-
logical perspective, our custody product can be charac-
terised by high levels of STP with information being
processed in a very effective manner. Going forward, we
will pay significant attention to our new internet portal.”
“We continue to invest in our technology platform,”
adds Ostwald. “We are currently completing the first
module of our internet portal, which will offer a web-
based reporting functionality. Later, our clients will also
be able to enter their instructions for OTC settlements
and corporate actions online.”
Apart from internet enhancements, service providers in
Germany are focused on the new SWIFT standards. “We
will be compliant with the new SWIFT Standard Release
2005 in May this year,” says Ostwald.
Foreign Perspective
For Citigroup Global Transaction Services (GTS) in
Germany, 2004 was a year in which to digest major initia-
tives such at the launch of the Central Counterparty and
the introduction of the new settlement system a year pre-
viously. “Following these initiatives, we focused on gear-
ing up our depot bank service offering,” says Gregory
Rodeheaver, securities country manager.
From a depot bank perspective, the developments in
Germany market are extremely significant. “Global cus-
tody is only part of the client service offering of a
German depot bank,” explains Jürgen Ehle, German head
of project management for Global Funds Services at
Citigroup. “These providers are under pressure from
clients who require efficient straight through processing
and high quality reporting interfaces. These requirements
are prompting depot banks in Germany to review their
structure and business approach. There will be an
increase in activity in the retail funds sector in Germany.
Not all depot banks have the structure to support these
clients and consolidation among providers is inevitable.
Consolidation will present an opportunity for the global
custodians who are entering Germany with a broad,
global business structure.”
Citigroup GTS has invested in Germany in order to
increase its presence and its range of services provided to
the funds industry. “Owing to existing cost pressures in
the market, straight through processing remains a critical
issue,” explains Ehle “A lot of work by German banks is
still performed on a manual basis. In order to fully serve
the highly intense and complicated nature of a German-
domiciled fund, a diverse service offering is a must.
Provided you have sufficient processes available in-house
you will be able to offer clients attractive fee schedules.”
During its 10- year presence in Germany, JPMorgan forms, through connectivity to the Swift network and
has witnessed significant contraction within the transac- Straight Through Processing provided by the ADP
tion banking sector. “Most consolidation has come about SWIFT Transaction Manager,” says David Gow, senior
through merger activity,” says Oliver Berger, vice presi- sales director, ADP Brokerage Services Group. “In the
dent for Investor Services (Europe). “Many of the case of the KAGs, the combination of connectivity and
'Landesbanks' got together to ensure that their transac- message processing allows them to participate in the
tion banking businesses could reach critical scale, while Securities Market Practices established by the BVI (The
in the commercial transaction banking market consolida- Association of Asset Managers in Germany).”
tion has largely been between same-sector banks. These An example of such a client is Universal, which has
banks aim to consolidate their systems and run on one managed to replace 65,000 faxes with SWIFT messages in
platform. We have not seen this consolidation among a six- month period.
private and mid-sized banks, which prefer to outsource.” In addition to the banking community, ADP manages
Germany's Investment Modernisation Act has looked data from WM Data, the source of security information
favourably upon players like JPMorgan Investor Services. in Germany. is the source for security information in
“As many transaction banks have proved, outsourcing is Germany. This service includes the provision of tools like
possible. But global players need a significant amount of OAS, an on-line visualisation of this vast data source and
TeD, an event calendar, which cre-
ates a corporate action event list for
“the KAGs have been granted permission by the new a selected group of instruments.
This work list is used to simplify
investment law to outsource additional internal back office processes.
administrative processes, including accounting” ADP in Germany also provides
services to banks with private
clients, by creating information
infrastructure on the ground in Germany in order to be required for tax earnings certificates. Client data received
part of the outsourcing game. You have to be local and by ADP is matched to WM Data to produce the relevant
make use of the global scale behind the local entity.” tax information. The complete service includes, consul-
As one of the first global entrants into Germany, tancy, annual updates for each tax year and the complete
JPMorgan is an important provider within the institu- outsourced production of the relevant documents. This
tional client sector. “Institutional investors look to global service is also available to banks outside of Germany (e.g
custodians for infrastructure, using our infrastructure in Switzerland and Luxembourg), many of which have
areas in which they do not want to invest themselves. The German clients. “An example of the quality of this service
institutional investor relies upon these components and is apparent in relation to the recent German Tax
upon our infrastructure, which we make available Amnesty,” says Gow. This involved producing the rele-
through our Internet portal, JPMorgan Access. This por- vant information retrospectively, on some occasions up
tal contains applications such as risk, performance, fund to nine years in arrears. With historical WM Data avail-
accounting and core custody information, which we able in-house and Fitas versions still available for each
make available to institutional investors on an electronic tax year, ADP met this demanding challenge, delivering
basis. The institutional investor focuses on about 20 the results through it’s data centre in Geneva, thereby
reports in the area of compliance, performance risk and meeting the stringent Swiss data laws.”
fund accounting, in order to steer and monitor their
funds and to glean better information for use in discus- Outsourcing to Foreign Companies
sions about fee transparency, which has become a big The German laws enabling foreign securities service
issue in the German market. 10 years ago, fee transparen- providers to take on some of the functions of transaction
cy was limited. To further increase transparency, global banks and asset managers have been relaxed over the last
custodians have broken down execution price, stock three years. Previous laws dictated that the German back
exchange fees, brokerage fees and any settlement fees into office of an investment bank had to be present in
their constituent elements.” Germany. But this has changed. Deutsche Bank has out-
sourced a lot to a company based in the UK. Within the
Technology EC, there is no law preventing the move of data from one
State-of-the-art communication is a major selling point place to another. It is implied that the German regulator
for ADP (Wilco) Germany, which provides SWIFT looks more strenuously at data that is held outside.
Service Bureau and Swift Transaction Management to With a more favourable approach to investment regula-
about seven clients. A further three clients are in the tion, Germany is fast becoming a land of opportunity for
process of moving to the Bureau. foreign and local securities service providers. Instances of
ADP’s main clients are KAGs, banks and data providers. outsourcing look set to increase and consolidation
“These clients are provided with a complete SWIFT serv- among financial services institutions will deliver all
ice from assistance with the completion of membership prospects to the best of the best.

Germany Panel Debate
Tom Carey
Big in Germany
Service providers who operate in Germany agree
that the country’s recent regulatory changes present
significant opportunities. In an exclusive panel
discussion, ISJ presents participants outlook on
Europe’s largest economy.
Alan Crutchett Tom Carey, Chief Operating Officer, ADP Wilco (part of
ADP Brokerage Services Group). Carey is responsible for
international strategy and operational improvement with-
in ADP Wilco. His remit is to continue the growth of the
company through both geographic and product-based
expansion. Carey joined ADP in 1992 and has been exten-
sively involved in the evolution of ADP Wilco's global
trade processing and settlement platform, Gloss.
Alan F. Crutchett, Managing Director, DWS Investment

GmbH. Crutchett was appointed Managing Director at
Cornelia Keth DWS Investment GmbH in January 2002, with responsi-
bility for Operations and IT. Crutchett held previous roles
in management, business re-engineering and new business
building at Dresdner Bank and Royal Bank of Canada.
Cornelia Keth, Head of Marketing & Sales CDS

BHF-Bank AG. Keth began her career in 1987 at Dresdner
Bank’s securities settlement department. In 1991 she
became head of marketing at BHF-BANK’s Custodial
Services department. At the beginning of 2004 Keth was
appointed head of Marketing & Sales cds (Custody and
Derivatives Settlement) at BHF-BANK, where she is now
Claude Noesen promoting bank’s re-entry into German sub-custody busi-
ness.
Claude Noesen, Client Relationship Manager, Alternative

Fund Services, Luxembourg, HSBC. Noesen is responsible
for client relationship management for HSBC’s Alternative
Fund Services (formally Bank of Bermuda Global Fund
Services) in Luxembourg. Claude additionally works as a
project director delivering German tax transparency to
funds and providing administration services to domestic
German hedge funds out of Luxembourg. Prior to this,
Achim Puetz Claude held the position of Director of Sales in
Luxembourg from 2002 to 2004.
Achim Puetz, Chairman, German Alternative Investment

Association (BAI). Puetz is founder and chairman of the
German Alternative Investment Association (BAI) and is
council member of the Alternative Investment
Management Association (AIMA). Puetz is also a partner
in the Munich office of SJ Berwin (law firm).
Rudolf Siebel LL.M, Managing Director, Market & Service

Rudolf Siebel BVI Bundesverband Investment und Asset Management
Siebel is responsible for fund industry standards, market
research, as well as member education and services, at the
BVI. He is a deputy member of the Board of Directors of
the European investment fund trade association, FEFSI.

Comment on 2004. What does challenges does 2005 pres- emphasis on privately run schemes.
ent to the German market?
Noesen: Following the adoption of the New Investment
Carey: While the industry may not highlight 2004 as a Modernisation Act in late 2003, some industry partici-
good year, ADP Wilco has observed a significant growth in pants expected the German hedge fund and fund of hedge
demand for its services and products in the second half of fund industry to experience growth of between 6 bn and
2004. Looking forward to 2005, I envisage continued 60 bn. Actual market growth to date has been around
growth in the KaG (Kapitalanlaggesellschaften) market. 800 million. One of the challenges impacting growth is
This growth will be driven by the funds administration the new tax transparency component, which makes the
market and the introduction of fund of funds. In turn, this processing of vehicles more onerous. However, we expect
will trigger investment in new infrastructure and systems. a high level of commitment from regulators and industry
In addition, regulatory change in Germany has continued participants in 2005 to finalise the new laws and imple-
to drive business demand. ADP Wilco's portfolio of tax ment an efficient process for establishing funds domesti-
products has certainly benefited from this demand. In par- cally. This will align with other initiatives to broaden dis-
ticular, the new requirements to report profit and loss on tribution channels, increase hedge fund awareness and
earnings relating to security investments have been a key understanding as well as attracting established foreign
trigger. managers to the German market.
In terms of increased investment, we believe the insurance
sector will utilise their five per cent alloca-
“From a regulatory framework perspective, tion, which was introduced by a new law
in September 2004, to invest in fund of
the scene has been positively set with the new hedge funds in an effort to diversify port-
Investment Act, the Investment Tax Act folio risk.
and the new rules on derivatives” Puetz: January 1, 2004 was a very impor-
tant date for the German fund industry. A
Crutchett: As a business year, 2004 could be described as new regulatory and tax framework for investment funds
one of modest recovery. From a regulatory framework per- was enacted on this date. The new law did not only trans-
spective, the scene has been positively set with the new form the provisions of UCITS III into German law but
Investment Act, the Investment Tax Act and the new rules also, for the first time, set a reliable framework for hedge
on derivatives. Usage of these new freedoms will pick up funds in Germany. On the regulatory front, the new law
through 2005, spurring the growth of new products and provides for specific rules on the set-up of hedge funds
services for institutional and retail investors. The market (and funds of hedge funds) as regulated funds and the
will open for highly specialised niche providers. marketing of hedge funds to private and institutional
investors, with the proviso that single hedge funds may
Keth: German banks faced growing cost pressures in under no circumstances be publicly offered or distributed
2004, leading to outsourcing activities. These activities in Germany. As the new investment law was accompanied
have materialised among an increasing number of Master by a revision of the investment rules for insurance compa-
KAG structures on the one hand and through a number nies (which made hedge funds a permissible asset class for
of important deals for German transaction banks on the investments of their restricted assets), many market partic-
other. From a political perspective, the introduction of ipants had very bullish expectations with regard to poten-
the new investment law has been of great importance. tial inflows into hedge funds. However, the difficult condi-
For 2005, challenges will more likely be focussed on the tions in financial markets in 2004 did not only have an
integration of past acquisitions, such as Deutsche Bank’s adverse effect on traditional securities funds but also made
purchase of Dresdner Bank’s local custody business. it very difficult for hedge funds to attract as much atten-
Hedge funds and Master KAGs will continue to be an tion and money as possible. Nevertheless, a growth rate
important topic in Germany, particularly in regard to the comparable to the ones seen in other countries is to be
greater outsourcing possibilities offered by the new legis- expected.
lation. As a consequence of this law, core business areas
of KAGs, including fund administration and asset man- Siebel: In 2004, the German investment funds industry
agement, can enter into outsourcing arrangements. In reached an all time high of EUR 1,002 bn in assets under
addition, increasing volumes will be invested into pen- management in retail and institutional funds. However,
sion schemes as the German pension system places more total net inflows in the order of EUR 17 bn, of which only

