Merger the best way
Attempts to create a pan-European stock exchage stole the limelight last year and overshadowed the equally important consolidation of clearing and settlement in Europe. With Clearstream, Euroclear and Crest expressing interest in a cross-border system and the LSE, London Clearing House and Crest forming a central counterparty, it appears the tables are turned this year.
As always, the driving force behind consolidation has been the question of costs. The most common comparison is between Europe and the US, and for investors in the former region it makes depressing reading. Theoretically, direct comparisons are difficult because of the much greater deal volumes in the US, but gross figures show total maintenance costs in the US to be around half of those across the Atlantic, despite the difference in liquidity.
Unsurprisingly then, there is pressure for reform of the European system, which shows massive fragmentation inconsistent with the much-trumpeted plans for a cross-border stock market. The question is which road should the clearing and settlement operations go down to reduce costs and increase efficiency? The obvious choice seems to be between merger and outright competition. But how does that square with the fact that some of them operate on a for-profit basis, whilst others are non-profit? Furthermore, will the problem of the regulator play as significant a role as it has done so far in stock market mergers?
To take the last point first, the answer is surely yes. London-Frankfurt collapsed when members expressed concern about the regulatory arrangements and members of the Amsterdam and Brussels exchanges have also queried the introduction of Paris-based rules in the Euronext deal. The solution to this would seem to suggest that the answer to our first question is not quite so simple. To develop one regulatory body, merger and takeover seem to be the only solution.
To a certain extent we have begun to see that. Clearstream, Euroclear and Crest have all made it clear that they are interested in developing cross-border systems. As is often the case with larger organisations, however, these deals are usually done on their terms. Consequently if we finally do get to the situation where we have three major players in Europe, based in Frankfurt, Paris and London, will further consolidation be possible? If the experience of stock market mergers is anything to go by, national pride will probably get in the way.
Nonetheless, we do seem to be heading that direction. In London the stock exchange, London Clearing House and Crest have come together to form a central counterparty for stocks, Euroclear are consolidating operations through Euronext and Clearstream have made their intentions clear during the past month. The battle to be the largest player in international clearing and settlement has been joined between Clearstream and Euroclear with the London operation set to join the skirmishes.
Clearstream’s moves are closely watched by rivals. Back in February they completed the integration of the Clearstream banking business on to the Creation settlement platform. Following this they were able to announce reductions in both internal and bridge transaction fees for equities. More significantly, perhaps, they also revealed new clearing, settlement and custody services in the four new markets of Estonia, Poland, Slovakia and Turkey. At the same time, equity services are being introduced to its existing links in Australia, New Zealand and Ireland.
André Lussi, president and CEO of Clearstream International said: “We have announced over e50m in transaction fee reductions since April last year - an unequivocal endorsement of our drive to collapse boundaries in global clearing and settlement. We shall pass on further cost and efficiency benefits of consolidation within the market as growth in volumes continues and processing becomes even more streamlined. Transaction cost reductions and dealing efficiencies were both integral components of the rationale for our merger last year. We are delivering on our promises”
Euroclear answered back with news of a record year in 2000. Commenting on the results, Pierre Francotte, chief executive officer, Euroclear Bank, and president, Euroclear France, said: “Our performance in 2000 has exceeded expectations for both Euroclear Bank and Euroclear France. These results, and in particular our market share gains, provide tangible confirmation that we are pursuing the right course by continuing to roll out new service enhancements and fee reductions at a steady pace. At the same time, we are working pragmatically with other partners to provide the market with a true pan-European solution for both bonds and equities. This is the best way to deliver the long-term and immediate benefits the market is demanding.”
So, the market leaders are quite clear about how best to provide the reforms. Merger, take-over and competition within a small cartel are their preferred solution. Some observers feel that the European Commission should be taking a greater interest in these developments. It is clear from what Lussi and Francotte say that the companies believe that securing their own positions in the market comes before delivering reduced costs.