Utility Concept Takes Hold in Post-Crisis World

Terry Flanagan

The financial world has changed dramatically in the past half-decade-plus since the global financial crisis, and one of the consequences has been an intensified focus on cost cutting. Banks in particular are anxious to reduce or eliminate spending on non-core back-office functions.

This is the rationale behind a partnership between Crédit Agricole Corporate & Investment Bank and Fidelity National Information Services, a provider of consulting and outsourcing solutions, to create a derivatives post-trade utility.

The IT platform allows investment banking firms to share IT services for cross-asset derivatives. The sharing by corporate and investment banks of their activities and resources, from trade booking to sub-ledger management, reduces their unit cost of execution and increases efficiency, the companies say.

“In a post-Lehman environment all banks have had to go through radical transformation to cope with the new paradigm of cost optimization,” Farzine Fazel, executive partner at Capco FIS, told Markets Media. “We worked with Crédit Agricole to create a global capital market post-trade utility where we transfer the IT platforms of Crédit Agricole to Capco FIS, and then use that as an anchor to connect other clients to this platform, hence, structurally reducing the cost of trade for operations.”

He added, “Whereas pre-Lehman banks had return on equities in the high 20s if not 30s, now, the best in class would probably get anything between 13 to 15 points. In order to cope with that massive cost optimization a bank needs to go to creative ideas.”

Pierre Dulon, Crédit Agricole

Pierre Dulon, Crédit Agricole

Crédit Agricole is a mid-sized investment bank that has embarked on a transformation plan to increase return on equity and productivity. It realized early on in the process that post-trade services had the potential for economy of scale.

“That’s why we tried to find a way to mutualize the platform with other banks in order to capture the economy of scale and to decrease the cost of trade, which is an important competitive advantage,” Pierre Dulon, chief information officer at Crédit Agricole Corporate and Investment Bank, told Markets Media.

The utility combines the existing platform of Crédit Agricole CIB with the large-scale and deep financial services capabilities and expertise of FIS and was designed to meet the needs of corporate and investment banking firms.

“The scope is really multi-asset and cross-product, and this includes derivatives and cash asset class and products,” Dulon said.

For now, the companies refer to as the Capital Market Post-Trade Utility. “The idea is that this is an IT-focused environment, where we take over the platforms from the post-execution all the way through pre-general ledger and accounting,” said Fazel. “In that vertical, we take the major technologies today used by Crédit Agricole, and then leverage it to other third parties. We want to go for a packaged strategy as opposed to a build strategy. Hence, the choice of Crédit Agricole.”

The utility intends to differentiate itself from proprietary post-trade processing platforms by the breadth of assets; the only asset class it doesn’t handle is commodities. “As opposed to using some proprietary technology or a black box, we decided to go for market-standard packages, which makes the migration path for new clients much smoother,” said Fazel.

Another difference is that the partners are addressing a more global market because the current footprint include Crédit Agricole is Europe and North America and Asia. “We have Hong Kong on one side, New York on the other side and then the major hubs in Europe,” said Fazel.

Added Dulon, “One of the reasons why we think this is the right time to go for this initiative is because regulation is pushing for having more or less more standardized solutions. For instance, OTC clearing means that you have to have more or less the same architecture for all these different products. We believe that the regulation on one hand and the productivity search on the other hand are both pushing for more standardization of this policy.”

Featured image via chalabala/Dollar Photo Club

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