Firms are cutting IT compliance spending when it is needed most, says report

By:
Russell J. Dinnage
Published on:

Banks and buy-side firms are substantially cutting investment in computer software and hardware products for key asset classes, including FX, despite it being essential in helping them comply with incoming financial regulations.

SunGard Capital Markets, a leading IT vendor, says their services are more likely to be required when institutions see they can gain a competitive advantage in the asset classes they deal in. However, investing in compliance-related products is not seen in the same regard.

"Tier-one banks are very happy to purchase external infrastructure software if they know that it works at other banks," says Peter Banham, SunGard’s capital markets head of strategy. "For example, regulatory compliance systems are not something that necessarily gives them a competitive advantage – they are required to have them to do business."

Banham’s views are supported by the findings of a survey released last month by consulting firm Ovum, which provides analysis on how new technology can be applied and implemented into companies.

Ovum’s survey found that 2013 will be "a more risk-averse year" for financial markets companies in the leading G10 economies, which typically spend large amounts of money on IT services.

Next year, both the buy- and sell-side of the market will either not invest in IT infrastructure or will only marginally increase IT investments needed to meet regulatory compliance demands from incoming statutes, such as the Dodd-Frank Act in the US and the EU’s European Market Infrastructure Regulation plan, that will affect their trading operations, the survey states.

The Ovum report is an annual survey of 250 financial institutions across three sectors – retail, insurance and financial markets – and has been conducted by the analysis firm for more than 10 years.

Specifically, it found that banks were more focused on IT spend for product accounting as part of a trend of investments in more complex, multi-asset strategies.

Ovum forecasts for growth in IT spend at sell side firms in next 18 months

 
 Source: Ovum

Meanwhile, buy-side clients will be investing in IT as they seek to shore up their ability to service existing assets under management for its own clients, according to the survey. 

 Ovum forecasts for growth in IT spend at buy side firms in next 18 months

 
 Source: Ovum

The reduction in investment comes at a time when firms face greater IT demands, as the volumes of data and the speeds required for intraday risk management and reporting increase significantly, according to the Ovum report. This will have implications for market, credit and liquidity risk at these firms.

Buy-side firms will respond to the incoming regulations by focusing next year on making reports for clients on how portfolios are performing in terms of transparency, frequency and accessibility, especially as mobile devices become a more common method of checking on the weighting of investments in an account.

Meanwhile, in 2013 the sell-side will need to increase the automation and optimization of its post-trade operations for markets such as FX, cash equities, futures and options in response to the incoming financial regulations, says the report.

"Both sides of the financial services sector are steeling themselves for a conservative 12 to 18 months ahead in terms of IT expenditure," says Rik Turner, the author of the Ovum report. "People at these companies are going to spend cautiously on IT."

SunGard’s Banham adds that independent research companies overseeing the IT services sector for financial markets firms have consistently reduced their estimates for the growth rate in 2013 spending on computer software and hardware technology, with some even halving their estimates between Q4 2011 and Q3 2012.

Comparatively, banks and investment firms would typically spend hundreds of millions of dollars per traded asset class – across FX, credit and rates, equities and commodities – on IT, both through in-house development and with outside vendors to ensure competitiveness, says Banham.

"Given current cost of capital concerns, our clients need to cut dramatically," he says. "It’s not about just saving 10%. The numbers are significant – in the more-than 50% range."