In April 2003, the Giovannini Group laid out a somewhat ambitious three-year plan for the removal of 15 barriers hindering the creation of an integrated clearing and settlement system for European securities trades. Since then, 12 countries have acceded to the EU and need time to assimilate the standards, but that, it seems, is secondary to the fact that only one barrier, barrier eight, has been fully removed.
The 15 barriers can be divided into three categories: the national differences in technical requirements and market practice; differences in tax procedures; and legal barriers. The barriers can also be divided into private and public sector responsibilities: the securities industry has been charged with agreeing on and implementing standards for the technical barriers, and the legal and fiscal barriers fall under the remit of the national authorities.
The work of the securities industry has been carried out through the various European trade associations, alongside Swift, Euroclear and the European Central Securities Depositories Association (ECSDA), which have been charged with looking after specific areas.
The European Commission has created the CESAME committee, an advisory group made up of industry representatives and experts, to monitor the removal of the technical barriers, and two other bodies to advise on the removal of the fiscal and legal barriers. The FISCO group (Fiscal Compliance Experts’ Group) has already produced a report outlining the obstacles, and a second one, expected later this month, will propose practical solutions to enable the member states to remove the fiscal barriers. The legal certainty advisory group is expected to publish its first report towards the end of this year.
Slow progress
JPMorgan is a member of the CESAME committee. Diana Dijmarescu, vice-president, JPMorgan Treasury & Securities Services industry issues, says that, although a lot of work has gone into the project, there is still much to be done to remove all the barriers because it is a complex and slow process.
“There are two phases in the removal of the technical barriers,” she says. “One stage is standard setting and agreement in order to remove a specific barrier and the second stage is the implementation of the standard in each member state. Only when the implementation process is completed across Europe can you say that a barrier has been removed.”
In June, 11 European trade associations wrote an open letter in the run-up to September’s Ecofin meeting of the finance ministers of the EU member states to say that the public sector responsibilities for removing no less than nine of the Giovannini barriers had fallen so far behind that efforts needed to be seriously renewed.
The letter said: “Unfortunately, we observe that progress on the elimination of public sector barriers [Giovannini barriers 2, 5, 9, 10, 11, 12, 13, 14 and 15] has not kept pace with industry progress. Therefore, the undersigning associations expect member states to renew their resolve to tackle these barriers.”
Ms Dijmarescu adds: “The slow process of removing the legal and fiscal barriers is frustrating. The industry has made great efforts to play its part but progress from the member states has been very slow. There is no guarantee that once the fiscal and legal recommendations are made they will be acted upon swiftly and translated into legislation.”
The costliest barrier
Of the six private sector barriers identified, barrier one – diversity of IT platforms and interfaces – is cited as both the most costly and the most prevalent. Andrew Muir, senior market manager in the Securities Market Reform Group at Swift, believes that much progress is being made.
“The existence of this barrier causes more unnecessary cost than the existence of any other single barrier,” he says. “The cost to remove it is at the lower end of the scale and many of the higher volume players already have access to most of the protocol facilities. It is just a case of moving more and more traffic away from the expensive and non-compliant platforms on to ones that use the protocol.”
To address the removal of barrier one, Swift published the Giovannini Protocol in March 2006. The protocol specifies a standard technology and interface platform that can be replicated over many different physical networks, but will ensure an unprecedented improvement in standardisation when fully adopted by all clearing and settlement infrastructures by 2011.
The subsequent File Transfer Rulebook, published in June, specifies generic rules for file construction and best practices for file transfer operations to eliminate the need for banks to go through expensive and time-consuming design processes before setting up their systems.
Mr Muir believes the Giovannini report was the best way to bring about changes to European clearing and settlement. He says that Swift’s short, medium and long-term plans are to continue to work for the removal of barrier one, in particular, and other barriers to deliver the benefits of the changes to its customers.
“It is going to take a long time for the full benefits of all of this work to show through,” he says. “To change how 27 different legislations work amidst the dynamics of the entire EU securities market is a major challenge. Single changes do not have an immediate effect on the structure of the markets; it will take some years before the real impact will show through.”
