Clearing Services for Global Markets: A Framework for the Future Development of the Clearing Industry

Half-title......Page 3
Series-title......Page 5
Title......Page 7
Copyright......Page 8
Dedication......Page 9
Table of contents......Page 11
List of figures......Page 19
List of abbreviations......Page 25
Acknowledgements......Page 30
Forewords......Page 33
1 Introduction......Page 35
1.1 Problem definition......Page 36
1.2 Literature and research gap......Page 40
1.3 Purpose of study......Page 43
1.4 Focus area of research......Page 45
1.5 Structure of study......Page 47
2 Setting the stage – definitions and industry setting......Page 50
2.1 Definition of clearing......Page 51
2.1.1 Process view......Page 52
2.1.2 Functional view......Page 53
2.1.2.1.1 Trade confirmation......Page 54
2.1.2.1.2 Transactionposition management......Page 55
2.1.2.2 Value-added clearing services......Page 56
2.1.2.2.1 Unique CCP services......Page 57
2.1.2.2.2 Collateral management......Page 65
2.1.2.3 Complementary clearing services......Page 66
2.1.3 Structural view......Page 67
2.1.3.1 Alternative execution venuesexchanges as clearing service providers......Page 69
2.1.3.2 CSDs and ICSDs as clearing service providers......Page 70
2.1.3.3 CCPs as clearing service providers......Page 71
2.1.3.4 Banksbrokers as clearing service providers......Page 72
2.1.4 Institutional view......Page 73
2.2.1 Microeconomic view......Page 75
2.2.2 Macroeconomic view......Page 78
2.2.2.1 Allocation of risk......Page 79
2.2.2.3 Market liquidity......Page 80
2.2.3 Asset class view......Page 81
2.3.1 Structure of the Value Provision Network......Page 84
2.3.2 Clearing member types......Page 86
2.4 Stakeholders in clearing......Page 91
2.5 Current clearing industry structures......Page 94
2.5.1 Europe......Page 96
2.5.2 United States......Page 100
2.5.3 Comparing Europe and the United States......Page 102
2.6 Summary......Page 104
3.1 Efficiency of derivatives clearing......Page 107
3.1.1 General efficiency criteria......Page 108
3.1.2 Operational efficiency and transaction cost theory......Page 110
3.2 Transaction costs of derivatives clearing......Page 113
3.2.1 Direct transaction costs......Page 116
3.2.1.1 Clearing house charges......Page 118
3.2.1.2 Service provider charges......Page 120
3.2.2.1 Cost of capital......Page 122
3.2.2.2 Risk management costs......Page 127
3.2.2.3 Information technology costs......Page 129
3.2.2.4 Back-office costs......Page 130
3.3 Network strategies......Page 133
3.3.1 Classification of network strategies......Page 134
3.3.1.1 Cross-margining agreements......Page 135
3.3.1.2 Clearing links......Page 137
3.3.1.4 Single central counterparty......Page 144
3.3.2 Overview of network initiatives from 1973 to 2006......Page 147
3.4 Summary......Page 151
4.1 Underlying data......Page 153
4.2 Method and process of data collection......Page 158
4.3 Structure of empirical study......Page 160
4.4 Data treatment and interpretation......Page 162
4.5 Quality of expert inquiry......Page 164
4.6 Summary on purpose and use of the empirical insights......Page 165
5 Analysing costs of derivatives clearing – transaction cost studies......Page 167
5.1 Findings from empirical study......Page 168
5.1.1 Relevance of clearing costs to clearing members......Page 169
5.1.1.1 Cost awareness......Page 170
5.1.1.2 Monitoring of all-in costs......Page 173
5.1.1.4 Ability to assess relevance of cost categories......Page 174
5.1.2 Direct versus indirect clearing costs......Page 175
5.1.2.1 Clearing members’ view......Page 176
5.1.3 Clearing members’ core cost drivers......Page 179
5.1.4.1 Direct costs......Page 184
5.1.4.2 Cost of capital......Page 185
5.1.4.3 Risk management costs......Page 187
5.1.4.5 Back-office costs......Page 188
5.2 Transaction cost analyses......Page 190
5.2.1 Clearing house fees......Page 191
5.2.2 Clearing houses’ volume discount schemes......Page 198
5.2.3 Total European clearing industry costs in 2005......Page 201
5.2.4 Clearing members’ average direct and indirect costs......Page 207
5.2.5 Clearing members’ unit costs......Page 209
5.2.7 Cost reduction scenarios for clearing members......Page 211
