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CURRENT NEWS
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TECHNOLOGY & SOFTWARE
 SunGard Trading and Risk Systems Acquires Kiodex for ASP-Based Commodity Risk Management
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SunGard Trading and Risk Systems, an operating group of SunGard (NYSE:SDS), today announced that it has acquired Kiodex, Inc., a supplier of Web-based risk management, financial reporting, FAS 133 compliance and market data solutions for companies exposed to commodities risk. Kiodex solutions-- Kiodex Risk WorkBench and Kiodex Global Market Data-- are delivered via an application service provider (ASP) framework. The acquisition, the terms of which were not disclosed, is not expected to have a material impact on SunGard's financial results.
The acquisition of Kiodex expands SunGard's portfolio of ASP-based risk services. It provides SunGard with proven ASP-based solutions for managing commodities risk, serving corporate end-users, energy producers and intermediaries, and financial institutions and hedge funds that trade commodities. Kiodex solutions are complementary to those that SunGard offers in each of these sectors, including AvantGard, Entegrate, Adaptiv, Reech and FAME.
The Kiodex Risk Workbench is a Web-based application that provides companies, banks, and hedge funds with the critical components required to hedge and trade commodities: deal capture, valuation models, risk reporting, and back-office functionality. In addition, the Kiodex Risk Workbench has integrated FAS 133 and IAS 39 modules. Kiodex also offers over 125 forward curves in the crude, natural gas, refined products, power and metal markets, used by many energy companies for compliance with Sarbanes-Oxley.
Kiodex will be an operating unit of SunGard Trading and Risk Systems, headed by Raj Mahajan as president. Tom Farley and Charles Reyl will assume key executive positions in the new business unit as chief operating officer and vice president, financial engineering, respectively.
Raj Mahajan, president of the Kiodex operating unit of SunGard Trading and Risk Systems, said, "The 19 new customers we signed in 2004 demonstrate the growing demand for Web-based risk management services. The current environment of high-energy prices, escalating volatility, and increasing regulatory scrutiny is motivating a broad spectrum of corporations to implement or revisit their risk management frameworks. As part of SunGard we aim to continue our rapid pace of growth by leveraging its financial resources and global distribution channels."
Jim Ashton, group chief executive of SunGard Trading and Risk Systems, said, "Our acquisition of Kiodex further strengthens our position in the ASP delivery space for risk management, an area that we currently serve with our Adaptiv solution for global credit risk management and Reech solutions for derivatives valuations and buy-side risk. Kiodex supplements this offering by addressing the need for commodities risk management across various sectors. It also helps customers to meet regulatory compliance according to the fair value accounting rules in the US (FAS 133) and Europe (IAS 39)."
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U.S. Bancorp Fund Services LLC Selects Advent’s Geneva
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San Francisco, September 13, 2004 - Advent Software, Inc. (NASDAQ: ADVS) announced that the alternative investment group of U.S. Bancorp Fund Services, LLC has selected Advent’s Geneva® solution for its real-time global portfolio accounting needs. Geneva® is the industry’s premier global investment accounting and portfolio management solution that solves the complex challenges faced by global asset managers, mutual funds, hedge funds, fund administrators and prime brokers with scalability and efficiency unmatched in the marketplace today.
U.S. Bancorp Fund Services, LLC provides a single-source service solution for mutual funds, closed-end funds, multiple series trusts, partnerships, offshore funds and separate accounts. The firm’s alternative investment group previously employed Advent’s Axys® portfolio accounting solution, but in the four years since the alternative investment group’s inception, has grown substantially, and required a system that would allow them to handle their clients’ increasingly complex securities and investment accounting requirements.
"We completed an exhaustive search for a new system, and ultimately decided on Geneva® for its flexibility, both in reporting and its wide acceptance of data feeds. Our clients have very unique investments among various products. We needed Geneva’s® flexibility to create custom reports for investments that are new to the market. Geneva® also provides impressive scalability, which is a requirement for our firm. As a service provider we need to rapidly respond to increasing client demands," said Christine Gray, vice president of U.S. Bancorp Fund Services.
