The London Stock Exchange insists on CrestCo, the UK system, while Frankfurt wants Deutsche Borse Clearing, its in-house settlement system, which is merging with Cedel, the pan-European commercial clearing house. The Germans say their system is more easily adapted to offer pan-European services, andhandles settlement of bond and derivatives trading, including over-the-counter derivatives.
CrestCo is mainly involved in the settlement of UK equities, although it has recently announced plans to take over the settlement of trade in UK government gilts. But London refuses to back down, arguing that its members, who do all their clearing and settlement though CrestCo, have no experience of Cedel.
Industry sources say that the issue is far more serious than outsiders realise. One source close to the talks said: "Clearing is the key. Anyone can cobble together a deal on the front end. But if you can have joint settlement and clearing, that is where the big savings are. The trouble is both London and Frankfurt have invested a huge amount of money in their respective systems."
Joint settlement was one of the key issues that Gavin Casey, the LSE chief executive, and Werner Seifer, his opposite number at Deutsche Borse, said would be resolved before the end of 1999 when they announced their bilateral alliance in November last year.
The strains between London and Frankfurt come at a sensitive time. The end of September brings the first anniversary of the agreement between the big European exchanges on a wider pan-European alliance, and the exchanges feel pressurised to produce a tangible announcement before then.