Thursday, April 17, 2008

Real-time realities

Guest blogger, Brussels ICSD, Euroclear, responds to news of Clearstream's new processing environment.

If memory serves me well, in 1998 both Clearstream and Euroclear (Euroclear Bank now) planned to launch real-time settlement platforms. Euroclear launched its daylight real-time settlement platform in 1999 and Clearstream postponed theirs indefinitely, citing other higher priorities such as Y2K.

Later, Clearstream launched its ‘continuous-batch’ daylight settlement platform called Creation for Clearstream Banking Luxembourg clients only; the CASCADE platform used by Clearstream Banking Frankfurt clients continues to operate today separately from Creation.

From our 10 years of experience in operating a real-time platform at Euroclear Bank, and our understanding of how real-time settlement works at other Euroclear CSDs, we know that there are different ways to organise a real-time processing environment, for example, event driven or calendared. To the client, however, the end result is the same – real-time availability of cash and securities.

Because Europe’s capital markets do not yet operate with harmonised market rules and practices, each processing platform must accommodate the particularities of the market(s) served, so the right approach for one market may not be the best for another.

Therefore, assessing whether one system is lower in cost to run than another requires highly complex analysis, including factors such as market practices, system capacity, processing peaks, levels of data-protection and client business-continuity sophistication.

Obviously, upgrading an existing system and consolidating five separate platforms into a single platform are very different initiatives. It would be nonsensical to compare a system upgrade with an unprecedented programme of infrastructure redesign that will save clients more than EUR 300 million per year.

Euroclear’s new Single Platform will, of course, operate in real time. Of equal significance are the joint efforts by Euroclear and our clients in the group’s five European markets (Belgium, France, Ireland, the Netherlands and the UK) to profit from the efficiencies of harmonised market rules and practices within these markets, in accordance with the Giovannini Group recommendations.

We firmly believe that platform consolidation and market practice harmonisation - in parallel - will deliver the most meaningful operational efficiencies and savings to the market. In recognition of these benefits, Euroclear Bank is now working with Clearstream Banking Luxembourg to harmonise market rules and practices for the international securities market, through the International Securities Market Advisory Group.

The two ICSDs have an excellent track record in making regular improvements to the Bridge, which is often credited by market participants as a stellar example of interoperability. Discussions are ongoing between the two ICSDs to further enhance the Bridge; interoperability can be improved further now that both Euroclear Bank and Clearstream Banking Luxembourg are operating in real time.

Monday, April 14, 2008

Clearstream's new processing environment

Well it certainly has been a busy few weeks for the world of European clearing and settlement. Not content with their trading counterparts stealing all the limelight in a post-MiFID world, the European CSDs announced their own 'Project Turquoise' in the form of the "Link Up Markets" initiative which will see seven European CSDs develop a common infrastructure for post-trade efficiency.

Fresh from that announcement, last week Clearstream the ICSD summoned a handful of journalists to its Canary Wharf headquarters in London to hear more details about the new generation of processing environment it announced back in March.

Instead of being courted with a glass of wine and a cocktail sausage, which we were told were being saved for all-important customers, we were given a detailed explanation of what Clearstream's new real-time processing environment really meant and how it provided a migration-free alternative to Euroclear's Single Settlement Engine (SSE), which aims to harmonise and improve settlement efficiency across five markets.

The move to a "real-time" processing environment is apparently part of a four-year strategic review that Jeffrey Tessler, president and CEO of Clearstream International initiated when he first joined the Luxembourg ICSD.

Philip Brown, relationship management, UK, Ireland & Nordics, Clearstream, said a number of market trends and requirements lead up to the new processing environment; a 25% increase per annum in custody volumes, increased complexity on the asset servicing side, investment fund volumes growing at a rate of 30% per annum, and the increasing move to same day repo which was putting pressure on clients to know where their collateral was and on ICSDs to support a same day settlement environment.

Brown said that Clearstream's new "real-time" processing environment would more tightly integrate settlement, custody and securities financing enabling clients to optimise their collateral by providing them with more timely information as to where their cash and securities are.

