Rival international banks Citi and UBS have teamed up in a unique joint-venture to offer middle- and back-office post-trade services to broker-dealers across Asia-Pacific’s fragmented markets.
The collaboration will see Citi’s securities services arm, which focuses on end-custody and clearing, partner the Swiss bank's brokerage business to provide a cost-saving services package.
The collaboration, due to be announced today, will see UBS provide middle-office services including reconciliation, allocation and pre-matching, while Citi will offer settlement, custody and asset servicing.
David Russell, Asia-Pacific head of Citi’s securities and fund services business, tells AsianInvestor it will be the first comprehensive post-trade solution for brokers in the region.
“The idea is by linking up the back-end custody engine that we have with some of the middle-office capabilities and expertise UBS has, we can commercialise that joint offering and offer it to other brokers who would look to outsource those processes,” he says.
Russell argues this type of service is especially suited to Asia-Pacific, where each country has its own separate infrastructure requirements in what is a highly fragmented marketplace for trading.
He says this move is client-driven, with brokers lagging asset managers in terms of outsourcing middle and back-office functions. This, he notes, will allow brokers to focus on the front end, dealing with clients, doing research, giving trade ideas and differentiating in execution.
“The brokers have kept everything in-house and that cost model is now at a tipping point,” he argues. “We are offering a solution where middle- and back-office servicing can be outsourced.”
The venture’s target clients are mid-tier players and below, but Russell says it will be a game-changer and will prompt other big brokers to examine their own infrastructure and the ways that costs can be commercialised.
“I think that process will happen now,” he states. “A number of brokers may have moved middle- or back-office to India or off-shored it somehow. But as far as I know no-one has looked at taking the next step, which is commercialising the back-office infrastructure, turning it into a business in its own right. That is why it is game-changing.”
Andrew Murfin, regional head of UBS’s group operations, adds: “Firms are increasingly having to review their operating options given the extreme pressure on cost bases and a regulatory environment that is highly challenging and rapidly evolving.
“UBS believes that this will drive a preference for buying expertise to service business rather than developing processes and technology in-house which require significant investment and lead to an unsustainable level of fixed costs.”
Russell is non-specific on the financial terms of the tie-up, saying only that “the costs and the upside are shared”. But he confirms that the two unlikely partners have been working on this project for the past year.
“We are now live and can bring on board new third-party clients with this combined offering,” he notes.
The venture is in talks with a number of firms already, says Russell. “There is a lot of interest to work with us on it. Why bother with all this infrastructure if you can outsource it to two of the biggest names in town?”
Citi’s key project manager on this has been Jeff Williams, its head of intermediary services, direct custody and clearing, based in Hong Kong. It is understood day-to-day work involved in the venture could number up to 100 existing staff across the two entities.
“If the business expands further, then clearly we will need to add staff," says Russell, "but at the moment we think we can handle this sort of business with the existing infrastructure."