Ladies and Gentlemen,
Allow me, first of all, to welcome you to the first joint European Commission/ECB "plumbers' conference", if I can borrow a metaphor from Peter Norman's recent book.
We are all fully aware how important post trading is for the proper functioning of our financial markets.
In spite of this, a few years ago not many people outside the post-trading business knew much about this field. If you allow me to continue with my initial metaphor for a bit longer, post trading is no different from the more familiar types of "plumbing": when it works properly, nobody thinks about it; however, if it does not, everyone notices immediately.
In each Member State, post-trading solutions were tailor-made to suit the needs and characteristics of the local market. These systems operated efficiently and safely and true to my earlier comment, hardly anyone thought about them. If the story stopped at this point, I guess we would not be here today.
As it happens, the story was far from over. The integration of the various national financial markets into a single, European market brought about an exponential increase in cross-border financial transactions. This, in turn, increased the number of interactions between the national post-trading systems, uncovering, at the same time, a stark truth: what was optimal at national level turned out to be less optimal at a European level.
Securities market participants have developed makeshift solutions to compensate for the lack of efficient connections between national systems. These makeshift solutions, while effective, proved to be insufficient. This was clearly reflected in the prices: the cost of a cross-border transaction was several times that of a domestic one. In such circumstances, one could hardly talk of a true single market.
Something was wrong with the "plumbing", and all of a sudden people started to take notice.
Since then, the initial focus on trading has shifted and the Commission has managed to push post-trading issues up the agenda and into the mainstream debate about financial markets integration.
Several initiatives are currently under way, each targeted at creating a safe and efficient EU post-trading market. They are: the Code of Conduct, the removal of the Giovannini barriers, TARGET2-Securities and the ESCB-CESR standards. These initiatives cannot be looked at separately for they are pieces of the same intricate jigsaw puzzle: all of them are necessary for the puzzle's completion.
This conference represents a good opportunity to take stock of the progress made so far by these initiatives and to discuss possible future steps in resolving the still outstanding issues.
Allow me now to focus on two of the initiatives I have just mentioned, namely the Code and the removal of the Giovannini barriers.
A little less than two years ago, I chose to provide the private sector with a unique opportunity and asked the industry to come up with a solution on its own. The industry stepped up to the plate and less than four months after my call presented me with the Code of Conduct for clearing and settlement.
At the time, I acknowledged that my favouring a Code over legislation was not without risks. However, a bit less than two years on, I believe that the gamble is paying off.
The beginning of 2008 marked the full entry into force of the Code. So far, the results it has brought are overwhelmingly positive.
The Code has, first of all, significantly increased price transparency. There is now universal publication of fees, as well as much more clarity on discount and rebate schemes.
Furthermore, since the beginning of this year, services have also been unbundled and accounts will be provided on a separated basis.
As good as these results may be, they are not the primary objectives; they are means to an end. Their purpose is to facilitate greater competition in the post-trading sphere. What we are witnessing right now is movement in the right direction on this front.
The Code has injected momentum into the market. The appetite of post-trading infrastructures to go to other markets and to compete with incumbents has increased. This is clearly reflected in the large number of link requests that have been made since last summer. The recent announcement of "Link Up Markets" is a further illustration of market momentum.
We are now starting to reap the benefits of these movements. For example, where the threat of competition has been strong, post-trading fees have started falling.
These achievements are tangible, concrete and visible in the market. Any other alternative instrument – including a legislative one – would have blocked the momentum. It would have diverted attention from innovation and competition and would instead have focused minds on discussing legal fine print – probably for years.
The progress with the Code has been encouraging. There are, of course, still some teething problems, in particular in the area of access and interoperability. While this is not a particular surprise because establishing links between infrastructures is a complex and time-consuming process, the issues do need to be sorted out in coming months.
I recognise that interoperability between central counterparties involves challenges for providers, users and regulators alike. Thus all involved entities have a legitimate interest to study these issues in depth.
But endless foot-dragging is not going to be acceptable - be it by incumbent infrastructures or their regulators.
