The Code of Conduct for Clearing and Settlement is being hailed as an important step in pulling down the barriers to cost-effective, cross-border clearing and settlement in Europe.

While some might have preferred the stronger legislative clout of a directive rather than a voluntary code drawn up by the European Commission, many believe The Code of Conduct for Clearing and Settlement, signed by stock exchanges, central securities depositories (CSDs) and central counterparties (CCPs) in November 2006, has provided a solution in a much shorter timeframe and that an industry-led solution is more practical.

Once implemented in January 2008, the code is expected to eventually cut the cost of trading shares between exchanges in the 25 member states by enhancing price transparency and increasing competition in the post-trading sector. However, breaking down completely the domestic infrastructures that currently exist in Europe and eliminating the barriers identified by the Giovannini report will take time.

The code, which initially covers equities, but should eventually also apply to bond and derivatives trading, simply provides the terms of interoperability between settlement systems and, for the first time, a pricing framework to enable price comparison.

Unilateral access

The deadline for publishing transparent prices was the end of 2006. The next deadline is June 30, when an agreed plan for interoperability between exchanges, clearing houses and settlement systems must be drawn up. The aim of this is to ensure standard unilateral access between organisations and ultimately increase freedom of choice for market participants. Service unbundling and accounting separation has been slated to facilitate customer freedom of choice and allow competition, and is due to be implemented by January 2008.

Matthias Ganz, member of the executive board and head of clearing and settlement at Deutsche Börse, says the exchange is giving its full support to the market-led initiative. He says: “This would have taken years to achieve with a directive and, with the industry involved, it allows us to shape it and avoid over-regulation. We have always considered ourselves to be transparent but we have improved our website to enable direct access to our pricing schemes. The price transparency is just the first step of what the European Commission wants to achieve. What is really behind it is price comparability.”

Small adjustments have been made to Deutsche Börse’s pricing following comparison with other organisations in order to harmonise pricing structures, but nothing substantial has needed to be changed. “The next step is standardisation to enable greater comparability, which will be more difficult to achieve because the historical prices have developed quite significantly,” he says.

The subsequent task of improving interoperability between exchanges, clearing houses and CSDs in Europe is a more complex undertaking that will require more plumbing, according to Mr Ganz. “We have 40 links with different markets in the world so links from a CSD perspective are not new and standards have been developed for these links,” he says. “What is more challenging are links between CCPs, and between trading venues and CCPs, and between CCPs and CSDs. The users have not put much pressure on this so far.

“At the end of the day, the commission wants us to create more options, and it wants us to engage and discuss any business case.”

In an ideal world, users should be able to choose any venue to settle, in any CSD or CCP. In principle, there are options that could be taken but the legal environment has requirements and safeguards that cannot be overcome. At present, there is very little alignment among the member states and they are showing no desire to legislate. They are still competing.

National norms

German blue chips are legally protected and must be settled through a German specialist bank. Similarly, a stock purchased in the London Stock Exchange must be settled in CrestCo, where the calculation of stamp duty is carried out. By law, domestic securities in France can only be settled in Sicovam.

But Mr Ganz says: “There is much room for improvement. No-one can hide behind the curtain of the law and say there is nothing to change. Still, within the legal environment in the member states, much can be improved among the CSDs. There are boundaries but if the market wants us to go further we will, and initiate those discussions.”

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Paul Symons, director of public affairs at Euroclear, says there are two key elements to price transparency. One is ensuring that customers understand the prices they have to pay and the other is giving them the ability to compare prices and services from different providers.

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