The second session on securities market infrastructures at Sibos addressed the cost of securities settlement amidst an ever-changing regulatory landscape characterized by low transaction volumes and CCP netting.
Against this backdrop, Global Custodian editor-in-chief and panel moderator Dominic Hobson asked panelists from the custodian, broker-dealer and infrastructure community for their thoughts on whether transaction volumes would rise. Robert Scharfe, CEO, Luxembourg Stock Exchange, gave an upbeat view of the landscape from the Grand Duchy.
We have 45,000 stocks listed for trading, he said. Trading volumes may not come back any time soon but OTC derivatives on exchange can create more volumes.
Goran Fors, head of Global Transaction Services at SEB, described the reduction in volumes as damaging. They wont come back in the future, he said.
Christopher Flanagan, co-chief administrative officer for Asia ex-Japan, Nomura, commented on the outlook for Asia: For broker-dealers, investment bank margins are going down. Our exchange and custodian customers want lower commissions. Asia is the bright spot. It will provide customers for us all.
Panelists addressed the lack of harmonization among market infrastructures. Providing the Asian perspective, Flanagan said: Asia is a different location with different capital markets in each location. Im hopeful that stage by stage things will improve and the liquidity will move forward with an opportunity for new exchanges.
Scharfe commented: The role of exchanges has been changing for some time under MiFID, leading to more competition in terms of OTFs and MTFs. Exchanges have a pubic institutional role. Instead of cherry picking, they need to cover the full range of securities. Luxembourg is flexible here.
Fors noted that while he does not yet see competition among CSDs in Europe, the environment in Europe is changing in terms of how CSDs operate. In ten years, the custody part of the business will be much closer to what CSDs do.
CSDs today have been trying to be an issuer and an investor CSD, Fors continued. Why do we have four separate infrastructures, and there are also MTFs and dark pools? Consolidation will happen. We have to pay more to CSDs, but consolidation will link up markets.
Commenting on what is good and bad about CCPs, Flanagan said: For broker-dealers, OTC for CCPs is a good thing from a risk-reduction point of view. Operation and overhead costs lower our margin. There are potential margin enhancements through lower costs.
Scharfe added: A higher degree of standardization in terms of automation leads to lower costs in the funds industry. We want distribution to be standardized.
Panelists addressed the question of whether market infrastructures should be user-owned or user-governed, and whether this would make transactions cheaper.
There is a preference for a competitive environment, which drives price, said Flanagan. There are vertical and horizontal preferences for infrastructures in Asia. It differs from country to country as each is at a different stage of development.
Scharfe said: If we hook up we get the benefits of competition and a utility. A utility that is not market owned is like a plane without a pilot. We need to justify the investment.
Panelists commented on how OTC derivatives regulation and T2S would drive further consolidation and harmonization among market infrastructures.
On the former, Flanagan said: Exchanges need to reinvent themselves as broker-dealers adapt to funds and OTFs. Some already have reporting tools.
Where does the custody business go in a T2S environment and increased regulatory change? Global custody demands will increase as they take on more risk for beneficial owners, said Fors. We need to see change on how we price things. Sub-custody will change in ten years. Well handle more of the complicated asset servicing, particularly with FATCA coming on stream.
Janet Du Chenne