Secondly, clearing house charges constitute the basisfor the subsequent analyses, such as the estimate of total European clearingindustry costs section 5.2.3,61which in turn allows for c
Trang 1r assessment of clearing members’ average direct and indirect costs
(sec-tion 5.2.4);
r analysis of clearing members’ unit costs (section 5.2.5);
r benchmarking of derivatives clearing versus other market infrastructure
costs (section 5.2.6);
r identification of cost reduction scenarios for clearing members
(sec-tion 5.2.7);
r presentation of non-clearing members’ perspectives (section 5.2.8); and
r introduction of cost reduction scenarios for non-clearing members
(section 5.2.9)
5.2.1 Clearing house fees
The comparison of clearing house fees is valuable for different reasons Firstly,the previous section showed that as the core driver of clearing costs, clearinghouse fees have great relevance for high volume clearing members with a prop.focus; but the fees ultimately represent an important cost component for allclearing member types Secondly, clearing house charges constitute the basisfor the subsequent analyses, such as the estimate of total European clearingindustry costs (section 5.2.3),61which in turn allows for conclusions on theaverage direct and indirect costs of the various low, medium and high volumeclearing member types (section 5.2.4) and their unit costs (section 5.2.5).For the comparison of per-contract fees, the major European clearinghouses (Eurex Clearing, LCH.Clearnet, OMX Clearing, MEFF and CC&G)were chosen to constitute the peer group to be benchmarked against the twolargest US derivatives clearing houses, the CME and the OCC For the pur-pose of this analysis, fees are not compared on a per-contract basis, but withreference to a hedged amount of €500,000 The fee levels presented in thefollowing thus signify the charges for a single derivatives transaction worth
€500,000.62The reference date for the analysis was 29 September 2006.63
61 Clearing house charges constitute the only publicly available information on the transaction costs of derivatives clearing As interviewees refused to provide quantitative details on their direct and indirect costs, any further cost calculation must therefore be based on publicly available data.
62 This type of analysis facilitates the comparison of the per-contract fees charged by clearing houses by equalising the different contract values Although it can be assumed that the contract value is at least to some extent reflected in the fee levels set by clearing houses, a comparison of per-contract fees runs the risk of yielding incommensurable results.
63 29 September 2006 thus served as the reference date for exchange rates and the value of the respective underlying.
Trang 2The fee levels of three different product groups, i.e equity, equityindex and interest rate products, are compared For each product group,benchmark products were chosen according to comparability and volumewithin the respective product group In other words, whenever possible, theproducts with the highest number of contracts cleared were selected as bench-mark products.64 The fees specified have been rounded down or up to thenearest integral number.65Comparing clearing fees is problematic when all-
in fees (comprising trading and clearing fees) are charged by clearing houses
or exchanges As this is indeed the case for Eurex Clearing and OMX,66 thefollowing workaround was implemented: in order to ensure comparabilitywith the fee levels of Eurex Clearing and OMX, trading fees were included
in the analysis Whereas the OMX fees thus represent the combined chargesfor trading and clearing, an artificial fee split was developed to separate thetrading and clearing components out of the all-in fees charged by Eurex.67Despite the inclusion of trading fees, the focus of the analysis is on the feescharged by clearing houses Note that whenever reference is made to Eurex’sclearing fee in the following analysis, this fee represents an artificial estimate.Should Eurex decide to separate its combined fee into trading and clearingcomponents at any point in the future, it must be assumed that this will result
in entirely different clearing fees For a comprehensive overview of all fees anddetails on the calculation, refer to Appendix 6 Following a brief description
of the benchmark analysis of equity, equity index and interest rate fees, thefindings are summarised and interpreted
64 Based on the assumption that the highest volume products enjoy the most competitive pricing and are thus best suited for a benchmark analysis, they were selected as benchmark products when- ever possible For the purpose of this analysis, the results of the comparison of benchmark prod- ucts are generalised according to the respective product category It should be taken into account that this generalisation of results might not be applicable to all products within a specific product category.
65 Decimal places 0.1 to 0.4 were rounded down; decimal places 0.5 to 0.9 were rounded up.
66 Furthermore, OneChicago charges all-in fees for single stock futures and Euronext.liffe charged an all-in fee for equity derivatives traded on the Amsterdam market and cleared through LCH.Clearnet until November 2006 Since then, Euronext.liffe and LCH.Clearnet have charged separate trading and clearing fees.
