Plumbers and Visionaries
Securities Settlement and Europe's Financial Market
The Wiley Finance Series

This book is the story of a financial sector that has grown hugely in importance in the 40 years since Euroclear, now the world?s premier settlement system for domestic and international securities transactions, was created to deal with a settlement crisis that threatened to smother the international capital market in its infancy.

Beginning with the settlement crisis in the Eurobond market, this book describes how Euroclear and later Cedel, its arch-rival, were founded to deal with the problem. It follows the challenges posed by cross-border settlement for a growing range of securities when most financial infrastructures operated only within national frontiers. The book demonstrates how securities settlement became an issue for public policy after the stock market crash of 1987 and how the problems of cross-border settlement moved rapidly up the European policy agenda after the euro?s launch.

More than a mere history, this book engages with the people who created the modern European securities settlement industry and taps into the often entertaining memories of its founding fathers. This book also focuses on the difficulties and challenges of cross-border transactions which have been identified as hampering Europe?s economic growth. It looks at the present state of the industry seeking a way forward so that the securities settlement infrastructure will better serve a single European capital market.

List of Tables and Figures ix

Preface xi

Part I New problems. New solutions 1

1 Settling Securities Across Borders 3

1.1 Turnover in the trillions 3

1.2 Process and players 9

2 The Eurobond Market and the New York Settlement Crisis 17

2.1 Autostrade shows the way 17

2.2 Foreign dollar bonds and their settlement 19

2.3 From Autostrade to the New York settlement crisis 20

2.4 The AIBD 23

2.5 Settlement services in Luxembourg 25

3 The ICSDs – Euroclear and Cedel 29

3.1 Closings in Brussels 29

3.2 The creation of Euroclear 31

3.3 Establishing Cedel in Luxembourg 35

3.4 Cedel’s success 37

3.5 The wider settlement picture 39

4 Euroclear Fights Back 43

4.1 The sale of Euroclear to its users 43

4.2 Difficult days 45

4.3 Commitment to investment 48

4.4 Euclid 51

4.5 Securities lending and borrowing 52

4.6 The Bridge 54

4.7 Prospering in difficult times 55

Part II Winds of Change 61

5 New Markets, New Tensions 63

5.1 Caviar and champagne 63

5.2 The 1980s – Deregulation and securitisation 66

5.3 Diversification at Euroclear 72

5.4 The Belgian cooperative 76

6 After the Crash 79

6.1 Strengthening cooperation and national systems 79

6.2 European considerations 82

6.3 American influences 84

6.4 Central bankers push for DvP 87

7 The Coming of the Euro 91

7.1 A world transformed 91

7.2 Beyond G30 92

7.3 The EMI and Lamfalussy 94

7.4 The growth of repo activity 97

7.5 The ECB and securities settlement 100

Part III An Industry in Ferment 105

8 The Rivals 107

8.1 Euroclear and the boom in domestic markets 107

8.2 Lussi and the revival of Cedel 116

9 Change at the Exchanges and CSDs 123

9.1 Investment and consolidation 123

9.2 Seifert in Frankfurt – a story of vertical integration 125

9.3 Th´eodore in Paris – innovation through IT 129

9.4 Taurus and CREST – a horizontal system by accident 133

9.5 The Swiss Value Chain 135

9.6 Different blueprints 136

10 Corporate Manoeuvrings 141

10.1 Pressure for change 141

10.2 A European clearing house? 143

10.3 A meeting of minds in Marrakech 144

10.4 Dark days for Euroclear 146

10.5 The fight back begins 147

10.6 The French defect 149

11 Euroclear Transformed 151

11.1 Euroclear separates from Morgan 151

11.2 The creation of Euronext 156

11.3 Euroclear acquires Sicovam 158

12 Seifert’s Silo 163

12.1 A flurry of initiatives 163

12.2 Lussi’s fortunes ebb 165

12.3 Lussi’s downfall 167

12.4 The banks change tack 170

12.5 Seifert secures Clearstream 171

13 Europe with Two Settlement Models 175

13.1 Euroclear acquires CREST 175

13.2 A sub-optimal outcome 179

13.3 Embedding the vertical and horizontal models 182

13.4 LCH and Clearnet merge 184

13.5 Fair & Clear 186

13.6 Changes in structures and governance 187

Part IV An Issue for Europe 191

14 The EU Reacts 193

14.1 The Lisbon Agenda 193

14.2 The Lamfalussy Committee of Wise Men 194

14.3 The Giovannini Reports 196

14.4 The cost of fragmentation 200

14.5 The Commission responds 201

14.6 The Andria Report 203

14.7 The ESCB/CESR standards 203

14.8 The G30 and EFR Reports 205

14.9 MiFID 206

14.10 The Commission’s second communication 207

14.11 The arrival of McCreevy 208

15 Setting Parameters 213

15.1 Algorithms and exchanges 213

15.2 Seifert and the law of unintended consequences 215

15.3 Exchange consolidation: an unpredictable catalyst 217

15.4 Competition authorities turn against silos 218

15.5 Competition and interoperability 220

15.6 For and against a single CCP 222

15.7 User discontent 224

15.8 Change at Euroclear 227

16 Work in Progress 233

16.1 Euroclear’s domestic market for Europe 233

16.2 Cesame and dismantling the Giovannini barriers 238

17 Frameworks for the Future 243

17.1 Two solutions at once 243

17.2 The code of conduct 244

17.3 Target2-Securities 250

17.4 T2S – the follow-up 254

17.5 Questions and more questions 259

18 Conclusions and Reflections 265

Appendices 271

A References and bibliography 271

B Key dates for the securities settlement industry in Europe 279

C Who’s who in the history of European securities settlement 291

D Glossary of technical terms 311

E Postscript 329

Index 333

Peter Norman is a London-based journalist and writer, specialising in European issues. He began a career in journalism in 1968 as a trainee for Reuters Economic Services in London. He later worked for The Times (of London) and The Wall Street Journal-Europe before joining the Financial Times in 1988 with responsibility for the newspaper’s UK and international economic news coverage. He spent 22 years of his professional life on the European mainland based at various times in Frankfurt, Bonn and Brussels. After three years in Bonn as the FT’s chief correspondent in Germany, he moved in 1998 to Brussels as bureau chief and chief EU correspondent. He has combined book authorship and journalism since returning to the UK in July 2002. Plumbers and Visionaries: Securities Settlement and Europe’s Financial Market is his second work of recent European history.