Choosing the optimal IT platform for best-of-breed asset servicing:

a European case study

To excel in today’s difficult financial environment, investment managers must learn to grasp the opportunities and challenges of client service. Playing a key role in this task is asset servicing. With this acquired knowledge, the full benefits of a robust IT infrastructure that supports client-driven innovation and excellence can be derived.

by Alex Buffet and Christian Wutz

As one of the eurozone's leading banking and fi­nancial services compa­nies, the French-based Société Générale group’s activities cen­tre around three core businesses: Retail & Financial Services; Corporate & In­vestment Banking; and Global Invest­ment Management Services.

Of these three, the Global Investment Management Services division incorpo­rates asset management, private bank­ing, securities services and multi-asset brokerage. Responsible for securities services is Société Générale Securities Services (SGSS), which is established in 28 locations worldwide with more than 4,000 employees.

SGSS provides a full range of securities services that are adapted to the latest de­velopments in financial markets and regulatory changes: clearing services, custody and trustee services, retail cus­tody services, liquidity management, fund administration and asset servicing, fund distribution and global issuer services. SGSS is the sixth-largest worldwide global custodian and the second largest in Europe with €3,246 billion of assets under custody (as at 31 March 2010), providing custody and trustee services for 2,946 funds and the valuation of 4,555 funds, representing assets under administration of €459 bil­lion. SGSS also ranks among the European leaders in stock-option management.

ASSET SERVICING: A WORKING DEFINITION

Asset servicing encompasses a broad range of services for custody and corpo­rate actions including safekeeping serv­ices for physical securities, data infor­mation for DTC-eligible securities, dividend, proxy and reorganisation services, restricted securities services, as well as the electronic registration and transfer of securities. As such, it can best be described as a core service provided by custodians. This service also includes collecting dividends and interest pay­ments, processing corporate actions and applying for tax relief from foreign gov­ernments on behalf of customers. As investment management companies across the globe get to grips with the exigencies of the post-crisis financial environment, their ability to effectively service the assets placed under their control will in many cases be the single largest determinant as to whether or not they are successful in taking a deal through to completion. Companies will find that access to scalable servicing op­erations capable of supporting rapid growth will give them significant ad­vantages over their competitors.

Building asset servicing operations that meet these needs requires time and good planning, but is ultimately essential for any financial services company intent on establishing and maintaining a successful platform for asset management. Many financial institutions around the world have built their business originating loans for their own balance sheet and have cre­ated servicing operations that meet their internal needs, but not necessarily those of structured finance investors and inter­national rating agencies.

A CUSTOMISED OPERATING MODEL

A scrutiny of core versus value-added capabilities can introduce alternatives in operating model delivery, with automa­tion being one of the possible outcomes; the other being outsourcing. With the outsourcing market becoming more ma­ture, providers are being challenged to offer a tailored operating model with the merits of competitive pricing and high service standards. Core services such as trade confirmation, investment ac­counting, fund accounting, and securi­ties lending processing are now being of­fered as staple products with standard service level agreements and without premium pricing.

On the other hand, a situation has arisen where value-added services have evolved with the demands of invest­ment managers, and now encompass middle- and front-office functions such as performance measurement, client re­porting, compliance and data manage­ment/technology. For these value-added services, standards and pricing vary for each investment manager. Overall, pro­viders with increasing market share appear to be acquiring new skills and capabilities while continually investing in technology in order to remain ahead of the game.

The substantial growth in hedge funds and alternative investments witnessed in recent years has increased regulatory pressures, while the specialised labour pool is on the decrease. Automation of the back office and outsourcing are an­ticipated in the near term to help close the widening gap or at least slow its growth. As settlement windows shorten and investments become more sophisti­cated, eliminating external-provider inefficiencies should continue to be a priority. Focusing on top performing technology/data vendors, outsourcing providers, global custodians and brokers can be mission-critical to capturing efficiencies in pre- and post- settlement services.

