Good news for technology vendors. According to a new Datamonitor report, overall investment in IT by European financial markets currently stands at US$21.1bn and spend is set to increase.
The report, ‘European Financial Markets Technology Strategies, 2001 – 2004,’ says that in a bid to reduce costly trade failure rates, increase transaction efficiencies with third parties and to comply with forthcoming Basel II regulations, European financial markets are being driven to invest in straight through processing (STP) and risk management technologies. This presents lucrative revenues opportunities for technology vendors, particularly within the asset management line of business.
Investment in STP and risk management technologies will grow at 16% and 10% a year respectively, between 2001 and 2004.
Given the acute cost and efficiency focus of European financial markets (capital markets, investment banking, corporate banking, asset management, market infrastructure/exchanges) at present, STP investment will help institutions generate the financial benefits associated with reduced manual intervention, increased levels of systems integration and faster interaction with third-parties
According to Datamonitor, investment in STP and risk management technologies will grow at 16% and 10% a year respectively between 2001 and 2004. In monetary terms, investment by European financial markets in STP technologies will grow from US$1.5bn in 2002 to over US$1.9bn in 2004. Meanwhile investment in risk management technologies will grow from US$533m in 2002 to US$728m by 2004.
The recent raft of risk-related corporate scandals including the massive trading losses at Allfirst, coupled with the growing appetite for credit rating agencies to downgrade corporate ratings in addition to proposed revisions to the Basel Capital Accord have escalated the importance of risk management. At the same time, the need to reduce trade failure rates and increase transaction efficiencies with third parties as the adoption of virtual matching utilities grows nearer, institutions will look towards increasing intra- inter-party STP efficiencies, said Ravi Chauhan, Datamonitor technology analyst.
The asset management line of business present the biggest opportunity despite the ongoing malaise
Unlike capital markets and investment banking, the European asset management line of business will still present technology vendors with a significant opportunity, as the need to increase automation with custodians, broker / dealers and third-party increases. The fall in equities markets coupled with recent investigations in the retail and institutional asset management sectors has heightened the focus on performance necessitating increased investment in front office support and analytical technologies.
Currently accounting for 16% share (US$3.5bn) of total European financial market spend on IT, investment in asset management technologies will grow at a compound annual growth rate of 5.5% to reach $3.9b by 2004 at which point macro conditions will have improved markedly.
Although 2002 will still see nominal spend directed towards the internal IT function as institutions continue to pare back discretionary spending as part of the drive to generate internal operational efficiencies and remove costs, the focus will revert to external vendors in late 2003, particularly those playing into the STP and risk management areas in the medium-term, as regulatory obligations draw nearer and as corporate profits strengthen.