Dan Barnes looks at how barriers can be lifted to creating and implementing a single European protocol for clearing and settlement and why it will be invaluable in cutting costs and reducing risk.

Back offices are suffering in the securities arena due to the inefficiencies created by diversity in everything from working practices to systems. In January this year, SWIFT, at the behest of the Giovannini Group, released a consultation paper to solicit feedback on its proposal for removing the first barrier to efficiency in the EU clearing and settlement market, as identified by the Giovannini Group in its 2003 report and action plan.

The paper asks for feedback from companies involved in the European securities clearing and settlement marketplace. It is one of the first tangible steps towards establishing market harmonisation in Europe, at last setting out the temporal framework for the 1999 Financial Services Action Plan.

EU consolidation

SWIFT is specifically addressing the definition and adoption of a single EU-wide protocol to overcome “the existence of national differences in IT and interfaces used by clearing and settlement providers”. Although Euroclear and Clearstream have generated a certain level of consolidation in the EU, the Giovannini Group established that this will not lead to the creation of a European central counterparty/central securities depository, one possible solution to this problem.

The group has therefore said that this barrier requires harmonisation of messaging standards and protocols in order to be overcome. It has charged SWIFT with defining the protocol that should then “be immediately adopted by the European System of Central Banks (ESCB) in respect of its operations. This barrier should be removed within two years from the initiation of this project”.

The barrier encompasses the problem of fax, paper-based and proprietary systems that create unnecessary risk and cost in this area, caused by duplication of connectivity and the operational costs. The development of the standard will take current industry initiatives into account such as the G30 Recommendation 2 (harmonising global messaging standards and communication protocols) and implementing ISO 15022 as the global securities communication standard. Following the close of the consultation period, feedback will be evaluated and the protocol should then be adopted in 2006.

Open all hours?

The European Central Securities Depositories Association (ECSDA) is taking the lead in the second of the barrier removals to be completed inside of two years. Barrier 7, which is the varied operating hours and settlement deadlines found across the EU, requires compliance from what the ECSDA refers to as Securities Settlement Systems (SSSs).

As Conor Leeson, head of corporate communications at Euroclear explains, there is the potential for great savings through this harmonisation: “In parallel with developments at EU level, we are committed to harmonising market practices and processes in the five Euroclear markets – the UK, Ireland, France, Belgium and the Netherlands. We are working in close co-operation with users in those markets to try to reduce the diversity and complexity that currently exists in, for example, the processing of corporate actions, such as income and cash distributions or market claims.”

The ECSDA has set targets for settlement (including cross-border settlement, intraday settlement and, in cases of settlement failure, trying to settle the transaction again) for April 2005. This is only the first stage of harmonisation, although it will certainly go some way to assisting before the longer-term issues are addressed.

Mr Leeson continues: “Alongside platform consolidation, harmonisation is the key component of our business model. Our clients are demanding this because it will make their lives simpler and enable them to reduce their costs. By providing them with common practices across multiple markets, they can rationalise the organisation of their back offices.

“If a client has to connect to 10 different platforms across Europe and manage 10 different ways of processing a settlement instruction, they may have to employ 10 different teams of specialists to make it happen. It follows that our efforts to harmonise and consolidate will deliver very significant cost benefits for their back offices.”

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