cmbo capital markets top 10 technology initiatives for 2012

2012 The Tower Group, Inc. May not be reproduced by any means without express permission. All rights reserved.

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Capital Markets: Top 10 Technology Initiatives for 2012 Capital Markets February 2012 V70:09CM

TowerGroup Key Findings Firms will be challenged to maintain margins and profitability in a low-growth business

environment due to increasing financial, regulatory, and political uncertainty.

Spending on regulatory compliance and risk management will be one of the few areas of budget growth, with global capital firms expected to spend $26.7 billion cumulatively over 20112013 on new regulations.

The top ten IT projects for 2012 can be categorized into three broad themes: focus on risk management and compliance, spending on infrastructure, analytics and data, and a realignment and revitalization of IT and operations.

What little discretionary budget and innovation expense in 2012 will go toward expansion into global markets, and the adoption of horizontal technologies, such as cloud computing and mobility.

Report Coverage

Introduction to the Top 10 Research Note The global capital markets industry will continue to transform in 2012, impacted by continued instability in financial markets and new regulations. How macroeconomic conditions, market volatility, Euro Zone uncertainty, and impending regulations impact the technology and operations decisions of securities firms in 2012 is the subject of this TowerGroup Top 10 Research Note. The report describes major business drivers the capital markets industry will face in this year and how these will manifest themselves in new technology and operations projects and priorities. Business drivers are external factors in the industry or the broader business environment that are outside the control of any single firm. The strategic responses identify the particular initiatives or actions that individual firms undertake in response to the generic business drivers. These then lead to the top 10 list of IT priorities and projects in the industry most likely to take place in 2012.


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Financial institutions will find this list of issues useful in validating their understanding of the market forces impacting the industry, and benchmarking their IT projects and priorities with their peers and competitors. Vendors can use this report in several ways. They can use it to better understand the business issues driving the industry and how to market their own solutions in the context of these business drivers. They can gauge industry proclivity toward particular IT priorities and make strategic decisions to acquire that capability, or partner with firms to provide it to clients.

Business Drivers in 2012 2011 was a tumultuous year for the global capital markets industry. End-of-year market performance in the United States and Europe is grossly misleading as it obfuscates the massive volatility we experienced during the year. The S&P 500 ended the year 1.4% lower than it began on January 1, 2011, but was down almost 14% in October 2011. In Europe, the Euro S&P 500 Stoxx index ended the year down 13.5%, but was down 34% at one point in November. This gut wrenching volatility shook investor confidence and money flowed out of risky assets into treasuries and gold. Even the exchange-traded fund (ETF) market was not spared with ETF asset growth in 2011 just 5.6%, down from a blistering 47% in 2009 and 38% in 2010. All this impacted IT budgets and priorities at capital markets firms with budgets flat to down 2%, and most discretionary projects delayed to better times. Unfortunately, prospects for 2012 do not look any better. The biggest business driver impacting brokerage firms and investment managers is uncertainty in the Euro Zone and the risk of the euro collapsing. Besides the obvious global economic slowdown this would cause, it would decimate the sovereign bond market and have serious spill-over effects in the corporate bond market. Since 2008, major equity indices have not fully recovered and Wall Street firms have been depending upon the fixed-income market for revenue growth, so a slowdown in the debt market would be catastrophic. Even outside the extreme scenario of the euro collapsing, continued Euro Zone uncertainty will put a damper on growth in IT budgets, especially on the sell-side. TowerGroup expects global capital markets IT spending to increase a modest one to two percent in 2012. Continued Euro Zone uncertainty in 2012 will also mean that US firms will further reduce their business exposure to Europe, on the heels of MF Globals collapse due to its over-exposure to European debt. What Jefferies did in 2011 reduced its Euro Zone exposure by 75% in less than six months will be replicated by more firms in 2012. Ironically, this means the tide toward globalization that capital markets firms have been riding for the last six to eight years will reverse itself, at least temporarily. In 2012, capital markets firms will also strive for greater transparency and disclosure, pressured by various stakeholders regulators, clients, boards of directors, shareholders, and the press. Requiring firms to disclose more information, and more frequently, is a very clear theme across different regulations (Dodd-Frank Act, MiFID II, and Basel III). New regulatory requirements include more detailed investment performance disclosure by hedge funds and private equity funds and detailed transaction data required of systemically important firms. For example, Form PF is a new requirement levied on hedge funds by the Dodd-Frank Act and is proving to be very onerous and expensive for funds to complete. Besides pressure from regulators, clients and shareholders are demanding greater insight into the business workings of financial institutions, asking questions they never asked


