ISBN 2-907587-10-2

By eliminating currency risk among 12 countries already – soon to be joined by Central Europe’s accession countries – and by fostering Europe-wide integration of money, bond and equity markets, the euro has radically transformed financial risk management in Europe. Meanwhile global initiatives like CLS – the Continuous Linked Settlement clearing house for foreign-exchange markets – also herald a new era in industry-wide cooperation with central banks and regulators to eliminate or mitigate risk in cross-border operations.

This exploration follows on the book Capital Markets without Borders published in 2000 on the transformation of exchanges and the challenge of global regulation as well as on the 2001 book Capital markets of the 21st century that emphasized market infrastructures in Europe and the opening of China’s financial markets.

The work has been conducted by PROMETHEE for the Edmond Israel Foundation, a center dedicated to the research and promotion of ideas of cultural, scientific, political and economic importance in the context of Europe. The work of the foundation is made possible by Clearstream International and other companies.

Outline

Introduction by André Roelants, Chairman, Edmond Israel Foundation, and CEO, Clearstream International

The euro’s quiet success
Note from the Editors Dr. Albert Bressand and Catherine Distler

Part I. INSPIRING VISIONS: THE POLITICAL ECONOMY OF MARKETS WITHOUT BORDER
I. Integrating financial markets and eliminating currency risk in the enlarged European Union
Sirkka Hämäläinen, Member of the Executive Board and Governing Council, European Central Bank
II. Widening and deepening the Union: the political and economic dimensions of EU enlargement
Philippe Maystadt, Chairman, European Investment Bank
III. Providing a lower-risk environment for private investment in the transition countries
Jean Lemierre, President, European Bank for Reconstruction and Development
IV. Fostering a private and public dialogue on global infrastructures
Sir Andrew Large, Vice Chairman, Barclays plc., and Chairman,
Project on Global Clearance and Settlement, Group of Thirty

Part II. PACE SETTING INITIATIVES: THE SECURITIES INDUSTRY IN THE AGE OF COLLATERAL WITHOUT BORDERS
I. New levels of risk mitigation in the forex market and the further development of the CLS community
Joseph De Feo, CEO, CLS Group
II. Currency risk, the dollar peg and good governance: the Hong Kong market perspective
K.C. Kwong, Chief Executive, Hong Kong Exchanges and Clearing
III. The utility governance and the reduction of risk for members
David Hardy, CEO, London Clearing House
IV. From fragmented securities pools to one global collateral pool
Saheed Awan, Executive Director Global Securities Financing, Clearstream Banking

Part III. FAR-REACHING TRANSFORMATIONS: CENTRAL EUROPE AND EU
ACCESSION COUNTRIES GEARING UP FOR THE EURO.
I. A fast track to the euro-zone for accession countries?
Professor Dariusz Rosati, Member of the Monetary Policy Council, National Bank of Poland
II. From price liberalization to adopting the euro: the Hungarian way
György Szapáry, Deputy President, National Bank of Hungary
III. Dreams shattered, new expectations and creative links: exchanges for the new Europe
Dr. Wieslaw Rozlucki, President and Chief Executive, Warsaw Stock Exchange
IV. A region of invasions, walls and curtains now joining the European core
Árpád Göncz, Former President of the Republic of Hungary

Part IV. ANNUAL SURVEY: MARKET PRACTICIONERS’ VIEWS ON THE CHALLENGES OF RISK MANAGEMENT
I. Survey results on the post-Enron, post-September 11 risks for capital markets
Florian Bressand, Research fellow, PROMETHEE

Including strategic insights from :

Marco Baggioli, Director of Securities Services Division, Merrill Lynch International
on The merits of CCPs, and the trade-offs and complementarities between risk mitigation and cost reduction
Ruben Lee, Managing Director, Oxford Finance Group, and Member of the European Parliament’s Advisory Panel of Financial Services Experts
on The great cultural divide

II. Managing currency risk: a post-euro market perspective
Neil P. Record, Chairman and CEO, Record Currency Management
III. Risk mitigation in the age of "Basle II" ratios and IAS standards
Benoît Catherine, Leading Partner, for Continental Europe, Financial Risk Management Services, PricewaterhouseCoopers

THE CHALLENGE OF RISK MITIGATION FOR CAPITAL MARKETS OF 2002
Concluding dialogue with René Karsenti, Director General, Finance, European Investment Bank


