The future of any business in the securities markets is being heavily influenced by cost considerations and the only way to stay competitive is to be efficient. At a time when firms are also being further constrained by regulation, outsourcing vendors are becoming all the rage.
Traditionally, outsourcing has largely referred to the typical back- and middle-office functions an investment manager doesn’t want to do and therefore shipping it to a custodian or vendor. Over the years, it has provided the business model for those securities services providers.
But now regulation is biting hard. Many once profitable business units for banks are now being seen as costly, requiring firms to revaluate many front-and back-end processes.
This includes fund administration, collateral management, cash management, FX, derivatives clearing, reporting, data management and reconciliation.
Suddenly outsourcing is no longer limited. The possibilities are endless.
Perhaps the biggest shift in outsourcing - as a result of the Basel III capital requirements - has been the significant increase in requests from clearing banks for technology solutions.
Speaking at the FIA IDX 2016 conference in London Ray Kahn, Barclays former head of agency derivatives services, said that technology and utility-type solutions are in incredible demand.
“We are all lining up to say ‘do you have something that will make our operations more efficient?’ The reality is that the industry is seeking efficiencies that will allow it to operate at an equilibrium, and we will look for anybody that can provide this,” said Kahn.
This regulatory pressure has formed the bedrock of the FIS Derivatives Utility, which has taken on the post-trade cleared derivatives operations of Barclays and Credit Suisse.
Banks are seeing the workload in their day-to-day operations increase as more products become accepted for central clearing, and this is where FIS see its opportunity.
“From a regulatory perspective, every firm that is clearing has to deal with Dodd Frank and EMIR. Even for the buy-side, these are projects that require changes to operating processes, changes to onboarding, and changes to technology,” says John Avery, director for client and industry engagement, Derivatives Utility, FIS.
“Our solution is focused on about 80% of what a clearing firm needs to do in the middle-and back-office on a day-to-day basis and on a change management basis. With our derivatives utility, we replace what that firm has to do today.”
While it does not remove the responsibility of compliance, it allows firms to use the expertise of the outsourced service provide and simplify these processes.
Avery adds that its derivatives utility is based on a shared resource architecture, with a mutualised, multi-tenant operating model. “The outsourced utility offering is interesting because it not only focuses on the transactional aspect of what a business requires for clearing, but also a significant value proposition through a shared resource approach.”