Issue 54, November 2007
All the World’s a Stage
Globalization in financial market activities is not a new phenomenon. Significant capital flows between countries have existed for hundreds of years in support of trade financing. The difference today however, is the number of participating economies and financial systems as well as the types and sources of capital flows.
Since the 1970’s, globalization in financial markets has gained significant momentum, continuing to date with few interruptions despite events such as the Argentine crisis in the 1990’s. This period has also witnessed significant changes in the types of capital flows in use, from long-term, debt-related instruments to equity-related capital flows to a significant increase in investment activity from international mutual funds and pension funds seeking diversification.
According to World Bank studies, the primary catalyst for the growth in global markets has been the deregulation of financial markets within individual countries. Developing countries have abandoned restrictive regulations such as credit limits or cross-border capital transfer and allowed financial organizations to participate in or launch businesses that were previously prohibited. Examples include securities, insurance, and asset management businesses.
This trend has enabled investors to enter these new markets, diversify risk, and experience enhanced returns. As a result, institutions and individuals from developed countries are buying shares of international mutual funds (including global, regional, and country funds) as well as depositary receipts, cross-listed shares of international companies, and international corporate and sovereign bonds in international capital markets. The expansion of capital flows to developing countries has significant benefits:
- An overall financial impact including greater economic stabilization
- Better business environments with standards in accounting and practices
- Increasing availability of qualified, educated, and trained human resources
- Increasing transparency in corporate oversight
However, increased exposure to world markets has also resulted in the smaller local stock markets shrinking or disappearing as trading moves from domestic markets to major global stock exchanges.
The Impact of Technology
Certainly, government liberalization, deregulation, the increased sophistication of investors and a maturing of developing countries have all led to the globalization of asset management. In addition, advances in information technology have enabled and fueled growth. Today’s financial organizations have greater access to and control over their overseas investments due to:
- Removal of distance as a barrier to investing in global markets
- Exponential increases in processing power and speed
- Availability of collaboration and communication capabilities such as the Internet, email, video, and robust financial software
- Standardization of communication protocols between financial institutions
This combination of business, infrastructure, and technological advances provides a growing capability for organizations and individuals to access and use international financial institutions. As a result, there is a continuing evolution, consolidation, and restructuring of the global financial services industry. The outcome is demonstrated by the growth of global banks and international corporations that provide diverse financial products and services in multiple markets and countries.
Challenges Firms Face
All of these factors have attracted asset management firms to venture into these new markets and regions to expand their client base or diversify their portfolios to access higher return potential. While the business team is actively investing, the operations and technology teams are aggressively focused on building the knowledge, hiring the resources, modifying the processes, and adjusting their systems and architecture to support the investment and trading teams.
Based on CutterResearch™ survey results, members face major challenges in supporting investment activity in global markets. These issues are exacerbated in very large organizations, especially those that are geographically dispersed. In answer to our question on the top three challenges faced in the global environment, members cited the following challenges:
- Data integration and sharing
- Pace of change in markets
- Finding and retaining skilled people
Top Five Challenges: All Firms
Application integration was the fourth most mentioned challenge and data integration was the fifth. Combined, it is apparent that integration in all its forms continues to be difficult for CutterResearch members. Building a partnership between IT and the business was also a major concern.
Below are highlights and Cutter insight from six months of research on member firms’ efforts, successes, and difficulties in this area.
- Firms are continually adjusting their organizational structure to compensate for changing business and market dynamics. However, there is no utopian organizational model that is transferable across firms, only best practices.
- Aligning operations and IT to closely parallel the business is critical to corporate success and ensures the entire organization remains synchronized and focused on corporate objectives.
- Determining what functional activities reside in which locations is an art, not a science, and is frequently influenced by corporate culture.
- Respect cultural differences; one size does not fit all.
- Firms with staff and clients located around the world are implementing new technology tools to support communication and collaborative working practices, but face-to-face meetings are the preferred method to forge strong relationships.
- The primary driver for launching regional business offices is having local clients; whether required by local regulations or by client expectations. Language and cultural differences frequently dictate the need for local staff. Their training requires an investment in time, effort, and travel.
- The off-shoring and outsourcing trend continues, concentrating on efforts to find talented resources to fulfill specific activities as well as reduce labor costs.
- Developing strong and well-documented policies, communication structures, and standards facilitates future expansion and enables teams to dynamically respond to new business needs.
- Increasing concern over the protection of personal data has governments worldwide enacting legislation to control access to and electronic movement of client information.
CutterResearch will provide further insights and member perspectives on these issues at our upcoming Technology Council™ and Technology Forum™ meetings in London and in New York.
|Supporting Investment Management in a Global Environment|
| London:||November 15, 2007|
| New York:||November 28, 2007|