All clear on the European front?
When Euroclear, the world’s largest cross-border securities clearing and trading depositary, announced earlier this month in Brussels the release of a blueprint for the formation of a new pan-European settlement infrastructure, it was the clearest indication yet that a series of behind the scenes alliances between the continent’s Central Securities Depositaries (CSDs) could lead to a single transaction network.
Less than a fortnight later, however, and Luxembourg-based Cedel, the second of Europe’s International Central Securities Depositaries (ICSDs) had announced its own plans for the formation of a single European clearing house, Cedel International via a merger with Germany’s Deutsche Börse Clearing and a memorandum of understanding with France’s equities, futures and options house SBF Group and SICOVAM the country’s CSD.
In a joint statement, Andre Lussi, president and CEO of Cedel International, Werner Seifert, chairman of the supervisory board of Deutsche Börse Clearing, and Jean-François Théodore, chairman and CEO of SBF Group and chairman of SICOVAM, commented: “Our common agreed vision is to become the leading provider of clearing, settlement and custody services. After looking at the various possibilities for the market and speaking to customers and other market participants, we concluded that we should find a solution that is European, neutral and open for others to join.”
Prior to the Cedel announcement Europe possessed 29 CSDs and two ICSDs - a fragmentation many criticised as hindering the development of cross-border investment and competitiveness in Europe - the US market only has two such CSDs.
The ‘hub and spoke’ approach advocated by Euroclear seeks to embrace a series of bilateral agreements shaping up between Europe’s CSDs - partly prompted by the European Central Securities Deposit Association (ECSDA), with the hub touted as a possible alliance between Cedel and Euroclear with leverage on the core competencies of each CSD.
Denis Peters at Euroclear, explains: “We are seeking a responsive solution to the needs of users looking for a single, cost effective entry point to the European central market, which has been redefined by the euro.
“The hub and spoke approach meets the criteria, whilst retaining flexible access to markets outside Europe and vice versa for overseas investors.
“Whether it’s via a spoke or hub part of the model that a client enters the chain will just depend on the nature of the business they are doing.”
Peters says the process is very much market driven and Euroclear has sought European CSD support and collaboration in testing the model, which he believes has lent the project continent wide credibility.
“One of the issues now is whether Cedel sees the merits of joining up. Negotiations are taking place at senior level to achieve a meeting of minds that will make this work,” he says.
Peters adds that the competition aspect which previously justified the existence of two European ICSDs is now disappearing:
“ At Euroclear the board decided that with fewer European currency exchanges and increasing global investment, conventional thinking had to go out of the window.
“ The issue is really whether competition is a help or hindrance to the market today. And we believe CSD collaboration via bilateral links is the rational way forward.
“ The national trend for CSD rationalisation is already happening on its own, but the question is how to extend this to Europe. Rather than build costly links with every CSD we want to form sets of bilateral links within a fluid system, akin to that of the airline industry.”
Peters believes the fundamentals are in place for such a structure, although with Y2K preoccupation at present, he sees little concrete movement until after January next year.
Another major issue is the IT element essential to such systems and its subsequent cost to the industry, which may be holding back the market until all the protagonists cards are firmly on the table.
A prominent example of national CSD rationalisation has been CREST in the UK. Iain Saville, chief executive at CRESTCO and chairman of ECSDA, comments: “We are consolidating and developing the business of CREST.
“Significantly, we have recently begun processing unit trusts via the same channels that custodians and brokers are familiar with for other asset classes.
“Economies can be achieved via IT savings for customers as well as the capacity for increasing transaction levels within the same structures and cost arrangements.
“What we want is to have completely dematerialised balances for all assets through CREST, so when your money goes you acquire your units, and vice versa,” Saville says.
CRESTCO is also taking over the Bank of England’s (BoE) government bond settlement system, technically integrating it into CREST by June 2000, and the bank’s money market settlements will come under CREST’s wing in June this year.
Saville adds that increasing funded pension provision in Europe will be lucrative for the CSDs: “ Some of it may well come through insurance providers, but much will certainly be marketable. We are seeking to provide one cheap electronic infrastructure that can support any relevant pensions, savings or investment pro-vider.”
Saville says CREST’s European strategy follows the same line, and ex-plains his own role as chairman of ECSDA in pushing forward the debate. “I believe we need to use the infrastructure we have already to produce a suitable European product.
“There are links between settlement systems, but these are mostly based on fax or telex communication and not strong enough to take the volumes which would render them serious depositary networks.
“CREST has no current links with other European CSDs, but then again we only did our first trade in 1996. We really wanted to do the whole process properly, getting sufficient critical volume before going cross-border. We didn’t want to set up manual links, then tear them down and start again.”
CREST is currently developing a proper real time delivery service in conjunction with the Swiss system under which fully automated access will be available to all securities and participants in both systems.
Saville notes that this is in effect a single ‘virtual’ European CSD, because you do not need to be a member of both CSDs. “This is where Europe is heading, and we have also just agreed with the Germans to build a very similar link. By September we will make German securities available to our CREST customers through an indirect link.”
He adds that the next step is to get France and the US on board, alongside the international clearing systsems Euroclear and Cedel . “The critical thing here, and this is where the ECSDA is important, is that building these links is really quite complicated, and the best arrangement is an accord on overall common standards to ad-here to, because then you can build once but implement many times at low cost.”
