Europe’s stock exchanges and clearing houses are braced for a move by Brussels to break the logjam that makes securities trading in Europe much more expensive than in the US.
Charlie McCreevy, head of internal markets at the European Commission, told the European parliament’s economic and monetary affairs committee on Tuesday, he favoured a voluntary code of conduct for exchanges, clearing houses and settlement systems in a move to make securities trading more competitive. An “industry-led” solution was the best way forward, he said.
Mr McCreevy was expected to propose that the clearing industry, the engine room of equity and derivatives trading, either agree a strict timetable to enact sweeping changes to allow clearing houses to compete with each other and reduce costs, or face regulation.
Mr McCreevy initially aired his scheme at a private meeting with industry representatives a week ago and distributed a summary of proposals, a copy of which was obtained by the Financial Times.
He wants to create a code of practice aimed at dismantling many of the barriers to competition between exchanges, clearing houses and securities settlement systems. These are currently embodied in the so-called vertical silos run by some of Europe’s largest exchanges, which control the trading and settlement processes. The new code is intended as a half-step between a voluntary and a mandatory solution.
The proposed new code would likely have the biggest impact on Deutsche Börse, Borsa Italiana and the Spanish stock exchange, BME, which is set for an initial public offering this week.
Investment banks have been urging changes for years and have support among some politicians who believe the current barriers raise the cost of capital for European business.
Mr McCreevy has for months been urging European exchanges and clearing houses to take action, warning that in the absence of a market solution, a directive would be forthcoming.
While most bankers privately concede they do not want a directive, they acknowledge that the commercial incentives to retain the current barriers are so strong that one might be necessary.
The first phase of the proposed code includes measures aimed at achieving price transparency and must be in place by the end of this year. Suppliers would have to make public the prices charged for each service including the standard volume and generally applicable conditions.
However, it is the second phase, in which an interoperability protocol is to be struck, that goes to the heart of the Commission’s proposed reforms. It is intended to be accompanied by legislation in several member states to sweep away local conditions that keep out competitors.
This phase, in which standards are to be set by June 30 2007, would require each stock exchange, clearing house central counter parties and central securities depositories to be able to send instructions to and from each other.
The third phase, to be completed by the end of 2007, is for the complete unbundling of all services and would require separate accounting for each service provided.
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