Europe’s cross-border clearing and settlement systems have long been considered too costly and inefficient. There are a number of ongoing and to some extent parallel discussions on how to address this issue.
The latest initiative is the European Code of Conduct on Clearing and Settlement on Cash Equities which was signed on 7th November 2006 by the Members of the Federation of European Securities Exchanges (FESE), as well as the representative bodies of Europe’s clearing and settlement industry, the European Association of Central Counterparty Clearing Houses (EACH) and the European Central Securities Depositories Association (ECSDA).
The main objectives of the Code are to establish a strong European capital market, to allow investors to trade European securities within a consistent, coherent and efficient European framework and, ultimately, to offer market participants freedom to choose preferred provider of services in trading, clearing and settlement.
The self regulatory approach chosen by McCreevy is part of the Commissioner’s better regulation agenda. The Clearing and Settlement Code stands out for several reasons:
- First, it is targeted at and based on the active involvement of the market. It seeks to address the concrete concerns that have been expressed by users of the posttrading services.
- It was negotiated in only two months between close to 60 different organisations from all layers of the trading and clearing value chain. This was possible because of the strong endorsement by the Commission and, in particular, by Commissioner McCreevy’s firm promise to deliver substantial commitments.
- It is unanimously supported by the industry and has been broadly welcomed by the user community. The strong commitment by the industry is documented by the fact that all chief executives have personally signed the Code.
- The implementation deadlines are very short: by the end of next year, all measures should be in place. The code will therefore change Europe’s posttrading landscape much faster than for example a Directive that would take significant time to draft, negotiate and implement.
- It provides a strong monitoring process that will be piloted by the Commission and puts in place a mediation mechanism to address potential complaints.
- Last but not least: it gives the market some time to digest the recent legislative measures and in particular MiFID[1, to be fully implemented and assessed before introducing additional measures at a time when markets are evolving at high speed.
The Code includes measures aimed at ensuring price transparency, access and interoperability, unbundling and accounting separation and an independent monitoring process. For each group of measures the Code sets a specific implementation deadlines
1. Price transparency measures in place by 31 Dec. 2006
2. Roadmap on Access & Interoperability to be adopted by 30 June 2007
3. Unbundling & Accounting separation to be achieved by 01 Jan. 2008
FESE’s members have already started work on the implementation of the Code. Given the very tight deadlines, each exchange will deal with transparency measures individually. A central link will be set up on the FESE website which will link to the relevant members’ websites. FESE tasks forces will also soon start discussing the roadmap on access and interoperability. We are likely to focus on very concrete examples and will ideally coordinate this work with EACH and ECSDA. Given the technical nature of these discussions part of this work probably will be outsourced.
Regarding unbundling & accounting separation, signatories of the Code have committed to provide this information to their national authorities. CESR[2] could therefore play a central role in reporting on whether the industry complies with the requirements of the Code.
As Commissioner McCreevy said in his speech on 7 November: “Implementation will be key”. Once the Code has entered into force, the Commission will carry out a review process to assess whether the objectives of the Code have been met. This process will involve consultations with all the relevant stakeholders. FESE intends to play its part and will provide a first implementation report to the ad hoc monitoring committee by January 2007.
