Read a report from Accenture Capital Markets on Utilities and Creating a role in the fabric of the industry.

1. Utilities: Creating a role in
the fabric of the industry
Top Ten Challenges for
Investment Banks 2015
10
Utilities:Creatinga
roleinthefabricof
theindustry

2. 10
Utilities:
Creating a role in the fabric of the industry
Increased regulation, tighter margins and ever-changing market
conditions are exerting growing pressure on investment banks
to focus on returns, rather than just revenues. It is essential that
investment banks seek to cut costs whilst addressing increased
data management burdens and tackling the challenges and
restrictions imposed by new regulations.
Many firms have reached a limit on the
benefits of offshoring and outsourcing for
cost efficiency and require a new model for
reducing costs. There is also an increasing
realisation that standards (for example, a
Legal Entity Identifier) will play an
important role in the emerging ecosystem,
as they will allow for greater
“interoperability” across firms. Finally, there
is an increasing realisation that, for many
firms, achieving cost reduction through
internal scale cannot be fully achieved with
in-house shared services.
Therefore, Accenture believes the market is
now ready to embrace utilities to meet
these goals by adopting industry-wide
collaborative approaches. The industry has
periodically created utilities in the past (e.g.
depositories) and it appears we are entering
the next wave of innovation in the form of
a new breed of utilities (see Fig. 1).
The emergence of utilities
The concept of shared utilities is not new
and has been applied in industries outside
of investment banking with great success.
A utility in this context is an entity created
by a variety of industry participants to
create efficiencies by collectively
performing a set of non-differentiating
functions that are similar across the
member companies. Over the years,
investment banks have created utilities or
shared platforms in selected domains but,
up until now, core securities processing
capabilities have been excluded from these
approaches. The post-financial crisis cost
pressures have served to highlight the
opportunities for utilities to reduce costs,
2

3. 3
The concept of shared utilities is
not new and has been applied in
industries outside of investment
banking with great success.
Figure 1: Evolution of the utility concept in capital markets
Source: Accenture Research
2013
• April - Basel III implementation extended from 2015 to 2018
• DTCC acquires full control of Omgeo from Thomson Reuters
• DTCC signs MOU with multiple banks for a reference data
regulatory and business requirements utility
• Bloomberg leverages data into a “reference data solution”
Polar Lake
• Markit expands reference data into 5 “utility” offerings
• Markit announced plans to launch a KYC Utility with HSBC
Morgan Stanley
• LEI standars begin taking shape in Washington London:
OpenCorporates launches OpenLEIs.com
1968 – 1970
Centralized
Certificate Service
(CCS) formed at the
NYSE and extended
to the ASE in 1970
1976
National
Securities
Clearing
Corporation
formed
2003
Fixed Income
Clearing
Corporation
formed in 2003 by
combining the
Government
Securities Clearing
Corporation and
the Mortgage-
Backed Securities
Corporation
2008
Financial crisis
leads to
beginning of
stronger
regulatory
oversight in U.S.
Europe
2009
June - Financial
reform introduced
by the Obama
Administration
December - Final
version of Financial
Reform Bill called
Dodd Frank
introduced to
Senate The House
2012
August - EMIR is
in force
Euroclear and
Smartstream
announce
collaboration for
the “first”
reference data
utility called
Central Data
Utility (CDU)
2014
• January - EMIR Central Clearing Regulations (CCR) come
into force
• February - EMIR reporting obligations begin
• Goldensource IBM announce collaboration for shared
utilities offering
• Swift acquires Omnicision to create a KYC and AML data
solutions and reference data product for LEI, Business
Identification Codes, and International Bank Account Numbers
• Financial InterGroup begins advocating for an independent
Utility citiing the number of vendors entering the space will
create greater chaos.
• “European Central Bank proposed central data utility - Issuers
would be mandated to deliver corporate event data and
reference data to the utility with data vendors helping issuers
fulfill their legal requirement to send standardized data to the
repository.”
• Retailers Banks form partnership for information exchange
to ward of cyber threats, post Target breach
• Thomson Reuters announces UK reference data utility
1973
Depository
Trust
Corporation
formed
2001
DTCC and Thomson
Reuters form JV
Omgeo for
post-trade
processing to
improve settlement
times and decrease
counterparty risk
2004
Basell II enacted
- slow to
implement until
2008 financial
crisis
2008
Markit introduces
Markit RED as a
Reference Entity
Database for
documentation and
confirmation in
credit derivatives
transactions
2010
January - Volker
Rule ammendment
added to Dodd
Frank by the
Obama
Administration
July - Dodd Frank
signed into law
Basel III agreement

