Financial Journalist

Hong Kong iMail October 30, 2000

Do not be dazzled by the figures bandied about by the most respectable financial institutions - they all want to believe

By Gerry O’Kane

A friend cornered me last week to tell of his brave concept for doing business. He thinks it’ll make millions and he should have no problem floating the company. It doesn’t cost anything to use it and requires no hands-on training. The customer doesn’t even have to be at home. He might be on his way to work. He can test the goods, try on the clothes, get answers from experts immediately and, if he likes the product, can hand over cash. He calls it buying from shops.

You might have heard the joke. You might not, but you understand the sentiment. Everyone seems to be talking about B2B. It is not Cantonese, Mandarin or English. It is jargon. Business-to-Business; it has been happening for thousands of years.

For small-to-medium sized Hong Kong business, it is a good perspective to mock the pomposity of the industry that annoys with its own self-importance. But it is worth bearing in mind that even buffoons can be good at what they do. The evidence is mounting that certainly larger firms, and quite probably SMEs, will be turning over billions of dollars that come from transactions carried out over the Internet.

Be sceptical of the figures bandied around, however. By 2005, Goldman Sachs expects Asia to generate about 10% of the US$4.5 trillion global market for B2B e-commerce. Not good news because if the International Data Corporation is to be believed two years before Asia would account for 25% of the global B2B. Or you could believe Forrester Research that by 2004 e-commerce would be worth US$1.65 trillion in Asia — three times the amount Goldman Sachs estimates. Of course it is doubtful these studies have the same definitions or geographical boundaries so we can excuse the discrepancies. But it doesn’t matter; if they are all out by a factor of ten, it remains big money.

Only the SME can evaluate whether taking the B2B route will be worthwhile. Not everything benefits from using the Internet contrary to what some would make us believe. But for a nation such as Hong Kong, which has traded internationally for generations, there should be more than a smattering of SMEs using the Internet. No doubt Hong Kong businesses remain sceptical after the farce of Hong Kong’s SPEDI project evolved into Tradelink to bring us a decade out-of-date electronic data trading system. But in today’s B2B marketplaces, for that is what they are becoming, online intermediaries connect buyers and sellers. Fortunately the new industry is not EDI and is not based on proprietary systems. Internet trade is open technically and access is only limited to government interference and national infrastructure.

So where does Hong Kong stand in the league of B2B development and should you be joining the race to put Hong Kong on the winners rostrum? On the one hand computers in companies linked to the Internet is far below that of most European states. It is certainly lower than Singapore, Taiwan or Korea. Indeed in all surveys Hong Kong falls below these nations in terms of revenues generated by B2B commerce. On the other hand one survey argues there are more secure servers for e-commerce per person in Hong Kong and Singapore than in the entire European Union. Certainly Hong Kong has an Electronic Transactions Ordinance which allows electronic writing and signatures to be recognised for legal purposes. If anything is crucial for the growth in B2B commerce it is this legal recognition. Contractual offers and acceptances can be done electronically. Public keys and Certification Authorities supporting electronic signatures are already in place with the Hong Kong Post Office. The UK is due to introduce this service soon. Singapore has a similar legal structure to Hong Kong, while Japan has found its existing laws on business, telecommunications and credit card use can cover e-commerce.

One hot point of debate in the European Union is the introduction of taxation on Net transactions. The EU wants value added tax (VAT) to be added to Internet sales, something the US is against. Japan has reported taxation should be considered but in the same breath says it should follow the OECD guidelines; or back to the US point of view. As for Singapore it does it the way you would expect. Internet sales from overseas companies must be registered for GST (Government Sales Tax) while domestic Internet companies that are exporting get tax relief of 10%. So much for the OECD.

Hong Kong on the other hand, is playing China’s game of wait and see. The Inland Revenue is looking at the issue but not saying much. However corporate tax forms now ask if any goods or services have been bought over the Internet.

But in spite of the legislation already existing, Hong Kong has serious problems with on-line contracts, in spite of these theoretical secure e-commerce servers. “Hong Kong’s banks have been somewhat behind place like the US in supporting e-merchant accounts but things appear to be changing for the better,” says Jackie Mailloux, director of communications at Lemon (Asia), an Internet services company. But she warns that what does exist makes it worth customers ensuring that the bank is delivering a quality service at a reasonable cost.

