IT project aims to slash European securities settlement costs by 90%

An integrated cross-border trading system is set to cut the costs of securities settlements. Nick Huber reports

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."

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