| George Zinn | ||||||
Corporate treasurers and investment managers are showing an increasing interest in using the internet to improve efficiency and to access information and sophisticated risk evaluation and management tools. There are substantial challenges to market participants in this new world. But companies that duck the e-finance challenge risk being left behind.
Euromoney reviews some of the latest online services provided by leading financial institutions – and by new competitors – to corporate treasurers and risk managers. The survey is not comprehensive: the financial institutions and other firms have been selected to illustrate the types and scope of web-based products and services on offer, now or soon. Nor does it cover all the electronic products of the participating institutions, only those relevant to treasury and risk management operations.
This gives us a snapshot of what is available for treasurers and risk managers over the internet. What’s clear is that whether you wish to issue a Eurobond or commercial paper, manage your firm’s currency or interest-rate exposures, float equity, obtain top-notch research on any subject, arbitrage among the financial markets, invest surplus cash, trade on the various derivatives exchanges, or shop a deal in a multi-dealer site, you will be able to do so on the internet with the offerings of the eight institutions covered below.
A diversity of approaches
All online financial service providers share the aim of increasing profit by achieving efficiency and/or to extend their reach to more clients. But that is where the similarities end. The products and services differ in most other respects. Some firms provide just a few stand-alone online products and services, others provide more integrated sites and wider coverage. This partly reflects each institution’s business focus, its core strengths and market competencies, and partly its degree of familiarity with the internet technologies.
Areas covered include risk management and advisory, trading/execution, brokerage, asset management, equities and equity issuance, debt issuance and syndication, cash management, clearing and settlement, custody, advisory and reference in general, and wireless-delivered mobile information. Some are aimed at corporate treasurers, some at fund managers, others at traders. Often, the same products can serve both the buy and sell sides.
Many banks are feverishly developing internet-based capabilities, but there are significant differences between the corporate treasurers and risk managers at which they are aimed. Some companies are adopting the new technologies as fast as they become available; others are far more cautious and seem to be lagging behind in the implementation of e-commerce strategies.
Microsoft is keen to embrace the new technology. Its treasury is wired, and large amounts of financial information can be retrieved from its corporate intranet or the web. George Zinn, director of Microsoft’s corporate finance group, says: “In the private suite on our website, I can click on a link that will connect me to any one of our counterparty’s secure websites, which offer research and analysis. Their functionality is impressive; some of those sites are capable of marking Microsoft’s positions to market. I manage the $20 billion strategic equity portfolio. I try to stay on top of the markets. As a result, I have subscriptions to several online services like convertbond.com, thestreet.com, and most important, moneycentral.com. I also manage the financial risks of the treasury and leverage, a web-based tool from Deutsche/BT called Raroc.”
Not everyone has moved so fast. However, banks should not confuse a more measured approach with lack of interest. Some corporate treasurers are inclined to wait until the e-finance providers have thinned out.
Hans Pohlschroeder, vice-president and assistant treasurer at Colgate-Palmolive in New York, is keenly interested in the new technologies. “We are currently not using any of the online treasury services provided by the financial institutions. We are trying to listen at this moment and trying to assess who are going to be the winners and in which markets, and whom we would like to use for issuing securities, buying and selling securities, or other services. We are aware that most financial institutions are very busy developing something and are in the process of formulating a strategy.”
The company is working with a big financial institution to develop and implement a proprietary global online system that is expected to generate considerable economies for its worldwide treasury operations.
Fund managers are quickly becoming active on the internet, in particular in research, investment opportunities, and trading, execution and arbitrage systems. That, perhaps, reflects the relative simplicity of using online trading systems.
However, few corporations yet seem to be using the internet actively in their treasury operations, often limiting themselves to retrieval of quotes, news, historical data or research. Several indicated their relatively low level of use. But the head of e-commerce at one leading broker says: “We see them [the corporate treasurers] popping in an out of our site all day long, looking for funding costs.”
Getting automated information directly into a treasury management system over a website can be an enormous productivity boost. In corporate treasuries and the bank departments that service them, there is an enormous amount of fax and phone traffic relating to the mechanics of the business, rather than to any value-added advice. The new technology can wipe out that low-value interaction. This is music to the ears of the corporate treasurers and the larger financial services institutions, many of which are becoming high-tech applications service providers (ASPs). Not only is the internet improving efficiency, it is extending the potential audience for sophisticated treasury services.
