5 Introduction focus to driving down the related costs; 25 studies comparing European and American cross-border securities settlement costs intensified the call to over- haul the European securities clearing and settlement system; 26 and discussions about European stock exchange consolidation also served to put cash equities post-trading arrangements into the limelight. 27 While the measures detailed in the Code address the areas of transparency of prices and services, access and interoperability, and the unbundling of services and accounting separation, they do not codify a particular industry structure. 28 TheCodeprovidesaframeworkforthefuturedevelopmentof European cash equities clearing, but European clearing houses must still find a way to implement the Code. The solution to creating a more efficient Euro- pean post-trade industry remains elusive because it involves highly complex structural issues. 29 It is therefore hardly surprising that disagreement vis- ` a-vis the optimal structure of the industry continues to prevail. European mar ket participants, such as exchanges, clearing houses, banks and investors, have thus been conducting ongoing consultations with the European Commission as well as public discussions on the most preferable future structure of the clearing industry – but stakeholders have not yet reached a consensus. The debate on the efficiency and st ructure of the European post-trade industry – particularly concerning derivatives clearing – has regained signif- icant traction since the Commission invited comments on its endeavour to extend gr adually the scope of the Code to include post-trade arrangements of fixed income and derivatives instruments in October 2007. 30 Finally, the efforts to establish a consensus on the most preferable future structure of the post-t rade industry have been complicated by the coming- ling of the post-trade services terms ‘clearing’ and ‘settlement’. As outlined above, the two terms are frequently – and mistakenly – used interchangeably in the public discussions accompanying the efforts to create a smoothly func- tioning post-trade infrastructure; academic and non-academic publications commit the same fallacy. While this partly results from the lack of generally accepted, clear-cut definitions, few people – even within the financial indus- try – understand the complex mechanics of post-trade services and their 25 Cf. Goldberg et al. (2002), p. 3; and European Parliamentary Financial Servi ces Forum (ed.) (2006), p. 1. 26 Cf. Werner (2003), p. 17. 27 Cf. AFEI et al. (eds.) (2006), p. 1. 28 Cf. FESE/EACH/ECSDA (eds.) (2006); and European Commission (ed.) (02.11.2006). Refer to http://ec.europa.eu/internal market/financial-markets/clearing/communication en.htm for details on the European Commission’s communication, the Code of Conduct, and other documents. 29 Cf. Lannoo/Levin (2003), p. 2. 30 Cf. European Commission (ed.) (2007), p. 3. 6 Clearing Services for Global Markets different providers in detail. 31 However, even among experts, negligent use of the terminology is widespread. 1.2 Literature and research gap Since the launch of the European Monetary Union, an increasing number of academic and non-academic publications researching the issues of indus- try structure and efficiency of European post-trading arrangements have emerged. Nonetheless, an important – but commonly overlooked – research gap persists: the majority of these studies analyse cross-border settlement and safekeeping arrangements between (International) Central Securities Deposi- tories, but neglect CCP clearing issues. The common comingling of the terms ‘clearing’ and ‘settlement’ only serves to obscure this major shortcoming, especially in the eyes of non-experts. When studies claim to analyse post- trading arrangements, they imply a comprehensive analysis of both clearing and settlement issues; yet most publications have exclusively concentrated on post-trade services provided by CSDs/ICSDs. 32 The often negligent or imprecise use of terminolog y in this context threatens to erode steadily the discussion on the most preferable structure of the European post-trading industry due to the spurious implication that findings on CSD/ICSD issues cover all relevant clearing issues. The Code was explicitly designed to increase the efficiency of cash equities clearing and settlement ar rangements in Europe, thus giving direction to the development of CSDs/ICSDs and CCPs. It should be noted, however, that due to the aforementioned gap in research, there were no studies on the industry structure and efficiency of European CCP arrangements to consult for the Code’s establishment. The European Commission has acknowledged the gap: ‘In fact, we are not aware of any empirical studies of European CCP activities.’ 33 As the limited contributions on the indust ry structure and efficiency of European CCP arrangements are essentially by-products of CSD/ICSD- related studies, a brief overv iew of relevant literature is provided in the following. This serves to clarify which studies concentrate on settlement and safekeeping arrangements between CSDs/ICSDs, but leave aside CCP 31 Cf. Group of Thirty (ed.) (2003), p. 2. 