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Utilities: Creating a role in
the fabric of the industry
Top Ten Challenges for
Investment Banks 2015
10
Utilities:Creatinga
roleinthefabricof
theindustry
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
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
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
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
About Accenture
Accenture is a global management
consulting, technology services and
outsourcing company, with more
than 305,000 people serving clients in
more than 120 countries. Combining
unparalleled experience, comprehensive
capabilities across all industries and
business functions, and extensive
research on the world’s most successful
companies, Accenture collaborates
with clients to help them become
high-performance businesses and
governments. The company generated
net revenues of US$30.0 billion for the
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
Disclaimer
This report has been prepared by and is distributed by Accenture. This document is for
information purposes. No part of this document may be reproduced in any manner
without the written permission of Accenture. While we take precautions to ensure
that the source and the information we base our judgments on is reliable, we do not
represent that this information is accurate or complete and it should not be relied upon
as such. It is provided with the understanding that Accenture is not acting in a fiduciary
capacity. Opinions expressed herein are subject to change without notice.
Copyright © 2014 Accenture
All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.

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Top Ten Challenges for Investment Banks 2015: Revolution: Challenge 10

  • 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 Accenture is a global management consulting, technology services and outsourcing company, with more than 305,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$30.0 billion for the 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 Disclaimer This report has been prepared by and is distributed by Accenture. This document is for information purposes. No part of this document may be reproduced in any manner without the written permission of Accenture. While we take precautions to ensure that the source and the information we base our judgments on is reliable, we do not represent that this information is accurate or complete and it should not be relied upon as such. It is provided with the understanding that Accenture is not acting in a fiduciary capacity. Opinions expressed herein are subject to change without notice. Copyright © 2014 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.