2F2 P
Investment Accounting Technology Trends
InvestTech Systems Consulting Jeremy M. Hurwitz October 2005
P2F2
Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion
October, 2005
Introduction to InvestTech Systems Consulting
Industry Leading Investment Systems Implementation Focus, Experience & Qualifications
Specialized expertise in investment management systems within large private institutions and public pension funds Investment industry leader in strategic architecture, operational efficiency and systems evaluation studies Successful completion of multiple large, complex implementation projects over 15 years Strong working experience with most leading investment systems accounting vendors
Qualifications & Experience
InvestTechs Project Team Sample Public Sector Experience
Public Sector Experience
Ohio Public Employee Ret. Systems Florida State Board of Administration Oregon State Treasury (& Ret. Funds) Central Bank of Norway (NORGES) Ontario Muni. Emp. Ret. System (OPERS) Hospitals of Ontario Pen. Plan (HOOPP) ABP Dutch Pension Plan Wisconsin State Investment Board TIAA-Cref State of Alaska Pension Plan State of Florida, Division of Treasury Texas Teachers Pension Fund Washington State Investment Board
Project Descriptions
Strategic architecture - systems evaluation - investment accounting and data warehouse systems implementations. Strategic architecture - systems evaluation - and investment accounting and data warehouse systems implementations Systems evaluations - Investment DWH implementation Custodial evaluation & equity trading systems implementation Strategic investment operations efficiency studies, investment accounting and performance implementations Investment accounting implementation Investment DWH & performance measurement implementation Investment DWH & performance systems implementation Risk management evaluation & selection study Strategic planning study. Investment systems evaluation and selection study Investment accounting systems assessment Strategic architecture - systems evaluation & selection studies.
P2F2
Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion
Industry Trends E-Trading
Fixed Income E-Trading Explosion
Bond e-trading ($4T / month) Steep CAGR (150%) Majors are Govts, MBS, CP
Source: Lehman Brothers estimates
Buy-Side Mega-Trends
1. Major Sector Consolidations Mega-brand Power
Banks, brokers, custodians, investment firms and Software Vendors. Vendors
2. Vertical Specialization Niche Focus
Expect leading firms to migrate to models that favor specialization
3. Regulation and Compliance - The Cost of Doing Business
Enterprise-wide infrastructures to address regulatory requirements
4. Data Organization What is your Data Strategy
Next-generation data services - predictive analytics and data mining
5. The Technology Differentiator
Spending on strategic IT projects will define the next leaders
Wall Street and Technology September 2005
Leading Buy-Side 2005 Focus
1. Enterprise Wide Data Integration Consolidate siloed data to derive
meaningful business information to support strategic objectives.
2. Soft Dollars Pressure - Dramatic changes in 2004/5. Impact on vendors services. 3. Algorithmic Trading - 2004/5 boom, greater emphasis on product differentiation. 4. SoX and BIS Basel II Accord (2007) Heavy focus on compliance. 5. Office Integration - Retail investors pressure advisors - must leverage
information across the firm to empower client servicing.
6. Transaction Cost Analysis Focus on execution and the TCA tools. 7. FIX/SWIFT & Other Standards - FIX 4.4 in 2005 focus on derivative products 8. Process Integration - Buy side need to improve operating efficiency across
entire IM cycle. Cost driven process. Soft dollar cuts compounding impact.
Wall Street and Technology April 2005
Accounting Market Backdrop
Pre 1990 Buy-Side predominantly manual/legacy (ADP) Post 2000 - 85% of securities accounting is automated Post 2005 - Growth in security class systems focus 2005 - Leading vendors (200+ clients) lag the technology curve Increased demand for automation and real-time focus
Demand for internal STP outpaces external STP Global processing - corporate actions, program trading, automation Extension of FIX into Fixed income and Derivatives
Typical Investment Systems Architecture
Large Buy-Side Institutions
External Feeds & Connections Market Data & Analytics Front Office Systems Trading Back-Office Accting/Cash Additional Back-Office
Linear information flow, incomplete integration, complex web of interfaces
VMUs
Electronic Transaction Systems Security Master Feed
Pricing, FX
Bloomberg
Risk Management
OMS Trading Platform
Fixed Income Trading Equity Trading
Portfolio Accounting
External Warehouse
Salomon Yield Book
Performance Attribution
Reconciliation
Client Reporting Custodians and Admins. Settlement Depositories
Lehman PC Product
Custom Analytics
Compliance
Derivatives Accounting
MBSCC EPN System
CMS BondEdge
Benchmark Modeling
Derivatives Trading
Cash Mgmt Client Billing
Broker Analytics
Credit MBS Analysis Trading System
MBS Trading
CDO/Hedge Accounting
Securities Lending
Front Office Data Marts
Operational Data Hubs
Data Warehouses
Inv. Acct Vendors and Services
Best of Breed Approach
Analytics: Bloomberg, CMS BondEdge Derivatives Solutions, Lehman Point, Solomon Yieldbook, Factset, Barra Trading: Bloomberg POMS, CRD, Ez Castle, Latent Zero, Macgregor, Longview Accounting: Advent, DSTi, Eagle, IDS, Princeton, SS&C/FMC, Thomson, Sungard Performance: DSTi, Sungard, Statpro, Eagle, FMC/SS&C Data Management: DSTi, Eagle PACE, Goldensource (FTI), Sungard FAME, Netik
Integrated Approach
DSTi, Thomson, Blackrock Solutions, Principia, Murex, Simcorp, Sungard, Eagle.
