Financial institutions preparing for T+1 will spend a lot of time with their middleware vendors, whose straight-through processing (STP) products and services will form the "glue that ties all the pieces together," says John Kiger, director of product marketing for San Jose, Calif.-based middleware vendor BEA Systems.
Middleware, which is quickly becoming synonymous with enterprise applications integration (EAI), is an "absolutely fundamental requirement" for STP, he says. "Participating in end-to-end transactions without the middleware layer that provides messaging and securities and data exchange between applications running the business is not possible."
Dushyant Shahrawat, an analyst at the TowerGroup in Needham, Mass., agrees. He says that while the "middleware product line hasn't changed, vendors are being proactive, helping clients understand what T+1 is all about."
That's because they're positioning themselves to become the vendors of choice for helping financial institutions iron out their straight-through-processing issues in the run-up to one-day settlement, which is expected to be implemented in 2004.
"Middleware is going to be critical to the T+1 environment," especially with the new transaction flow manager (TFM) proposed by the Global Straight Through Processing Association and a corresponding solution from Omgeo, from Thomson/DTCC, says Marilyn Hignett, a technology partner with The Capital Markets Company in New York City. It will be up to middleware to route the necessary information and make corrections in real time.
In order to establish a T+1 environment, the industry must spend an estimated $8 billion dollars, according to a business case report prepared for the Securities Industry Association by Accenture (formerly Andersen Consulting) and The Capital Markets Company.
Broker-dealers are expected to spend upwards of $5.4 billion followed by asset managers at $1.7 billion and custodians at $600 million. Infrastructure service providers, including middleware vendors, will cough up $237 million to prepare their systems. Shahrawat estimates that middleware vendors will spend $71 million or 30 percent of that amount, readying their own systems for T+1.
It's in the breakdown of where T+1 spending will occur that favors the middleware market. About $3.3 billion will be spent "modifying internal processes to ensure compliance with compressed settlement deadlines," while an additional $2.9 billion will be spent to standardize reference data and industry protocols, areas in which middleware plays a role.
While no one will hazard a guess at just how much of the $8 billion pie middleware vendors stand to earn, it's likely to be substantial.Shahrawat estimates that EAI spending alone by financial institutions, which includes middleware, will hit $733 million this year and rise to $1.19 billion by 2003, a compounded annual growth rate of almost 25 percent.
STP is all about integration and allowing the front, middle and back offices to speak to each other. It's also about being able to take incoming messages and send outgoing messages to trading partners and suppliers no matter what standard or protocol is used.
Greg Johnson, senior vice president of marketing at middleware provider Netik, says that in the past, financial institutions have had the ""tendency to think in silos. People think the front, middle and back office. You can't afford to do that anymore. You have to think horizontally across the plane. That's why middleware is going to be very important in pulling these things together.""While middleware covers a broad range of technology, think of it basically as air traffic control. It sits between the front office and client applications and the back office and the network and routes and reformats information as it flows into, through and out of the organization. This is particularly important in the trading arena, which is fraught with different messaging standards, such as FIX and those endorsed by SWIFT & ISITC. What middleware does is decipher messages, respond to them and change them into the appropriate format for sending elsewhere.
Shahrawat says there are four categories of middleware: messaging middleware, object request brokers, remote procedure calls and transaction processing monitors.
Messaging middleware is the most common in the financial services industry. It contains the transport layer for connecting applications and carrying messages. Object request brokers (ORBs) are a higher level of sophistication. ORBs manage the interaction between distributed-software components across the network, connecting customers and accounts to transactions.
Remote procedure calls is a type of middleware that usually operates through requests and replies and will block sending information until it receives the appropriate reply. RPCs are being used less by financial services. Finally, transaction processing monitors facilitate process and transaction management and client-server management.
In its report, the SIA defines the 10 building blocks necessary to facilitate T+1 in the industry. The SIA report notes that ""broker-dealers will need to develop seamless interfaces between front-office order execution and back-office processing and settlement systems. Asset managers and custodians will need to automate the allocation and settlement authorization processes."" That means ensuring communications are carried out using standardized methods and protocols, something that's currently elusive in the industry. For example, the report, completed last July, notes that communications to custodians vary widely, with 27 percent submitting trade notices using SWIFT, 26 percent through proprietary connections and 28 percent via paper and fax and the balance through other means. Allocations are also communicated using different standards with 26 percent submitted via fax and paper and 20 percent orally communicated.