Critics argue that Hong Kong’s traditional banking systems have been slow to react to the explosion of e-commerce. In the U.S. the government has been using on-line procurement since 1989, Britain started electronic procurement about three years ago and Hong Kong has just signed up to it recently. Sixty per cent of Fortune 500 companies use virtual cards for small-scale purchases.

In many current Hong Kong B2B operations where contact is made via Internet, products displayed on-screen and deals signed — payment has to go through the traditional methods. Forrester Research estimates the cost of administrative support for international trade averages 7% percent of the transaction cost. Export company margins are traditionally about 8%, so any increased efficiency in transaction costs can make a significant difference to Hong Kong businesses.

In the past year TradeCard has announced it will be targeting import and export companies in Hong Kong, Taiwan, Singapore and Korea. It aims to handle 70% of the paperwork required by traditional trade processes online and then pay via its partner’s payment centre, Thomas Cook. HKB2Bnet.com launched saying it was designed to incorporate product selection and transaction processes. Meanwhile Commerce One intends to build on-line trade exchanges in Hong Kong, among a plethora of other Asian countries. Sun Hung Kai Properties’ subsidiary, E-Supply Chain Management, says it will build a vertical, integrated, or complete, Internet service for the territory’s SMEs. All the big names such as Intel, IBM, Microsoft and Oracle have said they will offer complete services too but details of e-payments remain vague.

All these figures and arguments do not help an SME to enter the B2B arena. If you do join some sort of Internet marketplace, you need to discover who is involved, the shareholders and operators. Confidentiality about your business is vital. You must check all the terms and conditions of being part of this ‘community’. The SME must consider the geographic reach of their Internet business presence. If it is truly to be global and that is where the money is likely to be in the long-term, then having fast, localised sites in native currencies and language are needed but they cost more. If it is global can your partners or marketplace handle international transactions?

For SMEs considering the Internet for new business, ignore the hype and concentrate on the figures, the bottom-line. While Hong Kong may not be regarded as a B2B leader in Asia, this is no reason to lose out on your own opportunities.

B2B, Hong Kong, Tradelink, Internet transactions

Hong Kong iMail October 30, 2000

Too many are caught up in Internet issues when they should mind their own business and use the Net as a helpful tool

By Gerry O’Kane

In 1997, Chief Executive Tung Chee-hwa announced his Digital 21 IT Strategy.

His vision was for Hong Kong to retain its competitive edge by becoming a regional technological hub, a growth in e-commerce and a way for local businesses to enter new global markets.

On the face of it, the announcement of the Cyber Port showed Hong Kong was indeed making a play for a leading role in the global technology and e-commerce markets. The queues for shares in Li Ka-shing’s catchily named Tom.com seemed to suggest that the population of the SAR were ready for this new age.

But as we all know the Cyber Port has been criticised as being a property deal couched in technology dreams and Tom.com raised US$113m for … well, being a name.

For the smaller businessman these issues can cause confusion in how he should be assessing the Internet as a possible source of new business or enhancing old business.

The first thing that should be clarified is to forget what is going on at Pacific Century CyberWorks and Tom.com and all those companies whose core business is the Internet itself.

The business models that dictate these operations have nothing to do with existing companies that should be looking at whether elements of Internet technology can improve the way they trade. The way Hong Kong SMEs should view it is as if PCCW was a firm a century ago offering electricity. It might have a problem with the delivery of the new technology but you as a factory owner, shop or book-keeper must consider whether electricity will help your business. It does not mean you shut the factory, just use it.

Listening to many of the Internet company salesmen will not help either. They will talk of Internet Service Providers, web-hosting services, storefronts, e-malls, e-merchant payment services and a confusing array of software applications to support your Net business.

Their argument for SMEs to accept the Internet is along the lines that a growing company in a competitive market cannot afford not to participate in electronic market places. In theory doing business on the Internet lowers costs, increases efficiency and productivity. They argue to forget bricks and mortar; not participating on-line will mean not being in business.

A study released by Forrester Research of Cambridge, Massachusetts, predicts that Asia-Pacific nations will generate US$53.7 billion in e-commerce in 2000, rising thirty-fold by 2004.

