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Regulations have forced all firms to review
their pre-trade and execution costs.
This is now evolving to include clearing,
settlement and custody costs. How will
a new focus on post-trade costs impact
outsourcing models? Joe Parsons writes.
T
he onset of regulations across the financial
services industry has forced all firms to review
their operational processes. The new onus on
transparency, brought about by MiFID II, PRIIPS, as
well as the UK’s Financial Conduct Authority (FCA)
review on asset management, has brought costs and
value for money to the forefront of planning opera-
tional procedures.
Firms coming to terms with the best execution
requirements and a focus on transaction cost analysis
(TCA) under the MiFID II regime have largely focused
their efforts on the pre-trade, determined to get the
best deal for their trades. However, many have not yet
realised the costs associated with the post-trade.
According to a recent study by Liquidnet, which
interviewed back-office operations staff and heads
of dealing at 27 asset managers accounting for $16.9
trillion in assets under management, 61% said they are
looking at the implicit and explicit costs of trading. Yet
only one third include all costs and charges from pre-
trade all the way to settlement.
The fact that many firms have failed to understand
is that post-trade operations make up a considerable
amount of budget space. According to figures collected
by Aite Group, the average annual spend on post-trade
operations for tier one investment banks was over $36
million in 2017. Meanwhile, the average annual spend
on the post-trade for a tier one buy-side firm was $7.9
million, and $2.1 million for a tier one broker.
The study suggested investment banks spend the
most on staff even though they have often outsourced
their operations to lower-cost locations through off-
shoring arrangements.
But the new spotlight on costs and transparency has
meant all firms are under pressure to reduce costs
wherever the can, including the post-trade.
“The cost of trading has traditionally been viewed
as a front office function, with very little emphasis
on the back office and post-trade,” says Alex Krunic,
head of sales and relationship management for global
broker-dealer services, Societe Generale Securities
Services. “This has now changed, and a key driver for
this is margin compression we are seeing in the back
office. Firms are now realising you need to get the best
deal on all sides of the trade.”
Fall 2018
globalcustodian.com
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