Eurex Clearing AG 25 August 2015

Transcription

1 Eurex Clearing AG 25 August 2015

2 Position Trend Profitability Average Stable Asset Quality Strong Stable Capital Average Reducing Size/Diversification Strong Improving Liquidity & funding profile Strong Stable Management & Strategy Strong Stable Risk Management and Derivatives Strong Improving Market Position Strong Improving Individual disclosure Weak Stable Regulation and Supervision Strong Improving GDP growth forecast Weak Stable Stability of the finance sector Average Stable Government Support Strong Reducing Group Support Strong Stable Ratings Moody's S&P Fitch DB NR AA NR Outlook NR *- NR Country of domicile: Germany Regulators BaFin, Bundesbank, SNB, FINMA Net Revenue Distribution of DB (FY13) Key Financials (EUR m) FY13 FY12 Eurex Clearing Revenues Expenses Profit Transfer Net Profit Assets 16,763 19,828 Equity ROE 0.49% 0.85% Capital Ratio 25.4% 15.2% Deutsche Börse Revenues 2,217 2,209 Expenses 1,487 1,235 Net Profit Assets 189,310 19,4786 Equity 3,268 3,169 ROE 14.64% 20.35% Interest Coverage Gross debt/equity P2

3 Eurex Clearing AG Eurex Clearing AG (EC) is Deutsche Börse (DB) Group s clearing house, and services the derivatives, equities, bonds and secured funding and securities financing markets. DB is one of the leading global marketplace organizers for trading securities and derivative products. It also offers different products related to risk and collateral management. Its presence is mainly in Europe and US but it is increasing its reach in Asia and Africa. EC acts as a central counterparty (CCP) between buyers and sellers, and holds their collateral against trade positions. It is a wholly-owned subsidiary of DB via Eurex Frankfurt AG, which is an intermediate holding company for four Eurex group companies. EC s creditworthiness is closely linked to DB s, as the two are intricately linked structurally and operationally. Eurex is fully owned by DB and has a profit transfer agreement wherein most of the profit of Eurex is transferred to DB. EC has a letter of comfort from DB for losses up to 700mn (almost 3x EC s balance sheet equity) for clearing member default. Also, 80% of DB s (IFRS) balance sheet was made up of financial instruments of EC, while almost all of Eurex s revenue and expenses are related to DB group entities. P3

4 QUANTITATIVE Profitability DB Solvency and Leverage (x) For FY13, EC reported a profit of 0.398mn (2012: 0.792mn). The underlying profit was 1.227mn (2012: 1.186mn) before profit transfer to Eurex Frankfurt AG. Other income was 101.3mn, up by 1.1% yoy. Most of this income (98.5%) was for services provided internally to Eurex/DB group. NII was 1.443mn (2012: 8.5mn). The drop in NII was primarily due to low interest rates. Since it is a clearing house, Eurex doesn t have any commission income and the commission expense ( 1.75mn) was mainly due to bank fees. DB reported a net profit of 478mn for FY13, down 26% yoy from 645mn. Net revenue dropped 1% yoy to 1.91bn, in line with the guidance of 1.8-2bn. The improvement seen towards the end of the year (Q4) was expected given the strong market conditions, and this helped support the overall FY13 performance. The drop in profit was mainly due to low market volatility and interest rates which resulted in a fall in derivative trading volumes (-7% yoy). Though net revenue decreased only marginally (NII driven), EBIT and net profit fell by 5% and 26% because of a 23% increase in costs. Adjusted for efficiency programmes and an Office of Foreign Assets Control settlement over Iran sanctions (EUR 152m), operating costs will only have been 5% higher at 968mn. Overall, the FY performance was broadly in line with guidance and expectations, and highlight the significant influence of market conditions and cycles on DB s performance. Asset Quality Since the only receivables of significant size are cash collateral and receivables from affiliated companies, there are no assets defined as non-performing or in-arrears by Eurex. P4

