Mutualisation, in the context of financial services and shared innovation, refers to the process of transforming a business structure to a shared service utility where multiple parties may collaborate, or at least share the benefits and risks of a common platform, service, or standards.
Key drivers for mutualisation include the pressure to save costs, the need to innovate more effectively and the ability to respond quickly to an evolving landscape which is, in our opinion, critically defined by the technologies of DREAM-C.
Recent initiatives such as the T2-T2S consolidation, launched last year, represent significant progress towards optimising trade and post-trade processes, but inefficiencies and high costs persist in these areas. While jurisdictional differences, particularly within the EU, may necessitate some degree of fragmentation, ongoing regulatory changes are facilitating the implementation of more streamlined services and processes across various markets (e.g., securities). Leveraging new technologies can drive cost reductions and capital efficiencies for the buy-side and create new revenue sources for the sell-side, where regulation permits. With the concept of mutualisation facilitating the creation of new infrastructures and principles that can support the next generation of systems, products and services within Post Trade.
At Delta Capita, we believe this is achieved by leveraging different aspects and features of emerging technologies and creating synergies across them to drive innovation. These technological advancements, coupled with innovations in post-trade processing and risk management, are crucial for addressing the industry's operational weak points.
Collaboration & Shared Services
The challenge to achieving a mutualised shared service lies partly in how different participants are incentivised to collaborate and commit resource to the evolution of the technology landscape. Ultimately, we believe there is a double advantage for participants here. Firstly, the pooling of resources and functions into shared service functions enables the re-assignment of previously ring-fenced funds that support inefficient processes to be re-directed into supporting revenue-generating, growth-orientated functions and other value-add initiatives more directly.
Secondly, shared services provide an improved support model for re-engineered functions, and by targeting the inefficient and siloed pain points, the adoption of mutualised services leads to enhanced robustness of operational activities, and as such a reduction in inherent risk.
The fundamental challenge is that the approach requires a continued shift in the operating models of banks and none of this matters, though, unless the relevant SMEs and process owners can be convinced that migration to a new solution or adoption of new standards is the right strategic objective.
The cross-collaboration that a mutualised post trade landscape would have will depend on the buy-in of the key industry participants at all levels (even if for seemingly self-orientated purposes initially). Particularly valuable is the fact that new solutions, like that we have seen with utility platforms such as Proximity (a digital proxy voting solution originally developed by Citi), have begun to bring participants together around common standards (in this case helping issuers and investors navigate the requirements of the Shareholder Rights Directive II) and foster increased transparency within the trade lifecycle whilst guiding actions towards corporate governance.
Flexibility and Scale
Crucially, mutualisation will enable the industry to customise solutions to target key pain points. The ability to tailor these solutions at a technical level as firms see fit mean previously cumbersome process such as continuous margin adjustments and manual management of collateral postings will be rejuvenated; incorporating specific risk appetites, adjusting collateral requirements as per real time incoming data and removing the duplicate work numerous large teams are currently required to do.
The enhanced ease-of-access (provided by increased utilisation of API connectors) coupled with the significant processing power of advanced computing, means users have an enhanced plug-and-play capability in their existing infrastructure. This additional enhancement fosters greater flexibility on where and how institutions can utilise and implement these technologies.
The more users of the service, the greater its ability to harmonise previously diverse approaches and differing standards – both of which have long been key barriers to harmonisation and change in the post trade world.
The implementation of common standards and harmonised processes, however, should not restrict commercial offerings and differentiators across the industry, but merely build a more efficient foundation on which market participants can expand their business and conduct operational activities.
Similarly, these propositions will drive and direct outputs into a common purpose, facilitating an opportunity for regulatory bodies and forums to implement standardisation of practices. In turn, where they have previously struggled to reach consensus on how to regulate and monitor standardised practices, convergence of outputs into a common purpose could allow both compliance and the scoping out of those compliance measures to become much clearer.
Innovation and Emerging Technology
The underlying enablers that link the flexibility, scale and collaboration within mutualised services are the innovative and emerging technologies.
Whilst DLT and AI are driving improvements within single firms currently, the larger network effect that these technologies thrive on to achieve their full potential is clear, utilising broad datasets to provide accurate and insightful outputs. For example, use of DLT systems can reduce inefficiencies within a single firm’s trade reconciliation process through migration of their internal transaction flow onto DLT systems, but exponential benefits only materialise when the multiple counterparties to a trade also integrate into a DLT enabled ledger structure, empowering the system to provide a single source of truth and reliable automated reconciliation services.
In a landscape where numerous firms and institutions are invested in a consolidated, holistic approach, framework or management structure, DLT, AI and the other core elements of our DREAM-C paradigm will have a broader and more stabilised space in which to grow. This effect is circular, with greater adoption and use of such technologies allowing for enhanced harmonisation.
Similarly, mutualisation allows the distribution of risk associated with the experimentation of new technologies and new systems across a network of institutions rather than concentrating it within a single firm. This approach not only diversifies the inputs on which new technology is built but also distributes the demand for development, investment, testing, and deployment. By spreading these responsibilities, mutualisation reduces the individual risk burden on any single entity, thereby enhancing overall system stability and resilience.
Summary
The post-digital post trade landscape will see the adoption and growth of mutualised shared services. Given the speed and size of ROI that mutualisation promises, it will continue to be an attractive solution for industry players, where successful implementation of shared services in more niche areas will provide the blueprint and appetite for larger, more complex shared services with more players and more impact to come to fruition.
As we have shown, to some extent mutualisation becomes a self-fulfilling paradigm shift in the industry that will enable innovation to thrive and provide platforms through which innovative technology can be tried, tested and refined. Time to market is accelerated, in a more flexible and collaborative marketplace that is aligned on key pain points around transparency, accuracy and efficiency, and as such can support an entire ecosystem of capabilities and technologies available to its participants.
This article has been written by Olivia Godon (Assistant VP, Post Trade), Lars Müller (Managing Consultant, DLT Product Development), Niamh Kingsley (Director, Head of Product Innovation & AI), & Dom Amura (Head of Post Trade Services).
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