By Tim Gokey, chief operating officer at Broadridge Financial Solutions
With ongoing drumbeat by the US administration that it will seek to roll back key elements of Dodd-Frank and other regulations, many are wondering whether the industry’s focus on transforming post-trade operations and technology is decreasing. Based on conversations with senior operations and technology leaders across North America, Europe, and Asia the mood for change is as strong as ever, with new and more practical approaches for bringing it about.
Over the past two years, multiple efforts attempted to bring together groups of large firms to create a global institutional “utility” for the back and middle office. These conversations were spurred by the strong need for cost reduction among capital markets firms and the belief they had captured most of the low-hanging fruit that could be accomplished within their four walls (location strategies, outsourcing etc). In the end, these efforts foundered because of three critical issues: 1) inability of the largest players to agree on their highest priorities; 2) lack of an available next-generation, multi-tenant global technology platform; and 3) the high cost of on-boarding institutions onto such a platform once it was created.
Despite the demise of the prior conversations, significant progress has occurred since then based on new solutions which promise to unlock significant value. Indeed, a Broadridge white paper last year estimated the potential industry savings to be $2 billion to $4 billion annually just based on the most liquid asset classes. Three key developments have spurred continued progress toward a more mutualised approach in post-trade operations and technology:
The availability of new global, multi-asset technology platforms such as Broadridge’s new Global Post Trade Management platform. One of the largest global fixed income capital markets players has recently committed to consolidate more than a half-dozen platforms globally onto this next-generation platform, streamlining operations across markets and delivering a real-time view of positions, trades, and P&L, leading to better decisions, lower risk, and higher efficiency.
The realisation that a step-by-step approach is the most practical way to achieve the goal. With the failure of several multi-institutional initiatives, industry participants are realising that leading technology partners can arbitrage through time the different needs that different institutions have. If we address one set of issues today, for-profit entities with a balance sheet are willing to take the commercial risk that others will have the same issue tomorrow. Bringing on institutions one at a time also dramatically lowers the on-boarding cost and risk.
The promise of next-generation technologies like blockchain, cloud, and machine learning. Institutions are increasingly aware that the post-trade operations and technology approach of the next decade will undergo significant transformation. For each institution to bear the cost and burden of those changes individually doesn’t make sense and will slow progress. Conversely, a mutualised approach can be an “on-ramp” for institutions to take advantage of next-generation approaches with much lower investment.
Given this new thinking and emerging progress, what will be the impact of slowing or rolling back Dodd-Frank, DOL, and other US regulations? It’s too early to tell, but the early thinking is that the new OpTech approach will be even more relevant going forward. Of course, the regulatory and market structure changes in Europe and Asia remain unchanged. Even in the US, now that leaders have seen the potential benefit from a streamlined multi-tenant managed service approach, they realise that approach makes sense in any environment, and that it will give them very strong operating leverage if the environment becomes more attractive.
In the meantime, the benefits of a mutualised approach are beginning to be realised not just by capital market firms, but also by wealth and asset management players who see the ongoing commoditisation of asset management creating the kind of issues for them that capital markets players have endured the past five years.
One thing that is certain is that change will continue and that the post-trade OpTech environment of the next decade will transform immensely. By pursuing mutualised, multi-tenant approaches, leading industry players are advancing their ability to leverage new technologies and common operating models to gain effectiveness, reduce cost, and position themselves for the future.