The adoption of a utility model for core post-trade and related processes, could save banks up to $4 billion annually, according to a report from Broadridge.
The report outlines that core post-trade processing is “the logical starting point for an industry utility… its high levels of standardisation and growing compliance requirements make it one of the most attractive areas for cost mutualisation.”
The main attraction for a utility model is cost, whereby banks have become increasingly pressured to cut costs as a result of regulation.
The report highlights that the finance industry spends between $17 billion and $24 billion per year on core post-trade processing, reference data, reconciliations, trade expense management, client life-cycle management, corporate actions, tax and regulatory reporting.
A utility model is being increasingly explored in the derivatives market. In June SunGard went live with a new outsourcing clearing utility for futures and OTC derivatives, with Barclays as its first client.
Furthermore a number of banks and market infrastructures have cooperated in the creation of a swaps margin utility.
Speaking at an industry conference in June, Michele Neal, then global head of Listed Derivatives, Markets Clearing & Market Structure for Deutsche Bank, said outsourcing is on the radar for banks, but whether to adopt a full outsourced utility model is at the crux of the debate for the industry.
“What will an outsourced solution be if it means the same thing to everybody? Will everybody put the same number of things into that box, or will people try to think about what particular things touch my clients which can be differentiated, or will they outsource the most generic [functions] which involves the least amount of risk?” said Neal.
“The marginal cost of every client that moves into that model should mean the cost going down… This is definitely a watch this space kind of thing.”
However, the Broadridge report identifies a number of hurdles the industry still has to overcome before a viable utility model can be adopted for all banks.
These include aligning governance, ownership and pricing models, and identifying a viable technology and operating model that can support multiple banks with unique business lines such as custody, prime brokerage and asset management.
But according to Broadridge, the potential benefits of a utility model far outweigh the hurdles that have undermined efforts in the past.