— Alistair Smith, Barclays Capital

As a self-regulated market, foreign exchange has generally avoided any big scandals, yet it is still considered a risky deal, especially with the recent increased volumes of trades. Gerry O’Kane assesses the risks faced by prime brokers and the new solutions available to them.

Risk is an ongoing headache for any party in the chain of a foreign exchange deal. Equities’ dealers might find the forex market something of a nightmare, only having a choice of almost exclusively over-the-counter (OTC) products in an unregulated marketplace that has no central exchange.

Whatever about the theoretical problems, history shows that out of all the markets, the self-regulated foreign exchange environment has managed to tick over without the sorts of high profile scandals that have hit other securities.

However, the FX environment is changing. There are huge increases in volumes, new players, new ways to access markets, greater demands for credit and faster trading and there are worries that risk can only increase.

Each player in the chain is open to risk, although it is generally accepted that it is the FX prime broker that faces it the most since he is providing credit lines.

Risk to both parties

Firstly, there is the relationship between the prime broker and the client. This introduces risk to both parties, even from the stage of choosing a suitable prime broker. Then there is the relationship between the client and their executing broker and the executing broker and the prime broker.

“The obvious first step in limiting risk for the client is in the choice of prime broker,” states Devin Graham, global head of FX prime brokerage at UBS.

“In judging risk you need to look at the institution’s name and reputation, the credit worthiness of the counterparty, the size of the balance sheet, the brokers’ systems, reporting, cross collaterisation of asset classes and the trading system and the ability to communicate electronically,” summarises David Aldrich, head of Bank of New York’s hedge and broker business in Europe.

According to an analysis by Bank of America, the clients are faced with confidentiality and concentration risk and operational risk and market risk.

“Confidentiality is very important for clients – but then that’s why they moved to prime brokers from a single margin account,” says Roger Allen, director of FX prime broking at Dresdner Kleinwort. “There has to be a fair exchange of information with your prime broker but to give them everything is not a great idea but then it’s rarely an issue,” he adds.

As for concentrating risk with a prime broker, the system grew up specifically to move clients from the limitations of a single bank. “It’s essential in the system to trade with multiple parties, no one bank would take on all the risk of a fund and the client needs to adjudge the creditworthiness of the prime broker,” says Mr Aldrich.

The client faces several issues in operational risk: reconciliation of portfolio with the prime broker, trade rejection by the FX prime broker and the monitoring of post execution events.

Utilising technology

But as with so many of the risks facing all the parties in the chain, the use of technology goes a long way to mitigating much of the operational risk faced by all three right through the process.

“It’s important to have a sophisticated system covering trade entry to reconciliation,” explains Mr Allen. “A high level of automation is required through the process and minimising the manual process is important – each time something is re-keyed equals an increase in operational risk which is something you strive to reduce.”

“From the client’s perspective, using prime brokers to effectively provide the infrastructure and integration to track and manage positions limits their risk,” says Mel Gundewardena, global head of fixed income prime brokerage at Deutsche Bank.

As for issues of market risk, such as failing to notify the prime broker of trades in timely fashion, relying on the FX prime broker to properly match trades and highlight discrepancies and derivative issues with multiple brokers, these issues come down to the client’s internal management.

All these failings could happen to a company which did not use a prime broker but the advantage of having one is that these sorts of issues are discussed during initial contract stages and in adjudging levels of creditworthiness. In terms of mitigating risk the prime broker acts as a de facto extra line of defence. Apart from a client gaining market access and a best price advantage by going through a prime broker, its procedures and systems outlined as part of the contract push for business efficiencies too.

It could be argued that the core of any risk lies primarily with the prime broker. They face liquidity, credit, operational and market risks with both executing broker and client.

In reality, the majority of executing broking work they will deal with tends to be within the same institution since prime broking is generally offered free when using the dealing desks. It certainly limits credit and operational risk.

Managing exposure to their highly leveraged clients and establishing appropriate credit terms with them is at the heart of a prime brokers business. “Certainly there’s a clear distinction in the market between funds as an asset class, running alpha rather than hedging – the risk dynamics are completely different,” says Mr Aldrich.

“You must judge the clients suitability based on capital, strategies, personnel and come to a conclusion on what sort of risk positions you want and manage them efficiently,” says Mr Gunewardena. This often relies on real-time processing and managing the clients’ collateral and margin calls efficiently. On top of that he points to technology as limiting the impact risk factors, as with a cross-collateralising system that saves client’s margins and will automatically monitor credit levels at the give-up stage.

And the importance of the use of technology in limiting risk factors through the process cannot be underestimated. “Not every FX product is the same. With a spot trade you know all’s fine very quickly but with a 30-year interest rate swap if the trade does not get accepted it’s more difficult,” warns Alistair Smith, head of global netting products at Barclays Capital. “The communication of some trades is more complicated and small errors can creep in which is why we recognise that it’s important that the derivative transactions go through an electronic process even if it means rekeying at the beginning,” he adds.

Sell-side competitors have different systems for different products and that can make it difficult to ensure standards across the board. It is at this level that a client needs to find just how technically proficient their prime broker really is. “We have a very minimal set of transactions that reach us manually. All are processed electronically through our derivative PB system and fed into downstream booking systems,” explains Mr Smith.

And these sophisticated systems have an increasingly important place in the new developments in FX trading. “As algorithmic trading has expanded, for example, it is necessary to improve intra-day risk analysis and a capability to reconcile these sorts of trades,” says Steven Li, head of prime broking at Barclays Capital.

As for the executing brokers they too face many of these issues. Credit risk is generally the executing brokers prime concern, monitoring its limits within the parameters of the give-up agreement and avoiding trade rejection by the FX prime broker. At this point the prime broker needs to rely on its client to have given clear instructions on both process and procedure to their executing broker – what is permitted (in terms of product and delivery) and what is not.

Credit protection

Much of this will fall within the agreement outlined between the prime broker and client at the beginning. “We want to work with banks and clients within a transparent STP electronic framework, where we feel we can take risk that is well managed through our operational infrastructure,” says Mr Li.

In certain circumstances this may even specify what technology is to be used. But probably most importantly for the executing broker is the fact that the majority of the prime brokers operating in this market are parts of highly rated financial institutions, affording at least some credit protection.

Additionally, worries over give-up agreements seem exaggerated. “The give-up process is much the same regardless of whether it is spot FX, interest rate swaps or credit derivatives. Our system applies the same controls and matching consistently across all asset classes,” says Mr Smith.