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before. Endowments such as Yale University are asking investment managers which IT systems they are using and why they chose them. High-net worth clients are demanding greater detail on past investment performance of their hedge funds, no surprise after the Madoff and Stanford scandals. The drive toward greater transparency and disclosure will have major consequences for IT projects and operational practices in 2012. New requirements for additional data, more frequently and in specific formats (XBRL) will mean firms will need to open up legacy systems, write interfaces to applications, and invest in reporting infrastructure. This may even spawn more outsourcing of reporting with several asset servicers and software vendors hoping to offer reporting as a service. Regulatory compliance and optimization will be the next driver. Despite multiple regulatory delays in 2011, all major regulations are still on the agenda and 2012 will see firms preparing to meet preliminary deadlines related to the Dodd-Frank Act, FATCA, Basel III, and Markets in Financial Instruments Directive II (MiFID II). We will see new securities trading rules in the United States including obligations for high-frequency trading (HFT) firms and the rules governing dark pool activity. Buy-side firms will prepare to comply with the large trade reporting rule passed in Q4 2010. Europe will witness further progress in rulemaking on MiFID II and a possible formal combination of MiFID II and European Market Infrastructure Regulation (EMIR). So in 2012, capital markets firms will continue working on IT projects that help meet new regulations, and juggling deadlines imposed by all the different regulations. A related business driver in 2012 will be regulatory optimization, which refers to firms finding the right balance between investing adequately to comply with new regulations, and yet not overspending on it. Another dimension of regulatory optimization is the balance that firms need to strike in committing resources to comply with US and European regulation. For example, firms need to comply with over-the-counter (OTC) derivatives regulation in the United States and Europe, which entails optimizing investments and achieving economies of scale. The next business driver in 2012 in capital markets will be reassessing the IT operating model. This refers to the importance for institutions to correctly manage the IT and operations function, and to achieve the right IT operating model that meets multiple objectives cost effectiveness, reliability, business agility, security, and regulatory preparedness. Because IT has become a critical element of the capital markets business, these issues have become business executive decisions rather than purely CIO/CTO issues. Correctly managing the IT operating model has wide ramifications for securities firms, from implementing their business strategy, to achieving financial targets and staying clear of regulatory blowups. Reassessing and amending the operating model will cause firms to answer questions such as: what should our IT budget be, to what extent should we use third-party vendors, what and how should we outsource IT and operations? The final business driver in 2012 that we discuss in this top 10 note is the need for firms to better manage their global aspirations and current foreign operations. Theres no question that the desire to expand overseas experienced a hiccup in 2011 due to softness in emerging markets and Euro Zone instability. However, in the long-term, the financial industry is definitely becoming a more global, integrated business and financial institutions


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need to align themselves with this trend. In 2012, firms may pull back from parts of Europe, but there will be pockets of growth even in Europe (think Turkey and Eastern Europe). Growth rates in China, India, and Brazil may slow down in 2012, but long-term growth opportunities in these markets remain and US and European firms will continue building their presence there. For large brokers and investment managers that already operate across borders, the challenge in 2012 will be to manage IT and operations assets across these markets in the face of new regulatory concerns, volatile markets, and a slowing economic environment.

Top 10 Technology Priorities and Projects This section describes each of the ten technology priorities and projects in detail. We relate each IT priority/project to the business drivers motivating it, followed by a discussion of each objective, and then examples of projects within each IT issue.

