Utility or futility? Timing is everything

Utility or futility? Timing is everything

Neil Vernon

CTO at Gresham Computing

Views 791

Utility or futility? Timing is everything

03.06.2015 01:00 am

Imagine the setting: 140 years ago, down a dark Dickensian street in the City of London sits a lonely bank clerk at his desk, updating his ledgers by candlelight. This would by no means be the ideal setting for completing such an onerous task: with the lack of proper lighting, mistakes would have been inevitable, and money lost.

When, a few years later, the means to produce electricity through generators became available, the first bank to install electric lighting gained a distinct competitive advantage over its peers. But it didn’t last for long. Soon other banks began copying the first and the competitive advantage was gradually lost. Eventually the National Grid was created, and suddenly making one’s own electricity was old-fashioned (and expensive). It was much easier and more cost effective to outsource the task and buy it as a commodity from the central system.

The same logic applies to financial services: if you don’t choose the right moment to switch over to using shared industry utilities then you give yourself a competitive disadvantage and may lose out in the long-term. If you don’t notice that the market around you has changed, then success will be nigh-on impossible.

A key indicator in judging whether the time is right for utilities is to look at the language being used in the industry. Terms such as ‘best practice’, ‘standards’ and ‘reliability’ are all pointers towards mature segments of the market where standardisation has already been agreed. If financial organisations see these terms used in areas such as cash equities or bonds and debt processing, they can be confident some elements of the organisation’s business are ripe for utility provision.

While there has been talk of applying utilities in the area of OTC derivatives, if we look at the language being used to describe this market today it is not one of ‘standards’, but one of ‘reform’. People are talking about confusion and uncertainty in the market, and working groups are still being formed to decide on best practice, which can only be described as emergent at best. Executives need to be aware of the narrative surrounding the subject and realise that this specific sector is not yet ready to reap the benefits of a utility-based approach. 

In general terms, the more mature the instrument, the more standardised the processing. While cash equities processing, for example, is largely standardised across the industry – it’s not the case for OTC derivatives. Even in one geographic market such as London, OTC processes are carried out differently from organisation to organisation; reconciliation and back office processes vary greatly, and that’s before you consider adding an international dimension.

Don’t get me wrong, utilities are a great thing. It’s good to aspire to implement them and it may well be what the derivatives industry needs long term. We just need to approach them with caution and look very closely at market maturity before jumping the gun. Although it may seem like a good idea to get on board before everyone else, it might pay off in the long term to wait this one out and see where discussions around standardisation take us first.

Latest blogs

Danny Scott CoinCorner

Bitcoin: An Explosive 2020?

“By now, a lot of people have heard of Bitcoin. It’s been running consistently for just over 11 years and has enjoyed it’s fair share of positive and negative media attention. Many eyes have been on Bitcoin since the bull run of 2017, with people Read more »

Bernard Foot MYHSM

Use of cash after COVID-19

Recently, I looked at the question of whether using cash presented more of a COVID-19 health risk than using contactless. There was no convincing evidence either way, but it’s clear that there’s a sentiment against handling cash and Read more »

Shaun Collings Pure Storage

Change Starts from Within: Overcoming Digital Transformation Barriers in the Public Sector

Across the public sector there are various forms of digital transformation taking place, at different stages of progress.  Part of the driver for this is that citizens now expect a level of service akin to what they receive from private Read more »

Jonas Andersson Fingerprints

In Consumer Biometrics We Trust: Authentication For the Data Privacy Age

Data privacy is high on the global agenda. In the wake of data protection policies such as Europe’s GDPR, ensuring the integrity of personal data is an increasingly pertinent subject. This is a governmental and corporate policy reflection of the Read more »

John Burgos Mindgate Solutions

Overcoming anxiety around mobile payments & digital payments - In the South Asia Pacific

Innovation and technology usually go hand in hand.  Therefore, for innovation to be fully realized, the technology that enables the innovation must be adopted as well.  During the last 5 years, we have had innovations from Google, Apple, Read more »

Magazine
ALL
Free Newsletter Sign-up
+44 (0) 208 819 32 53 +44 (0) 173 261 71 47
Download Our Mobile App
Financial It Youtube channel