“It’s been made even easier with the industry bringing in standard ‘give-up’ agreements,” agrees Mr Gunewardena, referring to the New York Foreign Exchange Committee release of standardised agreements.

It’s an issue which also falls under operational risk since it is considered a manual process and while it is based on a messaging system, many do feed automatically into the prime brokers’ systems. According to Mr Graham, the Harmony messaging system acts as an industry-wide de facto standard. “It makes sense to use one technology, although it is true that deals should be given up as soon as possible – legally within two hours – we aim for real-time because we’ve got a significant investment in the technology,” he says.

In truth, the sector is not facing any risks it has not faced before. As cross-asset management platforms become virtually de rigour, experience in handling derivative products is sliding into the forex office from the experience of the derivative brokers. While the levels of credit risk increase, only reflecting the boost in business volumes and products available, the technical systems to manage them get more efficient.

However, while most players seem happy with the regulatory status quo within the industry there are murmurings of change. There is debate that the regulatory authorities may decide to enforce best execution rules on the FX world and push features like transaction costs analysis on a deal. Both the European MiFID rules and the recent US Regulation National Market System (RegNMS) seem to be trying to do just that.

But as these developments are only rumoured others are worried that they will open another danger. “Getting consensus among industry bodies is important to develop methodologies to keep the forex market orderly and with a defined process,” says Mr Gunewardena. “But the danger lies when institutions with their own ideas try to cut those existing costs work outside the system. By short circuiting the process that has developed could create a systemic risk and effectively increase costs for the whole industry.”foreign exchange, FX, OTC products, risk, prime broker, investment manager, technology, services

Electronic communications networks are increasingly used to handle forex deals – but their rise in popularity has been so dramatic that the market remains a mystery to some. Gerry O’Kane talks to the major players and lifts the lid on this technology revolution.

For an industry that likes to dot the ‘i’s and cross the ‘t’s, the fact that no one seems to know how many electronic communications networks (ECNs) handling forex deals are out there is a tribute to their dramatic proliferation.

And the effect of this proliferation over the past few years has been equally dramatic, being attributed to increased turnover in the spot markets and bid/offer spreads sliced wafer-thin.

An ECN brings together multiple market makers, matching buyer and seller together for a small fee and displaying the bids and offers from all market makers and traders on the platform. Orders are matched to the best available price.

eFX, as the techies like to say, has arrived, whether trading takes place over smaller private networks, or networks provided (often under licensing agreements or white-labelling deals) through brokers.

“The biggest change to the traditional FX prime broking landscape, apart from the huge growth in hedge fund strategies, is electronic trading and the growth in networks,” says Stephen Li, head of derivative prime brokerage sales at Barclays Capital.

Volume increases

A study by financial research firm Greenwich Associates found that of foreign exchange traders, 53 per cent traded electronically in 2005, up from 32 per cent only three years
earlier. Currently the average share of total forex trading volume captured by e-trading systems, regardless of size, is about 50 per cent. And it is the UK that tops the league with about 64 per cent of forex volume traded online, compared with 60 per cent traded that way in the US.

“The typical user of e-trading systems executes slightly more than half of its overall FX trading volume electronically, but e-traders tell us that they expect electronic trading to account for a full 57 per cent of their FX volume in 12 months’ time,” says Greenwich Associates consultant Robert Statius-Muller. “These expectations suggest that e-trading volumes will continue to grow for the foreseeable future.”

But Greenwich also warned that growth could be tempered by the fact that eFX platforms would have a harder time attracting new institutional customers.

Even so, size is no discriminator. Greenwich’s research shows that 51 per cent of players who handle more than $10bn per year in the FX market do so electronically.

This electronic market has long been dominated by EBS and Reuters, who in particular cater for interbank trading and who have seen their own trading activity quadruple over the past 18 months. But even these big boys are taking note of the changes in the FX trading environment.

Reuters and Chicago Mercantile Exchange (CME) announced plans in June last year to
create FXMarketSpace, the world’s first centrally-cleared, global foreign exchange marketplace, through a new 50/50 joint venture company. How it will affect the forex trading world is yet to be seen.

The recent acquisition of EBS by ICAP, the world’s largest interdealer broker, shows those in the know do not believe it is a contracting market. But both these deals further blur the clear divisions between regulated markets such as stock exchanges and the unregulated market dominated by OTC FX deals.

Nevertheless, other ECNs are unlikely to go away. There are newer platforms such as multi-dealer firms FXall, Currenenx and State Street’s FXConnect, while Hotspot is a multibank prime credit system. These companies are also experiencing serious growth, with many of them finding success in niche markets that produce enough trade volume to support their business.

“Our revenue growth was 23000 per cent in the past four years and although we’re only seven years old, our monthly volume turnover is hitting $100bn,” reveals Glenn Stevens, managing director of GAIN Capital.

“What we’re able to do is offer the more ‘downmarket’ sector an opportunity to trade – banks can’t service the $500,000 to $5m deals.”

The effects of these new dealing channels has been profound. The affordability of eFX
trading technology allows start-up investor groups to access the markets. It has allowed the smallest sorts of players to access the forex market – the micro hedge funds, the high-net worth individual or the retail speculator.

“The advent of e-commerce has lowered the barrier of entry to the FX market,” observes David Aldrich, head of Bank of New York’s hedge and broker business in Europe.

They have also allowed existing players to adopt strategies they would have found both
difficult and expensive to follow previously and with the cover of anonymity. All benefit from workflow efficiencies and integration into other systems.

Alpha opportunities

Many of these new participants reflect the growing trend of hedge fund and investment managers recognising that the foreign exchange market can produce alpha for their portfolios (although the hedging use of forex remains the dominant strategy).

“To a large extent the increased growth has been because of the recognition of forex as an alternative asset class and an alpha opportunity,” says Mr Stevens.

But for the banks that provide liquidity to the forex market, the emergence of these trading networks has been one of the critical factors in the plummeting bid/offer spreads in the spot market. Both the recognition of alpha opportunities and the price transparency now available across dozens of independent online markets, have pushed spreads dramatically downwards.

This search for alpha has seen technologies active in the equity and fixed income-markets, and algorithmic systems, enter the FX markets. Algorithmic trading is a way of timing entry and exit into a market, exploiting pricing opportunities and pushing up trade volumes.

