Clearing Services for Global Markets A Framework for the Future Development of the Clearing Industry_14 pdf

Decrease IncreaseYour total transaction costs related to clearing Your back-office costs Your total transaction costs related to clearing at the respective clearing house Other:... Pleas

Average monthly infrastructure/ line/connectivity fees in 2005* Average monthly transaction-driven fees in 2005 (before rebates)** Average monthly event-driven fees in 2005*** Average monthly fees charged for additional services in 2005****

463 Appendix 4

10 Which of the following intermediaries do you employ for the internal organisation of derivatives clearing services and how many of each?

Back-office vendors

CSDs/ICSDs

Custodians .

(Correspondence) banks .

Central banks .

Telecommunications companies .

Others (i.e consultants, etc.) .

Comments: .

11 Please specify your average monthly fees paid to the following intermediaries in 2005: Average Monthly Fee in 2005 Back-office vendors . EUR CSDs/ICSDs . EUR Custodians . EUR (Correspondence) banks . EUR Central banks . EUR Telecommunication companies . EUR Others EUR Comments: .

14

effort for regulatory capital requirements?

additional qualified back-office personnel?

operational/back-office procedures?

management structures and architecture?

If yes, how many additional headcounts?

If yes, pls estimate the effort in man- days

If yes, pls estimate the effort in man- days

17

Part 3 Scale effect analysis

19 Various network initiatives (mergers/alliances/partnerships, etc.) could be implemented toharmonise/consolidate the clearing service industry in the future Some of the potential benefits

of harmonisation/consolidation are listed below On a scale from 1 (very low importance) to 5(very high importance), please rate their importance

Clearing fee reductions

Reduction of no of involved

Lower capital costs

Enhanced netting opportunities

Increased speed of innovation

Single interface to multiple

markets

Single membership gateway

Choice of jurisdiction in which

User participation in governance

Commercial set-up of clearing

house (i.e for-profit or

Decrease Increase

Your total transaction

costs related to clearing

Your back-office costs

Your total transaction

costs related to clearing

at the respective

clearing house

Other:

473 Appendix 4

22 If a clearing house decided to enlarge its scale by connecting further on- and off-exchangemarketplaces, thus increasing the volume cleared in existing products, what impact would youexpect this to have on the following transaction cost categories? Please rate the impact on a

Your total transaction

costs related to clearing

at the respective

clearing house

Other:

Part 4 Case study analysis

For handling the subsequent questions, please take into account the following guidelines anddefinitions:

On the following pages you will be asked to evaluate the following actual and hypotheticalinitiatives according to the impact you (would) expect these initiatives to have on your clearing-related transaction costs:

Even if a certain initiative has not affected or would not affect your business, please evaluatethe impact you would expect it to have on your transaction costs!

Glossary

clear CFTC-approved EUR-denominated productstraded on Eurex through their existing clearing mem-bership This gives CCorp’s customers direct access tothe European product range of Eurex Phase I is there-fore often also referred to as the ‘EU Link’ Phase I cameinto effect in October 2004

products traded on Eurex US through their existingclearing membership Phase II is therefore also referred

to as the ‘US Link’ Phase II is still pending regulatoryapproval

to the integration process Full integration will entailmigration to a common technical platform and willgive clearing members the opportunity to clear theirbusiness through either CCP; both will use a commonset of legal and operating procedures Due to regula-tory, legal and other complexities, however, these inte-gration phases will not result in a single consolidatedclearing house entity with a common membership andlegal framework When evaluating the merger, you willfirst be asked to describe the impact the merger has had

on your business so far Secondly, you will be asked forthe impact you expect the merger to have after fullintegration has been realised

includ-ing the utilisation of a common technical platform,

475 Appendix 4

which would enable clearing members to clear theirbusiness through a single consolidated clearing houseentity with a single membership and single legal frame-work The full spectrum of cross-margining and net-ting opportunities would be available to clearing mem-bers This case study is intended to simulate the impact

of the creation of a single European CCP

members of Eurex Clearing to clear USD Fixed Incomederivatives traded on the CBOT through their existingclearing membership and that clearing members ofCME would be able to clear EUR Fixed Income deriva-tives traded on Eurex through their existing clearingmembership Cross-margining is assumed to be pro-vided between the EUR and USD Fixed Income deriva-tives for the clearing members of both entities

23 Please indicate whether the following initiatives have affected (would affect) yourbusiness:

We were affected by the Global Clearing Link, Phase I

We would participate in the Global Clearing Link, Phase II

We would utilise a clearing link between Eurex Clearing

and CME (as defined in the Glossary)

We were affected by the merger of LCH and Clearnet

We would be affected by a merger of LCH.Clearnet and Eurex

Clearing (as defined in the Glossary)

24 Do you believe that the proposed fictitious merger of LCH.Clearnet and Eurex Clearingadequately simulates the benefits and hurdles involved in the creation of a single EuropeanCCP?

