Global Trends: The Direction of the Exchange Industry in a Flat World

Transcription

1 Global Trends: The Direction of the Exchange Industry in a Flat World Dr. Antonio Riera March 25, 28 Agenda Global forces shaping the landscape Way forward and opportunities 1

2 Capital markets activity increased globally Increase in liquidity reflects new investors, technology Equity market capitalization of exchanges globally Total value of shares traded Market capitalization of exchanges (selected exchanges per region) 4 US$ Tn 8 US$ Tn 1 Region CAGR US$ Bn % CAGR Region CAGR Asia 11% Europe13% North 12% America % CAGR Asia 14% Europe 2% North 2% America % CAGR Region CAGR North 37% America 1 Asia 2 61% Europe 3 38% Nasdaq and TSX; 2. HKEx, SGX and ASX; 3. Deutsche Borse, OMX, LSE; 4. Selected based on those with time series going back to 22 (same sample set over time) Source: WFE, BCG analysis 2 Turnover velocity likely to increase in Europe and Asia Driven by lower barriers for trading, new product introductions North America Europe Asia Pacific 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Average for developing exchanges is 62%, while average for developed exchanges is 94% Source: WFE; Exchange benchmarking; BCG analysis 3

3 Exchanges possess unique assets... Comparison of exchanges versus other types of financial institutions Exchanges Balance sheet based financial institutions Non-balance sheet based (e.g., asset mgrs, info providers) Margins Relatively high margins Lower margins Strong margins 1 Scalability Fixed cost business Limited scalability Relatively scalable Quasi monopolies? Quasimonopolies Many players Many service providers Protection in downturns Retains its value in downturns More exposure in market downturns Sensitive to market downturns Annuity business Annuity streams Linked to interest rate Annuity streams 1. Typically 2%-4% operating margins (example T.Rowe Price and Janus) Source: BCG analysis 4 consist of three main categories... Number of contracts (Mn) 2,5 2, 1,5 Size of derivatives and cash transactions for selected exchanges, 26 Derivative specialist (Avg. PE: 52) CME P/E ratio vs. value of traded shares KRX Deutsche Börse 1, 5 CBOT CBOE ISE PHLX NYMEX American Börse Malaysia Osaka BOVESPA NSE India 4, Taiwan 26 Market Cap (US$ Bn) Shanghai (2) Regional contenders (Avg. PE: 32) Listed Plan to demutualize Global heavyweights (Avg. PE: 26) Demutualized Association NYSE- Euronext ICE- ASX HKSE OMX NYBOT SWX Tokyo LSE Shenzhen Thailand JSE Toronto (TSX) Nasdaq BSE SGX -5-1, 1, 2, 3, 5, 2, 4, 25, 26 Turnover (US$ Bn) 5

4 ... and perform crucial function for real economy Demand for capital Interface "The capital markets" Supply of capital Government Municipals Large companies Mid-market and Small companies Individuals EXCHANGE market access trading platform disclosure standards supervision Domestic Foreign Households Banks Pension funds Insurance co.s Investment funds Venture capital FDI Foreign portfolio Foreign lending Macroeconomic effects Economic growth Higher productivity and capital growth Higher employment Better developed financial sector + Microeconomic effects Wealth creation for private investors More flexible financing for companies Higher M&A power Driving entrepreneurial behavior 6 Four global trends affect all exchanges... 1 Globalization 2 New players and products Liquidity and better valuation potential in major exchanges Lower cost of capital for companies Higher risk-adjusted returns for investors New products becoming mainstream (e.g., derivatives, ETF s) Hedge funds growing very fast Private equity players driving market activity 3 (De)-(Re) regulation 4 Concentration Elimination of national regulation-based access Introduction of MiFID Increasing potential to internalize trades Dominant and growing share of large: asset managers broker/dealers Reduction of trading, payment and settlement cost Expansion of cross-border trading (1) February 26 7

5 Globalization is self-fueling and redefining exchange business models and competitive strategies 1 Issuers seeking the lowest cost of capital - globally Global brokers driving cash and derivatives intermediation across markets Capital Market Investors pursuing the best risk adjusted returns globally Global asset managers increasing market share, and new players (HF/PE) operating globally De-regulation enabling further globalization via elimination of domestic market protection 8 1 Global players redefining the new rules of engagement Pretrade 1 Driving asset class convergence Product engineering and development Market information Marketing & pre sales Research and analysis Consumer provisioning 2 Accessing multiple investor pools Access Order management Order matching Trade management Clearing Settlement Trade Financing Posttrade 3 Leveraging transactional efficiency Integrated liquidity pools Single-point access Portfolio/Trade administration Scale economies Shared IT costs Fund administration 4 Pursuing capital efficiency Common clearing Cross margining Collateral sharing Asset redeployment Single-point access Scale Shared IT costs Integrated reporting Custody/safekeeping Major participation by exchange Some participation by exchange Source: STAFA overview, BCG case experience 9