67 Eurex and the Clearing Corporation planned to charge a link fee of €0.05 for the clearing of the Eurex’s CFTC-approved euro-denominated products The average transaction fee for these products is approximately €0.30 It is assumed that the value of the link fee approximately resembles the stand-alone value of Eurex’s clearing service For the purpose of this analysis, the clearing and trading fees are thus assumed to be equivalent to 17 and 83 per cent of the all-in fee, respectively Note that this calculation serves the purpose of approximation only The average transaction fee of €0.30 includes both a trading and a clearing fee component Calculating the exact fee split would thus require taking this factor into account.
Trang 3200 250 300 350 1,000
No of cleared contracts in m Fees in EUR
No of contracts cleared in benchmark product in 2005
Hedged Amount: 500,000 / Reference Date: 29 September 2006
Eurex
24 36
OMX
91 200
Figure 5.8 Clearing and trading fees for €500,000 hedge in equity options or equity futures 68
Source: Author’s own; based on clearing houses’ published fee schedules.
Figure 5.8provides an overview of clearing and trading fees for a€500,000hedge in individual equity options or single stock futures The left axis displaysthe respective fees charged for the transaction in euros The right axis refers
to the number of cleared contracts in millions of contracts, i.e the volume
of individual equity options and single stock futures cleared through therespective clearing house in 2005.69 The sequence of the clearing houses
as presented in the figure is sorted by these cleared volumes The volume
68 Single stock futures traded on OneChicago can be cleared at the CME or OCC Whilst OneChicago charges all-in fees for single stock futures, the assumed fee split is artificial and based on estimates from expert interviews.
69 The volume of cleared products is exhibited on an annual basis rather than on a monthly basis because clearing houses are more likely regularly to review their pricing structure with reference to annual figures rather than to any short-term data.
Trang 4information is included in the analysis to evaluate whether or not clearinghouses tend to translate higher volumes in benchmark products into lowerfees.70
A comparison of the trading and clearing fees charged for a €500,000hedge in individual equity derivatives reveals that trading fees are generallyhigher than clearing fees The significant variation of total fees within thepeer group is largely due to the different trading fees charged by the exchangesrather than to substantial differences in clearing house fees The clearing of theequity options hedge is cheapest at the OCC and Eurex Clearing (ECAG), withthe OCC charging approximately€3 and ECAG claiming €4 At €9, MEFF’sare roughly twice as high as ECAG’s clearing fees; at€12, CC&G charges aretriple their fee At the reference date, LCH.Clearnet’s clearing fees were at
a non-competitive level, with€24 charged for the hedge On 27 September
2006, the firm announced a reduction of these clearing fees as of January
2007,71resulting in charges that were more in line with those of its peers (i.e
€6 for the hedge in equity options)
For the hedge in single stock futures, Eurex Clearing, LCH.Clearnet and theCME/OCC each charge clearing fees of roughly€6, while MEFF charges €9and CC&G€13 It is apparent that OMX charges the highest all-in fees for bothequity options and single stock futures Whereas its charges for equity optionsare on a par with the combined trading and ‘old’ clearing fees charged byEuronext.liffe and LCH.Clearnet, fees charged for single stock futures appear
to be extraordinarily high At€200, its fees are roughly three times higherthan those charged by CC&G and IDEM (the Italian derivatives exchange)
as well as fourteen times higher than OneChicago’s combined clearing andtrading fees
Figure 5.9exhibits clearing and trading fees for a€500,000 hedge in indexoptions or index futures.72Clearing the hedge in index options is cheapest inthe US; the OCC charges 13 cents In Europe, LCH.Clearnet offers the mostcompetitive rate at 25 cents Eurex Clearing charges more than twice as much,i.e 65 cents for the hedge in index options Lastly, CC&G charges€1.56 forclearing services
70 This helps to provide first evidence of the existence of economies of scale on the part of the clearing houses Note that a final conclusion on this issue is not possible without taking into account the production costs of clearing houses A more detailed analysis of clearing house production costs and the existence of economies of scale is provided in Chapter 6
71 Cf LCH.Clearnet (ed.) (27.09.2006).
72 Refer to Appendix 6 for details on which products were chosen for the benchmark analysis.
Trang 5No of cleared contracts in m Fees in EUR
Hedged Amount: 500,000 / Reference Date: 29 September 2006
No of contracts cleared in benchmark product in 2005
Figure 5.9 Clearing and trading fees for €500,000 hedge in index options or index futures
Source: Author’s own; based on clearing houses’ published fee schedules.
