Competing Exchanges: London Stock Exchange’s Don Cruickshank Sets Out Vision For Single Clearing And Settlement Structure

Don Cruickshank, Chairman of the London Stock Exchange, today set out a vision for a single European clearing and settlement infrastructure which would remove current barriers to a low cost capital market in Europe.

Mr Cruickshank welcomed the current EU review of competition in clearing and settlement organisations. And he said the Exchange was committed to working with its customers and the competition authorities to explore current structural problems, including the silo structures between exchanges and clearing and settlement organisations which exist in some parts of Europe.

In the keynote address to a conference on borderless trading, Mr Cruickshank said: "An efficient capital market plays a vital role in assisting the efficient allocation of capital to ideas. What's at stake here is nothing less than the economic competitiveness of the European Union as a whole."

Mr Cruickshank set out the Exchange's assessment of the structural and economic issues, and possible solutions:

• The economics of clearing and settlement pointed towards the best solution for Europe being a well-regulated natural monopoly;
• Without that, total clearing and settlement costs across Europe are around seven times higher than they need be;
• Investors carry these unnecessary costs - up to 1.2 billion euros p.a.;
• Change won't happen naturally - vertical integration between clearing and settlement organisations and exchanges in most countries leads to fear of change because of loss of influence and reduced profits - as much as 300 million euros p.a.;
• The current market structure raises questions about possible breaches of the competition articles in the EU Treaty - not just Articles 81 and 82, but others;
• Even before the recommendations of Lamfalussy are implemented, the Commission should determine:
  1. Fair, reasonable and non-discriminatory linkages between clearing and settlement organisations
  2. No undue discrimination between domestic and cross border trades
  3. No cross subsidy between the provision of clearing and settlement and provision of exchange services;
• However this interconnection "spaghetti" solution was unlikely to be enough;
• And the Commission should explore:
  1. Enforced ownership split between exchanges and their underlying clearing and settlement systems
  2. Pursuing steps to create a single clearing and settlement organisation, by, for instance, requiring central counterparties to operate on an open access basis
  3. Benchmarking charges between clearing and settlement organisations to an efficient provider of such services such as the DTCC in the US.

Summing up Mr Cruickshank said: "The London Stock Exchange, with no ownership role in clearing and settlement, is well placed to lead this debate. We would much rather face tough competition for exchange services within an efficient and growing European economy than exploit market power in an inefficient and fragmented market."