The merger between CRESTCo, the UK depository, and Euroclear has once again thrown the spotlight onto the rationalisation of the clearing and settlement infrastructure for European equity and fixed income transactions. For Euroclear – which had already absorbed the French (Sicovam), Dutch (Necigef) and Belgian (CIK) CSDs – it is a crucial, perhaps even decisive, victory in its ongoing battle for post-trade supremacy with Clearstream, created by the merger of Deutsche Börse Clearing and CSD Cedel in 2000.
While the Clearstream partners have focused on creating a so-called ‘vertical silo’ – wherein trading, clearing and settlement are centralised within one organisation to facilitate, so it is argued, greater efficiencies and cost savings – for the German market, Euroclear has pursued a policy of ‘horizontal’ integration, aimed at creating a new settlement model that seeks to lay the foundations for an integrated capital market for Europe.
With the UK now onboard, Euroclear now looks in an unassailable position, and has taken a crucial step forward to realising its long-cherished ambition of forcing Clearstream into a merger. At this point in time, both Italy’s Monte Titoli and Servicio de Compensación y Liquidación de Valores (SCLV), the Spanish depository, have remain uncommitted to either camp. However, in July of this year the Italian depository formally merged with Bolsa Italiana to create an Italian vertical silo; meanwhile, SCLV has absorbed Central de Anotaciones del Mercado de Deuda Pública (CADE) – the registration, clearing and settlement entity for the bond market – to create Iberclear, the first phase in the planned unification of the Spanish securities market.
By creating these domestic silos, both markets are looking to strengthen their bargaining position when they do sit down with either Clearstream or Euroclear, although at this point in time it would be a real surprise if either chose to hook up with the former, whose strategy is now looking increasingly self-serving and short-sighted.
And CRESTCo? On the face of it, the Euroclear merger would appear to be an admission of defeat and a slap in the face for its former chief executive, Iain Saville, who left to join Computershare in February of this year. Saville’s surprise exit, coupled with the fact that his successor, Hugh Simpson, was explicitly appointed as acting chief executive, was the first clear indication that the UK depository was preparing to abandon the separatist line it had adhered to so staunchly since the collapse two years ago of the ill-starred merger talks between the Frankfurt and London exchanges. Indeed, as chairman of the European Central Securities Depository Association (ECSDA), Saville had rejected any partnership or merger with either of the ICSDs, instead establishing in conjunction with SegaInterSettle, the Swiss depository, the separate Settlement Network grouping, which was predicated on direct electronic linkages between CSDs offering intraday finality allied to real-time functionality and standardised message protocols.
However, the Settlement Network had signally failed to bloom in the face of indifference, and in some cases intransigence, on the part of other depositories, regulators and end-users. Saville, however, is nothing if not a pragmatist, and it has since emerged that it was he – rather than, as widely supposed at the time, CRESTCo chairman Sir Nigel Wicks – who set the merger ball rolling. With minimal market overlap, a similar ownership and governance structure and a high degree of cultural compatibility, Euroclear quickly emerged as the obvious candidate.
The terms of the deal see shareholders receiving 30.15 Euroclear ordinary shares for each CRESTCo share held. While the UK depository will have only a 19% share in what has come to be called ‘Greater Euroclear’, it will nonetheless be well represented in the management hierarchy, with four directors on the 12-strong Euroclear Bank board as well as seven non-executive Euroclear plc directors (out of 26). Clearly, lessons have been learnt in the wake of the Euroclear/Sicovam merger, which left the French banks moaning about how they had been stiffed. Needless to say, reduced tariffs for users are promised.
However, a new CREST/Euroclear ‘single settlement engine’ is not expected to be up and running until 2005, and even then is expected to be fairly limited in scope; it will not be until 2008 that clients will be able to access all services and securities held by both CRESTCo and Euroclear via a single securities account, a single interface, a single means of payment based on a single set of tariffs.