A damaging dispute has erupted between the Bank of England and top City institutions over the new system, called Crest.
Opponents, including the Stock Exchange, SG Warburg and BZW, are already working on a rival amd more acceptable alternative. Smith New Court is also critical but is waiting to see how the new system develops.
A public rift with such prominent City institutions could cripple the Bank's efforts to create a new settlements system. Further delays in replacing London's present antiquated settlements system would also almost certainly result in increasing amounts of equity business by-passing the London market altogether.
The Bank is attempting to fill the vacuum left by the Stock Exchange, whose Taurus project collapsed eight months ago amid bitter recriminations in the City over excessive cost and complexity.
Peter Rawlins, chief executive of the Exchange, resigned after the fiasco. Michael Lawrence, the Exchange's new chief executive, may use the dispute over Crest to win back a more prominent role in the City for the Exchange.
The Crest proposals will recommend a minimalist, no- frills approach, which though automated would be less sophisticated than Talisman, the existing Stock Exchange system.
Some settlements experts in the City say the Bank has failed to understand fully the needs of the equities market. The head of settlements at one equity market-maker said that Bank of England papers on the issue contained glaring errors. He also claimed that Crest team members had displayed a 'high-handed lack of interest' at meetings he had held with them. 'Everything we say to them seems to fall on deaf ears. There is the potential for a major catastrophe. Frustration in the City is reaching such a level that a crisis is very near,' he said.
Peter Gregory, head of settlements at BZW, saidthat Crest, built from scratch, will initially be less effective than the existing Talisman system it is meant to replace.' We wanted to investigate whether Talisman could be upgraded to meet the requirements of the market.'
The Crest project is headed by a steering committee, chaired by Bank director Pen Kent, to which the Bank of England project team must report. Leading market-makers are not represented.
City critics believe that the Bank is doing little more than going through the motions of consultation and is not genuinely prepared to consider alternatives. 'The Bank is saying that it will not be dictatorial, and yet they drive their decisions through,' said Mr Gregory.
Another settlements expert observed: 'The Bank knows what it wants and is shoving it down people's throats.'
According to one Crest steering committee member, Mr Kent has been anxious to avoid a public debate too early so that the project is not hijacked by special interests, a problem that crippled Taurus. This committee member said: 'The Bank team might have started off giving the wrong impression but now they are on the right track. They have got to market Crest.'
Terry Pearson, senior securities adviser at Royal Bank of Scotland Securities Services and another steering committee member, said: 'Alternatives have been discussed and resolved within the steering committee. The debate will open up next week.'
Bank of England and Stock Exchange representatives are understood to have clashed at the October Crest steering committee meeting.
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