According to Deutsche Bank, 15-25 per cent of all FX activity is due to algorithmic trading, and these liquidity suppliers have no way to cope with the speed of some of these systems.

Many of them have become unhappy with the growth in these ECNs. Blame has even been heaped upon the opening of EBS Prime to buy-side institutions like hedge funds for starting this trend. While the banks want to regain more control over the market and dream of pushing spreads towards historical highs, the opportunity for influencing dealing patterns remains distant.

“Even between Reuters and EBS, each trading platform is more suited to certain FX players than others for either strategy or product requirements, and while there have been attempts and discussions by certain parties for a central marketplace, the market simply doesn’t want a monopoly,” warns Roger Allen, director of FX prime broking at Dresdner Kleinwort.

He believes that past reactions to players trying to capture parts of the market had shown it was a strategy unlikely to succeed. In his view reactions included direct and outspoken resistance to anyone trying to control the FX marketplace and an organic movement of business. This flow of business also reflected the idea that the FX market is not suited to an overly structured environment.

Indeed GAIN finds its own niche comfortable for avoiding larger deals, but even so there are indications of a certain amount of convergence between some of the ECNs and dominant players such as EBS.

“While a $50m trade would be big for us, EBS is designed to handle such trades,” explains Mr Stevens. “While the smallest trade on it is $1m, its average trade size is about $1.3m, while ours has risen from $250,000 to $700,000 converging towards their levels.”

Whatever the grumbling about falling spreads from the liquidity banks, they still participate on the ECNs. The trading platforms connect in an automated fashion to banks and act as a message hub that can translate the messages of any customer and bank so they can each talk to each other.

“We’re complementary to the banks who find our liquidity useful, and we’re a member of EBS Prime and have access to 10 top banks and remain in the sector because we’re acting like a prime broker,” says Mr Stevens. He views staying ahead of the technology is vital for any ECN’s long-term survival.

“We’re not wanting to re-invent the wheel. We have to keep up with demand for example enabling application program interfaces (APIs) with our system for things like algorithmic or auto-execution trading. We need to be able to provide real-time margining, for example,” says Mr Stevens.

An advantage of these sorts of systems is that they do allow clients to carry out transaction cost analysis, something that organisations with a fiduciary responsibility for best execution need and something that future regulatory changes may require.

One criticism of the way the market is developing is that there are so many ECNs, which, in theory, create market inefficiencies and boost costs to interface with them. But the industry argues these are marginal costs, not linear, and being able to both access the business and see developing trends makes viable whatever extra costs there are.

Additionally, the ease with which clients can get onto this web-based systems attracts both established forex players and the individual speculator. “You sign up in the online environment get a technical demonstration and then await our due diligence activities. After about three days you can start trading,” explains Mr Stevens.

For the ECNs, signing anyone up is good news, since research by Greenwich shows that once a party starts trading electronically, the volume of trades executed that way increases.

As for the future of the sector those involved show boundless optimism. However with so many players in the market few disagree that there will be some consolidation. Acquisitions are likely to be based on both profitability of the companies and also their technical expertise. Buying technology for this sector can be cheaper than developing it – and to stay in the forex business, having enabling technology is crucial.

Electronic communications networks, forex, FX, foreign exchange, trading, growth market, liquidity

— David Aldrich, Bank of New York

Prime brokers are investing in technology as the hedge fund industry develops. Gerry O’Kane looks at what the major players are doing, and hears some expert opinions on getting past the wall of secrecy to evaluate the best approaches for clients.

Cross-asset prime broking has become common in the industry, swept along by the ever-increasing volumes of business from the hedge fund sector.

Hedge funds have been seeking multi-asset trading for some time, allowing them to apply their complex strategies across foreign exchange, fixed-income, options, futures and equities. To keep up with this sector’s interest and lower elements of risk and boost their marketability, prime brokers have sought to provide complementary systems at their end.

“The prime broking industry has developed more into cross-product support as the hedge fund industry has developed,” says Mel Gunewardena, global head of fixed-income prime brokerage at Deutsche Bank. “There are more multi-strategies surrounding FX and fixed-income especially with more sophisticated hedge fund strategies. As a result people have been looking for ways to handle the complexities of market and infrastructure needs.”

In the simplest of terms for FX brokers, the global trading of fixed-income instruments and forex-linked derivatives issued in various currencies has boosted volumes in the FX market and further pushed demands for platforms that can deliver better functionality and lower costs. However, this appears to be only a minor part of the industry.

What has been happening is a drawing together of the strings found across the prime brokerage business, not purely in the FX marketplace. There is little doubt, however, that the development of derivative products to go hand in hand with FX strategies and an acceptance that they can act as a source of alpha, has driven the forex brokers to embrace these systems more enthusiastically.

Widespread demand

To put it in perspective, in March 2006 Dresdner Kleinwort announced its entry into the FX prime brokerage market as part of its strategy to complete its Digital Markets cross-asset class prime brokerage (PB) product offering.

As with many offerings, the Dresdner Kleinwort FX prime brokerage platform purports to support clients with access to products and services including FX spot, forwards and swaps, vanilla and exotic FX derivatives, local market currencies and derivatives and precious metals and commodities.

“We have a full products cross system – fixed-income, equity, forex, all consolidated on one platform in real time. It reports net margins providing collateral efficiency and consolidated reporting,” explains Roger Allen, director of FX prime broking at Dresdner Kleinwort.

In truth the development of these cross-asset platforms has been driven by a demand found across the investment spectrum and not at the behest of FX prime brokers. Indeed research by technology consulting firm Datamonitor indicates that the investment banks are leading the charge rather than any specialist FX prime broker, with the usual suspects such as Goldman Sachs, JP Morgan, Bear Stearns, UBS and Deutsche Bank all promoting their services.

“The ability to provide a suite of services to be integrated across asset classes that hedge funds and asset managers want to adopt is vital,” says Mr Gunewardena.

This should be unsurprising for two reasons. First the investment required to develop these systems demands deep pockets, and second much of the technology comes from leveraging the knowledge of the sell-side business in understanding how to rate and value asset classes, in particular over-the-counter (OTC) derivatives products.

According to Datamonitor, spending on systems to handle both margin management and securities lending will increase, and is estimated to reach $1.3bn (€1bn) globally by 2009, much of it ($666m) from broker dealers trying to compete further with the big investment banks. But this is spending across the prime broking business, and not just in the forex sector.