Clearstream's previous settlement engine was an overnight process which processed 95% of volumes efficiently. "It is the 5% we are trying to resolve by getting the market towards 100% efficiency" said Brown by providing same day settlement and financing.

Under the new processing environment, Clearstream will extend the settlement processing day from 4.30am to 6pm CET, which it said would not only optimise settlement efficiency by eliminating queuing times and enhanced fails management, but also minimise domestic turnaround times from three hours to three minutes, and optimise use of securities as collateral by enabling firms to hold less collateral.

"With event-driven real time processing we don't have a set time of day for starting processing," Brown explained. "Each cycle is driven by an event such as a corporate action or a bridge exchange file with Euroclear."

Commenting on its competitor Euroclear, Brown said that its processing environment was 'calendered' rather than event driven. I got the feeling that Clearstream also saw its new processing environment as an opportunity to steal some of the attention away from Euroclear's Single Settlement Engine project.

Brown was eager to point out that Clearstream was ready to switch on a real-time bridge between itself and Euroclear which would create the impression of a single processing environment, but that the Brussels ICSD was not quite ready yet.

"Euroclear's model is about the acquisition of CSDs around Europe for the creation of a single platform. Our solution is live now. Euroclear has not yet fully delivered its solution on a rolling basis," said Brown.

Arguably Euroclear's SSE, which requires platform consolidation in five markets, is a far more ambitious project than Clearstream's new processing environment. Brown would not be drawn on whether its processing environment was better than what Euroclear would offer. "I wouldn't say it is better or worse. We think you can get there quicker and more cheaply by using a robust infrastructure based on real-time processing."

Wednesday, April 02, 2008

European CSDs announce joint venture

At Sibos in Boston last year, Pierre Slechten, CEO, Euroclear France said that the European Central Bank's (ECB) Target2-Securities (T2S) proposal would lead to further consolidation of CSDs in Europe and cause CSDs to readdress their strategy in terms of moving up the value chain in custody.

Well it seems Slechten's predictions were right; well at least the latter point anyway. Whilst there may not be consolidation per se (at least not at this stage), today seven European CSDs (Clearstream Banking Frankfurt,Hellenic Exchanges Greece, IBERCLEAR Spain, Oesterreichische Kontrollbank Austria, SIS SegaInterSettle Switzerland, VP Securities Services Denmark and VPS Norway)announced that they would develop a commonly owned and designed routing and messaging infrastructure aimed at improving post-trade processing efficiency in Europe.

"It is an initiative that capitalises on domestic infrastructure," explained Jeffrey Tessler, chairman, Clearstream Banking Frankfurt. "It is about leveraging what is already in place for improved access and interoperability as outlined in the Code of Conduct (for Clearing and Settlement)."

The European Code of Conduct for Clearing and Settlement requires signatories to meet standards around price transparency, access and interoperability and service unbundling and accounting separation.

Announcing their joint venture, slated to cost $10 million, the seven CSDs stressed that their initiative would not replace existing domestic infrastructure, but instead create a "linked up market between CSDs so that everyone could speak the same format to one another". Couched in a slightly different way, Tessler said it was about bringing the efficiency of the domestic securities markets to the cross-border world.

Tessler would not be drawn on the exact cost savings of such an initiative, but said they would be "extremely significant". The key question on most journalists' lips however was, is this merely the CSDs going on the defensive in response to the ECB's T2S proposal for settling securities in central bank money using the existing Target 2 system?

Tessler was somewhat measured in his response. At first he said T2S would provide settlement not custody and that the market would benefit by having a "single gateway" for custody services offered by European CSDs, in addition to having a "single window" into the ECB's T2S Settlement Engine. "We are not building a settlement engine," Tessler stressed.

But as one journalist asked, does the joint venture between the seven CSDs mean that T2S is no longer relevant? Tessler said he didn't think that was the case and that the market believed in the benefits of a settlement system operating in an integrated model. "We have had conversations with the ECB about our initiative," he said, "and they see it as a facilitator to T2S."

However, there is no doubt that without the Code of Conduct and T2S, the CSDs would not have been forced to work more closely together. Tessler said the joint initiative would prepare market participants for a T2S world.