6 2 Growth in new asset classes outpacing traditional ones CAGR, (%) 45 Estimated size, 26 ($trillions) Scale = $1 trillion 4 35 Commodities Innovative products Funds of hedge funds 3 25 ETFs Passive equity LDIs Structured products Certificates Hedge funds Absolute return Passive fixed income Fixed income specialties Traditional equity Equity specialties REITs Quantitative products Real estate Private equity 5 Money market Traditional fixed income Active products Revenue margin (basis points) Source: BCG analysis. 1 Growth in derivatives markets outpaced cash equities Equity index futures with highest growth CAGR 12% Annual Growth Rate in Cash Equities and Equity Derivatives 1% 8% 6% 4% 2% % Americas Europe Asia World Cash equities (trading volume) Equity index futures (# of contracts traded) Single stock futures (# of contracts traded) Single stock options (# of contracts traded) Source: WFE Equity index options (# of contracts traded) 11

7 Growth in equity derivatives is expected to increase trading velocity in cash equity growth in derivatives and increase in cash equity turnover velocity Net increase in turnover velocity 6% 4% TSE 2% HKEx Bursa ASX Malaysia % SGX KRX -2% Growth in # of contracts traded (million) -4% -6% = growth in market capitalization = complete suite of equity derivatives (index & single-stocks) = insignificant single-stock derivatives = Only index futures Source: WFE 12 2 High growth potential from small cap issuers Higher Growth in Small Cap Stocks Market Capitalization Growth Comparison (23-6) 23-6 CAGR 6% 15% Several Examples of Strong Second Markets Small Cap Market as % of Total Market Capitalization (26) 5% 4% 1% 3% 2% 5% 1% % Americas Asia Europe World % Warsaw SE KRX LSE TSX SET Small Cap Market Osaka SE Athens SE Bursa Malaysia Bombay SE Overall Market Source: WFE 13

8 3 Deregulation enabling exchange demutualization and listing North America Latin America EMEA North Asia South Asia SEA + ANZ Listed Exchanges NYSE CME(1) CBOT NYMEX NASDAQ TSX Montreal SE Bolsa De Santiago Bolsa De Lima Bovespa Buenos Aires SE LSE OMX AB (2) Deutsche Borse AG Euronext (3) Oslo Borse BME Spanish Borsa Italiana HKSE Osaka SE ASX NZX SGX Bursa Malaysia PSE Demutualized Exchanges In process of demutualization CBOE Boston SE Bolsa Mexicana Bolsa De Colombia MICEX Luxembourg SE Irish SE Mauritius SE Tel Aviv SE Budapest SE Ljubljana SE Weiner Borse SWX WSE Istanbul SE Cairo & Alexandria Malta SE KRX TSEC TSE JASDAQ Nagoya SE NSE BSE Colombo SE Karachi SE JSX Other Mutual Exchanges RTS SE Shanghai SE Shenzhen SE SET 1) On Oct 17, 26, Chicago Mercantile Exchange signed a definitive agreement to merge with Chicago Board Of Trade (CBOT). The new entity will be called CME Group Inc. 2) OMX AB consists of Copenhagen SE, Stockholm SE, Helsinki SE, Tallinn SE, Riga SE, Vilnius SE, Iceland SE and major interest in Oslo SE 3) Euronext NV consists of Euronext Brussels, Paris, Amsterdam, Lisbon and LIFFE. In 26, Euronext agreed to be acquired by NYSE to form NYSE Euronext Source: Press Search, Company Websites 14 3 Listed & demutualized exchanges dominate world trading Listed and demutualized exchanges contributed >9% of world trading volume In Asia Pacific, trading volume growth is driven mainly by demutualized exchanges 6, 5, World exchanges trading volume (Bn USD) Listed %CAGR ( 2-6) 18.9 %Share trading (6) 76.6 Asia Pacific exchanges trading volume (Bn USD) World , Asia Pac 3.9 9, 8, Demutualized %CAGR ( 2-6) 3.1 %Share trading (6) , 7, 6, 3, 5, 4, 2, 1, Demutualized Mutual/Others , 2, 1, Listed Mutual/Others Private Source: World Federation of Exchange 15

