Mr Tessler, do you think the worst of the crisis is over?

“In October, people were very, very concerned. It really seemed like the end of the world. But the governments have done a very good job, dealing with the initial crisis, providing liquidity, providing stability. The historically low interest rates have given the financial institutions the time to address the issues and the ability to recapitalize themselves. It’s amazing. I saw that in 1990 when I was at the Bank of New York. This has a very big multiplier effect on bank earnings and that is exactly what they needed. So I think the crisis is not over. There is still more to come. But I think now people realise it’s not the end of the world.

What are the main risks remaining for the financial system and the economy?

“There has been a considerable involvement of the US government in the banks. But this is not a long-term solution; this is a solution for the crisis. If they don’t extract themselves from this unusual provision of liquidity and fiscal stimulus, ultimately it will be inflationary. This is the major question.

What is the situation of Clearstream?

“We have done quite well during this crisis. We have 2,500 clients in 102 different countries. And we are fortunate that our client base is very stable and liquid. Our traditional clients are the big custodian banks, retail banks, wealth managers and some of the largest central banks around the world.  Most of the independent broker dealers (Bear Stearns, Lehman Brothers, Goldman Sachs, Morgan Stanley, Merryll Lynch) are clients of Euroclear. So, for example, when Lehman Brothers went out of business, we had no exposure. I think there is the perception in the market that Clearstream is really a safe-haven during critical times. And during the crisis, the market share moved to Clearstream. Our calculation of the global market is that we gained 2% market share in 2008. It translates into maybe 500 or 600 billion euros of deposits in the international market.

What is your total market share today in the international market?

“38% [62% for Euroclear].

Euroclear is your main competitor. What are the main distinctions between Clearstream and Euroclear?

“We are part of an integrated organisation [Deutsche Börse], where we combine trading, clearing [Eurex Clearing] and settlement. Euroclear has a horizontal model. They offer settlement and custody. Anything else they do, they do it with third parties [Euronext, LSE, LCH Clearnet, etc.]. When the crisis hit in September, nobody wanted to take any counterparty risk. We were able to provide clearing and collateral management services into one integrated offering that we call EuroGC Pooling and which allows anonymity in the market. Our offer was exactly what the market was looking for at that time. When Euroclear’s clients wanted to access that functionality, they had to move their position to Clearstream. That was the clear validation that our integrated model is the right model. The vertical model has won.

Deutsche Börse is a listed company, Euroclear is user-owned. Does it not make any difference in the governance and the services to the clients?

“It is a competitive duopoly in a free market. So, if we are not providing price competition along with product innovation, all our clients would leave and go to user-owned entities.

In a recent interview with paperJam, Yves Poullet, Euroclear Bank CEO, said he was ready to hold discussions with you. He also mentioned a possible merger between Clearstream and Euroclear. What is your answer?

“We do talk to Euroclear once a quarter. We and Euroclear operate together in the international market. We have an operative link, called Bridge. We have common issues in terms of trying to bring levels of standardisation and harmonisation to our market, the international market. Ever since I have been CEO of Clearstream [since December 2004], in all the conversations we’ve had with Euroclear, we have never, ever, discussed a potential merger between Clearstream and Euroclear, or a potential acquisition of Euroclear by Clearstream.

Nevertheless, the sale of Clearstream has been discussed many times, especially when two activist funds, TCI and Atticus, were Deutsche Börse’s main shareholders. Do they still put pressure on you?

“TCI and Atticus significantly reduced their stake two month ago. They still have something like 1% or 2%. Clearstream represents 35% of the revenues of Deutsche Börse, and if you look at the performance during the financial crisis, it is the most stable part of the group. Clearstream sales revenues for the first quarter are down only 3%, compared to last year, which was a record year. On a relative basis, it is tremendous. Deutsche Börse Group is the only fully integrated exchange company in the world. New York Stock Exchange [Nyse Euronext] doesn’t have it, London Stock Exchange doesn’t have it, even Chicago Mercantile Exchange doesn’t have it. Our business model, the one that we have built, is really the envy of the marketplace. In September of last year, when we were facing some issues with our shareholders, the executive board led by Reto Francioni [Deutsche Börse CEO] received a 100% support from the supervisory board . Clearstream is not for sale.

Euroclear says the sale of Clearstream is a possibility...

