BNP Paribas, in common with other European agent banks, has made little secret of its growing hostility to the ICSDs in general and Euroclear in particular. In their view, the Brussels-based ICSD has garbed itself in the idiom of a user-friendly, user-owned, user-governed and not-for-profit utility acting pro bono publico whilst actually pursuing a ruthless competitive strategy designed to displace the agent banks as gatekeepers to the capital markets of western Europe. Their strategy articulated by BNP Paribas is to subvert the ICSD strategy of acquiring or merging with CSDs by forming a pan-European transactions bank with sufficient volumes of business to net trades across its own books and so deny the ICSDs transactions which would normally have settled in the CSDs.
Voicing this hostility explicitly and in public, as opposed to implicitly and in private, has so far proved a step too far for BNP Paribas. Nor is it without risk, especially with the ICSDs confdortably astride the high moral ground. But a presentation to a London conference on Tuesday by Jon Lloyd, head of sales and relationship management at BNP Paribas Securities Services, suggests that the agent bankers are at last overcoming their native caution. To be sure, the speech needs to be read carefully – indeed, many who actually heard the presentation missed its import entirely – but it contained not only a devastating attack on the ICSD view of the world but a fierce defence of the role of the agent bank in European clearing and settlement. What Lloyd said was this:
-The Euroclear case for a horizontal consolidation of the European market infrastructure rests on their estimate that CSDs and ICSDs account for just 4 per cent of the cost of settling a trade across borders, with agent banks (35 per cent) and multiple back office interfaces maintained by their clients (60 pe rcent) accounting for the rest. Lloyd says agent banks cost a lot because they do a lot – securities lending, tax reclaims, credit advances, securities financing, proxy voting, margin management and so on – which ICSDs would have to start doing themselves.
-It follows that agent banks – or at least the things which agent banks do – cannot be bypassed: somebody has to do them, and if its not the agent banks it will have to be the CSDS and ICSDs. And if CSDs and ICSDs really do account for just 4 percent of cross-border clearing and settlement costs, it makes virtually no sense to merge them: they are obviously incredibly cheap and efficient already. The savings from merging agent banks, allowing them to clear and settle trades across their own books, would be far greater. Many agent banks already charge lower fees for settling transactions internally.
-The ICSDs have advertised their strategy of acquiring CSDs so far in advance, and over-paid so heavily for the acquisitions which they have made already, that western Europe is now seething with CSDs who will sell themselves dearly or not at all. Which is bound to drive up the costs of consolidating depositories. Worse still, the ICSDs have yet to deliver any serious cost savings from the mergers they have agreed already – not least because they cannot centralise all the functions currently performed by the CSDs, which continue to have to be done at the local market level. Ergo, all the ICSDs are offering the market is to swap an agent bank for an ICSD as their intermediary in local markets.
“There is no doubt,” Lloyd told his audience. “That the ICSDs want what the agent banks have today. After all, both business models include the same clients; similar products and services; similar European ambitions. It is possible to make them seem optically different by introducing `Not for profit’ and `User governed, user owned,’ but these are largely cosmetic differences. `User governed, user owned’ is not really very different from `client focused and value-driven.’ In the end, the two alternatives are essentially: ICSD plus CSD or Agent Bank plus CSD.”
This is an astonishingly frank portrayal of the real competitive landscape in the European securities clearing and settlement infrastructure today. But who will dare to share it? It would be easy to agree with BNP Paribas Securities Services that competition is just what the market needs – may the best man win! – but it would be naive to do so. Easily the cleverest aspect of the ICSD strategy, especially on the part of Euroclear, is the way in which they have turned the shape of the securities clearing and settlement infrastructure into a public policy issue: an obstacle to the creation of a genuine single European capital market. Now the European politicians and regulators are involved, the issue cannot be solved by competitive pressures alone.