Processing costs have started to benefit from economies of scale derived from all time high volumes, particularly in the equities markets, reports a new survey by Z/Yen, the City-based Risk/Reward Management firm.
In addition, continued pressure to reduce costs has resulted in staff cuts in product and functional areas. However, high fixed costs make it doubtful that staff cutting alone can make a long-term impact on processing costs.
Jeremy Smith, a Director at Z/Yen, said, "When banks cut costs, they tend to cut strategic projects first. This may achieve the short-term savings needed to restore profitability and to placate traders and investors but at a later cost. When business returns, costs will again rise. This cyclical process of spend/cut/spend does not impact the cost per trade. Real reductions will only take place when banks can find a way to reduce their huge fixed costs or increase volume significantly"
As well as comparing year-on year processing costs for 11 major banks and the cost per trade for 38 products, the study also reviews efficiency indicators such as the frequency of trade amendments and the percentage of fails. This shows clear process inefficiencies in some banks.
The study also identifies a number of areas where major change could reduce costs.
Banks who process outside of London pay significantly less for staff and premises. For vanilla products, do processing staff really need to be located in central London?
Create processing utilities:
Banks who have centralised operations tend to process at a lower cost than those who still run individual country operations. Additionally, recent trends also point towards the creation of cross-product utilities for certain back-office functions.
The proportion of fixed costs is particularly high for treasury and derivative products. Should these be first trials for outsourcing?
External fees are a significant part of security processing costs. Self-clear and central depository clearing initiatives, such as SIS in Switzerland have shown that spend on agent and clearing fees can be reduced by up to a factor of 10.
A summary of the results of the study is shown on the following pages. For further details, please call Z/Yen on (020) 7562 9562.
The study was carried out by Z/Yen and a consortium of 11 major US and European Banks. The scope of the study was to compare and contrast Operations, Middle Office, Finance and IT costs for 19 processing activities over 38 individual financial products including:
| Equity Products: | Debt Products: |
|---|---|
|
Domestic Equities Cross-Border Equities Emerging Market Equities Convertible Bonds Stock Borrow Loan Equity Derivatives Exchange Traded Derivatives |
Euroclear/Cedel Bonds Non Euroclear/Cedel Bonds Emerging Market Bonds Repo Interest Rate Derivatives Credit Derivatives |
Each bank provided detailed cost, volume and headcount data for full-year 2000. Over 20,000 data points were gathered, analysed and consolidated into a set of comparative benchmarks.
A typical Summary of Findings can include the following:
Z/Yen's mission is to be the foremost risk/reward management firm. Risk/reward management is the application of risk analysis and return incentives to strategic, systems, human and organisational problems in order to improve performance. Z/Yen believes that the intelligent management of risk is the basis of significant reward. By recognising, understanding and managing risks, more risk can be assumed and performance increased. Z/Yen applies risk/reward management in the public, private and not-for-profit sectors in areas as diverse as finance, information technology, human resources, research & development, environment, quality, sales & marketing.Z/Yen's slogan is "zest for enlightenment", embodied in five distinguishing principles:
Z/Yen has developed a risk/reward methodology based on analytical techniques from a number of fields which manage risk. The methodology consists of a strategic framework, supporting software, procedures, case studies and report formats. The methodology has been applied to strategic planning, financial planning, information technology planning, marketing plans, fraud investigations, reserves analysis, systems reviews, cost-effectiveness studies and human resource planning.
Z/Yen's strategy is based on three approaches:
Z/Yen organises its work in projects with a specific proposal for each phase and strong project management. Z/Yen is committed to sharing the risks and benefits of work with clients, often in the form of performance-related fees, and measuring work in quantitative or qualitative terms. Z/Yen has access to venture capital and, where appropriate, can provide a combination of financial and advisory services in exchange for equity or other stakes.
Z/Yen applies its techniques with confidence in a variety of areas, but has stronger experience in technology, insurance, banking, media, health, distribution, charities and business to business services. Z/Yen has three partners, over ten staff and more than 50 associates. Staff share significantly in the benefits of success and Z/Yen seeks to develop a supportive environment in which professionals from a variety of disciplines can flourish.
Financial Services is an industry where risk and reward are clearly present in day-to-day decisions. As the leading risk/reward management firm, Z/Yen is ideally suited to helping institutions make decisions in the areas of strategy, systems, people and organisation. Z/Yen’s proprietary risk/reward methodology is culturally suited to the industry and unifies strategies from the boardroom to the trading floor and on to risk management and transaction processing.
Z/Yen’s work spans investment banking, investment management, retail banking, building societies, credit card companies, financial exchanges, financial information and financial system providers. The type of work ranges from strategic planning, through information systems planning, benchmarking studies, operational risk review, electronic market simulations, operational performance evaluation, correspondent banking restructuring, computer systems implementation, management information systems design, market research, project and programme management, infrastructure commercialisation and outsourcing.
Recently, Z/Yen has undertaken the following client assignments in the Financial Services arena:
Z/Yen participates actively in organisations that are attempting to expand the boundaries of financial research, for example, the Centre for the Study of Financial Innovation where Z/Yen recently presented on the subject "Can banks really reduce their processing costs?" Additionally, Z/Yen was the founder and concept developer of a £1.9 million joint research initiative, The Financial Laboratory, which won a 1996 DTI Foresight Challenge award.
Institutions cannot afford to stand still in a competitive market. With the advent of T+1, new entrants to the industry and continuing pressures on staff, a robust risk/reward response is vital. Z/Yen is the natural partner for institutions seeking positive changes in response to their environment.
For further information, please call Z/Yen on (020) 7562 9562.