“I find it strange. My point is we are a public company. So, we can never say no and never. If someone would like to come and offer 15 billion euros to Deutsche Börse, maybe we would consider something, but that’s not the case. One thing is quite clear: the market wants competition and doesn’t want a single provider.

In the United States, there is no competition in the post-trade industry. Does it not work well?

“For the equity and corporate bonds market, you are right; there is one single provider, DTCC [Depositary Trust&Clearing Corp.]. For the biggest market in the US, which is the government bond market, DTCC is not involved. It is a competitive duopoly between the Bank of New York and JP Morgan Chase, much like Clearstream and Euroclear. When the markets demand liquidity, when the markets demand product innovation, relationships, value added services, they want a competitive environment, not a single utility.

Could you tell us about your cost reduction plan, your move to the Czech Republic?

“We took early action to make ourselves a more efficient organisation. And a lot of that has to do with cost efficiencies. I think we have done it in a very good manner and we are well ahead of the industry. The first thing we did two years ago was to sell the building here. People said ‘they’re selling the building, they’re moving’. “We actually did a ten-year lease, with an option for an extension of another ten years, so a 20-year lease. That was a very smart move. We sold at the top of the real estate market. Real estate is not our business. We also established an operations centre in Prague, in the Czech Republic. Our intent in doing this was to improve our ability to manage on a regional basis, at the same time to reduce significantly our cost base, but not at the expense of our efficiency. When we made the announcement two years ago, we insured the unions that we would do it in a socially responsible manner, with a minimised impact on employees in Luxembourg.

Have some people been moved from Luxembourg to the Czech Republic?

“No. Only one manager who heads Clearstream’s operations in Prague.

How many people are employed by Clearstream in the Czech Republic?

“By the end of the year, the number will be 130. Till now, and for the first three tranches of the programme that also impacts Frankfurt, there has not been any forced redundancies. No one had to leave because of that. For the final movements we are just announcing, for the last two tranches, we are also confident that nobody will lose his job. As the results of all these moves that we have taken, we have the best cost/income ratio in the industry and we did that with no social impact. The programme is over and we accomplished our financial goals. You know, I don’t want to go to social events here in Luxembourg any more and have someone say that we might be leaving the Grand Duchy. We will be in Luxembourg as long as Luxembourg wants us to be here. Clearstream is committed to Luxembourg, end of story.

What are your near-term projects in the fund industry?

“The project that has been very successful has been CFF (Central Facility for Funds). It has provided a harmonisation and standardisation of the settlement of funds. I think, going forward, one thing that we would like to do, is to establish a connection for Luxembourg into Target 2 Securities (T2S) [European Central Bank initiative to improve the settlement in the euro zone] and to create a domestic CSD (Central Securities Depositary) for Luxembourg for all securities.

Why does Luxembourg need a domestic CSD?

“Because otherwise, Luxembourg would not be connected to the European infrastructure project and this would not be in the best interest of Luxembourg as a financial centre. The fund industry itself is going through changes. The industry is really trying to figure out how to best position Luxembourg for the future. And I can assure you we are working with the industry, with all the various groups, the stock exchange, the government and the Banque centrale. We want to be a solutions provider.

What changes can we expect for the fund industry with the creation of a CSD in Luxembourg?

“I don’t think there is much change for the funds industry at all in terms of setting up a domestic CSD. The question for the industry is what does it want to do with a CSD, just to have it as a connection to T2S for access to central bank money or use it to change the way business is done today.

Do you think that the fund industry underestimates the consequences of T2S, especially for the transfer agents?

“Some might underestimate, some may overestimate. The real answer is no one really knows. My message to the industry is ‘Let’s all work together’. The transfer agent (TA) is a necessary function, but is has to identify its future role within the fund processing environment. I do have experience in the TA business from when I was Chairman of the Bank of New York. I know it is not an easy business.”

 

*****
Career: an American in Luxembourg

Jeffrey Tessler (54) has been a member of the Executive Board of Deutsche Börse AG since 6 October 2004 and CEO of Clearstream International since 10 December 2004. He joined the German group following a 25-year career with The Bank of New York Company, Inc., where he served as a General Manager in Europe from 1998 to 2003. He holds an MBA from Seton Hall University (New Jersey) and began his career in 1979 at the Irving Trust Company, which merged with the Bank of New York in 1988. His experience includes roles as money market trader and dealer in US government bonds.

N. R.