Geneva® features a large inventory of security types and transaction coverage, helping firms react to changes in business climate by handling both existing and future investment opportunities. And Geneva® is the only global portfolio accounting and portfolio management system that meets the stringent and complex needs of investment managers worldwide when accounting for high volume, traditional, derivative, domestic and global investment strategies, as well as when integrating accounting data into their straight-through processing (STP) infrastructures.
"We’re extremely pleased to be able to help U.S. Bancorp provide superior client service through the extensive functionality in Geneva®. And it’s also great to see U.S. Bancorp grow its business over the years with the continued use of Advent products. We look forward to continuing this terrific relationship," said Peter Hess, Managing Director in charge of Advent’s global accounts business.
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REGULATORY & TAX
SEC May Reduce Reporting Requirements On Redemption Fees
Source: Defined Contribution News
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The final version of the Securities and Exchange Commission's 2% redemption fee proposal could turn the costs of the new rule from a nightmare to a nuisance. Senior SEC staff told the Government Accountability Office that they would recommend to the Commission that the burden on plans and their record-keepers should be lightened. Officials have not said how much of a change they have in mind. But others who have had discussions with the SEC on this topic think that instead of intermediaries for 401(k) plans having to report once a week on all of their billions of transactions, the final rule may only require a tiny fraction of that. The fee would be imposed on transactions done within five days of each other.
Recently foes of the redemption fee rule have begun to suggest the proposal was in deep trouble, the Commission is once again sharply divided, and withdrawal of the rule is a possibility. "Based on the communications we've had," said Peter Mauthe, spokesman for the Society of Asset Allocators and Fund Timers, "the vote would be two to two, excluding [SEC Chairman] William Donaldson." A fund industry lawyer said, "I hear the two percent is in trouble... Maybe the cure is worse than the disease."
But at an open Commission meeting last Wednesday Donaldson made it clear he expects a final vote approving a 2% redemption fee on mutual fund transactions will take place before the end of the year. One reason for confidence on that score could be that the objections that the pension industry and record-keepers have raised are going to be heeded--thus quieting political pressure. One of the first to come out strongly against the complications the 2% fee proposal would create was the American Society of Pension Actuaries. ASPA's executive secretary Brian Graff has been in ongoing discussions with the SEC since then. "I'm optimistic," Graff said. He believes the final rule will be one the pension industry can live with.
The proposed rule, as it stands, would have all intermediaries between mutual funds and investors identify everybody included in each of their omnibus transactions and supply that information to the mutual fund involved at least once a week. The purpose would be to detect market timers hidden among the anonymous mass of investors whose transactions are executed via omnibus accounts.
But people in the pension industry have objected to the SEC that the vast bulk of 401(k) transactions with mutual funds occur for reasons the owner of the account has nothing to do with. Only a few are participant-directed and therefore potentially market timing. In a letter to the GAO, Paul Roye, director of the SEC's Division of Investment Management, said, "the Commission staff is considering recommending modifications to the Commission's proposals that should mitigate against circumstances that could potentially adversely affect pension plan participants." But mitigate how much? Graff has hope that maybe SEC will shrink its definition of trades to be reported all the way down to just participant directed trades which make up about 5% of the total. And he'd like to persuade the SEC to shrink it even further, by excluding distributions taken by plan participants.
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PRIME BROKERS & ADMINISTRATORS
Citco's FoF business sale imminent?
Source: MARHedge
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Sep-3-2004 - Hamilton Lane, a leading private equity investor, is reported to be close to acquiring Citco's fund-of-funds business, which has been known as Citco Fund Advisors and Richcourt Fund Advisors.
The transaction is likely to feed recent widespread rumors that Citco, best known as the world's leading fund administrator with some $200 billion under administration, may soon be sold to UBS.
Citco's fund-of-funds operation, which is based in New York, manages and advises some $1.7 billion in "several multi-manager investment vehicles with a wide range of investment objectives and risk profiles," according to Citco's web site; the business is headquartered in New York, with satellite offices in San Francisco and London.
Hamilton Lane is based in Bala Cynwyd, Pennsylvania, a suburb of Philadelphia, and also has an office in London. In December 2003, an investor group headed by Hartley R. Rogers and including Cascade Investments, the family office of Microsoft founder Bill Gates, bought a 40 per cent holding in the firm.