An analysis of the fees for the hedge in index futures reveals that clearing ischeapest in Europe, with 25 cents charged by LCH.Clearnet The CME charges
30 cents for clearing the hedge, Eurex Clearing and CC&G both demand
65 cents and MEFF asks€2.50 The combined trading and clearing fees charged
by OMX are again well above the levels charged by its peer group, with€17charged for both the hedge in index options or index futures
Finally, the fees charged for a€500,000 hedge in interest rate futures arecompared.Figure 5.10provides an overview of relevant fees for cash settledand physically delivered interest rate futures.73 The analysis shows that theclearing of physically delivered interest rate products is cheapest in Europe,with Eurex Clearing charging 17 cents for the€500,000 hedge At 30 cents, the
73 Refer to Appendix 6 for details on which products were chosen for the benchmark analysis.
Trang 6No of cleared contracts in m Fees in EUR
Interest rate futures (phys.) clearing fees Interest rate futures (cash) clearing fees
Interest rate futures (phys.) trading fees Interest rate futures (cash) trading fees
No of contracts cleared in benchmark product in 2005
Hedged Amount: 500,000 / Reference Date: 29 September 2006
Figure 5.10 Clearing and trading fees for €500,000 hedge in interest rate futures
Source: Author’s own; based on clearing houses’ published fee schedules.
CME charges almost twice as much for clearing the hedge in T-bond futures;MEFF prices the clearing of its product at 75 cents.74Clearing the hedge incash settled interest rate derivatives is generally cheaper The cheapest feesare offered in Europe, with Eurex Clearing and LCH.Clearnet both charging
2 cents for the hedge The CME’s clearing fees are double the amount at
4 cents The all-in fees charged by OMX are above the combined trading andclearing fees of its peers; its fees for physically delivered interest rate futuresare roughly ten times higher than the fees charged by Eurex and roughly fourtimes higher than those charged by MEFF At€1.50, cash settled interest ratefutures are seven-and-a-half times more expensive than products traded atEuronext.liffe and cleared through LCH.Clearnet
74 The inclusion of MEFF’s product, the Bono 10, is for the purpose of enlarging the peer group only In
2005, not a single contract was traded in interest rate products at MEFF.
Trang 7To summarise, the benchmark analysis yielded a number of insights Firstly,trading fees are in all cases higher than clearing fees Secondly, the mosteconomical way to execute the hedge is in the form of interest rate derivatives.Hedging in index derivatives is more expensive, but hedging in individualequity derivatives is the most expensive of all.75 Further, the comparison offee levels charged by the different European and US clearing houses revealedthat with respect to four of the six benchmarked product types, Europeanclearing houses charged lower fees than their US counterparts However,
US clearing houses offer the lowest rates in equity options and index optionsclearing In fact, given the disparity between volumes cleared in the US incertain products, such as by the OCC in equity options and by the CME
in index futures, and the largest European CCPs, it is surprising that thedifference in fees is not greater It should be taken into account, however, that
it is common practice amongst American clearing houses to grant rebatesand/or (annual) discounts to certain clearing member types Such reductionswere not taken into account, which distorts any final conclusions
The analysis also serves to illuminate and provide a snapshot of the pricingstructure of the benchmarked clearing houses High volumes do not alwaysseem to translate into lower fees, suggesting that there is room for the reduction
of per-contract clearing fees Eurex Clearing offers competitive pricing for theclearing of equity options, single stock futures and interest rate derivatives.76Although the fee split is artificial, its fees for clearing index options andindex futures nonetheless appear to be too high.77 LCH.Clearnet’s fees forsingle stock futures, index derivatives and cash-settled interest rate productsare competitive.78 Despite the reduction in clearing fees for equity options,these charges still seem excessive.79Whereas the clearing fees charged by theCME and OCC for the clearing of single stock futures traded on OneChicago
75 These results are not surprising, because the pricing of derivatives is usually based on a per-contract level Due to the very high value of one interest rate contract as compared to one index, or individual equity contract, a smaller number of contracts is needed for hedging a certain amount in interest rate derivatives – which in turn results in lower fees charged for the transaction.
76 An analysis of combined trading and clearing fees, on the other hand, suggests that the all-in fees charged by Eurex could be lower for equity futures and physically delivered interest rate derivatives.
77 In index options, LCH.Clearnet charges half of Eurex’s clearing fees, although Eurex clears double the volume In index futures, Eurex’s clearing fee levels are equal to clearing fees charged by CC&G, albeit with a volume of cleared contracts that is roughly thirty-seven times higher.
78 An analysis of the combined trading and clearing fees indicates that the trading fees charged by Euronext.liffe for single stock futures could be lower.
