Reform Of European Clearing And Settlement: Don Cruickshank Chairman Of The London Stock Exchange Takes On The Critics

Don Cruickshank, Chairman of the London Stock Exchange said today that the campaign to tackle the in-built inefficiencies in clearing and settlement across Europe had developed a "strong head of steam". The need for reform was now acknowledged in many quarters, including by the European Competition Commission.

He noted that some critics of the Exchange's case still remain but he showed that their arguments were based on a number of misconceptions:

• "Leave it to competition" - he explained this was not possible in some key parts of the system. European public policy intervention was required.
• "It's like telecoms, you can get there through interoperability between CSDs" - he said it was not comparable to telecoms. The most efficient system could not be created through interoperability.
• "A single CSD would stifle innovation and increase systemic risk" - he said this was not true. Counter-intuitively one central system is better than non-competing multiple CSDs.
• "It's all too difficult" - again he said this was not true if policy makers grasped the nettle.

He went on to say: "Some parts of the clearing and settlement 'plumbing' can be made competitive but not all. I would expect the European Commission to mandate an acceptable infrastructure."

He said the prize was efficient low-cost trading which benefits investors and companies alike, reduces the cost of capital in Europe and strengthens Europe's competitive position. He warned, however, that there were some strong vested commercial interests in keeping those inefficiencies.

He set out the Exchange's reasons and conclusion for overhauling European clearing and settlement:

• The costs are high: European firms bear the costs of inefficiency in a increase of some 10 basis points on their cost of capital.
• Fragmentation is the problem: the excess costs flow from fragmentation of the clearing and settlement systems in Europe.
• A single system is the best solution: the economic characteristics of clearing and settlement mean that CSD services are more efficiently provided by a single system than multiple systems.
• Ineffectiveness of competition: it is not possible to introduce effective competition into the clearing and settlement layer of activities.
• Conclusion: Europe is best served by a well-governed single clearing and settlement system and rigorous enforcement of competition policy for trading services and value added services.

He added: "The reality - from the perspective of our customers - is that we sell a joint product - trading, clearing and settlement - and increasingly our customers are demanding access to a wider range of financial products."

"We are going to compete to serve those customers over the range of equities that are available across Europe. It follows then that we need reform of the clearing and settlement layer to allow us to compete to provide exchange services and cheaper access to those products."