Clearstream is an emblematic company in Luxembourg's financial centre, but paradoxically it has been very discreet in recent years. What is its current status?
We do have a strong Luxembourg base, but for various reasons we have kept a low profile in recent years. Nevertheless, we have 1,200 employees in Luxembourg--and 3,000 worldwide--and we have a turnover of €827.2m. Being discreet is not an end in itself, but it is true that explaining what we do in a clear manner is a complicated exercise. A private person understands what a bank does, because they are confronted with it in their daily life. We are in B2B, and not a very traditional or sexy B2B. But our importance in the world of finance is real: if we were to fall, a large part of European finance would come to a halt.
What I want to do is to show that nothing we do is secret. I want candidates who apply to us to know what makes us different from other financial institutions in the marketplace.
Clearstream is better known in the financial centre for the succession of redundancy plans in recent years than for being a company that recruits a lot. Is this image false?
Clearstream is a company in full development. It has always been so. And if, like all financial institutions, we have had restructuring plans, they were aimed at two objectives: cost control and management renewal. The idea was not to recruit outside Luxembourg, even though we did it for systemic reasons so that we didn't have all our staff in one location; it was mainly to have operational centres elsewhere that could take over if necessary. It was more to rebalance our workforce. We have always had a very ambitious and advantageous end-of-career policy for our employees.
Our objective has always been to retain what we have in the marketplace, and even to increase our presence.
Our objective has always been to retain what we have in the market and even increase our presence.
We could very well do what we do from the moon, but we feel very comfortable here in the grand duchy of Luxembourg for several reasons, such as the multilingualism, the quality of the infrastructure, the relationship with the regulator and the government, as well as the stability of the country, which is an extremely important criterion for us.
What are your activities, your current situation and your avenues for growth in Luxembourg today?
We have three businesses in the marketplace. The first is simple and classic, historical: it is the service to issuers. When companies and governments want to call on the market by issuing debt, this is organised. We are--via Clearstream Issuer Services--one of the orchestrators who enable borrowers to find their way in the capital market. This is not a business that everyone knows, but that everyone can more or less understand.
Once these securities are issued, they transpire on what are called secondary markets. Let's say you bought a French Treasury bond or a German Treasury bond on the primary market with a maturity of, say, 30 years. If, after 10 years, you decide to dispose of it, you sell it on a secondary market. We intervene once the decision to trade the security is made. This is the business line we call "investor services", our second business line. We take care of the actual delivery of the security--the settlement. We technically facilitate the exchange of securities for cash, or securities, as the case may be, but we are not a CCP.
Finally, there is a third business line, which is a little on the fringes of the other two, which is called "investment fund services", and whose objective is to facilitate the subscription and redemption of fund units. This is a fundamental business in Luxembourg. I was hired 17 years ago to develop it. Today it represents about a third of Clearstream's revenues, and it is growing rapidly. In fact, it is Clearstream's growth business. And it is a business that is much closer to the traditional businesses of the Luxembourg financial centre.
This is where the company focuses in its current state.
What does this activity actually involve?
We have become the world's largest platform for the execution and custody of fund units.
"You have to realise that for Clearstream, digital transformation is something extremely important. It is something we have always known and practised.
We have developed from scratch a service offering called Vestima, which aims to facilitate access for distributors--banks that sign distribution agreements with managers to make the latter's products available to their customers--to all the fund ranges that exist in the world. Distributors only need to create one account with us to access 200,000 investment funds worldwide, with the exception of US funds, for regulatory reasons. We offer more than 1,000 clients access to funds from 43 international jurisdictions with €3.3bn in assets under management. We route distributors' orders and hold their fund units.
We also act as a link between asset managers and distributors. With Clearstream Fund Centre (CFC), we have developed a central purchasing activity. We buy large volumes of funds from asset managers, which we offer to distributors on better terms than they could get if they negotiated face-to-face with the managers. While Vestima is a 'technical' business, CFC is a more commercial business.
We have really developed in the distribution business, through internal and external growth.
For example, in 2015 we acquired Citco Global Securities Services, a Cork-based company that provides fund execution services to hedge funds to 'put more products on the shelf'. Or our expansion into Australia, with the acquisition of a company specialising in fund execution and custody. Australia is a huge market dominated by huge pension funds that now have the ability to invest in Ucits funds. The idea is for us to attract flows from this market.
Do you have any other plans for external growth?
You should know that, for Clearstream, digital transformation is something extremely important. It is something we have always known and practised. If you visit our basements, where we used to have vaults that we rented to our client companies, you will see that these vaults are almost empty. There is less and less paper. Securities have dematerialised. That was our first digital transformation, which we completed a few years ago.
The second digital transformation for us is the use of blockchain technology. A technology that should not be confused with bitcoin.
The Holy Grail for managers, and this is a recurring theme at trade shows, is to have the lightest possible distribution network and the shortest possible path to the investor.
