The communications and messaging requirements of hedge funds have been addressed in a variety of ways over the years. Some of them have been widely embraced, some have been haphazard at best. Often, individual service providers develop a solution that is available to their own clients, but lacks the universal standards that would make a difference to the industry as a whole. As the scrutiny on hedge funds’ operational risk becomes ever brighter, things look set to change, thanks to a provider that has already helped to revolutionise the way banks, and even mutual funds, communicate with each other.
SWIFT (the Society for Worldwide Interbank Financial Telecommunication) has been around since 1973, and was originally founded to help banks communicate with each other via a proprietary platform, weaning them off the Telex machine and on to an electronic standardised messaging system they could all participate in. SWIFT is now used by over 8,300 financial institutions in 200 plus countries. It is co-operatively owned, and it is constantly striving to improve the communications environment in which its users operate. Those users now include hedge funds’ administrators and prime brokers, and the curtain is being lifted on a menu of messages which will allow them, and their hedge fund clients, to benefit from SWIFT’s infrastructure.
Take up of SWIFT within the hedge fund market is being facilitated by recognition of its benefits within the banking sector. On the one side, banks play an important role as hedge fund custodians and, increasingly, are moving into the administration space via a series of high profile acquisitions. On the other side of the coin, banks provide funds with brokerage services and, indeed, private banks, long-term SWIFT users, are also important hedge fund clients. This has meant that there is already a high degree of recognition, within the alternative investments community, of SWIFT’s value and capabilities. “All these organisations are keen to increase their automation,” says David Hardman, Senior Account Director at SWIFT. “The asset side can see the benefits which SWIFT can bring to the community.”
Fill in the blanks
SWIFT works to develop standardised transaction messages on its network, a kind of ‘fill in the blanks’ communications solution that an industry sub-sector can easily implement. This lets literally tens of millions of messages circulate the globe every day, carrying transaction information between banks and other financial entities.
SWIFT has been working hard to bring its electronic messaging service to the fund management sector. Its solutions are now increasingly being employed in financial sectors outside vanilla banking transactions, including broker dealers, custodians, mutual fund complexes and, more recently, hedge fund managers.
The increasing involvement of SWIFT in the hedge funds space is part and parcel of the broad trend towards institutionalisation of hedge fund management, something that has led both to increased investment in the operational infrastructure of hedge funds firms, as well as the closer involvement of major banking names like JP Morgan, Citibank and Fortis in the provision of custody services. SWIFT is now seeking to provide its communication facilities to the hedge funds community, both as a back office solution and for middle office functionality such as trade confirmation.
SWIFT is often to be found in the middle of industry discussions on how to improve day-to-day operations and, predictably, is playing a big role in helping fund managers become MiFID-compliant via its new ISO 20022 messaging standard. It is also supporting the new messaging format on its network, providing investment firms with a secure channel to report their transaction activity to market regulators.
SWIFT is also working with hedge fund administrators to help them increase the speed and efficiency of their straight-through-processing (STP) models. It has already carried out similar work with traditional mutual fund managers and is now looking to adapt its solutions to include hedge fund back offices. “Hedge funds require extra pieces of data, on top of the usual anti-money laundering, risk eligibility, and benefit plan sponsor declarations,” says Bill Gourlay, Regional Head of Fund Markets at SWIFT. “Our messaging format is designed not just to capture subscription and redemption flows, but also to add significant value in other areas such as reporting and valuation.”
SWIFT’s SHARP project (Swift Hedge Fund Harmonisation Project) is intended to serve as the basis for a new and independent communications framework that will serve hedge funds both in terms of increased back office efficiencies and more rapid and effective trade confirmation.
Bin the fax
SWIFT has been working closely with hedge fund service providers to deliver messaging frameworks that will be of real use for hedge fund managers and their service providers. “The message we have received is an encouraging one,” says Gourlay. “It is important that we have the market practice guidelines in place that will help define the way data is going to be used.”
Part of this involves further reducing the paper flow in back office processing. The hedge funds industry is one of the few corners of the asset management industry where document scans and fax machines are still important parts of the transaction equation. That is about to change. With a more efficient electronic messaging system in place, firms will be able to reallocate staff to more client facing roles.
