Success in achieving the benefits of utilities will depend on the ability of financial institutions to work collectively to realise long-term benefits, according to James Kemp, managing director at the Association for Financial Markets in Europe (AFME).
Kemp made the statement in a new report, “Industry Utilities: A perspective for Capital Markets”.
The paper sets out potential future opportunities for utilities use across the capital markets, as well as the challenges that could prevent utilities from coming to market.
The report also suggested the best practice principles for developing utilities for the industry, providing guidance for market participants, as well as supervisors and regulators.
AFME highlighted that opportunities for utilisation for capital markets, include pooling resources to achieve benefits of efficiency, scale and cost saving.
In terms of market efficiency, AFME stated that the utility allows for individual participant and wider market efficiency to be achieved.
In addition, AFME said utilities for post-trade activity may require a greater focus on standards and scale to ensure that architecting for each bank is minimised where possible.
The association also indicated that reference data, as well as know your customer and regulatory reporting all have the potential utility service, though AFME identified four areas where it said common barriers exist for utilities.
These include internal investment factors where financial institutions look at a utility on an individual basis, rather than as an industry-wide offering, or where funding limitations may prevent firms from investing long-term.
Other factors of concern include external regulatory factors where the ability to invest in utilities may be limited by pressure on capital markets participants to focus resources on meeting their regulatory requirements.
Another concern considered was operations. AFME said firms may be reluctant to give up control to a third-party, or where security risk could be increased, because utilities can lead to a concentration of a specific industry function or service.
Kemp commented: “In producing this report, AFME, working with its members, has set out to understand the core characteristics of utilities and the principles that should be followed for best practice, and to identify the potential opportunities for the industry.”
He added: “To achieve the benefits of utilities, both now and in the future, it is important that the whole industry works towards solutions that are interoperable, standardised, global and open to all.”
“Success will depend on the ability of financial institutions to work collectively to realise long term benefits, whilst policymakers and authorities have a key role to play in driving forward common, harmonised, global standards.”
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