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Page last updated
February 15, 2003

ISSN No:1470-5494 All rights reserved. No part or portion of this publication may be reproduced or transmitted in any form without the express, prior and written permission of the publisher. Whilst every effort has been made to ensure accuracy, the publisher accepts no responsibility for any person acting as a result of the content herein.



Switzerland, Europe, the world?

The concept of world domination has been around for centuries, from Genghis Khan, Julius Caesar, Alexander the Great, to, in more recent times, Napoleon. What these all have in common is the need for a geographical conquering. Today we all see a competition for world domination in industry, telecommunications, computer software, banking and, most importantly for us, securities settlement.

So what is driving this compulsion to be the biggest securities settlement house? To understand this more clearly, it is necessary to review the history.

From a nationalistic basis
For SIS, this history begins in 1970 when the Swiss market participants decided that they needed a central securities depository (CSD) to clear and settle their domestic securities trades - SEGA. It was also at this time that the market saw the first emergence of the ICSDs (international central securities depositories) in the shape of Euroclear and Cedel, and so there was a very nationalistic rationale to the introduction of SEGA.

However, it was not just Switzerland that was taking this view, other European, Asian and American countries were also moving in this direction. And so we saw a proliferation of CSDs around the world which still exist today; but are they still the same animal as they were back then in the 70's?

The explosion of the private banking industry in Switzerland, thanks to its neutrality, stability and secrecy, created the impetus for the next step in SIS' creation. The private banks managed the monies of thousands of individuals who either invested themselves or allowed the banks discretionary authority over their monies to invest. The bond market was still small and specialised, so they invested in equities.

The growth of equity investment brought new problems to the private banks; that of maintaining so many links and relationships with CSDs from all around the world. So in 1988 the Swiss banks decided to outsource this network management problem to a new company called Intersettle. This new company acted as a vehicle for the crossborder, international settlement of securities, focusing primarily on equities but able to handle all types of securities. It was also the first time that the banks; usually in competition with each othe; had got together to set up a "shared" solution.

Intersettle was set up as a non-profit-making company providing global custody for the Swiss banks who decided to outsource their network needs. This immediately provided Intersettle with a large customer base of 300 plus and a substantial pool of assets. This pool of assets allowed Intersettle to negotiate more favourable rates with the sub-custodians around the world due to the economies of scale and provided the Swiss banks with reduced fees and increased profits.

. . . . to a European vision
In 1999, the Swiss banks again realised the concept of a European vision and agreed to merge SEGA and Intersettle together to form SIS SegaInterSettle AG. This allowed the customers of the two entities to utilise the concept of "one-stop shopping" bringing them increased benefits. At present SIS SegaInterSettle AG keeps globally over 70,000 active securities in safe custody with sub-custodians in around 50 markets (with a new 6 Eastern European markets being opened as we speak) and is the sole ICSD capable of processing all conceivable types of securities in its system.

So, as you can see, the original Swiss CSD has changed to a combined CSD, ICSD and global custodian over the past 30 years. These changes have also been enhanced by the technological revolution which has occurred in this time. Now, SIS SegaInterSettle AG offers a fully integrated on-line, real-time settlement system including automated securities lending and borrowing, high quality corporate action services and entitlement events including proxy voting and tax reclamation as well as a mutual and off-shore funds capability. As a bank, SIS SegaInterSettle AG is able to supply cash managers with on-line real-time cash and securities projections, account records in all currencies as well as the usual funds transfer functionalities.

But are not these the same services offered by all CSDs and ICSDs? Of course, but where the majority of CSDs only provide these services for their home market or the ICSDs only provide them for mainly bonds, SIS SegaInterSettle AG offers them for all equities, bonds and funds in all markets. However, SIS and a few other CSDs are the only settlement houses able to do this in real-time; not rapid batch!

We do what is best for the market
Although the evolution of SIS has brought undoubted benefits to its participants, this evolution has still been a defence strategy to maintain a national settlement agent, albeit one that settles crossborder. However, this defensive strategy has recently turned into a potential offensive strategy allowing SIS to be at the forefront of the race to be the settlement system solution for Europe.

Over the last couple of years, we have all heard about vertical silos, horizontal silos and "hub and spokes". Throughout this time, SIS has been working on a co-operative solution which brings about the results required by the market in the quickest time possible. Examples include the OTC DVP Link with CSD's such as with CrestCo.

