Eurosystem

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• July 22, 2004

The Eurosystem’s response to the Communication on Clearing and Settlement

The Eurosystem strongly supports the Commission’s objective of creating a safe, efficient and integrated EU clearing and settlement infrastructure. In principle, the Communication identifies the key issues that need to be addressed in the field of clearing and settlement in order to enhance integration and reduce systemic risk. The present infrastructure for securities clearing and settlement transactions in the EU
remains insufficiently harmonised, highly fragmented and inefficient for cross-border activities. Although some consolidation has been achieved, there remain a very large number of service providers with limited competition between each other. Pan-European investors are required to access many national systems that provide different types of services, have different technical requirements and market practices, and operate under different legal and supervisory frameworks. The ongoing fragmentation of the infrastructure results in additional cost for securities transactions and could become a source of financial instability. Therefore, the Eurosystem agrees with the Commission that the existing barriers to efficient
EU clearing and settlement arrangements, as identified by the “Giovannini Group”, must be eliminated, which will require the combined efforts of the private and public sectors. In addition, the Eurosystem agrees that some parts of the clearing and settlement industry deserve more careful attention from a competition policy perspective. Finally, in order to ensure the smooth operation of markets and to guarantee financial stability, the Eurosystem shares the Commission’s view that a sound regulatory framework is essential.

Against this background, the Eurosystem welcomes the initiatives specified in the Communication. In particular, the Eurosystem supports the establishment of two expert groups on tax and legal issues as well as the establishment of an advisory and monitoring group to tackle all “Giovannini barriers” for which the private sector has sole or joint responsibility, and stands ready to contribute to the work of these groups. The Eurosystem understands that the participation of the CESR and the ESCB in the monitoring group will not jeopardise their continuing cooperation in the area of supervision and oversight of securities clearing and settlement systems in order to follow-up on the ESCB/CESR Standards. The Eurosystem in principle supports the adoption of a framework directive on clearing and settlement mainly for the following two reasons. First, a directive can complement the market-led removal of the “Giovannini barriers”, which is a necessary condition for competition to come fully into effect. Second, the effective and consistent implementation of the ESCB/CESR standards, as well as any other harmonisation measures that may be proposed by the expert groups, may require changes to the national legal framework that lie outside the power of national supervisory authorities.

The role and responsibilities of central banks

In general, the Communication underestimates the concerns and responsibilities of the central banks as regards a safe and integrated securities infrastructure.

The interest of the Eurosystem for securities clearing and settlement systems stems from four main reasons.

First because of the size of the payments made through securities settlement systems, the latter have the potential to affect the functioning of payment systems. Since the Eurosystem is, according to the Treaty, in charge of “promoting the smooth operation of payment systems”, it must extend its oversight of payment systems to the securities infrastructure.

Second, according to the Treaty, the Eurosystem can grant credit only against “adequate collateral”. In this respect, the inappropriate functioning of the securities infrastructure could seriously impact the ability of the Eurosystem to conduct monetary policy and to operate the TARGET system.

Third, the soundness and efficiency of the securities infrastructure in the euro area is a n important precondition for financial stability, for the confidence of the users and, ultimately, for the confidence in the
currency.

Fourth, some of the national central banks, which form an integral part of the Eurosystem, have explicit legal responsibilities in the field of securities clearing and settlement.

In the light of these responsibilities, the Eurosystem carefully monitors and assesses the securities infrastructure. International standards for securities settlement systems recognise explicitly the role of central banks in this field, together with that of securities regulators and other relevant authorities. The Commission is thus invited to refer to, and recognise explicitly, the responsibilities and tasks of the ESCB and the Eurosystem, especially their role for the oversight of the securities clearing and settlement infrastructure stemming from their above mentioned responsibilities and from the powers and responsibilities of the participating NCBs.

The relations between the work of the Commission and the work of ESCB/CESR

The Eurosystem expects that this framework directive does not duplicate the work of the ESCB/CESR. Rather, in line with the four-level approach embodied in the “Lamfalussy procedure”, the directive should set up high-level principles to be concretised by level two implementing measures. To this end, close cooperation between the Commission and the central banks will be essential. In particular, the Eurosystem agrees with the Commission that the ESCB/CESR standards might form the basis of such level two
measures.

At the same time, the Eurosystem would like to draw the Commission’s attention to the fact that, within the current comitology structure, no group or committee comprises representatives of both securities commissions and central banks. However, any group or committee that will be mandated to actually define the level two implementing measures will require, by nature, the combined efforts of securities commissions and central banks. A possible solution therefore could be to give a joint mandate to the
ESCB and the CESR.

Competition and the creation of a domestic infrastructure for the euro

The Eurosystem shares the Commission’s view that competition can only come into effect if all service providers and investors enjoy comprehensive rights of access to and choice of all clearing and settlement systems. However, to function properly, competition requires systems to be interoperable in order to minimise costs to the users in switching from one system to another. Given the huge economies of scale and network externalities inherent in clearing and settlement, further consolidation and integration of clearing and settlement systems can be expected to accelerate significantly.

In this context, it is important to note that currency areas have traditionally developed their own coherent domestic infrastructures for payment systems as well as securities clearing and settlement systems. The Eurosystem expects that the integration process will help to develop an efficient domestic infrastructure for the euro which allows for an adequate degree of competition among completely interoperable systems. As the Governing Council of the ECB has already emphasised on a previous occasion2, the domestic market infrastructure for the euro should logically be located in the euro area, as is the case with core
infrastructures in other monetary areas. Defining a domestic system on the basis of currency enables public authorities (and the Eurosystem in particular) to ensure the smooth functioning of payment systems, efficient monetary policy implementation and financial stability. From an oversight perspective, given the systemic importance of the securities clearing and settlement systems, it is important that the relevant main overseers are also located in the euro area. Furthermore, the location of clearing and settlement systems in the euro area would facilitate the provision, when deemed necessary and appropriate, of central bank money in euro. The Eurosystem invites the Commission to take note of and give adequate consideration to the Eurosystem’s concerns in this regard.

The Eurosystem has repeatedly pointed out that the process of consolidation or integration of the clearing and settlement infrastructure should be driven by the private sector, unless there are clear signs of market failures, and agrees with the Commission that market forces will determine the “final” structure of the securities industry.

Risks undertaken by securities clearing and settlement systems

The Commission considers that it should be neutral as regards the opportunity for central securities depositories to offer intermediary and/or banking services and it intends to refrain from proposing or imposing any separation of the intermediary and banking activities eventually offered by CSD, as long as the appropriate regulatory/supervisory safeguards are established. The Eurosystem would like to underline the importance of both the neutrality principle and the need for appropriate safeguards in order
to address public policy concerns, in particular the need to maintain and protect financial stability; in this respect, it should be ensured, at a minimum, that risks are properly addressed. In this respect, it can be helpful to clearly distinguish clearing and settlement activities since the two activities involve different types of risks and different potentials for systemic implications. It is also important that the functional definitions adopted clearly reflect the different activities. The Commission may benefit from the
extensive work undertaken by the Eurosystem when assessing the securities settlement infrastructure (including links) with a view to its eligibility for Eurosystem collateral operations. In this respect, for the sake of consistency with other regulatory work, it is suggested to use the relevant definitions provided in the Glossary of the ECSB-CESR report.

Furthermore, at this stage, a high-level directive on clearing and settlement should not preclude any particular regulatory measure that might be needed to address public policy concerns in the light of such a comprehensive analysis. In general, any specific regulatory safeguards could be further developed in the form of level two implementing measures as foreseen in the Lamfalussy procedure rather than in the framework directive itself.

Against this background, the Eurosystem welcomes the fact that the Commission considers that securities settlement systems settling in commercial bank money should at least provide a choice for their participants to settle in central bank money, as agreed by the ESCB/CESR working group. This recommendation is in line with the policy guidance of the Eurosystem in this respect.

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