top 10 challenges for investment banks 2014

IntroductionIntroduction

Top Ten Challenges forInvestment Banks 2014

Introduction

Top Ten Challenges for Investment Banks 2014

Consolidation and Stability

2013 has been a year of consolidation for the Investment Banking industry. Having spent the majority of 2012 rebuilding reputations and strengthening balance sheets, 2013 continued in a similar vein as Banks have tried to foster a more stable operating environment.

The fate of the macro-economy in the coming year is still uncertain, although analysts agree that the outlook is looking more positive. The European Central Bank has kept interest rates at record lows throughout the year amid economic data signalling that the eurozone may

finally be recovering. The situation in Greece, which looked far from certain last year, seems to be stabilising. The Greek government is more committed to reforms, and fiscal measures have been put in place to ensure a holistic strategy to exit the austerity.

2

The situation is the same in Portugal, Italy and Spain: political pressures are diminishing and monetary policies are taking affect. The re-election of Angela Merkel in Germany should mean a continuation of austerity measures that have predominated over the previous couple of years.

Having said this the challenges created by the financial crisis are by no means over, even the most optimistic of analysts predict more struggles along the way, but signs are showing that the extensive restructuring that Banks have concentrated on since 2008 is starting to bear fruit. Across the industry, Investment Banks are showing impressive results. Bank of America Merrill Lynch, a company that, since inception, has focused on restructuring, reported a 63% increase in net income for Q2 2013. Banks may not be targeting the pre-crisis RoE targets of 20%+, but targets of 12-15% demonstrate a renewed optimism and suggest industry-wide confidence. Cost-to-income and revenue per head figures, which went haywire during the crisis, have recovered and Banks are now targeting new, ambitious cost-to-income ratios.

Proceed with Caution Banks should remain cautious. Quantitative easing was essential to keep the US and European economies solvent at the height of the credit crisis, but its long-term role in strengthening the economy is unclear.

The Federal Reserve is continuing with its QE programme ($85bn/month) until unemployment in the US reaches 6.5% and the inflation outlook two years out is 2.5%. Undoubtedly Investment Banks are in a better position than in 2008, due to their restructuring and regulatory efforts, but QE has played its part. The Dow Jones and Real Estate prices may have risen, but the economic fundamentals remain anaemic. European unemployment remains high (although falling), real wages are decreasing and businesses are still staying away from spending. The message is clear: the economy is strengthening, but whisper it quietly.

3

restructuring effectively means more than cost-cutting. Focusing on core businesses, leveraging new sources of value and developing a culture of responsibility will all be crucial. Any institution that can react effectively to incoming regulation and adapt successfully to a new operating model will hold a competitive advantage against its peers. In this collection we look specifically at:• Restructuring in Response to Bank

Break-up: ring-fencing risky activities

• Restructuring the Investment Bank: streamlining and rationalising

• A New Ecosystem: using utilities to share the load

Most Investment Banks remain in the middle of a multi-year transformation that has required a strategic response. Major players in the industry are having to restructure their cash equity business, or abolish it entirely. The commodities industry has been rocked by players being forced to leave the space, leaving room for competitors to gain market share. Regulation has, of course, been the driving force behind all these changes. Emphasis has shifted away from high return on equity levels and towards strengthening the balance sheet – Basel III Tier 1 Capital, Liquidity Coverage Ratio and Diversified funding - as regulation is set to kick in 1st January 2014.

However, whilst Banks such as UBS and Nomura have restructured their FICC business, significantly scaling back capital-intensive businesses, Citi, Deutsche and JP Morgan strategies all focus on growing their FICC business, placing emphasis on an integrated approach, engaging the front-to-back functions to deliver comprehensive solutions.

Looking ahead The Top 10 Challenges 2014Fundamental Restructuring As ever we’ve considered the challenges and themes that are prevalent for the coming twelve months. The clearest of these is the thorough restructuring that the industry continues to experience. Investment Banks are setting ambitious cost targets for the year ahead, but

Improving on the BasicsAs well as industry scale restructuring, Banks will also need to rethink the roles that key functions play over the next 12 months. This is largely about ensuring that the “basics” of investment banking are adhered to: making sure that funding is as sustainable as possible, continuing to track new processes and procedures introduced to track trading behaviours, and emphasising the importance of the CFO group in order to effect change. In this collection we look specifically at:

4

“Investment Banks are setting ambitious cost targets for the year ahead, but restructuring effectively means more than cost-cutting”.

• Building Sustainable Funding: managing collateral & liquidity

• Watching Closely: improving surveillance and mitigating conduct risk

• Finance to Inform: taking the lead in business transformation

Positioning for Growth Finally, whilst Banks are rightly focusing on creating a solid base for future performance, gaining a competitive edge will require Banks to look beyond

traditional methods of banking. From leveraging disruptive technologies, to looking beyond typical compensations to foster the next generation of talent, Banks need to re-evaluate their strategy to get ahead. In this collection we look specifically at:• Building Profitability in Equities:

identifying the opportunities and controlling the cost

• New Disruptive Technologies: seizing the opportunity

• Rethinking the Digital Proposition: providing information clients really need

• Fostering the Next Generation of Talent: remunerating effectively

The year ahead will undoubtedly be another challenging one. Never before have Investment Banks had to compete on so many fronts, but 2014 represents the first year since 2007 for potential growth-on-growth. From restructuring, to regulation, to harnessing new technologies, these papers embody the collective thinking of Accenture’s Global Capital Markets Leadership Team, who continue to work closely with leading industry participants to deliver comprehensive solutions to these challenges.

5

A Changing Landscape – Half a Decade on...

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with approximately 275,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page iswww.accenture.com

Accenture ExpertsTo discuss any of the ideas presented in this paper please contact:

James HopkinsCapital Markets, [email protected]+44 20 3335 0936

Oliver KnightCapital Markets, [email protected]+44 20 3335 2667

Oliver RiddleCapital Markets, [email protected]+44 20 3335 3707

Copyright © 2013 AccentureAll rights reserved.Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.

DisclaimerThis report has been prepared by and is distributed by Accenture. This document is for information purposes. No part of this document may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice.

Restructuring in Response to Bank Break-up: Ring-Fencing Risky Activities

01



Restructuring in Response to Bank Break-up:Ring-Fencing Risky Activities

As outgoing Deputy General of the Bank of England Paul Tucker said recently, “It is absolutely essential that the ’too big to fail‘ problem is cracked. Nothing is more important to the success of the international reform agenda. Without it...the international financial system would balkanise as individual countries sought to protect themselves. The stakes are high.”1 This challenge will look to outline

exactly what is at stake and why 2014 is a critical juncture in the journey towards a restructured investment banking industry.

The Case for Break-UpThe most pressing case for the break-up of banks is the economic one. Banking executives are making decisions about the future of their business in a harsh economic climate.

As the global financial crisis recedes into the collective memory, legislators are grappling with the issue of how to reshape the landscape in a way that allows the industry to return to profitability (a key interest given the size of many government shareholdings), that aids economic recovery by lending to small business and that ensures governments will never again be held hostage by organisations deemed “Too Big To Fail”.

Challenge

Fundamental Restructuring

01

1Solving too big to fail: where do things stand on resolution, Speech given by Paul Tucker, Deputy Governor Financial Stability, At the Institute of International Finance 2013 Annual Membership meeting, Washington DC 12 October 2013.

2

2March, 2010. 3As at Q2 2013. Solving too big to fail: where do things stand on resolution, Speech given by Paul Tucker, Deputy Governor Financial Stability, At the Institute of International Finance 2013 Annual Membership meeting, Washington DC 12 October 2013.

As far back as 2010 there was a recognition that the pre-crisis model of amalgamation and consolidation into “mega-banks” was no longer a viable strategy. Virkam Pandit, at the time CEO of Citi, told a Treasury committee his bank would become “a smaller institution that is focused on being a bank, not a financial supermarket.”2 Immediately after the crisis Citi transferred $500bn worth of assets into Citi Holdings, and today this portfolio contains less than $150bn and has

been the vehicle through which the bank has divested itself of once prized franchises like Smith Barney.

Citi’s approach is by no means unique. In fact the desire to shrink, focus and reshape as a result of economic concerns has, if anything, been even stronger in Europe. A good example is Royal Bank of Scotland, whose equivalent division of non-performing assets (Non-Core) stood at £258bn of funded assets in 2008 and is now

at c.$45bn.3 Perhaps even more significant than this is the change in direction evidenced by RBS’s decision to restructure its Global Markets business. The reformed Markets and International Banking division has a funded balance sheet of £268bn compared with the £872bn that GBM once represented, and employs less the half the number of staff (11,300 vs. 24,100).

Despite this huge amount of restructuring RBS has still not been

0%

50%

100%

150%

200%

250%

203%

188%

179%

141%

112%

107%

97%

77%

76%

74%

69%

66%

66%

65%

65%

62%

59%

51%

51%

51%

51%

47%

38%

25%

21%

16%

16%

15%

14%

13%

12%

9% 5%

148%

ING Ban

k (NL)

Credit

Suiss

e (CH

)

UBS (

CH)

Dansk

e (Dk

)

Nordea

Bank

(SE)

Rabo

bank

(NL)

Santa

nder

(ES)

HSBC

(UK)

Credit

Agric

ole (F

R)

BNP P

ariba

s (FR

)

DNB (

Holla

nd)

Barcl

ays (U

K)

Erste

Grou

p (Au

stria)

RBS (

UK)

Sven

ska (S

E)

ABN (H

ollan

d)

Lloyd

s (UK

)

SEB G

roup (

SE)

Natixis

(FR)

BBVA

(ES)

UniCr

edit (

IT)

Deuts

che B

ank (

DE)

SocG

en (F

R)

Intesa

Sanp

aolo

(IT)

Bank

ia (ES

)

Commerz

bank

(DE)

Bank

of Am

erica

JPMorg

an

DZB (

Germ

any)

BMPS

(Italy

)

Citigr

oup

LBBW

(Germ

any)

Wells F

argo

Morgan

Stan

ley

Net Bank Assets As Percentage of GDP of Country of Domicile (FY 2011)

Figure 1: Source: Company data, Eurostat, US Department of Commerce Bureau of Economic Analysis, Goldman Sachs, Zero Hedge

3

This, considered alongside the fact that over half of all banking M&A activity since 2008 has been some form of Government re-capitalisation, goes some way to explain why there is a such a concerted effort on the part of banking regulators to attempt to break up, or at least limit the scope, of the “global systemically important financial institutions”.

The Regulatory ResponseIn short, regulators are trying to prevent activities perceived as risky or

speculative from putting the provision of payments and banking services in jeopardy.

