Compete, collaborate or consolidate?

By Avi Ghosh | Boston, MA - 30 September 2014

This year it’s the turn of the Boston Convention and Exhibition Centre to host Sibos, the world’s premier banking and financial services event. Those of us at CSDs, payment systems, clearing houses, trade repositories and other systemically important organisations were out in force for this morning’s Market Infrastructures Forum plenary panel discussion.

Amongst the familiar themes of risk mitigation and regulatory challenges, one of the key issues raised by the panel was the need for greater collaboration between FMIs. The audience was asked the question: “Is the pain enough for FMIs to overcome some of the hurdles of collaboration?” Unsurprisingly, the overwhelming consensus was that FMIs should and will collaborate further.

Collaboration between FMIs is nothing new. During the financial crisis, FMIs worked in unison to ensure that business wound down in an orderly manner when major institutions defaulted on their obligations. FMIs will continue to collaborate for commercial reasons when it is of mutual benefit for one another. Just last week, for example, SIX Securities Services and Euroclear signed an alliance on international fund services.

But should the industry just be concerned with collaboration, or something more? M&A activity, as well as alliances, is on the rise in the sector. Of course, the industry as a whole has to be conscious of creating single points of failure. Andrew Gray, a senior executive at the DTCC, in the panel session joked that we are unlikely to see a merger between DTCC and Euroclear, for example, ‘at least not until next year’. Yet the reality is that we are surely going to see considerable consolidation, at least in the clearing space, in the near future.

Clearing business models are in a very real sense being squeezed. With some firms competing on price, the original concept of a CCP is being compromised. CPSS-IOSCO’s principles on financial market infrastructures make it very clear that the primary role of a CCP is to safeguard the stability of the financial system. As clearing fees go down, risk mitigation will naturally have to suffer as a corollary effect. Consolidation in the clearing space in the months ahead will therefore be driven by increased risk management requirements, regulation and costs.

FMIs in some senses are all potential partners, competitors and also acquisition targets for one another. In this ambiguous environment, one of the most pressing issues for FMIs will be to decide – clearly - where they wish to compete, where they wish to collaborate and where they want to consolidate.


Avi Ghosh, Head of Marketing & Communications, SIX Securities Services

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