# C_2005221EN.01012601.xml

| 8.9.2005 | EN | Official Journal of the European Union | C 221/126 |
| --- | --- | --- | --- |

8.9.2005

EN

Official Journal of the European Union

C 221/126

---

Opinion of the European Economic and Social Committee on the Communication from the Commission to the Council and the European Parliament: Clearing and Settlement in the European Union — The way forward

(COM(2004) 312 final)

(2005/C 221/21)

On 29 April 2004, the European Commission decided to consult the European Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the abovementioned communication.

On 1 June 2004, the Committee Bureau instructed the Section for the Single Market, Production and Consumption to prepare the Committee's work on the subject.

Given the urgent nature of the work, the European Economic and Social Committee appointed Mr Burani as rapporteur-general at its 414th plenary session, held on 9 and 10 February 2005 (meeting of 10 February), and adopted the following opinion with 99 votes in favour and two abstentions.

th

1.   Introduction

| 1.1 | As part of the Action Plan for Financial Services, launched in 1999, the Commission is addressing the complex problem of transactions in securities, and in particular that of clearing and settlement, which are the cornerstone of such transactions. The safety and efficiency of systems — which are invisible to the retail investor — are fundamental to the life of the securities markets. The basic concepts are simple: clearing provides the parties with a guarantee against the risk of ‘replacement costs’ (insolvency of one of the counterparties), and settlement guarantees payment for the securities that have been sold. However, the underlying processes, mechanisms and regulations are an extremely complex and specialised subject. In this chapter, the key points of the Commission document are summarised. |
| --- | --- |

1.1

As part of the Action Plan for Financial Services, launched in 1999, the Commission is addressing the complex problem of transactions in securities, and in particular that of clearing and settlement, which are the cornerstone of such transactions. The safety and efficiency of systems — which are invisible to the retail investor — are fundamental to the life of the securities markets. The basic concepts are simple: clearing provides the parties with a guarantee against the risk of ‘replacement costs’ (insolvency of one of the counterparties), and settlement guarantees payment for the securities that have been sold. However, the underlying processes, mechanisms and regulations are an extremely complex and specialised subject. In this chapter, the key points of the Commission document are summarised.

clearing

settlement

| 1.2 | At national level, the systems work satisfactorily from a cost-effectiveness and safety point of view; however, problems arise at cross-border level, where inefficiencies, risks and increased costs exist as a result of undue fragmentation of the markets, which is in turn caused by different legislation, rules and customs in different countries. It is the market operators themselves who feel the need for reform. |
| --- | --- |

1.2

At national level, the systems work satisfactorily from a cost-effectiveness and safety point of view; however, problems arise at cross-border level, where inefficiencies, risks and increased costs exist as a result of undue fragmentation of the markets, which is in turn caused by different legislation, rules and customs in different countries. It is the market operators themselves who feel the need for reform.

national

satisfactorily

cross-border

inefficiencies, risks and increased costs

different legislation, rules and customs

| 1.3 | The Communication — which will be followed by a directive to be published shortly — puts forward the various aspects of the problem for discussion by the interested parties, with the fundamental aim of creating an efficient, integrated and safe European market for the clearing and settlement of securities transactions. Integration of systems will have to be achieved through the combined intervention of market forces and public authorities; the Commission itself proposes to promote coordination among private sector organisations, regulatory authorities, and legislators. |
| --- | --- |

1.3

The Communication — which will be followed by a directive to be published shortly — puts forward the various aspects of the problem for discussion by the interested parties, with the fundamental aim of creating an efficient, integrated and safe European market for the clearing and settlement of securities transactions. Integration of systems will have to be achieved through the combined intervention of market forces and public authorities; the Commission itself proposes to promote coordination among private sector organisations, regulatory authorities, and legislators.

creating an efficient, integrated and safe

the combined intervention of market forces and public authorities

coordination

| 1.4 | A framework directive will be necessary to ensure that infrastructure providers and service users (authorised operators) have access to the clearing and settlement system of their choice; this system must be properly authorised, supervised, and comply with competition rules. The Commission declares that when drafting the directive, it will respect the principles of subsidiarity and proportionality, taking into consideration the requirement to avoid, wherever possible, interfering with the rules adopted by national authorities to regulate the relevant market structures. The result of this approach should be a clear, reliable and consistent legal basis. |
| --- | --- |

1.4

A framework directive will be necessary to ensure that infrastructure providers and service users (authorised operators) have access to the clearing and settlement system of their choice; this system must be properly authorised, supervised, and comply with competition rules. The Commission declares that when drafting the directive, it will respect the principles of subsidiarity and proportionality, taking into consideration the requirement to avoid, wherever possible, interfering with the rules adopted by national authorities to regulate the relevant market structures. The result of this approach should be a clear, reliable and consistent legal basis.

framework directive

infrastructure providers and service users

have access to the clearing and settlement system of their choice

subsidiarity

proportionality

legal basis.

| 1.5 | The Commission does not intend to go into the issue of a possible (cross-border) consolidation of clearing and settlement activities, believing that this should largely be market-driven. It does, however, propose to ensure that public policy concerns (competition, soundness/efficiency of systems) are taken into consideration. |
| --- | --- |

1.5

The Commission does not intend to go into the issue of a possible (cross-border) consolidation of clearing and settlement activities, believing that this should largely be market-driven. It does, however, propose to ensure that public policy concerns (competition, soundness/efficiency of systems) are taken into consideration.

consolidation of clearing and settlement activities

2.   Current situation

| 2.1 | Clearing and settlement procedures are complex. The Commission uses these terms to describe ‘the full set of arrangements required to finalise a securities or derivatives transaction’. More precisely, the function of clearing includes
  novation
  (intervention by the clearing house and management of counterparty risk), and
  netting
  (calculation of debit and credit positions and settlement of bilateral obligations); there is also the ancillary function of
  netting with novation

  , which protects the counterparties from the ‘replacement cost risk’ (the risk of losses arising from the default of a counterparty). |
| --- | --- |

2.1

Clearing and settlement procedures are complex. The Commission uses these terms to describe ‘the full set of arrangements required to finalise a securities or derivatives transaction’. More precisely, the function of clearing includes
  novation
  (intervention by the clearing house and management of counterparty risk), and
  netting
  (calculation of debit and credit positions and settlement of bilateral obligations); there is also the ancillary function of
  netting with novation

  , which protects the counterparties from the ‘replacement cost risk’ (the risk of losses arising from the default of a counterparty).

clearing

novation

netting

netting with novation

,

| 2.1.1 | The nature of settlement functions, to put it very simply, is (a)
  notarial
  (codification of securities, central deposit of dematerialised securities, exchange of particulars between depositors and issuers, etc.); (b) of
  central holding of securities
  (management of securities current accounts, position monitoring, etc.) and (c) of
  settlement
  in the strict sense (calculation of counterparties, transfers between securities current accounts, interconnections with central banks, automated payments of cash balances, sub-daily transactions to bring liquidity to cash and securities payment systems, implementation of monetary policy transactions, etc.). |
| --- | --- |

2.1.1

The nature of settlement functions, to put it very simply, is (a)
  notarial
  (codification of securities, central deposit of dematerialised securities, exchange of particulars between depositors and issuers, etc.); (b) of
  central holding of securities
  (management of securities current accounts, position monitoring, etc.) and (c) of
  settlement
  in the strict sense (calculation of counterparties, transfers between securities current accounts, interconnections with central banks, automated payments of cash balances, sub-daily transactions to bring liquidity to cash and securities payment systems, implementation of monetary policy transactions, etc.).

settlement

notarial

central holding of securities

settlement

| 2.1.2 | The definition of functions, of technical terms and their meaning sometimes lends itself to ambiguity, both because the terminology in different languages is not always exactly equivalent, and because different shades of meaning can be applied with different nuances onto national markets. It is therefore extremely important that the future directive uses accurately verified terminology that is universally understood and is translated into the different languages with the cooperation of national experts. |
| --- | --- |

2.1.2

The definition of functions, of technical terms and their meaning sometimes lends itself to ambiguity, both because the terminology in different languages is not always exactly equivalent, and because different shades of meaning can be applied with different nuances onto national markets. It is therefore extremely important that the future directive uses accurately verified terminology that is universally understood and is translated into the different languages with the cooperation of national experts.

definition of functions

accurately verified terminology

| 2.2 | Clearing services are provided by bodies commonly called central counterparties (CCP). Settlement is carried out by central securities depositories (CSD). CCPs and CSDs form a ‘closed circuit’ which includes, in addition to their reciprocal relationship, central banks and authorised banks and financial institutions. Investors do not have a relationship with CCPs or CSDs; these are only accessible to operators (i.e. banks and financial institutions that are Clearing Members). |
| --- | --- |

2.2

Clearing services are provided by bodies commonly called central counterparties (CCP). Settlement is carried out by central securities depositories (CSD). CCPs and CSDs form a ‘closed circuit’ which includes, in addition to their reciprocal relationship, central banks and authorised banks and financial institutions. Investors do not have a relationship with CCPs or CSDs; these are only accessible to operators (i.e. banks and financial institutions that are Clearing Members).

