McCreevy stakes his legacy on code of conduct

It’s far too early to say whether Internal Market Commissioner Charlie McCreevy’s big gamble on financial market integration announced this week will pay off. But it’s certainly worth a try.

McCreevy has rounded up the firms which provide the machinery through which stocks, bonds and other securities are traded in the EU, the plumbing through which financial market liquidity flows, and put them in an arm lock. He has warned them that if they do not implement the code of conduct they have now signed up to, which is aimed at improving the securities market’s plumbing, then they had better watch out because he will fire a directive at them. But is this deal really going to be the breakthrough which McCreevy is hoping for and which Europe needs?

Without further progress in linking the EU’s national securities markets they and the single currency will not fulfil their potential as generators of wealth or deeper political integration. But the tortured history which led up to this week’s accord serves as a warning that a bumpy path lies ahead. McCreevy himself has pointed out that it had taken almost 17 years to get to where the EU was last year on cross border clearing and settlement - virtually nowhere.

So important is clearing and settlement that earlier this year the European Central Bank (ECB), controversially, announced that it was examining whether it, as a public entity, should plunge into partially private markets and set up a public utility to build a euro-area (not, note, a pan-EU) securities settlement vehicle.

London, not just Europe’s but arguably now the world’s leading financial centre, has been shaken by this vague, but ominous, euroland initiative. The City is wondering just how big a threat to London’s pre-eminence such an ECB-backed project could be?

McCreevy’s move, in contrast, is being led by the private sector. In the interests of creating competition, clearing and settlement infrastructure providers have said that over the next two years they will make their pricing structures more transparent and their mainly national activities interoperable across borders.

It is an initiative which, at face value, could prove to be the final nail in the coffin of the so-called vertical silos like Deutsche Börse which link trading and post-trade clearing and settlement into a single business. McCreevy and Competition Commissioner Neelie Kroes have targeted such operations as potentially anti-competitive, anti-integrationist and, by implication, anti-European.

There have been voluntary regulatory agreements in the past in Brussels. But precious few have lived up to their supporters’ expectations. And there are plenty more potholes on the road to be negotiated before McCreevy’s dream can become reality.

Individual governments are going to have to put Europe’s future ahead of their national interest and act to remove more of the barriers to integration highlighted in an EU report by a group of financial market experts led by Italian banker Alberto Giovannini.

The deal agreed this week only covers ordinary shares. To be really credible it would need to be extended to bonds and complex financial derivatives products, something McCreevy envisages and which one firm, Euroclear Group, said it would do immediately.

Of course the signatories to McCreevy’s accord are going to have to deliver on their promises. Some of the small print gives them viable escape routes. Moreover, there are some non-signatories, big bank competitors to the infrastructure providers, the likes of Citicorp and Paribas for example, who may try to take competitive advantage of their privileged positions, so undermining the agreement.

McCreevy is saying that the initiative is a test of the Commission’s better regulation agenda. In reality it’s the biggest test of self-regulation as an alternative to legislation that Brussels has ever seen. The odds are clearly stacked against the commissioner. But if the code of conduct works, even under the special circumstances which exist in the securities markets, it will make McCreevy’s reputation.

• Stewart Fleming is a freelance journalist based in Brussels.

It’s far too early to say whether Internal Market Commissioner Charlie McCreevy’s big gamble on financial market integration announced this week will pay off. But it’s certainly worth a try.