Of course, attempting to do this will create a web of additional cost and complexity. The three most developed “solutions” to date are to be found in the US (Section 619 of Dodd-Frank, universally known as the Volcker Rule), the UK (ring-fencing based on the Independent Commission on Banking’s Report) and, to a lesser extent, in the European Union in the Liikanen Report

returned to private ownership and the threat of being broken in a “good” bank and “bad” bank is still very real.

Reference to the role of governments brings up the other part of the case for restructuring, which is that Governments have neither the capital nor the appetite for underwriting the industry or providing future bailouts. As the chart in figure 1 demonstrates, a number of developed economies, especially in Europe, are dwarfed by the banks that are domiciled within them.

Figure 2: Note: Both ICB and Liikanen are still under development and subject to changeSource: Accenture Research

Key ‘Safe’ ring-fence – designed to isolate individual and small business accounts, preferred by the ICB inthe UK‘Risky’ ring-fence – designed to isolate activity percieved to be ‘high risk’, preferred by Volcker and Liikanen

LiikanenICB Volcker

Ring-fence retail deposits from risky investment banking activities

Ring-fence risky investment banking activities away from retail/

corporate deposits

Ban proprietary risk taking (proprietary trading and private

equity investment)

Activ

ities

(ran

ked

by p

erce

ived

com

plex

ity a

nd ri

skin

ess) Private Equity

Capital MarketsProprietary risk-takingMarket-makingSecurities TradingComplex Derivatives

‘Simple Derivatives’Trade/Project Finance (Non-FI)Transaction BankingLending (Corporate)Deposit-taking (Corporate)

Lending (Individual & SME)

Overdrafts (Individual & SME)Deposit-taking (Individual & SME)M

ust

be in

Mus

t be

out

Can

be in

Private EquityCapital MarketsProprietary risk-takingMarket-makingSecurities TradingComplex Derivatives

‘Simple Derivatives’Trade/Project Finance (Non-FI)Transaction BankingLending (Corporate)Deposit-taking (Corporate)Lending (Individual & SME)

Overdrafts (Individual & SME)Deposit-taking (Individual & SME)

Private EquityCapital MarketsProprietary risk-taking

Market-makingSecurities TradingComplex Derivatives‘Simple Derivatives’Trade/Project Finance (Non-FI)Transaction BankingLending (Corporate)Deposit-taking (Corporate)Lending (Individual & SME)

Overdrafts (Individual & SME)Deposit-taking (Individual & SME)

Mus

tbe

out

4

(See Figure 2). Each of these is trying to achieve something subtly different but, in simple terms, will necessitate a division of the banks into two, or more, legal bodies.

As the above schematic demonstrates, it is investment banks and investment banking divisions that will bear the brunt of this that operate at scale across all three geographic regions there is a chance that the permissions and prohibitions will not align, causing even greater complexity. All three initiatives will force banks, and investment banking divisions, to consider a full range of strategic and operational questions. This includes, but is not limited to:

• What will differentiate us in a newly formed competitive landscape?

• What efficiencies are lost / need to be realised?

• How far does legal and financial separation impinge on the ability to have a seamless customer experience?

• Does the separation fit with natural fault lines in the organisation or create new ones?

• How are these businesses operated, supported and governed in a fashion that is at once separate and still consistent with being a Group?

There are no easy or immediate answers to these questions, but that should not stop executives posing them to the best and brightest in their

organisations as they consider future strategic direction.

How Can an Investment Bank React?There is no simple, or universal, response to bank break up. For those institutions already on a path of divestment and simplification, there is a need to assess the portfolio of activities and understand how they help, or perhaps hinder, the bank’s ability to respond to restructuring requirements that are going to arise in the coming few years. The change initiatives associated with all of the above legislative agenda will be complex, time-consuming and costly. All banks would benefit from empowering a team of senior, dedicated individuals, with the requisite authority to challenge institutional orthodoxies. This team should be tasked with determining what the various future states should look like, how this feeds into, or diverts from, a wider group strategy, and how to get there with the minimal possible disruption.

The answers to this strategic challenge will differ, but there are perhaps two constants. Firstly Banks will need to ensure that they have sufficient capability to plan, design and implement this change. Building the nucleus of this capability over the next 12 months should help ensure that the following decade of transformative initiatives are delivered effectively. Secondly, and even more importantly, there is a need to engage actively and positively with the bodies

4

which are attempting to reshape this newly fragmented industry. Across the world, governments are grappling with a complex industry that has never before undergone such dramatic top-down change, trying to achieve policy aims without causing a swathe of unintended consequences. By engaging early and accepting the broad principles of what the authorities are attempting here, Investment Banks will be much better placed. The chief aim is to ensure that the new reality is one that they, and their clients, can live with and adapt to as it emerges from the wreckage of a banking world that was too big to fail.

5



01

About AccentureAccenture is a global management consulting, technology services and outsourcing company, with approximately 275,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$28.6 billion for the fiscal year ended Aug. 31, 2013. Its home page is www.accenture.com


Lupus Maltzahn Managing DirectorCapital Markets, [email protected]+44 20 7844 8544

Christopher HookCapital Markets, [email protected]+44 20 3335 1373

Oliver JordanCapital Markets, [email protected]+44 20 3335 3573


Restructuring the Investment Bank: Stream

lining and Rationalising

02

Restructuring the Investment Bank: Streamlining and Rationalising


Restructuring the Investment Bank: Streamlining and Rationalising

Ongoing regulatory and market forces are driving Investment Banks to transform their capital markets businesses, to lower complexity and enable significant expense reductions. For some banks, in businesses where they cannot accomplish this transformation effectively, high costs and insufficient returns will force them to exit certain products.

Other banks will use this inflection in the industry to aggressively restructure key businesses, to create sustainably lower cost structures and competitive advantage.

Regulatory, Client and Complexity ForcesBasel III and other regulatory changes will more than double the required capital allocations for most capital markets businesses. These regulations will increase the capital required to be held against

assets, based on market, counterparty, liquidity, operational, and other risk. Most affected are businesses that require inventory (e.g. Fixed Income) and highly structured products that cannot be centrally cleared. Compliance with Dodd-Frank and other regulations will also increase operating costs and, with the majority of Dodd-Frank still to be written, large amounts of uncertainty still exist.

02Challenge


2

Many Capital Markets products which had RoEs of 15-20% would likely have RoEs in the 5-10% range post this regulation, if no other business improvements were made (see Figure 1).

Ongoing client forces continue to put pressure on revenues. These include the shift in demand to simpler, “flow” products, the increased share of electronic trading, investors’ continuing desire for lower fees and spreads, and counterparties’ increased need for safety and control of their collateral. In addition, the technological infrastructure of Capital Markets has traditionally been built in product “silos” using significant custom development. This has yielded substantial complexity and cost, and often makes cross-product functionality difficult to implement.

Strategic TransformationFixing product RoEs within Capital Markets will require strategic transformation, addressing the business and operating models, optimisation of capital, and simplification of technology (see Figure 2). Two dimensions of business transformation in particular – operating model and technology – do not easily admit to incremental improvement. Such changes are complex, multi-faceted endeavours, requiring careful planning, testing and transition.

Addressing Technology CostsTop-tier Investment Bank technology has historically been complex and costly.

Figure 1Source: Accenture Research


Estimated Industry Product RoEs

25%

20%

15%

10%

5%

0%

Pre-Regulation

Post-Regulation – with no improvement

FX

Flow FI Structured FI

Commodities

Flow Equities

Structured Equities

Prime Services

Technology

Simplification through:

• Cross-product architectures• Replacing custom with vendor

software• Refocusing development to critical

areas of competitive differentation

Operating Model

Expense reducation through simplification:

• Using industry utilities• Outsourcing• Sharing services across products

Business Model

Streaming business model by:

• Cutting staff• Focusing down to key clients and

products• Simplifying their organisation

Capital

• Improving the measurement & allocation of capital

• Winding down the least efficient contacts and products

3

Separate product systems, over-reliance on custom development, and repeated, short-term budget optimisation have created a proliferation of interconnected systems. The technology organisations often mirror the application landscape they support, with myriad pockets of expensive specialisation.

In an average Capital Markets business with, for example, a 70% cost/revenue ratio, front-office costs, which are usually specific to each product, normally account for 40-50% of the cost base and are largely variable with respect to revenues. In contrast, technology, operations, and allocated costs are more difficult to lower when revenues decrease, when they tend to drive cost/revenue ratios higher.

Given current industry trends, a simplified functional architecture confers an advantage for many capital markets businesses. Multi-product client relationships and important cross-product functions such as risk and collateral management have made monolithic product technology stacks unwieldy. Over the past decade, vendor applications have advanced significantly in terms of their flexibility and ability to handle volume. By combining cross-product applications, vendor software, and outsourcing with focused custom development, it is possible to create a “greenfield” functional architecture that can be run at dramatically lower cost.

Choosing the Right TransformationEvery Investment Bank must design an appropriate transformation path based

on its own specific strategy, business and operating models and current technology platform. This will depend on decisions across multiple dimensions. Figure 4 shows some illustrative choices based on product and technology strategy. For example, while certain banks are switching to lower cost vendor software and simplifying their product offering, other Banks are simplifying their custom application suites in-house, while maintaining their full product range.

A key decision point here is understanding the RoE for each product type before and after reengineering. Maximising overall RoE will require a thorough assessment of which market segments a given bank can best

compete in, followed by implementation of the right technology and processes to support these. Some Banks will have the ability to generate high returns in structured products due to their market position and sophistication of pricing and risk models, while others will succeed by becoming low-cost, high-volume providers of “flow” product.

Even after the transformation target state and strategy are determined, significant implementation decisions must still be made. For example, target state IT applications could be implemented in a “greenfield” environment, and the existing book of business migrated. Alternatively, the transformation could be implemented in phased groups of products or functions,

Figure 3: Technology, Operations, and allocated costs tend to be fixed with respect to decreased revenues Source: Accenture Capital Markets

Illustrative Cost Structure Estimated at a 70% C/I Ratio

Front Office(Compensation & Non-Compensation)

Largely variable with respect to lower revenues

Largely fixed; grow in terms of C/I with lower revenues

Technology

Operations

Enterprise Support Functions

~44%

~25%

~16%

~15%

4

or the existing applications could be modified in situ in an evolutionary fashion. Each of these approaches has different pros and cons in terms of timing, costs, “throwaway” work, and non-completion risk.

Leading ExamplesHistorically, many of the regionally-focused European Banks have used packaged software in businesses such as derivatives, while their larger, global counterparts have evolved custom application stacks. However, more recently, a small number of global banks have committed to transition specific product businesses to packaged software in a “greenfield” build, expecting to dramatically lower their ongoing expenses. Another global bank

has committed to transition significant clearing and settlement functions to what will eventually become an industry utility, to make these costs variable with respect to transaction volumes. Both of these types of transformations will involve a period of net investment, but are expected to create strategic expense advantages thereafter.

