It is these barriers together with a complex, existing infrastructure, explains Andrew Howieson, managing director at TABB Group Europe and author of the report, that make it difficult to move quickly to a pan-European framework. âEuropeâs clearing and settlement infrastructure faces unprecedented challenges,â he writes. âThe current infrastructure is organized on national lines and complex, with no less than six central counterparties (CCPs) and 23 central securities depositories (CSDs), in effect poorly positioned to support a competitive pan-European trading market, which is why cross-border clearing and settlement costs in Europe are unacceptably high.â
According to Howieson, there are two major issues for the clearing and settlement frameworkâs ability to efficiently support the emerging new trading market. First, at the central counterparty (CCP) level, new trading venues are introducing new pan-European CCPs because the existing CCPs 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. Second, the cost of cross-border clearance and settlement remains unacceptably high and the âdividendâ that should accrue from the creation of a pan-European market is on hold.
Two major structural initiatives have been designed to address the issues: the Code of Conduct with its interoperability guidelines; and TARGET2-Securities, which proposes a common settlement platform for the Eurozone. âThe outcome of both initiatives is presently uncertain,â says Howieson.
While it is unlikely that development of the trading market will stall, 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.
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, âTARGET2-Securities, while its merits may be debated, is a significant undertaking that will not be implemented until at least 2012.â
âEurope has elected to go for a competitive clearing and settlement model,â says Larry Tabb, founder and CEO at TABB Group, âin contrast to the centralized clearing and settlement model supporting equity trading in the US. Interoperability is critical to this approach, allowing competing organizations to interact in a consistent market framework. The first test for interoperability is in the provision of competing CCP services. Unfortunately, the market is seeing the first results of delays in implementation, apparently the result of vested commercial interests that Andrew addresses in his detailed report.â
The 30-page research note with seven detailed exhibits, including clearing and settlement models, covers MiFIDâs affect on fragmentation versus consolidation; clearing, settlement and counterparty services; the current clearing and settlement model; fixing Europeâs clearing and settlement structure; the Giovannini Group report of 2003 and the 15 barriers to harmonisation; the Code of Conduct and Interoperability; interoperability of CCPs; new clearing facilities; TARGET2-Securities; and central clearing and the buy side.