Markets Boost Euroclear But Strategic Questions Are Unanswered

By its own estimation, Euroclear had an "exceptional" or "outstanding" year in 2001. And the figures published today by the Brussels based clearing house certainly bear out this claim. The value of securities transactions settled soared by 37 per cent

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By its own estimation, Euroclear had an “exceptional” or “outstanding” year in 2001. And the figures published today by the Brussels-based clearing house certainly bear out this claim. The value of securities transactions settled soared by 37 per cent to Euros 130,637 billion (2000: Euros 95,457 billion). The number of pre-netted transactions settled in Euroclear was 161 million in 2001, up 11 percent on 145 million recorded the previous year. And the number of netted transactions hit 47 million, versus 52 million. (This last figure, an apparent failure, is actually a success: netting via CCPs is designed to cut the number of transactions proceeding to settlement.) Finally, the value of securities held in custody by Euroclear for its clients at year-end was Euros 7,858 billion, 6 percent up on the Euro 7,424 billion of 2000. This Euros 434 billion increase does not include the business transfers to Euroclear announced in early 2002 by JP Morgan Chase and UBS.

But the truth is that Euroclear would have had a lot of explaining to do if it had not had a record year in 2001, when it added Irish and French government bonds to its repertoire and activity in the bond markets (where the ICSD earns all but a fraction of its revenues) as a whole was at its highest level for years. Figures from Clearstream Luxembourg, due out shortly, can be expected to bear this out. As Euroclear itself says, “the value of fixed-income securities held in custody grew by 14 per cent last year, more than compensating for the lower equity and investment fund market values in 2001.” This means – unsurprisingly – that the value of equities in custody at Euroclear actually fell.

Strong bond markets had a positive knock-on effect on the securities lending and collateral management businesses, on which Euroclear sets considerable store. In 2001, the average daily value of securities loans outstanding reached a record Euros 9.5 billion, compared with Euros 8.7 billion in 2000. Euroclear participants also increased their use of the tri-party collateral management service at the ICSD, with secured exposures in tri-party repo, credit derivative, secured loan and securities lending transactions hitting a record daily average of Euros 76 billion in outstandings last year.

Bond turnover may have received an extra boost from the growing use of CCPs such as LCH-RepoClear, Clearnet and TradeGO, the almost-forgotten CCP for Eurobonds set up by Euroclear. If so, it confirms the lesson of the US and UK experience with CCPs: netting increases rather than decreases in overall activity in securities markets. Clearstream, which has yet to bolt a CCP on to its clearing and settlement service, will take note. Typically, Euroclear cannot resist rubbing this point in. “As Euroclear, unlike other major CSDs and ICSDs, settles some transactions on a net basis,” reads the press release accompanying the results, “a direct comparison of Euroclear’s netted results vis–vis other European settlement providers underscores the high cost and inefficiency of settling large numbers of transactions on a gross basis.”

The tease is understandable, given the abortive bid for Clearstream earlier this year because – for all its protestations to have moved on from that defeat – Euroclear remains convinced that it has identified the right future for clearing and settlement in Europe. CEO Pierre Francotte, commenting on the results, indicated that Euroclear was happy to wait for the rest of Europe to catch up with its view of the world. “The favourable effects of consolidation are beginning to be reflected quantitatively in our business growth,” he said. “Our expanding relationship with Euronext, Virt-x, the London Stock Exchange and others should continue this trend in 2002 and thereafter. We also view our record performance as tangible confirmation that we are pursuing the right course by operating with an open settlement model that is user owned and user governed. We will continue to achieve business consolidation, whether through competitive services or by combining our operation with other settlement providers, where and when it makes sense for our clients.”

But the reality is that the Euroclear strategy of consolidation of CSDs and ICSDs in Europe is looking a lot less plausible than it did even six months ago. Clearstream is out of range for the foreseeable future. The likelihood that the Brussels-based ICSD will be able to acquire more CSDs any time soon is diminishing rapidly. Agent banks are getting restless over the threat of disintermediation by Euroclear in domestic markets. Yet the 2001 results show that Euroclear is still earning its keep off a relatively narrow base of businesses. A group of domestic bond markets and Eurobonds accounted for over 90 percent of turnover, and it took the addition of convertible bonds to push equities up to even 6 per cent of the total. Plenty of government bond markets – notably the Italian – remain out of reach, and it is entirely conceivable that some of the domestic bond business Euroclear conducts could be repatriated, especially now that the recent Giovannini and CEPS reports have confirmed the widespread supposition that the Brussels-based ICSD is expensive to use by comparison with the CSDs. And Euroclear did not even publish financial figures for FundSettle, the internet-based equivalent of the DTCC Fund/SERV platform for the processing of mutual fund transactions launched in November 2000. Euroclear may know where it is going, or at least where it wants to end up. The hard part now is working out how to get there.