The capital markets and investment banking industry is seeing a rapid shift in their business model. An avalanche of new regulations and the continuing economic uncertainty means the industry is operating at Return on Equity levels that are less than10%, much lower than the historical levels seen before the 2008 financial crisis. The Dodd Frank Act and European Market Infrastructure Regulation (EMIR) are pushing the Over-The-Counter (OTC) industry towards standardization. In Europe, TARGET-2-Securities (T2S) is being pushed for implementation at select Central Securities Depository (CSDs) in phases starting 2015. Driven by the change, investment banks and broker-dealers are gravitating towards becoming either large flow players in the trading business or niche players for select products and markets. At a time when the top 10 global investment banks are spending close to $100-$250 million per annum in maintaining and enhancing their back office securities processing systems, margins in both - the flow and OTC businesses are rapidly shrinking with uncertain trade volumes and creeping commoditization.
In addition, the changing market dynamics are forcing, broker-dealers to invest heavily in front office systems to differentiate themselves by providing better access to liquidity, best execution and lower fees. The industry’s continued shift towards electronification of asset classes and drive to reduce costs in traditional flow business means that significant investments are required in IT platforms to maintain scale, reduce cost-per-trade and remain relevant in the market. This article explores one of the industry trends, which is to create or join a utility platform for securities back office processing and the associated functions.
The word “Utility” is generic and often used in multiple contexts. For the purpose of this article we define it as shared platform across banks or within a bank to deploy technology services, operations services or both.
Multi-Tenant Utilities are Coming of Age
The ever adapting capital markets and investment banking industry is exploring new ventures and partnerships to create platform services in securities processing.
Today, most large players in the US and European markets are in advanced stages of setting up back office Securities Processing Utilities or joining one that already exists. The primary functions of this utility are related to clearing & settlement, reconciliation, reference data and corporate actions. The players in the fray include outsourcing providers, securities service firms, product vendors, exchanges, market data providers, depositories and Central Counter Parties (CCPs).
As a business model, the industry is not new to utilities and platform services. A few of the established players and platforms are shared in the figure below: