TICKER - European Clearing Comes Of Age? Don’t Bet On It

Under pressure from the European Union, Europe’s major exchanges and clearing and settlement organizations have begun requesting links to each other’s systems for the first time.

Under pressure from the European Union, Europe’s major exchanges and clearing and settlement organizations have begun requesting links to each other’s systems for the first time. Such connections could do more to lower costs, introduce competition and break down national exchange monopolies than the past year’s string of industry mergers.

Mandated by a voluntary EU-brokered “Code of Conduct for Clearing and Settlement,” and given final form in June with a set of official guidelines on how to establish so-called “interoperability,” the links aim to provide users with choice when it comes to clearing and settlement -- the most expensive portion of any cross-border securities transaction. “The greatest inefficiencies when buying and selling securities are imbedded in posttrade services, where almost everything has to be done in the domestic market in which you are placing your order,” says Alan Yarrow, London-based vice chairman of Dresdner Kleinwort and chairman of the London Investment Banking Association.

The code calls on “any organization receiving a proposal for interoperability [to] expeditiously enter into discussions with the proposing organization” to “offer market participants the freedom to choose their preferred provider of services.” The new guidelines could shrink clearing and settlement costs by nearly 20 percent, creating economies of scale and fostering greater competition between providers, according to a recent study by the EU’s Directorate General for Competition.

In August user-owned clearing house LCH.Clearnet, which serves both the London Stock Exchange and NYSE Euronext markets in Amsterdam, Brussels and Paris, became the first organization to request a link with another exchange when it approached both Deutsche Börse and Borsa Italiana. In September, Deutsche Börse announced that it had agreed to establish interoperability with SWX Swiss Exchange and would soon start negotiations to link to the equity trading platforms of Euronext Paris; Euronext Amsterdam; Interbolsa, the clearing organization of Euronext Lisbon; and Euroclear, the Brussels-based settlement operation for equities and bonds. Other exchanges and clearing and settlement organizations are likely to follow suit.

Still, roadblocks remain. “Different national laws and regulations within Europe concerning everything from how bankruptcy is treated to whether clearing organizations must be banks means that even with technical links, people may still be forced to use different posttrade services for many of the jurisdictions they trade in,” says Rory Cunningham, head of strategy at LCH.Clearnet.

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