European Clearing Still Just A Dream

by Carla Johnson, Investors Offshore, London

23 May 2002

When German stock-market operator Deutsche Borse AG won full control of Luxembourg-based securities settlement system Clearstream in April, many predicted a troubled future for the integration of European settlement services.

83% of shareholders in holding company Cedel accepted Deutsche Borse's bid for the 50% stake in Clearstream it does not already own, and the Frankfurt-based bourse said it saw itself as a complete provider of services, from trading to settlement of stocks and bonds. It said that a one-stop vertical shop was the best way to offer cheaper share trading in Europe.

Everybody else believes exactly the opposite, but news yesterday that rival clearer Euroclear is in merger talks with the UK's Crest raises fresh hopes that there may emerge an integrated European clearer.

What is not clear yet is whether Clearstream's clients, many of the biggest of them among the ex-owners of Cedel and most of them also heavily involved in ownership of Euroclear, have moved their business away from the German-dominated Clearstream.

J P Morgan Chase said in March that it was moving $150bn of client assets from Clearstream to Euroclear; and UBS, thought to be one of Clearstream's top clients, was expected to follow suit.

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. Before the DB takeover, Andre Roelants, Clearstream Chief Executive, said that he expected Clearstream to cut transaction costs by 20% in the next three years - but this didn't impress players in the European securities market who know that transaction costs in the US are seven times cheaper than in Europe.

Last 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 establishing 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."

Recommended