4. achieve standardisation of processes,
mutualise risk and increase service
quality in these core processing domains.
Currently, some of the key challenges
that banks face are related to data
management: poor data quality,
inconsistencies, poor standards across
source systems and consumers, and a
lack of transparency around costs.
Accenture estimates that data-related IT
expenditure represents approximately
8% of revenue on average across the
larger investment banks (see Fig. 2), with
Burton-Taylor predicting reference data
spend alone reaching upwards of $1.8
billion in 2014. With data burdens
growing organically and now
accelerating due to changing
regulations, the market has responded.
Costs and benefits of utility adoption
The potential benefits of utility creation
are without question. By embracing
utility usage, banks will be able to ensure
that duplication of effort is minimised, in
turn allowing a shift of resource to areas
of greater value. In addition, bringing
together the operations of a number of
organisations can further enhance cost
savings by ensuring economies of scale,
and the establishing of best practices
and industry standards.
According to our estimates, the use of
utilities can achieve cost savings of
$40-50m annually per firm among the
top 20 global investment banks for
reference data alone. Eventually, greater
cost efficiencies can be achieved once
market participants realise that certain
core functions, such as reconciliations,
could also be performed by utilities
without degrading competitive positions.
As transaction volume has improved,
transaction profitability has been under
pressure – driving the need for scalability
and the deployment of infrastructure
whose costs can adjust to market
volumes. Accenture Post-Trade Processing
is an innovative solution which will help
banks reduce post-trade processing costs,
including minimising future change
spend, adapt to new regulations and
increase speed to market, leveraging
proven, market relevant technology.
We estimate that the utility has the
potential to realise a reduction in costs
per trade of up to 30-50% (see Fig. 3).
4
By transferring the fixed cost model
currently employed by banks to a
variable cost model, clients will see
a decline in the marginal costs per
trade for every additional bank that
joins the service, benefiting both
new entrants and incumbents.
Challenges opportunities
The use of a utility does not remove
any of the regulatory responsibilities
borne by banks. However, utility
adoption improves data quality
through increased volume of
participant inputs, which in turn
improves reporting to regulators. A
further potential benefit is to create
industry best practices as a means
of driving standards, which is being
seen with various industry entities
such as SIFMA, DTCC etc., as
opposed to responding to
sometimes misguided regulatory
mandates. Finally, from a regulatory
perspective, moving day-to-day
processing functions to the utility
model allows banks to focus on the
control and governance functions
Figure 2: Estimated Data IT spend across selected investment banks, as % of revenue
Source: Banks, Accenture Research
• Goldman Sachs
• JP Morgan
• Morgan Stanley
• Credit Suisse
• Bank of America*
• Average
2009 2010 2011 2012 2013
12
10
8
6
4
2
0
* Bank of America is the only bank to report
Enterprise Data Management (EDM) spend
as separate line item – all other banks are
estimated based on total IT spend

5. 5
required to meet the regulatory
requirements of the firm’s activity.
The next challenge, which is actually an
opportunity, is the creation of the first
true market utility for financial services,
as a neutral party that is not viewed as
a disruptive force in the industry. To
date there have been several examples
of private vendors attempting to build a
market utility, only to fail due to the
markets’ lack of trust. Accenture
believes market participants have the
opportunity to create consortia for utility
functions which will be viewed as
neutral, third parties benefiting all in
terms of data quality, lower costs, and
improved regulatory reporting.
Conclusion
Utilities are potentially the next
meaningful opportunity for banks to cut
costs significantly while improving data
quality, and to create data standards
around which the industry and regulators
can coordinate, in contrast to the
regulation/reaction cycle of today’s
world. Regulatory burdens are
continually on the rise, data volumes
and management costs are
continuously increasing, and banks
need to find a mechanism that
enables them to achieve cost
reductions and efficiencies at a time
when targets are set around returns
rather than revenue.
Utility services provide banks with a
great opportunity to improve data
quality and coordinate each
organisation’s best practices to set an
industry standard. The opportunity
exists for a number of banks to
collaborate, establish a leading utility
provider, and then profit from other
organisations who wish to use the
service. The challenge remains in
finding those organisations that are
willing and able to make the first
move. From Accenture’s perspective
the choice is simple: choose to lead
the transformation and have the first
mover advantage, or get left behind.
The opportunity
exists for a number of
market participants to
collaborate, establish a
leading utility provider,
and then profit from
other organisations who
wish to use the service.
Figure 3: Industry Cost Curve example – Equities
Source: Accenture Research
Cost per
trade (£)
Transaction
VolumesFirms outside Top 5 Position of Top 5 Firms
Typical Cost Position of
Prospects for the utility
Top 5 Position
Top 5 Position
Cost Position of
Largest Firm
0.10
x1 x2 x8
Downward per transaction cost pressure
allows clients to achieve the cost profile
of a large securities house

6. About Accenture
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outsourcing company, with more
than 305,000 people serving clients in
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fiscal year ended Aug. 31, 2014. Its home
page is www.accenture.com.
Accenture Experts
To discuss any of the ideas presented
in this paper please contact:
Bob Gach
Managing Director
Accenture Strategy
robert.p.gach@accenture.com
+1 917 452 5952
Chris Brodersen
Capital Markets Research
New York
c.brodersen@accenture.com
+1 917 452 1093
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