While past efforts to harmonise clearing and settlement and other related market practices across the rest of Continental Europe have been fitful at best, the four markets of the Nordic region – Sweden, Denmark, Finland and Norway – have on the whole tended to be far better disposed towards regional co-operation in its various guises.
The past few years have seen the inauguration of the Nordic Exchanges (Norex) cooperation agreement – which was instigated in 1998 by the Stockholm Stock Exchange and Copenhagen Stock Exchange, and now also includes the Oslo, Icelandic, Estonian and Lithuanian bourses – and attempts to rationalise the region’s post-trade infrastructure, in the first instance with the failed Scandinavian Securities Settlement System (S4) regional clearing initiative and, more recently, in the shape of the fledgling Nordiclear project.
Meanwhile, there has been significant consolidation amongst the region’s custodians, not least the creation of Nordea, which combines Finland’s Merita Bank, Sweden’s Nordbanken, Denmark’s Unibank and Christiania Bank og Kreditkasse of Norway to create a truly pan-regional provider.
That said, there remains a ways to go before a true “one custodian, one solution” approach is fully realised – the recent collapse of the proposed merger between SEB and Swedbank suggests the emergence of other Nordeas is by no means assured.
This drive to consolidation is, at its heart, essentially pragmatic. The region’s exchanges recognise that, unless they can present a united front and pool resources to enhance efficiency and reduce trading costs, there is a very real danger that – given the narrow range of stocks, notably Nokia and Ericsson, that account for the bulk of trading in the region – large international broker-dealers may abandon the region’s bourses in favour of trading platforms such as virt-x or Eurex that are positioning themselves as a cheaper alternative. Indeed, it should be remembered that the impetus to establish Norex came from the promised merger of the London and Frankfurt exchanges.
Similarly, Nordic custody providers are only too aware of the slow, but nonetheless steady, encroachment onto their patch by the global custodians, who have been attracted by the shift within the region away from pay-as-you-go and defined benefits schemes towards privately funded and DC pension arrangements. As JPMorgan Chase points out, regional pension fund assets are expected to almost double between 2000 and 2005, while cross-border investment, already in the 30% region, is expected to continue its upwards trajectory.
“We have seen legislation changes establishing the creation of DC schemes and other tax advantaged savings schemes, the development of private pension provision spurred by reduced social spending, a trend toward funding pension liabilities which were previously backed by book reserve plans, and the conversion of supplementary industry pensions into DC type schemes,” notes State Street.
“As the internationalisation of portfolios and the growing switch from bonds to equities gather speed through the shift from state-backed retirement plans to funded systems, we believe there will be greater needs - and hence opportunities - for foreign custodians as funds become more sophisticated and require more value-added services from their custodians.”

Adds JPMorgan Chase: “Nordea are a force, but so too are Northern Trust, Citibank, Deutsche Bank, Bank of New York, State Street and ourselves – the trend is towards appointing a global custodian, with true global reach, so that the local investing institutions can leverage capabilities such as securities lending, technology interfaces, forex, cash management capabilities and integrated derivatives trading, clearing and settlement.”
Goran Fors, vice-president and head of client relations at SEB, acknowledges that the competitive environment will only get tougher going forward, particularly in Sweden, the region’s most sophisticated market. “Cross-border investment, and the number of markets invested in, have increased and pension funds have an increasing need for quicker information and better reports from custodians,” he says. The big challenge facing the region’s custody providers is how to evolve what has traditionally been very much a ‘plain vanilla’ offering to best meet these changing needs – and, furthermore, how to fund such enhancements to their service. In the circumstances, mergers and partnerships - which facilitate economies of scale whilst spreading the costs involved - are obviously highly appealing.
One of those costs will stem from the adoption of the new International Organisation for Standardisation-developed ISO 15022 SWIFT securities messages, which Northern Trust for one hopes will be “widely implemented” to help improve straight-through processing rates within the region.
Investment is also needed in all four markets to facilitate the replacement of existing batch settlement systems (whereby trades are collected and then settled at set times during the day and night) with real-time gross settlement.
RTGS is already available for certain transactions in Denmark and Sweden but custodians are unanimous in their agreement that its adoption across the region is crucial if the speed and cost of processing transactions therein are to keep pace with the rest of Europe.
Looking at the individual markets, Sweden is seen to offer one of the more efficient environments when it comes to settling trades, although by the standards of major European markets such as the UK or Germany the post-trade process remains quite manual. The introduction of a new pre-matching system at the end of 2000 is seen to have significantly reduced the number of failed trades, however.
Having rebuilt the country’s settlement system back in 1996 the Danish depository, the Vaerdipapircentralen (VP), has overseen a steady reduction in fail rates while building links with both Sweden’s Vardepappercentralen (VPC) and Euroclear, the Brussels-based international CSD. It is worth noting that, while bonds have long dominated the market, equities volumes have more than doubled in the past three years – in an effort to encourage Denmark’s nascent equity culture, a cap on the level of pension assets that could be invested in foreign holding was recently upped to 60%.
In Finland settlement instruction pre-matching remains paper-based approach and, as State Street points out, that process needs to be automated. However, the market’s book-entry system has been centralised within the Arvopaperikeskus (APK), the local depository, to help improve settlement rates and generally enhance flexibility. Separate settlement systems for bonds and equities are also seen as a hindrance, although there are plans afoot to combine them.
Pre-matching is still carried out via fax in Norway, and the market also lacks delivery versus payment (DvP) with simultaneous transfer of cash and securities. In addition, State Street advocates changes to the Norwegian market’s registration component, which requires the mandatory re-registration of securities in the name of beneficial owner for proxy voting purposes.
The CSD, the Verdipapirsentralen (VPS) is currently looking to address the high fail rates that blight the market – counterpart account numbers have been introduced to enhance the matching process, as has a new mechanism aimed at improving the way in which failed trades are dealt with.

Questions have been raised over how just swiftly the burgeoning regional harmonisation can be expected to develop, however. There had been some concern over the progress of the Norex alliance, which many participants felt had run out of steam. Norex had also come in for criticism on the grounds that it was failing to properly address custody and settlement issues.
Just as the storm clouds were growing ever darker, however, a timely fillip arrived with the announcement in July of the Nordiclear depository consolidation and collaboration initiative, which will seek to provide a “channel” into and out of the Nordic equity markets.
Speaking at the official launch, APK managing director Birger Schmidt stressed that the four national depositories had no option but to restructure given the general perception of the region’s equity markets as a single Nordic bloc (APK’s involvement in the initiative is particularly noteworthy as Finland has in the past distanced itself from the Norex alliance).
Industry reaction to the project has been overwhelmingly positive, with custodians viewing it as a powerful proposition that, importantly, prioritises the region’s clearing and settlement needs rather than viewing them as a mere addendum to the main event of exchange consolidation.

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