COVER INTERVIEW

12FX-MM | April 2012 Subscribe online at fx-mm.com

FROM STRENGTHTO STRENGTH

Philippe Chambadal, CEO, SmartStream

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COVER INTERVIEW

13April 2012 | FX-MM

SmartStream haveone of the highest, ifnot the highest, R & D to revenueratios in the industry.

hile market conditions in the financial sector have beenchallenging since 2008, SmartStream have achieved

consistent growth over the last four years. With offices in 18 countries and partnerships in many more, SmartStream are

steadily expanding. They provide real-time TransactionLifecycle Management (TLM) solutions to over 1,500 clients, and

more than three-quarters of the world’s top 100 banks use theirservices. I started by asking Chambadal about SmartStream’s progress in 2011.

“It was both a profitable year and a busy one for us as we launched a number of newsolutions. Our Transaction Fees Invoice Management (TFIM) solution launched andwe expanded our reference data utility with both large sell side and hedge fund clients,who are using us to manage ETDs, index components and ETFs. We have a verycomplete offering and source data directly from 450 exchanges. We consolidated ourposition with Tier 1 institutions and 29 of the top 30 banks are our clients and many arepromoting internal utility operations – concentrating post-trade processing into acentre of excellence or shared service centre.”

Although SmartStream are a recognised leader in post-trade processing solutionsChambadal is well aware that they need to keep innovating in order to stay ahead of thecompetition: “SmartStream have one of the highest, if not the highest, R & D to revenueratios in the industry. Since we bought the company in 2007 we have had a sustainedinvestment programme to rebuild our products. We built a reference data utility fromthe ground up, a new corporate actions solution, cash management and client moneyproducts and TFIM has been developed over the last 18 months or so. We have scalable,feature-rich products which can handle any asset type. While competitors operatesiloed products, creating costly and risky integration projects for their clients, TLM products build on a common infrastructure. Clients are looking for singleintegrated solutions for post-trade processing that handle reconciliations real-timefront to back – an independent control of the transaction stream that ensures nothingfalls through the cracks. There’s really no room for Excel or paper-based reconciliations– they represent no control”.

The global financial crisis and the stricter regulatory requirements aroundtransparency have made life difficult for many players in the industry but Chambadalsays that the situation has presented new opportunities for SmartStream: “in the US,Dodd-Frank and the OFR are both promoting the concept of a central data utility,which we have. In the UK, the FSA are pushing for real-time cash management, propersegregation of client money and we have the solutions there as well. Clients understandthat a cash management product in harness with a reconciliations product makes a lotof sense. You have a single flow of validated trades that can go from one to the other.You can compute your cash positions in real-time instead of just a couple of times a dayif you were operating in batch mode. We’re moving our clients to intraday so that they

Philippe Chambadal led the acquisition of SmartStream in 2007. As itsCEO, he has transformed the company into a highly respected post-tradesolutions provider and trusted strategic partner for a large number ofbanks, broker-dealers and asset managers. Steve Shaw talks to him aboutthe company’s recent achievements, latest trends and developments inthe industry and about growth opportunities for the company.

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have the capacity to look at their transaction flows at anytime and derive regulatory reports or see their cashbalances throughout the day.”

While a large proportion of SmartStream’s clientsare banks Chambadal says that the company hasbroadened its horizons: “we have custodians and fundadministrators who use our technology for their clients.Many hedge funds and money managers are using ourproducts indirectly. Most of the large custodians and large money managers use us. We’re expanding into the corporate sector with our Balance SheetSubstantiation Solution and into the retail bankingsector with an operational risk control solution for creditcard and ATM transactions. Both retail and mobilebanking payments require controls that link cashmanagement and reconciliations, so we are releasingsolutions for this too.”

The increased level of interest by financial firms inbuilding a shared resource for reference data/corporateactions data and back office processing must be goodnews for SmartStream. Chambadal agrees: “examine theneeds of the large banks, many run several securitymasters, sometimes dozens. So we built a customiseddata management service that can assist them. We pre-load the data and deliver it in an agreed format andsymbology of their choosing to the security masters theyhave onsite. We help create accurate consistency acrossall data types: instrument data, reference data, corporateactions, legal entity data and settlement instructions. Forthe buy-side, there are usually only one or two securitymasters onsite but an equal need for accurate, consistentdata – especially with the sell-side. Nirvana is wherebuy-side and sell-side firms use the same referencedata. You have around 40-45% of trade-breaks resultingfrom mismatches of trade reference data. A sharedreference data service eliminates this. Many mismatchesare in settlement instructions. The impact isdownstream as all these trade breaks permeatethroughout the whole system and the savings can be massive.”

Another element is corporate actions, of whichChambadal says: “post 2008 most hedge funds moved tohaving multiple prime brokers, all with a different viewof corporate actions, making processing across anumber of providers a daunting task for hedge funds.Doing pre-processing on their behalf, creating areconciled view across the different prime brokers,custodians and fund administrators is criticallyimportant to create efficiency.”