79 With more volume cleared in equity options than Eurex, LCH.Clearnet’s new fee is still one-and-a-half times higher than that of Eurex There is room for improvement with regard to Euronext.liffe’s trading fee; despite volumes that are approximately twenty-two times higher than those of CC&G and IDEM, its all-in fees are merely 3 per cent lower.
Trang 8are competitive, the CME’s fees for clearing index futures and interest ratederivatives appear over-priced.80The fees charged by the OCC for individualequity and index options seem reasonable, but not remarkably so.81Takinginto account the comparatively low volumes cleared at MEFF and CC&G, bothclearing houses’ fees are generally at very competitive levels.82The combinedtrading and clearing fees charged by OMX for equity options and cash-settledinterest rate derivatives are relatively high, but within the scope of the peergroup However, the fees charged for single stock futures, index derivativesand physically delivered interest rate products are non-competitive.
Overall, the comparative analysis of per-contract fees charged by the majorhorizontally and vertically integrated European and US clearing houses pro-duced no clear winner in terms of the most competitive fee levels
5.2.2 Clearing houses’ volume discount schemes
As outlined above, the second focus of the cost analysis is on investigatingthe clearing houses’ volume discount schemes The purpose of the analysis is
to discover which clearing member types – i.e low, medium or high volumeclearers – receive preferential treatment from clearing houses; this servesfurther to explore particularities of the current structure of the ValueProvision Network
Not all clearing houses grant volume discounts, though.Figure 5.11fies which of the benchmarked clearing houses employ volume discounts, and
speci-in which product categories It also identifies the criterion used by the clearspeci-inghouse to determine the discounts When clearing houses utilise the ‘trade size’
as a criterion for discounts, this refers to the number of contracts per action Other criteria employed are volume thresholds, i.e a determination
trans-of the minimum number trans-of contracts cleared, either on a daily or monthlybasis Usually, volume discounts either translate into reduced per-transactionfees or fee caps.83
80 Even though CME’s cleared volumes of index futures are roughly seven times higher than those of LCH.Clearnet, CME’s clearing fee is still higher Taking the trading fees into account changes the result
of the analysis, though – CME’s combined trading and clearing fee for index futures is the cheapest rate offered The same applies to the all-in fees for interest rate products charged by CME; these are at very competitive levels.
81 At first sight, the fees charged for the clearing of equity options seem to be too high, because they are at roughly the same level as those charged by Eurex, albeit with five times higher volumes cleared at the OCC However, the OCC provides refunds, fee reductions and discounts to its members on an annual basis, which can ultimately lead to a significant reduction of the per-contract fee.
82 Taking the trading fees into account suggests that fees charged by IDEM for equity options and single stock futures could be lower in comparison with its peers.
83 Volume discounts can also be granted through annual refunds and discounts.
Trang 9YES
Daily Contracts
N.A.
NO NO
NO NO
Interest Rate
Futures
CRITERION:
N.A NO
NO NO
NO NO
YES
Monthly Contracts
NO NO
CC&G MEFF
OMX LCH.C
Figure 5.11 Clearing houses’ volume discounts in benchmark products, as of September 2006
Source: Author’s own; compilation based on clearing houses’ websites 84
The overview shows that except for ECAG and MEFF, all of the otherbenchmarked clearing houses employ volume discounts.85Volume discountsare granted for the clearing of equity options, single stock futures, indexoptions and interest rate future contracts None of the clearing houses applies
a volume-based discount scheme for index futures
Whether or not clearing members generally welcome the implementation
of discount schemes again depends on their perspective and business focus.Clearing members with a prop focus welcome any reduction in fees charged byclearing houses; members with an agency focus, however, are often dismissive
of such discounts, because the schemes tend to augment the complexity ofcalculating the fees charged to customers The need to monitor and trackdiscount levels translates into increased back-office costs
From a proprietary point of view, I quite like fee caps, because we always hit them But it doesn’t benefit me as an individual from a client point of view Then yes, it just becomes a pain! 86
84 The key according to which annual refunds are granted by the OCC is not publicly available Therefore, the OCC’s annual refund policy is not included in the overview.
85 Note that the volume discounts specified for the CME refer to the Equity/Clearing Member pricing and that the discount scheme of OMX concerns combined trading and clearing fees.
86 Statement made by interviewed clearing member representative.
Trang 10(1) 1–15,000 (2) 15,001–30,000 (3) > 30,000
Daily Contracts
N.A.
