Underlining Australia's growing importance as a hub for the Asia-Pacific region, a number of systems and services providers-including international companies such as Misys Securities Trading Systems, OM, Wilco and SunGard Data Systems, as well as local vendor Global Banking and Securities Transactions (GBST)-are expanding their reach in the country as they pursue regional solutions for their global clients. However, one of the factors that makes Australia so attractive for securities dealers-its sophisticated settlement infrastructure, facilitated by central depository Chess-also makes the market a particular challenge for offshore vendors.
"The localization issue is a big one for any vendor coming offshore," said Michael Blomfield, chief operating officer of CommSec, Australia's largest online brokerage, "and that is basically Chess."
According to some broker-dealers and vendors, Chess, introduced by the Australian Stock Exchange (ASX) in the mid-1990s, is one of the most advanced processing systems in the world. Chess automates and nets broker-to-broker settlement and also provides a subregister where shareowners sponsored as market participants by a broker-dealer can register all their securities holdings in a Chess account, facilitating automation. Vendor systems must be capable of supporting these and other centralized functions if they want to link their back-office solutions to Chess-otherwise, they cannot process brokerage or client transactions.
The complexity of interfacing to Chess was one factor in Stockholm, Sweden-based OM's decision to shift from the One World product as its preferred solution for back-office processing in Australia, according to Peter Ferguson, OM's general manager in Australia. "OM has stopped actively marketing its One World product due to lack of sufficient client scale to justify further development," Ferguson said.
OM will now interface its Finess System-a back-office and clearing product, not yet live in Australia-with Plato II, an online trading and settlement system developed by Perth-based online brokerage Sanford Securities, which is Chess-accredited. Finess processes third-party clearing for brokers in Stockholm and interfaces to OM's Secur system, which OM operates locally on behalf of the Sydney Futures Exchange.
Ferguson claims integration of Finess and Plato II will provide a solution enabling settlement across all asset classes. But the way forward with Plato II is still open. "Finess is not a product we want to market on a stand-alone basis, whereas One World was," he said.
"The difficulty in this market has very much been-ironically-Chess accreditation," Ferguson added. "Chess is a very sophisticated product and a very good product, and while there is a relationship between those values, it's very difficult to interface to it."
As reported in Securities Industry News (Feb. 26, 2001), connecting to Chess was also a factor in Automatic Data Processing subsidiary Wilco's decision to purchase the locally developed Summit system from transfer agent Computershare, rather than customize Wilco's flagship product, Gloss, for the Australian market. Gloss was also expected to be the platform for Securiclear, a proposed joint clearing venture between Macquarie Bank and J.B. Were that did not pan out.
"Chess is quite different than the depository model," said Chris Barker, head of product development for Wilco Australia. "Chess provides fully dematerialized stock positions, and broker-sponsored holdings-which is essentially a fully disclosed holding of client positions-and this is a quite different element than anything we see in a depository model."
Chris Hamilton, executive general manager for clearing and settlement at the ASX, acknowledges that Chess' advanced functionality comes at a price. "The best thing about-Chess-is this: the External Interface Specifications manual," he said. "It costs about A$50 ($28.70), and that gets you all the information to access to our fully proprietary system. In other words, anyone can build a system to talk to us. The downside, for want of a better word, is that Chess is quite complicated in terms of the functions offered, particularly when compared with a depository system."
"In a depository model, the nominee applies all the changes to client positions," Barker said. "Here, under the broker-sponsored Chess model, the changes are applied by the registry and Chess and adopted by the broker and into the broker's system. The details have to be valid and equivalent across the broker system, Chess and the underlying registrar."
Added Hamilton: "The bottom line is that Chess is a remarkably efficient way of facilitating real-time, fully automated trading in any securities market. It is an evolution beyond the depository system that is still fairly widely used worldwide. The adoption of Chess by other markets is not a technology issue so much as a cultural one: Chess is an investor-centric system."
CommSec's Blomfield agreed that Chess is not like other processing systems. "It's very different," he said. "Chess is really much more advanced. The challenge is when you have that level of automation in an industrywide application, it clearly requires enormous rule definition. Players come in and say this doesn't look too hard; it's like a bank account for shares," and then they start getting into corporate actions and they find it's an absolute minefield. Chess provides a physical platform on which brokers can exchange stock electronically and it's having that bit in the middle, allowing brokers to talk to each other in a messaging format, that is so different from the rest of the world."
