15 Clearing and settlement of cross-border
securities trades
| (25635)
9224/04
COM(04) 312
| Commission Communication: Clearing and settlement in the European Union — The way forward
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| Legal base | —
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| Document originated | 28 April 2004
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| Deposited in Parliament | 10 May 2004
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| Department | HM Treasury
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| Basis of consideration | EM of 19 May 2004
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| Previous Committee Report | None
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| To be discussed in Council | Not known
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| Committee's assessment | Politically important
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| Committee's decision | Cleared, but further information requested
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Background
15.1 Clearing and settlement are the processes that occur after
a buyer and a seller have fixed the price and volume of a trade
in securities. Clearing is the process of confirming the terms
on which buyers and sellers of securities have been matched, such
as price and quantity. In some markets there are "central
counterparties" (CCPs) — in the UK a company known
as LCH. Clearnet acts as a CCP — to trades to minimise the
risks of buyers and sellers. CCPs stand between the buyers and
sellers, becoming the buyer to all sellers and the seller to all
buyers. Settlement is when a security is exchanged for payment.
Most securities are not held now in certificated form. Ownership
is tracked electronically by a "central securities depository"
(CSD) — in the UK CRESTCo acts as a CSD. Clearing and settlement
in the EU is still largely nationally based. These arrangements
are efficient at the national level but are inefficient for cross-border
trades. So the costs of clearing and settling cross-border trades
can be much higher than those of clearing and settling domestic
trades.
15.2 In 2002 the Commission initiated a consultation,
based partly on a report from the Giovannini Group (of experts
that advises the Commission on capital market issues), on clearing
and settlement of securities trades in the Community.[28]
The document
15.3 In this present Communication the Commission
sets out how it believes Community action can best contribute
to achieving safe and efficient cross-border clearing and settlement.
The Commission recapitulates the barriers to efficient cross-border
action in the Community, identified in three groups by the Giovannini
Group:
- technical and market practice
— use of different technologies by clearing and settlement
bodies across Europe and various other factors ranging from differences
in settlement periods to national laws which require trades executed
within a country also to be cleared and settled within that country;
- tax — arising from differences in collection
and refund of taxes procedures, which have an impact on cross-border
trades; and
- legal — arising from absence of a common
legal regime governing securities transactions, which also causes
situations of unfair competition.
15.4 The Commission then identifies four objectives:
- liberalisation and integration
of existing clearing and settlement systems;
- application of competition policy to clearing
and settlement;
- adoption of a common regulatory and supervisory
framework; and
- appropriate governance arrangements.
15.5 To further these objectives the Commission intends
to:
- set up an advisory and monitoring
group to tackle barriers for which the private sector is wholly
or partly responsible and to promote the overall liberalisation
and integration project;
- table a draft directive on clearing and settlement.
The Commission outlines what this draft would contain;
- set up expert groups to consider legal and tax-related
barriers and, if necessary, to propose harmonisation of national
law or procedures; and
- ensure effective implementation of competition
law. The Commission and national competition authorities will
tackle anti-competitive practices and other issues.
15.6 The Commission asks for comments on its Communication
by 30 July 2004.
The Government's view
15.7 The Financial Secretary to the Treasury (Ruth
Kelly) says:
"The Government supports the Commission's overarching
objective, expressed in the Communication, of:
'... the creation of efficient and safe EU Securities
Clearing and Settlement Systems...'
"In response to the Commission's previous Communication
on clearing and settlement, the Government said it could see possible
advantages and possible risks in a directive on clearing and settlement.
The possible advantages are that it could create an appropriate
environment in which private sector providers can compete to deliver
more efficient clearing and settlement whilst they are held to
appropriate regulatory standards. The possible risks are that
a directive will be too rigid and stifle innovation and the drive
for efficiency.
"The outline proposal for a directive in this
Communication is well focused on delivering a liberalised environment
in the EU for the delivery of clearing and settlement services.
The Commission make clear that the structure of the industry is
a matter for market participants. Before the Government could
support a proposal for a directive, however, it will need to be
convinced that its benefits exceed its costs. Before responding
to the Communication we will be discussing with market participants
an assessment of the costs and benefits of having a directive.
"The Commission's proposals for the directive
are currently only in outline form. Two issues of potential concern
when the detail is filled out relate to the interaction with existing
regulation and the governance regime for clearing and settlement
entities.
"The Commission is proposing a functional approach
to regulation, i.e. that regulation should depend on the type
of functions being performed rather than the category of institution
undertaking them. The Government supports this approach but recognises
that its implementation requires care to be taken to ensure that
it does not lead to overregulation of entities subject to more
than one form of Community legislation.
"The Communication is proposing that clearing
and settlement entities should be subject to specific governance
arrangements to allay competition and financial stability concerns.
Appropriate governance arrangements can help to bolster market
confidence. There is, however, a balance to be struck to ensure
that commercial companies have the freedom necessary to structure
themselves in the most efficient way possible, as long as they
continue to behave in a manner consistent with competition law.
"… the Communication also includes several
references to tax and, in particular, the Commission is proposing
an experts group on tax issues. As the UK Government has made
clear, taxation issues are a matter for member states, in accordance
with the principle of subsidiarity."
15.8 The Minister adds that the Treasury is to hold
shortly a roundtable meeting to discuss the Communication, to
which a wide group of representatives of market participants and
trade associations has been invited.
Conclusion
15.9 This Communication covers important matters
and we shall examine the draft Directive, if such emerges, with
interest. Meanwhile we clear the document, but we should be grateful
if the Minister would let us have in due course the Government's
response to the Commission's call for comments, together with
any comments from the roundtable meeting not included in the response.
28 See (23520) -; HC 152-xxxvi (2001-02), para 17 (10
July 2002). Back
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