The initial scope of the SWIFT offering is the 11 messages on its network specifically for use by the hedge fund community. In particular, it aims to help fund administrators to automate cash flow reporting, so that they are no longer required to rely on bank portals. Cash reconciliations, arrangement of redemptions and payment of prime brokers should now require less manual intervention. It will also speed up communications between funds of funds and investors. “The majority of data flows between the custodians and private banks,” says Hardman. He says it is critical that, once the largest senders and receivers of messages in the hedge fund sector are on board, everyone else should join quickly. At the same time, users won’t need to wait for universal adoption: if two parties are SWIFT users, they will be able to make full use of the network, gaining the clear efficiency and risk benefits that this will bring.
“The global nature of this process means that there should be a global impact,” explains Hardman. He is acutely aware that, given the global diversity of the hedge fund industry, including the use by both managers and service providers of multiple offshore locations, a utility like SWIFT’s could quickly make a big difference. The co-operative has already been working with institutions in Dublin, Luxembourg and Switzerland, as well as further afield, like Japan and at the DTCC in the US.
Solutions still need to be found for the paper-based processes that still surround the initial account opening instructions required when an investor first makes a subscription into a fund. The widespread recognition of digital signatures remains an obstacle to a completely paperless hedge fund investment equation, but Gourlay and his colleagues are optimistic that is just around the corner. For fund managers themselves, various ‘middleware’ packages are already on the market from third party service providers which will allow hedge fund firms to make use of SWIFT messaging. In addition, SWIFT is developing its own ‘lite’ solution that will be available for hedge fund managers, particularly smaller outfits, to make use of. The pilot exercise for the specific hedge fund messages built for back office service providers is described as 95% complete, so funds should be starting to see the benefits in their live environments by the end of Q2 next year.
SWIFT is upbeat about the take-up of the messaging service: there are very few administrators that have not already signed up, as they recognise the competitive benefits it conveys. The current user group is estimated to cover over 80% of current hedge fund assets under administration globally and is getting bigger all the time. “We are seeing plenty of evidence that this industry is growing up and becoming more concerned about operational risk,” notes Gourlay. “Hedge fund managers leaving the investment banks want the freedom to concentrate on their investment processes, while their service providers are in the process of going to industrial sized solutions. What is needed is interoperable technology that suits the requirements of both sides. SWIFT has been working on a message set that should suit these.”
Gourlay sees the competition between service providers heating up in the current financial climate, with more emphasis on fees and service levels than ever before. Once administrators are using SWIFT regularly, there will soon emerge a sharp dividing line between those that can rely on its electronic messaging framework for operational credibility, and those who have chosen not to. SWIFT is encouraging administrators, even at this stage, to get involved with the development process.
Doing more for trade settlements
But SWIFT’s involvement with the hedge fund industry is also focusing on prime brokers. Here, the co-operative has been looking closely at the speed of trade settlement, currently T+3. Much of the information required to facilitate T+1 is already possessed by the parties to many of the trades executed on major markets. Can more be done, asks Jitu Parmar, Head of Broker/Dealers, Treasury and Derivatives, UK and Ireland at SWIFT?
“This is a natural space for the hedge fund industry to be looking at,” he comments. The SWIFT Alliance Lite connectivity solution, launched in September, will enable more hedge funds themselves to become direct beneficiaries of SWIFT’s inter-connectivity, not just that of their service providers. SWIFT is working with the prime broking community on an ongoing basis to see if its services can help brokers to enhance the portals they currently use to interface with hedge funds.
“The prime brokers are giving us the lead on what we should be doing here,” says Parmar. “There is an intense level of competitiveness between prime brokers, but at the same time, hedge funds don’t want to be using 10 different portals. The challenge has been getting broker-dealers to use the same market practice, and this requires the support of a lot of people, and the changing of many applications.”
You don’t achieve this kind of coordination overnight, but SWIFT is optimistic that with the deployment of tools that can help to engage hedge funds, progress will be made. Funds that are keen to make use of SWIFT for trade confirmations will need to engage their brokers to confirm that they are set up for SWIFT messaging. Parmar says knowledge of the efficiencies SWIFT can bring is energising some managers already, and he is finding them very ready to focus on the communications side of their trading activity, particularly trade matching and real time cash information. Although it is early days yet, SWIFT holds out the possibility for similar efficiencies in other areas of the broker relationship, for instance securities lending.
