In yet another example of necessity as the mother of invention, Asia-Pacific broker-dealers are developing a variety of hub solutions depending on which aspects of the trade and settlement cycle in particular markets are centralized or outsourced. The new wrinkle is that some of these proprietary regional solutions developed by broker-dealer/vendor partnerships are now considered best practices and are being marketed worldwide.
A case in point is emerging market specialist Credit Lyonnaise Asia-Pacific Markets (CLSA), a subsidiary of the de-merged CLSA Group run independently out of Hong Kong that serves global clients in all major Asian financial centers. According to David Illett, group head of trading and operations, CLSA ranks among the top 10 lead managers in Asian equity capital markets, and investment in innovative technology has played a large role in this success.
"We were thinking about outsourcing operations because we had developed over the years a first-class research product and had an excellent brand name, but we realized too late that we hadn't invested enough in the back office," Illett said. "We started talking to large custodians, including Citibank, about the possibilities of outsourcing but we realized that with regulatory environments in Asia today, it wasn't really possible. So we decided to use modern technologies to, wherever possible, centralize operations, and over the last three years we've centralized operations from Singapore, Korea and New York in Hong Kong."
That office now runs a 24x5 operation that receives all client orders and issues most contract notes.
CLSA's centralized model comprises a back-office clearing and settlement engine, a global trading and order management platform, and a sophisticated enterprise application platform that interfaces global clients, local market branch offices and CLSA's back office. To achieve the desired efficiencies, the benchmark adopted was end-to-end, exception-based processing, and key aspects of the platform were developed with vendor partners to be CLSA proprietary systems.
The end result has drastically lifted processing performance, according to CLSA CIO T. Rajah. "Three-and-a-half years ago, clients expected trade confirmation two hours after market closure. Now it's two hours after the order is placed," he said. "Our benchmark is very simple-as soon as the trade is done and executed, the confirmation is instant."
Partnering Up
According to Rajah, CLSA's order management platform was originally developed with local Hong Kong vendor Finsoft, but that company was acquired by Paris-based global trading systems provider GL Trade in June 2001. GL Trade now markets the platform as its multicurrency, multimarket, order management system, GL OMS.
CLSA subsequently worked with GL Trade to develop its global order management capability. According to Rajah, the GL OM FIX system automates order capture and order routing via the back office for execution in the 10 local markets in which CLSA is a member. "In all the markets we hit, 90 percent of orders go straight through," he said.
The key component driving straight-through processing across CLSA's operations to markets and clients is an enterprise application interface (EAI) developed as a proprietary system with WebMethods. That company was subsequently awarded the 2003 SwiftReady Gold label for financial EAI in June 2003 for the CLSA-developed solution; it now markets a version of that platform as an out of the box Swift STP solution.
"We have a single-instance system, and at the end of the day the main component allowing us to do that is an EAI middleware platform that we invested heavily in," Illett said. "The EAI platform not only interfaces internal systems and local markets; it also provides real-time trade confirmation to global clients-without having to be processed by the Nova back office. We have an independent module in the EAI platform that provides instantaneous confirmation and that has given us a significant edge in the way clients view us."
Illett added, "We can basically confirm transactions to fund managers in just about any way they require it. We offer a customized approach to allow allocation and confirmation through Swift, Oasys, fax or whatever, and with that confirmation we give them customized reporting. Since just about all of our processing is straight through, it tends to be quick and it tends to be accurate."
According to Illett, exception-based processing on the EAI platform also provides CLSA's global offices and clients with a real-time view of post-trade processes that streamlines settlement processes by reducing potential fails. "All our operational staff globally--in Asia, Europe or New York--can see matching and fail information from custodians and from people in regional settlement offices, and everyone can see the status of their transactions and add their own comments. Populating the view with Swift matching messages provides real-time alerts from custodians into the system. You select what populations of trades you want to see--if you are looking at a particular North American client, for example. But if you are a settlement person looking after Malaysian settlements, you can select that view. We have also provided some clients with direct Web access to view settlement processes--they can only see their own trades--and they can also customise their view by market, size of trade or settlement date, etc."
New Innovator on the Block
Other technology innovators in the region include a recent entrant, ITG. The New York City-based electronic broker-dealer also centralizes its processing in Hong Kong, but unlike CLSA, uses technology to outsource its execution and clearing to local brokers in 11 Asian markets.
According to COO Alasdair Thomson, ITG opened its HK office in 2002 to offer U.S. clients access to Asian markets and bring the ITG's "best execution" model to Asia. "It's becoming increasingly important for clients to have a global book and say cover it'," he said. While liquidity in Asian markets is still too thin to support ITG's Posit crossing model, ITG gained local order flow by acquiring Hong Kong broker-dealer Hoenig Group in a merger finalized in September 2003.
The Hoenig acquisition also provided ITG with the opportunity to roll out execution services across its money manager client base. Hoenig runs a long-established soft dollar and directed brokerage service in Asia and the United States. Thomson believes the Hoenig/ITG network of directed brokers in local markets can be managed centrally from Hong Kong. "While it's important we base our operations in this time zone, given our technological capability we don't necessarily need branch offices in every market," Thomson said.
ITG models the liquidity impact of large trades in specific markets and runs a set of desk tools to achieve a variety of execution models that take into account client's timing requirements and related factors.
After the trade is done the outcome can be analyzed using ITG's post-trade transaction cost analysis tool-TCA-which evaluates investment decisions, critiques trading strategies, and compares the performance of traders or brokers. "To give up a trade to us may not mean the trade is done immediately," Thomson noted, "but we do minimize the cost impact of that transaction because we don't buy across our own desk, ship the order around, or run a proprietary book to buy a portfolio at a guaranteed price and then push the order out to the market over the day. Our model is extreme agency broking,'" he said.
ITG routes and processes orders via GBST Shares, a multimarket multicurrency trading and settlement system using FIX-compliant networks "where appropriate." According to Thomson, depending on the market the client may or may not be disclosed to the executing broker--but as orders are not shopped around--he claims there's no significant impact on the stock's liquidity. Depending on requirements, clients can also receive confirmations immediately. "The way we have structured the Shares system, we are able to book contract notes and generate post-trade confirmations in the respective client currency within minutes of receiving trade confirmations from brokers," he said.
