Financial Services

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Finextra, 4 September 2009 - 03:24


Risk and regulatory pressures are driving global transaction banks to invest more heavily in technology and IT outsourcing, according to a joint survey by banking co-operative Swift and IBM
In the survey of almost 1200 business and technology executives, outsourcing and resource sharing were widely seen by respondents as the best way to maximise the efficiency of the most commoditised functions such as back office processing.

Across transaction banking, including both payments and securities businesses, the number of executives considering outsourcing some aspect of their activities has doubled to as much as 60%, says IBM and Swift.

According to the survey, one-in-five respondents would consider creating a shared payments utility with other financial institutions, and 41% would consider outsourcing their electronic payments processing.

But while further investment to improve risk management was considered a top priority for most respondents, this activity was considered too critical a function to entrust to a third party.

Almost half of respondents to the survey identified technology initiatives as a major focus for strategic investment within their organisations. Close to a third are planning to implement a service-oriented architecture (SOA).

There were some differences in priorities for IT spending, with securities players intending to focus more on reinforcing existing capabilities, while payments players are more focused on innovation.

Securities businesses are engaging in platform replacements to upgrade legacy systems, enabling better automation and unlocking greater capacity. Meanwhile the priorities of payments businesses are centred on the development of new services, such as electronic and mobile payments.

Similarly, while only 28% of securities respondents reported that upgrading their security technology was a top priority, more than 60% of payments organisations are planning such an upgrade.

[admin]

Bank looks to 'industrialise' its IT to quickly quickly create new products using common components and chassis

Computerworld, Tim Lohman 16 September, 2009 15:32

The Commonwealth Bank’s IT management team is tracking ahead of schedule in its $480 million, four-year core modernisation program.

Speaking at a media roundtable, Dave Curran, executive general manager and lead for the modernisation project, said that at the one third mark in the project the bank had already delivered three major capability launches, with another planned for this calendar year.

The capabilities included real time banking and processing and a process of ‘industrialisation’ where new products can be created quickly for various parts of the business based on common components and chassis.

Curran said that using these capabilities, the bank had created a custom term deposit product for Colonial First State — which it will later push out to its wider CommBank business and retail customers — and had applied real time banking to a new staff savings account product and the Federal Government’s First Home Saver Account.

According to Curran, the bank had placed a focus on leading the project directly and had moved to capitalise on the momentum created by the upgrade of its online site, Netbank.

“We have watched a lot of organisations globally, before and during, get bogged down in analysis paralysis; we don’t allow people to slip on decisions and go back and revisit things,” Curran said. “That has let us build some contingency in our schedule as we know we will have some surprises; it doesn’t matter how hard you plan."

The surprises included finding undocumented functionalities in its legacy systems which affected customer-facing systems and services, he said.

“You base things on the documentation and history. But you find things that were put there 30 years ago that no-one knew about, which makes testing and piloting very important — to make sure we pick things up before we put something into production that will affect customers,” Curran said.

CIO, Michael Harte, said the bank had also deployed several project management methodologies including Systems Development Life Cycle (SDLC), which combines intellectual property from SAP and Accenture, and Project Governance Delivery Excellence (PGDE), the bank’s CIO and group executive Enterprise Services.

“SDLC is a robust discipline or set of practices that takes out chance, takes out variation and puts program quality into industrial strength computing,” he said. “PGDE lets you make the right investment decisions quickly, knowing they have a certain priority for business and customer outcome, executing those within the budget and timeframe allowed, making sure the code and process that comes out is repeatable and reliable.

“Something different to IT organsiations the world over is assuring and committing to the benefits. We’re seeing the quality of outputs increasing and, with good change management, greater assurance around the delivery of those benefits.”

The bank was also looking at further upgrading its customer site, NetBank, to include:

• a real time desktop banking application
• a relationship manager rating tool
• eBay-like messaging tools
• advice on creating stronger passwords
• expanded use of Web chat
• customer verification tools

.
It will also upgrade systems to include an SMS notifications service for due credit cards — something with the potential to cut the bank’s revenues, Harte acknowledged.

“There certainly is that potential,” he said. "It is not a direct intention to churn over interest on cards. You are trying to help people spend their money more wisely and grow a deeper loyalty with the organisation over a longer life time. It’s not our intention to keep people in the dark and charge them higher and increasing fees — we are going in the opposite direction and making charges and fees more clear."

[admin]

Credit where it’s due
Singapore’s credit bureau ups its service a notch with a new analytics platform, reports Melissa Chua.

MIS Asia, By Melissa Chua
12 May 2009

Bad debt is a deep-seated fear that haunts every bank. And this fear is even more pronounced as the current credit crunch threatens a financial institution’s very survival. Knowing which individuals to lend money to is a fundamental task for every bank, and every bad decision leaves the institution more vulnerable. Hence, the formation of credit bureaus, which aim to help banks make sound lending decisions.

The Credit Bureau of Singapore’s mission is not unlike its counterparts in other countries. Launched in September 2002, the bureau aims to implement the Monetary Authority of Singapore (MAS)’s vision to improve on the island nation’s risk management capability.

The bureau keeps guard over a repository of data relating to the credit application and repayment records of the island’s consumers. This data originates from a wide variety of sources, namely creditors, lenders, utility companies, debt collection agencies and the courts. Only the bureau’s 17 members, comprising all banks and finance institutions in Singapore, are privy to this information.

The amount of data the bureau manages is enormous, diverse and growing at a steady rate, with the potential to boggle the minds of those who sift through it. Hence came the bureau’s challenge: to ensure its members used and analysed the information in the best possible manner.