CME Futures or Options on Futures
(1) 1–21,000 (2) > 21,000
Trade Size Monthly Contracts
(2) > 2,000
Trade Size Trade Size
SSF Traded in SEK or DKK
(1) 1–1,000 (2) > 1,000 (1) 1–2,000
(2) 2,001–10,000 (3) > 10,000
(1) 1–6,000 (2) > 6,000
Trade Size Trade Size
Trade Size Trade Size
Equity Options
N.A.
Equity Options Traded in SEK, EUR
or DKK Traded in Paris
CC&G OMX
LCH.C
Unspecified Unspecified Single Stock Futures
– 20% – 40%
> 40%
– 50%
– 43%
– 20% – 40%
> 40%
VERY HIGH VOLUME VERY HIGH VOLUME
VERY HIGH VOLUME
VERY HIGH VOLUME VERY HIGH VOLUME UNSPECIFIED
HIGH VOLUME
MED./HIGH VOLUME Figure 5.12 Clearing houses’ volume discounts and benefiting clearing member types
Source: Author’s own; compilation based on clearing houses’ websites 87
Even though the clearing houses are trying to do you a favour by doing this tiered structure, it doesn’t reduce your costs; it actually increases your costs, because you have to track these and pass them on to the customer So that is a very big issue for us 88
Figure 5.12details the discount schemes employed by the clearing houses,specifies the benefiting clearing member types and allows conclusions as towhether or not the potential savings through volume discounts are substantial.The overview shows that clearing houses tend to give high volume clearerspreferential treatment through discounts Medium volume clearers hardlyever benefit, and low volume clearers are not eligible for discounts at all Out
87 Identification of applicable clearing member types is based on estimates that take into account the following information: the number of cleared contracts per year/month/day eligible for discounts; minimum and maximum market share thresholds as defined for low/medium/high volume clearers; and information on average contracts per cleared trade as published by clearing houses.
88 Statement made by interviewed clearing member representative.
Trang 11of ten relevant discount schemes, only one initiative allows medium volumeclearing members to benefit from fee reductions, three schemes benefit merelyhigh volume clearers, and five initiatives are solely applicable to very highvolume clearing members.89Given that the high and very high volume clearingmembers are the clearing houses’ most important customers, these findingsare not surprising; the clearing houses will logically aim to satisfy them Thosetypes of clearer also have the greatest lobbying power, which ensures that theirvoice is heard A clearing house’s governance and ownership structures alsoimpact the ultimate influence that different types of clearer can exert overthe CCP.
The analysis also shows that the potential savings from discount schemescan be substantial – on average, clearing members can save 50 per cent or evenmuch more in some cases Findings suggest that benefits from preferentialpricing can translate into a competitive advantage for the respective highvolume clearing members
To summarise, not all clearing houses provide volume discounts, but thosethat do penalise low and medium volume clearing members; the CCPs tailortheir discount schemes to their high and very high volume clients Fee caps andrebates mainly benefit the high volume clearers with a prop focus; whether
or not NCMs and other customers benefit from such schemes depends onwhether clearing members undertake the arduous monitoring and trackingeffort required to pass on these savings
5.2.3 Total European clearing industry costs in 2005
To enable a deeper understanding of the true costs related to European tives clearing and to provide a basis for analysing the impact that certainnetwork strategies between clearing houses have on transaction costs, thethird step of the cost analysis provides an estimate of the total Europeanclearing industry costs in 2005 The estimated figure represents the sum ofall direct and indirect costs borne by European clearing members in 2005for clearing exchange-traded derivatives transactions through Eurex Clear-ing, LCH.Clearnet, OMX Clearing, MEFF and CC&G The calculation ofcosts is based on insights from the empirical study (particularly information
deriva-on the compositideriva-on of all-in clearing costs for different benchmark clearingmember types; seeFigure 5.5), confidential information provided by EurexClearing, as well as publicly available data on clearing houses’ cleared volumes,
89 One initiative could not be specified due to a lack of publicly available information.
Trang 12Direct Costs*
Service Provider Charges = 250,000,000
Indirect Costs*
Cost of Capital = 128,000,000
Risk Management Costs = 94,000,000
Back-Office Costs = 647,000,000
Clearing House Charges = 475,000,000 3.