32 Cf. EACH (ed.) (2004a), p. 1; and EACH (ed.) (2004b), p. 1. 33 European Commission (ed.) (2006c), pp. 8–9. 7 Introduction clearing issues, as opposed to contributions which take CCP arrangements into account. Hart/Russo/Sch ¨ onenberger (2002) chart the evolution of CCP services in Europe and the United States. Scott (2003) performs a comprehensive analysis of the key issues surrounding strategic developments in the clear ing and settlement industr y. A report published by London Economics (ed.) (2005) provides a description of the securities trading, clearing and settlement infra- structures of the cash equities and bonds markets in the 25 Member States of the European Union (EU) as of March 2005. These contributions are among the few covering CCP-related issues. A significantly larger number of studies have been devoted to the organisa- tion oftheEuropean post-trade industry,with a particularfocuson CSD/ICSD arrangements: Malkam ¨ aki/Topi (1999) analyse the major trends and driv- ing forces of change in securities settlement systems. Various publications investigate the state and process of the ongoing integration of the Euro- pean securities post-trade infrastructure; these studies identify sources of inefficiency in the current CSD/ICSD cross-border arrangements and mea- sures to counteract them; see, e.g. Russo/Terol (2000), Giovannini Group (ed.) (2001), Giovannini Group (ed.) (2003), Hirata de Carvalho (2004) and Baums/Cahn (2006). Schmiedel/Sch ¨ onenberger (2005) and the Euro- pean Commission (ed.) (2006c) include CCP arrangements in their respec- tive analyses. Schulze/Baur (2006) underscore the importance of integrating and harmonising the European post-trade industry with their finding that an 18 per cent reduction in securities clearing and settlement costs could increase the gross domestic product by around 0.6 per cent in the EU. Milne (2005) reviews the role of standard setting as it affects competition in securities settlement, in the light of the establishment of pan-European and global arrangements for securities settlement. L ¨ ober (2006) presents and evaluates the existing EU legislative framework for post-trade arrangements and descr ibes current EU initiatives to increase efficiency, with a specific focus on legal CSD/ICSD-related aspects. Huang (2006) examines legal and regulatory issues pertaining to CCPs and explains why the application of CCP clearing could have ramifications for Europe and beyond. The author also briefly explores the case for a Single CCP at both the European and global levels, concluding that: In an ideal world, a single robust and efficient CCP with effective risk management, operating within the EU or even across the globe, would be able to maximise the effect of transaction offsetting and better risk management with more efficient collateral 8 Clearing Services for Global Markets management for the markets. In practice, the approach of maintaining a level of competition in financial services may seem more likely, in the EU in particular. 34 Several contributions to the field analyse and discuss alternative models for European securities settlement. Giddy/Saunders/Walter (1996), Giordano (2002), Niels/Barnes/van Dijk (2003), Chabert/Chanel-Reynaud (2005) and Chabert/El Idrissi (2005) research frictions in the settlement of European cross-border transactions and discuss alternative scenarios for a more inte- grated approach to European settlement arrangements. Milne (2002)exam- ines how competitive forces can be harnessed to further the integration and consolidation of European post-tr ading arrangements, especially with respect to securities settlement. A number of studies present theoretical models designed to provide conclusions on the future structure of European set- tlement and safekeeping arrangements. Kauko (2002), Werner (2003), Tap- king/Yang (2004), Holthausen/Tapking (2004), Rochet (2005), Kauko (2005), Van Cayseele (2005) and K ¨ oppl/Monnet (2007) all provide alternative mod- els. Kr ¨ opfl (2003), Van Cauwenberge (2003), Serifsoy/Weiß (2005), Van Cay- seele/Voor de Mededinging (2005) and Knieps (2006) contribute to the debate on the structure and organisation of European CSDs/ICSDs. Milne (2007) provides a detailed review and discussion of many of these and other papers. Increasingly, empirical studies are investigating the existence of economies of scale in European settlement and depository systems; see Schmiedel/ Malkam ¨ aki/Tarkka (2002), Van Cayseele/Wuyts (2005) and Van Cayseele/ Wuyts (2006). Besides these studies, others (many of which were produced or commissioned by interested stakeholders) aim at identifying and examin- ing the costs of European securities post-trading activities: 35 Lannoo/Levin (2001), Giovannini Group (ed.) (2001), London Stock Exchange/Oxera (eds.) (2002), AFTI/Eurogroup (eds.) (2002), Deutsche B ¨ orse Group (ed.) (2002) and Euroclear (ed.) (2003) focus on CSD/ICSD-related costs, w hile Morgan Stanley/Mercer Oliver Wyman (eds.) (2003), NERA Economic Consulting (ed.) (2004) and Deutsche B ¨ orse Group (ed.) (2005a) also take into account CCP-related costs. Regarding these studies, the European Commission finds: ‘While useful, none of the results have been universally accepted as providing an accurate description of the prices or costs incurred by investors in acquiring post-trade services in Europe.’ 