Over the years, global custodians have invested heavily to join the digital age, upgrading their technology infrastructures to communicate securely through the electronic messaging network owned by more than 2,300 member banks of Swift, the Society for Worldwide Interbank Financial Telecommunication, But Swift remains a lopsided cooperative, counting only about 200 money managers as members. Very few of them are equipped to use Swift’s network and messaging standards, so many firms, surprisingly, still send transaction instructions to custodians by fax. “Inefficiencies, costs, errors and [high] head counts result from the volume of paper,” says James Donovan, head of the securities industry division at Swift.
Now Swift and some big custodians are moving fitfully toward a pilot fax-elimination project. The effort aims to leverage a cost-effective middleware technology solution to translate messages from asset managers into Swift formats and deliver return confirmations in the original format. “It may take us six months to determine the market potential,” says Donovan.
If successful, the effort could provide asset managers with the opportunity to select from a field of vendors that adhere to Swift-approved standards, helping ensure that their investment in automation works across multiple custodians.
Finding an industrywide solution that suits custodians and asset managers isn’t easy. Although a number of middleware vendors offer the technology, Swift is wary of compromising its market neutrality by endorsing any single company. Meanwhile, some custodians are hesitant to invest in a standard that “subsidizes” asset managers that haven’t been willing to spend money on automation. And persuading money managers of the merits of automation becomes complicated because many don’t fully grasp the hidden expenses associated with their manual processes.
“Data management costs are indirect and thus hidden,” says Taylor Bodman, a Boston-based partner at Brown Brothers Harriman & Co., where he supervises BBH Infomediary, the firm’s proprietary electronic messaging platform that links asset managers to its custodial operations.
Left to their own devices, custodians have typically provided asset managers with unwieldy proprietary solutions, such as access through a Web portal to process corporate actions, like stock splits or merger votes. In the absence of a universal standard, though, some custodians have overcome inertia and begun developing translation services that are helping to reduce paper communications.
BBH Infomediary is a case in point. The service bureau charges clients of its custody business a one-time implementation fee, along with a per-transaction fee, and translates information in proprietary format into data that is usable by a full complement of money managers’ external providers, including brokers, subadvisers and even rival custodians. BHH Infomediary has operated an automatic fax service since its inception in 2001. Roughly three quarters of the nearly half a million electronic messages that it now transmits daily were previously communicated by fax.
According to Bodman, BHH Infomediary clients realize a return on their investment in less than 12 months.
JPMorgan Chase & Co., the lead custodian in Swift’s fax-elimination effort, is another industry leader. It has partnered with external solution-provider Evare, based in Burlington, Massachusetts, whose middleware platform transforms files from any format into Swift messages. Steven Cohen, senior vice president in charge of securities processing for JPMorgan Worldwide Securities Services, reports straight-through-processing rates of 99 percent or better. Evare works with more than 150 clients and 45 custodians — and is also involved in discussions on the fax-elimination pilot.
Swift’s Donovan is eager for standards. “We will work with any solution partner of Swift to help our membership reduce the pain of paper,” he says.
