Industry utilities have a reputation for procrastination and entropy, but over the past five years Euroclear, the Brussels-based international depository, has displayed an admirable determination to seize the initiative and, even more unusually, to bite the bullet when it comes to making tough choices.
The merger between fellow ICSD Cedel International and Deutsche Börse to create Clearstream back in May 1999 was a potentially mortal blow for Euroclear.
Scant months later, some nimble footwork on the part of Sir Andrew Large and his fellow Euroclear board members had seen the balance of power shift back towards Brussels. Having signed a memorandum of understanding to join the ECH party, in November 1999 Paris-Bourse and Sicovam, the French depository, sensationally switched allegiances and partnered with Euroclear. Within a year Belgium’s CIK and Necigef in the Netherlands had signed up and it was Euroclear’s own centralised Euroclear settlement solution that was in the ascendancy. That supremacy was confirmed in July 2002, when UK depository CRESTCo agreed to become part of what had come to be known as ‘Greater Euroclear’.
However, another significant change, this one internal, is often overlooked, even though it was arguably instrumental in clearing the way for all that followed. In the months before it struck the Sicovam/Paris-Bourse deal, the decision was taken to remove JP Morgan from its role as operator and banker to the Euroclear System and replace it with a new wholly market-owned entity, Euroclear Bank. This decision was driven by a perceived reluctance on the part of European depositories to ally themselves with a clearing organisation so explicitly tied to the US. “The changing environment for clearing and settlement in the Euro-zone means Euroclear needs to become clearer in its European identity,” the ICSD commented at the time.
The pragmatism that informed Morgan’s banishment is echoed in Euroclear’s recent announcement that it is to undertake a significant corporate restructuring in an effort to neutralise its critics in the marketplace – most notably the European agent banks that make up the Fair & Clear pressure group – who have consistently attacked its expansionist strategy.
Alarmed that the ongoing consolidation amongst the region’s depositories will see the ICSDs extending their dominance in the eurobond business into the equity settlement sphere, in the process disintermediating the agent banks – which it believes are best placed to preserve competition and foster innovation – Fair & Clear has been lobbying furiously for a clear legal separation between the essential facility role of infrastructures and the risk-taking role of commercial banks.

Fair & Clear argues that, given its geographical footprint, Euroclear in particular is well positioned to undercut the agent banks by offering cheap settlement across multiple markets through a single centralised account made available via the Single Settlement Engine (SSE) it is currently building, with Euroclear Bank cross-subsidised by the various Euroclear CSDs. Accordingly, Euroclear Bank should be floated separately and the CSDs reconstituted as user-owned, user-governed single entities and there should be separation of CSD and CCP infrastructure from commercial services provided by banks.
“Banks that are infrastructures should not benefit from privileged or preferential treatment,” Fair & Clear maintains, noting that the infrastructural model now emerging in Europe is unique. While the US boasts a centralised clearing and settlement utility in the shape of the DTCC, it is a market-owned monopoly that provides no commercial banking services. By contrast, both Euroclear and Clearstream derive significant revenue streams from the provision of credit and cash management services.
The new structure proposed by Euroclear seeks to allay concerns that Euroclear Bank could enjoy preferential status within the group compared to the CSDs and could be in a position to compete unfairly with third-parties such as agent banks. A new company – Euroclear SA/NV – will be created, incorporated in Belgium, which will own and operate the SSE and more generally provide shared services to all Euroclear group entities. At the same time, Euroclear Bank and each of the national depositories – CRESTCo in the UK, Euroclear France and Euroclear Netherlands – will all become sister subsidiaries of Euroclear SA/NV.
The result, Euroclear argues, will be a more transparent business in terms both of inter-company cost allocations relating to the SSE and other shared services across the various entities that make up the group; and the avoidance of any potential cross-subsidy of Euroclear Bank activities by the CSDs. As Euroclear chairman Chris Tupker acknowledged: “The consolidation of processing platforms across the different entities of the Euroclear group requires a new approach in defining the ownership and operation of the shared platforms.”
