Q&A: Bullish on Microsoft .NET in the Securities Markets

NEW YORK, June 19, 2002 — The settling of financial transactions on a massive scale is the ultimate real-world test of computer platform reliability.

At this week’s Securities Industry Association’s Technology and Management Conference and Exhibition in New York, financial services technology leader Capco announced an alliance with Microsoft and the first comprehensive solution for completely automating the process of trading stocks and shares.

Kenny McBride, Microsoft Global Industry Manager for Securities and Capital Markets

No applications are more mission-critical than those deployed in the securities markets. Daily trading volumes are huge, and every completed transaction is legally binding for both seller and buyer. Straight Through Processing or STP — the electronic automation of the whole process from initiation to settlement — is the ultimate goal. Capco’s STP Bridge solution, built on the Microsoft .NET platform, provides security industry players with the complete interoperability between legacy systems that is the key to STP.

The drive toward STP is expected to accelerate this summer as the SEC mandates a move by 2005 to one-day transaction settlement, known as T+1. Burdened by a plethora of disparate legacy systems, that process currently takes up to three days, or T+3. A Tower Group report estimates that financial institutions will spend $19 billion globally in the next four years to achieve T+1.

To learn about Microsoft’s strategy in this vertical sector, PressPass spoke with Kenny McBride, global industry manager for securities and capital markets.

McBride has over 18 years of financial markets experience. Working for various global institutions, including National Westminster Bank in London, he established himself as a highly regarded market maker identifying fundamental business and technological changes affecting the global markets. In 1998 in Seattle, he co-founded Financial Market Solutions (FMS), a start up software firm that created sophisticated Web-based transaction software for the financial markets.

PressPass: Can you describe the role of information technology in the securities industry?

McBride: IT is at the core.

For every stock trade there may be a dozen messages exchanged between the various parties involved. Typically, pre-trade messages supply analytics and research so a client can decide on a purchase. Then the individual or institution contacts a broker or investment bank which executes the trade, matching a willing buyer and seller at a given price. Post-trade, there’s a complex settlement process between custodian banks and brokers.

This system developed in a very traditional environment. A lot of institutions still use faxes and phones for some of those messages. But as the market has been opened up by advances in IT, the capability to execute trades is being offered by new organizations or those that formerly acted only as brokers — think of E*Trade, Ameritrade or Charles Schwab. With increased volumes, new players and a rapid growth in day-trading, the risk factors have risen. The industry realizes it has got to get down from T+3 to T+1, and ultimately to same-day settlement.

This is why Microsoft is very keen to expand in this area. We believe that technology will be the factor driving where the business is going.

PressPass: What are the IT challenges in this sector and how does Microsoft.NET address them?

McBride: With the ready availability of financial information over the Internet, collaboration between the various institutions involved in the financial marketplace has become crucial. Consequently there’s a drive toward standardization of communication between the parties, whether they be pre-trade information suppliers, brokers, dealers, buyers, sellers or providers of post-trade settlement services.

These institutions have to be joined at the hip. Hence the focus within the industry on XML, which enables standardized data transmission across the Internet, and the creation of XML schemas, protocols and standard business processes.

So interoperability is an absolute technical requirement. What separates .NET from its rivals is the pre-baked standardization of XML into our products.

From the business perspective, the deciding factors are speed-to-market and ROI. The .NET tools will build mission-critical apps quickly. And we cost-effectively provide the capacity and scalability needed in an enterprise server infrastructure; the ROI from .NET technologies is second to none.

PressPass: Are there .NET elements specific to this vertical industry?

McBride: The central goal is STP — electronically automating the entire process of trading securities or any financial instrument, from the pre-trade analysis to post-trade settlement.

A key issue is how to deal with “trade exceptions,” which occur when a transaction fails to match at the buyer and seller ends. The longer trades are not matched up, the greater is the risk exposure in a moving market. Mismatched trades cost the industry billions a year. Identifying and reconciling those trade exceptions quickly is central to automation of the process.

To that end, Microsoft is building up the business-process capabilities within our software server suites. For this vertical sector, Microsoft BizTalk Server will orchestrate the message flows that occur during a trade and handle the exceptions.

All our .NET enterprise products are benchmarked and proven to work in these demanding environments. By inserting business processes and logic on the server we provide the foundations to rapidly develop applications.

Microsoft is producing a high-performance engine specifically for the securities markets. The financial institutions can then build their own racing cars.

PressPass: Do Web services fit in to this vertical sector?

McBride: Yes. Historically the capital markets sector has been dominated by mainframes. In a mainframe environment, every time you add an application it becomes part of the legacy system; you cannot take one piece out without affecting other parts.

On the .NET platform, a system can call upon modular Web services that will seamlessly plug and play with what you have, using standard Internet protocols. It gives you the flexibility to change and improve different aspects of your offering without affecting other areas interlinked with it.

i-Deal, a joint venture between Merrill Lynch, Microsoft, Salomon Smith Barney (a unit of Citigroup) and Thomson Financial, has essentially built a .NET-based Web service that streamlines the process of raising capital and building an IPO book.

PressPass: How significant is the expected SEC rule change that mandates T+1 by 2005?

McBride: It’s reminiscent of the Y2K deadline. Obviously there’s a downturn right now and a lot of financial institutions have pulled back IT spending significantly. The move to T+1 will help shift the momentum again.

Financial services is a key area for Microsoft. The revenue growth potential is tremendous. It’s been a mainframe-dominated sector. But today, to be agile in this vertical industry, the .NET platform is the fastest and most cost-effective way to go.

PressPass: What does the Microsoft/Capco alliance signify for the industry?

McBride: Straight Through Processing is clearly the future of the securities industry, and Capco’s STP Bridge is a solution that can seamlessly handle all the connectivity and protocols necessary to communicate with the current transaction matching engines, including GSTPA, Omgeo and the Singapore Exchange’s CPM utility.

Our two companies will jointly promote and market the STP Bridge as a .NET-based solution. In North America you’ll see STP established first between major exchanges and financial institutions in the sell-side capital markets industry. When it comes to settlement processes that involve exposing services to clients and partners, those institutions have traditionally built their own in-house customized solutions from scratch.

Now, with the standardization and connectivity protocols built into STP Bridge, a good 80 percent of the initial programming work is already done. A financial institution can focus solely on the remaining 20 percent of customized work: making sure the technology is tailored to its existing environment and specific business processes.

More broadly, Capco is a very focused, vertically-oriented consultancy. It deeply understands the financial markets. We envision Capco helping build further solutions for this vertical market based on Microsofts technologies.

Capco’s leadership team sees the benefits of the .NET platform for the financial markets and believes that our technology will be cutting edge in the securities sector for years to come.

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