By the middle of next year, then, we should begin to see some material benefits for funds with service providers that are making active use of the SWIFT network. For the service providers themselves, it should bring a welcome additional level of security to their operations in uncertain times.
SWIFT (the Society for Worldwide Interbank Financial Telecommunication) has been around since 1973, and was originally founded to help banks communicate with each other via a proprietary platform, weaning them off the Telex machine and on to an electronic standardised messaging system they could all participate in. SWIFT is now used by over 8,300 financial institutions in 200 plus countries. It is co-operatively owned, and it is constantly striving to improve the communications environment in which its users operate. Those users now include hedge funds’ administrators and prime brokers, and the curtain is being lifted on a menu of messages which will allow them, and their hedge fund clients, to benefit from SWIFT’s infrastructure.
Take up of SWIFT within the hedge fund market is being facilitated by recognition of its benefits within the banking sector. On the one side, banks play an important role as hedge fund custodians and, increasingly, are moving into the administration space via a series of high profile acquisitions. On the other side of the coin, banks provide funds with brokerage services and, indeed, private banks, long-term SWIFT users, are also important hedge fund clients. This has meant that there is already a high degree of recognition, within the alternative investments community, of SWIFT’s value and capabilities. “All these organisations are keen to increase their automation,” says David Hardman, Senior Account Director at SWIFT. “The asset side can see the benefits which SWIFT can bring to the community.”
Fill in the blanks
SWIFT works to develop standardised transaction messages on its network, a kind of ‘fill in the blanks’ communications solution that an industry sub-sector can easily implement. This lets literally tens of millions of messages circulate the globe every day, carrying transaction information between banks and other financial entities.
SWIFT has been working hard to bring its electronic messaging service to the fund management sector. Its solutions are now increasingly being employed in financial sectors outside vanilla banking transactions, including broker dealers, custodians, mutual fund complexes and, more recently, hedge fund managers.
The increasing involvement of SWIFT in the hedge funds space is part and parcel of the broad trend towards institutionalisation of hedge fund management, something that has led both to increased investment in the operational infrastructure of hedge funds firms, as well as the closer involvement of major banking names like JP Morgan, Citibank and Fortis in the provision of custody services. SWIFT is now seeking to provide its communication facilities to the hedge funds community, both as a back office solution and for middle office functionality such as trade confirmation.
SWIFT is often to be found in the middle of industry discussions on how to improve day-to-day operations and, predictably, is playing a big role in helping fund managers become MiFID-compliant via its new ISO 20022 messaging standard. It is also supporting the new messaging format on its network, providing investment firms with a secure channel to report their transaction activity to market regulators.
SWIFT is also working with hedge fund administrators to help them increase the speed and efficiency of their straight-through-processing (STP) models. It has already carried out similar work with traditional mutual fund managers and is now looking to adapt its solutions to include hedge fund back offices. “Hedge funds require extra pieces of data, on top of the usual anti-money laundering, risk eligibility, and benefit plan sponsor declarations,” says Bill Gourlay, Regional Head of Fund Markets at SWIFT. “Our messaging format is designed not just to capture subscription and redemption flows, but also to add significant value in other areas such as reporting and valuation.”
SWIFT’s SHARP project (Swift Hedge Fund Harmonisation Project) is intended to serve as the basis for a new and independent communications framework that will serve hedge funds both in terms of increased back office efficiencies and more rapid and effective trade confirmation.
Bin the fax
SWIFT has been working closely with hedge fund service providers to deliver messaging frameworks that will be of real use for hedge fund managers and their service providers. “The message we have received is an encouraging one,” says Gourlay. “It is important that we have the market practice guidelines in place that will help define the way data is going to be used.”
Part of this involves further reducing the paper flow in back office processing. The hedge funds industry is one of the few corners of the asset management industry where document scans and fax machines are still important parts of the transaction equation. That is about to change. With a more efficient electronic messaging system in place, firms will be able to reallocate staff to more client facing roles.
