Clearstream no longer thinks of itself as just a depository but as a commercial bank

At the London Capital Club, Jeffrey Tessler, CEO of Clearstream International, the Luxembourg-based ICSD, painted its competitor, Euroclear, the other half of the ICSD (International Central Securities Depository) duopoly, as being in a much weaker position - directly exposed to the failure of broker/dealer clients during the crisis, a number of changes at top management level including the impending arrival of a new CEO, and still stuck in the mindset of a utility, not a commercial bank that is moving up the value chain.

One could be forgiven for thinking that old rivalries between the ICSD duopoly, which go back decades, have never really dissipated. However, Tessler was also complementary towards his Brussels-based counterparts saying that it too recognised the importance of interoperability amongst CSDs (although the jury is still out on whether Euroclear is likely to join Clearstream's Link Up Markets).

He complemented Euroclear for the work it had done in integrating the CSDs within the Euronext markets into one with its Euroclear Settlement of Euronext-zone Securities (ESES). Yet he added that  it would be difficult for Euroclear to extend its single platform concept beyond the Euronext markets, so it would have to embrace interoperability and hopefully join Link Up Markets.

When I spoke to outgoing Euroclear CEO Pierre Francotte at Sibos in Hong Kong last September, he said Euroclear was looking at Link Up Markets, but he remained non-commital. It will be interesting to see how Euroclear's new CEO, Tim Howell, approaches the issue of interoperability and Link Up Markets when he finally  takes the helm at the Brussels-based ICSD.

If Euroclear decides not to join Link Up Markets, which has built a converter for fostering interoperability between different domestic CSDs, Tessler said you could still have bilateral links in all major markets. However, from Link Up Markets' perspective its ambition is to provide a single point of access into multiple markets."We believe interoperability as a strategy going forward is the right one," says Tessler. "Regulation is moving in that direction. Instead of destroying local market infrastructure, we want to leverage the infrastructure that exists." For more on Link Up Markets as a single pipe, listen to Jeffrey Tessler.

Clearstream Banking Frankfurt, which is the German domestic CSD within the Deutsche Bourse Group, sees its membership of Link Up Markets as a way of not only fostering interoperability among CSDs, but also moving up the value chain to prepare for a much-changed world post-TARGET2-Securities (T2S), which is the new settlement platform for euro-denominated securities due to go live now in 2014.

"T2S is like taking a chalkboard and erasing everything off of it," said Tessler. "Through Link Up Markets we will be able to access multiple markets through a single window. We are transforming Clearstream Banking Frankfurt from a domestic CSD into a hub for accessing multiple CSDs throughout Europe and the world."

 But Clearstream International, the ICSD part of the business, has far loftier ambitions. Tessler says it plans to become not just a depository but a commercial global custodian like J.P. Morgan or Bank of New York Mellon that provides value added services such as Global Securities Financing, which is an increasingly successful part of its business, going from has a 22% market share in 2002 to a 51% market share.

Interestingly, custodian banks are also customers of Clearstream, and when questioned on whether Clearstream would compete directly with its customers, Tessler said regional subcustodians that acted as an intermediary between the broker and the CSD, would find their business increasingly threatened. Increasingly, he says, brokers will ask themselves, 'Why do I need a subcustodian?'

Tessler says Clearstream is winning more securities financing business than its competitor Euroclear because of its vertical integration model which combines the trading functionalty of Deutsche Bourse, with the settlement and collateral management capabilities that also exist within the group, particularly Clearstream Frankfurt's direct links with the Deutsche Bundesbank. For more on why Clearstream has been successful in the securities financing space, listen to Jeffrey Tessler.

Neither clear nor settled

At a much scaled down Finexpo (which is perhaps a sign of the times) in London today, those regulators and market participants that have watched on in frustration at the slow pace of consolidation and interoperability among European securities settlement and clearing providers, were told they "should be careful what they wished for".

Those were the words of Simon Wheatley, director of regulatory liaison, LCH. Clearnet, which signed a "non-binding" agreement to merge with the US-based Depository Trust & Clearing Corporation (DTCC) in October last year, only to attract another suitor, interdealer broker Icap and a consortium of investment banks who are believed to also be in discussions with LCH.Clearnet.