TURNKEY OPERATIONAL SOLUTION

In the specific case of SGSS, it has developed its asset servicing solutions over the past five years delivered out of Paris and Munich. These solutions can stand alone or form part of a more global package. They are based on a turnkey operational solution which includes pricing, middle-office services, performance and risk measurement and attribution as a single package, all fully integrated with its extensive global custody and/or fund administration services. In response to the increasing sophistication of financial instruments and management strategies, SGSS through its asset servicing capabilities provides

assistance in accessing an adaptable technological solution that can be individually tailored to a client’s activities. Another provision is an independent pricing of a client’s portfolio to assist in satisfying regulatory requirements. Its independent pricing service for OTC products (swaps, convertibles, high-yield bonds, foreign exchange options) and complex products covers various asset classes (interest rate, inflation, equity, foreign exchange, commodity, credit, commodities and hybrids). It is based on a range of efficient tools monitored by a team of specialised financial engineers with hands-on experience in using quantitative analysis.

Professional trading desk standards such as front-to-back software are used for the valuation of plain vanilla products as well as a range of proprietary and commercial analytics used for the valu­ation of structured products. The offer­ing also relies on relevant market data sources that include partnership with OTC brokers and banks for complex parameters such as implied volatilities or correlations as well as a database dedicated to the management of standard and exotic market parameters.

LEADING GERMAN POSITION

In addition to being present in most of the important markets across Europe, SGSS also holds a leading asset servicing position in Germany through its sub- sidiary SGSS Deutschland KAG. Here its customers include Pioneer Invest­ments KAG (Germany), W&W Asset Management, Veritas Investment Trust and Avana Invest.

Its legal predecessor was Activest In­vestment KAG mbH, whose origins date from 1960, and which was owned by the German HypoVereinsbank group. With 50 years of experience in the German institutional fund busi­ness, it can draw on 30 years of coopera­tion with more than 100 leading asset managers, becoming part of the Société Générale group in December 2007.

With assets under administration total­ling around €65 billion, funds under administration numbering over 500 and structured products standing at around 1,500, SGSS Deutschland KAG combines two closely related business segments.

The one is providing Master-KAG services (i.e. special fund and white-la­belling) for institutional investors and asset managers, including several DAX30-listed companies, medium-sized companies, non-profit organisations (i.e. churches, social associations, em­ployer liability insurance associations), and financial service companies (asset managers, insurance companies, banks and savings banks).

The other segment covers the provision of insourcing services such as fund ad­ministration, reporting and middle of­fice for investment companies and asset managers. Here its customers include Pioneer Investments KAG (Germany), W&W Asset Management, Veritas In­vestment Trust and Avana Invest.

SGSS Deutschland KAG’s middle-of­fice portfolio for complex products pro­vides customised outsourcing solutions. Together, the teams and technologies at the disposal of the German operations ensure an excellent level of operational support covering all functions essential to the processing of OTC instruments and structured products.

The middle-office services provided by the German operations are delivered over its own leading edge platform, which seamlessly manages trade sup­port, compliance monitoring and col­lateral, while assuring the level of trans­parency required by regulators. Incorporating rigorous procedures for monitoring and comparison that ensure consistency and accuracy of results, the solution offers a full set of standard re­porting formats for middle office, risk and payment systems, as well as fully customised reports.

A FULLY INTEGRATED APPLICATION

The services offered to clients are modular and fully integrated, providing ex­tensive flexibility and adaptability to every sourcing strategy. A full range of middle-office services (trade matching, settlement instructions and routing) is available either on a standalone basis – with very flexible connections and in­terfaces through an advanced connec­tivity hub – or in combination with other services such as front office ASP (automated flow).

By choosing this combination, SGSS Deutschland KAG’s clients have access to an integrated application in the form of SimCorp Dimension, which offers an extensive range of functionalities in­cluding position-keeping, cash forecasts, simulations, analysis and order management. Another benefit is an assort­ment of pre-customised templates, which is available and can be individu­alised on request.

As part of SGSS Deutschland KAG’s IT infrastructure, the highly configurable and flexible system largely supports trading, middle- and back-office services. Here the requirements are partly regulated by law, so that the services are standardised and have high-quality requirements.

The performance spectrum is extensive and the automation rate (STP) high. However, the frequency of changes in this area is low, generated either by leg­islative changes or new customer re­quirements. In the case of special serv­ices (accounting reports, tax treatment and key ratios), the complexity is high. In addition, the introduction of new fi­nancial instruments is governed by a high frequency of change.

