The concept of processing utilities in financial services firms has been around for many years. Indeed, depending on where you look, many processing utilities already exist. On the market side, consortiums have worked together to form common trading facilities often in not for profit entities. Chi-X is a good example of a multilateral trading facility born out of a consortium of major financial institutions later to become a Recognised Investment Exchange. On the depository side, Central Securities Depositories (CSD) arose from a need to be able to transfer securities via book entries rather than by the physical transfer of certificates. Many CSDs now operate in the Eurozone offering central processing capabilities across various markets. The latest evolution of the utility concept focuses on the remaining infrastructure maintained by financial institutions to be able to manage trade flow and positions between execution and delivery.
Following the advent of the financial crisis and the resulting influx of regulatory driven change required by financial institutions, the ability to maintain siloed processing infrastructure became unsustainable. Organisations needed to simplify their landscape to be able to deliver the change in a timely and cost effective way. With this simplification came the ability to centralise processes in enterprise wide utility models. This centralisation of function provided the added benefit of allowing a level of cross function transparency often not available with disparate systems.
Enterprise Utility constructs require significant investment from organisations due to the need for uniform operating models across multiple lines of business which have often developed organically. The ability to standardize processes and accept firm wide operating models enables the change requirement to be defined and implemented once rather than in multiple instances leading to significant agility within the organisation. Indeed, this optimisation of change leads to the biggest commercial benefit. Although there are benefits derived from the centralisation of platform and resources, these demands still maintain significant cost correlation to processing volume.
Having witnessed the success of the enterprise utility concept, the industry has already started looking at the next iteration of the utility model, the industry utility. In an industry utility an external party provides processing across multiple financial services organisations thereby spreading the change costs across a wider pool of participants. Several services have already come to market across areas such as KYC data provision, trade reporting, reconciliation and even clearing services. Many organisations take the opportunity to relook at existing operating models as part of the transition to a service and can benefit by the standardisation of processes to market benchmarks. However, significant challenges remain with the provision of data to external parties due to data privacy laws or even the outsourcing of functions due to regulatory restrictions. Never the less, the commercial attractiveness of the servicing of non-differentiated functions by central processing utilities cannot be ignored and many financial services organisations have recognised the need to work with regulators to find a solution to the current restrictions.
A potential solution to the inability to move directly to an industry utility model is the ability to adopt common operating models and platforms across multiple members of a processing consortium. Many organisations already use common technology solutions due to the consolidation of applications towards market standard platforms. Indeed, global financial organisations have already embraced the need for platform and process standardisation across geographies where regulations require in country processing. The ability to extend this model to a processing consortium that create a servicing company to centrally manage change across all consortium members would see members gain the majority of benefits normally associated with the wider industry utility. Further still, the ability of the consortium to collectively negotiate around technology requirements and human capital management provides further opportunities to maximise commercial efficiencies. In many situations, it would be conceivable that these processing consortiums would themselves become the industry utility solutions as they move from not for profit entities into fully commercial services companies.
To conclude, the industry will continue its move towards central servicing for non-differentiating services where possible, focusing reserves on customer experience and similar areas of differentiation. Although this journey is well underway, we can expect to see many model iterations as firms look for ways to progress within the legal and regulatory boundaries as they currently exist.