5 Capital and leverage Eurex exposure by counterparty (FY13) The total capital ratio was 25.4%, with the regulatory minimum (KWG) at 79mn (8% capital ratio) vs the total amount of core capital of EC at 249mn. A minimum solvency ratio of 8% applies to all the regulated companies of DB like EC, Clearstream etc. The capital requirements for credit and market price risks of EC AG are relatively stable despite volatile total assets, since it has a high percentage of collateralised or zero-weighted cash investments. Capital requirements under EMIR are higher, at 217mn for EC. Against this, EC had an adequate buffer of ~ 32m. Size Eurex exposure by geography (FY13) Most of EC s 16.76bn in assets are in Switzerland (49.7%), Germany (28%) and other regions of Europe (21.8%). There are small exposures (<0.5%) in N.America and Asia. These assets are mainly in 3 categories: Foreign bank balances (52%), reverse repo (45.8%) and bank balances/ receivables from clearing business (1.36%). According to counterparty type, most of the receivables were from Central Banks/govt ( 9.2bn) and Institutions ( 7.5bn). DB reports 189bn in total assets. Most of these are financial instruments of EC (81%). The difference in balance sheets arises from the fact that DB reports according to IFRS while EC numbers are under HGB. The rest is mainly receivables from banking business (5%) and trade receivables/current assets. Restricted and cash bank balance amounted to 17bn. P5

6 Liquidity and funding profile DB Debt Maturity EC has to meet stringent liquidity requirements due to its status as a CCP. Since it has extended its license to become a deposit and credit institution under the German Banking Act, EC has been able to utilize standing facilities at the Deutsche Bundesbank. Stress test calculations are carried out on a quarterly basis (by EC) for liquidity risk and based on these stress tests (report undisclosed), EC claims sufficient liquidity. EC has to comply with regulation from multiple institutions like KwG, BaFin, SNB, EMIR etc. which have different requirements regarding liquidity and though the exact figures of these tests are not public, EC seems to comply with all of these regulatory requirements. EC has very little liquidity risk as its durations of customer cash margins and investments are closely matched. Under the broader DB group, Clearstream operates under strict mismatch and rate limits. Apart from these measures, DB has access to a total of 10.7bn worth of letters of credit/facilities directly or through its subsidiaries ( 5.1bn: Clearstream Banking from Euroclear Bank S.A./N.V., 2.1bn: EC from Euroclear Bank, Commercial Paper: DB- 2.5bn, Clearstream-1bn). DB has 1.8bn of market issuance, of which two are bullets and one is a hybrid with first call at 2021 (maturity 2041). Eurex traded contracts (EUR mn) P6

7 Qualitative Trend EurexOTC Clearing Volume (EUR mn) Aside from 2011 results, when there was a fall of 15% yoy, EC s net income (before profit transfer) has been consistently moving up, and had a 3.5% yoy rise in 2013, though the asset size has been falling since 2011 (2011: 16.7bn, 2013: 19bn). It cleared market risks worth trillion euros (gross monthly average) for DB vs trillion in Clearing volumes increased in but have been falling since then, mainly due to fall in number of transactions and are not expected to rise in short term (2013: 1.55bn contracts, 2012:1.66bn, 2011: 2.04bn). In cash markets, clearing volumes for transactions involving equities has also been in decline since 2011 (2013: 88.4mn, 2012: 99.5mn, 2011: 126.3mn). Equity index derivatives have had the biggest share of revenues since 2010 and the highest clearing revenues/ volumes each year with 650mn contracts in 2013 (2012: 770mn, 2011: 959mn, 2010: 809mn). The decline was due to investor caution about the Eurozone economy. Equity derivatives clearing volume have been falling from 2010 (2013: 385mn, 2012: 413mn, 2011:450mn, 2010:512mn). The interest rate derivatives steadily fell but in 2013 had a slight jump at 510mn, though it is not yet at the 2010 levels (2012: 470mn, 2011:630mn, 2010: 575mn). The OTC derivative market has been shifting towards being centrally cleared due to change in regulations as well as market member s perception of reduced risk at CCPs. In mid-2013, 60% of the total OTC derivatives were centrally cleared but this number is expected to rise to 75% once the clearing obligation across all markets is implemented. EC is well-positioned to take advantage of this trend, especially with its product EurexOTC Clear which is used for clearing interest rate swaps and other OTC products. P7