Clearing

central counterparties (CCP)

Settlement

central securities depositories (CSD)

‘closed circuit’

Investors do not have a relationship with CCPs or CSDs

| 2.3 | Cross-border transactions can take place in different ways according to the following alternatives:






  — | direct remote access to the foreign Securities Settlement System; |
| --- | --- | --- |

2.3

Cross-border transactions can take place in different ways according to the following alternatives:

—

direct remote access to the foreign Securities Settlement System;

| — | use of a custodian having direct or indirect access to the foreign Securities Settlement System; |
| --- | --- |

—

use of a custodian having direct or indirect access to the foreign Securities Settlement System;

| — | use of an international CSD having direct or indirect access to the foreign Securities Settlement System. |
| --- | --- |

—

use of an international CSD having direct or indirect access to the foreign Securities Settlement System.

| 2.3.1 | Aside from the fact that not all of them are available to all operators, each one of these options has advantages and disadvantages. However, they do have one thing in common: high costs and inefficiencies, these latter not being the fault of the systems, but inherent to the need to use complicated procedures and to protect all participants from the risk of default or non-delivery. |
| --- | --- |

2.3.1

Aside from the fact that not all of them are available to all operators, each one of these options has advantages and disadvantages. However, they do have one thing in common: high costs and inefficiencies, these latter not being the fault of the systems, but inherent to the need to use complicated procedures and to protect all participants from the risk of default or non-delivery.

one thing in common: high costs and inefficiencies

| 2.4 | From what has been said in the previous paragraph, it would be easy to conclude that, in order to create an integrated, competitive and safe market, it would be enough to adopt common standards, harmonise legislation and taxation, and rationalise and internationalise the structures. The Committee warns against simplistic optimism; solutions that might seem easy in theory must be carefully assessed against the current situation of a Europe made up of 25 countries, which differ profoundly in size and in economic weight. In the Union as a whole, there are 24 CSDs, of which just two deal with 32.2 % of the number of transactions and 60.4 % of their total volume; 14 of the 25 countries do not have clearing structures (CCP). Moreover, in the EU15, settlement with central bank money far exceeds settlement with commercial bank money, accounting for 67 % of both the number and volume of transactions. |
| --- | --- |

2.4

From what has been said in the previous paragraph, it would be easy to conclude that, in order to create an integrated, competitive and safe market, it would be enough to adopt common standards, harmonise legislation and taxation, and rationalise and internationalise the structures. The Committee warns against simplistic optimism; solutions that might seem easy in theory must be carefully assessed against the current situation of a Europe made up of 25 countries, which differ profoundly in size and in economic weight. In the Union as a whole, there are 24 CSDs, of which just two deal with 32.2 % of the number of transactions and 60.4 % of their total volume; 14 of the 25 countries do not have clearing structures (CCP). Moreover, in the EU15, settlement with central bank money far exceeds settlement with commercial bank money, accounting for 67 % of both the number and volume of transactions.

current situation

| 2.4.1 | This apparently very lop-sided situation is understandable if one considers that various countries with low market capitalisation do not have, nor can have, CSD or CCP structures: these are costly and can only survive if they can rely on significant volumes. Some structures have reached a near-monopoly position at national level (which does not necessarily mean that they are in breach of competition rules) and work efficiently and at low cost. |
| --- | --- |

2.4.1

This apparently very lop-sided situation is understandable if one considers that various countries with low market capitalisation do not have, nor can have, CSD or CCP structures: these are costly and can only survive if they can rely on significant volumes. Some structures have reached a near-monopoly position at national level (which does not necessarily mean that they are in breach of competition rules) and work efficiently and at low cost.

near-monopoly position

efficiently and at low cost

3.   General comments

| 3.1 | The Committee takes note of the Commission's initiative, and welcomes the drafting of a document that represents progress on the road to integration of the European securities markets. The subject area is a specialised one. It is highly technical in nature, and with economic and financial content that cannot always be easily understood, but also has political and competition aspects that could have significant effects on the future of the markets. Innovations — whether suggested or imposed — should therefore be implemented gradually, with both immediate and long-term repercussions being assessed. |
| --- | --- |

3.1

The Committee takes note of the Commission's initiative, and welcomes the drafting of a document that represents progress on the road to integration of the European securities markets. The subject area is a specialised one. It is highly technical in nature, and with economic and financial content that cannot always be easily understood, but also has political and competition aspects that could have significant effects on the future of the markets. Innovations — whether suggested or imposed — should therefore be implemented gradually, with both immediate and long-term repercussions being assessed.

political and competition

gradually

repercussions

| 3.2 | Whilst the implied aim of the Commission's initiative is to make the European market competitive with the American one (which, moreover, is used as a benchmark at the suggestion of the European Parliament), it should not be forgotten that the recent enlargement of the EU has brought in relatively ‘weak’ markets, or ones with experience and structures that are not yet consolidated. Changes made without assessing their immediate and, even more importantly, long-term consequences could have traumatic effects, with the risk of bringing about undue dominance of the ‘stronger’ systems. Consolidations, mentioned by the Commission as a beneficial effect of integration (and on which it declares itself ‘neutral’) should not be determined by the need to survive, but rather decided on by market forces freely assessing their appropriateness. |
| --- | --- |

3.2

Whilst the implied aim of the Commission's initiative is to make the European market competitive with the American one (which, moreover, is used as a benchmark at the suggestion of the European Parliament), it should not be forgotten that the recent enlargement of the EU has brought in relatively ‘weak’ markets, or ones with experience and structures that are not yet consolidated. Changes made without assessing their immediate and, even more importantly, long-term consequences could have traumatic effects, with the risk of bringing about undue dominance of the ‘stronger’ systems. Consolidations, mentioned by the Commission as a beneficial effect of integration (and on which it declares itself ‘neutral’) should not be determined by the need to survive, but rather decided on by market forces freely assessing their appropriateness.

enlargement of the EU

Consolidations

freely assessing their appropriateness

| 3.3 | Aside from the situation described in point 2.4, the main factors determining the fragmentation of markets are differences in national legislation and tax systems, both as regards property law and as regards transactions. Community intervention is needed in these fields in order to achieve regulatory convergence that will remove the legal — but especially fiscal — obstacles that currently exist. |
| --- | --- |

3.3

Aside from the situation described in point 2.4, the main factors determining the fragmentation of markets are differences in national legislation and tax systems, both as regards property law and as regards transactions. Community intervention is needed in these fields in order to achieve regulatory convergence that will remove the legal — but especially fiscal — obstacles that currently exist.

differences in national legislation and tax systems

regulatory convergence

| 3.4 | Whilst regulatory convergence is a necessary precondition, it is not enough. If the ultimate aim is to create a robust pan-European structure, there needs to be a level playing field for competition among banks and financial institutions and competition based primarily on freedom of choice of intermediaries (see point 3.7) through careful monitoring of access rules. Creating the conditions for optimum competition is a prerequisite for achieving a reduction in prices for investors. |
| --- | --- |

3.4

Whilst regulatory convergence is a necessary precondition, it is not enough. If the ultimate aim is to create a robust pan-European structure, there needs to be a level playing field for competition among banks and financial institutions and competition based primarily on freedom of choice of intermediaries (see point 3.7) through careful monitoring of access rules. Creating the conditions for optimum competition is a prerequisite for achieving a reduction in prices for investors.

a level playing field for competition among banks and financial institutions

freedom of choice

access rules

reduction in prices

| 3.5 | The Commission does not express a view on the issue of clarifying and keeping distinct the roles of operators (banks and financial institutions) from those of infrastructure. These latter carry out the function of clearing (central counterparties, CCP) and settlement and custody (central securities depositories, CSD). Each category has different purposes and operational characteristics, and therefore need different rules and supervision appropriate to each role. However, the Committee would point out that commercial banks are increasingly tending to ‘internalise’ clearing and settlement functions. |
| --- | --- |