Says Philippe Buhannic, managing director of CSFB’s fixed-income e-commerce activities: “Through internet delivery, we are able to provide risk management tools, traditionally reserved for only the most sophisticated financial institutions, to all types of clients while sparing them the lengthy installation process.”
Even though sophisticated risk management tools are easy to access, not all corporations will use them. But the internet allows such customers to use as much as they think they need. Corporate and institutional customers, instead of buying or developing their own risk management systems at huge expense, can now download those provided by banks. Obviously the banks, increasingly competing with software vendors and consultants, expect a pay-back in underlying business volume.
| Name of institution: Credit Suisse First Boston | |
| Name of product: PrimeTrade | |
| Feature/function: | Commentary or not available (NA): |
| Main focus of the system | Internet-based global electronic trading and order routing system designed for institutional investors trading across many financial products |
| Scope | Primarily listed derivatives, foreign exchange, Eurobonds, US treasuries, European sovereigns, US CPs, European CPs, agencies, investment grade corporates |
| Valuation tools | |
| Portfolio analysis | PrimeRisk provides value-at-risk and other portfolio modelling |
| Other stand-alone | |
| financial calculators | Bond yield, options , foreign exchange, hedging rates |
| Risk analysis tools and techniques | |
| Market risk | Full instrument valuation and Monte Carlo value at risk (VaR) via PrimeRisk II |
| Credit risk | In test mode |
| Collateral management | NA |
| Market data and tools | |
| Market news | Global financial and commodity products |
| Historical market data | In planning mode |
| Technical models | In planning mode |
| Forecasts | NA |
| Resources | |
| Accounting information | All transaction information in PrimeTrade |
| Tax information | NA |
| Legal information&documentation | Documentation is included |
| Forex control®ulations info | NA |
| Research | Hyperlink to CSFB research website |
| Collaboration tools | |
| Pose questions to experts | Yes |
| Chat room | Yes |
| Forums | Yes |
| Video conferencing | NA |
| Application sharing/whiteboarding | NA |
| Productivity tools | Calculator |
| Advisory/consulting services | NA |
| Client training features | Comprehensive training is provided to each client for all PrimeTrade applications |
| Execution/online trading | Yes |
| Integration with internal systems | |
| Export from internal to vendor’s | Yes – fully integrated in various modes |
| Export from vendor’s to internal | Yes |
| Export from Excel to vendor’s | Yes |
| Export from vendor’s to Excel | Yes via the PrimeClear application |
| Technical Specifications | |
| Internet/intranet | internet |
| PC operating system used | Windows, NT, UNIX, etc. |
| Internet protocol | Java |
| Hardware required | 486MG PC |
| Security features | Multi-level security – RSA for data Confidentiality and SHA for integrity |
| End-user customization | Customized reporting is available |
| Service/system pricing | Varies depending on scope and range of services provided |
| Contacts for more info | Philippe Buhannic, New York 212-325-2318 |
| Philippe.Buhannic@CSFB.COM | |
The benefits of this evolution for end-users are likely to be enormous. Michelle McCarthy, managing director, sales and marketing, Raroc 2020 atDeutsche Bank in Seattle, Washington, says: “We have noticed that ASP providers can be used to ‘right-size’ an application that would otherwise be too large or too costly for a company. Large-risk software packages make a lot of sense for banks, who need to track daily risk figures for regulatory purposes and have large risk management groups, but they don’t make much sense for the more occasional user of risk information. Investors and corporations typically fall into this less-frequent user category. Using an ASP gives them access to the most sophisticated software, and even the operational staff behind it, at a fraction of the cost of a built-in client-server application.”
Some of the online systems discussed are up and running, others are being developed. Most financial services institutions are developing new products or adding functionality, and content to existing products. However, some did not appear to know themselves well enough to find and provide the information sought. Other firms were excessively secretive, referring to their e-commerce activities as confidential and proprietary.
We were not able to evaluate the products of these institutions, as the market rumours and gossip were ambiguous. “There is a lot of vapour out there and you have to see it, touch it and test it to believe it,” says the treasurer of one big multinational. Another e-commerce financier said: “They could be secretive because their systems are pathetic or because they really are working on something where they feel even a peek from the outside would result in a leak they don’t want to talk about.”
