At the heart of the web
There’s a lot of activity at the securities services group formerly known as Chase Global Investor Services. Following the merger between Chase and JP Morgan, the newly created JP Morgan Investor Services group is reshaping to meet client demands and changes in technology. According to Dick Taggart, head of the e-business solutions group, JP Morgan is channelling its efforts into servicing institutional investors and offering products right across the so-called value chain, pictured below.
At the moment the group concentrates on custody, forex services, accounting, securities lending and cash management. “Typically it is services on the right side of the value chain that we’re offering,” he says. JP Morgan will continue supplying these but is keen to develop more. Enter the internet. “It’s an enabler for us in that we can begin to offer some services that you’d find in the middle and front office,” says Taggart.
As examples he gives trade order management and portfolio management systems. “While they may not be our core competencies the strategy is to find ways to offer those, in some cases third-party products, on an integrated platform so that clients can achieve efficiency in their own processing all the way from the front to back office – the holy grail of STP,” he says. In short, the idea is to integrate the entire range of activities pictured below.
Take, for example, portfolio management applications, a non-core service for a global custodian. The group does not have the capability at the moment, nor does it intend to build such a system. Instead, according to Taggart, there are many suitable applications on the market. The idea is to find ways to broker these services in an integrated, internet-based manner to clients.
And following the merger, there are services within the broader JP Morgan franchise relating to capital markets- investment banking, research etc that the new group can now offer and so on.
The priority is to get the services online. According to Taggart the group is replacing existing 1980s technology, proprietary mainframe to mainframe connections and client server applications. JP Morgan has over 1,000 institutional clients with an electronic interface. It’s not that the technology is at fault, rather that there are speedier, more efficient systems.
“If you think about just the service dynamics associated with maintaining software in 1,000 locations, if we can do this through browser technology, the software sits on our side then the maintenance of this is more efficient.” Instead of travelling to clients and holding them up while installing upgrades, it can be centralised and from there sent immediately to1,000 browsers.
Using the new platform, JP Morgan is set to introduce new information services, the first are the so-called reference data products. Taggart says they maintain a tremendous amount of reference data just to run their business- security master files, knowledge of rules and regulations, tax rates, holiday dates etc. “A lot of this data we can repackage and offer it to our clients.”
In addition, many clients buy data (pricing data, corporate actions data, security cross-reference data) and spend huge amounts of time managing it, an activity Taggart believes JP Morgan can take off their hands: “Scrubbing, managing, aggregating and hosting that data, that’s where we think we’ve got a valuable proposition.”
The second element is transactions data. Taggart says their operation is of such magnitude as to produce a valuable insight into trading and fund flow patterns, spreads, liquidity and performance of various counterparties: “we’re processing over 50,000 cross- border transaction a day across 80 markets and that gives us a large database to mine for trends and patterns.”
JP Morgan is working on a means of aggregating, summarising and presenting this data without giving any proprietary client strategies, after which they will then market this data. “The pattern of information we pick up about how those counterparties perform from a trade settlement perspective is valuable information for investment managers who are trying to factor that in to their risk and compliance activities,” he says.
Taggart says the merger has not changed the original strategy. “We’re spending a little time cataloguing assets and resources and talking with the folks on the JP Morgan side about our strategy.” JP Morgan used to have a custody and security service business but sold it and Chase’s old securities service group would understandably like to service JP Morgan’s considerable assets. JP Morgan has a long range contract with the Bank of New York to provide those services but Taggart says there are contractual negotiations under way and they expect a final resolution shortly. In addition to the new services, Investor Services is also collaborating with the new LabMorgan, which comprises internet strategy teams representing each business line. “Now with the merger complete we’ve got the combined resources of Chase.com, Chase Capital Partners and LabMorgan to help us execute our strategy,” says Taggart.
As part of the strategy, the new outfit is engaging in what it calls co-opetition Taggart explains: “The internet has sparked discussion among the major players in the industry.” Institutions now co-operate in fields they once fought over (hence the term co-opetition). An example of this is the bond platform MarketAxess. “It hasn’t really happened that much in the investor services and custody business. We do lot of work through the industry bodies- the IOA, the DTC etc and we are collaborating and co-operating with our competitors,” says Taggart.
Taggart say this is going to continue to intensify and there will probably be more joint ventures between the major players. “People used to be able to sit behind their whole product suite and there wasn’t a lot of transparency about the value of component parts. The internet brings a lot of transparency to what people are actually good at.” Reference data could for example, be an area where they co-operate with one of their main, in the old sense of the word, competitors.
Another big theme is integrating ASPs or application service providers with FSPs, full service providers. Institutions still buy, install, and run many applications today. “What’s starting to happen with the internet is that those applications are available on an ASP basis which means you don’t install it in house, you utilise it and rent it through the internet. There’s less maintenance, less fixed cost and you use it as you need it.
“Our view is that ultimately almost everything will be available in some form of ASP basis,” says Taggart and they are trying to figure out how to integrate them. It’s one thing to have a portfolio system here and a trade order management system there, say, but unless they work together they are hopeless. JP Morgan sees itself as an arranger of these ASP systems.
These changes are going to take a number or years but they fit nicely with Taggart’s belief that certain institutions will begin concentrating on core competencies while relying more heavily on others for support services. “The world is going to resolve down to investment managers really only doing what they are good at and that is making investment decisions and working with their clients. All the other things they have had to do will be hired out, preferably rented from a handful of providers that can integrate or arrange all the required services in a complete package.”