December 2002
Processing Costs for Securities trades have reduced significantly over the last 12 months reports a new survey by Z/Yen, the City-based Risk/Reward Management firm. The survey was based on the processing costs, headcount and trade volumes of 14 major banks and covered 35 product types including Cash Equities, Bonds and OTC Derivatives (Interest Rate, Equity and Credit).
Over the last twelve months, the average processing cost for a Cash Equities trade has reduced from $14 to $10 while a Bond Trade has reduced from $51 to $34. These reductions have been driven by increased volume at most banks, increased rates of STP and also by reduced external Clearance and Settlement Fees due in part to netting agreements.
Processing costs have also reduced for OTC Derivatives, particularly for Credit Derivatives where the Cost per Trade has reduced from $2,650 to $1,680 with average volumes increasing from 650 per year to 2,900 per year.
Between banks, there was a wide range of processing costs: for Cash Equities, the Cost per Trade for the dearest bank was 12 times more than the cheapest and for Interest Rate Swaps, 5 times more. Although in some cases, this is due to business mix, the difference in the Cost per Head is also a huge driver of processing costs.
Within this year’s study, the fully loaded annual Cost per Head, in London, varied between $100,000 and $160,000. However, banks processing outside of London have reduced their Cost per Head to $60,000. The table below shows potential savings for a typical bank in relocating its London operations.
| Saving in Cost Per Trade | Annual Savings (USD) | |
|---|---|---|
| Equities | $2 | $14 million |
| Bonds and Repo | $8 | $6 million |
| OTC Derivatives | $160 | $7 million |
Jeremy Smith, a Director at Z/Yen, said, “We estimate that 60% to 80% of back office functions could be moved to a cheaper location. If this happens, the impact on costs will be huge. Many banks are now looking at locations outside of London, particularly Scotland, Ireland and India where university educated staff are available at a fraction of the “City of London” cost.”