Interoperability is alive and well in Australia's financial industry, as both buy and sell sides adopt open systems and standards to improve business and market efficiencies. "The old days of system providers protecting what they perceived as their intellectual property by making it difficult to integrate with other systems is over," observes Paul Bryant, head of financial planning at mid-tier broker-dealer Wilson HTM.
Constrained by high domestic portfolio weightings and trading volumes that are relatively small by global standards, Australia is nevertheless an early adopter of global messaging protocols for front, middle and back offices-including FIX, Oasys and Swift. But adoption to date is limited to top-tier broker-dealer firms and investment managers. "The business case remains an issue," says Martin Carpenter, Swift's Asia-Pacific manager. "We find ourselves working with the top thirty fund managers, and even there, the focus can be on revenue as opposed to processing. The challenge is to raise awareness of cost constraints and building scalability."
Hub Solutions
Bridging the gap for smaller outfits, leading front office and middleware provider Iress uses a hub solution for Swift connectivity. "That's one way we're starting to get indirect contact with the broker-dealer community, with Iress in the middle as a marketwide processing hub," said Carpenter. "The model is driven by the investment manager, who chooses Iress to manage the trade confirmations; that obliges the broker-dealer to be on the Iress ETC [electronic trade confirmation] system as well. Iress can then offer Swift settlement messaging to the custodian counterparty as a value-add." Iress has joined the Swift network and has all the capability to support Swift settlement messages, Carpenter says.
Joining the push to drive down Swift user costs is leading custodian JP Morgan, which, driven by demand by offshore clients, recently released a proprietary Swift network, called Message Express. "In terms of assisting interoperability with Swift, it means fund managers can have a Swift-like environment but not a Swift link with us, and we'll hub that into Swift for them," says Graeme Arnott, JPM's director of investment services for Australasia.
Initially aimed at smaller and mid-sized funds, which don't have enough appetite or volume to join Swift proper, JPM's service has also attracted interest from larger funds, according to Arnott. "It gives them a lot of advantages: As messaging standards evolve and change, this will limit the number of times users have to update Swift middleware." The approach is beneficial to messaging in the overall marketplace as well, Arnott argues. "Swift hubs are a global trend; it won't be just JP Morgan offering this kind of service," he says.
Iress On Top
For its part, Iress continues to dominate domestic order flows and trade confirmation through its established network in Australia. Used by the majority of investment managers and broker-dealers, Iress' order management system, called IOS, gives offshore clients access to the Iress network of brokers through FIX. "Only Australia's top brokers have sufficient offshore trade volumes to justify a FIX engine themselves," said Kirsty Gross, the firm's product sales and marketing manager. "But our FIX service allows global fund managers to direct client orders to brokers using a FIX message which IOS translates and processes directly into broker systems."
Given its broad installed base among fund managers and brokers, Iress middleware has become a key nexus for back-office providers like GBST, Capital Market Solutions and ADP Wilco, which in addition to supporting Oasys, Swift and FIX using open application program interfaces (APIs) also offer interfaces with, or adaptors for connection to, Iress. This facilitates order flow and electronic processing of post-trade tasks by GBST Shares, CMS iBroker and ADP Wilco Summit systems.
Joined at the Middleware
In the bid to increase the value of client business systems, back-office vendors are also offering proprietary middleware solutions with an eye to expanding core capability. GBST, for example, launched a suite of market integration and industry connectivity interfaces in 2003 that offers a range of stand-alone APIs between GBST Shares and the products of various middleware vendors and providers, says Craig Apps, GBST's general manager of clearing, settlement and custody solutions. "The more our systems are successfully embedded in client sites by facilitating processing between critical business systems and to external providers and counterparties using industry standard protocols," Apps says, "the more value we can add."
A growing number of major cash management trust (CMT) providers and margin lenders distribute their products through GBST's client base of retail brokers to more than one million investors via broker-dealer desktops, Apps reports. Broker-dealer Wilson HTM recently integrated its equities and funds management processing by interfacing the FMC portfolio management systems with Shares, using GBST middleware, so that client data and holdings are accurately reflected in both systems at any given moment-without the need for manual intervention, he says.
Capital Market Systems would also enter the middleware space, according to sales and marketing director, Joe Nash, who reports that CMS will launch a standalone ETC solution for both CMS and non-CMS clients before the end of the year. Using industry-standard open APIs, the module will facilitate the entire post-execution cycle, from block bookings to allocations rebookings and confirmations, says Nash. CMS's Nova system, Nash adds, was one of the first in Asia-Pac to adopt Swift ISO 15022 standard.