Overcoming Barriers to ChangeA successful transformation will require overcoming significant cultural barriers. Any strategic transformation will cross multiple budget years, as well as business and support areas, and will involve significant financial outlays and risks. The business culture must support balancing short-term goals

Example Transformation Paths

Figure 4Source: Accenture Research.

Complex / structured product set

Vendor / Outsource

• Prevalent regional bank strategy

• Substantially lower costs

• Reliance on vendor/s for features and enhancements

• Current positioning for many top-tier banks

• Requires high-margin, high RoE products

• Business desire flexibility, innovation and speed market

Example: Transform custom technology platforms

• Custom platforms must be cost-effective

• Lower margin (“flow”) products

Example: Leverage vendor software to lower costs

Example: Simplify business and technology strategy

• High volume, “flow” business model

• Substantially lower costs

Technology Strategy

Product Strategy

Custom / In-house

Simplified /“Flow” product set

and long-term benefits, and have the appetite to sustain the full change journey. Appropriate sponsorship and governance will be critical to minimize the risks of scope-change and non-completion. The technology culture must also be able to manage the optimal mix of vendor and custom software, and avoid falling into a “not-made-here” bias.

Another key hurdle is overcoming historical paradigms: in the past, the majority of firms have developed and leveraged their own risk models across asset classes. With increasing regulation and standardisation of products, it is worth asking whether in-house risk models truly differentiate a firm across every asset class. Many firms are wondering whether to focus their highly skilled, costly programming resources on developing pricing and risk model for only the more exotic products.

ConclusionWe believe that the industry shifts driving the need for transformation are here to stay, and that the banks that restructure themselves for today’s reality will be at a competitive advantage. Accenture estimates that banks can reduce technology and operations operating costs by 50% or more if they dramatically simplify their existing plants and organizations. However, banks that are successful in this pursuit must have both the vision and the tenacity to stay the course through a multi-year change journey.

5

Restructuring the Investment Bank: Stream

lining and Rationalising

02




Jonathan FiresterManaging DirectorCapital Markets, New [email protected]+1 917 452 2332

Laurie McgrawManaging DirectorCapital Markets, [email protected]+1 267 216 1313

Wynn DaviesCapital Markets, New [email protected]+1 917 452 6345


A New

Ecosystem: Using Utilities to Share the Load

03

A New Ecosystem: Using Utilities to Share the Load



The centralised utility model has been examined and adopted in various forms by the capital markets industry over time, as the industry has matured and its participants have continued to strive for ways to navigate new challenges. Central Securities Depositories (CSDs)

were established as specialist organisations to hold securities centrally for market participants, thereby increasing the efficiency of asset transfer around the financial system. These utilities have become part of the essential plumbing of securities markets.

Industry utilities can meet the demand for process efficiency and cost savings, and sharpen the competitive advantage of participants in capital markets.

03Challenge


2

Utility creation has also been part of the regulatory response to systemic industry shocks. The collapse of Lehman Brothers in 2008, which triggered the global financial crisis, has driven subsequent regulation which mandates the clearing of derivatives transactions through central counterparties (CCPs), to mutualise the risks of counterparty default.

Through looking at CSDs and CCPs as examples, it is clear that the centralised utility model carries a number of clear benefits (see Figure 1).

In a fast-moving industry like Capital Markets, the utility model also appeals to firms wanting to create new revenue opportunities, and current structural trends are combining to create these opportunities in the marketplace.

Firstly, securities markets are experiencing a continuing decline in volumes and tightening margins, with Investment Banks having to adjust to a new reality of tighter regulatory controls and lower volatility. Meanwhile, the cost of maintaining processes and technology to serve

these functions remains stubbornly high, despite targeted efforts to reduce the fixed cost base through traditional means, including significant headcount reduction, the use of BPO and captive shared service models. Cost bases continue to be inflated by capital requirements under Basel III, and the burden of further regulatory reform. This combination is weighing heavily on Investment Banks’ profitability and contributing to single-digit RoE numbers across the industry.

Secondly, a wider range of non-bank participants in the market are looking to diversify away from their traditional businesses to find new sources of

revenue. Custodians, depositories, exchanges and other third-party providers are all looking for ways to become part of the fabric of the industry. By scrutinising functions throughout the trade lifecycle, the majority of which are currently performed separately by every Investment Bank, these players are recognising that there are opportunities for consolidation.

Homogenous functions duplicated by firms across the industry are candidates for utilitisation, particularly where they represent a fixed cost burden.

Figure 1: Benefits of industry utility model Source: Accenture Research

Standardisation

Establishing of consistent industry standards and benchmarks

Increased Service Quality

Sharing of expertise & best practices

Cost Reduction

Through economies of scale & reduced process duplication

Mutualisation of Risk

Spreading risk across all market participants

3

• It is imperative, and in everyone’s interest, that the data is correct.

• Data is homogenous and used by wide range of participants.

• The greater the number of participants, the more accurate the data is likely to be (for example in achieving consensus on price).

Onboarding and know-your-customer (KYC) is another example of a function

with these characteristics, with Markit & Genpact recently announcing the launch of a centralised client onboarding solution to the market.

Despite these advantages, the challenge for utilities driven by revenue opportunities – as opposed to a utility which is driven by a regulatory imperative, for example – is to ensure that the solution being offered is compelling enough to drive the required industry uptake. Without this critical mass, the benefits of the utility model are quickly negated.

The convergence of cost, regulatory and technological pressures is forcing banks to reassess their securities processing operations

As profitability is squeezed in securities markets by the combination of depressed volumes and a stubborn fixed cost base, Banks are being forced to look at ways of reducing costs and returning to more sustainable RoE numbers. This is especially important given the impending impacts of further regulatory reform: CSDR, T+2 settlement, TARGET2-Securities (TS2) and Tripartite netting promise wholesale market change and significant, costly rebuilding of existing technology platforms.

A bank lacking the scale and technological edge to compete as a Top 5 player is faced with the prospect of either exiting business lines that cannot justify its cost to serve, or finding ways to obtain scale advantages. For this type of bank in particular, the key to a more

Functions which are repeatable and performed to the same degree by multiple market participants are open to standardisation and consolidation within a utility context. The provision of reference data (client & instrument) is one example:

• Banks still have issues, and expend significant cost and effort, trying to get it right.

Figure 2: Summary of post-trade processes and information flows to / from utility Source: Accenture Research

To/From CounterpartyAllocation instructions

Confirmation details

Settlement status

Claims / disputes

From / To a Utility CustomerTrade feed Client data feed Instrument data feed Account hierarchy feed

To/From Market infrastructure

Confirmation instr.

Settlement instr.

Transaction reporting

11. R

efer

ence

Dat

a

Ledger postings Trades / positions Elective decision requests FOBO rec and depot rec feeds Position informationStatus information

1. Trade Capture

2. Trade Agreement

3. Position Management & Settlement

4. Cash Management

5. Accounting & Valuation

6. Regulatory & Internal Reporting

7. Collateral & SEL Management

8. Asset Servicing

9. Own Issue Managent

10. Reconcilliation

4

sustainable business model is an ability to fundamentally transform internal cost structures and reduce the overall cost per trade.

Post-trade securities processing represents a significant portion of the trade lifecycle (and cost base) and is made up of exactly the kind of homogenous processes that are open to consolidation. Vendor-operated utilities can provide a scalable and comprehensive option, providing banks with the opportunity for immediate and aggressive fixed cost savings in the near term, as well as the longer term flexibility and transparency of a variable cost model. Across the industry, the huge sums of money spent by different Investment Banks to maintain largely identical processes and technology platforms could be significantly rationalised.

Sharing the load in post-trade processing: multiple clients, same processes, shared cost

Post-trade securities processing covers the wide range of basic functions currently performed in-house by the “back office” in every investment bank. Accenture Post-Trade Processing relies on the centralisation and standardisation of this core processing across different banks and product lines, providing a client-agnostic platform that harnesses uniform technology and resources (see Figure 2).

The business model is underpinned by the benefits of scale:

• Reduction in cost per trade, potentially by up to 30-50%, can be achieved through an immediate reduction in fixed costs, as well as a shift to a variable cost model that

Figure 3: Industry Cost Curve example – Equities Source: Accenture Research

is responsive to scale (see Figure 3). As more banks join, the marginal cost per trade decreases, benefiting existing clients.

• Mutualised cost of change & compliance as the utility is required to meet additional regulatory demands from the outset. This is of particular benefit where uncertainties, over timelines or scope, still persist in the regulatory agenda.

• Improved service delivery: Delivery of real-time information allows for more informed decisions and better management of collateral for securities operations. Comprehensive support across multiple markets, coupled with trade status information, enables the provision of a higher quality of service internally (to the front and middle office) and externally (to their clients, regulators, CSDs etc.). Management of SLAs and visibility of defined KPIs, monitored against industry benchmarks, provides shared accountability.

Looking to the future, the utility model will continue to be refined as it is shapes itself to meet industry demands. Competitive pressures, such as the entrance of additional third parties into the market, utility customer feedback and ongoing performance improvements necessary to expand the client base, promise to further improve the model, drive down the cost per trade and expand the benefits to the wider market and potential clients.

5

Firms outside Top 5

Cost per trade (€)

0.30

0.15

0.10

Transaction Volumes

Position of Top 5 Firms

x1 x2 x8

Top 5 Position

Typical Cost Position of Prospects for the Utility

Cost Position of Largest Firm

Downward per transaction cost pressure allows clients to achieve the cost profile of a large securities house

A New


03




Owen Jelf Managing DirectorCapital Markets, [email protected]+44 20 7844 2792

Mark TargettCapital Markets, [email protected]+44 20 7844 8061

David SandlerCapital Markets, [email protected]+44 75 1016 3147


A New


03




The centralised utility model has been examined and adopted in various forms by the capital markets industry over time, as the industry has matured and its participants have continued to strive for ways to navigate new challenges. Central Securities Depositories (CSDs)

were established as specialist organisations to hold securities centrally for market participants, thereby increasing the efficiency of asset transfer around the financial system. These utilities have become part of the essential plumbing of securities markets.

Industry utilities can meet the demand for process efficiency and cost savings, and sharpen the competitive advantage of participants in capital markets.

03Challenge


2

Utility creation has also been part of the regulatory response to systemic industry shocks. The collapse of Lehman Brothers in 2008, which triggered the global financial crisis, has driven subsequent regulation which mandates the clearing of derivatives transactions through central counterparties (CCPs), to mutualise the risks of counterparty default.

Through looking at CSDs and CCPs as examples, it is clear that the centralised utility model carries a number of clear benefits (see Figure 1).

In a fast-moving industry like Capital Markets, the utility model also appeals to firms wanting to create new revenue opportunities, and current structural trends are combining to create these opportunities in the marketplace.

