Buy-Side Bashing in Singapore
In session after session at this year's Sibos conference in Singapore, asset managers were blamed as the major roadblock in the industry's quest for straight-through processing.
In fact, frustration with a perceived lack of interest in STP on the buy side prompted a special session entitled, "In Search of Efficiency -Who should contribute and what role should asset managers play?"
According to Nadine Chakar, CEO of global custodian ABN AMRO Mellon, custodians have some responsibility for the buy side's lack of automation. "We masked their inefficiencies by creating workarounds," she says, with custodians investing in technologies like document imaging "to handle the flow of faxes."
Chakar says, however, that such accommodations must end. "We cannot continue to assume that burden. We have to get them to assume responsibility and that will require them to make some investments."
Getting the buy side to make such investments, however, will be easier said than done.
That's because though broker/dealers and custodians rail against asset-manager inefficiencies at conferences, they would never risk a business relationship by demanding operational improvements directly from a client.
Michael Brown, a managing director with buy-side firm Barclays Global Investors Australia, says the buy side knows order flow is far more important to broker/dealers than operational efficiency. With serious competition on the sell side, broker/dealers are all too aware that asset managers can choose from a hundred execution intermediaries and destinations.
"Broker/dealers can follow the money, so they don't like telling their customers how they should be doing business," says Brown. "The economic opportunities associated with increased levels of STP pale in comparison to order flow which is king to brokers."
Campbell Fleming, a managing director of European operations with JPMorgan Fleming Asset Management, says that it's also important for broker/dealers and custodians to keep in mind where the buy side gets its bread buttered. "We compete on our performance of generating returns which is the key to gathering huge pools of assets." Those assets usually come from large corporates and pension funds that know little about comparing investment managers on the basis of operational efficiency.
Brown says it's up to the broker/dealers to handle trade processing. "The fund manager doesn't care how all that post-trade-processing stuff is done. They want someone to do it for them in a cost-effective way. The fund manager is in the business of making money and operational efficiency is not a key component of their proposition to the marketplace."
Anthony Fraser, executive director and head of the operations division with broker/dealer Morgan Stanley Dean Witter, admits that the buy side often sees the sell side as a necessary evil. "The reality remains that I am not their core business, I am a cost."
Fraser says that while issues of operational efficiency are creeping into specific buy/sell side conversations, such is the exception rather than the rule. Instead, a buy-side firm's business is garnered on the merits of a broker/dealers execution capabilities and proprietary research, he says, "Those issues dominate."
Brett Goodin, president of the Asia-Pacific and Japan region for Fidelity Investment Management, says the buy side has shown a willingness to move forward with STP but, often, has been met with a chilly reception. He says more involvement from organizations like Swift - the international-banking consortium founded to facilitate cross-border payments and the host of Sibos - will be critical if real progress is to be made.
"It is only recently that Swift has wanted anything to do with the investment-management community," Goodin says. "When we have asked banks and brokers using Swift to adopt standards to trade, we were often met with a wall of refusal."
Speaking to a general-session audience, Goodin says, "If you believe in STP, and you care about asset managers, please break down the barriers in your organizations and help us get connected." He suggests implementing standard protocols to help the buy side more easily handle growth.
ABN AMRO Mellon's Chakar says that while standards have helped custodians link up with counter parties more easily than when proprietary protocols were king, they are often too flexible in usage. Excessive flexibility means though a standard will have wider appeal and adoption, a firm like Mellon must still perform extensive testing with each of its customers before doing business.
An initiative which once had wide appeal - the GSTPA - may have gone bankrupt last year, but the shockwaves from its implosion are still reverberating throughout the financial-services industry. In all, the industry lost over 90 million euros in the post-trade, pre-settlement matching venture. At the time of its demise in late 2002, many blamed asset managers for not directing their order flow through the utility.
As a result, asset managers, and the industry as a whole, are now largely against the concept of massive utility-like projects which purport to solve the industry's problems by large-scale collaboration.
Fleming says, "The complexity of our business in Europe and Asia defies quick standardization or solutions - Big bangs are out. This is about Darwinian evolution." Industry-wide multi-year projects, he says, are also not in favor. "Unless you can deliver a solution in 12 to 18 months, don't bother doing it."
Brown reminds broker/dealers and custodians not to tread too heavily on their customers - the asset managers. "If fund mangers don't care they are unlikely to contribute to an issue. They also do not have the breadth and depth of talent to engage in too many forums. They have to be selective, so I think you have to leverage off the key players that can help to inspire the community."
When asked by the audience once again, who should pay for the industry's automation, Brown was frustrated. "I would like to stop talking about this. I think we have been talking about this for the course of the whole conference. In the end, the client pays for everything. I think it's reasonable to expect the fees (the buy side) pays for services to be reinvested by broker/dealers and custodians. There is no appetite for longer-term funding or investing, and we should stop thinking that there will be."