Forrester expects Japan to account for slightly more than half the region’s e-commerce. But, it adds, Australia, South Korea and Taiwan are projected as the other leaders in the area - not Hong Kong.

So should local SMEs get into this brave new world?

Before looking at e-payments or web-hosting, companies have to look at themselves and appraise their own current way of doing things. Hong Kong’s Internet penetration is believed to be around 20%, much lower than Europe or Singapore. According to Chris Westland, professor of IT and the Hong Kong University of Science and Technology, over 60% of Hong Kong SMEs do not even have email and 93% of these have said they have no intention of getting it all. He also points out that being successful in the new world requires creativity, empowerment and participating management, not a traditional hallmark of most local SMEs.

Jackie Mailloux, director of communications at Lemon (Asia), an Internet services company, says, ” Before rushing out to contract a Web developer or Web hosting service, company managers need to sit down and figure out what they hope to achieve by putting up a web site or, in other words, what it is supposed to do for the business.”

This cannot be emphasised enough because it will dictate what kind of service your require. If you are a retailer are you intending to sell to local people over the Net or would you prefer an international audience? Do you intend to deliver, sell directly by Internet or simply market the company? Is your company looking to sell factory-made products in bulk to other businesses or services? And is your company capable of making internal changes that might be needed to maintain this new way of doing business?

“With that in mind, and some preliminary ideas on paper, they should go out to find a partner who actually understands the nature of that business and can therefore provide sound advice,” adds Ms Mailloux. Ideally that partner will clarify what you will need and what impact it is likely to have on your internal company structure.

Should you go the route of using the Internet purely as a marketing tool, choices are simpler. You will probably provide what is known in the industry as ‘brochureware’.

“Perhaps a web site’s most important but often-undervalued function, however, is in the marketing sphere,” she says.

“In a place like Hong Kong the company web site can and should become the core of a whole range of marketing activities, replacing company newsletters, supporting direct marketing events, and so on.”

Even this simpler function will dictate what sort of service provider you might want because if it is to be constantly updated, it may be cheaper to outsource that production to a third party.

The more complex question is whether to sell over the Internet. Then the SME has to decide whether to partner with an existing e-tailer, go into a virtual shopping mall or perhaps spend a lot of money creating an online shopping site. When you do that it may upset and compete with your distributors or other sales channels. The question is whether to lead or follow.

Following may be cheaper but if done incorrectly can lead to problems.

The SME must base its Internet strategy around the customer whether it is another business or a consumer. It must fulfil the expectations of efficiency and good service.

And that has been shown as not going too well in Hong Kong up until now. A recent ACNielsen online’s E-Shopping Survey, while reporting a 30% in annual consumer spending, says that customer satisfaction has declined 23 percentage points over the last eight months.

Even though sales are up, customers are most dissatisfied with slow delivery (64%) something that seems a fundamental error in the fast world of computer communications. Thirty-seven percent were unhappy that the incorrect products were delivered.

If the SME has gone the way of an e-mall or partnered an existing e-tailer, he will probably have little control over the delivery or even packing of the goods. The cheaper way of selling online was to allow the partner to do that but it is the SME’s name on the goods and that is bad publicity and perhaps a vow on the part of the customer not to buy his goods again. It is here that the SME has to do his homework too.

Issues of online payment and a global presence all become entangled in these decisions but as we have shown clear thinking and good advice are essential parts of choosing an Internet strategy. Consider it as being any other business decision and do not be blinded by hype or confused by jargon.

Internet Business, Digital 21, Hong Kong, SME, online

Benchmark, Fourth Quarter 1999

By Gerry O’Kane

London, Friday December 31, 1999: 17.10pm: James Bufton-Tufton, head dealer at Securities 2000, looks panicked as a call light begins flashing on his desktop satellite phone - it’s the satellite line from Jakarta. The office stops. He reaches across and flicks the switch, “Yes.”

“Hidiyat, here in the Jakarta office,” says the voice. Bufton-Tufton says nothing and listens intently. He drops the receiver, it’s left dangling like a bungee chord from the desk, then turns to a colleague.”Call New York, dump all the ADRs we hold in PT Indosat, sell our Indonesian WEBs (world equity benchmark shares) and see if we can’t offlay our holding in that Hamon Asian Market Leaders fund. Jump to it!”

