In this discussion, the new Global Head of Capital Markets for TCS Financial Solutions advocates the creation of an industry utility for securities processing that can handle all aspects from trade inception, capture, clearing and settlement, and asset servicing. Read on for excerpts from an interview where he makes a case for industry utilities.
Do you see the internal utility as a business model that other banks should imitate?
It’s a logical first step to achieve the labour arbitrage, but it’s not the end game. Regulators have become wary of the amount of risk that banks have been prepared to take on with traditional BPO arrangements, and in some countries, there is an added degree of scrutiny regarding jobs going offshore. The control environment needs to be robust for what are high risk processes with demanding deadlines, especially for the more exotic events.
In addition, cost pressures are only increasing due to the volume of regulation coming down the pike, as well as demands upon banks and their custody and prime finance businesses as tax jurisdictions around the world issue new interpretations on cross-border securities ownership.
The top line is also under threat. In the past, we had imagined perpetual growth of clients and trades. However, even where that does happen, the pattern has changed for settlement volumes. Equities traders, in particular, are seeing reduced margins, and brokers are seeking to consolidate. For the infrastructures that are now in place, these significant swings in capacity are as difficult to manage as overcapacity.
What’s the appropriate business model for banks given the situation you describe?
With the flattening in market activity combined with regulatory and cost pressures, it’s likely that we’ll see movement toward a single industry utility for clearing and settlement. When the individual banks look at each other, they realize that they’re doing very similar things and have very similar processes throughout the flow of the trade cycle, little of which gives them a competitive advantage with clients. As a consequence, a few organizations are now considering the option of an industry utility to centralize non-competitive functions. It simply just makes more sense.
How would an industry utility work?
Banks would minimize their overhead by consolidating and integrating onto a single platform a wide range of back-office banking activities that currently reside on several platforms. Banks would still service their front-end clients, and the functions of the utility would be white-labeled to whatever degree is appropriate for each bank. In this way the banks would differentiate themselves through front-end service, while freeing up more time and budget for their client-facing organizations to pursue product and service improvements.
Instead of each bank spending considerable sums for the same regulatory compliance fixes, that regulatory spending would move into a single pot to be implemented once for all participants. The result of an entity such as the IRS issuing new rules for Cost Basis and FATCA, would be that those rules could be implemented just once, for all participants, on the new platform.
What are the main barriers to the idea?
Segregation and protection of client data is a priority. In addition, the utility must give consideration to any proprietary processing that a participant bank prefers to retain for itself. These are capabilities that TCS is well-positioned to deliver.
There are also internal politics to navigate at some organizations, but the regulatory and cost pressures are widespread and powerful forces. Legacy organizational structures are be-coming harder to justify.
What effect would an industry utility have on bank budgets?
An industry utility would reduce transaction costs across the board. In addition, the ability to shed a large and growing regulatory burden would enhance the possibility for new technology spending. Most banking organizations have a limited bud-get to replenish and refresh their technology, and the current level of regulatory spending has had the effect of shrinking the budget for everything else. An increase in regulatory demands means that budgets decrease for new products, platform upgrades, and even for consolidation and integration of existing platforms.
What role does TCS have in advocating the idea?
We’re in the marketplace now promoting a case for industry utilities, and I’m the strongest advocate for that. NGS and I came together in that belief eight years ago, which is why I see this move to TCS as a logical step, a progression from running an internal utility for a single bank, to being in a position to offer those utility services for the industry as a whole. I believe that it’s going to be successful, although clearly, it will take us some time to get there.