EuroCCP, the central counterparty (CCP) built and owned by The Depository Trust and Clearing Corporation (DTCC) for the Nasdaq Europe trading platform, went live today. EuroCCP will provide netting and clearing services to trades executed in both US and European securities on Nasdaq Europe, the European arm of Nasdaq formed last year and which subsequently took over the ailing Brussels-based pan-European trading platform, Easdaq. Nasdaq Europe is a small market by comparison with the London Stock Exchange, Euronext or Deutsche Borse – it lists just 310 securities, capitalised at Euro 8.6 billion, with average daily turnover of Euro 7.1 million – but it offers DTCC a platform on which to build a broader CCP clientele in Europe, and guarantees the American CSD a place at the table in any merger negotiations. Indeed, the establishment of EuroCCP looks an unusually aggressive move for the DTCC. Jeff Smith, the chief executive of EuroCCP, has certainly not emerged from the civil service culture of many DTCC officials. He started on Wall Street with Herzfeld & Stern in the 1960s, before spending twenty years at Salomon Brothers, then in its heyday. Smith subsequently ran treasury operations at Daiwa Securities in New York. So his experience is far removed from the diplomatic and consensual approach DTCC has adopted in Europe until now – exemplified by its willingness to surrender what became the GSTPA to an industry consortium and (in the CCP area in particular) by the conference of CCPs the American CSD convened in Chelsea Harbour in February this year.
However, there are those who think the DTCC has ever been as consensus-minded as it likes to appear. They argue that the American CSD has pursued a consistent and single-minded strategy with what might be described as cunning pragmatism. On this view, DTCC is the active agent of its American owners, and especially of the major investment banks, who want the CSD to support their efforts in overseas markets by exporting the American clearing, netting and settlement model to the rest of the world. The DTCC half-share in the Omgeo virtual matching utility joint venture with Thomson, for example, carries a call option over the Thomson stake, which will facilitate a merger with GSTP/axion4 when it decides the time is ripe. Likewise, EuroCCP – whose ambitions are not confined to servicing Nasdaq Europe , which is merely the first client- gives DTCC both leverage and a bargaining counter in any realignment of CCPs in western Europe. The prices EuroCCP is setting, of Euros 28 on each side, certainly represent a serious competitive challenge to the London Clearing House (LCH) and Clearnet. Even the February conference, which ended in agreement to work towards standardisation and more efficient links between CCPs, can be read as the DTCC taking the heavy roller to pitch on which it intends not to act pro bono publico but to compete vigorously.
In short, when the consolidation of European CCPs begins, DTCC wants to be among the contenders. EuroCCP gives it that opportunity. And the American CSD harbours similar ambitions ahead of the long-awaited consolidation of European CSDs. In this area, it has forged links with a dozen CSDs. But with the exception of the link to the CDS in Canada, which sees a million trades a year, the links are not particularly active. This reflects the fact that they are ahead of the market: irrespective of how many foreign stocks the London Stock Exchange, Euronext, Deutsche Borse, Virt-X, Nasdaq Europe and the other trading platforms list, liquidity in particular stocks remains firmly domestic, and trades tend to be executed in the domestic market. This makes it hard for CSD links to add value, because brokers execute trades with their sister company in the relevant domestic market, and deliver cash or securities to an account at the local CSD. It is not until liquidity is properly detached from domestic markets, and a genuine global market in equities develops, that regional or global trading platforms serviced by egional or global CCPs and CSDs will be necessary. At that point, the regulatory barriers which prevent domestic CSDs settling foreign shares will fall- especially as the cross-border markets start to settle on T + 1 or even T + 0, because there will not be time to wait for domestic CSDs to open before exchanging shares for cash. CSDs will have to internationalise, merge and compete for business- all of which the DTCC is already preparing to do.