Other dealers start scurrying to their phones calling New York: which fund house has the biggest exposure to Indonesia, which companies are owed money by Indonesia, who are the multinational Indonesian partners; is it Deutsche Telekom or Cable & Wireless? Sell, sell, sell. Oh and by the way dump a pile of Japanese industrial stock. They depend on Indonesian oil don’t they?

Fiction? Not entirely. Firstly, at the cusp of the year most banks and financial houses will be staffed watching for any fallout from the so-called millennium bug, also known as the Y2K problem. Many staff will be issued with satellite telephones in case national phone networks fail. And while PT Indosat may be fully Y2K compliant, even the World Bank has expressed concerns about the overall readiness of Indonesia. After all, they’ve had to put down manic civil unrest, elect a new leader and vote on the independence of East Timor - Y2K’s not been at the top of the agenda. Telecommunications companies are particularly open to systems failure, with devastating knock-on effects.

What is certainly true is that the consequences of any technology failure due to the millennium bug are likely to create ripples throughout global markets. No single Y2K problem is likely to bring a company to a prolonged standstill. On the other hand as it faces an accumulation of failures, including those imported from non-compliant vendors or clients, the company could face serious difficulties.

What to Look for
What should investors be examining? There are several distinct effects of the Y2K bug:
# the markets’ perception before January 1;
# the market effect of failures on investors’ perceptions
# and the economic impact of Y2K failures.
Already Goldman Sachs, a US investment bank, has estimated that the average Gross Domestic Product (GDP) of the OECD countries will fall by 0.6 per cent next year because spending on sorting out the Y2K problem will be curtailed. Even before anything’s happened experts are warning of a drop in growth for the world’s biggest economies.

In August, Credit Suisse Private Banking found that its clients saw Y2K as a threat and were considering shifting asset allocations in favour of cash and away from emerging markets and smaller company stocks. (In the UK, US and especially emerging markets, smaller companies are viewed as the most likely to fail).

Credit Suisse ranked the United States as the best prepared for Y2K, followed by the European Union, Switzerland, South Korea, Japan, Singapore and Hong Kong. However, it lambasted Eastern Europe and the emerging markets of Asia. It named Russia, Brazil, Taiwan, Mexico, Malaysia, India, Thailand, Argentina, China and the Philippines as being in a “danger zone.”

The Y2K problem is the legacy of the way computers were designed in the past. From as early as the 1950s computer engineers tried to save on cost. Memory was expensive and has remained so until the 1990s. To save memory these engineers stored dates with two digits - DD/MM/YY. The problem arises because some systems will recognise January 1, 2000 as the year 1900, making any data relying on dates prone to error. There is no single solution; every chip, every date-relevant coding in programs has to be checked and repaired. And this includes simple chips embedded in products such as microwaves and car engines.

Much of the argument in Asia is that: “it won’t affect us, we don’t have as many computers as the West”.

“This is a global problem affecting not only industrial countries which are highly dependent on computers but developing countries as well,” says James Bond, director of the World Bank’s Energy, Mining and Telecommunications Department and co-ordinator of Y2K grants to developing countries.

“While wealthy countries and large companies have the money and skilled technicians needed to immunise computers and their operating software from the millennium bug, many of our developing country clients cannot muster the resources to tackle a problem that most see as a vague and distant threat,” says Bond.

A Matter of Priority?
Therein lies much of the problem. The emerging economies, not only in Asia but in Eastern Europe, South America and Russia, have had two years of financial trauma. Resources that could have been used to tackle the Y2K problem have evaporated. In addition, there is a lack of resources to pay for compliance and the emerging markets also have a serious dearth of skilled engineers to tackle the problem. But not all financial managers agree with the fears for the emerging markets. Templeton’s Mark Mobius is one such optimist.

“By mere virtue of them being in emerging or undeveloped markets, telephone companies, utilities and banks are not as dependent upon computers and full computerisation as are the developed country companies. The developed country companies have far more complex systems which can more easily be thrown out of kilter than emerging market companies,” says Mobius, manager of one of the world’s largest emerging market funds, the Templeton Emerging Markets fund.