Changing landscape

During its second year of operations, the bureau began offering a set of data analytics products. William Lim, executive director, Credit Bureau Singapore, describes this set of tools as a “static shop of data and information”. These products served the needs of the bureau’s members well enough during the early to mid-2000s; but the changing banking and credit landscape soon proved these tools inadequate.

“Members would come in and request an analysis of a credit card portfolio for a particular month. The bureau would produce the information for these members, such as share of wallet and the delinquency rate. But that system had its limitations, due to it being too static, not to mention time-consuming,” says Lim. Time to delivery would also be lengthened, and man hours consumed, if a member institution were to request for information that differed from its monthly staple. “Clearly, that was not the best way to make ourselves useful. Bottlenecks would ensue when seven different banks asked for varied criteria in the reports,” says Lim.

“Some banks may have changed their credit approval policy, and what distinguishes good credit hunger from bad credit risk is something that the banks will need to do very well,” says Lim. “That’s where we come in: to assist our members, who may each have developed a different set of criteria, in view of the current credit crisis.”

The bureau thus decided to enhance its data analytics platform in late 2007. The project did not commence earlier as the data needed to “attain critical mass” before it could “capitalise on a more intelligent platform”, according to Lim.

Flexibility

An analytics platform from SAP BusinessObjects was selected for deployment, as part of the bureau’s efforts to improve its service delivery. The new Web-based platform, named the Credit Pulse Hub, aimed to provide users with an easy-to-use interface for accessing the data, so individual users could perform data analysis at will.

No new repository of information was created. Instead, user-defined views of the information sitting in the multiple, existing databases were created. The quality of the data available did not prove problematic, says Lim, as the existing data was already “good and clean” with “no data massaging” needed. Data was merely ported across to another tape drive, so it would not affect the live data production environment. According to Lim, the main challenge associated with the deployment was ensuring users were allowed access only to data to which they were authorised.

“We had to make sure certain regulations were adhered to,” says Lim. “The data that users pulled out could only be their own, and within the parameters set down by the MAS.”

The new platform also focused on being flexible enough to cater to users with varied needs—from the credit officer, who logs in daily for a drilled down analysis and what-if scenarios, to the human resource officer, who might log in once in awhile to find possible reasons for a high attrition rate. Custom dashboards for mobile devices could also be configured, for users whose lifestyles dictated they access the platform while on the go.

“Because the platform is delivered through the Web, users can access it anytime and anywhere. It’s customisable according to the needs of a particular bank, or even a particular department within the bank,” says Lim. “You can view it online, distribute it or even download it to your proof list of users.”

Different styles

In the past, the bureau would also try its best to stick to a particular report template across all its users, in order to maximise manpower efficiency. This procedure proved inadequate, as the bureau soon found the banks to have varying requirements.

“Each bank has a different focus, with different types of reports needed. When that happened, it created a bottleneck in terms of workflow,” says Lim. “It would take us a long time to create that query and churn the output when, for example, seven banks require seven different templates.”

The new platform, on the other hand, allows each bank a “certain degree of autonomy”, says Lim. “They’re not going to have to call us in the middle of the night, due to different time zones, just to pull some data. They can now do so themselves, as long as it lies within the specified boundaries.” The availability of historical data on the new platform is also a plus point.

Users can now draw out reports from any previous timeframe, a vast improvement over the limitations of the monthly reports which the bureau used to churn out for its members.

Feedback

The Credit Pulse Hub is currently being used by four of the bureau’s member banks, which Lim declined to name, citing client confidentiality.

User feedback has generally been positive, mainly due to its ease-of-use and the sharp increase in the number of scenarios users can construct with the available data, in comparison to the static reports they used to receive.

The previous set of data analytics tools is still available to the bureau’s members, but Lim is hoping to gradually get all users migrated to the new platform.

Acknowledging the previous tools might still be useful for members enquiring after a particular product, Lim says: “There are some who still prefer paper reports, but hopefully that number will go down, as we progress.”

[admin]

SMH, November 6, 2009


Secret software is helping a new breed of high-speed traders get really rich, really quick, writes Michael Evans.

To some, it's the geeks' revenge. ''These are the guys who can calculate 42 times 832 in their heads,'' one insider says.

To others, it is the dark side of share trading - proof that the dice are loaded against the average investor.

However you look at it, it is being used to get filthy rich. Quickly.


Dinesh "Danny" Bhandari.
They are the new breed of derivatives traders: they have no clients, they trade their firm's own money using high-powered computer programs like F1 - Formula One, so-called because it is so fast - based on secret algorithms.

US sharemarket officials and Congress are mulling bans on some of their tricks. And it is so profitable, the big banks are using it. The New York Times and The Wall Street Journal have devoted pages to the dark arts of ''high-intensity'' and ''low-latency'' trading and the world of ''dark pools''.

Little over a decade after the demise of the chalkboard trading room floor, technology is outpacing regulatory attempts to keep a level playing field and fair market.

And the advent of superfast computers and programs has given rise to high-frequency trading whereby the game is outrunning other investors, and leading to a ''technological arms race''.

The local market regulator, the Australian Stock Exchange - which makes money from every trade on market - has issued a discussion paper with the objective of ''identifying improvements'' in trading rules.

And in the meantime the likes of 32-year-old Dinesh ''Danny'' Bhandari (right), from Kensington, are making millions of dollars.