8 Financial Stability A CCP like EC has the capacity to significantly reduce risks to market pariticipants thorough more risk control measures. They provide additional stability to markets due to multilateral trade netting and increasing liquidity. Though CCPs provide multiple stability benefits to the market but since they themselves handle massive concentrated risks, in case they default, the fallout could be highly disruptive. Their risk management is usually DB deals IPO of Deutsche Börse Full acquisition of Clearstream Acquisition of ISE Stake in STOXX increased to 50% Majority stake in EEX Full acquisition of Eurex EEX / CGSS consolidation very robust. They need higher buffers than other institutions. CCPs are heavily regulated, and have multiple ways of addressing systemic risks related to excessive risk taking, high interconnectedness of market participants and insufficient collateralisation of market and credit risk. Through bouts of crises, the sector has held up well. Management and Strategy EC is a wholly owned subsidiary of Eurex Frankfurt AG, which forms part of DB. Hence, EC s management and strategy is heavily influenced by DB. In the European exchanges, growth in the exchange sector has mainly been through M&A. DB has a significant presence and expanding exposures in the areas which have the potential to increase the revenue stream i.e clearing, trade reporting and collateral management. DB has grown over the years through diversifying into different regions and businesses, usually via inorganic growth. Apart from the main deals (in table on the right), DB is building an Asian presence via an agreement with the Taiwan Futures Exchange (TAIFEX) and, through Clearstream, with the Singapore Exchange (SGX). It also developed a strategic coperation agreement with Bank of China and has rolled out its derivative trading system with Bombay Stock Exchange (BSE) in India. In 2014, DB signed a deal with Shanghai Stock Exchange which would act as distributor and licensor in China. In Philippines, it signed a letter of intent to collaborate on market data, product development, and expansion of distribution channels for real-time data with P8

9 the Philippine Stock Exchange. It also has distributed bond indices and govt bonds prices for some African countries as well as African Stock Exchange using Xetra (DB subsidiary) which will provide security trading pan-africa. And in Norway, DB marketed its IT services to Norexeco (Norway Paper/Pulp Exchange). As such, DB s strategy is one of continued expansion into related areas geographically as well as in lines of business. In the last few years, DB has tried to merge with both London Stock Exchange (LSE) and NYSE Euronext, but both fell through (NYSE rejected based on antitrust grounds as the combined entity would be the world s largest trading house and create a de facto monopoly ). Risk management and derivatives Unlike at banks where the main capital requirement is for credit risk, for EC (and DB) this is for operational risk. These include availability risk, service deficiency, physical asset damage and legal risks. However, counterparty credit risk is a bigger on a gross basis but is almost wholly mitigated and hence requires very little capital. In case of clearing member in default, the key elements of EC s risk management are: Position netting of the member Collateral of the member Clearing Fund contribution of the member Dedicated amount of EC Clearing Fund contribution of all other Clearing Members Maximum two assessments per Clearing Member Parental Guarantee of DB (Letter of Comfort of 700mn) Remaining Capital of EC Other financial risks for EC (market and liquidity risks) are relatively limited. EC has to meet stringent liquidity requirements due to its status as a CCP. EC can utilise standing facilities at the Bundesbank since extending its license to become a deposit and credit institution. Stress test calculations are carried out for liquidity risk quarterly. In addition, EC implemented inverse stress tests on liquidity risk in These tests analyse which scenarios would additionally have to occur to bring about a situation of insufficient liquidity. P9

