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Innovation: “It’s all about timing”

28 Mar 2019

Innovation: “It’s all about timing”Interview with Stephan Leithner, Clearstream

Stephan Leithner, Deutsche Börse AG, Member of the Executive Board, responsible for Post-Trading, Data & Index

“Everything has its time", replies Stephan Leithner with a smile when asked about his banking days. He was with Deutsche Bank for 15 years, before leaving his management board seat in 2015. He has been Member of the Executive Board at Deutsche Börse since 2018.

Mr Leithner, 2018 was a successful year for the Börse, so where did this growth come from? 

Stephan Leithner: In 2018, we achieved growth in all three areas of our value chain. In other words, in our pre-trading, trading and post-trading activities. I am responsible for Deutsche Börse's post-trading as well as the market data and index businesses. Over the past year, we have seen a positive trend in all of these areas. The reality behind this growth is, however, that there are of course also areas in which we, as infrastructure providers, are dependent on the market development. 

So, market volatility has really boosted your business. Isn't that a risk too?

Leithner: It does help us, but I don't see volatility levels declining either. In custody services, however, fees are based on the value of the securities deposited. If prices and values fall, this is reflected in the short term. We are, however, more interested in long-term trends. Look at investment funds. In the past, funds were not traded on the Börse, but today ETFs are considered standard to a large extent.

Where do you see the greatest potential, regardless of market trends?

Leithner: In the pre-trading business, it's on the index side. We are monitoring the growing trend towards passive products very closely. This is evident, for example, in the increased demand for our many DAX and STOXX indices, but is also the case, for example, with funds in the post-trading business.

There are those who have voiced concerns about the uncertainty surrounding this trend towards passive funds. Do you share their concerns? 

Leithner: There are risks. That is what happens when you are dealing with complex, non-transparent products. This is why our priority is to create transparency in regulated markets. Problems always arise in areas that are not supervised. In other words, in those corners that nobody looked into, or that no spotlight was shone on when there was some doubt. Share prices will never cease to go up and down, but it's really about transparent frameworks. 

Let's go into the engine room. What’s your progress with digitalisation? 

Leithner: Well, let’s look back at when it all started. The financial industry has, in many areas, been a major frontrunner in the digitalisation process. At a time when electronics in cars were still a pipe dream, banks and stock exchanges had already implemented quite a lot digitally. 

There's not much of that left now.

Leithner: Much of that 15-year leading edge has been lost. At that time, our industry was experiencing an economic boom in which you didn't have to do much because there was no real pressure to change, and then came the crisis in which companies were either not allowed to or not able to do much.

Many companies did respond to the changes at an early stage. 

Leithner: Absolutely. From the brand to the business model right through to the running systems, everything was in place. No one was talking about N26 back then. In many situations it simply comes down to timing. Some players had other priorities, and then came the crisis.

But this can also happen to the stock market. Suddenly yields collapse and then the funds to invest are no longer available.

Leithner: That is why it is so important and why it also makes so much sense that the Börse and its value chain are positioned in the way I described at the beginning. This ensures that we have exactly the cash flow we need to be able to make investments at any given time. We need continuity of investment.

Is the Deutsche Börse lagging behind in terms of its digitalisation strategy?

Leithner: Stock exchanges were already heavily digitalised and switched to digital at a time when the strengths of a trading floor at a bank were still measured by the number of screens installed. We are an infrastructure provider, so we have to be ahead of the times. The stock markets were and still are.

If this development continues, what will your business look like in ten years? 

Leithner: My idea would be to have a digitalised central system in the sense of a platform that has highly standardised interfaces with customers and is also anchored in a European capital market union.

How realistic is this?

Leithner: There’s three questions: What is technically possible, what are the market frameworks that customers can meet, and what is the regulatory environment like?

But this could remain just a pipe dream for a long time to come. Customers, in turn, have to invest heavily in order to meet all the requirements.

Leithner: Things happen at very different speeds. This is a fact and we cannot change that. Crypto assets are attracting great interest, but volumes are still rather low. We are still at the very beginning here in terms of regulations. Expertise needs to be built up here first, and this takes time.

It's different with blockchain then.

Leithner: Yes, because here everything happens on a much smaller technical scale. Blockchain is being used in closed systems. This technology is already used very successfully in those areas where there are accredited participants and trusted counterparts. And it is extremely useful for certain applications. Together with HQLAx, we are developing a blockchain platform for collateral swaps in securities lending.

Are you really interested in that? Blockchain replaces the intermediary and therefore also the stock exchange. 

Leithner: The central element of our business model is trust. It's precisely this trust that is needed in the blockchain world. It needs central, trustworthy, highly regulated partners, and this has to be considered separately from the technical role. The time came when there was no longer any need for floor trading. This has by no means diminished the importance of the stock market. We have converted this once analogue marketplace into a digital marketplace. And it remains a marketplace.

A marketplace that is becoming less transparent. 

Leithner: That's precisely why the role of the stock exchange is so important. Transparency is key. It should always be clear who the market participants are, to whom they are accredited and also how the assets are accredited. These details can't just be pulled out of nowhere. We need transparency and control over financial flows. Nobody wants to encourage money laundering or terrorist financing. Digitalisation also makes for greater transparency and we must take advantage of this.