Referring to the European Code of Conduct for Clearing and Settlement which looks to promote certain standards in terms of price transparency, access, interoperability and service unbundling, Wheatley said that "competition" [between clearers at least] did not come free.

Asked whether a single clearer in the form of the US-style DTCC model would increase risk or reduce risk, Wheatley said that while it may take away some issues, it would introduce others, and that one size did not necessarily fit all.

Marco Strimer, CEO, SIX x-clear said that ultimately the Code of Conduct was about consolidation and that not everyone would make it to the finishing line. However, he added that consolidation of central counterparties (CCP) also meant that all market participants would need to change their systems. In other words consolidation, while seemingly desirable does have its costs, particularly for those that have to adapt to accommodate it.

On the settlement side, things seem to be moving more quickly with ICSD Euroclear consolidating settlement platforms and harmonizing market practices in three markets
as part of its Single Platform initiative, which will eventually encompass seven CSDs.

The European Central Bank is also looking to standardize settlement of euro denominated securities on its yet-to-be completed TARGET2-Securities (T2S) platform, but while the ECB received indications of intent from most of Europe's CSDs that they would use T2S once it went live, it has yet to secure legally binding commitments from them, which could take much longer than anticipated.

Ilse Peeters, director of public affairs at ICSD Euroclear said that she did not expect the ECB would receive legally binding commitments by March as there were still outstanding questions regarding the governance, pricing structure and legal aspects of T2S. John Tanner, head of equity post-trade service development at the London Stock Exchange said that questions also remained regarding the Bank of England and sterling's participation in T2S.

So it seems all is not clear nor settled by any means in Europe's fragmented clearing and settlement landscape.

Clearstream is in "good shape" says CEO

At a press briefing this morning in London, Clearstream International CEO, Jeffrey Tessler, quashed ongoing rumours that Deutsche Börse may "spin off" its ICSD.

Back in 2007, at the time that much of the transatlantic consolidation between national exchanges was kicking off and Deutsche Börse had made numerous failed bids for the London Stock Exchange, FinancialTech Insider reported rumours suggesting that the German exchange could sell off parts of its business, including the ICSD Clearstream.

According to newspaper reports at the time, Atticus Capital, which held an 11.68% stake in Deutsche Börse,was keen to see it separate Luxembourg-based Clearstream International from the exchange and return cash to shareholders.

Today in London, Tessler said the board of Deutsche Börse remained committed to the existing business model and that there were no current plans to spin off the ICSD, although it was open to any future debate and discussion regarding this.

Despite ongoing challenges in the credit markets, Tessler said Clearstream was in relatively good shape (it is one of the few custodian banks that is still AA rated, he said) and that, unlike its competitors, it had not been directly exposed to the failure of major sell-side firms such as Bear Stearns and Lehman Brothers as it never had broker dealers as client.

Tessler said Clearstream had witnessed an "explosion" in cash balances, which had tripled as investors perceived the ICSD as a "safe haven". Despite declines in mutual fund settlement as German retail investors shied away from equities, Tessler said Clearstream's main business, Eurobonds, remained promising as debt issuance from both governments and corporates is expected to rise substantially outstripping the capacity of domestic markets, thereby benefiting the international market that the ICSD services.

Despite the difficult economic climate, Tessler reiterated the benefits of Clearstream's strategy of pursuing "interoperability" rather than a single settlement engine, which its competitor, Euroclear is building.

Clearstream Banking Frankfurt is spearheading the Link Up Markets initiative, which will build a format converter to facilitate interoperability between the seven participating securities depositories. Tessler said Link Up Markets would be able to "plug into" any system around the world and would allow CSDs to feel comfortable in a post-TARGET2-Securities world.

Clearstream also appears to be advantaging from the increased uptake of securities financing, which saw its Global Securities Financing business grow by 24%. Clearstream is looking to increase its basket of eligible securities that can be used as collateral by opening it up not just to bonds, but also equities. It has also developed a central bank pledging facility allowing collateral within Clearstream to be used to access central bank money. It is also exploring the use of investment funds for collateral purposes.

DTCC and LCH.Clearnet to merge

We've had transatlantic exchange mergers, now it seems that securities clearing houses are tying the knot with the DTCC and LCH.Clearnet announcing their intentions to merge.