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Quotes

Part I. INSPIRING VISIONS: THE POLITICAL ECONOMY OF MARKETS WITHOUT BORDER

“As any other single currency area, securities transactions in the euro area should be carried out under the same efficient and sound conditions irrespective of the location of the counterparties, the infrastructure, the intermediaries and the issuers of the instruments being traded.”
Sirkka Hämäläinen

“The Eurosystem is prepared… to continue to play the role on the one hand as a catalyst, facilitating the decision-making process on infrastructures, and on the other hand as an oversight authority, monitoring implementation.”
Sirkka Hämäläinen

“I believe that to combine widening with deepening in a considerably enlarged EU implies that we have to accept that further deepening may, more often than in the past, involve only a subset of EU members. Members that want deeper integration should not be prevented from others to move ahead but at the same time they should accept it if others want to retain more of their national sovereignty. Under these circumstances, there is no trade-off between widening and deepening.”
Philippe Maystadt

“The monetary challenge is one of convergence and of stability in convergence. It is a very serious subject: one can state that convergence has occurred and then pay a huge price for having ignored reality, or one can observe reality, and verify that convergence has taken place
and that it is sustainable… Complying with ERM-II disciplines for two years is long enough to establish whether the fiscal and macro-economic policies in the candidate country are geared toward preserving convergence. Markets are the judge…”
Jean Lemierre

“The paradox is that concentration can go with greater competition as the multiplicity of CSDs gave each of them a monopoly power over its part of the network. By creating genuine interoperability and open access among a smaller number of larger entities, the ability of users to shop around would be increased rather than decreased.”
Sir Andrew Large

Part II. PACE SETTING INITIATIVES: THE SECURITIES INDUSTRY IN THE AGE OF COLLATERAL WITHOUT BORDERS

“Pressure is now building up on settlement mechanisms because individual markets have moved to reduce the time elapsed between the trade date and the settlement date. Whether in terms of check clearing, securities settlement or foreign exchange, all processes are being compressed into shorter and shorter cycles. This creates tremendous pressure on collateral management.”
Joseph De Feo

“We are now developing a new clearing system for equities as well as for derivatives… This system embodies an open-architecture based on ISO standards and are compatible with SWIFT. It is designed to make cross-border clearing, cross-margining and collateralization possible… However technology is only one aspect of the challenge… The legal dimension is essential for cross-border risk management.”
Ki Chi Kwong

“A central counterparty is inherently a utility-type structure; it should not be owned by a listed, profit-maximization type of organization, as such an owner does not have resilience and integrity as its prime concern.”
David Hardy

“CLS could or will affect the whole securities industry as it could suck collateral out of other uses it is currently put to.”
Saheed Awan

“Banks essentially provide payment services and help maintain market liquidity. They must do so with minimal risk to save scarce capital. In the complex environment of global capital markets, services like tripartite repos give bank treasurers a high degree of flexibility without creating new levels of operational risk.”
Saheed Awan

Part III. FAR-REACHING TRANSFORMATIONS: CENTRAL EUROPE AND EU ACCESSION COUNTRIES GEARING UP FOR THE EURO.

“Europe and the world have changed so much since Maastricht was adopted that I don’t see how we could expect ten-year old policies to apply unchanged to a very different set of countries in a very different environment.”
Dariusz Rosati

“Short of skipping the transition phase altogether, the only way to make fixed-exchange-rate ERM-II work would be through an explicit commitment of unlimited support by the ECB in the case of a speculative attack. This is how the attacks against the French franc were defeated, with the Bundesbank in the role that the ECB should play for us today. We have drawn the attention of the ECB to the need for such a commitment but, so far at least, we fear that it might not be available.”
Dariusz Rosati

“One can begin thinking of the EU as one large country with some less developed regions that will benefit from the pull effect and from the regional policies that result from strong links with the center.”
György Szapáry

“Stock exchanges in Central Europe should gradually transfer into demutualized, for-profit organizations open to foreign participants and shareholders. The natural partners in such a development are foreign stock exchanges, investment banks, providers of information technology, and telecommunication service providers.”
Wieslaw Rozlucki

“All in all, frontiers continue to exist unchanged today, but the "notion of a frontier" is steadily changing. Translated into everyday language, this means that communities with the same past and fate are growing increasingly conscious and their co-operation is all the more imperative… The European Union has been created, not only in legal and political terms, but also in Man's consciousness too. Its enlargement is no smooth sailing, though.”
Árpád Göncz