Luxembourg's Clearstream In Eye Of European Settlement Storm

by Ulrika Lomas, Tax-News.com, Brussels

14 January 2002

Dreams of delivering a single European market in financial services on schedule remain remote, and one of the major problems is clearing and settlement, now firmly identified as a big hurdle in the path of a pan-European financial market capable of rivalling the US in terms of depth, liquidity and efficiency.

A move in entirely the wrong direction is Deutsche Borse's pursuit of the 50% of Luxembourg securities clearance house Clearstream it doesn't already own, which is continuing apace, with a Memorandum of Understanding expected to be finalised this month. Most non-involved commentators see the takeover, 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, and its existing 50% holding in Clearstream, to see off rivals such as Cedel which owns the other 50% but is itself owned by more than 90 financial institutions.

On Friday, 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".

Ownership of settlement infrastructure by national exchanges is the main problem. Apart from Deutsche Borse's grip on Clearstream, Euronext - the French-dominated alliance of Paris, Amsterdam and Brussels (with Portugal due to sign up soon) - owns Clearnet, through which deals on the three exchanges are cleared, and it has a small stake in Euroclear - its "preferred" settlement partner. London's structure looks more like an hourglass than a vertical silo. Trades from a variety of exchanges - from the London Stock Exchange to the International Petroleum Exchange - are cleared through a single institution, the London Clearing House. Settlement comes in various flavours, from the likes of Crest, Euroclear and Clearstream, though the LSE, LCH and Euroclear have announced a link-up to provide "straight-through settlement".

Even in London ownership is complex. LCH is 75% owned by its members but Euronext's acquisition of Liffe gives it a 17% stake in the London clearer, with the balance held by the LSE and the IPE.

Assembling a single, coherent structure for clearing and another for settlement is a horrendous task. Yet somehow it has to be done. The European Securities Forum, which numbers most of the world's top investment banks among its members, has a clear view. Its head, the former Bank of England executive Pen Kent, wants the industry to take a utility-style approach - with a single clearing and a single settlement system for Europe. It has camaigned for a system to be on a not-for-profit basis and separate from and independent of the trading platform owners.

Given the money that clearing and settlement generates - 26% of Euronext's pre-Liffe merger revenues, for example - the idea has gone down like a lead balloon in some quarters. Though the ESF may compromise on its not-for-profit approach Mr Kent is firm in what is at stake. "Without rationalisation it is hard to see how [a single market by 2005] can be achieved."

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