"One thing Chess does do," said Hamilton, "is enable smaller markets to exhibit or surpass the efficiencies you would otherwise expect to be available only to large markets. For example, technically speaking at least, we could move to T+1 [settlement] tomorrow morning. That said, though, we are seeing an evolution where new systems such as London and Hong Kong are showing a lot of resemblance to Chess, and that's a good thing."
Chess has actually provided a regional edge for Australian vendor GBST, according to new CEO Stephen Lake, who says GBST's integrated front- and back-office system, Shares, was specifically designed to allow brokers to fully benefit from the processing platform. "We were the first to align a client system with Chess Phase 2 in 1996," he said.
Lake said GBST processes about 45 percent of all equities traded on the ASX. The company also claims more than 50 percent of trades in New Zealand, has gone live in Hong Kong with ITG, and has won J.P. Morgan's Australian retail business (re-named Ord Minnett) amid a string of announcements about client renewals and wins in Australia and New Zealand.
ITG Australia, the local operation of ITG has been using GBST Shares as an agency client of correspondent clearer Australian Clearing Services, for a number of years. In December 2001, ITG insourced its back office using Shares and also selected the system for its institutional business in Hong Kong; Shares went live in that market in April. "This provides ITG a common platform for its regional operations and the benefit of a single vendor relationship," said Lake. "Clients need confidence their platforms can enable regional solutions, particularly if they want to hub clearing for a number of markets."
For its part, CommSec recently signed a three-year renewal of a contract with Misys Securities Trading Systems for its revamped trading and processing system, iBroker, and iBroker Margin Lending. Misys upgraded iBroker and iBroker Margin Lending to an Oracle 8i database platform and Forms 6 environment, enabling both systems to become Web-enabled.
Bloomfield claims 90 percent of CommSec's front and back office is already fully automated, including the straight-through processing of client orders onto Seats, the ASX trading platform. Blomfield said cost efficiencies from back-office automation, as well as Chess, are key to extracting a margin.
"That's a fundamental issue for us," he said. "Whether it's through necessity or good management, we've had to drive scale in our back office. At times, we've had to process up to 27,000 trades in a day and you cannot do that without scale."
A challenging Australian market hasn't deterred SunGard from extending its reach in the country to equities processing on the sell side. "I think Australia has always been a relatively advanced market," said Till Guldimann, vice chairman in charge of strategy at SunGard. SunGard already processes derivatives, treasury and fixed interest for local clients, totaling $30 million in revenue per year, according to Guldimann.
SunGard's focus on equities is part of a regional strategy. "When you are in the region, it's important to be with leaders in the region; that's one thing," Guldimann said. "The second thing is that globalization is very important for large financial firms. We are following clients here to be sure we can serve them on a global basis. That, in turn, brings you to global players from the Australian markets, like the Commonwealth Bank. We serve them overseas and we serve them here too."
SunGard also plans to extend its securities processing capability to Chess, according to Guldimann.
Wilco's regional strategy is "local connectivity, global reach" said Barker. The vendor plans to use Summit as its local interface to Chess and build messaging capability to the Wilco Gloss system for institutional brokers and to Tarot, Wilco's retail offering, which is widely used in Europe and the United Kingdom. Connectivity between systems would enable brokers to consolidate client positions across markets and currencies; the solution would also offer exception-based processing provided by Wilco's STP Explorer, Barker said.
GBST is also extending its end-to-end processing into derivatives as part of a system to facilitate regional processing and clearing across instruments and markets, according to Lake. The privately held company plans an off-market capital raising in the fourth quarter to speed this and other offshore initiatives.
"This will see the company offer 25 percent of its capital," said Lake of the offering. "But despite persistent approaches from our competitors, the business is not for sale."
Lake believes GBST's correspondent clearing system provides a strong market advantage. "If Australia follows the United States, 80 percent of broker-dealers will outsource their back-office operations and capital risk," he said. "We are the only vendor to provide this functionality with Chess and so provide a fully cost-effective outsourcing solution for clearers and correspondent firms."
Barker said Wilco also possesses all the components required to enable a correspondent clearing solution across markets for Australia, but added that such an initiative would be client-driven.
Commenting on the fact that vendors other than OM have attempted correspondent clearing systems for Chess, Ferguson said: "It's a tough project."
