Invited address delivered to the Joint European Central Bank/European Commission Conference The safety and efficiency of post-trading arrangements in Europe, 21-22 April 2008, Frankfurt, Germany Session 1: Central bank services and market facilities The view from a global banking perspective and T2S Robert Barnes, FSI Managing Director, Equities, UBS Investment Bank Chairman, Securities Trading Committee, London Investment Banking Association 1. Good afternoon Mr. Commissioner, Mr. President, Ladies and Gentlemen. I would like to thank the European Central Bank and the European Commission for inviting a humble practitioner to speak before such a distinguished audience. 2. From a global banking perspective, we wish to work in a spirit of partnership with Exchanges and Clearing and Settlement entities to promote liquidity and new business; and we thank the European Central Bank and European Regulators for a framework within which we can behave as entrepreneurs. 3. We believe T2S is an opportunity to reduce post-trade costs, subject to managing planning risk, and we thank the European Central Bank for User-inclusive governance. Please continue to listen to Users. 4. Now is also the time for agent banks and CSDs to seize the opportunity to make the next stage of the business case to us Users. 5. The key message, therefore, is that we urge incumbents and new entrants to volunteer proposals for lower fees and improved market efficiency. 6. Ladies and Gentlemen, your willingness to listen to and respond to this request is evidence of your focus to promote Best Practice and is central to the growth of market liquidity across Europe. 7. Ladies and Gentlemen, I am here today to represent UBS, my employer, and to share insights in a spirit of partnership and cooperation. UBS is the leading global wealth manager, a top tier investment bank, and asset manager. UBS is the largest trader of Cash Equities in the world and, following the UBS acquisition of ABN AMRO s global futures and options trading business in October 2006, UBS is one of the largest also in Exchange Traded Derivatives. UBS is one of the leading Equities and Fixed Income traders in and across the European domestic markets. 8. Therefore, we have a high interest in national, European and global initiatives, including T2S, that can lead to improved efficiency and lower cost. robert.barnes@ubs.com Page 1 of 6 Robert Barnes +44-20-7568 0315
9. Integrity is our number one priority. 10. Our landscape vision is one of Lower fees; Improved efficiency; and a Structure open to meaningful competitive new entry. 11. Why does this matter? Because lower fees increase liquidity, minimise market impact, and ultimately improve investment performance for issuers and end investors. 12. Ladies and Gentlemen, we face frictional costs at all levels of the value chain: reporting and transparency, trading and execution, clearing and settlement. 13. The free market alternative for addressing frictional costs is competitive new entry. 14. We prefer to encourage market solutions rather than prescriptive regulation. 15. Therefore, we thank the Regulators for establishing a framework encouraging competition. 16. Within this Regulatory framework, we have examples for Cash Equities across the value chain of new entrants like BOAT, Chi-X, x-clear, and incumbents like Deutsche Boerse, that volunteered proposals, attractive to Users, that are now in production. 17. We hope the T2S process will catalyse a similar approach for settlement. 18. We understand settlement has two aspects: Those subject to legal and fiscal constraints per country; and Those aspects not constrained by domestic frameworks. 19. The potential of T2S is to enable settlement providers the ability to operate across a pan European rather than just a national level for those aspects not constrained by domestic legal and fiscal differences. 20. As a case in point, UBS Investment Bank today uses 5 agent banks to service settlement with CSDs for 9 out of 10 Eurozone countries. With T2S, we may still need agent banks for asset servicing, for example corporate actions management, which is out of scope of T2S. 21. The prize for agent banks and CSDs and new entrants is to capture more business as a global bank like UBS may look to reduce the number of providers from 5 to 3 to 2 or 1 across today s 10 markets and capture further business from us as more countries enter the European Union. 22. Sure, there are issues, such as the fact that access to T2S comes through national CSDs, and T2S participation by CSDs is voluntary; robert.barnes@ubs.com Page 2 of 6 Robert Barnes +44-20-7568 0315