EUR 6.5 bn were in retail funds, are disappointing. high margin business has markedly declined, companies
Investor confidence in long-term funds, especially equity will look to broaden their service offering in an attempt to
funds, is still low. The industry expects growth in 2005 and attract new business and ensure ongoing profitability.
beyond as investors increasingly realise, after recent Ultimately, it is about being able to provide customers
changes in the tax treatment of life insurance products, with the broadest and deepest range of securities services
that funds hold the most advantages for long-term savings across a range of markets, hence the acquisition of Bank of
in private or occupational pensions. In the past few years a Bermuda (one of the top service providers to the hedge
lot of companies’ books have changed ownership. fund industry) by the HSBC group. Smaller domestic cus-
todians will find it tough in such an environment and
Is the German market becoming more or less competitive given the new investment law and the significant opportu-
and can we expect further consolidation going forward? nities that it offers to both custodians and administrators,
there is likely to be increased interest by global players.
Carey: The market will continue to become more compet-
itive as the true business drivers are considered, i.e. cost of Puetz: While consolidation in the German market will con-
ownership and ability to address change. Further consoli- tinue, the competitiveness of this market will not decrease.
dation remains a possibility, especially for firms, which All major players are well aware of the need to be active in
want to compete in the worldwide markets. Germany, or risk the consequences if they are not.
Crutchett: Competition for the local sub-

agency business has traditionally been tough,
“Further consolidation can be expected in the
with only a handful of players actively run- co-operative and savings banks sectors”
ning such a franchise. Further consolidation
in this segment is unlikely. The depotbank business for
German domiciled funds is provided by a large number of Siebel: The German market is becoming more competi-
indigenous banks. Here we can expect consolidation, driv- tive and consolidation is increasing, thanks to mergers or
en by increasing product complexity and technological acquisitions among the banking or insurance parents of
pressure. domestic asset managers. At the same time foreign asset
managers are making inroads on the retail and institution-
Keth: Competition in the German market is indeed al front. German asset managers are focusing on speciali-
increasing owing to a decreasing number of custody serv- sation, either concentrating on asset management or
ice providers and increasing cost pressure from clients. administration. This focus has led to the creation of the
The German custody market has already undergone fun- “Master-KAG”.
damental changes as evident from the Deutsche-Dresdner
deal. As for the independent domestic providers, The success of Germany’s transaction banks is based on
Commerzbank and HVB have been subject to merger two operational strengths: payment services and securi-
rumours for some time. Further consolidation can also be ties services. Discuss.
expected in the co-operative and savings banks sectors, the
latter of which is to be omitted from state guarantees from Carey: The provision of these services exemplifies the
the summer of 2005 onwards. These institutions may also demand for one-stop-shopping. At the core of this lies the
opt for outsourcing opportunities, where DWP, ETB and more fundamental desire of controlling costs, in this
TXB have established themselves as providers for securities instance through an outsourcing model.
services. On the other hand, international custody
providers, such as BNP Paribas, are also delving into the Crutchett: Activities that are beyond the client facing
German market. activity have been migrated to transaction banks. These
activities are mostly discrete or linked processes that occu-
Noesen: Further consolidation is likely but this is not py a small part of the complete value chain. The main
restricted to the German market. We expect consolidation drivers of this migration include the avoidance of technol-
to occur in the securities industry globally. The European ogy spend and unit cost reduction for commoditised
market is still fairly fragmented and is therefore likely to activity, while being able to retain the client relationship.
lead the trend in terms of consolidation. While German Keth: The outsourcing of payment and securities services -
custodians will be affected by multinationals seeking to as typical bulk transactions in the banking business - is the
create efficiencies and gain market share through mergers first step for German financial institutions. The demand
and acquisitions, competitiveness will remain key. Once for outsourcing solutions has led to the establishment of

transaction banks. At first, deals developed at a sluggish

pace and some of them folded during the project stage. Keth: The main focus has been online reporting as a value
But recent deals have included larger volumes such as the added service. This should include easy access such as
outsourcing of payment services by Deutsche and Internet or online file transfers. Emphasis also falls on
Dresdner Bank to Postbank. The fact that these services handling and flexibility in generating individual reports,
present the major operational strengths of German trans- including aggregated reports and reports that include his-
action banks is likely to change due to major changes into toric data. In addition, the possibility of downloading data
the legal framework, which opens further outsourcing into the client’s own network for further processing is of
capabilities such as fund-administration or risk manage- great importance to clients, as are short term updates,
ment solutions. which reflect continuous booking. Analytical reports such
as transaction cost analysis, risk management solutions
Noesen: Consolidation in the securities world is largely and performance analysis are also requested. Further
attributable to the transaction banking sector. While larger products like transition management, securities lending
institutions will be aiming to offer both services, the and repo, treasury or derivatives trading and settlement
smaller transaction banks will need to focus on either pay- remain key value added services, presenting a one-stop
ment services or securities services. So far two different solution for the client.
strategies have emerged. The first is in the form of trans-
Noesen: Institutional Investors are
increasingly looking at the quality of the
“Institutional investors are valuing the services service providers chosen by fund man-
offered by Master KAG, paticularly the provisions agers. At the same time, transparency
and risk awareness are becoming even
of consolidated reporting accross all investments” stronger drivers. Software such as
HSBC’s GFSRiskPlus application, which
action banks, which have been set up by large financial allows managers to extract risk measures such as VAR cal-
institutions to act as independent service providers to culations, stress testing, Monte Carlo simulations, market
securities settlement and payment processes. The second risk and credit risk on-line are becoming increasingly pop-
approach focuses on becoming the first entity to work ular. Web-based tools allow fund managers and their
with T-Systems, an independent non-bank IT service investors to access positions and reports 24 hours a day.
provider servicing custodian and transaction banking plat- In addition, it allows investors to evaluate their respective
forms on a joint venture basis. risk parameters. These are services that an investor should
now be looking for from the administrator.
Puetz: The banking industry is experiencing the most rad-
ical structural changes in its history. Globalisation, pan- Puetz: The severe losses, which German institutional
European deregulation and liberalisation of the financial investors have sustained as a consequence of the down-
sector, increasing deployment of high-performance infor- turn, has prompted a focus on portfolio diversification
mation technology, changing customer requirements and and hence take a deeper look into alternative assets like
the break up of the value added chain all lead to ever hedge funds. But these investors are still lacking in experi-
lower margins. In order to remain competitive, banks are ence with this asset class and will therefore have to avail
compelled to react to this drop in profits with a resultant themselves of external advisors for due diligence and
increase in cost pressure. In this respect, the production of research work, in order to handle the risks associated with
bank services can provide immense savings potential. such investments.
As markets move away from traditional investment strate- Siebel: Institutional investors are valuing the services
gies, institutional investors are increasingly looking for offered by a Master KAG, particularly the provision of
value added services. Which value added services are key consolidated reporting across all investments, from
at present? Spezialfonds to direct holdings. Reporting covers regulato-
ry aspects such as investment fund and insurance laws,
Crutchett: Cost efficient administration with daily portfo- sophisticated performance and risk measurement, and the
lio reporting (optimally with a direct link to investor’s ability to provide IFRS reporting on the basis of the hold-
own accounting system). IFRS and regulatory reporting ings of the fund. With the launch of a domestic KAG,
(e.g. VAG), VaR reports and performance attribution func- Fidelity has underlined the importance of a visible pres-
tions are also key. ence and close contact to the German market place.

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Commerzbank is regulated by FSA for the conduct of investment business in the UK
Now that investment laws have paved the way for UCITS rules, the variety of permissible assets has significantly
III, have institutional investors become more liberal with increased and the use of derivative instruments has been
their investment strategies and have hedge fund assets liberalised, including the possibility to use derivatives not
increased? only for hedging, but also for mere investment purposes.
Nevertheless, hedge funds are still outside the scope of
Crutchett: The expectation is that many institutional UCITS III. Thus, it is up to each EU member state to set
investors will increase their asset allocation in hedge funds. specific rules for hedge funds. Apart from some early-stage
It is still too early to highlight a definite trend. consultations, the competent EU bodies have not yet taken
any specific measures to “legalise” hedge funds.
Keth: Although the industry has been quite euphoric
about the introduction of hedge funds in Germany at the Siebel: The new Super-UCITS is eligible for investment by
beginning of 2004, less than EUR 1 bn was invested in both insurance companies as well as pension vehicles.
hedge funds at year-end. This figure is equal to 0,2 per However, we do net yet see widespread use of the possibili-
cent of the total volume of investment funds. The reasons ty under the UCITS directive to increase the market risk of
for this slow progree include unsolved regulatory details, the fund to 200 per cent because of the negative risk
adverse market conditions and high costs. Insurance com- weighting this implies for insurance companies. Similarly,
the investment by insurance companies
“The new provisions for hedge funds present and pension funds in hedge funds
remains limited, as these investors need
opportunities for asset servicing providers” to increase their regulatory capital to be
able to support large investment in such
panies are even further restricted as they can only invest a assets. As a result we expect a measured increase in assets
maximum of five per cent of their assets into hedge funds. under management in regulated hedge funds going for-
Due to current the obstructions, neither the investments ward.
into hedge funds nor the creation of hedge funds in
Germany have increased. Although Germany tends to be a Technology is becoming an increasingly important factor
conservative country, investments in hedge funds may for institutions when allocating mandates. To what extent
increase over time if positive experiences are observed. But does technology drive your industry and what systems
due to the difficult risk assessment of hedge funds, it is changes or implementations has the industry made in the
expected that assets to be invested will remain limited. past 12 months?
Noesen: There has not been a significant increase. The Carey: It is apparent that the SWIFT network and messag-
German hedge fund market saw an inflow of roughly $1 ing are becoming common methods of communication
bn of assets in 2004, which was below expectations. for clients. From our own perspective the increased inter-
However, only time will tell. We believe that as institution- est in SWIFT has been borne out by the growing number
al investors become more comfortable, they will allocate of firms committing to process SWIFT messages on an
larger sums to hedge funds in Germany. As mentioned outsourced service bureau basis during the last 12 months.
previously, both pension funds and insurance companies Seven new German clients have joined our SWIFT Service
will be looking to use their five per cent allocation in an Bureau from a broad spectrum of service groups, includ-
effort to diversify risk. Education and knowledge on the ing KAGs, a transaction bank, and the data provider WM
sector is on track and with the more liberal regulatory Daten, who contracted ADP to convert their corporate
environment (such as the UCITS III), the long term out- action information to ISO 15022 standards for distribu-
look for the German hedge fund industry looks positive. tion via SWIFT. To that end, ADP has advanced its tech-
The outlook will become more positive once there is clari- nology within the SWIFT Service Bureau to provide a new
ty on the exact details and impact of the New Investment user interface and controls to allow clients to maximise
Modernisation Act. STP rates with their SWIFT messaging. This is known as
the SWIFT Transaction Manager. Interfacing and messag-
Puetz: UCITS III has brought Europe one-step closer to ing in general continue to evolve. ADP has adapted to this
integrating its financial services community and facilitat- change within its tax products by offering XML defined
ing asset pooling for global companies. The recent changes message interfaces to minimise the cost of integration.
are paving the way for a single market for financial servic-
es in Europe and could lead to liberalised investment Crutchett: Many asset managers were traditionally slug-
strategies among institutional investors. Under the new gish to invest in new technology. This has changed.

Leading firms, such as DWS, have made and are continu- groups. Furthermore, the Master-KAG structure is very
ing to make significant technology investments through- efficient for institutional investors seeking multi-manager
out the value chain. The past 12 months have featured structures. Consolidation will probably outweigh the
implementations in investment accounting, fund account- number of new entrants who are likely to focus on niche
ing, compliance, client reporting, risk management appli- strategies (hedge funds, structured products, quant, etc.).
cations and distribution servicing platforms. Given that the larger players have the scale and have
already invested in new technology, the opportunities for
Keth: Custody services have developed into a combination service providers are likely to be among medium and
of high level of STP rates and seamless and effective infor- small size KAGs as well as new entrants.
mation delivery, offered by highly qualified and dedicated
people. Due to clients’ ever increasing cost sensitivity, tech- Keth: From an asset allocation perspective, KAGs tend to
nology – expressed in high STP rates - has become a key invest more into over-the-counter, exchange traded deriva-
issue in the custody business. Substantial investments have tive products and structured products. This investment
been made and this will continue, in order to reduce man- behavior leads to an increased demand for sound risk
ual input. Future threats will include the implementation management solutions offered by asset servicing providers.
of SWIFT 20022 UNIFI formats and the increasing Further opportunities for asset service providers evolve
demand for SWIFT based solutions from
institutional investors like KAGs. As for BHF-
BANK, major investments have been made to
“full lift-outs will be rare wheras component
support the implementation of the ISO 15022 based outsourcing will increase”
standard and to prepare a flexible and cus-
tomised reporting matrix. Furthermore, a risk measure- from the introduction of hedge funds as well as from an
ment tool has been developed in co-operation with the increased demand for outsourcing solutions. These solu-
software provider Algorithmics in order to assist clients to tions may include depot banking and fund administration
comply with the requirements of the derivatives ordinance services. Some asset-servicing providers have already
(DeriV). The preparation of an Internet based reporting carved out their territories in the hedge funds industry,
tool with download functionalities is also in full swing. even though this sector has not developed as expected.
These providers include Citigroup, which already has
Siebel: The German KAGs, especially those focusing on established a Master-KAG to offer prime brokerage and
administration, have made huge efforts towards achieving depot banking as a one-stop solution to hedge funds.
internal and external STP. More than 2O KAGs are in the Increasing investment volumes in Germany, due to
process of implementing automated trade confirmations increasing privately organised pension schemes, present
and settlement instructions (MT 515/ MT541/3) on assets further opportunities within the KAG market.
under administration to the tune of EUR 350 bn each. In
response to this BVI-led STP initiative, more than 20 Noesen: Our aim is to provide tailored and flexible con-
international brokers are also implementing MT515 mes- nectivity to our client base, ensuring that technology is an
saging schemes. As of December 2004, all German KAGs enabler both externally and internally. We recognise that
are internationally, uniquely identified by the Bank technology is an important component in the hedge fund
Identifier Code (BIC), which allows for easier reporting industry and, as a specialised hedge fund administrator,
and trading in both national and cross-border situations. our technology strategy evolves as the needs of the indus-
try changes. Working with leading technology vendors is
Comment on opportunities within the KAG market. Do one of its cornerstones. We have worked with US-based
the new provisions for hedge funds present opportunities Advent Inc. – a software development company – and
for asset servicing providers? Koger NTAS to provide our core accounting and investor
servicing systems. More recently, we have added to the
Carey: The KAG market is regarded as one of the fastest initial offering using an open-architecture web based
developing areas of the German financial market. There is channel.
a great drive to improve procedures to cater for increased
transaction volumes. The BVI is driving the use of SWIFT Puetz: The implementation of UCITS III has not only
to create communication standards. increased the possibilities to use derivative instruments in
portfolio management but has also facilitated the out-
Crutchett: There are about 70 KAGs in total, with the sourcing of fund management and administration services
market being dominated by a small number of large to third parties. This should on the one hand create new

