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Initiatives to Improve Clearing and Settlement in Europe
Here are five key initiatives designed to improve the efficiency and safety of securities clearing and settlement in Europe. They have different but complementary objectives.
MiFID
One of the most important measures concerning the securities markets is the Markets in Financial Instruments Directive (MiFID), an E.U.-wide legal instrument that took effect in November 2007. MiFID, among other provisions, fosters cross-border securities market integration by removing barriers to competition in the trading of securities. The objective is to use effective competition as a means to ultimately lower the costs for issuers to raise capital and investors to trade.
MiFID sets the regulatory framework for electronic trading platforms (multilateral trading facilities or MTFs) to compete with national stock exchanges. A number of pan-European MTFs have been set up and some are in advanced planning stages. Together with the existing national stock exchanges, they will provide investors the possibility to seek out the best price for securities at the lowest transaction cost.
Removing Giovannini Barriers
Removal of the “Giovannini Barriers” means the harmonization of differences in market practices, infrastructure rules and procedures, legal requirements and tax processes that add to the cost of securities transactions across national borders in the E.U. By removing the differences, the cost would be lowered for market participants.
Progress on the removal of these barriers is monitored by the European Commission’s Clearing and Settlement Advisory and Monitoring Expert Group, CESAME. Diana Chan, EuroCCP’s CEO, is a member of this group.
The barriers are named after Alberto Giovannini, who chaired a working group that in 2002 identified 15 barriers to efficient cross-border clearing and settlement of securities in the E.U.
Code of Conduct
The Code of Conduct is a set of voluntary measures adopted in November 2006 by stock exchanges, central counterparties (CCPs) and central securities depositories (CSDs) to open up competition in clearing and settlement.
Under the Code of Conduct, an exchange in the E.U. cannot give a CCP an exclusive right to clear its trades. A CCP has to agree to interoperate with another CCP that wants to clear for the same exchange. Likewise, a CSD has to give CCPs and other CSDs access to its services. Prices must be transparent and there must not be mandatory purchase of bundled services.
By ensuring that infrastructures can effectively exercise their right to compete, the Code of Conduct aims to provide market participants the possibility to choose the lowest cost provider for the best services in clearing and settlement.
Implementing interoperability, however, is proving to be more complex than policymakers had envisaged. The CCP community in Europe is working on resolving a number of issues, such as a CCP’s financial exposure to an interoperating CCP’s failure.
EuroCCP has signed the Code of Conduct.
TARGET2 Securities
The European Central Bank (ECB) proposed in July 2006 to build a single platform, TARGET2 Securities (T2S), to which CSDs in the E.U. and potentially beyond could outsource the settlement function, thereby achieving pan-European scale economies.
T2S will settle equities, corporate fixed income securities and government bonds, functioning in certain aspects similar to the U.S. Fedwire Securities Services. Securities will be delivered against payment in central bank funds.
T2S is not mandatory and will not replace the CSDs, which will continue to exist as separate legal entities and provide asset servicing to their members. As currently planned, market participants will be able to access all markets covered by T2S via a single communication channel, whether they have direct membership of all participating CSDs or use one of the CSDs as a gateway to the rest.
The T2S platform should help improve liquidity management for market participants and accelerate the harmonization of market practices. What’s more, the positive impact of T2S on harmonization will not be limited to settlement. It is expected that corporate actions that involve the credit and debit of securities will also benefit from standardization within the T2S platform.
A public consultation has just concluded and the Governing Council of the ECB will decide whether to proceed with the project in June of this year. The success of T2S will simplify settlement arrangements for pan-European users of CSD services, such as EuroCCP.
The ECB has a Contact Group for Euro Securities Infrastructures (COGESI), a forum for central banks, market infrastructures and market participants to discuss developments in clearing and settlement in the euro area. EuroCCP is one of the market infrastructures that has been invited to be a member of this group.
ESCB-CESR Standards
ESCB is the European System of Central Banks and CESR is the Committee of European Securities Regulators. These Standards are a European adaptation of recommendations originally developed for global securities markets by the CPSS-IOSCO Joint Task Force for Securities Settlement Systems. (CPSS is the Bank for International Settlements’ Committee on Payment and Settlement Systems and IOSCO is the International Organisation of Securities Commissions.)
The CPSS-IOSCO Joint Task Force published a set of recommendations in 2001 for securities settlement systems and a second set in 2004 for central counterparties. The recommendations focused on the legal, financial and operational safety of market infrastructures.
In 2003, the ESCB and CESR modified the recommendations for securities settlement systems to suit the European context, primarily to accommodate the existence of CSDs that are also banks and that compete with banks. The ESCB-CESR Standards attracted strong resistance from the banking community, which did not consider it appropriate that recommendations intended for market infrastructures be extended to them in the form of Standards. On the other hand, CSDs that were also banks were of the view that they should not be encumbered by stringent standards that could impede their ability to compete with banks. The Standards for securities settlement systems were put on hold in 2005, and the Standards for central counterparties were not published. Recently, E.U. policymakers decided to review and finalize them. @