The meter is running

Have you been keeping the score? In the last twelve months, clearing and settlement agencies have been engaged in a hectic round of mergers, alliances and joint ventures as they jostle for position in the rapidly consolidating European securities market. But, a year after the European Securities Industry Users’ Group – now re-branded as the European Securities Forum (ESF) – laid down its guiding principles for development of the clearing and settlement infrastructure, are we any closer to ‘a single integrated process’?
The partners in iX, the new exchange to be formed by the merger of the London Stock Exchange and Deutsche Börse, don’t appear to think so. They have chosen to exclude Clearstream, in which Deutsche Börse has a 50% stake, from the merger. Although one might suspect that there was some pretty intensive lobbying from CRESTCo to make sure that Clearstream didn’t get the clearing and settlement business by default, a more charitable view would be to accept that neither partner is yet ready to commit to a single provider.
Even though the lack of a single integrated settlement platform reduces the overall value of the merger, you can see their point. Clearstream is on a knife edge at the moment: last year’s concept of a European clearing house fell flat after Sicovam defected to Euroclear at the eleventh hour, and it has failed to convince any other depositories to join. It does not offer real-time settlement, and is in the middle of a highly ambitious, and hugely expensive, project to upgrade its systems. It was not helped by the recent departure of Juergen Marziniak, chief executive of Clearstream Banking, a mere two years after he joined from Deutsche Bank, to which he has now returned. If a merger with Euroclear is to be consummated, that is reason enough to suspend any judgement about its ability to handle the iX business.
CRESTCo presents different issues. Whilst it is rightly applauded for its cool efficiency and pragmatism in the UK market, it is muddying the waters with its determination to offer an alternative to the Euroclear/Clearstream axis in Europe. Having originally tried to inspire members of the European Central Securities Depositories Association to build Eurolinks – a project about which little is heard – CRESTCo has now launched The Settlement Network. This latest plan proposes that CRESTCo and its partner, the Swiss depository SegaInterSettle (SIS), will build a small network of major settlement systems that have high-capacity, sophisticated and cost-effective technology by using real-time DVP links. So far, the links extend only between the UK and Switzerland and the UK and the US. Last year, CRESTCo tried and failed to establish a direct link with Deutsche Börse Clearing, the latter citing other priorities as a reason for its inability to build the link. These priorities will presumably change if and when iX becomes a reality.
Small wonder then, that the two iX partners decided to sidestep the issue of a single integrated clearing and settlement process for their own exchange, whilst simultaneously telling the market that there must be consolidation in Europe. They are no more capable of picking a winner than anyone else, and they do not want to be lumbered with the wrong choice.
Whatever consolidation does occur, you can pretty much guarantee that Euroclear will come out of it well. One year ago, its prospects were decidedly less rosy. Cedel, as it then was, had caught it completely unawares with its grand scheme for a European clearing house, and Euroclear was forced to produce a hastily written and poorly reasoned white paper on its own vision for the European structure. In a dreadful error of judgement, it decided to refer to is blueprint as ‘the hub and spokes’ model, where it was the hub and national CSDs were mere spokes. It sank without trace, much to the relief of all concerned.
But Cedel’s slap in the face had a catalytic effect. Euroclear started doing deals left, right and centre. ISMA members appointed it as Trade Guarantee Organisation for Coredeal against competition from Cedel. In September last year, it announced plans to drop long-time operator and banker, Morgan Guaranty, and become a bank; in the same month it rolled out real-time settlement. In November it got together with LCH and GSCC to form the European Securities Clearing Corporation, and then trumped Cedel by sealing an alliance with Sicovam, which has subsequently turned into a full-blown merger.
It has built direct settlement links with both the Brussels and the Vienna stock exchanges, and has been appointed as the settlement system for Tradepoint’s pan-European stock market. It plans to build an internet-based settlement platform for mutual funds, and hopes to play a major role in the provision of settlement and related services for EURONEXT, the single European stock exchange to be created by the merger of ParisBourse, the Amsterdam Exchanges and the Brussels Exchanges.
Perhaps unsurprisingly, Sir Andrew Large, who was Euroclear’s chairman during one of the more turbulent periods of its history, decided to step down in March, giving way to Chris Tupker, Euroclear’s new chairman, who gives the impression of being impatient and intolerant of fools. Tupker wasted no time in announcing that he felt that consolidation was inevitable and that Euroclear was amenable to merger discussions with its greatest rival.
If these talks have started, it is likely that the European Securities Forum (ESF) will hold some considerable influence in the final outcome. Composed of 24 of the industry’s heaviest hitters, ESF is now led by Pen Kent who, as a former executive director of the Bank of England, has negotiated more deals and handled more crises than most people have had hot dinners. In the securities industry he is probably best remembered for his astute and measured stewardship of CREST after the collapse of TAURUS, restoring some much needed credibility to the UK after years of stock exchange incompetence. Kent is known to be very enthusiastic about the London/Frankfurt merger, and will almost certainly be called upon as an honest broker to help resolve European clearing and settlement issues.
Confused? Let us return to that original question: are we any closer to ‘a single integrated process’? On the face of it, we are not. We still have too many exchanges, depositories, fund managers, broker/dealers, custodians and banks. But there has never been a better time to sort out the mess, once and for all. Consolidation is on everyone’s lips, and there appears to be a genuine will to resolve the issues before they completely erode the few remaining competitive advantages that Europe still has as a financial centre.
Tupker knows that he has to capitalise on the market’s positive frame of mind: “We have the attention of senior management in many of the biggest firms we serve,” he said in an interview shortly after he took up the position in March. “We’ve probably got a window of no more than six months to deliver something tangible before we lose that attention.”
The meter is running; can he, or anyone else, deliver?