P&L Talk Series – UBS

Colin Lambert: UBS recently announced a change in structure for its FX, Rates and Credit (FRC) business, can you outline the new business model?

Imed Souki: There has not been a significant change in the structure of the business, it is really a continuation with me taking sole responsibility for the business today, whereas Chris is tasked with taking it where it needs to be in the future. The client relationship dynamic is changing and we want to ensure we are, and remain, relevant to our clients.

Chris Purves: We have created a Strategic Development Lab (SDL), which is a new initiative within the FRC business. The SDL is intended to design and build the FICC business of the future and has responsibility for electronic trading, data science and machine learning. It will also look at strategic investments as well as innovation and technology within FRC.

CL: Can you expand on that?

CP: As Imed said, this is merely just an evolution of the FRC model, because it all circles back to continuation of business and making sure we invest where we can excel. My predominant focus is on the future and by moving slightly away from the trading business I have the luxury of looking three-to-five years ahead, which makes sense, because it means I am meaningfully freed up to think about it.

The first stage of this work is actually assessing what we think the future will be, what will be important in, for example 2022? Is there a road map to get us through the next few years? Absolutely not. But we can make an assessment of what we think we need to change, for example, around governance, or what bits we think are missing that we need to add. 


There is a lot we can think about, what do we need to build and what do we buy? How must we adapt to sell things differently? We know we will need to adapt how we sell products, but there are lots of unknowns like, for example, the size and required skill set of the sales force of the future.

The idea behind the new role is that unless you are ready now to adopt change, you could be left behind. In banking the only thing you can do quickly is exit a business, it is harder to build something, its takes longer, involves more resources and can be expensive. You have to get it right.

It will be data driven, we will use elements of machine learning and AI, and our focus has to be on maintaining value. Generally in banking I think too much value has been lost historically because there are too many gaps in the service. We need to be really curative and care for our data, it will probably drive everything. If we get it right – and to succeed we need to be informed properly – if we understand and really use the data well the opportunities for the FRC business are tremendous.

By moving to our new structure I can focus on how we use, store and downstream data, on taking the behavioural impact out of the evolution of our business, and creating optionality.

IS: That is why we have slightly separated today’s business from the stuff of the future – we still need to produce ROI – that is my task, but we need to future proof the business as well.

CL: Monetising data is a growing business opportunity in many peoples’ eyes, will this be a part of the future?

IS: The key will be identifying what is differentiated and really value added to our clients.That may well involve using our own data to better understand what services our clients will reward us for and how we can differentiate ourselves from our competitors. 

CP: I think we have to become more commercially minded about our technology and the stuff we are really good at. A good example of what we can do is ORCA Direct, our latest FX algo,that was something we were really good at and was used internally, and we have now rolled that out to selected clients. 

Too many times in banking technology is built once and used once. We should be looking to replicate the value of the initial technology, so build once and sell 100 times or more. So I think we will leverage the technology we build internally going forward.

CL: How big a role did the regulatory landscape play in the decision to change?

IS: Regulation has reduced most business returns significantly across the FICC space and there is now a lot of capital deployed in the FICC industry  – although we do operate a very capital-light model,which means across the industry it is not being deployed efficiently. This is a big hurdle to overcome, because this environment has seen costs increase in all businesses while at the same timemargins are being squeezed. 

A good example is how best execution sits within MiFID 2, this has increased competition – especially from the non-bank sector which is not as capitally challenged as the banks – which has compressed margins at a time when volumes are stable at best, and so growth is not coming in terms of market share. We regard this uneven regulatory landscape however as an opportunity to be embraced not resisted, and one the SDL can help us navigate.

CL: A theme of the past year, thanks to the regulatory impact you talk about, has been banks cutting the client tail – how has this changed the dynamic that Imed mentioned?

CP: Firms are better understanding the value of the client relationship, they have done a lot of work on it and most can now fairly judge the value any individual client is worth. It is not about who does the most trades anymore, it is about the overall cost and value equation, what are the returns after we have taken out cost of coverage and capital allocation for example?

