Europe’s fragmented clearing and settlement infrastructure will slow the shift to the pan-European framework envisioned by MiFID, according to a new research report.
The latest report from research firm Tabb Group, “European Clearing and Settlement: Breaking Barriers – Building Alliances,” contends that while MiFID brings into view the development of a pan-European market at the trading level, the clearing and settlement structure remains organised largely on national lines with deep-seated regulatory, legal, fiscal and market-practice barriers.
Andrew Howieson, managing director at Tabb Group Europe and author of the report, asserts that these barriers, together with a complex, existing infrastructure,
will make it difficult to move quickly to a pan-European framework.
“Europe’s clearing and settlement infrastructure faces unprecedented challenges,” he writes, pointing out that the existing infrastructure is complex, with six central counterparties (CCPs) and 23 central securities depositories. This, he contends, makes it “poorly positioned to support a competitive pan-European trading market, which is why cross-border clearing and settlement costs in Europe are unacceptably high.”
Although the report says it is unlikely that development of the trading market will stall, it contends that the success of new multi-lateral trading facilities (MTFs) and intermarket competition is likely to slow and be constrained by the increase in operational complexity and costs associated with an unresolved cross-border clearing and settlement process.
According to Howieson, there are two large barriers hampering the clearing and settlement framework’s ability to efficiently support the emerging trading market. Firstly, at the central counterparty (CCP) level, new trading venues are introducing new pan-European CCPs because the existing ones do not meet their pan-European coverage requirements. This means that multiple CCPs will need to be able to work together efficiently in support of trading in dual-listed stocks. Secondly, the cost of cross-border clearance and settlement remains unacceptably high and the ‘dividend’ that should accrue from the creation of a pan-European market is on hold.
The report points out that two initiatives have been designed to address the problems: the Code of Conduct with its interoperability guidelines; and TARGET2-Securities, which proposes a common settlement platform for the Eurozone. However, Howieson adds, “The outcome of both initiatives is presently uncertain”
What is more, Tabb Group believes that both the Code of Conduct and TARGET2-Securities will be challenged. While critical, explains Howieson, the Code of Conduct is reliant on institutions that may have no stake in facilitating interoperability. He adds, “TARGET2-Securities, while its merits may be debated, is a significant undertaking that will not be implemented until at least 2012.”