There are big changes underway for custodians in Spain and Portugal at the moment. The Portuguese market has just completed its transition onto the Euronext platform and the Spanish government is in the process of bringing all of the country’s various markets and depositaries together under the umbrella of Bolsas y Mercados Españoles (BME). For custodians, it means new challenges. In Portugal, the local custodians will face new challenges from abroad, while in Spain, a more centralised market will raise the bar for domestic players.
The financial restructuring of the Spanish markets was completed in September when the Bank of Spain swapped its stake in Iberclear, the new central securities depositary (CSD), for 10% of the holding company BME. BME now owns Spain’s four stock markets in Madrid, Barcelona, Valencia and Bilbao, as well as MEFF, the derivatives exchange, Aiaf and Senaf, the fixed income platforms and Iberclear. “The reorganisation of the market is over now,” says Adolfo Garcia, managing director of securities services at Santander Central Hispano Investment. “The next question is when BME will be floated.”
There is still work to be done to complete the technical integration however. Before the creation of Iberclear, Spain had two separate depositaries, the Securities Clearing and Settlement System (SCLV), and the Central Book Entry Office (CADE) run by the Bank of Spain, for government bonds. The two depositaries were integrated under Iberclear in May this year, with the aim of providing a single window of access onto both the equity and the bond markets. It hasn’t quite got that far yet.
“The big issue is how to access them,” says Fred Mariette, vice president of new business development in investor services for JP Morgan in Iberia, France and Switzerland. Iberclear is working on a single point of access with Swift, which will make it easier for participants once developed. “Technology is central to all this,” says Mariette. “There are still two systems running side by side, for equities and debt. SWIFT and Iberclear are developing interfaces which will allow participants to have access to both system. This will be very good for all the participants.”
The timeframe for this interface is still vague however. “Iberclear is currently reviewing the final implementation date for single window access. Current indications lead to mid-2004,” says David Staquet, Swift’s business manager for Iberia.
Once that interface is in place, Iberclear will have to look at which platform it will opt for in the long run. At the moment it is considering using one of the two inherited platforms or building a new one from scratch. And the central depositary is also considering improving the matching system between participants.
“If we go to an new entirely new system we may see some of the smaller providers drop out,” says Juan Briz, head of sales and relationship management at BNP Paribas Securities Services in Madrid, “because that would require further investment.”
Briz hopes this might be an appropriate excuse for some of the domestic banks to outsource their clearing and settlement capability. BNP Paribas is now white labelling its back office systems to medium-sized Spanish banks. “Some suppliers have already left the market,” he says, “And there will be more if big investments are needed. These changes are good news for the big players.”
SCHI, the biggest player of all in Spain, has just completed a major investment programme. When Banco Santander merged with Central Hispano four years ago a decision had to be taken about the two separate IT platforms. It was a good moment for SCHI to reassess its own requirements. “We decided it was a priority for us to be technologically independent rather than part of the main bank,” says Garcia. “That means we have our own support team and resources.”
Circumstances have changed significantly since the decision was taken to make such a substantial investment. “We weren’t expecting such a drop in the markets,” says Garcia. “There are a number of other banks that should be investing in their technology that aren’t because it is so expensive. We’re lucky we took the decision then.”
The reorganisation of the markets under BME is a result of Spain’s decision to go its own way on integration for the time being at least. “When the euro came in everyone thought that the move to one depositary and one central counterparty would be achieved fairly quickly,” recalls Garcia. “Then everyone realised how difficult it would be to overcome the egos and technological differences things went a bit quieter. Spain decided to put its own markets in order first and not to rush into anything.”
Now that that work has been done, it will make it much easier for Spain to build relationships with other exchanges in Europe. If that is what BME decides to do. “The big question is what to do in Europe,” says Garcia, “whether to be swallowed up, to remain independent, or converge with other markets at some point in the future. At least now there is a single voice.”
The Lisbon Stock Exchange of course opted to throw in its lot with Euronext several years ago. Trading was finally transferred onto the Euronext system on October 24. So Portuguese custodians have had to invest heavily just to stay in the game.
Not only has the transition been expensive, but it’s also been hectic. The local banks got the final specifications for the connection at the beginning of this year. That meant they had only one month for testing compared to the six that Amsterdam enjoyed. “Despite all the issues we had to deal with, the short testing period in particular, we’re comfortable now,” says Gina Costa, head of settlements at Banco Comercial Portugues, “even if one does still have concerns.”
BCP and the other local custodians face a double challenge in the next few months. Not only must they manage the transition to a new platform, but also the potential competitive threat of other custodians in France, Belgium and the Netherlands gaining access to the Portuguese market as general clearing members.
“We do recognise the other local custodians’ expertise in their local markets as they recognise ours,” says Costa. “We’re quite confident. Local expertise and our excellent relationship with local regulators will remain key drivers for BCP. Otherwise we’d just shut up shop and go home.”
In theory, Portuguese custodians will also have new opportunities in the other Euronext markets. In practice, they have their hands full with the transition at the moment. “We only found out what was needed to be present in all the markets this year so we needed to go for the quickest and most efficient solution, and using other local custodians is probably the quickest.”
Spanish custodians also have an opportunity to compete with foreign competition, although in an area where they should have a natural advantage. At present, most lending of Spanish securities happens in London. That’s because of an ambiguity concerning the tax status of resident Spanish lenders. The tax authorities consider that lending is similar to selling and so when you return a loan you could be liable for capital gains tax. This understandably makes the holders of Spanish securities slightly uncomfortable. The new financial law addresses this issue, although further clarification is still required on securities lending. That’s expected by the year end.