business opportunities for structurers of derivative instru- of lift out deals. On the other hand, international market
ments, which could be offered to German funds. On the participants doubt that the full back office lift out deals
other hand, there should be a growing demand for fund would have a brilliant future, as they are too cost-intensive
support and administration services (like fund accounting due to their individualised structure. Only large market
or risk management) which, due to a comparably small participants are able to gain sufficient experience to cope
local infrastructure, could create additional opportunities with these deals in a cost efficient manner. Furthermore, in
for well-experienced foreign service providers. conjunction with an increasing flexibility in other aspects -
such as reporting or technical infrastructure - a compo-
Siebel: The new provisions for hedge funds present nent based outsourcing form will become more likely,
opportunities for asset servicing providers. But also on the probably in a core satellite structure.
traditional long only fund side the German market,
including the Master-KAG, remains attractive for asset Noesen: We anticipate the Master KAG route to be widely
servicing providers, as evidenced by the ever-increasing adopted in Germany by new hedge funds and funds of
share of Spezialfonds, which are managed or advised by hedge funds. An alternative is the Investment AG, which is
third party managers. Currently one third of Spezialfonds similar to a Luxembourg SICAV. HSBC has teamed up
assets are managed externally. with INKA, the Master KAG and a wholly-owned sub-
sidiary of HSBC Trinkaus & Burkhardt.
“The development of more specialised Unlike many of the 60 KAG’s who are
service providers will lead to further supporting their own business, INKA
acts as the administrator to third party
component based outsourcing” funds but with the additional benefit of
value added services such as risk management and compli-
Comment on the future of outsourcing in the German ance. As with custodians, we are likely to see consolida-
market. Can we expect the full back office lift out deals to tion in KAGs, as they are pushed by their boards to decide
increase or will component based outsourcing form the whether to focus on investment management or look at
basis of client contracts? administration only. The new Investment Modernisation
Act could provide a business option for a handful of
Carey: Earlier attempts at outsourcing have left some serv- Master KAGs, i.e. those who will specialise, who will gath-
ice providers with a small number of clients. In such mod- er knowledge over time and who will not shy away from
els, the provider may find it a greater challenge to make the considerable IT investment.
profit and pass economies of scale to its early adopters. In
addition, I believe that some clients have suffered from the Puetz: The new outsourcing rules should surely help to
need to grow their infrastructure to monitor and control facilitate enhanced outsourcing activities in the German
the service provider. Again, this has impacted the business fund industry. There is already a certain form of process in
benefit of such arrangements. One would suspect that a place, which governs the current outsourcing transactions.
more mixed model would be adopted in operational out- So far, outsourcing has primarily been made on a compo-
sourcing moving forward. By this we mean that the full nent basis but there is a certain tendency towards full back
“lift out” option will not be taken up but selective func- office outsourcing. KAGs are offering their fund platforms
tion-by-function lift outs will be attempted. The service as a tool to bundle the administrate investment activities
provider will identify the unique functions that the new under one “umbrella”, while using various external man-
prospect possesses and attempt to extract these. It will agers.
wish to leave behind the core functions for which it will
already possess capabilities. Evidently, this may be affected Siebel: Outsourcing of both asset management and asset
by local labour laws. servicing has been accepted in the German market place.
However, owing to the lack of dedicated outsourcing part-
Crutchett: In my opinion full lift outs are likely to be rare ners, most back office outsourcing tends to be with other
whereas component based outsourcing will increase. KAGs, which take over the fund accounting. The develop-
ment of more specialised service providers will lead to fur-
Keth: Looking back, full back office lift-out deals have not ther component based outsourcing. BVI is supporting
been common in Germany. Nevertheless, the new invest- these trends by conducting research on the identification
ment law broadens the possibilities for outsourcing e.g. of and description of the individual processes within an asset
fund administration for investment institutions KAGs manager, in order to enable the provision of standardised
which might mark a milestone for the future development component outsourcing to KAGs.

SPONSORS OF
TOMORROW’S PEOPLE
ISJ ESSAY COMPETITION 2005
Investor Services Journal has Categories:
launched a competition to seek
out tomorrow's stars in securities · Compliance / Regulation
services. The competition is · Hedge Funds
open to any student of an area
of securities services to write · Outsourcing
2000 words on questions set in · Risk Management
one of the following categories to
win US $2,000: · Technology in Financial Services
Academic Advisory Panel Questions in each category are available online at www.ISJforum.com
Professor Eva Liljeblom
Dept. of Finance and Statistics, The winning entrant will receive a prize of USD 2,000.
HANKEN Swedish School of Economics
and Business Administration
The deadline for entries is 4th May 2005
Professor Frank Kirwan
Royal Bank of Scotland Visiting Professor of Strategy
The University of Edinburgh Management School Industry Judging Panel
Associate Professor Narayan Naik - Essays will be judged our panel of industry experts:
Director, Centre for Hedge Fund Research and Education
London Business School Accenture - Chris Broyden, Partner, Capital Markets Practice
Christian C.P.. Wolff, Ph.D
Program Director HSBC Securities Services – Paul Stillabower, Head, Business
Amsterdam Institute of Finance Development
Dr. Sami Tamer
Lecturer in Finance BNP Paribas Securities Services - Tony Solway, Head, UK
School of Management and Economics
The Queen's University of Belfast Citigroup Global Transaction Services - Giulio Di Cerbo, Managing
Margaret Woods Director, Head of Banks and Broker Dealers
Senior Lecturer in Accounting and Finance
Nottingham University Business School JPMorgan - Mark Austin, Head of Strategy, Investor Services EMEA
Christopher Cook
Head of Division and Field Chair - Accounting and Finance State Street - Jeff Conway, Managing Director, Investor Services
Head of Division - Information Sciences
University College Northampton
The prizes for the winner and certificates for the runners up in each
Trainers - Center for Interactive Financial Training (CIFT) category will be presented at a reception, which will also be attended
Robin Brown
Capital Consultancy Ltd by the Industry Judging Panel, members of the Academic Advisory
Paul Meadows Panel and the ISJ team. The reception will take place in June 2005.
Director - Chadley House Training
Andrew Street For further information about the Competition including the
Managing Director - Value Consultants Ltd questions and the rules, please visit our website www.ISJForum.com
ISJ would like to thank the Academic Advisory Panel,
comprising the above individuals who set the essay questions. www.ISJFORUM.com
Corporate Actions
The securities industry appears The case for corporate actions standardisation has been
effectively established in the past few years with leading
to be striking the right chords in industry bodies like the Giovannini Group and the Group
of Thirty (G30) highlighting the need for automation. As
corporate actions standardisation. the January 2003 G30 study stated, “Corporate actions,
across the market are the major source of financial loss
attributable to operational failure.” Another report by the
Rekha Menon highlights the Depository Trust & Clearing Corporation (DTCC) further
most notable efforts in the quantified the risks associated with corporate actions pro-
cessing, stating that failure in handling a single, complex
search for standardisation. corporate action has the potential to result in losses run-
ning into tens of millions of euros.
Progress?
While complete standardisation is still a long way off, it
is almost universally acknowledged that current standardi-
sation initiatives are working in the right direction. The
key initiative that has made a significant impact is the
The Quest for

SWIFT ISO 15022 message format. Despite a slow initial
uptake, ISO 15022 is considered the defacto industry stan-
dard for corporate actions, and all the participants in the
Standards
corporate action lifecycle from data vendors to the custo-
dians are implementing the standard. However, 15022 has
its own pitfalls, the main being differing interpretations of
the standard by individual firms. Industry experts state
that this is essentially because the standard is too open and
flexible. So the way Firm A interprets and represents a par-
ticular corporate actions event might be quite different
from the way Firm B does. Differences in market practices
across geographies and the slow adoption of the 15022
standard has further compounded the problem.
Forum
To SWIFT’s credit, the standards organisation has taken
cognisance of the interpretations problem, and in April
last year, it initiated a corporate actions operations forum
comprising top global custodians, investment managers
and broker/dealers, with the objective of agreeing on the
interpretation of ISO 15022 messages. In addition, SWIFT
created the market data providers user group with a man-
date to achieve a standard approach for the implementa-
tion of ISO 15022. There are 10 vendors already members
of this user group and the group has outlined twelve key
principles on how corporate actions should be implement-
ed. “It was a real bonus that SWIFT formed this group.
Without this initiative, vendors would have implemented
ISO 15022 in different ways,” comments Nat Sey, manager
of infrastructure and delivery at market data vendor, FT
Interactive Data. Sey however adds that although all the
ten vendors were active members of the group, only a
handful have thus far implemented the principles or have
plans to do so. Interactive Data itself launched its ISO
15022 service in August last year and is currently in the
process of connecting to SWIFTNet.
According to Darryl Twiggs, product manager at
SmartStream Technologies, aside from the work being
The new hymn sheet? done by the market data providers user group with regards
to 15022 interpretations, another reason why the (data

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Corporate Actions
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web based VRT (Voluntary Response Tracker) enables fund managers to
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determine their action in real time.
Cash Management
Standard message handling (SWIFT, 15022) enables corporate action information
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Corporate Actions
standardisation) issue will get sort-

ed out is because all the vendors
are working to meet the 15022
design deadline by 15th May 2005.
“This means that their data will be
in the same version,” he says.
Another organisation that is
working towards refining the ISO
15022 messaging format, is the
DTCC. “The 15022 standard is
great, however it only goes to a cer-
Brett Lancaster tain extent in solving the problem,”
states Brett Lancaster, vice presi-
dent of DTCC's Global Corporate Actions business.
“Corporate actions are very complex, and 15022 does not
fully address the granularity of information required for
corporate actions processing. We have been working to
develop best market practice guides that set usage rules for
ISO 15022 corporate action message standards, seeking to
create globally harmonised market practices,” says
Lancaster.
Validation
The DTCC’s Global Corporate Actions (GCA) Validation
service, which was
launched in 2003
“Corporate actions, across the market are to provide good
the major source of financial loss quality, clean and
timely corporate
attributable to operational failure” actions data glob-
ally and boasts of
customers like UBS, currently produces data in DTCC’s
proprietary format. However, recognising market demand,
DTCC is producing an ISO 15022 version as well which
should be ready in the next three months. “Then cus-
tomers can decide in which format they want to take in
data, our proprietary format or the ISO 15022 format,”
states Lancaster
Source
While efforts to further improve the ISO 15022 standard
are commendable, industry experts contend that the most
effective way to resolve the problem of inconsistent, bad
quality corporate actions is to go for standardisation right
at the source, when an corporate action announcement
happens. The logic being that ensuring that information
about a corporate action is announced in a standard, con-
sistent and complete format by the entity most familiar
with the specific details is the most effective way to address
the risk associated with identifying and interpreting the
information. “We are arguing that the issue should be
resolved at-source so that companies report on any event
in the same format,” states Lancaster. He says that DTCC
supports the efforts being made by ISSA (International
Securities Services Association) and SIA (Securities
Industry Association) in this respect explaining that glob-
ally, an ISSA committee is working to obtain agreement on

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Speaking your language

A corporate actions language fit for the global village
FT Interactive Data’s ISO 15022 global corporate actions FT Interactive Data is delighted to offer new and existing
service went live on 2 August 2004. ISO 15022 is customers immediate access to this new global service.
considered as a positive catalyst for corporate actions
processing and can help to reduce risk and increase Clearly speaking, FT Interactive Data is helping to lead
operational efficiency. the way in global corporate actions data.
FT Interactive Data has provided global corporate Take advantage of immediate access – please call Nat Sey
actions event data for over 30 years and has a wealth on +44 20 7825 8744 or email: ISO15022@ftid.com today.
of experience in gathering, updating validating and www.ftinteractivedata.com
delivering this data. By mapping its corporate actions data
to the MT564 event types specified within ISO 15022,
FT Interactive Data is an Interactive Data company

Corporate Actions
a standard set of announcement data elements and in the

United States, the SIA’s Corporate Action Division has pro-
posed that a template of corporate action data elements be
agreed upon. In Europe too, the RDUG (Reference Data
user Group) is working towards achieving at-source stan-
dardisation. “There is a ground swell of opinion that the
corporate actions issue should be resolved at the source,
the issuer and agent level to avoid interpretational risk,”
says FT Interactive Data’s Nat Sey, a member of RDUG,
describing the inefficiencies involved in corporate action
processing in the current environment where the issuer via
its agent announces a corporate event. That announce-
ment takes the form of a Word document or perhaps a
PDF file and the content is generally unstructured text.
Any third party such as a data vendor wishing to process
the event must first
attempt to interpret
“There is a ground swell of opinion that the corporate the content, which is
actions issue should be resolved at the source, the a complicated affair
taking into consider-
issuer and agent level to avoid interpretational risk” ation the endemic
inefficiencies of the
process, differences in regional practices and the complex
nature of individual corporate events. “At Interactive Data
we have literally hundreds of people dealing with data and
structuring it,” says Sey.
Action
While currently there is minimal automation with
regards to the capture of notifications from the issuer, the
London Stock Exchange’s recent announcement to offer all
its corporate action announcements using the ISO 15022
format is an example of an increased momentum in the
adoption of standards in the marketplace. London Stock
Exchange is the first stock exchange to implement this
standard and industry reports suggest that other stock
exchanges will follow suit.
To further assist the process, the RDUG is proposing that
Existing stylised illustration of the participants in the

corporate action chain (based on the UK model)

