Where next for Securities Servicing? Is the past a good indicator - PowerPoint PPT Presentation

Where next for Securities Servicing? Is the past a good indicator for the Future? Philip Brown

Clearstream, 11 June 2010 1970’s… v Few CSDs v No DvP v First stages of electronic book-entry …limited automation… 2

Clearstream, 11 June 2010 1980’s… v Increased issuance of securities v Boost of trading companies v Surge in stock market activity …deregulation… 3

Clearstream, 11 June 2010 1990’s… v Rise of cross-border activity v Repo takes-off v ISD introduces “European passport” …globalisation… 4

Clearstream, 11 June 2010 2000’s… v Consolidation in global custody v MiFID triggers surge of MTFs v Code of Conduct v Road to T2S… …consolidation, and the impact of the public sector… 5

Clearstream, 11 June 2010 2010… v Pressure for new regulatory standards v Collateralisation…securities financing… risk management… CoBM vs CeBM… v On-going competition smashing prices …profit hunting… 6

Clearstream, 11 June 2010 Snapshot 1970’s …Limited automation… 1980’s …Deregulation… 1990’s …Globalisation… 2000’s …Consolidation / Public Sector… 2010 …Profit hunting… 7

Clearstream, 11 June 2010 Pace of change… Pace Of Change ‘70 ‘80 ‘90 ‘00 2010… 8

Clearstream, 11 June 2010 Features of our industry today Oversupply n Price driven competition n High degree of self-manufacturing n Limited loyalty value in relationships n Suppliers bear cost of regulatory compliance n Bundled fees prevail n 9

Clearstream, 11 June 2010 What are the features of our industry, today? Trend 1. Large number of suppliers at § Exchange layer all stages in the value chain… § CCP layer § CSD layer § Agent bank layer § G. Custodian layer (currently) 10

Clearstream, 11 June 2010 What are the features of our industry, today? 2. Competition is price driven… …Market leaders are driving price reductions… …Are we just in a constant fight to the death?... 11

Clearstream, 11 June 2010 What are the features of our industry, today? 3. Most suppliers “self-manufacture” their products… Over capacity in non-differentiated products No obvious scale advantages across the board Competitors trying to distinguish on the whole value chain, rather than where they truly can make a difference… 12

Clearstream, 11 June 2010 What are the features of our industry, today? 4. Most suppliers fail to leverage customer loyalty in their fee negotiations… l Clients want the best price l Pricing is “cost +”, not value based l Core products operate at a loss, compensated by “risky” satellite products 13

Clearstream, 11 June 2010 What are the features of our industry, today? 5. Cost of compliance with regulatory change is fully borne by… the supplier side… n Further pressure on margins… n Uncontrollable costs… n Unforeseeable costs… 14

Clearstream, 11 June 2010 What are the features of our industry, today? 6. Pricing is bundled and does not allow clients to tell us where they find added value in our services… Income CoAcs Risk Mgmt Insurance Service Reports reviews Client support Queries Rel. Mgmt 15

Clearstream, 11 June 2010 How does our industry compare with others?... Product Price Cost Margin Black coffee 1,00 0,75 0,25 Espresso 1,50 0,80 0,70 R 1,95 1,00 0,95 Cafe Latte G 2,50 1,05 1,45 V 3,25 1,10 2,15 R 2,50 1,05 1,45 Double shot G 3,00 1,10 1,90 V 3,75 1,15 2,60 16

Clearstream, 11 June 2010 How does the securities industry compare with the car industry of 20/30 years ago? Secs. Services Car industry Features (today) (20/30 years ago) 1. Large no. of suppliers � � at all stages in value chain � � 2. Price-driven competition 3. Self-manufacturing � � 4. Failing to leverage customer � � loyalty in fee negotiations 5. Cost of compliance fully ß � borne by supplier side 6. Price bundling not allowing � � customers to recognise value 17

Clearstream, 11 June 2010 How does the securities industry compare with the car industry of today? Secs. Services Car industry Features (today) (today) 1. Large no. of suppliers ß � at all stages in value chain ß � 2. Price-driven competition ß 3. Self-manufacturing � 4. Failing to leverage customer ß � loyalty in fee negotiations 5. Cost of compliance fully ß � borne by supplier side 6. Price bundling not allowing ß � customers to recognise value 18

Clearstream, 11 June 2010 How do buyers of cars display financially where they find added value?... Basic price € 45,000 + parking assistance… € 500 + rear side airbags… € 300 + navigation system… €2500 + heated front seats… €500 + wood interior trim… €250 + adaptive cruise control… €750 + B&O sound system… €2500 + iPod adapter… €300 + wireless cell phone link… €800 Total Price €53,400 19

Clearstream, 11 June 2010 Where is the profit in the car industry? Margin 20% 15% 8% 3% 0% Used cars Car Parts Component Manufacturing Retail financing wholesale manufacturing (vehicles only) (vehicles only) (ext. suppliers) Insurance Mechanical repair and body shop Agent Securities Customer Settlement + Custody Network Financing Service 20

Clearstream, 11 June 2010 Looking at a corporate action, today… “Example: US57632PAG54 – exchange offer” Aggregate cost: 480 Price Average cost: 60 Average 1 2 3 4 5 6 7 8 Suppliers 21

Clearstream, 11 June 2010 Looking at a corporate action… tomorrow? New co – “Global Corporate Action, S.A.” Price Aggregate cost: 80 Average cost: 80 Average cost to subscribers: 10 Average 1 Supplier Low price / High volume / Higher quality 22

Clearstream, 11 June 2010 In the car industry, how did the leaders differentiate themselves? Ford Car industry leaders of GM 30 /40 years ago competed on price and commodity products Chrysler Reality today is very different… Toyota BMW VW Quality / Driver Platform sharing Lean manufacturing Experience 23

Clearstream, 11 June 2010 Where next for Securities Servicing? (i) Fee compression Limited Excess Client Supply Our common Loyalty challenges Inability for Total Cost of clients to the whole express added supply chain value 24

Clearstream, 11 June 2010 Where next for Securities Servicing? (ii) n The “new normal” is not great news for the post trade business, but neither is there a consensus on what it is. n Other industries give us signals to guide our way n More consolidation along the supply chain (the rule of three) n Shared service centres n Some added value pricing, some cost-plus n Choose your niche . n We have been too focused on internal cost management n Market collaboration needs to improve for us to prosper. n Let’s compete where we are differentiated and stop fooling ourselves about where this is…. 25

Thank you Philip Brown Member of the Executive Board, Clearstream Banking Luxembourg