Mobius also argues that those firms which are computerised have more modern machines which were already Y2K compliant.

“The management of emerging market companies face crises on a daily basis (blackouts, brownouts, government intervention, corruption, etc.) and are thus better prepared to handle crises as compared to their developed company counterparts who are not confronted with these problems on a daily basis. Given these reasons, we don’t think that the telephone companies, utilities and banks in emerging markets will be any worse off than their counterparts in developed markets and, in fact, may be in a better position on January 1, 2000,” he argues.

It is not a view technology research companies take, especially since about 98% of installed business software across Asia is illegal and not eligible for official software patches.

“About 35% to 40% of businesses in Asia are expected not to be Y2K ready by December,” Dane Anderson, vice-president for computing systems research, IDC, told an industry meeting in Bangalore earlier this year.

This echoed an earlier study by the US State Department of 161 nations. It found that about half of the countries face a medium-to-high-risk of Y2K computer breakdowns in their telecommunications, energy and transportation sectors. It believes the impact on international trade could create serious problems.

Domino Effect
Examine the PT Indosat scenario: should much of the phone network within Indonesia fail it could take months to fix the problem. As a stock holder of PT Indosat you could be looking at months of negative expenditure and that ignores possible legal ramifications. As a holder of an Indonesian fund any slide in telecom giant PT Indosat’s share price (Indonesia’s largest company) could drag down the index, quite apart from the direct effect of weak communications on companies’ businesses.

Oil producers may find production slowed because they are unable to communicate with suppliers easily, delaying and reducing sales to Japan. Japan goes elsewhere for oil paying an increased price which boosts manufacturing costs met by hiked retail prices. Inflation goes up, the yen gains value against the dollar and so the dominoes keep falling.

This interaction of economic and financial elements cannot be underestimated, especially on the scale it may hit in January. It was the “discovery” of a high level of debts in Thai banks that began the economic crisis in Asia in 1997 and brought down relatively developed economies such as Hong Kong and Singapore. In 1996 when Singapore listed Creative Technologies announced a loss (after three interim reports had already laid out the figures) it dragged down all of Singapore’s electronics stocks. Since the electronics sector was the flavour of the year, the Singapore index fell by 11% in less than 24 hours.

The interaction of the markets shows how badly investments could suffer should something go wrong. The argument throughout most of Asia and South America is that nothing will go wrong. But even the ever-independent Malaysian system is worried. In July Ali Abul Hassan Sulaiman, governor of Bank Negara Malaysia, the Malaysian central bank, told newspapers that despite the majority of critical financial systems reaching compliance in a June test, business would be suspended as a precautionary measure over the New Year. And note the word ‘majority’. Malaysia has also received US$100m to help in Y2K compliance from the World Bank.

Indeed the World Bank has warned of catastrophes in some markets. Bond at the World Bank points out that in a Bank survey at the beginning of 1999 of 139 developing countries only 32 had initiated a national compliance programme. A further 21 were taking concrete remedial steps to safeguard their computing systems, 42 reported awareness of the problem but were not currently taking action and 43 did not respond. The Bank warned that the mere existence of a national Y2K action plan should not be taken to imply that countries will be fully Y2K compliant by the end of 1999.

In the US, managers at mutual fund company T. Rowe Price officially admitted that they have been reviewing Y2K compliance efforts of all the companies whose shares are held in their stock mutual funds. Of the 500 American companies examined, 20 have been put on a watch list and several were sold.

Not Just Equities
The effects of the Y2K problem are however not just limited to equity investments. There are consequences for global growth and the bond markets too. Merrill Lynch’s “Y2K Fixed Income Investor Survey” polled more than 100 firms and found that uncertainty over cash flow may prompt investors to sell corporate bonds and other riskier securities.

While this was only a survey and US analysts always seem to have a vested interest in promoting the US as a safe haven, already US Treasury Bills (bonds) which mature in the first week of January have gone up in price. Investors, unwilling to hold what they consider risky securities and needing cash flow early in the year, are pushing January bond prices up. Others are noticing and companies are selling asset-backed securities and corporate bonds early before the flood of sales some believe will happen. Paul Jablansky, head of research in this sector at investment bank Salomon Smith Barney predicts that as much as US$20 billion could be added to the normal sales of asset-backed securities in the third quarter of 1999.

