Finance 2004: Dancing with Regulations

Opinion: Bigger, faster, better, cheaper-or at least one step ahead of the feds. Those were the main themes for financial industry IT during 2004.

2004 will be remembered as a year of consolidation and reactions to regulations in the financial services industry.

Mergers and Acquisitions
This year featured quite a few mergers and acquisitions in the financial technology space—most welcome, such as Banc of America Securities purchase of Direct Access Financial in March, Bank of New Yorks buyout of trading technology firm Sonic Trading in April, and Citigroups takeover of Lava Trading in June. These three transactions were undertaken to give the trading departments of these major banks additional technology oomph as algorithmic trading moves to the forefront for institutional investors.

One major buyout attempt has been fought tooth and nail by the target, as has tracked the hostile takeover of PeopleSoft by rival Oracle all year long. As the year closes, it appears that Oracle has gotten the majority of PeopleSoft shareholders to agree to the buyout, but PeopleSoft management is not giving up easily.


Check 21 and Banking
American banks are assessing the potential impact of the Check Clearing Act for the 21st Century, which authorizes the creation of a new instrument, an IRD (image replacement document). An IRD is a substitute check that has been imaged from the original paper version presented to the clearing bank. It has the same legal status for proof of payment as an original check.

Check 21 was inspired by he terrorist attacks of 9/11 when tons of paper checks sat, uncleared, on grounded planes for days. The act has already prompted quite a few new products for banks, including digital imaging and storage solutions as well as beefed-up security. Banks that 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.

Banks themselves will end up footing the bill for all this technology, but they could reap the benefits of faster clearing of large checks. Large banks are reportedly jumping into the marketplace, since they want to accelerate collection of the big checks written out of state. They also want to cut their courier costs by avoiding shipping physical checks from point to point.


Phishing and Fraud
Attempts by fraudsters to convince people to give up account numbers and passwords were, unfortunately, successful enough that banks and other financial institutions have been forced to play defense. According to the Anti-Phishing Working Group, the number of unique phishing attacks rose from 116 in December 2003 to 1,422 in June—a 12-fold increase in six months. Moreover, these attacks are expensive; Gartner Research estimates that phishing schemes alone have cost banks $1.3 billion.


Securities Markets
Trading and investing are a key part of the financial industry. The regulators have been busy in this space this year, while self-regulated organizations (SROs) have been trying to stay a step ahead. SROs include the New York Stock Exchange Inc. (NYSE), American Stock Exchange Inc. (AMEX) and the National Association of Securities Dealers Inc. (NASD), 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 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.

Good news for IT providers to the exchange: The existing system will require significant changes and enhancements that will take some time to deliver. According to industry insiders, the push toward an expansion of Direct+ is being greeted with positive enthusiasm.

/zimages/1/28571.gifClick here to read more about the NYSE proposal.

Sarbanes-Oxley Compliance
SarbOx requires additional clear reporting on corporate activities, and has generated changes to accounting software and report generation. Companies that have public float, or publicly owned shares, exceeding $75 million and that have fiscal years ending on or after Nov. 15, 2004, must comply with internal control reporting and disclosure requirements per Section 404 of the Sarbanes-Oxley Act of 2002. Companies with less than $75 million in public float have until July 15, 2005, to comply with Section 404. For most administrators, Sarbanes-Oxley is ushering in a whole new era of IT.


The 10-Ton Gorilla Goes After Intuit
Recognizing the opportunities provided by SMBs (small and medium-size businesses), Microsoft took dead aim at Intuits domination of the small-business accounting market by announcing a new version of Microsoft Office aimed specifically at small-business managers. The new product, code-named Magellan, will ship in late 2005. Though the product hasnt been available yet for review, its having an effect on companies that are waiting to see what Magellan has to offer before switching over from their spreadsheet-based systems.

/zimages/1/28571.gifClick here to read more about Microsofts plans.

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