Föhrenbergkreis Finanzwirtschaft

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‘Project Scalpel’: Behind Big Banks’ Plan to Save $2 Billion

Posted by hkarner - 29. März 2017

Date: 28-03-2017
Source: The Wall Street Journal

Wall Street firms discuss joint venture to process transactions

Big banks have cut more than $40 billion of costs since the financial crisis.

They aren’t done.

While prospects for revenue growth at banks have brightened since the election, a handful of the biggest firms are considering ways to slash still more from their back-office budgets. One effort, dubbed “Project Scalpel,” is aimed at cutting the administrative and operational costs involved with processing stock and bond transactions after a trade is struck, according to people familiar with the discussions.

Talks around this effort are at an early stage but so far have included a number of banks, such as Goldman Sachs Group Inc., Morgan Stanley and Bank of America Corp., the people said. If the idea materializes, it could create a joint venture that allows banks to share trade processes and technology.
The hope is this would be widely used by the industry and eventually trim at least $2 billion from the banks’ annual spending, the people said. In the past, banks viewed their ability to efficiently process trades, and handle transfers of ownership and associated activities like dividend and interest payments, as a competitive advantage.

Now, the processes and systems around these functions have become commoditized. Competing banks have redundant systems handling the same functions.

A joint system would eliminate the duplication, spread the cost burden and make it simpler to upgrade technology, according to the people familiar with the discussions. It also would free up resources for revenue-generating investments, they said.

There are plenty of obstacles. These include questions around data privacy and ownership stakes in the venture, and whether to use existing technology systems or build a new one. Some bankers also fear a for-profit service provider could eventually grow too powerful and boost fees.

Despite the hurdles, banks for decades have cooperated in other areas such as creating transaction venues and building clearinghouses. The recent discussions represent a possible extension of that cooperation and underscore that banks remain obsessively focused on keeping expenses in check.

The six biggest U.S. banks have eliminated more than 100,000 jobs since 2009, while shedding less-profitable business lines and trimming compensation.

This is the result of a relatively fallow period on Wall Street in which banks’ returns on equity have been held down by a combination of more-stringent capital requirements, lackluster economic growth, superlow interest rates, and more subdued trading.

On cost-cutting, “much of the easy stuff is done,” said Mark Alexander, a former senior technology and operations executive at Bank of America. “Banks now need to think about doing something different and transformational.”

European banks including Barclays PLC and Société Générale SA have said they are working with technology providers to outsource and share some trading back-office operations in Europe.

Financial-services firms spend as much as $24 billion annually on post-trade operations, or what is known in the industry as activity that occurs “south of the trade blotter,” according to a study by technology firm Broadridge Financial Solutions Inc.

A shared-processing venture would potentially allow banks to cut or reassign thousands of back-office workers. Each firm would keep scores of risk managers, programmers and traders focused on making trades happen.

Joint ventures involving rival banks are complex, though. A couple of years ago, about 10 banks tried to create just such a post-trade with clearinghouses including the Depository Trust & Clearing Corp. Those talks foundered because there were too many different views about what the finished product would do and the technology that would underpin it.

The latest idea is to narrow the group. The Scalpel discussions also involve a recently formed investment firm called Motive Partners, the people familiar with the matter said. Motive is led by bank-technology veterans including Morgan Stanley and Goldman alum Stephen Daffron,  and former Fidelity National Information Services Inc. executives Rob Heyvaert and Michael Hayford.

Banks have previously collaborated on combining back-office functions. In the 1970s, securities firms created a clearinghouse to reduce and then computerize mountains of paper trading tickets. The result was the DTCC, which handles trillions of dollars of securities transactions daily.

Over the past two years, collaboration has accelerated again. Banks recently created joint utilities for things like anti-money-laundering compliance procedures and sharing basic underlying information about stocks and bonds.

“The banking industry must find ways to structurally lower costs,” UBS Group AG Chief Executive Sergio Ermotti told analysts last year. He says the way to achieve it is “closer collaboration between financial institutions.”

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