EUROPE – Europe’s clearing and settlement systems are fragmented and inefficient and need a centralised body - that’s the message from separate studies by Deutsche Bank and Euroclear.
Deutsche Bank has proposed a new European central settlement body, with Euroclear calling for a single platform spanning European domestic markets.
The comments chime in with thinking at the European Commission level. Internal markets commissioner Frits Bolkestein says: “Efficient cross-border clearing and settlement…is essential to allow market participants to operate effectively in an integrated EU financial market.”
“To overcome inefficiencies in the cross-boarder equities business the establishment of a cross-border operating institution is required,” Deutsche Bank says in a research note.
“A Central Securities Settlement Institution, connecting and interlinking domestic systems,” the bank says, “will boost cross-border efficiency while retaining the benefits of existing domestic structures.”
“The concept of the Central Securities Settlement Institution provides a sound basis for further consolidation and integration of the European capital market because the linkage of domestic systems increases the pressure to apply common technical standards, harmonised rules and regulations, identical tax treatment and handling of country-specific taxes.”
Such a body, Deutsche says, would solve the “unnecessary complex” bilateral links between all clearing and settlement bodies in Europe – though it would add another service layer. In terms of governance, it would be able to accommodate “competing business approaches and concepts”. It would provide “interoperability” and act as a catalyst for standardisation.
Euroclear, the world's largest settlement system for domestic and international securities transactions, agrees that cross-border settlement prices are too high. “Cross-border settlement is expensive and inefficient,” it says in a new paper on cross-border settlement. “The root causes of cross-border settlement must be addressed.”
It says high cross-border settlement costs could be reduced by around 90% by giving users the direct access to a single operational securities account on a single platform spanning European domestic markets.
It agreed with Deutsche that operators of settlement systems should be owned and governed by their users and should not just pursue shareholder value. The model is the US, where settlement is more of a utility function.
Euroclear says that simplified cross-border settlement is key for the development of the European capital markets. “Only by achieving these aims will the European capital markets be able to compete effectively with the US capital markets," it says.
“The fragmentation of the settlement infrastructure is also a source of major risks and costs for the market,” Euroclear added.
The comments follow on from Bolkestein’s consultation on the future of clearing and settlement in Europe. He said in December that the 61 respondents to his consultation exercise “agreed with the Commission's assessment that efficient EU-wide clearing and settlement processes are vital if the EU is to succeed in creating a true internal market for financial services”.