Euromoney contacted 12 leading financial institutions and four online e-commerce providers and asked them: “What online products and services does your firm provide to corporate treasurers and other risk managers, in particular in the area of capital markets, derivatives and risk management?” Seven financial institutions and one online e-commerce provider responded fully.
Issues to consider
How do you find the product/service you want and need? How do you select the right providers? Which service is the most suitable for your operations? Are your security issues properly addressed? These are important questions and, relationship considerations apart, should be seriously considered by treasurers and risk managers.
| Name of institution: Deutsche Bank Group | |
| Name of product: Raroc 2020 | |
| Feature/function: | Commentary or not available (NA): |
| Main focus of the system | Risk measurement service bureau; provides risk reports to institutional investors via encrypted internet application. Customers or custodians send simple holdings feed, we conduct risk analysis. |
| Scope | Market risks: equity, interest-rate, currency, commodity. products include: cash, futures, options, swaps, mortgage, asset-backed, convertibles |
| Valuation tools | |
| Transactions analysis | Use many valuation models to decompose holdings into risk exposures;and can include benchmarks (for tracking error) or pension liabilities. |
| Portfolio analysis | Risk factor sensitivities are rolled up at the portfolio level; we also can include the sensitivities of the benchmark |
| Other stand-alone fin calculators | NA |
| Risk analysis tools & techniques | |
| Market risk | Uses Monte Carlo VaR to reflect the profile of non-linear instruments |
| Credit risk | Shows simple credit spread risk |
| Collateral management | NA |
| Market data and tools | |
| Market news | NA |
| Current market data | Maintain a set of feeds for use in arriving at risk factor sensitivities |
| Historical market data | Maintain historical market data to provide the covariance information underlying the VaR calculation |
| Technical models | NA |
| Forecasts | NA |
| Resources | NA |
| Collaboration tools | |
| Pose questions to experts | Customers contact service bureau professionals for consulting and questions. |
| Chat room | NA |
| Forums | NA |
| Video conferencing | NA |
| Application sharing/whiteboarding | NA |
| Productivity tools | NA |
| Advisory/consulting services | Clients are assisted in interpreting and using risk reports, and setting risk thresholds |
| Client training features | Clients are trained in the use of applications |
| Execution/online trading | No |
| Integration with internal systems | |
| Export from internal to vendors | Yes |
| Export from vendors to internal | Yes |
| Export from Excel to vendor’s | Yes |
| Export from vendor’s to Excel | Yes |
| Technical specifications | |
| Internet/intranet | Encrypted internet application |
| PC operating system used | Windows 95/NT 3.51 or higher; Netscape Communicator 4.0 or Internet Eplorer 4.0 or higher; Adobe Acrobat Reader |
| Internet protocol | HTML |
| Hardware required | Intel Pentium, 32 Mb RAM |
| Security features | 128-bit encryption in the US, 40-bit elsewhere, password protection |
| End-user customization | Customizable analysis tools; all reports download into .csv format for use in Excel or databases |
| Service/system pricing | Minimum cost $25,000 per year, cost varies by frequency of risk reports, number of portfolios, and complexity of portfolios |
| Contacts for more info | Michelle McCarthy, Seattle, WA, USA, +1-206-325-2020, Michelle.McCarthy@db.com |
| Additional information | www.raroc2020.comFeature/Function: |
The concerns most frequently expressed by users and advisers include the convenience of the service, its user-friendliness, and security. These factors, when taken with the functionality sought, are likely to make a difference between success and failure in achieving efficiency and productivity gains on the internet.
Convenience and commingled sites
Banks and other internet providers deliver online information to their customers via three different channels: single institution open sites (AIB’s FXCenter); single institution proprietary sites (Morgan Stanley’ ClientLink); and multi-institutional portals (TradeWeb and MarketAxess)
The key distinction between trading/execution sites is between single-counterparty trading systems operated by banks and others that want their customers to deal with them exclusively; multi-party trading systems where several banks provide quotes; and auction systems where sellers make offers and potential buyers bid for it.
Ultimately developments are likely to be dictated by end-users. Most financial institutions realize that, and some have taken steps in that direction, producing the commingled site. Many in the industry believe commingled multi-party sites are the future.
