If there is one thing the financial industry in Switzerland is proud of, it’s the Swiss value chain. It is a structure comprising SWX Swiss Exchange, SIS SegaInterSettle the international and domestic central securities depository, the central counterparty SIS x-clear, and Swiss Interbank Clearing (SIC), the payment system operated by Telekurs. This arrangement allows for the full automation and real-time integration of trade, settlement and payment flows involving central bank money in the Swiss domestic market.
Patrik Frieden, vice-president and head of marketing global investment reporting at Credit Suisse AM says the efficiency of the Swiss value chain has saved Swiss banks a great deal. “All trades undertaken on SWX Swiss Exchange and Virt-x are fully automated, right through to the end of settlement. This straight-through processing has helped Swiss banks to fully automate and thus reduce costs,” Frieden says.
SIS Group, which through SegaIntersettle and x-clear plays a central role in Switzerland’s settlement infrastructure, posted record results in 2004, with profit of CHF28.6m (e18.6m). Peter Sami, chief executive of SIS Group said results would lead to price reductions for SIS users in 2005.
The profit also helped SIS to offset the loss it suffered as the result of the failure of the Global Straight Through Processing Association’s initiative to build a post-trade processing hub for cross-border securities. In 2002, SIS Group had to write off CHF40m after the matching engine project filed for bankruptcy. SIS Group developed the matching engine in collaboration with TKS/TCS, an Indian software development firm and Swift, the Brussels-based, bank-owned financial messaging co-operative.
In the first few months of 2005, SegaIntersettle rolled out new products. In April, it extended its triparty repo service beyond Swiss francs to offer trade settlement in euro, US dollar and sterling in the Swiss repo market. Under the arrangement, trading takes place on the Eurex Repo platform and orders are transmitted as irrevocable settlement instructions to SIS, where they are settled and administered by the triparty repo service. SIS calculates and values all open repo positions daily. If necessary, margin transfers are triggered automatically per counterparty.
Marco Strimer, chief executive of SIS x-clear and member of the SIS executive board, says SIS is developing an automated securities lending and borrowing platform with Eurex that is based on the repo platform extension. “Clients will be able to extend or exchange collateral on a delivery versus delivery basis with full margining,” he says.
The securities lending programme is just the start. Strimer says SIS will look into developing collateral management and reporting capabilities that will give SIS’s clients “the ideal tool for managing collateral more effectively and efficiently”. The challenge for securities services providers, he says, is that clients want all of their collateral in one place and providers need to offer a single point of access to that collateral.
“SIS’s clients are very interested in the idea of using SIS as a single point of contact and as a window to the outside world. We need to be able to further extend our services globally to meet that demand.”
In May, SegaInterSettle added a client notification module to its corporate actions processing service. The CAES Utilities module provides client notification letters in three languages – English, German and French. The letters contain all information relevant to shareholders concerning voluntary and special actions on their securities.
The letters sent out to SIS clients include additional information on legal and tax related aspects of the corporate event. The next development will be to enable users to have client data and account information scanned automatically into the client notification letters.
While SIS acts as the global custodian for Swiss banks, the number of international clients is increasing. Strimer says thaty around one-third of SIS’s clients are now from outside of Switzerland. “SIS is a bank and can maintain bank accounts for clients and extend credit lines. This is important for us in positioning the company as a global custodian and an international central securities depository.”
Frieden says foreign banks are still more likely to choose one of the Swiss banks as a sub-custodian rather than going directly to SIS. “The Swiss banks can offer more sophisticated solutions than SIS, which is more for clearing and settlement.”
CSAM’s pension fund clients face considerable cost pressures, says Frieden. Most pension funds invest heavily in bonds and must guarantee members a technical interest rate that is set by the government. At present, the government rate is higher than the actual bond rate and pension funds are struggling to guarantee the government’s minimum rate.
Real estate, however, offers more stable returns. “Real estate, which has good and stable returns, is becoming a much more important asset class for Swiss pension funds and about 12% of overall asset allocation is now in real estate,” Frieden says.
He says custodians are finding that their customers are much more cost sensitive. “The pressure is on custodians to offer not just a cheap product, but a full solution that includes investment vehicles that are interesting for clients and that fit together well. We also need to offer these services at a very attractive price.”
The bulk of clearing and settlement costs in Switzerland - and elsewhere in Europe - come from cross border transactions. Strimer says SIS would like to be able to replicate the Swiss value chain for cross border transactions, but much depends on the local markets outside Switzerland. “If a market has only one settlement period per day, it is difficult to offer a similar service. If you are looking at a market with well-developed real-time functionality then it would be ideal at linking up with the CSD or custodians to provide as close to real-time processing as we can.”
In October 2004, SegaInterSettle and NeoNet, a Stockholm-based agency brokerage, launched a joint venture integrated cross border trading and settlement solution, Inset Access. The solution enables users to trade on NeoNet’s 13 European equity marketplaces and settle with SegaInterSettle. Settlement instructions are automatically generated during the trading process, eliminating the need for clients to send separate instructions to the Swiss central securities depositary (CSD). Users also don’t need relationships with multiple brokers and custodians in the local marketplaces, instead having one settlement contact with SegaIntersettle and one broker contact with NeoNet.
“Inset Access underpins our efforts to press forward with straight through processing in cross border settlement. The existing value chain will be further strengthened and expanded, bringing us a step closer to the European value chain,” says Strimer.
The first user of the system is Bank Hofmann, a Swiss private bank. Caspar Reutz, director in charge of securities operations at the bank, says the service will enable the bank to process transactions faster, more transparently and on a best execution basis. “Bank Hofmann is able to place electronic orders directly in the local marketplaces without being a member. This STP approach with an independent intermediary is a further milestone in electronic order settlement. Since 1996 the SWX Stock Exchange, probably the most efficient exchange solution worldwide, has successfully applied STP principles.”