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.

No CCPs can't save the world

With the financial markets in recovery mode, following last year's annus horribilus, the question everyone, particularly the regulators are asking, is can CCPs save the world?

That was the title of one of the morning sessions on the opening day of the Sibos conference in Hong Kong and by the time I managed to find my way to the conference hall where the debate was taking place, it appeared that most of the panellists were saying what most people at the coalface already knew, that CCPs can only reduce risk for those instruments that are standardised.

"The ability to determine price is important to the central clearing function," said Kim Taylor, president of Chicago-based CME Clearing. "We want to be able to determine price, have a good knowledge of the forward looking risk and be able to set standards in terms of who can participate. Given these three elements CCPs in standardised markets do provide enhanced efficiency."

Yet with so many CCPs popping up as multilateral trading facilities continue to multiply, some maintain that the multitude of emerging CCPs could create even more risk. "I don't think any of us take lightly our obligation to reduce systemic risk," Taylor riposted, adding that there was a danger of heightened risk if the markets tried to push every instrument into a clearing house. "We need to focus on the more standardised end of the curve."

Alberto Pravettoni, managing director, group corporate strategy for LCH.Clearnet, said that it had sufficient mechanisms in place to ensure it did not take excessive risk. But while CCPs may want to differentiate on what is standardised and what is not when it comes to central clearing, the regulators may have a different idea. Some see central clearing as a panacea for the market's current woes. And as academic Craig Pirrong, from the University of Houston pointed out during the panel debate, it may be difficult to distinguish between what you can and what you cannot clear.

Pravettoni believes there is an opportunity to put more products (namely, some equity and fixed income instruments) through clearing houses. But for the end users of clearing houses there is an increasingly confusing array of CCPs to choose from.

The question is how many clearing houses should there be? In the FX markets, Rob Close, president & CEO of CLS Bank, said there probably should only be two or three. However, markets like Korea and Singapore have mooted the idea of setting up local clearing houses for OTC derivatives. The latter did not appear to go down too well with Monday's panellists who all pretty much agreed that given the global nature of the markets, global clearing solutions, not local market-specific solutions, were needed. "Trying to force these products to go through local clearing routes would be counterproductive from a risk management standpoint," said Pravettoni.