Custodians to Drive Automation in the Quest for Control and Efficiency
Lee C. Adams
Executive Director, J.P. Morgan Global Custody Services

At the risk of stating the obvious, the market conditions we have faced over the past 12 months have been unprecedented, and one needs to look hard for any positives to have come out of this period. One positive result is that global custodians are, again, leading the charge in the drive for automation.

The case for automation is simple and compelling:

• Automation is a (arguably the) fundamental driver for control and efficiency.
• Control equals risk mitigation.
• Efficiency equals improved margin. A simple hypothesis, but it is a useful starting point from which to examine automation as a catalyst for significant change.

Funds Automation
Investing in funds lacks the automation and standardisation that have evolved over time in the equities settlement space, but now there are real opportunities for global automation of funds orders. The industry adoption of SWIFTNet (ISO 20022) messages, the overhaul to settlement practises in the U.K. funds market, the opening up of the NSCC charter to non-U.S. institutions and the automation offered by funds platforms are all aligning to create a global framework for automation throughout the funds order life cycle. This extends into the hedge fund sector, where the SWIFT Sharp initiative is central to the industry’s drive for automation.

With these core components in place, J.P. Morgan is leveraging them to deliver end-to-end automation and control. This dramatically increases efficiency and reduces risk for mutual funds and hedge funds, from order placement through confirmation, settlement and asset servicing.

This removes the dependency on fax-based communication that is still widespread in the fund processing life cycle.

Zero Tolerance for Faxes
As an industry, we have been trying to remove faxes from the trade life cycle ever since they were introduced, but they are remarkably resilient. You can remove them from one part of the processing chain, client segment or region and they pop up somewhere else.

The importance of removing faxes was once again brought into sharp relief last year with the collapse of Lehman. To react quickly to seismic movements in the market, it is imperative that automated methods of communication be employed, facilitating electronic receipt, monitoring, transmission and management.

To rid ourselves of faxes we need to understand why they are still being used, given that the risk and cost of using them is self-evident. Following is the supposed case for the defence of faxes (together with the case against in italics):

1. Faxes are flexible (e.g., if an instruction does not fit a standard template, a fax can be used to cover the nuances). This increases the potential of an instruction being misinterpreted.
2. Faxes can be easily routed to a specific address (pointing at a fax machine on a desk). Instructions should be centralised in a secure, controlled environment.
3. Faxes are a cheap form of STP. Autofax capability enables the sender to create the illusion of STP by adding manual processing by the fax receiver.

At J.P. Morgan, we are committed to secure, electronic communications between all participants, zealous in our drive to remove faxes by:

• Proactive adoption of market standards which promote STP, and using appropriate tools such as SWIFT STaQS to monitor and optimise STP levels.
• Providing a wide range of options for STP to our clients, including our Web-based banking platform (J.P. Morgan ACCESSSM) and comprehensive SWIFT support (including SWIFT Lite to provide online SWIFT messaging for low-volume users).
• Working in partnership with clients to facilitate the conversion to appropriate electronic methods.

With the options of proprietary and SWIFT-provided platforms readily available, it is difficult to imagine framing an argument for the continued use of faxed trade instructions. The goal of zero tolerance for faxes is a tall order, but the risk associated with fax processing should make them unacceptable in any transaction processing environment. The focus must be on properly implementing the wide range of options that now exist, to the point where ”zero fax” is a statistic rather than an aspiration.

J.P. Morgan Global Custody Services
J.P. Morgan provides custody and securities servicing solutions to the world’s leading institutional investors, including mutual funds, insurance companies, pension funds and banks. Assets under custody are currently valued at USD 13.7 trillion. With 25 regional operational, technology and customer service centers, providing clients with the full range of custody and securities servicing products across all time zones, services are by underpinned by state-of-the-art client reporting and systems capabilities.

By taking a solution-based approach to global custody, J.P. Morgan helps clients maximize processing efficiency within a robust, controlled, automated and information-rich environment. With offices in each region of the world and a network of subcustodians covering more than 90 markets, J.P. Morgan helps clients meet the challenges of cross-border investing and actively promotes global standards for efficiency and risk management.