Total European Direct Costs = 725,000,000
Total European Indirect Costs = 1,448,000,000
*Costs in EUR
Figure 5.13 Total European derivatives clearing costs in 2005
Source: Author’s own.
per-transaction fees, other fees charged, communication and network charges.This resulted in the calculation of direct and indirect cost estimates for thebenchmark clearing members This data was subsequently used to calculatethe total industry costs For details on the quantitative analysis and the under-lying assumptions, refer to Appendix 7
Following the presentation of the quantitative results, the shortcomingsand limitations of the analysis are outlined A more detailed interpretation ofthe cost estimates is provided in section 5.2.6
Figure 5.13 outlines the quantitative results of the analysis.90 The totalEuropean costs of derivatives clearing amounted to roughly€2.173 billion in
2005 This figure correlates to the first level of transaction costs, thus senting all direct and indirect costs that the 219 European clearing membershad to bear in the first place Note that some of these direct and indirect costsare redistributed within the Value Provision Network, as they are ultimately
repre-90 Figures are rounded to millions of euros; €100,000 to €499,000 are rounded down, whereas €500,000
to €999,000 are rounded up.
Trang 13passed on (either directly or indirectly, as part of the commissions) by clearers
to their respective NCMs and/or other customers
At€725 million, direct costs represent 33 per cent of total industry costs,whereas indirect costs of roughly €1.448 billion amount to 67 per cent oftotal costs The most significant cost categories in 2005 were back-officecosts, with estimated annual costs of €647 million, followed by IT costs of
€579 million; clearing house charges accounted for €475 million and serviceprovider charges came to€250 million At the lower end of the spectrum,capital costs and risk management costs added up to approximately €128million and€94 million, respectively
The underlying data on individual benchmark clearing members’ costswas cross-checked with interviewees representing three of the selected clear-ing members Some limitations in the data were thereby uncovered, mainlyresulting from a mismatch of clearing-related costs as defined in section 3.2and the input received from the interviewed clearing members
The interviewees’ perception of the different cost categories is outlined
in section 5.1 and explains why certain cost categories (such as the cost
of capital and risk management costs) were structurally underestimated interms of their significance by the interviewed clearing members Other factorsalso impacted the results of the cost analysis, mainly affecting the indirectcost categories All of these factors are detailed in the following paragraphs.Whereas the validation of the data on clearing house charges revealed that theabove-mentioned figure is in the right magnitude (see Appendix 7 for details),several caveats apply to the interpretation of the indirect cost estimates.91The estimated €94 million in risk management costs represents the per-sonnel costs pertaining to the basic continuous risk management processesrelated to monitoring proprietary and agency positions, but they do not coverthe personnel costs arising from sophisticated risk management processes.Particularly high volume clearing members typically incur costs resultingfrom dedicated risk management processes, which go beyond pure positionmonitoring The figure thus underestimates the effort and costs related tosuch sophisticated risk management processes As outlined above, the diffi-culties associated with the correct evaluation of risk management costs havevarious causes Risk management commonly covers several different marketsand products within a company; the responsibility for risk management canalso reside in (geographically) distinct departments and is not necessarilyrelegated to one individual manager Depending on the clearer’s set-up, risk
91 These caveats were identified with the help of interviewees.
Trang 14management costs might not be reallocated internally, which makes it evenmore difficult for clearing managers to gain a true understanding of thesecosts Clearing-related risk management costs are thus difficult to isolate and
to assess correctly
Another indirect cost category whose magnitude is structurally mated by clearing members is the cost of capital As outlined above, calculat-ing, analysing and understanding the true cost of capital related to clearing
underesti-is difficult for various reasons When asked to assess the cost of capital, theinterviewed clearing members might not have had in mind the full scope
of these costs as defined in section 3.2.2.1 Furthermore, the cross-checking
of the data revealed that the figure of€128 million for capital costs in 2005undervalues the magnitude of capital costs in that it mainly accounts forexternal financing costs As the empirical research is biased towards the view
of collateral-rich clearing members, whose capital base is usually sufficient tocover any clearing-related collateral requirements, most respondents do notneed to utilise external financing for clearing The majority of intervieweesconsequently cited very low costs of capital for derivatives clearing How-ever, as the cost of capital also includes the opportunity cost of capital, i.e.the expected return foregone by clearing members due to bypassing otherinvestment alternatives, this cost category is undervalued by the difference ofthe value of the benchmark portfolio and the value of the executed portfolio(interest payments from the clearing house) as outlined in section 3.2.2.1.The figure of€579 million for IT costs covers IT systems and their basicclearing-related functions, such as interfacing with clearing houses and inte-grating the received data with internal systems; the estimate therefore fails toincorporate the IT costs related to enhanced systems that manage complextasks related to customer and/or NCM relationships and systems developmentcosts The IT solution needed for this task is much more complex and conse-quently requires higher expenditures The figure for IT costs in 2005 is thusunderestimated in that it does not include the costs normally incurred fromimplementing and operating the requisite enhanced and flexible IT solution.Finally, the estimate of €647 million for derivatives clearing back-officecosts in 2005 covers the performance of basic back-office functions related tocontinuous position management, regular processing and the orderly booking
of transactions to (customer/NCM) accounts However, the figure does notincorporate the costs for functions related to customer/NCM services or cus-tomer/NCM relationship management GCMs in particular incur significantadditional costs resulting from the need to manage customer sub-accountstructures, as this often has to be done manually to some extent The figure
Trang 1511% Service Provider Charges 22% Clearing House Charges
Risk Management Costs 4%
Cost of Capital 6%
IT Costs 27%
Back-Office Costs 30%
Figure 5.14 Composition of total European derivatives clearing costs in 2005
Source: Author’s own.
