Enormous change is being seen across the globe, as financial institutions strive to lower costs to remain competitive in the face of lower revenues, increased regulatory supervision, and mandatory prudential controls. This has focussed attention on reducing the costs of service delivery through increased use of lower cost providers
Enormous change is being seen across the globe, as financial institutions strive to lower costs to remain competitive in the face of lower revenues, increased regulatory supervision, and mandatory prudential controls. This has focussed attention on reducing the costs of service delivery through increased use of lower cost providers of standardised services, and a desire to consolidate processing in lower cost locations.
The southeast Asian region offers opportunities for consolidation of processing to support multiple markets and to take advantage of competitive staff and operational costs. Historically, investment banks and brokers servicing global institutions have established branch offices in nearly all southeast Asian markets. After establishing the required market and clearing and settlement participation each office is staffed with dealers, operations, support, and IT staff. A settlement system is either provided by the exchange, purchased from a vendor or developed based on an existing in-house system modified to support local requirements. The use of multiple independent branch offices can incur significant operational inefficiencies with resultant costs and risks, including:
Multiple vendor relationships in respect of systems that fundamentally perform the same functions, but in different markets;
Duplication of back-office operations for each market being serviced;
Increased overheads leading to a higher cost per transaction;
Inconsistent levels of STP, and;
Difficult or non-existent consolidated reporting, often not in real-time.
In the stockbroking industry nearly all Asian markets now operate on similar basic principles—electronic clearing and settlement, centralised settlement novation, delivery versus payment and electronic messaging. Despite this, most brokers still maintain distinct and costly operations in each market. Until now, the only way to centralise these operations and reduce costs was by building and integrating systems in-house, of which high volumes were required in each market to justify the cost of integration.
Asian markets are unlikely to see the same level of cooperation and consolidation as markets have seen in western Europe. This is mainly due to cultural and political differences between markets, no single currency and the lack of an over-riding union of nations. Instead, the developing markets are working to increase their attractiveness, risk profile and liquidity by enhancing regulations, IT infrastructure and settlement practices to become more in line with established markets.
As Asian markets continue to mature and compete to attract investment from more developed markets, standardisation of market practices and new outsourcing capabilities will allow global investment banks and brokers to benefit from more efficient regional processing models. Standardisation of transaction profiles across each market creates the opportunity to centralise processing of standard business functions. This would lower costs and risks for regional participants and allow them to better service their client’s global investment needs.
Centralisation of standard processing can deliver significant benefits, but further efficiencies may be achieved by outsourcing centralised operations to a business process outsourcing partner, preferably located in a low-cost country. Unfortunately to date, business process outsourcing has proven difficult for multi-market securities processing due to language barriers, communications costs and market-specific regulation.
The move to outsourced business processing is yet to see significant growth in the provision of clearing and settlement services in Asia. Although some of the larger investment banks are working to centralise operations regionally, full outsourcing of operations is currently limited by market regulation, systems integration issues and the requirements of local market interfaces.
There are several ways in which centralised processing can be supported:
Outsourcing all post-trade clearing and settlement processing to a BPO, which provides a standardised service across the relevant markets.
Using a regional processing application and centralised operations staff but outsourcing market specific functions to an entity with established connectivity and expertise in the relevant markets.
Using a regional processing application and centralised operations staff integrated with existing local connectivity capabilities.
The full outsourcing option can vary from a full third party clearing service which includes provision of regulatory capital to an account operator model where the business process outsourcing only provides processing services on behalf of the outsourcing entity. Take up of third party clearing services in southeast Asia has been limited by local market regulations which do not provide support for the business model. The account operator model is limited to outsourcing operational processing while the required regulatory and operational capital costs remain with the outsourcing entity.
The combination of regional processing capability with outsourced local connectivity should support the use of global systems that use standardised interfaces for common business processes. The model will require a business process outsourcing, that has established connections to the local clearing and settlement infrastructure and is prepared to offer standard interfaces suitable for use by a centralised multi-market processing application.
Major global custodians are increasingly extending their services to offer these types of capabilities as they typically have the required linkages to the regional central securities depositories. The trend for these entities is to extend their existing settlement and custody services to support more components of the trading, clearing and settlement of equities.
The third option combines the centralised processing model with existing local connectivity capabilities. It aims to remove the redundancy inherent in having multiple separate offices performing the same functions. Development of the required translation layer which converts industry standard instructions to and from the required local format is a significant task, particularly for entity without significant internal IT expertise.