36 Oxera (ed.) (2007), which was thus assigned 34 Huang (2006), pp. 232–3. 35 For a comparison and overview of the different cost studies, refer to Scott (2003), pp. 13–16; Schmiedel/Sch ¨ onenberger (2005), pp. 28–30; and European Commission (ed.) (2006b). 36 European Commission (ed.) (2006e), p. 1. Also see European Commission (ed.) (07.11.2006), p. 1. 9 Introduction by the European Commission to close the research gap, developed a method- ology to monitor changes over time in prices, costs and volumes of securities trading and post-trading activities (covering services provided by CSDs/ICSDs and CCPs). 37 Despite Oxera’s important contribution, two important research gaps continue to persist: no research to date has been provided on derivatives clearing costs. Furthermore, no comprehensive analysis of both direct and indirect clearing-related costs has been undertaken. 38 Because measuring and isolating indirect costs is a difficult and highly complex task, Oxera’s study does not incorporate indirect costs. To summarise, the existing research on the industrial organisation of the post-trade industry reveals a major shortcoming: although clearing services provided by CCPsplay acr ucial roleforfinancial markets integration, 39 there is no comprehensive analysisof the industry structure andefficiency ofEuropean CCP arrangements. So far, contributions have focused on CSD/ICSD-related research. Regarding the existing literature on CSDs/ICSDs, Milne (2007) finds that ‘[d]espite the economic impor tance of this industry it remains under- researched’; 40 thesameisevenmoretruefortheareaofCCPclearing.The scant research on the organisation of CCPs has thus far only been an off- shoot of CSD/ICSD-related research. Furthermore, all of these CCP studies concentr ate on securities clearing, and exclude aspects relevant for der ivatives clearing. Understanding the industrial organisation of clearing therefore requires a great deal of new work. ‘We need thorough descriptive analysis of the industry . . . so that the profession fully understands the processes and services involved. We need new theoretical models that explore the specific economic features of this industry. We need careful empirical studies that recognize the unique features of the industry.’ 41 1.3 Purpose of study The purpose of this study is to provide a substantial contribution to closing the aforementioned research gap. To this end, the two core research issues are 37 Cf. European Commission (ed.) (07.11.2006); and Oxera (ed.) (2007), p. i. The methodology is to be applied for the first time in the second half of 2007, and subsequently in the following three years. 38 Refer to section 3.2 for a definition of clearing-related direct and indirect costs. 39 Details on the clearing services provided by CCPs and the associated micro- and macroeconomic benefits are outlined in Chapter 2. 40 Milne (2007), p. 2946. 41 Milne (2007), p. 2947. 10 Clearing Services for Global Markets the efficiency of CCP clearing and clearing industry structure. It is the research objective to determine the impact that different cross-border integration and harmonisation initiatives between CCPs have on the efficiency of clear ing. For the purpose of this study, these integration and harmonisation initiatives are referred to as ‘network strategies’. The results of this investigation allow conclusions to be drawn with respect to the most preferable future clearing industr y structure. Clear-cut definitions designed to avoid any further confusion about CCP and CSD/ICSD issues, together with a concise characterisation and descriptive analysis of the current state of the clear ing industry, set the stage for the following analytical objectives: (i) Examine the efficiency of clearing: r develop a method to assess the efficiency of CCP clearing; 42 r identify, classify and analyse the clearing-related direct and indirect transaction costs that market participants have to bear; r generate insight into the nature and dynamics of these costs from the perspective of different market par ticipants; r provide a detailed qualitative and quantitative analysis of direct and indirect clearing costs to enable benchmarking to other market infrastructure-related costs, such as trading and settlement. (ii) Provide a characterisation of the clearing industry structure: r identify and analyse characteristics of the current clearing industry structure. r classify archetypes of different network strategies; r provide anover view of selected network strategies in theclearing indus- try; r define potential demand- and supply-side scale effects in clearing; r collect evi dence for the existence of demand- and supply-side scale effects in clearing. (iii) Research the impact of