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Coalition plans European counterparty to cut dealing costs
London, Oct 18: A broad group of some of the world's largest banks plans to design a pan-European central-counterparty facility in an effort to slash the cost of share dealings. A central counterparty is a financial utility that stands between buyers and sellers to guarantee that money and securities will change hands, allowing the smooth completion of trades. The counterparty also allows banks and securities firms to offset, or net, a large chunk of their buy and sell orders, thereby reducing the amount of capital needed to back trades. The 24-bank group, known as the European Securities Forum, or ESF, initially would seek bids from outsiders to operate the counterparty. But it would consider setting up the operation itself if the bidding process doesn't produce an acceptable solution, said Pen Kent, a former Bank of England official who leads the group. In the US, a single central counterparty is used by all major exchanges, including the New York Stock Exchange and the Nasdaq Stock Market.Partly because there is no pan-European counterparty, cross-border trades in Europe must pass through a confusing maze of clearing and settlement procedures. As a result, stock trading costs on average are 10 times higher in Europe than in the U.S. The ESF move is aimed partly at stopping five major investment banks - which include Deutsche Bank AG and Goldman Sachs Group - from developing a central counterparty on their own. Other bankers were critical of those plans and said they would further fragment the region's markets. Europe's national equity markets are under pressure to consolidate, but that will be a difficult process, as indicated by the recent failure of a merger plan by the London and Frankfurt exchanges. The London-Frankfurt plan succumbed to questions of national pride and the difficulties of reconciling the differences in German and British regulations. As a result, attention is shifting to the less glamorous clearing and settlement side of equities trading, including centralcounterparties. London Clearing House and Eurex Clearing, a unit of Deutsche Boerse AG, are in preliminary talks about possibly combining their businesses. Those talks arose recently after a planned merger between LCH and Paris-based Clearnet were put on ice. The LCH-Eurex talks "are approaching the end of the exploratory stage," said a person familiar with the matter. "I wouldn't characterize them as very serious and regular at this stage." The litany of sticking points sounds familiar: the location of any merged entity; which national regulatory and insolvency laws would apply; the choice over which technology system to use; and whether the company should be a non-profit, as is LCH, or a for-profit company like Eurex Clearing's owners. Both are still developing their central counterparty facility. The LCH one, which will be used by the London Stock Exchange, is to be finished early next year and that of Eurex Clearing, which would cover German and Eurotop 300 shares, shortly thereafter. One plan being discussed is a system similar to Royal Dutch/Shell, where the Dutch and U.K. companies are legally separate but strategy for both is set by a singlecommittee of managing directors. The ESF plan calls for one central counterparty covering all European equities, which would eventually expand to include bonds, derivatives and over-the-counter instruments. "It's a very determined step," Mr. Kent said. "It shows the degree of commitment in the banking community to make serious improvements to the infrastructure." In another move to lower the cost of cross-border dealing, CrestCo, which operates the U.K. share settlement system Crest, said it will expand its service to include all Eurotop 300 shares and all Nasdaq-traded companies. Its fees will be similar to those levied for U.K. shares. The move takes effect Oct. 23. The Wall Street Journal Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.
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