1. technology and computing

Securities Services
Where do we go from here?
Phil Brown, Clearstream
CEE Summit 2015, Bratislava
CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
What has characterised the business
environment in the last 15 years?
– Rapid development of
new giants
– Rapid death of
established companies
– Size and success today
is not a guarantee of
survival tomorrow
26 May 2015
2
CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
The digital disruption developed giants in a
minimum of time and showed financial
opportunities of the digital age …
Number of clients in Germany
Market capitalization, in EUR m
370
50
1
40
30
20
178
233
48
2
10
69
Year of establishment 1870
1994
1 Calculated from 94% market share for search requests and 55 m internet clients in Germany
2 Less than 10m Germans purchase regularly by auction on the internet
Source: Statista, Bloomberg Business
1995
1998
2004
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
… but disruptions of all kinds also have the
potential to bankrupt market-leading firms
quickly and brutally
Detailed further
Technology
=
Technology
=
Technology
=
Technology
=
Regulatory change
=
Source: Press, company website
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Example: entire industries have been
reshaped through external shocks –
example; digitisation in the media industry
Winners
Laggards
-5% p.a.
Music – iTunes
and Spotify
significantly
disrupt industry
structure
(worldwide
recorded-music
revenues, USD
billions)
+13% p.a.
20.5
19.0
Print media:
online
propositions
are only
growing market
segment
(newspaper
advertising
revenues in the
US, USD billions)
2008
16.0
2009
15.4
5.2
4.8
4.6
4.2
3.2
2007
17.5
2010
iTunes revenue grew 55% in 2012
(USD 4.2 - 6.0 bn)
▪
Spotify subscription revenue rose
562% (~ USD10 - 60 m) in 2010
▪
Hollywood Video closed all 1,900+
stores in 2010
▪
MailOnline is growing at 20% every
month with over 100 m users in
January 2014
▪
Zinio revenue doubled to USD 20 m
from 2007 to 2010
▪
Borders profits declined USD 1 bn from
2006 to 2010, going bankrupt in 2011
2011
-7% p.a.
45.4
+9% p.a.
37.8
27.6
3.2
2007
3.1
2008
25.8
2.7
2009
23.9
3.0
2010
3.2
2011
Source: BookStats, 2012; Association of American publishers; Newspaper Association of America; Enders analysis
Industry
▪
Digital
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Has the banking industry already been
disrupted, or “is all this just cyclical”?
‒ Retail banking under severe profitability pressure
‒ FX and Securities Lending decimated
‒ Material increase in liability (AIFMD / UCITS V)
‒ Continued core fee compression
‒ Constant regulatory change agenda – squeezing the returns
out of investment banking
‒ Sell-side shrinking rapidly
Are we just so
“medicated” by
the postLehman world
that we haven’t
noticed the
disruption, or
do we just
believe that
what is actually
structural may
be cyclical?
‒ Buy-side consolidating
‒ In the global custody business, the great revenue explosion
from demographics still hasn’t arrived
‒ Disintermediation is driving even more profit out of the
industry (Alibaba, ETFs)
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
New players aggressively enter the
financial services industry
Alibaba is China’s
largest e-Commerce
site
Alipay online
payments accounts
for ~ 50% of all online
payment transactions
in China
Yu'E Bao online
money market fund
platform now has
USD 81 billion assets
under management,
making it the 4th
largest money market
fund in the world
In 2014, applied for a
banking license to
participate in other
areas of business
Source: Company web sites, press research
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Let’s take a “glass half full view”
We’re all still here ….
Earnings are returning slowly
No exits from the business in
recent times
We’re popular within our firms because
we don’t consume much capital
Clients are sticky because they “trust” us
All true – but what could
change this orthodoxy?