“Multi-strategies are now so common that the attractiveness of signing up to a platform is often not just to handle FX but across the assets,” says Alistair Smith, head of global
netting at Barclays Capital.

Smith points out that any relationship with a prime broker must include a longer-term view that even if you do not want the facility now, where might the future of your business lead?

The general industry consensus is that for most clients the future has already arrived. Bank of International Settlement figures for the first half of 2006 show a huge growth in over-the-counter derivatives. Notional amounts of all types of OTC contracts stood at $370,000bn at the end of June, 24 per cent higher than six months before. Outstanding credit default swaps (CDS) increased by 46 per cent, while interest rate derivatives rose by 24 per cent and FX contracts expanded by 22 per cent.

The expansion in use of these products in any forex strategy lends itself to using cross-asset management systems, but some believe the nub of the question for the FX prime broker is clearer than that.

“I think that the issue of cross-asset management systems is a red herring in this business. Cross margining, however, is something that’s important to customers,” argues Justyn Trenner, head of research firm ClientKnowledge. “Having systems that recognise and revalue portfolios and apply the margin calculations to FX related assets is what the customers are interested in.”

The fund manager uses the credit line provided by the prime brokerage by placing collateral with it and allowing it to trade and source liquidity from many other counterparty banks. The broker handles the clearing and operational aspects of a transaction and the execution broker bank ‘gives up’ the trade to the prime broker, which accepts the settlement and credit risks on both the client and counterparty.

For the client the system provides better market liquidity and more competitive pricing, in part because they can deal with a variety of counterparties but also because they are only seen to be trading under the prime broker’s name. Essentially the system gives the client a certain amount of leverage on their own assets.

Real-time reports

“These platforms enable a portfolio margining approach and you should find that the net
margin required is substantially lowered, giving you greater utilisation of capital through cross-collateralisation,” explains David Aldrich, head of Bank of New York’s hedge and broker business in Europe.

Mr Smith of Barclays Capital adds: “The attraction of cross-product margining is that clients aren’t employing so much of their capital. If on one master agreement you’ve lost $10m but on another you’ve made $50m, that’s a lot of cash moving around on an individual deal basis. But with cross-margining there is no need to move margin so capital is freed up.”

Mr Smith comments: “Clients are looking for cross-products margining, but not necessarily in real time.”

For other strategies, real-time information is vital. “Online real-time reconciliation across derivatives is important if, for example, a hedge fund has booked a trade the wrong way and has been hedging incorrectly for two days. That’s a lot of money lost on margins,” says Mr Smith. In theory, extending this capability across a hedge fund’s portfolio of assets can bring big savings. From the prime broker’s point of view, the system also reduces their credit risk and enables them to offer additional loans to their customers. Traditionally many of the brokerage departments worked in silos, duplicating effort in managing collateral and sometimes, with overlapping use of collateral, giving inaccurate cover to the bank.

Another driver is rapidly changing regulation. Under Basel II, cross-collateralisation can reduce the capital charge that a bank needs to allocate for its exposures. It also provides operational efficiencies.

Another boost for the FX sector is the emergence of algorithmic trading. This rules-based investment strategy has seen the number of trades expanding exponentially and has become a regular, if relatively small, source of alpha for hedge funds. The ability to cross-collateralise in real time on these sorts of trades again boosts the client’s capital base and reduces the prime broker’s risk.

But there are those in the industry who view with scepticism many of the claims to offer a full cross-asset platform.

“A lot of players profess to offer a comprehensive cross-asset platform but just how efficient they are in cross-margin calculations is debatable, and there remains a lot of manual work behind,” observes Nick Jones, head of European sales and marketing of FX at Bear Stearns. “Many are fine on handling vanilla FX products but some OTC stuff is not there yet.”

Secrecy is all

Mr Smith at Barclays Capital agrees. “There are some products that don’t lend themselves to off-setting such as distressed bonds,” he says. However, as part of initial contract negotiations, prime brokers insert portfolio calculations to assess these sorts of margins and risks and as technology develops add solutions to the platforms.

“A lot of the dominant players in the prime brokerage area have heritage systems and find it difficult to provide a true cross-asset handling service. The newer players don’t have that older technology but the investment required in any area of prime brokerage is very, very substantial,” says BNY’s Mr. Aldrich.

As with so much of the prime brokerage business, secrecy is paramount. While companies such as Barclays Capital have developed systems from scratch and generally get mentioned as one who has ‘done it’, those with weaker product offerings are generally not identified.,tag>cross-asset prime broking, multi-asset investment, derivatives, hedge funds, investment managers, FX, foreign exchange

The explosion within the FX market is no secret, but now prime brokers are looking to get a piece of the action as the asset class evolves into a potential alpha generator. Gerry O’Kane reports.

It has become almost a cliché over the past few years to say that the business of foreign exchange is booming. Year-on-year volume turnover is growing, liquidity is improving and there are more players in the forex game. Even the business infrastructure has evolved.

“There’s no doubt that the market continues to grow for those in foreign exchange prime brokerage (FXPB) with substantial changes over the past six years,” agrees Devin Graham, global head of FX prime brokerage at UBS.

Few would argue that it was only a single factor that has changed the business. New business models have gone hand-in-hand with a fundamental change in the investment strategies of asset managers, hedge funds, pension funds and corporates.

“I see more interest from clients in the market use of forex for alpha rather than only hedging,” says Mel Gunewardena, global head of fixed income prime brokerage at Deutsche Bank.

The figures for the business are certainly impressive despite a recent slow-down in the market. The Bank of International Settlements (BIS) tri-annual survey showed a massive 25 per cent growth in 2004 when daily volumes were calculated to be $1700bn (€1283bn), while research firm Greenwich Associates reported a 14 per cent growth in 2005.

New research from TowerGroup concludes that by 2007, global FX daily average volumes will exceed $3000bn. It expects that over 44 per cent of that volume will be traded electronically, a far cry from the antiquated methods of the 1990s whereby trading was nearly solely by phone or fax.

While FX trading is still dominated by the large dealing banks in the final provision of liquidity and market-making, it is the FX prime brokers who have made the biggest changes to exploit new technologies and new demand.

“In the past, funds held margin accounts directly with the banks for forex trading but because their positions were known, they frequently didn’t get best price and became fed up with markets going against them,” says Roger Allen, director of FX prime broking at Dresdner Kleinwort.