and projects like T2S need management of on-time delivery and valuefor-money; and we hope to avoid the unintended consequences that good progress elsewhere by national CSDs, Euroclear, Clearstream and others are not derailed. 23. So, if you share our entrepreneurial spirit and wish to take advantage of the opportunity offered by the European Central Bank and the European Commission, we urge you, the CSDs and agent banks, incumbents and new entrants, to volunteer proposals to us Users for lower fees and improved efficiency. 24. Here are some suggestions of minimum conditions for a successful proposal. First, post-t2s, the fees for settlement including agent and CSD and T2S must be less than today s combination of agent and CSD fees. Secondly, we welcome creative fee incentives for the balance of asset services notionally out of scope of T2S up the value chain. Generally, we appreciate tariffs that reward scale, like volume discounts and a cap on aggregate fees. 25. UBS is platform-neutral and pro-competition. 26. We evaluate initiatives with respect to economic and functional criteria, and successful offerings must be compelling on both. 27. We expect T2S is an opportunity to reduce post-trade costs, and for us that means lower fees. 28. Consider the successful track record of market-led initiatives that have embraced the pro-competitive frameworks from the Regulator in the face of complex challenges. 29. Reporting and Transparency: the successful new entrant of BOAT. (iv) (v) Pre-MiFID, approximately half of German Cash Equities traded away from the Xetra orderbook OTC Over-The-Counter and was not required to be published. EU Regulation MiFID mandated a harmonised transparency and obliged firms to report undisclosed trades including previously invisible but significant German OTC data. The consequence is a surge in new data. Firms, however, are no longer obliged to report only to domestic exchanges. The challenge was huge potential fragmentation of pan-european data. robert.barnes@ubs.com Page 3 of 6 Robert Barnes +44-20-7568 0315
(vi) (vii) (viii) (ix) We UBS and the industry responded with Project BOAT, a MiFIDcompliant Cash Equities reporting solution. The project launched on time for 1 November 2007 MiFID, and six months on: more than 22 firms report in aggregate more than a fifth of all European trade reports and this is more than that of the largest Exchange group in Europe, currently the combined London Stock Exchange+Borsa Italiana and trading platforms themselves, like NYFIX EuroMillennium and others are choosing to report all their executions to BOAT. [Promotion via Markit, technology via Cinnober.] Note that the Regulators did not prescribe how or where to report. Driven by market creativity, BOAT is a User-endorsed reporting magnet, and Market Data Vendors, like Thomson Reuters, Bloomberg, Telekurs, and others consolidate BOAT and exchange data into a single data feed. [Jan 2008, Markit purchased BOAT, now branded Markit BOAT.] 30. Trading and Execution, the successful new entrant example of Chi-X. (iv) Pre-MiFID, many attempts at capturing pan-european orderbook trading faced the structural hurdle that Europe lacked a critical mass deployment of Smart-Order-Routing technology that, through software, creates a single virtual pool of liquidity from fragmented physical puddles of platforms attempting to compete. With the impending arrival of MiFID and its re-defined principles-based Best Execution framework, many firms decided to deploy Smart-Order- Routing as a matter of pro-competitive commercial advantage. Note that the Regulators did not prescribe the deployment of Smart- Order-Routing. Driven by market creativity, Chi-X, a new MTF Multilateral Trading Facility, has benefited from this market trend of Smart-Order-Routing deployment, and with its own compelling commercial and functional offering is setting a precedent as the first competitive pan-european trading platform that is capturing orderbook activity that is consistent and growing from nothing a year ago to a material alternate venue. Consider: Chi-X matched EUR 0.1bn in March 2007, 1bn in June, 5bn in August, 10bn in September, 21bn in January 2008, and 33bn in March 2008. In some individual names, particularly in the UK, Chi-X has routinely more than 15% of intra-day on-orderbook activity vs the total on Chi-X and the incumbent, including more than a third of Royal Sun Alliance on Friday 18 April, for example. robert.barnes@ubs.com Page 4 of 6 Robert Barnes +44-20-7568 0315
31. Incumbents also can respond without the need for Regulatory intervention. For example, Deutsche Boerse in partnership with Users proposed an incentive of lower fees for automated trading. We UBS have embraced this and compared with 2004, in 2007 UBS executed four times the number of trades and three times the value of German Cash Equities on the Xetra orderbook. UBS today is number 1 on Deutsche Boerse for Cash Equities, and Germany is an important local market for us. We hope Deutsche Boerse will continue and extend this tariff innovation. 