Expectations of a European Commission Directive on Clearing and Settlement arrangements in Europe have receded.
Charlie McCreevy, the European Commissioner for the Internal Market, said today that he expected the European stock exchanges, CCPs and CSDs to commit themselves instead to a voluntary code of conduct – “unequivocally.”
By “unequivocally,” McCreevy means that he expects the European securities industry to deliver voluntarily on four fronts. First, that by the end of this year a series of measures to improve price transparency will be in place. Secondly, that there will be agreement by 30 June 2007 on a roadmap and conditions for ensuring effective rights of access on a fair, transparent, non-discriminatory basis, so that the conditions are set for interoperability between exchanges, CCPs and CSDs as soon as possible. Thirdly, that by 30 December 2007, there will be separate accounting of the main clearing and settlement activities, paving the way for – and by the same date – “price unbundling of the main services and activities.”
McCreevy declared himself wary of imposing a solution on the market, emphasizing instead that “we should work with the grain of the market … it is not our role to impose a particular model.” Whilst the Commission must look to ensure the smooth running of the markets, the removal of unnecessary barriers, and the stringent application of EU law, McCreevy thought any new regulatory measure might hinder current progress. “I am convinced that if the Commission were to propose any kind of a regulatory measure, we could slow down, or even block the restructuring process already underway – possibly even for years,” he said. He thought regulation now would merely distract market participants, and lead to a sub-optimal outcome by comparison with the natural evolution of a solution. “An industry-led solution is the best outcome for improving the efficiency of clearing and settlement in the EU,” he said. “This is their opportunity to show they can contribute to the solution.”
McCreevy adds that the code of conduct sets an ambitious agenda, and that the “ball is in the industry’s court.” He expects “full cooperation from the industry” and “a clear timetable,” and warns that the code “will be backed up by a strong procedure for verification and external auditing of the commitments made”, and that “other stakeholders will be involved.” Expansion of the mandate is also likely. McCreevy says the code “will initially apply to cash equities,” but “should also be extended in time to cover other instruments such as derivatives etc.” Meanwhile the Commission will continue its analysis and monitoring of the industry, including a new external study which will monitor stock market prices and volumes.
One of the first companies in the industry to comment was Euroclear. In a statement, the Brussels-based ICSD describes the code of conduct as “a sensible and pragmatic alternative to specific new legislation.” Euroclear committed itself to working towards all the goals set by McCreevy, and especially the 15 Giovannini barriers, noting the responsibility of the public sector for eliminating them.
McCreevy made his comments to the Economic and Monetary Affairs Committee of the European Parliament. Describing improvements to the efficiency of cross-frontier clearing and settling in the EU as a matter of “enormous importance,” he noted that, despite some progress, cross-border clearing and settlement remains expensive compared to domestic settlement, and that further “inefficiencies” need to be eradicated from the market. However, McCreevy emphasised that he favoured a “varied, proportionate” approach.
The Commissioner also noted efforts in progress that have yet to yield results, such as the Markets in Financial Instruments Directive (MiFiD), due for implementation by EU member-states by November 2007. That, he noted, will open up competition between exchanges and other trading platforms. Article 34 of MiFID, McCreevy pointed out, allows open access to counterparty clearing and settlement systems across member states.
Under it, all regulated markets must offer participants choice in settlement systems.
McCreevy was less impressed by progress on the removal of the 15 barriers to cross-border settlement identified by the two volume Giovannini Report, where the timetable on the elimination of all obstacles is badly behind schedule. McCreevy believes that there has been “some progress, but not enough”, and urged member states to “accelerate work” on solutions to some of the remaining Giovannini barriers, with the aim of completion by the end of 2007, when the CESAME group mandate expires.
McCreevy also discussed the ECB’s statement on Friday, and the prospect it held out of a single platform for the settlement of securities transactions in central bank money. The ECB said on Friday that it was looking at further co-operation with central securities depositories and other market participants, with a view to providing a new service for securities settlement within the euro area. The facility would be owned and operated by the Eurosystem of Central Banks that support the TARGET system for large value cash payments on a collateralized basis. McCreevy noted such a system, “could allow large cost savings” due to “technical harmonisation”, and described it as “a major step towards a single Eurosystem interface with the market.”