also does not take into account the average of error account costs, related efforts or the full extent of compliance and legal documentation costs.Interviewed clearing members thus underestimated the magnitude of back-office costs; managers generally do not have a complete overview of all of thecost components defined in section 3.2.2.4 This derives from the fact that thedefined components of back-office costs are commonly located within severaldistinct departments and cover various different business segments; no onesingle manager is likely to have oversight and knowledge of all of these costs.The figure for the magnitude of back-office costs does not incorporate theabove-mentioned factors and thus constitutes an underestimate
project-To summarise, the estimate of total European derivatives clearing industrycosts for 2005 does not reflect all clearing-related indirect costs It can beassumed that the actual indirect cost figure is higher than suggested Takingthis into account, the finding that indirect costs exceed direct costs remainsunchanged, whereas the relative importance of indirect costs increases andthe relevance of direct costs decreases With reference to the available costestimate, direct costs constituted approximately one-third of total Europeanderivatives clearing costs in 2005, and indirect costs represented roughly two-thirds Unfortunately, due to a lack of access to more detailed cost data, themagnitude of the difference between the provided figures and the true cost datacannot be quantified; it is therefore not possible to produce an amelioratedcost estimate
Whereas the results suggest that indirect costs were higher than directcosts in 2005, the relative significance of back-office versus IT costs is more
Trang 160 500,000,000
Low Vol (Regional) Medium Vol (Reg.-Glob.) High Vol (Global) Clearing Member Types :
Figure 5.15 Per cent stake of different clearing member types in European derivatives clearing costs in 2005
Source: Author’s own.
problematic to determine The available cost estimate indicates that office costs and IT costs constituted 30 and 27 per cent of total industry costs,respectively, revealing that total back-office costs were higher in 2005 thantotal IT costs
back-When analysing back-office versus IT costs, it should be taken into accountthat the results of the cost estimate are biased towards the information pro-vided by the six benchmark clearing members (refer toFigure 5.5); all butone considered back-office costs more significant Whereas this is true for thebenchmark clearers, it is not necessarily true for any other European clearingmember The twenty-one interviewed clearing members unanimously con-sidered the two categories as the most important sources of indirect costs,but their input did not reveal the dominance of one over the other It cantherefore be concluded that back-office and IT costs constituted the two mostsignificant indirect cost categories, but it cannot be clearly determined which
is more so
Finally,Figure 5.15outlines the per cent stake held by the different clearingmember types in the European costs of derivatives clearing Whereas totalcosts are roughly distributed equally across all three clearing member types –i.e low, medium and high volume clearers must bear 29, 37 and 34 percent, respectively, of total industry costs – a different picture emerges when
Trang 17direct and indirect costs are compared The finding that high volume clearingmembers bear roughly 56 per cent of all direct costs explains their stronglobbying interest in trying to push clearing houses to reduce their fees (which,
as outlined above, is particularly relevant from a proprietary perspective).The figure also illustrates the finding that indirect costs account for thebulk of European derivatives clearing industry costs, of which regionally-to-globally active (medium volume) clearers and regionally active clearers have tobear the largest part (40 and 37 per cent, respectively) These clearing membertypes consequently have a strong stake in the reduction of indirect clearingcosts
5.2.4 Clearing members’ average direct and indirect costs
The fourth step of the cost analysis consists of an assessment of average annualdirect and indirect costs of different low, medium and high volume clearingmember archetypes This analysis does not claim to deliver results applicable
to any particular clearing member, but it does provide for an archetypicalassessment of clearing costs This in turn offers a deeper understanding of themagnitude of clearing-related costs for different clearing member types andserves to explain the structural particularities of the European Value ProvisionNetwork
The calculation is based on the assumptions underlying the estimate of totalEuropean industry costs, as outlined in Appendix 7, as well as on insights fromthe empirical study and feedback from selected interviewees This enabled thecalculation of the average annual direct and indirect costs for clearing memberarchetypes, as outlined inFigure 5.16
For the purpose of this analysis, it was assumed that all of the sented European clearing member archetypes are direct members of all majorEuropean clearing houses (Eurex Clearing, LCH.Clearnet, OMX Clearing,MEFF and CC&G) For low and medium volume clearers, this assump-tion deviates from the definition provided in section 2.3.2 The definitionestablishes that regionally active (low volume) clearers do not maintainmore than a single clearing membership (with their domestic home clearinghouse) The definition also outlines that while regionally-to-globally active(medium volume) clearers are active (or interested in becoming active) inmany markets; they maintain only a single direct clearing relationship withtheir domestic home clearing house To clear their transactions in the other(foreign) markets, these members utilise one or several other GCMs as clearingintermediaries
Trang 18pre-HIGH VOLUME CLEARER
MEDIUM VOLUME CLEARER
LOW VOLUME CLEARER
0.43 0.78 1.21
1.32 13.19 Costs in EUR
Figure 5.16 Average annual direct and indirect costs for clearing member archetypes 92
Note: ø = average.