Some time ago SmartStream launched their TLMCash & Liquidity Management product and have seen

good take-up for this. Chambadal says: “our cashmanagement services are doing well. Helping our bankclients to achieve a real-time view of their cash positionsis something that both they, and the regulators, want.We’ve had some good traction on the buy-side as well, asthey see a lot of value in deploying a cash managementsolution. As we already have a reconciliation engine in place, having the tie-up with cash management is critical.”

Chambadal observes that the two biggest culpritsresponsible for high costs in trade processing aremismatches in the reference data (about 40%) and acombination of manual processes and fragmentedsystems – systems which are siloed by department, byasset class, by geography and by business unit. He says:“the level of fragmentation inside Wall Street is trulystunning. We help by providing consistent data and alsoby providing automation, eliminating a lot of manualprocesses by having a very efficient matching engine.Our TLM Premium product can handle any asset classincluding OTC and ETDs and we can get our clients’STP rates up from the 80-85% industry average to amatched rate of 96-98%. When you’re doing severalmillion transactions a day the savings can be enormous.The other aspect to this is scalability. You need to have aproduct and an infrastructure that is able to cope withvery high transaction volumes and we have this as well.”

At this point we’re joined by Anne Pounds,SmartStream’s Product Manager for TFIM, whoexplains the rationale behind the product: “we foundthat a number of our bank clients wanted to understandall of the component costs of the transaction lifecycle.We worked with a number of players, first on the OTCside, then on the ETD side. TFIM enables a bank notonly to bring some control to the fees that they’re payingin the wholesale market and understand what thosecosts are, but also to start centralised or globalisedbilling for ETD or OTC trades. TFIM caters to marketintermediaries, banks who want to look at their inboundfees, or understand the downstream client impact ofthose fees.”

The industry is bringing together its OTC and ETDprocessing. Pounds explains in more detail what ishappening: “some of the banks are moving theirexchange traded back offices into an OTC world andtrying to bring those back offices together to bringexpertise on the exchange-traded side to be able toprocess OTC under the new regulations when it goesexchange cleared. Some banks are doing the reverse. A lot of re-engineering is going on and clients needsolutions that can bring together the ability to manage

COVER INTERVIEW

14FX-MM | April 2012 Subscribe online at fx-mm.com

The level offragmentation inside

Wall Street is truly stunning

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and control their processes regardless of the way that the transactions are being done. The other part of thesolution enables the banks which have counterpartbrokers to have interoperability with those other marketparticipants. This brings in the whole referencedata/cross-referencing capability. Solving theinteroperability problem is one of the biggest challengesin brokerage today.”

Pounds goes on to explain how the banks are tryingto move the control point closer to trade execution:“today, invoices come in very late in the cycle, perhaps amonth after the trade took place. Some banks don’t gettheir invoices until four or five months after the trade, soyou’ve done all your processing in the front, middle andback offices but then you have to pick those trades upagain and have to allocate or associate fees to these. Bybringing the fees element closer to trade time it willenable the banks to bring this function into theirexisting operations and make it more expedient so theperson who’s fixing breaks is also able to manage the feespart of the equation. Banks will be able to see if aparticular trader is being overcharged or if a particulartrader is costing more. Our solution helps banks whichhaven’t currently got the right framework to pull all thisinformation together and will enable them to makebetter use of their global buying power and provideimproved supplier management.”

Another dimension of the problem is the way thatthe banks organise their documentation stores and how

they translate and interpret this documentation. Poundssays: “many banks are still working off paper, so we’vepositioned the product to help them with their datamodels. A lot of the bigger banks have made so manyacquisitions over the years that they have to cope with amultitude of different types of documentation,fragmented products and systems, differing layers ofcontrol and inconsistent reference data. Achievingstandardisation and consistency across these bigbanking groups on how products or services should becharged can be a huge challenge. We have been able tohelp them by bringing them a solution which providesmore rigorous and consistent data definition and assistswith their standardisation efforts.”

When asked for his views on the fast-changingregulatory landscape Chambadal sees some commonthemes in all of the regulatory developments –transparency and control. He says: “if you’re running abank on batch systems, checking cash only twice a day,that’s not a good place to be. The regulators on bothsides of the Atlantic are pushing for real-time, or quasireal-time visibility for proper management of your risk.It starts with effective management of reference data,corporate actions and counterparty data and creatingreal-time, event-driven frameworks for this so thatbanks can report to regulators and isolate probleminstitutions in quasi real-time. What we’re seeing is thatanything compliance-related is going straight to thefront of the queue when it comes to resourceprioritisation. A fragmented world with nointeroperability between counterparties is not what theregulators are looking for.”

Talking to Chambadal one gets a strong sense thatSmartStream are a company on the move and that theyhave a clear idea of where they’re going. When he talksabout the company’s future plans Chambadal isreluctant to go into too much detail but says: “we see thebuy-side abandoning the management of their ownmiddle office and back office operations and this willpresent interesting opportunities for us. With the banksthemselves we think there will be a trend towardscommoditising the non-unique services they performin-house and doing this through shared serviceoperations. A number of banks have approached usalready, building on our successful reconciliationsutilities and this presents opportunities for bothSmartStream and our clients.”

COVER INTERVIEW

15April 2012 | FX-MM

If you’re running a bank on batchsystems, checkingcash only twice a day, that’s not a goodplace to be

Further information...

www.smartstream-stp.com

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