The result of this re-evaluation is that while clients have not being totally cut off, some are receiving wider pricing thanks to the better understanding and value the banks are placing on their business. Banks generally have been building technology to facilitate much smarter pricing, so different clients are inevitably going to have different experiences. In turn this means some have had to review their execution styles in order for them to remain efficient in the market and better curate their liquidity.

IS: The relationship between the bank and client is much more balanced than it was, there is a more open dialogue and we better understand and talk about the difference between a service and a value add. Repos is a good example, it was long seen as a top line revenue for the banks, but now it is seen as a service.

Data has enabled these conversations, it has helped find a point of balance with the clients and in turn helped build and maintain a long term sustainable relationship.

Most of our clients face similar margin pressures that we do and so understand that in order to keep providing prices and a service, that we also need to generate a return. Having an open, data driven dialogue with our clients is critical to ensuring clients understand the impact that regulation is having for example on our capital costs, whether trades are capital additive or reducing and help drive a more balanced relationship and predictable client experience.

CL: Are clients becoming more open to data-based discussions?

CP: On the client side we have seen different speeds of uptake of data analytics, some clients are very advanced and use data really well, others are less interested – and there is a spectrum in between. No one is perfect – people point out that banks have been slow to adopt these practices, but the reality is a lot of the tooling required to do this simply wasn’t available until the last few years. 

While it is unsurprising that there are firms all along the curve, I think there is now a greater understanding of the urgency required to adopt data analytics to help build a better and more sustainable business.

CL: How has the data influenced the FRC business at UBS?

IS: A strong understanding of our business has helped us develop a model that provides services we are excellent at, which has in turn allowed us to move away from those we were not. Going forward more banks will focus on their strengths and so you will see banks move in different directions. Some are exiting certain regions, others are exiting certain markets and this means that clients have to access different services from different providers much more than they used to. 

We are seeing more clients understand they do not need a one stop shop anymore, regulation is a driver of that, so too is electronification – it is much cheaper to create and maintain the pipes than it used to be. So banks will focus more and adopt an approach UBS did in 2012 when we went through what was undoubtedly a painful process, by focusing on the added value services we could deliver and cutting those we didn’t.

The good news for clients is that technology means it is much easier for them to access a range of services, such as credit, FX and fintech capital from a number of different areas.

For the bank, the start of the process was understanding where we are relevant and adding value and really pushing resources to those areas. 

CP: Although we started this evolution of our business in 2012 it remains an ongoing process where we are always looking at the services in which we are winning insufficient business and then deciding to up our game or exit. 

This is about building a business by looking through the cycle, which is important, because some decisions are not reversible, you need to look at the current environment and, importantly be forward looking.

IS: One thing is clear, there is no room for mediocre service, clients are looking for excellent service as a minimum.

CL: This sounds to me like a scenario for consolidation…

IS: The reality is banks are shrinking and consolidation is likely, much of this will take place behind the scenes. In areas like the back office and other services that are cost heavy and not value adds, you may see a merger of services – a more utilitarian approach. It doesn’t mean regulation will not continue to be a weight on the business, but it does mean the pressure can be alleviated a little in specific areas. It also means clients have to make the right choice of partner.

You could see a surge in bank-led consortia to take on the challenges we face around areas like DLT where we have the technology but we haven’t yet really delivered meaningful solutions. By driving this process forward we can make a difference to our shareholders and our clients.

CL: How easy will that be?

IS: The challenge is some people are still defending a legacy, but that itself is an opportunity for us. The structure of our business is focused, so we only look at those areas in which we excel, which I think can really differentiate UBS.

Every challenge offers opportunity and facing the reality of the situation and understanding what is happening means you have an opportunity, because there will be first mover advantage and room for a focused player that can react quickly to change and adapt best to the evolving environment. That is what we are seeking to achieve with our new structure.



Colin Lambert

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