Execution-to-Custody: An end-to-end solution for financial intermediaries

Financial intermediaries, namely traditional banks and retail brokers, are dealing with a number of difficult headwinds. Many of these organisations are now looking to leverage “Execution-to-Custody” solutions, to obtain operational efficiencies and improve their own underlying customer services. Gary O’Brien, Global Head of Banks and Brokers at BNP Paribas Securities Services, shares his insights on how the bank’s Execution-to-Custody product can support intermediaries as they look to future-proof their businesses and grow revenues.

Could you please give an overview of some of the main challenges facing your intermediary clients?

O’Brien: Right now, intermediaries are under intense pressure. Banks and retail brokers are facing mounting competition from new entrants, many of whom are expanding their market share at the former’s expense. There are several reasons explaining the success of these new entrants. Firstly, they are unconstrained by the legacy technology problems inhibiting the incumbents, which has enabled them to integrate cutting-edge digital features into their front-end solutions more seamlessly. Through the adoption of digitalisation, new entrants are offering retail clients highly bespoke services This is vital, given that investors are increasingly seeking out returns in new markets and products, owing to some of the challenging performance conditions in traditional fixed income and equity markets.  As these new entrants continue to expand wallet share, the incumbents are looking for ways in which to respond.

How are the incumbent providers attempting to future proof their businesses?

O’Brien: In order to remain competitive, incumbent brokers and banks are reducing fees to maintain their client base, investing in their technology systems and processes, or both. However, these approaches are likely to have a negative impact on margins. Others have opted to identify cost efficiencies within their core business. For instance, some banks and brokers are looking to rationalise their sub-custody networks by working with fewer providers to keep supplier oversight costs down.  Alternatively, other intermediaries are creating partnership solutions, whereby they purchase more services from individual banks. The exponential growth of the integrated execution, settlement, and asset servicing solution – otherwise known as the Broker to Custody model – is indicative of this trend.

What does a traditional execution-to-custody model look like, and what are its benefits?

O’Brien: Traditionally, retail brokers using an execution-to-custody model have integrated their execution and asset servicing requirements with one provider. This effectively creates a single counterparty relationship covering all of the brokers’ activities. So how does this model typically work? A retail broker will send an order to an investment bank’s execution desk. Once the order is executed, a settlement notification is sent to the custody department to facilitate settlement on behalf of the retail broker. This structure enables the retail broker to gain operational efficiencies, as they no longer need to perform back office processing to support trade settlement. This also helps brokers reduce the risk of market failure, due to the integrated settlement instruction. Furthermore, this model is highly effective among retail brokers focused on specific markets and those looking to achieve scale. This is because it relies on a centralised custody relationship, which supports asset servicing in one location, traditionally through the global custody structure. This means that brokers can obtain easier access to new markets.

What challenges does the traditional execution/custody model pose for clients?

O’Brien: While the traditional execution-to-custody model is a sensible option for brokers to take, it does have limitations. Not least because the entire set-up is wholly dependent on the capabilities and coverage of the investment bank’s execution desk and custody arm. This can sometimes result in brokers being constrained in terms of the markets and financial instruments, which they are able to fully access. For instance, if a bank’s execution desk is limited to a certain number of markets and security types, then clients are limited as a result. This is a serious weakness, particularly as retail investors are becoming more sophisticated, and are seeking out better performance and risk diversification through exposure to new markets and instruments.

Please give an overview of BNP Paribas’ Broker to Custody solution, and what are its core strengths?

O’Brien: BNP Paribas has strengthened its core electronic execution capabilities. The bank has a truly global offering, which supports flexibility in terms of the booking location for execution.  The bank’s custody model reinforces this flexibility, offering local custody access to 27 markets and a centralized global custody set-up covering 90+ markets. In addition, we service all major asset classes; principally equities, bonds, warrants and funds. Our capabilities can help retail brokers expand into new markets and asset classes, allowing them to increase their client base.

What differentiates BNP Paribas Securities Services’ solution relative to those offered by your peers?

O’Brien: Most significantly, BNP Paribas Securities Services’ Broker to Custody tool lets clients leverage other execution providers on demand in addition to the bank’s own in-house execution desk. This gives clients a level of flexibility not normally available to them through other providers. By partnering with multiple, top rated brokers, our clients can benefit from a best of breed and tailored solution. It is advantageous from a risk management perspective too, as clients can port business to a different execution desk if there are issues at their primary provider. Operationally, this set-up has limited impact on intermediaries as they can continue to pass settlement instruction responsibilities to their chosen brokers.  Beyond that, the solution supports automation, simplifies the trade lifecycle process for clients, enhances STP (straight through processing) thereby minimising the risk of trade fails, and reduces cost and risk through netting, aggregation and book entry settlements. Furthermore, BNP Paribas Securities Services provides standardised and agile reporting capabilities, meaning clients now receive reports in the same format irrespective of the individual custody arrangements which they have implemented.

How do you see the product evolving moving forward?

O’Brien: As retail investors evolve, brokers will need to offer clients a wider range of services. A number of intermediaries are looking to augment returns for their underlying clients through BNP Paribas Securities Services’ securities lending capabilities. Retail investors, who may traditionally sit on long positions with low transactional volumes, can now lend out their assets via BNP Paribas Securities Services’ securities lending desk, thereby generating a return on their investments. Other services such as foreign exchange can also be integrated into the offering in a way that provides total transparency to end customers. Elsewhere sophisticated asset owners are becoming more empowered, bringing asset management activities in-house. We anticipate that the Execution-to-Custody solution will be very attractive to these investors as they look to obtain a one-stop shop for their custody and trading needs.