Euroclear is in the middle of building a multimillion-pound system, called the Single Platform, to help speed cross-border settlements in the Eurozone. But it is also fending off competition from the EU which plans to do the same thing with its planned Target2 Securities network (T2S). And while all this is going on, key users like the London Stock Exchange (LSE) have demanded price cuts as a result of the cut-throat competition among bourses.
“Frankly, most of what we do for the investor is a pain,” says Howell, 50, who took up his post in April, after moving from HSBC where he was global head of securities services. “Traders want what we do to happen seamlessly, with the least amount of risk, and for a good price.”
Howell is sitting in a smart steel and glass meeting room in the firm’s Cannon Street offices for his meeting with City A.M.. Howell, however, is actually based in Brussels and spends much of his time commuting between head office and his home in west Sussex.
Euroclear fits neatly into the biggest-company-you-have-never-heard-of category. In Europe, it dominates the third and final part of share and bond trading – settlement. This takes place after a decision to buy or sell has been made at an exchange, and that position has been guaranteed and reconciled at a clearing house. At Euroclear, payment is taken on the trade and the asset changes hands to the new owner.
Euroclear, which was spun out of JPMorgan’s Brussels office in 2000, processes just over half the bonds and 60 per cent of the equities traded in Europe. This means that last year the business processed €513.5 trillion of transactions, an eight per cent fall on 2008. It also held €20.2 trillion of securities for its clients, 12 per cent higher than the year before. In terms of sheer volume it settled 179.6m trades in 2009. The numbers are truly breathtaking.
The firm’s range of clients include investment banks like Goldman Sachs and Credit Suisse, the central bank of Brazil or Germany, or exchanges like the LSE or Chi-X. The business, which employs 4,000 staff, is owned by a collection of banks including HSBC, Barclays, Citigroup and Credit Suisse; none hold more than a six per cent stake.
Trading costs in Europe are far higher than they are in the US, and regulators as well as market players argue a key way to bring down costs is to link up country networks to make the process seamless.
This was in impetus behind Euroclear’s Single Platform, begun in 2005, which last January succeeded in linking up trading systems in France, the Netherlands and Belgium. Howell says: “It took around five years of talks beforehand to get this done. Half to agree on the rule changes that were needed, and half to build a system on the back of that.”
The Euroclear chief says the EU’s 27 nations all have different settlement methods, and that the desire is that all will gradually move to a common standard, which will make trading faster and cheaper.
However, just before the financial collapse, the EU itself announced that it would build its own system, T2S, which is due to roll out from 2014 and aims to bring down post trade costs by up to 90 per cent. Howell, though is sceptical is that this tight timetable can be met in light of the recession and the vast, ongoing regulatory shake-up.
The Euroclear boss says: “It is extremely hard to get everyone around the table to discuss literally hundreds of rule changes. Part of the trouble is that a lot of these changes need government legislation. And at a time when many of these administrations are putting through difficult austerity measures, it is hard to justify setting aside time to debate changing something like financial settlement rules.”
When T2S was first mooted many thought it would severely damage the sales of Euroclear and rivals like Clearstream, which is owned by Deutsche Borse.
But Howell is more relaxed about it now as its introduction may be some way off. He says: “It will take some settlement income away from us, but if volumes go up this could be negligible.”
And he adds that Euroclear has adapted the building of its Single Platform so that it will be able to plug into the T2S network whenever it is brought into service.
Last year Euroclear made a loss of €38.4m, compared to a profit of €261.7m the year before. The firm puts this down to writing down €185m of the value of several rivals it bought with its paper in Sweden and Finland, as well as the UK share matching business Xtrakter, over the last decade.
However, Howell is quick to point out that this does nothing to affect the cash the company has at hand. Last year it posted operating income down 18 per cent at €934m, due in the main to levels of trading that are around 15 per cent down from their 2007 peak.
Howell says: “We are trading satisfactorily, we are highly capitalised, highly rated and highly liquid. During the financial crisis we were able to trade normally because our single purpose bank business model allowed us access to capital.”
Euroclear makes the majority of its cash through charging for settlements as well as charging for looking after the cash for clients that remains on its books over extended periods of time.
But the impact of the crisis has been profound on the settlement business; it has shifted the focus from expansion to security and pricing issues.
Howell says: “It fair to say that these things are a dichotomy, because it costs money to build secure systems. But people are a lot more focused on cost now. They thought risk was a commodity, that everyone did the same things with the same amount of security. People didn’t believe you would not get paid for your asset. That is not the case anymore, because we have seen it happen. But now people are asking, is there a price for a secure system below which the risk is too great?”
The focus on price can be seen in the public spat between Euroclear and the LSE earlier this year. LSE boss Xavier Rolet said that post trade costs were worth as much as 60 per cent of a trade and demanded Euroclear cut its costs. Euroclear argued that their part of post trade was only five per cent of LSE client costs.
But after much public horsetrading, Euroclear did cut the fee it charged the London exchange to £0.009 a trade from £0.022, by moving to a net rather than a gross charge, which saves large clients as much as £10m a year.
Howell says: “This should has been a normal negotiation that should have been conducted slightly less openly. There was a lot of emotion attached to these talks at the time, which we had to let run out of the discussion. The cost to us was a small proportion of our overall business.”
Howell is prepared for the onslaught of EU regulation he feels is bound to come as a result of the financial crisis. He says: “It is right that regulators and central bankers look to calm the shocks that people thought would never happen.”
Although he is not expecting radical change in his area of the market as he says settlement costs are widely seen as “low risk elements of the financial system.”
His main regulatory concern are “unintended consequences. It is very easy to get into a state where things happen accidently. We plan to get very involved in the details of plans which will affect us.” He says he was in a meeting with lawmakers in Washington last week and “spent two hours discussing the meaning of the word relevant in a draft document.”
Capacity expansion, pressure on pricing, boosting the security of its systems and debating semantics with regulators – Tim Howell has plenty on his to-do list to keep him busy as he sorts out one of the key bits of infrastructure underpinning London’s financial services industry. Euroclear may be unknown outside of the City – but in finance, as with the rest of life, one should never underestimate the importance of what happens behind the scenes.
CV | TIM HOWELL
Work: Howell joined Euroclear in April 2010 as chief executive from HSBC where he was global head of HSBC Securities Services, responsible for the custody, fund administration and corporate trust businesses of the HSBC Group since 2005. Previously, he was group treasurer, responsible for asset and liability management from 1999, and head of market risk for the HSBC Group when he joined the company in 1990. Before that he was director of corporate finance at CIBC Corporate Finance, and an accountant at Samuel Montagu and Arthur Andersen
Education: University of Birmingham
Family: Married, two children