Source: Market Structure Partners
A research report commissioned by a group of clearing participants including Pershing, Citi, Deutsche Bank, Credit Suisse, Morgan Stanley and Bank of America Merrill Lynch has found Australia to be one of the world’s most expensive developed markets to clear and settle equities.
The report was authored by Market Structure Partners. CEO Niki Beattie, a well respected expert on market structure issues, said the findings show combined costs for clearing in Australia are the third most expensive in developed markets after Spain and Brazil.
Looking at value and number of trades cleared vs the average cost to clear them, the report shows Australia as the second most expensive market after Brazil, even once economies of scale have been accounted for.
“We note in the report that the three most expensive markets for post-trade - Spain, Brazil and Australia - are all markets with one dominant exchange, where the issue of clearing has not been addressed by regulators prior to the listing of an exchange. It looks like in these markets there is room for improvement when you examine the cost of clearing,” said Ms Beattie.
This report focuses on the costs incurred directly by intermediary market participants, which Ms Beattie says is the best way to analyse true costs to a market. “Usually, intermediary firms will pass transaction costs to their clients with an additional margin and costs for other services,” she said. “Therefore analysing intermediary costs, rather than end investor costs, is the most fair comparison across markets and it is important to acknowledge that when it comes to clearing, the clearing members are directly on the hook when it comes to managing risk.”
The report also analyses the unusual risk management and default ‘waterfall’ model used in Australia. “In most other markets, after the funds of the defaulting participant are used, there is a default fund where the risk is shared between the non defaulting market participants,” Ms Beattie said. “ASX Clear is unusual in that is uses its 100% of its own capital to substitute for a default fund. Is it appropriate to have this much of shareholders’ capital at risk? Does this create the wrong type of behaviour when it comes to risk management? Who says $250mn is the right number? Is this the most systemically stable model? And how is replenishment going to work when these funds run out? These are all issues worth exploring.”
The report does not make recommendations on the basis of its research. However with the moratorium on clearing competition coming to an end early next year, Ms Beattie said it was a sensible time to independently review the real cost to Australian market participants of such high post-trade fees and the overall risk model.
“Australians are paying much more than most for their clearing and settlement even when you take economies of scale into account,” she said. “It’s good to have a transparent debate where all the issues can be discussed.”