In securities processing, multi-tenant utilities as a business model has slowly, but surely emerged in recent years. There are several existing players like Broadridge, Pershing, State Street Global etc. that offer platforms which offer services like Mid-Office and Back Office operations, BPO services, clearing solutions for sell-side brokers and utilities for buy-side players. In addition to these, large banks like SocGen, UBS and Citibank offer their own internal platforms as utilities for third parties. What is clear is that offering securities processing services as a utility is a highly capital intensive operation and choosing the right design principles, service model and partnership construct is critical to the success or failure of such a service.
Due to the complex nature of the setup, the substantial IT investments required and potential disruption in regular processes, banks are usually faced with a dilemma – Develop the utility from scratch, or partner with a product vendor. The following framework of design considerations can help in choosing the appropriate design option.
- Time to market
- Extensibility to other tenants and other lines of business within the bank
- Ability to handle minimum forecasted trade volumes
- Significant overall cost reduction
- Operational risk during implementation
In addition, best practices in platform design dictate that the utility should:-
- Have a service oriented design with global rollout capability
- Have shared processing functions and rules engines with data masking
- Have a single code base for the platform with separate processing queues for individual tenants
- Have linearly scalable architecture and
- Have flexible interfaces
Usually, banks prefer to monetize a utility through direct sales or partnerships, and due to the capital intensive set-up, there is usually a consortium of banks that comes together to build the platform. That brings up the question of the correct legal entity for the utility. In such cases, a Special Purpose Vehicle (SPV) is the recommended legal structure. The SPV, in this case will own the platform and offer it as a service to the processing entities. The stake in the SPV will be determined by the amount of investment made into the project by participating parties. Usually, there are provisions for change in ownership structure as new tenants join and also for transfer of ownership and assets and exit clauses for existing tenants. The SPV provides the most appropriate legal structure to isolate platform assets, regulator and operational risk and cash flows from individual tenants.
What are your views on the best design and legal structures for multi-tenant utilities? What other models have you come across? Please share in your comments.