Tuesday, September 15, 2009

Euroclear and Link Up Markets continue dialogue

Twelve months ago at Sibos in Vienna when Tomas Kindler, managing director of Link Up Markets, the joint venture between eight European CSDs, said that it would go live in early 2009 with its central mapping engine to foster interoperability between different CSDs, most people probably thought he was mad.

Kindler himself even admits that there were some doubters, however, in March this year, Link Up Markets officially went live. The main benefit it will deliver for participating CSDs is that it fosters interoperabilty by converting domestic messaging formats used by national CSDs into a common ISO-compliant standard.

Although the joint CSD initiative started out with a largely European focus, it is has since expanded beyond Europe with South African CSD, Strate, becoming the ninth CSD to join Link Up Markets. "Strate want to extend their business model and position themselves as a hub in the region," said Kindler, and he says we could see some of the Asian CSDs doing the same.

Kindler says the Asian Development Bank (ADB) and a group of experts comprising regional CSDs and custodians are looking at a Giovannini-type exercise for the ASEAN markets. China, Korea and Japan are believed to be looking at a regional settlement solution or an Asian ICSD.

However, unlike Europe which benefits from having a single currency, Asia's securities settlement infrastructure is even more highly fragmented and is characterised by varying levels of sophistication. "The ADB is not the European Central Bank in terms of influence and policy making, so I think its ambitions are more of a long-term initiative," said Kindler.

The pressure [for CSD] to change is also more prounounced in Europe, given the requirements of the Code of Conduct for Clearing & Settlement which calls for interoperability and the launch of the European Central Bank's TARGET2-Securities (T2S) initiative which will consolidate settlement of eurozone securities in central bank money on a single platform.

Closer to home Link Up Markets is also in discussions with Brussels ICSD Euroclear. If Euroclear were to join it would be a major coup for Link Up Markets given that Euroclear incorporates seven markets and has substantial volumes. Pierre Francotte, CEO of Euroclear, says Link Up Markets would be considered on its merits and that the real value for SWIFT in joining would be to link into markets not covered by its seven CSDs.

For CSDs in Europe faced with the prospect of having to outsource securities settlement to T2S when it goes live in 2013, there are essentially only two games in town: join Link Up Markets or become part of the Euroclear Group Monte Titoli in Italyis the exception in that it developed a joint partnership with a global custodian, but Kindler says he hasn't seen a lot of developmen around that. "The options for [European] CSDs are limited," he says, "however, there is no right or wrong approach."

The next phase for Link Up Markets is to leverage its joint-CSD infrastructure to develop additional services such as pooling collateral across participating CSDs. Kindler also hopes that it will become an attractive proposition for CSDs looking to connect to T2S, which will require an element of conversion.

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