The future of the IFSC


COOMERCIAL PROFILE - SCIENCE FOUNDATION IRELAND:A new research cluster called FMC2 aims to make Ireland a key player in advanced financial software

WITH TENS of thousands of stocks, bonds, commodities and other assets in which to invest, the job of the asset manager has grown increasingly complex and it would be nigh on impossible without the assistance of modern information technology.

More than 70 per cent of all trades carried out on the New York Stock Exchange are carried out by computers with little or no human intervention and sophisticated financial software is at the heart of every major investment institution.

Ireland is now set to become a major source of advanced financial software thanks to the work of the newly established Financial Mathematics and Computation Cluster (FMC2) – funded by Science Foundation Ireland (SFI).

The €4.7 million project will create a centre of financial research excellence by bringing together complementary expertise in financial mathematics, financial economics and computer science. Research at FMC2 will initially concentrate on the development of theory and methods for asset management to greatly enhance the development of, and future employment growth in, the international financial services industry in Ireland.

The software could be vitally important in sustaining jobs in Ireland’s international financial services sector.

“The IFSC was founded in Dublin in 1987 and grew from humble beginnings,” says Prof Anthony Brabazon, head of the FMC2 research team. “In spite of the scepticism expressed in some quarters at the time, the visionaries were proven correct: the IFSC flourished and now, 20 years later, it directly employs 25,000 people in knowledge-based, high-value-added jobs and accounts for approximately 35 per cent of all Irish services exports amounting to some €20 billion per annum.”

But continued success is not a certainty. “Companies in the IFSC face increased competition from other countries. Our tax regime can easily be replicated and what will be a key differentiator in the future is the availability of skilled people.

“At FMC2 we are looking to protect the employment that’s there and help the industry generate new jobs in the more high-value-added mid- and front-office activities. We need to up our game if we want to continue to grow employment in this sector. A key enabling factor will be the deepening of the pool of high-calibre, financially trained graduates with quantitative skills for employment in financial services firms.”

The pioneering FMC2 research cluster involves collaboration and engagement between a range of researchers in UCD, Dublin City University, NUI Maynooth, the University of Ulster, University of California, Los Angeles (UCLA), Columbia University, the Federal Reserve Bank of New York and the Technical University of Kaiserslautern in Germany. Industry partners include Pioneer Investments, Ryan Capital and the Institute of Bankers in Ireland.

It is one of SFI’s 19 strategic research clusters (SRCs) which link scientists and engineers in partnerships across academia and industry to address crucial research questions, foster the development of Irish-based technology companies and grow partnerships with industry that could make an important contribution to Ireland and its economy.

“This cluster forms a pivotal element of national infrastructure, creating a critical-mass research centre which will undertake research and training for the financial services industry. A prime objective of the research cluster is to support industry product and process innovation in order to grow employment in the financial services sector in Ireland. The cluster’s researchers will be working directly with our industrial collaborators in order to help achieve this goal,” Brabazon adds.

FMC2 will provide expertise to the financial services sector in the three fundamental elements of financial markets – risk, information and liquidity. It will undertake world class research in areas of strategic relevance to the services industry in Ireland.

In excess of 40 people will be directly involved in the research activities. In addition, personnel from industry will also participate in the collaboration. “By training highly skilled PhD and post-doctoral researchers for the financial services sector, Ireland will be able to develop high-end asset management and financial products which will underpin the future development of the international financial services sector in this country,” Brabazon says.

The initial concentration on asset management reflects its importance to the IFSC. “Asset management accounts for 40 per cent of all employment at the IFSC,” says Brabazon. “What we are going to do is develop software to assist firms in their asset-management activities. The big issue facing portfolio managers is the variability of returns across the different asset classes and within those classes. Our software will help them allocate for robust returns.”

The development of this software involves the collaboration of people with backgrounds in mathematics, computer science and finance, and requires a strong input from industry partners who allow for the models and the software to be tested under real-world conditions.

“What we are doing is pulling together those different skillsets and talents which the industry will require in future years,” Brabazon says. “This will allow us to create a centre of financial software excellence in Ireland and an intellectual engine to assist firms here in their research and development efforts in the future. In the immediate term, our industry partners are using FMC2 as a resource for their own research activities.”

Robert Richardson, chief executive of industry partners Pioneer Investment Management, says: “Research has always been central to our business model over the past 80 years. We are pleased with the opportunity to be able to provide our international industry expertise to this strategic collaboration. We are very optimistic that through this project we can further enhance our in-house quantitative research capabilities and contribute to the development of the quantitative research discipline in Ireland.”

Industry support is the central aim of the cluster and it will achieve this in a number of ways, according to Brabazon. “In addition to undertaking leading-edge research, we will directly train a cohort of PhD researchers and post-doctoral researchers, future employees and entrepreneurs,” he says. “Also, by creating closer linkages between universities and industry, the cluster will feed back into the education of a much larger number of undergraduate and postgraduate students. It will engage with a range of industrial collaborators in order to create technology-transfer opportunities and thereby support their innovation activities.”

There is also the positive signal that its establishment sends the industry. “The creation of FMC2 provides additional tangible evidence of the government’s aim of positioning Ireland as a centre for high-quality financial services and high-quality employment, thereby supporting the client development activities of IDA Ireland and Enterprise Ireland,” Brabazon says. “Of course, industry engagement is a two-way street, and the long-term success of Ireland as a centre for financial services depends on the support of industry for education, training and research activities.”

He is optimistic about the cluster’s future prospects and those of the industry generally.

“We are clearly in volatile and turbulent times and adaptability, in all sectors of industry, is more important than ever. However, in spite of the challenges we face, I think that we can be optimistic. The international financial services sector in Ireland has shown a remarkable capacity to re-energise and reinvent itself over the last 20 years and the current environment, as well as presenting challenges, opens up opportunities for the nimble.”