3.5

The Commission does not express a view on the issue of clarifying and keeping distinct the roles of operators (banks and financial institutions) from those of infrastructure. These latter carry out the function of clearing (central counterparties, CCP) and settlement and custody (central securities depositories, CSD). Each category has different purposes and operational characteristics, and therefore need different rules and supervision appropriate to each role. However, the Committee would point out that commercial banks are increasingly tending to ‘internalise’ clearing and settlement functions.

clarifying and keeping distinct the roles of operators

from those of infrastructure.

clearing

settlement and custody

different rules and supervision

| 3.5.1 | Two of the biggest organisations, which present precisely the situation described in the previous paragraph (i.e. combining banks and intermediaries, albeit with separate accounts) have been operating in the market for some time. The experiences of these organisations have been positive in terms of efficiency, economies of scale and profitability. Furthermore, it would be unrealistic to think that it would be possible at this stage to order the splitting up or restructuring of businesses that make up the backbone of the market. |
| --- | --- |

3.5.1

Two of the biggest organisations, which present precisely the situation described in the previous paragraph (i.e. combining banks and intermediaries, albeit with separate accounts) have been operating in the market for some time. The experiences of these organisations have been positive in terms of efficiency, economies of scale and profitability. Furthermore, it would be unrealistic to think that it would be possible at this stage to order the splitting up or restructuring of businesses that make up the backbone of the market.

| 3.5.2 | There are two possible courses of action: either to accept that combined organisations can exist, or to go down the strictly legalistic path of imposing separation between banking activities on the one hand, and clearing and settlement activities on the other. The first solution would benefit the market in terms of efficiency and costs, but raises — at least in theory — the possibility of increased risks and of making controls less effective; the second would be in line with the traditional doctrine of separation of activities, but does not appear to be achievable, nor, all things considered, desirable. It is clear at this stage that the only recommendation the Committee can make is that the keeping of separate accounts be sufficiently transparent as to enable effective controls, both by supervisory authorities and by competition authorities. A directive setting out the details by which these conditions could be fulfilled would be welcome, not to say necessary. |
| --- | --- |

3.5.2

There are two possible courses of action: either to accept that combined organisations can exist, or to go down the strictly legalistic path of imposing separation between banking activities on the one hand, and clearing and settlement activities on the other. The first solution would benefit the market in terms of efficiency and costs, but raises — at least in theory — the possibility of increased risks and of making controls less effective; the second would be in line with the traditional doctrine of separation of activities, but does not appear to be achievable, nor, all things considered, desirable. It is clear at this stage that the only recommendation the Committee can make is that the keeping of separate accounts be sufficiently transparent as to enable effective controls, both by supervisory authorities and by competition authorities. A directive setting out the details by which these conditions could be fulfilled would be welcome, not to say necessary.

the keeping of separate accounts be sufficiently transparent as to enable effective controls, both by supervisory authorities and by competition authorities.

| 3.6 | As already stated above, investors have relationships only with operators; central counterparties (CCPs) and central securities depositories (CSD), on the other hand, are accessible only to operators by means, respectively, of clearing members and securities depositories. The CSDs interact, in turn, with the respective national central banks and with other domestic or foreign CSDs. |
| --- | --- |

3.6

As already stated above, investors have relationships only with operators; central counterparties (CCPs) and central securities depositories (CSD), on the other hand, are accessible only to operators by means, respectively, of clearing members and securities depositories. The CSDs interact, in turn, with the respective national central banks and with other domestic or foreign CSDs.

central counterparties

central securities depositories

accessible only to operators

| 3.7 | Operators are already monitored by the supervisory authorities, but intermediaries lay down extremely strict proprietary and technical rules with regard to accessing their services. The consequence of this is that only a limited number of operators have direct relations with intermediaries, whilst the others must go through authorised operators in order to complete transactions that carry a risk. The rules laid down by the intermediaries are shaped by the public interest function vested in these bodies: they have the task of ensuring the stability of the market and, in the final analysis, the protection of investors. The supervision and competition authorities also have to ensure that the rules on access laid down by intermediaries do not lend themselves to being used to restrict freedom of access. |
| --- | --- |

3.7

Operators are already monitored by the supervisory authorities, but intermediaries lay down extremely strict proprietary and technical rules with regard to accessing their services. The consequence of this is that only a limited number of operators have direct relations with intermediaries, whilst the others must go through authorised operators in order to complete transactions that carry a risk. The rules laid down by the intermediaries are shaped by the public interest function vested in these bodies: they have the task of ensuring the stability of the market and, in the final analysis, the protection of investors. The supervision and competition authorities also have to ensure that the rules on access laid down by intermediaries do not lend themselves to being used to restrict freedom of access.

public interest function

stability of the market

the protection of investors

freedom of access

| 3.8 | In view of the operational characteristics of each player, investors have a

  direct

  interest in the reliability and soundness of

  operators;

  the market, on the other hand, is based on the reliability and soundness of the

  intermediaries
  . Whilst the systemic risk is common to operators and intermediaries, the checks carried out on each of them need to be different in approach. Hence the need, mentioned in point 3.5 above, to maintain distinct roles and rules. As far as the CSDs are concerned, it is worth noting that the credit risk of the participants (which are, for the most part, financial institutions) is practically non-existent, since the laws of Member States protect investors against the insolvency of a CSD by requiring that securities held in custody do not appear on the participants' balance sheets. |
| --- | --- |

3.8

In view of the operational characteristics of each player, investors have a

  direct

  interest in the reliability and soundness of

  operators;

  the market, on the other hand, is based on the reliability and soundness of the

  intermediaries
  . Whilst the systemic risk is common to operators and intermediaries, the checks carried out on each of them need to be different in approach. Hence the need, mentioned in point 3.5 above, to maintain distinct roles and rules. As far as the CSDs are concerned, it is worth noting that the credit risk of the participants (which are, for the most part, financial institutions) is practically non-existent, since the laws of Member States protect investors against the insolvency of a CSD by requiring that securities held in custody do not appear on the participants' balance sheets.

investors have a

direct

interest in the reliability and soundness of

operators;

the market

is based on the reliability and soundness of the

intermediaries

maintain distinct roles and rules.

| 3.9 | On the subject of separation of roles, the Committee is puzzled — as indeed are some operators — by the trend for some banking institutions to buy out CSDs in a number of countries, thus integrating — or, to put it better, mixing — their traditional role with that of international CSDs (I-CSDs). The Committee requests the Commission to search, in the first instance, for any signs of distortions of competition resulting from the presence in the same entity (or in separate but related entities) of the functions of operator and intermediary. In particular, it would be appropriate to check that CSD functions are not being used to finance or promote other activities. |
| --- | --- |

3.9

On the subject of separation of roles, the Committee is puzzled — as indeed are some operators — by the trend for some banking institutions to buy out CSDs in a number of countries, thus integrating — or, to put it better, mixing — their traditional role with that of international CSDs (I-CSDs). The Committee requests the Commission to search, in the first instance, for any signs of distortions of competition resulting from the presence in the same entity (or in separate but related entities) of the functions of operator and intermediary. In particular, it would be appropriate to check that CSD functions are not being used to finance or promote other activities.

banking institutions to buy out CSDs

distortions of competition

| 3.10 | Whilst distortions in competition remain to be proven, the combining of functions certainly gives rise, as has been stated above, to difficulties of supervision by the authorities: as a bank, an I-CSD remains subject to the banking rules and supervision of the country in which it is based, whereas as a CSD, it is subject to different rules and to supervision by the authorities responsible for securities markets in the country in which it operates. Even if the accounts are segregated, links — whether obvious or less so — can bring about overlapping responsibilities, or, worse still, dangerous gaps in supervision. However, for the sake of objectivity, it should be recalled that laws on the custody of securities (see point 3.8) effectively protect the investor. |
| --- | --- |

3.10

Whilst distortions in competition remain to be proven, the combining of functions certainly gives rise, as has been stated above, to difficulties of supervision by the authorities: as a bank, an I-CSD remains subject to the banking rules and supervision of the country in which it is based, whereas as a CSD, it is subject to different rules and to supervision by the authorities responsible for securities markets in the country in which it operates. Even if the accounts are segregated, links — whether obvious or less so — can bring about overlapping responsibilities, or, worse still, dangerous gaps in supervision. However, for the sake of objectivity, it should be recalled that laws on the custody of securities (see point 3.8) effectively protect the investor.