Saville says the 14 strong European national CSD membership is committed to this strategy.
The new Swift message standard across Swift links between CSDs is being adopted, with the French and Swiss currently working on a link and the Swiss and German’s already there.
“I think we will have a single virtual CSD by the end of 2000, where each major depositary has a high quality link to every other CSD,” he says.
The question has been asked whether it would be easier just to merge all the CSDs, but Saville explains it is not that easy - primarily due to differences in the law of title and payment processes between countries. He points out that issues of corporate actions and corporate governance also vary greatly, adding to his belief that the European settlement industry is big enough not to be labelled a “one size fits all” arrangement .
And Saville is ambivalent about any future tie-ups with the ISCDs. “Merging settlement systems is a five to 10 year job in my view, so this is not an overnight issue. Euroclear and Cedel are part of the answer, but so too are these virtual real time links between the CSDs.
Derek Duggan at leading custody consultants Thomas Murray, comments: “ECSDA is undoubtedly looking to establish some kind of collective responsibility role for Europe’s CSDs, without imposing an organisational structure on the market.
“Originally, the idea floated about was to have a viable European network by January 1 this year, but the attempt now is to get something concrete in place before the end of the year to provide one of the pillars for the completion of the single market in financial services.”
Analysts have suggested though that the CSDs could begin to capitalise on the new networks by chasing the value added business of custodians, however Saville is keen to refute this from a Crest perspective: “ We are in the business of providing secure title and collateral for use in wholesale payments - nothing else, it is not our job to compete with our customers.
“Other CSDs are pursuing global custody business, but normally only in markets that aren’t big enough for the competitive presence of the large custodians.
“I don’t think any of our customers feel threatened in a commercial sense by the CSD links being set up.”
Duggan at Thomas Murray believes the boot may actually be on the other foot.
“The trend with CSD alliances and the announcement made by Euroclear seems to be towards establishing a methodology arrangement between the local and cross border depositaries on the clearing and settlement sides, but not on the value added side.
“Custodian input could be playing a role here, because such a set-up would mean they could focus more closely on the value-added aspect of their business.”
In February this year French CSD Sicovam signed new agreements with three depositaries - Monte Titoli in Italy, OEKB in Austria and Necigef in the Netherlands, admitting these countries government securities into its processing, following a similar arrangement concluded with Deutsche Börse Clearing, in December 1998.
And citing the need for efficient cross-border securities transfers serving as collateral in the new euro-zone as the reason behind its push for new European links, Sicovam confirmed the end-game of such links as the full development of a pan-European securities market.
The launch last year of France’s RGV (Relite Grande Vitesse) single clearing and settlement process for debt securities, now handling a daily average of almost E100bn has given Paris a headstart in Europe.
The real time gross settlement platform is the only system of its kind unconditionally accredited by the European Central Bank.
Jean Regirges at SICOVAM says the system covers same day transfers of government bonds and a 30 minute processing period for equities.
“In terms of SICAVs, there are no plans yet to develop anything because the demand is not there, but this could happen if the market takes off in conjunction with the European pensions industry.
“The main topic right now is this link for government bonds, and we are talking to the Spanish and Belgian central banks, which manage their own clearing for government bonds, as well as the Finnish exchange, to strike up links.
“We are also exploring links with the other CSDs as well as Euroclear and Cedel, although this has been ongoing for several years.”
Equally fruitful is the work being carried out by the fledgling Central & Eastern European Central Securities Depositary Association (CEECSDA).
Formed in late 1998 by 11 CSDs (Bulgaria, Croatia, Czech Republic - SCP and UNIVYC, Estonia, Latvia, Lithuania, Poland, Romania, Slovakia SCP and CSCC), CEECSDA had its second general meeting last month in Bucharest, where the Bucharest Stock Exchange was also admitted to the association.
Gergely Horváth, general secretary of CEECSDA, explained: “We have now met the necessary regulatory and budgetary requirements to be recognised as a functioning body and to begin addressing the real issues of cross-border clearing and settlement between what is an extremely diverse group of countries.
“It is not just a question of stating what is best practice for the various CSDs. The stage we are at in central and eastern Europe demands that we show how this can be achieved - and the task is made all the more difficult because we need to have it completed in the next three to four years if we are serious.
“Unfortunately we don’t have the 25 years that the rest of Europe has had to develop, nor the steering role of the European Central Bank.”
CEECSDA has set up a number of working groups to examine issues such as IT and legal restrictions in an attempt to homogenise the organisation.
And Horváth believes that in the future CEECSDA will be an association ready to operate in tandem with ECSDA and also provide an EU membership platform for central and eastern European countries.
However, he is realistic about the problems facing the group: “ If you compare Slovenia to Bulgaria or Albania then the market premiums on their government bonds have absolutely no correlation, unlike those for western Europe - so it is an uphill task we face to allign these CSDs.”
Proposals for similar CSD arrangements in Scandanavia have also been floated, albeit with no concrete develoments thus far.
Greece is also shifting to a dematerialised clearing system to bring it in line with the rest of Europe - so the network possibilities are fast burgeoning.
And should Cedel ultimately jump into bed with Euroclear following the current negotiations, then the reality of a European depositary network will really start to take shape.