Trading systems face shake-up

Cross-border trade in securities is an expensive business in the EU, a process generally involving chains of inter-mediaries, still ridden with inefficiencies. The case for EU action linking up the stock exchanges, clearing houses and settlement firms operating in national markets would appear to be clear, but the European Commission has opted to tread softly, encouraging industry to dismantle obstacles to free movement in the sector voluntarily with a code of conduct.

The sector is already due to undergo important changes under MiFID, or the Markets in Financial Instruments Directive (see above). Within a couple of years, the entire structure of the industry is expected to look very different; the near-monopoly enjoyed by exchanges in the trading of shares will come to an end and investment firms will enjoy access to clearing and settlement systems throughout the EU. By setting targets for price transparency, rights of access, accounting processes and unbundling of trading services and activities, the Commission’s code of conduct will complete the process of liberalisation in the sector.

The Commission has refrained from making specific mention of ‘vertical silos’ in its code, but its disapproval of this business model has already been hinted at. Integrated exchanges such as Germany’s Deutsche Börse, where trading is offered alongside the post-trade services of clearing and settlement, are thought to contribute to artificially inflated cross-border transaction costs.

It seems unlikely, however, that integrated silos will pay any heed. Walter Allwicher, a spokesperson at Deutsche Börse, welcomed the Commission’s decision to adopt a market-led solution, but declined to acknowledge that silos are a cause for concern. "I’m not aware of any recent communication from the Commission where they express a view on the structure of our industry," he said. "How should you define a market-led approach?"

Measures for phase one of the code, which aims to improve price transparency, are to be put in place by the end of this year. The second phase, which will set conditions for establishing a communication system between institutions, is to be launched by the end of June 2007. Phases three and four will introduce separate accounting of the main clearing and settlement activities and price unbundling by December 2007.

Whether the Commission’s carrot and stick approach works as planned through voluntary action remains to be seen. The various phases of the code will, in any case, strike at the heart of integrated systems. The days of the vertical silo would seem to be numbered.

Cross-border trade in securities is an expensive business in the EU, a process generally involving chains of inter-mediaries, still ridden with inefficiencies. The case for EU action linking up the stock exchanges, clearing houses and settlement firms operating in national markets would appear to be clear, but the European Commission has opted to tread softly, encouraging industry to dismantle obstacles to free movement in the sector voluntarily with a code of conduct.