5.2.8 Non-clearing members’ perspectives......Page 219
5.2.9 Cost reduction scenarios for non-clearing members......Page 220
5.3.1 Findings from empirical study......Page 224
5.3.2 Transaction cost analyses – clearing members......Page 225
5.3.3 Transaction cost analyses – non-clearing members......Page 227
6.1 Demand-side scale effects......Page 229
6.1.1 Network effects......Page 231
6.1.1.1.1 First level network effects: product layer......Page 236
6.1.1.1.2 First level network effects: system layer......Page 241
6.1.1.2.1 Second level network effects: product layer......Page 244
6.1.1.2.2 Second level network effects: system layer......Page 245
6.1.1.3 Interrelation between CCP and GCM level network effects......Page 246
6.1.1.4 Spill-over effects of CCP and GCM level network effects......Page 248
6.1.2.1 Compatibility......Page 250
6.1.2.3 Starting problem......Page 252
6.1.2.4 Innovative ability and lock-in......Page 253
6.2 Supply-side scale effects......Page 254
6.2.1 Economies of scale......Page 257
6.2.2 Economies of scope......Page 260
6.2.3 Clearing houses’ cost structures......Page 262
6.2.4 Cost implications of scale and scope enlargements......Page 265
6.2.5 Preliminary conclusions......Page 268
6.3.1 Demand-side scale effects......Page 269
6.3.2 Supply-side scale effects......Page 271
7 What theory reveals – framework for efficiency analysis of network strategies......Page 273
7.1 Scale Impact Matrix......Page 276
7.1.1 Analysis of network strategies’ supply-side scale effects......Page 277
7.1.2.1 Impact on CCP and GCM level network sizes......Page 280
7.1.2.2 Network economic particularities......Page 281
7.1.2.2.2 Starting problem......Page 282
7.1.2.2.3 Lock-in......Page 285
7.1.2.2.4 Growth potential......Page 287
7.1.2.3 Potential for network effects......Page 288
7.1.2.4 Potential to internalise GCM level network effects......Page 290
7.1.2.5 Net positive network effects......Page 291
7.2.1 Transaction Cost Impact Matrix (TCIM)......Page 292
7.2.1.1 TCIM for regionally active clearing members......Page 295
7.2.1.2 TCIM for regionally-to-globally active clearing members......Page 297
7.2.1.3 TCIM for globally active clearing members......Page 299
7.2.2 Efficiency Impact Matrix......Page 301
7.3.1 BMIM for regionally active clearing members......Page 302
7.3.2 BMIM for regionally-to-globally active clearing members......Page 304
7.3.3 BMIM for globally active clearing members......Page 306
7.4 Preliminary findings – impact of network strategies on efficiency......Page 309
7.4.2 Transaction Cost Impact Matrix......Page 310
7.4.3 Efficiency Impact Matrix......Page 311
7.4.4 Business Model Impact Matrix......Page 312
7.4.5  Summary of impact......Page 313
8 Checking theory against reality – case studies of network strategies......Page 319
8.1 The clearing link study......Page 320
8.1.1.1 Cross-margining agreements: general benefits and constraints......Page 321
8.1.1.2 Clearing links: general benefits and constraints......Page 325
8.1.1.3 Suitability of clearing links to integrate European clearing......Page 330
8.1.2  Case study: Eurex Clearing and the Clearing Corporation......Page 334
8.1.2.1.1 Eurex Clearing......Page 335
8.1.2.1.2 The Clearing Corporation......Page 337
8.1.2.2 Background and objectives of the initiative......Page 340
8.1.2.3 Concept and structure of the initiative......Page 344
8.1.2.4 Status of the initiative......Page 346
8.1.2.5 Interviewees’ assessment of the case study......Page 347
8.1.2.6 Scale Impact Matrix......Page 349
8.1.2.6.1 Analysis of supply-side scale effects......Page 350
8.1.2.6.2 Analysis of demand-side scale effects......Page 353
8.1.2.6.3 Overview Scale Impact Matrix......Page 362
8.1.2.7.1 TCIM for regionally active clearing members......Page 364
8.1.2.7.2 TCIM for regionally-to-globally active clearing members......Page 366
8.1.2.7.3 TCIM for globally active clearing members......Page 368
8.1.2.7.4 Efficiency Impact Matrix......Page 370
8.1.2.8.1 BMIM for regionally active clearing members......Page 371
8.1.2.8.2 BMIM for regionally-to-globally active clearing members......Page 372
8.1.2.8.3 BMIM for globally active clearing members......Page 374
