A WORRYING VISION of the European securities market is taking shape in some minds. It shows a rapacious monopoly processing all trades from the Atlantic to the Urals, reshaping settlement in its own interests and winning custodian business away from the traditional players. But because it is owned by its users, this monster is hard to attack. Unlike your typical dystopian fantasies set decades or centuries in the future, though, this one is imminent. It is happening now.
Euroclear, owner of five of Europe's central security depositaries (CSDs) and an international central security depositary (ICSD), is the supposed villain of the piece. The key to the debate is Euroclear's ICSD, Euroclear Bank. As well as having aspects of the CSD function for Eurobonds, Euroclear Bank is an intermediary providing custody and banking services in non-Eurobond securities. As such, it competes with other commercial banks that act as custodians.
Euroclear Bank is an important intermediary. For example, over six weeks beginning in mid-January, it processed more than 23,000 instructions involving $27 billion of the nominal value of Argentina's debt-swap programme – more than any other settlement system involved in what Euroclear describes as "the largest single custody event that has ever challenged the securities markets". Over 99% of instructions were straight-through processed.
The problem – actual or potential, depending on your point of view – is that the Single Settlement Engine will bundle the national CSDs in the Euroclear group with Euroclear Bank on the same processing platform. Without a clear separation between CSDs and ICSDs, Euroclear Bank could take advantage of its position within the same group that controls the CSDs. It could benefit from cross-subsidies or get cheaper access to the new, consolidated settlement infrastructure. It could persuade Euroclear to make access to CSDs through subcustodians more difficult, for example by limiting the range of securities that are accessible without going through Euroclear Bank, and then levy monopoly rates. It could enjoy privileged access to reference data and accounts that, as a securities lender, give it a competitive advantage.
Separate function
"The status of Euroclear Bank is one of the most important topics in the Dutch market," says Ellen van Krimpen, associate director and head of global network at Kas Bank in the Netherlands . . .
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