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Brussels, 3rd June 2002

Financial markets: Commission consults on clearing and settlement

A European Commission consultative Communication published today considers the need for EU level measures to improve clearing and settlement, in other words the procedures by which transactions in securities and derivatives are finalised. Efficient cross-border clearing and settlement is essential to allow market participants to operate effectively in an integrated EU financial market. The Communication identifies two main objectives: removing barriers to the finalisation of individual cross-border transactions and removing any competitive distortions that prevent market forces from delivering a more efficient infrastructure for cross-border activity. The current cross-border arrangements in the EU are complex and fragmented, imposing costs, risks and inefficiency on investors, institutions and issuers. As a result the costs of cross-border clearing and settlement in Europe are much higher than in the United States. The Communication sets out, for the first time, overall Commission policy on this subject and presents possible courses of action to improve the cross-border post-trading environment. Responses are invited by 31 August 2002. The consultation document is available on the Europa website

Internal Market Commissioner Frits Bolkestein, said: "This is about eliminating legal barriers, defining standards for clearing and settlement, managing risk and ensuring fair competition. And in the end, reducing trading costs, improving market efficiency and boosting investment and growth. This is a complex area, but what is at stake is very simple: without efficient cross-border clearing and settlement in the EU, citizens, businesses and investors will not reap the full benefit of an internal market for financial services. That is why we are launching this Communication on a subject which has traditionally been the domain of technicians rather than policy-makers."

Scope of the Communication

The Communication considers the current arrangements for clearing and settlement in the EU and sets out some policy objectives to achieve further integration, along with possible measures to realise those objectives. It contains a number of specific questions to which the Commission seeks responses as well as inviting comment on the overall approach.

The Communication does not address the question of what form of market infrastructure is needed in the EU. Rather, it examines how to create the conditions needed for market forces to deliver the most efficient solution.

Why a Commission Communication on clearing and settlement?

Clearing and settlement are vital processes for investors and institutions and for the smooth functioning of the financial market as a whole. An integrated securities market in the EU must be supported by an efficient, secure post-trading environment.

As interest in pan-EU financial activity has increased, so the inefficiency of cross-border clearing and settlement arrangements has become more evident. Improvements are essential to help European markets compete internationally. Some industry estimates suggest that cross-border clearing and settlement costs in the EU are multiples higher than in the United States.

The "Lamfalussy Report" in February 2001 (see IP/01/215) highlighted this as one of the three important areas for work in the securities markets. More recently, the Giovannini Report on Cross-Border Clearing and Settlement, presented to the Commission in November 2001 (see IP/01/1654) provided a description of the cross-border clearing and settlement environment in the EU. This report highlights the complexity and degree of fragmentation in the cross-border post-trading environment.

Barriers to cross-border transactions

A number of obstacles increase the cost, complexity or risk involved in the finalisation of cross-border transactions compared to those in the domestic market. The Giovannini Report (see above) identified 15 such obstacles, subdividing them into three categories:

  • technical/market practice

  • tax procedures

  • legal certainty

The Communication considers how each of these sets of barriers can best be removed, and by whom. Interested parties are asked to comment on a number of possible measures and to identify the priorities.

Creation of a level playing field

Existing EU legislation covering clearing and settlement and the institutions involved in them is neither systematic nor comprehensive. The European securities market and the institutions active in the market are changing, so that it is possible for entities undertaking the same or similar activities to receive different legal treatment, simply for historical reasons. The creation of a level playing field between market operators for clearing and settlement activities may require that these activities be systematically defined at European level.

Equally, the risks that result from cross-border securities transactions are different to those arising in a purely domestic environment. The maintenance of financial stability requires that these risks should be adequately managed. This is the motivation behind securities regulators' and central banks' current initiative to develop common standards for clearing and settlement systems. Their work is complementary to that of the Commission and the implementation of these standards should go a long way towards increasing national regulators' confidence in the systems used in other Member States. However, it is possible that some principles would need to be enshrined in law in order to achieve a truly integrated post-trading environment. The Communication seeks views on the need for framework legislation governing these activities at EU level.


Lamfalussy Report: Final Report of the Committee of Wise Men on the Regulation of European Securities Markets, February 2001

Giovannini Report: Cross-Border Clearing and Settlement Arrangements in the European Union, November 2001

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