A missed opportunity for Europe

Godfried De Vidts

Failure to create a common market for securities in Europe in the 1990s means that the continent is paying dearly, says Godfried De Vidts

With experience that pre-dates the existence of Global Custodian by 15 years, Godfried De Vidts, director of European Affairs, ICAP and chairman of ICMA’s European Repo Council, has seen his share of change in the industry.

But aside from changes such as moving away from delivering settlement instructions by courier, phone or telex, De Vidts has seen many market introductions in Europe, which have changed securities services drastically.

For example, “the decision was made in the early 90s by the central bank community in Europe to use repo as a way to give liquidity to the markets,” he explains. “In line with this development, the first Global Master Repurchase Agreement (GMRA), the basic documentation for international repo trades was created, and by the end of the 90s we had both the GMRA and the GMSLA (Global Master Securities Lending Agreement).”

Along with the developments around securities finance, Europe also saw a major introduction in the 90s in the form of a new currency.

“Following the creation of the euro at the end of the 90s, one saw major back-office settlement changes,” says De Vidts. “Previously, a bank used to have at least one corresponding bank provider for Belgium, Germany, France, etc., as each country had their own currency. Overnight, banks only needed one provider basically offering all euro cash services, showing them that monetary union pushed by the creation of the European Central Bank was a cash union but not a securities union, because you still had French bonds in France, German bonds in Germany, and Belgian bonds in Belgium.”

While European central banks had been using repo as a liquidity tool, the use of the euro showed that there are still efficiency obstacles in the repo market, with national bonds held in national central securities depositories.

“The Giovannini group looked at the repo market, and that’s where we started to work on the now famous barriers,” says De Vidts. “In effect, we had a monetary union but we still lacked a capital or securities market union. I believe this will now be changed with the creation of TARGET2-Securities and with the abolition of the repatriation of sovereign bonds to be submitted to the European Central Bank (ECB). Add to that the ECB acceptance of tri-party as a product to bring collateral to the central bank and the industry efforts to improve the bridge between Euroclear and Clearstream.”

The U.S. had a similar efficiency problem with multiple CSDs before the Fed had to intervene and create the Depository Trust and Clearing Corporation (DTCC). “But in Europe we haven’t had the political will,” says De Vidts. “We have 20+ CSDs for one currency union, which is crazy. What’s happening now is a significant evolution, even silent revolution for Europe. I believe you will see a much more coherent eurozone monetary union supported by a eurozone back office.”

Looking back, Europe’s decision to move in stages to a more cohesive union might have been misguided.

“When I talked to officials from the European Monetary Institute, the forefather of the ECB, they said they were so overwhelmed with the work when creating the new currency that there was absolutely no time to look at securities,” says De Vidts. “This was a historical mistake for which we are still paying dearly in Europe. Talking to people who are still involved in the markets, they will acknowledge this. If you look at today’s actions that the ECB has taken to stimulate the economy, the fact is one cannot start quantitative easing because we don’t have a European government bond market; we have a domestic bonds market. All of the legacy issues that need to be settled now should not have persisted for so many years.”

Some of the challenges that face the securities services industry may not have come to fruition had Europe moved to both a monetary and securities union sooner.

“I don’t think we would have needed TARGET2-Securities (T2S) if we had had this evolution much earlier,” he says, referring to the change to a single European market for cash and securities.

“I’m confident that with T2S, there will still be issues to be solved, but I think we’ve come a long way. Instead of a big bang, we chose to take little steps. It’s been a very expensive exercise, and I think history will prove this was a mistake.”

At the same time though, he says, things do change quickly in a short period of time, such as the internet and mobile phones in the early 90s not being nearly what they are now. “So you have to see it in the perspective of history and innovation. In the future, if there ever is another currency union in the world, they should learn lessons from Europe; we really missed an historic opportunity. But I’m not negative; I think looking at where we came from, it’s understandable that it didn’t happen, and in the historical context, what’s 20 years? But at the moment we still feel the pain from the inability to create something better.”