How far can you
go with corporate
rather than using a text-based document to make an event
announcement, the issuers can instead use an intelligent
actions?
document format that requires them to do no more than
select from drop-down boxes and build their event on the
fly. Such a formatted document could then be provided to
the market. Nat Sey believes that such a document promis-
es huge efficiency gains to the industry. In the next couple
of months RDUG plans to create a pilot environment
where this intelligent document format can be tested.
In addition, the organisation is planning to continue and
expand its dialogue with other industry bodies involved in
standardising the corporate actions space such as the
European Central Bank and the European Central
Securities Depositories Association.
It remains to be seen how RDUG’s intelligent document
format suggestion will fare, but there can be no doubt that
the industry has come a long way, and such initiatives and
regular dialogue between industry participants will soon
bear fruit.
> Event Calendar
> Proxy Voting

Workplace Portal
> Voluntary Action

Workplace Portal
> CAES Utilities
Our answer is: really far. And what’s more, you can go really far
without leaving your desk. For instance, you can proxy-vote
with your Internet browser, no matter where the General Meet-
ing is. You can rely on high quality corporate event messaging
and streamline your notifications workload with multilingual
text blocks. And there’s so much more to CAES, Corporate
Actions Enhanced Services, by SIS SEGAINTERSETTLE AG. Go for it.
Now you’re working state-of-the-art.
Source: DTCC
Member of the SIS Group

SIS SEGAINTERSETTLE AG, Brandschenkestrasse 47, CH-8002 Zurich, Phone: +41-1-288-4511
Fax: +41-1-288-4512, office@sec.sisclear.com www.sec.sisclear.com
Corporate Actions
A strange thing is happening in the securities industry.

People, often from within the same sector and from com-
Will Intelligent peting companies, are working with one another for the
betterment of the whole industry. Since when did com-
petitors become so friendly? Could it be since they bought
Document into the idea of standardisation of the core components of
their offerings – on which there is no gain to be had in
competing with one another?
Format put Fed up with the inefficiencies and difficulties that the
industry faces on a daily basis, we all yearn for a more pro-
ductive, lower risk environment in which to do business.
Issuers in the This yearning is manifesting itself in the formation of sev-
eral industry groups that are taking it upon themselves to
explore the causes and seek potential solutions.
Limelight? The Reference Data User Group (RDUG) is one such
group. Founded by Dr Anthony Kirby and John Gubert of
HSBC Holdings in June 2002, the group now acts as a vir-
tual, not-for-profit forum and consists of more than 156
practitioners and suppliers. It has coupled with other
market associations and industry bodies both in Europe
and North America to further its goals by improving
cooperation. RDUG’s terms of reference describe it as ‘a
forum where representative members of the global securi-
ties markets can discuss and agree on solutions for key
market issues pertinent to STP’. RDUG has at different
Nat Sey points throughout the past two years established three sep-
arate work streams: Unique Instrument Identification,
Legal Entity Identification and Corporate Actions. The
latter stream deals with issues that the industry has identi-
fied as those requiring attention from the perspective of
the existing use of standards. It also looks at the role that
issuers play in the processing chain. And it is now the turn
of the issuers to hog the limelight.
What if, rather than simply Correctly Interpreting an Event
using a text-based document to Few would describe the way that global corporate
actions are processed today as efficient. The issuer, perhaps
make an event announcement, via their agent, announces a corporate event, which takes
the form of a Word document or perhaps a PDF file and
issuers instead used an the content is generally unstructured text. Any third party
intelligent document format that such as a data vendor wishing to process the event must
first attempt to interpret the content. Given the inefficien-
required them to do no more cies, differences in regional practice, as well as the indus-
try’s penchant for coming up with weird and wonderful
than select from drop-down asset types and event combinations, we might justifiably
be surprised that the process works at all.
boxes and build their event on Ironically, however, it is in the issuer’s interest that the
the fly? event is correctly interpreted and therefore understood: in
the case of an elective event, this will have a direct bearing
Nat Sey, FT Interactive Data’s on its take-up. And it is in the data vendor’s interest to
interpret the event correctly as the vendor will be judged
manager of infrastructure and by customers, at least in part, on the basis of the accuracy
delivery, and member of the of content. Clearly, it is also in the market practitioner’s –
e.g. the investment bank’s – interest to reduce risk and try
Reference Data User Group to avoid potentially costly errors as far as possible.
Given all this, one might reasonably ask why on earth we
(RDUG) and its corporate are still making do with a less than ideal process.
actions working group, Removing Interpretation from the Equation
investigates. As with so many other efficiency related problems, tech-
nology certainly has a part to play. ISO 15022 – and its

Corporate Actions
comprehensive corporate actions’ dictionary – is still rela-

tively new to the party. And today’s bandwidth availability
makes verbose languages a breeze to transmit and process.
Technology is only part of the solution though. The
heart of the answer is of course to push the codification
process further up the chain of events and to virtually
remove interpretation from the equation. If issuers them-
selves were to make structured event data available, most
observers agree that interpretational risk would be reduced
to negligible figures.
When this has been suggested to issuers in the past their
response has been, whilst not frosty, decidedly chilled.
This is due to the assumption that costly resources would
have to be allocated to the implementation and mainte-
nance of expensive automation solutions. It is now time
for that idea to come in from the cold: RDUG has an ace
up its sleeve.
The Intelligent Document Format

What if, rather than simply
using a text-based document to
make an event announcement, the
“If issuers themselves were to make structured event
issuers instead used an intelligent data available, most observers agree that interpretational
document format that required
them to do no more than select risk would be reduced to negligible figures”
from drop-down boxes and build
their event on the fly? In the case of a rights issue, the first
drop-down box might be for ‘event type’, and selecting this
would provide three additional drop-downs – ‘number of
new shares’, ‘number of old shares’, ‘issue price’, and so on.
This would require no more resource than simply writing
the event out in prose. Such a formatted document could FT Interactive Data, an Interactive Data company, has
then be provided to the market and, if absolutely neces- been a provider of corporate action event data for over
sary, used in the same way as present – with content aggre- 30 years and has a wealth of experience in gathering,
gators having to apply their interpretation of the event updating, validating and delivering corporate actions
before passing it on to their customers. Where such aggre- data to back office environments. In August 2004, FT
gators have the facilities, however, they would be able to Interactive Data launched its ISO 15022 service – the
extract the component parts from the document and culmination of significant development work to map
process the corporate actions event in all its structured global corporate actions data from its proprietary
glory – perhaps transforming it into an ISO 15022 MT564 formats to the MT564 event types specified within the
for onward dissemination to their customers. This would industry data standard. The ISO 15022 service is
provide ‘backward compatibility’ with huge potential effi- available as an optional module within FT Interactive
ciency gains at the same time. Data’s FTS online desktop portfolio administration tool.
Anthony Kirby does not believe that RDUG should be
prescriptive about the solution: “RDUG exists to identify FT Interactive Data has participated in open standards
process deficits and the business cases for change – not forums for a number of years. Initiatives such as the
invent standards nor dictate technology solutions which Market Data Provider User Group, Reference Data User
are the rightful remit of other industry efforts and the Group and ISO Working Group 11 are all contributing
supplier community. We look forward to expanding the towards making an even playing field, with fantastic
dialogue further during 2005 with the issuer communities transparency upon which the more dynamic data
and their agents across the European Union, by partnering vendors can build real added value. Easier access to
with bodies such as the European Central Bank, the that added value is achieved because the more vanilla
European Banking Federation and the European Central offerings are easier to process, and as a result, this frees
Securities Depositories Association, as well as engaging up valuable resource to concentrate on the integration
further with relevant bodies in the UK such as the and execution of those added value components.
Institute of Chartered Secretaries and Administrators, the
Financial Reporting Council and the Financial Services For further information please contact Nat Sey.
Authority. Experience has taught us that the challenges Tel: +44 (0) 20 7825 8744
are not insuperable if industry bodies remain focused on Email: nat.sey@interactivedata.com
their core missions and couple to other industry efforts www.interactivedata.com
underway to avoid reinventing the wheel.”

STP and Automation
extremely active in this regard, integrat-
PaperWait ing the elements of order routing, cash

and securities settlement, and asset serv-
icing. “The platform enables fund buyers
to easily interact with more than 400
TAs,” says Logier. “Previously the buyers
The nightmare scenario for any financial
As the securities industry institution is a three-day backlog of
would have had to maintain a separate
operational relationship with each TA.
wrestles with a unprocessed fund transactions piling up
in the back office, exacerbated by the
On the other side, fund promoters now
see hundreds of fund orders routed cen-
paper-based phone ringing off the hook, to the sound trally from FundSettle, instead of a bar-
of angry clients and more instructions. In
environment, the the meantime, trades continue to pour in.
rage of orders from 100 to 150 disparate
distributors. The savings in terms of net-
potential of STP solutions While the scenario is not as fanciful as
some may think, the reality is that the
work costs, technology and staffing are
immense.”
increases. potential European paper crisis will radi- FundSettle’s integration of the three
cally shake up the investment funds main fund-processing functions on a sin-
industry. As Thierry Logier, head of gle platform is central to Euroclear's
Investor Services Journal Investment Funds Product Management
at Euroclear, succinctly states: “Certain
investment-fund strategy. Today, the plat-
form covers approximately 23,000
looks at the concerted parts of the fund-market infrastructure
are beginning to creak as more and more
domestic and offshore funds, having
added more than 3,000 funds in 2004 and
efforts of fund platforms investors rely on funds for their privately a large number of financial institutions
managed pensions, and contribute to
to address the paper- company-based investment-fund plans.”
are using the platform as their preferred
STP solution. These institutions include
intensive processes of It is a mystery why great numbers of
fund distributors, transfer agents (TAs)
retail banks, investment banks, private
banks, global or local custodians, and
today and fund promoters do not prepare fund supermarkets. Platforms such as
themselves for the inevitable, considering these add value to third-party fund dis-
that the infra- tributors, who distribute a wider and
structure and more operationally complex range of
technology exist funds. “The distributor can rely on the
today to avoid the efficient and automated flow of transac-
paper crisis of tion information, from routing to settle-
tomorrow. But, ment to custody, thereby guaranteeing
with so many the timely and correct payment of their
solutions avail- trailer fees,” says Logier. “If there are
able, which set of chinks in that chain, then invariably these
criteria should be fees will be delayed and/or incorrectly
used to assess calculated.”
them? The Rather than maintaining relationships
Thierry Logier answer is as com- with multiple suppliers for the provision of
plex as the envi- information in their respective parts of the
ronment in which the fund industry chain, fund-market participants are increas-
operates: fragmented processing meth- ingly using a single service provider, which
ods, complex webs of communication offers all three elements of fund processing
links between TAs, distributors and pro- under one roof, in the hope that the real
moters, differing regulatory environ- risk of information depreciation along the
ments, low levels of straight-through pro- chain will then be eliminated. Pure STP
cessing (STP), increasing third-party fund between order routing, settlement and asset
distribution and, of course, heavy reliance servicing is now an imperative, whereas
on paper. manual intervention perpetuates unneces-
sary costs and risks.
Taking Paper out of the Mix Another area where the financial servic-
If the European fund industry is to es industry is drowning in paper is in
avoid or at least mitigate the impact of a fund documentation, with pile upon pile
paper crisis, then more of its participants of prospectuses gathering dust in the cor-
must look to embrace solutions that ridors of financial institutions. Again,
automate and simplify the exchange of platforms such as Euroclear’s offer a solu-
information. Investment fund platforms tion: “In the near future, FundSettle users
such as Euroclear’s FundSettle, have been will have online access to all fund