8.1.3 Summary of findings – impact of clearing links on efficiency......Page 376
8.1.3.1 Scale Impact Matrix......Page 377
8.1.3.4 Business Model Impact Matrix......Page 378
8.2 The merger study......Page 379
8.2.1 Case study: the London Clearing House and Clearnet......Page 380
8.2.1.1.1 The London Clearing House......Page 381
8.2.1.1.2 Clearnet......Page 383
8.2.1.2 Background and objectives of the initiative......Page 385
8.2.1.3 Concept and structure of the initiative......Page 388
8.2.1.4 Status of the initiative......Page 393
8.2.1.5 Interviewees’ assessment of the case study......Page 396
8.2.2.1 Scale Impact Matrix – supply-side scale effects......Page 404
8.2.2.2 Scale Impact Matrix – demand-side scale effects......Page 405
8.2.2.3 Transaction Cost Impact Matrix......Page 406
8.2.2.5 Business Model Impact Matrix......Page 407
8.3.1 Background and objectives of the initiative......Page 409
8.3.2 Findings from the empirical study......Page 411
8.3.2.1 Single European CCP: potential benefits and constraints......Page 412
8.3.2.2 Suitability of a single CCP to integrate European clearing......Page 417
8.3.3.1 Scale Impact Matrix – supply-side scale effects......Page 420
8.3.3.3 Transaction Cost Impact Matrix......Page 421
8.3.3.5 Business Model Impact Matrix......Page 422
8.4.1 Clearing links......Page 423
8.4.2 Mergers and acquisitions......Page 424
8.4.3 Single CCP......Page 425
9.1 Total European industry costs......Page 427
9.1.1 Efficiency impact of clearing links......Page 428
9.1.2 Efficiency impact of a single CCP......Page 429
9.2 European clearing members’ average costs......Page 432
9.2.1 Efficiency impact of clearing links......Page 433
9.2.2 Efficiency impact of a single CCP......Page 435
9.3.1 Total European industry costs......Page 437
9.3.2 European clearing members’ average costs......Page 438
10.1 Future development of the European clearing industry......Page 440
10.1.1 Recommendation for European derivatives clearing......Page 441
10.1.2 Application of findings to cash equities clearing......Page 447
10.1.3 Competitive dynamics in the European clearing industry......Page 448
10.1.4 Reconcilability of findings with the Code of Conduct......Page 450
10.1.5 Who should link to whom......Page 451
10.1.5.3 Lane concentration......Page 453
10.1.6 Structural changes in the Value Provision Network......Page 454
10.2 European clearing in a global context......Page 457
10.3.1 Future development of the European clearing industry......Page 458
10.3.2 European clearing in a global context......Page 461
11.1.1 Chapter 2 – Setting the stage – definitions and industry setting......Page 462
11.1.2 Chapter 3 – Defining the core issues – efficiency and network strategies......Page 463
11.1.4 Chapter 5 – Analysing costs of derivatives clearing – transaction cost studies......Page 464
11.1.5 Chapter 6 – Exploring theoretical basics – scale effects in clearing......Page 465
11.1.6 Chapter 7 – What theory reveals – framework for efficiency analysis of network strategies......Page 466
11.1.7 Chapter 8 – Checking theory against reality – case studies of network strategies......Page 467
11.1.8 Chapter 9 – Quantifying the efficiency impact – European network strategies......Page 468
11.2 Discussion and recommendations for future research......Page 469
Appendices......Page 475
Appendix 1 Matrix overview of clearing-related transaction costs (part I)......Page 477
Appendix 2 Matrix overview of clearing-related transaction costs (part II)......Page 479
Disclaimer......Page 480
Confidentiality and anonymity......Page 490
Part 1 Relevance of CCP clearing......Page 491
Glossary......Page 492
Part 3 Scale effect analysis......Page 504
Part 4 Case study analysis......Page 507
Glossary......Page 508
Part 5 Basic respondent information......Page 516
2. Transaction cost analysis......Page 519
5. Case studies of network strategies......Page 520
6. Future development of clearing and global outlook......Page 521
Appendix 6 Clearing house fees......Page 522
Appendix 7 Total European derivatives clearing costs in 2005......Page 524
European clearing links:......Page 529
Bibliography......Page 534
Index......Page 561