Banks eye shared platforms to balance OTC profit outlook

Post-crisis reforms to banks through increased capital requirements, limits on proprietary trading activity and changes to the formerly highly profitable OTC derivatives business are pushing banks towards shared platforms and outsourced solutions.

Post-crisis reforms to banks through increased capital requirements, limits on proprietary trading activity and changes to the formerly highly profitable OTC derivatives business are pushing banks towards shared platforms and outsourced solutions.

Mas Nakachi, CEO of OpenGamma, a firm that offers a risk management solution, said conversations at key derivatives conference held by the Futures Industry Association (FIA) in Boca this month revolved around even the most established entities in the OTC derivatives market looking to shared solutions for elements of this business.

“Banks are increasingly looking to share functions with similar firms to reduce costs and break away from the traditional approach of replicating infrastructure used by competitors, from functions in the back-office right through to margin calculations,” he told theTRADEnews.com.

He added that even the largest firms were being challenged on whether existing business lines within the OTC space were adequately profitable to sustain activity in the post-crisis, Dodd-Frank era of central clearing and listed trading of swaps instruments.

“There is a lot of pain in the industry about how to generate profits from this new OTC derivatives world and even the most established firms in this space are needing to radically re-think their businesses,” he said.

In January, Swiss bank UBS struck two deals to outsource the bulk of its fixed income trading platform – a move seen by the industry as a drastic example of the regulatory-driven cost pressures facing large banks.

The advent of swap execution facility (SEF) trading, which began in October, and was boosted in February with mandatory trading, has not had a major impact on the market yet, Nakachi added. This, he said, was due to the fact many asset managers were still adjusting to new processes and systems related to the platforms.

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