In fact, lack of communication protocols and standards was cited by 38 percent of institutional broker-dealers and 47 percent of asset managers as an impediment to achieving T+1, while 25 percent of institutional broker-dealers, 43 percent of retail broker-dealers and 40 percent of asset mangers cited the inability to undertake front-to-back STP and real-time automation as a major problem. Part of that can be attributed to the continued use of legacy systems within financial institutions.
Mike Trapani, marketing manager for SunGard Business Integration, says that's where middleware comes in. ""People aren't going to throw away old systems. They have to implement middleware somewhere.""
The number of vendors in the middleware space continues to grow. There have been recent name changes among some vendors and others have been scooped up by larger companies, such as Sybase's acquisition of New Era of Networks (NEON). Sybase's suite of products is growing to meet the integration needs because there's no single solution, merely a set of solutions.
When shopping for a middleware provider there are a number of things to look for. Kiger, of BEA, says ""open standards are absolutely crucial."" Open standards provide financial institutions with ""investment protection"" and allow you to build applications that run on most platforms. It can also be a recruiting tool, as there is a larger talent pool to draw on when you use open standards.
Netik's Johnson says you should also look for vendors who can help track the trade from the time the order is placed through to settlement and reconciliation and matching. Moreover, he says, the vendor should be familiar with the Global Straight Through Processing Association's T+1 trading model and the Thomson/DTCC proposal. ""If people can't connect to either one or both of those then there's going to be problems.""
Kathy Ball-Toncic, vice president of capital markets for Financial Fusion says financial institutions also need to consider the ""financial resilience"" of the vendor and the likelihood it will be in business by the time T+1 comes to fruition. Other things to consider: scalability, security, speed of implementation, flexibility and the ability to handle different data formats in a global implementation. The systems don't come cheap, with most starting in the low six figures for an implementation, running up to the seven figures for larger firms. While the list of middleware vendors fluctuates, here are 10 companies that serve the financial services industry.
Based in Fairfax, Va., WebMethods has offices throughout the U.S., Europe and North America. With more than 550 customers globally, WebMethods focuses on the financial services industry providing business integration solutions to automate businesses and is in the process of bringing to market a SWIFT solution.
Clients: Citibank, Fidelity Investments, SecureTrade
Strategic Partners: Deloitte Consulting, Ariba, Commerce One, EDS, Siebel Systems
Key Product: WebMethods Enterprise, WebMethods B2Bi WebMethods Enterprise is for integration within the organization or behind the firewall, while WebMethods B2B is intended for integration between two trading partners across the firewall. Provides seamless integration of business processes linking ERP, financial, customer relationship management and mainframe systems. Expects to support GSTPA and Thomson/DTCC solutions in the future.
Quote: ""Our real focus has been on STP among global 2000 treasury departments, fund managers and the broker-dealer community. We also heavily target these new financial exchanges coming out for the OTC products as well as interconnection for broker-dealers.""--Ian Warford, director of global financial markets
This European firm, which started operating here last June, expects 60 percent of its income to come from North America by the end of this year. It focuses solely on providing financial institutions with STP solutions.
Clients: Citibank, Swiss American Securities, Deutsche Bank
Strategic Partners: Microsoft, Compaq, Hatcher Associates Inc.
Key Product: xNetik
With more than 250 financial institutions as clients, Netik deploys a plug-and-play approach to STP, which allows for faster implementations. Its suite of solutions consists of seven products, including xNetik Interchange, which facilitates the ability of financial institutions to speak to each other electronically. xNetik allows a single point of access and eliminates the need to rekey information.
Quote: ""What we really provide is STP solutions built around a core middleware product, xNetik Interchange. It provides a basic integration framework for pulling together all the financial institution's back-office legacy-type systems.""--Greg Johnson, senior vice president marketing
Mercator Software, Inc. (www.mercator.com)
Formerly known as TSI International Software Ltd., this Wilton, Conn.-based company has targeted the STP and T+1 markets. It has created a global securities initiative to the industry's call for T+1 processing, based on the 10 building blocks established by the SIA. In 1999, it acquired the Braid Group Ltd., an STP component solutions vendor.
