-Paper prepared for
FESE by Alasdair Murray
According to the author, European securities exchanges are liquid, efficient and competitive in terms of the costs and ease of access of domestic transactions. However, the cost of cross-border transactions remains unacceptably high, particularly in terms of clearing and settling trades.
Therefore, Murrays advise is to create a legal framework which stimulates further cross-border consolidation and competition between securities markets. To maintain the competitive strengths of European securities markets, any attempt to ‘micro-manage’ securities regulation should be avoided. His recommendations are as follows:
Principles of Regulation:
The ISD and other securities markets legislation should be based on the core principles of a prudential and functional approach to regulation:
European exchanges do have a natural desire to maintain high regulatory standards in order to attract customers.
Exchanges should be permitted to adopt their own trading rules and listing strategy above the minimum standards outlined by EU legislation.
Exchanges should be permitted to register as investment firms and diversify their services as they see fit.
The EU should remove clauses in the original ISD of 1993, such as the listing requirement and the new markets clause, which potentially could be employed by member-states to obstruct an exchange operating across the EU.
A true single passport for securities markets would allow exchanges to list stocks under the jurisdiction of the issuer.
Internalisation:
Investment banks face a potentially major conflict of interest in their increasing desire to ‘internalise’ trades. If EU regulators are to permit internalisation, they will need to ensure:
The bank operates ‘Chinese Walls’ between its broking and trading arms.
The rules on broking are tightened. CESR has not yet included such a provision in its rules of conduct.
Banks will need to fulfill similar transparency requirements to exchange-based systems.
Regulators will need to step up education efforts to ensure retail investors understand how orders are transacted and have a choice as to where this should take place.
Regulators will need to conduct regular reviews across all forms of exchanges of the price formation process, and the charges levied to ensure that investors continue to enjoy “best execution” for their securities trades.
Clearing and Settlement:
The average costs of clearing and settlement securities across the EU are not as great as previously suspected.
The EU should not a structural solution to the problem as there is no evidence that exchanges are forcing up costs through the ownership of clearing or settlement companies. Instead, the EU and CESR should focus on overcoming the regulatory differences between member-states, which are the main cause of higher clearing and settlement costs.
Price and trading data:
Forcing exchanges to deliver data for free, as some in the Commission have suggested, is likely to prove counter-productive, and regulators should not attempt to impose price caps.
Key issues facing European securities exchanges: paper prepared forFESE by Alasdair Murray
© FESE
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