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"REGULATION IS NOT ENOUGH TO ACHIEVE A SINGLE EUROPEAN MARKET BY 2010" Pan-European Roundtable Calls for Investors to Demand Changes from Intermediaries

London, Paris, Frankfurt 25 July 2005 – At a recent roundtable event held in Paris by Omgeo, the leading provider of global trade management services, industry figures from the UK, France and Germany agreed that regulation alone, whilst essential, is not sufficient to drive a single European capital market. Moreover, the panellists claimed that, so far, investors have taken a back seat in the consultation process. The participants called on investors to push their intermediaries to make fundamental changes to their operational infrastructure if the EU’s goal of a single securities market is to be achieved by 2010.

The roundtable, entitled “The Myth of the Pan-European Securities Industry”, was held in the context of the ongoing debate surrounding the operational infrastructure of the European securities market. It was chaired by Tony Freeman, Director, Industry Relations EMEA, Omgeo. Participants included Diana Chan, Managing Director, Citigroup Global Transaction Services; Nigel Solkhon, Global Segment Manager, Asset Management, IBM; Andrew Douglas, Manager, Securities Market Infrastructures, SWIFT; David Myers, Managing Principal, Capco; Pierre Vrielinck, Deputy Head of Fund Services Operations, BNP Paribas Securities Services; and Martin Brennan, Managing Director, Global Client Solutions Group, Omgeo.

Participants agreed that the lack of pressure from investors on their intermediaries has delayed the development of a single operational infrastructure in Europe.

Diana Chan, Managing Director, Citigroup Global Transaction Services, said, "Investors seem to be somewhat missing still in this debate. Making the securities industry more efficient will require fundamental changes in how the markets and market infrastructures work. At present, investors typically use intermediaries such as brokers and custodians and rely on effective competition among these intermediaries to lower the cost, as well as rely on the regulators to make sure the environment is safe for them."

Martin Brennan, Managing Director, Global Client Solutions Group, Omgeo, agreed, saying, "The focus of the European Union should be on the cost of intermediation. The industry has the ability to remedy the problem if it pulls in the same direction. Vested interests, however legitimate economically, do inhibit the pace of positive change. We are unnecessarily duplicating layers of technical processing such as matching and supporting technology which necessitate several interfaces and ultimately inflate costs. It is critical that this inefficiency is tackled in order to lower costs and risks for issuers and investors."

In addition, participants went on to claim that existing technology like straight through processing is not being used to its maximum potential and will remain the case unless business processes change.

During the discussion it was agreed that there are three critical factors driving the industry towards the goal of a pan-European securities industry:

1. International Investors Increasing the Pressure for Cheaper Cross-border Trades

There was consensus amongst participants that the growth in cross-border trading within the EU and between the EU and US markets is pushing the need for efficient cross border trading to the fore, but the reliance by investors on intermediaries for cross border trading is keeping costs high. As an illustration, cross border securities trades currently cost €5 per trade, compared with €0.50 per cross border money transfer.

Andrew Douglas, Manager, Securities Market Infrastructures, SWIFT, added, "There are certain drivers which we couldn’t remove without the political agenda, but the biggest driver has to be cost. We need to have a level playing field across Europe and reducing intermediary cost is the prime driver behind the Giovannini project."

Foreign investors are also driving changes in the structure of the securities industry in order to get best value for money and are more selective in finding the best level of service for their cross-border trading. For instance, they are choosing to deal with individual components of the trade cycle rather than, as was the tradition for example in Germany, a universal bank – one stop shop.

2. European Union Regulatory Initiatives

Together with investor pressure, participants saw pan-European regulation such as the Markets in Financial Instruments Directive (MIFID), Basel II and the Giovannini Group Report as necessary to push diverse market players towards the same target. However, the focus by domestic regulators on their own market and the bulky nature of regulation at EU level currently being implemented by the industry is delaying the move to a single, efficient market.

MiFID aims to harmonise regulation across the EU, increase the transparency of operational infrastructure and spread best execution of trades by April 2007, but panellists estimated industry implementation of the directive will tie up IT resources for the next two years. The roundtable also made reference to the International Convergence of Capital Measurement and Capital Standards (Basel II), the new capital adequacy framework adopted by the Group of Ten (G10) countries in 2004. Expectations are that Basel II will be enforced in all European countries as part of a new directive on the European capital framework by 2006-2007. Some participants felt that achieving a single market will be difficult when national regulators do not have a European perspective.

Martin Brennan, Managing Director, Global Client Solutions Group, Omgeo commented, "Initiatives like MiFID, Basel II and the Giovannini Report are focusing the attention of the industry. There is a real political drive for a single capital market. Having solved the payments dilemma for Europe by protecting the end investor from the high cost of intermediation and payments, I believe that the EU may now look much more closely at similar problems within the securities industry. Translating political attention into positive action in the marketplace is entirely another matter. Proposed changes are more complex than they first appear."

Pierre Vrielinck, Deputy Head of Fund Services Operations, BNP Paribas Securities Services, added, "As a market participant, we have a direct interest in seeing market efficiency improve. The regulators need to understand that there has to be clear differentiation between pure commercial banking activities and the central infrastructure and that these activities have to be kept separate. This has to be regulated so that the central infrastructure has no exposure to credit risk in order to protect investors assets, and that open competition is maintained between financial intermediaries, in order to keep pressure on prices."

Diana Chan, Managing Director, Citgroup Global Transaction Services, reinforced the message that regulators are regarded as essential to opening up the European securities market, saying, "Europe’s challenge is to make sure that the regulators do their job to protect the investors and that there is sufficient competition so that efficiency savings are actually passed through to the investors. Market inefficiencies are the common denominator for European securities trades when Europe wants to compete with the US. Unless these fundamental structural costs are removed, it’s going to continue to be expensive."

3. Market events such as the collapse of Enron have been catalysts for improving market practices

Members of the panel agreed that market forces alone will not bring about a single European capital market, but that operational failures such as the collapse of Barings, Enron and events like Y2K and the launch of the Euro do lead to the crises and improvement of the securities industry operational infrastructure. The subject of how operational failures can trigger change and where the next crisis is likely to come from was referred to by the roundtable participants.

Andrew Douglas, Manager, Securities Market Infrastructures, SWIFT, took a more optimistic view, "A crisis does not have to be a market failure. A crisis can be a coming together of people’s views that the way we work today is not necessarily the best way. There is an overriding imperative that we all want to make the European market a more efficient place to work. That is a crisis caused by a confluence of opinion."