OTC derivatives, in the form of interest rate swaps, have been affected significantly by the recent wave of financial regulation. Banks will soon be required to execute these instruments on Swap Execution Facilities (SEFs) or Multilateral Trading Facilities (MTFs), and clear them centrally. These SEFs / MTFs will be electronic trading venues that will centralise liquidity and, therefore, increase competition among dealers. In the extremely fast-paced world of trading, this move to electronic trading venues means that the IT infrastructure will become a major determinant of the degree of competitiveness of a bank.

Key Findings

• Latency – The refresh frequency for benchmarks at most of interviewed institutions is under one second, and averages around 300 ms. The latency for stripping a par yield curve into a zero coupon curve is typically less than a second as well, but some participants were unable to provide exact figures as the basis is being stripped constantly. The Request for Quote (RFQ) of a custom swap can generally be computed in less than 500 ms. 
• Benchmark rate calculation and contribution – Using forward curves to calculate IR benchmark rates is the prevalent method, but the approach typically varies by currency. There is more diversity in the approaches towards price contribution, with a curve output, brokers’ feed aggregation and the computation of some tenors as a combination of different strategies emerging as key methods. 
• Modelling methodologies – Four of the five interviewed banks reconstruct the curves without using approximations. There is a wide variety of methods used to construct the curves, ranging from smooth curves to quadratic curves. At most banks, traders are free to choose from a range of methods. Convexity adjustments are normally made manually by the traders without the aid of models. 
• Curve servers – The interviewed banks normally generate different curves for pre-trade and post-trade processes. Unique curves are normally produced for each Credit Support Annex (CSA) agreement as well. Curve stripping and pricing are typically performed by the same server. 

Conclusion

The Dodd-Frank Act and European Market Infrastructure Regulation (EMIR) will introduce sweeping changes to derivatives trading to improve transparency and reduce systemic risk in the financial sector. With increased competition among dealers on these electronic trading venues, the IT infrastructure in place and the latency experienced by traders will become key determinants of banks’ profitability. This research has shown that major banks have reduced pricing latency to milliseconds, and are bracing themselves for further change in this space.

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The recovery from the global recession has become especially precarious in the aftermath of the Eurozone sovereign debt crisis and fiscal tightening in the Western world. Given these uncertain times, expert analysis and novel ideas are being diligently sought by investors. Opportunities in the financial sector, however, often also bring challenges. The format in which this research should be distributed is one such challenge, as a variety of formats have now emerged, including research aggregators, which consolidate research from various sources into one point of access.

Key Findings

• Distribution channels currently being used – An average of 60% of the surveyed institutions provide research via email for several different types of research. The uptake of email push for research distribution is extremely low, however, averaging only 10% across all research types. Research Aggregators are only used by 25% of the sample in this research. A majority of the respondents stated that their clients prefer to receive all types of research by email. Research aggregators, on the other hand, are the preferred channel according to an average of less than 20% of the respondents. The proportion preferring email push rise above 10% only for equity and emerging market research. 
• Use of research aggregators – Only slightly over half of the institutions use research aggregators. The minority that uses research aggregators, however, are primarily major universal banks with prominent investment banking arms. Bloomberg is by far the most widely used research aggregator, being the aggregator of choice for 80% of the surveyed institutions. Thomson Reuters is used by 50% of the institutions. Research aggregators that direct the clients to the institution’s own website, such as Market Hub, are less favoured.  
• Purpose of providing research – Research at 39% of the participating institutions is intended to be a service to existing clients only. Nevertheless, a notable majority of institutions also use research to expand the client base, but this is not the sole purpose. Nearly all of the banks where research is only seen as an additional service to existing clients do eventually expect more business from them. When intended as a marketing tool as well as a service to existing clients, the latter is a marginally more important consideration than the former. 

Conclusion

The rising dependence on flow trading for revenue growth means that investment banks must produce research of the highest quality to strengthen their relationship with prospective clients. In addition, they must also keep abreast of new technologies that can be used when delivering research to clients. This report shows that whilst a number of banks do provide their research through multiple channels, clients still overwhelmingly prefer standard email and banks’ own web portals.

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Efficient mobile communications are increasingly driving the success of modern business as the workforce becomes more mobile and we store ever more corporate data in the cloud. Whilst this brings huge business benefits in terms of improving efficiency and productivity, the safe use of mobile devices to access corporate cyberspace requires a deeper understanding of the security risks involved. Supported by the proliferation of high-end consumer technology such as smartphones, tablets and netbooks, the adoption of personal, mobile technology in the corporate environment is increasingly common. 