Stocks that Benefit
Other effects on equities are expected even before 2000, with analysts predicting price benefits for shares dealing in foodstuffs and technology consultancies, while non-US or non-European airlines, were likely to suffer price collapses.

A look at the macro-economic effect of Y2K problems is even more daunting. Gartner Group, a computer consulting firm, has ranked country readiness between one and four, four being most prepared. China, Thailand and Indonesia all rated one. Malaysia, India and Argentina rated two. An analysis by Goldman Sachs calculated each nation’s IT capital, also as a percentage of GDP. The countries most at risk from Y2K are those with large IT capital stock but little effort in fixing the bug.

By using both Gartner’s and Goldman Sachs’ figures you could more clearly view the risk of each country. China, Thailand and Indonesia’s GDP dependent on IT was 4.1 per cent, 5.5 per cent and 7.7 per cent, respectively. For Malaysia, India and Argentina it was 10.2%, four per cent and 14.4% respectively. While few would say all IT systems will fail, Y2K problems could certainly knock a few percentage points off growth in one fell swoop.

Should this happen debts will grow again and fears of default will re-emerge probably pulling down the markets and economies of the West. BENCHMARK is not saying market Armageddon has arrived, but that investors ought to be examining their financial options based on “sell high, buy low”.

With many developed markets at or near all time highs and many emerging markets (especially in Asia) sporting considerable gains this year, it seems that the markets are not fully discounting any nasty shocks on New Year’s eve when the world’s investors will be partying the night away.

The Y2K Investment Bomb, Asia

FT Mandate 8 Nov 1999

Pressure from US authorities for T+1 to be implemented by 2002 is expected to have biggest global impact. Institutions unprepared for these changes are likely to become victims of consolidation. Gerry O’Kane reports

The achievement of straight-through processing (STP) and trade plus one day (T+1) in the global custody arena is equated in the minds of many with reduced costs, increased profits and greater competitiveness.

T+1 will increase broker and dealer transactions, boosting commission, while the fund manager enjoys lower charges and greater profitability and the investor more efficient trading. Others say T+1 is simply a way to reduce risk, which might have financial benefits.

“Having entered into a commitment, the sooner you discharge it and get on with the next one, the sooner you make money,” says Alan Jenkins, business development director for STP with Cap Gemini, an IT firm.

Jeffrey Tessler, general manager of Bank of New York (UK), agrees that it is a likely knock-on effect although difficult to correlate. “One point about T+1 is that settlement trade is getting busier due to pension reforms and the equity culture developing in Europe,” explains Mr. Tessler. “The fact is that the rules of the game are concentrating more on risk management and cutting that risk is important.”

With stock settlement, as with any system, the longer and more complex the processing of a transaction, the greater likelihood of problems occurring. For example should a stock be intra-day traded all the time? If each transaction takes trade plus five days to complete, it creates a complex paper trail to discover if someone has made a processing error or received the incorrect stock. It is also expensive. Any new system that cuts the complexity and time lowers the final cost of a mistake and reduces the chances of a mistake being made. This is the main reason argued for T+1.

According to a SWIFT study, the price to the global custody industry of repairing such failed deals and related problems amounts to $2bn in excess costs annually. As business increases, especially cross-border deals, the cost of mistakes will rise.

The US Securities Industry Association shows that US holdings of foreign securities rose 36% between 1995 to 1998, while foreign holdings in US securities rose by 62%. This was only in a part due to the buoyant market conditions.

“It’s a huge issue and every single conference has STP on its agenda,” agrees Michael Goering, Citibank’s director of product solutions. But Mr Goering adds that the issue of T+1 is not as clear-cut as many would claim. In some circumstances achieving T+1 is not a technology issue at all.

He points out that globally only 60% of transactions arrive at custodians in an electronic form. Two per cent of Citibank’s transactions still arrive from investment managers as faxes. Globally of those electronically formatted some 40% follow STP standards, while it rises to 80% into Citibank from European managers. Having said that, the US depository receives broker confirmations automatically.