Firstly, securities markets are experiencing a continuing decline in volumes and tightening margins, with Investment Banks having to adjust to a new reality of tighter regulatory controls and lower volatility. Meanwhile, the cost of maintaining processes and technology to serve

these functions remains stubbornly high, despite targeted efforts to reduce the fixed cost base through traditional means, including significant headcount reduction, the use of BPO and captive shared service models. Cost bases continue to be inflated by capital requirements under Basel III, and the burden of further regulatory reform. This combination is weighing heavily on Investment Banks’ profitability and contributing to single-digit RoE numbers across the industry.

Secondly, a wider range of non-bank participants in the market are looking to diversify away from their traditional businesses to find new sources of

revenue. Custodians, depositories, exchanges and other third-party providers are all looking for ways to become part of the fabric of the industry. By scrutinising functions throughout the trade lifecycle, the majority of which are currently performed separately by every Investment Bank, these players are recognising that there are opportunities for consolidation.

Homogenous functions duplicated by firms across the industry are candidates for utilitisation, particularly where they represent a fixed cost burden.

Figure 1: Benefits of industry utility model Source: Accenture Research

Standardisation

Establishing of consistent industry standards and benchmarks

Increased Service Quality

Sharing of expertise & best practices

Cost Reduction

Through economies of scale & reduced process duplication

Mutualisation of Risk

Spreading risk across all market participants

3

• It is imperative, and in everyone’s interest, that the data is correct.

• Data is homogenous and used by wide range of participants.

• The greater the number of participants, the more accurate the data is likely to be (for example in achieving consensus on price).

Onboarding and know-your-customer (KYC) is another example of a function

with these characteristics, with Markit & Genpact recently announcing the launch of a centralised client onboarding solution to the market.

Despite these advantages, the challenge for utilities driven by revenue opportunities – as opposed to a utility which is driven by a regulatory imperative, for example – is to ensure that the solution being offered is compelling enough to drive the required industry uptake. Without this critical mass, the benefits of the utility model are quickly negated.

The convergence of cost, regulatory and technological pressures is forcing banks to reassess their securities processing operations

As profitability is squeezed in securities markets by the combination of depressed volumes and a stubborn fixed cost base, Banks are being forced to look at ways of reducing costs and returning to more sustainable RoE numbers. This is especially important given the impending impacts of further regulatory reform: CSDR, T+2 settlement, TARGET2-Securities (TS2) and Tripartite netting promise wholesale market change and significant, costly rebuilding of existing technology platforms.

A bank lacking the scale and technological edge to compete as a Top 5 player is faced with the prospect of either exiting business lines that cannot justify its cost to serve, or finding ways to obtain scale advantages. For this type of bank in particular, the key to a more

Functions which are repeatable and performed to the same degree by multiple market participants are open to standardisation and consolidation within a utility context. The provision of reference data (client & instrument) is one example:

• Banks still have issues, and expend significant cost and effort, trying to get it right.

Figure 2: Summary of post-trade processes and information flows to / from utility Source: Accenture Research

To/From CounterpartyAllocation instructions

Confirmation details

Settlement status

Claims / disputes

From / To a Utility CustomerTrade feed Client data feed Instrument data feed Account hierarchy feed

To/From Market infrastructure

Confirmation instr.

Settlement instr.

Transaction reporting

11. R

efer

ence

Dat

a

Ledger postings Trades / positions Elective decision requests FOBO rec and depot rec feeds Position informationStatus information

1. Trade Capture

2. Trade Agreement

3. Position Management & Settlement

4. Cash Management

5. Accounting & Valuation

6. Regulatory & Internal Reporting

7. Collateral & SEL Management

8. Asset Servicing

9. Own Issue Managent

10. Reconcilliation

4

sustainable business model is an ability to fundamentally transform internal cost structures and reduce the overall cost per trade.

Post-trade securities processing represents a significant portion of the trade lifecycle (and cost base) and is made up of exactly the kind of homogenous processes that are open to consolidation. Vendor-operated utilities can provide a scalable and comprehensive option, providing banks with the opportunity for immediate and aggressive fixed cost savings in the near term, as well as the longer term flexibility and transparency of a variable cost model. Across the industry, the huge sums of money spent by different Investment Banks to maintain largely identical processes and technology platforms could be significantly rationalised.

Sharing the load in post-trade processing: multiple clients, same processes, shared cost

Post-trade securities processing covers the wide range of basic functions currently performed in-house by the “back office” in every investment bank. Accenture Post-Trade Processing relies on the centralisation and standardisation of this core processing across different banks and product lines, providing a client-agnostic platform that harnesses uniform technology and resources (see Figure 2).

The business model is underpinned by the benefits of scale:

• Reduction in cost per trade, potentially by up to 30-50%, can be achieved through an immediate reduction in fixed costs, as well as a shift to a variable cost model that

Figure 3: Industry Cost Curve example – Equities Source: Accenture Research

is responsive to scale (see Figure 3). As more banks join, the marginal cost per trade decreases, benefiting existing clients.

• Mutualised cost of change & compliance as the utility is required to meet additional regulatory demands from the outset. This is of particular benefit where uncertainties, over timelines or scope, still persist in the regulatory agenda.

• Improved service delivery: Delivery of real-time information allows for more informed decisions and better management of collateral for securities operations. Comprehensive support across multiple markets, coupled with trade status information, enables the provision of a higher quality of service internally (to the front and middle office) and externally (to their clients, regulators, CSDs etc.). Management of SLAs and visibility of defined KPIs, monitored against industry benchmarks, provides shared accountability.

Looking to the future, the utility model will continue to be refined as it is shapes itself to meet industry demands. Competitive pressures, such as the entrance of additional third parties into the market, utility customer feedback and ongoing performance improvements necessary to expand the client base, promise to further improve the model, drive down the cost per trade and expand the benefits to the wider market and potential clients.

5

Firms outside Top 5

Cost per trade (€)

0.30

0.15

0.10

Transaction Volumes

Position of Top 5 Firms

x1 x2 x8

Top 5 Position

Typical Cost Position of Prospects for the Utility

Cost Position of Largest Firm

Downward per transaction cost pressure allows clients to achieve the cost profile of a large securities house

A New


03




Owen Jelf Managing DirectorCapital Markets, [email protected]+44 20 7844 2792

Mark TargettCapital Markets, [email protected]+44 20 7844 8061

David SandlerCapital Markets, [email protected]+44 75 1016 3147


Building Sustainable Funding: Managing Collateral &

Liquidity

04

Building Sustainable Funding: Managing Collateral & Liquidity


Building Sustainable Funding: Managing Collateral & Liquidity

As regulatory reform increases the volume of collateralised trades and mandates larger capital and liquidity buffers, market-wide demand for good quality collateral continues to rise.

Meanwhile the pool of available collateral is shrinking: collateral eligibility rules have tightened and market uncertainty threatens to stifle traditional funding streams. In order to maintain a sustainable funding model,

one that meets regulatory requirements while ensuring a sustainable return on capital, Investment Banks must institutionalise a more effective deployment of assets across all their lines of business.

04Challenge

Improving the Basics

2

Banks are facing a “perfect storm” of increased demand for collateral and an industry-wide reduction in the high-quality collateral required to secure funding.

The demand for collateral, particularly good quality (credit worthy and liquid) collateral, is increasing for investment banks, chiefly on the back of a global regulatory agenda that has identified collateralisation and liquidity buffers as a means of mitigating systemic risk.

Driven by OTC derivatives reform, the volume of trades requiring collateralisation is increasing; both for centrally-cleared and bilateral models. As central clearing deadlines have come and gone, what was previously a pending challenge has become reality: not only must banks and their clients post more collateral, the frequency and volume of margin calls and associated processing has increased in lockstep. Banks must also satisfy Liquidity Coverage Ratio (LCR) requirements, ensuring they have enough liquid assets (generally cash and government bonds) to sustain their short-term funding needs.

At the same time, the pool of assets available to meet collateral requirements is shrinking. Tighter rules on eligible collateral from central banks and clearing houses, coupled with a decline in credit quality for certain assets once seen as “risk-free” (for example, European sovereign debt), is restricting the volume and availability

Figure 1: Value of reported and estimated collateral ($ billions) as at Dec 31st, 2012Source: ISDA Margin Survey, 2013

EstimatedReported1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

138

145

289

491

707

854

922

924

1,470

2,649

2,150

1,984

2,459

2,666

200

250

437

719

1,017

1,209

1,329

1,335

2,126

3,957

3,151

2934

3,652

3,700

3

of eligible assets to meet investment banks’ funding needs. Investment banks themselves are carrying lower inventories which, coupled with lower trading levels, may make it more

difficult to sell even higher quality collateral in the event of default (therefore making such collateral less acceptable).

There are additional challenges on the horizon. A proposed European Financial Transaction Tax (FTT) has the potential to cause the short-term European repo market to contract by up to 66%.

Responding to the challenge of sustainable funding in the long term is about more than matching assets and liabilities

As demand and supply factors have converged to challenge the availability of liquidity of collateral, Investment Banks have been driven to develop sustainable funding strategies. However the challenge which the majority of banks now face is how to embed the necessary change within an operating model and technology infrastructure that can manage these requirements for

the long term, and generate tangible benefits for the business.

Optimisation: unlocking the potential in collateralWhile core processing has traditionally met the demands of collateral management – ensuring the day-to-day margin obligations of the business are satisfied – leading Investment Banks are looking further at ways of optimising their usage of collateral to generate the best return on available assets.

As summarised in Figure 2, the process requires clear visibility of a number of inputs to optimise the placement of each available asset – that is, generating the maximum return within a set of legal constraints. For example, methods of collateral optimisation available in the market, such as asset rehypothecation and cross-product margining, are only possible on the basis of transparency of ownership and clear legal agreements.

To perform optimisation on the scale required therefore requires a high degree of process automation and a significant investment in technology:

• To codify legal agreements into a set of reference data parameters that can be understood end to end – a particular challenge when they exist in multiple formats (e.g. scanned PDFs);

Figure 2: Inputs for collateral optimisation Source: Accenture Research

Asset Inventory

Clear visibility of each asset at the Banks‘s disposal, including:• Location of the asset (e.g. exchange or custody account)• Owner (whether client or internal)• Segregation Basis (client money requirement)• Rights of Use, such as Title Transfer

Margin Obligations

Accurate & up-to-date view of margin requirements accross all businesses:• Initial Margin Requirements• Variation Margin Requirements• Member Defalt Fund Requirements• Buffer Fund Requirements

Client Agreements

Codified set of assumptions & requirements involved in collateral transfer between counterparts:• Definition of acceptable collateral• Haircut amounts for specific securities / instruments• Margin call frequency (intra-day / end of day)• Rights of rehypothecation

Other Data

Various other data inputs required for the optimisation process including:• Market Data for pricing & MTM• Internal data for transfer pricing, Repo rates per asset• Movement / holding fees (cost of moving collateral)

Collateral Optimisation

4

• To make external data (for example margin requirements per client per CCP) available in near real-time to run multiple optimisation calculations intra-day or on-demand;

• To develop an optimisation engine with algorithms that are tailored to the specific requirements and risk appetite of the bank – these are expensive to develop, and require a huge amount of processing power;

• To tightly integrate optimisation technology within existing end-to-end application infrastructure (e.g. asset movement engines) to track positions and transactions.