9 Demutualized exchanges have seen accelerated growth Example: Australian Stock Exchange 3 Explosive growth in market capitalization and trading value Leap in listed companies Strong efficiency improvements Market cap. & trading value (AUD Bn) Listed companies Cost to income ratio Demutualized in Trading value Market capitalization CAGR Mkt cap. +11% Trading val. +14% CAGR 98-6 Mkt cap. +16% Trading val. +23% CAGR Listed cos. +1% CAGR 98-6 Listed cos. +5% CAGR 98-6 Cost/ Income ratio -11% 16 3 Listed exchanges with significant improvement in valuation Average Price/Earning ratio of exchanges 1, 2-27YTD P/E ratio (x) Average P/E: ~17x Average P/E: ~26x 1 # exchanges YTD Top exchanges within each region (weighted by market cap) Note: P/E Ratio as at end June 27 Source: Bloomberg, BCG analysis 17

10 Re-rating driven by growth rate and margins With derivatives and CSDs driving higher valuations 3 P/E (26) vs. Revenue growth (CAGR 23 to 26) P/E (26) vs. Operating margin (26) 5 P/E (x) HKEx 5 P/E (x) HKEx 4 ASX 4 ASX 3 2 Deutsche Borse LSE OMX NYSE TSX Nasdaq SGX 3 2 Nasdaq OMX NYSE LSE Deutsche Borse SGX TSX 1 1.% 1.% 2.% 3.% Operating margin change (26-23) >2% Operating margin change (26-23) 1%-2% Operating margin change (26-23) <1% Revenue CAGR (23-26) Note: P/E values reflect end-year 26 figures; Nasdaq figure adjusted to exclude liquidity rebates from revenues Source: Factiva, Bloomberg, Company annual reports; BCG analysis % 1% 2% 3% 4% 5% 6% 7% 8%.5 Operating margin (%) 26 Revenues (US$ Bn) 18 Asset management concentration and M&A is on the rise Bigger and more expensive deals 4 Number of mergers and acquisitions of asset managers 1 Acquired AuM ($billions) Total price of acquisitions ($billions) ,5 2, , ,5 1, , AuM ($billion) / number deals Price/AuM (%) Brokerage industry is essentially consolidated Sources : Berkshire Capital; BCG analysis. 1. Including institutional asset management, mutual funds, wealth management, real estate funds management, and hedge funds. 19

11 Top global players have kept pace with market growth $549B AuM threshold to be part of top 2 in 26 vs. $29B five years before Rank Asset management company 21 AuM ($B) Rank Asset management company 26 AuM ($B) 1 Fidelity Investments 2 Barclays Global Investors 3 State Street Global Advisors 4 JPMorgan Fleming Asset Management 5 The Vanguard Group 6 Capital Group International 7 Deutsche Asset Management 8 Mellon Financial 9 Allianz Global Investors 1 Merrill Lynch Investment Management 11 Morgan Stanley Investment Management 12 Citigroup Asset Management 13 Alliance Capital 14 UBS Asset Management 15 ING Asset Management 1 16 Zurich Scudder Investments 17 Putnam Investments 18 Northern Trust Global Investments 19 Wellington Management 2 Bank of America Asset Management Barclays Global Investors Fidelity Investments State Street Global Advisors Capital Group companies Allianz Global Investors BlackRock The Vanguard Group JPMorgan Asset Management Legg Mason Mellon Financial Corporation Natixis AM ING Investment Management Deutsche Asset Management UBS Global Asset Management Credit Agricole Asset Management Northern Trust Global Investments AllianceBernstein (AXA group) AXA Investment Managers Prudential Investment Management Goldman Sachs Asset Management 1,623 1,575 1,534 1,32 1,164 1,75 1, Scale key to competitiveness driving concentration 1. Including Baring AM Note: Alliance Capital renamed to Alliance Bernstein (kept separate from AXA IM) Source: Global investors Dec 26/Jan 27 = New in top 2 - primarily acquisition-driven growth = New in top 2 - primarily organic growth 2 Global forces driving exchange consolidation and changes to the current business models Global forces shaping industry landscape Increasing Consolidation pressures 1 Globalization 2 3 New Players Exchange (De)-(Re) & Products regulation 4 Concentration Investors and issuers with more options to invest/raise capital Cross border competition from global/regional exchanges Competition from non-conventional competitors Consolidation of exchanges globally National exchanges at risk of being marginalized... need to address consolidation pressures 21

