“Basel III and other regulatory issues and restrictions have a number of driving factors and downstream effects on tier one primes, which drives our whole investment thesis here at PrimeOne Solutions,” states Chris Chanod pictured), Global Head of Business Development, PrimeOne Solutions, part of CoreOne Technologies.
PrimeOne Solutions provides a gateway for new entrants to the prime finance space as well as an avenue for Tier 1 and Tier 2 prime brokers to reduce infrastructure and technology costs.
One of the key driving factors Chanod refers to is a reduction in profitability for primes. Margins have shrunk. This is pushing tier one primes to embark on drastic cost reduction, specifically around inefficient legacy infrastructure.
‘The costs of a tier one prime to run their global infrastructure platform ranges anywhere from USD75-200m a year. One point that everyone agrees on is that that cannot remain the same. Seven years ago, when leverage boomed and financing activity increased, banks attempted to make their infrastructure more efficient, but in many cases they inadvertently ended up making it more expensive,” says Chanod.
Back in 2007, throwing money at global infrastructure platforms was fine because balances were rising, profits were growing. But although we live in a different age today, what has remained in stasis is the inexorably high operating costs to running these platforms. This is the nub of the problem.
“There’s a misalignment because the technology was developed for a different era,” says EJ Liotta, Global Head of PrimeOne Solutions. “Their infrastructure doesn’t work, not only from a cost perspective but because of the way primes operate. A prime broker is an intersection of many different services of a bank; balance sheet, reporting, clearance, execution, derivatives and so on.
“In the past, the banks stitched everything together and called it Prime Finance. Now, it’s about closer evaluation of the quality of collateral held at the bank. Now, people have to dynamically evaluate the quality of that relationship based on assets, and because that infrastructure is not necessarily suitable, banks are not always able to ascertain what the quality of that relationship truly is. So it’s not just about reducing cost, it’s about having more efficient software to more effectively evaluate the quality of that relationship.”
This plays precisely to the strengths of PrimeOne Solutions. The firm has engaged in a series of strategic platform lift outs from tier one banks and re-platformed proven, battle-tested prime finance technology. It was, as Chanod points out, the first vendor to lift out a global cash PB system and securities lending system, specifically from Barclays.
“We also lifted out a sixth generation global synthetics PB platform for global swaps trading. We’ve coupled those three solutions, across global cash PB, global securities lending and global synthetic PB with a front-end client reporting platform that sits on top (Prime Reporter),” says Chanod.
What PrimeOne Solutions is able to do is provide new entrants with a pure plug-and-play platform for global prime finance. As Liotta points out, “the order of magnitude in terms of cost reduction is 80 per cent”.
“Secondary providers need to become scalable and have an infrastructure that rivals tier one banks. They can’t support the increase in volume and sophistication of clients without using a proven vendor model because they can’t afford to, nor do they have the time to build it internally,” concludes Chanod.