“The prime broker is segregated from the sell-side of the bank and the system of ‘renting’ part of our balance sheet to trade developed,” he adds. Trading under a prime brokers account gave players not only a line of consolidated credit but a certain amount of anonymity.

“The FX prime broker central market is clearer for a client – placing his collateral with one counterparty (the prime broker) to get effective access to the market, also extending his credit lines to access executing brokers,” explains Mr Graham.

What differentiates the FX market from others such as equity or bonds is that it has evolved as an over-the-counter (OTC) market. Operationally that creates problems in as much as it is a principal to principal deal. By using a prime broker the client can get access to more liquidity; the credit line. It also reduces cost and risk in settling trades since the client has one or two relationships (with prime brokers) rather than having perhaps dozens by dealing directly.

“It is very much a service and no-one makes very much money on FXPB, but we’re always looking to add value and hopefully win execution business where the money is made,” reveals Nick Jones, head of European sales and marketing of FX at Bear Stearns.

Indeed one source says prime broker margins on handling clients’ credit has fallen from about $20 per million ten years ago, to $5 per million today. But while that may be true, it has not seriously hurt the business. “Fees have come down a lot but effectively we’ve bettered our position through the use of technology,” explains Mr Allen. “It’s important to realise you pay for what you get and with prices too low there’s no service or investment but the industry knows this.”

Indeed the development of FXPB reflects much of what has happened elsewhere in the financial services world. As with securities lending and securities servicing, there is an ongoing leveraging of technology in particular utilising experience and systems from the sell-side of their institutions. The objective is not only to protect their own assets and assess risk but provide more efficient trading to cut costs and to an extent provide a level of outsourced services to the clients.

“It’s the availability of that technology that makes prime brokers more accessible to the players even enabling smaller banks to trade with a wider range of second tier banks. The market has grown dramatically with different types of users utilising different channels,” outlines Justyn Trenner, head of research firm ClientKnowledge.

The FX prime broker is not the only player to have facilitated a greater access to the marketplace.

The more traditional request for quotes primarily from the largest banks is being challenged with exchange-like models using a bid-and-offer system.

This growth in electronic communications networks (ECN) has made it easier for traders to enter the FX market and reduce the risks associated with these transactions. In part the ECNs have introduced the liquidity always held by the sell-side to those on the buy-side.

In spite of many of the new traders being low-value, high-volume players, the plummeting costs of transactions over these, and the bigger networks dominated by EBS and Reuters, has seen the growing use of black box technology. The algorithmic systems give speculative trading in search of alpha a boost.

Traditionally the FX market was nearly solely one which found business from hedging strategies, protecting equity or bond positions from moving currency rates. The dramatic shake-up in investment strategies following the equity crash at the millennium saw long-only asset managers, pension funds and hedge funds seek out alternative investment strategies.

“We’ve seen a lot of growth from hedge funds and asset managers seeking alpha – some are asset managers launching hedge funds, pension funds are accessing FX through them and hedge funds, all add to the business,” says Mr Graham.

In part the alpha strategies are facilitated by the use of algorithmic trading which has become cost-effective. However, the macro economic outlook has changed as well. The convergence of G7 monetary and fiscal policies in the 1990s saw fewer alpha opportunities, but the current environment of policy divergence has once again boosted the opportunities for creating alpha.

But alpha strategies remain a minor part of the business. “Speculating in forex is only a fraction of the market and currently hedging remains a much bigger component there,” says Ted Platt, head of prime brokerage in EMEA at Merrill Lynch. He says the industry is more concerned with broadening its offering, handling alpha strategies, hedging and systems.

Cross-product investments

“As hedge funds develop bigger and more multi-asset strategies and asset managers move into new classes as a way of generating returns, there is more demand for cross-product trading and integrated prime brokerage platforms,” explains Marek Robertson head of FX liquidity solutions at Barclays Capital.

As with all the issues facing FX prime brokerage the strategies have created certain chicken and egg situations.

“FX prime brokers are now challenged to service both high volume cash products and increasingly complex derivatives products,” adds Mr Robertson. “It’s one thing to service vanilla products but harder to do so for high frequency traders and multi-asset derivatives traders, and this is pushing the development of cross-asset platforms to manage risk and consolidate margins.”

Similarly the investment in technology has allowed prime brokers to service clients in spite of the increase in trades. “Constant investment has led to grand economies of scale and it’s easy to add 10,000 tickets a day whereas if those tickets had to be handled in the old fashioned manual way you wouldn’t have the capacity,” says Mr Allen.

The issue of technology is now at the heart of the development of the forex markets. It is vital to be able to give access to the burgeoning numbers of ECNs, offer application programme interfaces to clients to allow their own black box technology access to the markets, process tickets, reduce operational risk by automating processes wherever possible and simply provide services that clients demand.

“It’s not a business so much about pieces of technology, but front-to-back systems that simplify trade capture, handle reconciliation, process settlement and offers clear reporting. It should be a smooth process from trade booking onwards,” advises Mr Platt.

Today, the importance of these systems cannot be under-estimated. Not only are they crucial in reducing risk between all the parties, the client, the prime broker and the executing broker, but there is an element of expectation from many of the clients that that is what they expect.

Hedge fund clients and the like are hugely important to the prime brokers. According to BIS figures one third of FX activity in 2004 came from hedge funds, commodity trading advisors (CTAs) and professional money managers. Most of the rest lies with interbank FX dealing, the largest of whom have their own exclusive dealing networks obviating the need for prime broking.

As with elsewhere in the financial world, hedge funds and now CTAs want to concentrate on their core business and wish to outsource the process to the prime brokers. Without having the facility to service this demand leaves a prime broker out in the cold.

And there is every indication that this business will grow. In early 2006 TowerGroup estimated that the compound annual growth rate in hedge fund FX assets would be 15 per cent, around $2000bn by 2008, a figure it now acknowledges to be on the low side.

foreign exchange, FX,alpha, prime brokers gaining business, derivatives, OTC products,/tag>

The future might look rosy for foreign exchange prime brokerage, but those who refuse to provide a broader service through new technology may find themselves left behind. Gerry O’Kane discusses this and other issues facing FX prime brokers in the next few years.

There is little doubt that the industry sees the future of prime brokerage in the foreign exchange market as healthy. Trade volumes may not be growing at the rates of a year ago but they show no signs of declining either.

“In a nutshell, future developments will include many more clients attracted to the prime brokerage model not just for leveraging credit but also to avail themselves of the sort of outsourcing models the prime brokers have,” says Roger Allen, director of FX prime broking at Dresdner Kleinwort.

