Follow Us

Follow us on Twitter  Follow us on LinkedIn
 

12 September 2006

Forum Notes




Notes on meting held in the European Parliament,
 
Securities trading and post-trading
 
Graham Bishop opened the meeting by thanking Piia-Noora Kauppi, MEP, and her staff for their help in arranging the function. In his introductory remarks, he pointed out that it is just 14 months until the starting gun is formally fired to start the race for positions in the EU-wide market for trading securities. Given the importance of that process in allocating capital effectively within the European economy, that will be a vital race. We cannot possibly forecast the winners at this stage but he was certain that the racetrack will look very different from today as we approach the end of the first decade of monetary union.
 
The 14 month period is the time left until MiFID comers into force. He said that it is fashionable to describe this measure as just a monster exercise in compliance and, for many firms, it may well involve them getting proper documentation of their client’s needs. But ticking compliance boxes is likely to obscure the fundamental purpose of MiFID – opening up the trading of securities to any qualified player, rather than forcing trading to be concentrated onto a monopoly stock exchange.
 
If one monopoly is to be broken, then we do not want to find that others simply take its place – in any part of the chain of actions required to settle a securities trade. Hence the importance of the role of DG Competition in assessing the various possible combinations of exchanges. Given the radical changes that are likely to flow from MiFID and the possible application of competition policy, he praised the courage of Commissioner McCreevy in postponing any decision to legislate. Instead the proposed Code of Conduct should come into force in parallel with MiFID.
 
However, at the end of these technical discussions, there is a question to be answered: who weighs up the public interest of Europe in optimising the conditions for our economic growth? Should decisions on vital parts of the infrastructure be left to the particular private interests of one or two hedge funds as they cannot possibly reflect the totality of “the market’s” view?
 
Eduardo Martínez Rivero said that DG Competition only started looking at Clearing and Settlement issues in 2001 after the Lamfalussy Report, noting that the only case remains the Article 82 action against Clearstream – which was a narrow and specific decision.
 
The key conclusions from the May 2006 Report include the need for interoperability, the lack of evidence about the efficiency of vertical silos and the relatively large costs within the broker-dealer sector. However, many of the rules examined e.g. concentration and trade reporting were created in the pre-MiFID era so may soon be out-dated.
 
For CCPs, it was noticeable that there is a high degree of strategy input by the stock exchanges as a CCP cannot freely decide to offer its services without the exchange’s permission. London provides an example of multiple CCPs, but it was a decision of the exchange to admit who they wanted. Interoperability emerged as a crucial issue and there were many questions about how to achieve it. Indeed, the responses to the Questionnaires suggested that it will not happen spontaneously and the users want to choose their own CCP rather than have to accept the exchange’s selection.
 
DG Comp had many responses to the Report and 31 are on the website. There was wide support for unbundling and separation of accounting (except for those whose profitability might be affected). Respondents were also clear that great activity in this field should be avoided until MiFID had been implemented. However, they do want an all-day bridge between Clearstream and Euroclear.
 
The next steps are internal discussion and then see how the new C&S Code works. But Commissioner Kroes is keen to associate national financial regulators with the drive for more competition.
 
Mario Nava highlighted that the Code focussed on what is feasible and what the market requires and that both the buy and the sell side of the market seem to agree with it.. The Code requires self-discipline from the industry corresponding to the trust that the Commission has put in it.. But that does mean that industry must deliver – where it is outside its control.
 
The principles present in the Code (price transparency, interoperability and access, unbundling and accounting separation) are common to many network industries. However, their implementation will be far from easy and efforts are required by the industry. Many of these issues have both a competition and a financial stability justification: for example accounting separation serves both in equally important ways. Indeed, not only is cross-subsidisation made more difficult but also if an entity got into trouble, then units that have fully-separated accounting would be far more capable of being sold off.
 
He is confident that the industry will come forward with good plans which will save a lot of time for everybody. The monitoring is ambitious – perhaps quarterly and the Committee should include DG Comp and other EU institutions such as the ECB and CESR.  Involvement of the users is also being studied.
 
Piia-Noora Kauppi noted that the European Parliament has not yet formally seen the Code but she was happy that the Commission had not proposed legislation at this stage as this was the recommendation in her Report. That had underlined that the aim should be to remove barriers rather than prescribe activities.
 
The timetable for the Code is demanding and the sequence of price transparency, interoperability and then unbundling seems correct. She fully agreed with the idea of waiting for it all to come into practice before drawing conclusions. However, she did feel that a regulated market should have the right to choose its own CCP.
 
Overall, the proposed measures are very ambitious, so there must be close contact with market participants, especially where the Code seems to call for actions that the particular player cannot do e.g. because they are not a vertical silo. There are questions about how the external auditor concept will work as the monitoring must be effective, thus requiring detailed knowledge of the industry.
 
The European Parliament is thinking about its response but it would have to be quick. Moreover, many MEPs are unhappy with the absence of a Directive so a formal debate risks re-opening that battle. If the Code of Conduct fails to deliver, then Parliamentarians may draw a more general conclusion about the efficacy of this type of voluntary arrangement and be more reluctant to sanction them in other areas.
 
A vigorous discussion ensued. Whilst supporting self-regulation, implementation is key, otherwise many players would soon fall back to demands for legislation. So the plan is that CEOs should sign the Code on behalf of their own firm rather than trade associations acting on their members’ behalf as that would get real buy-in at the highest level. It is not yet certain that the Code will get assent but no organisation had yet declined.
 
The issues around interoperability dominated the discussion as it would certainly foster competition – but who will pay for it? There are not yet any ideas about costs but it can be argued that those seeking access should bear all the costs. Why should a private company such as an exchange pay the costs of its competitors? Indeed, how are the managers of listed companies going to get agreement from their shareholders to give away short-term profits? Nonetheless, an exchange ought to reply quickly and give prompt access where it is presented with a reasonable business case.
 
Without appropriate economic incentives, companies may find it difficult to justify complying with the Code and such a technical matter as interoperability could be frustrated at quite a low level within a company – despite the apparent commitment of the senior executives. How long will it take before the success of interoperability can be judged? Concerns about the practicality of the concept were clearly apparent.
 
The ECB’s proposal for a securities component of Target II (T2S) triggered much discussion as the case for improved efficiency would be clear if it were the only payment system, but if it is simply an additional one, then the argument is much less clear.
 


 
The date of the next meeting of the European Finance Forum is provisionally set for 5th December.


© Graham Bishop


< Next Previous >
Key
 Hover over the blue highlighted text to view the acronym meaning
Hover over these icons for more information



Add new comment