2011 The Tower Group, Inc. 12

Top 10 Technology Initiatives in Capital Markets for 2012

Top 10 Technology Initiatives for Capital Markets

Bolster Risk Management

Capability

Learn to Live with Radical Transparency

and DisclosureImplement Agile Data

Management Align IT Investment with

New Growth MarketsChallenge Vendors

on Big Data and Analytics

Upgrade Trading IT for Market Reform

Connect to Market Infrastructures Across

Trade LifecycleConsolidate Vendors;

Right Source OperationsLeverage Existing

Investments for OTC Derivatives

Selectively Implement New Technology (Cloud, Tablets)

Business Drivers

Risk of Euro Zone Meltdown

Pressure for Greater Transparency & Disclosure

Regulatory Compliance

Regulatory Optimization

Reassessment of IT Operating Model

Manage Globalization

Strategic Responses

Refocus Firm on Core Business Activities

Enhance Operational and IT Efficiency

Realignment of Incentive

Re-evaluate Product Offerings to Match Customer Requirements

Enhance Risk Management Capability

Source: TowerGroup

Exhibit 1 Capital Markets Top 10 Trends of 2012 Source: TowerGroup TowerGroup has organized the top 10 technology initiatives into three themes as outlined in Exhibit 2. They are 1) continued focus on risk and regulation, 2) invest in infrastructure, analytics and data, and 3) realign and revitalize IT and operations. Each of the top 10 technology projects aligns with a particular theme, while some map across different themes.


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Three Technology Themes for 2012

Top 10 Technology Initiatives for Capital Markets

Bolster Risk Management

Capability

Learn to Live with Radical Transparency and

DisclosureImplement Agile Data

Management Align IT Investment with

Growth MarketsChallenge Vendors

on Big Data Analytics

Upgrade Trading IT for Market

Reform

Connect to Market Infrastructures Across

Trade LifecycleConsolidate Vendors;

Right Source OperationsLeverage Existing

Investments for OTC Derivatives

Selectively Implement New Technology

Continued Focus on Risk and Regulation

Invest in Infrastructure, Analytics, and Data

Realign and Revitalize IT and Operations

Source: TowerGroupExhibit #: 70:09-E2

Exhibit 2 Three Themes in the Capital Markets Industry for 2012 Source: TowerGroup Theme 1: Continued Focus on Risk and Regulation Upgrade Trading IT for Market Reform The role IT plays in securities trading is perhaps one of the most crucial of any parts of the trade lifecycle and so trading has attracted the highest proportion of IT budget overall. This trend will continue in 2012 driven by new regulatory changes, continued change in market structure, exchange consolidation, and changing market conditions. The impact of new regulations on securities trading IT is evident by the sheer amount of money we expect capital markets firms to spend to comply with new rules. TowerGroup estimates that global capital markets firms will spend a cumulative $1.78 billion (USD) on changes to trading IT from 2011 through 2013 in direct response to new regulations. About 40% or $710 million of this will be incurred in 2012 in response to capital markets regulation. Examples of US trading related changes are OTC derivatives, large trade reporting, limit up/limit down rule, changes to sponsored access, and employee trade surveillance. European laws impacting trading include MiFID II, EMIR, Undertakings for Collective Investments in Transferable Securities IV (UCITS IV), and the creation of a consolidated tape. Typical IT projects in this area include amending order management systems to support new best execution requirements, improvements to risk management applications, new smart-order routing applications, and implementing sell-side measures to monitor buy-side sponsored order flow. All types of vendors will play a role here including firms such as Charles River Development and Advent Software, as well as SunGard and IPC.


