In the second part of an interview, Frédéric des Closières, head of sales & marketing at Lexifi, talks to SRP about the factors behind the company's success in the structured products industry in recent months and the challenges the upcoming European regulations will bring to the sector.
The sudden influx of structured product providers which have implemented the Lexifi Apropos tool in the past 12 months or so does not come as a surprise to des Closières. "We are concluding a fairly successful year indeed," he says. "I would say that it is the result of different factors, the first one probably being that, after several years of successful market presence and by working closely with our clients, word of mouth has increasingly played its role."
Another factor, according to des Closières, is the debate around financial regulation. "Beyond the direct requirements from financial regulators around the world, we are seeing a move from market participants towards more transparency, more auditability and better client relationships," says des Closières adding that in order to efficiently reach satisfactory levels on these elements, financial institutions now need to implement robust and well-founded software solutions.
"Let me illustrate this with an example. Following regulatory consultations on product governance, product distributors need, now more than ever, to be very careful about the quality, timeliness and consistency of the information transmitted to end investors." The degree of dependency of the distributors, with regards to product manufacturers, hinders their ability to ensure consistent, high-quality after-sale services, according to des Closières, "because the post-trade services offered by manufacturers on the market are simply too heterogeneous". "Hence the need for buy-side firms to gain independence on these aspects in order to become more self-reliant."
This natural objective for distributors, who are supposed to work in the best interest of their clients, cannot be achieved efficiently without the implementation of modern software, especially in the context of structured products, according to des Closières. "The diversity of financial portfolios and the ensuing elaborateness of their lifecycle event calendars make it a real challenge for regular software, with which a high degree of automation can only be achieved through huge investments and allotment of vast resources to maintain it," he says. According to des Closières, LexiFi's technology ensures a seamless transition to meet current regulatory requirements and set a strong basis to proactively respond to future evolutions. "What matters is not only to take on current challenges, but how the overall architecture will support future business and regulatory requirements. We are well equipped to provide such investment protection against future uncertainty."
The final factor behind Lexifi's success in recent months is, according to des Closières, linked to the company's ability to consistently develop new features and swiftly answer market needs. "Through continuous R&D efforts to refine our underlying technology and the software on top of it, and by gathering feedbacks from our clients we have been able to quickly identify and respond to fundamental market needs throughout the years," he says. "For example, one of the biggest issues faced by buy-side institutions lies in their inability to precisely capture product specifications in their IT systems.
"For structured products it is always a manual, error-prone and time-consuming task and as of today, the often only available document for the description of structured product's payoffs in the market is a PDF term-sheet," says des Closières. "We have therefore decided to develop a tool that automatically captures, through a single drag-and-drop of the PDF term-sheet in our platform, all the product specifications needed to post-process the product - in other words a 'PDF termsheet importer'," says des Closières. "Although numerous other new functionalities also benefit our clients, the advantage provided by such a tool is more directly perceived by users and it makes a huge difference.
"I guess this combination of three reasons: regulation, word-of-mouth and even more tangible features has helped us a lot on the commercial side."
When it comes to regulation, the implementation of the Markets in Financial Instruments Directive (Mifid) 2 and Packaged Retail and Insurance-based Investment Products (Priips)/Key Information Documents (Kid), will have a big impact on the structured products industry, and, according to des Closières, many clients may have their own interpretation of the new rules.
"The heterogeneity of our client base allows us to understand how each actor is interpreting the different regulations and how they have decided to meet these new requirements," says des Closières who admits he is quite surprised to see that even comparable institutions are taking very different paths. "For instance on the Kid regulation, some have decided to outsource completely the production of documents by subscribing to a service, while others prefer to keep the procedure in-house, and even hybrid solutions combining services and on-site capabilities are explored."
The same degree of uncertainty regarding market reaction applies with regards to Mifid 2, according to des Closières. "Here we see that even what seems to be small changes asked by the regulator, will probably have a big impact on the way people are conducting business," he says. "For instance, one of our clients is now considering that they will no longer be able to charge upfront fees. This will have a large impact on their business as they will probably have to change the wrappers used for their products from notes to funds for which it is easier to charge running fees.
"So this simple interpretation will have a considerable impact. Hence our first mission for the coming year is to assist all of our clients in their transitions," says des Closières.
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