Data Management Infrastructure Changes in Financial Institutions

By David K Donovan Jr SEC Sapient
Broker Dealer Financial institutions are in a state of radical change and have not gone through this type of transformation to their business models since inception of their business. Having the right data management strategy and infrastructure is critical to success for institutions who want to compete in the changing operation paradigm while continuing to manage operational risk and generating alpha (for the buy side).
Some of the issues that financial institutions are facing today:

1. European and U.S. regulators still have to come together and agree on the right set of rules to govern the trading of over-the-counter (OTC) derivatives.
2. Exchange Traded Markets ( ETD) need to examine high frequency trading ( HFT ) and decide whether to vote on additional regulatory and legislative governance.
3. All parties in the capital markets life cycle are demanding greater transparency into financial and operating risk models and procedures.
4. Reduced operating budgets with steady pressure to manage constantly changing operational risk management and regulatory compliance requirements.
5. The European debt crisis has led to many changes within the banking industry. Central banks regulators are mandating frequent , efficient and granular transaction reporting.

Data Management Infrastructure is critical to the new operating paradigm
Data management is becoming one of the most important initiatives to financial institutions commercial success. Most firms will not slash budgets but will get more out of existing budgets by lowering the total cost of ownership or TCO. Financial services firms will look to lower TCO by outsourcing commoditized operations and processes. Banks will look to identify within their infrastructure what components or businesses can be outsourced to a shared model possibly leveraging competitors infrastructure. The self analysis will also focus on what part of their infrastructure is proprietary to their business and keep this in house. Banks will look to become more nimble so they can better manage ongoing change to their business. How you manage data, be it yours or third party provided is going to be critical to address the future state of activities and change in the operating paradigm.
What is driving this need for the right data management infrastructure among the issues listed above are the changes in the operating model including
- Electronic trading moving to new asset classes and regions
- Broker dealers requirements for low latency connections to as many execution venue’s as possible while minimizing hardware and operational costs.
- The new central clearing and OTC derivatives market structure will put increasing rise in demand for new sources of cleansed data.
Alpha Creation and need for data management strategy
The right data management strategy and infrastructure will also play a factor in performance attribution and Alpha creation. Pension funds will target more of their annual contributions to hedge funds as a greater source of investment in hope of making up the gap between benefits owed to pension participants vs. the total of pension contributions and returns on existing assets. The key to hedge funds generating Alpha is their ability to take large sets of disparate data and finding investment opportunity. Part of this strategy includes speed and latency measurement. Hedge funds have and edge when they can crunch data faster which leads to identifying trading opportunities faster than their competitors.
Summary
In summary broker dealers need to deliver differentiated services at a lower TCO. Asset managers are looking for unique and creative forms of Alpha generation while managing operational risk. Financial firms regardless of strategy will need to have an operating model and infrastructure that can be agile and react to continuous and unexpected change. Re thinking your data management operating model is a critical part of your success.

David K Donovan Jr SEC is Vice President & Managing Director of Sapient Global Markets, a business and technology services provider to the capital and commodity markets. Previously, David K. Donovan Jr was the Sector Leader, Technology Group, at Fidelity Management & Research (FMR). The preeminent trader at FMR, his vision and grasp of the intricacies of the global market enabled him to make key decisions across Fidelity’s major funds. Disclaimer: The views and opinions expressed here do not necessarily reflect the views and opinions of Sapient Global Markets or any other company.

http://davidkdonovan.net/boston-capital-markets-blog/david-k-donovan-jr-sec-capital-markets-in-a-state-of/