Founded in 1991, it has, according to its web site, initiated more than $26 billion in private equity investments, and currently has around $5 billion under management. Rogers, formerly co-head of the US private equity department of Credit Suisse First Boston and co-head of the $2.7 billion CSFB Equity Partners private equity fund, was named vice chairman; Hamilton Lane's chairman Leslie Brun is its largest single shareholder.
Mario L. Giannini, chief executive officer of Hamilton Lane, declined comment.
A Citco executive also declined comment, but offered to forward an email to people authorized to comment. No response had been received by press-time.
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Commerzbank Overhauls Derivatives Platform
Source: Operations Management
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Commerzbank will revamp processing for over-the-counter derivatives and will join SwapsWire and the Depository Trust & Clearing Co. trade matching/confirm services. The use of the matching service will provide automated confirmations of transactions, speeding processing and reducing the risk encountered with manual confirms. "It is an overall program for a revamp of operations to make a giant leap forward in efficiency and risk reduction," said Stephen Andress, global head of OTC derivatives operations.
Also, the bank will use Mark-It Partners' RED Database for reference data to help in straight-through processing. The system ensures transactions have correct reference data, and matches automatically on the first try, said Andress.
At the same time, Commerzbank is implementing Scrittura's workflow management system, Workflow Manager, and document imaging tool, DocGenerator, to manage the processing of confirmations that are not matched automatically. With the reliance on the new applications, Commerzbank can allocate more resources to focus on complex deals that require manual intervention. Andress declined to quantify reductions in risk and cost resulting from the new systems or from participating in the matching services. There are no plans for head-count reductions, he noted.
Commerzbank is working to ensure the workflow management and document imaging systems are integrated seamlessly with other applications, including tools provided by Summit Systems and Murex. Scrittura was selected because it offers seamless integration with other applications from a shortlist of three vendors. The vendor's track record and OTC focus influenced the decision, said Andress.
The installation of the new applications is underway with the first phase due to be complete by year-end and the project complete in the second quarter.
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Citi Creams Global Custody Rankings
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PRNewswire reports that for the fifth year running, Citigroup ranks as the world's largest global custodian, charged with the safekeeping of nearly $4.2 trillion in cross-border assets, according to Institutional Investor magazine's annual international custody ranking. Citi outdistances its nearest rival, J.P. Morgan Chase & Co., by nearly $1.6 trillion. J.P. Morgan Chase repeats in second place with $2.6 trillion in global assets under custody, followed by Bank of New York, holding on to third with $2.4 trillion in global custody assets in its care.
THE TOP 5 GLOBAL CUSTODIANS ($ billions)
1- Citigroup $4,189
2- J.P. Morgan Chase & Co. 2,601
3- Bank of New York 2,400
4- State Street Corp. 2,100
5- BNP Paribas 1,875
Recent deal making by J.P. Morgan Chase and its rivals suggests that global custodians have moved beyond asset accumulation and are focusing on strategic transactions that bring in new products, services, technology and talent. J.P. Morgan Chase merged with Bank One Corp. in 2004, and London-based HSBC Bank (sixth in the Institutional Investor ranking, with $897 billion in global custody assets) purchased offshore fund administrator Bank of Bermuda. BoNY took a majority stake in London's Netik, which offers a specialized data warehouse for asset managers.
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OPERATIONS
Caymans cleanup will last weeks
Source: MARHedge
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Sep-14-2004 [UPDATED] - Caymans-domiciled hedge funds are likely to face at least some operational issues over the next few weeks as their administrators, accountants and attorneys clean up from the depredations of Hurricane Ivan.
Accounts of extensive damage to buildings, including water damage caused by the hurricane's tidal surge, and heavy rainfall pouring through roofs stripped off by the wind, began to emerge from the battered islands today, although both fixed-line and cellular phone service is sporadic, at best.
The powerful Category 5 storm was the strongest ever to hit the islands. The online news service Cayman Net News reported that water rose as high as 8 ft in some areas of the main island, Grand Cayman, and that many commercial and residential buildings were at least partially submerged. No deaths were reported.
