Trade Reporting: A Costly Exercise

Terry Flanagan

Faced with a wave of trade reporting regulations, capital markets firms are questioning whether it’s worth it to continue to adjust internal infrastructures — particularly with the availability of new alternatives, such as outsourced trade reporting services.

A large bank that makes 500,000 trades per month can expect to spend about $30 million to build an initial reporting system, plus $18 million per year to maintain it (including operations, testing, technical, remediation and business analysis resource costs), according to a report by Sapient Global Markets. Additional system build-out costs for Tier 2 banks to address Emir and other G20 rulesets are estimated at $45 million.

By comparison, with an estimated yearly managed services fee of $3.5 million, a Tier 2 bank’s total business-as-usual expenses are reduced by more than half, from $18 million to $8 million per year.

“It removes a lot of overhead,” said Cian Ó Braonáin, global lead of Sapient’s Regulatory Reporting practice.

The Sapient report scrutinizes the total cost of ownership of trade reporting, based on implementation cost, IT and infrastructure expenditure, operations and support staff, and repository fees. The report also highlights ongoing issues related to the current state of supporting trade reporting, noting why many firms are re-examining their strategies and internal infrastructure.

“It is apparent, given the amounts already invested, that building, re-building and re-engineering current systems is not a viable option for what is a highly commoditized function,” Sapient Senior Vice President Randall Orbon said in a release. “Now that several major deadlines have passed, many organizations are looking for alternative ways to lower their (total cost of ownership) without compromising reporting quality or compliance. As a result, there is likely to be a shift among market participants toward alternatives, for example managed or cloud-based services that can reduce the cost and complexity of trade reporting.”

In the report, Sapient said that companies often estimate only the cost of an initial build or implementation and don’t account for the ongoing cost of supporting and adapting the technology platform as regulations change, as well as the likelihood that technology builds and implementations do not go as planned, which creates additional operational overhead.

“It’s really just an exercise of wanting to try and get people to think more about the wider costs that they might be incurring,” said Ó Braonáin. “Often they look at the expenditure of actually building solutions, but then forget that the poorly built solution you end up with because you built it in a hurry means that your operation and technical overhead is three times what it could have been.”

By failing to consider the alternatives to building and maintaining in-house reporting systems, companies may be led into making wrong decisions about whether to exit existing businesses.

“You’ve probably heard an awful lot of noise from different participants saying ‘Regulations are costing us so much and we have to pull out of these markets,’” said Ó Braonáin. “Maybe that’s not necessarily the case, and maybe there’s a smarter way to approach that.”

He added, “Before you decide to pull out of markets, you need to understand the true picture of your reporting costs, so that you can explain whether or not reporting is actually causing this issue.”

The premise behind the report is to get companies to think about the reporting problem in a proactive way. “When we discussed the concept of total cost of ownership and with different clients, we found that a lot of people weren’t really thinking about the problem in that way,” said Ó Braonáin. “They were still very much in a reactive mode, rather than proactively thinking about what they could be doing to make themselves more efficient.”

Featured image by NAN/Dollar Photo Club

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