Another boost for the utility model

SunGard announced yesterday that it will launch a new industry utility for post-trade futures and cleared OTC derivatives operations and technology, with Barclays helping pilot the project by handing over some of its post-trade processing and regulatory reporting obligations to SunGard. This would not come as a surprise to readers of Celent’s coverage of technology and process evolution by capital market firms. In a number of recent reports (and blogs) we have highlighted how the evolution of the regulatory environment is forcing firms to look for new models for running operation and technology. The constantly evolving regulations have created additional obligations for financial institutions (FI), particularly in the areas of risk management, reporting and regulatory compliance. While all FIs need to adhere to these changes, the changes add very little in terms of competitive advantage to the FIs. At the same time keeping track of and responding to these changes need significant investment of resources on an on-going basis leaving them with little time or resource to focus on core activities. Therefore they are not only looking to outsource these non-differentiating activities to third part providers, but also looking to gain further cost advantages through shared service or utility model of engagement. Under such arrangement one service provider caters to the need of multiple players, at times even the full industry, which allows all involved parties to benefit from significant economies of scale as well as through reduction in duplication of efforts. In some areas (such as KYC utilities) we have seen banks coming together to form groups or consortium to develop industry wide utilities. In other areas we have seen individual bank-vendor partnership developing a solution with plans of making it available to the wider industry in the future. The Sungard post-trade utility therefore re-emphasizes our point of the industry’s desire for radical cost reduction by exploring new engagement models. It needs to be pointed out though that industry wide adoption of the utility model will take time. Many firms are still waiting to see the success/failures/pain points of those that are exploring with these new models. Some FIs at the moment are trying the utility model at an intra-firm level, i.e., across different divisions of a bank. Success of these efforts in the early days will expedite adjacent cost reduction opportunities as firms continue to explore emerging operating models beyond conventional captive operations.