When Rupert Hambro landed at Luxembourg International Airport in 1963, he was met by guards armed with machine guns. The airport was then no more than a landing strip with a couple of Nissen huts. Hardly a site for international terrorism. But the heavy security was not designed for Hambro; it was to protect his luggage.
Hambro carried with him a precious cargo of bonds sealed in zinc-lined wooden crates. The crates of printed notes jNorges Komrnunal Bank 5.75% 1970) had to be fork-lifted from the aircraft’s hold and carried by truck to the vaults of Kredietbank Luxembourgeoise, under police escort.
This was nothing out of the ordinary for 1963. In the early 1960s, bonds had to be physically delivered at the close of a transaction, usually by transporting them to a bank for safekeeping. The market desperately needed a better, faster system of clearing its securities.
By the late 1960s, delivery problems in the secondary market had reached crisis proportions, due the laborious and hopelessly outdated methods of clearing and settlement then in use. People were losing money as a result of slow delivery. And armed guards didn’t come cheap.
In December 1968, Morgan Guaranty established Euro- clear, with the aim of minimising or eliminating the costly and time-consuming transportation of securities and ensuring prompt delivery. Employing a network of depository banks in II countries, the clearing house enabled participants to achieve same-day settlement of transactions using computerised book-entry rather than physical delivery, “Without Euro-clear we would all have gone broke,” says Walter Koller, a market veteran.
Based in Brussels, Euro- clear began with 50 participants. Today, it has more than 1,500. Morgan Guaranty still operates the system but is now only a minority shareholder. It has been estimated that the bank earned $150 million from Euro-clear in 1987.
Cedel, Euro-clear’s arch- rival, was established in 1970 by 69 financial institutions to provide independent competition. Based in Luxembourg, Cedel (Centrale de Livraison de Valeurs Mobilières) has over 2,200 participants, although its market share is much smaller than Euro-clear’s.
Without these two deliveiy and settlement systems, the Euromarkets would cease to function. What’s more, some domestic securities markets are beginning to wake up to their attractions. They also could use a system that provides delivery against payment on the end of a phone. Rupert Hambro will vouch for its advantages.