Participants in the European clearing and settlement industry will be hoping that a code of conduct for Clearing and Settlement will be enough to appease European regulators and avoid the imposition of a directive.

The Federation of European Securities Exchanges (Fese), the European Association of Central Counterparty Clearing Houses (Each) and the European Central Securities Depository (Ecsda) drew up the code. It covers post-trading activities in cash equities in Europe and is a voluntary commitment by the organisations that have signed it.

Paul Bodart, executive vice-president at Bank of New York in Brussels and a member of the board of Euroclear, the international central securities depository (ICSD), said: "I believe that the code of conduct, for the time being, is a better alternative than a directive, because it can be implemented faster and it imposes market discipline. But there is a risk that if it does not bring the result the Commission wants, a directive will come."

There was a stampede to welcome the code from interested parties. Matthias Ganz, member of the executive board of Deutsche Borse, which operates Clearstream, another ICSD, said: "The code of conduct reinforces our strong belief that the creation of a European clearing and settlement system requires market-led rather than legislative action."

Deutsche Börse participated in the creation of the code in its capacity as a member of Fese, Each and Ecsda. It said it intended to implement the code by the end of 2007.

Euroclear, too, welcomed the code, adding that it would apply the code from the outset to all asset classes, including fixed income.

Tim May, chief executive of CrestCo, the UK securities settlement house and member of the Euroclear Group, said much of the code reflected how Euroclear had been operating. "As an infrastructure provider, we have tried to be cognisant of some of these issues, such as interoperability, in the first place."

May said the code put all participants on the same playing field, implying "that everyone should try to work this way".

One of the main aims of the code is to force industry players to unbundled their services. The code states: "The ultimate aim is to offer market participants the freedom to choose their preferred provider of services separately at each layer of the transaction chain (trading, clearing and settlement) and to make the concept of cross-border redundant for transactions between EU member states."

BNY's Bodart said as a custodian, the code would tell him how much the bank was paying to connect directly to CSDs and central counterparties. "If I am using a subcustodian in a particular market to connect to the local CSD, I will have a better idea of what they are paying to the CSD and the margin they are making on my business. The code represents a much more transparent way of operating."

Not everyone is happy with the code, however. One representative from a custodian who did not wish to be named, told IPE that unless a definition of core and non-core services was forthcoming in the code, the unbundling aspect would be irrelevant. "If you look at horizontal unbundling, that is separating settlement services from banking services upstream and downstream, I am not sure that will occur. The distinction between core and commercial is essential in unbundling."

This argument stems from a fear by some European custodians that market infrastructures, such as the ICSDs, will move into their territory and compete unfairly. The ICSDs, of course reject this, but May did say, "if you want to be a commercial player, you must expect competition".

He added: "The push for interoperability and unbundling by the European Commission will help. Users will have the choice to go to another CSD if their current provider is not offering the best price or the required access. I expect the code will allow users to choose better who their providers are and because there will be tariff competition, I expect prices to go down. That is exactly what I, and users, want."

Bodart said the fundamental problem was that there were too many CSDs in Europe (about 25). "As an industry, we need to reduce the number of CSDs because in our business, the cost of doing business is directly related to how many technology platforms you are using. The code of conduct will help us to reduce the number of platforms. At the end of the day, the smaller CSDs, central counterparties and exchanges will be forced to merge or look for alternatives. Prices will come down and they will not be able to continue to develop the technology platform that is necessary."

Bodart also said he was disappointed the code had been initially restricted to equities. "I believe someone at a high level said most of the cross-border activity is in securities, but to be honest I don't believe that. There is a high level of activity in bonds as well as shares."

The code will be extended to other instrument classes once it has been bedded down, as well as to other service providers, such as online trading networks and alternative stock exchanges.

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