An integrated cross-border trading system is set to cut the costs
of securities settlements. Nick Huber reports
For a man responsible for the creation of an integrated system for
the multibillion-pound European securities markets, David Wyatt
looks remarkably relaxed.
Managing director of Europe's leading securities settlement system,
Wyatt is heading an IT project that aims to transform European
financial markets. On an impressive "whitewall" at his London
office, Wyatt outlined Euroclear's post-merger IT strategy.
Euroclear, formed by the merger last year of Brussels-based
settlement house Euroclear and the CrestCo settlement system, said
it will be able to reduce by 90% the cost of cross-border
settlement tariffs at City firms by 2005. This will be underpinned
by a single settlement engine - a project overseen by Wyatt.
Currently, firms trading on markets have to send payments to
different settlement systems across Europe to settle deals. Using a
single integrated settlement system would reduce risk and
settlement costs.
IT savings for market firms are also expected if the integration
project goes according to plan. There will be back-office savings
by standardising procedures across domestic European markets and
reducing the need for firms to have different interfaces with the
various European financial markets, by trading directly, rather
than through intermediaries.
The new settlement system will handle more than 600,000
transactions per day across Europe, ranging from UK equities to
euro bonds.
It is a major IT project. It involves the integration of existing
Euroclear settlement systems for the different markets, the
creation of a single settlement engine to hold all customer
balances in one place, plus the development of an overarching IT
architecture and common interfaces to glue everything together. And
it all has to be achieved by 2005.
The initiative comes at a time when European banks are under
pressure from the European Commission to lower the cost of
cross-border trading. From July, banks in the EU will no longer be
able to charge more for low-value cross-border EU transfers than
they do for domestic transfers.
Cross-border trading activity is now tens of thousands of
transactions per day but this is expected to increase substantially
as the cost of trades falls. Currently cross-border trades cost
about c30 (£20) per transaction.
Wyatt said the decision to consolidate existing settlement systems
after the merger, rather than building a new settlement
infrastructure or using one of a handful of Euroclear systems, was
the least risky option.
"We have chosen to add them together and deliver something that
works for different markets," he said. "It is more technically
achievable."
The first stage of the project will be the creation of a central
settlement engine to process customer transactions. By 2008 the new
settlement platform is due to be extended to offer access to all
group securities.
"This reduces the need for customers to work with multiple systems,
which reduces cost [for cross-border trades]," said Wyatt. "It
allows us to cut our costs of delivery and the cost per
transaction."
Work so far has focused on finding out the needs of the different
markets and agreeing the design of the single settlement engine.
Technical details have yet to be finalised although the system will
probably be written in standard programming languages such as Cobol
and C.
A strategy for migrating and testing systems will also have to be
worked out. The most important elements of the new system will be
its architecture and ability to integrate with a diverse range of
applications. Web data standards XML and FIX - a protocol fast
gaining ground in the financial services industry - are two likely
candidates to underpin the system, although Wyatt declined to
comment on specifics.
"The fancy bits are the architectural and messaging interface,"
said Wyatt. "We are certainly talking about current industry
standards. The platform will also have to be scaleable. The new
settlement platform will be built to cope with millions of
transactions per day."
Euroclear customers will have to ensure their existing systems can
link to the new single settlement engine but Wyatt stressed it aims
to keep migration costs to "as near zero as possible".
And despite the current corporate vogue for large IT projects to be
outsourced, most of the work on the new settlement engine will be
done in-house, with contractors drafted in when necessary.
Industry experts said Crest's good track record in delivering large
projects on time and on budget - such as the CrestCo settlement
system in 1996 - increased the likelihood of Euroclear's successful
integration.
"The design of the system seems right and they seem to be going
about it in a sensible way," said Mike Jones, chief executive of
City Compass, a City think-tank and research group. "It has a good
track record in terms of delivery."
The one factor that could derail the implementation is project
creep, said Jones.
"Euroclear would be wrong to be over-influenced by markets asking
for modifications to the system but I don't think it will fall into
that trap."