By Gary Maller, Asia-Pacific Correspondent

September 6, 2004 - The challenge of interfacing a back-office clearing system with Australia's sophisticated, fully disclosed, dematerialized central depository, Chess, continues to make growth by acquisition a key feature of Australia's vendor landscape.

In the latest moves, leading buy-side financial planning software provider IWL has acquired outsourced clearing firm Australian Clearing Services (ACS), while Misys Securities Systems has sold its Asia-Pac operations to Capital Market Solutions (CMS) in a management buy-out deal. In a marketplace where opportunity rather than technology drives competition, some acquisitions can present an ironic situation: market participants adopting their competitors' vendor platforms in the fight over the same clearing space.

CMS Acquires Misys Systems
As Ralph Horne, now the chief executive officer at CMS, recalled, acquisition was the growth strategy driving U.K.-based Misys' original push into Asian markets by way of Australia. "The way we did business was by soft entry into Asia-Pacific markets by acquiring Fujitsu and Mocom, the number two and three vendors in Australia at that time. It was very important to get a beachhead in a country where we felt conditions were right, and obviously Australia was at the forefront there," Horne said.

As a regional director for Misys, Horne subsequently merged the Fujitsu and Mocom operations and spearheaded growth into Asia, using Mocom's Nova back-office system. Exiting the back-office securities sector in 2003, Misys sold its European operations to GL Trade and Horne acquired the Asian region, establishing CMS. "Having bought the companies who made up the Asian operations on behalf of Misys, and built the organization, it was a very natural progression to put a bid in for those firms in a deal completed with Misys late last year," he said.

As Horne reported, CMS runs its Asian operations out of Melbourne, with on-the-ground support for clients in Australia, Japan, Hong Kong, Korea, Malaysia, New Zealand, the United Kingdom, and New York. Australian clients use the iBroker securities system, originally developed by Fujitsu, and CMS has no current plans to launch its multimarket platform, Nova, in Australia. As Horne explained, "If you look at the dynamics of the Australian market, it's primarily for domestic settlements, and iBroker handles domestic settlement of exchange-traded instruments exceptionally well. We see no reason to change that." Horne would not identify CMS clients, but claimed that the migration from Misys to CMS has gone well and expects CMS to grow current market share in Australia, where observers place the firm second to market leader and local developer GBST, and ahead of ADP Wilco. Like Misys, Wilco also entered the Australian market by acquisition, in Wilco's case by purchasing the Summit system, originally developed by Computershare.

As previously reported (Securities Industry News, May 31), emerging markets specialist Credit Lyonnaise Asia-Pacific Markets (CLSA) runs CMS's Nova as its multimarket, multicurrency back-office platform throughout Asia. According to Horne, Nova's multi-settlement interfaces give CMS an edge. "That's where we're probably ahead of everyone else," he said. "We have interfaces built for Shanghai, Shenzhen, Japan, Malaysia, the U.K. and Australia. We support local market functionality for Korea and are in the process of building an interface for New Zealand."

IWL's Integrated Strategy
Tougher compliance rules and increasing broker-dealer back-office costs were key factors in Melbourne-based software developer IWL's recent decision to acquire outsourced clearing provider ACS, according to IWL's CEO, Otto Buttula. According to Buttula, integration is a key driver in the Australian financial industry. "Whether people like it or not, the Financial Services Reform Act (FSRA) and increasing regulation are not going to treat people differently, whether they are a financial planner or a broker-dealer," Buttula observed.

Until recently, Australia's financial services industry has been clearly split between buy-side financial planners--who represent major funds as distributors or private dealer groups, and drive indirect client investment into super-funds, wrap accounts and master trusts--and sell-side retail broker-dealers, who trade stock directly for investors and manage settlement on their behalf. However, most Australian investors have mixed portfolios, with shares held both as stock and as units in managed investments. For that reason, planners and broker-dealer advisers increasingly find themselves in direct competition for a larger share of the total retail portfolio, using a new breed of integrated "wealth management" solutions.

IWL is positioning itself aggressively in this market, straddling the buy- and the sell-side divide and spanning the transaction value chain, from market data and order placement in the front office to outsourcing and correspondent clearing in the back office. Spearheading the push is VisiPlan, the company's planning solution, which won the National Australia Bank-MLC group in 2003. When fully deployed over the NAB-MLC base, Buttula believes that VisiPlan will enjoy a healthy market share of Australia's 16,000 financial planers.

