Proposed acquisition by Euroclear plc of Crestco Ltd

No. ME/1393/02

A report under section 125(4) of the Fair Trading Act 1973 on the advice given on 6 September 2002 to the Secretary of State for Trade and Industry under section 76 of the Act

PARTIES

Euroclear plc (Euroclear) is the parent company (97.6 per cent ownership) of Euroclear Bank SA/NV (Euroclear Bank). Euroclear Bank is an international central securities depository (ICSD) that operates the Euroclear System – a clearance and settlement system for internationally traded securities. In addition to its role as an ICSD, the Euroclear group has recently acquired the local clearing and settlement depositories (CSDs) in France, Belgium and the Netherlands, although they currently continue to operate as separate systems. In the year to 31 December 2001, Euroclear reported pre-tax losses of £24.3m on turnover of £156m and total assets of £6.5 billion. In the same reporting year, Euroclear Bank reported pre-tax profits of £86m on turnover of £241.9m and total assets of £6.1 billion.

CRESTCo Limited (CRESTCo) is an approved Operator of a 'relevant system' under the Uncertificated Securities Regulations 2001. This provides the legal basis for dematerialised transfers (see note 1) within the UK, i.e. CRESTCo operates as the Central Securities Depository (CSD) for the UK (see note 2). CRESTCo is currently the UK's only provider of the settlement function for dematerialised UK equities and UK domestic debt securities. CRESTCo is also a recognised clearing house in the UK under the Financial Services and Markets Act 2000 (FSMA). In the year to 31 December 2001, CRESTCo reported pre-tax profits of £12.28m on turnover of £91.4m, and total assets of £82.5m.

JURISDICTION

The merger satisfies the assets test under the Fair Trading Act 1973. The book value of the gross worldwide assets being acquired is approximately £82.5 million. The ECMR does not apply.

ASSESSMENT AND RECOMMENDATION

The parties are active in the supply of clearing, settlement, and custody in national and trans-national financial transactions. Four relevant markets have been defined:

• national custody and management of securities
• cross border custody and management of securities
• national clearing and settlement of securities transactions and
• cross border clearing and settlement of securities transactions.

Although they share certain customers, the parties have minimal actual overlap. It is difficult to envisage the emergence of an alternative system to existing national CSDs, and therefore the merger will not result in a real loss of potential competition.

There are, however, two vertical issues arising from the merger – the issue of cross subsidisation and of restriction of access to CRESTCo. It is possible that because CRESTCo is essentially a monopoly, the merged entity may be able to raise prices in CRESTCo to cross-subsidise Euroclear Bank. Euroclear has explicitly stated that there will be no cross-subsidisation between domestic and international business and also cited strong user/member power as an important deterrent. Also, if the merged entity were to cross-subsidise, it is not clear that this would have a significant effect on competition for cross-border clearing and settlement.

Some global custodians have raised the issue of restriction of access to CRESTCo with respect to possible closer ties with the stock exchanges and delivery-versus-payment (DVP) links with CRESTCo. Global custodians are concerned that they should be given equal and fair access to all features of the CSD. However, these concerns do not appear to be born out given that Euroclear will not be in a position to determine its status vis-à-vis the London Stock Exchange and the London Clearing House. In addition, whilst it has been announced that Euroclear's link with CRESTCo is likely to be upgraded to DVP status, there is nothing to prevent any other provider from opening up a DVP account with CRESTCo.

The two vertical issues this case raises do not appear likely to lead to a substantial lessening of competition. The customer benefits of this merger in terms of reduced costs for cross-border clearing and settlement are likely to far outweigh any costs associated with the possible dis-intermediation of certain functions of global custodians.

Aside from the concerns discussed above, other third parties raised no substantive competition concerns regarding the merger.

On these grounds we recommend that the proposed merger is not referred to the Competition Commission.

NOTES

1. Computer-based transfer and evidencing of title to units of a security without a certificate.

2. CRESTCo also operates as the CSD for Ireland, Jersey and the Isle of Man.

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