Proving the Exception
Despite functional and pricing differences, all three vendors systems support exception-based processing, according to recent announcements by both GBST and ADP Wilco. Jessie Pak, managing director for ADP Wilco's Asia-Pacific division, says that Summit now supports complete STP capabilities for institutional brokers. Users need only deal with exceptions, which are pushed in real time to desktops. Pak says that Summit supports Oasys Global Direct through a real-time adaptor, which routes exceptions to the booking monitor. CMS's Nova system also enables exception-based processing with their EQM product, Nash noted.
Spurred by investors who have put the spotlight on cost of investment, buy- and sell-side participants are looking for efficiency gains, observes a technology spokesperson for a large global investment bank and client of GBST. "Exception-based processing is extremely important," the spokesperson said. "Clients, who themselves are increasingly financially constrained, are demanding more automation and greater speed through the allocation and confirmation process. Increasingly, they have to justify their costs to their customers on whose behalf they are investing and that translates through to higher expectations of the broker."
Australia needs FIXing
"FIX will become increasingly important in the Australian marketplace," predicts the spokesperson for the GBST client bank. "Internationally, the majority of top-end brokers and institutional investors are moving towards FIX. Within the Australian industry, we have to be capable of handling FIX if our market is to retain global credibility and market share."
"As a global broker," the GBST client says, "our pitch to clients is that if they adopt FIX, then we can execute for them in any market in which we operate and furthermore that we can do that execution efficiently. To date the largest take-up of FIX has been in cash equities trading, but increasingly the futures and bond markets are embracing the FIX standard and usage will continue to grow."
"In the face of increasingly sophisticated clients, for whom non-advisory equity brokers and full-service brokers are equally attractive, we've been forced to find more cost effective ways to execute, and hence our embracing of the FIX standard. Domestically, funds managers will be forced to look for economies as they come under the same pressures as some of their European and U.S. counterparts. For those domestics that invest both locally and internationally, one of those economies may well be the adoption of FIX as a standard for transacting both domestic and international business."
Execution Specialists
E-Trade is one non-advisory firm that is already bridging the buy-sell divide by expanding its self-directed retail model into wholesale offerings for financial planning groups, wrap providers, institutional and retail brokers, and individual advisers. The wholesale side of the business is a growing part of revenues, according to E-Trade's head of operations, George Karantzias. "Using ADP's Summit system for the back office, E-Trade's proprietary STP order processing and vetting engine EVE allows wholesale and retail customers to trade directly onto the ASX Seats trading system," Karantzias says. "This capability has enabled us to grow our wholesale client base from start-up to 150 in the last few years. Resultant processing efficiencies have also enabled redeployment of two-thirds of our operational staff to the revenue side of the business, while increasing trading volumes in the same period," he says.
Converging World Standards
In a bid to extend its network of users by offering connectivity in the front office, Swift is forging a strong relationship with the FIX community, according to Carpenter. "SwiftNet already carries pure FIX messages between the buy and sell sides," he says. "With regard to standards, obviously we're not going to duplicate FIX work already completed, but we're working closely with FIX so our combined efforts are aligned or at least in sync."
The adoption of world standards--"interoperability"--will mean that when users send a Swift message and the counterparty prefers FIX, the mapping process between FIX and Swift will be much simpler due to the standards alignment, Carpenter says.
How that convergence will take place remains to be decided, but Carpenter claims that ISO 20022, the new XML-enabled version of ISO 15022, will facilitate easier adoption of new message types, including support for managed funds and FIX, and will assist in opening up access beyond the boundaries of the securities industry. "We're not saying our standards are better," Carpenter says. "We're just trying to say let's have one standard.'"
Corporate Actions Still Divide
Australia's Swift users migrated to ISO 15002 in November 2002, says Carpenter. Adoption of settlement and clearing messages went smoothly in most cases, but corporate actions remains a challenge. "We did not get a big take-up on day one for corporate actions messages," he remarked.
Swift continues its push to expand support for Swift corporate action messages beyond custodians to investment managers and exchanges, including the Australian Stock Exchange (ASX). "At the end of the day, it will be a question of what the industry is prepared to pay for this service," Carpenter says, "but custodians and investment managers have made it clear that receiving corporate actions from the ASX via Swift ISO 15022 means they don't have to reformat that data into Swift as it's received into their systems."
But the adoption of Swift messages by the ASX for corporate actions is only one option being considered by the exchange, according to an ASX spokesperson. And ASX adoption of Swift is critical for the standard's extension into Australia's sell side, Carpenter believes. "It creates a stronger business reason for brokers to use Swift and a toe in the water for doing future business with the ASX."