Vertical Best of Breed
Derivatives Solutions, Wall St. Systems, IBSI, Principia, InvestTran, CDOSuite, Beauchamp, InvestTier, Equitrack, Algorithmics
Integrated Vs. best of Breed
Deployment of Integrated Solutions
1-Stop Shop Legacy Systems
Vendor Re-Integrated Solutions
Best of Breed Peak Outsourcing ??????
-----1980------------990s-----------1995----------2000-----------2005--------- Time Scale
Leading Investment Accounting Vendors
Company
ADP Wilco Advent Software, Inc. Microgen plc Beauchamp Financial Technology Checkfree Investment Services DST International Eagle Investment Systems Financial Models Corporation Global Investment Systems (GIS) Integrated Decision Systems (IDS) ITS Associates Inc Misys Princeton Financial Systems QED Information Systems SimCorp SS&C SunGard Thomson Financial Trema Group Wilshire Associates
Product
Tarot Axys, Geneva AIMS Back Office FundManager Checkfree APL HiPortfolio Eagle STAR FMCPacer, FMCGenvest MFACT Global Inv. Manager Tiara Quasar PAM Q2 SimCorp Dimension CAMRA Invest One, Portfolio One Portia, Vestmark Trema Finance KIT Abacus
Full Basic Perf Perf Invest. Suite Acct. Meas. Attrib. DWH Compl. Recon Risk Hedge Pools X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X X
Accounting Market Backdrop
Recent banking consolidation and vendor shuffle
Sungard The Consumer is consumed SS&C buys FMC and SS&C is purchased Checkfree buys IDS Macgregor and TradeWeb are purchased Custodians outsourcing drives purchases:
SSB buys PAM and DST products Mellon buys Eagle BoNY buys Netik
Who is next?
Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion
Product Evaluation Framework
Core Product Functionality Technology Platform Data Management Model Extended Integration/Automation (STP) Flexibility & Scalability Service Models and Costs Vendor Strength (Risk Profile and References) Integrated Applications (Value Added)
Data Warehousing Reconciliation tools Performance and Risk Compliance
Technology
Security Type Coverage
1970 - 1990 1990 - 2000 2000 - 2005
Generation I
Generation II
Generation III
Domestic Equity Vanilla Fixed Inc.
Global Equity Extended Fixed Inc Asset Backed Futures/Options Basic Derivatives
Global Equity Extended Fixed Inc Adv. Asset Backed Futures/Options AddI Derivatives Bank Debt REO & Priv. Equity
Extended Securities Trends
Exotics are Becoming the Norm
MBS TBAs, CMBS Swaps (Interest, Currency, Credit Default, Many-to-many legs) Collateralized Debt (CDO, Tracer) Bank Debt, Credit Lines, Distressed Debt Complex Hedging Overlays / Strategies Driving Management Blurry Lines Between Fixed Income and Derivatives
Blame the Fed
Flat curve, tight spreads driving reach for yield
Blame the Hedge Funds
Waitthey are invading your firms!
