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Study: Creation of a utility for post-trade processing could save banks $4B

4 min read

Modern Money

A new study by Broadridge Financial Solutions finds that large banks could cut costs of processing trades by 40% though the adoption of a utility-type model. Sharing a range of functions such as post-trade processing, reconciliations and post-trade data, expense management and regulatory reporting would save the average Tier 1 bank $100-$300 million per year.

The new report, “Charting a Path to a Post-Trade Utility,” deals with the increasing costs of meeting new regulations and economic hurdles that cut into banks’ profit margins. “Despite significant cost cutting and restructuring post-crisis, most banks still struggle to post returns that exceed their cost of capital,” said Broadridge COO Tim Gokey. “Over the next five years, regulatory pressures are set to grow, so banks are increasingly looking to new and unconventional ways to regain efficiencies, particularly within the trade life-cycle. Emerging utility models hold significant promise.” Industry-wide savings could reach $4 billion, according to Broadridge.

New Landscape Creates Momentum for Change

This isn’t the first time the industry has considered collaborating to create a utility. “Over the past two decades, institutions have invested heavily in unsuccessful attempts at building such utilities – typically due to misalignment over governance and ownership, competing priorities, and technology and implementation struggles.” Gokey says the study delves into what is different this time around and identifies one major factor: momentum. “There is an increased need and enough stories of success that the equation has changed,” Gokey says. “The industry may be nearing an inflection point where the potential benefits of a post-trade processing utility outweigh the challenges that have undermined past efforts.”

The report features case studies and analysis from Broadridge’s proprietary data trove, with particular focus on post-trade processing as a starting point for the development of a utility model. The report also addresses challenges and opportunities that would come with such a joint processing model.

The report finds vast similarities among major banks when it comes to post-trade processing for most fixed-income and equity trades. This area offers the greatest potential for reducing costs via a utility. According to the report, bank M&A has left the industry with many redundancies and lagging investments in mid- and back-office functions after the 2007 financial crisis. Pooling trades would provide economies of scale and could greatly reduce costs.

In addition, the report states that post-trade processing represents a natural area for the focus of a new utility, as this is central to all trades, including the functions of confirming terms, records matching, clearance and settling of trades, regulatory reporting and managing reference data.

The Role of an Industry Utility in “Living Wills”

A joint utility would help spread the regulatory burden and help banks meet the “living wills” requirement for large institutions. A utility, as proposed in the report, would enable portfolio assets of a failing bank to quickly be identified and shifted to safe havens, easing recovery and resolution.

The report takes a close look at the resolution of Lehman Brothers during the financial crisis. Gokey says a utility would ease resolution if a similar situation occurs. “If all the assets and books and records are at a third party, the ability to transfer those is greatly facilitated.”

What role, if any, does block chain play?

Block chain has been front of mind for many in the financial services space. When quizzed about the role block chain might play in the post-trade space, Gokey noted the initial focus of most block chain developers has been on more complex asset classes where transactions are much more paper-intensive. Gokey says block chain may one day play a role in fixed-income and equities, but that a post-trade utility for those assets make sense now.

“The creation of an industry post-trade utility will require a carefully scoped approach, starting with the most liquid and standardized asset classes – fixed income and equities – and focusing on regions where the market structure is most centralized,” Gokey said. “By leveraging proven multi-bank technology and operating models and a commercially-driven approach, banks would nearly halve the investment, time and risks associated with establishing a post-trade utility.”