[ M A R K E T
ited, where many have only chosen to
outsource their clearing and custody
functions.
There is a significant demand for banks
and broker-dealers to reduce in-house
costs through outsourcing to other
service providers. A study from Oliver
Wyman of 31 banks last year found 55%
of those surveyed were seeking to reduce
in-scope rune costs by more than 20% by
using outsourcing, and 31% said they were
willing to invest more than €50 million on
outsourcing.
But while outsourcing is often the
answer for reducing costs, achieving
post-trade efficiencies will be difficult for
firms using multiple providers all with
different technology stacks.
“Exacting change using different sets
of technology outsourcing providers and
staffing outsourcers is difficult, so there
is a need to improve this process on both
sides. To really make change, the technol-
ogy-based functions and the people-based
processes need to be thought of together,”
says Erik DiGiacomo, global head of pro-
fessional services, Broadridge Financial
Solutions.
“You get a direct financial improvement
where the technology vendor and the
people-based process are in the same
room devising a new operating model.
We find the innovative process tends
to be faster, and the resulting oversight
required to maintain control becomes
simpler.”
Over the years, mutualised services have
emerged, which allow banks, broker-deal-
ers and asset managers to all outsource
non-differentiated services onto a utility
and obtain economies of scale.
This is something that technology
vendors such as Broadridge and FIS and
competing on, with cost reduction and
business optimisation at the heart of their
pitch, but there are still sceptics over
these models.
According to the Aite study of 22 market
participants in settlement operations at
global capital markets firms, 62% of firms
have no interest in a managed service to
support their middle- and back-office.
Pricing post-trade solutions
With awareness of post-trade costs
increasing, and the rise of utility models
that can mutualise these services, the cost
pressures on custodians are rising.
R E V I E W
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P O S T-T R A D E
C O S T S ]
Like other areas of the financial services industry, there
is a concern that such regulatory burdens and demands
on performance is straining how custodian’s price post-
trade services.
According to the Oliver Wyman study, price sits as
the second highest priority for banks when planning to
outsource. However, the study also suggested a number
of regional banks and broker-dealers lack the neces-
sary level of internal transparency to effectively use a
cost-per-transaction model when comparing costs of
processing in-house verses the cost of processing with a
third-party.
While rules on unbundling, set out under MiFID II,
targeted the pricing of research being separate from
execution, there are several knock-on effects on the post-
trade.
“With the unbundling of costs from MiFID II where
historically you never had to pay for asset servicing
on a standalone basis, firms may need to do that. The
challenge is how do you price it in. Providers have to do
so based on the risk, so how do you price risk on a stan-
dalone basis? Providers are getting better at understand-
ing this, and charging separately for different functions
via an unbundled approach,” says Krunic.
“To really make change, the technology-based functions and
the people-based processes need to be thought of together.”
ERIK DIGIACOMO, GLOBAL HEAD OF PROFESSIONAL SERVICES, BROADRIDGE FINANCIAL SOLUTIONS
What all post-trade providers want to avoid is a race to
zero. The asset management industry has already seen
this with regards to fees, such as the launch of Fidelity
Investment’s zero-cost index fund.
The reality is post-trade service providers live in a
world that is highly complex, dealing with multiple
infrastructures and requiring the most up-to-date tech-
nology to handle safekeeping of assets.
Despite client pressures to lower costs, custodians are
looking to counter by providing value-added services
that can justify their prices.
“Clients are trying to push for a race-to-zero, this is
one of the reasons for the ongoing need to drive efficien-
cies. They need to appreciate that the cost for managing
the complex global infrastructure, operational risk and
regulatory oversight is significant. Reducing cost should
be balanced with added-value services, such as using
data to help assess asset liquidity and offering valued
business and strategic insights into market specifics
which can assist in best execution decision making,” says
Jane Karczewski, head of global custody, HSBC Securi-
ties Services.
As post-trade pricing becomes increasingly engrained
in the total cost of trading equation, and even best-exe-
cution calculation, custodians will have to become more
aware than ever of their value for money.
Fall 2018
globalcustodian.com
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