Michael Packer of Merrill Lynch says: “A number of commingled sites are driven by clients seeking the greater convenience of doing business with multiple participants without having to remember multiple passwords and multiple navigation schemes. The subtlety comes in understanding what functions will occur in the commingled area and what functions should remain in the proprietary spaces.
“The other reason for commingled sites is that in some product areas or functions there is a need for faster dealing speed and more transparent price discovery. Instead of making five phone calls to get bids on a transaction, you can simply visit the commingled site and complete the trade directly.”
He concludes: “These commingled capabilities will coexist with single-dealer capabilities for many client groups.”
Most market participants echo this, although there are subtle differences in viewpoint. “Technology can facilitate providing fixed income institutional clients with the access they want to liquidity pools – especially in commoditized products – and to commingled research and headlines. For this reason dealers concerned about clients have emphasized multi-dealer portals in their e-commerce strategy,” says Ben Wolkowitz, managing director of Morgan Stanley Dean Witter.
Christiane Mandell, managing director, head of global foreign exchange sales and research of Bank of America, adds: “Technology trends are clearly moving away from proprietary or closed systems to open, standards-based systems. We strongly support such efforts, since we see it as a way to better serve our customers.”
Some market participants view single-institution sites in certain applications/areas as passé. Larry Tabb, director of securities&investments practice at Tower Group financial services consulting firm, says: “While we anticipate large amounts of spending on these [single-institution] sites, we don’t believe that these sites will provide their institutional clients with the most convenient method of obtaining information or trading.
“While these sites are useful and we don’t see firms being able to escape their development, we believe that institutional firms do not want to visit multiple brokers’ websites to obtain information or trade. In the long run the so-called community sites, which combine content and transactional capabilities from multiple broker/dealers, will be the successful business models. Through these commingled sites institutional firms can obtain competitive prices, obtain market data, and research without clicking on multiple brokers’ sites.”
The interface challenge
The other challenge facing product developers is to design systems that are intuitive and easy to use. Too many require a series of cumbersome keystrokes to execute a trade, and overwhelm the user with unorganized information displayed on multiple windows. Learning new designs, interface conventions and keystroke sequences increases inefficiencies and is often impracticable for end-users. How practicable or feasible is it for a treasurer to use a dozen applications, each on a different site, with a different password, and a different interface?
| Name of institution: AIB Corporate & Commercial Treasury | |
| Name of product: FXCentre | |
| Feature/function: | Commentary or not available (NA): |
| Main focus of the system | E-treasury portal for corporate and medium size companies |
| Scope | Live forex rates, equities, breaking news, interactive research, economic commentary and forecasts, mobile finance, currency trends, products & services. Also provides a secure environment to confirm currency deals and view international payment transactions |
| Valuation tools | None |
| Risk analysis tools and techniques | None |
| Market data and tools | |
| Market news | Live feed with up to 50 breaking news stories per day |
| Current market data | Live market commentary updated throughout the day, from 07.00am – 17.00pm, Live forex rates updated every three minutes |
| Historical market data | Five-year historical foreign exchange rates and interest rates for 625 currencies online, graphs and trends |
| Technical models Forecasts | None |
| Resources | |
| Accounting information | NA |
| Tax information | NA |
| Legal information & documentation | NA |
| FX control & regulations info | Meets all regulations |
| Research | Extensive research from chief economist and research team on markets, currencies, interest rates, domestic and international economies. Visit johnbeggs.com on fxcentre to see our online research centre |
| Collaboration tools | |
| Pose questions to experts | Yes – email our chief economist and he will reply confidentially |
| Chat room | NA |
| Forums | NA |
| Video conferencing | NA |
| Application sharing/whiteboarding | NA |
| Productivity tools | NA |
| Advisory/consulting services | Risk management advisory services are provided to clients by AIB Corporate Treasury relationship dealers |
| Client training features | Training is provided by us to customers in the form of six treasury familiarization training courses each year. |
| Execution/online trading | Quarter 3 2000 |
| Integration with internal systems | |
| Export from internal to vendor”s | Export to Excel for forex deal confirmations and international payment advices |
| Export from vendor’s to internal | No |
| Export from Excel to vendor’s | No |
| Export from vendor’s to Excel | Yes |
| Technical specifications | |
| Internet/intranet | internet |
| PC operating system used | Windows (all environments) |
| Internet protocol | HTML |
| Hardware required | Standard |
| Security features | SSL 128 bit encryption for the secure area of the site |
| End-user customization | Yes – users can customize the live rates, equities or personalize their own channel of information for their mobile phone using fxcentre.com |
| Service/system pricing | Free |
| Contacts for more info | Susan Kelly, AIB Corporate Treasury, +353-1-6417672 e-mail |
| Susan.A.Kelly@aib.ie | |
“As the amount of content grows on institutional brokerage sites, ergonomics, or the development of an effective internet navigation mechanism will become increasingly important and difficult,” says Tower Group’s Larry Tabb.
