ACSDA 8th Seminar

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ACSDA 8th Seminar Presentation by SIMON
THOMAS Thomas Murray 2nd October 2008
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Agenda

• Risk Situation in the Americas
• Market Infrastructure in Europe
• Market Trends
• Consolidations
• T2S Link-Up
• MTF Effect on CSDs
• Emerging Market Trends
• Range of Services provided by CSDs
• Benchmarking Best Practice Risk Reduction
• Conclusions

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Overall Capital Market Infrastructure Risk Ratings
AAA AA AA AA- A A A- BBB BB B CCC
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Principal Market Infrastructure Silos in Europe
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Current Market Trends

• Pressure on profitability of exchanges from MTFs
  is driving exchanges downstream into vertical
  silos (e.g Spain, Germany, Norway)
• Aggressive horizontal consolidations (e.g NASDAQ
  OMX Group, Euroclear NCSD)
• Defensive vertical consolidations (e.g. Norway,
  Switzerland)
• Historical transition from exchange/broker owned,
  to market owned to public ownership
• Transfer from market utility to commercial
  enterprises
• Involvement of central banks in CSD business (e.g
  Costa Rica, T2S)
• Transition from internal clearing to external
  clearing via CCPs and CMUs

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Silos Consolidations in Europe
NASDAQ OMX
NYSE Euronext
DIFX/ Qatar
Vertical Silo
Horizontal Silo
Horizontal Association
Independent CSD(s)

• American Invasion US exchanges bought into two
  horizontal silos
• Small is Vulnerable Anything not in a vertical
  silo is up for grabs
• Vertically Challenged Are the vertical silos
  coming up short in their dormant strategy?

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CSD Strategies Case Study Scandinavia

• NCSD was a failed attempt at harmonisation. T2S
  forced it onto the slow track while its
  shareholders grew frustrated. The sale to
  Euroclear is effectively the Swedish banks
  cashing out. Anybody with good Euroclear
  solutions will have an advantage. This may well
  attract the likes of BNP Paribas into the
  Nordics.
• The advent of CCPs along with the new MTFs would
  have killed off an independent APK
• VPS is seeking to follow Norwegian mutual funds
  and hedge funds abroad (into Luxembourg and
  Ireland) and effectively become a custodian. It
  is already DnBs major competitor in the mutual
  fund business
• VP has focused on the registration business,
  buying up all the providers. It has an
  interesting proxy voting solution and is making
  headway in mortgage bonds (Mexico and Asia).
  Opened Luxembourg branch to service Danish
  Eurobonds.
• With NCSD sold to Euroclear both VPS and VP had
  no option other than Link-Up Markets

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CSDs T2S

• Fundamentally flawed
• No cost justification
• Nationalisation of public companies without
  compensation
• Absorbs too much collateral
• Cant handle the retail model
• Too much project risk
• No confidence in ECB to deliver
• Corporate governance excludes participants.
• Timelines- live in 2013
• Decision to proceed now confirmed
• Scope creep continues (Eurosystem Single
  Interface ESI)

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CSDs Link Up Markets

• Includes 7 CSDs
• Clearstream Banking Frankfurt, Hellenic
  Exchanges, IBERCLEAR, OeKB, SIS, VP, VPS
• Continue to invite in other CSDs
• Allow CSDs to share T2S linkage costs
• Interoperability (the Code of Conduct) is aimed
  at reducing cross border settlement costs.
• Mid 2009 launch with a budget of 10 million.
• As well as transaction routing it includes a
  centralised Securities Database, Corporate Action
  Event Storage Engine as well as a Proxy Voting
  Portal covering the involved markets. This begins
  to put the CSDs in the custody space. It will be
  interesting to see Citi and BNP Paribas
  reactions.

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Consolidations in the Americas
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MTFs in Europe
MTFs
Chi-X
Turquoise
NGM/ NGX
EDX London
Cinnober
Freeway
CLICK
Instinet
PEP Markets
Burgundy
NOS Direct
INET
Dark Pools
Nordpool
Baikal
SmartPool
Liquidnet/ ITG Posit/ Euro-Millennium
Cinnober
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Turquoise - Settlement
OEKB
Turquoise
Euroclear Belgium
Euroclear France
Euroclear Nederland
EuroCCP
Euroclear UKI
Clearstream Frankfurt
Interbolsa
Citibank (Settlement Agent)
SIS
VP
NCSD
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MTFs Effect on CSDs

• MTFs threaten exchanges natural monopoly.
  Exchanges looking to re-acquire CSDs to guarantee
  revenue streams.
• CSDs less dependent on their home exchanges.
• Multiple MTFs may settle in same CSD.
• MTFs want CCPs in the value chain (represents
  additional complexity in post-trade environment
  and net settlement revenues to CSD).
• Internalisation of settlements by settlement
  agent.
• The MTFs are aimed at the broker/dealer market
  while the dark pools are aimed at the
  institutional investor market. These two markets
  have different clearing and settlement
  requirements.

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Emerging Market Trends

• Expanding added value services (e.g issuers
  service, derivatives, funds processing)
• Ownership and Governance Issues

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Range of Services
Cash Market Services
Alternatives Market Services
Bermuda, Bolivia, Costa Rica, Ecuador, El
Salvador, Guatemala, Jamaica, Panama, TT,
Uruguay, Venezuela
Chile, Colombia, Peru, Egypt, Russia, China,
Canada, UK, Japan, Singapore, Sweden, Finland,
Denmark, Malaysia, South Africa
France, Germany, Italy, Poland, Hong Kong,
Australia, Thailand
USA, Norway, Euroclear, Clearstream
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Range of Services
DCV Chile
DCV Registros
Settlement
Safekeeping
Matching
Clearing - DVP, netting
Registration
Tax Services
Investor Services
Stock Lending
Issuer Services
Derivatives Processing
ICSD Services
Refinancing
Fund Services
Value Added
Traditional
VPS Norway
Settlement
Safekeeping
Matching
Clearing - DVP, netting
Registration
Tax Services
Investor Services
Stock Lending
Issuer Services
Derivatives Processing
ICSD Services
Refinancing
Fund Services
Oslo Clearing
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Ownership and Governance Issues

• Historical transition from exchange/broker owned,
  to market owned
• Market owned entities develop for the benefit of
  the whole market
• CSDs need understanding shareholders
• Should central banks be in the business?
  (Colombia, Costa Rica, Venezuela, Argentina,
  Uruguay,T2S)
• Balanced board composition and independent
  directors, essential to manage competing interests

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Conclusion

• Environments are changing quickly and CSDs need
  to be adaptable
• CSDs are being threatened from several sides and
  need to work out a survival strategy
• MTFs represent a business opportunity for CSDs
• Challenges for CSDs to consolidate to
• provide enhanced services retaining cost
  efficient low risk operations
• build credibility and trust through strong
  Governance
• Thomas Murray plans to participate in emerging
  trends through
• Support CSD with Gap Analysis and Rating services
• Providing markets with strategic advice through
  Workshops and Consultancy