Torstone Technology: Self-clearing isn’t for every firm
22 June 2018 London
Image: Shutterstock
Settlement operation teams estimate that the second Markets in Financial Instruments Directive (MiFID II) will be the regulation that impacts operations the most over the next 24 months, according to a white paper released by Torstone Technology.
The survey, found that out of 22 respondents from operations teams, 15 settlement operations teams at capital markets firms thought MiFID II was the regulation to impact their day-to-day operations.
The paper, discussed the changes that regulations, such as MiFID II have brought to the financial industry, and investigates deliberations faced by sell-side firms with regards to the decision to self-clear versus outsource post-trade processes.
It also delves into how and why middle- and back-office technology environments have come under the industry spotlight, including direct connectivity to market infrastructures, such as central counterparty clearing houses and central securities depositories.
In the whitepaper, Torstone advised firms to “balance the costs against operational priorities.”
It said: “Self-clearing isn’t for every firm, but if the C-suite feels it enables the firm to retain a competitive edge, then it’s the right option in that particular market. It also doesn’t always mean adding more bodies—if the right technology is in place, firms can operate efficiently with the same headcount.”
Torstone said: “This white paper explores the post-trade processing environments within two mid-tier brokerage firms and the challenges they are facing against the background of regulatory and market-structure change.”
“It highlights the dynamics behind a firm’s decision to self-clear versus outsource post-trade processes to a third party, including the development of hybrid models in which firms opt for one arrangement in one market and the other in another market.”
Of recent times in the industry, Torstone said: “It is no secret that the sell-side has been between a rock and a hard place over recent years as margins have thinned, compliance costs have increased, and greater transparency requirements have focused regulator and client attention on areas of inefficiency and operational risk.”
Of post-trade improvement, Torstone recommended: “When it comes to evaluating post-trade options, find the model that suits your firm best and offers the flexibility to change as your requirements change.”
Torstone also stated that the financial service’s post-crisis regulatory agenda has “significantly increased compliance costs for the industry.”
“The ongoing alterations to the capital framework as part of the introduction of Basel III and related localised implementations, have placed an industry imperative on achieving capital and operational efficiency due to balance sheet and capital usage restrictions.”
Torstone said: “This has meant offsets for client initial margin balances are few and far between, which, in turn, has caused brokers to exit the client clearing business.”
Torstone also discussed the pressures for the middle- and back-office services to introduce next generation technologies to keep up with other industries.
For brokers, Torstone said: “Not all brokers feel that middle- and back-office services are commoditised, however, and some judge client service in the settlement process to actually be a competitive differentiator.”
Torstone advised to “Consider cloud. The cost of ownership equation is much more compelling if cloud-based technology and services are thrown into the mix. Most of your peers are using cloud, even if they aren’t shouting about it from the rooftops yet.”
Of outsourcing, Torstone advised: “Even if you decide to keep processes in-house, you don’t have to build everything yourself. There are plenty of options on the market to work with technology specialists that can take on some of the heavy lifting when it comes to keeping pace with market, regulatory, and next-generation technology change.”
Torstone concluded: “Whether your firm chooses to work with an outsourcer or a software solution provider, putting in the hours at the start of the relationship to define priorities and highlight any perceived hurdles will save a lot of time down the road.”
“Setting realistic goals and timelines is important for both brokerage firms and their vendor partners.”
Torstone worked with Aite Group to conduct in-depth interviews with 24 operations executives at both buy-side and sell-side institutions during the second half of 2017 and the first half of 2018 for the white paper.
The survey, found that out of 22 respondents from operations teams, 15 settlement operations teams at capital markets firms thought MiFID II was the regulation to impact their day-to-day operations.
The paper, discussed the changes that regulations, such as MiFID II have brought to the financial industry, and investigates deliberations faced by sell-side firms with regards to the decision to self-clear versus outsource post-trade processes.
It also delves into how and why middle- and back-office technology environments have come under the industry spotlight, including direct connectivity to market infrastructures, such as central counterparty clearing houses and central securities depositories.
In the whitepaper, Torstone advised firms to “balance the costs against operational priorities.”
It said: “Self-clearing isn’t for every firm, but if the C-suite feels it enables the firm to retain a competitive edge, then it’s the right option in that particular market. It also doesn’t always mean adding more bodies—if the right technology is in place, firms can operate efficiently with the same headcount.”
Torstone said: “This white paper explores the post-trade processing environments within two mid-tier brokerage firms and the challenges they are facing against the background of regulatory and market-structure change.”
“It highlights the dynamics behind a firm’s decision to self-clear versus outsource post-trade processes to a third party, including the development of hybrid models in which firms opt for one arrangement in one market and the other in another market.”
Of recent times in the industry, Torstone said: “It is no secret that the sell-side has been between a rock and a hard place over recent years as margins have thinned, compliance costs have increased, and greater transparency requirements have focused regulator and client attention on areas of inefficiency and operational risk.”
Of post-trade improvement, Torstone recommended: “When it comes to evaluating post-trade options, find the model that suits your firm best and offers the flexibility to change as your requirements change.”
Torstone also stated that the financial service’s post-crisis regulatory agenda has “significantly increased compliance costs for the industry.”
“The ongoing alterations to the capital framework as part of the introduction of Basel III and related localised implementations, have placed an industry imperative on achieving capital and operational efficiency due to balance sheet and capital usage restrictions.”
Torstone said: “This has meant offsets for client initial margin balances are few and far between, which, in turn, has caused brokers to exit the client clearing business.”
Torstone also discussed the pressures for the middle- and back-office services to introduce next generation technologies to keep up with other industries.
For brokers, Torstone said: “Not all brokers feel that middle- and back-office services are commoditised, however, and some judge client service in the settlement process to actually be a competitive differentiator.”
Torstone advised to “Consider cloud. The cost of ownership equation is much more compelling if cloud-based technology and services are thrown into the mix. Most of your peers are using cloud, even if they aren’t shouting about it from the rooftops yet.”
Of outsourcing, Torstone advised: “Even if you decide to keep processes in-house, you don’t have to build everything yourself. There are plenty of options on the market to work with technology specialists that can take on some of the heavy lifting when it comes to keeping pace with market, regulatory, and next-generation technology change.”
Torstone concluded: “Whether your firm chooses to work with an outsourcer or a software solution provider, putting in the hours at the start of the relationship to define priorities and highlight any perceived hurdles will save a lot of time down the road.”
“Setting realistic goals and timelines is important for both brokerage firms and their vendor partners.”
Torstone worked with Aite Group to conduct in-depth interviews with 24 operations executives at both buy-side and sell-side institutions during the second half of 2017 and the first half of 2018 for the white paper.
← Previous industry article
Heartwood: ECB’s Draghi’s statement on quantitative easing had hawkish ambition
Heartwood: ECB’s Draghi’s statement on quantitative easing had hawkish ambition
NO FEE, NO RISK
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
100% ON RETURNS If you invest in only one asset servicing news source this year, make sure it is your free subscription to Asset Servicing Times
