Pershing: Outsource to optimise your capital usage - Scott Coey
Difficult economic conditions, compounded by the expense of new regulatory requirements, have led many financial institutions to outsource non-core processes. Scott Coey, director of institutional broker-dealer solutions at Pershing, discusses how this increasingly popular practice can free up investment banks and broker-dealers to focus on more important matters.
Established in London in 1987, Pershing provides agency brokers, market makers and investment banks with middle and back-office outsourcing solutions. Its parent company BNY Mellon was recently named one of the 50 safest banks in the world for a third consecutive year by Global Finance magazine. Director of institutional broker-dealer solutions Scott Coey discusses the impact of regulatory changes on institutional banking and how outsourcing is becoming an ever more attractive option.
Future Banking: Regulatory changes have made investment banking a much more expensive business. How is this impacting upon Pershing's operations?
Scott Coey: Ever since the introduction of the Markets in Financial Instruments Directive (MiFID), investment banks and institutional brokers have been facing a growing financial burden. We recently published a thought leadership piece in which an investment bank COO said that "supporting and running an investment bank has just got doubly hard" - and that was before the introduction of MiFID II and TARGET2-Securities (T2S) were fully understood.
The cost, time and expertise required to remain compliant means that partnering with a provider such as Pershing in order to support your non-core business can be the key to remaining profitable.
As a result of these balance sheet pressures, are you seeing a clear move away from fixed cost models?
As recently as five years ago, a lot of banks were taking on the full trade lifecycle. Since the correction of the market, we've seen banks and broker-dealers choosing to focus on their core business and client retention. Needing a 100-strong regulation, compliance, clearing and settlement workforce is no longer considered balance-sheet effective.
When balance sheets and trading volumes are constrained, and the average ticket size is shrinking, the commission the client makes per trade is smaller while the core cost incurred remains the same.
Therefore, any solution that replaces fixed overheads with a variable cost structure gives broker-dealers and investment banks more power to invest in their own growth.
Pershing published a white paper that mentioned the advent of the 'virtual investment bank', which takes full advantage of outsourced services. What form might such an organisation take?
Customers will want bespoke research and key customer services, plus the ability to package the two together to gain the maximum return. The other functions of that trade lifecycle can be commoditised.
For the execution of the trade, Pershing offers clients a direct market access (DMA) solution that gives the customer full access to all markets.
For the clearing and settlement of a trade, Pershing's GlobalClear connects to all the key European central counterparties (CCP) and settlement venues, and is coupled with robust middle and back-office services.
Our clients can monitor the performance of their trading desks not just for efficient execution and settlement, but also for efficient use of capital. By using our package of profit and loss tools, clients can further identify where they can best squeeze more pennies from the pound.
Can you tell us about the GlobalClear platform that was launched in May of this year?
GlobalClear is a back-office outsourcing solution that combines books and records clearing, settlement and custody for institutional broker-dealers in Europe and Asia.
It enables an institution, regardless of size or capital balance sheet, to use Pershing's settlement network, balance sheet and operational controls while continuing to grow its business.
It is currently the only solution to provide the benefits of segregated accounts, and comprehensive support and infrastructure, while allowing the client to retain its name in the marketplace.
We've traditionally been involved with mid-tier institutional brokers, but in the past 12-18 months we've been talking to a lot of investment banks about our services, as each business line has different balance sheet restrictions and individual requirements. It's an exciting time for us at Pershing.
All of this is driven by constantly improving technology. What is Pershing's strategy in this important area?
For our core services, we have a proprietary solution. We are not reliant on anyone to enhance or develop it. We have 600 people across Pershing here in Europe, 200 of which are involved in IT, along with a second site in Chennai, India. With respect to our specific segments, we do go out to the market and partner for individual solutions, but only with those considered the best in their area.
It's a combined solution. At the core of our business we clear and settle trades, and provide access to markets but, when developing tools, we bring best-of-breed partners onboard.
In such volatile times, having a strong outsourcing partner is vital. What can you do at Pershing to mitigate potentially negative market influences?
Our client partnerships are the core of our solution. As recent events have shown, when large firms fail the fallout is wide. There are a lot of moving parts that require specific skills and knowledge, and at Pershing our position in the market provides our clients with the comfort that we have the expertise to respond to these challenges. Corporate actions are another area where, if not properly handled by experts, substantial losses can occur. Pershing has a dedicated team focusing purely on this.
How do you see things changing over the next 12-24 months?
When I entered this marketplace 15 years ago, we were at a very different place in the outsourcing lifecycle. The markets were booming and growth could be seen in all areas.
The markets have now come full circle; regulatory constraints have been applied, trading volume strategies have changed and every piece of revenue has been squeezed.
Right now, with so much emphasis on cost control and in an environment of declining volumes and revenues, the argument for outsourcing has intensified. Add to this the increasing regulatory costs on the horizon, and there is an immediate urgency to protect the core business and outsource anything that can be outsourced - not only to address immediate issues, but to lay the framework for the thorough future-proofing of businesses.
What is Pershing's most significant advantage over its competitors?
Pershing's scale and length of time in the market is obviously important, as well as the fact that we don't compete with any of our customers. But the key factor that has allowed us to maintain such good customer relationships is that clearing and settlement are at the core of our offering.
This is not an ancillary service; all of our expertise is geared towards it. Investment banks and broker-dealers want to know that the company they trust for post-trade services anticipates changes to the regulatory landscape, and that their names and assets are fully protected.
We have a client base of over 120 companies, many of which recommend us to other market practitioners. We are involved with market commentary in the form of our thought leadership programme and are at the core of discussions regarding changes to the European landscape. With this has come many further business referrals.