STP and Automation
prospectuses. Moreover, they will also be tion information.” rately between all of the relevant parties.”
able to review all relevant operational Logier remains confident that full-service
details of the funds, from the platform’s solutions will prevail: “This is competi- High Tech or no Tech?
own database,” says Logier. “All information and natural consolidation at work, Change is permeating most corners of
tion will be easily downloadable.” with the market choosing the solution Europe’s capital markets, and the funds
that best services its needs,” he says. sector is no exception. While change to
A Paperless Standard date has been slow, Logier feels that
Underpinning fund-processing solu- Third-party Fund Distribution momentum is on the increase for STP in
tions like FundSettle are the new fund- Despite advances in fund industry fund transactions. In the coming five
transaction messaging standards from automation made possible by existing years, he predicts STP levels of very close
SWIFT. SWIFT is currently promoting a platforms, says Logier, the funds indus- to 100 per cent across the main cross-
new XML standard, ISO 20022, which try’s development of open architecture border and domestic fund markets and,
will further advance the standardisation models, whereby distributors extend their as a result, far less paper in circulation.
and efficiency of the investment funds products to include third party products, He also predicts that the number of funds
industry. “While the market is hesitant to remains limited. on offer will stabilise, as promoters con-
embrace yet another standard so soon “Many fund distributors note that their solidate the range of funds on offer. “This
after ISO 15022, we expect a gradual customers want more than just a wide trend will accelerate as the asset-manage-
pick-up of the new XML format in the range of funds. In addition to being ment sector continues to consolidate,” he
coming one to three years,” says Logier. offered choice, more fund investors are says. “To this end, we would expect to
“It will probably be adopted sooner in demanding tailor-made advisory services service well over 35,000 funds on
those markets operating without or with from their distributors about the funds FundSettle by 2010. In the future, clients
a limited SWIFT infrastructure, and/or offered. Thus, fund distributors, rather will be looking for value-added services,
small amounts of technology investment than selling scores of relatively generic and not merely order-routing engines
that need to be amortised. Euroclear is funds, are instead offering a portfolio of that must be plugged into separate settle-
fully supportive of SWIFT’s efforts and best-of-breed funds in cooperation with ment and custody service providers.”
our fund platform will soon become strategic partners. There is a threshold to Streamlining operational flows from
compatible with the new XML standard.” the number of funds that any one organi- trade inception to the reporting of a set-
Going forward, it is expected that sation can sell. Moreover, it is a selective tled transaction through a centralised,
financial incentives will reward STP and business; a major retail bank is likely to single-access point is clearly one of the
ensure further standardisation and choose a handful of trusted and capable obvious ways to modernise the European
automation in the funds industry. In the promoters that will provide assistance in funds industry. Greater efficiency, lower
meantime, Logier asks, “Why not corre- staff training, client servicing and fund costs, reduced risks and better informa-
late transaction fees with the levels of promotion. Ultimately, a fund promoter tion quality can all be achieved through
STP that a given transaction attains? assumes a certain level of responsibility STP technology. Service providers like
After all, why should those companies for the way in which its funds are sold Euroclear are intent on bringing the
that have made investments to streamline and serviced. So too does the distributor. industry back from the brink of a paper
their businesses have to subsidise others It is, therefore, solid business sense for crisis. Logier concludes: “Platforms like
that rely largely on manual processing?" promoter and distributor to centralise ours will help to transform the growing
their business onto a single robust and intricacies associated with cross-border
A Competitive Market efficient processing platform, where and domestic fund-processing into
FundSettle is by no means the only solu- information flows seamlessly and accu- mounds of paper confetti.”
tion to more sophisticated European fund
processing. EMX and Vestima+ are two Paperless Platform
other fund solutions that are in service
today. In contrasting these with his own
platform, Logier says: “These are “order-
routing only” systems, de facto unbundled
from settlement and asset servicing.
Detaching settlement and custody from
order-routing could work well in mature
markets operating under the CSD model,
where it is merely a question of routing the
orders to the local CSD. But, as cross-bor-
der fund transactions continue to grow, an
“order-routing only” solution will not pro-
vide the STP settlement or custody features
that also serve to accommodate the dis-
crepancies in market practice from one
country to the next. Nor will it provide a
unified reporting mechanism that cen-
tralises domestic and cross-border transac-

STP and Automation
control teams. From a financial point of view, evaluating
Strengthening the payback of an investment in this area should normally

take into account the savings in every department and
should not be considered as a standalone process.
Fortunately for the entire securities industry, the business
the Weekest Link case of such automation is self-sustainable, with direct
savings. One could also consider other financial benefits
such as bonuses.
Before entering the process of benefit evaluation, we have
to keep in mind that both distributors and fund providers
are facing a similar but reversed situation: distributors will
of course benefit from the automation of order process-
ing towards several fund providers, while fund promoters
will benefit from similar improvements by automating
orders coming from several distributors.
Before proceeding with this analysis in the context of
full STP order management in the fund distribution
process, one can easily think that, by using faxes to send
orders to a fund, a distributor is, directly and indirectly,
penalising not only itself but the fund performance and
the other shareholders too. Hence it could be understand-
able that fund promoters would want to link a trailer fees
Bruno Zutterling policy to the efficiency of systems implemented by the
distributor for order and settlement processing.
While full automation in the Debates
Coming back to theme of this article, if it is now widely
securities industry may seem a accepted that an automated process ensures greater effi-
long way off, service providers ciency, there are still debates concerning the solutions to
be used in respect of expected benefits versus costs. For
continue to build machines to distributors, it is clear that they have to choose one of
several solutions, from automated faxes to total externali-
make this goal possible. Bruno sation. However, for fund promoters or their agent, the
Zuttlerling of Clearstream situation is slightly different, as they have to accommo-
date and sometimes suffer their customer’s choice. As
explains how automation is there is no reason why several distribution networks in
different countries apply the same means of automation,
within reach the promoter’s agent will have to cope with several sys-
tems and formats, increasing the global complexity of the
When discussing the subject of automation in the
problem.
securities industry, one should first consider the various
As the choice of automation mechanism is mainly in
processes involved across the full length of the value
the distributor’s hands, it is important to identify which
chain. Indeed, a partially automated system is like a
level of automation would best suit their requirements
chain with the strength equivalent of its weakest link.
and, given the fact that several possibilities could be con-
Today, owing to the intensive use of faxes for order pro-
sidered, it could be useful to isolate the advantages and
cessing, any fund distribution organisation has a weak
costs of each possible solution for each player. By clarify-
link, which triggers inefficiency in every other area of the
ing the advantages of each level of automation, we are
business. In fact, by streamlining operations from the
then able to identify the best solution for each player.
front office to the middle and back offices, automated
However, for a given level of automation, constraints and
order processing not only brings direct savings generat-
efficiencies will not be the same for distributors and
ed from automating a manual process and reducing
providers and we have to take into account that an opti-
error rates, but also triggers further savings in down-
mal solution for one side is not necessarily the best solu-
stream processes like the commercial management of
tion for the other side.
distributors and fund providers, trailer fee reconciliation
The fax could be a partial solution for very small distrib-
and settlement efficiency.
utors such as independent financial advisers. However,
this tool cannot be considered as an industry solution as
Benefits
it lacks important functionalities such as audit trails, vol-
Hence, from a company point of view, the decision to
ume management and non-repudiations. Furthermore, it
automate an order process should involve many depart-
is hard to imagine an industry that adopts the same fax
ments within the distributor or the asset management
template and operates in a fax-only environment.
company, from the commercial teams to the audit and
The means, which really enable market players to man-

STP and Automation
age volume and ensures basic traceability enrichment of orders and the ability to restrict access to a specific range
functionalities, is file transfer. But even this of funds. These functionalities help in the day-to-day running of an
cannot be considered as an industry-wide industry to which the Vestima+ open hub is dedicated. Through this
solution because there is no real common service, STP and automation can finally begin to materialise across the
standard or communication procedure. industry.
SWIFT
Significant steps towards automation are
made possible by SWIFT. This network is
bringing real efficiency to the market by
promoting standards and formats,
enabling non-repudiation, compliance and
audit functionalities and setting a certain
common standard of communications.
However, if this solution could be consid-
ered as an industry-wide solution for the
most important financial institutions, it is
obviously concentrated on very large play-
ers who are able to leverage the investment
with functionalities in other areas, such as
payments. These players are able to cope
with regular improvements and are able to
manage their own referential data.
The use of a ‘hub’ provides a unique
solution for every type of distributor and
fund agent, enabling them to enjoy SWIFT
functionalities with a level of flexibility and
added services like referential data access.
By providing easy access through web-
based solutions, a hub enables access to
the SWIFT network, as well as very sophis-
ticated functionalities for every type of mar-
ket participant. By providing these func-
tionalities, a hub is able to improve the
entire securities industry and is one of the
most efficient solutions in respect of cost
of implementation/benefits.
Vestima+
To highlight the level of service that a
hub can provide, consider the example of
Vestima+, launched by Clearstream in
January 2005. This new generation of
funds platform is an “open hub”, enabling
distributors to automate their order pro-
cessing and to choose how they wish to
settle and to safe keep shares. The range of
possibilities in settlement and custody is
significant and can cover everything from
shares kept in the fund register i.e. without
custody fees, to shares kept with the global
custodian, and of course safekeeping with
Clearstream or Euroclear Bank. This open
hub is accessible through the SWIFT net-
work, but could also be accessed from a
public Internet web station for uploading
orders and download the answers.
Aside from the above functionalities, the
hub provides access to referential data and
commercially useful, daily reports. Last but
not least, the platform provides minor
functionalities such as the automated
Events
Events for securities industry professionals’

fact-finding and networking endeavours
March 1 2005, 1 day
Spitalfields Advisors
Securities Lending Forum
London, UK
Tel: +44 (0) 20 7392 4008
Web: www.securitieslendingforum.com
March 7 2005, 2 days

The Institute of Economic Affairs
Retail Banking in Europe
The Okura, Amsterdam
Tel: +44 (0) 207 608 0541
Web: www.marketforce.eu.com
March 9 2005, 1 day

Securities Finance International
Securities Finance & Hedge Fund Symposium
Royal Banqueting House, London, UK
Web: www.securitieslfinance.co.uk
March 14-16 2005, 3 days

PASLA/RMA
Conference on Asian Securities Lending
Seoul, South Korea
Tel: +1 215 446 4035
Web: www.rmahq.org
March 21 2005, one day

ISITC
ISITC 11th Annual Industry Forum and Vendor
Show
Boston, MA
Tel: +1 703.823.1600
Web: www.isitc.org
April 18 2005, 2 days

IRC Conferences
Alternative Investment Summit 2005
London, UK
Tel: +44(0) 870 777 4144
Web: www.irc-conferences.com
May 10-13 2005, 4 days

ISLA/RMA
Conference on International Securities
Lending
Athens, Greece
Tel: +1 215 446 4035
Web: www.rmahq.org

Events
May 11 2005, 3 days 15th Annual Fund Forum International

Marcus Evans Summits Venue TBA
Pensions and Investments Summit in Switzerland, Tel: +44(0)1202 201182
EPI 2005 Web: www.irc-conferences.com
Montreux, Switzerland
Tel: +357 22 849302 September 5 2005, 5 days
Web: http://www.epi-summit.com/ SWIFT
Sibos 2005
June 8-9 2005, 2 days Copenhagen, Denmark
IMN Conferences Tel: +32 2 655 4228
Scandinavian Institutional Investors Summit Web: www.swift.com
Stockholm, Sweden
Tel: +1-212-768-2800 October 10 2005, 2 days
Web: www.imn.org IRC
Hedge 2005
June 26-27 2005, 2 days London, UK
IMN Conferences Tel: +44(0) 870 777 4144
New Mexico Pension Fund Congress Web: www.irc-conferences.com
Santa Ana Pueblo, New Mexico
Tel: +1-212-768-2800 October 18-21 2005
Web: www.imn.org RMA Conference on Securities Lending
Boca Raton, Florida
July 5 2005, 3 days Tel: +1 215 446 4035
ICBI Web: www.rmahq.org
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
Conference Digest - Securities Lending
About 400 people attended the IMN Eleventh Annual

Come Together Beneficial Owners’ Summit on Domestic and International
Securities Lending & Repo in Phoenix, Arizona.
The program included a special focus on fixed-income
lending, the Securities and Exchange Commission and the
Securities Lending Transparency Initiative, cash collateral
reinvestment and risk management, and indemnification.
According to Peter Adamczyk of AIG, the programme
was of a very high quality. “The audience raised some
interesting questions and there
was a tremendous amount of
interaction. There were several
presentations, which I felt were
particularly useful. One of them
took place during the first session,
the 'Agents and Principals' round-
table. During this session, the
large custodial bank lenders spoke
about the differences between
their various securities lending
Peter Adamczyk programmes.
“I found this very illuminating,
as I initially would have said there are very few differences
among these programmes. But in fact, different firms
highlighted those areas in which they felt they excelled.
State Street, for example, emphasised their technology and
their ability to quantify risk-adjusted performance.
“Barclays Global Investors spoke about securities lending
as an investment management discipline as opposed to the
traditional view of it being an operational business, and so
on. This last point was a recurring theme throughout the
conference.”
Asset Owners
A significant number of people in the audience at the
Arizona conference represented the asset owner communi-
ty. “This contrasts with industry conferences such as the
Risk Management Association (RMA) conference in the
US in October 2004, the RMA / International Securities
Lending Association (ISLA) joint conference in Europe in
May 2005 and the RMA / Pan-Asia Securities Lending
The securities lending industry Association (PASLA) conference in March 2005,” says
faced a heat wave this February Adamczyk. “These conferences are mostly attended by
market practitioners, whereas the recent IMN conference
as participants assembled in had a large percentage of people who are customers of the
Arizona. practitioners, presenting a platform for a host of different
questions.”