Technology Evolution
1970 - 1990 1990 - 2000 2000 - 2005
Generation I
Generation II
Generation III
Legacy VSAM/Propriety Flat Files Batch on T+1 Green Screen
Client Server (2 Tier) Relational Database Multi-File Formats Batch on T+0 Windows Custom APIs
N-Tiers Relational & BLOB XML / Messaging Near Real-time Windows and Web Open APIs and Web Services ASP/BSP Services
Data Management Layers
1970 - 1990 1990 - 2000 2000 - 2005
Generation I
Generation II
Generation III
CRM
Basic Securities Accounting Data End-of-Day Access
Ownership and Contact Extended Security Attributes Intra-day Access
Extended Asset Classes Research and Analytics Direct Access to Security Universe Near Real-Time Market Updates Data Aggregation Warehouse Layer
STP Enabling Features
1970 - 1990 1990 - 2000 2000 - 2005
Generation I
Generation II
Generation III
Basic User Interfaces Reduce Manual Entry
Custom Trading Interfaces Basic System Automation DTC / OASYS SWIFT File Based Reconciliation
ECN / OMS Standard Interfaces Workflow Management Tightly Woven Settlement Integration ISO / FIX Message Based Marching / Recon
Internal System Transparency
STP - Integration is key
Accounting is the core engine of the business processes Open component architectures are keys to agility and efficiency Principles of STP applied from Back to Front Expect more ECNs / ATN (Tradeweb, MarketAcces) Expanding Industry Standards
Bond Market Association and ISITC working on common derivatives protocol for ISO and FIX 4.4
These Features Extend the Shelf-life of your Investment
Service Model The Outsourcing Continuum
Software Licensing for In-House Operation Application Service Provider (ASP) Business Service Provider Business Service Outsourcer
Traditional In-House Model Investment Manager Shoulders Operations And Technology Infrastructure And Integration Between Best of Breed Applications
Remote Access to Vendor Supported Systems/Technology Infrastructure Investment Manager Retains Operations Responsibilities IT Operations assumed by Provider ASP Vendor Provided Market Data Feeds
Technology and Services Supplied Investment Manager Retains Operations Staff Provider Manages System Infrastructure and Services
Traditional In-House Model Operations Staffing Lift-Out Outsourcer fully assumes Middle and Back-office Operations Operations Risk may be assumed by provider
Accounting Outsource Options
State Street Banks Princeton Financial ePAM
Outsourcing on SSBs Multi-currency Horizon or PAM
SS&C SSC Direct
Application Service Provider (ASP), outsourcing CAMRA system support - not operations. (Current maintenance $130k/yr.)
Mellon Bank
GSS has new product using Eagle PACE/STAR for full operations outsourcing.
Bank of New York
Smartsource, potential lift-out current CAMRA. Financial Models Company products (PACER, FMCNet, Recon)
Conning (uses proprietary CAMRA) GlobeOp, IFS, FCS, DSTi + Others
Vendor Momentum & Resources
Installation Base Information
Number of Client Sites 600 500 400 300 200 100 0
550 370 200 45 40 EIS FMC 50 20 PFS SUN TFS DST 250
# of Clients
QED
ADV
Total Number of Employees 290
300 250 200 150 100 50 0
290 250 250 170
60 25 33
# of US Employees
QED
EIS
FMC
ADV
PFS
SUN
TFS
DST
Vendor Product Report Card
Extended asset coverage Industry standards calculations Extended data requirements Value added features (Performance, Recon.) + Message-enabled integration (APIs, MQ,) + Improved data access tool sets Derivatives, multi-asset classes Advanced technology offerings Exception based workflow models
Meeting Markets Needs
High
Med
Low
InvestTech Evaluation Framework
The Devil is in the Details
InvestTech Evaluation Framework
P2F2
Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion
Generation IV Tech Gotta Haves
Web-compliant, n-Tier architecture Dynamic data structures (add your own fields) Dynamic security types (build your own flavor) Standard adaptors (OMS, vendors, ISO 15022, OMGEO) Open messaged based API (XML) Data repository integration (reference data) Ease of Implementation (vs ASP) Powerful client reporting tool sets Ease of adoption - Optional service offerings High performance (support the volumes)
Generation IV and Beyond
FI Holdings Modeling Review Equity Modeling Commingled Pool Hedge Fund CDO
Portfolio Management
Service Layers
Analytics Engine
Portfolio Accounting
External Assets
Service Level
Core DB
Research Tools
Message Architecture Based
Attrib
Performance Measurement
Peers
Risk And Compliance
2a-7
External Risk
Composites
Rule Based
Future Of Investment Accounting Systems Can Portfolio Accounting become a commodity? Probably Not
Replacement is non-trivial Integration is non-trivial User training (to optimal efficiency) is nontrivial Cost is non-trivial
Product Development Life Cycles
Development
Peak of Expectations
Time to Pick the Next Winner Expectation Re-alignment
Initial Development
Stability
Market Reaction
42
Decline
Time
2yr Blocks
P2F2
Agenda
1. Introduction to InvestTech 2. Buy-side Trends and Developments 3. Investment Accounting Framework 4. Technology Projections 5. Wrap-up and Discussion
Thank You
