It is not often that officials in the clearing and settlement business raise their heads above the parapet. But the recent proposal by Euroclear, the world's largest clearer of cross-border transactions, to rationalise Europe's clearing industry has sparked controversy.

Cedel, the Luxembourg clearer and longstanding rival of Brussels-based Euroclear, poured cold water on the so-called hub and spokes proposal. Under the plan, which Sir Andrew Large, chairman of Euroclear, hopes will be pushed by the main users and owners of the clearing bodies, Euroclear and Cedel would merge to form the "hub" of the European market.

The continent's remaining clearing houses, totalling almost 30, would set up direct links with the hub and scrap any plans to establish bilateral links with each other. This would enable Europe's largest cross-border investors and brokers to concentrate their wholesale business in one depositary while retaining the domestic roles of the national depositary houses.

Backers of the plan say that the process would result in large savings for the international banks and investors, and enable them to concentrate their cross-border equity transactions - currently cleared by the national depositaries - in the same place as their debt transactions - mostly concentrated in Euroclear and Cedel.

At the same time it would lower costs by eliminating duplication. Membership of the leading clearing bodies overlaps extensively. "At the moment everyone is building their own real-time settlement system or embarking on some other IT venture," says one banker. "We have to pay our share for most of these systems. It doesn't make sense."

Banks also complain that they have to retain back-office links with a number of different depositaries. This is considered wasteful and capital inefficient because it prevents them from concentrating their collateral in one clearing house.

However, Andre Lussi, president of Cedel, says the plan would create the very duplication it seeks to prevent. Unlike the US, which is served by just three depositaries, Europe would retain its national settlement houses.

"As spokes they (the domestic clearing houses) would have to yield ground to the hub and give up their independence," says Mr Lussi. "This would revive the old political factionalisms that have characterised previous failed attempts to create a pan-European solution."

Cedel, which is planning to launch a counter-proposal in the next week or so, is thought to be in talks with Deutsche Borse Clearing to set up a pan-European system. Rumours abound about other alliances.

"Euroclear's view is that the hub cannot be dominated by any one national clearer for obvious political reasons," says a member of the clearing house. "We can't abolish the national clearers but it would be foolish to allow anyone to predominate on a continental level so the hub and spokes proposal is the only realistic option."

However, Cedel also points out that Euroclear is operated by Morgan Guaranty, a subsidiary of J.P. Morgan, the US bank. This, say officials, undermines its claim to be promoting a European solution.

Ultimately, say bankers, it is the market that owns the clearers and it is therefore up to the market to override any institutional rivalries between the depositaries and impose a continent-wide solution. Many believe this should be accomplished sooner rather than later.

"The launch of the euro makes a nonsense of Europe's fragmented settlement industry," says one senior US banker. "It's really a question of whether the largest banks can get their act together and tell the clearers what to do. If we don't, then in the end we'll be the ones who pay the cost."


A fork in the fairground ride
The call of the telecoms industry
Spontaneous eruption
ABS as standard
Game show culture catches on
Developed markets power ahead