However, there are likely to be changes as the industry develops and adjusts itself to the ever-increasing demands of existing clients and new entrants.

“I’d expect FX prime brokers will continue to focus on client problems, including efficient pricing or risk management, in order to give them some edge over competitors. They’re pushing to bundle more products” says David Aldrich, head of the Bank of New York’s hedge and broker business in Europe.

At the back end of the process, integration will continue, he believes, making it easier to move data through to custodians and fund administrators.

While technology solutions are seen to be the main driver of change over the immediate future, one area that may get a shake-up are those prime brokers who only specialise in foreign exchange. “I think that FX prime brokerage is a subset of the business and when you’ve got hedge funds only dealing in forex that’s fine but when they want broader market access then capabilities will be important” warns Ted Platt, head of prime brokerage in EMEA at Merrill Lynch.

For these smaller FX-only operations finding the money to invest in the technology required by this broader service demand will not be easy. As a result there is likely to be an increase in white labelling systems and one ECN, GAIN Capital already generates half of its revenues from that business.

But it is unlikely to be an immediate disappearance of the specialist players since it seems that about half the players in forex continue to use non-electronic trading.

“It’s fair to say that technology will move to make the process more automated and reduce the reliance on phone deals and not to be able to go with that growth could cause problems,” says Mr Platt. “I’d never write off a specialist but I do expect broader prime broker players,” he adds.

Elsewhere some expect to see consolidation in the number of ECNs. “There are a wide variety of these systems now and while its likely that both EBS and Reuters will remain the main players, more are likely to come in,” says Mr Allen. “But I’m certain we’ll see a consolidation process in that sector too and it’s starting already.” In June 2006, ICAP, the world’s largest interdealer broker acquired EBS.

“For the future I’d see ECNs offering more tools such as cross-collateral trade to pick up margins and certainly an improvement in real-time servicing,” says Glenn Stevens, managing director of the GAIN Capital Group, an electronic communication network (ECN).

He also notes that as the ECN market develops, players may look for technologies that allow them to disaggregate large trades, something only the more sophisticated FX prime brokers currently offer. This means executing deals in smaller pieces over time concentrating on market impact rather than pure price.

The use of technology to create further operational efficiencies and lower risk will continue to develop, as will an ever-increasing use of electronic trading. The development of more workflow solutions for clients is likely to continue.

As algorithmic trading has left the equities world and moved into forex, some expect more sophisticated models to emerge. The one caveat with it, however, is that it functions better in low-volatility environments, as the forex market-place has been for some time. Should this change there may be a fall-off in some of the volumes coming from the less-sophisticated players, leaving the advantage to those with models that spread risk.

According to Mr Stevens, modelling systems are likely to become more sophisticated. Post trade data-mining is one area tipped for growth. While some of the bigger banks already do this, it is not yet a common but could tighten spreads still further as the systems extrapolate the effects of certain deals in the market.

Already algorithmic trading has highlighted issues of pricing across ECNs, as banks complain that they are being hit by sniping. They argue that some players are putting in bids and offers to EBS and Reuters and then hitting ECNs at the same time for larger amounts. It creates a ‘liquidity mirage’ and hurts the liquidity providers, the big banks, and because the speed of using algorithmic techniques it is hard to respond.

“Sniping does happen but the counterparty banks figure it out after a while and refuse to do business for a time,” says Nick Jones, head of European sales and marketing of FX at Bear Stearns.

The effects of this are two-fold. Firstly few see future bid/ask spreads widening any time soon and secondly, it will push the banks to reassess how they will provide liquidity. The critics of the banks’ complaints on sniping is that it highlights an inefficiency in their pricing methodology and their own systems will have to improve – boosting data mining technologies, for example.

prime broker, foreign exchange, FX, technology, ECNs, Gain Capital

At a time when China is lurching from one financial scandal to another, writes Gerry O’Kane, both Northern Trust and Citigroup have won the first global custody mandates from a Chinese pension fund.

The National Council for Social Security Fund (NCSSF) was established in 2000 to act as a fund of last resort and is the only scheme allowed to invest overseas. “They recognised that only global custodians rather than local institutions, have the qualifications to provide the services they want,” said Lawrence Au, regional manager, Asia-Pacific for Northern Trust.

For Northern Trust, the mandate includes global custody, compliance monitoring and performance measurement. It followed this deal by winning a mandate to act as overseas custodial agent and provide similar services to qualified domestic institutional investors (QDII) in China for the Bank of Communications.

The NCSSF mandate was won in an open RFP with five competing global players and Mercer acting as a consultant.

What makes the deal more significant is that it is the first step in looking outside China for investment opportunities and a number of international investment RFPs are expected in the coming months.

So far, the NCSSF has only invested part of its underlying assets of $30bn (expected to increase by 20 per cent per year) in domestic products, but its initial foray into international securities is expected to be up to $1bn using fund managers who do not have to hold the qualified investment licences issued by the Chinese authorities.

More importantly, the performance of the NCSSF in investment terms and transparency is seen as the first step towards future liberalisation of the national pension system. “The importance of the NCSSF cannot be underestimated. It enjoys a special status with the Chinese government recognising the serious issues facing it,” observes Mr Au. “All eyes are watching how well the NCSSF manages the fund.”

China, like so many nations in Europe, is facing a pensions funding crisis and the NCSSF was set up to report directly to central government’s State Council to provide future funds to failing pensions. The patchwork of provincial, city and company schemes face huge deficits as a result of a mixture of poor investment decisions, rampant corruption and an aging population.

According to World Bank figures, the current system has obligations for one pensioner to every three workers. As a result of the one-child policy that will be one-to-two by 2010. While liability deficits are not published, Mercer Investment Consulting estimates it will be $27bn by 2010.

Also the scale of corruption was highlighted with the recent arrests of the former director of the Shanghai pension fund, Zhu Junyi, and the city’s most senior communist official, Chen Liangyu. They were accused of misappropriating funds in the region of $1.25bn for illegal loans and investments in real estate and other infrastructure deals.

Currently, these local and company pension schemes are only allowed to invest in cash and national bonds.

Initially, opportunities for fund managers with NCSSF will be limited. “There are certain restrictions on what sort of overseas assets can be used, for example only investing in developed markets,” says Mr Au. Other limitations include forbidding investment in derivative products and disallowing securities lending.

