When life throws you lemons….
… build a juicer, corner the melon market and prove that dyslexia never stopped anyone from succeeding.
The Tabb Group — in a 2011 presentation to the Commodity Futures Trading Commission’s (CFTC) Technical Advisory Committee — estimates that the largest US OTC derivatives dealers will spend a total of $1.8B on Dodd Frank (DFA) related technology costs; with the top eight spending over $1.5B.
An August 2012 update to a 2010 S&P analyst report puts its annualized estimate of DFA-related technology and related expenses for the top eight US banks at $2.0/$2.5B.
Throw in the profound and fundamental changes the regulations have wrought on OTC derivatives market structure, business models, terms of competition and future earnings expectations — and that’s a lot of chucked lemons.
All those lemons however present an opportunity for competitive differentiation.
This Acuity Derivatives client report From Regulatory Compliance to Technological Advantage (making lemonade…) below seeks to show that given the fundamental nature of changes to the OTC derivatives industry and also the high technology costs involved; that the deployment of this technology spend should not be viewed solely in the context of sunk compliance costs, but in the context of investing for competitive technology advantage.
We analyze the key functions and flows in a post-DFA, post-Basel2.5 OTC derivatives dealer, and identify fourteen (14) opportunities for technology differentiation, along both functional and data dimensions. We explore the technology features that underlie these opportunities and the complexities they impose. We conclude by looking at steps that may be taken in realizing these opportunities — to include technology selection and deployment approach.