Europe To Increase Settlement Competition

Terry Flanagan

The European Commission is planning to overhaul the settlement of share and bond trades across the region.

Seen as the plumbing of the financial system, settlement is the last of the three main market infrastructure sectors to be exposed to competition by the European Union. Trading and clearing have already been opened up to new entrants.

Currently, there are over 30 securities settlement systems across the EU, known as central securities depositories, including the biggest, Belgium-based Euroclear, which is the largest provider of securities settlement in Europe, and Deutsche Börse’s Clearstream.

But the European Commission wants to turn this fragmented landscape into a more efficient and better regulated system to cut cross-border trading costs for investors, introduce legislation that cuts settlement to a T+2 timeframe, fining market participants who fail to settle securities deals and abolish paper share certificates.

“I am committed to ensuring that all financial markets are properly regulated and supervised,” said Michel Barnier, the EU’s financial services commissioner.

“Settlement is a crucial process for the securities markets and the financing of our economy, and as such its safety and efficiency needs to be ensured. The numbers speak for themselves: in the European Union, transactions worth over one quadrillion euro were settled by CSDs in the last two years.”

Despite the settlement system weathering the global financial crisis without resorting to help, Barnier is determined to allow all authorized CSDs the chance to operate across all borders of the 27-nation bloc.

At present, settlement costs for cross-border trades can be four times as much as those of trades where both parties are in the same country, according to the European Commission. Settlement is also T+3 in some countries.

The European Central Securities Depositories Association, a lobby group, broadly welcomed the proposals released by the European Commission.

“We are supportive of much of the content, especially measures to harmonize the authorization and operation of CSDs across Europe,” said Soraya Belghazi, secretary-general of ECSDA.

“Like other critical market infrastructures, CSDs exist to take risk out of the market, which is why global regulators and the G20 in particular are keen to encourage their use by market participants. Rather than disrupting the existing market structure in post-trade, ECSDA thinks that financial stability can be enhanced by tight regulation of the limited credit function of some CSDs and by the adoption of an effective resolution regime for market infrastructures.

“We thus welcome the Commission proposal as a good basis for discussion. We trust that the European legislator will work to improve the current text in a way which allows CSDs to further contribute to enhance the safety, efficiency and transparency of Europe’s financial markets.”

CSDs, which ensure the exchange of securities against cash following a securities transaction, are seen as systemically important because they operate the infrastructures that enable the settlement of nearly all securities transactions. CSDs also track how many securities have been issued, and by whom, and each change in the holding of such securities. They also play a crucial role in the financing of the economy, as almost all the collateral posted by banks to raise funds flows through securities settlement systems operated by CSDs.

However, CSDs are still regulated only at national level, and cross-border settlement is less safe. The European Commission says failure for cross-border transactions can reach up to 10% in certain markets.

The proposal now passes to the European Parliament and European Council of Ministers for negotiation and adoption.

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