Crest and Euroclear settle on a merger

In the rarefied world of stock exchanges, "consolidation" may be the word on everyone's lips but, with the notable exception of Euronext, it remains an elusive dream.

Since bringing itself to market, the London Stock Exchange has been mentioned in connection with numerous juicy-sounding mergers, being put in the frame with its arch-rival in Frankfurt, Nasdaq and Liffe, the derivatives exchange that was eventually snatched from under its nose by Euronext. The trouble is, none of it has come to fruition.

While all of this consolidation hasn't been happening, other critical parts of the share-trading mechanism have been getting together. Last week Crest and Euroclear announced a merger that takes the business of share settlement into realms that the exchanges have yet to tread. It's a first step into pan-European market thinking, which incorporates the good bits of the UK and the Continent.

Settlement hasn't so much got a bad name, as none at all. What the likes of Crest and Euroclear do goes on at the back of the back office. They run the system that "settles" all the trading that goes on during the day – organising the official changes of stock ownership, and the movement of certificates if required.

Crest runs settlements on London and Irish markets while Euroclear provides the equivalent service on Belgian, Dutch and French markets.

But as well as shaming the exchanges by beating them to it, Crest and Euroclear's merger will shake things up in two main ways.

The first effect is built into the logic of the merger itself. The cost of a UK investor buying a European share is much higher than domestic trading because the settlement costs are high as soon as you attempt anything cross-border. The aim of the merger is to reduce costs by 90 per cent over the next couple of years, and make the dealing costs the same throughout Crest and Euroclear's markets.

But another effect could be to expose the position of Clearstream, the settlement business that is now wholly owned by Deutsche Börse. Crest and Euroclear avoid regulatory issues because their ownership structure gives massive powers to their customers, who effectively watch over them in place of a regulator. Deutsche Börse, on the other hand, does not have those checks.

This creates a serious problem: Crest and Euroclear present the Continent with a clear centre for more consolidation. Once trading costs are reduced between some countries, the same system should work everywhere. But as long as Clearstream remains in the hands of Deutsche Börse, that is not going to happen.

It would be a massive shame if this wave of consolidation were finished before it began, but those back-office boys have a funny way of making big things happen very quietly.