Most start-ups take a few years to turn a buck. Not Tibra Capital. In 2006, fresh from parting ways with his Dutch-based rival Optiver, the South Australian-born derivatives trader Bhandari put $2 million into a new business venture. Reflecting the nature of his split with Optiver, it was originally called FTD - or F--- the Dutch.

A handful of former colleagues at Optiver plus some fresh investors joined him, using their private companies with creative names such as Begg, Borrow and Steal, Impropriety Unlimited and Rottengarabaldi to chip in a further $4 million.

They set to work, seeking to profit on tiny price differences by buying and selling shares, futures, bonds, derivatives and options, trading in the hundreds of millions of dollars per day.

High-frequency traders test prices by issuing buy or sell orders that can be withdrawn in milliseconds, giving traders an idea of the market's willingness to trade at those prices.

They can also earn tiny profits millions of times over from rebates provided by exchanges for being a market maker, or by being willing to buy and sell when there is a shortage of other traders.

Incredibly, in its first full year Tibra turned a profit of $14 million. The following year it made a profit of $57 million. And accounts just lodged with the Australian Securities and Investments Commission show that, despite the global financial crisis, Tibra posted a $77.5 million profit last year. Revenue nearly doubled, to $271 million. Between them, the salaries of the six key executives were $6.8 million.

Tibra's extraordinary growth led to Bhandari's debut on the BRW Young Rich List this year with a personal fortune conservatively estimated at $40 million. Last year he was named the young entrepreneur of the year by Ernst & Young.

But Tibra's success has been called into question. Private investigators have been used to gather evidence before a myriad court actions by Optiver over the past three years amid claims Bhandari and his colleagues are profiting from software that belongs to their former employer.

Tibra denies the allegations. ''We believe there is no basis to these claims and we will take all appropriate steps to vigorously defend our position,'' a company spokeswoman told BusinessDay yesterday.

Over recent months the darker side of high-intensity trading has been the subject of regulatory scrutiny in the US.

''Powerful algorithms - 'algos', in industry parlance - execute millions of orders a second and scan dozens of public and private marketplaces simultaneously,'' The New York Times said in July. ''They can spot trends before other investors can blink, changing orders and strategies within milliseconds.''

Some estimates put the volume of trade performed by algorithms on US markets at more than half. Joseph Mecane of NYSE Euronext, which operates the New York Stock Exchange, told The New York Times: ''It's become a technological arms race, and what separates winners and losers is how fast they can move.''

High-volume traders argue they provide liquidity to the market but one federal prosecutor noted in a recent case of a former Goldman Sachs programmer - accused of stealing secret computer codes - that the software could ''manipulate markets in unfair ways''.

In another case in the US, the Commodity Futures Trading Commission accused Optiver of manipulating the price of oil. Transcripts and taped conversations included in the commissions's case reveal that traders in Optiver's Chicago office talked openly among themselves of ''whacking'' and ''bullying up'' the price of oil.

When called to account by officials of the New York Mercantile Exchange, they described their actions as ''providing liquidity''.

''We have created a market that best serves those who don't want to hold anything,'' Tim Quast, an investor relations executive, told a conference in Denver last month.

In Australia most of the big investment banks also conduct proprietary trading using algorithms. But it's the likes of Tibra - with operations in Sydney, London, Hong Kong and Amsterdam and the US next on the list - which had been quietly making millions from a standing start, that has the market talking.

Already its staff of 200 has more IT people than traders - 80 to 75.

Its operations spilled into the public sphere not only with Bhandari's appearance on the BRW Young Rich List. Tibra has been battling its way through the courts in a series of clashes over the past three years.

Optiver alleges Bhandari and his colleagues used its confidential information to help set up Tibra's programs. It is also suing for copyright infringement and seeking damages for Tibra ''flagrantly'' and ''recklessly'' using its confidential software.

One claim states how, in 2004, Optiver employees wrote a a piece of programming code to improve its trading speed from 80 milliseconds to between 0.5 to 1.5 milliseconds - speeds with which mere mortals cannot compete.

In late 2005, according to one court claim, Optiver ''terminated'' Bhandari's employment.

By the middle of the following year further trading and technology employees quit to join Bhandari at Tibra, including Glenn Williamson, Tim Berry, Andrew King, Martin Nickolas and Kinsey Cotton.

Optiver's boss, Robert Keldoulis, ''became suspicious at the speed with which Tibra had moved from a newly incorporated company to a successful competitor'' and discovered emails sent by one former employee, Andrew King.

It is alleged that suggestions were made on how to improve the speed of the Optiver F1 system. This will be examined when the case returns to court this month.

Tibra says the claims are baseless and will be vigorously defended.

When BusinessDay approached Tibra seeking an interview with Bhandari, a Tibra spokeswoman said he was overseas on extended leave until March.

In a recent interview after he was named the young entrepreneur of the year, Bhandari gave an insight into his business. ''Our aim essentially is to trade in other people's risk and trade with a view to keeping our positions relatively neutral,'' Bhandari said in the interview, hosted on CommSec's website.

While a Warren Buffett takes a view on an industry, a sector or a company, Bhandari is different.

''We don't generally take a view on the market,'' he says. ''What we're doing is a lot of transactions, many many thousands of transactions a day, and obviously just trying to make a small profit on each or on some of those trades.''

It's the volume traded, not the direction of markets, where they make their money.

''Our business is somewhat immune from the directions of financial markets.''

But the global financial crisis brings fresh challenges, including government and market supervisory interest.

The importance of technology to the company's profit is clear: ''We are very much a technology company. And we integrate trading strategies and trading operations with what we call cutting-edge technology to give us an advantage.