The Commission is monitoring the situation very closely to ensure that all actors involved respect the commitments of the Code and the Guideline as well as broader obligations of, for example, a competition nature.
To ensure progress I call on all infrastructures to fully respect and apply the Code in order to show that it can deliver competition. I do not think I need to remind the industry that the Code is the last chance they have to prove that they are capable and mature enough to provide adequate solutions to the current issues.
Of course, the private sector is not the only one that needs to increase its efforts. The public sector needs to play its part as well.
Member States welcomed the Code when it was announced and I therefore expect them and national authorities to back it up with support on the ground.
When assessing link requests, national authorities accordingly need to consider the effect on the freedom to provide services enshrined in the Treaty and the freedom to choose your post-trade location provided for by MiFID.
To be fair, there has been some progress in the right direction recently.
The Commission welcomes the Post-Trading Expert Group set up by CESR and commends the work they are conducting on mapping the regulatory arrangements in the various Member States. I am convinced that, with good will and good work, regulators will be able to bridge the identified regulatory gaps across jurisdictions.
I also urge regulators to resume work on the ESCB-CESR standards as soon as possible. I said this during the informal ECOFIN meeting in Ljubljana, and I take this opportunity to repeat the message once again.
A political consensus on this matter seems to be emerging, which is encouraging news.
Ladies and Gentlemen,
Allow me now a few words on the Giovannini barriers.
In the seven years since they were first identified, a lot of work has been carried out in order to remove them. Yet still a lot more remains to be done.
The most progress has been made in eliminating the private sector barriers. For this I would like to congratulate the private sector. I would also like to thank the members of the CESAME group for their work in this area.
As you probably know, the mandate of the group will expire this June. However, in order to keep momentum going, a new group – called CESAME 2 – will be created. The Commission is currently accepting applications for membership in the group. I therefore take the occasion to invite all interested industry experts to apply.
Progress on eliminating the public sector Giovannini barriers has been less swift. That does not imply that there has been no progress. Nevertheless, the Commission is aware of the fact that the public sector needs to pick up the pace of its work, also in order to avoid hampering progress in the private sector's efforts.
In October last year, the Council called on the Commission to propose concrete actions and a timeframe for the removal of the legal and fiscal barriers.
As regards the fiscal barriers, the Commission intends to take a two-pronged approach, based on the proposals made by the FISCO group last October.
On transaction tax procedures, the Commission is planning to immediately establish bilateral contacts with each of the two Member States concerned and discuss possible solutions.
On withholding tax procedures, the Commission considers that a Commission Recommendation to be adopted at the beginning of 2009 is a possible way forward.
The Commission is now analysing the pros and cons of the FISCO proposals. It will also conduct further discussions on the subject with the industry, Member States and the recently established joint EU/OECD Working Group.
As regards the legal barriers, the Commission is waiting for the final advice of the Legal Certainty Group, which should be ready later this year.
This advice will address the complete range of legal issues identified by the Giovannini report. These include national differences in the legal treatment of securities and restrictions on the location of securities, as well as the legal elements of national differences in rules governing corporate actions.
An additional helping hand to the process of removing the Giovannini barriers could also come from the T2S initiative.
Some market participants have been arguing that eliminating the Giovannini barriers will not suffice to have true competition in the post-trading arena. They claim that further obstacles exist in some Member States. These obstacles either prevent entry from - or create unfair bias against - providers of clearing and settlement from outside that Member State. As I have said on other occasions, if such obstacles exist, the Commission will demand that they be rapidly dismantled.
Last but not least, the Commission is adopting amendments to the Settlement Finality Directive and the Financial Collateral Directive in order to bring the two Directives in line with market and regulatory developments that have occurred since their adoption.
Ladies and Gentlemen,
I am convinced that the successful completion of the various on-going initiatives will allow for the creation of a truly integrated European post-trading market, which will further strengthen the European financial market.
The potential benefits for the EU economy are immense. The Commission will be attentive to ensure that these benefits will not stop at the wholesale level, but rather will percolate down the whole value chain and reach the retail level as well.
I look forward to hearing the debates on how to make this project a reality.
