Rivals for European CSD come out fighting
Rival visions of how to create a European central securities depository (CSD) are battling for support in the industry. Three competing designs have been put forward, with the European heavyweights Euroclear, Cedel and CrestCo all in opposing camps.
But the signs are that firms want the three to bury their differences and find a compromise, and soon. The heads of the three organisations were challenged to find some common ground last month at Sibos, the major banking and securities technology conference run by the Swift banking co-operative in Munich.
The rival visions are based on three different technology architectures for linking or consolidating national CSDs to create a super-settlement house for Europe. The proponents of each are trying to strengthen their positions by forging alliances with key industry players.
The first proposal was made last year by the European Central Securities Depository Association (ECSDA), and is being spearheaded by UK securities settlement service provider CrestCo. It proposes creating a “European financial superhighway” – a set of high-speed electronic links between a core group of major European CSDs, each of which would link with smaller CSDs.
Among the main advantages of the design are that it will build on existing systems, be relatively quick to get into operation and provide high performance, said Iain Saville, CEO of CrestCo, speaking at Sibos. Some of the links are already in place, for example between CrestCo and Switzerland’s SIS SegaIntersettle.
But critics have dubbed the design “the spaghetti model”, claiming it has an over-complexity of links and not enough support to prevent rival designs.
In May this year, Euroclear outlined a ‘hub and spokes’ design. This has at its hub a new central processing unit with bilateral links (spokes) to national CSDs. The spokes would settle domestic high-volume securities transactions, while the hub would handle cross-border settlement for the global investment, broker-dealer and custodian community.
Many in the industry believed Euroclear pictured itself as the hub. At Sibos, Luc Bomans, general manager of Euroclear’s operations centre, denied this, although he did not rule out this role for Euroclear.
In July, Cedel upstaged Euroclear by announcing it was merging with Germany’s Deutsche Börse Clearing and that it was negotiating with ParisBourse and Sivocam, the French CSD, to join them. They plan to create a processing centre called the European Clearing House (ECH). This will be part of a design that Cedel calls “the pyramid”. Speaking at Sibos, Jürgen Marziniak, chief executive officer, said: “The pyramid is an open model and there is room for all to join.” But it is not clear how this would work, and ECSDA and Euroclear showed little sign of accepting the invitation. This is bad news for the industry, as everyone agrees that the current multiplicity of CSDs – more than 30 across Europe – is costly and inefficient. Bo-mans claimed the industry could have saved up to $150m (E143m) a year if Cedel had accepted an earlier invitation by Euroclear to merge. With securities volumes growing rapidly – CrestCo, Euroclear and Cedel cleared around $60trn between them in the first half of this year – rationalisation of existing services is needed.
Consolidation of European settlement services seems inevitable. In his keynote speech, European Central Bank board member Tommaso Padoa-Schioppa said: “Securities settlement systems clearly represent what economic theory would call a natural monopoly.” He said that a single system would eventually emerge but the ECB and national central banks would leave it to the market which design prevailed.
The differences between the opposing camps are largely in the design and the time scale; the main obstacle is the competing ambitions of the major players. Unless there is some compromise soon, the central clearing house will arrive later rather than sooner. This is the realistic timetable given the costs and complexity of integrating their systems, argues Saville. His rivals do not appear to have his patience, and there is likely to be further manoeuvrings among Europe’s CSDs.