''Our advantage is not our position in the market or the size of our company but the technology we're able to bring to our operations.''

Online chat rooms are filled with tales of young graduates wanting to work for companies like Tibra. They talk of an aptitude test that demands lightning-fast problem-solving.

The firm's culture draws much attention, too. Staff wear thongs to work and drive sports cars, one insider says.

Bhandari portrays himself as a modest, sport-loving guy. ''For me personally, I enjoy a lot of sports, motor sports, cricket and football, all the great Aussie sports, and travel. My wife and I have been to many dozens of fantastic places together so that's something we really enjoy doing.

''It's nothing glamorous; we just like getting the job done, and the rewards aren't necessarily obvious to everybody but they're certainly obvious to us.''

[admin]

This is not local - but it is fascinating!


Information Management Online, November 3, 2009

John Dodge

Two years ago, Bob McMahon wondered why antiquated systems at Bernard L. Madoff Investment Services weren't replaced with more modern and efficient off-the-shelf systems.

The Madoff systems were expensive to maintain and made it difficult to grow the business by expanding into new classes of securities. McMahon's job: To organize and document projects that would create custom technology for the firm's trading operations.

On Dec. 11, 2008, he got his answer.

That day, Bernie Madoff was arrested and charged with stealing tens of billions of his clients' money over decades. McMahon knew if "technologists" replaced the proprietary systems with more modern and open computers, they would have invariably found the absence of data on countless stock trades that supposedly took place. In a sense, the preservation of old computer technology helped Madoff successfully go undetected for years until his massive Ponzi scheme collapsed that day.

Over the past six weeks, Securities Industry News has dug into and beyond the court records to construct the most extensive report yet on how Madoff actually operated: The systems and technology he and underlings used to create-or fake-the most detailed set of customer accounts underlying a fraud in the history of the securities industry.

Included are the first details of a declaration filed Oct. 16 on behalf of the court-appointed trustee, Irving Picard, investigating the case, which describes how the real and the fake trading floors worked. And why the securities investors believed they owned are never going to be declared "missing." The answer: Because they never existed in the first place.

On the eve of the first anniversary of Madoff's arrest, this then is the story of how the legitimacy of his House 5 was turned into the ******* product of House 17-used solely to create and maintain an alternate reality of trades never made.

But it's more than that. It's also a cautionary tale to information technology managers and executives at shops up and down Wall Street. If you think something is amiss, don't let it rest. Do your own investigation. Before the company you work for turns out to be missing as well.



LEGITIMATE AND ILLEGITIMATE

"I asked myself how Bernie could have hidden and maintained this for so long. A lot of it was done because he had proprietary and legacy systems. And he relied on IT people he hired and paid," to not upset the status quo, says McMahon.

As a project manager, he always felt like an odd duck at Bernard L. Madoff Investment Services (BLMIS), an outfit which seemed to lack standards and procedures routine at former employers of his such as the International Securities Exchange and (now Fiserv, Inc.) CheckFree Investment Services (now Fiserv, Inc.). Little was documented and the company seemed to be overwhelmed keeping the older systems from breaking down.

"I immediately recognized there was massive institutional chaos in the way the place was managed. No one found value in participating in project management meetings or in writing things down. There was no documentation," says McMahon, today an operational performance consultant for Standard & Poors.

McMahon lasted less than a year at Madoff's firm. He was hired in February 2007, by long-time BLMIS chief information officer Elizabeth Weintraub. She died in September of that year.

Differences over updating the systems and formalizing procedures with Weintraub's two successors led to his dismissal the following January, by McMahon's account.

Nader Ibrahim, who was on the support desk from 2000 to 2003, confirmed that the atmosphere in the BLMIS IT department was often tense and unusual.

"We did not have titles, which was definitely suspicious to me. We all knew who each other worked for, but nobody knew what the other person was doing," he said. "Everything was on a need-to-know basis. There was a lot of secrecy."

But there were no real secrets about Madoff's purported trading for thousands of investment advisory clients because investigators say they have discovered it never happened.

It's not as if Madoff didn't have a real trading floor. Madoff's legitimate market-making business was located on the 19th floor of 885 Third Ave., in New York, using one IBM Application System/400 computer IBM Application System/400 computer, known within the firm as "House 5.'' BLMIS' information technology operation was located on the 18th floor, where McMahon had his cube and was supposed to organize and document projects involving custom technology for the trading operation.

On the 17th floor? The fake trading floor where a second IBM AS/400 known internally as "House 17" processed historical price information on securities allegedly bought for clients. The end result was phony trade confirmations and wholly manufactured - but official-looking - statements for 4,903 investment advisory clients.



OPEN AND CLOSED

Madoff's legitimate traders used a mix of green-screen and "M2" Windows-based desktop computers. These ran in-house trading software referred to as MISS, which McMahon recalled standing for something like Madoff Investment Systems and Services. The internally-named and developed M2s ran MISS as a Windows application and were used by younger traders who wanted familiar software instead of the rigid green screen system, developed around 1985, where only text appeared on screen and instructions were in almost cryptic codes entered into command lines.

Support for House 5 was almost like that of a large investment bank's support of its trading operations. Nothing was too good, in theory, for the Madoff trading operation on the 19th floor. Even if it was not necessary.

"Madoff did not buy anything off the shelf. The IT team was doing proprietary software development. Maybe J.P. Morgan Chase needs all this heavy technology, but a hedge fund with 120 people doesn't have to be in systems development," said McMahon, adding that a similarly-sized firm might have a half dozen IT people. Both McMahon and Ibrahim pegged the number of people actively supporting technology at BLMIS at between 40 and 50.