Clients: Targeting large asset managers with $50 billion of assets under management. Bank of New York, Banque Degroof, Odyssey Asset Management.
Strategic Partners: EDS, Deloitte & Touche, PricewaterhouseCoopers
Key Product: Commerce Broker
Mercator added Braid's solutions, including its trade reconciliation and matching, liquidity management and trade message handling, enrichment and repair to Commerce Broker. The system provides data transformation and deals with multiple industry protocols using pre-built adapters for popular messaging and data transporters.
Quote: ""We're providing a value proposition for both connectivity and value added solutions that are going to dovetail off the initiatives required to get to T+1.""--Tom Carracino, financial services marketing manager
SunGard Business Integration
Formerly known as MINT, SunGard Integration, based out of New York, is part of SunGard Data Systems Inc. It provides intelligent middleware and enterprise application integration solutions to the financial services marketplace through a hub solution that's able to communicate with several different applications using one central point.
Clients: Barings Asset Management, Bank Julius Baer, Deutsche Bank
Strategic Partners: Accenture, Cap Gemini Ernst & Young, EDS, Microsoft
Key Product: Mint Knowledge Family
With more than 100 systems installed at leading financial institutions across Europe, North America and the Far East, the Mint family provides business integration. The key component is MINT Knowledge Broker, the hub that handles communication among applications throughout the branch and network. Interfaces includes SWIFT, ISITC, CREST, FIX, SIC, OASYS Global and SECOM. Mint Knowledge Manager allows users to create a library of commonly used transformation rules.
Quote: ""What we'd really like to do is to be able to take trades and send them out to the GSTPA network, provide return information from the GSTPA network back into the organization, routing it to correct business systems such as confirmation and settlement systems. What we are able to do is allow them to message and trades flow seamlessly from start to end once it leaves the trading desk. All processes will be updated and kept in synch using our system to communicate that data. What we want to be able to do is offer you a solution to either network.""--Brad Barton, national sales manager, SunGard Business Integration
Financial Fusion, Inc. (www.financialfusion.com)
Formed through the merger of Home Financial Network, Inc., and the financial server business unit of Sybase, Inc., this Watertown, Mass.-based company provides support for a variety of financial applications and protocols.
Clients: Salomon Smith Barney, Dresdner Kleinwort, Nomura Securities, State Street Bank, Instinet
Strategic Partners: Pricewaterhousecoopers, Sun Microsystems, IBM, S1
Key Product: Financial Fusion Server
Provides financial service firms with seamless connectivity to internal and external systems. Application and database independent. Includes protocol adapters for securities industry standards, including SWIFT, FIX, GSTPA, ISITC and XML. The message broker transforms messages from one standard to another through graphical user interfaces and wizards, which eliminate the need for a programmer to carry out these tasks.
Quote: ""We are solutions sellers and have the tools to hook up to anybody. We connect systems within an organization and have a lot of strength connecting organizations to all of their counter-parties, which is important in achieving straight-through processing.""--Kathy Ball-Toncic, vice president of capital markets
SeeBeyond Technology Corporation (www.seebeyond.com)
Formerly Software Technologies Corporation, this Monrovia, Calif.-based provider boasts successful integrations at more than 1,400 companies worldwide.
Clients: ABN Amro, Commerzbank, JP Morgan, Hypo Vereinsbank
Strategic Partners: Accenture, KPMG, SWIFT and Siebel Systems
Key Product: e*Xchange Suite
It's e*Xchange suite of solutions provides securities firms with an infrastructure to manage integration across systems, partners and processes. Includes:
- e*Gate Integrator: Enables back-office connectivity, data transformation and mapping.
- eBusiness Process Manager: Supports modeling, managing and monitoring of business processes during the transaction lifecycle.
- ePartner Manager: Allows you to establish connections with trade partners.
- eSecurity Manager: Permits secure transmission over public domains. - e*Way Intelligent Adapters: Enables data processing across different financial standards and protocols.