But with Euroclear pursuing its own market harmonisation strategy via its Single Settlement Engine and the ECB intent on introducing T2S, will the joint venture between the seven CSDs see the emergence of yet another market infrastructure that market participants have to connect too?

Tessler said that the joint venture was purely a domestic CSD initiative and that Euroclear could participate via its domestic CSDs, such as Euroclear France or CREST in the UK.

But given the SSE strategy Euroclear the ICSD is pursuing, are they going to want to participate in the joint initiative at the domestic level, and if more domestic CSDs in Europe do not join the initiative, are the real cost benefits and economies of scale that such a venture promises unlikely to be fully realised?

For those agent banks that may be feeling a little nervous about CSDs joining forces to provide custody services, Tessler said that they would continue to use agent banks for services such as tax processing and for settlement in central bank money. But hang on a minute, isn't that what T2S is meant to be doing?

Despite Tessler's assurances, the role of agent banks going forward appears less than clear, and there is a danger that with so many different market initiatives for harmonising and standardising clearing and settlement in Europe, that the market will merely end up with a handful of competing and uninteroperable initiatives.

Are corporates being heard on e-invoicing?

SEPA Credit Transfers are live and in recent months we have seen announcements from various vendors (Sterling Commerce's partnership with VAT and GST experts TrustWeaver, Fundtech's acquisition of Accountis)about their forays into the e-invoicing space, which is the 'e-SEPA' corporates often talk about.

Does that mean that banks are finally waking up to the fact that most corporates do not really give a damn about SEPA Credit Transfers (SCT) and SEPA Direct Debits (SDD), which lets face it are interbank instruments?

Not that there aren't advantages for companies using SCT and SDD, but that is not really what SEPA is about for most corporates. Corporate associations such as the European Associations of Corporate Treasurers (EACT)have been particularly vocal about their desire to leverage SEPA to overcome the remaining hurdles to pan-European e-invoicing.

The European Commission appeared to heed their call by setting up an Informal Task Force on e-Invoicing, which has issued recommendations for removing the remaining hurdles to pan-European e-invoicing.

While corporates are in dialogue with the EC Task Force, via a Corporate Supply Chain Panel set up by TWIST and EACT, we hear on the grapevine that any attempts by corporates to have a stronger voice in helping architect pan-European payment processing and e-invoicing standards, are being impeded by the Commission, or more correctly, the strongly represented and funded European banking lobby.

Some of the banks maintain that it is only a handful of larger corporates that want 'e-SEPA' and that to deliver what the corporates are asking for is all too difficult. Yet, just as banks(the European Payments Council) chose to sideline corporate opinions when they were drafting the frameworks for SCTs and SDDs, it seems they may be trying to do the same when it comes to pan-European e-invoicing.

The banks were so eager to be seen to be doing something about reducing the cost of cross-border euro payments, in order to avoid further regulation, that they only focused on the inter-bank processing aspects of SEPA rather than looking at the 'bigger picture' and the real opportunities SEPA presents to truly transform the European payments landscape.

Could this have something to do with banks wanting to tout their own proprietary e-invoicing solutions to corporates? After all, if they are losing so much revenue from standardising cross-border euro payments, they are going to have to make up the slack somewhere else, by trying to lock customers in somehow with proprietary solutions.

Yet, time and time again corporates, particularly those that are multi-banked, have said they don't want proprietary banking solutions; the same argument perhaps applies to e-invoicing. And while the banks maintain that they are best placed to drive widespread adoption of e-invoicing, corporates are far from convinced.

Despite all the rhetoric and the conciliatory attempts by the EC to engage corporate demands for pan-European e-invoicing, it appears that self-interest and preservation may be at work again and that SEPA merely represents a 'band aid' that banks have put over the existing infrastructure in their efforts to appease the regulators, rather than trying to treat what is intrinsically wrong with the existing infrastructure.

Me thinks that the European payments landscape may be setting itself up for its own 'Project Turquoise', except this time it won't be driven by banks but by corporates disgruntled with the status quo.