“Everyone anticipates that all the Chinese pension funds will invest overseas but it’ll take time. The NSSF is a role model on how to do it using the cream of Chinese investment managers,” concludes Mr Au.

Northern Trust, Citigroup, NCSSF, China pensions, corruption

The ‘lift-out’ days of old have moved on, since outsourcing providers stood up to being forced into maintaining multiple systems on one platform. Gerry O’Kane charts the modern outsourcing landscape.

It was a gleeful announcement. JPMorgan Hedge Fund Services (JPMorgan HFS) had signed an agreement to take over the middle- and back-office of Henderson Global Investors, along with staff for its 14 hedge funds, representing approximately $2bn (€1.6bn) of assets.

It seemed like the world had changed since outsourcing started with State Street’s 1999 agreement with US fixed-income manager Pimco. “There’s no doubt that outsourcing has been around for a long time, especially in the mature custody sector – you can almost take an off-the-shelf solution,” outlines James Hockley, a specialist in the operations practice at consultancy Investit.

And for JPMorgan, a contract with an asset manager with £67.7bn of assets under management is noteworthy, but it did not have the flag-waving, trumpet-blowing feel of past outsourcing deals.

In part this is because the outsourcing business has changed and its largest players are far more circumspect than in the past. Talk to anyone in the securities servicing business a couple of years ago and trying to get them to speak of anything other than lift-outs was akin to getting Tony Blair to mention socialism.

Doubts raised

Now there are indications that there remains a certain amount of doubt among continental European asset managers that outsourcing is offering solution it purports. Julius Baer Asset Management and Robeco Asset Management are two firms who have been adamant that the big outsourcing route simply does not fit their needs.

And among the industry players there is more talk of component outsourcing.

“The outsourcing market has matured. There may be more lift-outs in the right circumstances but there is a new style of component-based work,” says Richard Warne, head of relationship management for JP Morgan Worldwide Securities Services. “It is possible to break up the services within the middle or back office and consider taking out an element of a service or investment style, rather than the whole thing.”

It is a view with which Mark Kerns, managing director of fund management services in Europe with Bank of New York, agrees. “We might take a lift-out with a view to moving to our environment but the idea of multiple lift-outs is simply not sustainable.”

“What we’re seeing is modular outsourcing continue to grow especially in the area of alternative investments,” he adds.

The deal with Henderson, because it is handling an alternative asset class, now falls under that view of component outsourcing so suggesting that the industry has moved on. The style of outsourcing that dominated the market was the lift-out and even those players no longer hammer the message home.

The thesis of the lift-out operation was win enough outsourcing mandates from well-chosen asset managers and run them on a platform that would give you economies of scale benefiting both asset manager and the securities servicing firm. The system could then be considered a strategic asset and be suitable for many more players, especially the smaller players.

The downside is that such a solution could offer only limited customisation for the
asset manager, but they’ve generally been spoiled by the good life and compromise is not a word often looked up in an asset manager’s dictionary.

As outsourcing projects continued it seemed that providers would furnish any bell or whistle the asset managers desired, including paying them for signing the contract. “Three or four years ago I had providers virtually on their knees with an open cheque book seeking deals,” reveals Luc Leclerq, head of operations at F&C Asset Management.

“The way that most asset managers got into big outsourcing was through lift-out, getting an end-to-end structure for themselves,” points out Mr Hockley. But the asset managers made decisions on the back of a higher cost base and declining revenues and custodians bought their way into the business.

“They were like two blind lovers struggling to find something familiar,” adds Mr Hockley.

But something had to give and 2005 brought something of shock to the asset management industry and their consultants. Those most eager to provide outsourcing grew a backbone when they realised they were being forced down the road of maintaining multiple systems, not one platform.

“There have been something like 30 deals, many seeking to put the same asset managers service onto the custodians’ own platform but you’d struggle to find more than eight that have fully migrated to the lift-out platform,” points out Mr Hockley.

Developing back bone

The custodians wanted to show they wouldn’t be shoved around. While the Bank of New York retained the custody and administration business of Merrill Lynch Investment Managers, it walked away from a full outsourcing deal because of Merrill’s refusal to move to its SmartSource platform. Merrill returned to an in-house system. JPMorgan had already abandoned its five-year struggle to implement an outsourcing deal with Schroders and paid back £20m.

F&C Asset Management and Mellon parted company over outsourcing its back office but maintained other outsourcing deals. According to Mr Leclerq there were issues of service provision at the right price, but those were not the only concerns of fully outsourcing the back office.

“With outsourcing the custody side it’s very simple and there’s competition allowing you to hop from one provider to another without too many problems and the main reason is that there is a structure in place - we’ve a standard gateway called Swift,” argues Mr Leclerq.

This is not the case with the back office. “When I give that away either getting it back or transferring to another service provider is really difficult,” adds Mr Leclerq. “I need to see a win/win situation – my business partner needs to make money too or we all know what happens then…”

And the providers seem to have got the message. “We’ve had our wave of lift-outs as a phenomenon and over the next 18 months State Street will be on a single platform which will be important for the market since with the next wave you can get scale,” says Wade McDonald, head of the asset management and BancAssurance groups with State Street Investor Services in the UK.

As with the Bank of New York and JPMorgan, State Street’s official line is no more lift-outs, but all have the proviso that should the right deal come along with the right staff and technology it might be considered.

Ironically, even Brown Brothers Harriman (BBH) which had been singular in its approach through component outsourcing says it will consider a lift-out but only to acquire a core technology platform.

What all are emphasising is the ability to provide the single solution a new client might be looking for.

Perhaps somewhat paradoxically the provision of single solutions or components, are often as a result of what has been learned through lift-out and the various manouevrings that took them into that market. “With the increase in derivatives there a shortage of resources and a knowledge base and we’ve already seen the big guys buying up hedge fund administrators so they can cover these instruments,” says Mr Hockley.

“There are always factors in this industry driving costs up - new regulations, distribution, new investment strategies especially in the alternative asset space,” points out Mr McDonald. It is in these areas, as well as the more mature outsourcing areas like custody and transfer agency, that he sees much of the component market.

“We’re seeing in the UK that institutional managers are finding that they don’t have efficiencies in certain areas and they are considering component outsourcing,” he adds.

Modular health

“I’d say the modular business will get healthier especially in the light of the growth of the alternatives market,” says Mr Kerns. “Global collateral management services have been a major success for us because of alternative strategies.”