Euroclear has already carried out extensive work to harmonise market practices across its five markets for the delivery of its Single Platform in 2010. Euroclear’s work on corporate actions has served as a blueprint for the trade associations working on removing barrier three (see below).
Reaching agreement
| Paul Symons, director, head of public affairs at Euroclear, says the challenge in addressing the Giovannini Group’s recommendations is getting agreement on all the issues across all member states, but that the private sector is progressing well and is moving from a specification phase into a delivery phase. |
“Our work is a helpful foundation for getting agreement across the rest of Europe, and what we have agreed internally, for our own five markets, is entirely consistent with what is being agreed on a more pan-European basis,” says Mr Symons. “Getting agreement on recommendations is one thing; implementing consistently is another. It relies on banks, issuers and settlement systems abiding by voluntary standards.”
He believes that barrier three will be the most difficult to remove completely because it requires issuers to behave in a different way when undertaking corporate actions and it will take time for the new standards to filter through to all issuers across Europe. “These are standards, they are not set down in law, as they are simply too detailed to be set down in law,” he says.
Euroclear will be able to deliver €300m per year in savings as a result of its platform consolidation and market practice harmonisation, and it is estimated that these savings could grow to as much as €800m were this to be extended to the rest of Europe.
It could be some time before every barrier is removed completely and the standards are applied completely and consistently across Europe. “The market is well aware of this; there is a real willingness to deliver progress. The key point is to get the solutions agreed and delivered as soon as possible, and adopted by all market players,” says Mr Symons.
Barrier two is the next likely barrier to be ticked off the list because it has been greatly helped by the Markets in Financial Instruments Directive (MiFID), which allows customers and stock exchanges to choose their settlement location. However, there are still some legal restrictions on the issuance of public debt in some countries, and the legal certainty group is still looking into this.
Ms Dijmarescu says: “Implementation is not wholly complete because interoperability between central counterparties and central securities depositories is needed and has yet to happen.”
Compliance with the ECSDA standards is expected for the original 15 EU countries by mid-2008 to address barriers four and seven but, although domestic intra-day settlement has been resolved, cross-border deadlines are still being debated.
Ambitious targets
Mr Symons concludes: “The only contentious facet about the Giovannini Group barriers was the original timeframe that the group set for their removal. It cited 2005-06, which everyone accepted was overly ambitious, but quite rightly so. It is only by setting ambitious targets that we will deliver change in Europe.
Ms Dijmarescu agrees that although the proposed timeframe was ambitious, the scope of the report was necessary. “The Giovannini reports were trying to be comprehensive in the detail to give the industry and the member states a target to work towards, which was commendable. It has provided the securities industry with a blueprint,” she says.
She also believes that, even after the 15 barriers identified by the Giovannini Group have been removed, there may be further issues to tackle. “We know what we have to do to get to a better place but that does not mean that once every barrier has been removed there will no other new issues.”
Although the European Commission is keen for these barriers to be removed, it agreed to a five-year implementation period for the Swift Protocol in March 2006. But if the proposed Target2 for Securities gets the green light, the implementation date is slated for 2013. It will be then – more than 10 years after the Giovannini barriers were first identified – that the industry could become unstuck if removal work is not fully completed.
THE GIOVANNINI BARRIERS:
1. Diversity of IT platforms and interfaces.
2. Restrictions on location of clearing and settlement.
3. Differences in national rules governing corporate actions.
4. Absence of intra-day settlement finality.
5. Impediments to remote access.
6. Differences in standard settlement periods.
7. Differences in operating hours and settlement deadlines.
8. Differences in securities issuance practice.
9. Restrictions on location of securities.
10. National restrictions on activities of primary dealers and market makers.
11. Restrictions on withholding agents.
12. Restrictions on tax collection.
13. Absence of EU-wide framework of securities law.
14. Differences in legal treatment of netting.
15. Uneven application of conflict of law rules.
