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Four unexpected areas where financial institutions could save money

Banks, Brokerage, CSDR, Europe, Financial Institutions, FTTs, Income management, Meritsoft, Taxes

March 08, 2019

  • Banks
  • Brokerage
  • CSDR
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From the major European banks scaling back their trading units to the world’s largest investment managers slashing research spend by 40% – consolidation seems to be very much the theme of 2019.

By Daniel Carpenter, Head of Regulation at Meritsoft

Regardless of whether you sit on the sell or buy-side, here are four cost centres that financial institutions should take a hard look at if they are to harbour any hopes of seeking out much-needed efficiency savings from across the business.

  1. CSDR: The Central Securities Depositories Regulation is one of the key regulations coming into effect in 2020. Though European, CSDR will affect all banks catering to European investors and is poised to be an operational nightmare if not handled properly. To comply with CSDR, banks will have to handle fails management, penalty of fails, buy-in process (sales settlement & reporting).
  1. Preparing for more FTTs: Banks should be prepared for additional countries enacting financial transaction taxes in 2019 and the years to come. We’ve already seen talk of these taxes coming into effect in Spain and Germany, and rumours continue that there will be an EU-wide tax. Any banks that cater to ex-pats living abroad with US investments must be prepared to manage this slew of transaction taxes coming into play and consider what it means from an operational cost perspective.
  1. Brokerage: Large banks are paying in excess of £100 million per year for brokers to facilitate transactions with counterparts across multiple desks. Banks can, of course, negotiate rates with their brokers. However, often the issue is that most have, until now, failed to find an accurate way to track and validate exactly how much they’re paying them per transaction and which rates are being used across desks, and across different units of the bank. Inadequate information, not being able to account for discounts, and a lack of comparability into how brokers charge for the same service, are all key factors behind failing to find an accurate way to measure and reduce costs.
  1. Income management: While the primary focus of investment banks is making money, something not often considered enough is that banks also have to manage the process of giving investors money back in the form of claims and recovering Claims from counterparties. Claims arise in many forms, for example when coupons or dividends happen to come across mid flow between buying and selling. This means money can end up in the wrong accounts on more occasions than banks might consider, which can inadvertently become a significant cost center and risk mitigation aspect. With a significant amount of capital still tied up in old receivables, not to mention capital tied up in interest rate costs on outstanding receivables, banks need to seek out ways to track cash management and cash flows (receivables and payables) between their counterparties.

As 2019 begins to take shape, those that consider these four areas will be best placed to not only reduce operational overheads and funding costs, but to crucially handle mounting pressure from the boardroom to make efficiency savings.

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