Banks To Outsource Post-Trade?
Sell-side banks will increasingly look to outsource back- and middle-office processing according to BNP Paribas Securities Services, who predicted that a global investment bank will offload its entire post-trade activity this year.
Bruno Campenon, head of financial intermediaries & corporates at BNP Paribas Securities Services said in a blog, What to expect in 2018, that the buy side has already outsourced much of its back and middle office processing but this has not happened on the sell side. However, this is changing due to the increase in the cost of technology and regulation.
“We expect that, in 2018, a major global investment bank will outsource its entire post-trade activity,” added Campenon. “This will become the accepted operating model for global sell-side firms and the resulting mutualisation of costs will be a major factor in restoring profitability to this industry.”
Consultancy Celent said in a report last year, European Post-Trade Infrastructure Evolution, that most broker-dealers been have been waiting to see the impact of T2S, especially since this may involve significant operational restructuring. The final phases of the implementation of TARGET2 Securities (T2S), the platform which aims to harmonise cross-border securities settlement in the Eurozone, were completed last year.
“It is important to note that in the continuous cost saving environment broker-dealers are in, T2S’s harmonization aspects should drive standardization of post-trade processes, which is resulting in greater scope of outsourcing, mutualization, and managed service for their benefit,” added Celent.
So far, only a handful of players have announced major overhaul of post-trade operations and/or custody relationships in light of T2S and associated benefits according to the consultancy.
Celent also noted that the financial industry has had to focus on the implementation of MiFID II, the regulations covering financial markets in the European Union, which came into force on 3 January 2018.
Arnaud Claudon, head of asset managers at BNP Paribas Securities Services, said in the blog that MiFID II will have a major long-term impact but it will take until this summer before all players are fully ready.
Claudon said: “MiFID II may lead to new fee models at different levels: investment research costs, execution fees, ongoing charges.”
He also predicted that the number of boutique fund managers will increase, particularly those that consistently outperform in a niche expertise, and so will the number of large firms.
“Large size firms – above $300bn assets under management – are increasingly in an industrialisation approach: in an environment of pressure on margins and regulatory cost, large asset managers are looking into both rationalising their fund range and being present in active and passive management,” he added. “It is key in this transformation phase to rely on a multi-offering in multi locations and local to global partner.”
There are three key areas where action is required.
Some material changes have come out of ESMA’s review of algorithmic trading.
A consolidated tape will significantly improve transparency and create a level playing field.
AFME said there should be mandatory free data contribution to the consolidated tape.
The review is an opportunity to recalibrate MiFID II regulations post-Brexit.