Distributed ledger technology (DLT) is a digital system that records asset transactions and their details in multiple locations at once. Unlike traditional databases, DLT does not have a repository of reference data or a centralised administration function. In a distributed ledger, each of the nodes processes and verifies each element of the transactions. A consensus on the veracity of these elements is then reached between the different nodes. This technology can be used to record static data, such as a land register, or dynamic data, such as transactions. Such a computer architecture revolutionises record keeping, radically changing the way information is collected and communicated.
We will use this technology to build the bank of the future.
How do you plan to do this?
We don't want to accompany the technological change, but to initiate it. We are planning a service that aims to change the way securities are issued and traded in the secondary market.
Digitalisation is going to take hold in the fund industry, and we are moving towards fully dematerialised investment funds. Today, traditional registers are dematerialised. And it's not going to stop there. We felt it was important to protect ourselves against this inevitable change by becoming one of the players.
How do we do this? By becoming a partner of FundsDLT, a company specialising in the digitalisation of fund distribution launched in 2016 by the Luxembourg Stock Exchange and Fundsquare. This company now includes Credit Suisse Asset Management, Natixis Investment Partners and us, in addition to the Bourse. What is interesting about FundsDLT is that we have gone beyond the proof of concept.
Here we are again between the managers and the distributors. The Holy Grail for managers, and this is a recurring theme at trade fairs, is to have the lightest possible distribution network and the shortest possible route to the investor. The lightest and shortest possible network is also what distributors want, as they are also looking for more favourable conditions for the creation, structuring and management of the funds they distribute to their clients. We position ourselves between these two players by offering them technical possibilities to improve and gradually eliminate certain links in the value chain.
It is often said in our business that funds are sold, not bought. This is changing.
We already have interested customers: Zürcher Kantonalbank (ZKB) and Raiffeisen, in Austria, have created fully digitised funds via DLT, with the aim of having control over the entire value chain, except perhaps for pure management.
Another example is the Italian asset management company Azimut. It has created funds that eliminate the entire traditional distribution chain by offering its clients access to its products via simple apps available on smartphones or tablets.
It is often said in our business that funds are sold, not bought. This is changing.
Can digitalisation in your business go further?
We have talked about execution, distribution and innovation. There is still a fourth area: data. Data is the buzzword that gets everyone excited.
I remain rather more realistic. Our clients include over a thousand distributors and more or less 700 asset managers for whom we process 60 million transactions a year. These are bundled transactions, which means that behind one transaction there can be dozens or even hundreds of purchase transactions. We are the largest platform in the world, with the second largest being a third of our size.
For distributors and managers, finding the right data that will enable them to do their job or meet regulatory obligations is becoming a nightmare. As we are at the convergence of all data, why not position ourselves in this business? We have studied the market. It is divided into two basic types of data. There is what we call fund data and what we call analytics.
We are moving towards even more digitalisation. But digitalisation in the fund industry is not just about storing on computers what used to be recorded on paper, it is about changing the way fund shares will be issued and distributed.
Fund data is the data that is--almost--untouched, the pure data that includes the ISIN number of the fund, its name and its investment policy, which is the key to making sure that your customer is a customer who can access that specific fund through this kind of thing. In this niche of fund exploitation, there are about fifty players in Europe who share €300m in revenue. Analytics are all the data that can be combined to obtain trends, and therefore make forecasts. This market is worth between €500m and €600m in revenue, again divided between about fifty players.
One billion to be repatriated between a hundred or so players, this may seem marginal.
But as we are at the convergence of data, why not position ourselves in this business? This is a somewhat rhetorical question, because we are in the process of developing a service offering. We have acquired teams from BNP Paribas, and within the Deutsche Börse group we have invested in ISS (Institutional Shareholder Services), a company that handles a lot of data in the fund sector. The group, seeing the growth of the fund business at Clearstream, is very interested in the prospect of allowing us to develop, including through external growth.
So, the fund industry is facing a Copernican revolution equivalent to the one that affected banks in the payment value segment. Who do you think will be the first losers?
We're heading for even more digitalisation. But digitalisation in the fund industry is not just about storing on computers what used to be recorded on paper, it is about changing the way fund shares are issued and distributed. The usefulness of a register in a DLT configuration disappears. Of course, in 10 years' time we will still have shareholder registers. But less and less. The funds that will be created in the future will be digital native, while the old ones will have to evolve. All those who cling to the paper register, such as registrars and transfer agents, will have to reinvent themselves. If we take the logic of digitalisation to its logical conclusion, the exchange of securities for cash will disappear. The major asset managers who are also technology providers will probably transform their technologies in order to support the wave of "DLTisation" of the market. It will not be brutal. Rather, it will be an inevitable natural evolution.
I also expect cryptocurrencies to enter the business. I'm not talking about bitcoin or crypto-currencies as assets--that's another debate--but crypto-currencies as a tool. Today, buying and selling procedures takes between one and three days because the issuer of the share or the cash handler needs one to three days to confirm the existence of the fund shares and the cash involved. It is conceivable that when a scriptural currency has been converted into electronic money and the share of funds is issued in real time by a registration not in an account but in a DLT ecosystem, we can talk about instantaneous moment of exchange.
This story was first published in French on Paperjam. It has been translated and edited for Delano.
This article was written for the October issue of Paperjam magazine published on 23 September 2021.
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