different network strategies on the efficiency of clearing: r develop an innovative fr amework for analysis that integrates the per- spectives of different market participants and provides a graphical illustration of the complex relationships between economies of scale and scope, and network effects in clearing, their impact on transaction costs and industry efficiency; 42 The term ‘clearing’ as used throughout this study refers to services provided by CCPs. 11 Introduction r analyse the magnitude of demand- and supply-side scale effects inher- ent to different network strateg ies in the clearing industry; r examine whether these demand- and supply-side scale effects translate into an equally great transaction cost reduction; r classify the efficiency impact of different network strategies in the clearing industry; r take into account other relevant dynamics to discern whether any particular network strategy will reduce costs as well as maximise profits for the different market participants; r quantify the efficiency impact of different network strateg ies. These analyses serve to identify the most preferable future clearing industry structure and to deliver recommendations on the indust ry’s future develop- ment. The two core issues of research are efficiency of clearing and industry structure. Clear-cut definitions together with a concise characterisation and descriptive analysis of the current state of the clearing industr y set the stage for the following analytical objectives: besides defining the efficiency of clearing and identifying ways in which to measure it, this study aims to determine the efficiency impact of various cross-border ‘network strategies’, i.e. integration and harmonisation initiatives between CCPs, within the clearing industry. An assessment of this impact serves to identify the most preferable future clearing industry structure. The research primarily focuses on analysing the European exchange-traded derivatives clearing industry. In a final step, the research results are applied to European exchange-traded cash equities clearing as well as to Europe with respect to its global positioning. 1.4 Focus area of research Action to promote financial integration in the field of clearing and settlement needs to be taken urgently. In a fast-evolving global financial system, there is a window of opportunity to raise the euro area financial infrastructure to the highest levels of efficiency, competitiveness, sophistication and completeness. The window of oppor- tunity was opened by the euro, but will not remain open forever. T he shape of the euro financial system is likely to be determined in the next few years and remain crystallised in that shape for a very long time. 43 43 Tumpel-Gugerell (2006). 12 Clearing Services for Global Markets This section briefly outlines the rationale for choosing to focus the research on the exchange-traded derivatives clearing industry and on Europe. The research centres on exchange-traded derivatives clearing because CCPs have traditionally played a more significant role in this area than in cash equi- ties markets due to the characteristics of derivative tr ades. 44 CCPs thus have a much longer history in the context of derivatives clearing. The rationale for focusing on derivatives clearing further lies in the enhanced electronic and global market structure related to derivatives trading and clearing, which significantly increases cross-border flows. 45 The rapid growth of exchange- traded derivatives in the past decade has been accompanied by an increasing internationalisation of the markets and their clearing arrangements. 46 Insti- tutional and individual traders worldwide continue to expand their use of derivatives instruments. Institutional investors in particular are increasingly trading derivatives, such as single stock futures or options,inlieu of the respec- tive underlying stock. 47 Derivatives markets are therefore growing faster than stock mar ket activity. The daily liquidity of many equity derivatives is more than three times higher than the trading volume of the underlying stock, and the derivatives trading volumes continue to grow faster than the secu- rities trading volumes. 48 The exchange-traded volume of derivative financial instruments, i.e. futures and options on interest rates, exchange rates, cash equities and equity indices, has consequently grown enormously over the past decade. 49 It is therefore useful to study derivatives clearing and subsequently apply the findings to cash equities clearing. The examination of clearing for cash equities markets will benefit from the derivatives clearing analysis. 50 Despite the fact that the US clearing industry is often looked at as a model for Europe, 51 it is in some respects still more fragmented and less integrated than its European counterpart. 52 This is one of the reasons why Europe was chosen as focus area for the study. Additionally, in Europe, the cross-border integration and harmonisation of the clearing industry has been spurred on 44 Details regarding the role of a CCP in cash equities and derivatives markets are outlined in Chapter 2. 