Conference Digest - Securities Lending
Competition aspects of the market with a group of people you would

The business cases for custody lending and third party like to do business with.”
lenders was hotly contested by both types of providers at
the summit. Adamczyk explains: “One custodian men- Q&A
tioned that one third of their total lending programme Conference delegates were suitably impressed by the diver-
globally involved assets for which they were not the custo- sity of questions raised. McIntire participated in a round-
dian. table discussion at the event and
“I think this is remarkable, as it highlights the fact that had the following to say: “The
the lines between the various market participants are panel was moderated by Mark
becoming thinner and thinner. Faulkner (from Data Explorers),
“This makes it difficult to label lenders nowadays.” who is good at drawing up good
questions and getting a lively dis-
“One custodian mentioned cussion going. He was able to
draw questions from the audience.
that one third of their total “Usually, when asked if there are
lending programme globally any questions from the audience
nobody wants to raise their hand.
involved assets for which they But someone submitted a ques-
Tred McIntire tion on a piece of paper, and this
were not the custodian” format seemed to encourage
greater audience participation.
Attendees “There were discussions about cash reinvestment as most
According to Adamczyk, about one-third of the Arizona of the business in the US is done versus cash. There were
conference attendees were market practitioners. “These questions about the periods for which participants
practitioners included those who are lending or borrowing analysed their reinvestment returns.
and who are actively supporting the trade. “Owing to the Fed-Rate hikes of this year there have
“Another 25 per cent are people from those firms, whose been times when some of the cash reinvestment pools
job it is to provide client and marketing support. The rest have under-performed and loans would be negative.
of the attendees were largely beneficial owners. This repre- “There were discussions about whether to analyse lend-
sents a growing trend among the asset owners in atten- ing performance on a day-by-day, week-by-week, month-
dance at these conferences. by-month or quarter-by-quarter basis.
“I would say that people are much more involved nowa- “One of the panelists said reinvestment should be con-
days. One of the speakers commented that he had been in sidered over a longer period of time and not on individual
the industry for about 20 years and 15 years ago, he would days. There are always a lot of questions about risk and do
sign a contract with an asset owner and never talk to them the agent lenders share in the risk with the beneficial own-
again. ers? Clearly that is the case because many lenders in the
“Nowadays there is regular contact between client and US offer indemnification against borrower default or they
service provider, including monthly and daily reporting. may share in losses of individual loans on a day-by-day
The process is much more hands on. It is fair to say that basis.
people who attend these conferences tend to be the larger “There was a question about benchmarking where peo-
firms, such as the New York State Teachers Retirement ple spoke about various services that provide performance
System, which has about $80 bn in lendable assets. Entities information. A panelist from Brown Brothers Harriman
such as these clearly have the resources and the scale to be explained that one way to benchmark would be through
very hands on. I would think there are a lot more asset- multiple providers, that is, if the beneficial owner is large
owners who follow securities lending much more closely enough, by splitting portfolios among different lenders or
than before.” by splitting an individual portfolio.”
Tred McIntire from Boston Global Advisors added that the If the Arizona summit was anything to go by, the securi-
participation of the beneficial owners was significantly ties lending industry should entertain a host of key
high. “This conference is designed for beneficial owners. debates over the next year.
What made it good is that a lot of pension plans and
mutual funds were in attendance. They make an effort to
to attend the sessions.
“There was also good participation from vendors, who
saw the summit as an opportunity to promote their firms.
It is an opportunity to share your knowledge of certain

14th ANNUAL CONFERENCE ON INTERNATIONAL
SECURITIES LENDING
May 10-13, 2005

Athenaeum InterContinental Hotel
Athens, Greece
x The joint U.S./European Securities Lending Conference sponsored the recognized

industry associations.
x Issues that influence lending markets in Europe and around the world
Market Developments/Updates
Regulatory and Technology Changes
European Clearing and Settlement Issues
Developing/Emerging Markets
Keynote Addresses by:

Spyros Capralos, Chairman, Athens Stock Exchange S.A.
David Taylor, Author & European Business Speaker of the Year 2004
x This is the conference that identifies best market practices and sets global
standards in international securities lending.
Come and join your colleagues for these important updates and discussions!
For more information or to register visit RMA's website:

http://www.rmahq.org/RMA/SecuritiesLending/
or contact Kim Gordon (215) 446-4021
E-mail: kgordon@rmahq.org
Conference Chairs
Philip Reichardt Timothy Douglas

Director Managing Director
Euroclear Citigroup
London New York
Investment Management - Outsourcing
range of tasks such as pricing, security master and corpo-
In, Out, Turn rate actions performed in the middle office and back office
that are a duplication of effort, and liability outsourcing.
Additionally, by shifting operational risks to the service
provider, the investment manager can focus on core com-
it all About? petencies and apply the technology budget to the front
and back office. While maintaining or improving the qual-
ity of service to the investor, investment managers will also
be able to provide access to global markets, support new
Which factors will prompt further products and higher volumes. Yet despite this, the invest-
ment community has been slow to embrace outsourcing.
outsourcing among investment Reluctance
managers? Nii Tetteh of Several factors have contributed to the reluctance of
Barrington Partners investigates. investment managers to outsource. First among these is a
perceived or a real loss of control over service to clients
and the front office, both in quality and customisation
There has been significant publicity over the last couple requirements. Additionally, outsourcing would remove
of years about the next major trend to sweep investment many or most of the staff from the advisors office. The
managers. Nii Tetteh of Barrington Partners explains community has also not been comfortable with the rela-
which factors prompt these managers to outsource. tive inexperience of vendors, primarily custodians, within
The outsourcing of broad areas of the middle and back the middle office arena. Given the long-term implications
office promises many benefits that allow investment man- of outsourcing, investment firms need greater assurances
agers to concentrate on their core competencies. In the US that the service provider they select will be a ‘survivor’.
there have been a few sizeable ‘early adopters’
but no broad acceptance as of yet. However,
Barrington Partners, a Boston based firm
“Given the long-term implications of outsourcing,
specialising in middle and back office investment firms need greater assurances that the
consulting for fund and asset management
companies, has recently seen an increased service provider they select will be a ‘survivor’”
interest in reviewing technology and out-
sourcing options. Has anything changed? Many investment managers are not yet convinced that
vendors have demonstrated they have a sustainable busi-
Holy Grail? ness model to support the long-term reinvestment needed
First, investment management outsourcing has rapidly to keep ahead of the technology curve.
become the ‘Holy Grail’ of custodial banks. They see the
potential in outsourcing of the middle office functions for Technology
over 500 firms who manage $25 trillion in assets. If this What does interest most investment managers is
market expands, it will provide long-term growth and upgrades in the level of technology supporting their busi-
profitability to the custodial bank community. About 10 ness, and in some cases having another party take respon-
custodial banks have committed the resources and capital sibility for making the necessary changes. Banks are aware
required to support this market. The challenge for banks of these technology issues and understanding the busi-
has been three-fold: First, any successful offering will have ness. A number of banks have entered outsourcing deals
to be functionally relevant to the investment manager. in order to gain the staff, who understand the operational
Secondly, the technology platform of choice will need to environment. Many of these banks have worked on their
demonstrate significant scalability and processing efficien- platform by either developing capabilities, partnering
cies that allow a service provider to pass along cost sav- with outside software firms, or a combination of both.
ings. Finally, custodians will have demonstrated that they The successful implementation of several clients will vali-
have both the systems and personnel that understand the date the effectiveness of the vendor’s operating model and
front and middle office environment, and not just the the viability of the underlying technology platform. Not
back office skills that they are known to possess. only does this reflect the potential scalability and cost effi-
The increase in interest also suggests that investment ciency of the provider but it also demonstrates that the
firms are recognising the new business climate, in which platform can support the investment management differ-
they work; that many aspects of middle and back office entiators; accurate and comprehensive data for
operations are commodities and the key to success is analytics/decision support, and flexible reporting to
focusing on distribution and performance. clients. Current activity would suggest that outsourcing of
front and middle office functions in the US will be a slow
Attraction process. However, based on the number of firms consider-
There are several aspects of outsourcing of the middle ing issues relating to technology and efficiencies out-
office that should attract advisors: volume efficiencies, a sourcing, this market will begin to grow more quickly.

Letters (continued)
letters continued from page 4 a low cost, easy to implement, web based Outsourcing data aggregation and
Missing the Boat (continued) STP solution aimed at this manual mar- reporting functions to third party serv-
...But the Regulator proposes to go one ket. It will automate investment man- ice providers would allow fund man-
step further and include reduction in agers’ trade allocations – an area which agers to focus on the business of
yield (RIY) calculations alongside TERs in the brokers cite as their key pain point. investing while satisfying the trans-
each prospectus. Not only are RIY calcu- With such solutions in the marketplace, parency and risk control requirements
lations potentially misleading for invest- STP will be more accessible to all fund of their institutional clients.
ment funds due to their use of an managers, regardless of their size, and Joan Kehoe, executive vice president &
assumed 6 per cent yield, but the reduce risk and cost for the whole managing director, PFPC International
method is only recognised in the UK and industry.
is predominantly used for life insurance Tony Freeman, director of Industry Perfect Price
products. Providing investors with two Relations, Omgeo EMEA Clearing and settlement for crossborder
methods for calculating charges, which fund operations is still a fragmented
will result in different figures, can surely Fund Manager Solution market in the EU, resulting in ineffi-
only add further confusion not simplicity. Institutional investors increasingly cient and costly operations as well as
The intention of the Simplified turn to hedge funds to generate increased operational risk. FEFSI, the
Prospectus was to supply investors with a absolute returns in an uncertain mar- European association of fund and asset
clear explanation of products and their ket. Most institutional assets are invest- managers, is acting as a catalyst for
costs, but the proposals coming out of ed in funds of hedge funds (FOHFs), change in the area of fund processing
the Regulator do nothing more than gold- in Europe. In November 2003, FEFSI
plate the EU directive and in doing so are “Increased disclosure need instituted the Fund Processing
moving the UK away from a European not create new layers of Standardisation Group (FPSG) which is
made up of representatives from major
integrated financial market. administration or distract fund groups, distributors, fund order
Helen Stephenson, communications
officer, Investment Management hedge fund managers from messaging firms, fund platforms, trans-
Association their primary mission: fer agents and clearing and settlement
operators. At its recent meeting on in
generating alpha.” December 2004, the FPSG completed
Making Progress
I read the Reference Data Management which now account for about 40 per the first phase of its current work pro-
Challenge Survey with interest (ISJ, cent of hedge fund assets. gram with the adoption of two papers:
Volume 4, Jan/Feb 2005) and was reas- Because of their due diligence respon- - A paper entitled “Standardization of
sured to see that 80 per cent of firms sibilities, pensions and other institution- Funds Processing in Europe”, which
interviewed have implemented a strategic al investors require more transparency develops a number of recommenda-
approach to reference data. Statistics like and risk control than most FOHFs have tions. After being embraced by the
this would lead one to believe that the the capacity to provide. In order to sat- industry, these recommendations will
securities industry is focussing strongly on isfy those requirements, FOHFs may serve to increase efficiency in the
improving operational efficiency and risk turn to third party service providers area of fund order processing and
management.. with the technology and expertise to settlement.
But the reality is a world apart. There is quickly and accurately process high “...one of the most funda-
still a large number of investment man- volumes of complex hedge fund infor-
agers (mainly small to medium sized mation.
mental problems facing the
firms) who continue to process all of their Technology requirements would markets in all asset classes
trades by fax. They themselves do not include the ability to capture position is the fact that electronic
always feel the pain of their manual pro- data and valuations from multiple
cessing, but for their brokers it can cause sources and present it in a single, inte-
price feeds are not providing
“There is still a large grated format. While hedge fund man- all the information necessary
number of investment agers are notoriously close-mouthed to perform a trade.”
about their methods, a third-party serv-
managers who continue - A paper entitled “A Pan-European
ice provider can help to establish rela- Fund Processing Passport”, which pro-
to process all of their tionships that protect the funds’ propri- poses that fund management compa-
trades by fax” etary information while facilitating the nies summarise, at class level, the
process of data aggregation for reports essential information on their open-end
serious headaches, with some receiving to institutional investors.
up to 43,000 faxes per month, any of investment funds in order to facilitating
Increased disclosure need not create funds processing. The content of the
which are easily lost, late or simply illegi- new layers of administration or distract
ble. To remedy this, six leading brokers passport has been drawn up from the
hedge fund managers from their pri- viewpoint of all relevant professional
have collaborated with Omgeo to produce mary mission: generating alpha. players involved in the operational

