07 March 2012

Reuters: EU blueprint to shake up settlement of trades

Settling trades, the final step in any deal where ownership of a bond or share is transferred to the buyer, relies on a multi-trillion euro system to swap legal title to a security in return for payment. The system stood up well during the financial crisis and none of the 30 central securities depositories (CSDs) in the EU needed support. But the European Union's financial services chief Michel Barnier wants to turn this fragmented landscape into a more efficient, better regulated system to cut cross-border trading costs for investors.

Vital plumbing

Settlement is the last of three main market infrastructure sectors to be opened up to competition. The EU has already opened up trading and clearing to new entrants. "It's an arcane bit of the plumbing, but it's absolutely vital", said Graham Bishop, a member of a European Commission expert group which made recommendations to improve the working of this market roughly a decade ago. "We identified many problems in this market more than 10 years ago", he said. "But many of the players, whether it be banks or exchanges, resist bitterly because new laws often mean losing a chunk of profit."

The draft law bans a CSD from carrying out many banking services, a move, which if approved, would force Euroclear Bank and Clearstream's Frankfurt and Luxembourg operations to separate out basic CSD operations from banking services. CSDs in Austria and Hungary would also be affected.

The European Commission said CSDs that provide banking services as well are exposed to more risks and a greater likelihood of suffering a default - an argument Euroclear and Clearstream have vigorously opposed.

If a national regulator thinks a CSD that also offers banking services is safe it can make a "reasoned request" to the European Commission for exemption from the rule. The European Parliament and EU States have the final say on the draft law, and changes are often made during the approval process.

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© Reuters