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Skip Navigation LinksHome :: Back Issues :: When shareholder value conflicts with shareholder utility

March 2002

When shareholder value conflicts with shareholder utility


Deutsche Börse’s move to take full control of international central securities depository Clearstream highlights the divergence between banks, exchanges and clearers that would like to see an integrated utility-style system of settlement for European securities markets and those exchanges such as Deutsche Börse that see such operations as a way of generating value for their own shareholders.




Leading securities firms in Europe have strongly opposed Deutsche Börse's decision to reject Euroclear's bid for the German exchange's stake in Clearstream, the international central securities depository (ICSD) that provides clearing and settlement for bonds and equities in Europe. Many securities firms saw a merger of Euroclear and Clearstream as a highly desirable move towards creating the infrastructure of a true European securities market. For securities dealers, operating in a series of national markets has been costly and inefficient because of a lack of integration of clearing and settlement systems.
       

View graph.
What's worse, Deutsche Börse now intends to assert 100% control over Clearstream.
The affair highlights a conflict between those pursuing a vision of an integrated European securities market and newly floated European exchanges set on delivering value to shareholders. In the first camp the European Securities Forum (ESF) is prominent. Deutsche Börse is an example of an institution in the second camp. While critics have accused it of short-termism, investors in its stock aren't too concerned.
Huw van Steenis, an exchange analyst at JPMorgan, says in a report that: "The integration of Clearstream [into Deutsche Börse] offers credible cost savings through greater integration of post-trading services with trading services." He adds: "The deal will facilitate faster roll-out of useful potentially revenue-enhancing products such as the introduction of a German CCP [central counterparty]." Analysts' main concern is how the bourse will replace revenues once netting - whereby parties make or receive a single net payment for all deals on each settlement date, as opposed to making individual payments for each deal - is introduced in 2003.
Deutsche Börse originally merged its clearing and settlement with Cedel - a consortium of 89 financial institutions - in 1999, to form Clearstream. It has now decided to acquire Cedel's 50% of Clearstream, giving the exchange 100% ownership of the ICSD. This creates what is often called a vertical silo, whereby an exchange owns or governs trade-processing entities.
This won't change the way trades are conducted in the German domestic market. These trades will continue to be settled through Clearstream, offering users no choice of central securities depository (CSD), much the same as other national silos.
The chief antagonism then, lies with the long-term vision for an integrated European market. Pen Kent, chief executive of the ESF, says: "The reason we're all disappointed is because Clearstream and its owners had a choice about what happened to Clearstream. The alternative was a merger with Euroclear that would have moved Clearstream firmly in the direction of a horizontal structure for Europe. However, in the process they may have shot themselves in the foot." That is, customers may be less likely to use Clearstream if Deutsche Börse owns it all.
       
The German exchange has antagonized some large
users despite being a low-cost provider
It all comes down to price
In their disappointment about the failed link-up of Europe's two ICSDs, critics have said that Euroclear should have increased its bid. Pierre Francotte, CEO of Euroclear, responds: "We went as far as we could financially in our offer for Clearstream considering that Deutsche Börse had made it very clear that they wanted cash for their 50%. For Euroclear to put more cash on the table would have meant jeopardizing the long-term viability of the merged entity."
A spokesman for Deutsche Börse says: "We were not willing to accept Euroclear shares in exchange for its stake in Clearstream." Instead, the exchange insisted on receiving either cash or shares in a publicly listed company. In order to raise its offer, Euroclear would have had to pass on this cost to its customers.
Further, Francotte says: "The response was not a big surprise because Deutsche Börse already owned 50% of Clearstream and they therefore had a right to veto. They had made it fairly clear ahead of time that they intended to exercise it. At a conference in London, Deutsche Börse said the only chance of ever agreeing to a proposal by Euroclear was if the offer was obscene." Euroclear says this became clear during the period between submitting its negotiable offer, on October 31, and the meeting of the Clearstream board on December 7.
Analysts valued Deutsche Börse's half of Clearstream at e1.1 billion ($960 million). Deutsche Börse has made a cash offer of e1.6 billion for Cedel's half of Clearstream, with the option to take up shares in the exchange. Euroclear's offer - e2.65 billion combined cash and securities for 100% of Clearstream - was rejected by the Clearstream board. At the time of going to press, Deutsche Börse was waiting for a final decision from Clearstream shareholders, expected by April. The Clearstream board has recommended that shareholders accept the offer. The exchange believes that, by creating a securities processing chain for trading, clearing and settlement, it will be able to lower costs and introduce innovations faster.
In a show of disapproval, UBS has announced that it will transfer its assets to Euroclear if the bid is successful. JP Morgan Investor Services is already in the process of transferring its global custody assets, valued at approximately $150 million, to Euroclear. JP Morgan says: "One of the primary motivations for the move is to utilize a single ICSD for reasons of operational efficiency. Another is because we disagree with Deutsche Börse's creation of a vertical silo."
Jose Velez, managing director of UBS, says: "We just can't live with 19 to 20 entities all doing clearing and settlement. So when Euroclear originally proposed a merger with Clearstream we thought, aha, since these are the two international custodians here in Europe, this is a very good way to finally come up with eventual solutions. If this could happen, we think it would be a locomotive for further consolidations, so we supported that. Then Deutsche Börse decided to put in their proposal and we publicly came out and said we were opposed to this because this consolidates these vertical silos which are essentially run by countries."
Deutsche Börse says its current structure, with 50% ownership of Clearstream, already provides the lowest costs for trading, clearing and settlement. But some of the big securities firms believe the exchange's vision is short-term and are holding out for a horizontal solution that they believe will better serve the European market. Velez says UBS has decided on this because: "What we hope doesn't happen is that all the countries decide to take the same approach as Germany and then we'd be in for non-efficiency for ever."
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