12 Global consolidation will accelerate, especially western markets Nevertheless, some standalone exchanges will still survive Pan-European consolidation likely to accelerate, Deutsche Bourse and LSE remain Asian consolidation will happen, but at a slower pace. Investment in prime target markets of India and China currently restricted by regulations Domestic US consolidation almost complete now looking to expand globally GCC/MENA overlooked by global players likely to start consolidating South America likely to remain; though now Brazil to emerge as a consolidator African exchanges mostly too small 22 Consolidation is inevitable and is redefining their business Madrid SE Valencia SE Barcelona SE Bilbao SE BVLP LIFFE Brussels SE Amsterdam SE Bourse de Paris NYSE PCX Arc Redibook GlobeNet AMEX Iceland SE Copenhagen SE Vilnius SE Stockholm SE Helsinki HEX Nasdaq Strike Brut Island Instinet Philadelphia SE Boston SE London SE Borsa Italiana Deutsche Börse ISE CME CBOT NYMEX Source: Celent Report; Reuters; Press release Euronext Bolsas y Mercados Espańoles Nasdaq NYSE Euronext Bourse Dubai Nasdaq OMX 28 23

13 Evidence supports acceleration hypothesis Pace of consolidation is accelerating in mature markets and is well supported by exchange economics US Mn25, Global exchange M&A activity YTD Consolidation improves liquidity... Average growth rate of market cap to GDP ratio (2) Average growth rate of turnover velocity (3) 2, 15, , Pre Post Pre Post 5, Feb- 8 2 Total Mkt Cap (SEK B) Completed deals only, except for 28 YTD (Feb 28) 2. Average of 3-yr CAGRs of the ratio of market cap to GDP for Euronext, OMX and BME exchanges, pre- and post-consolidation 3. Average of 3-yr CAGRs of turnover velocity (turnover divided by average year-end market cap from current and preceding year) for Euronext, OMX and BME exchanges, pre- and post-consolidation Source: BCG analysis, Euronext, OMX, BME Spanish exchanges as well as margins OMX total market capitalization and operating margins, Total Mkt Cap Operating margin 6 Operating 5 margin 4 (%) Within Asia, change in landscape expected to continue, with market cap. of China & India surpassing Japan by 212 Asian exchanges by market capitalisation (27) Asian exchanges by projected market capitalisation 1 (212) Future ranking Current ranking Tokyo SE Shanghai SE HKEx Bombay SE NSE India Shanghai + Shenzhen SE NSE India + Bombay SE Tokyo + Osaka SE HKEx #1 #2 #3 #4 #2 #4 #1 #3 ASX KRX Shenzhen SE Taiwan SE SGX Bursa M'sia ASX KRX Taiwan SE SGX Bursa M'sia #5 #6 #7 #8 #9 #5 #6 #7 #8 #9 Osaka SE IDX SET Philippine SE NZX HoChiMinh SE IDX SET Philippine SE HoChiMinh SE NZX #1 #11 #12 #13 #14 #1 #11 #12 #14 # Market cap (US Tn) 1. Based on forecasted GDP growth and expected depth of capital market for the respective countries; Expected depth of capital market is based on historical trend line analysis Source: EIU; World Federation of Exchanges; BCG analysis Market cap (US Tn) Gained position Lost position 25

14 Globalization, demutualization and market discipline require a clear strategy and course of action How are our domestic market operations and capabilities compared to other major markets? What is preventing foreign institutions from increasing investment? How do our key stakeholders view us, and what changes do they want to see? What is our relative position? What do we want to be? How to get there? What is the best course to gain crossborder business? Should we go public? How to increase float and convince the right companies to list on our exchange? Should we expand our product set more aggressively? Should we go for alliances; what type; with whom? 26 Agenda Global forces shaping the landscape Way forward and opportunities 27

15 Exchange consolidation driving agenda But requires a strong domestic position Exchanges need to become more crossborder and multi-product exchange Exchanges need to develop the scale and breadth required to compete with other global players Build up liquidity and trading volumes Offer wide range of products, in line with other leading exchanges Best-in-class regulatory and back office functions However, a phased approach is critical Need to develop internal capabilities before looking at acquisitions Unbalanced alliances or mergers likely to backfire Developing requisite capabilities is immediate portfolio strategy priority Strategic initiatives required to position for the end-game Focus energies to strengthen domestic market Enhance suite of products, services and core capabilities Pursue value added regional alliance opportunities Develop connectivity with relevant capital markets Consider partial alliance opportunities along the value chain Develop strategic intelligence capability to gather required information 28 BCG s perspective on evolving landscape Evolving transaction engines are instrument and market insensitive Equities Derivatives Bonds Funds Derivatives Equities Bonds Transaction engine Funds Trading Clearing Trading Clearing Settlement Settlement Trading Clearing Trading Clearing Settlement Settlement (Trading) Netting Settlement Custody Integrated Risk Management Position mgmt. Margining Collateral mgmt. Banking Services Connectivity & Capital Management Information Regions More or less operating as silos Transaction processor and risk manager, across instruments and markets Opportunities exist for providers to facilitate and drive industry transformation 29