32. Clearing of Cash Equities. (iv) (v) MiFID access provisions regarding CCP, clearing and settlement arrangements complemented by the European Code of Conduct signed on 7 November 2006 by European Exchanges, CCPs, and Settlement entities, encourage competitive new entry and provide the regulatory tools for Users to escalate concerns to European regulators for adult supervision if an incumbent attempts to frustrate pro-competitive new entry. The industry already is responding to this opportunity. In consultation with Users, including UBS, London Stock Exchange and SIS x-clear announced on 24 May 2006 the intention to provide member firms with a choice of clearing provider in addition to LCH.Clearnet for UK equity trades processed by LSE. This coincided with publication of a paper by the EU Commission Competition DG entitled, Competition in EU securities trading and post-trading Issues Paper which stated in the Executive Summary on page 2, CCP services could - and probably should - operate in a competitive environment provided issues of interoperability are overcome. The precedent already exists in the Swiss market where LCH.Clearnet has reciprocity and competitive access, and for the UK market all participants are technically ready. Extension of meaningful initiatives such as SIS x-clear to the UK market will give further credibility to rolling out similar competitive initiatives to other European markets. The elegance of the proposed competitive CCP model open to all is that only members that believe they will benefit commercially and functionally from migrating clearing from the incumbent need switch. The rest stay with the incumbent if they wish. With the pre-emptive fee cuts in anticipation of competitive choice, all Users, whether switching or remaining with the incumbent have realised some benefit. Note that Regulators did not prescribe a Clearing and Settlement Directive. The key insight relative for those looking to leverage the T2S project is the approach SIS x-clear used successfully to secure relevant User endorsement. SIS x-clear first volunteered a commercial proposal for lower fees, then confirmed its willingness to bear capital expenditure for the development of the offering, and had a credible track record of ontime delivery. robert.barnes@ubs.com Page 5 of 6 Robert Barnes +44-20-7568 0315
33. So, we have a number of positive examples of entrepreneurial leaders proposing new ideas, securing endorsement from Users, and implementing these ideas into production. In all these cases, spanning reporting and transparency, trading and execution, and clearing of Cash Equities, the Regulators did not mandate prescriptive regulation, but rather provided a framework within which market participants could innovate commercial solutions. 34. Now the European Central Bank and the European Commission offer a similar procompetitive framework for settlement that has potential beyond the narrow scope of the pan-european settlement backbone the ECB Eurosystem may build. 35. We believe T2S is an opportunity to reduce post-trade costs, and for us, a bank with international cross-border activity, that means lower fees. Lower fees, improved efficiency, and a landscape embracing meaningful competition will increase liquidity, minimise market impact, and ultimately improve investment performance for issuers and investors. 36. The significance of this positive market reform to Europe is so important to UBS that I am delighted to mention that joining us in the audience is UBS colleague Peter Lorenz, Managing Director and Head of Market Infrastructure & Initiatives globally for UBS Wealth Management and Business Banking. 37. Now is the time for agent banks and CSDs to seize the opportunity to make the next step of the business case and we are pleased to see the market already responding with complementary proposals like Link Up Markets. 38. Therefore, from a global banking perspective and T2S, Ladies and Gentlemen, we urge incumbents and new entrants to volunteer proposals for lower fees and improved market efficiency. 39. Thank you very much. ---------------------------------------- Robert Barnes, FSI BA Harvard, PhD Cambridge. Joined the proprietary trading team at Swiss Bank Corporation in 1994, gained experience 'downstairs' on the LIFFE derivatives floor as a yellow jacket and 'upstairs' trading special situations via brokers across most western markets. Currently Managing Director, Equities responsible for at UBS Investment Bank, Chairman of the Securities Trading Committee of the London Investment Banking Association, a member of user advisory groups for a number of Stock Exchanges and pro-competitive initiatives, the FSA's Capital Markets Sector Senior Practitioners Committee, Euroclear's UK Market Advisory Committee, a Fellow of the Securities & Investment Institute sitting on its Membership Committee, the UBS high level representative to the European Commission's CESAME group, and a member of the FTSE Country Classification Committee. ---------------------------------------- UBS 2008. All rights reserved. "UBS Investment Bank is a business group of UBS AG (UBS). The material contained in this article is for informational purposes only and contains opinions which may be subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of UBS as a result of using different assumptions and criteria. Neither UBS nor any of its affiliates, nor any of UBS' or any of its affiliates, directors, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this material." robert.barnes@ubs.com Page 6 of 6 Robert Barnes +44-20-7568 0315