Alan Ware, managing member of New York-based Pike Place Capital Management, which is setting up an offshore hedge fund domiciled in the Caymans, said he had not been able to reach either his offshore administrator or attorneys based there.
Calls made by MAR to several hedge funds, administrators and attorneys' offices on Grand Cayman were greeted with an "all circuits are busy" message as of midmorning Tuesday.
It remained equally difficult for firms with operations there to obtain first-hand accounts of damage to their facilities or operations.
Citco Group, which has a particularly strong presence in the Caymans, instituted its back-up and emergency recovery plan ahead of the storm, moving tapes off the island to ensure its data was safe. "Thankfully, we have not been notified of any casualties, but power and communications are still down and it is impossible to ascertain the full impact of Hurricane Ivan. We are in the process of gathering further information and executing our recovery plan," said a brief statement posted on its Web site.
The company is currently running investor relations out of its Bahamas office, and net asset value and similar accounting-related services from Curacao, Toronto, or Amsterdam, depending on client demands.
Andrew Weaver, an attorney with Ogier and LeMasurier, based in Jersey, in the Channel Islands, spoke to colleagues at Ogier and Boxalls by cell phone early Tuesday, though limited generator capabilities and reportedly dwindling fuel supplies prompted the calls be kept short to conserve battery power.
Electrical power, which was shut off Sunday evening ahead of Ivan's arrival, is being sporadically restored throughout the three islands, though mainly for essential emergency purposes.
"The whole place is pretty devastated from what we've been told by our guys on the ground," Weaver said. "We don't know at this stage when they'll be up and running, but we are working at reallocating work so far as necessary."
Weaver said he expects it will take "at least a few weeks" before the firm's systems are restored and reconnected to the network. "Longer term, however, I don't think we'll be impacted very much," he said.
The main airport was reopened for restricted operations, with an operational air traffic control tower, by 5 pm Monday, according to a government news release. Cayman Airways, the national carrier, canceled all flights through Wednesday.
Cayman is the world's largest offshore jurisdiction, with its 500 banks and trust companies holding deposits of more than $1 trillion; approximately 3,600 funds are domiciled there.
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Allianz Group Rolls Out System to Monitor Group-Wide Counterparty Credit Concentrations
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Software vendor Yolus Limited has deployed an Enterprise Risk Management system for Allianz Group to analyze counterparty credit concentrations across its insurance, asset management, banking and trading operations worldwide.
Built on Yolus' Enterprise Risk Management platform (Y-ERM), the system dubbed ARiES takes exposure data from across the Group to provide a consolidated view of credit exposures in a single system. Together with Yolus, Allianz began developing the system in Q4 2003 and has spent the last month in user acceptance testing with a number of its subsidiaries. "The system, which has been developed and refined with the strong support of risk professionals from across the Group, is a state of the art modular system with web based access underpinned by cutting edge credit and information technologies." says Raj Singh, Chief Risk Officer, Allianz Group. Raj Singh continues, "ARiES enables us to analyze Group-wide credit concentrations at the touch of a button. We have global visibility of our credit exposures and can alert the Group to counterparts at increased risk of default."
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DTC Says Goodbye to Paper
Source: Securities Industry News, Chris Kentouris
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While much of the U.S. industry chatter about reducing the number of certificates in circulation has focused on requiring electronic ownership of accounts, the Depository Trust Co. (DTC) is also doing it the old-fashioned way.
Starting in November, a shredding firm hired by the industry-owned settlement hub will destroy about 5,000 non-transferable certificates, involving some 1,000 issues, for which there are no shareholder record-keeping services. And that’s just the beginning.
In June, DTC won approval from the Securities and Exchange Commission to destroy all non-transferable certificates it holds for more than six years. More than a quarter of DTC's entire inventory of 1.2 million certificates is non-transferable. "This is the same as what you do at home when you clean out the closet and get rid of those old shirts you haven't worn in six years," argues Joe Clemente, asset services product manager for Depository Trust & Clearing Corp., DTC's parent. "Every now and then you have to do a clean up and get rid of the stuff that's just been sitting on the shelf taking up space."
