Euroclear, enlarged by the acquisition of multiple CSDs, has as a result suffered from the fall in equity market values. The value of securities held in custody by Euroclear on behalf of clients at the end of last year totalled Euros 10.6 trillion, a 6.2 per cent fall from the Euros 11.3 trillion of a year earlier.
The whole of this decline occurred at the CSDs Euroclear has acquired, while the traditional business of Euroclear Bank actually saw an increase in assets in custody. While the year-end value of securities held in custody by Euroclear Bank totalled rose 9 per cent over the course of the year from Euros 4.4 trillion to Euros 4.8 trillion in 2002, the value of assets deposited at the three CSDS owned by the Group all fell.
The falls were particularly marked at CREST and Necigef (now Euroclear Netherlands). At Sicovam (now Euroclear France), the total value of securities held at the end of last year was Euros 3.1 trillion, a 9 per cent fall from last year’s Euros 3.4 trillion. But securities held through CREST (set to become Euroclear United Kingdom) also decreased by 23 per cent in 2002, from Euros 2.6 trillion to Euros 2.0 trillion. Similarly, securities held in Euroclear Netherlands were down by 22 per cent from Euros 863 billion in 2001 to Euros 664 billion in 2002.
So only the fact that there was a sizeable gain in assets held in custody by Euroclear Bank to offset the plunging equity market values prevented the decline in asset values being even worse. And where did they come from? The mutual fund processing platform, FundSettle, obviously helped. Euroclear says the number of transactions processed on FundSettle increased more than 500 per cent in 2002 from the previous year – admittedly, from a relatively low base – and that the number of transfer agents using FundSettle tripled during the same period. Euroclear also increased the number of funds on the platform to 16,000, having added more than 3,000 funds in 2002. This will have drawn assets into custody at Euroclear Bank.
But FundSettle cannot have accounted for much of the approximately Euros 400 billion increase in assets held in custody at Euroclear Bank last year. A Euroclear spokesman says the increase was due primarily to the fact that existing clients put more of their business at Euroclear Bank, partly because of the general shift away from equity and into fixed-income securities in 2002, but also because a number moved business to Euroclear Bank from Clearstream Banking Luxembourg, agent banks, and other service providers. JP Morgan Chase famously switched its account away from Clearstream in protest at the failure to merge with Euroclear.
2002 was also the year Euroclear began to make good on its promise to cut settlement costs, and there were substantial cost reductions for clients using Euroclear Bank to settle Irish government bonds and French equities “It is to the credit of our business model that we are able to pass on to our customers the benefits of economies of scale, particularly in a difficult business climate,” says CEO Pierre Francotte. Which hints that further price cuts are in the pipeline. “As always, we’re looking for opportunities to further reduce prices, so clients can certainly expect more good news from us in this regard,” says a Euroclear spokesman. However, he declined to be more precise on timing and scale.
On the face of it, the main oddity in the figures released today is the fact that the number of netted transactions settled by the Euroclear Group increased in 2002, despite weak financial markets. Turnover, or the value of securities transactions settled, was Euros 238.9 trillion in 2002 – an increase of 14 per cent from the Euros 209.9 trillion in 2001. All parts of the group seem to have contributed. Euroclear Bank turnover in 2002 was EUR 103.5 trillion, a rise of 19 per cent from Euros 86.9 trillion in 2001. Turnover at Euroclear France grew by 21 per cent, reaching Euros 53.0 trillion in 2002 from Euros 43.8 trillion in 2001. CREST’s 2002 turnover was Euros 82.4 trillion, an increase of 4 percent from the EUR 79.2 trillion in 2001.
But rising turnover is one thing; it is the rising in the number of transactions proceeding to settlement even after netting which is striking. The number of netted transactions settled in Euroclear was 129 million in 2002, compared with 127 million in 2001. The only market where the volume of netted transactions did not increase was France. Euroclear France settled 29 million transactions in 2002, 8 per cent fewer than the 32 million processed in 2001. Euroclear attributes this to a sharp decline in French retail market activity.