25 Please assess whether the following initiatives (would) provide value-added to your business

The Global Clearing Link, Phase I

The Global Clearing Link, Phase II

A clearing link between Eurex Clearing and CME

The merger of LCH and Clearnet

A merger of LCH.Clearnet and Eurex Clearing

26.

27.

28.

29.

30.

32 How high have your investment costs for the following initiatives been to date?

INVESTMENT COSTS

33 Please provide a rough estimate of the following investment costs How high

INVESTMENT COSTS

do you expect your additional investment

costs to be by the time the full integration of the

merger of LCH and Clearnet has been achieved?

EUR

would you expect your investment costs to

be for adjusting to a full merger integration of

LCH.Clearnet and Eurex Clearing?

EUR

would you expect your investment costs to

be for adjusting to a clearing link between Eurex

Clearing and CME?

Global Clearing Link Phase 1 (EUR Link)

Global Clearing Link Phase 2 (USD Link)

Merger of LCH and Clearnet

(fictitious) Merger of LCH.Clearnet and Eurex Clearing

(fictitious) Clearing Link Eurex Clearing and CME

Part 5 Basic respondent information

35 What is your clearing member status at the following clearing houses – and in which yeardid you acquire the respective status? Please specify if more than one entity within your group

is a clearing member at the respective clearing house:

Clearing services are a (small or large) part of our business model.

We don’t want to leave the clearing of our traded volume to a third party

We would have preferred a different clearing status, but don’t fulfil the

minimum capital requirements

We would have preferred a different clearing status, but we consider this

status too costly

37 What was your average daily transaction volume per clearing house in 2005 in derivativesand equities?

Eurex Clearing

LCH.

Clearnet

Derivatives no of contracts

Equities no of transactions

44 How would you classify your organisational structure (i.e functional organisation ororganisation according to business areas/asset classes)?

Thank you very much for your contribution!

Appendix 5

Sample interview guide

clearing members

1 Introductory questions

Clearing, LCH.Clearnet, OMX, MEFF and CCG What was your motivation for choosingthe respective clearing status?

exchanges/products, what were your reasons for switching your clearing membership fromone clearing house to another?

2 Transaction cost analysis

complete? Direct costs – clearing house charges, service provider charges; indirect costs –cost of capital, risk management costs, information technology costs, back-office costs

clearing costs by some other means? Do you monitor direct and indirect costs, or only directcosts?

estimate of their relative magnitude, i.e the ratio of direct costs to indirect costs?

for each of the following six transaction cost categories: clearing house charges, serviceprovider charges, cost of capital, risk management costs, information technology costs andback-office costs

ICMs/GCMs?

2005?

for clearing service provision (i.e for-profit vs not-for-profit clearing houses, user-governed

vs non-user-governed, vertical vs horizontal integration)?

r The practice of outsourcing clearing-related functions (either to a third party or within

company structures) enables firms to ‘follow the sun’ Outsourcing is also viewed as a saving mechanism Do you agree? Are you planning to outsource certain clearing-relatedfunctions? If yes, in which areas do you expect to see cost savings? How high do you expectthese savings to be?

costs, and what is their approximate ratio?

securities clearing?

3 Network strategies

Why or why not?

value-added? Please specify

(European) clearing industry: clearing links, M&A or a Single CCP?

value-added clearing services? Would you welcome the provision of broader services by CCPs? Inother words, are there any clearing services currently offered by GCMs that you would like

to see offered by CCPs?

4 Efficiency impact of network strategies

costs?

cent reduction of capital costs, etc.)?

5 Case studies of network strategies

Eurex and CCorp – Global Clearing Link:

II on your clearing-related transaction costs?

487 Appendix 5

CFTC-approved European contracts through CCorp?

LCH and Clearnet – Merger:

in the future?

to date? What impact do you foresee on these costs after full integration has been realised?

transaction costs: integration of risk management, integration of IT (clearing platform) andthe replacement of multiple (back-office) technologies, interfaces, membership criteria andoperating procedures with a single, harmonised operating infrastructure?

Single European CCP:

CCP?

