Having made its way from the backoffice and, increasingly, through the middle office, the outsourcing phenomenon is starting to take hold in the front office. Due to a combination of new regulations and increasing complexity in trading, outsourced dealing services are beginning to replace many inhouse capabilities.
According to Philippe Boulenguiez, global head of dealing services for BNP Paribas Securities Services, a lot of regulation coming out of Europe, such as MiFID II, is prompting international investors to consider the adequacy and rising costs of compliance for their dealing desks.
His business is a separate subsidiary of BNP Paribas SS that oversees about 700 billion euro (A$1.13 trillion) in outsourced and advised dealing across the major asset classes. The trend for big pension funds to insource more of their investments was also adding to demand because they wanted more intelligence around the execution of trades, he said on a visit to Australia last week.
The “natural clients” of the service were fund managers, insurers and pension funds. In Australia, he said, investors with international exposures were increasingly looking at the services.
“Some clients outsource only one asset class, such as fixed interest, while others also outsource dealing in equities and fixed income,” Boulenguiez said. “Clients pay a fee directly to their outsource partner, never a commission. We are a pure player in the market, acting as an agent. We don’t use the bank’s balance sheet.”
MiFID II (Markets in Financial Instruments Directive) is the latest series of regulations agreed to in Europe last year to extend the number of instruments subjected to regulation to include OTC derivatives and fixed income. The first set of regulations date back to 2007, just before the global crisis.
It has been estimated by industry consulting firm Investit, that a dealing station – including data, systems, salary and overheads – costs about US$550,000 a year to run. Outsourcing can take advantage of scale to contain or reduce costs but also provide additional benefits such as connectivity to more markets and trading venues.
BNP Paribas has 39 dealers in its centres of London, Paris and Hong Kong, which mean greater contact with a wide range of counterparties. Francis So, head of dealing services in Hong Kong, who accompanied Boulenguiez last week, said this was becoming more and more important because of the scarcity of liquidity globally as many banks pulled back from certain trading activities.
“The knowledge form local brokers on the ground is important too in times of a lot of volatility, such as this,” he said. “Compliance costs are rising, as are operational risks, requiring best practice… You’d be surprised at how many people buy when they should have sold a security.”
* Greg Bright is publisher of Investor Strategy News (Australia)