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An Efficient Europe: Clearing and Settlement Alternatives
September 8, 2008
Almost ten years after the introduction of the euro, the cost to trade securities across borders remains high, thanks largely to the European Union's complicated infrastructure. And the exact route toward that elusive single European financial market, where post-trade processing is harmonized and efficient, is still a work in progress.
The Markets in Financial Instruments Directive (MiFID) has fostered the creation of alternative trading venues to compete with incumbent national stock exchanges, but there have been no easy answers for the post-trade landscape. Proposed solutions broadly fall into two camps--consolidation or competition.
Five years since the European Commission-sponsored Giovannini Group identified 15 barriers to an effective post-trade environment, little progress has been made in public-sector reform. In 2006, the EC introduced a voluntary code of conduct designed to ensure interoperability, transparency and competition among market infrastructures. Yet none of the dozens of applications made for interoperability between depositories and clearinghouses have come to fruition. Meanwhile, the emergence of multilateral trading facilities (MTFs) has led to more central counterparties, such as the Depository Trust & Clearing Corp.'s EuroCCP subsidiary and Fortis' European Multilateral Clearing Facility (EMCF).
The European Central Bank (ECB) has proposed a pan-European platform--Target2-Securities (T2S)--that would allow central securities depositories (CSDs) to outsource their trade settlement processes. The initiative will cut down costs and processing times, according to the ECB, but questions remain: What are the revenue implications for CSDs and custodian banks? How will their business models be affected?
The depositories, which have offered conditional commitments to T2S, have come up with their own alternatives. A group of seven--led by Clearstream--has formed Link Up Markets, which in the first half of 2009 is expected to launch a hub that will let customers access other depositories' markets via their own. Euroclear, whose seven CSDs have not been invited to join Link Up Markets, is moving forward with its Single Platform program, which will migrate all of its depositories onto one system by 2011.
To help sort through a complex situation, Securities Industry News senior international editor Chris Kentouris invited several key figures in the post-trade processing industry to talk about streamlining the European environment. Participating were Paul Symons, director of public affairs at Euroclear in Brussels; Alberto Pravettoni, London-based managing director of corporate strategy for LCH.Clearnet; Tomas Kindler, managing director of Madrid-based Link Up Markets; Henry Raschen, head of regulatory and industry affairs in Europe for HSBC Securities Services' institutional fund services; and Jan Bart De Boer, global commercial director of brokerage, clearing and custody at Fortis.
Which of the various post-trade initiatives will make the biggest contribution in reducing the cost of cross-border transactions?
Symons: Full implementation of the three pillars of the European Commission's code of conduct that promotes competition, openness and a level playing field between infrastructure service providers is an initiative that we believe will deliver a post-trade environment in Europe with the requisite impact on cost reduction. Much progress is being made to fulfill the objectives of the code; however, more time will be needed, especially in delivering access and interoperability to secure all of its benefits. We also believe that if Target2-Securities is as successful in 2013 as the European Central Bank promises in lowering settlement risks and costs substantially below what central securities depositories can do on their own, it will attract the business of CSDs and their clients. By that time Euroclear will have delivered its Single Platform and have integrated the Finnish and Swedish CSDs, saving clients more than EUR350 million per year. The Single Platform will then cover about 65 percent of the Eurotop 300 in equities and more than 60 percent of the European domestic bond markets and will be interoperable with T2S, making a compelling combination.