The initial scope of the SWIFT offering is the 11 messages on its network specifically for use by the hedge fund community. In particular, it aims to help fund administrators to automate cash flow reporting, so that they are no longer required to rely on bank portals. Cash reconciliations, arrangement of redemptions and payment of prime brokers should now require less manual intervention. It will also speed up communications between funds of funds and investors. “The majority of data flows between the custodians and private banks,” says Hardman. He says it is critical that, once the largest senders and receivers of messages in the hedge fund sector are on board, everyone else should join quickly. At the same time, users won’t need to wait for universal adoption: if two parties are SWIFT users, they will be able to make full use of the network, gaining the clear efficiency and risk benefits that this will bring.
“The global nature of this process means that there should be a global impact,” explains Hardman. He is acutely aware that, given the global diversity of the hedge fund industry, including the use by both managers and service providers of multiple offshore locations, a utility like SWIFT’s could quickly make a big difference. The co-operative has already been working with institutions in Dublin, Luxembourg and Switzerland, as well as further afield, like Japan and at the DTCC in the US.
Solutions still need to be found for the paper-based processes that still surround the initial account opening instructions required when an investor first makes a subscription into a fund. The widespread recognition of digital signatures remains an obstacle to a completely paperless hedge fund investment equation, but Gourlay and his colleagues are optimistic that is just around the corner. For fund managers themselves, various ‘middleware’ packages are already on the market from third party service providers which will allow hedge fund firms to make use of SWIFT messaging. In addition, SWIFT is developing its own ‘lite’ solution that will be available for hedge fund managers, particularly smaller outfits, to make use of. The pilot exercise for the specific hedge fund messages built for back office service providers is described as 95% complete, so funds should be starting to see the benefits in their live environments by the end of Q2 next year.
SWIFT is upbeat about the take-up of the messaging service: there are very few administrators that have not already signed up, as they recognise the competitive benefits it conveys. The current user group is estimated to cover over 80% of current hedge fund assets under administration globally and is getting bigger all the time. “We are seeing plenty of evidence that this industry is growing up and becoming more concerned about operational risk,” notes Gourlay. “Hedge fund managers leaving the investment banks want the freedom to concentrate on their investment processes, while their service providers are in the process of going to industrial sized solutions. What is needed is interoperable technology that suits the requirements of both sides. SWIFT has been working on a message set that should suit these.”
Gourlay sees the competition between service providers heating up in the current financial climate, with more emphasis on fees and service levels than ever before. Once administrators are using SWIFT regularly, there will soon emerge a sharp dividing line between those that can rely on its electronic messaging framework for operational credibility, and those who have chosen not to. SWIFT is encouraging administrators, even at this stage, to get involved with the development process.
Doing more for trade settlements
But SWIFT’s involvement with the hedge fund industry is also focusing on prime brokers. Here, the co-operative has been looking closely at the speed of trade settlement, currently T+3. Much of the information required to facilitate T+1 is already possessed by the parties to many of the trades executed on major markets. Can more be done, asks Jitu Parmar, Head of Broker/Dealers, Treasury and Derivatives, UK and Ireland at SWIFT?
“This is a natural space for the hedge fund industry to be looking at,” he comments. The SWIFT Alliance Lite connectivity solution, launched in September, will enable more hedge funds themselves to become direct beneficiaries of SWIFT’s inter-connectivity, not just that of their service providers. SWIFT is working with the prime broking community on an ongoing basis to see if its services can help brokers to enhance the portals they currently use to interface with hedge funds.
“The prime brokers are giving us the lead on what we should be doing here,” says Parmar. “There is an intense level of competitiveness between prime brokers, but at the same time, hedge funds don’t want to be using 10 different portals. The challenge has been getting broker-dealers to use the same market practice, and this requires the support of a lot of people, and the changing of many applications.”
You don’t achieve this kind of coordination overnight, but SWIFT is optimistic that with the deployment of tools that can help to engage hedge funds, progress will be made. Funds that are keen to make use of SWIFT for trade confirmations will need to engage their brokers to confirm that they are set up for SWIFT messaging. Parmar says knowledge of the efficiencies SWIFT can bring is energising some managers already, and he is finding them very ready to focus on the communications side of their trading activity, particularly trade matching and real time cash information. Although it is early days yet, SWIFT holds out the possibility for similar efficiencies in other areas of the broker relationship, for instance securities lending.
By the middle of next year, then, we should begin to see some material benefits for funds with service providers that are making active use of the SWIFT network. For the service providers themselves, it should bring a welcome additional level of security to their operations in uncertain times.
