Banks See Future in Outsourcing Derivatives Clearing

As operational costs continue to mount for clearing banks, outsourcing certain functions to third-party vendors could be the way forward in seeking efficiencies, according to industry experts.

Barclays became the first bank to sign up to a new post-trade utility operated by tech vendor SunGard, in which it has outsourced certain functions for clearing futures and OTC derivatives.

With increased capital and leverage ratio requirements on the horizon for banks, the cost to carry out swaps clearing could rise by five or six fold, according to analysis from J.P. Morgan.

In addition to Basel III, banks are seeing more workload to their day-to-day operations increase as more products become accepted for central clearing.

For banks to continue to be operationally efficient, and to manage the clearing of new asset classes, the answer could be in the form of outsourcing.

“The challenge on our ROE (return on equity) is the cost space, so we have looked heavily into our cost space,” says Stephen Li, European head of clearing, Barclays, at an industry conference in London.

“Outsourcing, what we believe, is the new era that all banks will be looking into [for managing costs]. We all have the same operational processes so there is a search from everyone for efficiencies.”

Michele Neal, global head of Listed Derivatives, Markets Clearing & Market Structure for Deutsche Bank, agrees that outsourcing is on the radar for banks, but whether to adopt a fully outsourced model is at the crux of the debate for the industry.

“What will an outsourced solution be if it means the same thing to everybody? Will everybody put the same number of things into that box, or will people try to think about what particular things touch my clients which can be differentiated, or will they outsource the most generic [functions] which involves the least amount of risk?” says Neal.

“The marginal cost of every client that moves into that model should mean the cost going down… This is definitely a watch this space kind of thing.”