Managing In Asia: Not Quite The Norm
Mike Evangelista, Managing Director, Head of Liquidity Solutions Apac at NYSE Technologies looks at the global trends of managed services, and how Asia differs.
When you look at the trading side of the bank, depending on who you’re talking to, which customer and whether local or global, you get different questions. The locals are resource constrained and domain expertise constrained. Sometimes they want to shift focus into a new area but they just don’t know how to. So they’ll approach a vendor to help them with those particular services.
If you take it to the other side of the spectrum, the global banks, they have much of this already in place. Coming out of the US and Europe, Asia has taken a lot of knowledge from overseas and tried to retrofit that for Asia. The cost centres are coming under heavy scrutiny from the profit centres.
Banks are very good at looking at what is commoditised and what is not, and what do they need in terms of their own intrinsic business logic to keep internally versus some of the things that are being done industry-wide that are fungible. Even the order management system could be actually packaged up and sent to a third party.
The trend across the industry in general is that firms are expected to cut costs on the IT side by 30% or more over the next two to three years. That’s going to force the banks to start being very creative on how they are rationalising. Can they share services? Can they streamline? Can they eliminate processes? Can they unify platforms?
In a recent meeting with a bank they were very keen to ask us about analysing their stack. What parts of that stack could they give to us to help run for them. They want to reduce technology spending, they want to be able to pay someone to do this rather than having to deal with the issues paying for head counts and locations and offices.
You can rationalise a lot of your connectivity through a centralised provider. And then obviously you rationalise your team size as well, streamline your time and you deal with less cost. We’ve had a lot of banks come to us and ask us to help provide a service around how they on-board new clients, how they service their clients, how we monitor their clients and how we put more control around change management.
Asia has a lot of regional diversity and has lower volumes than what you see in the US and Europe. Overall, the electronic lifecycle is less mature. As a result, you have a lot less domain expertise in the region. You’ll see a lot of traders who come out to Asia from Europe, from the US and bring that knowledge on how to do these types of businesses out in Asia. That’s one of the areas that Asia really struggles with when they’re trying to stand alone.
The geographical challenge is one of the hardest things for a bank to deal with. A bank may have to operate across five, six, seven, eight, nine different countries in Asia and they’ve got staffing and regulatory dynamics coming from multiple angles. It is very difficult to cover.
Regulation keeping pace with technology
All of the different markets vary in the cycle of regulatory dynamic. Some are trying to deregulate, some are trying to increase regulation. It all depends on a local exchange, a local regulatory regime.
Japan has been steadily deregulating becoming probably one of the more HFT friendly places. Korea is approaching aggressively, yet controlled, to become like a Western-based economy with their regulatory deregulation. And then you have places like Singapore and Hong Kong which are increasing the amount of regulation around how the banks operate, which is becoming a huge burden on how these banks generate their profit.
In previous years bank policy was to have data centres in every major country, but now this doesn’t make much sense cost-wise. Depending on local regulatory requirements, some banks are now installing regional data centres creating a hub and spoke system. They’ll have one big data centre, for example in Singapore with smaller local regional footprints then hinging off the back of it across Asia Pacific.
“Banks are very good at looking at what is commoditised and what is not, and what do they need in terms of their own intrinsic business logic to keep internally versus some of the things that are being done industry-wide that are fungible.”
Countries are sensitive. One of the examples that came up in the Singapore FIX Trading Community Conference was the willingness of regulators like MAS to embrace the cloud-based concept of data. In other countries they are okay with data being sourced out across the cloud in different locations, but in some countries like Singapore, they’re not so willing to have customer sensitive data stored outside of the country.
It is part of our role to help educate around how we could work with the banks to take anonymous data and help back and store that data across cloud infrastructure and then work within the regulatory requirements or regimes for each individual country and then dial our solution from there.
In Asia firms are being forced to be more creative; a bank has a compliance officer or a compliance team in every country. It’s expensive.
It is an ongoing trend across the sell-side that most of their budget is going to regulatory projects. They have almost no headroom for any new business initiatives, let alone innovation. Everything that’s coming across on their pipeline of projects is regulatory. Everything else is hitting the brakes. They’re all looking at where can they can cut back or streamline some of their services to free up some more funds and resources to do some of the business innovation that could help grow the bank.
The time horizon for much of this outsourcing and managed services depends on how aggressive the banks want to be. When you’re working with a third party, and once you start to feel comfortable working with them, they become almost like a partner. Internally, the cost centre is basically a partner of the business. If the bank and the business side and the profit centre start to feel that they get the same type of partnerships from an outsourced or third party technology service, the curve starts to rise very quickly.
Over the next two to three years, a lot more is going to be done outside the four walls. It starts with something that’s enterprise and then it keeps growing from there. It turns into managed services. Firms just want to pay a monthly fee. They are looking for solution providers to deal with the myriad of approaching regulatory requests, and to deal with the integration and on-boarding. In turn they just want a monthly cost from a trusted partner.
Relationships are more critical in Asia than any other place in the world. The hardest part is getting the bank comfortable with the vendor, but once they are comfortable and teams are familiar with the vendor, the relationship starts to build and people start to work very closely together.
I think in a lot of cases the banks are starting to work more and more with the outsource companies in a hybrid-type of model. It could be 60-40 or could be 20-80 or 50-50. Really, it depends on what part of the cycle the bank is in, and how aggressive the bank wants to be on their approach to some of these cost challenges that they have.
The great part about Asia is it continues to grow. It continues to generate a lot of interest overseas. And the outsourced dynamic approach can cover a lot of different assets. It could cover cash equities, it could cover derivatives, it could cover FX, and it could even cover fixed income. And then there’s always that regulatory delta that just keeps changing.