AST: Firstly, tell us about the history of SIX Securities Services.
Zeeb: The SIX Group was formed at the beginning of 2008 following the merger of SWX Group, Telekurs and SIS Group.
We are now the infrastructure provider for the entire value chain in Switzerland, from trading through clearing and settlement and the information provision required for high-quality asset servicing. I cover the post trade side of the business, which includes CCP clearing through SIX x-clear, CSD services for the Swiss market as well as cross-border settlement and custody in 65 markets through SIX SIS, and Registrar services through SIX SAG.
AST: How do you see the market?
Zeeb: We’re seeing steady levels of activity in the settlement space. It’s nowhere near the volumes seen prior to 2008, but it’s stable. Likewise the custody side is stable, but it’s not yet at pre-crisis levels. Because of low interest rates, interest income has almost dried up completely, and that means firms - including ourselves - have had to become more efficient organisations.
Custodians are no longer finding their margins attractive once you take out interest revenue, securities lending fees, collateral fees and the like. So now you have to look at how you’re running the business, and where operational efficiencies can be realised.
AST: Does this mean that we are moving back to custody as a fully-priced service?
Zeeb: I can’t speak for other custodians but there is certainly a greater awareness that the custody role and the safety of assets is worth paying for. Fixed costs are increasing because of the greater reporting and compliance costs. There’s only so much that can be compensated for through greater operational efficiency - there’s pressure across the whole industry to accommodate increased client and regulatory demands while keeping prices low. That inevitably will lead some players to reassess their presence in this industry.
AST: Has the profile of your clients changed since the crisis, in terms of the type of firm and their attitudes to risk?
Zeeb: As an infrastructure provider, our clients continue to be banks and broker dealers. I don’t think the risk profile of this group has changed, although risk weightings for different types of business have. What has also changed is the awareness of risk by clients and an increased reluctance to enter into activities they don’t fully understand.
As a result, we have found that there is a much more rigorous product development process being implemented by many of our clients. More questions are being asked by compliance and legal departments when going into new markets about who takes responsibility along the way. Ultimately, everyone would like to see someone else accept liability at the various steps of the value chain, but this is not necessarily realistic. The result is a closer working relationship with our clients in defining the impact of new products on risk, and on how these risks can be mitigated together in a cooperative environment.
An additional concern of all of us in the value chain, whether client or service provider, is to ensure that regulators understand what the roles, responsibilities, and interactions are between the various intermediaries and infrastructures.
During the Madoff case, for example, liquidators have been looking at who made the decisions and who executed those decisions. Custodians didn’t make them, so why should they be in the firing line? But other players in the chain do have to take responsibility for their part of the process - asset managers advising their clients, for example. By the time a custodian receives the instruction to settle, the decision to buy or sell has long since been taken and executed.
This is not about avoiding liability. Our role is fairly circumscribed - it’s to execute settlement instructions and look after the assets. But there is a fine line which we walk - we do not provide tax advice, nor do we provide investment advice. By the time we get the instruction, the trade has already been done. We take the responsibility for doing our job properly - protecting assets is our role. There is still a substantial education exercise required.
For those of us in the industry, the roles of the respective players are very clear, and based on this, investors can quite rightly make certain assumptions about asset safety in certain types of securities and jurisdictions. The somewhat disturbing difference now is that liquidators and regulators are looking for someone to pay the bill, and that has the potential to skew the responsibilities quite dramatically. It is important to look at the entire value chain that produces services for investors and it is clear that much more education is required.
The Barings collapse also provided a good example for why firms must not put trading and back office functions in the hands of the same person -separating these functions ensures that there are checks and balances in the process.
It’s important to remember that throughout the financial crisis no CSD failed - we all worked together to ensure that there was liquidity in the market. Our processes worked.
AST: What ambitions does SIX have for the market, both in Europe and globally?
Zeeb: The Swiss financial centre that we represent cannot be isolationist vis-à-vis the rest of Europe. There is so much going on and the landscape is changing so quickly that our model of a decade ago is no longer a viable option. Our plan is to expand beyond the 65 markets that we already work with.
In the first instance, the area highest on our radar is Europe. Various directives and initiatives have been launched by the EU that will affect Switzerland because there is an arrangement between the Swiss and European authorities to incorporate EU law into Swiss law. Beyond that we are very excited about India and the rest of Asia.
Both SIX SIS and Switzerland are strong brands and are a combination of delivering high-quality services in a sophisticated, safe and stable regulatory environment. We can take that and sell it abroad. At the same time, there are markets that have modelled their financial centres around Switzerland and we work with them to see how they can develop further.
AST: Are there too many CCPs in the market? Is consolidation inevitable?
Zeeb: There are currently far too many - over 20 in Europe with more announced, which will mean even greater fragmentation. That by definition decreases the potential efficiency, and safety, of a central counterparty.
I don’t know the optimal number [of CCPs]. Probably more than one, but less than four per country. The problem is that by increasing the number of CCPs, not only can each CCP net fewer transactions, but clients will be asked to provide additional collateral for default funds to cover potential inter-CCP risk. This fragmentation of collateral itself leads to an inefficient use of scarce resources and will be resisted by clients. As a result, a shake-out will inevitably occur. I believe that we will survive, because of our efficiency, our real-time risk modelling capabilities, and our strong capital base. At the moment it’s hard to identify the strategy behind some of the CCPs in the market and how they, and their shareholders, will fare in a more rigorous regulatory environment.
AST: What are your views on the implementation of Target 2 Securities?
Zeeb: Target2-Securities has been useful in defining a framework for harmonisation of settlement processes across Europe.
The issue I have with it is the huge investment required across every intermediary in the value chain, for a part of the business which generates neither the largest risks, nor the highest costs. Across the EU, CSDs have generally been quite efficient.
Ideally, as part of the market infrastructure, I would be keener to see a harmonisation of tax rules and/or corporate actions across Europe, as these are the areas where the costs and risks for all of us are substantially higher.
AST: How do you see the future?
Zeeb:From an infrastructure point of view, I believe that a number of CSDs across Europe will struggle to be competitive in a T2S environment, either because they will be unable to broaden their activities into the investor CSD space, or because their volumes are too low to warrant the substantial fixed costs of maintaining a safe and stable domestic market infrastructure.
Since we have already developed many of these capabilities, I am extremely optimistic that SIX Securities Services will benefit from new opportunities in the changing landscape in Europe. As other market participants assess their options, we will be well-positioned to help them provide services on a white-label basis, or indeed to work in cooperation with other infrastructure providers to expand the range of services provided to end clients. The combination of T2S and regulatory changes over the next few years will herald a fundamental change in how infrastructures and domestic custodians provide services, and I very much look forward to playing a larger role in this environment going forward.
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