The merger has been a long time coming, given the fragmentation within securities clearing in Europe and the lack of "interoperability" in the clearing layer, which is one of the conditions set down by the European Code of Conduct for Clearing and Settlement.

Interestingly, the DTCC revived the old Nasdaq Europe platform, EuroCCP, in an effort to give firms a choice of where they clear and to break away from the model of clearing being a "proprietary function of vertical exchanges".

Following resolution of certain key commercial, legal, tax and regulatory issues, it is intended that DTCC’s existing European subsidiary, EuroCCP, will join with the new LCH.Clearnet HoldCo to form a single European clearing business.

It kind of makes you wonder why the DTCC bothered setting up EuroCCP in the first place as merger discussions with LCH.Clearnet have been ongoing for some time, and perhaps in this current economic environment where risk management and cost savings are uppermost in people's minds, LCH.Clearnet finally caved.

It is unclear which technology platform will predominate, but it is anticipated that the proposed merger will result in efficiency gains, largely derived from technology savings, as well as economies of scale as both the US and Europe would be supported by a common infrastructure. As such "further reductions in the costs of LCH.Clearnet’s and DTCC’s services", most notably for equities in both Europe and America, are anticipated. Other markets will also be covered including, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps and credit default swaps.

The formal announcement from the DTCC said that LCH.Clearnet would move to an at-cost based structure comparable to DTCC’s within three years. It is believed Euroclear, which has a 15.8% holding in LCH.Clearnet supports the transaction in principle and will remain a shareholder.

A "binding" agreement between the DTCC and LCH.Clearnet is subject to a number of conditions including; consultation with the Works Council in the French subsidiary of LCH.Clearnet, the approval of shareholders, and the relevant regulators and tax authorities.

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.

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."

The next generation

Further to my post of the 14 May entitled, My Generation, outlining how Ajax is being used to build richer web applications particularly for trading front-ends, Caplin Systems announced the launch of such an application, Caplin Trader, today.

Caplin Trader is described as an "ready-made application that enables banks to build high-function multi-product trading portals in FX and fixed income." A major bank is deploying Caplin Trader, details of which are expected to be announced at SIFMA's Technology Management Conference in June.

"We are seeing a lot more people saying that in fixed income a bank portal is a requirement, which follows what happened in FX," says Paul Caplin, CEO, Caplin Systems. And although a number of banks already have web-based FX trading portals, Caplin says it is seeing a "refresh" of single bank FX portals banks built three or four years ago.

Caplin Trader, which sits on top of Caplin's integrated data and messaging platform, is targeted at the next generation of trading front-ends, which Caplin says will be much richer applications in terms of look, feel and functionality thanks to new technologies such as Ajax.

"There seems to be a lot of customers that want trading functionality integrated with useful information (prices, research, news), which is a way for banks to entice cutomers to trade directly with them," Caplin explains.

Caplin Trader's "drag-and-drop Ajax framework" includes standard components such as product grids, trading panels, trade blotters, trading tickets, product and instrument search, charts and news displays. Banks can more easily aggregate various sources of content on one screen by pulling it together in a browser. This is what is referred to in the biz as "mashups."

My generation

Despite all the hoopla around the internet it is only in the last four to five years that online trading of FX and equities has really taken off. Even then, despite the proliferation of online platforms for trading FX, as I reported from Miami a few weeks back, a surprising number of companies still prefer the sound of a voice on the other end of the phone rather than the click of a mouse.

Having said that, it seems the e-trading 'bug' is catching on and is encompassing other asset classes such as fixed income, at least that is what Paul Caplin, CEO, Caplin Systems is telling us. "We are seeing a wider requirement particularly in fixed income and FX for a high-function web front-end for trading," says Caplin.

But hang on a minute, haven't most banks already built web trading front ends particularly in the FX space where there is a multitude of single bank and multi-bank sites for trading FX online? Well, yes, says Caplin, but he describes some of these single bank web front-ends as 'primitive', mainly because they only support Request For Quote (RFQ) when the market is moving towards 'streaming' prices.

Also he says a number of traditional web trading applications were built using Java, which, according to Caplin, is considered to be no longer viable for trading front-ends.

Caplin says the next generation of e-trading platforms will feature richer web applications but around AJAX and "enterprise mashups" or web aggregation where multiple content is aggregated on one screen or web browser.

