'Clearing and settlement barriers removed in 2008'

On Monday, David Wright, Director, Financial Services Policy and Financial Markets at the European Commission, made an interesting statement of policy work around European Clearing & Settlement in the Securities markets. Here's his words as I captured them (e.g. not 100% accurate but the essence):

"What we are trying to do is increase competition in the market, encourage rationalisation and improve competition across the board, so that cross-border Clearing & Settlement Mechanisms (CSMs) costs are the same as domestic. 

"On clearing and settlement, everyone here should recognise that our policy is made up of four different pillars:

1. the industry code of conduct,
2. our support for TARGET2 for Securities,
3. removing the legal and fiscal and technical Giovannini barriers, and
4. ensuring that standards are in place for CSMs in the EU from the European Central Bank and CESR. 

"The code of conduct is a three-part code that will be signed by everyone in this space in the EU:

1. the first part relates to price transparency;
2. interoperability is the second part of the code; and
3. third is unbundling and accounting standards. 

"There have been a large number of requests – 40 or more from one organisation – for interoperability.  It’s now critical to the EC that this results in flows of business to increase competition and to drive down prices and commission. 

"The Commission will monitor this space carefully, and we have made it plain that we will not tolerate any anti-competitive blocking of any form.  You can also expect that the Commission will push for interoperability agreements where we receive these requests. 

"Even with all of these discussions, there are lots of players in this space.  So there will be rationalisation and consolidation, and that’s for the market to determine.  The key is that these agreements take hold.  We also want our market participants to choose where they clear and settle – that’s at the heart of MiFID – and so these agreements are critical to this.

"The other aspects are just as important.  We are removing the legal and fiscal barriers and are now being asked for a timeframe for the removal of those barriers.  The commission in the New Year will come forward with a timeframe, a tight timeframe, to genuinely move forward to remove these barriers.

"On the standards for securities clearing and settlement, one or two member states and regulators have been slow on this, but the Council of Ministers has now appointed a group to look into this and ensure the standards are put into place.

"So we have a four-pronged strategy and will use all the equipment we have to ensure aspiration turns into delivery ...

"Our urgent priority is to get the code of conduct to work in practice in the marketplace, not just on paper.  We create conditions for markets to function, but not the markets.  Therefore, when we went down the non-regulatory route, we put the ball into play with the industry. It’s in their court, not ours.

"This is a real test on both sides to see if they can work it out and, if we can help them to work it out, we will.   We’ve had an open and inclusive policymaking approach.  We’ve tried to build a system and a model that is inclusive and takes the best from third party jurisdictions.  This is an open and transparent working method which has helped us well over the past few years. 

"This is also why I get jumpy about reciprocity and all that stuff.  We need to be attractive to capital from all over the world.  The priority is for the industry to deliver this code.  Success or failure falls for the industry ...

"Giovannini is with the governments to resolve.  We are going to work on this in the Spring with those government offices, to set a timeframe that is realistic but short-tem, to remove those fiscal and legal barriers."

I was pleased to hear that Giovannini's barriers is a priority for the Commission.  After all, an October Banker magazine feature started with this paragraph:

"More than a year after the Giovannini Group’s original deadline for removal of all 15 barriers to the creation of an integrated clearing and settlement system for European securities trades, only one barrier has been fully removed."

and concluded with:

"Although the European Commission is keen for these barriers to be removed, it agreed to a five-year implementation period for the Swift Protocol in March 2006. But if the proposed Target2 for Securities gets the green light, the implementation date is slated for 2013. It will be then – more than 10 years after the Giovannini barriers were first identified – that the industry could become unstuck if removal work is not fully completed."

I mentioned this to David who was a bit unhappy with the idea that only one - the interoperability standards - had been removed through SWIFT's Giovannini Protocol. 

The real issue is national fiscal and tax laws that cocoon and protect the national CCP's (Central Counterparties), CSDs (Central Securities Depositories) and SSPs (Securities Settlement Providers).  The challenge for Mr. Wright and his team is to get face-to-face with these national governments and get them to change these monetary policies. 

It sounds like he's going to give it a go but, if the track record of MiFID transposition is anything to go by, he's got a tough task and, seeing as Mr. Wright is going to be the Lone Ranger, then he'll need a very good Tonto ... any volunteers?