Key steps in tandem
The coming months will see crucial developments in the areas of bearer securities, Belgium's new pensions vehicle and the Target2 Securities project, says Heather McKenzie
The Belgian financial market started this year with a major move aimed at improving efficiency. On 1 January, Belgian law abolished physical bearer securities, a move also designed to stop abuses such as tax evasion caused by the anonymity of such securities.
Bruno De Geest, managing director, brokerage clearing and custody, at Fortis brokerage, clearing and custody in Brussels, says the abolition of physical bearer securities in the Belgian marketplace by 2013 would mean there will be less manual workload to process such securities, and lower costs. "This could improve the competitiveness of Belgian banks," he says.
"As we speak, the dematerialisation process has merely started. New shares issued as from 1 January will not be available in physical form but only in dematerialised form/registered form, that is in the register of the issuing company. Already issued physical instruments have to be converted into dematerialised or registered shares by 2013 at the latest."
This is also a make or break year for the OFP investment vehicle, according to observers. In introducing the vehicle in 2006, Belgium became the first European country to offer multinationals a framework under which they could create both pan-European and international pension funds. Yet the political impasse in Belgium, with a government yet to be formed following the June 2007 general election, could undermine the OFP's chances of success.
"The next few months will be important in establishing the credibility of Belgium as a base for cross-border pension funds," says Renaud Vandenplas, head of location for BNP Paribas Securities Services in Belgium. "The political situation may be playing a role here, because economic players don't like situations that are unclear. This factor may be considered a negative by asset managers assessing the potential of Belgium for cross-border pension funds."
Tom Casteleyn, managing director at BNY Mellon Asset Servicing in Belgium, says one of the most important factors in determining whether OFPs will be a success is when the first pension fund creates one. "I think everyone in the market is waiting for this to start - it is an area of huge potential growth for the Belgian market," he says.
There are three possible stages to the development of the OFP market, adds Casteleyn. "First, every pension fund within Belgium has to become an OFP within the next few years. Second, a number of companies are looking at establishing cross-border OFPs from scratch, and some companies are quite advanced in their plans. Finally, the really big asset growth in the OFP market will come from existing pension plans transferring their funds to that structure. This is a very complex step, but people are looking at it, although we are still some way off from seeing the first such move being announced."
Casteleyn's colleague, Leonique van Houwelingen, head of relationship management, continental Europe at BNY Mellon Asset Servicing and head of pensions continental Europe, relationship management, BNY Mellon Asset Servicing, points out that the pension market in the Netherlands is likely to react to the Belgian OFP initiative, particularly on the tax side.
"While Belgium would like to be a tax haven, I do not think that any transfer of funds from the Dutch market to Belgium will come very quickly, particularly as the pension funds in the Netherlands find themselves in a much more developed pension market," says Van Houwelingen.
"Next to that, an important question remains regarding the transferability of Dutch pension funds to Belgium. Defined contribution plans are less complex to transfer than defined benefit plans, but most Dutch pension funds are still structured as defined benefit funds. Listening to the larger pension funds in the Netherlands, at this stage there is not much incentive to transfer pension plans to Belgium."
It is very difficult to determine exactly how the Belgian OFP measures up to similar structures in Luxembourg and the Netherlands, for example, says Van Houwelingen, as it is still very early days when it comes to understanding the OFP's full impact.
Casteleyn believes OFPs will take centre stage in the months ahead. "This year we will have to see some implementation," he says. "There are a number of working groups focused on it and it is likely there will be some interesting developments during 2008."
Vandenplas agrees: "I have hopes that there will be major growth in this field, because if the Belgian OFPs, which are a very good product, do attain international credibility, the market is almost the whole of Europe. Any pension funds with an international passport could be serviced from Belgium."
Traditionally dominated by local providers, the Belgian market is opening up, says Vandenplas. "As in the rest of Europe, custody clients in Belgium want a securities services provider with international reach, a variety of products and deep pockets to ensure they can follow their clients as they develop over the coming years." Niche players will find it increasingly difficult to survive by servicing the Belgian market alone.
The landscape of clearing and settlement in Europe is undergoing a major transition and this year could be crucial as the European Central Bank (ECB) is due to decide in July whether or not to go ahead with the Target2 Securities project, which is designed to create a single central securities depository for the euro-zone.
Gael Nicora, head of FI continental Europe relationship management at BNY Mellon, says: "The integration of the European post-trade - clearing and settlement - infrastructure will have a significant impact on our clients in the next few years. Euroclear's single platform (SP) and the ECB's Target2 Securities will change how users access CSDs in different markets in Europe. Additionally, T2S will take some settlement processing away from the CSDs but many T2S servicing functionalities - especially asset-servicing functionalities - are still unclear.
"Many questions relating to the technical and economic feasibility of T2S are still open and the industry has until April to respond to the public user requirements consultation document. We think that the T2S project has momentum and has significant backing both from the ECB and from top management of many European banks, so at this stage we are heavily involved in both initiatives in order to understand their potential impact and to determine how best to organise ourselves for the endgame in European settlement, whatever it may be.
"The main objectives of both initiatives are to reduce costs and risks, by bringing in a more efficient settlement regime, so we are moving in the right direction."
De Geest says the objectives of both Euroclear and T2S are quite similar in that they aim to maximise efficiency and control in the settlement process of euro-denominated securities transactions by using an integrated platform with standardised messages. "When thinking of the increased activity in securities processing and the need for efficient settlement processing when MiFID will be fully active, something needs to be done," he says.
"But as both Euroclear's ESES and T2S cover the same instruments, although T2S has a broader scope, and share the same intentions, it's hard to think that both can co-exist. Adding the T2S platforms to the existing processes and settlement platforms, like ESES, is in my opinion far from efficient. It's not clear to me at the moment if T2S's ambitions will be met, although the track record on cash processing via Target2 is promising."
In the end, says De Geest, the users will decide what's the best solution for efficient settlement processing on the European market place - but probably not before 2011.
Initiatives such as ESES, Target and the single euro payments area will force firms to reconsider their business models. Questions remain around the evolution of international central securities depositories such as Euroclear and Clearstream - will they completely replace local CSDs, or will Europe evolve a similar model as in the US, where the DTCC acts as a single CSD?
As for the year ahead, it is likely that the current volatility in the markets will continue for "a while" during 2008, De Geest says. "We are seeing more professional trading firms showing an interest in global execution capabilities linked to financing and market access services."
The harmonisation of financial law and taxation processes across Europe should also have an important impact on the global custody business, he adds. "Cross-border transactions will tend to be more efficient and cheap. This can increase the number of transactions processed, so that clients might face capacity issues to process increased volumes."