Key Findings

• Corporate policies – Banks are finding that Blackberries have better security than the iPhone for corporate usage and, therefore, most have them as their preferred device. Staff are issued the phones based on their role and/or seniority, and there are various tariff packages and spend guidelines in place. 
• Uses – Other than for phone calls, emails and Internet browsing, mobile devices are not being used in the corporate environment as much as they are for personal use, for security reasons. There are, however, various applications that are being introduced. 
• Risk and security – Technology has advanced beyond the security required to use it effectively in the corporate environment, although the latter is catching up. Banks are keen to build security so that personal and corporate usage can be combined, reducing costs. 
• The future – The use of two mobile devices will become normal, with professionals using three or more devices. Capabilities to make applications, services and information available coherently across devices, including middleware, synchronisation and self-provisioning solutions are important here. Cloud computing, being considered by some, will allow more applications to be connected. 

Conclusion

It is hardly surprising that this new generation of powerful, personal mobile devices has entered the enterprise space.  Employees look to them as business aids and, in some cases, as replacements for traditional computing tools such as laptops and desktop PCs. Indeed, some business leaders argue that personal devices used for corporate activity can actually lower costs for the organisation, particularly if the employees are purchasing the devices, software and accessories themselves. Compliance regulations, however, are restricting the pace of the growth of applications being used, and it is less of a business requirement than a ‘nice to have’ device to increase flexibility in the workplace.

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The 2008 banking crisis exposed the inadequacy of many financial institutions’ IT infrastructure in supporting risk management processes. Data was commonly stored in numerous disparate repositories which did not interface with each other, that inevitably led to the expensive replication of data. Fortunately, banks are now trying to ameliorate the situation by investing in very large databases (VLDBs) that can feed downstream systems with more consistent and accurate data.

Key Findings

• Enterprise-wide data systems – Four interviewed banks currently have an enterprise-wide database which shares information across the bank. Yet, at three of the banks, installing an enterprise-wide database did not eliminate the need for siloed data systems at business unit-level. Rather, business units build their own data system in order to attend to their specific business unit needs.  
• Functions supported by VLDB – With one exception, all of the interviewed banks are using VLDBs to support risk management activities. This is understandable given the sheer volume of data risk managers need to analyse quickly and accurately. 
• Data storage strategy – Banks are actively searching for an alternative technology to improve storage capacity. Data compression is used ubiquitously by the banks. Banks are still reluctant to embrace cloud computing due, mainly, to security concerns surrounding this new technology. 
• Database technology providers – The data technology market is in a state of flux with several new entrants offering innovative products. Oracle, IBM and Microsoft, however, continue to be the market leaders and, indeed, are used by the interviewed banks in their data platforms. 

Conclusion

Modern banking is a technology-intensive business which involves the processing and storage of a vast volume of data. Transforming this data into valuable information for managers is a key challenge when the data resides in various disparate systems. This research indicates that banks are now overhauling their data management systems. By centralising key information, banks aim to improve consistency of regulatory reporting, reduce data-access latency, solve issues relating to data proliferation and increase the functionality of their data storage systems. 

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Pervasive failures of risk management within the banking industry and the resulting devastation strongly imply that some functions, such as Finance, cast a disproportionate influence over the banks’ business strategies. Nowadays, however, the clout of the Risk function relative to other departments over business-critical endeavours is quickly increasing. As many of the responsibilities of Finance and Risk overlap, several institutions have prioritised the demolition of silos to foster a collaborative environment.

Key Findings

• Reporting line for the CRO – 58% of the 96 respondents in the online survey stated that the CRO reports directly to the CEO. The CROs at a further 29% of banks report both to the CEO and the Board of Directors. At only one tier-2 European bank does the CRO report to the CFO. 
• The necessity of integration – 46% of the respondents believe that integration should be pursued only selectively in areas where the responsibilities overlap most strongly. 28% of respondents advocated complete integration, while 26% stated that integration is either unnecessary or infeasible. 
• Areas of collaboration – Risk-adjusted performance monitoring and capital management are the two areas where Risk and Finance cooperate the most. At a number of banks, new products are also approved after sufficient consideration of the opinions of Risk. Compliance and limit setting, on the other hand, involve the least amount of joint input. 
• Integration of systems – 23% of the respondents have completely separate systems for each department, with no overlap in any particular area. Another 49% of respondents also have separate systems but there is sharing in some areas. Only 25% of the surveyed institutions, primarily composed of small banks, have a single integrated system for both departments. 
• Future plans – 59% of the respondents have recently pursued, or are planning to pursue integration projects, while 41% of the sample has no such plans. At half of the banks that are currently pursuing integration, the projects have been jointly funded by Risk and Finance. 

