SunGard claims derivatives clearing utility will save clearing brokers from margin squeeze
A new industry utility is being launched by SunGard for post-trade futures and cleared over-the-counter (OTC) derivatives operations. The firm says the utility will enable clearing brokers to cut costs by creating economies of scale in middle and back office processing and technology. It will carry out some futures and over-the-counter derivatives operations and technology processes, as well as some regulatory reporting.
Mandatory clearing under Dodd Frank and EMIR, regulatory and client pressure for collateral segregation and especially the increased cost of liquidity and capital under Basel III have created an operating environment that continues to erode the profit margins of clearing brokers. A Tabb Group study found that the challenging market conditions in recent years has resulted in a reduction in the number of CFTC-registered clearing brokers by 49 per cent. The study also found that these ongoing structural changes and regulatory pressures are driving remaining clearing brokers to look to more efficient and cost-effective ways to manage their back office operations.
Barclays will become the utility’s first customer while also migrating specific futures and OTC derivative clearing operations and technology processes to the utility. In the process a number of Barclays employees will transfer to SunGard. It is a first-of-its-kind deal that SunGard believe will typically cut costs in the area by 20 per cent.
"Barclays has always taken a proactive approach to managing its business and adapting to regulation," explains Tim Stack, head of agency derivatives services at Barclays. "By taking this leadership position with SunGard, we are able to provide our clients with a practical solution that keeps our products and services at the forefront of the industry. We are confident that this utility is a transformational change for the industry, and that it will help provide clear benefits to our clients, to Barclays and to the industry as a whole.”
Brian Traquair, executive vice president of SunGard Financial Systems, adds that "post-trade cleared derivatives processing is highly commoditised, providing little differentiated value to each firm at increasingly higher costs due to today’s regulatory environment. SunGard’s post-trade derivatives utility will help transform the cleared derivatives middle and back office across the entire industry, resulting in a more sustainable operating model and cost structure for the future.
Larry Tabb, founder and CEO of Tabb Group, which published the report detailing the 49 per cent fall in CFTC-registered clearing brokers, welcomed the utility. “With well over half of post-trade derivatives processing replicated in each clearing firm, consolidating a majority of these non-differentiating operations into a single shared industry utility will positively change the economics of the industry by increasing efficiency, simplifying regulatory compliance and altering the cost structure for industry participants,” he says. “Reframing the existing business model will enable clearing brokers to focus efforts and investments on clients and risk-facing activities. The introduction of a derivatives utility is expected to be transformative because it will essentially re-define the cleared derivatives operating model for the industry and drive sustainable efficiency improvements through standardisation and best practice implementation, automation and scale, as well as ongoing TCO savings for utility customers."
The news comes very shortly after Barclays’ chief executive Antony Jenkins warned he was losing patience with the investment bank's current situation and would make further cuts if profitability did not improve.