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Continuing consultation on clearing and settlement

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Published 19 January 2005 - Updated 02 August 2007
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The European Commission and financial market players are working together to improve the EU's clearing and settlement system. The existing complex and costly procedures leave the EU lagging behind other world markets in the highly competitive market of buying and selling equities.

Barriers 

The 2001 Giovannini Report identified 15 barriers which it divided into three categories:

  • National differences in technical requirements and market practice;
  • Differences in tax procedures;
  • Legal certainty.

To overcome the technical requirements (Barrier 1), various bodies are working on the issues including:

  • SWIFT : a financial sector co-operative designed to standardised communications systems and softwares across the finance industry. Issued a consultation document on Jan 5 2005.
  • ECSDA (European Securities Depositories Association): set up in 1997 to reduce risk and increase efficiency across Europe in clearing and settlement. Currently working on risk management, public policy, settlement links, IT and harmonisation.
  • Euroclear: the European securities depository has formulated 85 proposals aimed at standardising and streamlining the processing of transactions.

Framework Directive

The directive would set up a common regulatory framework covering all the functions carried out by the various institutions in clearing and settlement. This would allow mutual recognition and the integration of national systems. The directive would also set down rules on disclosure requirements, accounting separation and the unbundling of specific services. To ensure competition, there would also be a comprehensive right of access for all clearing and settlement providers to all EU markets.

CESAME

The 2004 Communication also suggested setting up expert advisory groups: one to promote integration and work towards eliminating the Giovannini Group barriers, one on tax and one on legal issues. Further to this, the Clearing and Settlement Advisory and Monitoring Expert group (CESAME) was set up in July 2004 (see press release    IP/04/935). The group, headed by Alberto Giovannini is made up of 20 high level representatives from the clearing and settlement sector.

Positions: 

The Commission, although stressing that post-FSAP legislation on financial services should be kept to a minimum, has indicated that clearing and settlement is an issue where legislation is required. It is one of the priorities singled out by Commissioner Charlie McCreevy on taking up his post (see Euractiv 8 Dec 2004).

The parliamentary rapporteur on the matter, Theresa Villiers, in not in favour of further legislation but wants pressure to be put on exchanges themselves to lower the barriers to cross-border transactions.

Industry bodies, such as Amcham, the FBE and ESBG generally are in favour of the promotion of harmonisation particularly through the removal of the Giovannini barriers. They also approve of the involvement of industry through CESAME and the transparency in the legislatory process this allows. However, they are wary of over-regulation and urge the Commission to look at non-regulatory solutions.

Next steps: 
  • The Commission will carry out an extended impact assessment of the proposals in its Communication of April 2004. This is to be presented by autumn 2005. 
  • The    structure for the proposed assessment was published in October 2004. 
  • Contributions to the debate on the framework contained in SWIFT’s consultation document are to be made by April 15 2005.
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Background: 

On 5 Jan 2005, the financial communications co-operative SWIFT issued a consultation document aimed at developing a framework for a common protocol for clearing and settlement across EU borders. This is one more step in the process, expected to include an EU directive, towards simplifying and reducing the cost of clearing and settlement in Europe.

Clearing and settlement rules concern the procedures by which transactions in securities and derivatives are finalised. The existing arrangements are complex, costly and inefficient: they involve risk for investors, institutions and issuers alike and, most importantly, put the EU at a competitive disadvantage vis-à-vis other world financial markets.

Market players must take a number of key steps to transfer the ownership of shares and secure payment, such as confirmation of the terms of trade, calculation of amounts due, delivery and safekeeping of the securities and registration of the change of ownership. A number of different institutions are involved at each stage.

Structures for clearing and settlement of securities transactions evolved nationally and arrangements for coping with cross-border transactions were highly fragmented. With the introduction of the euro and the push for the single EU financial market, this became a pressing problem. 

The Commission asked the Giovannini Group, a group of 72 senior representatives of the securities sector formed in 1996, to examine the existing structure and report on ways it could be improved. In Nov 2001, the group issued its first report, which identified 15 barriers to cross border clearing and settlement in the EU. In April 2003, it issued its second report setting out a strategy for removing these barriers within 15 years and a series of actions to achieve this, some of which could be taken by the private sector on its own and some which would require government intervention. 

The Commission also carried out its own examination of the issue, publishing two communications in May 2002 and April 2004, followed by a period of consultation with markets and regulators. The 2004 Communication built on the suggestions of the second Giovannini Report. It put forward a proposed framework directive and proposed carrying out an impact analysis of its planned proposal. In November 2004 the Council adopted the conclusions of the Commission’s recommendation.

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