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Investing in trading applications and infrastructure will also be driven by the continued race toward zero latency. Top vendors that will benefit from this trend include Progress Software (Apama), Informatica (29 West), Sybase, and Corvil. For all the negative publicity levied on high-frequency traders and investor mistrust of high-speed execution, the need to spot liquidity and execute trades fast is still paramount. And the trend is spreading to new asset classes (e.g., futures, options) and new geographies (e.g., emerging markets like Brazil and India). But the rush toward low latency is also driving related processes like risk management and pricing and analytics toward ever faster speed, which requires amending a lot more applications that trading systems. Investments in low latency will be also made by exchanges, execution venues, clearing corporations, and other entities that are an integral part of the trading ecosystem. Bolster Risk Management Capability The scope and urgency required of risk management practices continues to increase. In a risk-averse environment with huge downsides in sovereign and counterparty risk, boundaries between market, credit, counterparty, liquidity, and operational risk are blurring. TowerGroup estimates that spending on risk management technology across the globe will vary among the three large geographic segments, averaging CAGR of 6.8%. In the Americas, higher economic capital standards, a compliance-driven focus on risk management, changing demographics, and the increase in Latin American counterparties will result in elevated levels of spending compared to Europe and Asia. From a technology and operations perspective, the need to monitor and act upon changes in exposure as a result of changing market conditions has put renewed focus on the two challenges of risk management. First is the need to collect ALL the data that is required with the right level of quality and timeliness, and second is the analytical capacity to translate raw data into actionable insights. Collecting and organizing large amounts of data and acting upon event triggers is the bread and butter business of many horizontal technology providers, which offer buyers an acronym soup with everything from ETL, BI, CEP, to MDM and many more. In 2012, there will be a backlash against the idea that all you need for better risk management are tools to collect, group, and visualize raw data. Risk-specific analytics capability, as well as integration with line-of-business applications for problem resolution is the new hot topic. This creates opportunities for traditional risk application providers like Algorithmics (now part of the IBM stable), Sophis (now part of Misys), SunGard, Razor, QuIC (now part of MarkIT) to extend their footprint, but also for accounting and portfolio management solutions from firms like Murex, Calypso, DST, SimCorp, and SunGard to increase their appeal to firms looking to consolidate vendor relationships and maximize their use of existing investments. 2012 will be the third year in a row when global capital markets firms increase their IT/operations spending on risk management by double digits. TowerGroup estimates risk management spending to rise by 11% in 2012 after a similar increase in 2010 and 2011. Learn to Live with Radical Transparency and Disclosure A milestone for transparency will be the introduction of the European Central Bank asset-backed security (ECB ABS) Data Warehouse in Europe by the end of 2012, allowing loan-


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level data to be shared for European asset-backed bonds, and increasing the level of standardization and liquidity. As risk aversion has morphed into institutionalized distrust, TowerGroup is seeing a similar focus on radical transparency at all levels of the industry. Financial instruments, software products, and services are all now subject to a level of due diligence and scrutiny that allow buyers to see inside the envelope. Not only do they want to see the finished product, but they also want to see the sources, components, and methods that are used to produce it. If financial technology buyers were shopping for bread they would demand to see the finished loaf, the key ingredients flour, yeast, salt, and water the recipe, as well as the food hygiene inspection reports. Higher levels of transparency and disclosure mean more spending on customer education, maintaining books and records, greater storage, and investing in visualization tools. Although such investments may help firms boost productivity and better manage its business, it is often a distraction to management and an enormous addition to cost. Based on TowerGroups research, we estimate that securities firms are spending between 12% of their overall IT budget on such attempts at enhancing transparency and disclosure. Firms that will benefit run the range of database infrastructure, analytics, and visualization and include Teradata, SAS, Panopticon, TIBCO, as well as horizontal master data management providers. At the level of financial instruments and asset-backed securities, European loan level data will become more widely available with the introduction of the ECB ABS data warehouse this summer. Disclosure and transparency are also at the heart of the increased reporting requirements for hedge funds and other private funds (Form PF in Dodd Frank and Review of the Markets in Financial Instruments Directive). There is an ongoing lack of academic and practical consensus on how to price assets and value portfolios for risk management, performance, or compliance reasons. When mark-to-market and mark-to-model are still compromised or unusable, the only thing that can restore trust is a return to first principles where all component parts of any type of risk need to be explicitly reported. This is a challenge to the basic risk-reward principle that underlies trading and supplier relationships in our industry and 2012 might be the year when many market participants decide the costs of radical transparency outweigh risk-adjusted prices. Leverage Existing Investments for OTC Derivatives The delays in implementing regulation to change how OTC derivatives are traded and settled are creating the impression that it is safe to adopt a wait and see attitude. An uncertain economic, political, and regulatory environment is not helping firms are focusing on what they do not know yet, instead of planning for changes that they know will be inevitable. But make no mistake. OTC derivatives reform will take place, both in the United States and Europe. By 2014, TowerGroup expects that over 40% of OTC contracts will be centrally cleared, and securities firms are evaluating their options to get ready for this growth. We estimate that capital markets firms will spend $2.02 billion on OTC derivatives reforms in 20112013, with more than 35% of that to be incurred in 2012. Forward-looking firms are looking to leverage existing capabilities, and past investments in straight-through-processing (STP) technology for equity and vanilla fixed income processing are obvious candidates. The post-reform derivatives landscape will have increased volume, standardized contracts, new connectivity requirements, centralized matching, new identifiers


