The future of any business in the derivatives and securities market is being heavily influenced by cost considerations. The only way to stay competitive is to be efficient. At a time where firms are being further constrained by regulation, outsourcing vendors are becoming all the rage.
Traditionally, outsourcing has involved all the typical back- and middle-office functions a trading firm doesn’t want to do and shipping it to a custodian or vendor to do for them. Over the years, it has provided the business model for those securities services providers, custodians, and hedge fund administrators.
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.
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.
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 more workload to 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.”
Core vs non-core
The impact of regulation has been profound, with many banks and buy-side firms being forced to review what is core and what isn’t to their overall business.
For certain back- and middle-offices which have traditionally operated on legacy systems, the costs of maintaining and managing the IT infrastructure is becoming too much.
“Gradually banks and buy-side firms are having debates about what are core and non-core services,” says Peter Farley, senior marketing strategist, Misys.
“There is a lot of IT costs tied up in back-office operations, and a lot of it needs to be streamlined and made more efficient. Banks will have to be able to redeploy funds to places where you can make a competitive difference in the pre-trade and risk space, and to meet the regulatory demands.”
By finding new cost-effective ways of managing back-office infrastructure, banks are attempting to differentiate what is proprietary and where they are adding core value to their customers.