David K Donovan Fidelity SEC - Radical Changes in Financial Services

According to David K Donovan  Jr  SEC financial institutions are in a state of radical change and have not gone through this type of transformation to their business models since inception of their business. Some of the issues that financial institutions are facing today:
-  European and U.S. regulators still have to come together and agree on the right set of rules to govern the trading of over-the-counter  (OTC) derivatives.
   -  ( ETD) Exchange traded markets need to examine high frequency trading ( HFT ) and decide whether to vote on additional regulatory and legislative governance.
  -   Data management is becoming one of the most important initiatives to financial institutions commercial success. All parties in the capital markets life cycle are demanding greater transparency into financial and operating risk models and procedures.
  - Most firms will not slash budgets but will get more out of existing budgets by lowering the total cost of ownership or TCO.
 -  Every firm will look to lower TCO by outsourcing commoditized operations and processes. Banks will look to identify within their infrastructure what components or businesses can be outsourced to a shared model possibly leveraging competitors infrastructure. The self analysis will also focus on what part of their infrastructure is proprietary to their business and keep this in house.
-  Banks will look to become more nimble so they can better manage ongoing change to their business. A couple examples of the future state activities would be ;
         -  Electronic trading moving to new asset classes and regions
         -  Broker dealers wanting as many low latency connections to as many execution venue’s as possible while minimizing hardware and operational costs.
-  The most common initiative across most banks is the need to invest in data management infrastructure. Having a more efficient data management operation is being driven by the need for increasing operational risk management and regulatory compliance.David K Donovan Jr Sec
-  The European debt crisis has led to many changes within the banking industry. Central banks regulators are mandating frequent , efficient and granular transaction reporting. The new central clearing and OTC derivatives market structure will put increasing rise in demand for new sources of cleansed data.
-  Data will also play a factor in performance attribution and Alpha creation. Pension funds will target more of their annual contributions to hedge funds as a greater source of investment in hope of making up the gap between benefits owed to pension participants vs. the total of pension contributions and returns on existing assets.

-  The key to hedge funds generating Alpha is their ability to take large sets of disparate data and finding investment opportunity. Part of this strategy includes speed and latency measurement. Hedge funds have and edge when they can crunch data faster which leads to identifying trading opportunities faster than their competitors. David K Donovan Jr SEC

Conclusion 
In summery broker dealers need to deliver differentiated services at a lower TCO. Asset managers are looking for unique and creative forms of Alpha generation while managing operational risk. Financial firms regardless of strategy will need to have an operating model and infrastructure that can be agile and react to continuous and unexpected change.Re thinking your data infrastructure is a critical part of your success. David K Donovan Jr SEC

http://www.davidkdonovansec.com
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Tabb Forum Interview - June 13th

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AIG Bonds Once considered Junk are on the rise again

Wall Street is back in the hunt for higher yields in a low interest environment as it teams up to go after deals considered ‘sick’ two years back.
SOURCE: Wall Street Journal
DATE: APRIL 26th, 2012
ARTICLE BY: MATT PHILLIPS AND AL YOON
Yields continues and with the right risk management plan and strategy and product availability, the game is on.
Two bundles of bonds that once helped sicken American International Group Inc. AIG -1.25% now have Wall Street salivating.

 Two bundles of bonds that once helped sicken AIG now have Wall Street salivating.

Some of the biggest banks are teaming up to jockey for the securities, which may be sold in coming days by the Federal Reserve Bank of New York. The banks would then sell the bonds off to clients such as money managers, hedge funds and insurance companies.

With the Thursday morning bidding deadline looming, Credit Suisse AG, CSGN.VX -1.67% Goldman Sachs Group Inc. GS +0.66%and Citigroup Inc. C -1.37% have joined forces in recent days, as have Bank of America Corp., BAC -1.88% Morgan Stanley MS +1.95% and Nomura Holdings Inc. 8604.TO -1.79% Two firms that have already have interests tied to securities, Barclays BARC.LN -2.17% PLC and the original underwriter, Deutsche Bank AG, DBK.XE -1.88% are planning on bidding together as well.

http://davidkdonovan.net/boston-capital-markets-blog/investors-teaming-up-for-those-sick-aig-bonds-again-david-k-donovan-jr/

David K. Donovan Jr - Structured Products Offer alternatives in low yield environment

Structured Products Offer Compelling Opportunities in Turbulent, Low Yield Market - David K Donovan Jr

By David K Donovan Jr.
http://www.davidkdonovan.net
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Federal Reserve Chairman Ben Bernanke recently said the U.S. central bank would spare no effort to boost weak growth and lower unemployment.  Almost three years ago, the Fed cut its benchmark rates to near zero to pull the economy out of a sharp recession, and on August 9, 2011, it eased monetary policy further by expanding its earlier promise to hold rates at rock-bottom levels for an extended period, at least through mid-2013.

