Referring to the ongoing work being carried out by DG Competition and DG Internal Market and Services, Commissioners Neelie Kroes and Charlie McCreevy said today that they intended to come forward before the summer break with their joint proposals on improving the efficiency of cross-border clearing and settlement in the EU.
"No-one contests the need to address the high cost of and the corresponding difficulty of having access to cross-border clearing and settlement in the EU" stated Commissioners Kroes and McCreevy. "We have not yet reached any definitive view on the precise measures we would propose to remedy this situation. It is clear, though, that the present system is untenable. Changes are going to have to be made. We believe the industry recognises this as well and we would encourage them to be part of the solution and not the problem".
The Commissioners said that before taking their final decision they would encourage market players to come forward with effective proposals to trigger the necessary changes. “Where possible, we would prefer to have market-led solutions which meet effective competition and internal market concerns.” However, if there is no substantive move forward the Commissioners made it clear that they would come forward with their choice of policy tools to address the issues before the summer break.
The 2001 Giovannini report (see IP/01/1654), on which market participants were consulted, suggested that a period of around two years would be necessary and sufficient to implement a number of necessary changes to Europe’s trading architecture. Whilst some preparatory work has been started, the scheduled timetable will not be met. See:
http://europa.eu.int/comm/economy_finance/publications/giovannini/clearing1101_en.pdf
For there to be more competition, particularly at the trading level, competitors need to be able to have access to “fungibility” in central counter-party arrangements: the positions of a single member on both platforms should be able to be offset against each other to produce a single collateral position and a single position for settlement. This issue is one which affects all trading infrastructures, independently of their ownership structure. Some exchanges have already recognised this and taken steps to ensure that potential competitors are not prevented from entering the market. Others have not yet done so and are strongly encouraged to review this situation urgently.
Background
Since August 2005, building on earlier work, the Commission has collected and analysed legal information on vertical arrangements between infrastructures, and their impact on actual and potential competition in EU trading and C/S, to identify impediments to competition or infringements of the competition rules. The study received input from service providers and users representing around 90% (by volume and by value) of on-exchange traded cash securities in 2004. The Commission has arrived at some preliminary observations which need to be verified with market participants. On the basis of this further analysis, the Commission will present a paper outlining issues for consultation and discussion.
Following the 2001 and 2003 Giovannini reports which identified 15 public and private sector barriers to efficient and safe cross-border C/S, the Commission published a Communication describing the possible policy means to tackle these inefficiencies (see IP/04/551 and MEMO/04/99). The Commission underlined that its aim is to promote an integrated, safe and efficient C/S environment throughout the EU.
The Commission has also been examining the public policy options under the single market rules and working with industry to remove barriers. Work is continuing in the following areas:
(i) The Clearing and Settlement Advisory and Monitoring Expert Group (CESAME) has met 6 times and is working on market-led initiatives to bring down the 6 industry related barriers to integration as well as discussing ways to solve the 4 regulatory barriers. Barrier 8 (securities issuances) is already dismantled, and ongoing work on other barriers is showing progress, in particular on barriers 1 (common IT protocol) and 3 (corporate actions).
(ii) The Legal Certainty Experts group (LCG) is tackling the legal barriers (i.e. legal treatment of netting and conflict of laws). LCG has collected a 600 page overview on laws pertaining to C/S and is now working on a concise report.
(iii) FISCO (Fiscal Compliance Experts Group) is examining how to remove fiscal compliance barriers (i.e. restrictions on withholding agents and on tax collection). FISCO has almost finished a fact finding report and will seek improvements to tax collection procedures.
(iv) The Commission is finalising a thorough economic Regulatory Impact Assessment (RIA) which should be completed soon. It will examine empirically and theoretically the costs of the present fragmented C/S system in the EU and the benefits of further integration.
(v) The Commission will also soon put out for tender a study on C/S pricing.
