While a number of commentators, myself included, have been rather unkind to the European Securities Forum (ESF) over the past few years, the organisation has brushed aside its critics and soldiered doggedly on with efforts to bring about the harmonisation and integration of European clearing and settlement processes. So does the publication of its latest annual action plan mean we critics will soon be forced to eat our harsh words?
Not that those words were lightly thrown, whatever ESF chairman Joan Beck and chief executive officer Werner Frey might think. Set up in 1998 and now comprising 22 members representing some of the largest operators in the European securities markets, the ESF initially took a combatative stance under the leadership of executive chairman Pen Kent. Unfortunately, having lobbied vigorously for the merger of Euroclear and Clearstream in order to eliminate duplication in the international central securities depositories sphere and, frustrated by what it saw as clearinghouses’ shilly-shallying on the subject, threatened to bulldoze through its own blueprint for a unified European central counterparty, Kent and his cohorts were forced into a series of credibility-withering climbdowns.
This willingness to compromise over key ideals reached its low point with the spectacular U-turn performed over so-called vertical silos, wherein trading, clearing and settlement are combined within one entity, as is the case in Germany following the Deutsche Börse-Clearstream merger. Having repeatedly attacked such silos for promoting cross subsidies and being an obstacle to cost reduction and economies of scale, the ESF suddenly decided that, while it remained commited to its stated goals of an enhanced transparency, cost reduction, and a single European market it was no longer going to lose too much sleep over the means employed to achieve those ends. If, in the short term, the road to capital markets nirvana is littered with vertical silos, so be it.
This abrupt shift from the pugnacious to the pragmatic set the tone for the ESF’s endeavours under the leadership of Beck and Frey: taking over the reins in 2002, the pair were fluent in the esperanto of Eurocrat and consequently the messages emanating from the ESF’s London HQ were henceforth more temperate, with much talk of conciliation and facilitation and “reinforcing dialogue” with its three key constituencies: the ESF membership; Europe’s securities infrastructure organisations; and legislative and regulatory bodies. “We cannot be dogmatic,” Frey told assembled journalists at a lunch held in London in the summer of 2002.
While in keeping with the happy-clappy ideals of the European masterplan, such a stance is problematic. As I wrote at the time: “It would appear the ESF, rather than acting as some dynamic agent of change, is in fact merely grasping at the flapping coattails of the industry as it races out of sight.” This assessment seemed to be borne out the following year when the ESF published its grandiosely styled ‘Call for Action’ in which it set out a range of ‘priorities’ to be addressed, covering communications, identification codes, corporate actions, remote depository access, dematerialisation, settlement timeframes, transaction reporting requirements and tax reclamation.
Described as being “in support of and complementary to” existing initiatives from the likes of CPSS-IOSCO, ISSA, the Group of Thirty and, last but by no means least, banker Alberto Giovannini’s highly influential working group, the document once again saw expectations confounded. In place of the expected song of praise to the creation of a European securities code as a first step to standardising operational mechanisms in the region, we merely got a kind of Giovannini-lite. With the securities firms already buried beneath an avalanche of in-depth reports detailing the future shape(s) of European clearing and settlement, the ESF once again looked to be playing catch up.
In an effort to differentiate itself, the ESF’s ‘priorities’ covered not only fragmented market practices but also legal, fiscal and regulatory diversities; similarly, it formulated a series of practical steps in order that these priorities would be tackled quickly and with the minimum of disruption and cost. However, with gentle persuasion and appeals to good sense the main weapons in its armoury, one could not help surmising that the ESF lacked the requisite muscle to actually push through its proposals.
This sense that the ESF had little going for it except good intentions was only compounded with the publication of its 2004 Action Plan: “ESF takes the view that the public sector should take legislative action in a detailed and bespoke manner to remove identified barriers such as access restrictions at national levels and the prevailing fragmentation in the area of securities law…ESF and its members are committed to contribute their efforts and resources to solve these problems.” Hold the front page, do wake up the back, and so on.
But just for a moment let us put aside our lofty expectations, shall we? After all, most of the areas within which the ESF is attempting to effect change are actually outside the remit or control of market participants. Perhaps reasoned dialogue is after all the best , indeed the only, avenue open to it? If the ESF made limited progress in its designated priority areas during 2003, with concrete results in relation to just three objectives regarding the harmonisation of communications, more encouraging progress was made during 2004, as the latest action plan attests.
Agreement was reached with the European Central Securities Depositories association and the European Association of Listed Companies among others regarding proposals to harmonise record and ex date for cash dividends, thus substantially reducing the amount of compensation payments. Italian CSD Monte Titoli has undertaken to allow remote access, while representatives of Nordic securities infrastructures have agreed that, if the creation of a new CCP is unavoidable in that region, existing infrastructures, techniques and procedures will be utilised. Finally, agreement has been reached in principle with the Swiss federal tax authorities on a concept that will simplify and automate the tax reclaim process in that market.
As of February, Deutsche Börse has changed its rules and regulations to remove restrictions on clearing and settlement – the ESF also notches this up as a victory, but given the European Commission’s decision last year to punish Clearstream Frankfurt for price discrimination and refusal to supply, it is debatable whether it can lay exclusive claim to that scalp.
In addition, the ESF has moved a significant step closer to securing two other goals. The Danish tax authorities have indicated a willingness to expand significantly taxation at source, making tax reclamation largely superfluous. It has also struck an agreement in principle with the Association of Global Custodians and the US Securities Industry Association over a solution that will make non-US certification process more cost effective; the three will now pursue the matter with the US authorities.
Small steps perhaps, but then Rome wasn’t built in a day. Given the enormous amounts of hot air being expended to no great noticeable effect over the more ambitious aspects of the grand European post-trade redesign, perhaps the ESF does indeed have a valuable, albeit minor, role to play. So hats off to Messrs Beck and Frey – I’ll start eating mine now.