But large staff and support for House 5 has not thrown off investigators. Court-appointed trustee Irving Picard, who is charged with liquidating Madoff's remaining assets, has instead focused on "House 17,'' where the daily administration of the Ponzi scheme was executed.

Picard hired an investigator, Joseph Looby, an accounting forensics expert who probably knows the most about the technology that aided Madoff in stealing client funds other than former members of Madoff's staff. Looby is an expert in electronic fraud and senior managing partner with FTI Consulting Inc. in New York.

Looby's 20-page declaration on Picard's behalf with the U.S. Bankruptcy Court for Southern District of New York on Oct. 16 amounts to the deepest examination yet of the foundational technology behind Madoff's fraud. The declaration seeks to deny paying Madoff's victims based on their last statements, dated Nov. 30, 2008, because the values stated were based on investments that were allegedly never bought or sold (see graphic, below).

Reached in his Times Square office, Looby, like Picard, said he could not elaborate on his examination of "House 17. "I'd love to, but it's an active investigation," he said, after filing the affidavit.

But in the declaration, he reported that "House 5" supported Madoff's market-making operation and was networked to third parties outside the firm that would logically support a trading operation. One, for example, was the depository and clearing firm Depository Trust Clearing Corp. (DTCC).

"[House 5] was an AS/400, consistent with a legitimate securities trading business," Looby wrote. In the declaration, he often compares House 5's legitimacy to House 17's illegitimacy.

House 17, for reasons that are now obvious, was shut off to anyone but Madoff's former chief finance officer and right-hand-man Frank DiPascali Jr. as well as any accomplices. DiPascali sits in a New York jail awaiting sentencing after pleading guilty to 10 felony counts on Aug. 11. He faces 125 years and his sentencing is scheduled for May 2010. In the interim, investigators are hoping to get his cooperation to implicate others.

"They want to squeeze him for more than what he's giving now so he can avoid 125 years in prison," said Erin Arvedlund, author of "Too Good to be True: The Rise and Fall of Bernie Madoff." The former reporter for Barron's in a widely-cited 2001 story challenged Madoff's implausible if not impossible returns and asked why hundreds of millions in uncollected commissions were left on the table. It appears now there were no trades made, from which to derive commissions.

"[House 17] was a closed system, separate and distinct from any computer system utilized by the other BLMIS business units; consistent with one designed to mass produce fictitious customer statements," according to Looby's declaration. House 17's expressed purpose was to maintain phony records and crank out millions of phony IRS 1099s on capital gains and dividends, trade confirmations, management reports and customer statements.

"The AS/400 was like a giant Selectric typewriter. When you're making up numbers like that, you're using your computer as a typewriter," said computer consultant Judith Hurwitz, president of Hurwitz & Associates in Newton, Mass.

Indeed, the Application System/400 is a multipurpose server that's very good at printing. IBM publishes several technical overviews for IT professionals known as "RedBooks" on the AS/400's extensive printing capabilities and also offers printing and forms design software for it.

The AS/400, launched in 1988, is one of IBM's most popular servers ever. Over the years, it has morphed into the iSeries, then the System i and has since been merged into the Power Systems line, which provides servers to companies "of all sizes." At IBM, the AS/400 "is like the Energizer Bunny," said a spokesman.



ON THE HOUSE

House 17 held 4,659 active accounts overseen by DiPascali where Madoff purportedly executed a “split strike conversion” strategy on large cap stocks. In basic terms, it’s a “collar,” putting a floor and a ceiling on returns. A floor on potential losses is created by purchasing a put on a stock. The sale of a call then puts a ceiling on the returns. The “split” in “strike” prices is considered a “vacation trade.’’ The trader doesn’t worry about what happens until the expiration dates on the put or call options arrive.

The strategy was allegedly applied for the thousands of customers on “baskets” of large cap stocks. According to the faked BLMIS statements, these accounts typically yielded 11 to 17 percent returns annually.

Another 244 “non-split strike” accounts produced phony returns in excess of 100 percent and were managed by BLMIS employees other than DiPascali.

The phrase “Managed by BLMIS employees” discovered and used by investigators is one of many strong indications that more were in on the fraud than just Madoff, DiPascali and BLMIS auditor David G. Friehling, the only ones charged so far. Friehling has pled not guilty. Meanwhile, Looby notes that 25 individuals worked for the investment advisory arm of BLMIS.

The “non-split strike” accounts included many “long time” Madoff customers and feeder funds such as those operated by Stanley Chais or Jeffry Picower and against whom Picard has filed civil suits to reclaim billions in profits alleged to be illegal. Picower of Palm Beach was found dead in his pool Oct. 25. Chais maintains he’s innocent.

In the declaration, Looby repeatedly asserts that no securities were ever bought for BLMIS investment advisory customers.

Proceeds sent in by clients for that purpose were “instead primarily used to make distributions to or payments on behalf of, other investors as well as withdrawals and payments to Madoff family members and employees,” the declaration states.

Here’s how it worked: BLMIS employees fed the AS/400 constantly with stock data, enough to support trades that would satisfy the expectations promised to Madoff’s thousands of eventual victims.

To support the fantasy returns, so-called “baskets” of S&P100 stocks would be bought and sold, on behalf of clients. Looby did not specify the typical size of a basket, but they were proportional to the proceeds a client had remitted to BLMIS.

“If a basket was $400,000 and a customer had $800,000 available, two baskets of securities and options would be purportedly “purchased” for the account,” Looby wrote. The types of stocks can be seen in a Madoff statement (p. 17).