DTC confirmed the certificates would be destroyed on its premises, with depository officials overseeing the process--a precautionary step that will make it less likely that a cancelled certificate will fall into the wrong hands and get passed off as genuine.
The SEC has encouraged the reduction--if not the complete elimination--of certificates as a means of reducing not only the costs and risk involved in post-trade clearance and settlement, but the storage of paper as well. Under a separate rule also adopted earlier this year, transfer agents are permitted to destroy certificates within three business days of their cancellation as long as they follow certain imaging and record-keeping guidelines.
Although DTC's customers often remove positions from their accounts, the actual certificates representing those positions remain in the depository's vaults. That means DTC assumes the risk and costs of storing and maintaining the certificates as well as monitoring the status of each issue. As of January, DTC will increase from $1 per issue to $5 per issue the monthly surcharge for keeping position records open on certificates that have been non-transferable for more than six years.
Once an issue is listed for destruction, DTC will "chill" all activity, including deliveries and deposits, on that issue. Participants concerned about the destruction of any of the certificates can withdraw the inventory ahead of time; DTC will publish a list of ID numbers 60 days before the announced destruction date. Finally, DTC will image and record each certificate that will be destroyed.
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MANAGERS, FUNDS & PENSIONS
Och-Ziff To Drop Distressed Fund
Source: Alternative Investment News
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Och-Ziff Capital Management Group is jettisoning its distressed fund. In a recent cryptic letter to investors obtained by AIN, firm founder Dan Och announced that the firm was separating itself from the Och Ziff Freidheim Credit Opportunities Fund. Steve Freidheim runs the fund.
The letter stated, "We are very supportive of Steve and his effort," leading to speculation that Freidheim will set up shop on his own. The separation from the credit fund will be effective Dec. 31, the letter says. The fund held $1.2 billion in assets in 2003, according to Alpha magazine's rankings of the top 100 hedge funds.
Freidheim is also the manager of the distressed allocation for the firm's flagship multi-strategy fund. In January, the fund had a 32% distressed allocation, and in a letter to investors, Och announced his intentions to reduce the slug. A subsequent letter in April revealed the allocation had been reduced to 20%.
Calls to Freidheim were not returned. Och was traveling and did not return messages left at his New York office. The letter referred inquiries to investor relations, but calls to investor relations officials J.K.Brown and Kevin Silva, were not returned.
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Mellon Ventures To Halt New VC Investments; No Plans To Wind Down
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Mellon Financial Corp. said, in a recent press release, that its venture capital subsidiary, Mellon Ventures LP, would not make new direct investments except in support of its existing portfolio.
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JP Morgan may spin off One Equity Partners
Source: AltAssets
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JP Morgan acquired Bank One for about $58bn in July this year and has been integrating many of both banks' operations. But the Bank One private equity business, One Equity Partners, has a different investment and management style and operates from a different New York building.
JP Morgan has already committed $700m to One Equity's $2bn fund. After that commitment is concluded, One Equity Partners may elect to raise a new independent investment vehicle and JP Morgan would invest in that fund, according to the Wall Street Journal. A future One Equity fund would seek to raise $2.5bn and JP Morgan is likely to invest about $500m, the newspaper said.
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RISK MANAGEMENT
Systemic risk, leverage on IMF issues list Funds flayed for failure to follow through on disclosure and reporting enhancements
Source: MARHedge
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Sep-15-2004 - Hedge fund managers controlling more than $2 billion should report risk information to national authorities to enable systemic risks to be better monitored, according to the International Monetary Fund.
In a section of its Global Financial Stability Report published today, looking at Structural Issues in Mature Markets, the IMF devoted more than 12 pages to developments and practices in hedge funds. Noting the industry's growth, the report said that "we still do not know what we do not know about hedge funds, and efforts to improve our surveillance and understanding of their market activities should be supported."