Retail information tends to be limited. Individual investors are looking for equity and mutual fund quotes, research, news, trading capability, and the ability to view statements, confirms, and other account-oriented information. By contrast, says Tabb: “As firms develop institutionally oriented content they find that the level of information that is needed to deliver expands drastically from mortgage pool information to the value of very specific and arcane products, to full operational support. The ability to both integrate this data and provide it in a flexible, consistent, and easy to navigate manner is a tremendous challenge that again can only be solved with a large amount of ingenuity and money.”
Most treasurers and risk managers seem to be looking for a suite of products and services that are well packaged, tailored to their needs, easy to use and implement, and not too costly.
“The way these things are going to evolve is that you do a client service first to find out what they want, as opposed to creating something from scratch that you think is a great thing and then try to sell it. It is lot easier to find out what they want and give it to them. There is a lot more logic in doing it this way but it has to be content-driven to be of value,” says a New York investment banker.
Security concerns
Security has become the main concern of business conducted over the internet. Security does not restrict itself to encryption; it also includes firewalls, and constant monitoring of network activity to ensure the integrity of the overall system.
Most financial institutions and other online providers felt confident with the security embedded in their systems. Merrill Lynch’s Michael Packer says: “We have taken a stronger position than many others in this area. We use software digital certificates today, and will allow clients in the future to select different levels and types of authentication and security, including not just the digital certificates used today but also SecureID cards and other methods. Clients who are looking at research, for example, may only need a password, while a client who is completing a very large-scale Euro-sovereign or high-yield transaction should have stronger security such as a digital certificate. We are hearing from our clients that they are satisfied with the level of security we offer.”
Corporates seem more resistant to change for many reasons, with security being one of them. Treasuries of many corporations still operate in the traditional ways, using a combination of manual processes, intranets, faxes, phones and email. Only a tiny minority has ventured into online trading. To implement their online system broadly, the online providers must first educate their customers and convince them of the advantages, including lower processing cost and significant productivity gains.
The market and competition
Depending on scope and functionality – or breadth and depth – of the site, individual development costs can run from less than $1 million for a plain site to more than $100 million over a period of years for more comprehensive sites.
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Although no figures were quoted by any institution, maintenance costs to support an existing infrastructure and to add content and functionality can be high. And if things go wrong it can be costly: one big international bank is known to have spent more than $5 million to develop a site only to discover on completion that the technology was inadequate and obsolete.
Only big players can afford such costs. The middle market will not be able to compete and is going to be squeezed out. “The securities industry is spending massive amounts to create institutionally oriented internet sites. In the US alone we anticipate that broker/dealers will spend $2.2 billion in 2000 to create integrated cross-business internet sites to enable their institutional clients to trade and directly access high-quality information and research,” says Tower Group’s Tabb.
“This is quickly becoming a game of scale, as the bulge bracket firms are using technology to attract clients and compete. As the larger firms invest in these new delivery channels and electronically enable themselves, it will be increasingly difficult for smaller firms to make these investments and hence competitively fall further behind.”
Do smaller players have the resources to compete? Michael Packer of Merrill Lynch says: “Quite clearly, it is going to be a challenge for the smaller players to survive. It can cut both ways, however: on the one hand, clients will demand a level of global e-commerce capability that will be increasingly difficult for the smaller institutions to provide; on the other hand, systems like TradeWeb allow smaller participants to enter bids in particular markets, and if they have the best bid, clients will trade with them.”
And who will be the losers? “Those who do not aim to radically change the behaviour of their professionals who deliver financial products, and the process by which transactions occur, to exploit the new technologies,” says Bank of America’s Mandell.
