While greater clarity is needed on the scope of new rules on clearing competition in Europe, the benefits of plans to streamline cross-border settlement are sufficiently obvious to avoid further delays, according to Kevin Milne, director of post trade at the London Stock Exchange Group (LSEG).
Changes to Europe's post-trade environment are outlined in the current draft of the European market infrastructure regulation (EMIR) and a revamp to the Markets in Financial Instruments Directive, known as MiFID II).
Ahead of a critical Luxembourg summit of European finance ministers, Milne insists the two pieces of legislation – and a new regulation accompanying MiFID II, dubbed MiFIR – are moving Europe's clearing infrastructure “broadly in the right direction”, he nevertheless reserved judgement pending further clarification.
“How the legislation is drafted is very important. New regulations promise open access to clearing that is non-discriminatory, but as yet it is not clear how these provisions will be written,” Milne said.
The new laws should promote competition and inhibit closed vertical silos from preventing interoperability, he added.
A draft version of MiFIR has promised measures to remove commercial barriers to competition in the clearing of securities and would require central counterparties to accept clearing of securities on a non-discriminatory and transparent basis, regardless of the trading venue on which a transaction was executed.
“The European Commission (EC) needs to make sure this regulation is written correctly so that it is effective,” Milne said. “The market needs to be assured there is mutuality over the acceptance of this criteria and that parties cannot be discriminated against for commercial means under the guise of ”threats to the functioning of markets'.”
He said a positive outcome would depend on how the EC defined market stability: “A lot of good-intentioned regulation has fallen foul of inaccurate drafting,” he noted.
Turquoise, the multilateral trading facility (MTF) majority owned by the LSE, last month announced plans to offer clearing choice from November this year.
Subject to regulatory approval, Turquoise will allow members to select from four different clearing houses for equity trades and the MTF has said it will encourage other clearing houses to join its interoperability initiative in due course.
However, the extent to which clearing competition will be mandated by regulation across Europe's cash equities and derivatives markets is uncertain due to increasingly political disagreements about the scope of EMIR.
The regulation was initially the EC's response to G20 demands to reduce counterparty risk in the OTC derivatives markets, but a draft approved by the European Parliament has extended its scope to include cash equities and exchange-traded derivatives.
UK Chancellor George Osborne this week is expected to implore EU finance ministers not to scale back their draft version of EMIR, arguing that a proposed merger between German exchange operator Deutsche Börse and NYSE Euronext makes it even more important that exchange-traded derivatives be subject to clearing competition. A number of market participants, including the LSE, have argued that the combination of Deutsche Börse's Eurex and London-based LIFFE, operated by NYSE Euronext, would create an unassailable monopoly without new rules to underpin competitive forces.
“We are a believer in choice and fairness for the customer,” Milne said.
“There is no reason why the same interoperability standards for OTC derivatives should be inappropriate for cash equities or exchange-traded derivatives.”
Last week LSEG announced it had entered into exclusive discussions with Anglo-French clearing house, LCH.Clearnet. LCH.Clearnet clears equities for the LSE and for transatlantic exchange group NYSE Euronext, but has also developed clearing capabilities in a number of other asset classes, including OTC derivatives, in recent years. The LSE already owns the Italian clearing and settlement facilities following its purchase of Borsa Italiana.
A further source of uncertainty over the future shape of Europe's post-trade infrastructure became apparent when Milne spoke at this year's Sibos banking conference in Toronto two weeks ago, on a panel discussing the cost efficiencies likely to be realised under TARGET2-Securities (T2S), the European Central Bank (ECB) initiative to streamline Europe's securities settlement systems.
During the panel session, Jean-Michel Godeffroy, director general of payment systems and market infrastructure at the ECB, disclosed there would be further delays to the project which originally was scheduled to go live September 2014 after already being postponed from 2013.
Godeffroy informed delegates the launch would be further delayed until 2015 because of disagreements between the ECB and the 30 European central securities depositories (CSDs) who under T2S would each transfer key securities functions to the central bank.
“Before the announcement, those who advocated change had been growing in optimism about what T2S would bring. Those who did not want change had come to a sense of inevitability,” said Milne. “For both groups, the delay seemed to herald a change of tack by the ECB.”
Last month, the Bank of England confirmed to the ECB that Britain would not take part in T2S, due to concerns over costs and a lack of consensus in the UK market on the transfer of settlement of sterling-denominated securities from Euroclear UK and Ireland to T2S. Nevertheless, the LSE's Milne argued that T2S would bring process improvements to Europe's securities markets as a whole.
“Customers want T2S because it will mean cross-border charges should decrease as efficiencies become apparent,” Milne said. “As long as T2S is done well, it will be good for the market. CSDs need to stop worrying about the technicalities and get behind the initiative. It is in the industry's best interests to get behind it and make it successful.”