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Using technology to improve the management of investment portfolios - the view from SIX

This article is from The Wealth Mosaic's recent report on how technology can be utilised to improve the management of investment portfolios

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by SIX Group
| 08/01/2021 14:03:56

SIX operates and develops infrastructure services for the Swiss Stock Exchange, Banking Services and Financial Information sectors with the aim of raising efficiency, quality and innovative capacity across the entire value chain of the Swiss financial center. With a workforce of some 2,600 employees and a presence in 20 countries, SIX generated operating income of CHF 1.13 billion and a Group net profit of CHF 120.5 million in 2019.

The Swiss Stock Exchange itself offers comprehensive listing, trading and post-trading services, making use of our unique value chain, and products and services that best serve your needs. As a central infrastructure provider, SIX safeguards the flow of information and cash between financial institutions, traders, investors and service providers around the world. All systemically important legal entities of SIX are subject to supervision by the Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA).

Thought leader
Christophe Lapaire is a senior executive with over 20 years’ experience in the banking industry. He has worked for the Swiss National Bank and several Private Banks in Switzerland, giving him a strong background in Asset Management, Product Management and global Operations.

Prior to joining SIX in 2012, Christophe was Head of Operations of HSBC Private Bank (Suisse) SA in Geneva, and COO of HSBC Guyerzeller Bank AG in Zürich.

Christophe has studied Literature at the University of Geneva, holds a degree in Business Administration and has performed an Advanced Executive Program at the Swiss Finance Institute in Zürich. Christophe is President of the Swiss Finance Institute Alumni Association.

Taxing times for investors
Investors – including high net worth individuals (HNWIs) – are likely to face a period of prolonged economic hardship post-Covid-19. With dividend payments at a number of blue chip companies temporarily suspended and interest rates across major markets hovering at unprecedented lows, returns for many investors are expected to evaporate over the next 12 months. Although active fund managers and index tracking products have enjoyed a performance turnaround as equity markets moved into positive territory after the extreme volatility in March, many investors acknowledge that this bounce could be a temporary one.

For countless investors, the long-term risks of Covid-19 have yet to be priced into their portfolios. In fact, a number of ratings agencies including Moody’s Investor Services have put the asset management industry on a negative watch. As a result, private banks and wealth advisers are on alert and need to find ways to maximise their clients’ revenues. The impact of these negative headwinds could, however, be blunted if wealth managers and private banks were to optimise and digitalise some of their operational processes. Identifying solutions to mitigate the impact of tax on portfolio performance would be a good starting point. It is also something which the Swiss Stock Exchange can help support.

Tax takes its toll on return generation
Despite a number of countries - including the UK – providing generous capital gains exemptions for foreign investors transacting in their local markets, plenty others do not. Italy, for instance, imposes a 26% tax on foreign investors selling domestic securities, whereas Switzerland applies a 35% withholding tax on dividends being paid out to resident and non-resident investors. Even though double tax treaties exist to prevent double taxation on dividends, not all investors are able to obtain tax efficiencies when investing in overseas securities markets. This can have a negative impact on overall portfolio performance.

Tax complexities breed challenges
There are a number of reasons as to why investors are not getting the tax benefits they are entitled to. Firstly, tax claims are a notoriously complex subject matter. Compounding matters further are that different markets adopt their own unique approaches towards tax. Often, the local rules around tax can change arbitrarily, sometimes with limited warning. This lack of harmonisation often makes investing in equity markets across multiple jurisdictions incredibly cumbersome from a tax perspective. As investors do not always have the tax expertise nor the systems and processes in place to routinely monitor for tax changes across multiple jurisdictions, they may incur higher tax charges in certain markets, which they should otherwise have avoided.

The same problem rings true at some of the smaller private banks and wealth managers. Many of these institutions – although they can deliver a degree of tax optimisation around portfolio management to end clients – do not always have the infrastructure to perform this role effectively. However, some of the larger private banks and wealth managers do have the systems and digital capabilities to carry out tax optimisation and have since returned vast sums of withholding taxes to their clients as a result. With beneficial owners becoming increasingly sensitive to costs coupled with the ongoing decline in product margins, tax optimisation is a major value-add that private banks and wealth managers can provide.