difficulties of supervision

| 3.11 | In concluding its general comments and as an introduction to the specific comments that follow, the Committee notes that the Commission document is based on the desire to create an integrated market that is free from restrictions, complies with competition rules, and operates at low costs. All these aims are to be supported. In particular, the EESC would like to emphasise the following:






  — | every innovation has an impact, whether positive or negative, on the soundness of the market. No consideration, whether of liberalisation or of competition, must override the need to protect investors; |
| --- | --- | --- |

3.11

In concluding its general comments and as an introduction to the specific comments that follow, the Committee notes that the Commission document is based on the desire to create an integrated market that is free from restrictions, complies with competition rules, and operates at low costs. All these aims are to be supported. In particular, the EESC would like to emphasise the following:

—

every innovation has an impact, whether positive or negative, on the soundness of the market. No consideration, whether of liberalisation or of competition, must override the need to protect investors;

soundness of the market

| — | the rules on competition must be observed, but it must be remembered that not all participants are equal in terms of risk, |
| --- | --- |

—

the rules on competition must be observed, but it must be remembered that not all participants are equal in terms of risk,

competition

not all participants are equal in terms of risk

| — | the notion of an open market must be tempered by the concern not to impair its quality, |
| --- | --- |

—

the notion of an open market must be tempered by the concern not to impair its quality,

| — | until real convergence of tax rules is achieved, the market will continue to show distortions and high costs, which will become even more obvious once the technical and legislative obstacles have been removed; furthermore, uniform procedures would make it easier to control tax evasion, |
| --- | --- |

—

until real convergence of tax rules is achieved, the market will continue to show distortions and high costs, which will become even more obvious once the technical and legislative obstacles have been removed; furthermore, uniform procedures would make it easier to control tax evasion,

convergence of tax rules

distortions and high costs

| — | whilst it is right that the barriers that currently hinder access to local markets should be removed, the fact that each market has its particular characteristics and customs, which no harmonisation will ever succeed in eliminating, must not be underestimated. On this matter, although the Commission's declaration quoted in point 1.4 appears reassuring, the Committee would point out that legal certainty is not an optional extra. |
| --- | --- |

—

whilst it is right that the barriers that currently hinder access to local markets should be removed, the fact that each market has its particular characteristics and customs, which no harmonisation will ever succeed in eliminating, must not be underestimated. On this matter, although the Commission's declaration quoted in point 1.4 appears reassuring, the Committee would point out that legal certainty is not an optional extra.

local markets

particular characteristics and customs

legal certainty

4.   Specific comments

4.1   The obstacles identified by the Giovannini reports

| 4.1.1 | The two reports of the Giovannini (1) group form the basis of the Commission's deliberations; the findings of these reports are the result of the work of authoritative experts, who command complete confidence. However, whilst the facts as stated are indisputable, the Committee believes that there remains some margin for further discussion on the opinions expressed. Therefore, the following comments are made in a constructive spirit. |
| --- | --- |

4.1.1

The two reports of the Giovannini (1) group form the basis of the Commission's deliberations; the findings of these reports are the result of the work of authoritative experts, who command complete confidence. However, whilst the facts as stated are indisputable, the Committee believes that there remains some margin for further discussion on the opinions expressed. Therefore, the following comments are made in a constructive spirit.

1

the facts

the opinions

| 4.1.2 | The obstacles identified by the two Giovannini reports (15 in all) can be sorted into three groups: those that are technical or result from market practices; those linked to tax formalities; and legal obstacles. According to the opinion expressed in the reports and shared by the Commission, one of the main obstacles to integration is restrictions on clearing and settlement locations, which, when applied, deprive operators of freedom of access to, and choice of, clearing and settlement locations. The commission rightly states that such restrictions restrict competition; whilst the Committee is broadly in agreement with this, it would suggest that a closer look be taken at the reasons for some of these restrictions in order to ascertain whether valid reasons exist that justify them, beyond mere protectionism. |
| --- | --- |

4.1.2

The obstacles identified by the two Giovannini reports (15 in all) can be sorted into three groups: those that are technical or result from market practices; those linked to tax formalities; and legal obstacles. According to the opinion expressed in the reports and shared by the Commission, one of the main obstacles to integration is restrictions on clearing and settlement locations, which, when applied, deprive operators of freedom of access to, and choice of, clearing and settlement locations. The commission rightly states that such restrictions restrict competition; whilst the Committee is broadly in agreement with this, it would suggest that a closer look be taken at the reasons for some of these restrictions in order to ascertain whether valid reasons exist that justify them, beyond mere protectionism.

technical or result from market practices

tax formalities

legal

restrictions on clearing and settlement locations

restrict competition

| 4.1.3 | Other identified obstacles are those that cause, or indeed oblige, operators to use local participants to access foreign Securities Settlement Systems. Here, too, the Committee would advise caution: as highlighted in point 3.11 above; not all restrictions and obstacles arise out of the desire to protect domestic markets. |
| --- | --- |

4.1.3

Other identified obstacles are those that cause, or indeed oblige, operators to use local participants to access foreign Securities Settlement Systems. Here, too, the Committee would advise caution: as highlighted in point 3.11 above; not all restrictions and obstacles arise out of the desire to protect domestic markets.

use local participants to access foreign Securities Settlement Systems

| 4.1.4 | On the other hand, the Committee wholeheartedly agrees with the Commission's criticism of the fact that in some countries, settlement systems must have an integral mechanism for collecting transaction taxes, whilst the use of another system could give rise to the payment of higher taxes. However, this barrier, which certainly limits operators' freedom of choice for cost reasons, is one of the most difficult to remove, as it relates to a national taxation measure. |
| --- | --- |

4.1.4

On the other hand, the Committee wholeheartedly agrees with the Commission's criticism of the fact that in some countries, settlement systems must have an integral mechanism for collecting transaction taxes, whilst the use of another system could give rise to the payment of higher taxes. However, this barrier, which certainly limits operators' freedom of choice for cost reasons, is one of the most difficult to remove, as it relates to a national taxation measure.

have an integral mechanism for collecting transaction taxes

4.2   Absence of a common regulatory/supervisory framework

| 4.2.1 | Clearing and settlement systems are subject to regulation and supervision by national authorities: there is no European regulatory framework. In the absence of common legislation — and thus of a ‘European passport’ — it is logical that national authorities should be able to deny access to their own markets by systems that they do not control. The justification arises from the fact that their job is to protect the market for which they are responsible. In order to put right this shortcoming, the European System of Central Banks (ESCB) and the Committee of European Securities Regulators (CESR) have set up a working group charged with developing common standards for European providers of clearing and settlement services, adapting the recommendations of the G-10's Task Force on Securities Settlement Systems to the European context. The results of this work will be translated — it is hoped — into recommendations and not rules. The advantage of recommendations is that they can be adopted by everyone, and can also be changed rapidly to take account of changes in technology and in the market. |
| --- | --- |

4.2.1

Clearing and settlement systems are subject to regulation and supervision by national authorities: there is no European regulatory framework. In the absence of common legislation — and thus of a ‘European passport’ — it is logical that national authorities should be able to deny access to their own markets by systems that they do not control. The justification arises from the fact that their job is to protect the market for which they are responsible. In order to put right this shortcoming, the European System of Central Banks (ESCB) and the Committee of European Securities Regulators (CESR) have set up a working group charged with developing common standards for European providers of clearing and settlement services, adapting the recommendations of the G-10's Task Force on Securities Settlement Systems to the European context. The results of this work will be translated — it is hoped — into recommendations and not rules. The advantage of recommendations is that they can be adopted by everyone, and can also be changed rapidly to take account of changes in technology and in the market.

there is no European regulatory framework

common standards

recommendations and not rules

| 4.2.2 | The adoption of common rules is the basis of market integration. The ESCB/CESR standards will not be binding, since only a Community directive can change or supplant national laws. The Committee hopes that the ESCB/CESR rules will be published after the framework directive is approved and will be consistent with that directive, limiting themselves to integrating the rules set out in it or filling any legislative gaps. Any other approach would risk creating confusion in the markets. |
| --- | --- |

