As US banks third-quarter earnings releases showed 25% year-on-year falls in revenue from fixed income and currencies, and investors in Europe braced for similar results from banks there, a trend looks to be firmly establishing itself. The big earnings driver of investment banks in the years following the crisis is faltering sharply. A key revenue pool is in what increasingly looks like secular decline.
Banks will be focusing once more on ways to bolster their margins by taking out fixed costs. At the same time, IT budgets are increasingly being strained by new regulatory and reporting requirements and some banks are considering what once seemed unthinkable: moving more and more of their business onto shared platforms.
"We have a number of initiatives under consideration, with groups here looking at the possibility of sharing costs with other banks on joint platforms for various functions such as post-trade processing," says Michael Reuther, member of the board of managing directors of Commerzbank responsible for corporates & markets and treasury. "While there are no announcements imminent, we are constantly looking at new ways to manage our costs and this might become an increasingly accepted way of doing so."
During the course of its consulting work for banks on their key business challenges, Accenture has become so convinced that this trend will soon establish itself that, in partnership with technology provider Broadridge, it has launched its own post-trade-processing outsourcing solution.
|Owen Jelf, managing director at Accenture Trading Services|
Accentures value proposition is that banks, by mutualizing their business flows, can both reduce day-to-day operating costs and defray the investment expense of regularly upgrading systems that at many banks have been patched together through years of mergers and acquisitions, regional expansion and moves into new asset classes and products. The pitch is that a new cutting-edge system has a better prospect of future proofing against the unending onslaught of regulatory impositions and changing business requirements.
Over the summer, Accenture signed up its first client, Société Générale, to the system that will take on business flows in all securities across FICC, equity, warrants and structured notes. It will handle key post-trade-processing functions such as settlement, books and records, asset servicing, operational management and control, real-time data access and administrative accounting.
"Société Générale Corporate & Investment Banking and Accenture share the same vision of what could be the future model for securities processing among investment banks: industrializing some services by mutualizing processing activities and costs across multiple institutions," enthused Christophe Leblanc, chief operating officer of Société Générale CIB. "We are happy to be the first client of Accenture Post-Trade Processing, a pioneering solution that sets a new industry standard for efficiency in securities post-trade processing, and which will enable us to deliver top-quality services to our clients."
Accenture hopes this is just the start. It says that pricing of the service will be partly volume-dependent. The higher the volumes it can attract onto its platform, the greater the potential for bank customers to cut their per-unit cost of securities trade processing. Accenture is looking to sign long-term contracts with a number of banks across Europe, Asia, Australia and the Middle East. Although it doesnt sound like the kind of venture the worlds biggest investment banks would consider, Jelf suggests that the target market of investment banks that might be attracted by its offers numbers as many as 50. Accenture is in discussions of varying seriousness with up to 20 of these today. It hopes to sign up at least five or six, though it will not rush, and maybe eventually a dozen or more.
"I have been surprised by the level of interest among even the top-tier banks," says Jelf. "There is a new and growing acceptance of collaboration in the industry. And outsourcing to an independent third-party provider is not as difficult as outsourcing to a rival bank."
Jelf says that taking on trade-processing staff and business flows from SG CIB and fully transitioning onto the new platform could take from 12 to 18 months. "These are big undertakings. We wouldnt like to be onboarding more than two or three banks in one year. But I believe, given the work we have already done, we are maybe two years ahead of the competition in providing this form of trade-processing utility."
Given that regulatory change has imposed such a burden on banks that some might consider quitting businesses if they cannot reduce costs through such outsourcing, it will be interesting to see how regulators react to the transition of operating risk from individual banks to a shared utility. "Our assumption is the regulators will not constrain such moves. We are applying in the UK for a Financial Conduct Authority licence," says Jelf. "If anything the utility model is one the authorities might well support."
Euromoneys conversations with regulators suggest concerns have not diminished much since the crisis over the capacity of banks management information and risk management systems to deliver speedy and comprehensive analysis of market and credit risk exposures. If Accenture Post-Trade Processing can help deliver this, it might be a substantial side benefit.