Results of 2010 Global Custodian Tri-Party Securities Financing Survey Published

The results of Global Custodian’s annual survey of Tri-Party Securities Financing have been published today. This year marks the 10th anniversary of the survey, which aims to measure the services received by clients of tri-party securities financing. Service providers participating in the survey were eligible for ratings on a regional basis for Europe, North America and Asia, as well as a Global basis.

The survey questionnaire covers six service areas (Costs, Servicing & Value-Added; Business Model; Collateral Optimization; Operational Efficiency; Operational Efficiency; Collateral Management & Monitoring; and Reporting & Communications) across 33 questions. Respondents rate their providers using a scale of 1 to 7, where 7 is excellent; 6, very good; 5, good; 4, satisfactory; 3, weak; 2, very weak; and 1, unacceptable. Average scores are weighted for scoring well in areas named as important in each service area by all respondents, and for the size and sophistication of the respondents themselves. To be Top Rated , providers must achieve a weighted average score that equals or betters the weighted average score of all providers in a region or in the survey as a whole. Commended status is a more subjective category and takes into consideration factors other than scores alone. Providers whose scores are well adrift of the overall survey average are Unrated .

In the survey, Euroclear manages to pull ahead of its arch rival Clearstream-something it has struggled to do in recent years-to take the lead in Europe, where it is overall score earns it Top Rated status along with Clearstream and SIX SIS. BNY Mellon and J.P. Morgan earn Commended ratings. The ability of the Brussels-based ICSD to raise its scores in roughly half the survey is especially impressive, given that that Euroclear entered the crisis of 2007-2008 with exactly the clientele that was hit hardest by the flight to quality in the securities financing markets: the global investment banks, one of which defaulted.

“We are delighted with the ratings we received this year from our clients and consider our first-place rank as a reflection of the quality relationships we have built with our clients,” said Olivier Grimonpont, Director and head of Collateral Services at Euroclear. “We ask for feedback and listen to what clients tell us they need, which enables us to deliver higher and higher quality services. The results this year are particularly gratifying after the difficult post-Lehman market conditions. We are pleased to see tri-party services back on track.”

However, Euroclear still trails both Clearstream and SIX SIS in one important area: costs, servicing & value-added. And although Clearstream comes in second place for Europe, Luxembourg-based ICSD can take unequivocal satisfaction from securing what is comfortably the highest score in the survey for its contribution to the development of the market. The last two years have been less than kind to all tri-party providers. Durations were reduced-largely to overnight-counterparties vanished, and collateral criteria became distinctly less generous. Alternative models, most obviously CCPs, are in vogue. As a result, providers are being forced to reinvent themselves. That said, certain service areas-cost finance, breadth of counterparties, range of collateral, market reach and collateral eligibility criteria-remain at the heart of the business, and they are areas where Clearstream clients have indicated a need for improvement.

For SIX SIS, its best scores come in areas where it would expect to do well: efficient margin calls, high levels of automation and straight through processing, and impressive operational staff. However, closer analysis shows that Swiss ICSD is still not winning plaudits for the quality and flexibility of its reporting-which was an issue last year-or for collateral management, monitoring and optimization. Although it scores well from an operational perspective (respondents admire not just the efficiency of margin calls, but the management of cash and fails, and the quality of asset-servicing), its returns on screening, selecting, mobilizing and valuing collateral are adrift of the market leaders.

In North America, Top Rated BNY Mellon earns the highest score of any provider in any region and maintains its pole position from 2009. However, the same cannot be said for its European clientele, who mark it drastically lower in that region, awarding the bank mere Commended status. It is a similar pattern suffered by BNY Mellon’s main rival, J.P. Morgan. In fact, scores from European respondents, who are less generous than their North American counterparts, drag down the global scores for both banks. Still respondents on award relationship managers both side of the Atlantic their highest accolades, and BNY Mellon continues to outscore its principal rival in three out of five questions and all but two service areas.

Nevertheless, J.P. Morgan still has the broadest reach of any provider in this survey. It is Commended in all three regions and globally. The bank made its biggest gains for reporting and communications, which was a problem area last year. Overall, North American clients are most pleased, and compared with its European base, J.P. Morgan fares slightly better in Asia, where it has pioneered domestic tri-party in Japan as well as Australia and is the only provider to be rated in the region. However, it can expect more competition in the near future as tri-party service providers expand. Like its main competitor, J.P. Morgan gets its highest scores for relationship management.

TABLE 1: League Tables

* Because responses were received for only one provider in this category, the global average was applied.

† Scores that are within 0.02 points of the Global Average are considered Top Rated.

Compared with 2009, survey response levels were up. This year, the survey attracted 201 responses in total, 175 of which were included in the final database, after making the customary excisions for error, duplication and affiliation. This is an increase of approximately 8.5% on a year ago. This is in keeping with the increased client levels indicated by participating service providers in our survey. Despite actions taken by most banks to deleverage, all five rated agents reported an increase in clients for both collateral providers and collateral takers. Additionally, the main tri-party agents active in Europe have mostly reported increased business (see Table 2) this year. According them, these clients are focusing more closely on the risk management of their various activities. They are concerned with accurate and effective collateralization of all types of exposures as well as a wider range of asset classes.

* Figure translated from Euros at a rate of €1.44

1 Global Custodian estimate calculated by adjusting downwards the 2010 figure by 9%, which was the average decline experienced by all providers in the survey that year.

2 Global Custodian estimate calculated by adjusting downwards the 2009 figure by 28% and the 2010 figure by 9%, which was in both cases the average decline experienced by all providers in the survey that year. BNY Mellon no longer breaks down total outstandings into international and domestic components (the last figure provided $310.0 billion for 2008), but publishes only a global figure for average outstandings, which was $1.5 trillion in 2010.

3 Clearstream says another $501.6 billion is held in Clearstream Banking Frankfurt, up from $287.2 billion in 2009.

4 Euroclear says it has another $469.4 billion is handled by the Crest DBV system in the United Kingdom, up from $352.0 billion in 2009.

5 J.P. Morgan says its daily tri-party outstandings in the United States are $305.5 billion, down from $600.0 billion in 2009.

6 Figure translated from Swiss Francs at a rate of $1.03. SIS has another $92.0 billion in domestic tri-party, up from $91.2 billion in 2009.

The results of our survey come at a time of change and recovery in the industry. As counterparties increasingly look to mitigate counterparty and credit risk, they are moving away from unsecured markets. As such, the tri-party repo market will most certainly expand in scope as an important source of liquidity.

To see the full survey results, subscribers to GlobalCustodian.com should click here.