Independent auditors will review and attest to Euroclear’s compliance with OECD transfer-pricing principles relating to cost allocations and ensure the Euroclear group entities are applying these principles “in all material respects”. The new structure also seeks to address the question of systemic risk, ensuring that the Euroclear CSDs – and by extension day-to-day settlement in the relevant markets – are not imperilled in the (unlikely) event of Euroclear Bank’s insolvency. The restructuring is set for the end of 2004, following review by regulators and approval by the board of Euroclear plc.
Charles Cock, head of multi direct clearing and custody at BNP Paribas – along with Citigroup one of the biggest players in the European clearing business and hence a leading light within Fair & Clear – could muster only qualified praise for the restructuring. “The Euroclear CSDs will now be sisters of Euroclear Bank rather than daughters, and that is a step in the right direction,” he says.
However, while the new structure might address European regulators’ concerns over the ‘ripple effect’ of systemic risk, it does not address two core concerns of Fair & Clear, Cock added. Firstly, like its sister CSDs – but unlike the agent banks – Euroclear Bank will be able to take advantage of the benefits offered by the centralised SSE technology infrastructure and the concomitant consolidation of assets it facilitates; secondly, shortcomings as regards governance are not addressed.
As Cock points out, the SSE infrastructure will give rise to both pricing and product “synergies” that will give Euroclear Bank an unfair advantage over its commercial bank competitors. “We want to see total, absolute segregation of roles and responsibilities between the market infrastructure and commercial/competitive layers – but the SSE will bridge those two worlds,” he says. “Take communications. All the accounts for Euroclear Bank and the Euroclear CSDs will be held on one system, thus obviating the need to use SWIFT to communicate details of transactions between those parties. That will mean a significant cost saving for Euroclear Bank – as a comparison, BNP Paribas’ SWIFT bill exceeds E10m annually.”
On the governance side, Cock argues that the various market advisory committees (MACs) established by Euroclear for each of the five domestic markets in which it acts as the CSD are a deeply unsatisfactory means of representing the interests of national securities markets.
To ensure the level playing field that Fair & Clear’s ‘open access’ model advocates, Euroclear should service the agent banks or CSDs but not both, Cock adds. “This is not just about our vested business interests, but also about guiding principles for the whole market,” he says. “Euroclear Bank is no different from any other commercial bank. We are all going after the same clients – custodians and broker-dealers – in the same markets in the same geography across the same asset classes. We are doing the same business, only in a slightly different manner – they operate from a centralised model whereas an agent banks operates in a decentralised fashion.”

Euroclear remains nonplussed by these assertions. “We are not totally surprised by Fair & Clear’s reaction,” says Conor Leeson, Euroclear’s corporate communications manager. “We remain of the opinion that the changes we are proposing go a very long way towards addressing the legitimate market concerns that have been expressed by some of our clients and, indeed, some other parties.” It was “nonsense” to draw a direct comparison between Euroclear Bank and agent banks in terms of their scope of activities, he adds: “We are a single purpose bank whose only role is to facilitate the settlement of our client’s transactions. They, on the other hand, are universal banks with interests in everything from investment banking to securities servicing.”
Turning to the future governance structure, Leeson is keen to emphasise that “Euroclear Bank will become a subsidiary of the new holding company, which is owned by Euroclear plc, which in turn is 100% owned by its users”. The existing structure evolved, in part, as a function of the staggered way in which Euroclear entered into the acquisition of its various national CSDs, he adds. “We are not too big to put our hands up and acknowledge market concerns and, what’s more, to do something about them,” he says. “The bottom line is that infrastructural fragmentation across Europe is the reason that processing cross-border trades here is so expensive, and the only real way to tackle that fragmentation head-on is by consolidating platforms. That is precisely what we are in the process of doing.”