4.2.2

The adoption of common rules is the basis of market integration. The ESCB/CESR standards will not be binding, since only a Community directive can change or supplant national laws. The Committee hopes that the ESCB/CESR rules will be published after the framework directive is approved and will be consistent with that directive, limiting themselves to integrating the rules set out in it or filling any legislative gaps. Any other approach would risk creating confusion in the markets.

will not be binding

published after the framework directive is approved

4.3   Absence of a level playing field

| 4.3.1 | Some institutions that provide clearing and settlement systems are also licensed as banks or investment firms. The Commission notes that whilst banks and investment firms can offer custody services on a cross-border basis using their ISD (Investment Services Directive) passport, no comparable right is provided for providers of clearing and settlement services only. Moreover, the two types of operator have different capital adequacy requirements and are subject to different rules on supervision and on the supply of services. The Commission concludes that this situation raises major level playing field issues. |
| --- | --- |

4.3.1

Some institutions that provide clearing and settlement systems are also licensed as banks or investment firms. The Commission notes that whilst banks and investment firms can offer custody services on a cross-border basis using their ISD (Investment Services Directive) passport, no comparable right is provided for providers of clearing and settlement services only. Moreover, the two types of operator have different capital adequacy requirements and are subject to different rules on supervision and on the supply of services. The Commission concludes that this situation raises major level playing field issues.

custody services on a cross-border basis

major level playing field issues.

| 4.3.2 | The Commission appears to see the problem primarily in terms of opening markets and of a level competitive playing field; the Committee prefers to give precedence to the safety of the markets and the effectiveness of controls. The situation that is currently emerging should be viewed with some concern. In the absence of clear, uniform rules, hybrid or joint structures have been created, in which it is difficult to understand what the main activity is — banking, intermediary services, or clearing. Whilst joined or complementary activities can create synergies and economies of scale, it is also the case that subjecting different activities to multiple controls and rules should be avoided. |
| --- | --- |

4.3.2

The Commission appears to see the problem primarily in terms of opening markets and of a level competitive playing field; the Committee prefers to give precedence to the safety of the markets and the effectiveness of controls. The situation that is currently emerging should be viewed with some concern. In the absence of clear, uniform rules, hybrid or joint structures have been created, in which it is difficult to understand what the main activity is — banking, intermediary services, or clearing. Whilst joined or complementary activities can create synergies and economies of scale, it is also the case that subjecting different activities to multiple controls and rules should be avoided.

opening markets

level competitive playing field

safety of the markets

the effectiveness of controls

| 4.3.3 | In conclusion, the Committee would be extremely wary of an approach focusing on competition: the safety of the markets must be the pre-eminent factor that shapes all decisions. Once this condition is satisfied, it will be a matter of finding a sensible balance between respecting the rules of the free market on the one hand, and protecting the interests of operators and investments on the other. |
| --- | --- |

4.3.3

In conclusion, the Committee would be extremely wary of an approach focusing on competition: the safety of the markets must be the pre-eminent factor that shapes all decisions. Once this condition is satisfied, it will be a matter of finding a sensible balance between respecting the rules of the free market on the one hand, and protecting the interests of operators and investments on the other.

safety of the markets must be the pre-eminent factor that shapes all decisions.

5.   The Commission's objectives

| 5.1 | The Commission's objective is the creation of EU Securities Clearing and Settlement Systems that are efficient and safe and which ensure a level playing field among the different providers of these services. It proposes to achieve these aims by adopting appropriate measures and policies on:






  — | liberalisation and integration of existing clearing and settlement systems, ensuring full rights of access and removing barriers; |
| --- | --- | --- |

5.1

The Commission's objective is the creation of EU Securities Clearing and Settlement Systems that are efficient and safe and which ensure a level playing field among the different providers of these services. It proposes to achieve these aims by adopting appropriate measures and policies on:

efficient and safe

level playing field

—

liberalisation and integration of existing clearing and settlement systems, ensuring full rights of access and removing barriers;

liberalisation and integration

| — | full implementation of competition rules; |
| --- | --- |

—

full implementation of competition rules;

competition rules

| — | the adoption of a common regulatory and supervisory framework; |
| --- | --- |

—

the adoption of a common regulatory and supervisory framework;

common regulatory and supervisory framework

| — | implementation of appropriate governance arrangements. |
| --- | --- |

—

implementation of appropriate governance arrangements.

governance arrangements

| 5.2 | The Committee agrees, albeit with some reservations, with both the objectives and the procedures and policies to be adopted. It is also broadly in agreement with the operational path marked out by the Commission; therefore, the following paragraphs simply contain a few comments intended to contribute to the excellent work carried out by the Commission. |
| --- | --- |

5.2

The Committee agrees, albeit with some reservations, with both the objectives and the procedures and policies to be adopted. It is also broadly in agreement with the operational path marked out by the Commission; therefore, the following paragraphs simply contain a few comments intended to contribute to the excellent work carried out by the Commission.

| 5.3 | The Lamfalussy and Giovannini reports, and indeed the Commission, agree that once all the necessary measures have been adopted, a healthy process of consolidation of settlement and clearing systems will be set in motion. This process should be market-driven. The Commission believes it must take a neutral stance on structural issues; it therefore proposes to refrain from adopting a position on horizontal or vertical consolidation and on the provision of intermediary and/or banking services by settlement systems or by central counterparties. |
| --- | --- |

5.3

The Lamfalussy and Giovannini reports, and indeed the Commission, agree that once all the necessary measures have been adopted, a healthy process of consolidation of settlement and clearing systems will be set in motion. This process should be market-driven. The Commission believes it must take a neutral stance on structural issues; it therefore proposes to refrain from adopting a position on horizontal or vertical consolidation and on the provision of intermediary and/or banking services by settlement systems or by central counterparties.

consolidation

This process should be market-driven

neutral

on structural issues

| 5.4 | The Committee would like to make a few comments on this matter, to complement and clarify what has been said in point 4.3.2 above. It believes that, whilst transnational consolidation of equivalent institutions is likely to create economies of scale and to simplify procedures, the consolidation of different activities into a single institution tends to create gigantic, hybrid businesses. The supervision authorities, working closely with competition authorities, will have to ensure that this does not constitute a threat to the survival of smaller businesses. Furthermore, if only from the point of view of transparency, the market ought to be put in a position to understand who does what. |
| --- | --- |

5.4

The Committee would like to make a few comments on this matter, to complement and clarify what has been said in point 4.3.2 above. It believes that, whilst transnational consolidation of equivalent institutions is likely to create economies of scale and to simplify procedures, the consolidation of different activities into a single institution tends to create gigantic, hybrid businesses. The supervision authorities, working closely with competition authorities, will have to ensure that this does not constitute a threat to the survival of smaller businesses. Furthermore, if only from the point of view of transparency, the market ought to be put in a position to understand who does what.

transnational consolidation of equivalent institutions

consolidation of different activities into a single institution

survival of smaller businesses.

| 5.4.1 | The Commission's declaration of ‘non-intervention’ should also be considered in the light of the ‘declaration of intent’ contained elsewhere in the document (see paragraph 6.2, final indent) which provides reassurance on the intention to monitor compliance with competition rules. |
| --- | --- |

5.4.1

The Commission's declaration of ‘non-intervention’ should also be considered in the light of the ‘declaration of intent’ contained elsewhere in the document (see paragraph 6.2, final indent) which provides reassurance on the intention to monitor compliance with competition rules.

monitor compliance with competition rules

6.   The Commission's initiatives

| 6.1 | The Commission's programme for achieving its objectives seems wholly proper and rational, and, above all, realistic: innovations can be introduced gradually — which will allow reasonable lengths of time for full implementation — and always in accordance with the rules of the market, carrying out legislative or regulatory action only when necessary. |
| --- | --- |

6.1

The Commission's programme for achieving its objectives seems wholly proper and rational, and, above all, realistic: innovations can be introduced gradually — which will allow reasonable lengths of time for full implementation — and always in accordance with the rules of the market, carrying out legislative or regulatory action only when necessary.

gradually

legislative or regulatory action only when necessary

| 6.2 | The Commission has set up an advisory and monitoring group with the task of analysing the barriers which, according to the Giovannini report, should be removed by private sector initiative. The Commission further intends to:






  — | propose a framework directive to create a sound legislative framework, thus facilitating the mutual recognition of the various national systems; |
| --- | --- | --- |

