John Gubert on Euroclear-CREST

As one who has been closely involved with the Crest Euroclear transaction over the last months, I have to admit to disappointment at the views you have expressed. The work of both Euroclear and Crest in finding a new paradigm,

By None

As one who has been closely involved with the Crest-Euroclear transaction over the last months, I have to admit to disappointment at the views you have expressed. The work of both Euroclear and Crest in finding a new paradigm, a blending of business models and an enhanced governance structure has been overlooked.

The new company is user focused. Crest has always been user focused. So has Euroclear. But there are new and important protections in the proposed governance structure. The new company is an expression of user value in infrastructure, while rewarding the originators of source capital. Unlike a shareholder value organisation, the user and shareholder base is quite symmetrical and thus an area of minimal conflict when allocating financial surpluses.

The model distinguishes between the national CSD (aiming for enhanced cost recovery) and the commercial segment (the ICSD function). Some would argue for these to be separate institutions. But that would eschew economies of scale in infrastructure. And would impede the continued blending of a utility culture with commercial acumen.

Critical will be safeguards to ensure that there is equitable cost allocation across the different areas of activity. User pays is fundamental to the effectiveness and integrity of the model.

So a key question is what is the governance?

The New Group has introduced independent directors. The New Group has new board members who have been involved in the design of the new model and are committed to its implementation. The executives of the two companies blend well together and have accepted the challenge of the new model, both the spirit and the concept of the new design. The Market Advisory Committees are to be given greater authority with the power to address directly the Chairman and the Board if they consider it necessary.. This is a powerful governance tool.

The role of the wider Group is to bring together diverse infrastructures, create a single settlement engine, and reduce intra-European costs. This is after all what much of the market have been asking CSDs and ICSDs to deliver for several years now ! But that is the lesser part of the user value. It will allow us to be a powerful force for market convergence, whether in respect of market practise, technical convergence, legal alignment or fiscal consistency. It will have resources to tackle the Neanderthal structures in areas such as settlement of unit trusts and other collective investment schemes or the proxy voting process. It will have global impact and enable improved linkages with other markets, for its culture, as evidenced by its boards, will be global and not just European.

This is a vision rather than a promise. Personally, as a prospective member of the boards of both Euroclear Holdings and Euroclear Bank, I know my commitment (and that of many of the other board members) to that vision. I know the executive commitment to it as their first priority.

It challenges some of us in traditional areas of our business. But it offers us all reduced cost of access to a wider range of securities. It does not reduce my value added as an intermediary; it merely removes barriers to efficiencies. The role of the Euroclear value added services provide a further challenge. But the target markets we have as intermediaries, whether towards brokers with a need for flexibility on liquidity and credit or funds requiring administration and fiduciary services, are complex and Euroclear Holdings remains a niche rather than full service provider.

There will be some overlap; there will be some friction. There are grounds to challenge the vision. But the core drivers are sound. User governance. Service ethos. And an ease of access to a wide range of instruments.

I believe that progress must be scrutinised against the planned business and corporate model. I believe that transparency is critical to its delivery. And above all, I take comfort from the willingness of the executive and non-executive teams to work for the most competitive of infrastructures within the European time zone. For in a business where fees are under acute pressure, that efficiency will be an important determinant of the future of many of our organisations.