Ripe For Picking
Fund accounting is one application that many of the firms that have already taken stock of their legacy platforms are targeting for outsourcing or replacement. "Failure to implement a state-of-the-art accounting platform is asking for trouble," consultancy firm Woodbine Associates says in a recent white paper. "Risks tied to substandard investment platforms include operational gaffes; compliance breaches; regulatory transgressions; failure to detect fraud, theft and human error; failure to properly value assets under management; and failure to properly value and service client accounts. This technology plays a central role in day-to-day business operations," the report says.
Meanwhile, regulatory changes under Title VII of the Dodd-Frank Act and European Market Infrastructure Regulation will require firms to centrally clear most standard over-the-counter derivative transactions, forcing them to take a fresh look at collateral management and central clearing capabilities in the OTC derivatives market, says Sean Owens, Woodbine's director, fixed income research and consulting.
"In the collateral space, with clearing and initial margin requirements, there are tentacles that reach out to other functional areas," such as front-office trading, looking at margin requirements on a pretrade basis and risk systems that need to give a view of different entities, Owens says. "So the way some firms are addressing this is by looking to outsource."
Nevertheless, they aren't giving up all internal control but rather are looking for the most effective way to manage their operations. Outsourcing decisions vary by organization, Owens says: "For internal systems, most firms are looking at their overall capabilities on an integrated basis."
Some firms are looking at point solutions for collateral management, he says. For instance, firms that trade OTC derivatives will need to manage collateral for bilateral trades. "Some firms are looking at solutions that will allow them to automate collateral processing. Others are looking at that, plus a larger trading platform," Owens says.
As long as they can boost efficiency while keeping costs in check, financial services firms are looking to leverage legacy IT systems in-house, says Peter Vescuso, executive VP of marketing and business development at Black Duck Software, a software and consulting company that promotes open source software adoption, governance and management. Ultimately, the Intellect report notes, the challenge is to facilitate innovation and regulatory compliance, while working within the limitations that legacy systems impose. As such, a number of firms are building new layers of functionality on top of their legacy systems, particularly to enable mobility, Vescuso says.
Another strategy to keep costs in check is to replace commercial software licenses with open source projects, he adds. Financial institutions are increasingly turning to open source operating systems such as Linux, as well as Web services, databases, content management systems, application servers and frameworks such as Apache Hadoop, which supports data-intensive distributed applications under a free license. While open source licenses lack direct support, firms can get development support under separate contracts with service providers.
Unconventional Staffing Sources
Financial services institutions are increasingly taking nondifferentiating products outside their bank's IT walls, as they seek to collaborate with others on open source projects. In late November, NYSE Technologies launched the OpenMAMA Enterprise Edition as a part of its Open Platform. OpenMAMA Enterprise Edition is a commercial offering that provides an open, vendor-neutral integration layer for a variety of middleware systems, including NYSE Technologies Data Fabric.
Deutsche Bank also threw its weight behind a new capital markets initiative called the Lodestone Foundation, as a way of sourcing new talent that can collaborate on IT projects.
"We don't have all the skills in the 8,000 people we employ in the bank," said Tony McCarthy, head of investment banking IT at Deutsche Bank, in a video on the Lodestone Foundation website. "We don't have all the skills even in the 14,000 resources that we work with on the outside" with Deutsche Bank's service providers. "So I see an emerging environment where there's not only the internal ecosystem of how we work in the bank, the ecosystem of how we work with our partners, but there's another one, and it's probably the most important one, and that's the emergence of the Gen Y desire to not work in the corporate world."
"They don't like it, they don't want it. And yet they're very talented," McCarthy adds. "And I thought, right, I have effectively 22,000 resources that I pay for on a committed basis to build software. Why are we in this model? It's not attractive to some with better talent."
Prior to putting his weight behind Lodestone, McCarthy says, he had been looking at the role that IT professionals should play inside the bank. "Is it to build software? Is it to provide solutions? Or is it to provide the frameworks that enable us through modern technologies to reach out to where the talent is and get them to work with us in the way they want to work, which can be late night, little teams, but not as employees with the bank?"
It's all about providing the how, and finding better ways to find the "who," he says. "That's a model for the future."