The French market dematerialised its stock twenty years ago. As other markets – notably Japan – are still engaged in the same prices, what can they learn from the French experience? Edouard de Lencquesaing, former custody chief at CCF and now a partner, Netmanagers, give his view.Today the pressure on the European securities world is intense. We all know about the Lisbon Treaty’s ambition: by 2010, Europe should be one of the most efficient economies in the world. To reach this objective, our financial services industry has a key role to play. After the end of the first Financial Action Plan (2000-2004), industry and European political authorities finally realised that without the harmonisation of the ‘post-trade’ environment, very few efficiency gains would be made. In our industry, the back office drives the ‘bottom line’.
These ‘post-trade’ issues are therefore to be the priority of the next Plan – though the word ‘Plan’ is perhaps no longer appropriate. Even if faced with formidable global competition, some Europeans would still prefer a pause! Nevertheless, we must now collectively construct an efficient European post-trade industry that truly incorporates the security and efficiency of all our domestic markets.
Conflicts of interest in this area have raised the stakes in meeting this challenge, resulting in ‘ignorance’ surrounding the best solution, the mistaken belief that competition is a panacea for the industry, and a stifling of common sense expertise. All these factors have merely increased confusion and exaggerated the complexity of the project.
It is with this in mind that the 20 years of experience following dematerialisation in France should be analysed – this is not a sign of a new ‘arrogance’ from the French banking community but recognition of how a proven, successful process can be leveraged to contribute, in a positive way, to the process of creating the new financial landscape in Europe.
Twenty years ago the dematerialisation ‘adventure’ was also very challenging for us. Its implications for industry practices and IT systems were huge for all participants, whether issuers, custodians, brokers or market infrastructures. And it was clear from the beginning that individual, short-term interests would never coincide with our common, longer-term goals.
The key lessons of this experience were the consensus-building process and the way we managed at the time to put aside our differences. The success of the project was due to several factors. The most important was the leadership of a number of key people among the French financial community who threw their weight behind the project and leveraged their position, clout – and charisma – to push the project forward. At the time we were not afraid of ‘visions’ and ‘models’. At the time we were confident we could shape our own destiny by taking the risk to decide what should be good for our industry as a whole.
The dematerialisation process in France was started by a government report, the Perouse Report. This was not a report merely to please politicians, but a report engaging the end-users of our industry over the long term; a report mixing vision, pragmatism and common sense. It was a report that addressed all the different components of an efficient securities ‘ecosystem’, covering the legal environment, such as the ‘chain’ in securities ownership interconnecting the issuer, the CSD, custodians and investors; the concept of finality, and the definition of a framework for business practices – how the custody business should function and who assumes what responsibilities. Importantly, it also defined the key role of SICOVAM, our CSD; a role that positioned the CSD squarely at the service of its members, as a hub to maximise its network effect and as the builder of what was to become RELIT, then RGV.
The framework of this process has shown its robustness over time. It was able to absorb the Banque de France’s bond-clearing system (SATURNE) and then to adapt to new technologies and build a real-time settlement system (RGV) based on a central bank money leg connected to CRI, our RTGS payment system.
For 20 years we have benefited from the strength of this construction, one based on a strong coherence and on striking the right balance between the different areas of expertise that we had to originally muster. Thus when we face in Europe issues such as legal compatibility with the rest of the world, we are reluctant to jump to conclusions and leave these issues solely to the lawyers. Recently, we had to reopen and mount a challenge on a very important issue – conflict of laws – regarding securities accounts in the context of the Hague Convention. Our challenge resulted from a need to reconcile new legal principles with technical and operational realities, and we were able to highlight critical features that, left unchecked, would generate new risks. The same multi-disciplinary approach will have to be adopted in a few weeks with the UNIDROIT Convention that addresses the material law of securities.
While leadership is key, it is not enough to drive such ambitious projects. Part of the success in France was also due to methodology, discipline and a firm project management process. An ad hoc structure, a board, a steering committee, users forum – all these were established with a specific budget and ad hoc financing mechanism. Debates were intense and passionate, but each step of the decision-making process was transparent and each decision was based on clear assumptions and justifications.
Today, the scale of the post-trade challenge in Europe cannot be an excuse not to try and build such a consensus, both within the industry and amongst law-makers and regulators. If we take the example of how best to tackle the Giovannini barriers, we have an industry body organised by the European Commission (CESAME). It is a good start. But it is not in line with our ambition, nor does it address the urgency of the matter.
Most importantly we have to deliver a clear framework for our own ecosystem – as has been the case historically at the national level. For this framework to be efficient, secure and robust, it must clearly address and identify the role of market infrastructures, their inter-relationship and position between the worlds of securities and of high-value payments and their harmonised relations with their members and sub-members based around a sort of European passport. When our industry clearly has in mind the nature of this ecosystem, we will then have to have to decide what forces to mobilise so as to accelerate the consolidation process among 45 CSDs.
The result will then look like a framework for our ecosystem and this framework should be enforced by clear legal backing – as is the case everywhere in the world. In Europe we call this legal backing a Directive! The lack of a legal foundation merely contributes to more confusion and compounds ‘complexity’. It will prolong the current trend that is characterised by a short-term vision as well as obsolete models that lack creativity in imagining what a borderless Europe would look like and needs; waste time and money by promoting pointless and hypothetical competition between CSDs; and weaken industry competitiveness by blurring roles between infrastructures and their members and creating new systemic risk by promoting unnecessary risk-taking at the heart of infrastructures.
The merger process currently underway between stock exchanges demonstrates first the strategic importance of distinguishing an infrastructure that privileges its users and strikes the right balance between users and shareholders in matters of governance. Secondly, it raises the need for appropriate governance between the chain of infrastructures (CCP, CSD), whether in ‘official’ silos or ‘non-official’ silos.
Lastly, this merger process also underlines the urgent need to establish the seamless and fair organisation of our own ecosystem. As was the case 20 years ago in France, the call here is for responsibility: among our leaders, among the industry, and from the political authorities. What is at stake is nothing less than the destiny of European finance and its place as a leading player in the world economy.
By Edouard F. de Lencquesaing, Partner, Netmanagers