Source: Mark Wellham, Rhyme Systems
Mark Wellham, Arrow product manager at Rhyme Systems, explains the need to put the new Euroclear Business Model at the top of financial industry 'to-do' lists.
Since the merger of Crest and Euroclear in 2002, it seems that a mountain of documentation has been published on the subject of their joint Business Model describing the vision for an integrated European capital market.
Despite the influx of new information, the need could not be greater to review what is the largest, most technically challenging and wide ranging change that Euroclear has made.
Although it will not be fully implemented until 2010, now is the time to consider the proposals that Euroclear has advocated and plan what is right for your organisation. Despite some changes likely to be made along the way, these proposals will not be restricted solely to software-based modifications, but will force some back office practices to change.
The Business Model aims to make cross border settlement cheaper and more efficient, in order to help deliver a domestic market for Europe. To achieve this goal, the Business Model requires a consolidation of technology platforms across Europe, to be implemented over three phases.
The first phase will be the launch of the Single Settlement Engine (SSE) that will enable each International Central Securities Depository (CSD), UK, Irish, French, Dutch and Belgium systems, to interface with a single settlement application. This will replace the current group CSDs' core settlement applications, and should be largely transparent to members. However, changes will be inevitable in some areas - settlement priorities, transaction linking, pending updates (a new transitory status) to name but a few.
The SSE is scheduled for live implementation in July 2006, for Crest, and around the same time for other CSDs to have their own version of the SSE. March 2007 will see one version of the SSE servicing all the CSDs.
With any integrated solution, harmonisation of components and the way they interact is a prerequisite for a successful, efficient process. Within Europe the diversity of the legal systems and tax regulations make it an incredibly difficult task to reach common ground.
Settlement and custody has the advantage of existing overlapping functionality and processes. This is such an important and complex area, warranting the creation of several working groups, market advisory committees and steering groups, that consultations with the market and necessary regulatory and external bodies will continue for the next few years.
The implementation of Euroclear Settlement for Euronext-zone Securities (ESES) is important to this process as it proceeds to harmonise the system functionality, market rules and practices for the French, Belgian and Dutch markets through the integration of a single settlement and custody platform. So the second phase of the Business Model focuses on the implementation of ESES that is expected in 2007, following the launch of the SSE.
The third and final stage of the Business Model will ensure the complete consolidation and delivery of a common communication interface for all users. The success in integration is truly achieved when harmonisation and generic processes are evident throughout Europe. One of the key aspects is a single common messaging format for all of Europe. This has been overwhelmingly endorsed as the ISO 15022 standard.
The ISO 15022 messages do not support the full range of business messages currently provided by the proprietary standards, e.g. stock borrowing and lending and DBVs coverage is missing. Crest must ensure all business requirements are satisfied before elevating ISO 15022 to the single messaging standard.
It seems more likely that the business gaps inherent in ISO 15022 will be closed during the next evolution of the ISO standard, i.e. ISO 20022, which will be XML-based. It is therefore important to note that the proprietary messaging will, at some stage, be discontinued. ISO 15022 and ISO 20022, at the same time, will be introduced as it's replacement. It is likely this will occur between 2008 - 2010, and will allow a certain period of parallel running of the ISO and proprietary messaging.
Alarm bells should now be sounding as the likelihood of system development looms. I expect this will depend on a number of factors: Do you run an in-house solution? Have you already developed ISO 15022? Do you use XML? Do you rely on a third party supplier solution for Crest connectivity? All questions you should be asking yourself now in preparation for an integrated capital market.
Whatever aspects of business you are currently considering, put the impact of the Business Model high on your list to ensure you qualify for Europe.