In recent years, the demand for Third-Party Clearing (TPC) in Asia Pacific (APAC) has risen strongly, with brokerage firms shifting away from account operator or self-clearing models, and handing responsibility for clearing and settlement to external service providers. While the region is behind the likes of Europe in adopting TPC, demand for the model continues […]
As brokers grapple with growing volatility, rapid advances in technology, and the need to access liquidity and funding in a fragmented market, they are increasingly looking to third parties to handle their day-to-day operational activities. The reason is simple: even in the face of complex market developments, the need to focus on better serving their clients – rather than tying up resources in infrastructure and operations – must remain front and centre.
Back office outsourcing services, which go beyond third-party clearing (TPC) and settlement to encompass functions across the trade lifecycle, have become increasingly prevalent across the financial services sector globally, spilling over to sell-side firms as they hope to recreate synergies seen first by the buy-side. Full back office outsourcing services in this context entail handing over functions including operations, technology and banking services to a third-party provider.
The COVID-19 pandemic has been a catalyst, upending the trade cycle in unexpected and dramatic ways. Volumes and volatility have surged, with markets first tumbling then bouncing back. This exposed the need for brokers to pivot quickly, not just in terms of operational team sizes and geographical location, but also with regards to technologies deployed and investment required.
The perfect storm in APAC
Buy-side firms in the US, adjusting to infrastructural and regulatory change in a consolidated market, pioneered back office outsourcing services. Seeing the outsourcing benefits, the sell-side quickly followed suit. When the concept was replicated in Europe, it had to evolve to cater to a fragmented market: one in which participants had to navigate different time zones, currencies, and regulations (including the Markets in Financial Instruments Directive, or MiFID). This complexity magnified the appeal of outsourcing to a dedicated service provider.
For the same reasons, the outsourced model is gaining ground in APAC markets. Though the journey is more nascent, demand is being driven by several factors.
First in Asia, as globally, brokers have been wrestling with compressed margins amid competitive pressure, exacerbated in the wake of the pandemic.
Second, digitisation and the need to adopt the latest, often expensive, technologies have put added pressure on margins, underlining the appeal of outsourcing functions to a specialist who owns or runs its own technological capabilities and can deliver economies of scale. For instance, the Australian Stock Exchange (ASX) is planning to replace its cash equity clearing and settlement system, CHESS, with a new process based on blockchain in 2023. Other exchanges in the region are investigating in smart contract, ledger and tokenisation technologies, while participants in many markets are adopting digital trading platforms.
Third, employing a business model that is agile and flexible enough to quickly adapt to changing conditions is paramount in Asia, especially as avenues for cross-border investment between Hong Kong and mainland China evolve. Navigating developments such as the recent inclusion of southbound trading in the Bond Connect, or intermittent structural changes to the cross-border Stock Connect scheme, become easier by outsourcing to a large-scale operator.
Last but not the least, the appeal of having a live presence in a country or city without dealing with the complications of tightening or evolving market regulations on a day-to-day basis is also an undeniable draw. The appeal of this model has only grown as international travel has become more complicated as a result of the health crisis.
Ultimately, these drivers have underlined the benefits of outsourcing functions to a third party that has access to liquidity and is well placed to hire, train, and maintain sizeable operational teams while also deploying the latest technology – delivering these to a broker much more efficiently than doing it in-house.
Crossing lines: outsourcing more functions across asset classes
As these trends accelerate, the rationale for outsourced back office functions is widening. In Europe and in APAC, we are seeing discussions about the possibility of outsourcing moving further vertically into an organisation. Clients are exploring options for middle office and even front office functions such as dealing services, going so far as revenue-generating areas like lending.
Additionally, banks and brokers, in their quest for cost effectiveness, efficiency and growth, are increasingly considering outsourcing more horizontally across asset classes. They are shifting from seeking a larger operator to look after operations for cash equities and fixed income businesses, to hiring someone to handle ETFs, listed derivatives clearing, over-the-counter clearing and collateral management.
And as buy-side firms reap the benefits of outsourcing functions beyond settlement, custody and clearing, the sell-side is also beginning to see the value in entrusting functions like collateral management and risk reporting to a third-party vendor.
In effect, BNP Paribas’ clients are increasingly asking us as their custodian if we can move upstream into operations so they can focus on what’s important to them: their clients.
The key is integration: a one-stop shop
As possibilities for outsourcing broaden, banks and brokers seeking to reduce operational complexities could hire a clutch of outside vendors to handle different aspects of trading operations. But appointing a bank to look at clearing, engaging another firm to look at the technology side, and someone else altogether to manage people and operations can get complex, expensive, and risky. Handing over back office solutions to one specialist provider who can handle everything will likely be more cost-effective, easier to manage and a longer-term solution.
Banks and brokers that choose to work with an operator of scale to outsource their back office functions can leverage years of industry experience to increase efficiency across the trade lifecycle while protecting their margins, utilising cutting-edge technology, and minimising risk.
At BNP Paribas, we understand that outsourcing needs evolve in tandem with market dynamics, and firmly believe that employing a single, seamless infrastructure set-up for back office functions can facilitate faster entry into new markets and asset classes. Our expertise in back office and middle office outsourcing, and growing proficiency infront office outsourcing, uniquely positions us to offer a suite of services to both the buy-side and the sell-side, delivered as a platform or on a modular basis. With our in-depth experience following the migration of many clients to full back office outsourcing, we are able to tailor solutions to every client’s specific requirements and needs, weaving in a level of flexibility that makes outsourcing a viable long-term option.