Enabling Treasury: exact management of scarce resources is keyHistorically, Treasury has not owned secured funding or collateral. However, as it becomes a more centralised and more prominent function, the need to maximise the return on assets at the banks’ disposal (and therefore closely manage funding costs) is increasingly a Treasury challenge.

Collateral transformation or substitution is one particular challenge for banks in a market where high quality assets are scarce. Receiving client collateral that cannot be used to cover margin requirements at a particular CCP, and which therefore must be substituted with eligible securities, represents a significant funding cost. Treasury functions must

respond to this challenge: firstly by exhausting the optimisation potential of client assets, and secondly by developing a process that can weigh up funding costs against client profitability analysis, to pass back the cost via client pricing schedules where necessary.

Furthermore, after years of planning how to change their funding profiles to meet LCR requirements, the challenge facing Treasury now is how to manage them going forward. Given that the mandated liquidity “buffer” will generate a return well below its funding cost, sizing it accurately to fulfil regulatory requirements but not beyond is crucial to keep the cost as low as possible. Maintaining the optimal size of the liquidity buffer relies on the delivery of accurate, granular data from a large number of external sources, including CCPs and exchanges.

Recognising the opportunitiesAs banks invest in the changes required to better optimise their own collateral and funding requirements, these capabilities can also become value-add services for their client base. Banks with large prime brokerage units can take advantage of a supply of pledged securities (through rehypothecation) and maximise access to buy-side borrowing. Asset pools on the buy-side can be explored to the maximum extent possible as sources of liquidity

and quality collateral, allowing asset managers to increase their profitability while providing additional sources of liquidity for the bank.

Furthermore, by helping clients manage the demands on their collateral and the complexities of position management, certain offerings become a compelling proposition:

• Collateral Optimisation: services providing cross-asset class visibility of margin requirements and collateral availability, with capability to manage the optimal placement of client assets;

• What-if Margin Calculators: services offered by brokers that allow clients access to pre-trade modelling of margin requirements, giving clients the opportunity to compare multiple CCPs.

Investment Banks across the industry have for a long time been re-assessing their funding strategy in response to the challenges of the current environment. Yet truly high performers are now taking decisive action in two ways. They are investing in process automation to optimise the use of all assets across their business, and they are taking offerings to their clients that maximise the pool of assets at their disposal, tap additional pockets of liquidity in the market, and manage collateral more efficiently.

5

Building Sustainable Funding: Managing Collateral &

Liquidity

04




Daniel Kapffer Managing DirectorCapital Markets, [email protected]+49 617 3946 6150



Watching Closely: Im

proving Surveillance and Mitigating Conduct Risk

05

Watching Closely: Improving Surveillance and Mitigating Conduct Risk


Watching Closely:

Improving Surveillance and Mitigating Conduct Risk

The recent spate of high-profile scandals felt initially in Europe and now emerging in other geographies, indicates conduct risk is becoming more pervasive for Investment Banks.

Surveillance represents a powerful tool for combating inappropriate conduct, through monitoring of the front office’s trading activities and broader scrutiny of firms’ ways of working. Banks need to invest substantively in a holistic approach that transforms

their surveillance capability. As clients continue to scrutinise Banks’ integrity, enhancing surveillance capabilities presents an opportunity for Banks to establish greater resilience in their operations and to increase their competitive advantage.

05Challenge


2

The Unchecked Rise of Conduct RiskOversight and control has been a major theme of financial markets since the market collapse in 2008 as regulators have sought to increase transparency and investor confidence. Despite the extensive efforts of regulators to guard against inappropriate execution of business activities, some Investment Bank practices remain misaligned with regulatory requirements as some staff continue to operate in a way which contravenes Bank policy. Conduct risk – the risk that detriment is caused to institutions, clients or the wider marketplace by malpractice – has continued to rise in the form of:

• Market conduct risk – challenges around product suitability and pricing;

• Employee conduct risk – borne out in a series of industry scandals, culminating last year in the resignation of a CEO of a global Investment Bank in the wake of an insider trading scandal.

Conduct risk continues to resonate with Investment Bank leaders as an acute operational challenge. Key symptoms for firms struggling to mitigate conduct risk include inconsistency in control processes, for example around policy implementation, control testing or management reporting, which are often reinforced by unclear roles and responsibilities. In a recent report the UK Parliamentary Commission on Banking Standards highlighted

• Lack of the required skills within Banks to systematically identify and mitigate conduct risk

• A mindset amongst some in the front office that inappropriate practices can continue in the pursuit of short term business objectives as monitoring and surveillance programmes will not identify deviations from policy

• Fragmented technology architects that drive inconsistencies in data quality, data gaps and can reduce market transparency around non-exchange traded products

• Managing specific regulator requirements, at both the jurisdiction and sometimes even the exchange level, drives operational complexity that opens firms to further potential sources of conduct risk

• Changes in industry practice for how asset classes are traded, for example the shift of certain assets classes on to exchange platforms, which in turn drives further complexity for Banks seeking to mitigate conduct risk

• Market competitiveness continues to drive innovative product design as firms seek competitive advantage, though these new products can also out-pace the capability of compliance departments to provide sufficient monitoring

the challenge of “officers in risk, compliance and internal audit lacking the status to challenge front-line staff effectively”1.

Mitigating the Risk of MisconductExpectations are rising on many fronts for Investment Banks to mitigate conduct risk effectively as clients scrutinise firms’ integrity. The consequences of not establishing an effective mitigation approach are severe, with regulators showing

a capacity to penalise firms and individuals heavily if they do not meet the required standards. Banks must respond to the challenges posed to avoid further damage to their reputation and financial results. Barclays CEO Antony Jenkins summarised the challenges faced by the industry in the Bank’s recent Strategic Review: “there is no choice between integrity and profit in this business”2.

Internal Drivers External Drivers

1 Source: Barclays Strategic Review, 12th February 2013

3

Distilling the drivers of conduct risk – both internal and external – is a critical step for Banks seeking effective mitigants.

A key ingredient to effectively mitigate conduct risk is to monitor client interactions and middle and back office processing activities, for evidence of misconduct. Allowing potentially harmful practices to remain unchecked opens Banks to the risk of regulatory actions, such as mandatory requirements for extensive and costly remediation efforts. Public exposure of isolated cases of market abuse may also shake investor and client confidence, which can cause financial damage as clients begin to gravitate towards institutions that evidence greater responsibility in the marketplace.

Investment Banks have a number of potential tools available to improve their monitoring capabilities; however, the enhancement of trade surveillance emerges as the primary consideration.

Trade surveillance can be established both pre-trade and post-trade. Industry thinking to date has tended to focus on post-trade surveillance methods, which can monitor the front office for front-running, suitability, best-execution and regulatory transaction reporting. Recently, however, pre-trade surveillance methods such as behavioural analysis and pattern recognition have emerged as disciplines to identify potential violations before they emerge. For example, pre-trade surveillance can validate trade

instructions, ensure trading thresholds are not breached, and prevent trades from being conducted using restricted instruments. An Accenture survey of financial institutions indicates that enhancement of analytics and modelling capabilities is a current management priority for nearly 60% of institutions3.

Future State SurveillanceFigure 1 summarises the key components of the approach Investment Banks should consider when re-evaluating their trade surveillance capabilities. The details shared below summarise outputs of industry seminars that Accenture has recently chaired with leading Investment Banks as they each scrutinise their trade surveillance capability.

1. Governance• Dedicated Trade Surveillance function

with clear scope and accountabilities, reinforced by global policies and procedures that address both pre- and post-trade surveillance

• Function is led by a single Accountable Executive to set a “tone from the top”, manage day-to-day operations and provide visibility of key risks and issues to senior management using standardised reporting

• Detailed management reporting that can identify trade-level issues, including breaches and subsequent disciplinary actions

Figure 1: Key components of trade surveillance. Source: Accenture Research

1. Governance

Trade Lifecycle

2. Process 3. Talent 4. Technology

5. Lessons Learned

Research Sales Trading Post-Trade Processing

3Source: ‘Rethinking Risk in Financial Institutions: making the CFO - CRO partnership work’

4

2. Process• Surveillance process configured to

oversee both pre- and post-trade surveillance

• Maintains an end-to-end view of the business to enable surveillance from the front office through to the middle and back offices (e.g. Technology, Marketing, HR)

• Function services cross-asset class and cross-counterparty to enable economies of scale and appropriate sharing of expertise

• Integration of trade surveillance processes with other forms of bank surveillance, for example around employee e-communication

3. Talent• Trade Surveillance function

demonstrates a blend of skills, including awareness of the front office business models as well as mastery of the requirements within the control environment

• Definition and monitoring of a culture of surveillance within the bank, with clear expectations set for each Trade Surveillance professional’s role

• Dedicated curriculum and continuous training for Trade Surveillance professionals to refine skills in line with changing industry demands

4. Technology• Effective data governance, featuring

appropriate partnership with technology and a defined data strategy focusing on quality and

completeness within dedicated warehousing to ensure that trade- and client-level views can be provided on demand

• Single case management system that provides clear issue hierarchies, assigns ownership of items and enables clear audit trails on actions taken

• Data analytics tools to identify patterns that can avert issues before they cristallise, inform lessons learned and add sophistication to reporting

5. Lessons Learned• Periodic testing and refinement of

surveillance scenarios and data feeds, as well as ad-hoc quality checks to processes

• Adoption of new themes to surveillance procedures based on changes to the bank’s business model (e.g. as a result of launching of new products) and as required by changes to external stakeholder expectations

The Journey AheadBank-wide practices for trade surveillance are beginning to mature, with some banks starting to integrate the advances made in technology to ensure more robust monitoring capabilities. However, further work remains for banks to establish a holistic approach to trade surveillance that drives more comprehensive mitigation of conduct risk.

Banks can use the above framework as guidance when starting or continuing their journey towards a more effective mitigation approach. For many banks the journey ahead can feel extensive, though breakthroughs in technology and enhanced industry knowledge of conduct risk and its drivers means it is by no means an insurmountable challenge. Banks that successfully deliver the required change are set to emerge more resilient and more competitive in what remains a fast-changing industry.

