Rising Market Concentration in the Post-Trade Industry

Several drivers will impact the evolution of the post trade industry. Different drivers act in different directions, however, if there is one common theme that is the concentration of players in the post trade ecosystem is likely to go up over the next 5-7 years and post-trade processing will increasingly become a scale business. This trend will be particularly seen in Europe, especially among market infrastructure and custody service providers. The growing concentration will be driven primarily by adoption of T2S and implementation of CSD regulations. Dark pool regulations will take volumes back to the lit market, helping incumbent exchanges gain more share. Custody service providers will also see rising concentration. T2S will be the prime driver for this in Europe. Local custodians could find consolidation among CSDs detrimental to their role. We expect significant consolidation among local sub custodians, and the market will ultimately be left with a few regional players and some niche players in local markets. Driven by these changes, some global custodians could decide to create their own CSD. Implementation of certain regulations like Basel III, Volcker, and Liikanen proposals could reduce concentration among investment managers and broker-dealers. However, opposing forces such as adoption of best execution and reporting tools, Big Data capabilities, and improved netting capabilities will help large broker-dealers gain market share. In a market that is becoming extremely competitive, harmonized, and industrialized, it is important that participants review and reconsider their current business model. Firms are responding to these challenges in a variety of ways. In the short term broker-dealers are considering headcount reduction, asset disposals, and portfolio run-downs to stay competitive, while in the medium to long run efforts to reduce duplication between geographies and products through centralization and offshoring are gaining traction. CSDs are looking to use common infrastructure allowing for interoperability and to build connections to local CSDs to manage non-local assets for clients. In Europe some custodians and non-euro CSDs may partner with euro CSDs to gain access to T2S. Some custodians will look to buy/build CSDs to gain access to T2S in Europe; however, their number is likely to be limited. Investment in technology to adopt to the post T2S world is a consideration for many players. Celent has learned that some banks are taking this opportunity to upgrade or replace their complete technology infrastructure by taking a firm-wide strategic approach. Provision of efficient collateral management services will also become important. These developments will mean market participants will have plenty to think about. Smaller players will need to consider strategies for survival, while larger players will need to explore opportunities to gain market share in a business that is increasingly becoming one based on scale. We discuss these and many more trends in a recent report titled ‘Future of the Post-Trade Industry, Part II: Rising Market Concentration’.