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for products and counterparties, and updated message formats (FpML and FIX). This is the sweet spot for industrialization of this transaction lifecycle, and TowerGroup expects that incumbent providers such as SunGard, Advent, Broadridge, DST, and other providers of scale will position themselves as safe pair of hands with technology, services, and business process outsourcing (BPO) solutions that deemphasize the perceived uniqueness of derivatives contracts. As OTC contracts are slowly becoming just another flow product, the competition between niche specialists and processing factories will increase choice for firms that need to decide how they can still make a profit on lower margin commoditized products. Theme 2: Invest in Infrastructure, Analytics, and Data Challenge Vendors on Big Data Analytics 2012 will also be the year when big data becomes more popular in the capital markets industry and firms begin to employ big-data techniques to address problems in risk management, regulatory compliance, and portfolio analytics. Big data is defined as the use of sophisticated technology and massive computing power to handle massive data sets that are difficult to handle using traditional database tools. The difficulty is how to capture, store, search, share, and visualize data. Capital markets firms are usually years ahead in the use of new technology than other financial sectors. However, when it comes to big data, they are learning from retail banks that already employ big data in areas such as campaign marketing, credit card management, and retail payments. For example, Bank of America has been successful in employing big data technology to manage huge quantities of data using the open source framework Hadoop. Big data will remain a huge opportunity for vendors in 2012 and attract interest from all types of vendors, both large and small. All the large diversified IT vendors are active in the big data space including IBM, Sybase/SAP, Microsoft, Oracle, and Teradata. Then there are smaller vendors such as Acxiom, Vertex and Attivio. Vendors will approach big data either from a data acquisition, data management, or data visualization of data analytics perspective offering solutions in each of those areas. Implement Agile Data Management TowerGroup research shows that close to 60% of operations executives score their internal data management maturity as low, cementing the hard-won reputation of data projects as worthy but too hard. But risk awareness is challenging that status quo data silos are identified by 72% of respondents in that same survey as the number one or number two causes of poor risk management practice. The link between risk and data is neither new nor surprising: scratch the surface of any risk or regulatory project and you will find it bleeds data and the past years have seen an increase in the number of data management projects that are driven by risk and compliance more than by operational benefits. Having a consolidated data repository of golden copy data for all your financial instruments, trading relationships, positions, and transactions has obvious and increased relevance in todays environment. Although this same aversion to risk extends to ambitious projects to consolidate and improve firm-wide data. Therefore, while data management is rightly


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targeted for improvement, firms are wary of embarking on multi-everything IT projects that will not contribute to line-of-business profitability in the current budget year. The lens through which firms evaluate data projects has become more short-term. Time-to-market, usability, and access management are the differentiators in a market that agrees with the long-term benefits of firm-wide data improvement, but needs to become more agile to maintain the support of business sponsors. This will benefit segment specialists and technology innovators including Cadis, PolarLake and First Derivatives, as well as more horizontal offerings from Informatica, IBM, and Information Builders. The supply chain for market and reference data is also set for fundamental change the reporting requirements embedded in Dodd-Frank and EMIR will create an as-good-as-free channel of pricing data, which challenges the commercial model of incumbent data vendors even further. Technology innovation in standardization is for once moving at the right pace standards for legal entity and contract identifiers are in the works and minor updates to Financial Products Markup Language (FpML) and Financial Information Exchange (FIX) will allow market participants to use existing export-transfer-load (ETL) and messaging infrastructure. Connect to Market Infrastructure Across Trade Lifecycle The changes to the unholy trinity of trading, clearing, and reporting of OTC contracts is at the forefront of infrastructure changes, but it is telling that operations executives are prioritizing reporting to swaps data repositories (SDRs). Fifty-eight percent of surveyed executives ranked it higher than clearing or trading when assessing their priorities. Across these three areas of focus, connectivity is once again an operational priority. Managing how firms connect to trading venues, clearing and settlement providers is an example of efficiency and specialization when it comes to equity and fixed income instruments. However, the impact of risk mitigation and regulation is breaking up trading and processing silos, and forcing all market participants to plan and execute a lifecycle connectivity strategy across all asset classes. For all derivatives transactions subject to the provisions of Dodd-Frank or EMIR, buy-side firms will need to manage connectivity to multiple trading venues (swap execution facilities and organized trading facilities), as well as a panoply of confirmation matching, clearing/settlement and trade reporting venues. Buy-side firms need to evaluate the increased cost of direct connectivity and processing complexity. Existing intermediaries (brokers, clearers, and custodians) are facing a quality of service and revenue trade-off: they cannot afford to offer complete coverage of all options without increasing costs. The search for growth in global markets will also trigger opportunities for providers of settlement and clearing services as well as software solutions adding new exchanges, clearing providers, and depositories to their existing capabilities. This trend toward sharing of infrastructure costs bodes well for community-based franchises such as Omgeo, MarkIT, SWIFT, DTCC, as well as ICAP-owned Triana and TriOptima. This is not just the usual drive toward more efficient and cost-effective back-office infrastructure; the changed requirements for trading, clearing, and reporting are creating an interconnected trade execution and processing environment. The mechanics of transaction cost analysis (TCA) will need to take into account margin and collateral requirements, and the costs of membership and processing fees across the entire investment lifecycle. This


