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Increasing use of OTC Derivatives and process automation by Investment Managers puts pressure on Brokers to improve service levels

"Investment Managers’ perception of Brokers’ operations service levels has lowered significantly in 2005", reports a new survey by Z/Yen, the City-based market intelligence firm. "Increasing volumes and the transfer of processing to offshore locations as a cost reduction strategy by Brokers have impacted service levels."

As price spreads continue to narrow, Investment Managers are looking at other differentiators to support their choice of Broker, particularly the level of Operational Performance. Fragmented organisational structures, inaccurate or late trade confirmations, and staff turnover were all cited by as issues that Brokers need to address. As volumes continue to grow, those Brokers with scalable processes and knowledgeable staff will begin to benefit from the increased emphasis on Operational Performance.

• 80% of Investment Managers now say that Operational Performance has an influence in business allocation. Of these, a quarter say that good or excellent performance will increase the amount of business given to a Broker.

Some Brokers have already responded to the higher demands placed on their operations teams and have established well resourced Client Management teams for high value clients:

• BNP Paribas were voted best 2005 Operations Bank for Interest Rate and Equity Derivatives
• Morgan Stanley were voted best 2005 Operations Bank for Credit Derivatives
• UBS were voted best 2005 Operations Bank for Currency Derivatives
• JP Morgan were voted best at Client Management in 2005

Outsourcing of operations processing is also increasing at Investment Managers. Of the 49 Investment Managers interviewed, 14 now outsource all or part of their operations. Both Investment Managers & their Outsource Agents predict further growth in this area.

Additionally, Investment Managers have invested hugely in technology with over 50% now using, or planning to use Swapswire and DTCC over the next 12 to 24 months.

Jeremy Smith, Director of Financial Services at Z/Yen, said, "OTC Derivatives are becoming a key part of Investment Manager’s strategies and they are therefore demanding a higher standard of service from their brokers. Brokers need to ensure that their client facing processes have the sufficient levels of investment to meet this demand".

Z/Yen surveyed 49 leading European and North American Investment Managers and Hedge funds during September & October 2005. The survey was commissioned by 9 leading Brokers, to help prioritise customer service needs and to independently assess the views of their Clients.