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The CEOs of companies that supply financial systems and software ought to add a long list of bureaucrats to their holiday thank-you list. Those who serve the banking industry ought to be especially grateful.
Thanks to regulations that went into effect in 2004, such as the Check Clearing Act of the 21st Century (Check 21) and Sarbanes-Oxley, companies such as Unisys, Oracle, Microsoft and IBM were able to add to their bottom lines.
Many financial IT suppliers hit a slump once companies had solved their Y2K issues, but busy bureaucrats have given them numerous reasons to smile.
Check 21—inspired by the terrorist attacks of 9/11 when tons of paper checks sat, uncleared, on grounded planes for days—has generated quite a few new products for banks, including digital imaging and storage solutions as well as beefed-up security.
The act allows banks to exchange files called IRDs (image replacement documents) rather than physical checks, in order to transfer the represented funds from one account to another. Banks who return IRDs to their customers have to come up with ways to reassure their customers that the process is secure and their money is safe.
Systems suppliers are urging banks to install new hardware and software that will help them not only meet the challenges proposed by Check 21, but also get a leg up on their competition.
Bob Hunt, senior research analyst at the Tower Group, said in a Webcast produced by Unisys that 40 percent of banks still dont have a plan in place for Check 21. With physical check volume declining, and the payment services revenue that goes along with check processing dropping as well, banks that are avoiding this issue stand to lose a chunk of their profits.
Hunt estimates that as much as 40 percent of a banks revenue is contributed by payment services, including check clearing, and comprises 30 percent of its cost base. He also notes that many banks have had some of the technologies in place, such as image archiving and transport, that fulfill the requirements of Check 21, though they may not be exploiting them in a way to improve the bottom line.
Most regulations are put on the books in response to abusive practices. Thanks to innovative (read: illegal) accounting at firms such as Enron and WorldCom, which cost shareholders billions, the set of regulations commonly called Sarbanes-Oxley (or Sarb-Ox) were written. Sarb-Ox, however, requires reports and assessments, but not a secure IT infrastructure.
John De Santis, CEO and president of Sygate, a security solutions provider, has said that section 404 of the act, which mandates certification of internal controls, requires companies to perform a self-assessment of risks for business processes that affect financial reporting. He is concerned that systems that lack the appropriate level of security could land corporate executives in the clink.
De Santis says ensuring network integrity requires much more than reports and assessments, which is as far as Sarbanes-Oxley goes. It requires an infrastructure that supports enforceable policies and best practices to ensure compliance, an infrastructure with much deeper guidelines, and better, clearer definitions of “best practice” for specific industries such as banking and insurance. This is something else for corporations to spend money on, thanks to regulatory action.
Next Page: Trading and investing.
Trading and Investing
Trading and investing are a key part of the financial industry. The regulators have been busy in this space this year, while SROs (self-regulated organizations) have been trying to stay a step ahead.
SROs include the NYSE (New York Stock Exchange), AMEX (American Stock Exchange) and the NASD (National Association of Securities Dealers), which monitors the trading activity in Nasdaq markets.
The NYSE has proposed expanding its “hybrid market,” which combines an electronic exchange such as that provided by Nasdaq with its traditional auction model.
A recent filing with the SEC (Securities and Exchange Commission) details the rules governing automatic-execution orders, sweeps of the limit-order book, specialist and broker interest files and algorithms, and other features of the hybrid market such as “liquidity replenishment points”–the points at which the auction will have an opportunity to supply liquidity to dampen volatility.
Also included are multiple, specific examples on how orders will be handled under various trading scenarios.
The existing system will require significant changes and enhancements that will take some time to deliver, which is good news for IT providers to the exchange. According to industry insiders, the push toward an expansion of Direct+ is being greeted with much enthusiasm.
Those who create regulations are still hard at work, coming up with more rules that will benefit the financial IT industry.
Accounting software suppliers will be making some as-yet-undefined changes to their programs to comply with a recent decision made by the FASB (Financial Accounting Standards Board).
Public companies are being asked to start expensing options beginning with their first fiscal reporting period after June 15, 2005. Private companies and companies that file as small business issuers are not required to comply until after Dec. 15, 2005.
The new rules, according to the FASB, are intended to provide investors and other users of financial statements with more complete and unbiased financial information. Critics of the proposal say the rules are difficult to interpret and will hurt tech firms that use stock options as a key component of employee remuneration.
Accounting software publishers need to stay on top of the progress of this ruling so they can figure out how (or whether) to rewrite their code to give their customers the necessary tools.
What gift will the industry get next from legislators and regulators? Stay tuned.