5

Watching Closely: Im

proving Surveillance and Mitigating Conduct Risk

05




Samantha Regan Managing DirectorCapital Markets, New [email protected]+1 917 4525500

Andy SchaerCapital Markets, [email protected]+44 20 3335 0471

Benjamin ShortenCapital Markets, New [email protected]+1 917 452 6071


Finance as Strategic Enabler: Informing Business Decision M

aking

06

Finance as Strategic Enabler: Informing Business Decision Making


Finance as Strategic Enabler: Informing Business Decision Making

The financial crisis and subsequent market conditions brought to light new challenges for Investment Banks. This provided Finance with a platform to demonstrate its abilities in new ways, which has accelerated and further enhanced the evolution of its role from financial steward to business partner.

The Finance function now plays an increasingly important role in ensuring not only the regular reporting of financial performance, but in forward looking decision making to support the execution of the Bank’s strategy. In order to achieve this, Finance needs to address three key challenges:

1. Responding to increasing regulatory pressures in both immediate and strategic ways

2. Helping to lead strategic decision making and playing a key part in driving profitability

3. Playing a leading role in cost reduction and optimisation to drive a more efficient bank-wide operating model

Each of these challenges will impact the not only Finance but the alignment and interaction with other functions, notably Risk and Treasury.

06Challenge


2

Investment in InfrastructureThe scale of change required to meet regulatory pressures places significant strain on the infrastructure of many banks. Future regulatory requirements can no longer be met with simple incremental improvements. Instead, an integrated view of infrastructure across Front Office, Finance, Risk, Operations and other functions is required.

Strategic Response to RegulationThe challenge of grappling with multiple regulatory initiatives will become ever greater in 2014 and beyond, and Banks must find a way to structure themselves to be able to respond quickly.

Structured and Responsive Approach to Regulatory Implementation The urgency and volume of regulation has resulted in a large number of tactical responses due primarily to regulator required timelines. As a result, much of the effort is happening with limited overarching governance and without a holistic end solution in mind. For example tactical regulatory reporting solutions may rely on manual effort to map and consolidate fragmented sources of data into cohesive reporting frameworks. As a result complexity is often increasing and the ability to be flexible and responsive to new changes is reducing.

Setting up cross divisional regulatory implementation governance and improved regulatory impact assessment

capabilities should allow change activities to be more carefully planned, sequenced, aligned to business priorities and managed to ensure cost effective implementation.

Getting the Data Right First Time Has Become a Strategic EnablerSourcing a significantly increased volume of fragmented data elements, along with ensuring the quality of this data, remains a hot topic given regulations that are due to come into force in 2014, e.g. FinRep/CoRep and Basel’s risk aggregation rules. Across the industry banks are accelerating towards daily reporting as the “standard”.

Finance is a key participant in defining the data standards and data quality framework, including identifying data ownership and control measures, and monitoring adherence to new data and data quality standards. Big data technologies will also provide significant opportunities for Finance to provide insight and forward – looking analytics.

“The urgency and volume of regulation has resulted in a large number of tactical responses due primarily to regulator required timelines”.

3

Agreeing a series of interim target states as well as an ultimate end state is important to ensure that the investments both meet regulatory compliance needs and further the overall redesign of the Bank’s infrastructure. As such, Banks need to ensure senior level investment governance encompasses regulatory compliance and architecture/design authorities.

Enabling Strategies for GrowthIn the current constrained market environment Finance, working with Risk and other functions, is increasingly being asked to find ways to maximise return on equity (RoE) over the medium term, whilst optimising the use of scarce resources. Finance increasingly needs to provide forward looking analytics and assistance in executing strategy.

Supporting InnovationAfter several years of restructuring and deleveraging, Banks are now actively looking for new revenue opportunities. New businesses will operate in a more highly regulated, lower RoE environment, meaning Finance has a significant role to play in supporting the allocation of scarce resources and ensuring the sustainability of new business in the future market environment.

Providing Deep Industry InsightFinance, in partnership with Risk, no longer only plays the part of the traditional “number cruncher”, but is increasingly involved in helping to set the strategy of the Bank. For Finance to

become more of a trusted business advisor they need to build additional capabilities – such as providing industry insights, strategic options to respond to regulatory and market pressures and analysis of market opportunities.

Forward Looking AnalyticsTraditional P&L based analytics are being improved to provide greater granularity and accuracy (such as improving intraday effects and more appropriate pricing models). Significantly there is also a shift to include balance sheet and risk analytics at a business level so that asset and liability management, associated costs and key risk drivers can be factored into business performance measurement. Forward looking analytics now plays a key part in helping the Front Office functions make the right trading decisions, particularly in relation to managing scarce resources in relation to capital and liquidity.

Driving Sustainable Cost Management The pressure on margins and RoE has driven a focus on reducing the cost base in order to continue delivering shareholder value.

Cost Reduction and Eliminating ComplexityIncreasingly CFOs have a remit not only to report the Bank’s cost base but also to set and drive strategies to reduce or optimise that cost base. CFOs are employing several techniques to do this – major restructuring of businesses, establishing cross divisional shared services (marrying up the function with

its IT department to create synergies), use of market utilities, as well as the more established nearshoring/offshoring and “spans & layers” headcount reduction techniques.

Alignment of Finance, Risk and Treasury FunctionsThe need to adapt swiftly to changes from regulation and market drivers has imposed constraints on Banks which is forcing a move to tighter and more

4

proactive control over financial resources. Integration of these functions enables senior management to understand risk and financial factors in a more dynamic and efficient way, with synergies between the various support functions driving significant cost savings across the organisation.

Enhancing Finance’s Skill BaseThe new Finance function should be

valued as a genuine business partner, able to influence decision making at Board level based on its ability to deliver robust challenge and add value. This requires Finance to adapt training and recruitment to keep pace with the changing Finance role – focusing on building leadership and communication skills, along with strategic insight and the ability to challenge the status quo.

Conclusion The influence of Finance functions in investment banking is increasing – a trend Accenture believes will accelerate. Whilst the actions required by Finance are increasingly clear, the difference for the winning Banks is the speed and quality of execution. For 2014 these strategic priorities are to:

- Drive and develop strategic responses to regulation – including the organisational/governance response, a considered approach to data management, and continued and well planned infrastructure investments

- Drive and enable Bank growth strategies – through supporting innovation, business strategy, and developing forward-looking analytics

- Drive cost optimisation through eliminating complexity and improving functional alignment

- Manage the control environment to ensure statutory and regulatory reporting requirements are met.

“Whilst the actions required by Financeare increasingly clear, the difference forthe winning Banks is the speed andquality of execution”.

5

Finance as Strategic Enabler: Informing Business Decision M

aking

06




Adam MarksonManaging DirectorCapital Markets, [email protected]+44 20 7844 4688

Marli LuytCapital Markets, [email protected]+44 20 3335 1141

Lynn HallettCapital Markets, [email protected]+44 20 3335 0702


Building Profitability in Equities: Identifying the Opportunities and Controlling the Cost

07



Building Profitability in Equities:Identifying the Opportunities and Controlling the Cost

With Investment Banks plotting their strategic direction over the coming years, one of the most persistent questions is the future of equities. Accenture tracks the revenues of the largest global investment banks on a quarterly basis.

These results show that whilst overall IB revenues have fallen by 20% since their 2006 peak, equity trading revenues have dropped by 32%. Fixed Income (FICC) revenues have also declined from their

2006 peak, but these now account for 64% of all trading while equity trading now makes up less than a fifth of the industry’s revenue and an even smaller share of profits.1

07Challenge

Positioning for Growth

1Source: Accenture Research

2

Much of this can be attributed to commoditisation of equities trading and increasing competition, caused in large part by regulation and technology change. An example of the technology change has been the explosion in volumes of high frequency trading (HFT), unheard of seven years ago but now nearly 70% of the order flow on major exchanges. To maintain pace with this, significant investment has been required to deal with the accompanying volumes. All the while regulators are demanding a higher transparency and clients want their providers to give them better risk analytics.

These challenges are causing many banks to consider drastic options, including shutting down or selling off business lines that cannot generate desired returns. In the past year institutions ranging from Rabobank to Royal Bank of Scotland have made the decision to exit either parts or the whole of the equity business.

Structural Shifts Financial services are not the first, and will not be the last, industry to experience technological change driving a concentration within a market. The increasingly sophisticated demands of customers, regulators and Banks’ internal risk systems have all


250,000

200,000

150,000

100,000

50,000

0

-50,000 2000 2002 2004 2006 2008 2010 2012

CF Total

Trad Principal

Trad FI

Trad Eq

Top 10 Global IB Revenues: by division

3

contributed to increases in the cost of trading. The result is predictable: the top four Investment Banks account for 61% of revenues, up from 44% in 2005. Scale is clearly a growing key differentiator that justifies investment and ensures profitability. As for the remaining banks, they are likely to find they must either accept lower margins on their business, or develop particular niches or specialisms where they can be seen to deliver value.

The overall fall in profitability can be partially offset through development of add-on value for clients. An example of an add-on service that can be further developed is equity research. This may seem counterintuitive given the sell-side dwindling information advantage, but for a long time clients have elected to trade with banks that provide superior research and demonstrably help to improve their performance. The shift however is away from broad coverage to deploying deep specialists who can provide insight on certain fields not available elsewhere. This intellectual advantage is one of few ways for banks to safeguard long term business from clients.

Bundling of products, whilst maintaining transparency, is something that can be used to increase margins within the equities space too. Collateral and risk management offered in combination with brokerage can be one example of an add-on service that might be attractive to smaller, less sophisticated clients.

The other area of significant opportunity for equity issuance and trading is in emerging markets. In 2005, some 22% of equity issuance in global emerging markets was undertaken by 10 European and American Investment Banks. By 2011, these Top 10 Investment Banks had managed to capture some 51% of the equity issuance of what had become a far larger market. This dominant market position has been maintained in subsequent years.

Last Effective Lever – Control the CostFor those banks that take the strategic decision to remain in equity trading, one of the keys to success will be lowering Total Cost of Ownership (TCO), through three key levers:

• Cost reduction strategies

• Optimising cost management and sustainable cost reduction

• Structural efficiency improvements

4

Emerging Markets Equity Issuance

18,000

16,000

14,000

12,000

10,000

8,000

6,000

4,000

2,000

0

DM BanksEM Banks

UBS

CitiJPMorgan

Morgan StanleyGoldman Sachs

Bank of America Merrill LynchDeutsche BankCredit Suisse

HSBC

CITIC Securities

Reduction of cost through outsourcing of core securities processing, market connectivity, reconciliation of processed activities, accounting and reporting, will be key to lowering overall costs. Transition of application development/maintenance and business process to third parties will further increase to include non-peripheral and core business functions such as quantitative analytics, risk, and finance areas.