Letters (continued)
aspects of investment funds distribu- underpins Basle II. However, America ity. Custodian banks and investment
tion: investor intermediaries, distribu- has already indicated that only those banks also have to accept their portion of
tors, distribution platforms, fund man- banks, which are active internationally the blame too, especially when it comes
agement companies and their service and which have a balance sheet of to time and money wasting industry initia-
providers (transfer agents/registrars, more than $ 250 bn will be required to tives. It is impossible to really get signifi-
fund accounting agents, trustees, cus- comply. The fact that there will, as cant costs off the table when all con-
things stand, be a raft of major OECD cerned want to be made whole. The
banks that are not obliged to adopt the harsh truth lies in the mathematics. To
“the year 2005 will be new rules, and another group (notably, return a higher proportion of people’s sav-
remembered as the starting the Europeans) who must comply, ings to them intact, you have to spend
point for cross border fund appears to contradict one of the two less money administering them and that
critical reasons for introducing com- means that there is a smaller pie to share
processing in Europe.” mon capital adequacy standards in the between the organisations involved.
first place - the creation of an "even Kevin Milne, senior vice president, SS&C
todians, portfolio managers). playing field". Technologies
To contribute to a Europe-wide adop- The opportunity for "regulatory arbi-
tion of the proposed recommendations trage" for those who have a choice Revolution Now
and, thus, a more efficient funds pro- between complying with Basle II or We are fortunate enough to be part of the
cessing procedures in Europe, FEFSI sticking with the old methodology must most exciting financial revolution of the
member organisations were asked to surely be a competitive advantage last 20 years. The alternative investment
endorse the two FPSG papers and to bestowed, ironically, by a process has surpassed traditional Capital markets
encourage the members of their asso- designed to eliminate unfair competi- innovation by bringing new creativity.
ciation to implement the recommenda- tion. So, too, must be the ability to One may argue that alternative invest-
tions in due course. avoid sizable implementation costs. ment is a new asset class; others may
Thanks to the usage of ISO 20022 XML The obvious antidote would be for argue it is a new philosophy on invest-
fund templates by major fund complex- European Financial Regulators to take ment. But the net result is that the growth
es, distributors and transfer agents and the same pragmatic approach adopted rate of this new industry as well as the
the implementation of the FEFSI FPSG on the other side of the Atlantic, restor- pace of innovation is unique in recent
recommendations, the year 2005 will ing equivalence and ensuring an even financial history. But do investors under-
be remembered as the starting point playing field. stand where they are investing?
for common market practices for cross Patrick Butler, member of the Managing Regulators are trying, aggressively, to
border fund processing in Europe. Board, Raiffeisen Zentralbank (RZB) impose some control procedures but
Rudolf Siebel, head of Market and investors do not seem to care. But should
Service, BVI Sharing Blame they? The actual issue is not coming from
I read the letter from Mark Austin from a choice of performance or even a risk
Counterproductive? JP Morgan in the Jan/Feb 2005 edition of adjusted performance as most investors
Standardised capital adequacy rules ISJ with great interest. I can only applaud are sophisticated and capable to measure
were first introduced in the late 1980s and echo his sentiments. Too often over their appetite for risk. The actual issue is
(Basle I) for two reasons: to strengthen the last few years, well meaning industry coming from a very basic starting point
the financial system and to create an which is about the valuation of their
even playing field between competing “It is impossible to really get investment. Most of the alternative invest-
banks. To quote the introduction to the significant costs off the table ment vehicles are now using complex
July 1988 text of the Basle capital when all concerned want to financial instruments to manage their
accord: portfolios. None of these are valued on an
"Two fundamental objectives lie at the be made whole.” intuitive basis and very few investors have
heart of the Committee's work on regu- initiatives have been turned into exercises an absolute certainty of the valuation of
latory convergence. These are, firstly, of self-preservation, with Taurus and the their investment. The expertise required
that the new framework should serve to GSTPA being most notable and ultimately to actually value these instruments is
strengthen the soundness and stability expensive. The ultimate end user of the mathematically challenging and market
of the international banking system; investment industry is, by definition, the data are rare and complex, most often
and, secondly, that the framework investor and in a significant proportion of requiring row data reengineering.
should be fair and have a high degree cases it is the individual pension fund The most amazing challenge in this rapid-
of consistency in its application to holder or savings plan participant who ly growing industry is coming from the
banks in different countries with a view pays the price for the inefficiencies we all most basic concept of investment: value.
to diminishing an existing source of know exist. It is a challenge that this revolution will
competitive inequality among interna- However, it is also fair to point out that the have to handle quickly.
tional banks." fund managers, while being far from Christophe Reech, president, SunGard
The same rationale, presumably, blameless, cannot take all the responsibil- Reech

People Moves
from his broad experience as we execute Euroclear management team and in
Moving our major projects of consolidating our

technology platforms and harmonising
2001 was appointed Managing Director.
&
market rules and practices. The Bank of Joe Barra has joined ADP Clearing &
New York is a very important client of Outsourcing Services, as president and
Euroclear, and its continued representa- will be directly
Shaking tion on our Board is a demonstration of

user governance at work.” Paul Bodart
is responsible for The Bank of New
responsible for
all clearing oper-
ations and serv-
York’s Brussels Operations Centre, the ice delivery. Barra
A selection of the Bank’s global custody hub in Europe. brings more than
appointments Before joining the Bank in 1996 as part
of the Bank’s acquisition of JP Morgan’s
20 years of expe-
rience working in
updated daily at custody business, Bodart had worked the brokerage
for JP Morgan for ten years, first in industry, serving
WWW.ISJFORUM.COM Brussels and then in New York. Joe Barra in various capaci-
ties. Prior to join-
Tom Swayne, currently executive vice ing ADP, Barra was instrumental in
Steve Bernstein, managing director and president and head of the JPMorgan establishing National Investor Services
global head of securities services at Investor Services business, has decided Corp (NISC) as TD Waterhouse's affili-
Citigroup Global Transaction Services to retire after nearly three decades of ate clearing broker/dealer, and served as
has decided to leave Citigroup to focus service at the firm. As the senior execu- its President and Chief Executive Officer.
more time on his many charitable inter- tive for JPMorgan Investor Services He also continued to take on increasing
ests, his music magazine, Relix, and since 1999, Tom Swayne has grown the responsibilities within TD Waterhouse
other media properties. Bernstein first business into one of the largest global that included building its Capital
arrived at Salomon Brothers in 1980 as providers of custody and investor solu- Markets group and overseeing its
a summer intern, and secured an offer tions with strong client and product nationwide Call Centers and Investment
to join Salomon post-graduation. For leadership positions. Mike Clark, head Centers.
the past two years, he has been the of JPMorgan’s Institutional Trust
global head of Securities Services and Services business, will assume leader- Stewart Adams has been appointed by
was instrumental in leading Securities ship of the Investor Services business, ABN AMRO Mellon to bolster its sales
Services to record revenue levels. in addition to maintaining his current force in the UK and Ireland. Adams
Prior to joining Global Transaction role. joins ABN AMRO Mellon from State
Services, Bernstein was the global head Tom Swayne and Mike Clark will work Street, where he was head of Scotland,
of Business Continuity for Citigroup and closely together to ensure a smooth UK Sales and Marketing. Reporting to
also served as Chief of Staff to Michael transition. In his expanded role, Mike Peter Adams, Head of Sales, Adams will
Carpenter when he was chairman and Clark will continue to report to Heidi split his time between offices in
chief executive officer of Salomon Smith Miller, Chief Executive Officer. Edinburgh and London. His appoint-
Barney. ment will strengthen ABN AMRO
Euroclear Nederland has appointed Guy Mellon’s sales approach and will
Paul Bodart, executive vice president of Schuermans as Chief Executive Officer enhance their exposure to asset man-
The Bank of New and General Manager of Euroclear agers, trustees and pension funds
York, has been Nederland, and Chairman of its man- across the UK and Ireland. Adams will
appointed to the agement team. Peter Sneyers, who is leverage more than a decade of experi-
board of currently fulfilling these roles, will trans- ence in the financial sector to carry out
Euroclear plc and fer to Euroclear Bank in Brussels to his new role.
Euroclear head up the firm’s Corporate Actions
SA/NV. Chris and Tax service area. SimCorp has appointed Ian Crompton
Tupker, Schuermans began his Euroclear career as managing director of SimCorp
Euroclear’s chair- in 1986 and has held progressively sen- Limited in the UK. He replaces Kjell
man, said: “We ior positions in financial, marketing, Nordgard, who has returned to
welcome Paul client service and human resources. In SimCorp’s head office in Denmark after
Paul Bodart
Bodart to our 1996 he became a member of the five years in the UK office. Crompton
Board and look forward to benefiting

People Moves
joined SimCorp in April 2003 as sales of April 1, 2005. within North America. Thoma has 10
director. Previous positions held Obersteiner will be reporting directly to years experience in securities and cor-
include regional sales director at Eagle the Board of Management. "We perceive porate actions processing. Previously,
Investment Systems and sales manager significant potential for IPOs and capital Thoma was the Corporate Action
at Primark Investment Management increases in the CEE region", explains Reorganization Manager at Fifth Third
Services, now part of Linedata. He also Gerhard Grund, Board member of Bank, where he was responsible for all
has support and client relations experi- Raiffeisen Centrobank with responsibili- aspects of corporate actions processing.
ence in over 15 years in the UK invest- ty for equity finance, "and in Erich Prior to Fifth Third Bank, Thoma was a
ment management software industry. Obersteiner, we are pleased to have Corporate Action Specialist at Bank One
Elizabeth Gee has been promoted to found an expert with many years' experi- Trust with various responsibilities for
sales director. Gee joined SimCorp in ence in the capital markets and excel- both mandatory and voluntary corporate
May 2004 after a sales career at DST lent contacts in central and eastern actions.
International. Europe for our newly established
department." MFS International has appointed Anne
Stephen M. Wynne has been given the Healy as director of Relationship
role of directing strategic and opera- The Alternative Investment Management and Marketing. Her
tional development for PFPC's global Management Association (AIMA), the appointment reinforces MFS’s commit-
organisation. He will report to Timothy global hedge fund and alternative ment to the role of client relationship
G. Shack, chair- investment industry association, has management.
man and chief announced the election of its Council MFS opened for
executive officer for the term to September 2006. The institutional busi-
of PFPC. Wynne Council has unanimously re-elected its ness five years
has been with chairman and deputy chairman for the ago. Healy joins
PFPC for over 25 next two years: Chairman Christopher MFS with over 17
years, serving in Fawcett (second term as Chairman); years experience
a number of Deputy Chairman Dermot Butler (third in the City and
capacities, most term as Deputy Chairman); Clayton has performed a
recently as exec- Heijman, Fortis Prime Fund Solutions variety of roles in
Stephen Wynne utive vice presi- and Paul Smith of HSBC Institutional asset manage-
dent and chief Trust Services continue to act as global Anne Healy ment. Most
operating officer of PFPC Worldwide advisors to the Council; Florence recently she was at Schroders where, for
Inc. In that role, he oversaw the man- Lombard, Executive Director of AIMA, is the last eight years, she had a lead role
agement of the client advocacy office a Permanent Member of the Council. in business development and client rela-
and directed securities services provid- General Counsel is Iain Cullen of tionship management, specifically tar-
ed by PFPC including fund accounting Simmons & Simmons. Company geting UK pension funds in both the
and administration, custody and global Secretary is Mary Richardson, Associate corporate and public sectors.
alternative investment services. Director – Regulatory and Legal.
Additionally, Wynne was responsible for DST International (DSTi), the busi-
the sales division. XcitekSolutionsPlus, the global provider ness solutions provider for the invest-
of corporate actions automation, has ment management industry, is
Current Vienna appointed Steve Thoma as senior client expanding its North American sales
Stock Exchange administrator team. Alex Britnell joins DSTi as
board member within the client director of sales, where he will focus
Erich services team in on global enterprise sales. Britnell
Obersteiner has the Birmingham, comes from SS&C Technologies Inc,
been appointed Alabama office. where he was a senior sales executive.
director of the Thoma will have Pamela Pecs Cytron, DSTi’s executive
newly estab- responsibility for vice president of North American,
lished "Equity providing produc- said: “We continue to experience
Capital Markets tion support and tremendous success in North America
CEE" depart- implementation and the ability to enhance our
Erich Obersteiner ment at of the XSP™ soft- client’s experience with additional
Raiffeisen Centrobank AG effective as Steve Thoma ware application components is high.”

ISJ Directory of Services Custody, Clearing & Settlement
BHF-BANK is one of the leading German commercial banks which operates as an
advisory, service and commercial bank on the areas of Asset Management &
Financial Services, Financial Markets & Corporates and Private Banking. Financial T: +49 69 718 3738
Services comprises the bank’s custody services, investment company (depotbank) F: +49 69 718 6050
services and its securities and derivatives clearing business.
Through the combination of its local market know-how with an in-depth product Contact: Cornelia Keth
expertise it aims to serve its clients in an individual and flexible way. The bank’s E: cornelia.keth@bhf-bank.com
longstanding experience in the German securities services market goes hand Address: Strahlenbergerstraße
in hand with a corporate culture that values prompt acknowledgements and short 45; 63067 Offenbach a.Main
decision-making channels. W: www.bhf-bank.com
Assets under Custody: EUR 160 bn
No of funds: 244
Crédit Agricole Investor Services is the Securities and Financial Services arm of
the Crédit Agricole Group, providing a whole range of products and services to
institutional clients including Depositary/Custody/Trustee, Fund Administration,
and Corporate Trust. Innovation, technology, local expertise and strong T: + 33 1 43 23 84 68
commitment to clients enable our European network to be a leading player in the Contact: Patrick Lemuet (Paris)
European industry and to excel in servicing Institutional Investors, Banks and T: + 352 47 67 24 13
Corporate clients. Our position in the market place is reinforced by a strong local
presence, particularly demonstrated by the specialised subsidiaries, set up in Contact: José-Benjamin
Paris, Luxembourg and Dublin. The Group also operates a European network of Longrée (Luxembourg)
fund administration centres, the Fastnet network, with local operations in
Luxembourg, France, Ireland, the Netherlands and Belgium. The Fastnet network
is a joint venture with the Fortis Group.
DnB NOR is the largest and leading provider of Custody, Clearing and
T: +47 22 94 92 95
Remote Member Service in Norway In addition, DnB NOR provides a wide
F: +47 22 48 28 46
range of value added services to both Foreign and Domestic clients.
Contact: Bente I. Hoem
Through an Alliance solution with banks in Sweden, Finland and Denmark,
E: bente.hoem@dnbnor.no
DnB NOR can offer seamless regional products, which can be customized to
our indiviual client's needs.
W: www.dnbnor.com
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-
E: oda.m.myklebust@nordea.com
leading Internet banking and e-commerce operation with 3.8 million customers.
W: www.nordea.com
RBC Global Services is the corporate and institutional custody arm of RBC Financial T: +44 (0) 20 7653 4095
Group. We are the largest global custodian in Canada and among the 10 largest in
F: +44 (0) 20 7248 3946
the world. We have been serving institutional investors for more than 100 years,
Contact: Tony Johnson
including 22 years in the global custody business.
Global Head, Sales &
RBC Global Services, along with RBC Global Private Banking, provides a broad range of
Relationship Management
value-added services and tailored solutions to institutional investors internationally.
E: antony.johnson@rbc.com
RBC provides the full range of fund administration and global custody services.
Assets under Administration: US$1.3 trillion Address: 71 Queen Victoria
Number of sub-custodians: 78 Street, London, EC4V 4DE, UK
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
your securities in the most logical manner.
W: www.seb.se
Assets under Custody: US$ 200 bn