Proceeds from purported basket sales existed only on “House 17” and on the paper it put out, which indicated the funds were put into safe U.S. Treasury bonds. Meanwhile, funds remitted by clients were being diverted to a JPMorgan Chase & Co. bank account known as “703.”

A sharp eye could have detected that funds weren’t where they were supposed to be: 2008 customer statements showed funds in a “Fidelity Spartan U.S. Treasury Money Market Fund” that hadn’t been offered since 2005. The fabulous returns had lulled BLMIS clients to sleep. “You don’t ask questions when you’re up,” said McMahon.

While some trading data was input by hand, DiPascali cleverly used “essentially a mail merge program” to replicate the same stock trading information across multiple accounts, according to the declaration.

Stocks in a basket were “priced” after the market closed (i.e., with the knowledge of the prior published price history). Customer statements were then fabricated by BLMIS staff on House 17 which appeared to outsiders to keep track of customer investments and funds in a manner typical of any investment advisor. “BLMIS staff confirmed it, the system facilitated it and consistent returns could not have been achieved without it,” Looby’s declaration states.

Indeed, the customer statements had been perfected as an instrument in the deception. Madoff investor Ronnie Sue Ambrosino, a former computer analyst who ironically had worked on an AS/400, told Securities Industry News that she never suspected a thing. After all, the Securities and Exchange Commission had given Madoff a clean bill of health on several occasions since 1992 by not digging deeply into his operations or just plain neglect.

“The statements were always perfect, neat and immaculately presented. They came on time and everything was like clockwork,” said Ambrosino, 56, a victim and now activist representing a group of about 400 Madoff investors. She bristles when the AS/400 is called old or outdated. “I know the 400 and it’s a pretty powerful machine.”

99.9 PERCENT FAKE

It was powerful enough to convince investors that whatever proceeds they sent to Madoff were being invested in the stocks cited on their statements.

“Key punch operators were provided with the relevant basket information that they manually entered into House 17. The basket trade was then routinely replicated in selected BLMIS split strike customer accounts automatically and proportionally according to each customer’s purported net equity,” Looby’s declaration says.

The situation was largely the same for non-split strike clients except that the purported trades were in single equities, not baskets. “Thousands of documents including customer statements, IA (investment advisory) staff notes, account folders and programs in the AS/400 were reviewed, and these documents confirm the fact that such statements were prepared on an account-by-account basis (i.e. not basket trading),” Looby wrote.

Looby verified that trades between 2002 and 2008 were phantom by cross-checking with various clearing houses such as DTCC, Clearstream Banking S.A. in Luxembourg, the Chicago Board of Options Exchange (CBOE) and four other clearing firms.

He also compared the cleared trades on the AS/400 “House 5” and “99.9 percent” of the fake trades on “House 17” did not match. The only connection he found is what looked like a small portion of a single client’s trades, which were directed by the client and recorded on House 5.

Madoff employees monitored the “baskets” for split strike accounts in an Excel spreadsheet to make sure “the prices chosen after-the-fact obtained returns that were neither too high or low.”

However, such monitoring was far from perfect. Looby cited several examples where daily trading volumes at BLMIS exceeded the entire daily volume for several stocks.

For instance, Madoff reported the purchase of 17.8 million shares of Exxon Mobil on Oct. 16, 2002. This amounted to 131 percent of the company’s trading volume for that day. BLMIS’s actual Exxon Mobil holdings that October were verified by the DTCC at 5,730 shares. Similar discrepancies for Amgen, Microsoft and Hewlett Packard were found on Nov. 30, 2008, the date for the final batch of BLMIS customer statements, as it turned out.

BLMIS data for options puts and calls was even more blatantly unreal. On Oct. 11, 2002, Looby found that BLMIS “applied an imaginary basket to 279 accounts with a volume of 82,959 OEX(S&P 100 options) calls and 82,959 puts.” That amounted to 13 times the OEX volume at the CBOE that day.

Many following the case speculate that other criminal defendants will be named. Arvedlund says prosecutors from the U.S. Attorney for the Southern District of New York (Lev Dassin) office have to assemble strong cases and that takes time.

“Prosecutors don’t want to get it wrong, indict other family members and then have them found not guilty,” says Arvedlund. A spokeswoman for the U.S. Attorney for the Southern District of New York declined comment.

However, it’s looking increasingly likely that others beyond the first three will eventually be hauled into criminal court. Picard has already tightened the noose in civil court, attempting to reclaim billions from Madoff family members and close associates.

Recent legal documents in the case tangentially and directly implicate others, either talking about yet-to-be-named “co-conspirators” or identifying them outright. A 264-page lawsuit filed by investor Jay Wexler on Oct. 20 accuses Bernard Madoff’s assistant and recruiter Annette Bongiorno and her staff with researching stock and options data “to generate tickets showing fictitious trades.” No response from Bongiorno could be obtained or found by press time.

Also surfacing in Wexler’s lawsuit are explosive allegations about decades of “rampant” drug use and wild parties in the BLMIS offices.

They are not far off the mark, according to Ibrahim. “I saw it all around me. Once a month, Bernie would throw a party for the systems guys and things would get a little out of bounds,” he said, adding that most of the alleged partying was after work. But “it was still a normal work environment” during the day, Ibrahim told Securities Industry News.

In his expansive lawsuit for which he demands a jury trial, Wexler identifies 19 defendants including banks, auditors, former feeder funds, several Madoff family members and associates, former BLMIS employees and even an insurance company.

