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.

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