Financial Markets 2.0 - Time To Get Match Fit

I'll be brief in setting the scene, because we've heard it all before; the last 5 years were all about taking cost, risk and leverage out of the Financial Markets business - the crash diet for the binge that was had in the 10 years before.

The interesting question is, what does the next 5 years hold?

In many ways, the next cycle is more challenging than those of the past - how can Financial Markets businesses operate within the new normal of lower cost/risk/leverage, but still operate with profit and demonstrate growth?

This humble consultant believes that we'll see some radical macro-operating model change. And that change will be for the better.

If we ask ourselves, "What are the core competencies of a Financial Markets business?", there really are only two answers...

1. To efficiently price and transfer exchange risk, interest rate risk and credit risk.

2. To efficiently price and distribute capital.

The rest is just hygiene. Yes, legal documentation, settlement processes, KYC/AML, confirmation matching are all important. But the reality is, they are like putting deodorant on in the morning - necessary, but nobody is ever going to congratulate you for it.

Of course, for the Universal Banking club (JPMorgan, CitiGroup, Deutsche, HSBC), these functions will always be big business - and the volume of business will likely support the cost of retaining these hygiene functions in house, at least for the time being.

But, for the rest of the markets business, it's time to get laser focused and ask the question, "What's worth owning and what is worth using?"

Asking and answering this question is what will drive significant operating model change in our industry - no longer will we have banking monoliths. In the Financial Markets 2.0 model the winners will be risk and capital pricing experts leveraging an ecosystem of industry utilities.

We're already seeing the green shoots of those utilities - single points of KYC verification, collateral and dispute management standardisation, clearing and margin replication services, trade repositories and confirmation workflows. 

But, the emergence of utilities is only the start. The real challenge is how to integrate them with your business - and that challenge is starting to slow down the adoption of a Financial Markets 2.0 model.

So, how do you get match fit for Financial Markets 2.0 and be a maker and taker of industry utility?

As you might expect, much of the answer lies in technology and architecture. Here's just three things to look for...

Operating Model - What do we own? What do we use? - Bring the answers to these questions to the forefront of your operating model and investment budget thinking. Map it out over time - what does the roadmap look like? How do you get there? The bandwidth for this analysis used to be applied to application decommissioning and operational cost - move it up a level!

Reference Data and Trade Events - Have a market wide Reference Data and Trade Event strategy. I am deliberate in the use of "market wide". Yesterday's "enterprise wide" was good for driving up STP and other efficiencies, but the new efficiencies come from interoperability and that requires a data and event strategy that works across many banks and many participants.

Demand More From Vendors - The cost of maintaining platform is radically different to that of 10 years ago. Adding in the cost of forward regulatory compliance (DFA, EMIR, BCBS IOSCO etc) tips the balance of owning hygiene functions definitively in the wrong direction. Look to vendors to pick up that ongoing cost. Integrate vendors with an industry context rather than a bank context to minimise switching cost and increase portability when the next big utility play comes to the fore.

So, it's time for pre-season training and time to get match fit. Don't get left behind playing yesterday's cost reduction game - the eco-system players in Financial Markets 2.0 will win an unassailable advantage.