Large banks could save up $4 billion each year by adopting a shared utility model for trade processing, according to a study by Broadridge.
The report argues that by sharing in a range of trade processing functions - from core post-trade processing, reference data and reconciliations to trade expense management, corporate actions, and tax and regulatory reporting - in a utility model, market participants could hack up to 40% off their annual $6-$9 billion spend.
Tim Gokey, Broadridge chief operating officer and co-author of the report, says: "Over the next five years, regulatory pressures are set to grow, so banks are increasingly looking to new and unconventional ways to regain efficiencies, particularly within the trade lifecycle. Emerging utility models hold significant promise."
In November last year, FIS paired with Crédit Agricole Corporate & Investment Bank to launch a post-trade utility for the derivatives market. The utility combines the existing platform of Crédit Agricole CIB with the tech expertise of FIS and was designed to meet the needs of corporate and investment banking firms worldwide for shared IT services for cross-asset derivatives.
Looking across all asset classes, Gokey says core post-trade processing (clearance, settlement, custody, financing and recordkeeping) offers the highest potential for cost reduction at banks currently. Individual bank back offices are beset by inefficiencies from under-investment and merger-led system redundancies.
Says Gokey. "Over the past two decades, institutions have invested heavily in unsuccessful attempts at building such utilities - typically due to misalignment over governance and ownership, competing priorities, and technology and implementation struggles. But with growing ROE pressure, fewer banks competing head-to-head across markets and greater willingness to consider new operating models, the industry may be nearing an inflection point where the potential benefits of a post-trade processing utility outweigh the challenges that have undermined past efforts."
Any attempt to build such a model would require a carefully scoped approach, believes Boradridge, starting with the most liquid and standardised asset classes - fixed income and equities - and focusing on regions where the market structure is most centralised.
Concludes Gokey: "By leveraging proven multi-bank technology and operating models and a commercially-driven approach, banks would nearly halve the investment, time and risks associated with establishing a post-trade utility."
A more radical alternative may yet lie in the form of blockchain technology. In July, Peter Randall, the former CEO and founder of Chi-X announced the launch of a system dubbed SETL with a view to streamlining post-trade infrastructures.
The SETL system has been designed to enable market participants to move cash and assets directly between each other, facilitating the immediate and final settlement of market transactions. SETL maintains a permissioned distributed ledger of ownership and transaction records, simplifying the process of matching, settlement, custody, registration and transaction reporting.