SG GSSI offers a complete range of value added securities services for all institutional
T: +33 1 53 05 45 09 investors: clearing, custody and trustee, fund administration, transfer agent and registrar
Contact: Mathieu Maurier, services. Societe Generale ranks 4th securities custodian in Europe and 10th worldwide
Vincent Ginet with USD 1,350 billion in assets held. SG GSSI provides custody & trustee services to
E:Mathieu.maurier@socgen.com, 2,300 funds and its subsidiary Euro-VL provides valuations for over 3,300 funds
vincent.ginet@socgen.com representing assets of USD 300 bn. The quality of these services is acclaimed by the
W: www.sggssi.com 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
Crédit Agricole Investor Services is the Securities Services arm of the Crédit
Agricole Group, servicing Institutional Investors and Corporate Clients. CAIS pro-
vides a full range of services including Product Structuring, Accounting, Portfolio
Valuation, NAV Calculation, Third Party Distribution Platform and Shareholders
T: + 33 1 43 23 84 68 Services, Corporate Trust and Employee Saving Schemes, Capital Markets
Contact: Patrick Lemuet (Paris) Services, Private Equity, as well as Communication and On-Line Transaction
T: + 352 47 67 24 13 Tools. Specialising in the provision of the above services, CAIS is well known for
Contact: José-Benjamin its expertise in asset and liability allocation and globalisation techniques such as
multi-manager and multi-class structures, Funds of Funds, Pooling, Master
Longrée (Luxembourg)
Feeder and Cloning. Some of the above services are outsourced to the Fastnet
network, a partnership with the Fortis group. The Fastnet network, operated by
Crédit Agricole Investor Services, is present in France, Luxembourg, Ireland,
Belgium and The Netherlands. Assets under Administration: EUR 446 bn
T: +1 (441) 295-1111 Butterfield Fund Services (Bahamas) Limited boasts a team of experienced
Contact: Andrew Collins professionals dedicated exclusively to serving investment managers.
E: contact@bntb.com Fund administration is Butterfield Fund Services’ sole business, allowing us to
W: www.bntb.bm demonstrate our commitment to fund administration.
T: +1 732.563.0030 Derivatives Portfolio Management provides onshore and offshore alternative asset fund
F: +1 732.563.1193 administration, back and middle office outsourcing, portfolio valuation, daily NAVs, risk
Contact: Lisa Cohen administration and portfolio transparency solutions for fund managers, asset allocators,
Address: Two Worlds Fair Drive, institutional investors and proprietary traders. DPM’s services are designed to solve com-
Somerset, New Jersey, plex administrative needs and improve operational efficiency. DPM has the systems,
NJ08873, USA infrastructure and experience to handle your toughest administrative challenges. DPM
W: www.dpmllc.com has a world-wide staff of 200 employees. DPM’s HQ is in Somerset, New Jersey with
offices in London, the Bahamas, and the Cayman Islands.
SG GSSI offers a complete range of value added securities services for all institutional
T: +33 1 53 05 45 09 investors: clearing, custody and trustee, fund administration, transfer agent and registrar
Contact: Mathieu Maurier, services. Societe Generale ranks 4th securities custodian in Europe and 10th worldwide
Vincent Ginet with USD 1,350 billion in assets held. SG GSSI provides custody & trustee services to
E: Mathieu.maurier@socgen.com 2,300 funds and its subsidiary Euro-VL provides valuations for over 3,300 funds repre-
vincent.ginet@socgen.com senting assets of USD 300 bn. The quality of these services is acclaimed by the world’s
W: www.sggssi.com leading agencies: - Trustee and custody – Paris: Aa2 (MQ) (Moody’s) - Global custody –
Paris: aa (Fitch Ratings), Trustee Paris: aa+ (Fitch Ratings).
UBS Fund Services offers comprehensive fund administration services including fund
Jean-Paul Gennari,Luxembourg set-up, registration and support around the world (currently 28 countries), fund account-
T: +352-44-1010 6503 ing, NAV calculation, compliance management, risk control and reporting. We provide a
Markus Steiner, Switzerland flexible offering from the full range of services, including Private Labelling, to selected
T: +41-61-289 04 92 functions. Services are based on leading fund administration architecture, multi-source
Mike Marsh, UK
pricing and powerful compliance tools. Our capabilities also extend to services for hedge
T: +44-20-7901 5229
funds through our teams in Cayman and Ireland. In times when management attention
W: www.ubs.com/fundservices
is increasingly focused on value creation, it may be rewarding to re-evaluate whether
asset administration remains a strategic core business to you.

ISJ Directory of Services Securities Lending
eSecLending is a global securities lending manager servicing large institutional
T: US- +1 617 204 4500
lenders, including pension funds, mutual funds, insurance companies and T: UK- +44 (0)207 002 7600
investment managers. eSecLending's model is based on the premise that Contact: Dan Ahern
exclusive principal relationships generally offer greater value and significantly E: info@eseclending.com
higher returns to a lender than traditional custodial or third-party agency lending W: www.eseclending.com
programs. The firm, which has auctioned over $450 billion since inception, Addresses: 175 Federal Street,
awards principal business through an auction process to ensure greater 11th FL, Boston, MA 02110, US
competition and price transparency. eSecLending is majority-owned by Old Old Mutual Place, 2 Lambeth
Mutual plc and maintains offices in Boston, London and Burlington, Vermont.
Hill, London EC4V 4GG, UK
T: +41 (0)44 218 14 14

IFBS offers the financial industry a wide range of consulting services as well as F: +41 (0)44 218 14 18
individual and standard software solutions. The firm supports clients along the entire E: info@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
W: www.ifbs.com
Technology
ADP Brokerage Services Group is an industry leading outsourcing vendor for global
transaction processing systems, desktop productivity applications and investor
communication services to banks and brokerages worldwide. T: +44 (0) 207 551 3000
-Proxy Edge – comprehensive solution for institutional global proxy voting management. E: info@bsg.adp.com
W: www.bsg.adp.com
-Gloss – leading international STP system which automates the trade processing
Address: The ISIS Building,
lifecycle from trade capture through confirmation, clearing agency 193 Marsh Wall, London,
reporting and settlement. E14 9SG, UK
-Tarot - a UK retail and private client stockbroking, custody and fund management solution.
-Securities Data Management – outsourced data services for securities operations.
Data Solutions You Can Bank On

T: +44 (0)20 7464 8407 / +1
Asset Control's Total Data Management offers seamlessly compatible in-house
212 445 1076
software and out-sourced services. Asset Control solutions manage prices, reference
F: +44 (0)20 7464 8746 / +1
data, risk factors, credit risk data, corporate actions and research data. The solutions
212 265 6402
support market risk, Basel II, portfolio management, trading and enterprise-wide
Contacts: Pascal Guignabaudet
operational coherency.
(EU), Belinda Hamer (US)
Address: 60 Lombard Street,
Asset Control is the only firm in its class offering turnkey solutions with guaranteed
London, EC3V 9EA, UK
delivery dates. These ready-to-work solutions eliminate development time and risk.
E: pascalg@asset-control.com
As a future-proof technology investment, Asset Control has been certified by a
bhamer@asset-control.com
unique track record of long-standing customer implementations in leading financial
W: www.asset-control.com
firms around the world.
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 T: 08702000443
Investment Managers, BPO providers and TPA’s. Various acquisition models are F: 020 7959 3030
offered covering the following areas; Mob: 07980912649
Contacts: Mark Culham,
Address: 288 Bishopsgate,
European Unit Trusts; Offshore Funds; PEP, ISA, OEIC & SIPP's; Pooled London, EC2M 4QP
Pensions; Property Funds; Fund of Funds; Multi Manager Funds; Wrappers; E: mark@fundsoft.co.uk
Fiduciary portal; Funds Automation; Funds Supermarkets; Reporting ; Hedge W: www.fundsoft.co.uk
Funds; Investment Trusts.
SimCorp Dimension is a powerful, comprehensive and truly seamless investment

management system. It can handle NAV and other calculations, with complete T: +44 (0) 20 7651 8800
related accounting, for a huge variety of fund structures and product types, includingF: +44 (0) 20 7651 8811
regional specialities. Support for broader functions, such as performance attribution Contact: Ian Crompton, sales
and risk management, are particular strengths of the system. director, SimCorp Dimension
E: ian.crompton@simcorp.co.uk
Address: SimCorp, 10 Walbrook,
SimCorp Dimension has been designed from scratch as a total straight through pro- London EC4N 8DQ
cessing system, handling all aspects of the investment management process, consis- W: www.simcorp.com
tently. Data is recorded into a single database so that reporting is made easy, there
is no reconciliation of data and no duplication of procedures.

GLOBAL ORGANISERS OF INSTITUTIONAL FINANCE & INVESTMENT CONFERENCES
THE FIFTH ANNUAL
SCANDINAVIAN INSTITUTIONAL
INVESTOR'S SUMMIT
LAST YEARS SPONSORS
PLATINUM SPONSOR JUNE 8-9 2005
MERRILL LYNCH
THE GRAND HOTEL • STOCKHOLM
GOLD SPONSORS
INVESTMENT MANAGERS
INTECH An excellent educational and networking opportunity,
ROBECO this event has grown to become the largest of its
kind, tailored specifically for the Nordic region's
SILVER SPONSORS
DTZ institutional investor.
A.G. BISSET The programme aims to offer its delegates the
CITIGROUP
opportunity to learn from experts in the financial
DANSKE CAPITAL
DIMENSIONAL FUND
management industry, including fellow investors,
ADVISORS INC. advisory groups and many of the world's most
FTSE GROUP innovative fund management professionals. Details
GABELLI ASSET of last years event can be found on the following link:
MANAGEMENT
JPMORGAN
http://www.imn.org/2004/a644/
KEMPEN CAPITAL
MANAGEMENT
MORGAN STANLEY
PUTNAM INVESTMENTS
SAM GROUP
SEI INVESTMENTS For More Information, Please Visit:
STANDARD & POOR'S
STOXX LIMITED
www.imn.org/etm751/isjm/
Email: Call: Fax:
BRONZE SPONSOR mail@imn.org (212) 768-2800 Ext. 1 (212) 768-2484
FTSEUROFIRST
information management network

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THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

Fund Structure; Fund Administration; Information & Data

INVESTOR Reference Data; Transfer Agency; Legal & Compliance

OFFSHORE CENTRES – BRAZEN BEACONS PLUS:

Now Vestima+ also meets your needs in domestic fund

Increase your STP rate. Lower your costs.

Vestima+ offers you new perspectives.

Get connected to Vestima+ today,

INVESTOR Buy In, Bow Out?

BENEATH THE SURFACE Janet Du Chenne - Editor

12 Vive La Difference The Credo of a first-class global custodian

16 Centre of Strength Service providers on why it’s good in Luxembourg

26 Analyse This… Financial professionals answer a range of questions

30 A Question of Trust Regulation - cornerstone of trust in Luxembourg

32 Brazen Beacons How are offshore centres of the Western Hemisphere

INVESTOR SERVICES JOURNAL 1

INVESTOR Continued from page 1

THE GLOBAL SECURITIES SERVICES INDUSTRY JOURNAL

INVESTOR Reference Data; Transfer Agency; Legal & Compliance

46 Weighing in the Risk Determining risk exposure is important when entering

52 Staying Ahead DPM’s Alan Tooker examines the complexity of hedge

54 Setting the Scene What does the acquisition of a hedge fund

56 US giants win in EU US custodians continue to dominate news in Europe

58 Race against Time Service providers in Germany are confident of a

63 Germany Panel Financial professionals in Germany debate the latest

72 The Quest for Rekha Menon highlights recent efforts to standardise

78 Issuers in the FT Interactive Data on a possible solution to the

80 Discarding the ISJ present presents the latest efforst intended to

82 Strengthening the Link Automation is within reach, writes Clearstream’s Bruno

86 Come Together Digest of the securities lending industry’s conferences

92 People Moves Movers and shakers in the global securities industry

94 ISJ Directory A-Z list of investor services companies and contact

2 INVESTOR SERVICES JOURNAL

London New York Sydney

INVESTOR Write to letters@ISJforum.com ply than compliance”.

4 INVESTOR SERVICES JOURNAL

6 INVESTOR SERVICES JOURNAL

Your single access point

8 INVESTOR SERVICES JOURNAL

DPM Europe Ltd

10 INVESTOR SERVICES JOURNAL

In just five years BNP Paribas

“This is a low margin business,

12 INVESTOR SERVICES JOURNAL

INVESTOR SERVICES JOURNAL 13

14 INVESTOR SERVICES JOURNAL

INVESTOR SERVICES JOURNAL 15

16 INVESTOR SERVICES JOURNAL

UBS 119.2 93.2

Credit Suisse 51.4 46.5

Source: Fitzrovia, Luxembourg Fund Encyclopaedia Fitzrovia, Luxembourg Fund Encyclopaedia

INVESTOR SERVICES JOURNAL 17

Hedge Funds agement. Luxembourg has just introduced an exemption

18 INVESTOR SERVICES JOURNAL

Our specialized team has an outstanding track

We know that precision and timely execution are

We would be delighted to give you the benefit of our

Banque Générale du Luxembourg S.A.

Solid partners, flexible solutions

The Luxembourg Investment Fund Industry in 2004 - number of funds

20 INVESTOR SERVICES JOURNAL

sponsors would therefore recommend Dublin for hedge

,UXEMBOURG 'LOBAL #USTODY