In a market where margins are tightening and regulatory controls are increasing, it really is survival of the fittest out there for investment banks. Utility models are emerging as a cost-effective way to shape up for the future. Today and next week, I’m going to examine one of the key areas of focus for investment banks this year: using utilities to share the load.
Let’s first take a closer look at the utility model and its role in financial services.
The capital markets industry has adopted the centralized utility model in various forms over time. The model has evolved as the industry has matured and its participants have continued to strive for ways to navigate new challenges. Central Securities Depositories (CSDs), for example, were established as specialist organizations to hold securities centrally for market participants to increase the efficiency of asset transfer. These utilities have become an essential part of securities markets.
Utility creation has also been a key part of the regulatory response to market shocks—shocks like the collapse of Lehman Brothers in 2008, which triggered the global financial crisis. Regulation triggered by this event now mandates the clearing of derivative transactions through Central Counterparties (CCPs) to mutualize the risks of counterparty default.
But, by and large, the utility model is gaining the most momentum right now with firms which are attracted to the approach because of its potential to deliver material cost reduction and service improvement through use of leading processes and technology solutions. Next week I’ll explore some of these opportunities and benefits in greater detail and take a closer look at the utility approach in post-trade processing.
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