It may be a not-for-profit utility, but the Society for Worldwide Interbank Financial Telecommunication has never lacked for ambition. Founded 31 years ago by 239 banks in 15 countries, the La Hulpe, Belgiumbased network grew smartly through the 1980s, routing payments-related messages around the world and racking up surpluses that it returned to members in the form of lower prices and rebates.
But by the early 1990s, as bank membership approached 4,000, growth in message traffic began to slip, and Swift started to look for new opportunities in the broader world of financial services, particularly in the securities industry.
First, though, the cooperative needed to shake off its image as a closed club of commercial banks that in earlier years had rejected entreaties from the investment management industry to gain direct access to the network. Global custody banks had been particularly wary of buy-siders, fearing that they might use Swift to correspond directly with agents and counterparties, bypassing the custodians.
It wasn’t until March 2000 that Swift’s board -- citing “dramatic changes in the industry” -- admitted broker-dealers and asset managers as full members. By 2003, 32.3 percent of Swift’s 8.2 million messages per day were securities-related. Growing at roughly double the 9.5 percent annual clip of payments messages, the securities activity -- including clearing and settlement instructions -- is on pace to overtake banking volume in 2011.
As impressive as the growth is, Swift may still be paying a price for not opening up sooner. Half of the world’s 250 largest asset management firms are not yet on the network. Thousands more middle- and lower-tier firms have shown lukewarm interest at best; they still rely on fax, telex and e-mail for transaction messages that could be readily automated via Swift. Only 300 fund managers -- a fraction of the 7,600 financial institutions on the network -- are directly connected to Swift.
The group confronts a dilemma that has frustrated other companies trying to sell technology to the buy side since the stock market tanked in 2000: namely, the reluctance of institutional investors to spend money, even on overdue upgrades that offer an identifiable return on investment.
“While the sell side has focused on best execution [for trades], the buy side is not that interested -- it is more driven by getting the best deal for clients,” notes Guy Eden, solutions director of SunGard Business Integration, a unit of Wayne, Pennsylvaniabased SunGard Data Systems that offers a Swift connection service to asset managers. “As a result, the buy side is lagging in the use of technology.”
Swift is banking on a combination of infrastructure improvements, support services and modified pricing to bring more asset managers around.
The cornerstone of Swift’s tech strategy is SwiftNet, a modernized communications hub based on IP, the Internet protocol. The SwiftNet rollout, begun in 2001, is scheduled to be completed by year-end; 60 percent of message traffic has already migrated to the IP network.
SwiftNet includes so-called value-added services such as FileAct and InterAct, for storing and managing large and complex transaction records, that are particularly appealing to securities firms. Also of interest: the network’s implementation last year of the ISO (International Organization for Standardization) 15022 messaging specification, which is designed to reduce errors and promote straight-through-processing efficiencies.
Swift says that 15 top asset management firms have agreed to begin testing by year-end a fund distribution system using 15022 along with the extensible markup language, or XML, standard. And about 50 firms have signed on as early adopters of SwiftNet FIX, which relies on financial information exchange technology from Concord, Massachusetts, software house Financial Fusion to streamline and speed up buy-side-to-sell-side communications.
“New securities members coming onto Swift are much more demanding -- they want more than cash and stock reconciliation and settlement,” says Teresa Nolan, Swift’s director of securities for Europe North, who is based in London. “They are asking us for solutions for funds distribution and funds reconciliation. There is also interest in FIX and other value-added services.”
But is anyone buying?
One sign of movement: Some 700 asset management firms have connected to Swift via service bureaus operated by the likes of Citigroup; J.P. Morgan Chase & Co.; Jersey City, New Jersey based payments software company Fundtech; London technology consulting firm Steria; and SunGard. These entities generate about 10 percent of total message traffic.
The need for service bureaus, which spread access and maintenance costs across multiple users, underscores a common criticism of Swift: that its secure, private network has been too difficult and expensive to hook up to. Swift’s Nolan concedes that high costs have deterred potential customers, particularly small and midsize fund managers. But she says that IP-based SwiftNet makes more lower-cost connection options available through service bureaus and other “closed user groups” sponsored by members. Last month, for instance, Amsterdam-based custodian KAS Bank said it would bring 120 of its clients onto SwiftNet by December.
Service bureaus typically seek to fill smaller firms’ technology gaps. Steria, for example, has partnered with London systems integrator Simplex Consulting to offer three sets of options: a standard service for financial institutions and corporate transactional services; another for user groups like KAS’s; and disaster recovery services.
SunGard’s Eden points out that his company’s application service provider is tailored to smaller firms. They can transmit messages into the ASP, which converts the contents to the ISO 15022 standard to prepare them for Swift routing.
But service bureaus aren’t just for the tiny. One of SunGard’s clients is Harvard Management Co., which runs more than $20 billion in Harvard University pension assets, endowments and working capital. Using as many as ten prime brokerages and four custodians, Harvard Management relies on SunGard for its message formatting. John Bergen, Harvard Management’s director of back-office systems, says the ASP relieves the firm of the need to invest in additional securities hardware and software. “This is money we’d rather allocate toward other areas of our longer-term straight-through-processing initiatives, including automating and managing our global trading system,” he explains.
Ironically, institutions like Harvard are often quicker to use an ASP-Swift linkup than are the smaller, less-technology-savvy shops that many vendors target. Seventeen of the 25 largest U.S. fund managers use Misys CMS (formerly Crossmar Matching Service), a unit of London-based financial software company Misys that recently created a gateway to SwiftNet for transaction confirmations. Says A. Gilmore Bray, product and marketing manager at Misys Global Managed Services, “We provide connectivity while isolating our customers from the costs of infrastructure, software changes and maintenance.”
“Swift is top-of-mind in Europe and among big East Coast U.S. firms with operations in London,” says David Csiki, head of Indata, a San Diego, Californiabased provider of software to small and midsize asset managers. “The rest of the [U.S.] market isn’t paying much attention -- but it would improve efficiency industrywide if more people coalesced around Swift and especially FIX messaging.”
The smaller fry may, however, respond to a more explicit incentive to change behavior: lower prices. Notes SunGard’s Eden, “Many sell-side firms are now trying to force the buy side to improve the use of technology and standards by imposing charges for trades that require manual intervention.”
To lower the cost of buy-side connectivity, Boston-based posttrade processing specialist Omgeo last year introduced Allocation Manager, a cheap, Web-based link for brokerages and money managers who have historically depended on faxes.
However, Julian Barnes, investment servicing manager of London-based Royal London Asset Management, points out that brokerages aren’t rushing to gauge buy-side efficiencies and incorporate them into pricing. “They will say that the communication of trade details is a small portion of the overall relationship,” says Barnes. “This is disappointing. Because I am more efficient, I should be paying less than someone who is sending a broker faxes or telephone allocations.”
Investment managers should have a strong economic incentive to become more automated, argues Richard Hughes, the London-based head of Omgeo’s Europe, Middle East and Africa business. “A manual transaction can cost as much as E16 ($19), while automated transactions can be as low as E4 each to process.”
Swift is trying to do its part: On May 31 it started offering “introductory packages” that remove or lower some recurring software, security and maintenance fees for new customers with five or fewer counterparties. “We’d been told by firms [joining through closed user groups] that connecting to SwiftNet was too costly and complicated,” says Swift product manager Alain Drese. “It’s now simpler and definitely less costly.”
SunGard’s Eden believes small and midsize investment firms will eventually seize the same opportunities to cut costs that upper-tier asset managers like Harvard Management have. Swift and Omgeo, among others, are helping by changing their cost structures and spreading the word. At some point, buy-siders will see the light.
