Global broker firms are eager to expand and improve their Asian operations while regional brokers are looking at prospects beyond their borders. However, a worldwide drop in trading volumes, revenues and margins has forced these ambitious brokers to face a cold reality: they must improve their efficiency if they want to grow.
The new reality
The global financial crisis led to a considerable drop in global trade volumes, resulting in a sharp decline in revenues and margins. This has set the stage for broker-dealers to consider outsourcing operational functions that have no competitive advantage, allowing them to reduce costs and better focus on core functions.
No region reveals the new realities of the broking business as Asia does. Its economies and markets continue to grow and attract brokers from around the globe, yet its exchanges and regulations are fragmented, raising post-trade costs to levels well above those in Europe or the US. This complex operating and regulatory landscape prevents brokers from building a scalable regional post-trade infrastructure.
Building an in-house post-trade operation requires significant investment in technology and infrastructure. These fixed costs are becoming a competitive drag on brokers and are harder to rationalise in a period of volatile economic cycles, increasing capital costs and expectations of higher returns.
So how does a broker firm retain its post-trade capacity to capitalise on growth opportunities while managing ever-increasing technology and operational costs? They outsource.
Taking the plunge
For either a regional broker-dealer offering the edge of local expertise or an international firm with global reach, there is little competitive reason to keep the entire post-trade transaction life cycle in-house. UBS was one of the first firms to recognise the scale of these challenges and undertook a radical review of its APAC operating model, seeking greater scale and efficiency in its securities business while, at the same time, levering the strength of its regional footprint.
In 2012, UBS made the bold decision to move its Singapore-based market side clearing and settlement activity to Citi, the world’s largest proprietary custodian. This third-party clearing mandate was the first major clearing outsourcing in Singapore, and its complexity required the cooperation of the SGX, which enhanced its own infrastructure to accommodate such a drastic overhaul of its members’ operating model.
“We worked with Citi to dive deep into our operating model and identify cost savings by re-aligning and streamlining operations to achieve greater efficiency,” said Andrew Murfin, Asia Pacific head of group operations for UBS. “This was a first of its kind, and it changed the way firms in Asia look at clearing and outsourcing as a true optimisation strategy.”
The opportunity to outsource clearing and settlement exists across other major APAC markets, and major brokers are reviewing their operating models with greater efficiency and scale in mind.
Innovation through cooperation
UBS’ choice to outsource its clearing and settlement activity to Citi was part of a broader move to turn traditional securities post-trade processing on its head. The two banking giants also identified an opportunity to commercialise UBS’s state-of-the art middle-office platform by combining it with Citi’s direct custody and clearing network to create an end-to-end post-trade solution. The result was post-trade plus.
An industry first, this comprehensive solution makes UBS responsible for middle-office services while Citi provides securities clearing, settlement and custody services.
This game-changing solution frees brokers from maintaining costly post-trade infrastructure and enables greater focus on their core competitive advantages while giving them access to unparalleled knowledge, extensive capabilities and broad networks.
Brokers can save up to 50% of post-trade expenses by eliminating fixed technology and maintenance costs, while also lowering operational risks. As a consequence, savings may be deployed to boost regulatory capital or return on equity.
“There is a big future for outsourcing in Asia’s complex post-trade industry and I believe the current pressure on costs will act as a trigger for more innovation in the post-trade arena,” said Jeffrey Williams, Asia Pacific head of direct custody and clearing for Citi securities and fund services. “Post-trade requirements are constantly evolving to meet market, regulatory and connectivity changes, sharply increasing costs. When outsourced, these costs are instead borne by the provider.”
Radical market changes have paved the way for outsourcing services to represent a real and viable opportunity for broker-dealers in Asia. Best-in-class capabilities are readily available and the benefits are clear. Brokers who outsource are more flexible and better placed to take advantage of opportunities in Asia’s turbulent markets while saving costs when volumes are thin.
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For more information, please contact: Jeffrey Williams Regional Head, Direct Custody and Clearing, Asia Pacific Citi Securities and Fund Services [email protected] |
