Possible directive in the area
of cross-border clearing and settlement
48. The European Commission has indicated that a
Directive in this area could be a means to liberalise and integrate
clearing and settlement in the EU by giving all markets, clearing
and settlement service providers and investors full choice on
how and where to clear and settle cross-border transactions. Clearing
generally refers to processes for managing risks between a trade
taking place and it being settled, for example the risk that one
counterparty to the transaction fails and is unable to complete
the transaction. Settlement refers to the exchange of assets and
assets between buyers and sellers following a trade.
49. The Commission's White Paper on Financial
Services Policy 2005-2010 states:
Cross-border clearing and settlement infrastructures
are far more costly than at the domestic level and their level
of safety and efficiency is lower. The reasons for the high cost
of cross-border transactions are technical, legal and fiscal obstacles.
There is also no regulatory framework at EU-level. The Commission
suggested in its Communication of 2004 that a framework Directive
may be needed for an efficient, safe and cheap cross-border clearing
and settlement industry. To test this possibility, the Commission
is carrying out a very thorough consultation and impact assessment.
Once this process is finished, while taking into account any new
market developments, the Commission will decide during 2006 on
the course to take and whether to come forward with a formal proposal.
50. Commissioner Mr McCreevy said in September 2005
that "cross border securities trading remains very expensive:
Up to 6 times the cost of domestic transactions
undoubtedly a growing conviction in the market that the creation
of consolidated structures in the EU, such as a pan-European CCP
[counterparty clearing house], could help the development of the
European capital market
The solution must be market driven
and I have no ideological hang-ups as to the degree or nature
of the consolidation that should take place."
On 7 March 2006, Commissioner McCreevy and Ms Neelie Kros, Commissioner
for the Internal Market, released a joint press release which
Unless market players come forward with effective
and realistic changes to improve the clearing and settlement of
securities in the EU, the European Commissioners for Competition
and the Internal Market intend to propose action on the basis
of EU competition and single market rules before the summer break.
The current fragmented national monopolies in trading infrastructures
such as exchanges, clearinghouses and securities depositaries,
create high costs for the EU economy and represent significant
impediments to efficient cross-border trading in the EU. The securities
industry needs to accelerate work on removing a number of barriers
significantly, and provide a firm timetable for change.
51. We asked witnesses from trade associations for
their views on the desirability of European Commission intervention
in this area. Ms Knight said that she there were "big question
as to whether actually creating a directive is going
to bring the benefits that we all seek. A lot of the costs associated
with cross-border clearing and settlement are (1) the fact that
the clearing settlement systems do not use the same system; they
do not use the same messaging. If we achieved harmonised messaging
and the different systems are plugging together the arrangements
in one country then conform better with the arrangements in another,
and you get a big chunk of cost reduction; and (2) the current
charging structures. We are quite open in our charging structures
in the UK, but in much of Continental Europe there are different
and closed charging structures so users are paying for things
that they are not necessarily requiring. Open up that charging
structure and that is a competition issue and this
also starts to bring down the costs."
Mr Mullen added "MiFID is protean in its reach and is a huge
directive. We are not sure, as I mentioned earlier we have
yet to have the implementing measures; they will not be out until
January. We do not know to what extent MiFID may change the market
and how it might affect the clearing and settlement arrangements.
Until we see that knock-on effect it would not be timely for either
the Commission or ourselves to act."
52. Mr Tiner was more positive on the possible benefits
of a directive in the area of clearing and settlement, although
he noted that "is a sensitive subject because it is systemically
important to each individual country".
Mr Tiner said that he would like to "see the Commission and
the regulators putting pressure on the industry to sort this out.
We should not underestimate the influence we have over the companies
that can make the changes that are necessary in the market. We
have done that successfully here. We started using market solutions
as a tool to solve market failures quite successfully. We have
done it in a number of areas now where you do not have to reach
for the rule book or legislation; the market can sort the problem
out. It is a great opportunity here for the European financial
markets to sort this out. I would hope that the industry would
come to the table.".
In written evidence to the Committee, the Treasury stated:
We support the emphasis being placed on action by
the private sector to resolve problems. If it can be done it is
clearly preferable to public sector action, particularly additional
legislation. Therefore, we would urge the private sector, particularly
the main infrastructure providers, to reflect on what they could
do to meet the concerns expressed by the Commission. It is not
possible to resolve all issues in the three month timetable set
by the Commissioners for determining whether or not action is
needed at the EU level. But firm commitments could be made to
achieve progress on a realistic timetable.
53. The high costs of clearing and settlement are
borne by investors, either directly or through pension funds and
other investment vehicles. Furthermore, the high costs of cross-border
trading may be deterring retail investors from investing across
Europe. It is therefore important that the additional cost
associated with clearing and settlement across borders is reduced
over time. We are pleased with the approach taken by the Commission
in this area, which appears consistent with their 'better regulation'
agenda. The Commission has indicated that it is willing to step
aside if a market-led solution starts to appear in this area,
and the Commission must deliver on this promise if a sensible
solution emerges. We note that clearing and settlement has a systemic
importance to a financial services market, although this is not
a reason for inaction within a single European market for financial
services. If the market cannot or will not address the high costs
of clearing and settlement in Europe, it can have no complaints
when policymakers start to become involved.