The other parts of Euroclear Group saw at least static and in two cases higher post-netting settlement volumes. Euroclear Bank settled 18 million transactions, an increase of 20 per cent from the 15 million transactions processed in 2001. CREST, which launched in July 2002 a settlement netting service for SETS trades on the London Stock Exchange that clear through London Clearing House, settled 76 million transactions in 2002 compared to 74 million the previous year – an increase of 3 per cent. Euroclear Netherlands processed about 6 million transactions in both 2002 and 2001.
This increase in post-netting settlement volumes, albeit patchy, confirms that turnover has not wilted despite declining asset values. The disproportionately large rise at Euroclear Bank doubtless owes something to the broader shift from equity to fixed income last year, but Euroclear also reckons it is garnering settlement business from the alternatives: agent banks, Clearstream and fund distributors.
The ICSD adds that the increase in netted transactions confirms its longstanding belief that the introduction of clearing and netting through central clearing counter-parties (CCPs) such as London Clearing House and Clearnet actually increases trading activity, partly by reducing risk and capital consumption, but also by extending the range of actively traded securities and types of transactions. This is counter-intuitive – netting might be thought to reduce the volume of transactions proceeding to settlement, prompting a shift in revenue at an ICSD such as Euroclear from settlement to clearing, as is now happening at Clearstream – but almost certainly correct, especially in the longer term. The American experience with NSCC suggests as much.
Counter-intuitively again, activity also increased on the securities financing side at Euroclear Group, despite the prostrate condition of the securities lending markets and the stalling of the growth of the European repo market in the second half of 2002. True, daily borrowings of securities through the settlement-integrated borrowing programme at Euroclear Bank declined to Euros 8.5 billion in 2002 from EUR 9.5 billion in 2001. But the combined average daily value of tri-party collateral management deals outstanding in Euroclear Bank and CREST rose 9 per cent to Euros 222.5 billion in 2002 from Euros 203.3 billion in 2001.
Again, the bulk of the increase took place in the traditional businesses (predictably enough, in a disastrous year for equity finance). At Euroclear Bank, the value of average tri-party collateral management deals outstanding rose by 35 per cent to a record Euros 103.0 billion per day, compared with Euros 76.1 billion per day in 2001. Daily peaks were in excess of Euros 126 billion. At CREST, daily Delivery by Value (DbV) instructions – which a CREST account-holder issues to assemble a package of securities from a specified account to deliver to another member as collateral- decreased slightly in 2002 to the equivalent of Euros 119.5 billion, compared with EUR 127.2 billion in 2001.
Euroclear is certainly optimistic about the growth prospects in its collateral management business. “We expect that demand for collateral, as well as tri-party services to administer the collateral, will continue to increase as a means to free up capital, enhance returns and manage both counterparty and market risks,” says a spokesman. “Growth is expected in the traditional areas of tri-party repo, securities lending, secured loans and credit derivatives, as well as in collateralising margins requested by central counterparties or stock exchanges, and for monetary policy operations.”
The figures are interesting because they suggest that, despite the vehement opposition of agent banks, the defensive re-shaping of clearing and settlement infrastructure in important markets such as Spain and Italy and questioning of the Euroclear business model on grounds of economic principle, the Euroclear Group is getting traction. 2002 is also the first year that the results of the national CSDs of France, Ireland, the Netherlands and the United Kingdom have all been combined with Euroclear Bank, and can be compared with re-stated historical data to confirm a pattern of growth in all areas – turnover, assets in custody, netted transaction volumes and collateral outstanding – going back to 1999.
There are two views of what this means for the longer term. For Euroclear, its “solid operational performance reflects the market trend towards the use of efficient and comprehensive wholesale securities service providers in order to reduce settlement and related back-office costs.” For its detractors, especially among the agent banks organised as the Fair and Clear Group, these figures will provide ammunition to argue that Greater Euroclear must be stopped before it becomes unstoppable. With the publication of volume II of the Giovannini report imminent, this long running debate is set to heat up again.