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The Last Dance Begins For Clearstream

by Ulrika Lomas, Tax-News.com, Brussels

31 October 2001


The long-running battle for control of Luxembourg-based securities settlement house Clearstream moves a step closer to resolution today when the clearer will receive sealed expressions of interest from 50% shareholder Deutsche Borse, and Euroclear, competing Brussels-based clearing and securities custody house. The other 50% of Clearstream is owned by Cedel, another transaction-clearing organisation owned by more than 90 banks and securities houses that has been pushing for the clearing house either to merge with Euroclear or become a wholly-owned subsidiary of the Frankfurt exchange. Euroclear is also owned by a large number of banks, including the major investment banks who supply most of the liquidity to Europe's equity markets.

At issue is the sky-high cost of settling European securities bargains, said to be often up to seven times the US cost, and the question is whether Clearstream should be fully owned by the banks via Euroclear or solely by Deutsche Borse. There may be competition aspects, although the EU has not made any pronouncements on the subject.

Earlier this year Clearstream was the subject of various investigations launched after two French journalists, one of them a former Cedel employee, published a book in which they alleged that the depository allowed clients to open accounts for the purposes of money laundering. Clearstream denied the allegations, which were not upheld by the investigations and started legal proceedings against the journalists. The affair delayed consideration of Clearstream's fate for some months.

Clearstream's board is understood to have invited both Deutsche Börse and Euroclear to lodge proposals by the close of business today, outlining their indicative valuations and their plans for the business if they were to acquire full ownership. "Cedel has impressed on everybody that the one outcome it doesn't want is for the status quo to continue," a person familiar with the bidding process said on Tuesday.

Major German bank Westdeutsche Landesbank AG (WestLB) has expressed support for a takeover by Deutsche Börse: "I am in favor of a full takeover of Clearstream by Deutsche Börse," Gerhard Roggemann, board member of WestLB and a member of Deutsche Börse's supervisory board, told Handelsblatt. Some observers believe that Clearstream chief Andre Roelants would prefer to reach a deal with Euroclear, but Roggemann expects Deutsche Börse to win the battle in the end. He said that an integration of Clearstream would facilitate "straight-through processing" – the mostly automated processing of equity transactions to the point of settlement, and would cut transaction costs more quickly than a merger with Euroclear.

Roggemann underlined the importance of consolidation among Europe's existing 20 security settlement systems. He said Deutsche Börse already enjoyed the advantage of being able to offer all aspects of stock trading under one roof – from trading via its Xetra system to settlement via Clearstream. This so-called silo structure is less common on other European markets. "Deutsche Börse should build on this advantage in European competition," Roggemann said. But many international banks favor a merger of Clearstream with Euroclear, whose chairman Chris Tupker recently estimated the savings potential from a merger with Clearstream at 200 million euros a year.

Schroder Salomon Smith Barney, which, together with mergers boutique Soditic, advises Cedel, calculates that Clearstream is worth €2.4bn. Clearstream is understood not to have formally appointed banking advisers. Deutsche Börse is being advised by Goldman Sachs, and Euroclear by UBS Warburg.


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