The linkage allows the individual participants to maintain their own identity within their domestic market, whilst being able to offer a crossborder solution. This solution brings the G30 directives to the market in the shortest time frame.

However, we have also seen two other major solutions in the past year. We have seen the ICSDs try to change themselves into CSDs for certain domestic markets in a bid to try to break into the equity markets. This is most obvious with Euroclear Bank taking over the settlement systems for Belgium, France, the Netherlands, Portugal and England, while Clearstream Bank has been purchased recently by Deutsche Börse.

From the reaction in the market, is either of these solutions the ultimate answer? At present, the answer is no. Without a common tax regime and legislation it will be impossible for the European markets to come together to form the "United States of Europe". The loss of a national identity will be the biggest barrier to break down as can be seen in the reactions of the French and Dutch especially to the loss of their Sicovam and KAS systems to Euroclear; although both systems are still operating with a link to the Euroclear system (hub and spokes?).

So, if we do not yet have the key stones in place to have a fully integrated single settlement system; why is the market being asked to spend billions of euro on temporary solutions which have still to prove that they can work?

To answer this question, we must firstly answer a more fundamental question; just who is driving the securities market? Is it the users, the industry groups or the settlement systems?

The users like to believe that they are driving the consolidation of the European settlement systems especially through industry groups like the European Securities Forum (ESF). However, as we have seen recently, those same leading members of the ESF are the same banks which agreed for Deutsche Börse to purchase outright the Clearstream system, even though this purchase went against everything the ESF and European Commission has stated. It seems the thirst for cash outweighs all other considerations; short-term gain versus long-term progress.

So if it is not the users or the industry groups driving this consolidation, it must be the settlement systems themselves. It is, of course, human nature to preserve what you have built or won over time and to a certain extent that is what we are seeing today in the securities settlement industry. However, this preservation may not be the way the market should be moving at this moment in time.

As mentioned earlier, SIS with its CSD links is looking for the simplest, most efficient, most cost-effective way to bring crossborder settlement into line with domestic settlements. Why is SIS going down this route rather than looking to merge or takeover other settlement systems now? At this time SIS and, more importantly, its customers and shareholders (both the same) do not believe that mergers and takeovers bring the synergies required to bring about a cost-effective and efficient settlement system. However, that is not to say a merger or takeover would not be considered if the right opportunity came along.

The sentence above makes it sound as if SIS will only merge if they are to be the "top dog" in the relationship, however, observing the history of the Swiss banks and markets over the last 10 years shows a very forward looking, non-nationalistic outlook. In the markets arena we have seen SOFFEX; the Swiss derivatives clearing system; merge with the German system to form Eurex. We have also seen more recently the Swiss Exchange give up its blue chips to virt-x, the joint venture between SWX and Tradepoint, to provide the market with a single trading platform run out of London. In the banking sector, we have seen both the major Swiss banks relocate their investment banking arms to London and give them some degree of autonomy. So, from the history we can see that the Swiss try to do what is right for the market.

It is the market that must determine the route the industry should take, especially now as the opportunity for a European solution is feasible and desirable, not only by the banks but also by the politicians within the European Commission. SIS will work with the market place to determine the correct solution along with all the other settlement systems and then work to implement it. The whole concept of a European solution needs the joint efforts of all, breaking down the nationalistic identities and building a new European identity.

The influence of technology
There is, of course, one other area which will fashion the way the market moves forward, and that is technology. The technological advancements made over the past decade allow the markets to be much more efficient than ever before. The US has already recognised this and is pushing ahead with plans to move to a T+1 settlement period for its equities market. Within the bond markets we have settlement cycles come down from T+7 to T+5 to T+3. However, within the repo market we are already seeing a growing number of same day trades.

The move to same day trading is a reality we all have to face. This will bring complications to cash movements, risk analysis, portfolio management and settlement.

The market is also looking at the information flows from the main drivers of the market, the fund managers, to the brokers/trading houses and on to the custodians. The setting up of GSTPA (Global Straight Through Processing Association) and its directive to build a Transaction Flow Manager has begun this process. But again we see competition rather than co-operation raise its ugly head with Omgeo also set up to build a similar system. It is not up to me to say whether this is right or wrong; the market will decide.

