Location, location, location – picking the geography for your next securities operations centre

DEEP LOOK | Firms operating in the securities markets will make decisions on where to locate operations centres based on a range of different factors. There are some considerations that are standard across the board though, such as how to balance cost with client proximity. Paul Golden speaks with decision makers.

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When securities markets participants look at where to base an operations centre, the key factors are usually the availability of appropriate skills and efficiency drivers, such as cost synergies. That is the view of Daniele Tenerani, head of investment and protection operations at UniCredit, who adds that skills are crucial given the high level of specialisation required and the complexity of the business. “Many large financial institutions recognise this and look to centralise their operations, creating centres of competence, consolidating skills in an internal organisation and optimising processes and systems to enhance efficiency,” he adds.

In a paper published in September 2024, Mike Pierides and James Mulligan from law firm Morgan, Lewis & Bockius discuss the increasing focus on operational resilience as securities markets participants become increasingly reliant on third-party service providers.

They noted that financial regulators are emphasising the importance of operational resilience throughout supply chains – in part because the types of functions that form part of a company’s services have changed – and that broader shifts in working patterns and workforce attrition have also focused regulators’ minds on ensuring that companies are operationally resilient to disruptions.

Outage risks looming

In their conclusion, they observed that major ICT outages, supply chain disruptions, geopolitical risks and shifting work patterns have highlighted the importance for securities markets participants to reinforce their operational resilience.

So what are the main factors to consider when deciding where to locate a securities operations centre? PostTrade 360° took the question to senior decision makers in the industry.

Graeme Greenaway, COO corporate & investment banking at Standard Chartered, explains that his bank’s operations staff are strategically located in central hubs (global business services) for common utility activities, ensuring efficiency and consistency.

“However, it is also important to be close to our clients and business stakeholders and we maintain an in-country operations presence to meet language demands, local custody clearing system access and requirements as well as regulatory requirements,” he says. “This approach extends to the opening of new offices – such as in Saudi Arabia and Egypt – where we ensure a footprint on the ground.”

A securities operations centre is a facility where the operations unit sits and this could be outside of the country or market where Deutsche Bank offers securities services to its clients says Steven Hondelink, global head of securities services operations at the Frankfurt-based financial institution.

“Subject to regulatory approval, we aim to service multiple markets out of a single centre, which brings economies of scale and consistency with regards to quality of service,” he says. “Service centres need to have access to talent pools and need to be cost efficient.”

Let the sun guide you

Mack Gill, head of securities processing at FIS suggests that in an increasingly globalised securities industry – which is moving to 24/7 trading – it is vital to develop ‘follow the sun’ operations capabilities as well as looking to tap the best talent and cost locations.

“However, it is also important to look to achieve a balance of operations investment in lower cost locations along with continued local market presence to remain close to your clients amid a quickly evolving market,” he says. “Another consideration to balance in your location strategy is whether you want to be a big fish in a small pond, with easier talent attraction/retention, or locate in a larger economy with a more developed labour market. Both options have their pros and cons.”

The Morgan, Lewis & Bockius paper noted how supervisory focus is extending to operational resilience across third party services relationships, not just outsourcing. The merits of using an external securities operations centre versus performing these functions in-house remains an interesting point of discussion.

According to Tenerani, external securities operations centres can help financial institutions benefit from the expertise and efficiency of specialised players, leveraging their larger scale and international presence.

“Considering the scale that we have at UniCredit, we prefer to have securities operations internally,” he explains. “This helps provide a more secure, flexible and cost-efficient foundation for the delivery of the bank’s custody services, bringing the teams closer to their clients and enabling them to be more agile and impactful in their execution.”

Capability – human or machine

While the availability of skills is a major consideration when deciding where to locate a securities operations facility, it is important to acknowledge the extent to which the functions undertaken in these centres are automated.

“Most activities in securities trading, settlement and custody are automated,” notes Tenerani. “Automation is essential given the massive volumes managed and rigorous time constraints and (with proper supervision) plays a key role in mitigating operational risks.”

Standard Chartered’s securities services (transaction services) business offers operations as a dedicated service to its custody clients, providing direct oversight without further outsourcing to third parties.

“For sectors such as financial markets, where outsourcing is feasible, partnering with third party providers can offer significant advantages,” says Greenaway. “These include specialised skill sets, advanced technology, relevant scalability and round-the-clock coverage.”

The main benefit of outsourcing operations is the opportunity to tap into economies of scale along with industry standard processes and tools, says Gill. “Whether you can now achieve these benefits in-house by leveraging modern automation tools and cloud platforms is a question which can be debated,” he adds.

Gill describes automation as the holy grail for the industry and suggests that any investment in a securities operations centre, either in-house or outsourced, needs to be predicated on leveraging automation and ensuring that core processing platforms are not stuck in legacy mode.

“True automation of securities operations should start with a modernisation strategy for underlying core processing systems,” he continues.

Consider smart

According to Hondelink, the answer depends on whether external is defined as a third party (outsourcing) or internal location strategy (smart sourcing).

“If it is the former, operations is one of our USPs and therefore we do not outsource our core processing functions to a third party,” he says. “The benefits of smart sourcing include coverage of multiple time zones, cost efficiency and scalability.”

When asked to what extent the functions undertaken in these centres are automated, Hondelink acknowledges that automation reduces risk and improve scalability and time to market. “However, the scale of automation is dependent on market specifics, client behaviour and internal infrastructure,” he adds.

Security is an important component of resilience and a key element of any effective enterprise-wide risk management governance framework.

Preserving the security and confidentiality of data is critical within securities operations, as unauthorised disclosure of business-sensitive or client information could pose harm to clients and investors, damage a regulated entity’s reputation, or even cause instability in financial markets.

How would you take an incident?

As securities markets and operations become increasingly digitalised, ICT security specifications, testing requirements and incident handling have become critical.

On the question of what are the main security threats these centres have to deal with, Greenaway observes that where operations are local and security challenges exist, Standard Chartered implements rigorous safety measures, including around its facilities and transportation arrangements for its people.

“Our commitment to safety ensures that our team can focus on delivering exceptional service to our clients, regardless of the location,” he says.

Securities operations, as with many areas of activity, face operational risks generated either internally (such as technical failures or human error) or externally, for example security threats. Security threats such as data leakage or service interruption must be avoided at all costs, with continuous and comprehensive risk assessment and state-of-the-art risk mitigation technologies.