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Frustrating Europeans

Students of the history of global securities markets may come to look upon 1999 as a critical year. Although it might appear to be no different to any other year, there are the rumblings of a tectonic shift in the plates that hold together our industry. Almost daily we read about the birth of new electronic crossing networks (ECNs), forged from alliances between arch-rivals - look at E-Crossnet, Archipelago, Primex and Redibook, for example. We hear that the big US investment banks want to form their own electronic stock exchange for Europe; they have already established a powerful new company, BrokerTec, that threatens to revolutionise the bond and derivatives markets.
No region will be affected by these changes more than Europe. Although the euro is now a reality, very little else about Europe is homogeneous. There are far too many national exchanges and depositories; tax harmonisation remains the Eurocrats' pipe dream; there is no consistency between national laws regarding data protection and confidentiality; and markets open and close for business at different times and settle on different cycles.
The Americans, not unreasonably, find all this diversity very frustrating. They are used to uniformity in their domestic market, and cannot understand why Europe will not fall into line. Ideally they would like everyone to trade in US dollars and to settle through the Depository Trust Company, but most of them are pragmatic enough to see that this scenario is unlikely. As a second best, the Americans think that Europe should have a EuroDTC - a single clearing, settlement and depository system that replaces all the national and international central securities depositories (CSDs).
This wish has been articulated in a paper written by Tom Perna, the senior executive vice president in charge of The Bank of New York's global custody business. He calls it the Eurohub, and he believes that European markets will never get to T+1 settlement, let alone T+0, unless and until it is implemented. Like others, Perna can see that the European - and global - investment markets are in danger of running way ahead of the ability of custodians and depositories to settle their transactions. Whilst he accepts that initiatives like the Global Straight Through Processing Association (GSTPA) are making a valuable contribution, he does not see them as offering the total solution.
To some extent, Perna's proposals are an effort to invigorate the task of re-engineering the settlement process in Europe. Since Cedel stunned Euroclear with its announcement of a merger with Deutsche Boerse Clearing in May, and Euroclear responded with an ill-conceived blueprint for European clearing, there has been substantially more heat than light.
SICOVAM, the French depository named as the third partner in Cedel's proposed European Clearing House (ECH), has proved itself to be less than wholeheartedly committed to the project, bringing to mind the comment of Sam Goldwyn: 'A verbal contract isn't worth the paper it is printed on'. The same might be said of SICOVAM's memorandum of understanding. Lately, Cedel has let it be known that it is in discussions with Monte Titoli, the Italian depository, about joining the ECH; it has subsequently transpired, however, that the loquacious Italians are talking to just about anyone and everyone about alliances, including Euroclear.
Meanwhile, members of the European Central Securities Depositories Association (ECSDA) are continuing with their Eurolink project, but this, too, is dogged with problems. London and Frankfurt have so far been able to agree on practically nothing, a situation that has led to CRESTCo having to link to the German market through Dresdner Bank. London - in particular the Stock Exchange - wants to move to T+2 settlement from T+5, bringing it into line with Germany, but CRESTCo is not convinced and would prefer T+3, which would bring it into line with almost no market of any significance (the US has plans to move to T+1).
Euroclear has not stood idly by whilst all this has occurred. Its shareholders have decided to terminate the contract of JP Morgan, which has operated the system for over 30 years. Euroclear proposes to adopt a corporate and management structure that will look remarkably like Cedel. Euroclear is under pressure, and its senior managers are feeling it. Everyone knows that the best thing for the market would be for Euroclear and Cedel to merge, but that seems to be about as likely as Coca Cola and Pepsi getting together. There is too much at stake, and too much bad blood, for the deal to be countenanced by the respective current management teams. A merger will have to wait for new brooms to be installed on both sides.against this backdrop, Tom Perna has bravely stepped in to try and crack some heads together. His views demand attention, as his firm looks after assets of just under $6 trillion, and pretty much keeps Wall Street working every day through its vast clearing business. There is, of course, a natural resentment amongst Europeans towards those big bad Americans flying in and telling us how to run our business. But, on current form, the Americans have a substantially better perspective on what needs to be done, as well as the muscle to make it happen. Their patience is beginning to wear very thin, and they can hardly be blamed for that.

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