Post-trade services are at a crossroads | new regu ... - Roland Berger

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Roland Berger Strategy Consultantsgrowth in the wake of takeovers will enable economies of scale to offset growing pressureon margins. At the same time, extending the value chain and broadening their portfoliosgives providers greater leeway on pricing.Great market potentialToday, the European market for exchange-tradedderivatives already adds up to four billion contractsper year.4.000.000.000Explore the possibility of entering new asset classesOne way of achieving economies of scale is to penetrate additional asset classes. The marketpotential is immense: The European market for exchange-traded derivatives (ETDs), forexample, added up to four billion contracts in 2012, while the global market for OTC derivativestopped EUR 473 trillion. Bond trading on the secondary market generates EUR 80 trillionto EUR 100 trillion annually, despite the fact that only an estimated 3,000 fixed-incomesecurities are traded per day. At the close of 2012, the European repo (repurchase)market had a total volume of EUR 5.6 trillion, of which only 30% have so far been settledvia central counterparties. And that's not to mention the potential of the foreign exchangemarket, where around EUR 3 trillion changes hands on average every day. The biggestmarket in the world is still largely unregulated: The two leading trading platforms, ICAP andReuters, together have a market share of less than 10%.The biggest hurdle to successfully breaking into new asset classes is liquidity. Due to derivatives'lack of fungibility, it is hard for newcomers to draw off liquidity from incumbentplayers. In practice, this limits organic growth of existing and new market players. Forexample, fast-growing market segments such as ETD trading are in the hands of just threelarge providers: Eurex, Liffe/ICE and MICEX/RTS together occupy 95% of the market. Discussionswith various providers have revealed that their strategic challenge is to identifywhich markets and products are worth penetrating – and, of course, to determine whetherthey possess the necessary expertise to do so.The overdue process of vertical consolidation will most likely be triggered by rising costpressure and clients' growing tendency to concentrate on just a small number of providers.Despite the heavily fragmented nature of the European market, the trend toward a veryheavy concentration of custody volumes is already apparent: Four out of five dollars heldin custody are already placed with one of the four major providers.National interests obscure sound economic reasoningProviders must factor the trend toward consolidation into their decisions regarding necessaryinvestments, some of which will be very substantial. Certain smaller market playersmight do better to make themselves attractive as cooperation partners by choosing theright area of specialization. In isolated instances, however, this decision will be based onmore than purely economic considerations. National stakeholders are often only too willingto subsidize CSD business in the hope that they themselves can retain their sovereigntyover the domestic financial market infrastructure.Providers who decide to take an active role in the market transformation and who are sufficientlylarge should consider expanding abroad. Many growth markets in Asia and the MiddleEast lack the infrastructure needed to guide the growing influx of capital from around
content Post-trade Servicesthe world into the intended channels. Development potential in post-trade services is enormous– especially as the regulatory changes currently being implemented in the West arenow also taking effect (or at least serving as blueprints) in these parts of the world. Westernproviders who can deliver the required expertise – up to and including turnkey IT systems– will find the door open to all kinds of cooperation, as the example of LSE technologysubsidiary MillenniumIT shows. Given the right expansion strategy, the necessary investmentis not only easier to justify but can also be funded more quickly.Identifying and exploiting sweet spotsRoland Berger Strategy Consultants recommends five specific actions that can help providersof post-trade services position themselves in the T2S environment:• See change as an opportunity: T2S gives pan-European providers a suitable platform onwhich to consolidate client assets and, by leveraging their function as investor CSD, togradually draw liquidity off their national rivals. With the right partners, client-orientedsettlement and collateral management solutions can be developed that can also bemarketed in growth markets such as Asia and South America.• Improve your margins: Systematically industrializing operations creates lasting efficiencygains. The aim must be to gradually increase margins and align back-office capacitywith the new market conditions under the T2S regime.• Extend your value chain: Add-on services can help offset the loss of revenue associatedwith T2S. To develop client-oriented solutions, CSDs can add or extent collateral managementservices, expand into banking services and/or establish themselves as sourcingproviders for banks with end-to-end solutions.• Use your home advantage: National providers who lack the resources, infrastructure andexpertise needed for acquisition-driven growth strategies can engage in asset collecting.Where the given market structure permits, they should strive for exclusive agreementswith the foremost financial institutions on their home markets. This will strengthen theirposition and make them attractive as partners for global or pan-European competitors.• Develop specialization: National providers should consciously establish a position withregard to local and global concerns. Tax issues, databases of trading information (tradedata warehousing) and the peculiarities of national regulations give CSDs a wide arrayof options for positioning themselves in the T2S environment. By offering high-qualityprocessing of corporate action data for securities admitted for trading, CSDs can setthemselves apart and improve their margins: Clients should be willing to pay more forextensive guarantees of data accuracy. This strategy too can help providers consolidatetheir market position and makes them attractive to global players who lack their specificmarket knowledge.PLEASE CONTACT US AT ANY TIME WITHfurther questionsDr. Peppi Schnieper, Principalpeppi.schnieper@rolandberger.com+41 43 336 8710Bruno Colmant, Partnerbruno.colmant@rolandberger.com+32 2 6610 0Adrian Pfammatter, Senior Consultantadrian.pfammatter@rolandberger.com+41 43 336 8625think:act CONTENT…ditor: Charles-…douard Bouée, Prof. Dr. Burkhard SchwenkerOverall responsibility: Dr. Torsten OltmannsProject management: Dr. Katherine NöllingRoland Berger Strategy Consultants GmbHAm Sandtorkai 4120457 Hamburg+49 40 37631-4421news@rolandberger.comwww.think-act.com
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