What all this amounts to effectively is that the next gen of e-trading applications are likely to be much more richer in functionality, with banks being able to more easily and dynamically display multiple content (prices, research, news) on one screen across multiple products (FX, fixed income).

Press embargoes prevent me from going into any more detail at this stage, but Caplin will be making an announcement on Monday concerning the next generation of e-trading applications it is working on.

When the sleeping dragon awakes

Western sell-side firms have been champing at the bit to obtain a slice of the action in the Chinese brokerage market. Swiss-based UBS bank was amongst the first through the door with its purchase of a 20% stake in Beijing Securities. As part of China's entry into WTO it committed itself to allowing foreign partners to take an almost 33% stake in a joint venture brokerage in China.

According to the China Daily, following the announcement on July 2002 that joint venture brokers were permitted, only five have been established, including an arrangement between Goldman Sachs and Beijing Gaohua Securities.

China's myriad retail brokerages have been plagued by irregularities and a lack of corporate governance. The Chinese government classifies brokers into three main types: innovation brokers, standard brokers and problem brokers. At the end of 2005, 14 firms were classified as 'innovation brokers' and about 20 problematic brokers have been closed down or taken over by other firms, according to the China Daily.

Tim Marsh (ex UBS investment bank), chairman, Hong Kong-based Serisys Solutions, which provides IT services to China's capital and banking markets, anticipates that from October 2007, more foreign brokerage firms will enter the Chinese market as from that date they will be permitted to gain management control of Chinese brokers. But it is not just foreign brokers that are eager to penetrate the challenging Chinese market.

Transaction processing vendors are also eager to sell their securities processing solutions to China's capital markets firms to help local firms process the anticipated rise in volumes from the emergence of wholesale brokerage in China and to assist China's 'innovation' or 'modern'(meaning well-run) brokers in their global expansion.

Based on his experience in rolling out back office processing systems for UBS, Marsh and his company Serisys is putting its money on Syn~, the securities transaction processing platform of Coexis, a more than 30-year-old IT provider which originally sold its legacy back office processing solution CMP to investment firms such as Merrill Lynch, Goldman Sachs and CSFB. CMP and its client base was later sold to transaction processing systems provider ADP Wilco, but Coexis has since launched its "next generation" transaction processing and settlement system, Syn~.

Over crispy duck pancakes and prawns with lemongrass at London's Imperial City Restaurant, the location for Coexis' announcement of its strategic partnership with Serisys in Asia Pac, Marsh was effusive about the workflow capabilities embedded within Syn~.

Ply anybody with good Chinese grub and they are likely to be effusive about anything, but Marsh says the business process and rules-based transaction processing engine within Syn~ is unrivalled in the marketplace in terms of its adaptability, scalability and flexibility, the ability to isolate data from the underlying application so it can be used by other applications, and ease of integration as it sits on top of existing applications.

While competing systems such as ADP's Gloss may take a year to implement in complex operational environments, according to Marsh, Syn~ can be implemented in six to nine months. Serisys will support Syn~ in China and Asia Pac as an in-house solution or on an ASP basis.

Both Coexis and Serisys are working on translating Syn~ to Chinese and hope to add all the necessary functionality for the Chinese market by the end of this year. Coexis and Serisys will initially target the solution at the 18 'modern' brokers identified by the Chinese authorities as well as smaller brokers, which it anticipates will opt for an ASP offering.

But what about the global brokerages looking to enter the Chinese market? Won't they want to support their own in house transaction processing systems which they already run on a global basis or competing vendor's systems such as ADP Wilco's Gloss?

Marsh maintains that competing vendors such as SunGard and ADP Wilco do not have "transportable" securities processing solutions that will readily adapt to the Chinese market. "I don't see how foreign brokers will be able to squeeze their systems into Chinese brokers," he says. "It doesn't make any sense."

Serisys believes its local market knowledge combined with Coexis' next generation platform will prove a winning combination and is aiming to capture a 33% market share of the Chinese transaction processing market. Syn~ will be hosted in a development centre within the Hong Kong Science and Technology Park, five miles from the Chinese border. Marsh says this will also enable capital markets firms to comply with Chinese regulations regarding maintaining of customer data.

Could Clearstream be up for sale?