16 Three killer moves" to strengthen and reposition the exchange Equities Derivatives Funds Bonds Information Profitability and improvement IT systems (operations and pricing) Trading Clearing Settlement Growth strategy information products Growth strategy systems & entry Overall growth strategy for cash market Cooperation/merger with LSE SWX, Spain, Italy US-market entry, equities IT-Platform cost management 1 ECCP product & service strategy 2 Growth strategy in bond & repo trading Acquisition of bond & repo platform OTC clearing for bonds & repos Cash & derivatives integration Fat clearinghouse Concerted strategy, XTF market (Xetra, Eurex, IP) New products initiative Cross-product clearing services Transaction processing excellence Acquisition strategy for clearing layer Acquisition strategy in settlement & custody CSD links Integrated risk management, Local markets strategy Clearstream clearing and Repatriation asset of optimization bund settlement 3 24-hour trading US-market entry derivatives Partnering with/development of east Asian exchange New product initiative Regional connectivity OTC clearing for derivatives Group-wide packaging & pricing strategy Transaction banking joint ventures Custody services Fund accounting & admin services Straight-through processing Straight-through processing Straight-through processing Straight-through processing Source(s): BCG project experience 3 Successful global bourses evolved through the pathway Global network Global network Global network Domestic champion Regional player Domestic champion Regional player Regional player Domestic champion Global network Regional player Domestic champion OMX + Nasdaq 1998 Stockholm Baltic Copenhagen Iceland 28 Helsinki exchanges Initial efforts focused on development and Acquisition of regional exchanges integration of Swedish and Finnish capital market Developed capabilities in exchange technologies, i.e., IT systems Leading European exchange network, operating 8 exchanges Acquisition by Nasdaq to form 2 nd transatlantic network Euronext + NYSE 199s Paris Bourse led effort in European alliance initiative 2 22 LIFFE, BLVP Amsterdam, Brussels Merger to form first Pan European integrated equities and derivatives exchange Headquartered in Paris Acquisition of LIFFE and Lisbon SE 27 NYSE Acquisition by NYSE, 1st global exchange Recent interest in Asian markets, e.g., NSE India 5% equity stake, representative office in Beijing to support China based listings Source: Literature search 31

17 Regional (NOREX - precursor of OMX) alliance provides a very credible and very beneficial pathway increasing liquidity 3 European Exchanges Velocity (indexed) 125 Velocity by Exchanges (3) Additional synergies exist... Increased cross membership 1 75 European Exchanges (2) NOREX (1) HEX and Baltics join NOREX Better negotiation with information providers (e.g., Bloomberg, Reuters) Delivering a more consistent product for regional and cross-border investments 5 25 SAX goes live between SB and CSE OB and ICEX join NOREX However, clearing & settlement being outside of OMX / NOREX scope will continue to be a barrier to international trades (1) Stockholm + Copenhagen + Oslo + ICEX (2) Member of the Worldwide Federation of Exchanges (3) Velocity is calculated as yearly turnover / year end market capitalization Source: Worldwide Federation of Exchanges; NOREX; HEX; BCG Analysis 32 Domestic excellence is a precursor for global consolidation Strength of domestic capital markets infrastructure Liquidity supply and demand Market infrastructure trading, clearing and depository platforms Disclosure and regulatory environment Functionality, transactional efficiency and cost Position for market evolution One common venue to trade, clear and settle multiple instruments Transactional effectiveness and efficiency Risk management across instruments and markets Capital optimization and data connectivity Alliances and merger options from a position of strength Regional and Global Positioning Scope of alliance or merger across value-chain (clearing and depository vs. trading) Given the rapid industry transformation and exchange consolidation, Exchanges AND intermediaries (e.g. brokers) need to transform themselves Source: BCG Perspectives 33

18 ... But need to prepare organization for drastic changes Drastic Changes in attitude The process of demutualization is not simply a case of changing the words in the rulebook or constitution. It involves a change in attitudes within and outside the organization, changes in philosophy, changes in organizational structure, changes in working practice... we ve reinvented LIFFE twice or three times over Focus on Costs and Profitability - Deputy CEO, LIFFE Cost has always been on the mind of the users; now it s going to be on the mind of the exchanges... In the past, trading volume was the measure of success. Now it will be who is the most profitable, who has generated the most revenue to shareholders, who has the biggest market cap - COO, HKEC Change of executives roles & focus We have seen our members go from owning 1% of the exchange to roughly 15 to 2%. This changes the CEO s job - CEO, SGX Source: Press search 34