45 Cf. Hasan/Malkam ¨ aki/Schmiedel (2002), p. 12. 46 Cf. Bank for International Settlements (ed.) (1997a), p. 5. 47 Cf. Deutsche B ¨ orse Group (ed.) (2005a), p. 20. 48 Cf. Deutsche B ¨ orse Group (ed.) (2005a), p. 20. 49 Cf. Bank for International Settlements (ed.) (1997a), p. 1. Note that the analysis does not cover clearing services provided for over-the-counter (OTC) derivatives trades. CCP services have only recently been introduced to OTC markets. Cf. Bank for International Settlements (ed.) (2004), p. 1. Additionally, the study focuses on financial derivatives and does not include der ivatives on commodities such as sugar, cocoa, gold, etc. 50 Cf. LCH.Clearnet (ed.) (2004a), p. 2. 51 Cf. Corporation of London (ed.) (2005), p. 19. 52 Cf. Hart/Russo/Sch ¨ onenberger (2002), p. 8. For more information on the European and American clearing industry, refer to section 2.5.2. 13 Introduction by the introduction of the euro and the ongoing process of European eco- nomic integration, as outlined in section 1.1. Particularly the launch and implementation of the Code have lent new momentum for the European clearing industry, 53 which further underlines the vigour with which Europe is currently pursuing a fundamental restructuring of its clearing industry. These events serve as unique catalysts; comparable drivers are absent in the US. 54 1.5 Structure of study This section provides a detailed outline of the study’s structure, including the sequence in which the various analyses will be conducted. The study consists of nine main chapters (Chapters 2 to 10). Chapter 2 sets the stage for the research by providing relevant definitions of clearing, indicating the value-added of CCP clearing and delivering insight into the various stakeholders in clearing. An overview of the structural set-up of the European and US clearing industries follows. Chapter 3 defines the two core issues of research: the efficiency of clearing and the structure of the clearing industry. For the purpose of this study, the efficiency is measured by the transaction costs that clearing members have to bear. The transaction costs of derivatives clearing are defined and systema- tised to facilitate the analysis. The clearing industry structure is researched in terms of the different integration and harmonisation initiatives between clear- ing houses, with emphasis on certain inter-institutional arrangements called ‘network strategies’. Four archety pes of network st rategies are presented, fol- lowed by an overv iew of selected network strategies between clearing houses from 1973 to 2006. A comprehensive empirical study was conducted to obtain insight into the transaction costs of clearing as well as to derive a basis for analysing the impact that network strategies have on clearing costs. Chapter 4 introduces the empirical study by descr ibing the underlying data, the method of data collection and the structure and component parts. The data treatment and quality of the survey are also discussed. The results of the empirical study are presented in Chapters 5 and 8. 53 Cf. McCreevy (2006b), p. 2. 54 Cf. Hart/Russo/Sch ¨ onenberger (2002), p. 6; and Sabatini (2003), p. 1. 14 Clearing Services for Global Markets Introduction, Purpose of Study, Focus Area, Definitions and Industry Setting (Chapters 1 and 2) Definition of Core Research Issues (Chapter 3) Introduction to Empirical Study (Chapter 4) Basis for Analysis of the Impact of Network Strategies on Efficiency (Chapters 5 and 6) Transaction Cost Studies (Chapter 5) Analysis of the Impact of Network Strategies on Efficiency (Chapters 7, 8 and 9) Scale Effects in Clearing (Chapter 6) Future Development of the Clearing Industry (Chapter 10) Summary, Discussion and Recommendations for Future Research (Chapter 11) Problem Definition, Research Gap, Purpose of Study and Focus Area of Research (Chapter 1) Final Conclusions (Chapter 8) Preliminary Conclusions (Chapter 7) Efficiency Impact Quantification (Chapter 9) Theoretical Analysis (Chapter 7) Definitions and Industry Setting (Chapter 2) Efficiency of Derivatives Clearing Transaction Costs of Derivatives Clearing Efficiency of Clearing Clearing Industry Structure Network Strategies Case Study Analysis (Chapter 8) Figure 1.1. Layout of the study To evaluate the impact of network strategies on efficiency, itis first necessary to learn more about the transaction costs as well as the demand- and supply- side scale effects in clear ing. To this end, Chapter 5 examines various aspects of European derivatives clearing costs, presents findings from the empirical study and provides a number of quantitative and qualitative transaction cost analyses. Chapter 6 classifies potential demand- and supply-side scale effects in clearing and furnishes evidence of their existence. A three-step analysis of the impact of network strategies on the efficiency of European clearing comes next: Chapter 7 establishes an original framework for it. The framework builds on the findings of the previous chapters and consists of four matrices. These provide the foundation for an assessment of the impact of various network strategies on efficiency. The matrices also take into account other dynamics impacting the industry st ructures. It is thereby revealed that although some scenarios are cost-efficient, they are not neces- sarily profit-maximising for all clearing members. The analysis conducted in this chapter delivers preliminar y findings on the impact of network strategies [...]