10 Market position DB is one the main marketplace organisers and transaction services provider in the EU and consequently the world. Eurex is the largest derivatives market in Europe, and thirdlargest in the world. Clearstream is a major global post-trade provider while Xetra is the front-runner in European ETFs with almost 33% market share. The business model of DB (as a sum of EC, Xetra, Clearstream and Market Data+Services) has a high degree of vertical integration that other top exchanges do not. For e.g. only DB provides collateral management, CME doesn t provide cash market services, LSE provides only a few services in the derivatives market etc. This whole combination helps DB in engaging market members as it acts as a one-stop marketplace. Individual disclosure EC publishes its standalone financials (annually) and the disclosure is not as detailed as that of its parent company, DB, which provides quarterly reports and segment information. P10

11 Environment Regulation and Supervision EC is incorporated in Germany and licensed as a credit institution under supervision of the BaFin pursuant to the Banking Act. BaFin supervises EC in co-operation with the Bundesbank - EC is recognized as a Securities Settlement System under the EU Settlement Finality Directive and hence also falls under the oversight authority of Deutsche Bundesbank. EC is also an authorized clearing house under the European Market Infrastructure Regulation (EMIR). EC has been recognized by the Swiss National Bank and the Swiss banking Supervisory authority, FINMA, as being systemically important to the Swiss market. Therefore, both authorities have put EC under their supervision also. The annual reports of EC AG are prepared in accordance with the provisions of the German Commercial Code (HGB), the German Stock Corporation Act (AktG) and the German Ordinance Regulating the Accounting Requirements for Financial Institutions and Financial Service Providers (RechKredV). In 2012, the framework for principals for financial market infrastructures were published by Committee on Payments and Settlement Systems (CPSS) and the Technical Committee of the International Organization of Securities Commissions (IOSCO). The development of EC s business strategy is in line with the adoption of changed regulatory conditions. With EMIR, MiFIR/MiFID II, Basel III and the implementation in European law through the Capital Requirements Regulation/ Directive (CRR/CRD IV), new regulations were introduced during EC is reapplying as a CCP under EMIR (as at end-dec 13). It has also introduced a clearing obligation for standardised OTC derivatives, which will have to be cleared via a CCP. EMIR has already been in force since 16 August 2012, although the definitive introduction of the regulatory obligation requiring central clearing for OTC derivatives in Europe is not anticipated until the end of 2014 or Q Also new guidelines/framework for higher transparency of OTC derivatives market are expected to be rolled out by MIFID II/MIFIR during P11

12 GDP growth forecast As per the OECD s latest real GDP growth forecast, Germany (1.56% in FY-15 and 2.32% in FY-16), Switzerland (0.77%, 1.68%) are expected to underperform the OECD growth rate (1.9%, 2.5%) in the next two years. Stability of the financial sector The German and Swiss financial sectors are two of the biggest financial sectors in the world. Entities in both sectors have benefitted and continue to benefit from relatively good government financial positions as well as stable macro-economic indicators. In particular, the German banking sector saw multiple bail-outs following the crisis in 2008, when banks across sectors (private and landesbanken) had to be supported via capital and liquidity measures by both the central government and local state governments. In Switzerland, the government had to step in with an asset protection scheme and capital support for UBS. The issues in both sectors were mainly related to exposures outside the home countries. There were no defaults or bail-ins in any of the banks. Other parts of the financial sector, in particular those related to market infrastructure such as CCPs and exchanges, have held up well through the crisis with no instances of failure. We expect that this will remain the case with more intense regulation due to an increasing amount of market transactions via CCPs. GNI per capita As per the World Bank, GNI per capita of Germany was $47.25k in 2013, $90.6k in Switzerland vs $35.5k for the eurozone and $44.4k for OECD. Support/burden EC credit remains highly interlinked with that of the DB group, and there is a very high probability of support from the parent. P12

13 Organizational Structure 50% 50% 100% 79.44% 62.8% P13

14 Financials DB Financials P14

15 Eurex Financials P15