While these recent Fed decisions help maintain the housing industry, they also present an opportunity.  Despite today’s low-yield environment, individual and institutional investors continue to want higher returns as they balance risk versus reward, with more yield compensating them for taking on more risk. 

In today’s turbulent, low yield market, structured products or market-linked investments are becoming increasingly more attractive to both retail and institutional investors because they provide a compelling means of enhancing and broadening investment portfolios.  Structured products are investments that include a derivative-linked payout backed by the issuer’s credit.  Different forms include structured notes and certificates of deposit (CDs).  They are distinctly different from asset-backed securities (ABS) and mortgage-backed securities (MBS), which are investments funded by a pool of loans.  Because ABS/MBS are called “structured finance,” “structured credit” or “securitization,” the similar names can often cause confusion.

Traditionally, structured products have been more popular in Europe and Asia.  However, we expect their popularity to increase in the U.S. because of three factors: today’s historically low global interest rates; institutional investors “hunting for yield”; and an available feature of built-in principal protection, which creates an attractive investment for the retail sector. 

In fact, according to a report in Investment News, $30 billion in structured products were sold in the U.S. in the first half of 2011 as compared to $53 billion in all of 2010 and $33 billion in all of 2007 – which was considered a good year for the just burgeoning structured products marketplace.

Fueling this growth is the ability of structured products to offer customized exposure to the market and meet specific investor needs that can’t be met by standardized market instruments.  As such, they can be used as an alternative to direct investments in equities in the S&P 500, mutual funds, exchange-traded funds (ETFs) or market indices like the Morgan Stanley Emerging Markets Index and as an asset allocation strategy to reduce the overall risk exposure of a portfolio.  They are frequently offered as SEC-registered products, which make them accessible to investors just like stocks, bonds, mutual funds and ETFs and are a useful complement to those better-known products as part of a diversified portfolio.  However, unlike mutual funds, ETFs and hedge funds, structured products are created and offered continuously, with specific maturity dates that can be personalized to meet a variety of investment objectives.

The two general types of structured products that are both principal protected and at the same time participate in some other market via derivatives are market-linked CDs, which are bank accounts that pay a derivative coupon, and structured notes, which are bonds that pay a derivative coupon.  In the latter group includes a wide variety of structured products, such as equity-, interest rate- and FX and commodity-linked single name notes, baskets and hybrid blends.  Market-linked CDs are fully protected by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per instrument, while structured notes are guaranteed by the issuer, which includes many of the world’s leading financial institutions.

A Guaranteed Return with Reduced Volatility

Investors are attracted to structured products because they can offer protection against market losses while offering higher yields, access to specialized asset classes and tax advantages.  The full FDIC protection of market-linked CDs also makes them a very attractive principal-protected investment.  Structured products are designed so they can never lose the value of the initial investment, with the upside that if the market goes up, they generate greater returns, and if the market goes down, investors still receive all of their initial investment.  In other words, they guarantee a return of at least 100% of the original investment and have the potential to return much more – while ensuring reduced volatility or risk.

Specifically, principal protection guarantees the investor protection of principal if the note is held to maturity.  For example, if an investor invests $1,000 in a structured note with a face value of $1,000 with a five-year maturity, the note actually consists of two components – a risk-free bond that will generate sufficient interest to grow to $1,000 over the five-year period and a derivative.  With the money left over after purchasing the bond at its original issue discount to face value, the issuer can purchase another product that will match the investment strategy.  This may be swaps, options or another type of derivative.

At maturity, the investor gets back $1,000 no matter what happens to the underlying asset.  If the underlying value of the derivative asset is higher on the date of maturity than when it was issued, then the investor also gains that higher return on a nearly one-to-one basis.  If it is not, then the investor only receives the original principal-protected $1,000.

