T. Rowe Looks Beyond Corporate Actions

www.securitiesindustry.comWhat Makes MarketsFebruary 16, 2004

T. Rowe Price will expand its use of Smartstream’s straight-through processing product suite beyond corporate actions toinclude custodian reconciliation and probably confirmationand settlement, following testing in the Baltimore-based assetmanager’s proof-of-conceptlab, said Doren Jacobs, VP at T.Rowe Price InvestmentTechnologies.

While a pressing need toautomate corporate actions iswhat first led T. Rowe toSmartstream, among other ven-dors, Smartstream’s STP “con-trol architecture” passed musterin the end because it supportedother products that aligned withT. Rowe’s STP strategy.

Although Jacobs describes T.Rowe as a “best-of-breed” shop,the firm nonetheless aims to minimize system proliferation.Thus, a vendor that could support automation across multipleaspects of the trade processing cycle and facilitate communica-tion with counterparties, custodians and separate confirmationand settlement systems fit the bill.

“It’s not that [Smartstream’s] corporate action tool was thatmuch better out of the box than the number-two vendor werated,” Jacobs said. “We brought them back in on custodian rec-oncilement, where we are already a client of their SSR product,and we’re having them back in on confirmation and settlementbecause their overall STP control architecture fits very nicelywith our STP strategy. We are very enthusiastic about theirproduct direction, and are working closely with them so that bythe end of 2004, we will have a highly integrated solution thatmeets the majority of our transaction processing needs.”

Added Jacobs: “We will probably do other layouts in 2004,with Smartstream and with other vendors, around things likereference data.”

The best-of-breed approach has made middleware withregards to Swift and FIX messaging adoption very important.“We’re really trying to exploit the use of things like Swift andFIX, but we don’t want to end up with multiple Swift and FIXlibraries, so we’re more and more using middleware and trying

to replace point-to-point interfaces with more flexible architec-ture,” he said. T. Rowe currently uses Salerio e2e in its Londonoffice for confirmation and settlement.

T. Rowe uses FIX-compliant messaging “very extensively”in equities for pre-trade processing, though not for alloca-tions, Jacobs said. The firm has been live since 1998 with FIXmessaging for equities, and currently uses version 4.2 to com-municate with approximately 150 brokers globally.

Regarding fixed income, T. Rowe is waiting for its sell-sidecounterparties to adopt FIX 4.4—the only version of the mes-saging standard to address bonds—which was released last year.Jacobs said the firm would probably use FIX for fixed incomefirst in communicating with TradeWeb and MarketAxess, themultidealer bond trading platforms, via a Charles River inter-face.

“Right now, the interface is only at the block level, but infuture releases it’s going to be at the allocation level, so we don’thave to enter the trade on both platforms,” he said. “We can useour order management system to communicate directly withTradeWeb or MarketAxess.

“The reality is that the fixed-income brokers that we tradewith aren’t ready yet,” Jacobs added. “We’re very interested inFIX 4.4—part of our STP strategy is to consolidate and to beable to support FIX messaging better in some respects outside ofthe order management system. But I think it’s way in the futurebefore we think about FIX post-trade execution, because wehave things like Oasys today.”

T. Rowe uses Omgeo’s Oasys to confirm broker trade details.According to Jacobs, the firm will link to multiple vendors offer-ing trade matching, settlement and allocation services.

“Whether that’s TradeWeb, MarketAxess, a broker thatwants to confirm a trade with us via Oasys, a broker who wantsto be able to communicate with us over FIX—we would like tobe able to handle all of those,” he said. “What we need is to beable to interact with all these things, whichever makes the mostsense for a particular broker and asset class. Our primary con-cern is to reduce risk and improve efficiencies through automa-tion, and over time we can work with a particular broker orcustodian to move to a preferred method or standard.”

T. Rowe brings vendors directly into the shop for real-worldor “lab” demonstrations of how their wares will interact with thefirm’s systems before deciding on a strategy or direction to take,

BUY-SIDE AUTOMATION

Doren Jocobs

versus a more traditional request-for-proposals process. Besides evaluating Smartstream migration, current lab work

includes a project with Sybase to create better business continu-ity capabilities for T. Rowe’s global trading applications toensure around-the-clock trading and data access for its HongKong, London and Baltimore offices. The firm is also workingwith Sybase in the lab to evaluate various archiving solutions.

The work involves improving trading systems perform-ance, so data can be easily retrieved across single instances oftrading applications residing in any of T. Rowe’s locations.The strategy is aimed at consolidating systems as much aspossible and then harnessing their capabilities globally.

For example, the firm uses the same trading platformsregardless of geography, according to product sets—MacgregorMFTP for equities, Charles River for fixed income, andAutomatic Data Processing’s MBS Expert for mortgage-backedsecurities. Single copies of DSTi’s HiNet and HiPerformancesystems are also managed globally for accounting and perform-ance measurement. The firm’s investment division runs on SunSolaris and Sybase databases.

“We’re very concerned all the time with getting high avail-ability, maximum uptime of our systems, but also being able torun on our batch cycles within very tight windows so that wecan stay on single instances of these products,” Jacobs said.“We want the systems to be available all the time, so that tech-

nology is not an impediment to executing investment deci-sions. In addition, having a single instance of the platformsgets rid a lot of internal STP- and risk-related issues of man-aging a global operation.”

Regarding consolidation, T. Rowe will evaluate next yearwhether to move to Charles River’s new mortgage-backed trad-ing function, which, Jacobs said, is expected to be rolled out thisyear among a couple of Charles River clients.

“We think that there will be a solid release by 2005 of thefunctionality that we can evaluate,” he said. “I’m not saying we’dgo to it in 2005, but we can at least evaluate it and see wherethey are. We don’t really want the mortgage-backed traders tocompromise their functional requirements to fit them intoCharles River’s functionality. At the same time, we’d like to havefewer trading platforms and consolidate, so we work with thevendors to try to get them to adjust their product plans to meetour needs in the future.”

T. Rowe has contracted with Covansys USA, which has anoffshore subsidiary in Chennai, India, for purely technical proj-ects such as platform ports. In addition, the firm has enlistedanother Indian vendor, HPS Americas, which has offices inNew Delhi and Bangalore, India, to perform integration workwithin the investments segment, though that work currentlytakes place completely within the United States, Jacobs said. ■

— SHANE KITE

Reprinted from Securities Industry News, February 16, 2004. 1 State Street Plaza, 26th Floor, New York, NY. 10004, (212) 803-8351