... important valueadded to the trade’s counterparties These services are therefore referred to as value-added clearing services These comprise unique CCP services, such as novation, netting and risk management, as well as transaction/position management, collateral management and cash management The scope of netting and risk management services that a CCP can offer is unique Nonetheless, other clearing. .. 20 Clearing Services for Global Markets BASIC CLEARING SERVICES Trade Confirmation Novation Netting Risk Management Transaction / Position Management Collateral Cash Management Management Delivery Management UNIQUE CCP SERVICES VALUE-ADDED CLEARING SERVICES COMPLEMENTARY CLEARING SERVICES Figure 2.3 Functional view on clearing Source: Author’s own 2.1.2.1 Basic clearing services Clearing refers to the. .. secure their trades.93 ‘Collateral management is the process used to control counterparty assets against the exposure calculated as part of the risk management process.’94 Most importantly, collateral management ensures that margin requirements are covered by available collateral If there is a collateral shortfall, a collateral call is generated If there is collateral excess, a collateral release is... p 18 An organisation integrated in this way is often also referred to as a ‘vertical silo’ 40 Clearing Services for Global Markets Type: VERTICALLY INTEGRATED CLEARING Exchange Characteristics: Type: Clearing houses are organised as departments or subsidiaries of their affiliated exchange(s) HORIZONTAL CLEARING Exchange Characteristics: Figure 2.8 Clearing House Clearing House Clearing houses are not... to their status as ‘add-on features’, they are classified as complementary clearing services Complementary clearing services can comprise a significant number of different services, such as: r single interface and access to many markets and various CCPs (including centralised collateral and cash management services) ; r technical and operational support; r risk management and services across multiple asset... United States 2.6 Summary Figure 2.1 Structure of Chapter 2 2.1 Definition of clearing Paradoxically, the term clearing is used often, defined rarely and is, as a result, far from always clear.1 The precise definition of the term clearing , including the composition of the value chain and the related services, has been a matter of considerable debate among market participants, regulators and policymakers.2... that takes place between the execution of a trade and its settlement The linking of trading and settlement processes creates the need for a number of clearing services, which are essential to the life cycle of a trade, including trade confirmation, transaction/position management and delivery management These services are categorised as basic clearing services 2.1.2.1.1 Trade confirmation Trading entails... processed and managed until the respective legal obligations are successfully fulfilled The need for and intensity of this management strongly depends on the type of asset class It is for this reason that transaction/position management can either be classified as a basic clearing service or as a value-added clearing service – depending on the scope of managerial services offered As outlined earlier, in the. .. one’s debts In reality, however, clearing usually comprises a much greater scope of services The number of services offered within the clearing value chain generally depends on the characteristics of the cleared market and product and the provider offering these services. 8 The scope and type of clearing services available can be classified as follows (see Figure 2.3): r basic clearing services (section... unique to the CCP structure in terms of their scope and nature; they are therefore referred to as ‘unique’ CCP services Although CCPs have long been solely associated with derivatives clearing services, 28 their use in exchange-traded securities markets has also become common Central counterparty clearing has become an integral part of modern clearing services2 9 and forms a core part of the financial market . collateral 8 Clearing Services for Global Markets management for the markets. In practice, the approach of maintaining a level of competition in financial services may seem more likely, in the. clarifying the focus area. Clarifies terminology by providing a definition of clearing. Outlines value-added of clearing for individual market participants, for capital markets as a whole and according. Structures Summary 2. 4 2. 5 2. 6 Figure 2. 1 Structure of Chapter 2 2.1 Definition of clearing Paradoxically, the term clearing is used often, defined rarely and is, as a result, far from always clear. 1 The