Systems Integration Revisited

Harvey Rand's arguments in his letter to the editor (April) appear to be that consultant objectivity and integrity are threatened by relationships with software vendors, and that frequently such relationships are undisclosed. Since he makes reference to the relationship between IBM (the "strategic consulting partner” he mentions) and one of its software partners, I feel I must reply.

First, IBM is quite open about its relationships with its partners—to the extent that they have been publicized in the Wall Street Journal, for example. Our partnerships are nonexclusive and are designed to enable us to offer implementation skills and capabilities in what we believe are best-of-breed applications, at a level few of our consultant/integrator competitors can reach. Not only do we admit such partnerships exist—we also publicize them strongly to indicate the breadth and depth of our capabilities. IBM's capabilities certainly go far beyond our partner relationships, however. Our agenda is anything but hidden.

Second, we take the view that our clients' interests are best served by offering a complete line of service from objective consultancy to global delivery of systems integration and development.

When we act as an objective consultant, the solution we recommend will always be what we believe is the best match for our clients' requirements, regardless of whether or not the application provider is an IBM partner. At a recent IBM engagement for a Swedish bank, for example, IBM consultants didn't recommend any IBM partner offerings at the short-list stage, as the match was not strong enough in comparison with other things.

We are fortunate that IBM's reputation for reliability and excellence in the marketplace allows no compromise in our business principles, our commitment to objectivity and integrity, or, most important, our commitment to our clients. So in answer to Harvey Rand's question "Whatever happened to integrity?” I can confirm that it is alive and flourishing at IBM's trading and risk management practice.

Keith Bear
risk management business manager
IBM Banking, Finance and Securities

In-House Systems Can Succeed

I greatly enjoyed Tom Groenfeldt's article, "Why In-House Systems fail” (May). I made it mandatory reading for everyone in our company, because it is so germane to the essence of our business.

Our approach seems to be quite different from most other resource providers out there. We are called by clients for many reasons—to rescue them from "project hell” (as Groenfeldt described it); because clients simply do not have resources and the head of the desk is screaming; or because it's a new business line and they need rapid development but don't wish to increase their permanent staff.

Because we have had the opportunity to work closely with the IT departments of some of the top investment banks, we have observed how they are structured, and it seems to me that there are some structural reasons for the problems Groenfeldt described. In many financial institutions, it is not uncommon for IT to be given what is essentially a monopoly on supplying technology to the firm. End-users must go through IT to get their needs met. So, naturally, IT departments behave like monopolists.

Let us engage in a gedankenexperiment. Suppose senior management were to allow individual departments or trading desks to get whatever technology they desire. Desks could hire their own developers, buy vendor systems or out-source development. Suppose their only constraint is that certain data must be in a certain place in a certain format by a certain time. How they get there is up to the users. In addition, the firms would have to impose and administer strict risk guidelines, and be willing to suspend or shut down franchises that violate them.

The firm could fund some initial "start-up” software firms, acting as a venture capitalist. These "firms within a firm” could provide infrastructure and/or applications to end-users on a purely competitive basis—end-users and application developers on the desk would be under no obligation to purchase or use their product, and firms that fail would be shut down. Those that succeed might even provide a return on capital to their financiers (the firm) by selling the work product outside the firm to noncompetitors. The resulting IT department would be much leaner than in most banks, more innovative and more competitive.

This kind of organization would be more in line with the competitive, free-market, capitalist enterprise these banks epitomize. They, above all, should know better than to create monopolies. While such a structure might seem radical, Groenfeldt's article suggests that some firms may not have that much to lose by trying it.

Jeremy Evnine
Financial Engineering & Systems Inc.

The much-anticipated integration of the derivatives industry and the insurance industry took another step toward reality recently when CNA Financial Corp. announced it was forming Hedge Financial Products Inc., a wholly owned subsidiary dedicated to securitizing insurance risks.

Chairman of the new entity will be Richard Sandor, the current vice chairman of the Chicago Board of Trade. Sandor will be joined by Anthony Chiarenza, the CEO, and Joseph Cole, who will be responsible for new product development.

The new company is built on the idea that the insurance business is vastly undercapitalized and that there's a crying need for additional capital to help redistribute the risks. Hedge Financial Products will run as a separate business unit, operating as a combination of an internal investment bank and proprietary trading group.

Risks assumed by CNA might be hedged by issuing securities such as catastrophe-linked bonds, insurance-linked swap transactions, or even with listed derivatives contracts. The goal, says Chiarenza, is to optimize portfolios of particular risks that might be well-correlated to certain capital market products or derivatives. Exposure to a Peruvian earthquake, for example, might be hedged with copper futures on the assumption that an earthquake would cause copper prices to soar.

