The Sibos Insider Blog </strong>provides inspiring insights from financial industry experts and influencers. The blogs provide informed thought-leadership on a range of topics. The opinions expressed in these blogs reflect the personal views of the author and not their organisation, Sibos, or SWIFT.</em></p> </div> I’m not sure how many times I’ve heard people opine on the topic of industry utilities at securities-focused events over the last decade. “If only we had a centralised service to support function X”, they contend. “It would be much cheaper/easier/more efficient.” But nearly every time someone has attempted to establish one of these centralised services (I don’t like the word ‘utility’ for reasons I will elaborate upon), it has been slow to set up and industry adoption has been glacial. What exactly have we been getting wrong?</p> One of the key challenges seems to be continuing internal resistance to ceding functional control to an external party - a problem that sell-side firms in particular have grappled with over the years. There’s no doubt that handing the reins over isn’t easy, especially if the function has been an embedded process within the organisation for a long time. </p> Trusting an external service provider requires a leap of faith and confidence that support will be forthcoming if issues arise and that downtime will be minimal. It also requires the entire organisation to cooperate with the handover. IT teams have stood in the way of these moves in the past by citing security or data privacy concerns as a deal-breaker.</p> I’ve frequently used the analogy of a marriage to explain the depth of trust and commitment that is required for firms to outsource a part of their operations to a third party. And like any solid 21st</sup> century marriage, an air tight pre-nuptial agreement is par for the course, especially as regulators increase their oversight of the portability of these relationships.</p> The move also requires groundwork, you can’t just chuck a function over the fence to a third party and expect it to work. It is almost impossible to hand over a non-standardised process to a centralised service. This is part of my concern over the use of the word “utility” - very few functions in the securities markets are as standardised as gas or electricity provision. There are always nuances and operational quirks that must be taken into account when dealing with particular markets or particular entities. The process of industrialising a core function takes years of investment and hard work. Some areas of securities operations are more industrialised than others. Looking at functions that have been offshored or nearshored, such as reconciliation, it’s clear some are more suitable to hand over to a third party. Trying to fit one firm’s process into another’s rarely goes well. Starting from a common base is much more achievable.</p> However, internal challenges aren’t restricted to the financial institutions. Centralised services can become a governance nightmare if there are too many competing parties involved. Remember the old adage about broth being spoiled by too many cooks? Well, the same goes for consortia-led services. Fierce competitors rarely play nicely with each other for the good of the industry. Many firms talk a good game, but when it comes down to it, their own interests are given precedence over the industry’s interests. This is why neutrality is so important. It sometimes even means basing the headquarters of the firm in a neutral location, such as Switzerland, to overcome financial institution concerns related to data privacy, which continues to increase as a pain point over time.</p> The upshot is that though centralised services are, no doubt, of benefit to the industry as a whole, they take a lot of work to establish and continued investment to keep relevant over time. Gaining and maintaining the trust of your prospective clients isn’t easy and keeping the scope of the service manageable is key to turning all this effort into success.</p>