McCreevy set to keep Europe’s bourses guessing

Date: 26/01/06

Internal Market Commissioner Charlie McCreevy is coming under mounting pressure to clarify how he will improve the efficiency of Europe's clearing and settlement system, the 'financial plumbing' through which investors exchange cash for securities.

The current highly fragmented structure, with 19 settlement agencies (Central Securities Depositories) scattered around the EU, is seen as an expensive obstruction to the creation of the efficient capital market needed to underpin the single currency.

McCreevy is expected to give an update on the current state of play in a speech next Monday (30 January). But officials are playing down the prospects that he will have much new to say on the key outstanding issues.

Some are saying that while McCreevy is busy trying to put pressure on the private sector to speed up its efforts to improve the efficiency of their systems, the biggest problem is the lack of agreement among governments on how to proceed.

"It is the removal of the public sector barriers to the creation of more efficient settlement systems that is the most pressing issue," said Graham Bishop, a financial sector consultant and a member of the Giovannini Group, a Commission-sponsored committee which in two reports in 2001 and 2003 identified the key barriers to more efficient clearing and settlement mechanisms.

Of the 15 barriers it identified, six are private sector barriers to do with the way trades are handled in the market and do not require legislation, says a settlement expert. The other nine relate to the fragmentation of the legal and fiscal systems in the member states, different rules on shareholders voting rights and withholding tax structures.

"McCreevy said in a speech in Luxembourg last September aimed at putting pressure on the private sector that he wanted to see real progress in removing the barriers within six months," said another executive from the financial services sector.

"But the biggest issues that need to be dealt with are not to do with the processing of trades through the settlement system, they are related to the fragmentation of the legal and fiscal regimes in Europe," he added.

A joint public/private sector committee, CESAME, is monitoring progress and advising the Commission. Progress is slow, said one observer, partly because with 25 member states involved, talks tend to drag on.

But major issues are at stake. France and Germany are anxious to see Frankfurt and Paris remain important financial services centres.

They fear that too much cross-border harmonisation could lead to a strengthening of both the City of London's dominant position as Europe's major capital market and of the continental European business of the American investment banks who dominate the City.

Major European banks such as BNP/Paribas and Citibank, which act as agents for investors, facilitating cross-border deals by smoothing out the barriers, may have to restructure their businesses depending on how harmonisation proceeds.

Firms like Euroclear, a major cross-border settlement business, are worried about how harmonisation will affect its EUR 500 million investment in an integrated settlement system, which is due on stream in 2009-10.

The takeover battle surrounding the London Stock Exchange (LSE) and the pressure to merge which speculative investors are allegedly putting on the Deutsche B�rse, the German stock market, and its Paris-based rival Euronext, are also complicating factors.

Deutsche B�rse owns both Eurex Clearing, a clearing operation and, through Clearstream, the major German settlement business, and a similar operation in Luxembourg.

This is the 'vertical silo' which critics say has the potential to distort seriously competition in securities trading in Europe. Euronext still retains a 41.5% stake in LCH/Clearnet, a rival to Eurex but does not have a stake in a settlement business.

The UK Competition Commission has made clear that it is concerned about the implications for competition of the LSE coming under the control of a rival which has significant clearing and settlement interests and so the power to influence through cross-subsidies or tying where investors place their trades.

• Stewart Fleming is a freelance journalist based in Brussels.

Author suggests that EU Internal Market Commissioner Charlie McCreevy was coming under mounting pressure to clarify how he was planning to improve the efficiency of Europe's clearing and settlement system, the 'financial plumbing' through which investors exchange cash for securities.

European Commission: DG Internal Market: Financial Services: Financial Market Infrastructures: Clearing and settlement http://ec.europa.eu/internal_market/financial-markets/clearing/index_en.htm

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