Acknowledging the challenges that a hedge fund monitoring program would confront, the IMF said that it could occur in two ways:
If many of the hedge funds with $2 billion or more in assets - a universe of around 70 hedge fund groups, based largely in New York and London, and accounting for around 40% of industry assets - reported risk information, "a substantial picture of the risk profile of hedge fund activity (by strategy and other criteria) would be available to better monitor systemic risks." The report said that "we found managers of some of the largest hedge funds willing to provide risk information to national authorities on a voluntary basis."
Second, and independently, major prime brokers and banks may be able to provide supervisors with sufficient disaggregated information to allow officials to obtain a more complete assessment of particular risk profiles, potentially at the level of particular hedge fund strategies and financial instruments.
While noting that "a supervisory structure already exists to monitor hedge fund exposure and activity," it conceded that "a reasonable level of cross-border cooperation would be required among financial supervisors. It is not clear that sufficient cooperation and coordination exists today."
Coincidentally released on the final day for comments on the US Securities and Exchange Commission's hedge fund regulation proposal, the report specifically excluded "issues concerning investor protection...or safeguards against fraud." However, in what appeared to be a directed comment, it did question "wholesale regulation of even institutional hedge fund activity," and "whether the appropriate resources will be applied."
The report focused on several broad and related themes: counterparty exposure, use of leverage, disclosure and transparency, market discipline and the impact of hedge funds on smaller and developing markets.
Leverage questions
The wider leverage issue was addressed in several areas. Noting the "relatively moderate use of leverage by hedge funds today," it cautioned that may rise. Among its concerns:
Some evidence exists that managers are increasing leverage to overcome diminishing returns in some strategies, in order to enhance or maintain historical performance.
Hedge fund and risk managers have noted that leverage has shifted to newer and riskier strategies.
Repeating a concern expressed by the UK's Financial Services Authority earlier this year, the IMF said that increased competition among prime brokers, particularly newer entrants, has made it easier for hedge funds to obtain leverage.
Despite recommended best practices, most hedge funds report only accounting leverage, instead of economic leverage, which would more accurately gauge how underlying market risks are affected by changes in asset prices.
Particular emphasis was placed on concerns at the use of leverage at both the fund-of-funds and investor levels. The layering "may significantly increase the potential for amplifying volatility and market disruptions," while leverage at the fund-of-funds level "only serves to amplify the risk of leveraged hedge fund activity."
Some retail and institutional investors are being offered leveraged equity interests in hedge funds and funds of funds, as well as a variety of structured products, including principal protected or capital guarantee products. "In short, these multiple layers of leverage increase the risk profile of these institutions and investors."
On the traditional concerns of disclosure and transparency, the IMF said that despite broad support for earlier recommendations to improve hedge fund disclosure, "follow-through has been less than enthusiastic." It cited the experience of the Multidisciplinary Working Group on Enhanced Disclosure, which "was unsuccessful in obtaining the cooperation of a sufficient number of hedge funds to provide a meaningful basis for further review."
The disclosure and transparency issues flow into concerns about market discipline, identified by previous studies as "the principal means by which risk-taking is controlled in a market-based economy. Industry participants expressed skepticism about the ability of investors and other market forces to exert material discipline on hedge funds. Most simply, market participants believe the strong demand from investors for hedge fund capacity and increasing competition among regulated counterparties may undermine these sources of market discipline."
That competition for hedge fund business among banks and brokers creates "potential for this [source] of discipline to disappoint." The report said that one significant issue is that "the regulated counterparties" see only the risks of the managers they service, and often not their entire portfolios.
"Banks and brokers generally receive much better transparency today, which helps to manage bilateral exposures, but not necessarily systemic risk. The largest hedge funds utilize multiple counterparties, and remain uncomfortable with broad transparency. In part, this may be justified, as many counterparties are also competitors through their proprietary trading desks. Likewise, there is a large variance in investor disclosure, and given the current strong demand for hedge fund investments we question investors' ability to impose market discipline.
"In short, the hedge fund industry has not embraced earlier recommendations to develop improved standards for disclosure and reporting."
The complete text of the Hedge Fund Industry: Developments and Practices section of the International Monetary Fund's Global Financial Stability Report, published Sep-15-2004, excluding tables and footnotes.
This extract comprises approximately 12 pages of the complete 238-page Global Financial Stability Report is available from the IMF website by selecting the link.
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