Single CCP? If it is not, would you be willing to invest in the reorganisation/adaptation ofyour internal structures and processes to achieve these savings?

as compared to an oligopoly market?

by other integration and harmonisation initiatives?

supersede the related investment costs?

6 Future development of clearing and global outlook

you think the future role of clearing houses in a global market setting should be?

local?

dreamland’, what would this dreamland be like? Please describe the ideal scenario, includingits most important characteristics

Thank you very much for your time!

Clearing house fees

The clearing house fee comparison is based on the following assumptions and caveats:

exchange rate on 29 September 2006

fluctuate for equity options/futures and index options/futures, it should be kept in mind thatthe fees in the chart represent a snapshot of that particular date

depending on the value of the underlying For the purpose of the equity options clearing feecomparison, only equity options with a contract size of 100 shares were taken into account

calculates these as a per cent of the premium; these fees represent a snapshot of fees at aparticular point in time

relate to French equity options The new clearing fees (as of January 2007) were included forcomparative purposes

relate to Universal Stock Futures

split between trading and clearing fees is artificial and based on estimates obtained from theexpert interviews OneChicago charges an all-in fee

relate to its eligible member rate

clearing FCMs)

Total European derivatives clearing

costs in 2005

The calculation of the total European derivatives clearing costs in 2005 was based on theassumptions regarding the Value Provision Network (section 2.3), the structure of the European

which are detailed in the following:

1 Calculation of total costs for the six benchmark clearing members;

2 Calculation of total costs for the remaining 213 European clearing members

3 Calculation of total European derivatives clearing costs

Step 1.1: Calculation of fixed costs per clearing house and clearing member:

fees and connectivity/technical fees (such as line fees, charges for clearing working stationsand other IT equipment where applicable)

used by these six clearing members

charge for the above services, the benchmark clearing members’ fixed costs were calculated

the purpose of this study, it was thus assumed that fixed costs of a clearing membership atLCH.Clearnet roughly equal the fixed charges incurred by a clearing member through itsmembership at Eurex Clearing OMX clearing house charges are accounted for at a laterstage of the calculation of total clearing house charges (step 1.3)

volume clearer and one was a medium volume clearer In this study, low volume clearerswere assumed to be a member only at their home country CCP In contrast, medium andhigh volume clearers were defined as being active at all of the European clearing houses, i.e.assumed to be direct members of Eurex Clearing, LCH.Clearnet, OMX, MEFF and CC&G

member were calculated

Step 1.2: Calculation of variable clearing house charges per clearing house and clearing member:

help of the interviewees, the European market share for each of the six benchmark clearerswas estimated Their combined European market share was estimated to be 22.8 per cent

1 For details on the benchmark clearing members and their respective cost structures, refer to Figure 5.5.

491 Appendix 7

benchmark products correspond to the products identified for the comparison of clearing

at a later stage of the calculation of total clearing house charges; refer to step 1.3)

selected benchmark products in 2005, the benchmark clearing member’s market share and

benchmark product were calculated This sum represents the variable clearing house chargesfor the benchmark products per clearing house and clearing member

bench-marks were among the highest volume products in 2005 To account for the remainingclearing house products, the ‘rest volume’ charges per clearing house and clearing memberwere calculated

the benchmark clearing member’s market share minus total number of benchmark productscleared by benchmark clearing member per clearing house) was multiplied by the totalclearing fees charged for the benchmark products per clearing house and clearing memberdivided by the total number of cleared benchmark products per clearing house and clearingmember

reality vary from those fees charged for the selected benchmark products is thus neglectedfor the purpose of this calculation

consisted of estimating the option exercise and future settlement charges

exercises was assumed to be 6 per cent, the average rate of equity futures and fixed incomefutures settlements was assumed to be 3 per cent, and the average rate of index futuressettlements was assumed to be 7 per cent

LCH.Clearnet, MEFF and CC&G, the market share of the benchmark clearers and therespective fees charged by the clearing house, the option exercise and future settlementcharges per clearing member and clearing house were calculated

volume’ charges, and the option exercise and future settlement charges resulted in the totalvariable clearing house charges per clearing house and clearing member

Step 1.3: Calculation of total clearing house charges per clearing member:

clearing house charges per benchmark clearing member No rebates or (annual) discountswere taken into account

charges (due to unavailability); (ii) the artificial fee split between trading and clearing fees atEurex; and (iii) setting fixed costs of a clearing membership at LCH.Clearnet to equal fixed

2 Clearing fees charged by Eurex Clearing are based on an artificial fee split, as outlined.