On the sell-side, IWL acquired Perth-based broker-dealer Sanford in 2003, giving it a back-office equites system called Plato II. That platform enabled Sanford to offer outsourced clearing using "white-label" execution services for large financial planner groups. In this process, planners (who are not market participants) can offer trade execution to their clients, using Sanford as the executing broker. Integrating Plato II with VisiPlan as its front-end system could give IWL a comprehensive wealth management solution for planners and broker-dealers alike. "VisiPlan will clear through Plato II. Our end goal is to make the system one platform anyone can use, be it a broker-dealer or a financial planner. And we can turn components off and on according to what clients want to use," Buttula said.

Sticking With GBST
IWL will not compete in back-office software using Plato, however. Buttula sees no conflict of interest in the fact that IWL's new clearing arm, ACS, runs a correspondent clearing platform called Shares, developed by GBST, even as IWL continues to develop Plato's processing capability. "Plato is an internal system, and we will not be marketing it to other broker-dealers," Buttula said. He believes that this strategy is not incompatible with IWL's intention to attract planners or broker-dealers to the option of clearing through Sanford or ACS using the VisiPlan front end. "The growth of the Sanford business is traditionally in wholesale, but now, obviously, through the acquisition of the ACS business, we've got more choice of how we do that," said Buttula.

Buttula said that IWL will not migrate ACS clients from GBST Shares onto Plato II. "Our intention is to continue using GBST," he explained. "We are looking to extend that [ACS] contract with GBST, and are in discussions with them. Plato II is not capable of supporting multi-entity [(i.e., correspondent)] clearing, and at this stage, we will grow the ACS business on the GBST platform."

Buttula admitted that to some people this approach "doesn't make a lot of sense." Nevertheless, he maintained that the company is "still comfortable with that as a strategy going forward."

Even though GBST does not directly compete with IWL, the majority of Australian broker-dealer firms use the GBST Shares back-office system, including leading correspondent clearer Berndale Securities, a wholly owned subsidiary of Merrill Lynch. By entering the broker-dealer front-office market with VisiPlan, IWL could target both Berndale's correspondent clients and GBST's self-clearing brokers, eventually migrating them to clear through ACS using IWL's Plato II, which would, in this scenario, replace GBST Shares as the ACS clearing platform. "Obviously GBST have suspicions about our goals, but we just have to prove our intentions over time," argued Buttula.

Stephen Lake, CEO at GBST, confirmed his company's discussions with IWL, adding one caveat: "As the new owner of ACS, we have to ensure IWL's licensing arrangement for use of GBST's Shares clearing platform is appropriate for both parties."

Berndale's Competitive Balance
On the other hand, Craig Mason, head of Pac Rim Prime Brokerage and Third Party Clearing at Berndale, believes the balance sheet of Berndale parent Merrill Lynch gives it an edge over the newly merged ACS. "At the end of the day without a balance sheet, a clearing solution does not stack up in Australia," Mason said, referring to a number of ACS clients who have previously migrated to Berndale to more easily process big-ticket trades (Securities Industry News, March 3, 2003). The ability to price competitively is also an issue for clearers. "Our smaller retail firms actually leverage off the fact that we deal for the top-end firms as well. There is no way anyone can actually clear for small-tier firms at an equivalent price if they are not doing the volumes we are," Mason explained.

Clearing platforms like IWL's Plato  II would also require large volumes to justify the necessary investment, Mason believes: "I say this to anyone thinking of entering the clearing space in Australia, that it's a five to ten million dollar commitment to get the equivalent efficiency and automation Berndale has achieved using the GBST platform." Also in Berndale's favor, Mason said, is that in addition to prime brokerage and regional clearing for large institutions, Berndale achieves additional scale by clearing for Merrill Lynch Australia.

For his part, IWL's Buttula acknowledged that balance sheet and volume are key factors in success, and that he expects that outsourced clearing will continue to be a slow-growth market and tough for new entrants. "Margins are ordinary and you have to get volumes up," he said. But Buttula also believes that IWL's acquisition of ACS has addressed previous balance sheet concerns to some degree, and that convergence in the front office will drive broker-dealers towards integrated platforms. "Financial planners are increasingly moving into the broking space," he observed. "Obviously, that's why we bought Sanford. And vice-versa: Brokers are increasingly moving onto the fee space and portfolio space. The requirements for them to do business will be similar. So that's why we are moving into the broking space as well as growing our other business. It's the one-platform theory. One vendor."

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