Credit Suisse will outsource its post-trade derivatives operations and technology to a third-party to reduce costs on capital-intensive clearing services for futures and over-the-counter swaps.
The Swiss bank is the second to sign an outsourcing agreement for client derivatives clearing services with FIS Derivatives Utility, which was created following the acquisition of SunGard Financial Systems last November.
The agreement comes a year after a similar deal was struck between SunGard and Barclays. The UK bank began a three-year migration of its back-office derivatives clearing to the service in June 2015.
“Leveraging the FIS Derivatives Utility will allow us to spread the cost of innovation among a larger group of firms by creating a standardised solution developed by the industry’s top experts.” said John Dabbs, global head of prime derivatives services at Credit Suisse. “We believe this utility will transform the economics for derivatives market participants globally.”
The agreement adds to a range of measures announced by chief executive Tidjane Thiam last October, which aim to reduce annual costs by SFr3.5bn. The measures include 2,000 job cuts at the London investment banking business.
SunGard, which launched the service prior to its US$5bn acquisition by FIS, has previously said that Futures Commission Merchants could achieve a 20% reduction in operating costs by centralising their standardised back-office operations.
Any opportunity for cost efficiencies could prove crucial for brokers providing derivatives clearing services to their clients as the activities have proven costly under Basel III rules.
OTC derivatives clearing was once viewed as a potential cash cow stemming from new rules that force the majority of vanilla swaps contracts into central clearing, but costly capital and leverage requirements and the inability to re-hypothecate client margin that is posted against cleared swaps has forced a rethink on the futures-style scale business model.
BNY Mellon, Nomura, RBS and State Street have all exited client clearing for OTC swaps, while the number of Futures Commission Merchants registered with the CFTC has fallen from more than 100 to under 70 in the last two years.
“The evolution of derivatives markets has increased both the demand and the necessity for innovative solutions that transform the business model for derivatives clearing,” said Marianne Brown, COO for institutional and wholesale at FIS.
“By providing industry leadership and a potential path for the market, we look to achieve best practices around standardised processes that can benefit all market participants. Credit Suisse brings broad depth and expertise in cleared derivatives, as well as an extensive worldwide footprint.”
Credit Suisse is one of the largest players in client clearing for OTC swaps with almost US$11bn of segregated customer collateral backing cleared swaps, according to CFTC data as of March 31. The bank has an additional US$6.3bn of segregated customer collateral backing customer futures trades.
Barclays was one of the most active providers of client clearing services in the wake of Dodd-Frank rules forcing derivatives users to clear swap trades through central counterparties. It has fallen to sixth place with US$5bn of segregated customer collateral backing cleared swaps, CFTC data show.
Credit Suisse has not yet said whether any of its employees will move to the utility as a result of the agreement, but the Barclays deal saw 300 employees move to the technology firm.