6.2

The Commission has set up an advisory and monitoring group with the task of analysing the barriers which, according to the Giovannini report, should be removed by private sector initiative. The Commission further intends to:

an advisory and monitoring group

—

propose a framework directive to create a sound legislative framework, thus facilitating the mutual recognition of the various national systems;

framework directive

| — | set up expert groups who will deal with the various legal and tax problems and will be able to suggest ways of harmonising legislation or procedures; |
| --- | --- |

—

set up expert groups who will deal with the various legal and tax problems and will be able to suggest ways of harmonising legislation or procedures;

expert groups

legal and tax problems

| — | monitor effective compliance with competition rules, verifying ‘existing monopoly positions and further industry consolidation intervening when necessary’. |
| --- | --- |

—

monitor effective compliance with competition rules, verifying ‘existing monopoly positions and further industry consolidation intervening when necessary’.

effective compliance with competition rules

existing monopoly positions

intervening when necessary

| 6.2.1 | Most of the actions proposed in the Commission's action plan do not require specific comment; the Committee simply offers a few comments to add to the discussion. |
| --- | --- |

6.2.1

Most of the actions proposed in the Commission's action plan do not require specific comment; the Committee simply offers a few comments to add to the discussion.

| 6.3 | Rights of access and of choice (point 2.1 of the Communication) The central problem facing the entire project of an open, pan-European market is the barriers imposed by some authorities (and, to some extent, by almost all of them) to access by providers of clearing and settlement services to the location of clearing and settlement of their choice. Faced with the resistance of several national authorities, the Commission sees no alternative to a directive requiring the removal of these barriers and guaranteeing all the interested parties — investment firms and banks, central counterparties (CCPs), and settlement systems (CSDs) — the right of access to the relevant counterparties in any EU country. Within this framework, it would also be possible for regulated markets and multilateral trading facilities to enter into arrangements with CCPs and CSDs located in other EU countries. |
| --- | --- |

6.3

Rights of access and of choice (point 2.1 of the Communication) The central problem facing the entire project of an open, pan-European market is the barriers imposed by some authorities (and, to some extent, by almost all of them) to access by providers of clearing and settlement services to the location of clearing and settlement of their choice. Faced with the resistance of several national authorities, the Commission sees no alternative to a directive requiring the removal of these barriers and guaranteeing all the interested parties — investment firms and banks, central counterparties (CCPs), and settlement systems (CSDs) — the right of access to the relevant counterparties in any EU country. Within this framework, it would also be possible for regulated markets and multilateral trading facilities to enter into arrangements with CCPs and CSDs located in other EU countries.

Rights of access and of choice

barriers

access by providers of clearing and settlement services to the location of clearing and settlement of their choice

guaranteeing

right of access to the relevant counterparties in any EU country.

arrangements with CCPs and CSDs

| 6.3.1 | The Committee agrees in principle with the Commission's aim, but nonetheless wishes to introduce a note of caution. Not all of the barriers that currently exist are due to the protectionist concerns of national authorities; in many cases the intention is mainly to protect the market against risks over which the authorities themselves have no control. These concerns are legitimate. The exchange of information is not always satisfactory, but above all, information may not be up-to-the-minute, which would be a prerequisite for timely intervention. |
| --- | --- |

6.3.1

The Committee agrees in principle with the Commission's aim, but nonetheless wishes to introduce a note of caution. Not all of the barriers that currently exist are due to the protectionist concerns of national authorities; in many cases the intention is mainly to protect the market against risks over which the authorities themselves have no control. These concerns are legitimate. The exchange of information is not always satisfactory, but above all, information may not be up-to-the-minute, which would be a prerequisite for timely intervention.

note of caution

protect the market against risks over which the authorities themselves have no control

| 6.3.2 | The Commission document mentions a series of reinforced prudential measures, particularly with regard to capital adequacy and risk management, maintaining the principle of home country control. A model for supervisory cooperation will be introduced, ‘to avoid Securities Clearing and Settlement Systems... being subject to the supervision of multiple supervisors’. This approach is certainly right, but the difficulties of implementing it in practice are not to be underestimated. |
| --- | --- |

6.3.2

The Commission document mentions a series of reinforced prudential measures, particularly with regard to capital adequacy and risk management, maintaining the principle of home country control. A model for supervisory cooperation will be introduced, ‘to avoid Securities Clearing and Settlement Systems... being subject to the supervision of multiple supervisors’. This approach is certainly right, but the difficulties of implementing it in practice are not to be underestimated.

capital adequacy

risk management

home country control.

model for supervisory cooperation

| 6.3.3 | The growing sophistication of the markets and the sustained pace of consolidation, mergers, and corporate changes, mean that supervision authorities have a heavy workload. Theoretically, there is no doubt that cooperation measures are appropriate and sensible. The Committee is concerned, however, that in practice, significant difficulties will emerge: it will not be easy to integrate twenty-five systems with varying levels of efficiency, resources and experience. It believes that the date of entry into force of the liberalisation measures must be set after the unconditional agreement of

  all

  the national supervisory authorities. These will have to ensure in a responsible manner that they are in a position to participate in the system of information exchange and to guarantee the protection of markets from systemic risk. |
| --- | --- |

6.3.3

The growing sophistication of the markets and the sustained pace of consolidation, mergers, and corporate changes, mean that supervision authorities have a heavy workload. Theoretically, there is no doubt that cooperation measures are appropriate and sensible. The Committee is concerned, however, that in practice, significant difficulties will emerge: it will not be easy to integrate twenty-five systems with varying levels of efficiency, resources and experience. It believes that the date of entry into force of the liberalisation measures must be set after the unconditional agreement of

  all

  the national supervisory authorities. These will have to ensure in a responsible manner that they are in a position to participate in the system of information exchange and to guarantee the protection of markets from systemic risk.

in practice,

difficulties will emerge

date of entry into force

unconditional agreement of

all

the national supervisory authorities.

systemic risk

| 6.4 | Governance (point 2.3 of the Communication). The Commission states that it does not wish to go into the form of the entities that manage settlement systems and their central counterparties. However, the Committee would point out that many problems of competition and dominant position would be overcome by a cooperative form of enterprise among the participants in the system, working on a break-even basis rather than pursuing profits. |
| --- | --- |

6.4

Governance (point 2.3 of the Communication). The Commission states that it does not wish to go into the form of the entities that manage settlement systems and their central counterparties. However, the Committee would point out that many problems of competition and dominant position would be overcome by a cooperative form of enterprise among the participants in the system, working on a break-even basis rather than pursuing profits.

Governance

does not wish to go into the form

a cooperative form of enterprise

| 6.4.1 | Given the sensitive character of the functions of intermediaries and the considerable market power that these hold, the Commission considers it necessary to establish guidelines for efficient, transparent governance able to monitor company policy and the management of everyday business. The Committee agrees: the guidelines set out do not call for particular comment, save that they are in line with modern concepts of corporate governance. |
| --- | --- |

6.4.1

Given the sensitive character of the functions of intermediaries and the considerable market power that these hold, the Commission considers it necessary to establish guidelines for efficient, transparent governance able to monitor company policy and the management of everyday business. The Committee agrees: the guidelines set out do not call for particular comment, save that they are in line with modern concepts of corporate governance.

guidelines for efficient, transparent governance

| 6.4.2 | The Commission adds that these institutions, precisely because of the considerable power vested in them, could engage in anti-competitive practices. In order to ensure that this does not happen, CCPs and CSDs will have to keep segregated accounts that shed light on the running of their institutional activities, as distinct from the provision of other services. The same provisions should be applied to what the Commission describes as ‘any non-core activity, such as Banking’. As large as a CCP or CSD may be, describing banking as ‘non-core’ seems to be something of an oversimplification: participants in the settlement system need credit in commercial bank (or central bank) money in order to overcome temporary shortages in their cash position. Banking can involve very significant figures and, especially at times of tension in the market, the possibility of systemic risk arising should not be underestimated. |
| --- | --- |

6.4.2

The Commission adds that these institutions, precisely because of the considerable power vested in them, could engage in anti-competitive practices. In order to ensure that this does not happen, CCPs and CSDs will have to keep segregated accounts that shed light on the running of their institutional activities, as distinct from the provision of other services. The same provisions should be applied to what the Commission describes as ‘any non-core activity, such as Banking’. As large as a CCP or CSD may be, describing banking as ‘non-core’ seems to be something of an oversimplification: participants in the settlement system need credit in commercial bank (or central bank) money in order to overcome temporary shortages in their cash position. Banking can involve very significant figures and, especially at times of tension in the market, the possibility of systemic risk arising should not be underestimated.

