Citing rapid changes in European securities markets, J.P. Morgan & Co. is planning to walk away from operating Euroclear, the international securities clearing and settlement system it created in 1968.
The New York banking company, which earned significant fee income as it held on to key operational responsibilities even after opening ownership to other financial institutions, announced a definitive agreement Wednesday to terminate its operating and banking services contract.
J.P. Morgan will help Euroclear, based in Brussels, launch a new bank and operational services arm. Morgan will continue operating Euroclear over an 18-month transitional period and will be paid over three years at a rate of $195 million to $295 million annually, depending on Euroclear's revenues.
The 1,200 employees of J.P. Morgan responsible for Euroclear will transfer to the new entity. Morgan would remain a participant/owner and retain a position on the board of directors.
Morgan's Euroclear contract contributed $253 million in pretax income in 1998, which was 18% of the bank's total that year.
"We are proud of the role Morgan has played in creating and bringing Euroclear to its current position of leadership," said Michael E. Patterson, a Morgan vice chairman and Euroclear director. He described the decision as "the right direction for Euroclear and the market it serves."
The Belgian entity is one of two multinational clearing houses for stock and bond trades among financial institutions and their institutional customers. Euroclear claims to be responsible for 76% of the international trading market, amounting to $44.9 trillion worth of securities in 1998.
Its major competitor, Cedel of Luxembourg, has been actively consolidating with regional securities clearing houses in Europe. For example, in May it announced a pending merger with Deutsche Boerse Clearing, part of Cedel's attempt to create a larger European clearing, settlement, and custody service.
Euroclear officials said the consolidation trend among European clearing houses will likely continue, ultimately leading to something akin to Depository Trust Co., Wall Street's computerized recordkeeping institution that enables securities transfers to take place in a paperless environment.
Conor Leeson, an associate at Euroclear in Brussels, said J.P. Morgan and Euroclear mutually agreed that the U.S.-based bank's involvement might impede Euroclear's consolidation ambitions.
"With the consolidation of the European settlement infrastructure of the moment, it was perhaps better for the Euroclear system to have a European bank as its guarantor and operator, and Morgan was perfectly willing to go along with that," Mr. Leeson said.
The separation "will help Euroclear maintain its leadership and capitalize on its partnership and merger opportunities," said Joseph Evangelisti, a spokesman at J.P. Morgan. "This makes it easier for them to compete."
Euroclear is used by approximately 1,700 financial institutions. Morgan spun it off to participants in 1972, and there are now 1,500 owner-institutions. Mr. Leeson said the largest clearing participants include J.P. Morgan, ABN Amro of Amsterdam, Bank of New York Co., Goldman, Sachs & Co., and HSBC Holdings of London.
Morgan has been gradually exiting transaction-processing businesses it deems nonstrategic or exceedingly demanding of capital, said Raphael Soifer, an analyst at Brown Brothers Harriman & Co. of New York.
For instance, the bank sold its global custody business to Bank of New York in 1996. Like the Euroclear business, it did not bring synergies to other business lines, Mr. Soifer said.
"The evolution of the European markets would have mandated some change to Euroclear," he said. "This seems to have been a good way out for J.P. Morgan and a reasonable transition plan for Euroclear. This decision should not have much of an effect on their core businesses."
Mr. Evangelisti said the bank would increase its focus on growth opportunities in its core businesses, namely investment banking, credit markets, and equities, among others. As of the second quarter, these activities were growing at annual rates of 30%, 52%, and 75%, respectively.
"We are enthusiastic about the financial potential of our core businesses, which have grown rapidly in the past few years," Mr. Evangelisti said. "We told analysts that we aim for between 15% and 20% return on equity, and we remain committed to our targets." J.P. Morgan's share price rose 43.75 cents to $129.625.