In terms of technical application, the scalable system is based on Oracle 10g and is used for all of the core business processes, comprehensively managed by the Cronacle scheduling system.

The Crystal Reports reporting engine embedded in the investment manage­ment system is used for all processing reports and standard reports (i.e. legal reports). The mapping of complex tax issues and specific figures are taken care of by an in-house developed ap­plication and data warehousing system, while a team of specialists deals with new instruments.

PERFORMANCE AND RISK REPORTING

In the area of performance and risk re­porting, SGSS works to provide the control and visibility clients need to meet their investment goals, tracking the gross and net performance of funds and comparing the results with key benchmarks at any frequency desired.

Performance results are analysed across a comprehensive range of criteria (geographies, sectors, interest curves, cur­rencies, selection of key positions and more), based on the valued positions of client portfolios. SGSS’s performance attribution services provide complex breakdown and performance attribution that factors in a broad range of parameters, such as asset, country and sector allocation as well as stock-picking, and, for bond portfolios, currencies, interest rate curves, credit and selection.

Fast and accurate computation of market indicators and ratios (i.e. Sharpe, Infor­mation Ratio, Jensen, Treynor, alpha, beta, tracking error, volatility, correlation) provides invaluable information on the risk/return trade-off, and ex post analysis is applied in line with Global Investment Performance Standards (GIPS).

Risk is measured ex ante using the Value at Risk (VaR) method, and can be com­puted according to three approaches: parametric, deterministic, or Monte Carlo. The SGSS solution complies with regu­latory requirements, and measurement can be customised to precise require­ments with stress testing and multiple criteria.

In addition, VaR calculations can be complemented by Conditional VaR (CVaR), which takes into account extreme events.

As with performance tracking, risk cal­culation (VaR, tracking error, volatility) is applied to each decision taken during the management process by asset type, geographies and sectors. In short, clients benefit from the industry’s most compre­hensive, accurate and flexible performance tracking solution covering measurement, analysis, attribution, and risk modelling.

ASSET SERVICING BASED ON STRENGTH

Helping to set SGSS Deutschland KAG apart from its competitors is a combination of innovation, flexibility and client focus: innovation in the use of innovative solutions to help it stay ahead of the competition; flexibility as reflected in goal-oriented thinking and fast-track adaptability; and client focus to ensure that satisfied clients serve as the best reference.

Some 50 years of experience in the KAG business, combined with a pro-active and inter-active working rela­tionship with clients, have ensured a very high level of client satisfaction, with an estimated 80% of new clients won by word-of-mouth.

Secondly, the successful use of a sophis­ticated infrastructure, including in-house customising, individual interfaces, rapid extensions, short processing times and IT efficiencies, have contributed to a high degree of flexibility and added value for the client.

Finally, the development of customised solutions, promotion of a variety of co-operations and partnerships, the atten­tion to a large and expanding number of existing contacts in the form of brokers, asset managers and custodians, as well as the application of proven and tested interfaces and processes have helped to create a service-oriented one-stop solu­tion of benefit to clients.

By building on this market-leading posi­tion, SGSS and its German asset servicing operations have derived the full benefits of a robust IT infrastructure that sup­ports client-driven innovation and ex­cellence, while also providing flexibility, scalability, functionality and reliability.

Alex Buffet is Head of Market Data and Asset Servicing at Société Générale Securities Services (SGSS) and a member of its International Management Committee. After holding a number of senior executive positions at Société Générale for nearly 25 years, Alex Buffet joined Société Générale Securities Services in December 2008, taking on the responsibility for creating a new division dedicated to Market Data and Asset Servicing. Alex Buffet is a graduate from the Institut d'Etudes Politiques in Paris.

Christian Wutz is Managing Director of SGSS Deutschland KAG, responsible for Insourcing and the departments Asset Servicing, Product Management, IT, Customer Care and Client Projects. With more than 15 years of experience in the international banking field, he has held senior positions at HypoVereinsbank, Activest Investments and Pioneer Investments, prior to taking on the role as Managing Director of SGSS Deutschland KAG. He is a graduate of the Ludwig- Maximilians-University in Munich.