Looby’s declaration has several references to unnamed accomplices that would seem to dovetail with Wexler’s accusations. “To create the illusion that these stocks had been purchased or sold, BLMIS employees would use the AS/400 and its software programs to fabricate customer statements.”

Prosecutors have a mountain of evidence and they have leverage with the 52-year-old DiPascali. “We know he did not do it alone,” says Arvedlund, the author. And he has expressed a willingness to help.

His confession in court Aug. 11 began “…I helped Bernie Madoff, and other people, carry out the fraud that hurt thousands of people.” At the end of his confession and just prior to pleading to be released on bail, he said: “I hope my help will bring some small measure of comfort to those who have been harmed. I apologize for this catastrophe…”

Prosecutors argued for DiPascali’s release so he could help them sort through the AS/400 and 6,000 boxes of evidence that occupy a half a floor in a New York building. They failed and he was sent to jail to await sentencing.

As for Bernie Madoff, the fraud’s chief architect, he’s not talking and could take his secrets to his grave. “Boy, that would be a shame,” says Arvedlund.

[admin]

Fraud detection with a rapid return

"Within months, Commonwealth Bank of Australia sees 95 percent increase"

Using SAS, the Commonwealth Bank of Australia has detected twice the level of check fraud than in its previous system and had a 60 percent improvement in Internet banking fraud-alert volumes.

Consists of an interview with John Geurts, Executive General Manager for Group Security and Chief Security Officer at CBA.

[admin]

Insurance Networking News, Virtual Water Cooler, August 14, 2009

By Carrie Burns
As one of the first markets to adopt and implement ACORD Messaging Library (AML) as the data standard, the Australian insurance industry will begin the standardization with implementation for professional indemnity content that includes quote, bind and close transactions for new business, renewal, endorsement and cancellation processing.

"Universal data exchange, between consumer, intermediary and product manufacturer, has been achieved with the release of the ACORD PI Australian standard," says Robert Kelly, executive chairman, Steadfast Group Ltd. "When this product is fully rolled out, it will deliver efficiency, greater choice, and a competitive environment. Australia is now part of a worldwide standard."

Major activity to implement ACORD standards in Australia began in 2008 with the creation of that advisory committee. This immediately led to the formation of two working groups focused on the specific needs of their market. One focused on development of a framework, architecture and message design philosophy to meet the needs of the Australian Business Market, while the other took on business issues—primarily placement and forms.

"The rapid advance of ACORD standards in this market is testimony to the dedication and commitment of its leaders within the industry, and their shared goal of improving data communication and the processing efficiency of the independent broker" says John Kellington, SVP of ACORD. "We look forward to further development and implementation efforts, and thank all of those who have led this charge toward standardization."

[admin]

Data Projects to Pave the Way for Business Intelligence

CHALLENGE: Business intelligence tools can deliver decision-making insight to areas on Wall Street that sorely need it, such as portfolio and risk management. The catch? Data has to be clean, accurate and organized (if not integrated), which means firms' shelved enterprise data management projects may get resurrected.

Wall St and Technology, By Penny Crosman
NOVEMBER 23, 2009

Why It's Important: The need for business intelligence technology -- which can help firms understand counterparty exposures and operations risks and eliminate points of failure, as well as monitor performance and identify business opportunities -- came to light amid the collapses of several broker-dealers last fall. "The idea that you can have a valuations process that's discrete or distinct from a risk management process or even distinct from an operations process is being thrown out the window," says Stephen Bruel, research director, securities and capital markets, TowerGroup.

"How do you know what instrument to value if you haven't confirmed a trade yet? If operations are behind, if you haven't done a reconciliation with the counterparty, how do you know what transactions you need to collateralize or don't need to collateralize? If you don't know, what assurance do you have, for example, as a buy-side shop that you're not overcollateralizing the transaction?"

Where the Industry Is Now: Although quants and research analysts make heavy use of reports and analytics, business intelligence is largely absent from areas such as operations, risk assessment, investment performance and customer service. Most firms have multiple, disparate customer databases, operations data sources, collateral management databases and trading data stores that make it impossible to optimize business intelligence tools, which require a solid data foundation (often called a data warehouse) or at least clean and consistent data sources. Some capital markets firms are working to integrate data stores to facilitate BI-style dashboards and reports. Large enterprise data management projects that were begun at many large Wall Street companies several years ago but abandoned when the recession hit and IT budgets and staffs were dramatically cut may see new life in 2010.

"The steps to create a robust enterprise data management process are difficult to map out and implement, and you have the challenges of who's going to pay for and manage it?" Bruel says. "And if we have trouble with data management in individual silos, what's going to happen at the enterprise level? It becomes a series of tactical decisions."

Business intelligence is also emerging in wealth management.

For example, wealth management firm Janiczek & Co. recently chose hosted BI software from Mydials to monitor and manage portfolio management, relationship management, service management, sales management and business management results. "You get what you inspect, not what you expect," says Joseph Janiczek, the firm's founder and chairman. Some wealth management firms are seeking to provide better-looking and more sophisticated client reports, according to Craig O'Neill, SVP of Odyssey Financial, a provider of wealth and asset management software.

Focus in 2010: Some of the new rules Congress and regulators come up with likely will require business intelligence capabilities. For instance, regulators are certain to require firms to repeat the recent stress tests, according to TowerGroup's Bruel. "Broker-dealers are going to have to run internal stress tests for things like liquidity and report their findings back to the regulators," he says. Such activities should drive the purchasing of data management software and technology that provides more efficient access to information, such as in-memory databases. Further, complex event processing software will make its way into the back and middle offices to help firms answer questions about risk and valuations, Bruel adds.