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complexity is best illustrated by the concept of matrix execution, clearing and settlement, where an individual trade needs to negotiate a decision tree of SEF/non-SEF, cleared/non-cleared, SDR/non SDR reported transactions. Firms will be evaluating best of breed as well as one-stop-shop providers of connectivity, matching, and message transformation in order to meet these requirements. Theme 3: Realign and Revitalize IT and Operations Consolidate Vendors, Right Source Operations The capital markets industry is undergoing change and challenges of such magnitude that firms are taking a serious look at their long-term IT and operations strategy. In 2012, firms will be asking: how do we economize on our massive IT budgets in the face of prolonged revenue pressure? How do we scale down the massive IT infrastructure we have built over the last 1015 years that is not covering its cost of capital? What is the right balance between spending internally, and using external vendors (both software vendors and outsourcing firms)? These may seem to be questions that firms have always asked themselves, but whats different is that they are actually willing to make radical decisions now that they once would never have contemplated. In 2012, capital markets firms will look to consolidate vendor relationships further, driven by a desire to simplify IT, better manage external vendor relationships, and reduce vendor risk. For example, brokerage firms are looking to rationalize the three-to-five order management systems they use and standardize on one or two vendors. Further, they are extending their relationship with those order management vendors and using other products they have including compliance, post-trade connectivity and portfolio management. In response in 2012, we expect vendors to further expand their product functionality both up and down the trade lifecycle. So order management vendors will expand further into the front office offering portfolio construction and even investment research management functionality, as well as extending into the back office offering portfolio accounting and similar functionality. This will dramatically affect vendor competitiveness with firms that have a broader, integrated set of functionality (one-stop shops) gaining over firms that support only one type of service (one-trick ponies). Another trend will be institutions seeking greater flexibility and multiple service delivery options from their vendors. That means asking an application vendor to make its product available as an installed application, as an application service provision (ASP), on an outsourced service bureau basis, and as fully outsourced solution. Our research indicates a major uptick in the adoption of ASP-based service delivery, even in areas like order management and portfolio accounting, which firms were hitherto loathe to access via an ASP. This will lead into service provision via cloud-based solutions, which adds a new dimension to accessing IT services in capital markets. Expect more progress on this front in 2012. Finally, BPO will gain further ground after an uptick in BPO services in the last few years. Vendors that long offered just software applications and required clients to implement and process transactions using them, are now responding to client demand and building BPO services around their application. Such firms include Broadridge, Advent Software, and SunGard Data Systems. At the same time, a slew of outsourcing vendors (e.g., Cognizant,