anti-competitive practices

segregated accounts

any non-core activity, such as Banking

systemic risk

| 6.4.2.1 | An exception to the requirement to hold separate accounts would, however, seem to be acceptable in the case of CSDs, in that the ‘banking’ functions of these institutions relate to participating banks, and therefore tend to be, by their nature, subsidiary to settlement. Credit is therefore, in a way, an integral part of the regulations and, as such, could — or, according to some, should — be linked to the institutional function of CSDs. The same can apply to CCPs when credit is required for the smooth functioning of settlement, of which it could be considered to be an integral part. |
| --- | --- |

6.4.2.1

An exception to the requirement to hold separate accounts would, however, seem to be acceptable in the case of CSDs, in that the ‘banking’ functions of these institutions relate to participating banks, and therefore tend to be, by their nature, subsidiary to settlement. Credit is therefore, in a way, an integral part of the regulations and, as such, could — or, according to some, should — be linked to the institutional function of CSDs. The same can apply to CCPs when credit is required for the smooth functioning of settlement, of which it could be considered to be an integral part.

exception to the requirement to hold separate accounts

CSDs

by their nature, subsidiary to settlement

| 6.4.3 | It is unclear how, in practice, banking supervisory authorities and authorities responsible for supervising CCPs and CSDs can cooperate in times of emergency with the necessary speed. As already stated above, the Committee hopes that the consideration of potential risks for the market will lead all the supervisory authorities responsible for banking and non-banking activities under the aegis of the ECB to sign reciprocal cooperation and information agreements on an ongoing basis, and to adopt timely and effective measures in emergencies. |
| --- | --- |

6.4.3

It is unclear how, in practice, banking supervisory authorities and authorities responsible for supervising CCPs and CSDs can cooperate in times of emergency with the necessary speed. As already stated above, the Committee hopes that the consideration of potential risks for the market will lead all the supervisory authorities responsible for banking and non-banking activities under the aegis of the ECB to sign reciprocal cooperation and information agreements on an ongoing basis, and to adopt timely and effective measures in emergencies.

supervisory authorities

cooperate in times of emergency

| 6.5 | Legal and tax law discrepancies (point 3 of the Communication). The legal problems are so numerous and complex that it is not possible to list them all in a coherent fashion. Differences in legislation affect contractual and capital aspects, as well as matters of international, company and bankruptcy law, and have legal repercussions at every stage in the processes of purchase, clearing and delivery of securities. The Commission notes that ‘discrepancies in the national substantive laws of the various jurisdictions concerned may still adversely affect the whole process’. |
| --- | --- |

6.5

Legal and tax law discrepancies (point 3 of the Communication). The legal problems are so numerous and complex that it is not possible to list them all in a coherent fashion. Differences in legislation affect contractual and capital aspects, as well as matters of international, company and bankruptcy law, and have legal repercussions at every stage in the processes of purchase, clearing and delivery of securities. The Commission notes that ‘discrepancies in the national substantive laws of the various jurisdictions concerned may still adversely affect the whole process’.

Legal and tax law discrepancies

Differences in legislation

legal repercussions at every stage in the processes

‘discrepancies in the national substantive laws of the various jurisdictions concerned may still adversely affect the whole process’

| 6.5.1 | It is widely accepted that solving the innumerable and complex legal problems will take a long time. Realistically, the fact of the matter is that national peculiarities and bureaucratic conservatism have often given rise to impediments and obstacles to the process of legislative harmonisation. The Committee hopes that, for once, Member States' sense of responsibility will prevail over national interests. The Commission proposes to set up a group consisting of academic experts, public authorities and practising lawyers, which will have the task of looking in greater depth at the analyses started by the Giovannini group and to suggest appropriate solutions. The group will have to keep up contacts with the bodies that have undertaken similar work at global level (UNIDROIT). The Committee suggests that the group include technical and legal experts from among the operators. |
| --- | --- |

6.5.1

It is widely accepted that solving the innumerable and complex legal problems will take a long time. Realistically, the fact of the matter is that national peculiarities and bureaucratic conservatism have often given rise to impediments and obstacles to the process of legislative harmonisation. The Committee hopes that, for once, Member States' sense of responsibility will prevail over national interests. The Commission proposes to set up a group consisting of academic experts, public authorities and practising lawyers, which will have the task of looking in greater depth at the analyses started by the Giovannini group and to suggest appropriate solutions. The group will have to keep up contacts with the bodies that have undertaken similar work at global level (UNIDROIT). The Committee suggests that the group include technical and legal experts from among the operators.

a long time

impediments and obstacles to the process of legislative harmonisation

group

| 6.5.2 | The process of legislative harmonisation that the Commission proposes to undertake cannot be completed until the other aspects of the framework directive have been developed. In the meantime, we will have to live with the existing legislation, intervening at the legal level only when strictly necessary; hasty interventions that might need subsequent changes are to be avoided. Furthermore, the Committee notes that the markets have operated up until now without serious problems, and have done so on the basis of established customs and practices, which have rarely give rise to disputes, and even more rarely been subject to judicial decisions. Legal discrepancies are therefore to be considered, rather than as a barrier in the strict sense, as a procedural complication that leads to considerably increased costs. |
| --- | --- |

6.5.2

The process of legislative harmonisation that the Commission proposes to undertake cannot be completed until the other aspects of the framework directive have been developed. In the meantime, we will have to live with the existing legislation, intervening at the legal level only when strictly necessary; hasty interventions that might need subsequent changes are to be avoided. Furthermore, the Committee notes that the markets have operated up until now without serious problems, and have done so on the basis of established customs and practices, which have rarely give rise to disputes, and even more rarely been subject to judicial decisions. Legal discrepancies are therefore to be considered, rather than as a barrier in the strict sense, as a procedural complication that leads to considerably increased costs.

live with the existing legislation

established customs and practices

| 6.5.3 | The comments made in the previous point also apply to taxation measures, an area where legislative discrepancies and the legitimate desire of Member States to tax capital gains give rise to a mass of confusing provisions, which are often discriminatory, sometimes difficult to interpret, but always costly for the market. The Committee does not consider it necessary to go into the measures proposed by the Commission, which are formally correct but will not always be easily accepted by the Member States, especially if opposing ideological positions are not first set aside. The main objective is to harmonise procedures for collecting taxes; each of the various methods put forward as options has advantages and disadvantages, but it is important that, at least on this point, the Member States reach an agreement. |
| --- | --- |

6.5.3

The comments made in the previous point also apply to taxation measures, an area where legislative discrepancies and the legitimate desire of Member States to tax capital gains give rise to a mass of confusing provisions, which are often discriminatory, sometimes difficult to interpret, but always costly for the market. The Committee does not consider it necessary to go into the measures proposed by the Commission, which are formally correct but will not always be easily accepted by the Member States, especially if opposing ideological positions are not first set aside. The main objective is to harmonise procedures for collecting taxes; each of the various methods put forward as options has advantages and disadvantages, but it is important that, at least on this point, the Member States reach an agreement.

taxation

costly for the market.

harmonise procedures for collecting taxes

| 6.6 | Competition policy (point 4 of the Communication): the Commission document gives particular attention to this issue, and establishes an important principle: measures aimed at liberalising and integrating systems and competition policy complement each other. This principle might seem obvious, but once put into practice might lend itself to different interpretations, particularly of the restrictive variety. The Commission states that it wants to remain neutral on the question of horizontal or vertical consolidation, but warns that competition-related problems

  might

  arise when such consolidations lead to the creation or strengthening of a dominant market position, as is already the case. The problem is not the dominant position, which is not illegal per se, but illegal use of the dominant position: if this were to happen, given the nature of the market, it could create problems with applying the rules. |
| --- | --- |

6.6

Competition policy (point 4 of the Communication): the Commission document gives particular attention to this issue, and establishes an important principle: measures aimed at liberalising and integrating systems and competition policy complement each other. This principle might seem obvious, but once put into practice might lend itself to different interpretations, particularly of the restrictive variety. The Commission states that it wants to remain neutral on the question of horizontal or vertical consolidation, but warns that competition-related problems

  might

  arise when such consolidations lead to the creation or strengthening of a dominant market position, as is already the case. The problem is not the dominant position, which is not illegal per se, but illegal use of the dominant position: if this were to happen, given the nature of the market, it could create problems with applying the rules.