At BNY Mellon, 2010 plans include making the new business intelligence software easier to use and to deliver more-intuitive charts and reports -- for instance, showing salespeople at-a-glance wins versus goals or showing regional CEOs which opportunities require decisions in the next month.
Industry Leaders: Bank of New York Mellon recently completed a number of customer data integration projects to build business intelligence reports (using Oracle software) for institutional sales groups. State Street is engaged in an ambitious enterprise data management initiative.

Technology Providers: IBM, Oracle, Sybase, SAP, Microsoft, Actuate and Mydials.

Price Tag: Open source (free) and inexpensive business intelligence tools are available, but the underlying data integration or data cleanup projects tend to run in the millions of dollars.

[Steve Bennett]

Westpac’s cost savings and improved DR, data availability and storage capacity, Ric Callaghan, TDWI, February 2009

At a 2009 TDWI meeting and presentation by Westpac’s Ric Callaghan, Head of Technology, Enterprise Information Delivery.

Westpac’s Group Data Warehouse (GDW) has an overall storage footprint of 16.5 terabytes. Storage of such a large amount of data is a big cost to Westpac. In 2008 the bank completed a project that increased internal customer satisfaction through improved data availability, and increased storage capacity of the GDW by 46% whilst reducing annual storage costs by 16%. The project also delivered full data mirroring for Disaster Recovery (DR). Following is a brief summary of the project, its benefits and Q&A... Background on the GDW and the project The GDW has been in operation since 1998 and supports both operational and MIS functions in areas such as Marketing, Finance and Credit. The GDW allows the bank to better understand customer needs, product penetration and credit exposure. The GDW (Oracle DB) has over 5000 tables, more than 3000 jobs are executed daily and over 100,000 jobs are executed monthly. The project involved a number of innovative and previously untested approaches to storage. Major objectives included: implementation of tiered storage, migration of all archived data from tape to low cost disk, data compression, data retention and classification, and implementation of a critical tape backup infrastructure. About the project The project aimed to reduce risk and cost and to improve reliability and availability of data. At the time, the DR environment (Development box) stored about 10TB of data, 7TB were on tape and it took many days to retrieve data. If there were a disaster, it would have been a complex and time-consuming process to restore Production from DR. Critical aspects of the DR process are tested annually by Westpac as an enterprise. The objectives of the project were to compress and store older and archived data on low cost disk (rather than on high speed disk or on tape). Tier 3 storage (low cost disk) is about a third the cost of Tier 1 storage (high speed disk). 2 TB of data on Tier 1 can be compressed and stored in 1TB on Tier 3. This can reduce storage costs to a sixth. Tier 3 storage is slightly slower than Tier 1 storage, which is why it is cheaper. Nevertheless, it was actually running faster during the project due to fewer users.

All backups are now done to disk storage (Tier 1 or 3) rather than tape. Tier 1 stores 3 months of data. Data older than 3 months is now stored on Tier 3 rather than Tier 1 and
mirrored to the DR site. The last 5 years of data that was on tape has been compressed and stored on Tier 3 (7-8TB in 10,000+ partitions), making it more accessible.

At the time the project was begun, IBM said it was unique. A single Oracle instance spans two storage tiers running behind a single SAN Virtual Controller (SVC).

Benefits:

• Space savings: 901 LUNs (10TB) of data have been moved to 200 LUNs.
• Reliability: The phased migration of 10TB of Read Only data to Tier 3 occurred without a single system outage.
• Improved data access and DR: recovery of archived data is now immediate (from Tier 3) rather than taking 5 days (from DR or tape).
• Cost savings

Q&A How much data would you like to keep? Risk analysts are interested in being able to access 3 lifecycles of data ie. about 15 years worth (subject to any constraints eg. privacy or other legislation).

What could have been done better?

It is important to assign roles and responsibilities in a project like this, that has not been done before.

What does the future hold?

Having addressed existing problems with this project, future projects can utilise the current Tier 3 environment. We are advocating this work to the rest of WBC.

How did you convince the business to take the risk of this project?

The risks were effectively mitigated and any residual risks were clearly articulated and bought into by the business. Ultimately we were courageous enough to try something different, but at the same time carefully balanced any potential impacts of a new environment against significant cost savings, more accessible data, and a vastly improved DR environment. We have a very robust relationship with our Finance Business owner, which has been formed over 3 years (under current leadership) with much trust and transparency. If you make a comparison - the Business had to have faith that just as we expect a new (untried) laptop to work, so to should the changed storage technology be trusted.

Did this project address data quality (DQ)?

No. DQ issues are common in such a large organisation and often it is easier to fix failures rather than causes. Nevertheless, there is a move to assign stewards and business owners for data, which will address data quality among other things. WBC also has scorecards on critical interfaces so that critical issues can be addressed eg. BT interface failures have been reduced from 20 per month to 1 or 2 per month.

[admin2]

Found on the Microsoft BI website is a 2010 case study of BNZ's Business Intelligence Centre of Excellence:

"BNZ wanted to find a better way to analyze monthly data that is used to provide management information to its branches across New Zealand. The bank found a solution using the business intelligence (BI) tools supported by Microsoft SQL Server 2008 R2, including Microsoft SQL Server PowerPivot for Microsoft Excel and Microsoft SQL Server PowerPivot for Microsoft SharePoint. With the self-service BI tools, BNZ expects to simplify and accelerate the delivery of information to branches while allowing its BI department to manage the distribution and publication of information with greater efficiency."