Settle Down – Outsourcing is Here!
The Benefits of Outsourcing within Settlements
Settle Down – Outsourcing is Here! – The Benefits of Outsourcing within Settlements
As the financial markets continue to evolve and adjust, post the global financial crisis of 2007/08, banking institutions find themselves under constant scrutiny from national regulators and international bodies to meet demands relating to capital requirements, financial reporting, and corporate governance.
The combination of ever-changing regulation and the effects of the post-crisis downturn of profitability have presented the financial institutions with a challenging balancing act – how to manage increasing operating costs, yet remain competitive.
The focus for banks, now more than ever, is to identify the best operating model with an emphasis on cost optimisation and efficiency. Whilst numerous banks have adjusted their risk appetite, looked at innovative ways to re-engineer processes, and restructure internally, the option to outsource elements of day-to-day business activities has become an attractive solution, with security settlements being a logical fit.
To be frank, outsourcing is not a new phenomenon to the financial industry, nor was it born out of the 2007/08 financial crisis. In the 1990s, bank looked to improve their operating efficiency by upgrading technology, cost cutting and consolidation. These methods, while effective, are not perpetual, and outsourcing (be it near-shoring or off-shoring) has become the trend within the industry.
“Outsourcing has thus become a way of moving banks’ scarce resources away from trivial operations to value-added services, such as business strategy and execution, new opportunity identification and pricing, business results and interpretation, and M&A planning.”
Santosh Patnaik (Operations Officer, United Bank of India)
Whilst many outsourced roles would have been aligned to AML and KYC, the last several years have seen an increase in the post-trade processing solutions space, with key post-trade functions such as settlements leading the way. For anyone that has had exposure to or experience of the securities settlement processes, they will have invariably talked to, emailed or messaged out-sourced settlements staff servicing their counterparty on any given transaction.
Firms must, however, determine the balance between the cost of clearing and settlement services provided by a vendor and the value that they receive from self-clearing. The pressure to reduce costs that faces every financial institution leads us to believe that the future of areas such as settlements does fit naturally into an outsourcing solution.
An article from Banking Technology has highlighted the need for banks to turn to outsourcing to ‘run the bank’ in all areas such as settlements. Recent challenges and evolving technology are causing the industry to rethink the decision to hold onto certain processes and business models. Four key factors are driving this change;
The article also states that “outsourcing has become an industry standard for many ‘run the bank’ initiatives.” Allowing the firms to reduce costs and focus more on the core functions.
Outsourcing can be a huge success story but there are challenges. The opportunity to outsource settlements exists across all major markets and broker/dealers are reviewing their operating models with greater efficiency. For example, in the UK, Brexit has and will continue to make the post-trade industry more complex and costly. The evolving geo-political landscape and removal of fixed costs is going to be attractive to banks who will be under even more pressure to adapt with the global banking environment.
By outsourcing, a firm can retain its post-trade capacity to capitalize on growth opportunities while managing costs. One of the main benefits of outsourcing is that the relationship developed between the two parties will provide the transparency that market participants and regulators are demanding. This fits in perfectly with settlements. The importance of transparency, security and care whilst looking at certain trades and making sure that they are matched correctly is vital. With increased regulation, the legal aspect between the firm and the vendor is governed through service level agreements which is a huge positive.
If you compare certain considerations in-house to those when outsourced it is easy to see which option has the most benefits. Outsourcing creates a variable/reduced cost, a readily available talent pool with industry knowledge and a workforce that time and money does not need to be spent on to train.
Whilst looking at the future for outsourcing within settlements, it is important to understand the origins of outsourcing itself. For several decades, outsourcers could often do the work at a fraction of the cost of what companies spent to maintain themselves. This has helped fuel the growth of the entire industry and allowed banks to use outsourcing to become more efficient.
Process re-engineering to reduce costs and increase efficiency is something that banks and all businesses will always be looking to do and outsourcing areas like settlements certainly ticks that box.
Settlements being outsourced, whilst not an entirely new concept, has become a prime post-trade function that looks likely to continue for years to come. The benefits certainly outweigh the risks, which leads us to question why all banks aren’t just considering this as an option but adapting it into common practice?
Simon joined FinTrU through our second Financial Services Academy in 2015 after graduating from Liverpool John Moores University with a BA (Hons) in Media, Culture, Communication. Keen to develop a career in financial services, Simon came on board with FinTrU from his previous role in financial sales.
Since joining FinTrU, Simon has worked as a pre-settlement analyst for a Tier I investment bank, gaining a diverse professional experience through client engagements. Simon is responsible for dealing with fixed income/equity settlements of trades, allegement reporting, trade discrepancies and procedures to ensure settlement for internal and external clients. He uses background knowledge and experience to conduct complex data analysis, liaising with clients, senior team members in London, Hong Kong and New York.
Simon continues to work with the team in London to create and improve procedures for daily tasks, pre-funding analysis and central bank trade investigation