Out here in blogger land one does get a certain sense of satisfaction when the mainstream media picks up on themes we have been blogging about. Just to jog your memories, on the 6 February, FinancialTech Insider posted a comment entitled,Deutsche Börse's next move, which ventured whether given the failure of its merger attempts with other exchanges, would the German exchange sell off parts of its business, including the ICSD Clearstream?

Well according to a report in The Wall Street Journal,Atticus Capital,which holds an 11.68% stake in Deutsche Börse,is keen to see it separate Luxembourg-based Clearstream International from the exchange and return cash to shareholders.

In the forthcoming March issue of financial-i-magazine, I pose the same question to Clearstream International's CEO Jeffrey Tessler, who maintains that Clearstream is an integral part of Deutsche Börse group, comprising 40% of its revenues.

But in the rapidly evolving exchange landscape, anything is possible it seems and no one should underestimate the persuasiveness of an exchange's shareholders, particularly if other shareholders start making similar demands.

Deutsche Boerse's next move

Amidst all the machinations we have witnessed in the last few weeks between the Nasdaq and the LSE, one has to ask what the Deutsche Boerse makes of all this.

The German stock exchange knows only too well what it is like to be turned down by the LSE on more than one occasion, having made various bids for the London exchange dating back to 2000.

Watching the protracted negotiations (if one can even call them that) between the LSE and the Nasdaq, one has to wonder what impact this is likely to have on Deutsche Boerse's strategy. The exchange has been unusually quiet in these last few weeks, going about its business. But is it regrouping its resources to launch another bid for the LSE or possibly another exchange, or is it a case of twice bitten ...?

In light of the competitive threat regulations such as MiFID poses for national exchanges and the impact the Code of Conduct on Clearing & Settlement is likely to have on exchanges' cosy arrangements with clearing houses and CSDs/ICSDs, some are suggesting that at some point, Deutsche Boerse may be forced to reassess its vertically integrated approach.

As the exchange and securities clearing and settlement landscape in Europe evolves in response to regulatory and market forces, some interested observers are asking what is Deutsche Boerse likely to do with its post-trade business, which includes the ICSD Clearstream? Will it form separate subsidiaries and then sell them off bit by bit? What is the exchange's next move likely to be?

The cost of compliance

Various media reports in the last few months have contemplated the demise of New York as a major financial center, with US Treasury Secretary Henry Paulson, blaming over-regulation in the form of Sarbanes-Oxley and others pointing to the litigious environment in the US. Are there any lessons for Europe to heed in all of this?

The London Stock Exchange has been a major beneficiary of companies' decision to choose European markets over the US for capital raising. And it seems that US banks and other interested parties are closely watching how the Markets in Financial Instruments Directive (MiFID) plays out in Europe.

With MiFID granting investment firms a European passport for selling investment services and competition between national exchanges and multilateral trading facilities expected to increase significantly in Europe, American investment banks are watching with interest, having witnessed it all before in the US market where the emergence of ECNs threatened the hegemony of the NYSE and Nasdaq.

Interestingly, those ECNs left standing (ArcaEX and INET)have since been swallowed up by the very exchanges they threatened. Are we likely to see the same events unfold in Europe in response to MiFID? Will Project Turquoise, if it ever gets off the ground, eventually be bought by the LSE or Deutsche Bourse?

The bigger question however, is what impact will MiFID have on the international competitiveness of the European securities markets? Will MiFID create a more cost effective and efficient securities market that gives Europe a competitive edge over the US as a major financial centre? Or are we in danger of repeating the mistakes the Americans made with over-regulation of financial and capital markets?

There is a real danger of the cost of compliance with regulations such as MiFID outweighing the benefits. Will MiFID and the spate of other regulations designed to impose harmonisation and standardisation on a fragmented Europe, discourage companies from wanting to list, invest or do business in the UK and other major European financial centres?

Further to that point, the FT reported this week that European investment banking lobby groups would join forces to state their case to the European Commission and the Committee of European Securities Regulators, which may be a step in the right direction if Europe is to avoid over-regulation.

'BoNYM'

Since the announcement of the Bank of New York and Mellon Merger to create a banking giant with approximately $17 trillion in assets under custody, there have been a lot of murmurings in the marketplace as to the strategic value of the deal for customers.