Competition policy

an important principle: measures aimed at liberalising and integrating systems and competition policy complement each other

wants to remain neutral on the question of horizontal or vertical consolidation

competition-related problems

might

arise

per se

illegal use of the dominant position

| 6.6.1 | There have already been examples, quoted by the Commission, of cross-border consolidation between national and international CCPs, which have led to the creation of organisations of considerable size. Other forms of consolidation or structured cooperation are under discussion. When examining whether or not existing or proposed structures comply with competition rules, it must be remembered that in any case, CCPs and CSPs are by their nature few in number and large in size. Given their special nature, it is unrealistic to think that in each country a sufficient number of institutions could emerge as to prevent one of them having a stronger position than the others; the same could be said even more emphatically at European level. The difference between an institution that is more powerful than others and one that has a dominant position is very subtle. The judgment of the competition authorities should be based on an in-depth knowledge of the characteristics of the market and of its operational needs. |
| --- | --- |

6.6.1

There have already been examples, quoted by the Commission, of cross-border consolidation between national and international CCPs, which have led to the creation of organisations of considerable size. Other forms of consolidation or structured cooperation are under discussion. When examining whether or not existing or proposed structures comply with competition rules, it must be remembered that in any case, CCPs and CSPs are by their nature few in number and large in size. Given their special nature, it is unrealistic to think that in each country a sufficient number of institutions could emerge as to prevent one of them having a stronger position than the others; the same could be said even more emphatically at European level. The difference between an institution that is more powerful than others and one that has a dominant position is very subtle. The judgment of the competition authorities should be based on an in-depth knowledge of the characteristics of the market and of its operational needs.

cross-border consolidation

CCPs and CSPs are by their nature few in number and large in size

dominant

| 6.6.2 | Judgment on dominant positions or anti-competitive practices would be even more difficult if the trend — on which the Commission is neutral — towards horizontal integration between central operators and banking activities were to continue. Controlling prices will be particularly complicated and difficult. These certainly cannot be a matter for regulation, but the Commission states that it wants to check that they are not applied according to discriminatory criteria. The criteria for setting prices follow, or ought to follow, the rules of the market, and relate to volume, safety, the guarantees offered and to a series of qualitative considerations; it will be difficult to establish with certainty which assessments are subjective and which are objective, and when they are discriminatory. Assessing excessive prices resulting from a dominant position may prove more difficult still: there are no a priori criteria that can be applied to such cases, which need to be evaluated individually. |
| --- | --- |

6.6.2

Judgment on dominant positions or anti-competitive practices would be even more difficult if the trend — on which the Commission is neutral — towards horizontal integration between central operators and banking activities were to continue. Controlling prices will be particularly complicated and difficult. These certainly cannot be a matter for regulation, but the Commission states that it wants to check that they are not applied according to discriminatory criteria. The criteria for setting prices follow, or ought to follow, the rules of the market, and relate to volume, safety, the guarantees offered and to a series of qualitative considerations; it will be difficult to establish with certainty which assessments are subjective and which are objective, and when they are discriminatory. Assessing excessive prices resulting from a dominant position may prove more difficult still: there are no a priori criteria that can be applied to such cases, which need to be evaluated individually.

anti-competitive practices

Controlling prices

discriminatory criteria

excessive prices

a priori

| 6.6.3 | To conclude this brief look at the competition aspects, the Committee would like to express its broad agreement with the Commission's approach, but would also call for cooperation — based on binding rules — between supervisory and competition authorities, both at national and at European level. Supervisory authorities (in cooperation with competition authorities) can carry out ex ante monitoring to prevent the existence of dominant positions giving rise to abuse and exclusion. Ex post interventions, which are confrontational and damaging to the market, would thus be kept to a minimum once clear and sensible market and supervision rules had been introduced. |
| --- | --- |

6.6.3

To conclude this brief look at the competition aspects, the Committee would like to express its broad agreement with the Commission's approach, but would also call for cooperation — based on binding rules — between supervisory and competition authorities, both at national and at European level. Supervisory authorities (in cooperation with competition authorities) can carry out ex ante monitoring to prevent the existence of dominant positions giving rise to abuse and exclusion. Ex post interventions, which are confrontational and damaging to the market, would thus be kept to a minimum once clear and sensible market and supervision rules had been introduced.

ex ante

Ex post

| 6.6.4 | Finally, the Commission addresses, without adopting a position, the problem of agreements (exclusive and otherwise), clearly preferring to examine them on a case-by-case basis. This is a balanced approach, which the Committee supports wholeheartedly. |
| --- | --- |

6.6.4

Finally, the Commission addresses, without adopting a position, the problem of agreements (exclusive and otherwise), clearly preferring to examine them on a case-by-case basis. This is a balanced approach, which the Committee supports wholeheartedly.

7.   Conclusions

| 7.1 | The Committee has looked at the Commission document with considerable interest, and has analysed it above all from the point of view of the social partners it represents: it agrees with the approach and the guidelines. It recognises that the subject is extremely complex and delicate, and that there is therefore a long way to go before it will be possible to implement a future directive. The experts believe that implementing the rules could take several years. |
| --- | --- |

7.1

The Committee has looked at the Commission document with considerable interest, and has analysed it above all from the point of view of the social partners it represents: it agrees with the approach and the guidelines. It recognises that the subject is extremely complex and delicate, and that there is therefore a long way to go before it will be possible to implement a future directive. The experts believe that implementing the rules could take several years.

| 7.2 | The Committee recognises that consulting all the interested parties — the market, supervisory authorities and governments — will necessarily be a long and difficult process, and that the legislative process for a future directive could be very complex. It wonders, therefore, what situation might develop in the meantime; this is a legitimate question, which is asked without wishing to be unduly alarmist. After all, the markets have up until now shown that the existing rules are adequate to enable them to deal with emergencies, and the authorities have kept even the most difficult situations under control. |
| --- | --- |

7.2

The Committee recognises that consulting all the interested parties — the market, supervisory authorities and governments — will necessarily be a long and difficult process, and that the legislative process for a future directive could be very complex. It wonders, therefore, what situation might develop in the meantime; this is a legitimate question, which is asked without wishing to be unduly alarmist. After all, the markets have up until now shown that the existing rules are adequate to enable them to deal with emergencies, and the authorities have kept even the most difficult situations under control.

| 7.3 | The problem, if anything, is that of the short-term future: the development of ‘foreign’ markets — not just American, but also Asian — is encouraging the trend to create stronger, more efficient structures in Europe. This trend is rational and consistent with the rules of a market which cannot — including from the point of view of regulation — be isolated from a global context. Common sense and prudence will therefore be needed, in the light of the rules on competition, when permitting or prohibiting consolidations of businesses or the taking on of new tasks by businesses or financial groups. |
| --- | --- |

7.3

The problem, if anything, is that of the short-term future: the development of ‘foreign’ markets — not just American, but also Asian — is encouraging the trend to create stronger, more efficient structures in Europe. This trend is rational and consistent with the rules of a market which cannot — including from the point of view of regulation — be isolated from a global context. Common sense and prudence will therefore be needed, in the light of the rules on competition, when permitting or prohibiting consolidations of businesses or the taking on of new tasks by businesses or financial groups.

| 7.4 | On the other hand, the Committee believes that the decisions cannot be taken by the competition authorities alone: the binding opinion of supervision authorities should be a rule that — although it is not applied always and everywhere — applies from now on. The desire to open up markets and comply with rules on competition must not overlook the safety of the markets themselves. This aspect can only be assessed by those who are responsible for it. |
| --- | --- |

7.4

On the other hand, the Committee believes that the decisions cannot be taken by the competition authorities alone: the binding opinion of supervision authorities should be a rule that — although it is not applied always and everywhere — applies from now on. The desire to open up markets and comply with rules on competition must not overlook the safety of the markets themselves. This aspect can only be assessed by those who are responsible for it.

decisions cannot be taken by the competition authorities alone

binding opinion of supervision authorities

open up markets and comply with rules on competition must not overlook the safety

Brussels, 10 February 2005.

The President

of the European Economic and Social Committee

Anne-Marie SIGMUND

---

(1)  The Giovannini reports and the related documents are available on the Commission's website at http://europa.eu.int/comm/internal_market/financial-markets/index_en.htm#otherdocs.

1

---