In today’s FT, JP Morgan announces its derivatives trading re-engineering effort – 3 years in the making, and baking.
Is this what everyone else means when they say preparing for regulatory compliance?
But this is what competitive differentiation looks like for JPM, so far (apparently):
– 4 technology program pillars (and 24 workstreams) of a strategic re-engineering effort (sponsor: J. Dimon).
– Market making rationalization – one primary market maker for each asset class regardless of eventual risk owner.
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.
This new Acuity Derivatives client report From Regulatory Compliance to Technological Advantage (making lemonade…) 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.