Given that independently managed companies have been responsible for providing front office trading technology and support for so long, it is no surprise that interest is growing in a similar service for the back office function. The surprise however, may be in the length of time it took for companies to take up the baton of providing an outsourced, back office service. A company now offering such a service is Socx (Settlement & Operations Clearing eXchange), a joint venture between Wall Street Systems (WSS) and Deutsche Bank.
Deutsche’s money market division has become Socx’s first client, but the company is keen to stress that it is an independent operator, providing a real alternative to in-house operations, at a lower price, across all markets. Mark Bradbury, COO of Socx, says the company “is about re-engineering the back office process by replacing the legacy systems”.
Whilst it may have been some time before the concept of operations outsourcing became a reality, Socx itself has been built up swiftly, once the decision was made by the shareholders to finance a business plan that Bradbury says “had a very sound logic”. At the end of 2000, Francis Amman joined as CEO, and the company started building its infrastructure. It went live in May 2001, with Deutsche’s London money market operations as its first client; it is due to rollout to the German bank’s global money market operations in the coming months.
The technology platform used by Socx is a settlement and trade processing system developed by WSS, which has been integrated with sophisticated workflow and CRM tools from Staffware. This provides users with browser-based transaction monitoring and reporting facilities for the complete lifecycle of every trade. The service is hosted by Hewlett-Packard at its main data centre in Atlanta, Georgia, which provides an ultra-secure and scalable hardware environment, according to Socx.
These relationships are at the centre of the venture’s operating ethos, according to Bradbury, who adds, “We focus on our core competencies, which are settlements and clearing. We use other companies’ core competencies where necessary, for example our use of Hewlett-Packard to provide a secure computing environment, and go to them for access to their expertise. Hopefully, now other organisations will come to us for our core competencies. If they do, they will get high quality expertise at a good price, because of our use of ‘best of breed’ companies for our non-core needs.”
In terms of price, Bradbury says Socx’s target is to cut operational costs by 50%. “Because operations is such an important function, the saving has to be significant and compelling enough to attract clients,” he says. “We have to provide a powerful reason to choose Socx. If a trade goes through the lifecycle ‘clean’ the cost is very low for an STP trade. If there is an exception, we have a clear cut pricing structure for resolving this, meaning the cost to clients is very transparent.”
Bradbury also points out that the transparent pricing is a two-way concept, and that by means of a service level agreement, Socx commits to certain benchmark standards. “By breaking down the lifecycle of a trade, we can create a performance measure. Obviously we look to beat this, but if for some reason we do not, we will compensate the client by means of service credits.”
Socx’s technical potential is also stressed by Bradbury as a reason for clients to pick the service. He stresses that the company wants to use leading edge technology – and not be tied to a legacy system, which could happen were it an in-house development. “We are always looking to enhance our service. To this end, we can access technology from anywhere, and with the leading edge partnerships we have, with Wall Street Systems for example, we are aware of, and ready for, developments in the industry such as T+1 and CLS. This means that Socx will be at the forefront of technical changes, which enables us to make our clients future proof.”
Bradbury is keen to stress that Socx is not just a money market vehicle, it just happens that its first client is a money market operation. The service also encompasses foreign exchange, fixed income and vanilla derivatives. “We have a broad product and service offering, which we can offer across all markets and at all tiers in terms of client size,” he says. “Wall Street Systems publishes direct to Staffware, which means we can manage the system in real time, and escalate any problems quickly and efficiently. This is a very powerful workflow management tool, especially in MIS terms.”
Clients are continually updated with the status of all trades online and in real-time via the Web or other communications channels including e-mail and wireless technology.
Socx’s belief in the need to focus on core competencies is echoed by Paul Lewis, managing director, Global Markets at Deutsche, who says, “Deutsche Bank took the strategic decision to outsource this part of its business to a specialist service provider in order to allow it to focus on its core activities. Partnering with Socx saves us significant time and effort and Socx is committed to delivering the highest service levels, at a lower cost than could easily be achieved in-house. It is our view that the future of operations across the financial services industry lies with specialist outsourcing vehicles such as Socx and we are therefore firmly committed to supporting this initiative.”
Bradbury is quick to play down suggestions that Socx has been developed as a back office system with Deutsche Bank specifically in mind, stressing, “Socx has been built as an independent company in a green field site, specifically for the outsourcing market, not just Deutsche Bank who are a shareholder, and more importantly, a client.”
He also stresses that Socx is very much in favour of straight-through processing (STP), saying, “We want STP and we will work with clients to drive the STP rate even higher.”
The operation is run on a 24/7 basis from Socx’s London location (with full fail safe functionality), Bradbury says the company is considering a second location elsewhere, but has no plans to thus expand in the short term. The venture is Europe-focused because studies showed this to be where the higher volume of business is being transacted. Asia is seen as an opportunity in time, and should the decision be taken to open a second location, action can be taken swiftly. Bradbury notes that in technology terms, because of Socx’s link-up with Radianz, it really is just a question of plugging into the Radianz IP network from any new location.
The issue of regulation is something of a grey area for the outsourcing of operations, because, as Bradbury says, “You can outsource the function, but not the responsibility. The client is responsible for regulatory issues via the appropriate body, which means that in effect we are regulated by the clients.”
The next move for Socx will be all-important. It believes it has a strong product, which is hard to argue with, but it probably has to shake off suspicions that it was built for one client. Clearly a non-Deutsche client would help build the company’s credibility further, a point acknowledged by Bradbury. “Socx believes that a non-Deutsche Bank client is important because it would increase our credibility further, and add to our reputation. As we broaden our client base and products, we feel Socx will snowball,” he says.
The snowballing does not necessarily have to come from the banking industry. With banks also looking to outsource their own operations expertise to their clients as part of the move to full STP, any institution with a back office function can benefit from Socx’s services, Bradbury believes. From whichever sector of the market Socx’s next clients come from, the company is ready he says, adding, “Volume, high or low, is not a constraint. The model we have built provides benefits to all users, regardless of size.”
Ultimately, Socx’s continued growth will rely on its ability to, as Bradbury puts it, “break down the traditional view of operations in the financial markets”. “Our first client is due to come online globally very soon. What this means is that we can now market and sell a product that is a real and tangible alternative to in-house systems.”