Rationalising trading architectures will remain an option to decrease costs and simplify overall landscape across banks.

Banks should move away from custom-built internal solutions to vendor-based solutions, which in turn will reduce complexity and decrease the TCO. For those banks not positioned as one of top four or five providers by volume, there is a need to focus on reducing the complex web of technology and ensuring they have a nimble model in place that can help them respond effectively to market trends and development.

Times of great disruption can also be times of great opportunity; the challenge is to see clearly where the

greatest opportunities will be. Equity trading has been and continues to be transformed, by technology, by consumers, and by regulators. It should be remembered that equity trading, despite all the challenges and changes, is not going away as a business: companies will want equity financing, and there will be a need to trade shares in a secondary market. If hard decisions with realistic strategic choices are faced, and due attention is paid to both innovative revenue drivers and Total Cost of Ownership, the path to long term success is open.


5

Total Equity



07



Araya SolomonManaging DirectorCapital Markets, [email protected]+31 204 938 403

Deyan MihovCapital Markets, [email protected]+44 20 3335 2087


New

Disruptive Technologies: Seizing the Opportunity

08

New Disruptive Technologies: Seizing the Opportunity


New Disruptive Technologies: Seizing the Opportunity

The castle walls have been breached. As if overnight, countless Financial Technology (FinTech) start-ups have arrived to steal market share, and investors are taking note. Since 2008, global investment in FinTech start-ups has grown on average by 18% year on year with more than 60 deals made each quarter.1

These newly funded companies are all looking to drag financial services, kicking and screaming, into a new era of “frictionless finance”. The question is: should incumbent banks strengthen their defences and fight back, or lower the drawbridge and let the innovators inside?

The lending and investment market has been the first obvious target of this

new wave disruption to the industry. Peer-to-peer (p2p) platforms such as Zopa, Funding Circle, CrowdBank and the Lending Club cut out Banks from the capital allocation process, connecting buyers and sellers directly with social media style p2p technology instead of through traditional “high-touch relationships”.

08Challenge


2

1Source: Accenture research

The Sharing EconomyThis approach chimes with the move towards what Gen-Y enthusiasts call the “Sharing Economy”, which describes how direct social relationships, facilitated by technology, will disintermediate established industries. Airbnb, a US based service which helps connect tourists with people’s spare rooms rather than having to book traditional hotels, is a perfect example of this trend.

But the Sharing Economy doesn’t always have to cut out the established

order. For example, in Germany, Friendsurance brings together social networking with insurance provision – connecting groups of networked customers with insurance companies. This enables risk and claims to be shared across a friendship group, which Friendsurance says reduces fraud and cost of sale for the providers.

Investment Banking has its own examples such as OpenGamma, a start-up that has created an “open source” risk management platform that aims to reduce risk and increase transparency

Figure 1 Source: CB Insights

Fin Tech Financing Activity: Five Year Quarterly View

800

700

600

500

400

300

200

100

0

120

100

80

60

40

20

0

Q2’08

Q3’08

Q4’08

Q1’09

Q2’09

Q3’09

Q4’09

Q1’10

Q1’11

Q1’12

Q2’10

Q2’11

Q2’12

Q3’10

Q3’11

Q3’12

Q3’13

Q4’10

Q4’11

Q4’12

Q4’13

Investments ($M)Deals

3

while improving pricing accuracy and reducing development costs in the derivatives market. OpenGamma’s “radically open” approach takes the core ethics that start-ups live by – agility, openness, speed-to-market – and applies these to the OTC market.

OpenFin is another young company that uses technology to help Investment Banks act more like fast-moving and flexible start-ups than multi-billion behemoths. It’s technology provides a runtime environment that lets banks seamlessly integrate traders’ desktop applications, and deploy new ones. It even enables banks to build “app stores” that Apple and Android smartphone users are so comfortable with.

Examples like these demonstrate how banking can benefit from the surge in start-ups. Early-stage companies bring energy, ideas and a “can-do” attitude that is often lacking within industries that have been established for decades. They can also be a quicker and cheaper way to modernise – particularly as the financial crisis and capital requirements regulation has reduced the ability and appetite for banks to build new technology in-house.

Investment Banks RespondThe result is that more Investment Banks are trying to reach out to the start-up community - not only to buy their technology, but to engage more meaningfully in understanding how they can benefit from more innovative and agile approaches to disruptive thinking.

As one would expect, engagement between a large bank and a small start-up comes with its own set of challenges. On the one hand, banks’ regulatory, security and resilience requirements mean it is difficult to enter into a contractual relationship with a company that might have three employees and work from a garage. On the other, start-ups’ resource constraints mean that they do not have the time or money to spend working their product through a bank’s countless decision-making process before finally getting enough buy-in to make a sale.

Fundamentally, though, the challenge goes beyond these practical considerations and is more a question of the strategic appetite of the bank to embrace the change that start-ups bring. This is the most significant issue for both the technology and business sides of a bank – and it touches on the heart of the “innovator’s dilemma”.

This term, coined by Harvard professor Clayton Christensen in 1997, describes the tendency for successful established companies to over-emphasise customers’ current needs, while overlooking or resisting new technology and business models that will meet customers’ unstated or future needs. This is what leads established companies to miss out and ultimately be “disrupted” – or even destroyed – by new emerging business models or products.

It’s an important point for both bank technologists and strategists to bear

in mind. But it is exceedingly difficult to overcome – and requires bold leadership and a big appetite for risk. Not least because there are start-ups with disruptive ideas popping up continuously, and choosing which one to back can often seem more like gambling than strategic decision-making.

4

This highlights the risks and challenges in dealing with start-ups, many of which may lead down technological or strategic blind alleys, but some of which may hold the keys to future growth and sustainability.

How to Incorporate InnovationThe solution is to combine innovative experimentation with strategic oversight and direction. In other words, learn about, test and experiment with as many start-ups and new ideas as possible, while using this to inform the bigger strategic decisions. In fact, this is exactly what banks such as Morgan Stanley, JP Morgan, Bank of America Merrill Lynch and UBS have begun doing in a more structured way, by appointing teams that reach out to start-ups and feed into the overarching strategy.

Banks must also understand that seizing the opportunities offered by disruptive technology is not simply a case of embracing start-ups, but also about understanding that innovation occurs beyond the walls of the organisation. Many of the examples mentioned in this paper demonstrate

that banks can no longer control the end-user’s technology, and must realise that becoming part of the ecosystem is just as important.

Accenture’s own programme, the FinTech Innovation Lab, brings together start-ups and executives from the world’s largest Investment Banks to experiment over a three month programme to establish links, test technology, share knowledge and inform strategic thinking. Soon entering its fourth year, the lab has turned many start-ups into IT suppliers to the industry, and helped many banks validate and engage with early-stage companies.

Programmes such as this can help the process. But even so, innovation is not easy and requires bold leadership and an appetite for change. For many reasons, the established order and the new kids on the block are uncomfortable bed-fellows. But with active engagement, and a will to invest in the future, there still can be peace and prosperity between the disruptors and the disrupted.

“Innovation is not easy and requires bold leadership and an appetite for change”.

5

Copyright © 2013 AccentureAll rights reserved.Accenture, its logo, andHigh Performance Deliveredare trademarks of Accenture.;

New

Disruptive Technologies: Seizing the Opportunity

08



Samad MasoodAccenture Research, [email protected]+44 20 7844 8505

Stephanie LeeCapital Markets, [email protected]+44 20 7844 3363

Ian WhiteCapital Markets, [email protected] +44 20 3335 0602


Rethinking the Digital Proposition: providing information clients really need

09

Rethinking theDigital Proposition:providing information clients really need



Investment Banks recognise that digitalisation is necessary to generate new sources of revenue, but are challenged with defining a strategy and supporting business case. As digital businesses, they will need to change how they engage with their employees, alter internal processes and interact with their clients.

Digitalisation has become a necessary part of the fabric of which businesses are built upon today to create profitability, growth and differentiation amongst their competitors. Cross-industry insights are key to understanding how high-performing companies are delivering a rich and engaging digital brand experience.

Based on a 2013 survey of 300 bank executives performed by Bank Technology News (BTN), Investment Banks are highly focused on enhancing their digital capabilities.

The Case for ChangeThe value to be realised through adoption of digital capabilities such as analytics, collaboration tools and Cloud Computing will range from improving the client experience (resulting in greater

satisfaction and increased sales) to increased operational efficiencies and cost savings.

When Investment Banks become fully integrated digital businesses, they will transform their engagement with clients and, more fundamentally, the way in which they do business.

1. Seamless CollaborationAlthough initially slow to embrace social media, Investment Banks are adopting collaboration tools that provide direct interaction between back office operations and clients. Having initially used Facebook and Twitter to add to the channels used by Marketing, Investment Banks are now turning to more specialist platforms such as SalesForce Chatter to communicate with clients which are customised and tailored for integration

09Challenge


2

integration with existing CRM systems. These tools ensure information is available allowing for faster results and better decisions. Bankers will be more productive, efficient, and innovative as a result. When a top insurance company decided to overhaul its approach to managing existing customer relationships and identifying new areas of growth, better tools were required to aid in the tracking, planning and execution of their activities.

How much U.S. banks expect to increase IT spending in 2013

Areas in which U.S. banks plan to increase IT spending

U.S. Banks’ use of Cloud Computing

Mobile banking 57%Security 52%Online banking 46%Data centre/servers 39%Desktop computing 29%

15%Less than 4%

4%By 21% to 50%

25%By 5% to 7%

32%By 8%

to 10%

21%By 11% to 20%

28%

Branch expansion

32%

Advertising andMarketing

37%

Regulation

46%

New products and services

80%

Information Technology

12% Infrastructure as a service

25% Software as a service

8% Platform as a service

65% None

Figure 1 Source: Bank Technology News – “Banks’ 2013 IT Spending Sees Healthy Increase: Survey” (Feb 2013)

2. Data VelocityClients are demanding more relevant, tailor-made interactions at the time and place of their choosing. Having a faster data response model will allow for sophisticated analysis of complex products, such as derivatives, and simpler understanding of changing positions in the market and their effect on risk in real time. This will enable Investment Banks to aid clients in making better investment decisions

through an improved servicing experience by providing insights more quickly, allowing the customer to respond to ever-changing market conditions.

3. Collateral ManagementTraditionally, collateral management has been siloed. Each trading desk, prime services, financing and counterparty credit risk management units have their own individual priorities, with limited co-ordination across functions. Investment Banks are finding that cross-desk, cross legal entity, real-time product inventory management and margining can boost revenue, cut funding costs, reduce operational and counterparty risk, reduce regulatory capital needs and improve compliance (e.g., segregated account rules). This unified view for collateral management can be achieved through data rationalisation and incorporation of an analytics engine that is centrally controlled versus individual lines of business limiting data redundancy and increasing data availability across the organisation.

