When best is better than biggest
How many central securities depositories are there in Europe? The answer depends on who you ask, but you are in good company if you believe that, whatever the number, it is too many.
That is certainly the view of the members of the European Securities Industry Users’ Group (ESIUG), a lobby group growing increasingly powerful in the debate over the shape of the clearing and settlement infrastructure in Europe. Composed of 18 of the biggest players in the European securities markets, ESIUG’s formation was prompted by several market developments, including Cedel’s plan for a European clearing house, Euroclear's hub-and-spokes model, and ECSDA’s Eurolinks project.
Last May, ESIUG issued a series of guiding principles on its vision for the markets, the most important of which was that it wanted a “single integrated process in Europe for clearing and settlement of equity and debt transactions”. Ask individual members of ESIUG what they mean by ‘process’ and you will soon discover how tortuous the debate must have been before they arrived at that word. If they had said platform or provider or system or operator or utility, they would have lost all credibility before they had even started. But ‘process’ is a different thing: many more than one depository can use the same process and ESIUG would still be satisfied, at least in theory. Its unspoken priority is to reduce the number of depositories from its current level to a more manageable group.
In an ideal world, the single integrated process would be run by a single integrated operator. But this is not an ideal world, and ESIUG’s members are too wise to go down that path, so it is encouraging the initiatives of Cedel, Euroclear and ECSDA. It certainly does not wish to be seen to favour one grouping over another, even though it was widely felt the group was initially little more than a collection of Euroclear’s friends, a perception that has changed as the membership has expanded.
If anything, the main accusation levelled at ESIUG today is that it is being too fair to all parties. Since its May declaration, it has looked on as an apparently impartial observer as Cedel has announced plans to float, and Euroclear has said it will drop JP Morgan as its operator and convert to a bank.
More importantly, ESIUG has also watched as Sicovam, the French depository, negotiated first with Euroclear, then Cedel, before finally going back to Euroclear to form an alliance. To most, the behaviour of all the parties involved in this protracted mating ritual left something to be desired, but ESIUG has kept its own counsel on the issue.
Sicovam’s decision to team up with Euroclear was driven by many factors, both political and commercial, but what matters now is that the market is back to the old duopoly. If Cedel had managed to cement the deal with Sicovam, the new entity would have relegated Euroclear to the margins. As things now stand, there is no chance of consolidation behind a single supplier, and only a limited prospect of an early realisation of ESIUG’s single integrated process.
The game is far from over for ECSDA, either. The most vocal proponent of Eurolinks is CRESTCo, the UK depository, and both Cedel and Euroclear know they cannot claim to have a truly European clearing system without its participation. So far, CRESTCo does not want to play, and many of its smaller colleagues are equally wary of getting into bed with either the French or the Germans. They would far prefer to retain their autonomy and adopt a regional structure, and they are therefore unlikely to forsake the project without a very good reason. No-one has given them one yet.
Some observers believe the CSDs are almost ready to compete with custodians. Today they plainly are not, having neither the expertise nor the systems to deliver competitive services to demanding institutional investors. And the custodians, as major shareholders in national and international CSDs, and are unlikely to sign their own death warrant.
But Euroclear has given a signal – intentionally or not – that it has ambitions that would take it directly on to the territory of some its most important clients and shareholders. Last December, it announced it was cutting its tariff for equity settlement and safekeeping transactions by 36% and 16%, respectively. Its explanation seemed rather laboured.
This is the kind of thing that ESIUG should be reviewing, for there is a danger that, as the competition to win control of European clearing and settlement intensifies, clients will be the last thing on the minds of senior management. The very reason for ESIUG’s existence is that its members did not feel they were being listened to closely enough. That in itself should be sufficient to send a clear message to all the European CSDs. It is not a race to be the biggest – but to be the best.