For BBH it must be galling to find all your competitors, once the champions of lift-out, stepping on your patch. “The industry is continuing to change both for what is on offer and what’s in demand,” says Geoffrey Cook, MD, global head of fund administration at BBH. “Infomediary, the cornerstone of our modular outsourcing, has proved itself invaluable because of its scalable nature and looking at today’s landscape having 85 clients shows it has had value.”

“Our view has been that there are multiple ways to do something all with differing requirements and we try to provide suitable components – we’re not saying it’s right but it’s the space we want to play in,” adds Mr Cook.

And it’s the space everyone else now wants too. “We’re going to see an investment-based component approach develop,” observes Mr Warne. In particular, again he mentions alternative asset classes. “Asset managers want to run hedge funds pricing risk analysis or fund of hedge funds and some of these processes they can’t do with their own systems.”

He points out that going short was deliberately made impossible on their systems due to regulation and it is in these areas that securities servicing arms will find new custom.

“It’s a step-change to support new product lines but the ideal of mix and match remains to be seen,” concludes Mr Hockley.

Far more sceptical is Mr Leclerq. “I’m not sure about component outsourcing although the market talks a lot about it – if you have too many components there’s the question of it working at all and if it couldn’t make money as part of a lift-out bundle, how is it economic now?”custody, securities servicing, outsourcing, component outsourcing, asset management,

— Mark Kerns,Bank of New York

Fund administration is developing, but in favour of the larger managers who can use the increasingly complex investment style, more regulation and new demands to their advantage, writes Gerry O’Kane.

Fund administration is maturing. Whether it is the service, the pricing or the attitude from either supplier or client, it is frequently described as a ‘maturing sector’. An asset manager talking about outsourcing fund administration to a third party is not the news it once was: within the space of seven days JPMorgan announced a fund administration contract with Charles Schwab, hedge fund administration outsourcing with Henderson Global Investors, while HSBC picked up business with Royal London Asset Management.

In general, fund administration has been accepted as a non-core competency by asset managers.

The business does remain healthy and in the same week as all those deals, Northern Trust announced first quarter results which showed a 28 per cent increase in the value of assets under administration, boosted by its acquisition of Barings Financial Services Group’s fund administration arm.

But while it might be considered a more settled part of the investment world, it is not without pressures and changes, especially on the price of securities processing. “It’s an interesting time with a number of costs coming down and some going up,” observes Geoffrey Cook, global head of fund administration at Brown Brothers Harriman in Luxembourg. It’s a view unquestioned throughout the industry.

“Costs are reducing around clearing and settlement in many markets with the underlying service providers utilising technology in a more efficient way,” agrees Mark Kerns, managing director of fund management services in Europe and Bank of New York.

India would be a most obvious example. Once each share certificate had to be individually stamped by hand each time it was bought and sold. Now an electronic system not only cuts the risk of trade failure (losing share certificates was not unusual as they would travel Delhi streets by rickshaw), but cuts cost too.

While European bourses have not had such dramatic changes in processes, the automation, shortening of trading chains and so on, have lessened costs to both the fund administrator and client. “The efficiencies of local markets and local practice along with the expansion of Swift as a low-cost communications facility, for example, means each market becomes more efficient and administrators can eek out additional savings,” says Wade McDonald, head of asset management and bank assurance with State Street.

Pushing costs up

Agreement is rare in the banking community but no-one dares suggest the cost of handling long-only equity funds has increased. “But there have been substantial phenomena which have not slowed pace in five years that are pushing some costs up – regulatory changes and an evolution in investment style such as derivatives, leading to a growth in non-standard practices which are often people intensive,” warns Mr Cook.

The quest for more yield, whether in the pension fund or with the asset manager, has been unrelenting since the new millennium. To find it, new investment strategies have emerged using alternative products encompassing derivatives and asset classes such as property. “Unlike the long-only equity funds, many of these instruments don’t have uniform downstream processes for settlement. A lot of OTC [over-the-counter] products require manual intervention, don’t have a single price and it’s having the effect of pushing costs up,” outlines Mr McDonald.

BBH points out that for most long-only equity products, straight through processing (STP) levels are well over 90 per cent. “These levels come shooting down when dealing with OTC products,” says Mr Cook.

The impact of this changing face of investment strategy on fund administration outsourcing should not be under-estimated. “Providing this sort of service will put pressure on small administrators in terms of having the skill-set to understand the underlying products and the technical infrastructure,” says Richard Warne, head of relationship management for JP Morgan Worldwide Securities Services.

Like the other big boys of the securities servicing industry, acquisition of firms with experience of hedge fund administration and consequently of alternative investments, has been critical in building the expertise to handle this growing business. Apart from JPMorgan’s acquisition of Paloma, Mr Warne agrees that exploiting alternative investment knowledge from its investment banking arm was vital in the early days and even now it is spending $60m (€46.5m) in boosting the technology to handle this product suite.

While it remains early days for the asset managers and their toe-tipping in the alternative marketplace, the implications are more far-reaching. “It’s not a question of how widespread will derivatives become, for administrators it’ll become an absolute requirement even if only 5 per cent of the asset manager’s portfolio is in alternatives,” says Mr Warne.

As new regulations come to Europe, even traditional long-only equity funds could use derivatives on a small scale.

“At the very least smaller administrators will have to become more focused, they won’t be able to afford to be all things to all people,” says Mr Cook.

Collateral damage

Another implication in the growth of alternative investments is that their use goes hand in glove with using collateral services. For the larger players this requirement is another carrot to lure them to their own fund administration product. Not so the smaller administrator. “There’s been a stronger move to handle collateral efficiently and it’s been a major success for us because of alternative strategies,” agrees Mr Kerns.

Other factors affecting how administrators can operate include fund of funds and pooled assets. Both have further implications on technology infrastructure and the administrators’ understanding of underlying assets. Administrators maintain that funds of funds are straight-forward with long-only equity products, but the issue becomes more difficult when elements within a fund may include derivatives, requiring an assessment of impact on the overall portfolio. It also requires an ability to handle data from numerous transfer agents.

Overall, the larger players in the sector are happy with how the business is developing, if only because the increased complexities of investment style, new regulations and new demands (such as pooled assets) play to their strengths. For the rest of the administration world it looks set to follow custody, either specialise, be bought up or go under.global fund administration, securities servicing, outsourcing, settlement, custody, alternative investment strategies, collateral services