The merger between the two banks has resulted in it earning the moniker, 'BoNYM' in reference to the German band of the 70s, Boney M. I first heard that joke at lunch with another leading global custodian not long after the BoNYM announcement was made. It has since spiralled. It makes you wonder whether the branding gurus had a hand in the merger - what better way to capture the market's attention than naming yourself after a band that manufactured "bubble gum" infectious pop music.

Some observers suggest that whilst there are cost synergies to be realised from the merger, all is not "Daddy Cool." According to Richard Hogsflesh, managing director of R&M Surveys, which compiles an annual ranking of the top 10 global custodians, big does not necessarily mean better when it comes to customer quality.

In the December/January issue of financial-i magazine,he says that the trillion dollar tie up may be a cause for concern for existing customers of both banks as the deal appears to be more "shareholder-driven" than "customer-driven".

Another custodian I was speaking to the other day said whilst he understood the cost synergies both banks would derive from the merger, particularly in the competitive US custody market, he did not see how the merger would benefit the bank's international business.

It appears that the jury is still out on what 'BoNYM' really means for the global custody business, if anything?

Euroclear ups the ante over Target2 for Securities

Last week at the Sibos conference in Sydney, Australia, Jean-Michel Godeffroy, director general, payment systems, the European Central Bank (ECB) was seen loitering nervously near the exhibition stand of international central securities depositary, Euroclear.

Apparently a member of the Euroclear staff asked him if he was OK, to which Mr Godeffroy replied, 'I have an appointment with Pierre Francotte,' Euroclear's CEO.

And the relevance of this you may ask, well, I am sure ECB staff do not make a habit of loitering near the exhibition stands of financial service providers unless they have something serious to discuss.

Godeffroy was later ushered into a meeting room where, without the benefit of being a fly on the wall, the conversation perhaps went something like this (although it would have been in French and Belgian and perhaps peppered with more expletives);

Francotte: Bonjour Jean-Michel

Godeffroy: Bonjour Pierre

Polite conservation ensues for a few minutes

Francotte (in a polite but raised voice) to Godeffroy: What is the ECB trying to achieve with its Target2 for Securities Jean-Michel. Surely, this can only lead to further market fragmentation within Europe.

Euroclear is less than pleased with the ECB's plans to use Target2, the ECB's payment system for high value payments in euro, as the predominant system for DVP settlement in euro in central bank money for equities, corporate and government fixed income transactions.

Currently CSDs use national payment systems to settle the payment leg of securities transactions or in the case of Euroclear, Euroclear Bank performs that function. However, according to Euroclear, the ECB's Target2 for Securities or T2S proposal means that national CSDs would no longer be able to settle in central bank money; that would be "outsourced" to T2S; they would be required to settle in commercial bank money only.

T2S is a classic example of how regulators and central bankers tend to work. Come up with an idea, which in theory may sound great (after all Europe's clearing and settlement infrastructure is fragmented, why not try to force consolidation by using Target2), but do not consult the market first before you put it out there.

Consolidation of Europe's fragmented clearing and settlement infrastructure is already a political 'hot potato' and securities depositories like Euroclear obviously has its own nest to feather in terms of its plans to consolidate five settlement platforms into its Single Settlement Engine. Euroclear's argument is that they and the market in general are already making significant inroads by standardising securities settlement platforms and market rules governing corporate actions. Then along comes the ECB with plans of its own. Is it a recipe for disaster in terms of creating more market fragmentation?

T2S, Euroclear argues, could damage the work that is already being done by market participants to harmonise Europe's clearing and settlement infrastructure. "There is a risk that commitment to [harmonisation] and commitment to invest in change will fall away if the markets see a risk of double migration in the T2S proposal," Euroclear states.

Whilst the ECB may be trying to encourage further harmonisation of Europe's disparate clearing and settlement infrastructure, the question is to what extent is it willing to go to achieve this? Will T2S transform the ECB into "a full CSD" which would replace eurozone CSDs altogether?

Euroclear has called for further clarification of the ECB's T2S proposal, particularly in terms of whether it would generate additional cost, complexity and inefficiency and whether migration to T2S would be mandatory or voluntary; the latter it says raises doubts as to whether T2S would gain the critical mass required to warrant investment by the CSDs.