Source: Author’s own.
Figure 5.16illustrates the dynamics that constitute these structural ularities of the European Value Provision Network concerning the clearingmembers, as presented in section 2.5.1 The figure shows why it is economicalfor medium volume clearers to utilise high volume clearers as intermediariesinstead of being a direct member of all European CCPs It also indicateswhy a relatively small number of European high volume clearers (aroundseventeen) account for the bulk (roughly 73 per cent) of the total annualEuropean cleared market share (see Figure 2.19)
partic-Generally speaking, service provider charges, risk management, back-officeand IT costs are largely fixed costs in the context of this set-up, whereasclearing house charges and cost of capital are partly fixed, but for the mostpart constitute variable costs The more clearing house memberships a clearermaintains, the higher the related direct and indirect fixed costs According
to the findings from the empirical study, as outlined in section 5.1, thereare economies of scale on the part of the clearing members that enable highvolume clearers to economise on their internal structures and processes andconsequently leverage their fixed cost base
Figure 5.16underlines the existence of economies of scale by illustratingthat as cleared volume increases, unit costs decrease Low and medium volume
92 The market share refers to the clearer’s relative share of the total European exchange-traded derivatives clearing volume, i.e the sum of cleared volumes at Eurex Clearing, LCH.Clearnet, OMX Clearing, MEFF and CC&G.
Trang 19clearers therefore have to bear disproportionately high fixed costs, based onthe assumption that they are members of all major European clearing houses.The lower a clearing member’s market share, the higher its fixed cost burden,and the less economic sense it makes for the clearer to become a member
of all European clearing houses It is simply too expensive to replicate thesefixed costs when another firm can provide this service in a more cost-effectivemanner In this case, clearing members are better off maintaining a singledirect clearing membership and employing the intermediary services of aGCM to connect to any other clearing houses Low and medium volumeclearers in particular will therefore not opt to become members of everymajor European clearing house This explains why a very high percentage ofthe European market share in derivatives clearing is concentrated on a fewvery high volume clearers; these clearers have cost structures that make itattractive to offer intermediary services, and for low and medium volumeclearers, it makes economic sense to utilise these services Should a low ormedium volume clearer nonetheless choose to become a member of many orall major European clearing houses, the driving factors are likely to relate tosecrecy, control and reputation, rather than to cost efficiency
The provided assessment of clearing members’ average annual direct andindirect costs is based on theoretical archetypes In reality, the relationship
of cleared volume to cost structure is not so cut and dried; there are cases
in which low and high volume clearers operate with cost structures typicalfor medium volume clearers, and some medium volume clearers have coststructures resembling those typical for low volume clearers, etc Consequently,the incentive for using a GCM as an intermediary for certain markets instead
of maintaining a direct clearing membership can also apply to high volumeclearers, depending on their cost structure
Similar considerations apply to the analysis of the unit costs, which spond to the number of lots cleared by a clearing member in relation to thesum of total direct and indirect costs Analysing the unit costs provides insightinto the clearing members’ costs of production, which are further explored inthe following section
corre-5.2.5 Clearing members’ unit costs
Whereas the previous sections provided a detailed explanation and analysis
of the magnitude of direct and indirect clearing-related costs that differentclearing member types have to bear, this section focuses on putting these costsinto context