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Morningstar | Deutsche Boerse Is Fighting for Increased Share in Europe Amid Brexit Uncertainty

Deutsche Boerse is one of the two most dominant European exchanges and has a compelling suite of services. The firm has a dominant derivatives exchange, a leading ICSD, a leading cash equities exchange, and a burgeoning OTC clearing offering. Of its four reportable segments, we see the main contributors of growth coming from Clearstream and Eurex. For Clearstream, we see top-line growth primarily benefiting from growth in fees generated from assets under custody in its international central securities depository business, as well as collateral management fees. We expect the pan-European platform, TARGET2-Securities, to further consolidate custody volumes in Europe, effectively strengthening both Clearstream and its duopolistic competitor, Euroclear. As a result, we see Clearstream as a one-stop shop for settlement, custody, and collateral management services, whereby clients can access their collateral more cheaply and efficiently. The segment also benefits from rising rates due to increases in net interest income. Given that nearly half of its cash balances are exposed to rising U.S. interest rates, this has been a tailwind, although rising rates may have neared an end in the U.S. As for Eurex, while we don’t believe that all derivatives trading will return to pre-crisis levels, we do expect trading volumes in European equity index derivatives to eventually return to post-crisis highs. One trend that will aid Eurex across multiple types of derivatives includes the push by regulators to move from over-the-counter venues onto electronic trading venues. Given the segment’s moat, we also expect aggregate pricing of trading and clearing of derivatives to remain relatively stagnant in the medium-term even in the face of MiFID II reforms.We also like the moves the firm has made into foreign exchange trading, commodities trading, and its latest push to take some share from SwapClear in the OTC clearing space given the instability caused by Brexit. We think that Deutsche Boerse can continue driving expanded operating margins over the medium term as it aggressively reduces its reliance on external staff for IT consulting services and other cost-saving measures.