Swift Looks Down-Market

The international network tries a new tack to attract small firms.

SWIFT, the international financial communications network that has brought huge cost savings and efficiencies to commercial banks over the past three decades, has grown in recent years to become a significant securities industry utility as well. In 2007, Swift’s securities-related message volume soared 32 percent, to 1.39 billion. Its more mature banking-payments segment, though still accounting for a majority of Swift traffic, at 1.8 billion messages, increased at half that rate. Securities’ share of total messages rose to 40 percent from 33 percent five years earlier.

But the impressive numbers mask a shortcoming of the securities industry division that La Hulpe, Belgium–based Swift formed in 2000 to focus on that part of its market: It has fallen short of goals to bring the buy side into the fold, including hedge fund managers and hundreds of small and medium-size U.S. asset managers that have long resisted Swift’s entreaties, mainly because of membership and transaction costs. By failing to reach these firms, Swift doesn’t just lack the nearly universal coverage it has enjoyed in the global banking community. It loses out on potential transaction growth and fees. It also fails to fully realize the economies of scale that would result from having the maximum number of participants.

Swift has done just fine attracting the biggest asset managers and some major hedge funds. Jay Martin, head of securities initiatives for the Americas, says that big firms started joining en masse after 2001 as cross-border trading accelerated, products got more complex and managers had to deal with bigger numbers of custodians to serve the preferences of institutional clients. About 140 of the top 250 U.S. managers are Swift members.

The resistance appears to be rooted in the cost-sensitive buy side’s historical reluctance to invest in any more technology than it deems absolutely necessary. Many of the holdouts are still reconciling transactions, resolving errors and transmitting settlement instructions manually and through faxes. The management of Swift, a cooperative of 8,000 financial institutions, believes that it can bring these paper-bound operations into the 21st century by making it easier and cheaper to join. Lázaro Campos — the longtime head of Swift’s banking industry division who was elevated to CEO last year when Leonard Schrank, who oversaw the initial push into securities, retired — has resolved to change Swift’s image from that of a bureaucracy built by and for banks into an enterprise flexible enough to accommodate smaller organizations at lower prices.

“I asked our technology people for a solution that would allow investment managers to be up and running within a matter of days,” says Campos. The program they devised, Alliance Lite, is being tested by about ten firms ahead of a planned October launch. Serving firms that send fewer than 200 messages a day, the Internet-based system is hosted by Swift, which relieves the firms of having to maintain their own infrastructures.

“Swift is about reaching out to as many endpoints as possible,” says Martin. The persistent faxing of instructions to broker-dealers and custodians “creates a lot of inefficiencies, risks and costs that would be wiped away,” he adds, “if those smaller managers were using global standards over the Swift network.”

The founder of an equity and fixed-income firm managing less than $10 billion in assets says he is considering Alliance Lite, but he is also evaluating whether to outsource his entire back and middle office to one of his custodians, which could thus pose competition for Alliance Lite. That wouldn’t be a total loss for Swift, which handles large volumes of custodian traffic.

“The challenge for Swift is to prove the value of Alliance Lite to investment managers that retain manual processes as their primary mode of operation,” says Steve Goswell, director of design and development for the enterprise architecture team at Barclays Global Investors, a major Swift user with $2.1 trillion in assets under management.

“Swift becomes critical when you deal with tighter settlement time frames or when you want to get your message out to regions like the Far East,” says John Bergen, chief information officer of Harvard Management Co., which has $42 billion under management and sends 200 to 400 Swift messages a day. “How can you quantify the value of that? If you fail a trade, you could be locked out of the market.”