'Project Scalpel' envisions joint system for processing trades,
eliminating duplication
By Telis Demos and Liz Hoffman
Big banks have cut more than $40 billion of costs since the
financial crisis.
They aren't done.
While prospects for revenue growth at banks have brightened
since the election, a handful of the biggest firms are considering
ways to slash still more from their back-office budgets. One
effort, dubbed "Project Scalpel," is aimed at cutting the
administrative and operational costs involved with processing stock
and bond transactions after a trade is struck, according to people
familiar with the discussions.
Talks around this effort are at an early stage but so far have
included a number of banks, such as Goldman Sachs Group Inc.,
Morgan Stanley and Bank of America Corp., the people said. If the
idea materializes, it could create a joint venture that allows
banks to share trade processes and technology.
The hope is this would be widely used by the industry and
eventually trim at least $2 billion from the banks' annual
spending, the people said. In the past, banks viewed their ability
to efficiently process trades, and handle transfers of ownership
and associated activities like dividend and interest payments, as a
competitive advantage.
Now, the processes and systems around these functions have
become commoditized. Competing banks have redundant systems
handling the same functions.
A joint system would eliminate the duplication, spread the cost
burden and make it simpler to upgrade technology, according to the
people familiar with the discussions. It also would free up
resources for revenue-generating investments, they said.
There are plenty of obstacles. These include questions around
data privacy and ownership stakes in the venture, and whether to
use existing technology systems or build a new one. Some bankers
also fear a for-profit service provider could eventually grow too
powerful and boost fees.
Despite the hurdles, banks for decades have cooperated in other
areas such as creating transaction venues and building
clearinghouses. The recent discussions represent a possible
extension of that cooperation and underscore that banks remain
obsessively focused on keeping expenses in check.
The six biggest U.S. banks have eliminated more than 100,000
jobs since 2009, while shedding less-profitable business lines and
trimming compensation.
This is the result of a relatively fallow period on Wall Street
in which banks' returns on equity have been held down by a
combination of more-stringent capital requirements, lackluster
economic growth, superlow interest rates, and more subdued
trading.
On cost-cutting, "much of the easy stuff is done," said Mark
Alexander, a former senior technology and operations executive at
Bank of America. "Banks now need to think about doing something
different and transformational."
European banks including Barclays PLC and Société Générale SA
have said they are working with technology providers to outsource
and share some trading back-office operations in Europe.
Financial-services firms spend as much as $24 billion annually
on post-trade operations, or what is known in the industry as
activity that occurs "south of the trade blotter," according to a
study by technology firm Broadridge Financial Solutions Inc.
A shared-processing venture would potentially allow banks to cut
or reassign thousands of back-office workers. Each firm would keep
scores of risk managers, programmers and traders focused on making
trades happen.
Joint ventures involving rival banks are complex, though. A
couple of years ago, about 10 banks tried to create just such a
post-trade with clearinghouses including the Depository Trust &
Clearing Corp. Those talks foundered because there were too many
different views about what the finished product would do and the
technology that would underpin it.
The latest idea is to narrow the group. The Scalpel discussions
also involve a recently formed investment firm called Motive
Partners, the people familiar with the matter said. Motive is led
by bank-technology veterans including Morgan Stanley and Goldman
alum Stephen Daffron, and former Fidelity National Information
Services Inc. executives Rob Heyvaert and Michael Hayford.
Banks have previously collaborated on combining back-office
functions. In the 1970s, securities firms created a clearinghouse
to reduce and then computerize mountains of paper trading tickets.
The result was the DTCC, which handles trillions of dollars of
securities transactions daily.
Over the past two years, collaboration has accelerated again.
Banks recently created joint utilities for things like
anti-money-laundering compliance procedures and sharing basic
underlying information about stocks and bonds.
"The banking industry must find ways to structurally lower
costs," UBS Group AG Chief Executive Sergio Ermotti told analysts
last year. He says the way to achieve it is "closer collaboration
between financial institutions."
Write to Telis Demos at telis.demos@wsj.com and Liz Hoffman at
liz.hoffman@wsj.com
(END) Dow Jones Newswires
March 28, 2017 02:47 ET (06:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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