SIS has been involved in the forefront of the "technological revolution" within the settlements industry and beyond. SIS, as mentioned earlier, already operates a real-time settlement system; T+ 4.28 seconds; which includes real-time matching and information flows. It works on the RTGS basis (real-time gross system) and settles each trade separately. There are very few other systems which are able to handle trades this quickly. The system is also set up to accept trades directly from the exchanges thus allowing the participant the time to manage the results of the trade rather than having to worry about inputs and matching.

So from all of this we can see that SIS SegaInterSettle AG, a market-led solution, is able to be at the head of technological advances while being a non-profit-making organisation due to its spirit of co-operation with its users and shareholders.

But, with all this upside with SIS there must be a downside as well? The main downside of using the SIS system at the moment is the lack of international participants. At present, SIS has over 450 clients of which just over 100 are international (i.e. non-Swiss based). This provides users with a greater need to settle trades crossborder rather than internally. SIS is working hard to change this; the greatest need being to actually raise people's awareness of who SIS is and what it is capable of doing. This profile raising is continuing at pace, as the downturn in the markets allows SIS to promote its high level of services at low cost to a potential user base to whom pricing is now an important factor.

The other major downside for SIS and its customers is that the main settlement systems are too focused on maintaining their own survival at the cost of progressing as the market hopes. Too much money is being wasted on mergers and takeovers which in the end do not seem to benefit the customers to any great extent. Fees do not seem to be coming down for the crossborder trades as the domestic settlement houses keep transaction fees high for other international settlement agents. And who ends up paying for all of these wasted opportunities?; The customer; the one person the settlement systems are supposed to be working for.

SIS on the world stage
We have seen how SIS has progressed and changed within the Swiss market and how it is positioning and promoting itself within the new and ever-changing European landscape. But where does that leave it on the world stage?

SIS' preferred option of allowing the customer some choice in a settlement system but having direct real-time links between the differing systems provides SIS with a clear possibility of leading the European "charge" onto the world stage. As we can see in Europe, the difficulties faced politically, nationalistically and legally will be doubled or trebled if there was to be just one settlement service for all the world's markets. It is more likely that we will see a greater consolidation of trading exchanges, all of which will move to offering the top 500 or 1000 shares in the world, than see a more complex consolidation of settlement systems.

It could also be mooted that SIS' technological record puts it to the front of the pack in the move towards a global settlement system. The fact that the market wishes to move towards a real-time same day trading system requires the need for a real-time same day settlement system, which SIS already is. The procedures for putting in place direct links to other systems also gives SIS advantages over some of the other systems, as well as the fact that it is possible to settle any security within the SIS system.

But are all these points enough to allow SIS to begin the move to a global settlement system? At present, the answer is yes and no. Until SIS strengthens its place in the European settlement market place it is not in a position to move any further forward. More importantly, it is also necessary for the market users to begin to endorse wholeheartedly the way forward before any movement towards the ultimate goal will be seen.

So will the Swiss rule the world in the settlement system market place? Or will another system come to the fore? That question will keep us guessing, strategising and planning over the next few years. The more pressing question for us here in Europe is not who will win the settlement system "battle" but how the settlement system scenario will change within the next two years.

SIS; one of the main players in the game
For us at SIS, although these questions are important and will continue to be a driver of the settlement system market place, these are not the most important questions. The most important questions are what does my customer want now, next month, next year and how can we provide it for them efficiently and cost-effectively. For those settlement systems which focus too much on the European playing field scenario, they may end up not being in the "game" anyway as they will have no customers left to service, while those who decide to maintain their domestic national market only may find that the business becomes more international and therefore lose their liquidity.

SIS' goal is to strengthen its position as one of the major settlement systems in the European market place within the scope of direct OTC CSD links and from there allow the market place to frame the next steps towards a global solution. Co-operation within a framework of competition will be a necessary step, along with the reduction of a national settlement system identity before the end of the road will be reached.

More importantly, you, the market place, will have to decide; do WE want a European solution? Do WE want a global solution? And WHO do we want to lead it? - Then, and only then, will the process for reaching that solution be able to begin.

Anthony McGuigan
SIS SegaInterSettle AG
Vice President
Marketing & Sales





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