How to keep in the swim
With defined benefit and defined contribution pension funds totalling around €13bn, Belgium is a minnow compared to its neighbour the Netherlands. However, its status as a Euronext market and as a member of Euroclear Group mean it is not left on the sidelines by securities services players.
Renaud Vandenplas, location head of BNP Paribas Securities Services’ Belgium office says: “It would be impossible to sell custody services for the Belgian market only, unless the client wanted a very specific activity. For plain vanilla activity, services must be integrated into the Euronext whole. Clients consider Euronext as a unique zone and that has translated into higher volumes and lower prices.”
Euronext Brussels is the market for domestic and foreign equities, bonds, premium bonds, options and futures. LCH.Clearnet is the clearing house and central counterparty for all transactions on Euronext Brussels. Euroclear Belgium (formerly CIK) is the local central securities depository while the national Bank of Belgium acts as depository for fixed income securities.
As a Euroclear market, Belgium faces considerable change in its clearing and settlement infrastructure during the next few years. Euroclear’s business model proposes two levels of service – domestic, covering the services offered by its CSDs on group securities and full, which consists of Euroclear Bank services on group securities and non-group securities.
In order to do this, Euroclear is undertaking a substantial infrastructure re-engineering project, under which technology platforms across the group will be consolidated. The aim is to consolidate all of the international CSD and CSD systems and to create a common communication interface for all users.
An interim step that will affect Belgium is the creation of a single transaction processing platform, Euroclear Settlement for Euronext zone Securities (ESES). To be introduced in 2007, this will deliver straight-through processing of trades from Euronext’s single order book for both local and remote Euronext members. The initiative will provide a single access point to settle trades conducted on any of the Amsterdam, Brussels and Paris exchanges. ESES will then make way for the consolidated system and communication interface.
Philippe Verriest, director, Business Model and Harmonisation Division at Euroclear says ESES will require investment by Belgian banks as they migrate from the CIK system on to ESES. However, this migration will allow Belgian institutions to have direct access to the French and Dutch Euronext markets for post-trade activity. “After migration to ESES, these banks will be able to settle trades with counterparties in these markets as if it were a single market, through a single access point. This will eliminate the need for cross-border intervention and will reduce post-trade costs.”
Verriest says the approach of local banks may have to change. “The smallest Belgian bank, for example, will have to decide whether to be a direct participant in the domestic market or to use an intermediary. As for the larger banks, many of the Belgian banks have merged with either French or Dutch banks and I would say they no longer have an exclusively Belgian vision – they would already have a Euronext vision.”
Vandenplas agrees that the Belgian market will change: “This is an industry where huge investments need to be made in order to keep pace with market developments. A lot of money will have to be put on the table to build the systems needed for a harmonised Europe. Some of the smaller, local players may not have the commercial means to do this and may have to reduce in size or specialise.”
Eric Daubresse, managing director of the Brussels office of Fortis Brokerage, Clearing and Custody says until the past few years, Euroclear’s role was limited to settlement of Eurobonds and a small amount of custody. “It is now a competitor for pure cash clearing in the Euronext markets,” he says.
However it’s not all bad news, according to Daubresse: “While Euroclear might have an advantage in having a direct connection with the local CSD, which other banks don’t have, there are services that it does not offer and this is where Fortis can differentiate itself from Euroclear. For example, Sicavs need a trustee function, which Euroclear does not offer.”
Paul Bodart, executive vice-president, Bank of New York and a board member of Euroclear, says following implementation of ESES banks that compete for local custody in Belgium may stop providing it. “Belgian custody business is too small to be able to compete with Euroclear Belgium. These banks may say that custody is not core business and I believe that in some of the Euronext markets, local custody business will progressively disappear.”
Ryanne Cox, director of the Financial Intermediaries division at KAS Bank says the infrastructure changes in the Euronext markets may lead to outsourcing opportunities. “We have seen in several of the Euronext markets a lot of parties such as banks that don’t have their own accounts at the infrastructure level looking to outsource to third parties. These banks don’t want to invest in the many changes that are needed. This is where we have an advantage because we have already made an investment into linking into the infrastructure and we can leverage this to provide services.”
Euroclear’s plans are not the only issue Belgian securities services providers are grappling with. The market is scheduled to become fully dematerialised by 2008. At present, Belgian securities are still in physical form, although many are issues as global notes and immobilised. Tim Reucroft, director of research at Thomas Murray, the London-based custody risk rating and advisory company, says this feature accounts for some of the weaknesses in the market, which include an overnight asset commitment period, no fails management for OTC and National Bank of Belgium transactions and restrictive securities lending arrangements.
“There are many legacy issues that the Belgian market has to sort out, but the move to dematerialise is a slow step in the right direction,” he says.
Vandenplas says Belgium has “some specific hurdles” that have to be overcome. “On the tax side, we are lobbying for a simplification of the rules so we can more quickly reclaim taxes for our clients. Some of our clients are at present not eligible for tax reclaim because of their structure or country of origin. There is work still to do on this in Belgium.”
The restrictive securities lending arrangements Reucroft refers to may soon be freed-up, according to Michel Bertrand, vice-president investment servicing, State Street Europe and head of the bank’s Belgian investor services business. “We expect that regulators may issue a decree soon allowing securities lending for Belgian domiciled Sicavs. This is great news, as it will allow investors to recoup returns. Compared with Luxembourg domiciled Sicavs, this was a competitive disadvantage for Belgium. I think such a decree will be helpful and will make the market more competitive.”