In the wake of the decision by the Clearstream Board late on Friday to pursue discussions with Deutsche Borse only, Euroclear has decided to turn its attention elsewhere. “It is now clear that Clearstream is not interested in having any negotiations with us for the foreseeable future, so we will now move on,” says a Euroclear spokesman. “We will now shift our priorities away from Clearstream, because we now know that we don’t have to anticipate the time, the effort and of course the financials to execute a merger with Clearstream.” But he has a dark warning. “There are other ways to consolidate,” he says. “It may take a longer time, and be less orderly, but consolidation will happen, and we intend to continue to be a driver in that process.”
It seems the Brussels-based ICSD has two alternative approaches in mind. One is to find ways of working with other European CSDs which fall short of mergers. “With the French, the Dutch, the Belgian and the Irish we have found four different ways to consolidate, according to the needs of the market and the way the settlement system is structured,” he says. The Irish, for example, out-sourced settlement provision to Euroclear. Necigef in Holland was sold in its entirety to Euroclear, and clients are migrating on to the Euroclear platform. In the case of CIK in Belgium, Euroclear has purchased the cross-border settlement business only, with physical securities remaining within the domestic CSD. And Sicovam may have merged with Euroclear, but continues to run a separate processing platform. “We have not focused on the other CSDs that are out there because we have focused on Clearstream, but there has been a dialogue,” says the spokesman. “Now we can accelerate some of those discussions.”
The other alternative Euroclear will now pursue is an aggressive competitive strategy to lure business away from Clearstream. “We are going to reinforce our position as the low -cost, most highly efficient, well-connected settlement system in all of Europe,” he says. “By that means we can attract business from Clearstream, and perhaps even some of the cross-border business that is presently being entertained elsewhere. This is going to be our number one objective. It is an area where we believe we do have the financial wherewithal to initiate, and to follow through, a commercial strategy.” For Clearstream, this is a potentially sinister development. The competitive disadvantage of the Bridge between the two ICSDs, which was such a source of friction between them in the early 1990s, has not been solved completely and could flare up dramatically again. If they chose, the major London-based investment banks – or the membership of the European Securities Forum (ESF) more generally – could also accelerate a shift of business from Luxembourg to Brussels, by halting their use of Clearstream. Admittedly, few of them (the main exceptions are Barclays Capital and UBS) do much business with the Luxembourg-based ICSD anyway. Indeed, one measure of the confidence the German connection – or, more exactly, German liquidity – has brought to Luxembourg is the fact that the Clearstream management clearly believe they can survive and prosper without the patronage of Morgan Stanley, Goldman Sachs, Salomon Brothers and the rest of them.
Disinterested observers will be amused by the fact that Friday’s news from Luxembourg is ironic vindication of the strategy pursued by Andre Lussi. The former President and CEO of Clearstream, ousted in a palace coup in May this year, remained resolutely opposed to a merger with Euroclear without ever letting the investment bankers of the ESF believe he would never consider it. At the Brussels headquarters of Euroclear, the news has dashed hopes that he – rather than Werner Seifert, CEO of Deutsche Borse – was the main obstacle to merger negotiations. But the news cannot have come as a total surprise either, given that Deutsche Borse effectively owns half the seats on the Clearstream board as well as half the company, and desperately needed a success in the current round of infrastructural mergers in western Europe. Indeed, the decision by the Euroclear Board to raise its offer ahead of the crucial board meeting was an indication that, with the politics so clearly stacked against it, perhaps money would talk.
“We had some pretty clear indications that Deutsche Borse was going to exercise its veto power on our proposal, and we think it has done as such, and insisted the rest of Clearstream negotiate with it first and foremost,” says the Euroclear spokesman. “We made a sweetened offer on Thursday and as far as we know Deutsche Bore’s bid was below that, so it is not so much a money decision as a clear decision to negotiate with Deutsche Borse until everybody is happy. It indicates that there is something else being considered by the Board other than the offers being put on the table. There is a fairly big missed opportunity here not to save Euro 200-250 million per year by merging Clearstream and Euroclear.”
Those missing cost savings will be the main reason why the London-based investment banks will be angry rather than disappointed by the prospect of a vertical merger of the German trading platform and CCP with the Clearstream settlement platform. But despite the threats of Euroclear to lure business away from Clearstream – and the growing interest of European Union regulators in the infrastructure of the capital markets, to which Euroclear continues to attach some hope – Deutsche Borse can probably live with the anger. For if one thing has become clear in recent months it is this: the smaller domestic institutions, in Germany, Switzerland and elsewhere, have found their voice. They are making it clear that they have clearing and settlement needs too, and that those needs may not coincide with those of the international investment banks. Deutsche Borse can capitalise on that, just as it has obviously managed to counter those institutions on its own Board which are arguing (at Euroclear as well as Clearstream) for a merger between the two ICSDs. This new factor has altered the politics – if not the economics – of infrastructural consolidation in Europe.