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Disruptors in securities services –
T2S as an imminent disrupter
Short term
T2S
Compliance
Medium term
FinTech
Blockchains
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Leveraged correctly, T2S can lead to significant
capital, funding and operating cost savings
New settlement landscape, combined
with…
Bank / global custodian
Agent
CSD(s)
Agent Agent
T2S
CSD CSD CSD CSD
NCB account
– Harmonisation of
markets
– Consolidation of
cash, securities and
collateral
– Improved
settlement netting
– Single platform
… consolidated access via a single provider
– Delayering settlement-related exposures
– Pooling collateral for settlement and
triparty purposes
– Netting more cash settlements
– Simplifying operations
Significant capital, funding and
operating cost savings
Scenario
Potential
savings, EURm
BrokerDealer
EUR 100 billion
trading assets and
liabilities across
major T2S markets
Global
Custodian
EUR 400 billion in
assets under
custody across
major T2S
Regional
Bank
EUR 140 billion in
securities deposits
across major T2S
markets
70
50
30
Depending on their operating model and business, market participants
can realise savings when accessing T2S via the right partner
Source: Clearstream/Oliver Wyman 10.09.14 study
“The T2S Opportunity – Unlocking the hidden benefits of TARGET2-Securities”
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
My predictions for Europe after T2S
‒ Large fee reductions for high volume
(note – not high value) banks
‒ Higher CSD fees across Europe for safekeeping
– the trend has begun
‒ Rapid consolidation onto few CSDs and
agent banks
‒ Collateral optimisation will be a critical decision
factor in network management
‒ With capital markets union (CMU), further
consolidation of clients into fewer infrastructures
‒ Significant surprises in network costs, as
the new T2S pricing structures start to emerge,
and are experienced in practice
‒ We will look back on T2S as a highly
disruptive event, with implications beyond Europe
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Disruptors in securities services –
compliance is a potential disruptor,
unless the industry acts
Short term
T2S
Compliance
Medium term
FinTech
Blockchains
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
The omnibus model – the model on which
our whole industry is largely based
Omnibus model as basis of our industry …
– Based on a clear distinction between
beneficial and legal ownership
– The practice of commingling fungible
interests brings benefits to the market
and to end investors because it creates
large economies of scale, low
transactional costs and promotes a
degree of liquidity and mobility of
securities and collateral that has become
a cornerstone of market stability
– To achieve that, the global system
intermediates many players into
securities custody transforming the legal
ownership of securities interests multiple
times
… however
– The omnibus model reduces
transparency by substituting a
record of the end investor’s
identity for a record of the
custodian’s or the broker’s identity
– Commingling client assets
exposes custodians and their subcustodians/depositories to
significantly higher conduct risk
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
FinCEN and the CFTC issued almost identical
guidance in the past – but times are changing
2014
2003
“With respect to an omnibus account
established by an intermediary, a
broker dealer is not required to look
through the intermediary to the
underlying beneficial owners, if the
intermediary is identified as the
accountholder.”
FinCEN and the SEC, May 2003
“When broker-dealers have information
regarding a financial intermediary’s
underlying customers, they should treat
the holder of the omnibus account – as the
sole “customer” for purposes of the
customer identification program rule”
US Treasury and the SEC, October 2003
Source: SEC, US treasury, FinCEN
“Today’s action should serve as a clear alert to
firms operating in the securities industry that
they need to be vigilant with respect to
dealings with sanctioned parties, and that
omnibus and custody accounts require
scrutiny to ensure compliance with relevant
sanctions laws.»
OFAC Director, Adam Szubin 23 Jan 2014
“(The Bank) was obligated under federal law
to investigate customer activity on a risk basis:
omnibus accounts transacting in higher risk
activity, such as suspicious penny stock
transactions, merited additional scrutiny.”
FINRA Letter of Acceptance, Waiver and
Consent, 2 April 2014
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
ISSA compliance principles
The principles provide market participants with
practical guidance on the question of
transparency of ownership and control in
intermediated securities custody arrangements
The compliance principles are intended to cover
conduct risks in general including measures to
counter money laundering, terrorist
financing, market abuse, corruption, fraud
and the evasion of sanctions
The principles are designed to become the
securities equivalent of the Wolfsberg
Correspondent Banking principles
Source: ISSA
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Disruptors in securities services –
FinTech companies as new competitors
Short term
T2S
Compliance
Medium term
FinTech
Blockchains
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
FinTech start-ups are increasingly emerging
which have the potential to put traditional
financial services business at risk
12,000+
FinTech startups on the
market today
26 May 2015
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ESTIMATES
CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
So far payments dominate the FinTech
innovation landscape
McKinsey Panorama FinTech Landscape, # of startups
and innovations as % of database total1
Share of global
banking revenues
<5%
25%
5%-7.5%
13%
7.5%-10%
14%
Customer
segments
>10%
10%
4%
12%
…%
Retail
# of startups and
innovations as %
of database total1
9%
Commercial2
2%
3%
6%
1%
Large
corporate3
2%
Products/
capabilities
1 350+ commercially most well-known cases registered in the database, might not be fully representative
Source: McKinsey
2 Includes Small-, and Medium Enterprises
3 Including Large corporates, Public Entities and Non-banking financial institutions
4 Includes Investment Banking, Sales and Trading, Securities services, retail investment, Non-CA deposits and asset management fact
5 Revenue share includes C/A deposit revenue
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Example: Earthport/Ripple partnership has
potential to disrupt international payments
Sending
customer
Network Liquidity
across currencies
Ripple leverages its
pioneering protocol to
send the payment
messages.