4. Risk AnalysisToday’s regulatory environment is affecting end to end trading activities. The heightened regulatory controls imposed on trading via electronic solutions require greater transparency, and the provision of real-time exposure monitoring across the entire trade lifecycle. This requires referential data to be configured correctly and positions to be readily available. In addition,

3

Where Banks Plan to Increase Capital Spending in 2013

proper infrastructure is required to provide a view into client trends such as transaction types, trade activity. With this in place, forward-looking scenarios and peer analyses become possible, which will provide better understanding the client’s risk profile.

Technology/InfrastructureAs Investment Banks incorporate digital-driven enterprise into their critical business processes, they leverage new

building blocks to support a secure and agile environment. An investment in infrastructure and collaboration tools is required to become an industry leading digital brand is required to reap the benefits of digital capabilities

1. AnalyticsInvestment Banks are operating from poorly-integrated, legacy systems. However, refreshing technology is frequently not feasible or cost effective.

One solution is to implement a Corporate-owned data structure to shift data ownership out of operations silos and ensure a single view of customer. Data can be used to tailor interactions, services, and create new insights about clients, products, and markets. Accenture worked with a leading global Asset Management company to evaluate current processes, formulate a conceptual view of service analytics to support analytics maturity progression, conceptualise and develop tools to quantify and analyse cost to serve and a recommended plan to implement managed services around cost to serve analytics to achieve a 25-30% uplift in overall process efficiency.

Analytics can help an Investment Bank marry their operational needs with client insights enabling greater cross selling, client retention, and price optimisation. By knowing how to extract the most value out of every pound of spend, as well as being able to segment clients according to profitability, Investment Banks will substantially increase their competitive edge.

2. MobilityBy 2016, the number of connected devices is expected to grow by ~60% from 9B today. The expectations of investors are evolving and require that data and access to their bankers needs to be on their terms - anywhere, anytime in turn requiring Investment Banks to equip bankers with the right information at the right time. This behaviour shift is demanding that Investment Banks adapt

Customer Management

Cross Sell Strategy

Optimal Pricing

Customer Retention

Optimize Decision Making

Clients Actual New

Worth

Banker Desktop


4

their accessibility points for consumers to not just replicate the online experience but create personalised, on the go services that consider customer preferences and behaviours for the purposes of creating personalised and targeted programmes. The use of mobility also creates opportunity for things such as information sharing and training within the Bank enabling real-time access to training on tablets ensuring access to the most up to date materials, procedures and policies or providing instant updates/notifications to employees each time policies and regulations are revised or created. A large European Bank, for example, launched an iPad application for its financial advisors that provides customised presentations for client meetings and eSignature capabilities allowing for increased sales effectiveness. Differentiated mobile capabilities will allow Investment Banks to improve customer service, reduce costs (i.e. help desk, product/

service enrolment processing) and drive customer outreach/conversion.

3. Networking and Cloud Computing Investment Banks have taken advantage of point solutions in Cloud Computing – most have outsourced email and traditional server-based collaboration services to Microsoft and other established Cloud suppliers. Point solutions have been developed over time to support the types of information needed about clients for specific lines of business. The next step is a more holistic shift to Cloud services, and a move to open platforms enabling multi-market access and integration with third party Execution and Order Management systems. This enables systems and applications to become more nimble in terms of future development and will make “big data” more available. Once hosted in the Cloud, established solutions can be used to organise unstructured data allowing for personalized pricing and more accurate risk estimation.

An infrastructure assessment will aid in defining the right technology solution to lower capital and operational costs and increase efficiencies through increased data availability and increased capacity from current physical infrastructure.

4. Active DefenceAs the uptake of Cloud Computing and open network concepts increases, Data security becomes an increasing concern requiring analytics-driven event detection and incident response. Investment Banks will need to integrate solutions and approaches into an integrated security architecture that will proactively recognise risks and issues before they occur. The aim is to position security management functions one step ahead of hackers – making it more difficult to engineer and profit from security breaches.

ClosingDigitalisation enables more targeted engagement with clients, efficient organisation of data leading to more insightful analysis and the tighter security over confidential data. As Investment Banks move out of crisis response in the post-2007 era towards a new level of compressed RoE, these measures provide a platform for sustainable competitive advantage.

ResourcesPenny Crosman, Bank Technology News, “Banks’ 2013 IT Spending Sees Healthy Increase: Survey”, http://bit.ly/11sfP0b

Jeanne Harris, “How to Turn Data into a Strategic Asset,” Outlook, Accenture, June 2010, http://bit.ly/JHf6Sl

5



09



Alex PigliucciManaging DirectorCapital Markets, New [email protected]+1 917 452 4978

Christopher LucyManaging DirectorCapital Markets, [email protected]+1 703 947 2651

Jessica TownsendCapital Markets, [email protected]+1 704 370 5676


Fostering the Next Generation of Talent: Rem

unerating Effectively

10

Fostering the Next Generation of Talent: Remunerating Effectively


Fostering the Next Generation of Talent: Remunerating Effectively

Remuneration is recognised as one of the key factors affecting long-term corporate performance. Aside from its significant influence on overall costs, the structure of remuneration is also integral to a firm’s risk and return, the effectiveness of its strategy, and its ability to hire the best people. Crucially in the eyes of regulators, it also goes a long way to defining the wider corporate culture.

At a time when the industry is seeking to change the way in which it does business, compensation matters.

The challenge for all Investment Banks is to find ways in which they can control

staff costs while maintaining morale, and compensate employees for the value they deliver while satisfying the demands of shareholders and regulators alike. There is a clear mandate for change:

10Positioning for Growth

Challenge

2

• While Investment Banking remains a high-skilled business in which attracting the right talent is a key competitive differentiator, it is unacceptable to shareholders for even lower RoE targets of 12-14% to be missed because of high staff compensation levels. This is exacerbated when Banks publish only vague information on their compensation structures, or none at all.

• Bonuses tied to short-term goals and excessive risk-taking were widely credited as a cause of the recent financial crisis. As a result, stronger control over compensation costs is a common theme even in a fragmented global regulatory agenda: Dodd-Frank (US), the Independent Commission on Banking (UK) and the Liikanen Report (EU) are three key initiatives seeking to address industry structures.

• Industry surveys consistently show the sell-side Investment Banks trailing asset managers and hedge funds in measures of job satisfaction and security, working hours and work-life balance for their staff. Banks must ensure that they look beyond monetary remuneration to retain high-performing and motivated employees.

Reaching full potentialFor the industry to reach its full potential, the biggest and most important differentiator of any Investment Bank – its people – have to

be placed on the best possible footing. Furthermore, their incentives – both monetary and otherwise – need to be more closely aligned with that of the firm as a whole, and high performers rewarded for the sustainable value they add. Banks looking to achieve this should consider four approaches:

1. Further revise the structure of bonusesGlobally Banks are looking to lower fixed costs and lengthen the typical vesting period for equity. Longer vesting periods and greater remuneration

through bonuses allow claw-backs of compensation where revenues turn out to have been overstated or risks underestimated.

However, claw-back programmes are inherently reactive, and should be implemented alongside systemic changes designed to influence upfront behaviour. For example, Banks might consider a system that ties team remuneration to a specific fund, with the assets of that fund consisting of a portion of deals/sales/client delivery in which the team has been active.

3

from IT support to procurement, is well established. But a new approach is now being developed, which might be called “right sourcing”:

• Move workers from high cost front office roles, to lower cost middle office roles. This is most easily done in years when bonus expectations are subdued and the emphasis is on job retention;

• Shift middle office roles to near-shore locations, allowing cost savings in the order of 30 per cent whilst preserving direct management control;

• Extend the use of high-low cost location models within a single department. Operations such as risk, research and legal are increasingly using staff in low cost locations.

The fund could have a minimum life of three years and only pay out as investments are realised, aligning the incentives of firm and employee.

In the longer term these changes will have two effects. Even modest bonuses will quickly add up to become a substantial barrier to the movement of talent between firms, as new employers are expected to match the accumulated bonus reserves or ask employees to forgo considerable accumulated earnings. Secondly, a less mobile workforce will make it harder for Investment Banks to rapidly build new capabilities. The result is that Banks will have to plan their strategies more carefully, incorporating policies such as retraining existing staff for new roles, and placing new business considerations into a longer term – often organically staffed – framework.

2. Adopt lower levels of payOne of the most straightforward ways for the industry to meet its RoE targets would be to adopt generally lower levels of pay. As the UK data in Figure 1 shows, the bonus element of remuneration has fallen from almost six times base pay in 2008 to three and half times in 2013. A reduction to two and half times base pay would result in a lowering of cost/income ratios by approximately 15 per cent. In many cases this would be a substantial step toward restoring sustainable profitability.

3. Move to lower cost locations The idea of outsourcing or offshoring a number of standalone operations,

4

700%

600%

500%

400%

300%

200%

100%Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14

Figure 1: UK Average FS Bonuses (% of base) Source: UK ONS, Accenture Research

4

4. Establish or reinvigorate a culture focused on long-term value, total rewards, and careers. Firms who seek to create sustainable results in the long term will enjoy substantial advantages over their peers. Employers therefore need to encourage employees to make a long-term investment in the company. A flexible approach to “total rewards” that addresses more than financial compensation is highly relevant. Employers have a variety of levers to work with including roles/assignments,

“The bonus element of remuneration has fallen from almost six times base pay in 2008 to three and half times in 2013”.

mobility, time off, flexible work arrangements, and education. Analytics can be used to correlate engagement to these specific levers, as well as help tailor individual rewards packages by workforce, location, level, or other relevant criteria.

ConclusionOf course, one final option is that Banks could simply accept the volatility inherent in the nature of the industry. With this acceptance comes an acknowledgement that in downturns Investment Banks will have

to dramatically reduce staff numbers. The difficulty may be in rapidly rebuilding businesses when demand again materialises, but provided all competitors are in a similar position and follow a similar approach to incentivising staff, this approach need not be a competitive disadvantage.

How Investment Banks choose to remunerate their staff is critical to their business strategy, indeed central to the culture of their firm. Regulators will increasingly look favourably on compensation models which incentivise good practice, and these models will quickly become industry-standard.

High-performing Banks will go further and pursue policies which stretch well beyond the regulated minimum. Investors and society will reward and recognize organizations that put long term value and wealth creation above short-term gains. And as the calls for increased transparency of Banks’ compensation figures grow ever louder, from shareholders and regulators alike, there may be a significant first-mover advantage.

5

Fostering the Next Generation of Talent: Rem

unerating Effectively

10




Katherine LavelleManaging DirectorCapital Markets, [email protected]+1 703 947 2052



top 10 challenges for investment banks 2014

Documents