From laggard to vanguard: Supercharging bank’s corporate treasury operations
The fixed income and commodity and currency (FICC)
desks of banks have been relative laggards in terms of performance over the
last decade. A combination of a torrent of new regulatory requirements,
increased competition and a low interest rate environment has squeezed a once-reliable
profit generation centre. But income or no income, the FICC desk remains a
vital part of an integrated bank offering – and a critical driver of a bank’s
corporate treasury product distribution function.
Inefficient operations are ripe for transformation.
This is a trend that hasn’t changed in the 20 years between when I worked in FX
and Rates for a major European bank, then launched and built-up LPA Group, to
where we are now. The same problems that beset banking systems and processes decades
The opportunity for forward-thinking institutions is
to radically re-imagine their operations for today and tomorrow’s market
environment. This represents the ability to shake off years of stifled
innovation, unnecessarily high costs and questionable customer service in
favour of a more mutually beneficial relationship.
Many of the banks with the worst ratios of capital
expenditure to returns in their FICC desks are Tier 2 to 4 banks. Here
institutions have maintained full-stack infrastructure despite not having the volumes
and therefore being truly sub-scale compared to bulge bracket institutions.
Most banks are fundamentally conservative
institutions. With billions on the line, it is nearly impossible to stick one’s
head above the parapet. High profile failures end careers, while success can
easily be claimed by someone else. This goes some way to explaining while even
though the financial services industry has spent more than two decades of
discussions breaking up value chains, precious little has happened.
Even though there have been panel after panel
discussions on the value of moving some parts of the trade out of the bank,
very few institutions have actually taken action. Others are acting, but in a
way that is more retreat than bold move forward. In order to avoid the highest
regulatory requirements in the customer business, some (mid-sized) banks have
decided to serve only ‘professional’ customers. The advisory effort is
incomparably lower compared to smaller ‘retail’ customers, but this customer
group is more cost-sensitive, which in turn becomes apparent in the margins.
Other banks refused to change course because of the
equity and reputation placed on existing projects. Part of this has to do with
the ‘sunk cost fallacy’ – in many cases expensive systems have been
purchased and installed, at the cost of millions of dollars. But there is a
reason that’s it is called the sunk cost fallacy – it’s not necessarily
true. Expensive internal systems grow ever more extortionate as regulations
continue to evolve. Every new reporting action, every new change to the trade
surveillance process adds costs and contributes to the overall unprofitability
of the desk. As the old saying says, the best time to take action was five
years ago – the second-best time is right now.
Some institutions are finally taking action and moving
towards a more sustainable infrastructure. The model for a sustained FICC desk
runs through the corporate treasury function. There are six parts to the
creating systems built to last.
● Implement ‘mark to
market’ thinking throughout the organization – There should be maximum transparency
on revenues and costs and deep-seeded understanding of where the company is at
any particular time
● Standardise and reduce
wherever possible – Unless a product absolutely requires differentiation and meets a
necessary level of profitability, transfer to a standard solution or operator.
In every asset class only 5-8 different products are required, not 50!
● Externalize services
processes – Focus in on parts of
the value chain that do not allow customer differentiation. Don’t forget to
consider reducing the size of your trading desks.
● Move towards variable
– Upfront projects can cost millions and divert resources that may not be
ready. And a change in circumstance could require a whole new process just
after completion. Don’t get locked in and instead move towards solutions can be
up or down levelled based on the need of the organization
● Digitize regulatory
processes – Regulatory compliance is necessary, but it is also a cost. Move all
of this work away from analogue processes to more quickly implement future
● Don’t make everything
in-house – Favour the purchase and packaging of products rather than taking
on the risk and investment of creating products that already exist and can be
licensed. This could be a good way to adopt new technologies quickly, like AI
and machine learning, which can be essential in optimal timing and process for
some treasury functions.
Fully achieving this model requires a dedicated
third-party partner. The list above can serve as a checklist for evaluating
whether a particular partner has the capability to fully unlock value present
inside organisations. The right partner should have a track record and
dedicated resource to deploying solutions that use cutting edge technology to
lower the total cost of desks. For example, LPA’s Hedge Pilot provides
artificial intelligence-driven calculations that advise when and how much to
hedge. The firm’s Captano product provides access to market liquidity for a
range of FI, FX and MM prices, while providing market insights and risk
calculations that help sales people do their job better. Or the Capmatix product
family helps to reduce cost for regulatory compliance in this space
There is a knotty, inconvenient truth at the heart of
the banking industry. Even many of the largest, most successful institutions in
the world are losing money across large portions of their business.
If these companies, with scale and peerless
reputations can’t consistently turn a profit, what hope do the smaller regional
institutions have? The answer is to change the game that is being played. With
smart outsourcing and the development of a strong relationship with a specialty
provider, investment banks of all sizes can set up a sustainable model for the
FICC as they exist today.