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HCL, Accenture, and TCS) are further bolstering their ASP capability and expanding into areas like collateral management, client reporting and valuation services. Align IT Investment with Growth Markets The drivers behind this IT priority are well documented and understood. Simply put, western markets are maturing and giving way to greater opportunity in emerging and frontier markets, and what CEB calls the sweet 16 set of countries. As securities firms extend their footprint into new markets (Brazil, Russia, India, and China CEBs sweet 16 countries), they will look to address challenges related to global expansion: adequate personnel and infrastructure, addressing legal and compliance issues, and safeguarding intellectual property. On the IT side, specific issues will be supporting new security types, training operations staff on various country processes, and ensuring business continuity planning and disaster recovery measures. In the last few years, US securities firms that have aggressively pursued international expansion (T. Rowe Price in China, Fidelity Investments in India) have learned important lessons about the technology investments required to support such operations. In 2012, firms will take these lessons as they extend their franchise further into the sweet 16 countries. Typical IT projects involved will be: extending central IT capability to regional offices, integrating with local providers (e.g., asset managers interfacing with local sub-custodians), amending order management systems to accommodate local compliance rules, and extending processing systems to support new products (e.g., Sharia-compliant investments). An important element of aligning a firms IT to its growth plans is putting the right IT governance structure in place, which balances regional autonomy with the need to control budgets, prevent duplication of effort, and ensure compliance with internal IT standards. TowerGroup believes this is an area where securities firms must utilize the help of service providers that have experience with managing global IT, implementing projects across borders and have mastered the global delivery model. Some good examples include Indian offshore outsourcing firms like Infosys, TCS and Wipro, that have extensive experience managing IT teams across multiple countries, both for themselves and on behalf of clients. Other examples are Accenture, Sapient, and CapGemini Consulting. Selectively Implement New Technology Adoption of technology and innovation has frankly taken a back seat in the securities industry since the financial crisis. In 2007, securities firms were spending about 3% on new innovative technology projects, but by 2011, that amount was reduced to half a percent, and zero for many firms. Ironically, it is this combination of a tough economic environment and massive regulatory change that will spur institutions to adopt new IT approaches and innovate in 2012. The collective challenges facing the industry are too numerous to be addressed by marginal improvements in IT, and require more radical approaches and adoption of innovative IT. New innovations being considered are cloud computing, social media, mobility, tablets, and low-latency infrastructure. Cloud computing will be biggest innovation attracting attention in 2012. Firms will build upon the progress made by the Frankfurt Cloud (sponsored by Deutsche Bank), Bank of America


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and T.Rowe Price, among other prominent financial institutions. The long-term appeal of cloud computing is too compelling to ignore: scalability, cost effectiveness, ease of deployment, ease of service provision, and consistency of software code. Vendors like Microsoft, Amazon, and VMWare are leading the charge toward offering a cloud computing infrastructure on which other applications can be built. Business application vendors in the capital markets space like SimCorp, Advent Software, and SunGard Data Systems will build their software-as-a-service solutions on this Cloud infrastructure. But Wall Street firms will exercise caution while implementing cloud projects. In 2012, they will still not put mission-critical applications in shared clouds, but use private cloud infrastructures for such applications. For those frustrated with Wall Streets slow adoption of cloud services, consider the difference between Amazons Elastic Compute Cloud service getting disrupted and a resulting loss of a shopping order, with your brokers cloud service being down and your inability to place a trade on a volatile trading day.

Conclusion 2012 will be the year that firms cannot afford to sweat the small stuff. All market participants will have to assume new responsibilities, costs, and liabilities, and will have to do so without the rewards they might expect from taking on additional risk. Regulators and governments want to see transparency and market reform realized. Clients want full disclosure, reliability, and service innovation. Shareholders want to preserve growth through diversification, specialization, and once again globalization. Operations, risk, and finance executives are being asked to challenge long held orthodoxies about core competencies and optimal operating models. The financial services industry is still working through the fallout from the last crisis, even while the Euro Zone struggles and other sovereign debt challenges are threatening to make us think the unthinkable all over again. With margins, volumes, and GDP growth under pressure, firms have no choice but to be smarter, more focused, and agile enough to capitalize on the new opportunities this market environment brings. Across these top ten business and IT priorities for 2012, TowerGroups ongoing dialogue with institutions and providers shows a very solid catalog of innovation in technology and service provision. More than ever, firms and providers are aligned around partnership in adverse conditions: making the most of mutual investments not just in smart technology, but of relationships that were forged over many years of solving big challenges one step at a time.

Report CoverageIntroduction to the Top 10 Research NoteBusiness Drivers in 2012Top 10 Technology Priorities and ProjectsSource: TowerGroupTheme 1: Continued Focus on Risk and RegulationTheme 2: Invest in Infrastructure, Analytics, and DataTheme 3: Realign and Revitalize IT and Operations

Conclusion