Regulations and Client Demands Pack One-Two Punch

Terry Flanagan

Innovation in financial markets has become more crucial than ever, given the pressure on Wall Street bottom lines, which has gotten stronger as the economic recovery continues to sputter.

According to a report by IBM and Broadridge Financial Solutions, increasing regulatory pressures and shifting customer demands are forcing financial markets firms to transform how they operate.

Forward-looking firms are breaking from the “not invented here” syndrome to manage operations by building an open, agile and customer-focused model, based on collaboration with external partners.

“Two factors have emerged which distinguish the leaders from the laggards,” said Keith Bear, director of business development for financial markets at IBM. “One is the ability to cope with regulatory change, and the other is the agility of a firm’s operating model, which is characterized by how quickly it can introduce new products and services.”

The one-two punch of regulatory change and rapidly rising customer expectations is exerting tremendous pressure on the operating models of financial markets firms, the report said.

Making matters worse, these two drivers often compete for the same resources.

“One firm that we’ve worked with has 400 separate regulatory initiatives in place,” said Bear. “The sheer volume of change that firms will face from regulations, some country-specific and some at the global level, is enormous.”

Topping the list of regularly initiatives are the Dodd-Frank Act, Basel II, Large Trader Reporting, Foreign Account Tax Compliance Act (Fatca), Cost Basis Reporting (CBR), and European Market Infrastructure Regulation (Emir).

The report, based on a survey of 133 senior executives across a spectrum of financial services providers, reveals that while regulatory requirements (cited by 77% of respondents) and demanding customers (cited by 59%) are the top external drivers triggering changes in operating models, only 22% of firms currently excel at both.

“While some firms have responded to today’s market challenges by redesigning operations, an equal number of firms are still trailing behind,” said Bear.

The report shows that leading firms are positioning themselves for growth and gaining market share by looking outward, addressing how they interact with the marketplace.

They are redesigning operating models with a more holistic view across front, middle and back offices, and into their clients’ own operations, the report said.

Compared to their peers, leaders are far more inclined to build collaborative operating models that leverage expertise and technology via partnerships.

Collaborative sourcing approaches can take several forms, such as outsourcing, cloud systems, and mutualized processes shared across the entire industry.

“Operations is playing a much larger role as a catalyst to innovation,” said J. Michael Hopkins, president of securities processing solutions, fixed income at Broadridge Financial Solutions. “Operations is no longer just a spectator.”

The report found that leaders are more than twice as active as laggards in outsourcing highly standardized back-office processes.

The level of outsourcing varies significantly according to process area. Among leaders, settlement and clearance was outsourced by 60% of firms, while risk management infrastructure was outsourced by only 23%.

Among the laggards, settlement and clearance was outsourced by only 20%, while risk management infrastructure was outsourced by 21%.

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