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The Code of Conduct: Competition in the European Post-Trade Infrastructure

Celent predicts that the Code of Conduct could have limited effects on the European post-trade infrastructure, with the exception of the reduction of post-trade fees.

In its persistent objective to create a unified financial market across Europe, the EU commission has persuaded the trading infrastructure providers-under the threat of implementing a new regulation-to develop a "voluntary self-commitment" to create fair competition in the European post-trade market. This soft law is called the Code of Conduct. Under the Code of Conduct, post-trade infrastructure providers have to unbundle their services to increase the level of price transparency, separate their post-trade services revenues from other sources of income, and, more importantly, implement interoperability links with their competitors that operate or will operate behind the same trading venue.

A new Celent report, The Code of Conduct: Competition in the European Post-Trade Infrastructure, provides an overview of the current state of the European post-trade infrastructure markets, with an analysis of the services provided by the major market participants. While the Code of Conduct was created with the ambition to reshape the European post-trade infrastructure, there are some doubts about its final outcome.

"The majority of requests made for interoperability will not succeed," says Axel Pierron, Celent senior analyst and author of the report. "The reasons for failure will not be technical but rather will have to do with non-viable business models, resistance from incumbents, etc. Celent estimates that there are a limited number of CCPs that can operate in a profitable manner on the trading feeds of a single trading venue."

Nevertheless, on the central clearing counterparties side, the competition on price unleashed by the Code of Conduct is likely to continue, driving clearing fees even lower. Celent estimates that clearing fees should stop decreasing once they reach what is called the "switching cost"-that is, the point at which it is not profitable for customers to switch from one post-trade provider to another.

In the short term, there is a good chance that nothing will dramatically change in the European post-trade infrastructure. However, in the long run, consolidation is likely to occur.

This report provides a brief competitive analysis to examine which market forces are present. It then details the Code of Conduct's scope, potential impacts, and the challenges created by its implementation. Finally, three scenarios are developed to forecast the future of the European post-trade infrastructure landscape.