Quote: ""We want to be the provider that allows organizations to be able to pass information seamlessly around the globe in real time.""--Frank Fallon, vice president, global financial services
Talarian Corporation (www.talarian.com)
Based in Los Altos, Calif., Talarian has been in business more than 10 years and derives about 25 percent of its revenues from the financial services industry.
Clients: Bear Stearns, Credit Suisse First Boston, NYSE, Nasdaq
Strategic Partners: Aztec Technology Partners, Javelin Technologies Inc., Nortel, Novell
Key Product: SmartSockets
This is the firm's messaging middleware product. It allows firms to take information like stock quotes, indications of interest, requests to settle, and move from one application over another throughout the network, whether it's a LAN, WAN or the Internet. SmartSockets has various add-on modules that give it additional functionality, including SmartSockets SSL, an encryption module, SmartSockets Gateway, which enables content-based filtering and routing, and SmartMQ, which offers extra protection against message loss.
Quote: ""In general we go after the folks who are building STP systems and sell to them. Wall Street is different in that a lot of firms have an in-house development staff which is very sophisticated, so we do go after them.""--Tom Laffey founder and Chief Technology Officer, Talarian Corporation
New Era of Networks (www.neonsoft.com)
Sybase recently acquired this SWIFT gold certified, Denver-based company, which has more than 2,500 clients.
Clients: Wachovia Corporation, Primark Corporation, Indusrtrial Bank of Japan
Strategic Partners: SLI Consulting, Secco
Key Product: e-Biz Integrator,MQSeries Integrator
Allows financial institutions and online trading communities to integrate diverse applications for a seamless business flow. Provides a wide array of adapters, including XML, SWIFT, FIX, EDI and Siebel eBusiness Applications, among others.
Quote: ""What NEON is trying to do is be more than just a format and rules environment. We know your system was built long before the TFM was designed. We want to help you bridge that gap using our profile driven state engine so you don't have to rewrite your existing internal systems.""--Bill Keen, vice president of capital markets
BEA Systems, Inc. (www.bea.com)
Based in San Jose, Calif., BEA has more than 8,000 customers and has 89 offices in 30 countries.
Clients: Charles Schwab, E*Trade, Lehman Brothers, Morgan Stanley
Strategic Partners: More than 1,200, adding 100 per month.
Key Product: WebLogic Server
A Java application server for building and running high-volume, mission-critical ebusiness applications. Builds on BEA's earlier Tuxedo server, includes an integrated messaging system, enhanced XML capabilities and is certified J2EE compliant
Quote: ""What our platform offers is a single platform that can be used to build and deploy custom applications and also run off-the-shelf business applications.""--John Kiger, director of product marketing
Tibco Software, Inc. (www.tibco.com)
Based in Palo Alto, Calif., Tibco provides real-time infrastructure software to digitize Wall Street and has more than 600 customers around the world.
Clients: ""Pretty much everybody on the Street."" Merrill Lynch, Lehman Brothers
Strategic Partners: Accenture, Cisco, Cap Gemini Ernst & Young, Hewlett Packard, KPMG
Key Product: Tibco Active Enterprise
Active Enterprise is Tibco's line of e-business infrastructure products that help firms automate their operations by creating an integrated network of applications, databases and information. As part of it, TIB/Message Broker allows rules-based data transformation using a wide range of standards including SWIFT and XML. TIB/Adapters allow new components to be added to the system and are available for a wide range of off-the-shelf applications.
Quote: ""Our system allows you to attack straight-through processing through divide and conquer. You can eat an elephant a little piece at a time.""--Fred Meyer, chief marketing officer
Neon Systems, Inc. (www.neonsys.com)
Founded in 1991, this Sugar Land, Texas-based company provides integration, security and subsystem management software through its worldwide offices in 25 countries.
Clients: Merrill Lynch, Morgan Stanley, Deutsche Bank, Bank of Montreal, Wells Fargo
Strategic Partners: Not applicable
Key Product: iWave Solution
Provides comprehensive integration of data, applications and business processes. Allows organizations to share information between applications across multiple computing platforms and over the Internet with partners, customers and vendors. More than 50 plug-and-play interfaces for applications, data, transactions and enterprise management platforms.
Quote: ""We cut our teeth and got our experience working with legacy systems. We provide integration support as well as automated solutions.""--Jonathan Reed, vice president of business development