26 June 2007

EC's McCreevy warns exchanges over interoperability

Internal Market Commissioner Charlie McCreevy has warned Europe's securities exchanges to become fully interoperable, encouraging users to complain “immediately” if any anti-competitive or “unsavoury” practices persist. He has also demanded member states publish national terms for clearing and settlement services, sensing market-distorting bias.

Internal Market Commissioner Charlie McCreevy has warned Europe's securities exchanges to become fully interoperable, encouraging users to complain “immediately” if any anti-competitive or “unsavoury” practices persist.

In late-2006 McCreevy decided against regulating stock exchanges, opting instead for the 'soft-law' of a 'Code of Conduct', laying out obligations which market infrastructures must implement to avoid EU intervention. In the next few days, interoperability provisions will be published by a monitoring group, laying the ground for users to gain guaranteed access to foreign exchanges.

Sensing a battle ahead, however, McCreevy has warned the bourses to implement the market-opening provisions or face commission action.

“Competition Commissioner Neelie Kroes and I want to hear immediately if there is any anticompetitive behaviour or unsavoury practices. I repeat: immediately,” said McCreevy.

“It goes without saying that we expect all signatories to abide by the final outcome and apply the principles to the letter,” he warned, speaking at a Brussels convention organised by the Federation of European Securities Exchanges.

As the wave of exchange consolidation gathers pace in Europe and the US – with tie-ups such as NYSE Euronext and LSE-Borsa Italiana – the commission is keen to ensure that providers of post-trading services can still operate among the ever-shifting exchange constellations.

“The European Commission will be attentive to how signatories [of the Code of Conduct] interpret the business case for interoperability. We will not accept anti-competitive interpretation.”

Interoperability problems involve treating clearing and settlement requests at different speeds and prices, or applying differing conditions. Sometimes, users request special treatment for particular trades; conversely, exchanges have the right to refuse access.

While the self-regulatory step of the Code of Conduct was welcomed by most convention participants, Olivier Lefebvre, Executive Vice-President of Euronext was more sceptical, questioning whether the Code was efficiently achieving the goal of reducing the cost of clearing and settlement in Europe.

Lefebvre stated that the Code was – in some way – being used by some exchanges to justify their vertically integrated model and was not necessarily helping the consolidation of Europe's markets.

In the past the commission has warned signatories – such as LSE, Deutsche Boerse and Euronext – to implement the code in “spirit” as well as in detail. On previous pricing provisions, some exchanges had merely published a mass of pricing information without facilitating comparability.

The code has three elements – pricing, interoperability and accounting separation for unbundled services – to be agreed in that order by the end of the year; and the commission's monitoring group is set to put forward a draft for the principles of interoperability in the next few days.

Presently, the code applies to cash equities but the commission expects it to be extended gradually to other instruments such as bonds and derivatives.

McCreevy admitted that the work on interoperability was difficult and slow, targeting in particular national governments for their intransigence in the face of cross-border trading.

“We will be asking member states to publish the terms and conditions for operating in their market,” said McCreevy.

“To the extent that individual member states have terms and conditions or legal provisions that constitute obstacles to - or create unfair bias against - providers of clearing and settlement from outside that Member State [...] the Commission will demand that those obstacles or biases be rapidly dismantled.”

In a parting shot, Commissioner McCreevy also threw his “broad support” behind the European Central Bank's project to set up a settlement platform for cross-border securities trading, so-called T2S. He reminded, however, that his support would be dependent on its strict compliance with competition rules.

By Lewis Crofts

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