Deutsche Börse model under fire

By Stewart Fleming

Date: 04/05/06

The controversy over the future structure of Europe's financial markets intensified this week after Thierry Breton, the French finance minister, cast doubts over the suitability at the European level of Deutsche Börse's "vertical silo" business model. This brings trading, clearing and settlement services under one roof.

This follows a speech in March by Mario Draghi, the recently appointed governor of the Bank of Italy, in which he hinted that the vertical silo model is not the best structure for promoting the development of integrated pan-European financial markets.

Draghi's comments are being seen as creating a potential obstacle to the planned flotation of Borsa Italiana, the Italian stock exchange, which, like Deutsche Börse and the Madrid stock market, operates a vertical silo. Some Italian financiers are saying that Borsa Italiana can scarcely raise money from investors when its future structure and level of profitability are so unclear.

Breton and Draghi's statements come amid intense speculation about the future ownership of Europe's largest stock market, the London Stock Exchange (LSE), and at a time when the European Commission is trying to decide whether it should take legislative action to promote the integration of Europe's clearing and settlement systems. Internal Market Commissioner Charlie McCreevy has indicated that the Commission will make a decision on this issue by the end of June.

Breton was quoted last weekend as saying that the logic of a vertical silo system, while it could be understood at a national level, was "not adapted" at a European level.

Draghi's comments are particularly significant because he is a member of the Governing Council of the European Central Bank. The bank will be watching developments closely, because of the importance of clearing and settlement structures for the stability of Europe's financial markets and of the single currency.

In his speech Draghi says that Europe's share markets are still fragmented. He points out that, on the one hand, concentrating trades in larger consolidated markets makes them more attractive, but on the other, for smaller companies, national rather than cross-border markets are better. "Forms of horizontal consolidation and feder-ation between national markets would achieve both benefits," he adds, pointedly failing to endorse the vertical silo model.

Article reports on comments by French Finance Minister Theirry Breton who criticised the vertical silo model of the German stock exchange, Deutsche Börse, as being not viable at a European level. This followed similar remarks in a specch in March 2006 by recently appointed Governor of Italy's Central Bank, Mario Draghi. The vertical silo business model brings trading, clearing and settlement services under one roof.