21 February 2006

FT: Bourses attack bank moves to upset trading structures

Stock exchange groups in Germany and Italy have reacted angrily to the latest attempt to upset their 'vertical silo' structures, which bind trading together with clearing and settlement ser-vices. The exchanges were responding to a demand yesterday from some of Europe's most powerful banking groups, calling on the European Commission to force dismantling of vertical silos in markets such as Germany, Italy and Spain in the name of fairer competition.

The groups, which include the London Investment Banking Association, the Italian Association of Financial Intermediaries and the French Association of Investment Firms, said: 'Silos create potential for severe competitive distortions.' They supported the 'imposition of the unbundling of the vertical silos if private stakeholders do not start the process on their own'.

The banks argue that vertical silos inflate trading costs, particularly on cross-border business, an area being scrutinised by Charlie McCreevy, the EU's internal market commissioner.

One person close to Deutsche Börse last night dismissed the initiative as old hat and said the arguments were unproven.

Reto Francioni, who began as the group's chief executive last November, is as stout a defender of the vertical silo structure as his pre-decessor Werner Seifert. Mr Seifert's insistence on retaining ownership of Clear-stream, the Börse's clearing and settlement subsidiary, was one of the reasons why the London market was so opposed to the group's proposed acquisition of the London Stock Exchange. It was also problematic in the eyes of UK regulators.

Mr Francioni is tomorrow expected to issue a stout defence of the group's structure when he presents the group's 2005 annual results, pointing out that the banks' position is nothing new.

He is also expected to argue that the bulk of Deutsche Börse's clearing and settlement business has nothing to do with listed equities, but involves the settlement and custody of off-exchange bond trading, which itself is subject to stiff competition.

A Börse study several years ago found that neither stock exchanges nor settlement organisations caused border inefficiencies.

The Borsa Italiana, which is considering an initial public offering of up to 30 per cent of its share capital, has said it does not believe its own business model, which includes the post-trading services of clearing and settlement, is a monopoly.

It has said its post-trading services offer 'inter-operability' - that is, other providers of competing services can link seamlessly to the Borsa's own systems. Competition is possible within its system, the Borsa has said.

By Patrick Jenkins in Frankfurt and Norma Cohen in London

© Financial Times