A Capital Market for Europe: Nordic Developments
In some ways, the Nordic region mirrors wider Europe. It is characterised by similarities in history, languages and laws, but has different currencies and cultures. The Nordics also had the ambition to create a single capital market for the region, but with some of its exchanges and post-trade infrastructure providers either remaining fiercely independent or joining forces with partners from outside the region, capital market differences within the region remain.
But is this such a bad thing? Surely, in today’s age of globalisation, what investors and issuers want and need are deep and liquid markets that operate at the lowest possible cost in the most efficient and risk-averse way.
Sharing expertise, open access, interoperability, and cross-border alliances and mergers are all real possibilities today. In any form of new co-operation, there are bound to be glitches in delivering promised tangible benefits. For example, there were reputational bruises in Stockholm earlier this month as the Stockholm Exchange (known as OMX Nordic Market since completion of the NASDAQ OMX merger in early 2008) took a hammering for technical problems that rendered it closed for large parts of a business day. But this is a minor blip in what is already proving to be a fruitful combination. NASDAQ OMX first quarter revenues rose 30% compared to the same period in 2007. Transaction volumes have soared, enabling the company to revise its merger synergy savings upwards by many millions of euros.
Euroclear’s recent agreement to purchase the post-trade service provider – Nordic CSD – from local banking giants Nordea, SEB, Svenska Handelsbanken and Swedbank was supported by client-focused business logic. The decision taken by NCSD, comprising the central securities depositories for Finland and Sweden, is seen as a great opportunity for participants in the two Nordic markets to more drastically cut cross-border transaction costs and reach more foreign trading counterparties.
Without both infrastructure consolidation and market-practice harmonisation, financial professionals can only expect greater costs and complexities in the years ahead as the globalisation process continues. Skilfully managing post-trade costs and risks is as relevant for treasury managers in the front office as it is among operations specialists in the back office. Cost containment is even more relevant during turbulent times, as we have all come to learn.
Over the past five years, Euroclear has contributed to post-trade processing standardisation and harmonisation within the EU’s capital markets, alongside the European Central Securities Depositories Association, the European Securities Forum, the European System of Central Banks, the Committee of European Securities Regulators, the Association of National Numbering Agencies, the International Primary Markets Association, and SWIFT. In addition, it is converging the multiple transaction-processing platforms that it runs onto a single platform. With this change programme, Euroclear aims to lower the cost of settling cross-border transactions to domestic levels. The goal is to reduce a €5-20 charge for settling a cross-border transaction today to the €0.50 per transaction that an investor typically pays to settle a securities transaction in its own home market.
The future Euroclear group of CSDs, serving seven European markets, will support approximately 65% of the Eurotop 300 equity markets. When including Euroclear Bank, the international CSD, the new Euroclear group will support approximately 50% of all European domestic debt outstanding.
By delivering a single platform to serve all Euroclear markets in 2011, substantial economies of scale will be achieved. At that time, the capital markets of Belgium, Finland, France, Ireland, Sweden, the Netherlands and the UK will function operationally as a single market, with common rules and practices. All domestic and cross-border transactions will be processed on the single platform and clients will communicate to and from the Euroclear entity of their choice via a common communications interface using standardised message formats. In practice, cross-border transaction settlement will become as low cost and straightforward as domestic transaction settlement. Thus, a Finnish institutional investor managing a pan-European technology fund will be able to settle trades in stocks, such as Nokia, Ericsson, Alcatel-Lucent and BT, through a single Euroclear account, at domestic-level prices and in a variety of settlement currencies. Clients of the combined NCSD/Euroclear organisation can expect to save more than €350m per year in back-office and operational costs. This is half of the estimated €700-800m in annual savings achievable through CSD platform consolidation and market practice harmonisation across Europe.
In the enlarged group, both Finnish and Swedish user interests will be represented through Swedish and Finnish Market Advisory Committees (MACs), as in other Euroclear CSD markets. With membership decided by CSD users in each market, MACs are the primary source of feedback and interaction between the user community and Euroclear management on significant matters affecting the respective domestic markets.
NCSD’s agreement with Euroclear will allow NCSD to maintain its ‘cost recovery’ model, which means that excess profits will continue to lead to fee cuts for customers. Moreover, savings will materialise from new areas, for example, the removal of duplicate IT and network costs. Also, NCSD’s users will need to migrate only once to a single platform covering the Nordic and five other European markets. And the same technical user interface, fully aligned with industry-agreed ISO/Giovannini Group standards, will be used in all Euroclear markets and to access all services.
Equally important benefits are also to be delivered for issuers. Issuers in the Swedish and Finnish markets will gain by taking advantage of a single access point to a wide network of investors spanning the globe.
Direct access to legal records for clients of NCSD, composing the Finnish and Swedish CSDs, APK and VPC, respectively, will not be affected. VPC remains a Swedish AB ‘aktiebolag’ (limited company) and continues to be governed by the laws of Sweden with headquarters in Stockholm; APK remains a Finnish ‘Oy’ and continues to be governed by the laws of Finland with headquarters in Helsinki. Authorities such as the Swedish and Finnish tax authorities, as well as the data inspection boards, will have unchanged access to data records.
The supervision of VPC and APK will continue to be performed by the existing national authorities, as is the case for all the Euroclear CSDs.
From now until the migration of NCSD onto the single platform, it remains very much business as usual. Euroclear and NCSD will work closely together to establish the best way to integrate VPC and APK, making sure that bespoke elements, such as the Nordic account structure where end investors will retain all of their current account structure choices, remain. In this respect, there will be no change for NCSD’s 4.6 million retail account holders. Inevitably, there will be issues to resolve in our common path to a more cost-effective and efficient capital market for Europe. But we are confident that the common long-term vision to meld the lands of midnight sun into our growing pan-European settlement landscape will be realised.