Big Banks Fight Back At Deutsche Borse's Clearstream Dream

by Carla Johnson, Investors Offshore, London

23 January 2002

After it became obvious that Deutsche Borse was determined to buy out the 50% of Luxembourg's Clearstream securities settlement house that it didn't already own, Clearstream's clients began to 'consider their options'. Many of the biggest of them are among the owners of Cedel, which has the other 50% of Clearstream, and are also heavily involved in ownership of Euroclear, Clearstream's biggest rival. Some of them are also key members of the European Securities Forum, an organisation set up to lobby for greater transparency and lower settlement costs in Europe, something which the Deutsche Borse move makes more difficult.

First J P Morgan Chase said earlier this month that it was moving $150bn of client assets from Clearstream to Euroclear; now UBS, thought to be one of Clearstream's top clients, is locked in talks with Clearstream which are widely expected to result in its defection.

Most non-involved commentators see Deutsche Borse's takeover of Clearstream, which will create a vertical 'silo' in the securities markets, as being negative for consolidation, effectiveness and transparency in European securities markets; but Deutsche Borse has used its muscle to overcome objections from Cedel's owners. Or has it? If the top four or five 'bulge bracket' banks move out, Deutsche Borse may be left with just the husk of a once-successful clearing house, and it's possible that the threat of this may be enough to bring it back to the negotiating table in a less hubristic frame of mind.

After Deutsche Borse made its intentions clear, Andre Roelants, Clearstream Chief Executive, said that he expected Clearstream to cut transaction costs by 20% in the next three years - but this doesn't impress players in the European securities market who know that transaction costs in the US are seven times cheaper than in Europe. In December, S & P said that a takeover of Clearstream by Deutsche Borse 'would not address the demands of securities' markets participants to bring down costs by establihsing a single Eurobond clearing and settlement institution'. They might have said the same about equity trading.

Creating a single, pan-European settlement system would allow users to "net" deals - offsetting the costs of a purchaser here against the proceeds of a sale there, significantly reducing the amount of working capital required. Such a system remains remote, however. As Alberto Giovannini, who chaired a European commission committee looking at the issue, noted trenchantly: "We have a bunch of separated markets with their own institutions, rules and practices, inherited from an era when these markets did not trade with each other. These institutions cannot constitute the backbone of an efficient market; they are totally unsuited."

The commission had already spelt out why it was worried. Last year another of its committees, under Baron Alexandre Lamfalussy, warned that without an integrated financial marketplace "economic growth [and] prosperity will be lower and competitive advantage will be lost to those outside the European Union".

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