‘Market overhaul will not be derailed by Börse’s LSE bid’

By Anna McLauchlin

Date: 27/01/05

Plans to overhaul the market in finalising share transactions will not be derailed by the bid by Deutsche Börse for the London Stock Exchange (LSE), says the head of the European Commission's 'clearing and settlement' advisory group.

Alberto Giovannini also denied that the bid, which could create the biggest stock exchange operator in Europe, would change the work of the EU. "Our agenda is very well defined and will not change because of the actions of a couple of players in the market," he said, adding that consolidation was an overall aim of the EU.

"We are setting up a framework to remove the barriers to moving shares across borders in order to lower costs. The inevitable effect of this could be consolidation. If that consolidation gives the relevant player the chance to take advantage of his dominant position by pushing costs too high then this needs to be looked at and there are tools to do this."

The Börse's LSE bid has highlighted the growing debate as to whether clearing and settlement, the final steps after someone has bought or sold shares, is best carried out by a private company, which critics say can push up prices on a whim to pacify hungry shareholders or by an industry-owned body such as Euroclear.

But Giovannini said that this was not for the Commission to decide.

"I cannot see a strong argument for or against private or public bodies," Giovannini said. "It all depends on how the entity will be governed."

Giovannini said the Commission was currently studying the issue of governance to ensure that clearing was carried out in the interest of market users, including disclosure requirements and accounting separation. In its communication last year the Commission suggested that a monitoring group should be set up to oversee the breaking down of the cross-border barriers and to co-operate with national competition authorities. UK Conservative deputy Theresa Villiers, who is currently drafting a report on the Commission's intentions to be debated on 2 February, agrees that there should be no interference in what entity carries out clearing and settlement. "It is not for legislators to mandate any corporate structure or a type of governance," she said.

But Villiers is opposed to further regulation, certainly in the areas of governance or competition policy. She thinks that market pressure will ensure that barriers come down and that EU competition policy will put paid to any group wanting to pump up its share price by inflating transaction prices. "A directive cannot be flexible enough and it would eventually be intrusive," she added.

Last year the Giovannini group identified 15 barriers to cheaper clearing and settlement, ranging from confirming the price and calculating the amounts owed to safekeeping the shares before transferring the money to the seller.

The group discovered that the complicated tax and legal procedures involved in doing this across the EU's borders were making international trades up to ten times more expensive than domestic ones. For example, a Spanish trader wanting to buy shares in France Telecom and Deutsche Telekom must pay agent banks in both France and Germany to get his or her shares moved.

Alberto Giovannini, the head of the European Commission's 'clearing and settlement' advisory group, said that plans to overhaul the market in finalising share transactions would not be derailed by the bid by Deutsche Börse for the London Stock Exchange.