Conclusion

To reap the benefits of holistic, risk-adjusted measures of performance, as the current regulatory environment demands, banks must integrate Risk and Finance to the greatest possible extent. The importance of these benefits is acknowledged by nearly all of the surveyed institutions. In several areas, cooperation is currently limited, but may rise appreciably when the Risk and Finance systems are integrated. This objective is strongly desired by a large number of banks, who have initiated several projects to this end.

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Over the past few years investment banks have been expanding their Information Technology client offerings, in particular the use of enterprise portals (or e-Portals), in order to grow their respective businesses. E-portals have developed from the relatively crude Generation 1 platform, exemplified by the Yahoo portal of the early 1990s, to the considerably more sophisticated Generation 6 e-portal platforms which contain extensive built-in functionality and offer users a great deal of flexibility.

Key Findings

• A necessity, not an option – E-portals have become key to the growth of electronic trading offerings for investment banking clients. So much so that every bank must, as a matter of course, possess a viable e-portal on which clients can carry out a variety of e-trading functions. 
• E-portal technology – Straight Through Processing (STP) is key to the e-portal platforms being offered by investment banks, and is implemented as much as possible across their platform. The software underpinning the e-portal architecture is usually a mix of in-house and vendor-provided development but a trend is developing towards in-house development of proprietary software. 
• Benefits of the use of e-portals – The advantages offered by e-portals accrue to both investment banks and their clients and include greater efficiency, scalability, better pricing and increased transparency. Drawbacks, however, are experienced predominantly by banks, rather than their clients, and are largely related to the cost in capital and resources required to develop a viable e-portal that clients will use. 
• Mobile computing and e-portals – Some banks are focusing future development of their e-portal on the mobile computing space. Several banks interviewed for this report have developed, or are in the process of developing, applications which can be used on smartphones and tablet PCs. 

Conclusion

This report investigates the extent to which e-portal platforms are being utilised in the investment banking space, the nature and scope of the e-portals that have been developed and predicts what the future looks like for e-portals within the investment banking space. It is clear that banks take the development and maintenance of a viable client e-portal very seriously and have incorporated it into their business and IT strategies. The actual direction that development takes, however, is different from bank to bank, but the overall trend is to leverage the possibilities offered by e-portals, fully expecting them to promote business growth.

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The Internet browser is becoming an increasingly important enabler of modern business practice. What was once simply the door to the Internet now facilitates many business critical web applications. The astoundingly fast evolution of the web and web-based technology means that banks cannot afford to neglect rapid advancements in this area.

Key Findings

• Decision Making Process– There is very little flexibility for individual employees or even regional IT heads to decide on which internet browser to deploy as, generally, the desktop build is specified by a central team or group IT heads.

• The Dominance of Internet Explorer – Despite figures from StatCounter showing the decay of Microsoft’s internet browser market share in the consumer market, Internet Explorer has bedded down in the banking sector and there is no indication that this will change any time soon.

• Support for Windows XP – In general, an internet browser upgrade to a newer version is bundled with an upgrade of the operating system. Banks using Windows XP will be forced to upgrade to Windows 7 and those using Internet Explorer 6 will need to upgrade to either Internet Explorer 8 or 9.

• Prioritising Internet Browser Upgrades – As banks struggle with more urgent technology changes, driven by new regulation and cost saving in a challenging climate, the upgrade of internet browsers and desktop operating systems is not seen as a priority.

Conclusion

Decisions on workstation build specifications, which include internet browser and operating system strategies, are made on a global basis. Reasons given by the participating banks for the choice of browser vary and include contractual arrangements, the pervasiveness of Microsoft products and fears of compatibility issues which may compromise security. The trend seems to be that upgrades to Internet Explorer are planned for next year. The result of this research is that the changes in market share for internet browsers have not, and will not in the medium term, translate into moves away from Microsoft’s domination of Internet Browsers in the banking sector.

There is growing interest in vendor management among banks due to an increased reliance on third parties and the need to gain greater control over their cost base. The interest is also driven in part by increased regulation around data privacy and security. As vendor management gains traction as a business imperative, different models are emerging. This report examines whether implementing a central vendor management function will create the right business benefits, particularly within the IT function where a large proportion of the Bank’s spend lies. Information sources in this document are from in-depth interviews with major banks, as well as detailed vendor management discussions in a web forum within the Banking and Finance Technologies user group on LinkedIn.