However, this also has the effect of transforming your business model into one of trust.

Leithner: Well, it always has been that. Our business is built on trust. We, as the stock exchange, are the trusted counterpart and platform operator. Someone has to provide the network, set the standards and move the tokens.

This role could be assumed by a government institution, for which no listed company is needed.

Leithner: This is always a delicate balance that we as Deutsche Börse have to strike. Years ago, the big question was how to move securities settlement one step further. After careful consideration, it was decided that the European Central Bank would set up the TARGET2-Securities system. This was an important step for the stock market.

Why?

Leithner: It was an area where there was competition for investment. One
central state-run organisation ultimately procured the hundreds of millions it needed and built a shared system. This allowed Deutsche Börse to focus on the areas where it could create added value for its customers by using this platform. This has to be our focus here, too. 

Bankers can barely operate today without using the word 'platform'.

Leithner: Platform economics have long been in operation at our stock exchange. Xetra, Eurex, currency trading via 360T, these are all trading platforms. And our post-trading customers already have access to all three of our central securities depositories via an integrated interface.

Platforms are only as good as the players and products that use them. But this also requires openness.

Leithner: That's exactly what we as an exchange operator do. Clearing, for instance, has always been a very closed system. It has opened up the stock market and is proving to be more successful than ever. This has to do not only with Brexit, but also with the incentive structures available to our partners. We want to make full use of partnerships.

What role can you play as a European player? Has competition from the US and China not become overwhelming?

Leithner: You are underestimating Europe. Europe will be exceptionally strong if we can succeed in setting standards here. The whole issue of data security and data protection has been driven forward by Europeans. It's changed the world. US companies are suddenly facing issues that started right here in Europe.

An extraordinary advocate of Europe. 

Leithner: I am truly committed to Europe. There's no other way for me. Of course, a capital market union will take time. Maybe even longer than some people would like. But how can we measure how much we have achieved at all? The structures that have been created are enormous. The degree of professionalisation and standardisation of systems across national borders has reached a level that hardly anyone would have thought possible. Take the introduction of TARGET2-Securities as an example: Just 15 years ago, we had a fragmented stock market landscape that involved a multitude of incompatible settlement standards. This is all history.

How does Brexit fit in here?

Leithner: It doesn’t, but we can't change the decision. It is, however, also quite clear that the London financial centre will continue to play a leading role as a financial market. And that is the right thing to do - especially when we think in European terms. The rest of Europe most certainly would not profit from London's failure as a financial centre. 

With all the enthusiasm for Europe, size does matter. To what extent does competition from China and the US concern you?

Leithner: We cannot allow the gap to become too big. But we have a very good working base here in the European Economic Area. Also, we must remember that the euro has developed into a fixed reserve currency alongside the dollar. Financial markets linked to the euro will always operate under European sovereignty. It's a strong anchor.

How important are acquisitions?

Leithner: Alongside technology and organic growth, acquisitions represent the third pillar of our 'Roadmap 2020' corporate strategy. Wherever we see opportunities, we take a closer look at them. 

Do you have any special areas in which you could make acquisitions?

Leithner: Generally speaking, I can’t say. But in terms of funds business, digitalisation is not yet developed enough. We have already taken a major step forward in our completion of the takeover of the Swisscanto funds platform last year.

Maybe you could buy an index provider. There were rumours about MSCI being valued at $10 billion. 

Leithner: Whatever we purchase will specifically serve to strengthen our core business areas. Whether such scales of magnitude are necessary, as you just describe, is more of a question.

What kind of scale are you thinking about in terms of takeovers?

Leithner: In the post-trading area, we made a number of smaller acquisitions that complement our portfolio well: With Swisscanto, we have expanded our range in global funds business, and here we were in the upper double-digit million euro range. In other areas of Deutsche Börse, we've dug deeper into our pockets - 360T was around 700 million euros - quite a sizeable sum. Takeovers have to be easy to finance and quick to integrate.

It won’t be a big one then.

Leithner: Everything is measured by what is needed and where. For sure though, we will make a larger purchase at some point.

For Deutsche Börse, the question of security is both a means of safeguarding its existence but at the same time also a threat to its very existence. How do you guarantee your security?

Leithner: By making this topic our number one priority. Can we guarantee one hundred percent security? Probably not. But what we do to ensure that we achieve the best possible results is unparalleled, without question. It is an essential part of our investment strategy.

You were a banker for a long time, and now you are working at the stock exchange with very different profit margins. Are you worried about the banking landscape?

Leithner: The environment is undoubtedly under pressure. But the changes that have now been initiated, especially in terms of digitalisation, are definitely heading in the right direction. I think the swan song on banks I have heard in some places is mistaken. The 15 years I mentioned at the beginning of our interview have to be made up for again. Banks, which provide confidence and stability in their role as regulated intermediaries, are incredibly important.

Do you ever miss your days as a banker?

Leithner: Everything has its time.

Dr. Leithner, thank you for your time.
 

INTERVIEW BY INKEN SCHÖNAUER AND ANDREAS SCHOLZ.


This article was first published in the Euro Finance magazin (in German) issue 1/2019.


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