Earthport ensures
liquidity across its
strategic global network
to settle the payment.
Path finding algorithm
automatically matches
the payment with the
best-possible FX.
It also relies on it’s
well laid processes
to ensure robust
standards of
compliance.
Source: Company websites, press
Receiving
customer
Ripple also
undertakes the
clearing of the
payment on a
near real time
basis.
Comments
– Potential to replace several
banks performing clearing,
settlement, FX, messaging.
– Where exchange parties agree,
Ripple could potentially
complete transaction in
2 to 6 seconds.
– ‘Cost’ of transaction is
negligible, even compared with
existing Bitcoin exchange fees.
– Similar to digital currencies,
transactions across Ripple
network cannot be revoked.
– Legal requirements are
satisfied by Gateway operators
in their own local jurisdiction.
– Big question on regulation
of Ripple and comparable
players remain.
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
FX has shown multi-bank platforms have
capability to disrupt the market
Successful multi-bank platforms …
– Execution edge/technology focussed
– 2/3 of staff in technology
… have captured corporate treasurers
wallet share
MNCs
~90
Why should I
use single
bank platforms
~10
anymore
– Buy-side customers in 90 countries
Mid-Corps
– Over 400 currency pairs
– More than 1,300 institutional clients
globally
– 150 market makers in all currency
pairs
~75
~25
– First multi-bank network in 2000
– More than 150 liquidity providers
– 55 providers connected to platform
– 23 out of 25 top investment
managers use FX Connect
Source: Company web sites; press; expert interviews
Use single
dealer, single
bank
platforms
Use multi-bank
or 3rd party
execution
platforms
We need to get
a minimum of 3
quotes to meet
our ‘best
execution’
guidelines
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Disruptors in securities services –
blockchains with potential to alter the
entire industry
Short term
T2S
Compliance
Medium term
FinTech
Blockchains
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
What is a blockchain?
‒ Public ledger recording transactions in a digital currency and keeping
that history forever (e.g.. Bitcoin. Litecoan. etc).
‒ Maintained by a network of communicating computer nodes
running blockchain software in exchange for value (mining).
March 1, 2015
12:34:16
‒ Relies on network nodes to validate each transaction and add it to
their copy of the ledger.
‒ Receives details of transactions from one username to another and
stores that ownership data forever in a pseudonymous way.
‒ A distributed database with copies on each network node can
independently verify the chain of ownership of every digital ‘coin’.
‒ Comprises groups of newly accepted transactions (‘blocks’) which
are created periodically (e.g. approx. every 10 minutes for Bitcoin)
and added to the blockchain for distribution to all nodes.
‒ Relies on multiple independent verifications to determine when a
particular coin amount has been spent in order to avoid double
spending.
‒ The only place where digital coins can exist and therefore be
associated with a dynamic record of ownership.
Blockchain
Solves the
Byzantine
Generals
dilemma …
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Blockchains are well suited for all kinds
of applications and have the potential to
disrupt the way we work
How we work today … might be changed through the capabilities of a blockchain
Electronification of a
centuries old process
Proof of existence
Notary services
–
–
Based on “Trusted
Third Parties”
Paper ledgers replaced
with electronic ledgers
Secure records
A tiered structure of
bookkeeping
–
Bookkeeping is isolated
from the public
Smart contracts
–
–
–
E.g., documents,
music copyrights
licenses
E.g., Private records
– Medical records
Public records
– Birth register
E.g., financial
instruments
Semi-autonomous
corporations
E.g., permanent
time and date stamp
– Voting
– Patents
March 1, 2015
12:34:16
Physical asset log
–
–
E.g., deeds/
ownership
Digital keys, etc.
Ownership splits
–
Blockchain
–
Corporate
stock shares
Gold ownership
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Does what blockchain achieve sound very
different from the work we all do in
securities services?