Key Findings

• Vendor Performance – Consistent and clear management of vendor performance is a key priority for organisations that are increasingly relying on external parties to provide key services like IT, Facilities Management, HR, Finance and Accounting and Legal Services.
• Vendor Management Tools – Modern vendor performance management tools will sit very nicely alongside legacy procurement tools and ensure that there is no need to undergo major system overhauls. The reality is that there will be no full end-to-end solution, but a combination of tools that work together.
• Benefits – Centralisation can lead to better negotiations, quality control, volume discounts and standardisation for an organisation, if handled sensitively to business needs. It may not necessarily reduce costs initially, but may prevent future losses.
• Ongoing Management – Poor relationships can destroy value to a contract, having detrimental effects internally in unexpected places. It is important not to place all the focus on the initial striking of the deal but to keep up with the changing pace of the business and the environment.

Conclusion

Most banks have centralised elements to their vendor management process, particularly the IT commodities. It is not, however, just about cost savings in the short term, but about maintaining strong relationships to get the most out of vendors and their products in the long run. In fact, too much structure to enforce upfront cost reductions and control can result in problems down the line that will end up creating more expense. The best models appear to be where a central vendor or commercial management group work in partnership with the business line owners, marrying up the technical expertise with commercial focus to optimise business decision-making. Vendor management is not negotiating the lowest price possible; it is constantly working with vendors to come to agreements that will mutually benefit both companies.

For banks to gain a competitive advantage in an increasingly data-centric marketplace, portfolio managers and risk managers alike must access near real-time financial information. This is forcefully driving the demand for increasingly sophisticated computing capabilities, use of which is rapidly proliferating at several banks.

Key Findings

• Current Trends – Grid computing emerged as the most used HPC solution, followed by HPC Cloud Computing, Commodity HPC Cluster and GPU.

• Area of Use – Almost half of the responding banks use HPC exclusively in specific departments (43%) while a third use HPC across the entire organisation (32%).

• In-house vs. Vendor Solutions – There was a mixed response from participating firms in regard to the use of vendor packages. 41% of respondents use a combination of both in-house and vendor packages.

• Current Strategy – 42% of respondents stated that their current HPC strategy has been implemented for more than 36 months. The same respondents are using grid computing, either as a sole solution or in tandem with another HPC solution.

• Current Benefits – With an ever increasing amount of financial data to process and monitor, increased scalability and adaptability to volumes are the two most commonly expressed benefits of implementing an HPC solution.

• Challenges – Both tier-1 and tier-2 banks selected cost as the most concerning issue.

• Budget – Since the onset of the crisis, budgets have become highly constrained and tightly monitored. In the last 12 months, however, budgets have largely remained the same (30%) or have slightly increased (35%).

Conclusion

HPC is already proving to be an effective strategy at many banks. As the demand for more timely and accurate data processing increases, so will the need for more computational power. Therefore, even though the cost of HPC can be exceptionally high, an increasing number of banks should find this technology to be viable in the future.

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The revolution of business information systems and their corresponding data stores has transformed how global organisations produce and use information. This has happened in three parallel realms: enterprise business applications, personal productivity and content applications, and the internet. With the emergence of holistic and semantic data integration technologies, innovative organisations have started to leverage the immediacy and relevance of unstructured and Web data. This has enabled the use of rich enterprise applications and processes, and in the reverse scenario, real-time data in edge-of-enterprise Web applications.

Key Findings

• The Data Virtualisation Platform – To accomplish the goals of holistic data integration, a data virtualisation platform must be more than the sum of the key capabilities found in separate technology stacks for EII, Web extraction and Search/Indexing.

• Applications of Data Virtualisation – As organisations become aware of the unique capabilities of data virtualisation to merge structured and unstructured information, they are discovering new uses and even new business models to enhance their competitive position.

• Current Strategy – Data warehousing and integration strategies are common place in the market to varying degrees but none of the participating banks have taken the next step towards virtualisation. Where it has been used, it is only in pockets of the organisation, layered on top of the existing integration strategy.

• Responsibility and Stakeholders – There are a number of different areas of the bank which inhabits sponsors and stakeholders at the participating banks. As can be expected, heads of the business lines have a vested interest in Data Virtualisation. Furthermore, a number of the participants commented that IT is the main stakeholder.

• Future Plans – A majority of the respondents highlighted that future plans concern spreading their current techniques across a greater number of areas within the bank.

Conclusion

The goal of making information a strategic asset can no longer be limited to the subset of structured data contained in enterprise databases and applications. Business and government organisations must deal with the reality of the information explosion driven by Web 2.0 and user-generated content. Increasingly, just as much useful and relevant data resides outside enterprise applications as within it.