This allows investment managers to affirm these trades directly on the depository’s system, enabling real-time electronic delivery of settlement instructions to their custodians, bypassing the traditional flow of settlement transactions through the investment manager’s back office before being delivered to the custodian.

“This means deals can be settled in T+0 but only a small percentage of trades are affirmed and settled this way. With such a low adoption in the US domestic market, it begs the question as to how the industry will achieve the same capability on cross-border deals,” says Mr Goering. So T+1 can be achieved without all the players using new computer systems.

Mr Jenkins points to another paradox. “Crest has a virtually real-time settlement, recent figures show 87.6% of the trades matched on trade date (T+0) and less than 1% of trades remained unmatched at close of business on T+1. In part one reason that T+1 is not demanded is that Granny still likes to hold the physical piece of scrip and that can take up to ten days to settle.”

However, Mr Jenkins warns that getting from T+5 to T+3 was often a matter of simply making the technology of batch-processing just work faster. Real STP, on the other hand, requires different computer systems.

While countries such as Taiwan already operate at T+1 with 100% matching driven by the regulatory authorities, it is the pressure from the authorities in the US for T+1 to be implemented by 2002 which is expected to have the biggest global impact.

“Those institutions that aren’t ready are likely to become another victim of consolidation as they frustrate their clients,” observes Mr Tessler. This is one reason why houses such as BoNY, Chase, Citibank and State Street are already heavily involved in STP.

The problem they all face is the cross-border application of T+1. A group of banks and interested institutions established the Global Straight- through Processing Association (GSTPA) to provide a way to do this. The compeition has down to four final bidders on a system called Transaction Flow Manager (TFM). This utility facilitates and controls the information flow from execution to settlement, establishing inter-operability between investment managers, broker/dealers and global custodians very early in the trade processing cycle, and a “just in time” enrichment of transaction data by each party as the trade progresses in its life cycle. In other words they all get information at the same time rather than in the more one-after-the-other method which is currently the norm.

“It’s important to realise that if GSTPA succeeds it is in the best interest of most of the players but the markets are not standing around waiting for it,” warns Goering. This is one reason why most of the big players already have systems following the STP model. He adds, “But there is no global standard on even how stocks are referred.”

Others point out that while the standard will make the system far more efficient, it excludes handling sub-custodians and securities depositories. Cynics might argue that a system may benefit the biggest players but will simply add more cost to those not in the consolidated league of custodians.

More importantly is how long this cross-border T+1 will take to implement. Goering says global implementation could take up to 10 years. The issues of increasing liquidity to the marketplace is also still in debate. Some observers moving to T+1 could have that as a knock-on effect. Others say it will allow capital adequacy ratios to be cut.

Some say it will not, since while the regulatory authorities have got to grips with front-end adequacy ratios they have little idea about how it relates to the underlying settlement business.

The issues of T+1 are more complex than players would initially confess.

trade plus one day, T+1, global custody, STP

South China Morning Post Jan 1993

By Gerry O’Kane

In 2010 your systems will offer the world

The computer on the desk was the size of a laptop. The only reason for that was that the Professor liked to type. The dormant screen flickered and a video window appeared. The face said “Excuse me Dr Chan, you have an incoming call from Professor Lee in New York.”

Professor Chan looked up from his book, he still liked the feel of paper. “Okay, patch him through.” In the window the face of Professor Lee appeared and the two talked for a while. He was asking what Chan thought of the new weather data coming from the Lockheed Defence Meteorological Satellite Programme. Chan rang off and asked the computer to access the Lockheed database and soon the online satellite imagery of swirling cloud cover appeared on-screen.

The hurricane appeared to be over Hawaii. He called up the latest CNN report from a ravaged Waikiki Beach and watched as houses lost roofs and cars overturned. He asked to the computer to do an analysis using his Weather 3 application he developed last year using object oriented programming. After a few more hours of study and computer work he called a colleague in Manila.

He had never met Mr Alverez but got straight through. “Mr Alverez I don’t know if you been following Hurricane Alice but I think it might hit the outer islands. Here’s my data and analysis.”

A file with video projections of Alice’s path appeared on Mr Alverez’s screen, complete with notes on damage estimates. Mr Alverez did not speak Cantonese or English, only Spanish: the computer had translated.