Mutual fund companies are increasingly looking at structured products as long-term investments that can boost their firm’s offerings to their customers.  They can link a structured product to one of their flagship funds, for example, giving them another, new type of product that would increase their asset base.

Structured products can bring many of the benefits of derivatives to investors that would otherwise not have access to them as part of their investment portfolios.  However, with all investment products, it is vital that there is transparency so that more investors have access to sophisticated strategies like structured products in a safe and rational way.  Our mandate as an industry is to make sophisticated products and investment strategies simple, accessible and understandable to all investors by driving down the barriers to entry through technology and the promotion of standards. 

-----

David K. Donovan Jr is Vice President & Managing Director of Sapient Global Markets, a business and technology services provider to the capital and commodity markets.  Previously, David Donovan was the Sector Leader, Technology Group, at Fidelity Management & Research (FMR).  The preeminent trader at FMR, his vision and grasp of the intricacies of the global market enabled him to make key decisions across Fidelity’s major funds. Disclaimer: The views and opinions expressed here do not necessarily reflect the views and opinions of Sapient Global Markets or any other company.  www.davidkdonovan.com

Other interesting links:
http://davidkdonovan.net/boston-capital-markets-blog/demand-for-european-residential-securitized-products-coming-back-financial-times/

David K. Donovan Jr and David R. Hinkle - SEC Case

David K. Donovan Jr is a thought leader in financial services working with Sapient.

The Securities and Exchange Commission ("Commission") today  in Boston against David K. Donovan, Jr. ("Donovan"), a former equity trader at Fidelity Investments, and David R. Hinkle ("Hinkle"), a former broker at Capital Institutional Services, Inc. ("Capital Institutional Services"), for defrauding Fidelity and its advisory clients. The complaint alleges that, between July and September 2003, the defendants defrauded Fidelity and its advisory clients by gaining access to confidential trading information stored on Fidelity's internal order database, by learning that Fidelity's advisory clients, including the Fidelity mutual funds, were purchasing and intended to continue purchasing a substantial amount of the common stock of Covad Communications Group, Inc. ("Covad"), by using that confidential information concerning Fidelity's pending securities orders to trade on and ahead of Fidelity's securities orders for the stock of Covad, by failing to disclose to Fidelity and its clients that they were trading on and ahead of those orders, and by profiting thereby.

U.S. SECURITIES AND EXCHANGE COMMISSION

 No. 20528 / April 16, 2008

Securities and Exchange Commission v. David K. Donovan, Jr. and David R. Hinkle, Civil Action No. 08-CA-10649-RWZ (D.Mass. April 16, 2008)

According to the Commission's complaint, Donovan accessed Fidelity's internal order database on approximately 107 occasions and obtained confidential information that Fidelity was purchasing and intended to continue purchasing for its advisory clients a substantial amount of Covad common stock. The complaint further alleges that Donovan requested authorization from Fidelity to trade Covad stock in his personal account during the same period, and was denied. According to the complaint, during the above-mentioned period, Donovan viewed Fidelity's pending Covad orders using the internal order database, communicated with Hinkle, disclosed confidential trading information of Fidelity and its advisory clients, and, shortly thereafter, Hinkle purchased the stock. In addition, the Commission's complaint alleges that after viewing Fidelity's orders and being denied permission to buy Covad stock, Donovan caused purchases of the stock to be made in the account of his mother, who is a resident of Marblehead, Massachusetts. According to the complaint, profits accrued to both Hinkle and Donovan's mother's account when they sold out positions in Covad in the weeks following the purchases.
The Commission's complaint alleges that Donovan and Hinkle violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The Commission's complaint seeks permanent injunctive relief, disgorgement with prejudgment interest, and civil penalties.
For further information, please see Litigation Release Nos. 19930 (December 1, 2006) and 19983 (January 29, 2007).


The case of 

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David K. Donovan, Jr SEC Cleared

The SEC Motion for reconsideration has been denied.

David K Donovan Jr, A Boston Resident.