The concept of a European Clearing House is undeniably beguiling: imagine having a single clearing and settlement utility for all European securities transactions, linking local depositories and payment clearing systems whilst providing single-window access for participants. It is a vision that has long excited the imaginations of both Euroclear and Cedel, the two international central securities depositories (ICSDs), but neither have aggressively pursued the idea - until now.
Although Euroclear was first to break cover when it launched its white paper on the hub and spokes model, it did so in the knowledge that arch rival Cedel was about to unveil a much more exciting development, the new Cedel International. This new entity will have the German depository, Deutsche Bourse Clearing (DBC), and its French equivalent, SICOVAM, as partners with Cedel. André Lussi, the unstoppable president and CEO of Cedel, wants to build a European version of the Depository Trust Company, the North American depository, and bringing these two into the fold is a big first step.
Lussi is convinced that Europe should have a single clearing house, and it is hardly surprising that he thinks it should be Cedel. He argues that, if a fully functional European Clearing House was in place, the market could expect cost savings of some $300m (E290m) per annum.
He points to the fact that European financial markets are converging in other ways, most notably with the euro and the alliance of European stock ex-changes. Adding all this up, Lussi is sure that the time is right for consolidation of securities clearing and settlement.
Up to a point, he and his managers are correct. According to Cedel, there are currently 15 national CSDs in Europe, as well as the two ICSDs. That is far too many for a region that wants to look and act like a single market. There is a huge amount of overlap, of duplication of product and system development, that is simply a waste of the market's time and money. The scope for rationalisation is immense, as Cedel has recognised.
But how far can this rationalisation go? According to the European Securities Users’ Industry Group, a new association formed to respond to the Cedel and Euroclear initiatives, it should go all the way. One of the group’s key principles is for “a single integrated process in Europe for clearing and settlement of equity and debt transactions”. It calls for the process to be “largely owned and directed by securities industry users”, and warns that “the industry is not prepared to pay directly or indirectly for duplicate developments”.
Behind the scenes, pressure has been building for some time to deal once and for all with the issues of having two ICSDs, and this new group is merely formalising what has been said in private to the bosses at Euroclear and Cedel. To some extent, therefore, their motives for change are not altogether altruistic, as both are fighting for their long-term survival. Their shareholders - who also happen to be their clients - will not tolerate having to pay for two systems that do pretty much the same thing, even though it was the market that insisted on having competing operations in the first place.
The game is far from over, however. For a start, Euroclear is unlikely to roll over and play dead just because Cedel says it should. In fact, there is a very strong chance that Euroclear will do absolutely nothing, simply continuing with its existing business whilst trying to pick off some of Cedel's volumes from those participants who are unhappy with its plans. It seems less likely that Euroclear will get very far with its hub and spokes model, the reaction to which has been less than overwhelming.
More importantly, the national CSDs in Europe have plans of their own. The European Central Securities Depositories Association (ECSDA) is promoting the idea of bilateral links between its members, such as the impending tie-up between the UK’s CREST and Switzerland’s SIS. Opponents of these arrangements - who include Cedel - refer to them as a “spaghetti model”, precisely because a diagram of the links looks like a bowl of spaghetti.
The European CSDs dispute the validity of this. They say that their plan is to develop a series of major clearing and settlement hubs, into which the national CSDs will plug, which will then be connected to each other. In their vision, the market might have one Nordic hub, another for Benelux, and so on.
This is certainly how CRESTCo, operator of the UK’s system, sees things. It can envisage linking to Euroclear and Cedel as hubs, but not being taken over by either of them. It wants CREST to be one of the hubs.
Apart from these obstacles, there are the very real problems of tax, stamp duty, property rights and law. A European Clearing House won't get off the ground until harmonisation of all these factors has occurred - and no-one is betting on when, or even if, that will ever happen.
But Cedel shouldn't be criticised for its efforts or its ambition: if it achieves nothing else, it has at least energised the critical debate about the future of European clearing and settlement.