Fiction? Not according to either AT&T or Apple Computers. While few want to predict the future, present research indicates that is precisely the kind of desktop computerisation that will be available in 2010. Indeed, according figures and research being done by C. Kumar Patel, AT&T’s executive director, research, materials science, engineering and academic affairs division, that is precisely what the PC of 2010 will do.

Apple Computer has already produced a five minute video showing its machines performing these tasks somewhere around the year 2000 - commonly known as the Newton. “The Newton will be designed to replace everything from keeping a diary to accessing all information. It will go beyond a personal organiser and have an assistance capability to anticipate your demands and carry out your commands,” says Scott Schnell, director of Evangelism, the Apple unit developing the company’s future.

It will be as a result of technologies converging - speech processing, video, photonics, storage, processor manufacture and too many others to be listed. At present we have many elements that will go into such a machine, others are absent but all are possible.

How will computers so small, become so powerful? How ubiquitous will data become? And will communications cope with these increased demands?

According to Mr Patel the advances projected in microelectronics will easily help these PC developments. The number of components now being crammed onto a silicon chip is doubling every 18 months. “That trend will have matured by the year 2010 with chips containing up to a few billion components.” That will be done by using more and more precise lithography - x-rays and electron beams accurate to 0.1 of a micron. It will also change how chip manufacture will be done - from the present four weeks to three days. Even transistors will measure 400 by 400 atoms.

But even if processors become smaller and more powerful how can all this data be transmitted through a computer fast enough? Current circuit technology would find it difficult. By then PC manufacturers will be using photonics - controlling electrons by light and data transmission by light. Not only will everything become faster but according to Mr Patel, photonic systems will not operate sequentially but by parallel processing.

“It is estimated that such massively parallel photonic computers could have up to 1000 times the capability of today’s most powerful electronic computer,” he says.

And that improvement in ‘light’ technology will help in communications so necessary for integrating the PC of Professor Chan’s into worldwide databases and telephone systems. That 1000 fold increase in power will also be found in managing and sending information over optical fibre networks. One pair of fibres today take 50,000 telephone calls, in 2010 it will be 50 million - a capacity that will have to be reached to fulfill the demands for real-time information and video.

The way communications will operate will change, too. According to Michael Spindler, Apple’s president, ” There will be another trend (already happening) - communication inversion.” He believes that the traditional transmission by air will move to landline and vice-versa. Television will boom but via cable, with users having the choice of thousands of programmes, some interactive.

Meanwhile telephony will go via air - microcells pick up the transmissions and feed them into the optical fibre backbone.

Already Scott Schnell has displayed a transceiver which fits into a Powerbook and transmits at almost the same speed as an AppleTalk LAN. That is how Professor Chan received CNN and Lockheed - that video and data information was transmitted via the optical fibre backbone and then transmitted via wireless technology to the PC.

And that conversation with Mr Alverez? Well they could see each other because of videophone technology which would be easy over fibre optics. AT&T estimate the US will have 20 million videophones by 2010, this one was built into the PC.

What about voice? Speech processing chips are becoming more powerful by 33 per cent each year, and the algorithms to handle understanding of context, accent and semantics are improving all the time.

“We have a prototype called Casper,” says Mr Schnell. “I think it is the most exciting part of Apple technology.” It understands and writes on screen what Mr Schnell tells it. Up to a point, it makes mistakes and does not understand content but he believes it is only a matter of time before it is perfected.

Already AT&T demonstrated a real-time voice recognition and translation system at Expo 92 in Seville, Spain. While it had a limited vocabulary (carrying out financial transactions), it translated English to Spanish and vice versa. “The technology trend also leads us to expect that recognition vocabulary will be unrestricted and will permit natural language interaction allowing individuals to interact directly with networks and machine resident databases,” says Mr Patel.

So will Professor Chan warn Mr Alverez of the oncoming hurricane in 2010, even without speaking Spanish? “We may not be able to predict the future since many things are changing simultaneously and rapidly but we can surely enable the future to happen by nurturing appropriate technologies,” argues Mr Patel.

Future technology, Apple, Bell Labs, AT&T