Ultimately, Chiarenza is also looking to expand into offering CNA customers hedging services for other types of risks—many of which are now the exclusive province of over-the-counter derivatives dealers. A contract for catastrophe insurance on a particular factory could be expanded into an insurance policy that caps a company's commodity costs. "We're expanding the definition of insurance,” says Chiarenza. "After all, what's the difference between an insurance risk and a commodity risk?”

Bidyut Sen and John Copenhaver first met in 1982 as fellow members of Citi-bank's swaps group and went on separately to build illustrious careers in derivatives. Sen eventually became cohead of Morgan Stanley's derivatives products group, and head of structured products at the firm's money management business. Copenhaver, who helped start Prudential Funding's derivatives effort, left his position as former copresident of Sumitomo Bank Capital Markets in 1995 to smell the roses. "It had been 25 years since I'd had two consecutive weeks off,” he explains. "It gets old.”

Now, more than 15 years after they met, they've joined forces to form TriCap International, a new derivatives advisory and trading firm in New York. As advisers, they want to focus on the business management issues associated with derivatives operations—helping dealers with business analysis, hiring decisions and even determining whether it make sense to have a derivatives operation at all.

They also want to get involved in proprietary trading in a limited way—buying portfolios of hard-to-value structured products and what Sen describes as "spread trades that you don't have to watch every day.” The two are now shopping deals with prospective joint venture partners and hope to hire 25 people by the end of the year.

When Eugene Shanks left his job as CEO of Bankers Trust in 1995, there was talk that he would soon be forming a consulting company of one kind or another. Last month, Shanks announced he was forming NetRisk Inc., a new risk management consulting firm based in Greenwich, Conn.

Shanks will be joined by Daniel Mudge, who led the Global Risk Management Group at Bankers Trust since its founding in 1988 and whose efforts to develop the bank's RAROC (risk-adjusted return on capital) product date back to 1979. Also on board is James Lockhart III, former CEO of the $12 billion Pension Benefit Guaranty Corp., who will serve as CFO and insurance team leader.

The focus on the group will be the critical nexus between the practice of risk management and risk management technology. Although margins in the banking and insurance industries are shrinking and returns are declining, Shanks believes "risk management and technology represent two of the few opportunities for growth and profitability.”

Briefly

• Robert G. Scott was named managing director of global derivatives sales at BankBoston. He will focus on managing the firm's interest rate, equity, credit and emerging market risk positions. Scott had served as senior vice president at Lehman Brothers, responsible for structuring derivatives transactions for high-yield clients and cross-border merger and acquisition deals…
• Meridith Skodnik has joined Inventure's New York sales team. She previously served as director of sales for Haver Analytics…
• Coopers & Lybrand recently added two managers to its risk management practice team. James J. Vinci, a former managing director of the global risk management group at Lehman Brothers, joins the team as a business assurance partner in the capital markets industry group. John D. Finnerty, formerly of Houlihan Lokey Howard & Zukin, joins the team as a partner in the financial advisory service group's litigation and claims practice…
• Balan Nair has moved from JP Morgan to Union Bank of Switzerland to head a new desk geared toward mortgage investors…
• Dave Staley has joined Deutsche Morgan Grenfell as the senior mortgage salesman working with money managers, pension funds and insurance companies…
• Murali Ramaswami has been named senior vice president in Lehman Brothers' equity derivatives research group. He previously worked in marketing, sales, research and product development at Bankers Trust…
• Bank of Montreal has hired two derivatives professional for its Chicago office. Lynn Herald has become director of interest rate derivative sales, after having worked as an interest rate derivatives marketer at Dresdner Kleinwort Benson. Rajeev Patil has been named director and will take on a senior swaps trading role. He formerly served as vice president and head swaps trader at ABN AMRO…
• Financial Sciences Corp. has named Arlo Johnson president of its new Tokyo office…
• Amy Zisook has been appointed director of civic and governmental affairs at the Chicago Board Options Exchange…
• Deutsche Morgan Grenfell hired Patrick Prendergast as managing director, cohead of North American convertible bonds and head of North American convertible sales. He previously served as principal and head of convertible sales at Robertson & Stevens…
• Jerry Del Missier has been named global head of derivatives, global markets division, at BZW. He had served since 1992 as managing director of derivatives products at Bankers Trust…
• JP Morgan announced that Romita Shetty will serve as vice president of the structured credit group. Shetty comes from Standard & Poor's, where she was a director in that firm's structured finance ratings practice…