A solution that delivers
Banking and wealth management clients are increasingly demanding that their providers offer them tax optimisation services, and this is something that has been accelerated by the global implementation of the Automatic Exchange of Information. A failure by banks and wealth managers to adapt to their clients’ requirements could result in them losing business to competitors who offer this service. Investing in the systems to facilitate tax optimisation is not without its costs. In response, private banks and wealth managers are now looking to leverage the services of providers such as the Swiss Stock Exchange to obtain tax benefits for clients. As part of this, the Swiss Stock Exchange will manage the complexity of the process on behalf of wealth managers and private banks, by coordinating all of their tax activities with the relevant tax authorities.

The Swiss Stock Exchange provides a number of solutions around tax, including Relief at Source, Quick Refund and Tax Reclaim services. Its new Advanced Tax Services (ATS – Tax Reclaim Service) is an innovative and smart one stop shop solution aimed at banks and wealth managers. Most significantly, the service is readily available to organisations irrespective of whether their assets are held in custody at the Swiss CSD (SIX SIS Ltd.), a level of flexibility which is genuinely unique to the ATS-Tax Reclaim product. But how does ATS-Tax Reclaim support users?

At the most basic level, ATS-Tax Reclaim enables banks to offer a reclaim service at reasonable costs thereby helping them deliver value to their clients. The solution provided by the Swiss Stock Exchange is a straightforward endto-end tax reclaim service, which has been developed over the last three years in close collaboration with its clients, namely domestic and international private banks and wealth managers. Given the sensitivity of the data being handled, ATS-Tax Reclaim has been designed to meet the highest data protection and security standards.

The service is accessible through ATS Portal – the single-window access point to the ATS-Tax Reclaim service. A smart online application, based on innovative technology, the ATS Portal allows you to upload all data and documents essential to the tax reclaim process.

Core functions of the ATS Portal include:

  • Online transactions and data upload facility for banks.
  • Automatic, near-time validation of data is provided and automatic validation of instructions.
  • A client-centric dashboard provides visibility for the bank across multiple activities.
  • Smart bundling of underlying securities transactions into a formal tax reclaim over the longest possible reclaim period. Depending on the market, this can be as long as several years.
  • The bank defines the minimum amounts for reclaims, and this is freely configurable by markets, according to their underlying clients’ bespoke requirements.
  • Historicisation of transactions below the minimum reclaim amount is defined for inclusion in the next reclaim cycle. This means there are no losses attributed to smaller transactions and an overall better reclaim performance for end clients.
  • Archive of transactions with online access to data history and easy data export facility for banks.

Supporting the tax requirements of market participants
The ATS-Tax Reclaim solution offers a huge number of advantages to private banks and wealth managers globally. In addition to allowing banks to provide a new service to end clients, it will allow them to increase their book of business and entrench existing commercial relationships. That this service is being delivered by the Swiss Stock Exchange – a financial market infrastructure – as opposed to a competitor or consultant is also a very enticing proposition.

The Swiss Stock Exchange is widely accepted as being an industry leader when it comes to digitalisation and innovation across all facets of its business. Simultaneously, the Swiss Stock Exchange employs some of the leading authorities on tax, thereby ensuring clients receive a high quality, high-touch service. One of the biggest benefits for clients, however, is that by outsourcing tax optimisation to the Swiss Stock Exchange, they will no longer need to make significant, fixed investments into their systems or maintain dedicated tax operations experts. Given how fluid tax policies and regulations are globally, this will help firms generate major cost synergies at a time when operating costs are coming under pressure.

Externalising these processes to vendors with best in class, competitively priced technology solutions also helps providers reduce their operational risk. Given the ongoing challenges facing organisations as a result of Covid-19, this could allow firms to deploy more resources to critical, revenue generating areas of the business. This will enable private banks and wealth managers to enhance the levels of service to their own end clients, providing for a more enjoyable user experience. The ATS-Tax Reclaim solution is designed to cover around 90%-95% of the requirements of target clients; and provides support across a wide range of investment domiciles, client tax domiciles, asset classes, clients and account types.

Maximising revenue potential through operational efficiencies
Financial institutions and investors alike are poised to face significant challenges over the next 12 to 18 months. With returns expected to significantly decline, investors need to ensure they can maximise performance, something which can be achieved by finding operational efficiencies, especially through mechanisms such as tax optimisation. Simultaneously, it is crucial that private banks and wealth managers continue delivering a high calibre service to HNWI clients if they are to retain business moving forward. This is something that can be achieved through valueadd services such as tax optimisation. By leveraging the expertise of the Swiss Stock Exchange, private banks and wealth managers will be able to deepen their product suites, and offer a wider range of services to clients.

This article is from The Wealth Mosaic's report on how technology can be used to improve the management of investment portfolios. Access the full report here.