Blockchain enables the transfer of information
between two or more addresses within a
network
The information transferred is trusted, digitally
signed and decentralized processed
There is no need for the intermediation of any
single, central authority (no central third party) for
a transaction verification, since the maintenance of
the ledger is performed by a network of
communicating nodes (peer-to-peer network)
running dedicated software
Investors are taking it seriously –
by end Q1 this year, venture
capital companies had invested
over USD 500 million in
blockchain firms and
technology
One application of blockchain technology is the
Bitcoin – which is not just a currency – it is a store
of value – properties can be assigned to bitcoins
units to enable them to be used for specific
purposes
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Originally created for payment infrastructures,
Blockchain use cases are now expanded to
transaction infrastructures and smart transactions …
Continuous growth and extension of Blockchain Technology
– Main use case: Cryptocurrencies
Payment
infrastructure
Transaction
infrastructure
SMART transaction
structure
– Fixed amount of tokens are locked into an
account2
– The account is linked to a certain collateral
– Token value is determined by collateral
– This goes beyond simple position keeping
– Tokens can receive special properties or can
be programmed
– Transactions can become smart (selfenforcing; “if-conditions”)!
Multiple use cases being
developed
1 Epiphyte specialises in distributed ledger solutions for the mainstream financial system with the broader goal of connecting banking
networks with cryptocurrency networks
2 Bitcoin transactions are sent from and to electronic bitcoin accounts, and are digitally signed for security. Each account contains a
public address and a private key to sign transactions.
“Blockchain
technology will not
only change the
way we do
payments, but it will
change the whole
trading and
settlement topic“
Oliver Bussmann,
Group CIO, UBS
“Blockchain is doing
to transactions what
the internet did to
information. The
question now is who
becomes the
Google or
Facebook of the
transaction
universe.”
Edan Yago, CEO
of Epiphyte1
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
… driven by technological evolution and a
truly global marketplace for virtual assets
Exchange of
goods
Hand to hand
Local
Exchange of
coins
Exchange of
notes
Confirmation of
transactions by
a trusted third
party
Trading infrastructure
Confirmation of
transactions by
a trusted third
party
Confirmation of
transactions by
a trusted
network
Blockchain
Regional
Global
Internet
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Our business model might have to change
drastically
New state of asset distribution challenges established
processes of the industry
Current state of asset distribution
Multiple
Transaction Systems
Trading
Settlement
Clearing
Backends
Trading
Multiple
Transaction Systems
Entities/Users
Settlement
–
–
–
Entities and customers are not able to communicate with
one another directly
Entities and customers rely on trusted third parties to
verify transactions
– Issuers create assets
– Assets are created and kept in custody
– Ownership rights are transferred onto customer account
Trading, Clearing and Settlement are separately processed
with different transaction systems and technical
infrastructure leading to high integration efforts on both
customer and market infrastructure side
exchange
Information &
data exchange
Communication
between entities
and customers
via Blockchain
Information
& data
Clearing
Blockchain pipeline
Entities/Users
Multiple
Transaction Systems
Information &
data exchange
–
–
Customers can interact directly P2P using the
Blockchain pipeline transmitting value units (e.g.
security assets) which are unique and traceable.
The ownership of any type of asset existing on the
Blockchain can be sent without any other need of a
trusted 3rd party
Potential to radically change how transactions will be
conducted – major loss of banking system revenue base
could occur, if the transformation to a financial system
without intermediaries became successful
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Where, then, are we going?
‒ Disruption, in one form or another, is inevitable
‒ Arguably, disruption has already occurred, and we just cannot see
the woods for the trees
‒ Even with the existing changes, “you ain’t seen nothing yet”
‒ We have the opportunity to adapt for this disruption now, like we
are already doing for T2S
‒ In the compliance space, unless we work together, we risk
irreparably damaging our securities ecosystem, to the detriment
of us, our clients, and the end investor. This is why the ISSA initiative
is so critical
‒ Technology already exists that could massively disrupt our
businesses – but it has some material failings that we can work
together to resolve
‒ By engaging in this resolution, we can create meaningful roles for
our industry in this new constellation, but blind ignorance is not an
option
26 May 2015
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CEE Summit 2015, Bratislava
Securities Services - where do we go from here?
Example: Netflix outperformed Blockbuster
by setting a transformational vision much
earlier and executing against it
Bought
Shutdown
Online DVD
subscription
launched
1997
2004
Established
online DVD
rental
Source: Press, company website
Filed for
bankruptcy
2005
2006
2007
Focused on
video-ondemand
2008
2009
Partnered to
stream content
to consumer
devices
2010
Acquired
2011
Adopted fast
follower
approach but
failed to keep
up
2012
30m sub- Produces Revolutionised
scribers original TV DVD
distribution,
content
video
streaming and
now content
production
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