Growth Of Securities Depositories & Self-Clearing Will Impact Agent Fees

Agent Banks are coming under intense competition, both from international securities depositories and from the broker/dealers themselves, who are linking to exchanges in order to self-clear at a much lower cost per trade, reports a new survey by Z/Yen, the City-based Risk/Reward Management firm.

The recently completed survey, which was carried out by Z/Yen on a confidential basis on behalf of a consortium of 12 major US and European Banks, compared the fees paid for clearance and custody services in 23 European and Emerging European Markets.

The survey identified a number of key trends:

• Competition between agent banks to pick up clearing business in the key Euronext markets is forcing down fees – some broker/dealers now get free custody as an incentive to place business with an agent;
• As volumes continue to rise, both broker/dealers and agent banks are looking to increase STP rates with corresponding pricing incentives;
• Clearance fees are coming down, for example in Greece, where, following euro-entry, network managers are negotiating reductions of over 100% in fee tariffs;
• Given sufficient liquidity, some broker/dealers may be looking for a single clearer in Europe.
• A number of banks are moving away from agents to central depositaries such as SIS Segaintersettle AG, others are self-clearing in their high volume markets, particularly in Germany. In other markets, CSDs are aware that current service levels are not good enough and are investing heavily in new technology to bring service levels up to that provided by Agent Banks;

Jeremy Smith, Director of Financial Services at Z/Yen, said, "This study was a major break-through for the market. For the first time, it has provided banks with an effective benchmarking tool a) to compare the fees they pay against market averages and b) to understand the cost of going into new markets".

Summary of Findings

1. In almost every market, participants pay a wide range of fees - there is significant scope for cost savings in every market. Even in some of the more established markets such as France and Spain, banks can pay a wide range of fees.
2. With the exception of South Africa, the emerging markets are far more expensive to trade in than the established European markets. This reflects low volumes and liquidity.
3. Volume counts – but not in all markets. In some markets, tiered fees can bring down the average cost per trade significantly – by up to 75%. In other less-liquid markets, banks pay a flat fee for any volume
4. Where participants self-clear, fees can be over 10 times lower than remote fees via an agent. However, in some cases you only get what you pay for and fees for additional services can push up costs.
5. As with clearance fees, custody fees vary widely from market to market.

• The range and the average fees are much higher in the Emerging European Markets (except South Africa);
• Average fee is higher for Fixed Income than for Equities.

Further Studies

Z/Yen has recently completed two additional studies:

• Foreign Exchange and Money Markets – 2001 Processing Costs
• Equity and Debt Markets – 2001 Processing Costs

Further studies are planned into:

• Commodity Derivatives - 2001
• Clearance and Settlement Fees – Global Markets – 2001
• Brokerage Fees – 2001
• IT Costs in Financial Services – 2001

For further details, please call Jeremy Smith at Z/Yen on (020) 7562 9562.

About Z/Yen

Z/Yen's mission is to be the foremost risk/reward management firm. Risk/reward management is the application of risk analysis and return incentives to strategic, systems, human and organisational problems in order to improve performance. Z/Yen believes that the intelligent management of risk is the basis of significant reward. By recognising, understanding and managing risks, more risk can be assumed and performance increased. Z/Yen applies risk/reward management in the public, private and not-for-profit sectors in areas as diverse as finance, information technology, human resources, research & development, environment, quality, sales & marketing.Z/Yen's slogan is "zest for enlightenment", embodied in five distinguishing principles:

• Investing in clients;
• Investing in partners;
• Improving ourselves;
• Retaining and developing innovation and humour;
• Sharing the rewards.

Z/Yen has developed a risk/reward methodology based on analytical techniques from a number of fields which manage risk. The methodology consists of a strategic framework, supporting software, procedures, case studies and report formats. The methodology has been applied to strategic planning, financial planning, information technology planning, marketing plans, fraud investigations, reserves analysis, systems reviews, cost-effectiveness studies and human resource planning.Z/Yen's strategy is based on three approaches:

• Enhancement of the risk/reward methodology;
• Management consultancy projects to identify ventures;
• Development of a partner network.

Z/Yen organises its work in projects with a specific proposal for each phase and strong project management. Z/Yen is committed to sharing the risks and benefits of work with clients, often in the form of performance-related fees, and measuring work in quantitative or qualitative terms. Z/Yen has access to venture capital and, where appropriate, can provide a combination of financial and advisory services in exchange for equity or other stakes.Z/Yen applies its techniques with confidence in a variety of areas, but has stronger experience in technology, insurance, banking, media, health, distribution, charities and business to business services. Z/Yen has three partners, over ten staff and more than 50 associates. Staff share significantly in the benefits of success and Z/Yen seeks to develop a supportive environment in which professionals from a variety of disciplines can flourish.

Optimising Value in Financial Services Processing

Financial Services is an industry where risk and reward are clearly present in day-to-day decisions. As the leading risk/reward management firm, Z/Yen is ideally suited to helping institutions make decisions in the areas of strategy, systems, people and organisation. Z/Yen’s proprietary risk/reward methodology is not only culturally suited to the industry, but unifies strategies from the boardroom to the trading floor, from headquarters to the counter/ATM, from central office to the customer call centre. Z/Yen’s work spans investment banking, investment management, retail banking, building societies, credit card companies, central financial exchanges, financial information and financial system providers, including ‘front’, ‘back’, ‘middle’, ‘sell-side’ or ‘buy-side’. The type of work ranges from strategic planning, through information systems planning, transaction costing (benchmarking), market segmentation, new electronic market simulations, queuing models for counters, correspondent banking restructuring, computer systems installation, management information systems design, new product/Internet product design and outsourcing.In the last year, Z/Yen has undertaken or the following client assignments in the Financial Services arena:

• Development of marketing documentation for a European software house;
• Commercialisation strategy for an internal consulting group of a major bank;
• The first and second years of a benchmarking study for the Equity and Debt Markets which compared processing costs per trade for 10 major banks;
• A benchmarking study for the FX and Money Markets;
• A benchmarking study for clearance and settlement costs in each of the European markets;
• A major market survey on "buy-side" customer needs;
• Development of a Stock Exchange Trading Game for a "DotCom";
• A market survey of the OTC Derivatives Market focussing on outsourcing opportunities.

Z/Yen participates actively in organisations that are attempting to expand the boundaries of financial research, for example, the Centre for the Study of Financial Innovation. Z/Yen was the founder and concept developer of a £1.9 million joint research initiative, The Financial Laboratory, which won a 1996 DTI Foresight Challenge award.Institutions cannot afford to stand still in a competitive market. With the advent of T+1, new entrants to the industry and continuing pressures on staff, a robust risk/reward response is vital. Z/Yen is the natural partner for institutions seeking positive changes in response to their environment.